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Perfect competition refers to a market situation in which there are large number of buyers and sellers of homogenous products. The price of the product is determined by industry with the forces of demand and supply.

Perfect Competition Market: It refers to the market condition in which there are large number of buyers and sellers of homogenous products. The price of the product is determined by the forces of demand and supply in the market. Maximum production that a firm can produce is relatively small compared to the total demand of the industry’s product so that it cannot affect the price by changing the supply of the output. With many companies and products under the perfect competition, no individual firm in this is in a position to influence the price of the product.

The following similarities and dissimilarities are found in monopolistic and monopolistic competition markets :

Similarities :

1. In both markets, the equilibrium lies on the point where marginal cost and marginal revenue are equal (MC = MR).
2. In both the markets, the demand curve or the average revenue (AR). curve slopes downward from left to right, and the marginal revenue (MR) curve is below it.
3. In both markets, the equilibrium price of the product is more than its marginal cost.
4. Producers have control on the price of product in both markets. He can make slight changes in the product’s price, as per his wish.
5. In both markets, the equilibrium, point is below the average revenue curve.
6. In both markets, firms produce less than the optimum quantity. Hence, they have additional capacity of prodution.

Dissimilarities :

1. In a monopoly there is only one producer firm, while in monopolistic competition, the number of firms is more.
2. No product differentiation is done in monopolistic market, while it is a key feature in monopolistic competition.
3. There is more of firm’s control on product pricing in a monopoly, since there is no competition, while in monopolistic competition, the firm does not have such absulute control over price, since it has to compete with a number of firms in the market.
4. The demand curve of a monopolistic firm is of a steeper slope, while the demand curve in a monopolistic competition has a less steeper slope.
5. In monopolistic market, the firm receives extraordinary profit in the long term, while in monopolistic competition, the firm receives only normal profit in the long term.
6. A monopolist can adopt the policy of price discrimination, but this is not possible in a monopolistic competition.
7. In a monopolistic market, the price of the product is found to be the same in the entire market, since a single product is produced by a single firm, but because of product differentiation in a monopolistic competition market, prices of products may be different.
8. Sales costs are not generally found in monopolistic market, while in monopolistic competition, sales costs are significant due to mutual competition among firms.

(a) In monopolistic competition, firms can differentiate their products.

Main item of capital receipts is public debt.

Revenue receipts are those money receipts which do not create a liability for the government and also do not lead to reduction in assets of the government.

Primary Deficit is the difference between Fiscal Deficit and Interest Payment. 

It is estimated as under:
Primary deficit = Fiscal deficit – Interest payment
PD = FD – IP
Primary deficit indicates government borrowing on account of current year expenditure and current year receipts of the government.

Fiscal deficit is the excess of Total Expenditure over Total Receipts. 

It is estimated as under:
Fiscal deficit = Total expenditure – Total receipts other than borrowings.

Revenue deficit in government budget shows excess of Revenue Expenditure over Revenue Receipts.
Revenue Deficit = Revenue Expenses – Revenue Receipts

Following are the two objectives of government budget:

1. High rate of GDP growth: Through its revenue and expenditure policy, the government strives to achieve a high rate of GDP growth. It makes investment expenditure on infrastructure.

2 Balanced Regional growth: While allocating funds for infrastructural development, focus is placed on the development of backward regions of the country.

Government budget is a statement of the estimates of the Government Receipts and Government Expenditure during the period of financial year. It unveils/reveals fiscal policy of the government, focusing on growth and stability of the economy.

A direct tax is that tax the final burden of which falls on that very person who is liable of paying it to the government.

Following are the objectives of fiscal policy :

1. Contributing resources for economic development.
2. Allocation of resources
3. Removing the inequalities does in distribution of income and wealth.

Expenditure on subsidies do not cause any reduction in liability of the government and also does not create any asset for the government. Revenue expenditure refers to the estimated expenditure of the government in a fiscal year which does not create assets or causes a reduction in liablities. Therefore, expenditure on subsidies is termed as an important item of Revenue Expenditure.

