Scribd Logo
Upload

Welcome to Scribd!

  • Market

    Uploaded by

    Ankit Roy
    5 views35 pages
    Eco

    Original Title

    (4) market

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Eco

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    5 views35 pages

    Market

    Uploaded by

    Ankit Roy
    Eco

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 35
    ARON Rete coe In modern ‘economic system, market is the center of life. In common sense, a ploce where regular sell and purchase of commodities take place among buyers and Fels is ‘called market. But the concept of market in economics is different from the common sense concept. The Social relation or social institution which is developed through historical revolution among buyers and sellers of commodity and input iscalled market in economics. 4 istics of market. The characteristics are mentioned below : 1m ‘Specific commodity or specific input. Different types of market for different commodity, e.g: wheat market, jute market etc. Again different represent for different input e.g. labour market, capital mazket etc. to exist buyer and seller for specific commodity or input. Buyer nd seller give supply of the specific commodity or input. ill exist of the specific commodity or input. Sale and purchase of ut will exist according to that price. ‘Of transaction relation will exist among seller and buyer for the commo or input. e exist flow of transaction instead of only one transaction of the specific ty or input. different types of market the important market is perfect competition. ket where a homogeneous product is exchanged between the many buyers Sellers through mutual competition is called perfectly competitive market Perfect competition. A concept related to this market is revenue. For discussion of revenue different aspects of perfect competition are ed in this chapter. Different Concepts of Revenue amount of money received by the production unit or firm by selling its dity is called revenue. Three concepts of revenue are most important in ics. These concepts are total revenue, average revenue and marginal revenue. utee concepts are now discussed. Total Revenue : Total amount of money received by a firm by selling its bdity in the market at a fixed price is called total revenue. Total amount of sell by price per unit of the commodity is the total revenue, Total Revenue (TR) = Price per unit of commodity (P) x amount of sell (q). Is Total Revenue (TR) = P x q. a. mpl, if a firm sells 15 units of commodity at price Rs. 10, then total © will be (Rs. 10 x 15 units) Rs. 150. 147 FETT tatistics received by the firm per uni, called average Tevenye nt of money of sell is the averag, i ket is oduct in the mat) ; ms firm divided by the amoun! Total Revenue (TR) erage Revenve (AR) = {gnount of sell (4) So, A j.e., price of the commodity an = price (p), E ae Suen is considered from the stand point of th es) the stand point of the seller, Fo Eee revenue is conside! from this average revenue is the another name of price. ; For if.a firm gets Rs. 150 by selling 15 units of commodity, then averag revenue will be (Rs. 150 + 15 units) Rs. 10. ied by any firm by sellin (c) Marginal Revenue : Additional total revenue earns ‘one additional unit of its product in the market is called marginal revenue. Chi ii Men ee Change in the amount of sell (Aq) i Thus, Marginal Revenue (MR) = AR, Aq For example if iple if a firm earned Rs. 150 by selling 15 units of its product @ eamed Rs. 158 by selling 16 unit (Rs. 158- Rs. 150). of the product, then marginal revenue will © 411, i sae see between Total Revenue, ne ht ion between total revenue, avera a it Tespect to a particular situation. Ne commodit ity is fixed and the seller can sells Average Revenue and Margit age revenue and marginal revenue Here it is assumed that the price the commodity as many units, 25 4 4.1.11, Rela Revenue under peot between Total fixed) : Perfectly cieapettre werter tamales ie., price of the commodity ommodity is fixed and | fixed price. 1 Market : Perfect Competition 149 Fevenues under perfectly competitive market i.e., price ty is fixed. is seen that total ionately with unt of sell as the ty is fixed. The curve in this 4.1, the total revenue Total Revenue oO Amount of Sell Fig : 4.1 in the amount of sell. average revenue and marginal revenue under perfectly (ie. price of the commodity is fixed) is now explained. is seen that average revenue (AR) is fixed as the price of the and average revenue is equal to marginal revenue (MR) whatever ell. In this situation the shape of the average revenue and marginal shown in Fig. 4.2. In Fig. 4.2, DD, is the average revenue curve. It is parallel to the horizontal axis because the seller can sells any amount of the commodity at a fixed price. Further, as the average revenue curve is parallel to the horizontal axis marginal revenue curve is also parallel to horizontal axis and average revenue curve is itself the marginal revenue