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Under this market, the products produced and sold are different, but they are close substitutes for
one another. This leads to competition among different sellers. Thus, in this market situation
every producer is a sort of monopolist and between such mini-monopolists there exists
competition. It is one of most popular and realistic market situation to be found in the present
day world. A number of examples may be given for this kind of market. Tooth paste, blades,
motor cycles and bicycles, cigarettes, cosmetics, biscuits, soaps and detergents, shoes, ice
creams etc- explain the features-Refer note
PxQ=TR=20Q-Q2
MR=20-2Q
C= Q2-28Q+2
MC=2Q-28
In equilibrium MC=MR
20-2Q=2Q-28
4Q=48
Q= 12
Price=P=20-Q----So P=20-12=8
Profit=TR-TC= 20Q- Q2-(Q2-28Q+2)
13. Distinguish between Couronts and Chamberlins duopoly model.
The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each
attempts to maximize profits by choosing how much to produce. All firms choose output (quantity)
simultaneously. The basic Cournot assumption is that each firm chooses its quantity, taking as given the
quantity of its rivals. The resulting equilibrium is a Nash equilibrium in quantities, called a Cournot (Nash)
equilibrium. as the number of firms increases, the equilibrium approaches what it would be under perfect
competition. . As concentration rises, industry performance deviates more from the norm of perfect
competition. Stable equilibrium- Closed model-
Chamberlin developed his own model of oligopoly assuming interdependence between the
competitors. He suggested that each seller seeking to maximize his profit reflects well and looks
in to consequences of his move. Assuming that there are two firms A&B let A enter in to the
market as a monopolist. A will produce OQ and charge monopoly price OP2 .When B enters ,it
considers that PM is its demand curve. Under cournots assumption, firm B will sell output
Qnprice OP1.As a result, market price fall from OP2 TO OP1.Chamberlin assumes that firm A
recognizes the interdependence between them. Here A decides to compromise with the
existence of firm B, and decided to reduce its output to OK which is half of the monopoly output
OQ.According to Chamberlin, by recognizing their interdependence, the firm reach an
equilibrium which is the same as monopoly. Draw fig-
14. Explain the stages of business cycle and contra cyclical policies in economic
planning.
Cyclical fluctuations have become a regular feature of a capitalist system. A capitalist economy
is guided by competition and profit motive. There is freedom of private enterprise, private
ownership of property and free play of market forces of supply and demand. Businessmen in
their anxiety to earn more and amass wealth, produce much in excess of the absorption capacity
of the economy causing imbalances in the supply and demand conditions. Thus, the smooth
functioning of the economy is disturbed and subject to many ups and downs. Such ups and
downs have been termed as business cycles.
techniques of credit control. As expansionary phase is mainly supported by bank credit, adoption
of a dear money policy can put an effective check on further expansion. A rise in the Bank Rate,
by raising the lending rates of the commercial banks, making credit costly will have a
discouraging effect on more borrowings. A check can be imposed on the liquidity position of the
commercial banks by raising the Cash Reserve Ratio and Statutory Liquidity Ratio. Open market
sale of securities can also be conducted to make bank rate more effective. Selective techniques,
like raising of margin requirements, rationing of credit, moral suasion, direct action, publicity
etc., can also be used efficiently to tighten the credit situation in the economy.
Apart from these direct measures indirect measures like wage control, price control etc., can also
be adopted to put a check on the inflationary trend in the economy. Such monetary measures are
found fairly successful in controlling unwieldy expansion of the economy. Many countries like
U.K., U.S.A., France, Germany and India have used monetary measures to control inflation.
Monetary Policy and the Phase of Depression:
During the period of depression, to enlarge employment opportunities and raise the level of
income all out measures are to be adopted to increase the level of investment. To encourage
investment activity the central bank has to follow a cheap money policy. The bank rate and the
lending rates of the commercial banks should be reduced; money should be made available freely
by reducing the CRR and SLR. Through open market sale of securities, Cash reserves with the
banks should be increased to enable them to lend money easily for various investment activities.
Various qualitative techniques of credit control like reducing the margin requirements, moral
suasion etc., may be adopted to encourage businessmen to borrow and invest.
Cheap money policy, to induce businessmen to borrow and invest is not very effective as
investment is more guided by the marginal efficiency of capital than the rate of interest. Because
of low level of income and low prices and the low profit margins entrepreneurs do not come
forward to borrow and invest in spite of the low rates of interest. One can take a horse to the
water but cannot force to have it; a plethora of money cannot induce the public horse to have it.
Thus monetary policy as a remedy to solve depression has its own limitations.
2. Fiscal policy:
During the period of inflation or uptrend in the economy, when the private enterprise is over
enthusiastic and there is over expansion and over production government can use taxation and
licensing policy as very effective instruments to check such unwieldy growth. Price control
measures can be adopted. Government should adopt surplus budget, reduce public expenditure
and resort to public borrowing. The cumulative result of these measures would reduce the supply
of money in circulation, purchasing power and demand. On the contrary,during the period of
depression government should adopt deficit budget, Increase the volume of public expenditure,
redeem public debt and resort to external borrowings, indulge in a moderate dose of deficit
financing, reduce tax rates, grant subsidies, development rebates, tax-concessions, tax-reliefs
and freight concessions etc. As a result of these measures, supply of money in circulation will
increase. This in its turn would raise the purchasing power, demand for goods and services,
production and employment etc. J.M. Keynes recommended a number of public works
programmes to be launched by the government to cure depression. The New Deal policy of
President Roosevelt in the U.S.A. and Blum experiment in France were based on this very belief.
3. Physical controls:
During the period of inflation, a price control policy has to be adopted where as during
depression a price-support policy has to be followed. During the period of contraction
unemployment insurance schemes, Proper management of savings, investments, production,
distribution, expansion of income and employment etc., are needed depending upon the nature of
economic fluctuations.
4. Miscellaneous Measures:
(i) Introduction of automatic stabilizers:
An automatic stabilizer (or built in stabilizer) is an economic shock absorber that helps to
smoothen the cyclical business fluctuations of its own accord, without requiring deliberate action
on the part of the government e.g., progressive taxation policy, unemployment Insurance scheme
adopted in The U.S.A.
(ii) Price support policy followed in the U.S.A. during the post war period to fight the prospects
of depression.
(iii) The policy of stabilization of the prices of agricultural products in India through
procurement and building up of buffer stocks aim at economic stability.
(iv) Foreign aid is also used for influencing the aggregate demand and supply of goods in a
country.
(v) Granting of aid might help in recovering from slump.
In addition to these, some of the measures can be adopted at international level to mitigate the
adverse effects of business cycles and promote stability in the world economic growth like
control of private investment, control and distribution of essential goods, regulation of
international investments in developing nations, creation of international buffer stocks etc.
16. Analyse the following markets for its market structure and characteristics.
a. Butter- Monopolistic competition
b.Railway---Monopoly
c. AutomobilesOligopoly
17. Assume that a factory can produce a maximum of 20,000 units of output per
month. These 20,000 units can be sold at a price of Rs 100 per unit. Variable costs
are Rs 20 per unit and the total fixed costs are Rs 2, 00,000.
You are required to calculate
1. Break-even point--------- 2500
2. Break even sales revenue ---------25000
3. Sales required to earn a profit of Rs50000------- cost+target profit
200000+50000
=31250 units
0.80