Payment of interest does not create any asset for the government and also does not cause any reduction in liability of the government. Therefore, it is classified as Revenue Expenditure.

The central government offers loans to the state governments to cope up with the emergent situations. When these loans are recovered, assets of the government are reduced. Accordingly, these are classified as Capital Receipts.

Non-planned expenditure refers to the expenditure which is not related to the specified plans and programmes of development, and is also not related to the assistance of the central government to state governments.

Planned expenditure refers to that expenditure which relates to the specified plans and programmes of development and assistance of the central government to the state governments. It includes both Revenue Expenditure and Capital Expenditure.

Capital expenditure refers to the estimated expenditure of the government in a fiscal year which creates assets or causes a reduction in liabilties.

Following are the two characteristics of taxes :

1. It is a payment given by public to the government which is compulsory.
2. Payments received by taxes is used for social welfare and for public benefit

When government spends on government services, it is termed as non-development expenditure.
For example : expenditure for administration and expenditure for defence equipment.

Those goods whose benefit is for everyone are called public goods, like roads and hospitals. Private or personal goods are those goods whose benefit is not for the public but for the individuals, like personal car.

Payment of loans is said to be a capital expenditure because it creates assets for the government and also causes reduction in liabilities of the government.

Taxes received by the government do not create a liability for the government and also do not cause reduction in assets of the government which are two characteristics of Capital Receipts. Therefore, tax received by government is not considered as capital receipt.

The monopolist resorts to restriction of supply and charging of high prices because he a has the assurance that there are no competitors for him. Therefore, if the monopolist is faced with the likelihood of possible competition, he will not exercise his monopoly powers freely.

The monopolist employs various devices to injure and destroy rival firms. Therefore, the government should prohibit these unfair means of competitive commerce. 

However, implementing this policy’ is riot so easy:

1. The government can fix a price alone to regulate the rate reduction policy, but monopoly offers other types of concessions and exemptions to eliminate each other’s rivals.
2. New competitors have limited capital to successfully start production.
3. The monopolist leverages the mass production with reduced costs and increased efficiency. This is possible due to the well-established long-standing nature of monopoly firm.
4. The monopolist has a good financial position, so that he can spend a large amount on competitive advertising, which helps him to capture the market and to force competitors out.
5. The monopolist can set up his companies in his own name to sell the products of his rivals.
6. Existing firms have reputation and enjoy the goodwill of consumers, which makes it difficult for a new firm to successfully compete with it.

The following differences are found between the two:

(a) A monopolist fixes a price at a higher level than marginal cost, whereas a perfectly competitive firm sets price equal to MC.
(b) A monopolist can make super-normal profits even in the long run, as entry of new firms to the industry is not possible under monopoly. On the other hand, a perfectly competitive firm makes only normal profits in the long run.
(c) Price is higher and output smaller under monopoly firms as compared to those under perfect competiton.
(d) Monopoly equilibrium is possible whether MC is rising, remaining constant or falling, whereas for a firm working under perfect competition, MC must be rising at the equilibrium output.
(e) Monopoly equilibrium is usually achieved below the optimum size, that is, below the output level where LAC’ is minimum.
(f) A monopolist can discriminate prices, whereas price discrimination is not possible in a perfectly competitive market.

Price discrimination is possible in the following ways:

1. Price discrimination by a seller is possible when it is not possible to transfer any unit of the product from one market to another.
2. Secondly, price discrimination can occur if it is not possible for the buyers in the dearer market to transfer themselves to cheaper market to buy the product or service at a lower price.

In view of the above two essential conditions, price discrimination is possible in the following cases:

(a) The nature of commodity or service is such that it cannot be transferred from one market to another.
(b) There exist long distances or tariff barriers between the two markets in which price discrimination is practiced.
(c) There is a legal sanction for price discrimination.
(d) There are preferences or prejudices on part of some buyers to buy products at higher prices.
(e) Ignorance and laziness on the part of buyers.