curve. Because average revenue and margi- nal revenue are equal. Therefore in Amount of Sell Fig. 4.2, DD, is the average revenue Fig : 4.2 curve and marginal revenue curve. FHT TAT 150 Microeconomics I and Statistics Marginal Revenue and Elasti, tion between Average Revenue, ie MT ean considering the relation between average Tevenue, margin) ane an d elasticity of demand, the definition of .these three concepts are Biven, re’ aig Revenue of the firm divided by the amount of sell.is the average reven,, Total Revenue (TR) et pS, So, Average Revenue (AR) = 7 on of sell (q) ie., Average Revenue (AR) = ae But Total Revenue (TR) = Price per unit of Product (P) x Amount of sell (q) ie. TR = Pa. : TR ~P. So, Average Revenue (AR) = Bd 2 =P. a Change in Total Revenue (ATR) Margi IR) = = Eun nal Revenue (ME) Change in the amount of sell (Aq) ATR ite., Marginal Revenue (MR) = at : Percentage change in quantity demanded as of the commodity Further elasticity of demand (e) = — - Percentage change in price 2 of the commodity ie,e= Here Aq = small change in quantity demanded ~ AP = smalf change in price. Pera Hs assumed that P = initial price and q = initial quantity demanded. In this situation, total revenue TR, = Pq. Here it i ape 4 a We oe of demand is increased by Aq as a result 0 So, in this situation, total revenue TR, = (P ~ AP).(q + Aq) Therefore, ‘change in total revenue ATR = TR, - TR, or, ATR = (P — AP)(q + Aq) - Pq Or ATR = Pq'+ Pidq~ q.AP ~AP.Aq ~ P. of, ATR = P.Aq ~'q:AP = AP.AG. 7 ee ee ‘small change in price and Aq is the i » Por this we omit AP.Aq asit is eee eee very small. P.Aq ~ q.AP B|z sin Market : Perfect Competition HH poth sides by Aq, pale eet EP ag a ero" é ‘A i sR a). w oq ee of elasticity of d er Aa From the defination sticity of demand it is derived that e = AP oo? penioe ce relation (1) = 43) 1 Furber “a poe is the marginal revenue (MR) « MR= (1-2) 4 1 Seen os e = AR/I-- Again P= average revenue (AR) «. MR = ( 4) So the relation between average revenue, marginal revenue and elasticity of tet i MR = ax{1-4). 142, Perfectly Competitive Market or Market under _ Perfect Competition Perfectly competitive market is the most important market in the structure of matket, Theoretically perfectly competitive market is the ideal market in the structure of market, 42.1. Definition or Concepts of Perfectly Competitive Market : A market a homogeneous product is exchanged between the many buyers and many through mutual competition is called perfectly competitive market or market Perfect competition. #422, Characteristics or Assumptions of Perfectly Competitive Market : fe some characteristics or assumptions in perfectly competitive market. The ‘characteristics or assumptions are discussed here : buyers and many sellers : Under perfectly competitive market many ers and Many sellers are exist. This implies that the number of buyers and sellers ® Such that an individual buyer purchases a small portion of the total product vidual seller sells a small portion of the total product. So, an individual | individual seller cannot influence the market price. Therefore individual are the price taker and not the price marker. Part : Application of calculus : Short notes-11 : See explanation of the relation between ‘marginal revenue and elasticity of demand with the help of calculus. L POT re TEP TT Microeconomics © ft iti ket all selle: . 2 tly competitive mail TS sey 2, Homogeneous product : ent te real v ifference in the product of a peppnde ee re perfectly substitute to each other, _ rfectly competitive market oo yy resistance and the old selley, i spect there is no restriction nd sellers regarding market conditio, plete knowledge about the market, 4, d all the buyers and sellers exchang. my d seller in the market have co eae operates with only one price an their commodity at ice only. 5. Perfect mobility, of the the firm under perfectly competi jon : Factors of production used by re perfectly mobile. This means thay itive market a! e to other place and from one ug fer from one place factors of production freely trans! . eae a i rfectly competitive mark : Firms under pe! ° IK 7 3 ee ee lling the commodity or selling Cost is absent, i yr sel azn eS ea cae economist make 4 ee pure ti ition. According to them @ m t where a homo operas ee a ee many ceed and many sellers, free entry ang = of the market take place is called pure competition. On the other hand, along with the characteristics of pure competition, if complete knowledge of buyers and sellers regarding market conditions, perfect mobility of factors of production and production cost is the only cost exist then the market is called perfect competition 4.2.3, Demand Curve of a Firm Under Perfect Competition : A market where a homogeneous product is exchanged between the many buyers and many sellers _ through» mutual competition is ‘called perfectly competitive market or perfect competition. In this market individual buyer purchases or demand a small portion 0 the