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Normal profit Super normal profit


1. Normal profit is normal 1. Super normal profit is the surplus
remuneration or earning of the earned over and above the normal
entrepreneur for his entrepreneurial profit.
services.
2. Normal profit is earned by the 2. Super normal profit is earned by
marginal entrepreneur. super marginal entrepreneurs.
3. Normal profit is included in the 3. Super normal profit does not
cost of production. It is earned when enter into cost of production.
the average cost is equal to price.
4. Normal profit is earned in the 4. Super normal profit is earned in
long run. the short run but disappears in the
long run.
DISTINGUISH BETWEEN:

Concept of profit:
Normal profit: - Normal profit is normal remuneration or earning of the
entrepreneur for his entrepreneurial services. It is the minimum profit
necessary to induce the entrepreneur to supply his services. In short it is the
opportunity cost of the entrepreneur. Normal profit is earned by the
marginal entrepreneur. Normal profit is included in the cost of production.
It is earned when the average cost is equal to price. Normal profit is earned
in the long run.

Super normal profit: - Super normal profit is the surplus earned over
and above the normal profit. Super normal profit is earned by super
marginal entrepreneurs. Super normal profit does not enter into cost of
production. Super normal profit is earned in the short run but disappears
in the long run.

Sub-normal profit: - it is a market situation at which price is such that


firm average revenue is less than average cost. Thus the firm is actually
making loss. However in the case of subnormal profit, losses are bearable
(Manageable) as firms average revenue is greater than Average Variable
cost. Thus it is a situation where the firm is earning.

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Total loss / Shutdown condition: - It is a market condition where price


is such that firm average revenue is less than average cost and also it is less
than average variable cost. Under this situation the firm has to shut down
business as it’s earning are inadequate to meet its current expenses. This is
also called unbearable (UN manageable) loss.

IMPOR TANT : - Break Even Analysis : - It is an


important tool to study the Relationship between cost, Revenue and profit
at different level of output in the short run. The Break even point is located
at that level of output at which total revenue (TR) is equal to total cost (TC).
Therefore, Break even point is said to be no profit or no loss zone.
From the below diagram Total revenue (TR) is equal to Total Cost
(TC) at point “B” corresponding to OQ units of output. Hence point “B” is
called Break even point. At point “B” the firm neither makes any profit or
nor any loss. Hence this point is called as no profit or loss Point. Beyond the
Break even Point “B” the firm starts making profit and downwards to the
Break even Point “B” the firm suffers from losses.

TR
Profit

Loss TC
B
TVC
TC TVC

TFC

O Q Level of out put

ASSUMPTIONS OF BREAK EVEN ANALYSIS:-

1. The selling price must remain constant.


2. The volume of production and the volume of sales are equal.

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3. There will be no change in operational efficiency.


4. All costs are classified into fixed cost and variable cost.
5. There is only one product, in case of multi product firm, the product
mix must be stable.
6. The volume of production and the volume of sales are equal.

Limitation of Break – even analysis:-


1. The Break – even analysis can be applied only to a single product
system.
2. Under the multi product or jointly supplied product system it can be
applied only when product – wise cost can be ascertained. But the
determination of product – wise cost is extremely difficult.
3. Break – even analysis cannot be usefully applied where historical
data cannot be ascertained before – hand.
4. Break – even analysis also cannot be applied where historical data
are not relevant for estimating future cost and prices.
5. The Break – even analysis is based upon a number of unrealistic
assumptions Eg. Constancy of plant size, technology, production
methodology, sales mix etc.
6. The Break – even analysis ignores the time lag between production
and sales.

Q1. Define a firm. What are the objectives of a firm?


Ans. A firm is a production unit organized by the people either as
individuals or members of household functioning with the sole aim of
providing people with the goods and services either for their own
consumption purpose or for export purposes.

Objective of a firm
i. To maximize profit:- According to economists, the chief objective
of a firm is to maximize profit. All the firms take all possible
efforts not only to enjoy profit but also to maximize profit. A firm
reaches the point of maximum profit when its marginal revenue
(MR) is equal to its marginal cost (MC).