Price discrimination is profitable when at the single monopoly price, price elasticity of demand in one market is different from price elasticity of demand in the other. Only when price elasticities in the two markets at a single monopoly price are different, marginal revenue in one market will be greater than in the other and as a result it will pay the seller to shift some units from one market to the other and charge different prices in the two markets to increase profit.

On the basis of sales, the markets are classified as follows:

(a) Retail MarketThe market in which a small quantity of goods is sold to consumers is called Retail Market.
Example: Grocery shop of the locality, sweet shop and clothes shop, etc.

(b) Wholesale MarketIn this market, the sale of goods is done in large quantities. In this market, wholesalers sell goods to the retailer.
Example: Textile market, Drug market, etc.

On the basis of commodity, the markets are classified as follows:
(a) Common Market: Common market is the place in which various types of products are sold and bought.
Example : Clothes, Utensils, Jewellery, grocery markets are found in a common market.

(b) Special Market: It is the market in which special kinds of products are sold and bought.
Example: Grocery market, Clothes market, Jewellery market, Fruit market, etc.

(c) Market of Sales from Sample: When the sale of the goods is done by looking at the sample then it is called a market of sale by sample. Sale is usually done by showing a sample in wholesale markets.

(d) Market of Sales from Grading: Purchase and sale of some items is based on grading.
Example: Usha Stitching Machine, K-68 Wheat, Lux Soap, Dalda Ghee, Hero Cycle, etc.

In perfect competition, the price is fixed by the forces of market demand and market supply. It is at the price thus determined that all the firms in the industry sell their output. On its own, no firm can affect the prevailing market price. The number of firms under perfect competition is so large, that no individual firm, by changing its sale, can cause any meaningful change in the total market supply. Accordingly, the market price cannot be affected on the basis of market supply.

All firms in a perfectly competitive industry produce homogeneous products. In such a situation, if any firm fixes its price higher than the equilibrium market price, buyers would shift from this firm to other firms in the market. The policy of higher price will simply fail. Firm’s demand curve under perfect competition is perfectly elastic. It means that a firm can sell whatever amount it wishes to sell at the existing price. In such a situation, the policy of attracting buyers by lowering the price would result in unnecessary loss.

Thus, it is concluded that under perfect competition, it is neither possible nor desirable for an individual firm to change the price of the product. The firm is simply a price taker, not a price maker.

Following are the four characteristics of perfect competition market:

(a) Large Number of Firms In perfect competition, there are large number of firms in the industry. A single firm is not in a position to influence the price of the product by increasing or decreasing its output. The individual firm under perfect competition therefore takes the price of the product as a given datum and adjusts its output to earn maximum profits. In other words, a firm under perfect competition is price taker and output adjuster.

(b) Homogenous ProductIn perfect competition, the products produced by all firms in the industry are fully homogenous and identical. It means that the products of various firms are indistinguishable from each other; they are perfect substitutes for one another.

(c) Perfect KnowledgeBuyers and sellers are fully aware of the price prevailing in the market. Buyers know it fully well at what price sellers are selling a given product. As a consequence, only one price prevails in the market.

(d) No Extra Transport Cost For one price to prevail throughout the market, it is essential that there is no extra transport cost for the consumers while buying a commodity from different sellers.

In perfect competition, a firm’s marginal revenue curve is in the form of a straight line parallel to the X axis.

In the short-run, a monopolistic competitive firm’s equilibrium is established at the level of output where its MC= MR, and MC is rising at this level of output.

Short period equilibrium does not mean the same price for all firms. Uniformity in prices cannot be expected because the products of various firms are not identical. Cost of production of firms also varies. Normally average cost (AC) of large firms is less whereas it is high for small-sized firms. Therefore, supernormal profits are likely for some firms. Normal profits for some others and loss to remaining firms would accrue. 

