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CAFCECONOMI CS
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 BUSINESS
ECONOMICS
CHAPTER 2 THEORY OF DEMAND AND SUPPLY
DEFINITION
Demand Desire of the commodity, ability to buy and willingness to pay a price at a
particular period of time & demand is a relative term.

FACTORS AFFECTING THE DEMAND

REQUIREMENTS
1. Price: -
2. Income: -
3. Fashion: -
4. Advertisement: -
5. Taxation: -
6. Expectation regarding future price: -
7. Population: -
8. Price & substitute: -
Tea Coffee
10 100 10 100
20 50 10 150
9. Price of Complimentary: -
Car Petrol
1000 10 10 10
2000 5 10 5

LAW OF DEMAND
Law of Demand:- First law was purchase it is Qualitative statement describe by the Dr.
Alfred Marshall and it was product of Economic started in the year of 1890 when price is
rise demand fall when price fall demand rise these is inverse relationship between price
and demand.
Higher the price of commodity smaller is the quantity demanded lower the price of
commodity large is the quantity demanded.

Schedule:-
Price Quantity demand

5 100

4 200

3 300

2 400

1 500
Explanation:-
 It is a downward sloping.
 Price & demand is an inverse relation.
 It is negatively slope
 That was convert to origin.

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Assumption:-
There should be no change in
 Population
 Fashion
 Price of Complimentary
 Price of substituted
 Income and etc.

Exception: - (against the assumption law)

1. Gifften Goods: - Gifften Goods is described by Sir Robert Giffen when price is higher
then demand Price then demand it is direct relationship.
Higher the demand lower purchase
Lower the demand Higher the price
Lower the demand low purchase and transfer to superior goods
2. Conspicuous Goods: - Conspicuous Goods is also known as prestiges or snob appeal,
show off, Veblen effect or prestige’s goods effect etc. (only for rich class for a
diamond)
3. Habital Goods and Necessary Goods: -
4. Future Exception about price: -
5. Nature Climate
7. Demonstration effect
8. Fashion
9. Conspicuous Necessity
10. Ignorance:

Expansion in demand: - when more is demanded due to change of price and other factor
remain contant is called as Expansion in demand. Movement of demand curve slope
downward

Contraction in demand: - P DD
When less is demanded due to change in price and other factors remain constant is called
as contraction in demand. Movement of demand curve slope upward

 Increase in demand: - P (-) DD

Demand increase due to other factor change but price remain constant
Explanation: - Demand is increase due to other factor but price is constant. Demand
curve shifted from left to right.

 Decrease in demand: - P (-) DD

Demand is decrease due to change in other factor but price is remain constant is
called as decrease in demand.
Explanation: - Due to change in demand decrease but price remain constant and
demand curve shifted from right to left.

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FACTORS AFFECTING SUPPLY
1. Price:
2. Cost of Production:
3. Natural Condition: -
4. Export and Import: -
5. Infrastructure: -
6. Government policy:
7. Technology: -
8. Expectation of change in future price: -

LAW OF SUPPLY
Law of supply is introduced by Alfred Marshall in the book of principle of economic in the
year of 1890 when price high supply high price supply law

Status: - Higher the price of commodity greater is the quantity supply lower the price of
commodity smaller is the quantity supply.
Schedule: -
Price Quantity
1 100
2 200
3 300
4 400
5 500
The slope of supply curve is upward from the left to right

ASSUMPTION
There should be no change in the cost of production Natural condition, Export and Import,
Infrastructure, Government policy, Technology will remain constant.
Exception - Downward thing

1. Labours Supply: -
Price Quantity
5 100
7 200
10 500
7 700
5 1000
2. Saving: -
Amount Rate & Int. Saving
1000 10% 1000
5000 20% 1000
2000 5% 1000
3. Rare article –

4. Urgent need of money: -

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UTILITY
Definition
• Utility is the want of statues of human body is called as utility.
• Utility is the power of a commodity.

Features of utility:-
 Utility is a subject term
 Utility and pleasure are not same.
 Utility and necessary are not same.
 Utility is the relative term.
 Utility and usefulness are not same,
 Utility is known as ethical natural.
 Utility and satisfaction are not same.
 Utility depends upon intensity of wants.
 Utility is the basic of demand.

