Economics Master PDF Final

REGRESSION
• Converts data clumps into comprehensible information.
Understanding the impact of

the INDEPENDENT CAUSAL VARIABLE (X) on
the concerned DEPENDENT AFFECTED VARIABLE (Y)
All economic phenomena has to be understood in terms of

a set of CAUSAL VARIABLES (X1, X2, X3, …, XN)
impacting the DEPENDENT VARIABLE (Y)
Regression (contd.)
DEPENDENT VARIABLE (Y)

• INDEPENDENT VARIABLE (X)
DETERMINED Variable
• PREDETERMINED Variable
It serves as:
• It serves as:
the EFFECT
• the CAUSE
or the CONSEQUENCE
• or the STIMULANT
Y is also called a STOCHASTIC Variable since ....

Regression (contd.)
• Functional relationships b/w the 2 variables can be expressed

as: Y = f (X)
This functional relationship could either be:
Positive / Direct: Negative / Inverse:
X Y X
Y
X Y X Y
Y∞X Y∞1/X
Regression (contd.)
• Data informs about the variational relationship between X & Y
Positive / Direct relationship: Negative / Indirect / Inverse

relationship:
Slope: Positive in value Slope: Negative in value
Curve: Upward Sloping Curve: Downward Sloping
Y= Y=
EFFECT EFFECT
X = CAUSE X = CAUSE
Regression (contd.)
Unorganised / Organised data can be converted into an equation,

which will indicate the curve’s: TRAJECTORY & V(SLOPE)
Regression converts data into a LINEAR equation: Y = mX + h
Significance of ‘h’ ???
Econometrics, NOTATIONALLY and NOT CONCEPTUALLY changes this

LINEAR equation to:
ᵈ =ᵯ ᵼ �+ ᵯ ᵽ ᵇ PRF
�
SRF
Regression (contd.)
ᵽ ᵽ
X Y ᵉ ᵉᵉ ᵉ ᵈ ᵉ
1 17 -2 -3 6 4 21 -4 16 9
2 20 -1 0 0 1 20.5 -0.5 0.25 0
3 27 0 7 0 0 20 7 49 49
4 23 1 3 3 1 19.5 3.5 12.25 9
5 13 2 -7 -14 4 19 -6 36 49
15 100 -5 10 113.5 116

Regression (contd.)
3
X
1 2 4 5
Regression (contd.)
ᵽ
(R2) Coefficient of Determination of Goodness of Fitᵼ ≥ᵇ ≥ᵼ �
ᵈᵈᵉᵉ � ᵉᵈᵈᵈ � ᵽᵼ %⇒ ᵉᵉᵉᵉ � ᵈᵈᵉ

ᵼ �% ᵽᵼ �% ᵼᵼᵼ �%
For Given Data: R2 = 0.02 or 2%
Hence, the given X cannot explain

98 % of Y’s behaviour
Regression and Elasticity of Y on X
Regression and Elasticity of Y on X contd.
Y
∆�ᵈ ᵼ ∆�ᵈ ᵽ
∆�ᵈ ᵽ ∆�ᵇ ∆�ᵇ
∆�ᵇ
∆�ᵈ ᵼ
RIE
∆�ᵇ RE
A
B
∆�ᵇ
X
Regression and Elasticity of Y on X contd.
Y ∆�ᵈ
B ᵼ ∆�ᵈ ᵽ
∆�ᵇ ∆�ᵇ
RE
A
RIE
∆�ᵈ ᵼ
∆�ᵇ
∆�ᵈ ᵽ
∆�ᵇ
∆�ᵇ
X
Concave to X-Axis Downwards Convex to X-Axis Downwards
Y Y
For more of X we give up For more of X we give up
more & more of Y less & less of Y
X
X
Concave to X-Axis Upwards Convex to X-Axis Upwards
Y For more of X we get Y For more of X we get

less & less addition of Y more & more addition of Y
X
X
Convex to X-Axis Upwards Convex to X-Axis Downwards
Y Y
get
For more of X we For more of X we give up
more & more of Y less & less of Y
X X
Concave to X-Axis Upwards Concave to X-Axis Downwards
Y Y
X X
For more of X we get For more of X we give up
less & less increment in Y more & more of Y
A 6 B 4 C 2
A 6 C 2
C 2
Points of INFLEXION B 4 A 6
Model 3 B 4
Model 4 Model 5 Model 6 A 6 C 2
D
Model 1 Model 2
E G
H No INFLEXION Pt
Model 7
F
DEMAND
It is the DESIRE backed by:
The ABILITY
AND
The WILLINGNESS
17 To PAY THE PRICE
To PAY THECURRENT MARKET PRICE

Demand (contd.)
Hence, D = f(A, W)
Venn Diagrams used to depict Ability and Willingness:
Intersecting Intersection
sets Means ??
Ability Willingness
ty
ili
s
Ab
e
gn
in
ill
W
Disjoint sets s
Must they be
Congruent 18 Strategies to make ‘A’
sets? or ‘W’ favourable for
a firm?
UNEQUAL sets ??
Demand (contd.)
• Elasticity of Demand
Stimuli Technical Term Symbol
Price of the Price Ed Edp

concerned Good
Income Income Ed EdY
Price of a Cross Ed Exy

related good 19
Promotions Promotional Ed EdA

Demand and Elasticity (= Responsiveness)
20
Edp = 0
21
Edp < 1
% ∆ ᵄ � = �� % ∆ ᵃ
Edp = 1
ᵁᵂᵂᵂᵁᵂᵃ � ᵀᵂᵁᵂᵂᵂᵁ � ᵀᵁᵂᵁᵂᵁ
% ∆ ᵄ �� < �� % ∆ ᵃ

Edp > 1
ᵁᵁᵂᵁᵂᵂᵂᵁᵂᵃ � ᵀᵂᵁᵂᵂᵂᵁ � ᵀᵁᵂᵁᵂᵁ
22
Perfectly Elastic Demand

Demand
∆�ᵆ ᵼ
∆�ᵆ ᵽ
∆�ᵆ ∆�ᵇ ∆�ᵇ

ᵽ
∆�ᵇ
∆�ᵆ ᵼ
RIE
∆�ᵇ RE
A
B
23
∆�ᵇ
Price
Marshallian Mode
Price
∆�ᵇ
∆�ᵇ
∆�ᵆ ᵼ
∆�ᵆ ᵽ
∆�ᵇ ∆�ᵇ ∆�ᵇ
∆�ᵆ ᵼ ∆�ᵆ ᵽ RE
RIE A
B
Demand
• Price Elasticity of Demand
Px Dx
Dx = 70 - 0.3Px
10 400
20 330 25 At Px = 20, Edp = ?

