1. Perfect competition
Features: very many buyers and sellers; homogeneous product; free entry and exit; perfect knowledge; perfect mobility of factors; no selling costs.
Consequence: the industry fixes the price by market demand and supply; each firm is a price taker and can sell any quantity at that price. Its demand curve is perfectly elastic: AR = MR = price, one horizontal line.
| Feature | Why it makes the firm a price taker |
|---|---|
| Very many buyers and sellers | Each firm's output is a tiny part of supply |
| Homogeneous product | A higher price loses all buyers to rivals |
| Free entry and exit | No firm keeps a special position for long |
| Perfect knowledge | Everyone knows the one ruling price |
| Perfect mobility of factors | Factors move to where they earn most |
Key terms
- Price taker
A firm that must accept the price set by the market because its own output cannot affect it.
- Homogeneous product
A product that buyers regard as identical whichever firm sells it.
2. Monopoly and monopolistic competition
Monopoly: a single seller; no close substitute; strong barriers to entry (licence, patent, control of an input, huge capital); price maker; may practise price discrimination; demand curve is the downward-sloping market demand.
Monopolistic competition: many sellers; product differentiation (brand, design, packing); free entry and exit; selling costs; some control over its own price; demand slopes down but is more elastic than a monopolist's.
| Monopoly | Monopolistic competition |
|---|---|
| Single seller | Many sellers |
| No close substitute | Close but differentiated substitutes |
| Strong barriers to entry | Free entry and exit |
| Price maker; may discriminate | Some control over its own price |
| Imagined example: an island's only licensed ferry | Imagined example: two hundred branded knitwear shops |
Key terms
- Product differentiation
Making a product appear different from rivals' close substitutes through brand, design, quality or packing.
- Selling costs
Spending to promote sales, such as advertising and displays.
3. Oligopoly; monopsony
Oligopoly: a few large sellers; interdependence in pricing and output decisions; barriers to entry; heavy advertising; the firm's demand curve is indeterminate, because its sales depend on rivals' unknown reactions.
Monopsony (meaning only): a market with a single buyer, such as the only mill buying a district's cane.
| Term | Meaning | Imagined example |
|---|---|---|
| Monopoly | One seller | The only ferry to an island |
| Monopsony | One buyer | The only sugar mill buying a valley's cane |
| Clue in the case | Market form |
|---|---|
| Hundreds of sellers, same grade, price on a board | Perfect competition |
| Only one seller; licence keeps others out | Monopoly |
| Many sellers, own brands, new shops opening | Monopolistic competition |
| A few big firms reacting to each other | Oligopoly |
| Only one buyer | Monopsony |
Key terms
- Interdependence
The dependence of each oligopolist's decisions on the expected reactions of its rivals.
- Monopsony
A market with only one buyer of a good or factor.
4. Short-run equilibrium of a competitive firm
Conditions: MC = MR (= AR = P) and MC rising (cutting MR from below).
- Supernormal profit: P above AC at the equilibrium output; profit = (AR − AC) × Q.
- Normal profit: P = minimum AC; TR = TC.
- Loss: P below AC but above AVC; the firm still produces.
Key terms
- Supernormal profit
Profit above normal profit; total revenue exceeds total cost.
- Normal profit
The minimum return that keeps an entrepreneur in the industry; included in average cost.
5. Break-even and shut-down points
Break-even point: P = minimum AC (brass unit: ₹28 hundred at 6 hundred fittings).
Shut-down point: P = minimum AVC (brass unit: ₹15 hundred at 5 hundred fittings). Below it, revenue fails to cover variable cost and the firm stops producing; at it, the loss equals fixed cost.
From a schedule: find MC = MR with MC rising; compute TR − TC; if the loss exceeds TFC, shut down (imagined turmeric unit: shut down below ₹18.75).
| Output | TC | MC | AVC | AC |
|---|---|---|---|---|
| 0 | 36 | — | — | — |
| 1 | 60 | 24 | 24 | 60 |
| 2 | 78 | 18 | 21 | 39 |
| 3 | 93 | 15 | 19 | 31 |
| 4 | 111 | 18 | 18.75 | 27.75 |
| 5 | 135 | 24 | 19.8 | 27 |
| 6 | 168 | 33 | 22 | 28 |
| Price (₹) | Output where MC = MR, MC rising | TR | TC | Profit (+) or loss (−) | Decision |
|---|---|---|---|---|---|
| 33 | 6 | 198 | 168 | +30 | Produce: supernormal profit |
| 24 | 5 | 120 | 135 | -15 | Produce: loss below TFC |
| 18 | 4 | 72 | 111 | -39 | Shut down: loss would be 36 |
| Price relative to costs | Result | Brass unit price (₹ hundred) |
|---|---|---|
| P above minimum AC | Supernormal profit | 47 |
| P = minimum AC | Normal profit (break-even) | 28 |
| Minimum AVC < P < minimum AC | Loss, but produce | 20 |
| P = minimum AVC | Shut-down point | 15 |
| P below minimum AVC | Stop production | below 15 |
Key terms
- Break-even point
The output and price at which a firm's total revenue equals total cost, so it earns only normal profit.
- Shut-down point
The price equal to minimum average variable cost, below which a firm stops production in the short run.
6. Long-run equilibrium (explanation only)
Supernormal profit attracts new firms (free entry); market supply rises and price falls. Losses make some firms leave (free exit); supply falls and price rises. In the long run P = AR = MR = MC = minimum LAC, and every firm earns only normal profit. (The long-run diagram is not required by the ISC 2027 syllabus.)
Key terms
- Long-run equilibrium
The position in which no firm wishes to enter or leave the industry, with price equal to minimum long-run average cost.
Exam tips
Common mistakes
- Calling monopsony a market with one seller.
- Giving only MC = MR and forgetting that MC must be rising.
- Treating every loss as a reason to close: compare the loss with fixed cost.
- Swapping the break-even point (minimum AC) and the shut-down point (minimum AVC).
- Drawing the competitive firm's demand curve sloping down.
- Drawing a long-run diagram when the question asks for an explanation.
How marks are usually awarded
- 1 mark: one correct option, term or value.
- 2 marks: two features, or a condition with its reason.
- 3 marks: three bases of comparison, or a described diagram with the key point.
- 5 marks: parts answered in order, with described diagrams, working from schedules and a clear decision.