Total Utility
 Sum of utility is the service consumer all in the unit of commodity consumer.
 Formula: - Tun= Mu1+Mu2+Mu3……….Mu4
Tun= ∑Mun
Marginal Utility
 Additional utility is the desired by consumer additional unit of a commodity
consuming.
Formula: - Mun = TUn-TUn-₁
ΔTU
=
Δ No.of unit
Average Utility
TUn
Formula:-
No.of unit
 Relationship between TU & MU
 In this above diagram X is represented No of unit and Y is represented marginal
utility and total utility.
 When one is consume marginal utility and total utility is same.
 When 2 and 3 consume marginal utility is decrease and total utility is increase but in
diminishing rate.
 When 4 consume marginal utility is zero and total utility is maximum.
 It is point of satisfaction and satisfied.
 When 5 unit consume marginal utility is negative and total utility is decrease.
 It is disutility and dissatisfaction marginal utility is positive, negative and zero.
 But Total utility is always positive
 Marginal utility is downward shift from left to right.
 Total utility is upward shift from left to right.

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 No. of Unit MU TU AU
1 10 10 10
2 8 18 9
3 4 22 7.3
4 0 22 5.5
5 -2 20 4

LAW OF DIMINISHING MARGINAL UTILITY

Law of diminishing marginal utility is known as rational behavior it is intial it was
introduced by Mr. H.H. Gossen in the year of 1854 it is called as Gossen first law of
consumption. It is after introduced by Alfred Marshall in the book of principle of economic
in the year 1890.

Schedule: -
No. of Unit Marginal Utility
1 6
2 4
3 2
4 0
5 -2
Statement: - other things be constant additional benefit which person derived increase in
the stock of thing diminishing with increase stock which has already have.
In the above diagram X is represented no. of unit and Y is represented Marginal utility First
consume it is maximum marginal utility. When second and third marginal utility is
decreased When fourth consume marginal utility is zero. When five is consumed the
marginal utility is negative the it is positive, zero and negative. Is no as or satisfaction.
The curve is downward and shift from left to right.

ASSUMPTION
1. Homogeneity (same in colour, size, taste, quality law of DMU)
2. Continuity
3. Single use (electricity, food)
4. Cardinal Measurement
5. Reasonability (glass of water, cup of tea no small no large)
6. Rationality (Water or beer)
7. Marginal utility of money is constant
8. Constant (Taste, fashion)

Exception
1. Drunkard (not satisfied even with drinks)
2. Miser (not satisfied even with money)
3. Reading
4. Music (same as reading)
5. Power (up and up thinking)
6. Hobbies (do not fulfill the condition of homogenates)

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Consumer Surplus
 Consumer surplus is one of the important concept in economic theory which is
introduced by Dr. Alfred Marshall consumer surplus is basic of assumption
• Utility can be cardial Measure
• Marginal utility of money remain constant
• Income, fashion and tasty of the consumer remain constant
• Independence marginal Utility of each unit of commodity.

 Explanation: - Consumer surplus is a difference between maximum prices a person is

willing to pay for a goods and it market price.
According to Dr. Alfred Marshall consumer surplus defined as “The Axis of the price
which a person would be willing to pay rather than go without the things over that
which he actually does pay.

Formula: -
• Consumer surplus= What a consumer ready to pay – what he actually pay
OR
• Consumer surplus= Marginal utility- price
OR
• Consumer surplus = Satisfaction- sacrifice
OR
• Consumer surplus = Sums of marginal utility- (price × units purchase)
OR
• Consumer surplus = Total utility- Total amount spend

Schedule: -
No. of Unit Marginal Utility Price Consumer Surplus
1 10 2 8
2 8 2 6
3 6 2 4
4 4 2 2
5 2 2 0
6 0 2 -2
7 -2 2 -4

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INDIFFERENCE CURVE:-
An indifference curve is a curve which represented combination of two commodity that
gives same level of satisfaction.
As all the combination gives same level of satisfaction the consumer become indifferent
that is neutral has to which combination he gets.
In other words all the combination or indifference curve are equally desirable & equally
preferable.
△Clothes
Formula: - MRS =
△foods
Schedule: -
Combination Food Clothes Marginal rate of substitute
A 1 12 -
B 2 6 6
C 3 3 3
D 4 1 2

Assumption:-
1. Consumer should be rational and have complete knowledge and full information
about all the relevant aspect of economic activities.
2. Consumer is capable of ranking all combination of goods according to satisfaction
3. If the consumer prefer combination A to B& B to C then he must prefer combination
A to
C. In other word he has a constitute consumption pattern
4. If combination A has more commodity than combination B then A must be prefer to
B

MARGINAL RATE OF SUBSTITUTION (MRS)

1. The concept of marginal rate of substitution is the base of indifference curve
2. MRS defined as “The rate at which a consumer will exchange 1 unit of goods for
another units of goods”.

