Marx theory of economics growth

Marxist Theory

Marx is regarded as the father of history (scientific socialism) who prophesied the decline of capitalism and the advent of socialism. He is considered a great thinker of history. His famous book ‘Das Kapital’ is known as the Bible of socialism (1867). He presented the process of growth and collapse of the capitalist economy. He expected capitalistic change to break down because of sociological reasons and not due to economic stagnation and only after a very high degree of development is attained.

“Marxism is a religion. To an orthodox Marxist, an opponent is not merely in error but in sin”.

-Prof. Schumpeter wrote,

According to Marx, human civilization has manifested itself in a series of organizational structures, each determined by its primary mode of production, particularly the division of labor that dominates in each stage. In Marxian theory, production means the generation of value. Thus economic development is the process of more value-generating, and labor generates value.

Marxian Economic theory of growth is based on certain Assumptions:-

1. There are two principal classes in society. (a)Bourgeoisie (b) Proletariat. 

2. Wages of the workers are determined at a subsistence level of living. 

3. Labour theory of value holds good. Thus labor is the main source of value generation. 

4. Factors of production are owned by capitalists. 

5. Capital is of two types: (a) constant capital and (b) variable capital. 

6. Capitalists exploit the workers. 

7. Labour is homogenous and perfectly mobile. 

8. Perfect competition in the economy. 

9. National income is distributed in terms of wages and profits.

Marks stage of economic growth is classified into five stages which are as follows

                             

STAGE 1 – PRIMITIVE COMMUNISM

This is the first stage in which men performed the same economic functions i.e. – hunter-gathering. They worked together in order to survive. There was no private property and there were no classes existing in society. Eventually, the most successful hunter-gatherers gained power and control over the others and this leads to the next stage which is imperialism.

STAGE 2 – IMPERIALISM

The strong man ruled. He began by owning all the land but when threatened by outsiders, he would grant land to others in return for military service. A new land-owning aristocracy was therefore created. In this stage, people start having private property rights.

STAGE 3 – FEUDALISM

The land was owned by the aristocracy who exploited the peasantry who worked it. There was a surplus of food which the aristocracy sold to others creating a class of merchants and capitalists who wanted to share political power.

STAGE 4 – CAPITALISM

The wealthy merchants and factory owners (bourgeoisie) obtained political power and exploited the workers (proletariat).In such a society, the proletariat is fooled into believing that she/he is free because she/he is paid for his/her labor. In fact, the transformation of labor into an abstract quantity that can be bought and sold on the market leads to the exploitation of the proletariat, benefitting a small percentage of the population in control of the capital. The working class thus experiences alienation since the members of this class feel they are not in control of the forces driving them into a given job. The reason for this situation is that someone else owns the means of production, which are treated as private property. As the proletariat became politically aware they would rise up and overthrow the bourgeois government. All this because of the eventual growth of commerce (and of human populations), feudal society began to accumulate capital, which, along with the increased debt incurred by the aristocracy, eventually led to the English Revolution of 1640 and the French Revolution of 1789 both of which opened the way for the establishment of a society structured around commodities and profit (i.e. capitalism). Human society's entrance into capitalism occurred because of a transformation in the understanding of exchange value and labor.

STAGE 5 – SOCIALISM OR COMMUNISM

There would be a dictatorship of the proletariat as workers’ organizations re-distributed food, goods, and services fairly according to need, and profits were shared by all. The middle classes would come to understand that equality was superior to private ownership. Everyone would join together for the common good. Money and government would no longer be needed and society would be classless. As all countries reached this stage the world would become stateless and competition and wars would cease and more capital accumulation and technological improvement. At the start, growth under capitalism, generation of value, and accumulation of capital underwent at a high rate. After reaching its peak, there is a concentration of capital associated with a falling rate of profit. In turn, it reduces the rate of investment and as such a rate of economic growth. Unemployment increases. Class conflicts increase. Labor conflicts start and there is a class revolt. Ultimately, there is a downfall of capitalism and the rise of socialism.

