Nature and Scope of Business Economics

Topic: Unit - 1 (Introduction)

(1) Economics owes its origin to the greek word "Oikonomia" which means management of household.

2) There are 2 Fundamental fact of Economy

(1) Human wants are unlimited

(ii) Means to satisfy these unlimited wants are relatively scarce

(3) Business Economics: It is the application of economic analysis to make decisions in business operations. This concept was given by Joel dean in(1951)

🌟Q. What implication(s) does resource scarcity have for the satisfaction of wants?

Answer Not all wants can be satisfied

🌟Q. Human wants are in response to satisfy their wants?

Answer Unlimited

Business Economics means decision making.

(i) Business economics means use the economic analysis to make decisions involving the best use of an organization's scarce resources.

(ii) Business economics are also known as Managerial economics.

(iii) Business economics is also useful for NGO) and Non-profit organizations as well.

Types of Economics

Micro Economics (OR Theory of pricing OR Theory of slicing)
Macro Economics (OR Theory of Income & Employment OR General Equilibrium Analysis OR Theory of Lumping)

Topic: Micro Economics/Price theory

1. Study at individual level

2. We focus on small number of groups

3. We mainly study the following factors

(a) Product pricing

(b) Consumer behaviour

(d) Economic condition of a section of people

(e) Behaviour of Firm

(f) Location of Industry

Topic: Macro Economics

1. Study of Economy as a whole level

2. Aggregate study

3. We study mainly the following factors

(a) Overall level of output GDP

(b) National Income

(d) Interest rate

(e) Balance of trade Vx-Vm

(f) Balance of payments

(g) External value of currency

(h) Overall level of savings

(i) Overall level of investment

(j) Level of employment

(k) Rate of economic growth

(l) Export, Import and foreign investment

Topic: Macro Economics Vs Macro Economics

Topic: Nature of Business Economics (SPAM-MINT)

Business Economics is a Science

1. Science means Systemized body of knowledge which establishes cause and effect relationships.

2. Economics provides tools like statistics, econometrics, mathematics etc.

3. Business economics integrates the tools in to decision making

Business economics is an art

It involves practical application of rules and principles.

Topic: Nature of Business Economics (SAMP-MINT)- Love sir's way of learning

•Business Economics largely Based on Microeconomics

•Business Economics incorporates tools of Macroeconomics (doesn't operate in vacuum)

•Business Economics use the theory of markets and private enterprise

🌟Business Economics largely based on Micro Environment

🌟Business Economics involves the elements of Micro Environment

Topic: Nature of Business Economics (SAMP-MINT)

Business Economics is interdisciplinary in approach

It uses multiple tools such as:

(a) Mathematics

(b) Operational Research

(d) According, marketing, finance

(e) Statistics and econometrics

Business Economics is Pragmatic in approach as it tackles (practical problems which the firm faces in the real world.

🌟The Business Economics incorporates tools from other disciplines such as Mathematics, operations Research, Management theory, Accounting, etc. Therefore, Business Economics is Interdisciplinary

🌟Business Economics is in its approach as it tackles practical problems which the firm faces in the real world Pragmatic

Business Economics are positive and Normative in Approach.

Topic: Scope of Business Economics

(i) Internal Issues (Operational Issues)

(ii) External Issues (Environmental Issues)

Internal Issues

1. Also known as operational issues

2. Issues arise with in the organization

3. With in the control of management

4. Internal in Nature

5. Issues:

(a) Choice of Business. (b) Size of business

(e) Pricing. (f) Sales promotion

(g) Financial management of investment

(h) Management of inventory etc.

Micro economics applied to Resolve internal issues:

(a) Demand analysis and forecasting

(b) Production and cost analysis

(d) Market structure and pricing policies

(e) Resources allocation

(f) Theory of capital and investment decisions

(g) Profit analysis

(h) Risk and uncertainty analysis

External Issues

1. Also known as Environmental issues

2. Environmental factors affect the performance of business

3. Micro Economics applied to Resolve these issues

4. Following macro theories deals with external issues.

🌟 The operational or internal issues to which economic theories can be directly applied are related with. Micro Environment

Macro-economic theory is applied to solve external issues.

1. Types of Economic System

Capitalist
Socialist
Mixed

2. Stages of Business cycle

3. Government policies and Regulations

4. Banking policies and Regulations

5. Social and political environment

6. Trend in national income/employment/prices/savings etc.

7. Foreign Trade policies, fiscal policies

UNIT 2 CENTRAL PROBLEM OF ECONOMY AND TYPES OF ECONOMY

Topic: Central Problems of an Economy

The central economic problem is further divided into four basic economic problems. These are.