• Income Elasticity of Demand
Income Demand Dx = 7000 + 0.3Y

10000 400
At Y = 20k, EdY = ?
25000 600 26
• Promotional Elasticity of Demand
Promo Exp. Demand

Dx = 10 + 0.7A
50 400
80 900 At A = 50, EdA = ?

27
• Cross Elasticity of Demand
Competitive Goods Supportive Goods
Py Dy Dx Py Dy Dx
Py Dx Py Dx
50 40028 50 900
80 900 80 400
Dx = 25 + 0.7Py Dx = 25 - 0.7Py
• Cross Elasticity of Demand
Substitute Goods Complementary Goods
Py Dy Dx Py Dy Dx
Py Py
29
Dx Dx
Theory of Production
30
What is Production ?
It is the TRANSFORMATION of ??
Goods Service
UTILITY of a good - Tangible or Intangible
Form or STRUCTURAL utility

Place or SPATIAL utility
Time or TEMPORAL utility
31
What is Production ?
Form Place Time
1 2
32
TPP, APP and MPP
TPP: Total Physical Product
APP: Average Physical Product
MPP: Marginal Physical Product

Given MPP → Calculation of TPP and APP
1st Calculate TPP

TPP1 = MPP1
OR
TPP2 = MPP1 + MPP2
TPP3 = MPP1 + MPP2 + MPP3
TPPn = MPP1 + MPP2 + … + MPPn
Then Calculate APP
34
Given APP → Calculation of TPP and MPP
1st Calculate TPP

TPP1 = (APP1 )(Q1)
TPP2 = (APP2 )(Q2)
TPPn = (APPn )(Qn)
Then Calculate MPP

MPP1 = TPP1
OR
MPP2 = TPP2 – TPP1
MPPn = TPPn – TPP(n – 1 )
35
Calculation of TPP & APP Given MPP
QL TPP APP MPP

1 50 50/1 = 50 50
2 50 + 60 = 110 110/2 = 55 60
3 110 + 70 = 180 180/3 = 60 70
4 180 + 80 = 260 260/4 = 65 80
5 260 + 60 = 320 360/5 = 64 60
6 320 + 40 = 360 360/6 = 60 40
7 360 + 00 = 360 360/7 = 51 0
8 360 + (- 10) = 350 350/8 = 44 -10
9 350 + (- 20) = 330 330/9 = 37 -20
10 330 + (- 30) = 300 300/10 = 30 -30
36
Calculation of MPP Given TPP
QL TPP APP MPP
1 50 50 50
2 110 55 110 – 50 = 60
3 180 60 180 - 110 = 70
4 260 65 260 – 180 = 80
5 320 64 320 – 260 = 60
6 360 60 360 – 320 = 40
7 360 52 360 – 360 = 0
8 350 44 350 – 360 = -10
9 330 37 330 - 350 = -20
10 300 30 300 – 330 = -30
37
Schedule for TPP, APP and MPP
QL TPP APP MPP

1 50 50 50
2 110 55 60
3 180 60 70
4 260 65 80
5 320 64 60
6 360 60 40
7 360 51 0
8 350 44 -10
9 330 37 -20
10 300 30 -30
38
The Law of Variable Proportions
TPP
Stage 1 Stage 2 Stage 3
TPP
Fixed Factor Fixed Fixed Factor
Exhibits Factor Exhibits
Mechanical Exhibits Mechanical
‘Freshness’ Mechanical ‘Exhaustion’
‘Fatigue’
QL
39
TPP Stage 1 Stage 2 Stage 3
MPP
TPP
Fixed Factor Exhibits Fixed Factor Fixed Factor Exhibits
Mechanical Exhibits Mechanical ‘Exhaustion’
‘Freshness’ Mechanical
‘Fatigue’
QL
MPP
40
Curves for
QL TPP APP MPP