Gist Of Theory 

STAGES OF HISTORY AND CLASS CONFLICT AT EACH STAGE
STAGE	OPPRESSING CLASS	OPPRESSED CLASS
Primitive communism	No classes	No conflict
Slavery	Slave owners	Slaves
Feudalism	Landowners	Serfs
Capitalism	Bourgeoisie	Proletariat
Socialism	State managers	Workers
Communism	No classes	No conflict

                    

Source:

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UGC-NET ECONOMICS JULY-2018

1. Which of the following will be true for both monopoly and monopolistic competition in the short run?

(1) Price is greater than marginal revenue.

(2) Price is equal to marginal revenue.

(3) Price is equal to marginal cost.

(4) Price is equal to average cost.

2. Consider the following matrix which describes the respective strategies and the corresponding pay-offs of firms A and B operating in a duopoly:

Which of the following statement(s) is/are true for the above game?

Select the correct answer from the codes given below:

(a) Firm A has no dominant strategy.

(b) Firm B has a dominant strategy.

(c) The game has a Nash equilibrium.

(d) Neither Firm A nor Firm B has a dominant strategy.

Code:

(1) (a), (c)

(2) (b), (c)

(3) (d) Only

(4) (a), (b) and (c)

3. In the context of oligopoly, consider the following statements:

(a) Cournot’s equilibrium is a Nash equilibrium.

(b) Stackelberg equilibrium is a Nash equilibrium.

Select the correct answer from the code given below:

(1) Only (a)

(2) Only (b)

(3) Both (a) and (b)

(4) Neither (a) nor (b)

4. Match List – I with List-II and point out the correct answer from the codes below:

List - I (Concept)	List-II (Economist)
(a) Profit as a dynamic surplus (b) Profit as a reward for innovation (c) Profit as a reward for uncertainty bearing (d) Profit arises due to monopoly power enjoyed by the producers	(i) J. Schumpeter (ii) M. Kalecki (iii) F.H. Knight (iv) J.B. Clark

Code:

      (a) (b) (c) (d)

(1) (ii) (i) (iii) (iv)

(2) (iv) (i) (iii) (ii)

(3) (iv) (ii) (iii) (i)

(4) (iii) (iv) (ii) (i)

5. When the marginal cost is equal to average cost, the slope of the average cost is:

(1) positive

(2) negative

(3) zero

(4) infinite

6. For the function Q=A ⋅ K^α ⋅ L^β, which of the following is correct?

(1) The degree of homogeneity is 1

(2) The elasticity of substitution is equal to α+β

(3) Output elasticity with respect to capital is α

(4) The marginal product of a factor=Average product of the factor

7. When information asymmetry is observed after an agreement is obtained between individuals, it is called:

(1) Signaling

(2) Moral hazard

(3) None of the above

(4) Both (1) and (2) above

8. In the given diagram, after the price change, the price line shifts from PQ to PQ’. And consumer comes to equilibrium at point B instead of point A. Then what is true for potatoes?

(1) It is a normal good.

(2) It is an inferior good.

(3) It is a Giffen good.

(4) Nothing can be said about the nature of the good.

9. Which amongst the following is a correct description of inverse demand function?

(1) p=f (D)

(2) D=f (p)

(3) D = f(1/p)

(4) p = f(D, 1/y)

Where p=price, D=demand, and y=income.

10. The first fundamental Theorem of Welfare Economics requires:

(1) that there be an efficient market for every commodity.

(2) that the economy operates at some point on the utility possibility curve.

(3) producers and consumers to be price takers.

(4) All of the above.

11. The Theory in which the trade cycle is generated due to excess of actual over the desired investment has been given by who amongst the following?

(1) R.G. Hawtry

(2) F. Hayek

(3) P. Samuelson

(4) J. Schumpeter

12. Consider the following statements:

(a) ‘Liquidity trap ‘is a situation when people prefer to hold money rather than investing it.

(b) ‘Liquidity preference’ is the situation when people prefer to invest money rather than hold it.