(1) What to Produce?( choice of good)

(2) How to Produce?

(3) For whom to produce?- Rich, Poor

(4) What provisions (if any) are to be made for economic growth

Topic: Economic Systems & Its Types

Three types of economy:

(1) Capitalist Economy

JAPAN, USA

(2) Socialist Economy

China, Russia

(3) Mixed Economy

🌟Administered prices refer to Prices determined by an external authority which is usually the government

🌟Profit motive is a key characteristic of Capitalism

🌟 The interference of the government is very limited in Capitalist economy

Chapter 2. THEORY OF DEMAND AND SUPPLY

UNIT 1 – LAW OF DEMAND AND ELASTICITY OF DEMAND

Topic: Meaning of Demand

Desire
Means to purchase
Willingness to use those means for that purchase
Quantity demanded is expressed at a given price.
Quantity demanded is flow

What determines demand?

§Price of the commodity

Price increases → Demand decreases)

§Price of related commodities

Substitute Goods → Tea Price increase and coffee Demand decrease

Positive relation

Complementary Goods. → Pen Price increase and ink Demand increase Negative relation

§Disposal income of the consumer

Income increase :Normal goods Demand Increase Positive relation, Income increase :Inferior goods Demand decreases negative relation)

Topic: Meaning of Demand

§Taste and preference of buyers

•Demonstration effect people buy or have things because they see that other people are able to have them.

•Bandwagon effect demand for a commodity is increased due to the fact that others are also consuming the same commodity

•Snob effect demand for a consumer's good is decreased owing to the fact that

others are also consuming

• Veblen effect-highly priced goods are consumed by status seeking rich people to satisfy their need for conspicuous consumption.

§Consumer's expectations-consumer expects increase in future prices, increases in income and shortage in supply, more quantities will be demanded and vice versa.

§Other factors

Size of population
Age distribution of population
The level of national income and its distribution
Consumer credit facility and interest rates
Government policies and regulations

Topic: Law Of Demand

There is an inverse relationship between price and quantity demanded, ceteris paribus.

Topic: Demand function

The Demand Schedule

✔Individual demand schedule - single buyer

✔Market demand schedule - two or more buyer

Rationale of the Law of Demand

✔ Price effect of a fall in price - already discussed above

Substitution effect
Income effect

✔Utility maximising behaviour of consumers with reduction in price consumer will become more commodity as law of diminishing marginal utility concept apply.

✔Arrival of new consumers more consumer more demand

✔Different uses - more uses more demand

Exception to the Law of Demand (P increases D increases)

➤ Conspicuous goods - prestigious goods

➤ Giffen goods - Sir Robert Giffen named some inferior goods as giffen goods.

➤Conspicuous necessities - necessities of life

➤Future expectations about prices

Incomplete information and irrational judgement

➤Demand for necessaries

➤Speculative goods

Topic: Demand function

Expansion and Contraction of Demand/movement along the demand curve (due to change in price)

Increase and decrease in Demand/shift in Demand curve (due to other determines other than price)

Topic: Elasticity of Demand

Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends. More precisely, elasticity of demand is the percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends.

Price Elasticity of Demand

Point Elasticity

Arc Elasticity

Price Elasticity of Demand

Topic: Total Outlay Method of Circulating Price Elasticity

✔Ed=1→ Price increases and total revenue/total expenditure remains same

✔Ed >1– Price increases and total revenue/total expenditure falls

✔Ed<1–Price increases and total revenue/total expenditure increase

Topic: Determinants of Price Elasticity of Demand

➤Availability of substitute more substitute elastic demand, no substitute inelastic

➤Position of a commodity in the consumer budget greater income spent more elastic and vice versa

➤ Nature of the need that a commodity satisfies luxury goods elastic and necessities goods inelastic

➤Number of uses to which a commodity can be put and vice versa more uses more elasticity

➤Time period - longer period elastic and short period inelastic

➤Consumer habits - habit then inelastic and no habit elastic

➤Tied demand goods with very high or low range inelastic demand, middle range elastic demand

➤Minor complementary goods cheap goods with costlier goods demand is inelastic.

Topic: Income elasticity of demand

Topic: Relationship between income elasticity for a good and the proportion of income spent.

➤Proportion of income spent on a good remains same as income increases, the income elasticity for that good is equal to one

➤Proportion of income spent on a good increases as income increases, the income elasticity for that good is greater than one

➤Proportion of income spent on a good decreases as income rises, the income elasticity for that good is positive but less than one.

