Introduction

Earlier chapters of the NCERT Class 12 Introductory Microeconomics course studied perfect competition — a market structure in which both consumers and firms are price takers. That structure is approximated by a market that satisfies four conditions: (i) there are a very large number of firms and consumers, so that the output of each firm and the purchase of each consumer are negligibly small compared with the market total; (ii) firms are free to enter and to exit the market; (iii) the output of every firm is indistinguishable from that of the others, and no other industry's output can substitute for it; and (iv) firms and consumers have perfect knowledge of output, inputs and their prices.

This chapter — a favourite theme in CBSE Class 12 microeconomics questions and answers — examines what happens when one or more of these conditions is not satisfied.

• If entry is not free (condition ii is dropped), a market may end up with only a few firms. In the extreme, it may have a single firm with many buyers — this is a monopoly. A market with a small number of large firms is an oligopoly. Notice that dropping condition (ii) also drops condition (i).
• If the goods of different firms are not indistinguishable (condition iii is dropped) but are only close substitutes, and conditions (i) and (ii) still hold, the structure is called monopolistic competition.

The chapter therefore studies three non-competitive market structures — monopoly, monopolistic competition and oligopoly — and, along the way, builds the revenue concepts (total, average and marginal revenue) that a student needs for NCERT Class 12 economics previous-year questions on the theory of the firm.