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ii. To minimize cost:- This objectives is very much related to the


first objective. A firm which is successful in bringing down cost
can assure maximum profit. All the firm aims at maximum
profit.
iii. Maximisation of market sales: - Every goods providing firm try
to achieve maximisation of market sales. Then only it can achieve
maximum revenue through sales.
iv. Long Survival:- All business firms are keen to ensure their
survival for a long period. They are content with the steady and
gradual growth accompanied by normal profit. Such firm’s aim
is to ensure their continuous survival by serving the consumers at
reasonable prices.
v. To build up a business empire:- The primary motive behind
business it to expand and capture the entire market. Every firm
will follow all possible tactics to build up its own empire.

Dumping: -
Dumping is a device used by the seller to promote export and capture
foreign market. It refers to the sale of goods in foreign market at a given
price which is lower than the selling price of the same product in the
domestic market.
Dumping can be practiced by those sellers who enjoy monopoly in domestic
market. As such it is possible for them to charge a higher price at a
domestic market while selling the same at a relatively lower price in the
foreign market. The seller tries to cover the loss in foreign market by
charging higher price in domestic market. The purpose behind this
discrimination is to compete with the foreign market and to promote
export. This would help the seller to widen foreign market.
Dumping can be practiced under the following conditions only:-

• The seller enjoy monopoly in domestic market and


• There is perfect competition in the foreign market.
• The two different market should have different elasticity of
demand.

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Define price discrimination and Explain Different types


(Forms) of price discriminations.
Price Discrimination:- Price discrimination refers to a situation
when a monopolist charges different prices from different customers for
the same commodity at the same time.
E.g. BEST charges different prices for consumption of electricity for
domestic use and commercial use.

Different forms of price discriminations:-


1. Personal price discriminations:- When different prices are
charged form different buyer for the same product or service, it is called
personal price discrimination. When the prices are charged on the basis of
the status, ability of the person, this king of price discrimination is possible.
For eg. A Doctor charges different fees for the same treatment from rich
and poor, A teacher conducting private classes charging different fees for
different students according to their status.
2. Regional price discrimination:- When different prices are
charged in different Market or regions, it is called Regional price
discrimination. When price is charged on the basis of elasticity of demand,
this kind price discrimination is possible. For eg. In the Market where the
demand is elastic, lower price is charged and in market having inelastic
demand higher price is charged.
3. Size Price discrimination:- When large quantity of a
commodity is purchased, a lower price is charges. When a smaller quantity
of a commodity is purchased a higher price is charges. For eg. Whole seller
& retailer.
4. Sex Discrimination:- Price discrimination also take place on
grounds of sex. For eg. Education is free for girls but not for boys , So there
is a sex price discriminations.
5. Trade Price discrimination: - When different prices are
charged on the basis of the purpose for which the product is used, it leads to
the trade price discrimination. For eg. When electricity is used for domestic
purpose a relatively lower price is charged.

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Conditions necessary for price discriminations? Or


When are the Price discriminations possible?
Ans. The price discriminations are possible under.

i. Monopoly: - Price discrimination is possible only under


monopoly. The practice of price discrimination is peculiar to
monopoly only. If this practice is followed in other competitive
market, the consumer will leave the seller who charges high price
and go to the next seller who charges less. Then price
discrimination will break down.
ii. No Resale:- One of the essential conditions necessary for price
discrimination is the absence of resale of commodities. There
should be no possibility of resale of commodity from one
consumer to another consumer. Suppose if a particular
commodity is given to Mr. A at Rs. 20 per unit and to Mr. B at Rs.
40 per unit. Now if Mr. A buys 2 unit @ Rs. 20 per unit and
passes one unit to B, then there is no possibility of price
discriminations.
iii. Immobility of buyers:- When buyers are not able to move to
different markets price discrimination is possible. If the buyer
can move from high priced market to low priced market, then
price discrimination breaks down.
iv. Personal Service:- In case of services where personal attention
is necessary and resale is not possible. Price discrimination is
possible. For eg. Services of doctor, lawyers etc.
v. Differences in elasticity of demand:- The most important
factor that is responsible for the price discrimination is the
difference in elasticity of demand for a particular commodity at
different markets. Monopolist charge a relatively lower price
when the demand is elastic and he charges a relatively higher
price when the demand is inelastic.
vi. Boundaries and Tariff:- Price discrimination is possible when
countries or states are dived by boundaries. It is also possible
when different tariffs are introduced on the sales of the products.
For eg. In different places same medicines are sold at different
price due to different taxes imposed by different states.

