When the price of input used in the production of a commodity X increases, it will increase its cost of production, reduce his profit earned and thereby its supply shall fall in the market and vice versa, i.e.,
\(P_{ Input }\uparrow \{ CoP\uparrow Profit\downarrow \} S_{ X }\downarrow \\ P_{ Input }\downarrow \{ CoP\downarrow Profit\uparrow \} S_{ X }\uparrow \)
Explaining the above analysis with the help of a diagram given below:

(a) When the price of input rises it leads to a "decrease" in the supply of the given commodity. This is shown by the "leftward shift" of the given supply curve SS' of S₀S₀. Point X₁ is the new point of equilibrium (∵ of the intersection of the new supply curve S₀S₀ with the given demand curve DD').
OP₁ denotes the new equilibrium price, which is greater than the original equilibrium price OP. OQo denotes the new equilibrium quantity which is lesser than the original equilibrium quantity OQ.
Similarly, when the price of input falls this will lead to an "increase" in the supply of the given commodity i.e.,
\(P_{ Input }\downarrow \{ CoP\downarrow Profit\uparrow \} S_{ X }\uparrow \)
This increase in the supply is graphically shown by the "Rightward Shift" of the given supply curve SS' to S₁S₁ in the above diagram. Point Xo is the new point of equilibrium (∵ of the intersection of the new supply curve S₁S₁ with given demand curve DD') OP₀ denotes the new equilibrium price, which is lesser than the original equilibrium price of OP and OQ₁ denotes new equilibrium quantity which is greater than the original equilibrium quantity OQ.

(i) If the price prevailing in the market for a certain good is 'above the equilibrium price', say, OP I this leads to a situation of "Excess Supply' in the market. Explaining this with the help of the following diagram.

It is equal to 'ab' in the diagram. At this price OP₁, the suppliers will not be able to sell all that they want to produce. So they start offering lower price to the consumers. The supply price starts moving downwards along the supply curve SS' (from point b to X). At a lower price consumers demand more. The demand price also starts moving downwards along the demand curve DD¹. (from point a to X). Thus the gap between the supply and demand goes on narrowing as price falls. The price stops falling when it reaches OP at point X. Where Demand_X  = Supply_X.
If the price prevailing in the market is below the equilibrium price, say OP₀. At this price D_X is greater than S_X and this leads to a situation of "Excess Demand" equal to 'Cd' in the diagram. In this situation the consumers will not be able to buy all that they want. So they will start offering higher price to the suppliers and the price will start moving upward along the demand curve DD (from point d to X). At a higher price, suppliers will be willing to supply more. Thus the supply price also starts moving upwards along the supply curve (from point c to X) The price will continue to move upwards till it reaches OP at point X, where Dernand _X = Supply_X .

A perfectly competitive market is such a market in which an individual firm is a price-taker and has no influence on price which is given on fixed by the industry (price-maker).
Its main characteristics are :
(i) Large number of buyers and sellers: The number of buyers and sellers is so large that the output sold by any individual seller is very less or insignificant with respect to the total output of the industry. So, the contribution of any single seller has negligible impact on the total output being sold in the market. So, an individual seller has no impact on the price in the market.
The number of buyers is also, so large that an individual buyer has no independent significance as he purchases a very insignificant proportion of the total output being sold by this industry. So an individual buyer has no impact on the price in the market. Thus, in this market no single seller or single buyer has any significant impact on the price of the product being bought and sold in this market.
(ii) Allfirms produces and sell homogeneous products: By homogeneous products we mean that buyers do not differentiate between products of different firms. i.e. they treat products of all firms as homogeneous. It is because products of all firms are either identical or are stardardised due to which they are treated as identical. So, the buyers find products of different firms as perfect substitutes of each other. As a result, the buyers are not ready to pay different prices due to which no firm is able no influence the price.
(iii) Perfect knowledge prevails in this market: Perfect knowledge about the prevailing price of the homogenous product, exists in this market. So that, there is no exploitation of any buyer/seller. There is also a perfect knowledge to all firms in relation to input market. All firms have equal access to raw material and technology used in the production process. No firm can have a cost advantage over other firms and hence, all firms operate at a uniform cost structure.
(iv) Freedom of entry and exit: A firm can enter/leave the industry any time it wants, as there are no obstacles in way of new firms entering the industry and existing firms leaving the industry in the long run. In the short run, profits/losses are possible. If the firms make profits, new firms enter and raise the total supply of the 'industry. This reduces the market price and wipes out the profits. If the firms are incurring losses, the existing firms start leaving the industry and reduce the total supply. This will raise the price till the losses are totally wiped out.

When market for a good is an equilibrium and the supply of the good increases, following chain of effects will take place:
(i) When supply increases and price remaining unchanged, a situation of excess supply emerges.
(ii) Excess supply leads to competition among sellers, which causes the price of the good to fall.
(iii) Fall in price raises demand (expansion) and reduces supply (contraction).
(iv) These changes will continue till the market is in equilibrium again at a lower price.