(c) ‘Liquidity crunch’ is a situation of short supply of money in the money market.

(d) ‘Credit crunch’ is a situation of short supply of money in the loan market.

Select the correct statements using the code given below:

(1) (a), (b) and (d)

(2) (a), (c) and (d)

(3) (b), (c) and (d)

(4) (a), (b) and (c)

13. ‘Menu costs’ in relation to inflation refers to:

(1) Cost of revaluing the currency.

(2) Cost of altering price lists.

(3) Cost of the maintenance of monetary base.

(4) Cost of finding better rates of return.

14. According to M. Friedman, Quantity Theory of Money is the theory of:

(1) Value of money

(2) Price determination

(3) Nominal income

(4) Demand for money

15. Gilt-edged market means:

(1) Bullion Market

(2) The market of pure metals

(3) The market of government securities

(4) Market of commodities

16. Which of the following is likely to be most inflationary in its impact?

(1) Repayment of public debt

(2) Borrowings from the public to finance a budget deficit

(3) Borrowings from banks to finance a budget deficit

(4) Creating new money to finance a budget deficit

17. Consider the following statements regarding the Marginal Standing Facility (MSF).

(a) MSF is on the line of the existing LAF and is part of it.

(b) MSF is a costlier route than Repo.

(c) MSF functions as the last resort for banks to borrow short term funds.

(d) MSF is linked to the net demand and time liabilities of the Banks.

Choose the correct code given below.

(1) (b), (c) and (d)

(2) (a), (b) and (c)

(3) (a), (c) and (d)

(4) (a), (b), (c) and (d)

18. “The absorption approach” of analyzing the balance of payments was formulated by: 

(1) M. Friedman

(2) Marshall and Lerner

(3) Sydney Alexander

(4) Haberler

19. Which amongst the following is not correctly matched with regard to the balance of payments account?

Item	Nature
(1) Import of goods and services (2) Receipt of transfer payments (3) Direct investment receipts (4) Portfolio investment redemption	Debit in the current account Credit in the current account Credit in the capital account Debit in the current account

20. Prebisch – singer hypothesis relates to:

(1) Balance of payments problem of developing countries.

(2) Terms of trade in developing countries.

(3) Prevalency of poverty among developing countries.

(4) Inequality of income in developing countries.

21. Which of the following statement about India’s balance of payments is not correct?

(1) If a foreign citizen deposits some money in a bank in India, the accounts regard this as a credit.

(2) The current account balance shows only the balance for the trade in goods and services combined.

(3) Allowing for errors and omissions, the accounts always balance.

(4) If the country’s reserves of foreign currencies increase then there is a minus sign for this entry.

22. Let elasticity of demand for exports for a certain country be ex and elasticity of demand for imports be em. Assume that the country devalues its currency. Its balance of payments will almost certainly show improvement if:

(1) ex + em > 1

(2) ex + em < 1

(3) ex + em=1

(4) ex = em =1

23. Which of the following would cause Rupee to depreciate against U.S. Dollar, other things being equal?

(1) A rise in interest rates in India.

(2) A fall in incomes in the U.S.A.

(3) An expected rise in the external value of the rupee.

(4) An increased flow of foreign investment into India.

24. According to Mercantilists, trade is a:

(1) Positive sum game

(2) Infinite sum game

(3) Zero-sum game

(4) Negative sum game

25. There is incomplete specialization in production when the country faces:

(1) constant opportunity costs

(2) decreasing opportunity costs

(3) increasing opportunity costs

(4) indeterminate opportunity costs

26. Tax buoyancy is expressed as:

(1) 1

(2) 2

(3) 3

(4) 4

27. Income tax is generally based on the principle of:

(1) Benefit received principle

(2) Ability to pay principle

(3) Willingness to pay principle

(4) None of these

28. Which method can help in obtaining a welfare improvement if externalities exist?

(1) Regulation

(2) Assigning property rights and permitting bargaining

(3) Pigovian taxes

(4) All of the above

29. Which of the following is a capital receipt in the Government budget?

(1) Interest receipts on loans given by the Government to other parties.