✔Income elasticity is positive then its normal goods

✔If income elasticity is negative then its inferior goods.

Topic: Cross price elasticity of demand

1.Substitute product and demand- Price increases (X) Demand increases (Y) → upward sloping curve

2. Complementary goods

Price increases (X) D decreases (Y) → downward sloping curve

Topic: Cross price elasticity of demand

➤Goods are perfect substitute, cross elasticity is infinite

➤Goods are close substitute, cross elasticity will be positive and large

➤Goods are not close substitute, cross elasticity will be positive and small

➤Goods are totally unrelated, cross elasticity between them is zero

Topic: Advertising elasticity

Advertising elasticity is positive

🌟Contraction of demand is the result of: increase in the price of the good concerned.

🌟Demand for a good is perfectly inelastic. What will be the change in demand if price falls from Rs.10 to Rs.5.

-No change in demand

🌟Suppose the price of Pepsi increases, we will expect the demand curve of Coca Cola to: Shift towards right since these are substitutes

🌟A movement along the demand curve for soft drinks is best described as A change in quantity demanded.

🌟In case of Giffen Paradox, slope of demand curve is: Positive

🌟What will be the impact on the demand curve of Desktop Computer when the price of laptops increase

-Shift to Right

UNIT 2 – THEORY OF CONSUMER BEHAVIOUR

Topic: Nature of Human Wants

Wants refers to wish, desire or motive
Wants are unlimited
Wants differ in intensity.
Wants is satiable
Wants are competitive
Wants are complementary
Wants are subjective and relative
Wants vary with time, place, and person
Wants may become habits and customs
Wants are affected by income, taste, fashion
Wants arise from multiple causes

Topic: Classification of wants

Necessaries - essential for living

Comforts makes life comfortable and satisfying

Luxuries which are superfluous and expensive

Topic: Utility

Utility is thus the want satisfying power of a commodity.
Utility is a subjective and relative entity.
Marginal utility analysis propounded by Alfred Marshall
Indifference curve analysis propounded by J.R Hicks and R.G.D Allen

Topic: The Marginal Utility Analysis

It is a quantitative measure
Utility is the numerical score in terms of utils
Total utility as the sum of utility derived from different units of a commodity consumed by a consumer
Marginal utility it is the utility derived from the marginal or one additional unit consumed or possessed by the individual

MUnTUn-TUn-1

Topic: Assumption of marginal utility analysis

Rationality
Cardinal measurement of utility
Money is the measuring rod of utility
Theory assumes all the other factors constant
Continuity in consumption
Units are homogenous or identical in nature
Standard units
Marginal utility of money remains constant
Independent utility
Ignore complementarity between goods.

Topic: Limitation and Exceptions of the Law of Diminishing Marginal Utility

Rigorous assumption
Not independent
Law is not universal
Prestigious goods
Hobbies, rare collection, creative art, painting, music, poetry etc
In case of habit
People with miserly behaviour

Topic: Consumer equilibrium in single commodity case

Topic: Consumer surplus

Marshall defined the concept of consumer surplus as the "excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay", is called consumer surplus.

Topic: Applications

Consumer surplus is a measure of the welfare that people gain from consuming goods and services
Helps in setting price
Large scale investment decision involve cost benefit analysis which takes into account the extent of consumer surplus
For raising price
Guide to finance ministry

Topic: Limitations

Cannot the measured precisely
In case of f necessaries, consumer surplus is infinite
Consumer surplus is affected by availability of substitute
No simple rule for deriving the utility scale
Consumer surplus cannot be measured in terms of money
Concept can be accepted only if it is assumed that utility can be measured in terms of money or otherwise.

Topic: Indifference curve

Assumption underlying indifference curve approach

Consumer is rational
Ordinal concept
Consumer knows his taste and preference
Consumer choices are assumed to be transitive
More is better assumption or the assumption of non-satiation

Topic: Indifference curves

Is a curve which represents all those combination of two goods which give same satisfaction to the consumer
It is also called as iso-utility curve or equal utility curve
A set of indifference curve is known as indifference map

Topic: Marginal rate of Substitution (MRS)

Is the rate at which a consumer is prepared to exchange goods X and Y, holding the level of satisfaction constant (Le moving along the indifference curve)
MRS is falling because consumers want to gain more and sacrifice less. Two reasons for this-

Want for a particular good is satiable so that when a consumer has more of it, his intensity of want for it decreases.
Most goods are imperfect substitutes for one another. If a perfect substitute the MRS will be constant.

