Market Equilibrium and Non-Competitive Markets
Market Equilibrium and Non-Competitive Markets tests equilibrium shifts, price controls, monopoly pricing and monopolistic competition.
Market equilibrium and controls
Equilibrium occurs where demand equals supply; at a higher price excess supply pushes price down, at a lower price excess demand pushes it up. A price ceiling below equilibrium creates shortage, queues and black markets. A price floor above equilibrium creates surplus, as in minimum support prices.
Monopoly and monopolistic competition
A monopoly is a single seller with entry barriers; its demand curve slopes downward, so AR>MR. Equilibrium is at MR=MC, with price read from the demand curve; P>MC and deadweight loss can arise. A monopoly has no supply curve independent of demand. Monopolistic competition has many firms, differentiated products, free entry and some price-setting power; short-run equilibrium is MR=MC, long-run equilibrium at tangency of demand and AC with excess capacity.
Worked example
Demand P=100−2Q and supply P=20+2Q give equilibrium 100−2Q=20+2Q, so Q=20, P=60. A price ceiling of ₹40 makes quantity demanded 30 and quantity supplied 10, a shortage of 20. For a monopoly with demand P=100−2Q and MC=20, MR=100−4Q; MR=MC gives Q=20, P=60, so P>MC.
Traps
Do not set P=MC for a monopoly. A price ceiling above equilibrium has no effect. In monopolistic competition, long-run excess capacity is normal, not evidence of diseconomies of scale. Price discrimination requires market separation and low resale possibility.