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10.4 Market Struchure and Price Determination Under Perfect Competition
into
4. Free Entry and Exit of Firms: There is free entry of new firms
or any oher
the market. There is no legal, technological, economic, financialmarket.
barier to their cntry. Similarly, existing firms are free to quit the Thus,
the mobility of fims ensures that whenever there is scope in the business, new
entry will take place and competition willremain always stiff. Due to the natural
he
siffness of competiion, inefficient firms would have to eventually quit
industry
5. Perfect Knowledge of Market Conditions: Perfect competition
he
requires that all the buyers and scllers must possess perfect knowledge aboutand
exisung market conditions, especially regarding the market price, quantities
sources of supply. When there is such perfect knowledge, no buyer could be
charged a price different from the market price. Similarly, no seller would
unnecessarily lose by selling at a lower price than the prevailing market price.
This way, perfect knowledge ensures transactions at a uniform price.
6. Perfect Mobility of Factors of Production: A necessary assumption
Perfect
of perfect competition is that factors of producion are perfecly mobile. also
mobility of factors alone can ensure easy entry or exit of fims. Again it
ensures that the factor costs are the same for all firns.
7. Government Non-Intervention: Perfect competition also imphes
that there is no govemmentintervention in the working of market economy. That
on supply of
is to say, there are no tariffs, subsidies, rationing of goods, control Government
raw materials, licensing policy or other govemment interference.
non-intervention is essential to permit free entry of firms and for automatic
adjustment of dernand and supply through the market mechanism.
8. Absence or Transport Costs Element: It is essential that competitive
position of no firm is adversely affected by the transport cost differences. Ittheis
to
hus assumed that there is absence of transport cost as all fims are ckoser
market or there is equal transport cost faced by all, as all firms are supposed o
be equally far away from the make.
Pure and Perfect Competition
Adistincuion is ofen made between pure competition and perfect compe
tition. But this distinction is more a matter of degree than of kind. For a market
to be purely compeuive, three fundamental conditions mustprevail. These are:
(iii)
(i) a large number of buyers and sellers; (ii) a homogeneity of product and tour
the free eniry orexit of firms. For the market to be pertecly compeitive,
addiional conditions must be fulfilled, viz., (a) perlect knowledge of market, (b)
perfect mobility of factors of producion, (c) absoluie government non
intervention and (d) no ransport cost difference.
Incidentaly, the term 'perfect competition' is traditionally used by the
British economists while discussing the price heory. American economists,
 Chapter 11

Price Determination Under Monopoly

1. DEFINITION OF MONOPOLY
Monopoly is a well-defined market structure where there is only one seller
who contols the entire market supply, as thcre are no close substitutes for his
product and there are barriers to the entry of rival producers. This sole seler in
he market is called "monopolist". The term 'monopolist" is derived from the
Greek word"mono", meaning"single", and "polist" meaning 'scller". Thus, the
monopolist may be defined as the sole seller of a product which has' no close
substitutes. The monopolist is taced by a large number of compcting buyers for
his product. Evidenuy,monopoly is the antithesis of competition. In a monopoly
market, the producer (the monopolist), being the sole seller, has no direct
competitors in either the popular ór technical sense. Thus, the monopoly market
model is the opposite extreme of perfect competition.
Features of Monopoly
The characteristic feaures of a mongpoly fim are:
1. The monopolist is the sole producer in the market. Thus,
under mònop
oly, firm and industry are identical.
2. There are no closely compeitive substitutes for the product. So the
buyers have no alternauve or choice. They have either to buy the product or go
without it.
3. Monopoly is a complete negation of competition.
 I.2 Price Determination Under Monopoly
4. A monopolist is a price-maker and not a price-taker. In fact, his price
fixing power is absolute. He is in a position to fix the price for the product as he
ikes. He can vary the price from buyer to buyer. Thus, in a competitive industry,
here is a single ruling price, while in a monopoly, there may be price
differentials.
5. Amonopoly firm itself being the industry, it faces
adownward-sloping
demand curve for its product. That means it cannot sell more
price is lowered. output unless the
6. A pure monopolist has no immediate rivals due to certain barriers to
entry in the field. There are legal, technological, economic or natural obstacBes,
which may block the entry of new firms.
7.. Since a monopolist has a complete control over the market
the absence of a close or remote substitute for his product, he can fix thesupply as
in
price
well as quantity of output to be sold in the market.
Though a monopolist is a price-maker, he has no unlimited power to charge
a high price for his product in the market. This is because, he cannot disregard
the demand situation inthe marke. If buyers refuse to buy at a very high
he has to keep a lower price. He will produce that level of output which price,
maximises his profits and charge only that price at which he is in a position to
dispose of his entire output. Thus, a monopolist sets price for his product in
relation to the demand position, and not just fix any price he likes.
2. ENTRY BARRIERS: BASES OF MONOPOLY
The various factors and circumstances which act as entry barriers and cause
the emergence of monopoly and its growth may be enlis1ed as follows:
1. Natural Factors: In many cases, natural factors create a monopolistic
position which is described as "natural monopoly". For instance, in many
professional services, the natural talent and skill bestow monopoly on some
individuals. For instance, asurgeon who is more expert and popular can charge
higher fees than others in the field, as he has the monopoly of his skill. So is the
case with a lawyer, a singer or an actor.
2. Control of Raw Materials: Sometimes, monopoly is acquired
through the sole ownership or control of esential raw materials by a fim, as it
would be an effective barrier to the entry of other firms in the field.
3. Legal Restrictions : Legislative enactments regarding patents and
copyrights, trade marks, etc., bestow monopoly on some privileged firms, and
such legal provisions end to prevent the entry of potenial competitors in the
ficld. For example, when apatent or copyright is granted to a firm, no other fim
Can imitate its products.
 Cost --Output Relation
8.2

