Important Questions for Class 12 Economics Chapter 4 – The Theory of The Firm Under Perfect Competition

1) Define how free entry and free exit of a company in a seamlessly competitive marketplace imply.

Ans – Free to enter and free to exist in a perfectly competitive marketplace ensures that no firm earns abnormal or supernormal profits in the long period. All they can do is take home the normal profit since the firm gains no wildest profit due to the flexibility of easy entry and exit.

A large number of buyers and sellers in a perfectly competitive market ensures equalized profits over time through the equality mechanism in equilibrium in a perfectly competitive market.

Free Entry Access: New firms can enter the market freely without any extensive barriers. Hence, they can enter whenever the existing firms are earning substantial profits. As new firms increase the total market supply, competition increases. Usually, the market price lowers down because of competition. Hence profit for all firms as well.

Freedom to Exit: Similar is the case with freedom to exit for the firms. When some businesses make losses, the market supply gradually increases in price, and then loss gets reduced for other businesses as well. The cycle repeats till the point when all businesses will get a minimum level of supernormal profit that there is no supernormal profit in the long run.

Thus, free entry and free exit in a perfectly competitive market ensure that expert resources are assigned more efficiently in the desired sector. Companies are creating at the lowest zone on their average cost-centric curves, which means they are enhancing their productive operations to achieve maximum efficiency.

Also, as we know that the price in the market is on par with the marginal price range of overall creation, the desired efficiency can be attained without much hassle. This shows us that the perfect combination of overall goods and services created in the marketplace is what the expectations of the global consumers.

2) Explain the specific characteristic features of monopolistic competition that are considered monopolistic in general!

Ans – Monopolistic competition is defined as an industry that has several firms producing closely related products like a replica but completely different ones. A few distinct specifications of this type of structure enable individual firms to exercise some monopoly power over others.

Extensive Pool Of Sellers: There exist many sellers selling marginally varying but similar products. Each business has a tiny market share, and thus it has minimal control over its price, and its actions won’t affect the other sellers much. Many businesses create a highly competitive environment.

Product Differentiation: This allows a massive group of firms to operate with some degree of monopoly power regarding product differentiation. A firm’s product is differentiated, based on brand, size, color, shape, etc., Hence, it becomes a close resemblance but not a perfect substitute for the desired product from other firms. It therefore confers limited pricing power on firms.

Selling Price Range: Generally, firms spend money on advertisements and marketing campaigns to project differences in products, so that the consumers feel that it is superior. The selling cost enables the firm to maintain the distinction of the product and also compels the consumer to buy it.

Freedom of Entry & Free Exit: Like perfect competition, firms can enter and exit the market freely. In the long run, freedom of entry and exit bars the firm from gaining excess profits or suffering from losses for a long period. The freedom of entry and exit in perfect competition is vital in assigning the market price and the total range of profits for particular goods and services. It also ensures that companies don’t gain abnormal profits or incur extensive losses in a long period resulting in an efficient resource allocation.

Insufficient Information About The Products: The consumer, and the producer, don’t have all the relevant knowledge about the current global market dynamics; this makes them infer and, based on inferences, place a ‘preference hierarchy’ across goods. However, some consumers go for the heavily priced products of the known brand name even though products that are something closer at a lower price may be easily accessible to them.

Monopolistic competition is already present in the renowned fast-food sector. For instance, imagine Burger King and McDonald’s. Both are world-famous fast-food chains that specifically target an FMCG market by providing similar food products and customer services.

These 2 giant firms are actively seeking with each other and require direct segregation between themselves via brand recognition, product costing, and offering various food and drink items to assist their trusted customer base.

3) Explain how a supply schedule differs from a change in supply. Identify and discuss 2 variables that are influenced by a change in supply.

Ans – The difference between a supply change and a change in quantity supplied is what causes them.

Category	Change in Total Supply	Change in Supplied Quantity
Definition	A supply change happens whenever other than price determines the amount of a good to supply. i.e., the price of the total goods remains unchanged.	A change in quantity supplied happens due to the modifications in the cost of various commodities only when price changes while others remain constant.
Shifts and Movements	This causes the supply curve to shift in the opposite direction, such as shifting to the right increases or left decreases.	A movement up or down along an existing supply curve is brought about by a change in price.
Range	Supply increases and decreases.	Represents an expansion or contraction of supply

Graph for Change in Supply: This change looks like a shift in the supply curve, rightward because of an increase due to non-price factors.

Graph for Change in Quantity Supplied: An increase in quantity supplied by price will be an upward movement along the supply curve. Check out the graph where the supply curve deviated from the diagram.

Hence, if we change from p = 1 to p = 2; the quantity supplied might now rise with a span of 20 units from q = 10 (p = 1) to q = 30 (p = 2).

Ultimately, the modification in the goods supply enables product manufacturers to sell higher (or less) at any mentioned cost. Whenever there is a significant change in the total supply manufacturers will have a direct influence on the price revision forcing them to sell products at a varied cost range.

Here are some of the determinants that affect the change in supply:

Cost of Production: The inserted cost and the concurrent cost of production of goods are inversely proportional to the overall supply of the goods. Any significant change in the production cost or input price paves the way for opposing movement in the supply. For instance, whenever there is an increase in employee wages or labor expenses, the goods supply will take a massive dip.

Technological Advancement: Technological advances increase productivity by raising the supply curve. Also, it shifts the supply curve to the right. Changes in technology with an enhancement in the overall supply end up in a right shift of the supply curve. This depicts that when the tech is better, the overall supply will be a massive one compared to the rest.Prices of Related Goods: The price of other related goods can also affect supply when producers see a connection between them. For instance, ranchers may consider meat and leather related since both come from cattle. If the price of one of these goods rises, producers might shift resources toward it, affecting the supply of the other.

NCERT Questions for Class 12 Economics Chapter 4 – The Theory of The Firm Under Perfect Competition

The theory of the firm under perfect competition is a fundamental concept in economics, especially for students studying at the Class 12 level. Understanding this theory is crucial for grasping how firms operate in a market where there are many buyers and sellers. To help you prepare for your exams, we have compiled a list of important questions related to this topic. In NCERT Class 12, you will delve deeper into these concepts and learn about the various factors.