Army Public School

Economics Project
File
By Shivam Mutkule
Class XII (2021-
2022)

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 ACKNOWLEDGEMENT
I express my gratitude to my Economics teacher- Mrs.
Seema Pradhan who guided me through the project and also
gave valuable suggestions and guidance for completing the
project. My teacher helped me to understand the intricate
issues involved in making of project besides efficiently
presenting it.
Secondly, I would like thank my parents and friends for
their valuable support during the completion of this project.

Shivam Mutkule
XII ‘Commerce’
Mrs. Seema Pradhan

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 CERTIFICATE
This is to certify that Shivam Mutkule of Class XII
‘Commerce’, Army Public School Dehuroad has completed his
project assignment under my supervision.
He has shown proper care and utmost sincerity in
completion of his project.
I certify that the project is up to my expectations and as
per the guidelines issued by CBSE.

Mrs. Seema Pradhan

OBJECTIVE
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 The main objective to choose Oligopoly as my project
topic was to have an idea of the market in detail and also to
know about practical applications of the features of above-
mentioned market form.

I wanted know about the internal planning and structure

of the Telecom world since I love technology and hence was
inquisitive to know about the technological centric of Telecom
sector.

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TABLE OF CONTENTS
Market...............................................................6
Monopoly..........................................................7
Monopolistic Competition.................................8
Perfect Competition..........................................9
Oligopoly- Introduction...................................10
History & Background.....................................11
Demand Curve...............................................12
1. Financial Plan..........................................13
Appendix.........................................................16
Instructions for Getting Started with
Estimated Start-Up Costs.............................17
Instructions for Getting Started on Profit &
Loss Projections...........................................19

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MARKET

Market is introduced as a structure for the societal benefit of the society. Market structure
consists of various forms of market, the forms are characterized according to the nature and
degree of competition which exists in the market for goods and services. The structure of the
market both for the goods market and the service or the factor market is to be judged by nature
of competition which is prevailing in a particular type of market.
Ordinarily ‘Market’ refers to a physical area of place where commodities are bought and sold.
In Economics, market is a mechanism or arrangement through which the buyers and sellers of
a commodity or service come into contact with one another and complete the act of sale and
purchase of the commodity or service on mutually agreed prices.
A market is a physical form like a retail outlet, where the sellers and buyers can meet face-to-
face, or in a virtual form like an online market, where there is an absence of direct physical
contact between the sellers and the buyers.
Market may be a place perhaps may not be. Market can exist even without the direct physical
contact of the buyers and the sellers.

Forms of
Market

Perfect Imperfect Monopoly

Monopolistic Oligopoly
Competition Competition

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MONOPOLY

Monopoly refers to market situation in which there is only single seller or producer of a
commodity with no close substitute.
“Mono” means single and “poly” means seller.
In a monopoly type of market structure, there is a single seller, here this single seller meaning
the firm will control the entire market structure. It can set any determined price of its own
wishes since it has all the market power under his dominance. The consumers do not have
any other alternative than paying the price set by the seller.
Monopolies are the most undesirable form of market structure. Here the consumer loses all
their power and thus the market forces become irrelevant. However, a pure monopoly is rather
rare in reality.

Features-
 Single seller and large number of buyers.

 Negatively sloped demand curve.

 No close substitutes.

 Restrictive entry of new firms.

 Full control over price

 Price Discrimination

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MONOPOLISTIC COMPETITION

Monopolistic Competition refers to market in which there are large number of sellers
selling closely related differentiated products to a large number of buyers. Each firm
has partial control over price of market product. This market condition is combination
of monopoly and perfect competition.
This competition is a realistic scenario. In monopolistic competition, there are a large number
of buyers and sellers. But the difference is that they do not sell homogeneous products. The
products are similar but all sellers sell differentiated products. The sellers here can charge
marginally a higher price as they enjoy a dominant position in this form of market structure.

Features-
 Large number of buyers and seller.

 Product Differentiation: The products of each firm are differentiated from the other on the
basis of color, taste, packing, trademark, size and shape.

 Freedom on entry of new firm.

 Selling Cost: Cost on advertisement and sales promotion.

 Imperfect mobility: Factors of production and products are not perfectly mobile.

 Elastic and downward sloping demand curve.

 Lack of perfect knowledge.