re peed @ there exist many buyers in the market. So an individual buyer ae an pe a ie. individual buyer is the price taker and not pricy ene yn ee od ea a buyer or firm can increase or decrease his or ils stedtelt Tine $a ci tis 1a is demand curve of individual buyer or firm is 4 : Paralfe jorizontal axis. This is shown in Fig. 4.3. a In Fig. 4.3 Amount of commodity is plotted on the horizontal axis and price is plotted on the vertical ax’ Here DD, is the demand curve 0 % individual seller or firm. From th! | “diagram it is seen that this deman curve is parallel to the horizontal axig because the consumer can purchss any amount of the commodity at fixed price. Thus the demand curve the firm under perfect competition ® Amount of Commodity straight line parallel to horizontal # Fig :4.3 as the price of the commodity rem constant. dl Market : Perfect Competition nis rm in this market is in equilibrium profit is maximum. Price under Perfect competition is fixed ay the stand of the firm. As a result production and selling amount of commodity of a firm maximise profit is called equilibrium amount of production of the firm. ‘prium condition of a firm or profit maximising condition of a firm in the un under perfect competition is now explained with the help of marginal ‘and marginal cost. gitional total revenue earned by any firm by selling one additional unit of its ct in the market is called marginal revenue (MR). On the other hand, change due to change in one unit of production is called marginal cost (MC). conditions are to be satisfied for equilibrium of a firm under perfect tion in the short run. ‘at the equilibrium point, Marginal Revenue (MR) = Marginal Cost (MC). at the equilibrium point, marginal cost curve cuts the marginal revenue curve i., at the equilibrium point marginal cost curve will be upward rising. ation with the help of example: Equilibrium conditions or profit g conditions of a firm in the short run under perfect competition is now Total | Marginal | Profit cost cost (Rs.) revenue = Price | (Rs.) | (Rs.) 10 10 3 ¢ 4.2, market price of the commodity is Rs. 13. This price is the average ¢ and marginal revenue of the firm. From Table 4.2., it is seen that profit is along with the increase in production so long as marginal revenue is greater sinal cost of production (up to 4 units amount of production). e.g., for | amount of production the amount of profit is (total revenue ~ total cost i.e., Rs. 10) Rs. 3. The amount of profit is increase to Rs. 8 for 2 units amount ction. In this way for 4 units amount of production total profit increased to from 5 units, say at 6 units amount of production, marginal revenue Jess than the marginal cost (Rs. 15). As a result profit is decreased f second order condition of equilibrium i.e. marginal cost will upward |. So profit of the firm is maximised at 5 units amount of production. Microeconomics I and Statistics maximisation of the firm in the s! ed with the help of Fig. 4.4. 154 Equilibrium or profit 1 competition is now explain Price, Revenue, feet Cost hort run under Perec, > Amount of o M, M, ER production Fig : 4.4 In Fig, 4.4, amount of production is plotted on the horizontal axis and price, revenue, cost are plotted on the vertical axis. In the, diagram AVC is the average variable cost curve, AC is the short run average cost curve of the firm and MC is the ‘marginal cost curve. “ 55: teqis If market price is OP, then P,L, is the average revenue curve and marginal revenue curve of the firm which is parallel to the horizontal axis. Here the firm is in equilibrium at point A because at point/A; two conditions of equilibrium are fulfilled, ,) OP.DM. is getti Ma ccs pki (OPDM, OPM ae only normal Profit because the amount : market. price is -OP., then. PL. ae oo es ees PL, is the average revenue curve and marginal revenue se + Heresthe firm is in equilibrium at point E. lum are fulfilled. Here equilibrium fat venue of the firm j amount of loss ig (OP.EM. ae C pgm 7 me : sa i _ EM, - OCF) vies incurring losses and competition. Fo a equilibrium point of the firm in the s| : m under perfect often fee enn may earn excess profit oF From Fig. 4.4 it is seen oe lin a short Curve i.e., at point D th at the minim, . . 1¢ firm, earn: UM point of the sh a tn eae Deh Planes rae Sree even point of the fi - (tee rm. eee Competition es under perfect competition continues its production in the ncurs losses ? of the firm, short run is a period of time in which the $ of production. For this firm always bears the fixed cost is stopped. The amount of loss in the short run will be equal firm stops its production. But if the market price is greater than cost but Tess than the average cost, the firm will continue its | the firm incurs some losses, Because in this case the firm can fixed cost even though incurs losses, As a result the amount n the amount of loss (equal to total fixed cost) if the firm stops Il operate its production process in spite of losses so long ter than the average variable cost. But if the market price is n average variable cost then the firm will incur losses which is of the firm. In this situation there is no difference between the go on production from economic point of view. In this c stops its production. For this the minimum point of the ost curve is called shut down point of the firm. In Fig. 4.4., the ut down point.