Schedule: -
Combination Goods X Goods Y △Y
MRS =
△X
A 1 10 -
B 2 6 4
C 3 3 3
D 4 1 2
△Y
Formula: - MRS =
△X
1. The rate of sacrifice is called as marginal rate of substitution.
2. For any goods X & Y the marginal rate of substitution is the loss of Y which is
compensated by gain of X
3. There are reason for this:-
A) Due to law of DMU, the MRS XY decline because when the consumer when
more units of a particular food then his intensity of desire for additional units
of food decrease

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 B) Sometime MRS XY may be decline content or 0 it depends upon nature of
commodity
1. If two goods are normal MRS decline.
2. If two goods are perfectly substitute MRS remain constant & shape of
indifferent curve remain straight line downward sloping
3. If two goods are perfectly complimentary MRS will be zero & and
indifference curve will be L shape.
Mux 𝑃𝑃𝑃𝑃
4. Formula: - MRS = =
Muy Py

Properties if Indifference Curve

1. Indifference curve slope downward
2. Indifference curve slope convex to origin
3. Indifference cure do not touch X axis & Y axis.
4. Higher indifference curve higher the level of satisfaction, lower the indifference
curve lower the level of satisfaction
5. Indifference curve do not intersect with each other.

Budget Line
1. Higher indifference curve show higher level of satisfaction than lower one.
2. Two maximize satisfaction consumer will try to reach the highest possible
indifference curve.
3. Budget line show all those combination of 2 goods which the consumer can buy
spending his given money income on the two goods at there given price.
4. The slope of budget line or price line show the ratio of the price of two commodity
𝑃𝑃𝑃𝑃
that is
Py

Explanation:- In the figure A B represent budget line or price line & it should be noticed
that any point outside the given price line like point H will be beyond the rich of the
consumer and any combination lying within line point K show under spending by the
consumer and it reduce satisfaction of the consumer.

CONSUMER EQUILIBRIUM
1. The consumer is sets be equilibrium when he maximize his satisfaction.
2. A consumer is in equilibrium when he is driving maximum possible satisfaction from
the goods and is in no position to rearrange his purchase of goods.
3. Combination of indifference curve and price line both interact at point E. Point E is
known as consumer equilibrium.

Assumption
1. Consumer have fixed amount of money
2. Consumer is a rational
3. Consumer intend to buy only two goods
4. Goods are Homogenous and divisible.
5. The slope of indifference curve at any one point show marginal rate of substitute.
Mux Marginal Utility x
6. Marginal rate of substitute X, Y = =
Muy Marginal Utility y
7. The Slope of price line show the ratio of price of two commodity that is
𝑃𝑃𝑃𝑃 Price x
=
Py Price y
Mux 𝑃𝑃𝑃𝑃
8. So marginal rate of substitute = =
Muy Py

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CHAPTER 3 THEORY OF PRODUCTION AND COST

Production:-
 Production Means creation of economic utility.
 Production means creation of those goods and services which have economy utility
that is exchange value.
 Man cannot create the matter or destroy the matter.
 Utility may be created or added in many ways such as form utility, time utility,
place utility, knowledge utility and etc.

Features of land
 Land is free gift of nature.
 Primary factor of production.
 Inelastic supply perfectly.
 Passive factors of production. (dependable)
 Heterogeneous factors .(different)
 Site value
 Permanent factors
 Lack of Geographically mobolity but have occupational mobality.
 Derived demand.
 Optimizing marginal return.
 Land is a natural factor.
 Except humans & capital are living in land above the land, upper the land & under
the land.
 Land is permanent factors.

Features of Labour
 Labour is inseparable from labourer
 Labour is a human factor (change of feeling) So it is very much affecting Surrounding
 Working condition motivate.
 Labour is a perishable factor
 Labour sell its service and not himself.
 Labour is an active factor of production
 heterogeneous (quality , colour & all are different)
 Less mobility (language, culture were been different)
 Supply curve of Labour is backward bending.
 Supply of labour is inelastic in short run.
 Labour has less/poor bargaining power.
 All labour are not productive

Features of Capital
 Capital is Man-made Factor.
 Capital is productive.
 Supply of capital is elastic.
 All capital is wealth but all wealth is not capital.