1 50 50 50
2 110 55 60
3 180 60 70
4 260 65 80
5 320 64 60
6 360 60 40
7 360 51 0
8 350 44 -10
9 330 37 -20
10 300 30 -30
41
Curves for
42
Isoquants Analysis
Cap
Cap
IQ3 ; 30
IQ2 ; 20
IQ ; 10 IQ1 ; 10
Lab Lab
An Isoquant Isoquant Map
43
Isoquants Analysis (contd.)
Cap
Factor Cost Line
F3
F2
F1
C1 C2 C3
Lab
44
Production Equilibrium
Cap
F
E
IQ2
IQ1
B
IQ0
C Lab
45
Cap
F3
Expansionary Path
IQ3,30
F2
IQ2,20
E3
F1 IQ1,10
E2
E1
C1 C2 C3 Lab
46
Isoquants Analysis (contd.) Different Expansionary Paths
Cap
EP2
EP1
Lab
47
INCREASING R.S. Cap
DECREASING R.S.
Cap
DECREASING R.S. INCREASING R.S.
K E5
5
K5 ∆ᵃ 4
∆ᵃ 4 K
E5
4 E4
∆ᵃ 3 K E4
K3 E3 4
∆ᵃ 3
∆ᵃ 2
K2 E2 K E3
∆ᵃ 23
∆ᵃ 1 K
∆ᵃ 1 2
E2
K1 E1 K E1
1
L1 L2 L3 L4 L5 Lab L1 L2 L3 L4 L5 Lab
∆ᵃ 1 ∆ᵃ 2 ∆ᵃ 3 ∆ᵃ 4 ∆ᵃ 1 ∆ᵃ 2 ∆ᵃ 3 ∆ᵃ 4
Cap
E5
K5
∆ᵃ 4
E4
Laws of K4
Returns to ∆ᵃ 3
K3
E3
Scale ∆ᵃ 2 E2 CONSTANT
K2
∆ᵃ 1 E1
Returns to Scale
K1
L1 L2 L3 L4 L5 48
∆ᵃ 1 ∆ᵃ 2 ∆ᵃ 3 ∆ᵃ 4 Lab
Cap
Laws of Returns to Scale
E9
? E8
? ?
R S
D E7
? ?
to E6 ?
R S
IRS E4
E5 I
E3 to
E2 S
D R
E1
Lab
49
1st Mover Advantages Loss of 1st Mover Advantages
1. Lack of rivalry a. product backfires
2. Sole access to resources b. Opportunity cost
3. Novelty Value c. Increasing selling costs
4. IPR protection d. Better products from past exp
5. Customer retention easier e. Increasing input cost
6. Brand recognition f. Profitability reduces
7. Price setting power g. Tech obsolescence sets
8. Govt patronage h. Govt reduces patronages
9. Better fin access

Cap
Lab
51
Cap
Lab
52
Laws of Returns to Scale Cap
Cap
E9
E8
Lab
E7
E6
E5
E4
E3
E2
E1
Lab
COST OF PRODUCTION
54
OPPORTUNITY COST
a nuance of cost
55
OPPORTUNITY
COST
GY GY
A1 A1
GY
A
A A
M
A1
B GX
B1 B GX B1 B GX
B1
GY GY
A1
A
A
56
B B1 GX
B1 B GX
SHORT RUN
COST ANALYSIS
57
Short Run Costs
FIXED COSTS VARIABLE COSTS
TOTAL FIXED COSTS (TFC) TOTAL VARIABLE COSTS (TVC)

TVC
TFC TVC
F TFC
QTY QTY
58
ᵁᵀᵀ � ≠ ᵈ (ᵇ ) ᵁᵁᵀ = ᵈ (ᵇ )
TFC curve has a vertical
intercept TVC curve begins at the origin
Short Run Costs
FIXED COSTS VARIABLE COSTS
AVERAGE VARIABLE COSTS
AVERAGE FIXED COSTS (AFC) (AVC)
AFC AVC
AVC
AFC
QTY QTY
ᵇᵆᵆ ᵇᵇᵆ
ᵀᵀᵀ = ᵀᵁᵀ =
ᵀᵀᵀ = ᵈ ( ᵇ )ᵇ 59 ᵀᵁᵀ = ᵈ ( ᵇ ᵇ)
AFC curve is : AVC curve is nearly ‘J’ shaped

a RECTANGULAR HYPERBOLA
an ASYMPTOTE
TOTAL COST
TC,
TFC, T3 TC
TVC
ᵁᵀ = ᵇᵆᵆ + ᵇᵇᵆ
T2 V3 TVC
TC curve shares the
vertical intercept with TFC
TC curve is shaped by TVC
T1
TC curve is positioned by TFC
V2
F TFC
F1 F2 F3
V1
Q1 Q2 Q3 QTY
60
AVERAGE COSTS (AC) MARGINAL COSTS (MC)
MC MC
AC
AC
QTY QTY
61
AC curve is nearly a ‘U’ shaped one MC curve is nearly a ‘J’ shaped one
62
63
Relationship between AC, AVC and MC
AC
AVC
MC AC
MC AVC
64
QTY
Deliberation on
the shape of
the AC Curve
65
AC,
Stage 1 Stage 2
AVC, AC
AFC
AVC
66 AFC
Qty
Q2
AC,
AVC,
Stage 1 Stage 2
MC
AC
AFC + AVC = AC
&
AFC
∴ � ≈ ᵉᵈᵉᵉ
AVC
&
Qty
Q2
AC, Stage 1 Stage 2
AVC,
MC AC
AVC
AFC + AVC = AC
≈ ᵉᵈᵉᵉ
68
AFC
Qty
Q2
AC,
AVC, Stage 1 Stage 2 AC
MC
AVC
69
AFC
Qm Qty
AC & MC
Relationship
1. Describe the relationship
2. Talk about why that relationship
70
Applications
1. Excess capacity (PSUs failing)
2. Viability zone of production (3 reasons)
AC, MC MC
AC
M3
A1 A2 A3
M2
M1
71
Qty
Q1 Q2 Q3
Sub-Optimal Output Post-Optimal Output
Qty < OQ2 Qty > OQ2
Optimal Output
Qty = OQ2
Measuring AC & MC
via TC curve
72
Cost
ᵁᵁᵂ �∡ᵆ ᵇ ᵇ = ᵇᵆ � ᵈᵉ � ᵆ TC
ᵼ ᵼ
ᵁᵁᵂ � ∡ ᵆᵇ ᵇ ᵼ = ᵆᵆ � ᵈᵉ � ᵆ
ᵇᵈᵉᵉ ,� ᵈᵉ � ᵆ , ᵆᵆ > ᵇᵆ
t1
T1 O Q1 Qty
Cost
ᵁᵁᵂ � ∡ ᵆᵇ ᵇ ᵽ = ᵇᵆ � ᵈᵉ � ᵆ TC
ᵁᵁᵂ � ∡ ᵆᵇ ᵇ ᵽ = ᵆᵆ � ᵈᵉ � ᵆ
∴ ᵇᵆ = ᵆᵆ � ᵈᵉ � ᵆ
t2
∴ ᵇ ᵇ ᵽ = ᵇᵉᵉᵈᵈᵉᵈ � ᵇᵉᵉ
B
74
O Q2 Qty
Cost
ᵁᵁᵂ �∡ᵆ ᵇ ᵇ = ᵇᵆ � ᵈᵉ � ᵆ TC
ᵽ ᵽ
t3
ᵁᵂᵂᵂ ,� ᵆᵆ < ᵇᵆ � ᵈᵉ � ᵆ
C
75
O T2 Q3 Qty
Cost
ᵁᵁᵂ �∡ᵆ ᵇ ᵼ ᵇ ᵼ = ᵇᵆ � ᵈᵉ � ᵆ
ᵁᵁᵂ � ∡ ᵆᵇ ᵇ ᵼ = ᵆᵆ � ᵈᵉ � ᵆ TC
ᵁᵁᵂ � ∡ ᵆᵇ ᵇ ᵽ = ᵇᵆ � ᵈᵉ � ᵆ
t3
∴ ᵇ ᵇ ᵽ = ᵇᵉᵉᵈᵈᵉᵈ � ᵇᵉᵉ C t2
t1
B