* uilibrium of the Industry under Perfect Competition in the Short n in Which no firms.in the industry leave from the industry or no new ney to enter the industry is called equilibrium of the industry. s when all the firms in the industry earn only normal profit. under perfectly competitive market firms are generally earned fit or ineurred losses. As a result, when the firms earned supernormal s new firms have the tendency to enter the industry. On the other hand, s incurred losses, the old firms try to leave the industry (even though ible for new firms to enter the industry or old firms leave the industry )). So except in special case equilibrium of the industry under perfect short run is not possible. This special case may arise when all the ndustry earn only normal profit in the short run. fit Maximisation Conditions of a Firm i.e., Equilibrium of a Firm under Perfect Competition : Price and Output determination in ‘under Perfect Competitio: he firm under perfect competition in the an change production by changing the scale of production. Because in the its are variable inputs, there is no fixed input. Further in the long run, can enter the industry when supernormal profit is present in the the other hand, old firms try to leave the industry in the long run when ir din the industry. The firm under perfect competition earns only normal © long run. This means that market price is equal to average cost. ion are to be satisfied for equilibrium of a firm under perfect long rur. Tevenue (MR) = Marginal cost (MC). Application of calculus : Short Notes- 12 : See application of calculus to Conditions of a firm or profit maximising conditions of a firm under perfect rt run. Microeconomics I and Statistics 156 2, Marginal cost curve is He rising. 3, Price (P) = Average cost (AC). dition (3) is satisfied. But market price jg ¥ 7 mal profit if con ie bi Firm au on ay eS under perfect competition. For this the above three always equal libri written as, sore en (MR) = Marginal cost (MC) = Average cost (Ac) Sie = st (AC). i = i t (MC) = Average co: 3 sues peer eee to marginal cost except at the minimum poin, a tee Sori the equilibrium condition of a firm under perfect competition of average ro in the long run is 19h eat i i = minimum point of average ee. ‘ Bolden a es Jong run under perfect competition is now explaineq uit with the help of Fig. 4.5. Price, Revenue, Cost Amount of M, production Fig: 4.5 In Fig. 4.5, amount of production is plotted on the horizontal axis and price, revenue, Cost are plotted on the vertical axis. In the diagram LAC is the long run average cost curve and LMC is the long run marginal cost curve. PL, is the average revenue curve and marginal revenue curve. From Fig. 4.5, it is seen that in the long run the firm under perfect competition is in equilibrium at point A, because at point A, long run equilibrium conditions are fulfilled. Here the equilibrium amount of production is OM, and the equilibrium price is OP,. Here the firm is getting only normal profit, because in this case average cost and price both are equal to OP, or M.A. As a result total revenue and total cost both , X OM,) OP,AM,. So the amount of excess profit is (OP,AM, - OP,|AM,) zero i.e., the firm earns only normal profit. The firm cannot be in equilibrium if price is greater than OP,. Because the firm will get excess profit if price is greater than OP,. As a result, new firms will begin to enter the industry and the amount of production/supply will increase and price will decrease. As a result the amount of excess profit will begin to decrease, entry of new firms will stop only when the Price reduces to the level OP.. On the other hand, the firm cannot be in equilibrium if price is less than OP, Because the firm will incur loss if Price is less than Op,. As a result some firms will leave the industry and the amount of Production/supply will decrease and price will Market : Perfect Competition ‘Asaresult the amount of loss will bes; a Bipitienl tie peice reaches vs aoe pieseaed Exit from the industry ites the firm under perfect competition i int and earns only normal pro! price and the equilibrium amount 157 ng the long Tun is in equilibrium only at it. For this the equilibrium price is called Of production is called normal level of 4 4at.E4 om Bone a ad Cay anes Perfect Competition in the Long ‘i Me industry leave from the industry or no ne’ have the tendency to enter the industry is called equilibrium otis cBOSitp arises when all the firms in the industry earn only normal profit. ‘The firms under perfect competition earn only normal profit in the long