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 Capital is a passive factor. (dependable)
 Capital is a most mobile factor. (geographical as well as occupational mobility)
 Capital is durable. (Longer use)

Types of Capital
 Fixed capital (machine, fixed)
 Working capital (cash in hand, raw material, marker, ink)
 Sunk capital (specific capital: Xerox machine)
 Floating capital (Water)
 Real capital (Teacher with classroom 0
 Human capital (labour, skilled, trained)
 Tangible capital (can feel &touch)
 Intangible capital (Goodwill, patient, copyright)
 Money capital (shares & debentures)
 Individual capital (personal thing)
 Social capital (Bus, train)

One of the important function of an entrepreneur is to introduce innovations.

Production Function
• Production function states that relation between physical input into physical output
that is Raw material to finish goods.
• Minimum input and Maximum output.
• Minimum input get maximum output for given technology is known as production
function.
• Input is independence and output is dependent.
• The functional relationship between physical input into physical output per unit
under a given state of technology is called as production function.
• Short run and long run basic on factor and not on time.
• In short run capital is fixed factor and labour is variable. That is one factor remain
constant and other factor variable/ change.
• In long run all factor are variable capital as well as labour.
• Production function can be explained: -

A) Short run production function in which input and output relation are analyzed.
1. One input is variable and all other input are fixed. (Law of variable
proportion)
OR
2. Two inputs are variable and all other factors are fixed (Isoquants) (means
equal quantity)
B) The long run production function in which input and output relation are analyse
were all the inputs are variable (law of return to scale).

Concept of Product
Total Product
• Total output produce by all the factor per unit of time is called as total product.
• Total product increase with a increase in the variable factor input.
• Formula: - TP=AP×Q

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Average Product
• Average product means the total product per unit of a variable factor.
• In other word total product is divided by number of unit of variable factor.
• Formula:-
TP
1. AP =
No.of unit variable factor

TP
2. AP =
QVF

Marginal Product
• The marginal product means additional made to total product by the used of an
extra unit of variable factor.
• Formula:-MP=TP1-TPn-1
∆TP
∆QVF

PRODUCT SCHEDULE
Quality of labour Total Product 𝐓𝐓𝐓𝐓 ∆ 𝐓𝐓𝐓𝐓
Average product = Marginal product =
𝐐𝐐 ∆ 𝐐𝐐
(1) (2) (3) (4)
1 100 100 100
2 210 105 110
3 330 110 120
4 440 110 110
5 520 104 80
6 600 100 80
7 670 95.7 70
8 720 90 50
9 750 83.3 30
10 750 76 0
11 740 67.2 -10

Law of variable proportion

 Introduction:-
a) Increasing return of factor
b) Diminishing return of factor
c) Negative return of factor

 Statement of the law: - “As the proportion one factor in a combination of factor is
increase after a point first the marginal and then average product of that factor will
diminishing”.

Assumption
1. There is only one factor that which is variable and all other factors remains
constant.
2. All unit of variable factors are homogenous (different)
3. The state of technology is constant.

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Schedule
Unit of capital Unit of Labour Total Product Average Product Marginal Product
10 1 10 10 10
10 2 30 15 20
10 3 60 20 30
10 4 80 20 20
10 5 90 18 10
10 6 90 15 0
10 7 85 12.14 -5

Explanation
 Stage 1:-
LAW OF INCREASING RETURN TO FACTOR

 Stage 2:-
LAW OF DIMINISHING RETURN TO FACTOR

 Stage 3:-
LAW OF NEGATIVE RETURN TO FACTOR

RELATIONSHIP BETWEEN AVERAGE PRODUCT AND MARGINAL PRODUCT:-

 When average product raise as a result of an increase in quantity of variable input,
marginal product is more than average product.
 When average product is maximum marginal product is equal to average product.
E.g. AP=MP
 In other word marginal product curve cut the average product curve It is maximum.
 When average product fall marginal product is less then average product
e.g. MP<AP

PRODUCTION OPTIMIZATION (Iso = equal, quant= quantity)

 Production optimization is also known as Isoquant, Iso Product, Product indifference
curve, equal Product curve.
 Isoquant refers to variable combination of two variable input that gives same level
of output.
 As all combination on the iso product curve give the same level of output the
producer become indifference to the combination.

