Price Determination in Different Markets for CA Foundation
How prices are set under perfect competition, monopoly, monopolistic competition and oligopoly, and how firms decide output.
Business EconomicsPaper 413 MCQs2 lessons2 flashcards3 memory tricks
Practise Price Determination in Different Markets free
What you'll learn
- Market forms and equilibrium of the firm
Compare market forms and apply MR = MC. - Price discrimination and market equilibrium
Explain price discrimination and shifts in market equilibrium.
Key formulas
| Profit maximisation | MR = MC, with MC rising |
|---|---|
| Revenue relation | MR = AR(1 − 1/e) |
| Short-run shutdown | P < minimum AVC |
| Long-run perfect competition | P = MR = MC = minimum LAC |
Concepts explained
Perfect competition
Many sellers of a homogeneous product with free entry and exit: each firm is a price taker facing a horizontal demand curve (AR = MR = P).
What it means
- Equilibrium: MR = MC with MC rising.
- Short run: may earn supernormal profit or loss; shuts down if P < minimum AVC.
- Long run: free entry and exit leave only normal profit; P = MR = MC = minimum LAC.
- The firm's supply curve is the part of its MC curve above minimum AVC.
- P = ₹20; MC = ₹20 at 5 units (rising)
Answer: Produce 5 units
- Minimum AVC ₹12, price falls to ₹10
Answer: Shut down in the short run
Related terms
- Normal profit: minimum profit to keep the firm in the industry, included in cost
- Break-even point: P = minimum ATC
Exam tip: Shutdown is about AVC; break-even is about ATC.
Monopoly and price discrimination
A monopolist is the only seller of a product with no close substitutes; it is a price maker facing a downward-sloping demand curve, so MR < AR.
What it means
- MR = AR(1 − 1/e): MR = 0 at e = 1; MR < 0 when demand is inelastic, so a monopolist always produces where demand is elastic.
- Equilibrium at MR = MC; price read off the demand curve above that output.
- Price discrimination: charging different prices for the same product; needs separable markets with different elasticities.
- Higher price goes to the market with less elastic demand.
- AR = ₹10, e = 1
- MR = 10(1 − 1/1)
Answer: ₹0
- Railway AC class vs general class
Answer: Higher fare where demand is less elastic
Related terms
- Natural monopoly: one firm can serve the market at lower cost, e.g. water supply
- Degrees of discrimination: first, second and third degree
Exam tip: Monopoly profit can persist in the long run because entry is blocked.
Monopolistic competition and oligopoly
Monopolistic competition has many sellers of differentiated products; oligopoly has a few interdependent sellers.
What it means
- Monopolistic competition: brands, selling costs (advertising), downward-sloping and fairly elastic demand, normal profit in the long run with excess capacity.
- Oligopoly: few sellers, interdependent decisions, barriers to entry.
- Kinked demand curve (Sweezy): rivals follow price cuts but not rises, so prices are rigid.
- Collusion (cartels like OPEC) and price leadership are common in oligopoly.
- Many soap and toothpaste brands advertising heavily
Answer: Monopolistic competition
- A few telecom companies watching each other's tariffs
Answer: Oligopoly with interdependence
Related terms
- Cartel: firms acting together like a monopoly
- Duopoly: oligopoly with two sellers
Exam tip: Interdependence is the hallmark of oligopoly; product differentiation is the hallmark of monopolistic competition.
Memory tricks
Number of sellers and nature of product distinguish the market forms.
With MC cutting MR from below.
Higher price in the less elastic market.
Try 3 CA Foundation-style questions
Q1. The kinked demand curve, which explains price rigidity, is associated with
- oligopoly
- perfect competition
- monopoly
- monopolistic competition
Show answer
Answer: (1) oligopoly
Sweezy's kinked demand curve: rivals match price cuts but not price rises, so each firm is reluctant to change price.
Q2. A firm maximises profit where
- TR is maximum
- AC is minimum
- price equals AVC
- MR = MC and MC is rising (cuts MR from below)
Show answer
Answer: (4) MR = MC and MC is rising (cuts MR from below)
Producing up to where the last unit adds as much revenue as cost (MR = MC), with MC rising, gives maximum profit.
Q3. When price elasticity of demand equals 1, marginal revenue is
- equal to price
- negative
- infinite
- zero
Show answer
Answer: (4) zero
MR = AR(1 − 1/e). With e = 1, MR = AR × 0 = 0. Total revenue is at its maximum there.
Practise all 13 questions Free · explanations for every option · see where you go wrong