run. vein 10 enter the oes ate se amount of production/supply will increase and price will decrease. alad result the amount of excess profit will begin to decrease, ‘entry of new firms will stop when all firms in the industry earn only normal profit. © On the other hand, if the firms under perfect competition incur losses, some firms wil ave the industry and the amount of production/supply will decrease and price As a result the amount of loss will decrease, exit from the industry will Som wien all firms in the industry earn only normal profit. above analysis it is seen that all the firms under perfect competition earn profit in the long run. For this industry is in equilibrium under perfectly market in the long run. Supply Curve of the Firm under Perfect Competition in the Short tion between Cost Curve of the Firm and Supply Curve of the Firm , Competition in the Short Run : The amount of commodity a firm at a fixed price and at a fixed time is called supply of that firm. The t amount of supply the firm prepare to supply at different price ly curve of the firm. of the firm under perfect competition in the short run can be derived librium of the firm in the short run under perfect competition. To g. 4.6. is used. Amount of production and supply Fig : 4.6 mount of production and supply are pI ‘cost are plotted on the vertical axis. In Jotted on the horizontal axis and the diagram AVC is the average Fo Microeconomics I and Statistics 158 variable cost curve, id marginal reve, curve. arket price is OP, then P,L, is the average revenue curve an S venue If market pri ' is i wilibrium at-point Q, and the equilibriun, curve of the firm. eo eheieent if OM, ie., the firm will supply OM, amount o; amount of production 5 ois a point on the supply curve of the firm. In the same commodity at price ee then P.Ly-is the-average’ revenue curve and Marginal way if-market. price is ieee the fiemvis in-equilibrium at pcintQ, and the equilibrium, revenue curve of the firm. ly is OM,, i.e, thé firm will supply OM, amount of sqssetickgp oct Onin Se is an another point on the suppiy curve of the firm, commodity:at price OP,. So Q: know the amount of commodity the firm wants 4, In this way, it is epee re trun from the marginal-cost curve of the firn, By, supply at a fixed price in the a of the average variable cost curve is the shut down the minimum point (i.e., point not be in equilibriumon-that portion of the marvin Paint ofishe pees eee e variable cost curve. Because the amount of antes ~ eae ae jount of Joss if the firm stops its Production, Weaxtpethat panera Se eine is not the supply curve of the firm, MASE eeoeeres the point Q is the shut-down point of the firm en eee Si aa saan ‘short run supply curve: Therefore, that me. poes © la Be wapeeneerrinecis . ich i the minimum portion. marginal cost curve (MC),which is above Point coun eae curve (AVI le Sipply curve of the firm under perfect Siege In Fig. 4.6., thick portion of the MC curve is the Supply curve of the firm under tion in the short-run, 5 9) 9. > Thus it-can be said that the amount of supply, Ofa}firmsin’the short run under Perfect ic on market price, if market price is equal, to or greater AG is the average cost curve and MC is the margina| Cost i the firm under perfect competi- rice is the Supply curve of the firm. Sum of supply ‘ustry is the suppl. industry i.e., indust Supply curve is obtained by ad ot Ply Curve of the industry i.e., industry Curves of the firm in Rae » Mat portion of the Marginal the minimum foint of the aver; I ee ‘age variable cost curve j in the short run. This supply rising, u PPly curve of the firm Curve is always upward rising, ae rising. Thus short run supply always upward rising. i.e., suppl C when market price is incre icine : beraapsonod teenupplys of the Under perfect competition, , all the firms in the industry ly in the long run at different price is called supply curve of the Jong run. But the long run supply curve cannot be obtained from the L curve like short run supply curve, because in the long run, firm is in ly at the minimum Point of average cost curve. Not only the firms are at the minimum Point of the average cost curve the whole industry is at that point. ong run supply curve of the industry depends on the cost conditions ‘Three types of cost exist in the industry. Cost Industry, (b) Increasing Cost Industry, (c) Decreasing Cost it + If average cost of the firm in an industry remains point of the average cost curve remain the same as a result n of the industry then that industry is called constant cost © cost remain constant as a result of increase in production minimum point of the average cost curve remain the same, remain unchanged whatever be the amount of production and ng run under perfect competition firms and industry are in a cost = minimum point of average cost curve. , is the long run supply curve of the constant cost industry. Price Amount of production Fig £47 and supply » is parallel to the horizontal axis Le. here supply is infinite at FHT TAT 160 Microeconomics I and Statistics . i industry incre reasing Cost Industry : If average cost of the firm in an in y increases ie. eet point of the average cost curve shifts in the upward direction as a result of increase in production of the industry then that industry is calleq ing cost industry. 