Topic: Properties of Indifference Curve

Indifference curves slopes downward to the right
Indifference curves are always convex to origin
Indifference curve will be L. shaped if two goods are perfectly complementary.
Indifference curve can never intersect each other
A higher indifference curve represents a higher level of satisfaction than the lower indifference curve
Indifference curve will not touch either axis-as it is combination of two goods

Topic: Budget line

Budget line shows all the combinations of two goods which the consumer can buy spending his given money income on the two goods at their given prices.

PxQx+PyQy=B (income)

Budget line shift due to change in income and price of the goods.

Topic: Consumer equilibrium

Topic: Assumptions:-

Combination of two goods
Fixed income to spent on two goods
Prices of goods are fixed
Goods are homogeneous and divisible
Consumer acts rationally and maximize his satisfaction

🌟Marginal Utility Can be Positive or Negative or Zero

🌟Shape of Marginal Utility Curve is Downward Sloping

🌟MU=0 is called point of Satiety

🌟A consumer will purchase more of Good X than Good Y, only when

🌟Every point on Budget line represents full. spending by the consumer.

UNIT-3 SUPPLY

Supply refers to the amount of a good or service that the producers are willing and able to offer to the market at various prices during a given period of time.

Topic: Determinants of supply

Price of the good - Price increases Supply increases
Prices of the related goods - Price increases of related goods, Supply increases of it
Prices of factors of production - Cost increases Supply decreases
State of technology - new technology Supply increases
Government policy taxes increases Supply decreases subsidy increases S increases
Nature of competition and size of industry-competitive Supply increases
Expectations-future price increase Supply decreases currently
Number of sellers - more firms more Supply
Other factors-govt. policies, natural factors etc.

Topic: The Law of Supply

Other things remain constant, P increases S increases and vice versa (positive relation)

Topic: The Law of Supply

Movements on the supply curve - increase or decrease in the quantity supplied (due to price)

Topic: The Law of Supply

Shift in supply curve increase or decrease in supply (due to change in other factors other than price)

Topic: Elasticity of supply

As the responsiveness of the quantity supplied of a good to a change in price.

Topic: Elasticity of supply

Topic : Determinants of elasticity of supply

✓ Long period → supply is elastic and vice versa

✓ Large number of producers → supply is elastic and vice versa

✓ Unutilized capacity is there → supply is elastic and vice versa

✓ Raw material and inputs cheaper → supply is elastic and vice versa

✓ Adequate stocks of raw material etc → supply will be elastic and vice versa

✓ Factor of production commonly available and can easily be substituted or increased then → supply is elastic and vice versa

✓ Capital and labour are occupationally mobile → supply is elastic and vice versa

✓ Expectation of substantial rise in price → supply would be inelastic and vice versa

Chapter 3 THEORY OF PRODUCTION & COST

UNIT 1 THEORY OF PRODUCTION

Topic: THEORY OF PRODUCTION

Production is the organised activity of transforming resources into finished products in the form of goods and services; and the objective of production is to satisfy the demand. of such transformed resources.

Creation of utility
Any economic activity which coverts inputs into output which are capable of satisfying human wants.
Form utility-raw material to finished goods Place utility one place to one another
Time utility-Making available goods during Non-season

Topic: Factors of production

Land Characteristics:-

Land is free gift of nature
Supply of land is fixed- perfectly inelastic
Land is permanent and has indestructible powers
Land is passive factor
Land is immobile and have multiple uses
Land is heterogeneous not same
All labour may not be productive
Labour has poor bargaining power
There is no rapid adjustment of supply of labour to the demand for it
Labour is mobile
Choice between hours of labour and hours of leisure(rest)

Topic: Factors of production

Labour Means any physical or mental exertion directed to produce goods or services.

Characteristics of labour:-

Human efforts
Labour is perishable
Labour is an active factor
Labour is inseparable from the labourer
Land power differs from labourer to labourer

Topic: Capital

Rightly defined as 'produced means of production' or 'man-made instrument of production'. Capital refers to all man made goods that are used for further production of wealth.