ᵁᵁᵂ �∡ᵆ ᵇ ᵇ = ᵇᵆ � ᵈᵉ � ᵆ A
ᵽ ᵽ
76
T1 O T2 Q1 Q2 Q3 Qty
Measuring AC & MC
via TC Function
Using Calculus
77
78
Relationship between AC and MC At Pre-Optimum Output (KL)
AC, AC
MC
MC
K P
Qty
Shorter Method (thanks to Kevin Saju, FYBMS 2020-21)
79
80
Relationship between AC and MC At Optimum Output (pt L)
AC, AC
MC
MC
K P
Qty
81
82
Relationship between AC and MC At Post-Optimum Output (LP)
AC, AC
MC
MC
K P
Qty
83
LONG RUN COST
ANALYSIS
84
How to construct the LAC
The LAC is also called the ‘Envelope Curve’?
LAC
SACs LAC
SAC1
SAC5
SAC2 SAC4
SAC3
85
Qty
The LAC is also called the ‘Planning Curve’?
LAC
SACs LAC
SAC1
SAC5
SAC2 SAC4
SAC3
Q1 Qty
86
LAC
SACs LAC
SAC1
SAC5
SAC2 SAC4
B SAC3
Q1 Q2 Qty
87
LAC
SACs LAC
SAC1
SAC5
SAC2 SAC4
SAC3
A
B
Q1 Q2 Qty
88
LAC Shape of the LAC
SACs LAC
IRS DRS
89
Qty
Shifting of the LAC = Position of the LAC
LAC
LAC2
SACs
SAC1
SAC5
LAC1
SAC2 SAC4
SAC3 SAC5*
SAC1*
SAC2* SAC3* SAC4*
90
Qty
Shifting of the LAC = Position of the LAC
LAC
LAC2
SACs
LAC1 to LAC2 due to

LAC1
External Diseconomies of Scale
LAC2 to LAC1 due to

External Economies of Scale
91
Qty
LAC Relationship between LAC and LMC
SACs LAC
LMC
92
Qty
93
94
95
REVENUE ANALYSIS
Revenue
and only Revenue
Reveals the Competitive nature
of the Market
Question: Revenue and only Revenue Reveals the Competitive nature of the Market
Answer format
Per Comp Imper Comp
1. Schedule 1. Schedule
2. Combined graph 2. Combined graph
3. Discuss points of TR
4. Discuss points of AR
5. Discuss points of MR
98
6a. Relationship b/w AR and MR under PC and IPC

6b. Relationship b/w TR and MR
Competitive nature of the Market
Perfect Competition 1. Large number of participants
2. Homogeneity of the units of the product
3. Free entry and exit of firms
No. of sellers: Prices are 4. Perfect knowledge among participants
INFINITE uniform, since: 5. Perfect mobility of factors
6. No transport cost
7. No government interference
Imperfect Competition Prices are not uniform, as one or more of the 7 conditions listed
for Perfect Competition is / are missing
One Seller
Monopoly
No. of sellers:
FINITE Two Sellers Duopoly
Many Sellers Monopolistic Competition
A Few Sellers Oligopoly

REVENUE SCHEDULE
Perfect Competition Imperfect Competition
Qty AR TR MR Qty AR TR MR
1 2 2 2 1 30 30 30
2 2 4 2 2 27 54 24
3 2 6 2 3 23 69 15
4 2 8 2 4 20 80 11
5 2 10 2 5 12 60 - 20
6 2 12 2 6 6 36 - 24
7 2 14 2 7 1 7 - 29
100
TOTAL REVENUE
TR refers to the overall sales receipts received at a given level of sales
Imperfect Competition
Perfect Competition
TR TR
TRC
TRC
Qty
Qty TR Qty
Qty TR
1 2
101 1 30
2 4
2 54
3 6
3 69
4 8
4 80
5 10
5 60
6 12
6 36
7 14
7 07
AVERAGE REVENUE
AR refers to sales receipts received per unit of sales
AR
ᵇᵇ AR
ᵆᵇ =
ᵇ
The AR curve is the demand curve
P ARC
AR is price
TR = (AR)(Q) & T. Exp. = (P)(Q)
TR = TE, ARC
hence (AR)(Q) = (P)(Q)
Thus, AR = P
Qty
Qty
Qty AR Qty AR
1 2 1 30
102
2 2 2 27
3 2 3 23
4 2 4 20
5 2 5 12
6 2 6 6
7 2 7 1
MARGINAL REVENUE
MR refers to additional sales receipts received by selling one more unit
MR
Perfect Competition MR
P MRC
ARC
Qty
Qty
Qty MR
Qty MR MRC
103 1 30
1 2
2 24
2 2
3 15
3 2
4 11
4 2
5 - 20
5 2
6 - 24
6 2
7 - 29
7 2
TOTAL REVENUE, AVERAGE REVENUE & MARGINAL REVENUE (all together)