5 ; In this industry, average cost increases as a result of increase in production of the industry ie., the minimum point of the average cost curve shifts in the upwarg direction, as a result, production and supply will increase only when price leve] increases, because in the long run under perfect competition firms and industry are in equilibrium where, Price = marginal cost = minimum point of average cost curve in Fig 48, SS, is the long run supply curve of the increasing cost industry. ig 1 , Price s, 0 Amount of production Fig :4.8 and supply decreasii F ion of jing cost industry, of the industry then hans Price ry is called s 0 Ss, Amount o In this indy, Fig : 4.9 me Production industry i¢ rae average cost decre supply -e., the minimum poj ASS. as a re: Point Sult of ii ; Of the average cost ered Drekhicticosof the ifts in the dow: nward Market : Perfect Competition fel e - — and supply will increase only when price level } en 3 us under Perfect competition firms and industry um where, = marginal cost = minimum point of average cost e $5, is the long tun supply curve of the decreasin; i i 7 a downward sloping ie, here supply will faced gee and supply will decrease as a result of increase in price. ig seen that the supply curve of the industry under perfect pdeapetition run may be parallel to the horizontal axis or upward rising or ‘Measurement of Producer’s Surplus under Perfect Competition : firm or producer under perfect competition is zo maximise profit or the firm in this market is in equilibrium when profit or surplus is e under perfect competition is fixed from the standpoint of the firm. tion and selling amount of commodity of a firm which maximise ; called equilibrium amount of production of the firm. profit maximisation or surplus maximisation of a firm or iscussed. firm under perfect competition is to maximise profit or surplus. is the difference between total revenue and total cost to the firm. money received by a firm by selling its commodity in the market ty is the total revenue. (TR) = Price per unit of commodity (P) x Amount of Sell (q) (TR) =P xq. itive market price of the commodity is fixed and the seller as many units as he wishes with the fixed price. For this in enue increases proportionately with the increase in the amount of the commodity is fixed. irt of Fig. 4.10, TR is the total revenue curve. This curve starts from | upward sloping straight line. It starts from the origin because total amount of sell is zero. It is upward sloping straight line because Ses proportionately with the increase in the amount of production of TR line is equal to the price of the commodity which is always E n in the short run consists of two parts—one is the total fixed ‘is the total variable cost. Amount of total fixed cost'does not of prodiiction. So total fixed cost always remain constant. On tal variablé cost depends on the amount of production. tt of Fig. 4:10, TC is the total cost curve of the firm in the’ short ‘TC starts from the point D because here OD is the amount of 1 is always fixed. Total cost cufve TC first concave and then short run initially total cost increases at a lower rate than the and after a certain stage total cost increases at a higher af wariahla nranortian POT re TEP TT Microeconomics I and Statistics TC line is the profit or surplus of the §, difference of total revenue and total co s maximum. Profit or surp] 162 i i f TR and «c. 4,10, vertical distance oF °™ sete ee profit or surplus is the ghee eo — where the vertical distance of TR an oS iam at that situation. Total Revenue, Total Cost Amount of Producti Amount of Produc Fig : 4.10 From upper part of Fig. 4.10, it is seen that profit or surplus is maximum at amount of production because at that level of production vertical distance of TR TC curve is maximum. Here the maximum amount of profit or surplus is (TR - = MB — ME) BE, From the diagram it is seen that the amount of profit or sur is zero if the amount of production is OM, or OM,,. Because at these two points | tevenue and total cost are equal to each other. From the diagram it is seen that if amount of production is less than OM, then total cost is greater than total reve as a result the firm or producer incurs loss i.e. the amount of profit or surplu negative. Again if the amount of production is greater than OM, but less than c then total revenue is greater than total cost. As a result profit or surplus of the { is positve, Again if the amount of production is greater than OM, the firm incurs ie. the amount of profit or surplus is negative. Thus at OM level of production ! ‘profit or surplus is maximum. The locus which is