Topic: Types of capital:

Fixed capital-which exist in durable shape eg. Machines
Circulating capital-single use eg. Raw material
Real capital-physical goods eg. Plant
Human capital-human skill and ability
Tangible capital can be perceived by senses
Intangible capital-cannot be perceived by senses in form of rights and benefits
Individual capital personal property
Social capital-belong to society eg. Roads

Topic: Capital formation

Capital formation means a sustained increase in the stock of real capital in a country.(eg. Capital goods)

Stages of capital formation

Savings
Mobilisation of savings
Investment

Topic: Entrepreneur

Functions of entrepreneur
Initiating business enterprise and resource co-ordination
Risk bearing and uncertainty bearings
Innovations

Topic: Enterprise's objectives and constraints

Objectives of an enterprise

Organic objectives - survive and growth
Economic objectives-profit
Social objective-related to society

Continuous and sufficient supply of goods
Avoid profiteering and anti-social practices.
Create employment
Does not cause pollution
Improving quality of life

Human objective-related to human and employee

Fair deal to employee
Develop new skills and ability
Make job interesting and challenging
Provide employee to participate in decision making

National objectives -towards nationFair deal to employee

Remove inequalities of opportunities
Produce according to national priorities
Country become self-reliant and avoid dependence
Train young man as apprentices

Topic: Enterprise's objectives and constraints

In the pursuit of this objective, an enterprise's actions may get Constrained by many factors

Lack of knowledge and information
Restrictions imposed in public interest by the state on the production, price and movement of factors.
Infrastructure inadequacies and consequent supply chain bottlenecks
Changes in business and economic conditions
Events such as inflation, rising interest rates, unfavourable exchange rate fluctuations

Topic: Enterprise problems

Problem relating to objectives
Problem relating to location and size of the plant
Problem relating to selecting and organizing physical facilities
Problem relating to finance
Problem relating to organisational structure
Problem relating to marketing (4p's)
Problem relating to legal formalities
Problem relating to industrial relations

Topic: Production function

The relationship between the maximum amount of output that can be produced and the input required to make that output. It is defined for a given state of technology ie, the maximum amount of output that can be produced with given quantities of inputs under a given state of technical knowledge. (samuelson) L=labor K=capital

Topic: Assumptions -

Relationship between input and output exists for a specific period of time
There is given "state-of-the-art" in the production technology
Whatever input combinations are included in a particular function, the output resulting from their utilization is at maximum level

Topic: Assumptions -

Short-Run if the amount of at least one of the inputs used remains unchanged during that period.

Long-Run-is a period of time (or planning horizon) in which all factors of production are variable.

Topic: Cobb-Douglas Production Function

Where Q is output and L. the quantity of labour and C the quantity of capital K and a are positive constraints
The conclusion drawn from the famous statistical study is that labour contributed about 3/4th and capital about 1/4th of the increase in the manufacturing production. It is used in economics as an approximation

Topic-Concept Of Product

Total product(TP)-TP is the total output resulting from the efforts of all factors of production combined together at any time.

Average product (AP)-AP is the total product per unit of the variable factor. AP=TP/Q

Marginal product (MP)-MP is the change in total product per unit change in quantity of variable factor.

MPn=TPn-TPn-1

Topic: Law of variable proportions

Law of variable proportions or the law of diminishing returns

The law states that as we increase the quantity of one input which is combined with other fixed input, the marginal physical productivity of the variable input must eventually decline.

Topic: Relationship between AP and MP

AP rises as a result of an increase in the quantity of variable input, MP is more than AP
MP cuts the AP at its maximum.
When AP falls, MP is below AP

Topic: Stage 1: The stage of increasing returns

Better utilization of fixed factor
Division of labor and increase in efficiency
Better coordination between factors

Topic: Stage 2: The stage of Diminishing returns

Fixity of a factor
Imperfect factor substitutability
Poor co-ordination between factors

Topic: Stage 3: The stage of negative returns

Excessive variable factor

Topic: Returns To Scale

Return to scale Changes in output when all factors of production in a particular function are increased. together.

Constant return to scale increase in scale in same proportion, output increases in the same proportion. (eg. 10%-10%)

Increasing return to scale output increases in a greater proportion than the increase in inputs (eg. 10%-20%)

Decreasing return to scale output increases in smaller proportion relative to an increase in all inputs (eg. 10%-5%)

Topic: Production optimisation

Isoquants similar to indifference curve
All those combinations of inputs which are capable of producing the same level of output.
Isoquants are also called equal-product curves, production indifference co iso-product curves
Isoquants are convex due to diminishing marginal rate of technical substitution (MRTS)
Iso cost or equal-cost lines similar to budget line
Iso cost is a combination of two factors, which the firm can pay with a given outlay.

🌟The marginal, average, and total product curves encountered by the firm producing in the short run exhibit all of the following relationships

When the total product is rising, average and marginal product may be either rising or falling.
when marginal product is negative, total product and average product are falling.
when average product is at a maximum, marginal product equals average product, and total product is rising.

🌟except:

when marginal product is at a maximum, average product equals marginal product, and total product is rising.

🌟Following is a function of an entrepreneur:-

Initiating a business enterprise.
Risk bearing.
Innovating.

