Q. 4

Market for a necessary good is competitive in which the existing firms are earning supernormal profits. How can policy of liberalisation by government help in making the market more competitive in the interest of consumers? Explain.

Answer :

Market for a necessary good is competitive in which the existing firms are earning supernormal profits. Now when the government undertakes a policy of liberalization, this means more firms from outside can now enter the market and engage in production and selling activities. As more firms enter into the market, more number of firms now produce similar products. So the target of each firm will be to attract more number of customers towards them so that their revenue earned increases and thus profits incurred increases. To attract more customers the firms will now compete with each other in both price and non-price terms. In price competition, each firm will try to reduce its product price so that more number of people buy their products. Again in non-price competition it will advertise their products more lucratively or improve their product design and quality etc to attract customer towards them. In this way the market will be really become more competitive in the interest of consumers.


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