(2) Dividend and profit of public enterprises.

(3) Borrowings of the government from the public.

(4) Property tax receipts.

30. Which amongst the following would be most effective in mitigating the effect of externalities?

(1) Fiscal policy

(2) Regulation of monopoly

(3) Active monetary policy

(4) Freeing the markets

31. The maximum social advantage is achieved when:

(1) Total Social Sacrifice=Total Social Benefits

(2) Marginal Social Sacrifice=Marginal Social Benefits

(3) Net Social Sacrifice=Net Social Benefits

(4) Average Social Sacrifice=Average Social Benefits

32. Statutory incidence of a tax deal with:

(1) the person(s) legally responsible for paying the tax.

(2) the amount of revenue left over after taxes.

(3) the amount of taxes paid after accounting for inflation

(4) the amount of tax revenue generated after a tax is levied.

33. The relationship described by the Expectations – Augmented Phillips curve is correct in which of the following?

(1) Only in the long run.

(2) Only in the short run.

(3) Both in the short run and in the long run.

(4) Neither in the short run nor in the long run.

34. Non Accelerating Inflation Rate of Unemployment (NAIRU) means:

(1) a rate of unemployment for which the change in the rate of inflation is zero.

(2) a rate of inflation which makes the rate of unemployment zero.

(3) a rate of inflation for which the change in the rate of unemployment is zero.

(4) a rate of unemployment which is equal to the rate of inflation.

35. New Keynesians use which of the following to explain price and wage stickyness?

(1) Staggered labor contracts

(2) Menu Costs

(3) Behavior-based on bounded rationality

(4) All of the above

36. Consider the following statements:

(a) Effective demand in a market is the demand for a product or service which occurs when purchasers are constrained in a different market.

(b) Notional demand is the demand that occurs when purchasers are not constrained in any market.

Which of the above statements is/are correct? Answer from the code below:

(1) Only (a) is correct

(2) Only (b) is correct

(3) Both (a) and (b) are correct

(4) Neither (a) nor (b) is correct

37. For the capitalist economy, the primary objective of New Classical Economics is to explain which of the following?

(1) Business cycle phenomenon

(2) Underemployment

(3) Wage – price rigidity

(4) Effectiveness of Government policy

38. Which of the following growth model(s) assume(s) Neutral Technical Progress?

(1) Harrod model

(2) Solow model

(3) Both (1) and (2)

(4) Neither (1) nor (2)

39. In an economy, the GDP deflator is found to be 110 for the current year. If the GDP has registered an annual growth rate of 15 percent in the same year, then, the rate of growths of real GDP will be:

(1) 5%

(2) 1.5%

(3) 25%

(4) 2.5%

40. What is the nature of equilibrium in the IS-LM model?

(1) Stock equilibrium

(2) Flow equilibrium

(3) Stock and flow equilibrium

(4) Oscillating equilibrium

41. If marginal propensity to import is 0.1 and the marginal propensity to consume is 0.7, the value of the income multiplier will be:

(1) 1.25

(2) 2.33

(3) 2.5

(4) 3.33

42. According to the neoclassical theory of distribution, constancy in the wage share in national income would come about only when the elasticity of factor substitution:

(1) is less than one

(2) is equal to one

(3) is zero

(4) is greater than one

43. Which amongst the following is not a feature of J.E. Meade’s model?

(1) Perfect competition prevails.

(2) The economy produces consumer goods and producer goods.

(3) Perfect substitution is possible between consumption and capital goods.

(4) It examines the relationship between the growth rate of population and the growth rate of savings.

44. Consider the following production function forms with a technical progress term A(t).

(a) Q=f (K_t, A(t) ⋅ L_t)

(b) Q=f (A(t) ⋅ K_t, L_t)

(c) Q=A(t) f (K_t, L_t)

Of the above, which production function, with labor augmenting technology will keep the distribution of output between labor and capital as constant? Answer from the code below:

(1) Only (a)

(2) Both (a) and (b)

(3) Only (c)

(4) Both (a) and (c)

45. Which of the following statements about the AK model (Y=AK) of growth is false?

(1) This is a part of endogenous growth theories.