🌟 If decreasing returns to scale are present, then if all inputs are increased by 10% then output will increase by less than 10%.

🌟If the marginal product of labour is below the average product of labour, it must be true that the average product of labour is falling.

🌟The law of variable proportions is drawn under all of the assumptions mentioned below except the assumption that technology is changing.

🌟Wages paid to the factory labour. is a variable cost in the short run.

🌟A fixed input is defined as That input whose quantity cannot be quickly changed in the short run, in response to the desire of the company to change its production.

UNIT 2 – THEORY OF COST

Topic : COST CONCEPT

Cost Concept

Cost analysis is concerned with the financial aspects of production relations

as against physical aspects which were considered in production analysis.

Explicit cost and Implicit cost.

• Economic Costs = Explicit Costs + Implicit Costs

Opportunity cost:

Cost sacrifice made, or Opportunity foregone in accepting a next best alternative

Opportunity Cost arises only when alternatives are available. Opportunity Costs do not involve any cash payment as such.

Direct cost vs Indirect Cost

Direct cost or traceable cost

Direct costs are those which have direct relationship with a component of operation They are charged directly to product

Indirect cost or non-traceable cost

Indirect costs are those which are not easily and definitely identifiable in relation to a plant, product, process or department.

Apportioned on suitable basis

Fixed costs and Variable costs

Marginal Cost: Addition made to the total cost by production of an additional output.

Behaviour of Marginal Cost Curve:

The behaviour of MC Curve is the reverse of the behaviour of the Marginal Product (MP) Curve under the Law of Variable Proportions. Marginal Product (MP) Curve rises first, reaches a maximum and then declines, as seen in the Law of Variable Proportions

So, Marginal Cost (MC) Curve of a Firm declines first, reaches its minimum and then rises. Hence, Marginal Cost Curve of a Firm is U-shaped.

Cost Function-

It refers to the mathematical relationship between cost of a product and the various determinants of cost.

In cost function Dependent variable is Total Cost whereas independent variable is price of factor of production, size of output, level of capacity utilization etc

There are two kinds of cost functions:

Short run Cost Function

Long run Cost Function

Short run and cost Behaviour

Total Fixed cost (Short run) TFC is parallel to X-axis

Total Variable cost (TVC) Costs that change with changes in level of output. It has an inverse 'S' shape and starts from the origin.

Semi-variable There are some costs which are neither perfectly variable, nor absolutely fixed.

Total Cost VC + FC

AFC

AFC=TFC/Q.
AFC Curve is negatively sloped,
AFC Curve will not touch the axis since AFC cannot be = 0.

AVC

AVC=TVC/Q
AVC Curve will fall first, for the output level upto normal capacity.
AVC Curve will reach a minimum, and then rise again.
AVC is not exactly a U-shaped curve.

ATC

AC Curve will fall first, due to sharp decline in AFC.
AC Curve will reach a minimum and then rise again, due to increase in AVC.
AC is a U-shaped curve.

Marginal Costs p.u. = Diff. in TC/ Diff. in Q.
MC Curve will fall first,
MC is a U-shaped curve.
MC cuts AC from below, when AC is minimum

🌟The AC Curve and AVC Curve start increasing at the same output level only.

🌟The relationship between the AC and MC is that AC may be more than MC when MC is rising.

🌟When Average Cost is rising, Marginal Cost must also be rising

🌟MC Curve intersects the AC Curve at minimum AC

Selecting the suitable SAC Curve at different output levels:
Deriving LAC Curve in case of numerous / infinite SAC Curves:
In the diagram, the LAC Curve is drawn as a smooth curve, so as to be tangent to each of the SAC Curves.
When LAC Curve is declining LAC will be tangent to the falling portions of the SAC Curves.
When LAC Curve is rising LAC will be tangent to the rising portions of the SAC Curves.

Chapter 4 PRICE DETERMINATION IN DIFFERENT MARKETS

TOPIC: 4.1:- Meaning and Types of Market

Meaning of Market

In ordinary language, a market refers to a place where the buyers and sellers of a commodity gather and strike bargains.

According to Chapman, "the term market refers not necessarily to a place and always to a commodity and buyers and sellers who are in direct competition with one another".

According to the French economist Cournot, "Market is not any particular place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with each other that the prices of the same goods tend to equality easily and quickly".

