Explain the implications of the following in a perfectly competitive market:

(a)Large number of buyers

(b)Freedom of entry and exit to firms

OR

Explain the implications of the following in an oligopoly market:

(a)Inter-dependence between firms

(b)Non-price competition

a) Large number of buyers: A perfectly competitive market is that market which includes large number of buyers and sellers.

i) A homogeneous product is produced by them.

ii) When there are more number of buyers, the demand of an individual buyer is only a small portion of the market demand.

iii) Individual buyers cannot influence the market price of a good by varying their demands.

Hence, an individual buyer is a price taker and not a price maker.

b) Freedom of entry and exit to firms: In a perfectly competitive market new firms are free to enter and existing firms are free to exit.

i) This situation is only made possible in the long period as new firms will join the industry with the attraction of extra-normal profit.

ii) There will be a rise in the market supply, and therefore, the price will decrease.

iii) Thereby the extra normal profit will decline.

iv) Further, if the industry incurs extra normal loss, some existing firms will tend to leave the industry which will lead to a decline in market supply and market price.

v) The industry will not incur extra normal loss. This is how the firms in the long run earn neither extra profit nor extra loss in the industry.

Hence, firms were able to earn normal profit which prevents a firm from exiting or a new firm from entering the industry.

OR

a) Interdependence between firms: In an oligopoly market, the price and level of output of one firm impacts the price and level of output of rival firms. Keeping in mind this impact in mind, a firm decides the price and output in accordance with prevailing market conditions. Hence, a high degree of interdependence exists among competing firms, especially with respect to price and quantity of output.

b) Non-price competition: In an oligopoly market, firms donot compete each other with changes in the price.

i) If the firm increases the price, rival firms may not increase it, so it will lead to a loss of the market.

ii) Consumers will shift to rival firms.

iii) On the other hand, if the firm decreases the price, the rival firms may decrease it, so it will lead to a loss of total revenue.

iv) There will not be increase in the demand for the product.

v) They take into consideration the decisions of rival firms, and hence, the price does not move freely and it leads to non-price competition.

vi) High selling cost prevails in the market, resources are not fully used and welfare is not maximised.