Thus, a monopolistic competitive firm, in the short run, may:

(a) Earn super normal profits, i.e., AR > AC
(b) Earn normal profis, i.e., AR = AC
(c) Incur losses, i.e., AR < AC.

All monopolists do not belong to the same class. Some of them are more powerful while some are less powerful. 

Therefore, the ability to influence price is not uniform in all cases:

(a) The more the variation between marginal cost and price, the monopolist power will also be correspondingly higher.
(b) Powerful monopolists are able to obtain larger monopoly profits.
(c) Where the elasticity of demand is less, the extent of monopoly power will be more.
(d) Monopoly power will be less, where cross-elasticity of demand is high.

Even in the long run, there is always a tendency to protect the extra profit for the monopoly firm. Entry into the industry is prohibited, due to the fact that no firm can enter the market, unlike the perfect competition. Thus, when a monopolist earns long lasting super-normal benefits, then no other producer can enter the market in hopes of sharing super general profit potential. Therefore, long-lasting super normal benefits also do not end.

Lack of entry into the industry as well as lack of substitutes in the market means that the monopolist does not have an optimum size plant in the long-run or has to use it at optimum capacity. The monopolist will adjust his plant to the demand conditions in the market.

On the basis of area, markets are classified as follows :
(a) Local Market When the buyers and sellers of product are spread to a village, suburb or township, then the market is called local market. 

Example : Markets for perishable goods -butter, eggs, milk, vegetables, etc.

(b) Regional Market When the market of any product is limited to a region only, then it is called regional market.
Example: Semi-durable goods – Shirts.

(c) National Market When the product’s buyers and sellers are spread all over the country, then the market of that product is called national market.
Examples: Durable goods and industrial goods.

(d) International Market When the buyers and sellers of the product are spread in different countries of the world, the market of that product is called the international market.

When the price of the item decreases, the benefit of the producers decreases, due to which he either reduces the production or keeps the stock in stores waiting for a reasonable price in future. Due to the decrease in price, firms which start incurring losses exit from the industry, which reduces the supply of goods.

Correct option is (A) April 1, 1935

Correct option is (B) ₹ 5 crores

Monetary functions (Monetary responsibilities):

Controller of credit:

RBI controls credit creation of the banks by various monetary policy tools like Repo rate, Reverse repo rate, SLR, CRR etc.

Custodian of foreign exchange reserves:

• RBI holds all the important foreign exchange reserves/currencies like U.S dollars, British pounds, gold, etc. in its custody.
• RBI maintains these reserves with them so as to maintain the value of rupee as compared to other currencies under the fixed exchange rate process of IMF (International Monetary Fund).
• Fixed exchange rate regime is when the value of a country’s currency, in relation to the value of other currencies, is maintained at a fixed conversion rate by the central bank of a country.
• RBI maintains the value of rupee in the world economy by buying and selling these foreign exchange reserves in the open market.

Correct option is (B) January 1, 1949

Correct option is (B) Finance Ministry of Government of India

The full form of DEMAT account is Dematerialized account. It is an account through which shares, debentures, bonds,etc. can be held, bought and sold in electronic form.

Foreign banks entered India after the economic reforms in the year 1991.

Scheduled banks are those companies which are listed in the 2nd schedule of the RBI Act, 1934. Schedule banks can be classified into commercial banks and cooperative banks.

Correct option is (B) To transfer money from one account to other account through electronic medium

Banks can borrow funds overnight from RBI against government securities in emergency. This facility is a very short term borrowing scheme for scheduled commercial banks and is known as marginal standing facility.

Inflation means the supply of money is higher than the demand for money which leads to high prices of goods and services in the economy.

Deflation means the supply of money is less than the demand for money and hence the prices of the goods and services fall.

Prime Minister Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking? Savings & Deposit Accounts, Remittance, Credit, Insurance by all people of India.