TR,
AR,
TR,
AR, TRC MR
MR TRC
P ARC / MRC
ARC
Qty
Qty AR TR MR
Qty
Qty AR TR MR MRC
1 2 2 2 1 30 30 30
104
2 2 4 2 2 27 54 24 � ᵂᵂᵂᵂᵂᵂᵂᵂᵂᵂ
ᵁᵂᵂᵁᵂᵂᵁᵂᵂ ᵁᵂᵁ � ᵀᵁ �&� ᵀᵁ � ᵁᵂᵂᵂᵁᵂ � ᵁᵂᵁ �
3 2 6 2 3 23 69 15
4 2 8 2 4 20 80 11
5 2 10 2 5 12 60 - 20
6 2 12 2 6 6 36 - 24
7 2 14 2 7 1 07 - 29
Relationship between AR and MR
(Proof of 50 – 50, via Geometry)
Statement:
The MR curve bisects the horizontal perpendicular drawn from the AR
curve to the vertical axis
105
AR, AR - MR relationship (given, AR and MR are Linear Functions)
MR
A Let the Price = OP and the 1. TR = (AR)(Q) = A( OPBQ)
corresponding Qty = OQ
2. TR = A( OPTCQ) + A( TBC)
B
P
T
C 4. TR = A( OPTCQ) + A( APT)
5. A( OPTCQ) + A( TBC) = A( OPTCQ) + A( APT)
ARc from 2 and 4
MRc
6. A( TBC) = A( APT) from 5
Q D Qty
AA test
106
from 6 & 7, if similar triangles have equal areas, the
triangles are congruent.
Thus, the MR curve bisects the horizontal perpendicular drawn from the AR curve to the vertical axis
Linear AR - MR Relationship (Proof of 50 – 50, via Functions )
AR, 1. At Price OP, MR = AR
MR A
2. At Price P, the qty signified by MR is OQ1
T B 3. At Price P, the qty signified by AR is OQ2
P
4. MR: R’ = a – 2bQ1
5. AR: p = a – bQ2
6. From step 1, it follows that:
ARc
MRc
a – 2bQ1 = a – bQ2
Q1 Q2 Qty
D 7. Hence, 2bQ1 = bQ2
107
Relationship b/w Non-Linear AR - MR
If the AR & MR curves are CONCAVE, If the AR & MR curves are CONVEX,
MR cuts at a point, more than the mid pt. T MR cuts at a point, less than the mid pt. T
AR, AR,
MR MR
P
P
D R
A R A
T D ARc
T
ARc
MRc MRc
108
Qty Qty
Consequence of AR - MR relationship (Given AR and MR are linear functions)
AR,
MR A
ARc
MRc
ᵳ ∝
C D Qty
6. ∴ slope of MR = 2(slope of AR)
109
Relationship b/w Non-Linear AR - MR
If the AR & MR curves are CONCAVE, If the AR & MR curves are CONVEX,
slope of MRc > slope of ARc slope of MRc > slope of ARc
AR, AR,
MR MR
A A
M
ARc
M
ARc
MRc MRc
110
Q Qty Q Qty
The Relationship between AR, MR & edp
Via Calculus
ᵁᵂᵂᵂᵂ � ᵂᵂᵂᵁᵂᵂᵁᵂᵁᵂ
112
ᵀᵀ ᵀᵁ
ᵀᵁ ,� ᵁ ᵀ
= ;��
ᵀᵀ ᵼ
ᵀ >
ᵁ
If MR > 0
ᵁᵀᵀ
;��
ᵀ
ᵼ
<
ᵈ
If MR = 0
ᵀᵁ ᵁ
113
ᵁ ᵀ ᵁᵂᵃ
If MR < 0 ᵀᵁ ᵁ
Objectives of the Firm
114
Profit Maximization (Marginal Method)
ᵼ .�� ᵴ = ᵇ � − ᵆ
ᵽ .�� ᵴ ′ = ᵼ
ᵽ .�� ᵇᵇ = ᵇᵆ
ᵀᵁᵁᵁᵂᵂᵁᵂᵃ � ᵀᵂᵂᵁᵂᵂᵂᵂᵂ
115
Profit Maximization (Marginal Method) – contd.
MC MC
Perfect Imperfect
Competition Competition
Rev,
Rev,
Cost
Cost
E1
E1 E2 E2
P
MR
MR
Q1 Qty Q1 Q2 Qty
Q2
116
ᵽ .�� ᵇᵇ = ᵇᵆ ᵀᵁᵁᵁᵂᵂᵁᵂᵃ �ᵀᵂᵂᵁᵂᵂᵂᵂᵂ

ᵽ .�� ᵴ ′′ < ᵼ
ᵁᵂᵁᵁᵂᵁᵂᵁᵂᵂ � ᵀᵂᵂᵁᵂᵂᵂᵂᵂ
117
Perfect Competition
MC
MC Rev,
Rev,
Cost
Cost
E1
E1 E2 E2
P MR Stable (E)
Stable Eqm.
Eqm. (E)
MR
Qty Q1 Q2 Qty
Q1 Q2
118
Profit Maximization (Recap of full Marginal Method) – contd.
Perfect Competition MC
ᵼ .�� ᵴ = ᵇ �− ᵆ Rev,
′ Cost Unstable
ᵽ .�� ᵴ = ᵼ Eqm.
E1 E2
P MR
Stable
Eqm. (E)
ᵽ .�� ᵇᵇ = ᵇᵆ ᵀᵁᵁᵁᵂᵂᵁᵂᵃ � ᵀᵂᵂᵁᵂᵂᵂᵂᵂ