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Write short notes on Wastes of monopolistic


competitions:-
Ans. Critics say that the monopolistic competition leads to many types of
economic and social waste. That is why monopolistic competition has been
described as “Wasteful Competition” following are some of the wastes of
monopolistic competition.

1. Excess Capacity:- A firm achieves optimum output when the lowest


point of average cost curve coincides with price at the point of
equilibrium. This leads to optimum utilization of resources and
optimum output. But in case of monopolistic competition, the
equilibrium is achieved before the lowest point of the average cost is
reached.
2. Unemployment:- As the firm’s capacity is not fully utilized, it fails to
provide maximum jobs and becomes a cause for unemployment.
Unemployment leads to less income, less consumption, less savings and
ultimately slows down economic activities.
3. Wastage of advertisement:-The firms under monopolistic
competition indulge in product differentiation to attract consumers.
They spend a considerable amount of income on product
differentiation which would have been utilised for other purposes. The
large sum of money which is spent in the form of selling cost is also a
social waste. According to economists, selling cost does crease adverse
effects.
4. Cross transport:- The firms under monopolistic competition involve
in inter regional competition. It results in waste of resources in the
form of cross transport. For eg. A firm in Delhi searches market in
Chennai while the Chennai firm finds market in Delhi. It leads to
heavy expenditure of transport.
5. Exploitation of consumers:- The firms under monopolistic
competitions indulge in product differentiation, advertisement,
salesmanship etc., It results in heavy expenditure. The ultimate victim
of such heavy expenditure is the consumer who pays higher prices.
Though the prices are high, there is no guarantee that the advertised
products carry the expected standard as they are projected to be.

Project planning:- Project planning involves conceding, Generating,


evaluating, selecting the most profitable investments.
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It is a plan for investment fund and these with_


Determine the worthiness of investment project.
Estimating rate of returns from these project.
Estimating the cost of capital and availability of capital funds.
Simply speaking, Project planning is a means for
1. Organising the work of the project and to find the resources requirement.
2. Allotting the resources, a signing responsibility to different department.
3. Integrating and co - ordinating the entire process
4. Estimating the time for the completion of the project.

What is the importance of Project Planning?


Project planning is an important exercise in investment planning on account of
following reason.

1. The capital expenditure decision has long term effects.


2. If involves huge investment out lay.
3. The decisions once taken are not easily reversible.
4. It involves high degree of risk.
5. Project planning helps to have best utilizations of
resources.

What are the stages of Project Planning?


The following are various stage of project planning.

1. Search for new investment proposal: - The planner has to collect


addition information about Government rules and regulation, new market,
new product and the commercial geographic of various nation. He is also
required to analysis the performance of the existing industries in order to
have market information.
2. Project classification:- The planner is then required to classify the
investment proposal in order to have complete details of this investment
plans. Investment proposal are classified in to following types.
i. Replacement for maintenance.
ii. Replacement for modernization.
iii. Expansion of existing product
iv. Expansion of existing market.

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v. Conduction innovation that is research and development


vi. Investment to improve environment.
3. Analysis cost and benefit:- The project planner is required to have
complete idea of the cash flows and cost of capital. The planner has to
estimate the cash in flows and cash outflows.
4. Measurement of Investment worth:- The planner is then required
to use various investment criteria for comparison and solution of a project.
5. Feasibility study:- It is an analysis of financial, Marketing, technical
and economic aspect of the project. The planner has to find out the
feasibility of his investment proposal he has to understand the financial,
marketing condition problems to put his plan into reality.
6. Decision making:- It is an important step in the project and this is a
first step taken to start the project.
7. Implementation:- It involves integration and Co – ordination of
various activities in order to have successful implementation of the project.

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