Features of Market

The above mentioned definitions reveals the following features or a market:

Buyers and sellers
A product or service
Bargaining for a price
Knowledge about market conditions; and
One price for a product or service at a given time

On the basis of Geographical Area

Classification of Markets

From the marketing perspective, the geographical area in which the product sales should be undertaken has vast implications for the firm. On the basis of geographical area covered, markets are classified into:-

Local Markets:

Buyers and sellers limited to a local area or region. Highly perishable goods and bulky articles

Regional markets

covers a wide area such as a few adjacent cities, parts of states, or cluster of states.

National market:-

Demand for a commodity or service is limited to the national boundaries of a country. Eg; hindi books

International market

Commodities are said to have an international market when it is exchanged internationally. Eg gold

On the basis of Time

Very short period market - eg. Vegetables

Short period market - output can be increased from variable factor and fixed factor remains constant

Long period market - all factors are variable

Very long period or secular period- is one when secular movements are recorded in certain factors over a period of time

On the basis of Nature of Transaction

Spot or cash Market: Spot transactions or spot markets refer to those markets where goods are exchanged for money payable either immediately or within a short span of time.

Forward or Future Market: In this market, transactions involve contracts with a promise to pay and deliver goods at some future date

On the basis of Regulation:-

Regulated Market: In this market, transactions are statutorily regulated so as to put an end to unfair practices. Such markets may be established for specific products or for a group of products. Eg. Stock exchange

Unregulated Market: It is also called a free market as there are no stipulations on the transactions.

On the basis of Volume Business

Wholesale Market: The wholesale market is the market where commodities are bought and sold in bulk or large quantities. Transactions generally take place between traders.

Retail Market: When the commodities are sold in small quantities, it is called retail market. This is the market for ultimate consumers.

On the basis Competition

Based on the type of competition markets are classified into perfectly competitive market and imperfectly competitive market

Topic: Meaning and Types of Market

Types of Market

The Market Structures analysed in Economics are –

1) Perfect Competition: Many Sellers selling identical products to many Buyers.

2) Monopoly: Single Seller producing differentiated products for many Buyers.

3) Monopolistic Competition: Many Sellers offering differentiated products to many Buyers.

4) Oligopoly: A Few Sellers selling competing products to many Buyers.

5) Duopoly: Duopoly is a market situation in which there are only two Firms in the market. It a subset of Oligopoly,

6. Monopsony: Monopsony is a market characterised by a Single Buyer of a product or service.It is mostly applicable to Factor Markets in which a Single Firm is the only Buyer of a Factor.

7. Oligopsony: Oligopsony is a market characterised by a small number of large buyers. It is also mostly relevant to Factor Markets.

8. Bilateral Monopoly: It is a market structure in which there is only a Single Buyer and a Single Seller. Thus, it is a combination of a Monopoly Market and a Monopsony Market.

Topic: Meaning and Types of Market

Perfect Competition

Characteristics

Large No of Buyers & Sellers
Homogeneous Products
Free Entry/Exit
Perfect Knowledge
Mobility of Factors of Production
Price Taker

Topic: Meaning and Types of Market

Price determination under perfect competition and short run profit maximisation by a competitive firm

Short Run price determination, Optimum output and profit Determination

For Equilibrium

1. MC=MR

2. MC Must be rising

Topic: Meaning and Types of Market

Long-run Equilibrium of a firm under Perfect Competition.

SMC=LMC=SAC=LACP=MR

Topic: Monopoly

Features of Monopoly

Single Seller
Firm=Industry
Entry Restrictions- (i) economic, (ii) institutional, (iii) legal, or (iv) artificial.
No close substitutes.
Ed < 1
Price-Maker

Why Monopoly Arise?

Monopoly is caused by "barrier to entry", i.e. other Firms cannot enter the market.

Some reasons for occurrence and continuation of Monopoly are -

Strategic Control over scarce resources
control over a unique product. Li.
Patents and Copyrights
Governments granting exclusive rights
Substantial Goodwill
Natural Monopoly due to large economies of scale
Stringent Legal and Regulatory Requirements
Very high initial start-up costs
Use of Anti-Competitive Practices or Predatory Tactics.
Business Combinations or Cartels

Determination of Demand/Revenue curve

Market Demand Curve=Firm's Demand Curve Average Revenue (AR).

Relationship between AR & MR under Monopoly:

Both AR and MR are negatively sloped (downward sloping) curves.
MR Curve lies half-way between the AR Curve and the Y-axis, Le. it cuts the horizontal line between Y axis and AR into two equal parts.
AR cannot be zero, but MR can be zero or even negative.

Topic: Monopoly

7 Short Run price determination, Optimum output and profit Determination

For Equilibrium

MR = MC

MC must be rising

Price Discrimination

Price Discrimination occurs when a Producer sells a commodity to different Buyers, at different prices, for reasons not related to differences in cost.