Q1 Q2 Qty
Rev, MC
′′
ᵽ .�� ᵴ < ᵼ Cost
Unstable
Eqm.
E1
E2 Stable
(E)
Eqm.
MR
ᵁᵂᵁᵁᵂᵁᵂᵁᵂᵂ � ᵀᵂᵂᵁᵂᵂᵂᵂᵂ
Qty 119
Q1 Q2
Profit Maximization, Break-Even Objectives : Per. Comp. (Total Method)
TC TR
B2
tC Profit Max. at output OQ2
R
V(Max Profit) = RC = MQ2
B1 C
Q1 Q2 Q3 Qty
120
Profit Maximization, Break-Even Objective: Imp. Comp. (Total Method)
tR TC
B2
R
TR
tC
M
B0 C
Q0 Q1 Q2 Qty
121
Profit Maximization, Break-Even Objective:
Imperfect Competition (Total Method)
CONSTRUCTION SEQUENCE
Rev, tR TC
Cost B2
R
TR
tC
M
B0 C
Q0 Q1 Q2 Qty
122
ᵰ = ᵇᵇ � − ᵇᵆ
ᵇᵇ �: ᵇ = ᵽᵼ ᵉ − ᵉ ᵽ
ᵆᵇ �: ᵉ = ᵽᵼ − ᵉ Solution (Marginal Method)

ᵇᵇ �: ᵇ ′ = ᵽᵼ − ᵽ ᵉ Sufficient Condition
Necessary Condition
MC = MR
ᵉ ᵽ −� ᵽ ᵉ + ᵽ = ᵽᵼ − ᵽ ᵉ
ᵉ � = ᵽ . ᵽᵽ ᵉ � = − ᵽ . ᵽᵽ
∴ ᵇ ᵆ ′ > ᵇᵇ ′
∴ ᵉ = ᵽ . ᵽᵽ �� ᵈᵉ � ᵈᵉᵈᵈᵈᵉᵈᵈᵈ
123
ᵽ −� ᵽ ᵉ − ᵼᵽ = ᵼ
ᵰ = ᵇᵇ � − ᵇᵆ
ᵇᵇ �: ᵇ = ᵽᵼ ᵉ − ᵉ ᵽ
ᵆᵇ �: ᵉ = ᵽᵼ − ᵉ
ᵇᵇ �: ᵇ ′ = ᵽᵼ − ᵽ ᵉ Solution (Total Method)
ᵰ ′ = ᵼ ᵰ ′′ > ᵼ
ᵇᵈᵉᵉ ,� − ᵉ ᵽ + ᵽ ᵉ + ᵼᵽ = ᵼ ᵰ ′′ =− ᵽ ᵉ + ᵽ
ᵇᵈᵉᵉ ,� ᵉ = ᵽ . ᵽᵽ
ᵇᵈᵉᵉ ,� ᵉ = ᵽ . ᵽᵽ � ᵈᵉ � ᵈᵉᵈᵈᵈᵉᵈᵈᵈ
124
Illustrative Revenue Numerical for Perfect Competition
This proves that MR = AR under Perfect Competition
125
Rev,
MC
Rev,
Cost
AC Cost
MC
AC
P R
E
P AR / MR
T T C
C
E
MR AR
Q2 Qty
Q2 Qty
Perfect Comp Imperfect Comp
TR R = pq (Linear Curve) R = aq – bq2 (Non-Linear Curve)
MR R’ = p (curve || X-axis at pt p) R’ = a – 2bq (downward sloping curve)
AR p = K (curve || X-axis at pt p p = a – bq (downward sloping curve and so
and so prices are uniform) prices are not uniform)
AR & MR Rel Concurrent curves Divergent curves (AR above MR)
AR & MR Rel AR = MR = p AR & MR curves differ
Sales Max Not compatible Possible
Price Ed perfectly Elastic non-perfectly Elastic
126
Profit Maximization, Sales Maximization, Break-Even Objectives: Imperfect Competition
tR TC
P B3
R
TR
W
tC
B0 C
For Sales Max.: R’ = MR = Zero
Q0 Q1 Q2 Q3 Qty 127
Sales Maximization Objective:
TC Imperfect Competition
P
tR
R
TR
tC Sales Max. output coincides

B0 with Break-Even point 2
C
M
Qty
Q0 Q1 Q2
128
Sales Maximization
T TC Objective: Imperfect
Competition
B2 P
tR
R
TR
B1
tC
C Sales Max. output leads to a loss
Q0 Q1 Q2 Q3 Qty
W 129
Rev,
Cost tR
TC
Rev,
TC TR
Cost P
B2
R
TR
B2
tC
R
M
tC
B1 C
W
B1
C
Q1 Q3 Q1 Q2 Q3 Qty
Q2 Qty Q4
130
Given a firm’s data as: TR: R = 30q – q2 TC: C = 20q + 2q2 + 4
R = 30q – q2 C = 20q + 2q2 + 4

AR = 30 – q AC = 20 + 2q + 4/q
MR = 30 – 2q MC = 20 + 4q
Find the Maximum Sales Revenue of this firm
Solution
MR = 0 V(TR)max = 30(15) – (15)2
30 – 2q = 0 V(TR)max = 450 – 225

q = 15 units V(TR)max = Rs 225
131
Satisficing Firm
By Nobel Laurette (1978) Prof. Herbert A. Simon.
Book’s name: ‘Administrative Behaviour’ (1947)
Satisficing = Satisfy + Suffice
Claim:
Optimal solution is not possible due to presence
of simultaneous multiple-vectoral issues.
Hence, Possible Solutions are:

OPTIMAL in a SIMPLIFIED world
or
SATISFACTORY in a REALISTIC world
Satisficing Firm contd.
Simultaneous multiple-vectoral issues arise due to

commercial contentment of following stakeholders:
1. Employees
Remunerative payments
Work conditions: working hours, space, facilities,
incentives, promotions & increments, …
2. Financiers
Dividends and RoI status
Profitability and sustainability of the firm, …
Satisficing Firm contd.
Simultaneous multiple-vectoral issues arise due to commercial contentment of
following stakeholders:
Sheldon - TBBT,
3. Consumers Season 12, Episode 20
Quality & Price of good b/w 1st & 2nd minutes
A – A - A of the good, …
4. Promoters / Board of Directors
Firm’s Reputation
Overall performance of the firm, …
5. Government
Non-violation of the Laws of the land
Contribution to the economy’s goals, …
Welfare Firm
It has the following commercial traits:
1. Makes the BASIC goods available to all
2. Offer the goods at affordable / discriminatory prices
3. Tends to operate even beyond the break-even point, as

profits is not a motivation at all
4. They are usually government firms
5. Via CSR, private firms are now conscious of this objective
135
Welfare Firm (Contd.)
It has the following commercial traits:
6. Return of Liberalism as Neo-Liberalism
7. LPQ or SPS turns into LPG (= SSAP)

Marketisation of commercial spaces
8. Increasing role of:

(I) Parastatal bodies in governance
(CIDCO, MMRDA)
(II) PPP model based on:
BOT = Build-Operate-Transfer (Bandra-Worli Sealink, Mining ind. )
BOOT = Build-Own-Operate-Transfer (Mumbai Metro)
BTLO = Build-Transfer-Lease-Operate (Airports in India)
Pricing Strategies
137
Pricing strategies for Profit Max and B.E. Firms under Perfect Competition
Rev,
Cost
TC
TR
B2
R tC
Hence, P(Max π) Pricing =
B.E.P. Pricing
B1 C 138
Due to Price Uniformity under Perfect
Competition
Q1 Q2 Q3 Qty
Pricing strategies for Profit Max, Sales Max & B.E. Firms Imperfect Competition
tan∠B1OQ1 > tan∠ROQ2 > tan∠POQ3 >

tan∠B2OQ4 P(BEP1) > P(Profit Max) > P(Sales Max) > P(BEP2)
Rev, tR TC
Cost P B2
R
TR
tC
B1 C 139
Q1 Q2 Q3 Q4 Qty
AC, MC and other Pricing Strategies
140
Perfect Competition. Full Cost, MC Pricing and other Pricing Strategies
Rev,
Cost
MC
AC
A1 A2 A3 A4
P AR / MR
Q1 Q2 Q3 Q4 Qty
A1 Q1 & A4 Q4 = Breakeven or Full Cost Price strategy
A3 Q3 = Profit-Maximising & Marginal Cost Price strategy

A2 Q2 = Least Cost or Optimum Output Price strategy
141
Imperfect Competition. Full Cost, MC Pricing and other Pricing Strategies
Rev,
Cost
AC
R1 MC
R2
RL
R3
R4
L R5
E
142 AR
QL Q4
Q1 Q2 Q3 Q5
Qty
R1 Q1 & R5 Q5 = Breakeven or Full Cost Price strategy
R2 Q2 = Profit-Maximising Price strategy
MR
R3 Q3 = Marginal Cost Price strategy
R4 Q4 = Sales Maximising Price strategy
RL QL = Least Cost or Optimum Output Price strategy
Pricing Strategies – across various competitive Market Types

Rev, Rev,
Cost Cost
AC
R1 MC
MC
AC
R2
RL
R3
R4
R5
L
A1 A2 A3 A4
P AR / MR
AR
QL Q4
Q1 Q2 Q3 Q4 Qty Q1 Q2 Q3 Q5
Qty
MR
143
For Profit Max. (Marginal Method) MC = MR & MC’ > MR’
For Sales Max. TR’ = MR = 0 & TR’’= MR’ < 0
For Pricing Strategies (PS)
AC or BEP Pricing Strategies

144
: AR = AC
MC Pricing Strategies : AR = MC
C = 0.5q3 – 2q2 + 4q + 10
AR function is AR p = 12 – 7q2 MR = 12 – 21q2 = 0 q = 0.76 units

Max TR = Rs 6.04

145
AC or BEP Pricing Strategies : AR = AC
Formulae that will help to solve the following numerical objectives

146
AC or BEP Pricing Strategies : AR = AC
Market Dynamics
16 - Cases
P = F (D, S)
147
Case No. A B Comments
1 dd = K & ss INC dd = K & ss DEC

1 variable constant & the
other changes
2 dd INC & ss = K dd DEC & ss = K
148
1 dd = K & ss INC dd = K & ss DEC 1 variable constant & the
2 dd INC & ss = K dd DEC & ss = K other changes
Case Nos. 1A Case Nos. 1B

DD = K & SS DD = K & SS
Price Price Sn
So So
Sn
Pn En
Po Eo Po Eo
Pn En
149
Do Do
Qo Qn Qd, Qs Qn Qo Qd, Qs
Price falls & Qty increases Price rises & Qty decreases

SS = K & DD SS = K & DD
Price Price
So So
Pn
En Po Eo
Po Eo Pn En
Dn Do
150
Do Dn
Price rises & Qty increases Price falls & Qty decreases
3 dd INC > ss INC dd DEC > ss DEC Both variables change in

the SAME DIRECTION but in
4 dd INC < ss INC dd DEC < ss DEC DIFFERENT PROPORTIONS
151
4 dd INC < ss INC dd DEC < ss DEC
DIFFERENT PROPORTIONS
SS SS DD
DD
Price Price
Sn
So
So
Sn
Po Eo
Pn En Pn En
Po Eo
152
Dn Do
Do Dn
Price rise < increase in Qty Price fall < decrease in Qty
SS SS DD
DD
Price Price Sn
So En So
Pn
Sn Eo
Po Eo Po
Pn En
Do
Dn Dn
Do
Price fall < the increase in Qty Price rise < the decrease in Qty
153
5 dd INC > ss DEC dd DEC > ss INC Both variables change in

