Q1. Which of the following commodities has the most inelastic demand and why? a. b. c. d. e.

Soap Salt Penicillin Cigarettes Ice cream

Q2. List the major purposes of demand analysis from the view point of business management. Can manager manipulate all the variables which affect demand? Q3. What is meant by production function? Distinguish between law of returns to variable proportions and law of return to scale. Q4. Discuss economies of scale and diseconomies of scale. Q5. Explain the difference between : a. Fixed and variable cost b. Actual and opportunity cost. Q6. Describe Opportunity cost giving examples. How is opportunity cost relevant to managerial decision making. Q7. Discuss the factors determining market structure? How does market structure affect pricing decision of a firm? Q8. How is price of commodity determined under Oligopolistic market? Q9. Which of the following are true? Justify? a. b. c. d. Efficiency is the source of natural monopoly. A monopoly firm always earn abnormal profit Firms under monopolistic competition can only earn normal profits. Under perfect competition all firms always earn normal profit.

Q10. What is meant by equilibrium price and quantity? What factors cause an upward right shift and upward left shift of the equilibrium point from its original position. 3

The traditional theory resources used for the production of a product are known as factors of production. Factors of production are now termed as inputs which may means the use of the services of land, labour, capital and organisation. The Production Function

” Postulations This law is based on the below postulations. how output changes is the concern of this law. The TP curve first rises at an enhancing rate upto point A where its slope is highest.” It is expressed as follows. let us construct a sketch. The price of the produce is specified invariable Explanation of the Law To explain this law more clearly.T). 2. It shows how and to what extent output changes with variations in raw materials during a specified period. 7. M__ for management of organisation. L for labour. keeping other factors constant. tonnes etc.C.The Production function expresses a functional relationship amidst quantities of raw materials and goods.M. where Q stands for the output of a good per Unit of time. As per Leftwich “The law of variable proportions states that if a variable quantity of one resource is applied to a fixed amount of other input. Point A . N for land or natural resources. It is feasible to alter the proportions in which the a range of factors are collective Only one factor is erratic while others are held invariable All units of the changeable factor are standardized There is no variation in expertise It presumes a short run condition The produce is calculated in physical units. __ Q =F (L. In the words of Stigler “The production function is the name given to the relationship between rates of input of productive services and the rate of output of product. in quintals. the total product increases at a diminishing rate till it reaches its highest point C and then is starts falling. 5. It is economist’s summary of technical knowledge. 3. Law of Variable of Proportions If one input is variable and all other raw materials are fixed the concern’s production function exhibits the law of variable proportions. C for Capital and T for given technology and F refers to the functional relationship. output per unit of variable input will increase but beyond some point the resulting increases will be less and less with total output reaching a maximum before it finally begins to decline. 6.N. 1. If the number of units of a variable factor is increased. 4. From point A upwards.

Phase II starts when the average product is at its maximum to the zero point of the marginal product. the fixed factor is used more intensively and production increases rapidly.e. . The main reason for increasing returns in the first stage is that in the beginning the fixed factor is large in quantity than the variable factor. Another reason for increasing returns is that the fixed factor is indivisible which means that it must be used in a fixed factor. In the beginning the fixed factor cannot be put to the maximum use due to the non-adequacy of sufficient units of the variable factor. The maximum point on the AP curve is E where it coincides with the MP curve. is below X axis. This is the only phase in which production is feasible and profitable. Phase I Increasing Returns – In this stage. But when units of the variable factor are applied in sufficient quantities. the average product reaches the maximum and equals the marginal product when 4 workers are employed which is represented in the above diagram. marginal and average products are in fact the different stages of the law of variable proportions which are discussed below. division of labour and specialisation lead to per unit increase in production and the law of increasing returns operate. In fact. When more units of the variable factor are applied to a fixed factor. At the latter point. More and more workers are employed in order to have larger output. The average product curve AP and the marginal product curve MP also raise with TP. This point also coincides with point B on the TP curve from where the total product starts a gradual rise. Thus the total product increases at a diminishing rate and the average and marginal products decline. Phase II Law of diminishing returns – In this stage. When the TP curve reaches its maximum point C. The MP curve reaches its maximum point D when the slope of the TP curve is the maximum at point A. the falling and the negative phases of the total. This stage is portrayed here from the origin to point E where the MP and AP curves meet. The rising. the law of diminishing returns is only one phase of the law of variable proportions. between phases I and III is the most significant stages of production. Here land is scarce and is used intensively. production increases more than proportionately. The employment of the last worker actually causes a decrease in total output.where the tangent touches the TP curve is called the inflection point upto which the total product increases at an increasing rate and from where it starts increasing at a diminishing rate. Phase III Negative Marginal Returns – Production cannot take place in the phase III either. the MP curve becomes zero at point F. This cause points towards the law of increasing returns. Throughout this stage. This is represented in the diagram as the phases EB and FC. It is also explained in another way. Hence it is incorrect to say that the law of variable proportions is another name for the law of diminishing returns. When the TP starts declining the MP curve becomes negative. the total product is the highest. In this stage the TP curve also increases rapidly. i. For in this phase total product starts declining and the marginal product becomes negative. the marginal product is below the average product.