Schedule
Combination Capital Labour Marginal rate of technical sub
A 1 10 -
B 2 8 4
C 3 5 3
D 4 3 2

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PROPERTY OF ISO QUANT:-
1. Isoquant slopes downward.
2. convex to origin
3. Isoquant cannot touch the X axis and Y axis it never be (0).
4. Higher the isoquant higher the output.
Lower the isoquant lower the output.
5. do not intersect with each other

MARGINAL RATES OF TECHNICAL SUBSTITUTION

 The rate at which one factor of production is substituted in one place of the other
factor without any change in the level of output is called as Marginal rate of
technical substitution
 Formula:- MRTS = ΔL
ΔK
ISO-COST LINE
Iso-cost line is also known as equal cost line, price line, outlay line, factor price line

Producer Equilibrium
 A firm always try to produce a given level of output at minimum cost.
 The combination of Iso-cost line and Iso-quant is called as producer equilibrium.
 Producer equilibrium ensure maximization of profit and producer a given level of
output with least cost combination of inputs.
 Iso-quant are negatively slope and convex to origin.
 The slope of iso-quants show marginal rate of technical substitution which
demonization.
Formula: MRTS = MPx = Px = ∆L = ∆X
Mpy Py ∆K ∆Y

Law of return to scale:-

Law of return to scale are classified in three parts i.e.
a) Increasing return
b) Constant return
c) Diminishing return

A) LAW OF INCREASING RETURN OF SCALE:-

1. When the output increase by a greater proportion then proportion increase in
all the factors input.
E.g. - When all input are increased by 10% & output raised by 30%.
B) LAW OF CONSTANT RETURN TO SCALE:-
1. When the output increase agatily in the same proportion as that if increase in
all factor input is called as constant return to scale.
E.g. - When all input are increase by 10% and output also raise by 10%.
C) LAW OF DIMINISHING RETURN TO SCALE
1. When the output increase by a lesser proportion than the proportion increase
in all the factor input is known as diminishing return to scale.
E.g. All inputs are increased by 20% and output in by 10%.

COST FUNCTION: - Price of factor of Production are L,L,C,E.

Meaning
• Cost function is the functional relationship between cost and output.
• Cost function refers to the relation between cost of a product and varies determines
of its cost.

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Concept of cost
1. ACCOUNTIONG COST
 Accounting cost are those cost in which cash payment of business makes to
outsider which do not belongs to business man.
E.g.:- salary, wages, rent, interest.
 This cost is recorded in the books of account.
 Accounting cost is always known as explicit cost or contractual Payment.

2. NON-ACCOUNTING COST
 Non accounting cost are those cost or self-own property or self-supply
resources is called as non-accounting cost.
E.g.:- Rent for own property, self-improved.
 Non-accounting cost is also known as implicit cost and imputed cost
 This cost is not recorded or included in book of accounts.

3. ECONOMIC COST
Combination of Explicit cost and implicit cost is called as Economic cost.
FORMULA
• Economic cost = Accounting cost + Non accounting cost
• Economic cost = Explicit cost + implicit cost
• Accounting profit = Total revenue – Accounting cost
• Economic profit = Total revenue – Economic cost
• Non-accounting profit = Total revenue – Non accounting cost
• Economic profit = Total revenue –( Accounting cost + Non accounting cost)
• Economic profit = Accounting profit – Non accounting Cost= Economic profit

4. OUTLAY COST: Outlay cost involved actually outlay (expenditure) of funds on wages,
rent, salaries, etc.

5. OPPORTUNITY COST: Opportunity cost refers to its value in its best alternative or
scarifies.

7. DIRECT COST: Direct cost is the cost which can be measures or identify in the unit of
operation.
Eg. Rent, No. of students.

8. INDIRECT COST: Indirect cost is the cost which cannot be measure or identify in the
unit of operation.
Eg. Electricity.

9. FIXED COST: - Fixed cost do not change in the output.

Eg: - Rent, salary, insurance.

10. VARIABLE COST: Variable cost changes with the change in level of output.
Eg: -Raw material, electricity bill.

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11. SHORT RUN: Short run is a period in which some cost are fixed and some cost are
variable.