CosT
2. OUTLAY CosT AND OPPORTUNITY
is
Outlay cost refers to the actual financial expenditure of the firm. It
recorded in the fim's books of account. For instance, payment of wages,
nterest, cost of raw materials, cost of machincries, etc. are the actual or outlay
Costs.

Opportunity cost, on the other hand, is a notional idea. It is not the actual
expenditure incurred by the firm. It is measured in termsof the opportunity lost
It represents sacrificed alternatives.Opportunity cost may be measured in terms
of profits from the next best alternative venture that are foregone by the firm by
using the available resources for a particular business.
Usually, the opportunityy cost of investing owned capital fund in the business
is measured in terms of the current interest rate, as the businessman could have
lent this money instead of investing in business and earned interest thereon.
Thus, interest is the sacrifice of investing owned business capital. It is its
opportunity cost. It is just a notional idea which does not appear in the books of
account.

Thus, the opportunity cost is measured in terms of the forgone benefits from
the next best alternative use of a given resource.

Definition: The opportunity cost of a given economic resource is the

forgone benefits from the next best alternative use of that resource.
In other words, the opportunity cost of producing a certain commodity is the
value of the other commodity that the resource usedin its production could have
produced instead.
It should be noted that opportunity cost of anything is just the next best
alternative (the most valuable other commodity) forgone in the use of productive
resources and not all alternative possible uses.
Importance of the Concept of Opportunity Cost
The concept of opportunity cost has great cconomic significance.
1. Determination of Relative Prices of Goods : The
concept of oppor
tunity cost is useful in explaining the determination of relative prices of different
goods. For instance, if the same group of factors can produce either one car or
six Scooters, then he price of one car will tend to be at least six times that of one
SCOOte.
2. Determination of Normal Remuneration to a Factor: The opportu
nity costsets the value of a productive factor for its best alternative use It
imnliee
hot if anroductive factor is to be retained in its next best
becompensated for or paid at lcast what it Can carn from itsalternative use, it must
next best altermative
 Cost Output Relation 8.3

use. For instance, if acolege professor can get an alternative employment in a

bank as an officer at asalary of Rs. 3,000 per month, the college has to pay at least
Rs. 3,000 as salary to retain him in the college.
3. Decision-Making and ETicient Resource Allocation: The conceptof
opportunity cost is essential for rational decision-making by the producer. This
can be explaincd 'with the help of an example. Suppose, a producer in the
automobile industry has to decide as to whether he should produce motor cars or
SCOoters out of his given resources. He can arrive at a rational decision by
measuring the opportunity costs of producing cars and scooters and making a
comparison with the prevailing market prices of these goods. Suppose, oppor
tunity cost of 1 motor car is 6 scooters. The price of the scooter is Rs. 10,000,
while the price of the car is Rs. 70,000. In this case, it is worthwhile to produce
cars rather than scooters. Because, if he produces 6 scooters, he will get only Rs.
60,000, whereas a car fetches him Rs. 70,000, that is, Rs. 10,000 more. This
Would alsomean an efficient resource allocation.
Likewise, a factor agent or owner will decide about the use of the economic
Sources in that occupation where its opportunity cost is high. For instance, if
an Economics Professor can get a job in a bank as an economist on a monthly
salary of Rs. 4,000 against Rs.3,000 in acollege, then it is quite likely that he
would resign from the college and join the bank. It would also mean a more
efficient use of his knowledge and talent.
It follows that a resource will always tend to move to or will be used in an
occupation where it has a high opportunity cost. Thus, the concept of opportunity
cost serves as a useful economictool in analysing optimum resource allocation
and rational decision-making.
3. ExPLICIT AND IMPLICIT MONEY CosTS
Cost of production measured in terms of money iscalled the money cost.
"Money cost" is the monetary expenditure on inputs of various kindsraw
materials, labour, etc., required for the output, i.e., the money spent on
purchasing the different units of factors of production needed for producing a
commodity. Money cost is, therefore, the payment made for the factors in terms
of money.
While analysing total money costs, economists speak of explicit and
implicit money costs. To determine total costs, they include both explicit as well
as implicit money costs.
Explicit or Out-of-Pocket Costs
Definition: Explicit costs are direct contractual monetary payments in
Curred through market transactions.
Explicit costs refer to the actual money outlay or out-of-pocket expenditure
of the firm to buy or hire the productive resources it needs in the process of
production.