(2) The model assumes that an increase in the physical stock of capital will shift the production function upwards.

(3) The model assumes diminishing returns to capital.

(4) The model suggests that if the level of investment is higher than depreciation, there would be sustained growth.

46. Which of the following is not a correct feature for the absolute convergence to hold good?

(1) The same population growth rate

(2) Same savings propensity

(3) Same capital-labor ratio

(4) Different capital-labor ratio

47. In Solow’s growth model, the output per capita is a function of:

(1) Labour – Output ratio

(2) Capital – Output ratio

(3) Technical progress

(4) Capital – Labour ratio

48. Dusenberry was of the opinion that less developed countries will have a serious and adverse effect on their balance of payments due to:

(1) demonstration effect

(2) multiplier effect

(3) backwash effect

(4) spread effect

49. Leibenstein in his critical minimum effort thesis treats the population as a factor that is:

(1) Income-generating

(2) Investment – inducing

(3) Income – depressing

(4) Market – expanding

50. ‘Workers must own the capital to which their savings has given rise.’ This is an important assumption of the growth model, developed by:

(1) L. Pasinetti

(2) N. Kaldor

(3) R. Solow

(4) J.E. Meade

**TO BE CONTINUED........ 

ECONOMIC INTEGRATION

Meaning: 

Economic integration is a process whereby countries in a geographical region (location) cooperate with one another to reduce or eliminate barriers to the international flow of products, people, or capital. It can be of served forms with different degrees of integration.

ACCORDING TO SALVATORE’S

“Commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together”

Note:

Therefore it refers to a decision or process whereby two or more countries combine into a larger economic region by removing discontinuities and discriminations existing along national frontiers, and by establishing certain elements of cooperation between them.

ON THE BASICS OF COOPERATION WE HAVE THE FOLLOWING TYPES OF ECONOMIC INTEGRATIONS.

1. Preferential trading system/Preferential trade arrangements (PTA).
2. Free trade area (FTA).
3. Customs union (CU).
4. Common market.
5. Economic Union (EU).

1. PREFERENTIAL TRADING SYSTEM/PREFERENTIAL TRADE ARRANGEMENTS (PTA)

1. It was the earliest form of economic integration Among the 48 Commonwealth nations during the British Empire (1932).
2. It is the loosest form of EI which provides lower barriers to trade among the participating nations than to trade with non-member nations.
3. It ended after the formation of GATT rules.

2. FREE TRADE AREA (FTA).

1. It is a loose form of EI wherein the member countries fully or partially abolish trade barriers and tariffs on most (if not all) goods traded among them but retain their own tariff, trade barriers, and commercial policies with non-member countries.
2. It is simply based on inter-area trade.
3. Examples of this: are EFTA, LAFTA, and LAIA.

3. CUSTOM UNION (CU).

1. In this EI the participating counties adopt a common external policy and abolish all tariffs and trade barriers among themselves.
2. In CU all member nations act as a unit in their trade relations with non-member countries.
3. Example of this: European common market/European Union formed in 1957/ The European Community (EC).

4. COMMON MARKET.

1. Besides allowing for free trade and common external policy for non-member, It is a single unified common market area among nations in which there goods, services, and factor market are integrated.
2. The EC is also a common market.
3. EU achieved the status of a common market at the beginning of 1993.

5. ECONOMIC UNION (EU).

1. The economic union is the highest and most advanced form of economic integration, besides the integration of product and factor markets as in the common market; it involves the harmonization of monetary, fiscal, and other policies such as exchange rate, transportation, industrial, and social policies.
2. Example:-European economic the community transformed into an economic union called the European Union in 1991.

Specified Bank Notes (Cessation of Liabilities) Act 2017?