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PERFECT COMPETITION

Perfect Competition is a form of market in which there are very large number of buyers
and sellers of a homogeneous product. Price is determined by the market forces of the
supply and demand. An individual firm is a price taker.
Under perfect competition, each firm is a price taker and the industry is a price maker. This is
because there are a large number of firms selling homogeneous goods, i.e., similar goods. If
any firm increases its price, the buyer will shift to another producer. If the firm reduces the
price, it will not be able to cater to the demand that will be shifted to it on reducing the price.
The market price in the industry is determined by the intersection of the market supply and
market demand curves. Therefore, individual firms take the market price, so determined, as
fixed and adjust their supply accordingly.

Features-
 Very large number of buyers and sellers.

 Homogeneous product/identical products.

 Free entry or exit of firms.

 Perfect knowledge.

 Perfect mobility of factors of production.

 Absence of transportation cost.

 Firms are price taker and industry are price maker.

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OLIGOPOLY- INTRODUCTION

The term oligopoly is derived from two Greek words. “Oligi” which means few “Polien”
means to sell. It is a competition between two big sellers each one of them selling either
homogeneous or differentiated products.
An oligopoly is a market form wherein a market or industry is dominated by a small group of
large sellers (oligopolists). Oligopolies can result from various forms of collusion that reduce
market competition which then leads to higher prices for consumers. Oligopoly has its own
market orientation. With few sellers, each oligopolist is likely to be aware of the actions of the
others. According to game theory, the decisions of one firm therefore influence and are
influenced by decisions of other firms. Popular companies in this situation may employ
restrictive trade practices in order to inflate prices and restrict production.
The competition in an oligopoly may be greater where there are more firms in an industry. In
such kind of market form, all the firms try to outshine each other and hence a huge and tough
competition runs within them.

Features-
 Few Sellers

 All the firms produce homogeneous or differentiated product.

 Under oligopoly demand curve cannot be determined. It has a kinked demand curve.

 All the firms are interdependent in respect of price determination.

 Price rigidity.

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HISTORY & BACKGROUND

Oligopoly, the economist’s analogue to oligarchy in political science, is defined as a market

situation where independent sellers are few in number.
The origin of the term is not clear, but it is known to have appeared in the original, 1518 Latin
version of Thomas More’s Utopia.
Common usage of the term in English writings, however, dates from the 1930s (see
Chamberlin 1957). The central analytical problem with which the theory of oligopoly is
concerned is how each of the few sellers reacts to the economic activities of its rivals in order
to bring about determinate equilibrium solutions.
The theoretical problem is therefore conceptually different from, and vastly more complex than,
that of either pure monopoly or pure competition.
The monopolist’s revenue function is identical with the market demand schedule; that of the
pure competitor is easily derivable from a given market price which, by assumption, cannot be
affected by any one of the numerous competing firms.
Hence, neither the monopolist nor the purely competitive firm must consider how alternative
actions by rival firms will affect its own revenue possibilities—the monopolist has no rivals and
the competitive firm has so many that it can ignore any one of them. Oligopolists not only have
rivals, but they have so few of them that each is large enough to affect the others significantly.
Their prices, outputs, and other relevant variables are therefore interdeterminate.
The problem of interdeterminacy among oligopolists can easily be shown by considering the
simple maximizing equations of contemporary economic theory. It is generally assumed, at
least as a first approximation to reality, that business firms seek to maximize profits. The
validity of the assumption very likely varies directly with the degree of competition in the
market. Highly competitive firms earn only a competitive return on capital even when they
pursue profits maximization.

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DEMAND CURVE

In an oligopolistic market, firms cannot have a fixed demand curve since it keeps changing as
competitors change the prices/quantity of output. Since an oligopolist is not aware of the
demand curve, economists have designed various price-output models based on the behavior
pattern of other firms in the industry. The two most popular of them are- Kinked Demand Curve
Theory and Cartel Theory. Here, we are discussing about the Kinked Demand Curve Theory.

Kinked Demand Curve

In many oligopolist markets, it has been observed that prices tend to remain inflexible for a
very long time. Even in the face of declining costs, they tend to change infrequently. American
economist Sweezy came up with the kinked demand curve hypothesis to explain the reason
behind this price rigidity under oligopoly.
According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has
a kink at the level of the prevailing price. This kink exists because of two reasons:
1. The segment above the prevailing price level is highly elastic.
2. The segment below the prevailing price level is inelastic.
The following figure shows a kinked demand curve dD with a kink at point P.

From the figure, we know that

The prevailing price level = P
The firm produces and sells output = OM
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Also, the upper segment (dP) of the demand curve (dD) is elastic.
The lower segment (PD) of the demand curve (dD) is relatively inelastic.
This difference in elasticities is due to an assumption of the kinked demand curve hypothesis.