Note:

The Monopolist will be charging different prices in the two markets a higher price in Market with lower elasticity of demand, and a lower price in Market with higher elasticity of demand.

Objectives:

To earn Maximum Profit
To Dispose of Surplus stock
To enjoy Economies of Scale
To capture foreign markets
To secure equity thorough pricing.

Conditions for Price discrimination

Full control over supply
Division of market into two or more sub-markets
No possibility to resale.
Different price elasticity under different markets

Topic: Relationship Between AR/MR/Price Elasticity

The relationship between AR, MR and price elasticity of demand can be examined with the formula

Where, e = price elasticity of demand.

If e = 1 MR = 0
If e > 1 MR will be positive i.e. MR > 0
If e < 1 MR will be negative i.e. MR < 0

Topic: Monopolistic Competition

1. Imperfect competition is found in the industry where there are a large numbers of small sellers, selling differentiated but close substitutes products. E.g. Colgate, Pepsodent, Dantkanti etc. This market contains features of both competitive and monopoly markets.

Large number of sellers and buyers
Free entry and exit of firms.
Product differentiation
Non price competition
Every firm is price maker and price taker of his own product
Imperfect mobility
AR and MR: In monopolistic competition AR/MR will be more elastic than monopoly market.

Topic: OLIGOPOLY MARKET

An oligopoly is a market in which there are few producers of a product. Oligopoly is an important form of imperfect competition.

Types of Oligopoly

a) Pure Perfect oligopoly- deals in homogeneous products Aluminum industry Differentiated/ imperfect oligopoly - deals in product differentiated.

b) Open oligopoly - New firms can enter the market and compete with existing firms

Closed oligopoly - new entry is restricted.

c) Collusive oligopoly- common understanding or collusion in fixing price and output Competitive oligopoly Lack of understanding and compete with each other.

d) Partial oligopoly- when industry is dominated by one large firm i.e. price leader Full oligopoly - absences of price leadership.

e) Syndicated oligopoly -Firms sells their products through centralized syndicate/channel

f) Organized oligopoly: Firms Organize into a central association for fixing price, output etc

Features

Few sellers
Interdependence
Advertising and selling costs (Non price competition):
There is no generally accepted theory of group behaviour.
Kinked demand curve/Indeterminateness of demand curve
Kinked demand curve hypothesis given by an American economist Paul A. Sweezy. This is called as Sweezy Model.

Short Notes

If Marginal Revenue = MR, Price Elasticity of Demand = 'e', and e > 1, then MR will be Positive
What should a firm do when Marginal Revenue is greater than Marginal Cost Firm should expand output
When is the Firm said to be in equilibrium When it maximises its Profit**
Suppose that a Sole Proprietorship Firm is earning Total Revenues of Rs.120,000 and is incurring Explicit Costs of Rs. 90,000. If the Owner could work for another Company for Rs. 50,000 a year, we would conclude that The Firm is incurring an Economic Loss.
With a given supply curve, a decrease in demand causes an overall decrease in price and a decrease in equilibrium quantity
Suppose that, at the profit-maximizing level of output, a firm finds that market price is less than average total cost, but greater than average variable cost. Which of the following statements is correct The firm should continue to operate in the short run in order to minimize its losses
A firm having a kinked demand curve indicates that

- If the firm reduces the price, competitive firms also reduce the price
- If the firm increases the price, competitive firms do not increase the price

If supply increases in a greater proportion than demand The new equilibrium price will be lower than the original equilibrium and the new equilibrium quantity will be higher.
In the long-run, if the Firm is unable to cover the Average Total Cost then it-Moves out of the business
If AR < AVC and the Firm stops production, then -There is a Loss equivalent to Fixed Costs
Which of the following is not a characteristic of a competitive market Firms generate small but positive supernormal profits in the long run.
A purely competitive firm's supply schedule in the short run is determined by its marginal cost curve.
The firm in a perfectly competitive market is a price taker. "This designation as a price taker is based on the assumption that ,There are so many buyers and sellers in the market that any one buyer or seller cannot affect the market
Under monopoly price discrimination depends upon Elasticity of demand for commodity
Monopolistic competition differs from perfect competition primarily because in monopolistic competition, firms can differentiate their products.

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CA Foundation Study Notes

CA Foundation Paper 4 Business Economics Notes Quick Revision

Nature and Scope of Business Economics

Chapter 2. THEORY OF DEMAND AND SUPPLY

UNIT 2 – THEORY OF COST

Chapter 4 PRICE DETERMINATION IN DIFFERENT MARKETS

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