Oligopoly is a market structure characterised by the presence of a few large firms (producing homogeneous or differentiated products) intensely competing against each other and recognising interdependence in their decision-making. In India, oligopoly is seen in industries such as automobiles, computers, A.C., photocopiers, etc.
The features of Oligopoly are:
(i) Few firms. There are few sellers of the commodity and each sells a substantial portion of the output of the industry. Each firm is aware that it possesses a large degree of monopoly power.
(ii) Homogeneous or differentiated product. Some oligopoly firms may sell homogeneous products (such as cement, steel, aluminium, LPG cylinders) or differentiated products (such as cars). Former one's are known as perfect oligopoly and the latter one is known as imperfect oligopoly.
(iii) Interdependence of decisions. There is interdependence of firms, as business decision of a single seller will have a substantial impact on the product price, output and profits of the rival firms, e.g., there is interdependence of decision between Pepsi and Coke, Hindustan Times and Times of India. Since the number of sellers is small, each firm has to take into consideration the possible reaction of rivals, when making business decisions.
(iv) Heavy selling and advertising costs. Due to cut-throat competition, firms incur heavy selling and advertising costs to counter the rival firm's action, to ensure their survival and growth in the industry.
(v) Price rigidity. Normally firms are afraid of competing with each other by lowering the price. It may start a price war and the firm who starts the price war may ultimately loose. Each rival firm reacts immediately to the changed price, due to which the price remains rigid in this market.
(vi) Group behaviour. Normally group behaviour is observed in the form of collective decisions and mutual cooperation by the firms.
(vii) Barriers to entry. This market is characterised by the presence of substantial barriers to entry of new firms in the industry. These barriers can be natural like requirements of huge capital or operating at minimum average cost due to economies of scale) or artificial (like patent rights, product differentiation barriers) which prevents entry of new firms in the industry and therefore enables the oligopolistic firms to earn profit in the long run.
(viii) Indeterminate demand curve. Due to high degree of interdependence and uncertainty among oligopolistic firms, sales and profits of the firm are affected by the rivals' firms' actions. The firm does not sometimes know how his rival firm will react to its decision regarding change in its variables. The demand curve facing an oligopoly firm keeps on shifting as rival firms react to changes made by this firm. Therefore, demand curve facing an oligopoly firm is indeterminate -ii.e., not possible to determine).

(i) True, as a price-taker firm exists only under perfect competition, where AR remains same as more output is produced, i.e., price is given.
(ii) False, as in a perfectly competitive market, equilibrium price is determined not by each individual firm, but all the firms taken together, i.e., industry.

If market for a good, say X, is in equilibrium, i.e., Dx = Sx and if its demand increases, on account of any other factor other than the price of the given good.
(i) Price remaining unchanged, a situation of excess demand emerges.
(ii) This in turn leads to competition among buyers causing price to rise.
(iii) Rise in price causes contraction in demand and expansion in supply.
(iv) Price of the given good will continue to rise till the market is in equilibrium again at a higher price.

In a perfectly competitive market) at any price lower than the equilibrium price the quantity demanded of a commodity exceeds quantity supplied. It is called a situation of 'excess demand'.
When there is excess demand, the equilibrium price will be higher than the price at which there is excess demand. Whenever there is excess demand, the following changes take place:
(i) As demand exceeds supply, all buyers will not be able to buy the total quantity they want to buy. So there will be competition among buyers. This will raise the price.
(ii) As the price starts rising, quantity supplied starts rising as the sellers sell more when price rises (Expansion of Supply).
(iii) The rise in the price of the commodity causes contraction of demand and contraction of demand will continue till the price reaches the level at which D = S.
(iv) Thus, the excess demand will be wiped out and equilibrium price and equilibrium quantity are established.
In the given diagram, at the given price OP₀ , the quantity demanded isOQ ₁ while the quantity supplied is OQ. So there is excess demand to the tune of 'BC' or Q ₀. So there is excess demand to the tune of 'BC' or Q₀Q1· As a result, buyers compete to buy what they want. So, this will raise the price which will lead to contraction of demand and expansion of supply as shown by the arrows in the diagram and these movements will continue till equilibrium is reached at point X and equilibrium price is OP and equilibrium quantity is OQ.

Difference between collusive and non-collusive oligopoly

Basis	Collusive oligopoly	Non-collusive oligopoly
Meaning	Under this form, firms might decide to collude together and not to compete with each other	In this form of oligopoly, firms do not collude but compete with each other
Firms behave	Under this oligopoly, the firms would behave as a single monopoly.	Under this oligopoly, the firms behave independently.
Aim	They aim at maximizing their collective profit rather than their individual profit.	The firms aim to maximizing its own profits and decides how much quantity to be produced assuming that the other firms would not change their quantity supplied.

Features of oligopoly

Oligopoly market exhibits the features given below

(i) A few firms a few firms, but large in size dominate the market for a commodity.Each firm commands a significant share of the market which can impact market price of the product.

(ii) Non-price competition Under oligopoly, firms tend to avoid price competition. e.g. in India, both Coke and Pepsi sell soft drink at the same price.However, in order to enhance its share of the market, each firm tries to resort to non-price competition.

 

   Difference between collusive and non-collusive oligopoly

Basis	Collusive oligopoly	Non-collusive oligopoly
Meaning	Under this form, firms might decide to collude together and not to compete with each other.	In this form of oligopoly, firms do not collude but compete with each other.
Firms behave	Under this oligopoly, the firms would behave as a single monopoly.	Under this oligopoly, the firms behave independently.
Aim	they aim at maximizing their collective profit rather than their individual profit.	The firms aim to maximize  its own profits and decides how much quantity to be produced assuming that the other firms would not change their quantity supplied.