On February 27, 2017 Government of India notified the  Specified Bank Notes (Cessation of Liabilities) Act 2017.The Act repealed the Specified Banknotes (Cessation of liabilities) Ordinance 2016 providing for cessation of liabilities for the Specified Banknotes (SBNs) and for matters connected therewith and incidental thereto, with effect from December 31, 2016. The SBNs cease to be the liabilities of the Reserve Bank under Section 34 of the RBI Act and cease to have the guarantee of the Central Government.

A grace period has been provided during which the Specified Bank Notes can be deposited at five RBI Offices (Mumbai, New Delhi, Chennai, Kolkata, and Nagpur by Indian citizens who make a declaration that they were outside India between November 9 and December 30, 2016, subject to conditions or any class of persons for reasons that may be specified by notification by the Central Government. The Reserve Bank, if satisfied after making the necessary verifications, that the reasons for failure to deposit the notes till December 30, 2016 are genuine, will credit the value of notes in the KYC (Know Your Customer) compliant bank account of the tenderer.

The grace period for resident Indians expired on March 31, 2017. For non- resident Indians (Indian passport holders), the grace period is till June 30, 2017.

Any person aggrieved by the refusal of the Reserve Bank to credit the value of notes as mentioned above may make a representation to the Central Board of the Reserve Bank within 14 days of the communication of such refusal to him/her.

In terms of Section 6 of the Act, whoever knowingly or wilfully makes any false declaration shall be punishable with a fine which may extend to 50,000 INR or five times the amount of the face value of the SBNs tendered whichever is higher.

In terms of Section 5 of the Act, with effect from December 31, 2016 no person shall knowingly or voluntarily hold, transfer or receive any specified banknotes. After the expiry of grace period, holding of not more than 10 notes in total, irrespective of denomination or not more than 25 notes for the purpose of study/ research/ numismatics is permitted. Also, nothing contained in this section shall prohibit the holding of specified banknotes by any person on the direction of a court in relation to any case pending in the court. For deposit of confiscated SBNs, GoI has notified Specified Ban Notes (Deposit of Confiscated Notes) Rules 2017 on May 12, 2017.

In terms of Section 7, contravention of Section 5 shall be punishable with fine which may extend upto 10,000 INR or five times the face value of the SBNs involved in the contravention, whichever is higher.

In case the contravention/default in terms of Sections 6 and 7 is by a company, every person who was in charge of and responsible to the company at the time of contravention/ default shall deemed to be guilty and will be liable to be proceeded against and punished. If the offence is proved to be attributable to the conduct by any director/manager/secretary/officer/employee of the company, such person shall also be deemed to be guilty of the offence and will be liable to be proceeded against and punished accordingly

Source -RBI.

The Cournot Model oligopoly

Personality at a Glance

Antoine Augustin Cournot
Born: 28 August 1801
Died: 31 March 1877
Known for: Cournot competition, Oligopoly

                              

Antoine Augustin Cournot was a French philosopher, mathematician, and economist who contributed to the development of economic theory. The oldest determinate solution to the duopoly problem is by the French economist Antoine Augustin Cournot in 1838 who took the case of two mineral water springs situated side by side and owned by two firms A and B. 

Assumptions:

This model is based on certain assumptions which are as follows-

1. Interdependence-There are two independent sellers. In other words, the interdependence of the Duopolists is ignored.
2. Homogeneous product-They produce and sell a homogeneous product, mineral water.
3. Perishable good-The total output must be sold out, being perishable and non-storable.
4. The number of buyers is large.
5. Each seller knows the market demand curve for the product.
6. production cost-The cost of production is assumed to be zero.
7. Both have identical costs and identical demands.
8. Each seller decides the quantity he wants to produce and sell in each period.
9. But each is ignorant about his rival’s plan for output.
10. At the same time, each seller takes the supply or output of its rival as constant.
11. Neither of them fixes the price for its product, but each accepts the market demand price at which the product can be sold.
12. The entry of firms is blocked.
13. Each seller aims at obtaining the maximum net revenue or profit.