obtained by joining the valu different amount of profit or surplus at different levels of production is called Pp! curve or surplus curve. In the lower part of Fig. 4.10, profit curve or surplus ct is shown, ; egative as the amount of production i greater the above discussion it is seen ~ ae ae spe of TR carves TC carve acces Beane wicca carve is maximum as the slope of the two equal. c . curves E slope of TC care sequal othe soe ofthe tungant FG ch Renave Because TR line and FG tangent are parallel Again eis equal to the price (P) of the commodity and the slope of to marginal cost (MC). So for profit maximisation or is equal to marginal cost and the sufficient condition is that marginal cost curve will be upward rising. ‘Supply Analysis: It is essential to know the concept of man analysis. Discussion regarding demand have chapter. For this in this part different aspects of supply er that different aspects of equilibrium price determination by discussed. In this analysis impact of tax and subsidies are also ‘analysis of stability in this market are. also, discussed. 1 Analysis of supply is very important for discussing and theory of market. Actually the main objective of production gm the market. For this the different aspects of supply are price and at a fixed time is 7 hand, the amount of particular commodity markets Se peiety pacpare 0 soll at fixed peice aod ot fixed : Supply of a commodity depends on few Te sepply of 2 commodity may change ave 10 change in ‘Seamed wih Candee conomics I and Statistics f the determinants of supply. So supply is the dependent variable d of supply are the independent variable. Actually the supply for an, y function of the determinants of supply. The functional relation ¢ d the determinants of supply j n the supply for the commodity an ‘ function can be expressed in terms of symbols. Fo, f a commodity is 164 Microe atleast any one © the determinants commodity is the dependance betwee! called supply function. Supply ‘example the supply function oO $, = f(P,. Po. P,. 1,6, B) | Here S, = Supply of commodity x. | Pp. = Price of commodity x. | * = Price of other commodities. R= P, = Price of the factors of production. JT = Conditions ‘of techniques for production. G = Goal or objective of the producer. * f the seller regarding future price. B = Expectation or conception 0 The above supply function js called genet fuction it is Clear that there exist a dependence But if all the independent variables (P,, Po: P. T, G, E) are changed simultaneous! then it is not possible to determine the effect on S, seperately for each of th independent variable. For this reason taking any one of this determinants as variab} and other determinants as constant, we try to discuss the relation of that determinan ee ia eae in any fixed time keeping the other determinants of supply : stant, the relation bet it i ii tidy yA pee! the price of the commodity (P,) with the supply for th ral form of supply function. From thi relation of P,, Po: Pp, G, E with s = Sad S, 5 £(P,) . oe a functions is called special supply function. ies hanes of Sebply # Price of other commodities, price of the factors Teaipdaiy api es tt produetion, time etc. remaining constant the supply of @ Rane My as the price of the commodity is increased and the supply ra ie, beni coat ody of the commodity is decreased. This dir iscanedete orttapale iodity and the amount of supply of that commod Th eed ete cn aes the seller wants'to sell more ‘amount of the commodity tends Search ol * Ie commodity is increased and the seller wants to sell | SHaRna tee 'y when the price of the commodity is decreased. Supply of eile creased due to increase in the price of that commodity because” ) The producer wants to maximise his profit. ; (2) The number of seller may increase. j % 4.2.12.1.4, : i “ a te Sen Curve: At a fixed time the different amount of supp) cal Sasi? cues re price if expressed in a schedule then the schedul? femme see eee § upply curve is obtained by drawing the supply schedule a Serer ae a ¢ different amount of supply the supplier prepare to SUPE Tn Fig.4.t1 eae ee in the graph paper is called supply curve die Peasy ae : supply is plotted along the horizontal axis and the price ee ‘ lotted on the vertical axis. The amount of supply at different p" y the different points. In the figure, the point A represents the amount Market : Perfect Competition 165 Amount of Supply Fig: 4.11 poitve. Supply curve is upward rising due to law of su, S 5 pply i.e. supply is increased dye to increase in price and the supply is decreased due to decrease in price. So supply curve is upward rising due to law of supply. 