12. LONG RUN: - Long run is a period in which all cost are variable.
FORMULA
Total cost = Total Fixed cost + Total variable cost
TC = TFC + TVC

FORMULA
 Total cost = Total Fixed cost + Total variable cost
 Average cost = Total Fixed cost/ QVF
 Average Variable Cost (AVC) = TVC / QVF
 AC = Average fixed cost + Average variable cost
 Marginal cost = TCn-TCn-1
∆Total cost
Marginal cost = ∆QVF

AVERAGE VARIABLE COST

Average variable cost is a variable cost per unit of output.

Formula: AVC = TVC/Q

 Average variable cost fall as the output increase due to increasing return to variable
factors.
 Average variable cost is minimum at the optimum capacity output.
 Average variable cost raise very sharply due to diminishing return to the variable
factor.
 Average variable cost and average product of variable factor are inversely related
i.e. Average product is maximum and Average variable cost is minimum.
 Average variable cost curve initially fall reach minimum and then raise average
variable cost is “U” shape.

AVERAGE cost
 Average cost/Average total cost the total cost per unit of output.
 Formula: AC = TC/Q
= TFC+TVC/Q
= TFC/Q+TVC/Q
= AC = TFC + TVC
 Average cost initially fall reach minimum and then raise due to law of variable
proportion as output goes on increasing.
 Average cost curve is “U” in shape.

MARGINAL COST:-
 Marginal cost is the additional to the total cost curve cause by production one more
unit of output.
Formula: MC = ΔTC / ΔQ, MC = TCn-TCn-1

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 Marginal cost is independence of fixed cost that is in short period total fixed cost are
constant for all the level of output. Marginal cost is affected only by
“Variable cost”.
 MC = TCn-TCn-1
= TFC + TVCn - (TFC+TVCn-1)
= TFC+TVCn-TFC-TVCn-1
= TVCn-TVCn-1
MC = ΔTVC
 In the above diagram marginal cost curve first decline rich minimum and then goes
on rising as output increase.
 As output increase marginal cost fall due to increasing return and marginal cost rises
due to diminishing return.
 The marginal cost is inversely related with marginal product i.e. marginal product is
maximum when marginal cost is maximum.
 Marginal cost passes through the minimum point of average variable cost and
average cost curve.
 Marginal cost curve reach its minimum point earlier than minimum point of average
variable cost and average cost.
 Point R is point of inflation.

LONG RUN AVERAGE COST

 But in long run all inputs are variable.
 In short run size of plant is fixed. The size of pant cannot be increased or decreased.
 In long run the firm has sufficient time to bring about change in size of plant.
 In long run the firm move from one plant to another.
 The long run average cost curve show the minimum possible average cost for
product on various level of output.
 In the below diagram shows that long average cost curve (LACC) is not tangent to
the minimum point of short average cost curve (SACC) i.e.
a) When LAC curve sloping downward it is tangent to falling portion of SAC i.e.
economies of scale.
b) When LAC curve rising it is the tangent to raising portion of SAC i.e.
diseconomies of scale.
 SAC curve is also known as plant curve.
 LAC curve is also known as planning curve, envelope curve, saucer curve,
combination of SAC.
 LAC curve help the firm to make choice about the size of plant for producting a
particular output at minimum cost.
 LAC curve is “U” shape curve.
 The shape of LAC curve depends upon law of return to scale.
Long run average cost curve “U” Therefore, modern firm face L-shaped cost curve than U-
shaped.

: 16 :
CHAPTER 4 MEANING AND TYPES OF MARKET

Market refers to where buyer and seller buying and selling of goods and services at a
particular place or without any particular places directly or indirectly.

PRICE DETERMINE UNDER MARKET FORCE

Price Qty. DD Qty. SS
1 100 20
2 80 40
3 60 60
4 40 80
5 20 100
Prefect competition
 Large number of buyer/seller.
 Homogeneous product.
 Single price.
 Free entry/Free exit.
 Perfect Knowledge.
 No government Interference
 Perfer mobility.
 No transport cost
 Price taker.
 NO TRANSPORT COST

Condition of PERFECT COMPETETION:-

1. MR = MC = Equilibrium (maximum profit, maximum output)
2. MC Curve cut MR from below
3. AR > AC Super normal profit
4. AR = AC Normal profit
5. AR < AC Loss
6. MR > MC Incentive
7. MR < MC Decrease in cost of product
 Super Normal Profit
 Normal Profit
 Loss
 Shut down

Condition OF PERFECT COMPETETION IN LONG RUN

P = AR = MR=DD=SAR=SMR=LAR=LMR=SAC = SMC = LAC = LMC = Equilibrium
a) The output is produced at the minimum feasible cost.
b) Consumer pay the minimum possible price which just cover the marginal cost i.e.
c) Plants are used at full capacity in the long run so that there is no wastage of
recover. E.g. MC = AC
d) Firm earn only normal profit i.e. AC = AR.
e) Firm maximize profit i.e. (MC = MR) but the level of profit will be just normal.