Assumption:
Each firm in an oligopoly believes the following two things:
1. If a firm lowers the price below the prevailing level, then the competitors will follow him.
2. If a firm increases the price above the prevailing level, then the competitors will not
follow him.
There is logical reasoning behind this assumption. When an oligopolist lowers the price of his
product, the competitors feel that if they don’t follow the price cut, then their customers will
leave them and buy from the firm who is offering a lower price.
Therefore, they lower their prices too in order to maintain their customers. Hence, the lower
portion of the curve is inelastic. It implies that if an oligopolist lowers the price, he can obtain
very little sales.
On the other hand, when a firm increases the price of its product, it experiences a substantial
reduction in sales. The reason is simple – consumers will buy the same/similar product from its
competitors.
This increases the competitors’ sales and they will have no motivation to match the price rise.
Therefore, the firm that raises the price suffers a loss and hence refrain from increasing the
price.
This behavior of oligopolists can help us understand the elasticity of the upper portion of the
demand curve (dP). The figure shows that if a firm raises the price of a product, then it
experiences a large fall in sales.
Hence, no firm in an oligopolistic market will try to increase the price and a kink is formed at
the prevailing price. This is how the kinked demand curve hypothesis explains the rigid or
sticky prices.

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STRATEGIC PLANNING

Strategic planning is an organization's process of defining its strategy, or direction, and making
decisions on allocating its resources to pursue this strategy.
It may also extend to control mechanisms for guiding the implementation of the strategy.
Strategic planning became prominent in corporations during the 1960s and remains an
important aspect of strategic management. It is executed by strategic planners or strategists,
who involve many parties and research sources in their analysis of the organization and its
relationship to the environment in which it competes.
Strategy has many definitions, but generally involves setting strategic goals, determining
actions to achieve the goals, and mobilizing resources to execute the actions. A strategy
describes how the ends (goals) will be achieved by the means (resources). The senior
leadership of an organization is generally tasked with determining strategy.
Oligopolistic industry structures are actually quite common, with 2–5 firms controlling 80% or
more the profits in many business segments, from phones to automobiles to social media
advertising.
There are two dimensions for strategic planning in an oligopolistic industry structure:
 The first is to ensure that the industry remains an oligopoly. That means you need to
pay a lot of attention to suppliers that might be thinking of integrating forward into your
business space, and paying a lot of attention to customers that might be looking for
alternatives outside the narrow set of competitors. Keep an active eye on nontraditional
potential competitors.
 The second dimension is the “Prisoner’s Dilemma” modeling work that you need to do
to predict and track the behavior of your other oligopoly competitors. There is a ton of
signaling that happens in all industries, and a strategist looks at competitor behaviors
and announcements to explore where the competitors are likely to aim next. In many
industries, there are subsegments where each oligopolist has an advantage; there are
always light skirmishes where competitors test the waters to see whether a competitor
is likely to fight to retain or grow its share and spaces where it is likely to cede share,
depending on its values and core metrics. Sometimes, those skirmishes lead to full-
blown competitive attacks, pushing into one competitor’s most profitable segment and
changing the competitive dynamics of the industry. But that happens rarely, usually only
when the economy or one major competitor is weak or you sense that you have found a
point of leverage that can change the whole industry structure.

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FEATURES OF OLIGOPOLY

 Barriers to Entry
The main reason for few firms under oligopoly is the barriers, which prevent entry of
new firms into the industry. Patents, requirement of large capital, control over crucial
raw materials, etc., are some of the reasons, which prevent new firms from entering into
industry. Only those firms enter into the industry which is able to cross these barriers.
As a result, firms can earn abnormal profits in the long run.

 Non-Price Competition
Under oligopoly, firms are in a position to influence the prices. However, they try to
avoid price competition for the fear of price war. They follow the policy of price rigidity.
Price rigidity refers to a situation in which price tends to stay fixed irrespective of
changes in demand and supply conditions. Firms use other methods like advertising,
better services to customers, etc. to compete with each other.

 Few Firms
Under oligopoly, there are few large firms. The exact number of firms is not defined.
Each firm produces a significant portion of the total output. There exists severe
competition among different firms and each firm try to manipulate both prices and
volume of production to outsmart each other. For example, the market for automobiles
in India is an oligopolist structure as there are only few producers of automobiles.

 Role of Selling Cost

Due to severe competition ‘and interdependence of the firms, various sales promotion
techniques are used to promote sales of the product. Advertisement is in full swing
under oligopoly, and many a times advertisement can become a matter of life-and-
death. A firm under oligopoly relies more on non-price competition.