04.2,12.1.4.1. Why Supply Curve is Upward Rising : The different amount of supply the supplier prepare to supply at different price, when expressed in the graph per is called supply curve. Supply curve is generally upward rising i.e. supply is increased due to increase in price and supply is decreased due to decrease in price. The causes of the upward sloping supply curve are now discussed, (1) Law of Diminishing Returns : In a production Process other inputs remaining ‘mnstant if one input is increased continuously, the addition in productive capacity of the variable input (marginal product of the variable input) is decreased continiously tier a certain level. This is called law of diminishing returns, This law operates in short run production process. For this addition in productive capacity i.e. marginal Poduct of the variable input decreases. As a result cost of production tends to "ease, For this reason price of the commodity tends to increase due to increase in ‘88 of production along with the increase in output. Thus supply is increased asa oe inctease in price and supply is decreased as a result of decrease in price due “W of diminishing returns i.e. supply curve is upward rising due to law of shing retums, Q) Expectation of the seller to maximise profit : The producer or the seller a Supply the commodity with the expectation to maximise profit. Obpiins in ning, esan if the price of the commodity is increased, profit per unit is also ii f the commodity @ result the seller or producer increases the supply of t od a the expectation to increase profit. On the other hand, other hing semi Asa if the price of the commodity is decreased, profit per unit is reased. "sult the sell the supply of the commodity. Thus it is Men, Seller or producer decreases s eee Profit, Supply curve is upword rising due to expectation of the seller “ ate tes Microeconomics I and Statistics (3) Change in number of producer or seller + Other things remaining Conny if the price of the commodity is increased, the amount of profit is also increaseg, = tation of earning Ie number of producer or seller may increase due to eaiFine Pe itnd oe Prof As a result supply of the commodity ma) » the num y increase. Bir of producer or seller may decrease if the price of the ce aan hits ceed iS result supply of the ‘commodity may decrease. Thus supply © ipward rising a to change in number of producer or seller. : ra ‘ 4.2.12.1.5. Exceptions to the law of supply nprice of other commodities, Brig of the factors of production, techniques of production, time etc. remaining const, ity is i sed as the price of the commodity is increase; price of the commodity j, the supply of any comm' ‘ 4 the commodity 1s decreased as the - and the supply of between price of the commodity and the amount o .d. This direct relation j i Soe i led law of supply. There exist some exceptions to this supply of that commodity is ca Jaw. The exceptions are now discussed. (1) Commodities which cannot be repeatedly produce : Supply of the commode, which are produced only once and cannot be repeatedly produced, remain constan even though the price of these ‘commodities are increased. For example the pictur painted by Rabindranath Tagore himself, Law of supply does not hold here. (2) Labour market : In the labour market the supply of labour hour for individual labourer is increased upto a certain stage due to increase in the price of labour or wage rate. But after that certain stage the supply of labour hour is decreased due to increase in wage rate. Because the labourer wish to enjoy more leisure at high wage rate, As a result the time for work ie., supply of labour hour is decreased. This is an exception to the law of supply. (3) Sell under economic distress (acute poverty) : If the seller is on economic ae supply is'increased even though the price of the commodity is decreased. For hoe ane penn farmers at the time of harvesting, increase the supply eve? eee price of their products are very low. This is also an exception to the la¥ ne a of the seller regarding future price: The price of any comb increases continuously sellers may realize that the price of the sipply'atpreveh iso increase in the future. In this situation the sellers decrease thelt Es ite Fie ite of the increase in price of the commodity. On the other ha’ ce peice aetna sae increase their supply at ea erie, amma seumien ae! Here it is mentioned that the suppl le decrease in price of the commodity: the law of supply does not hold. al ee tec paar ene the Sak oe the price axis or downword sloping to the right or ese curve may be a These supply curves are called abnormal supply ‘ward bending (labour ae curve. A 4.2,12.2. Determination of Equilibrium Price—Derivati nial Price by demand and supply under perfect competiti rivation of Equilibt e sellers exist in a perfectly competitive market. F one Many buyers and maa individual seller are the price taker. As a fentie it this individual buyet competitive market is determined by the interaction of fat of te oe - jemand an\ supply of that commodity. Market : Perfect Competition 167 a t amount of commodity a cons: : Nd ere individual demand ates The aa tts st ster betes yor" the market demand curve. This market demand = pan cones js the market ¢© * ind curve is downward slopin;

    You might also like