: 17 :
MONOLOPY:-
1. Single seller.
2. No close substitute
3. Barrier to entry.
4. Complete control over the market supply.
5. Price maker.
6. Super Normal profit.
7. Price discrimination.
8. No distance between firm and industry.

Condition
1. MR = MC (Equilibrium) (Maximum profit, maximum output)
2. MC curve cut MR from below.
3. AR > AC Super Normal profit
4. AR > AVC
5. AR = AC Normal Profit
6. AR > AVC
7. AR < AC Loss
8. AR = AVC
9. AR < AVC shut down point
10. MR > MC Incentives
11. MR < MC Decrease (cost of production)
12. MR = ½ AR
13. TR, MR = + = ED > 1
14. TR max, MR = 0 = ED = 1
15. TR, MR = - = ED< 1

LOSS
 Monopoly in Long run
 PRICE DISCRIMINATION
 Different buyer, different price but the same product is known as price
discrimination.

CONDITION OF PRICE DISCRIMINATION:-

 Single seller.
 Complete control over the supply.
 Seller should be able to divide his market into two or more sub- market.
 No possibility of resale.
 Different market should have different elasticity of demand.

DEGREE OF PRICE DISCRIMINATION:-

 First Degree: - Price discrimination the monopolist will fix a price which will take
away the entire consumer’s surplus.
 Second Degree: - Price discrimination, he will take away only a part of the
consumer’s surplus here price varies according to the quantity sold .Larger
quantities are available at lower unit price.
 Third Degree: - Price discrimination, price varies by attribute such as location or by
customer segment.

: 18 :
MONOPOLISTIC COMPITION
Features
 Large no. of buyers and sellers
 Free entry and free exit (imp)
 Close substitute
 Product differentiation
 Selling cost
 Heterogeneous product
 Concept of group
 Different Price

Schedule: - Same as monopoly

Condition
 MR = MC(Equilibrium) (Maximum profit , maximum output)
 MC curve cut MR from below.
 3. AR > AC Super Normal profit
 AR > AVC
 5. AR = AC Normal Profit
 6. AR > AVC
 7. AR < AC Loss
 8. AR = AVC
 9. AR < AVC shut down point
 10. MR > MC Incentives
 11. MR < MC Decrease ( cost of production )
 12. MR = ½ AR

Super Normal
 Profit (short run)
 Loss (short run)

MONOPOLISTIC COMPETITION: Long Run

FEATURE OF OLIGOPOLY
 FEW SELLER
 PRICE RIGIDITY
 INTERDEPENDENCE
 GROUP BEHAVIOUR

TYPES OF OLIGOPOLY
1. Pure oligopoly or perfect oligopoly: - Occur when the product is homogenous in
nature e.g. Aluminium industry
2. Differentiated or imperfect oligopoly: - is based on product differentiation e.g.:-
Talcum powder.

: 19 :
3. Open and closed oligopoly: - In an open oligopoly market new firms can enter the
market and complete with the existing firms. But in closed oligopoly entry is
restricted.
4. Collusive and competitive oligopoly: - Few firm of the oligopolistic market, fixing
price and output is collusive oligopoly. There is a absence they complete with each
other.
5. Partial or full oligopoly: - Is partial industry dominated by one large firm market will
be conspicuous the absence of price.
6. Syndicate and organized oligopoly: - Where the firms sell their product centralized
syndicate themselves into a central association fixing prices, output, quotes etc.

Kinked Demand curve:-

 In many oligopolistic industry there is price “RIGIDITY” (Stability)
 The price remain sticky or in flexible for a long time.
 Oligopolistic do not change the price even if economic condition change.
 The theory of kinked demand curve is introduced by Paul Sweezy.

: 20 :
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