4. the production is optimum in this phase. Online Live Tutor Laws of Returns The Traditional Approach: We have the best tutors in Economics in the industry. He has defined as “An increase in the capital and labour applied in the cultivation of land causes in general a less than proportionate increase in the amount of produce raised. The Law of Returns to Scale The law of returns to scale explains the relationship amidst outputs and the scale of inputs in the long run when all the inputs are increased in the same proportion. Unlike other two phases. Not only that. forests and the building industry.The Traditional Approach problem into its sub parts and explain to you in detail how each step is performed. the firm enhances its scale of production by using more space. the variable input is used excessively. The heaviness of populace on land enlarges with the augment in population. It forms the basis of a number of a number of doctrines in economics.” Ricardo also based his theory of rent on this principle. 2. 5. law of diminishing returns where the production and profitability both are feasible. FC where the MP curve is below the x axis. 3. Consequently more and more persons are employed on land which is a fixed factor. In under developed countries it is of an elementary importance for understanding their problems. mining. In the words of Wick steed. the law of diminishing marginal utility in the theory of demand and that of diminishing marginal physical productivity in the theory of distribution are also based on the doctrine.” To meet a long run change in demand. Conclusion Therefore the best stage of production is phase II.” The universal applicability of this law has taken economics to the realm of science.The Traditional Approach concepts.” Importance 1. Here the workers are too many in relation to the available land making it absolutely impossible to cultivate it. You will get one-to-one personalized attention through our online tutoring . This approach of breaking down a problem has been appreciated by majority of our students for learning Laws of Returns .The dotted line represented in the diagram. where the production is impossible and hence there is no profit generated. The Malthusian theory of population shoot from the fact that food supply does not amplify rapidly than the growth in population since the operation of the law of diminishing returns in agriculture. In such economies agriculture is the main occupation of the people. the law of Diminishing returns “is an universal as the law lie itself. Therefore production will not take place in this stage. The Law of Diminishing Returns Benham defines the law of diminishing returns as “As the proportion of one factor in a combination of factors in increased. Rent arises in the Ricardian sense because the operation of diminishing returns on land forces the application of additional doses of labour and capital on a piece of land does not increase output in the same proportion due to the operation of this law. after a point the average and marginal product of that factor will diminish. In fact this law was responsible for Malthus’ pessimism. To the right of Point F. This leads to declining marginal productivity of workers.” It’s Application – Marshall applied the operation of this law to agriculture fisheries. more machines and labourers in the factory. Thus phases I and III are of economic absurdity or mere economic non-sense. unless it happens to coincide with an improvement in the arts of agriculture. Hence no manufacturer will produce in this phase by employing more units of the variable factor beyond the point zero marginal products MP because there is reduction in total product TP. As per Roger Miller the law of returns to scale refers “to the relationship between changes in output and proportionate changes in all factors of production. Our tutors can break down a complex Laws of Returns . Like wise.

Explanation of the Law. Please do send us the The Production Function. In other words. Cut throat competition is unlikely. Online The Production Function. Law of Returns to Scale help are highly qualified. It is often noticed that price under oligopoly is stable. Explanation of the Law. any producer in oligopoly can raise or lower his price without any fear of losing customers or of immediate reactions from his rivals. whether taxeit or explicit. Please do send us a request for Laws of Returns . Law of Returns to Scale problems on which you need help and we will forward then to our tutors for review. one force moves them to cooperate with one another so that the profit of each firm are maximized. we have excellent tutors who can provide you with Homework Help. Law of Returns to Scale Homework Help. Explanation of the Law. Our tutors who provide The Production Function. The firms under oligopoly are motivated by two opposing forces. 8. the price and output policy of each is likely to affect the other apprcialy but none can foretell precisely how. They are. Explanation of the Law. The price in the long run may settle at a level between the monopoly price and that under cut throat competition. we say the behaviour of the firm directly affects and is affected by the action of the rival firms. It is neither much responsive to changes in demand nor to the changes in the supply. Since the products are not similar.The Traditional Approach tutoring and experience the quality yourself. When they all deal in a standardized product and each is producing a considerable portion of total output. The other force takes the away from the joint profit maximizing price and profit. therefore. Under oligopoly the pricing theory is fundamentally the same with the difference that the larger the number of firms. Law of Returns to Scale Help: If you are stuck with an The Production Function. In case there is a product differentiation monopoly agreement are even less likely. Our tutors have many years of industry experience and have had years of experience providing The Production Function. Our tutors are highly qualified and hold advanced degrees. Law of Returns to Scale Homework problem and need help.How price and output is determined under oligopoly Posted by Princess | 08:50 Economics 0 comments In oligopolistic industry. For instance if demand . However keen rivalry among them may create conditions of monopolistic competition. Explanation of the Law. mutually interdependent.which will make learning fun and easy. there are only a few big firms which control the supply of a commodity and each firm produces a significant portion of the market. the greater will be the differences in the marginal costs and more remote will be the possibility of collusion or agreement. The price which will be fixed in oligopoly without product differentiation is thus inderminate.

Thus existence of oligopoly accounts for some of the price inflexibility that characterises our economy. The oligopolists avoid experimenting with price changes. no firm will venture to raise the price for fear that other firms may not raise the price and it may lose the market. For instance. Why shout he experiment? He is therefore content to leave price and output as they are. he will offend his rivals. But under oligopoly the number of firms is very small and step taken by anyone firm is likely to produce some reaction on the others. do not much affect price and output under oligopoly. As Tarshis remarks “Thus it is quite possible for demand and cost to change frequently and yet to produce no changes. changes in costs too. . he will lose his customers and if he lowers it. if wages have gone down. Nor will it lower price for the fear that the other firms may also lower their price and deprive it of any initial advantage. He knows that if he raises the price. or at any rate very few changes in price.increases. each firm may like to reduce the price. In competitive industry action of no single firm can affect the conditions in the industry. Similarly. but it is not sure if others too will not lower theirs. He has a clientele of his own when there is product differentiation. for the number of firms is very large.