 Interdependent
Firms under oligopoly are interdependent. Interdependence means that actions of one
firm affect the actions of other firms. A firm considers the action and reaction of the rival
firms while determining its price and output levels. A change in output or price by one
firm evokes reaction from other firms operating in the market. For example, market for
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 cars in India is dominated by few firms (Maruti, Tata, Hyundai, Ford, Honda, etc.). A
change by any one firm (say, Tata) in any of its vehicle (say, Indica) will induce other
firms (say, Maruti, Hyundai, etc.) to make changes in their respective vehicles.

 Group Behaviour
Under oligopoly, there is complete interdependence among different firms. So, price and
output decisions of a particular firm directly influence the competing firms. Instead of
independent price and output strategy, oligopoly firms prefer group decisions that will
protect the interest of all the firms. Group Behaviour means that firms tend to behave as
if they were a single firm even though individually, they retain their independence.

 Homogeneous Products
The firms under oligopoly may produce homogeneous or differentiated product.
I. If the firms produce a homogeneous product, like cement or steel, the industry is
called a pure or perfect oligopoly.
II. If the firms produce a differentiated product, like automobiles, the industry is
called differentiated or imperfect oligopoly.

 Cartels
With a view to avoiding competition, oligopoly firms often form cartels. A cartel is a
formal agreement among the firms to avoid competition. It is a sort of collusion against
competition. Therefore, it is often called collusive oligopoly. Under it, output and price
are fixed by different firms as a group.
Sometimes, lending firm in the market is accepted by the cartel as a ‘Price Leader’. All
firms in the cartel choose the same price as set by the price leader. A cartel takes full
control of the market. It makes monopoly profits.

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TYPES OF OLIGOPOLIES

 Collusive Oligopoly

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Instructions for Getting Started with Estimated Start-Up
Costs
Determining a business' startup costs is critical to ensure enough cash is available to begin
business operations within the budgeted time frame as well as within the cost budget. Startup
costs typically fall within two categories: monthly costs and one-time costs. Monthly costs
cover costs that occur each month during the startup period, and one-time costs are costs that
will be incurred once during the startup period.
Steps for preparation:
 Step 1: Enter the company name and the date this estimate is being prepared.

 Step 2: Enter the number of months and the monthly cost for each cost item that is
recurring. For one-time costs only, skip the monthly costs. If there are cost items that have
both recurring and one-time amounts, enter those as well. The total cost will calculate
automatically in the far-right column.

 Step 3: Once all of the costs are entered, review the individual items and total amount to
see where the budget can be fine-tuned or move something out into the future when more
revenue is coming in.

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 START-UP COSTS
Home-Based Agency Date
REVENUE JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YTD
Estimated Product Sales
Less Sales Returns & Discounts
Service Revenue
Other Revenue
Net Sales
Cost of Goods Sold
Gross Profit
EXPENSES JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YTD
Salaries & Wages
Marketing/Advertising
Sales Commissions
Rent
Utilities
Website Expenses
Internet/Phone
Insurance
Travel
Legal/Accounting
Office Supplies
Interest Expense
Other 1
Total Expenses
Income Before Taxes
Income Tax Expense
NET INCOME
* In the service industry, Cost of Goods Sold is the monetized value of the time spent on the client.

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Instructions for Getting Started on Profit & Loss
Projections
Completing projections for Profit and Loss of a new company is a good exercise to understand
and communicate when the company will begin to break even and see how sales and profits
will grow. The top portion of the model to the left, Revenue, is a good way to forecast sales,
month by month for the first year. The lower portion then applies estimated expenses for the
same period of time to derive the business' profitability.
Steps for preparation:
 Step 1: Enter the company name and the date this projection is being prepared.

 Step 2: For each month, beginning in January or whenever the start is estimated, enter the
expected sales to be. This could be for a single service or multiple services. Add lines to
this model for additional offerings. From this, subtract any product returns or discounts that
are to be tracked (these should be shown as negative numbers, for example, -10). Below
Net Sales, enter the Cost of Goods Sold. This refers to the monetized value of the time
spent on a particular client.

 Step 3: For each month, enter the estimated salaries, marketing, utilities, and other items
that are projected.

 Step 4: Once all of the costs have been entered, review the individual items and total
amount to see where projections can be fine-tuned or move something out into the future
when more revenue is coming in. The objective is to get to profitability and positive cash
flow as quickly as possible.

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