Explanation:

Given these assumptions, suppose there are two mineral water springs exploited by two firms, A and B. The market demand curve is DD1, and its marginal revenue curve is MR, as shown in Figure 1. The marginal costs of both A and В are assumed to be zero so that they coincide with the horizontal axis. Suppose firm A is the only producer in which case it produces and sells OA (=½ OD1) quantity when its MR, equals its marginal cost curve (horizontal axis) at point A. It charges the monopoly price AS (=OP) and earns ОASP as monopoly profits.

Now firm В enters the market and expects that A will not change its output level OA. It, therefore, regards the SD1 segment of the market demand curve as its demand curve. Its corresponding marginal revenue curve is MR2 which intersects the horizontal axis (its marginal cost curve) at point B. Thus it produces and sells AB (= ½ AD1 = BD1) quantity at BG (=OP1) price and it expects to earn BGTA profits. Firm A finds that with the entry of B, the price has fallen to OP1 from OP. As a result, its expected profits decline to OP JA. In this situation, it tries to adjust its price and output. Accordingly, assuming that В will continue to sell the same quantity AB (=BD1), it regards the remaining portion of the market OB available to it. It thus sells ½OB. The reduction in its output from OA (=½OD1) to AB (= ½ OB) causes the price to rise (not shown in the figure to simplify the analysis). As a result of A’s reduction in output, В thinking that A will continue to produce less reacts by increasing its output to ½(OD1-AB) which causes the price to fall. In this way, A’s reducing its output and causing the price to rise, and B’s reaction in increasing its output and causing the price to fall will ultimately lead to an equilibrium price OP2. At this price, the total output of mineral water is OF, which is equally divided between the two firms. Each duopolist sells 1/3 of the market i.e. A sells ОС and В sells CF. At this price, A’s OCLP2 equals that of B’s profits CFRL. It is evident that both the producers sell 2/3 of the total output, OD1 and each is producing 1/3 of OD1.

Under Perfect Competition:

Let us compare the Cournot duopoly solution with the perfectly competitive solution. The duopoly firms A and В in equilibrium charge OP2 price and sell OF output. Under perfect competition, the total output will be OD at zero prices. The price is zero because the marginal cost is zero. When the MR1 curve intersects the horizontal axis, which is the MC curve, the price is zero at point A in the figure.The total output OD1 will be divided between A and В equally as OA and AD1 Notice that in the Cournot solution, the price OP2 exceeds the zero marginal cost and zero prices under perfect competition, and the output OF is less than OD1 under perfect competition. However, in the Cournot solution, the output (OF) is greater than it would be under monopoly (OA). But the price under monopoly (OP) would be higher than under the Cournot solution (OP2).

Conclusion:-

The Cournot model can be extended even to more than two firms. As more and more firms enter the oligopoly industry, the equilibrium output and price of the industry will approach the perfectly competitive output OD1 and the zero prices.

Its Criticisms:

The Cournot model has been criticized on the following grounds:-

(A)The main defect in Cournot’s solution is that each seller assumes his rival’s supply is fixed, despite repeatedly observing changes in it. Joseph Bertrand, a French mathematician, criticizing Cournot in 1883 pointed out that seller A in order to regain all the customers lost to B, will fix a price slightly below that fixed by В, and price cutting may continue until the price becomes zero. Thus, Bertrand argued that there would not be any limit to the fall in price since each seller could by doubling his produce, underbid his rival. This would tend to drive down the price to a competitive level in the long run.

(B)The model is silent about the period within which one firm reacts and adjusts its output to the moves of the other. Thus it is a static model. 

(C)The Cournot solution is unrealistic because it assumes zero cost of production. 

D)It is a closed model because it does not allow the entry of firms. 

(E) The assumption that each duopolist can act without any output reaction from the other is unrealistic. It is, in fact, a no-learning-by-doing model. 

(F) Marshall, therefore, regarded Cournot’s model as “incapable of a universal solution.” This is because it is not possible to find an actual duopoly market where each duopolist acts autonomously and output is the ‘sole parameter of action’.