DIFFERENT DIRECTIONS & in
6 dd DEC < ss INC dd INC < ss DEC DIFFERENT PROPORTIONS
154
5 dd DEC > ss INC dd INC > ss DEC Both variables change in
SS DD SS DD
Price Price
So
Sn
Sn
En So
Po Eo Pn
Pn En Po
Do Eo Dn
Dn
Do
Qn Qo Qd, Qs
Qo Qn Qd, Qs
Price fall > the decrease in Qty Price rise > the increase in Qty
155
SS SS DD
DD
Price Price
Sn
So
Sn Pn En So
Po Eo Po Eo
Pn En Dn
Do Do
Dn
Price fall > the increase in Qty Price rise > the decrease in Qty
156
Both variables change in

7 dd INC = ss INC dd DEC = ss DEC the SAME DIRECTION & SAME
PROPORTIONS
157
PROPORTIONS
SS SS DD
DD
Price Price Sn
So
So
Sn
En
Eo Po Eo
Po En
Dn Do
Do Dn
Price = K & Quantity increases Price = K & Quantity decreases
158

8 dd INC = ss DEC dd DEC = ss INC the DIFFERENT DIRECTION but
in SAME PROPORTIONS
159
8 dd DEC = ss INC dd INC= ss DEC the DIFFERENT DIRECTION but
in SAME PROPORTIONS
SS SS DD
DD
Price Price Sn
So Pn So
En
Po Sn
Eo
Po Eo
Pn 160 En
Do Dn
Do
Dn
Qo Qd, Qs Qo Qd, Qs
Price falls & Quantity = K Price rises & Quantity = K


other changes



161

PROPORTIONS

in SAME PROPORTIONS
Find the % changes in price & quantity when demand & supply
decrease, given the following extractable (shuffled) demand &
supply functions:
pd1 - 90 + 0.7qd1 = 0
New
ps1 - 36 - 0.4qs1 = 0
p = 80 - 0.7q
pd2 - 80 + 0.7qd2 = 0
New ps2 - 24 - 0.4qs2 = 0
p = 36 + 0.4q
New Qty 40, price Rs 52

162
original Original
p = 24 + 0.4q p = 90 - 0.7q Original Qty 60, Rs 48
Price
Price
Bn =90
DD SS
Bo = 80
So
Sn
Eo En
Eo En
163
Dn
Bo =90
Do
Bn = 80
Qo Qn Qd, Qo Qn Qs
Price rises & Quantity = K

Price
Price
Bo =90
DD SS
Bn = 80
Sn
So
En En Eo
Eo
164
Do
Bn = 36
Dn
Bo =
Qn Qo Qd, 24 Qn Qo Qs
Price rises & Quantity = K

Key:
Price Do
ps1 = 36 + 0.4qs1
Dn RED Eqn. = Original Data
En ps2 = 24 + 0.4qs2 PURPLE Eqn. = New Data
52 Pn
48 Po Eo
Sn
pd1 = 90 - 0.7qd1
pd2 = 80 - 0.7qd2
So
Qn Qo Qd, Qs
40 60
Original New Change %

Demand pd1 = 90 - 0.7q165
d1 pd2 = 80 - 0.7qd2 xxx xxx
Supply ps2 = 24 + 0.4qs2 ps1 = 36 + 0.4qs1 xxx xxx
Price 48 52 04 8.33
Qty 60 40 - 20 -33.3 %
Perfect Competition
(Product Market)
Slide Nos. 22 to 25 not for FYBMS
166
Perfect Competition
Feature of Perfect Competition: PRICE
UNIFORMITY,
throughout the market
Conditions for Per Comp
1. Large number of participants

2. Homogeneity of the units of the product
3. Free entry and exit of firms
4. Perfect knowledge among participants
5. Perfect mobility of factors
6. No transport cost
7. No government interference
Total, Average, and Marginal Revenue for a Competitive Firm
Quantity Price = AR TR MR
Units Rs. Rs. Rs.
1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5
6 5 30 5
7 5 35 5
8 5 40 5
168
Collateral Features
1. The Industry is the PRICE-MAKER and the Firms are PRICE TAKERS
as the price of the product is determined by market supply and demand.
Firm
Industry Rev,
Price Cost
S
Ei P
P AR / MR
Qd, Qs Qty
2. The demand curve for the firm becomes Perfectly Elastic at the market
determined price.
3. The firm’s objectives are limited to:

i) Maximization of profits (= Net Revenue)
ii) Being a Not-for-Profit Firm 169
SHORT RUN DYNAMICS
UNDER
PERFECT COMPETITION
170
• Perfect Competition. SUPERNORMAL PROFIT
Industry Rev, Firm
Price Cost
MC
AC
S
Ei P
P E AR / MR
T
C
D
Qd, Qs Q Qty
At Stable Equilibrium point E: MC = MR = AR > AC
MC = MR MR = AR AR > AC
Stable Equilibrium Perfect Competition Super Normal Profits

171
Loss-making wrt CIT ?? The breakup of the Supernormal Profit (India)
M.A.T. = Minimum
Alternate Tax
Rs 36.48 cr
22% of the average of P Reserves E
the last 3 supernormal
Rs 9.12 cr
cr )
.6 %
profit, as a DEPOSIT Re-deploy Profits after
14 (40
Rs 21.88 cr deductions
Dividends
Rs isk
And when the firm Rs 45.6 cr
R
begins to enjoy super- Rs 9.12 per share
NP, then this deposit is 2% CSR = Rs 1.2
encashed by Tax
Authorities 22% CIT = Rs 13.2
C
T
O Q 172
• NORMAL
PROFIT Rev, Firm
Price AC
Industry Cost
MC
Ei P
E E
Ent. P AR / MR
Ent.
profit profit
Interest Interest
Rent
D Rent
Wages
Wages
Q Qd, Qs Q Qty
At Stable Equilibrium point E: MC = MR = AR = AC
AR = AC
MC = MR MR = AR (Q) (AR) = (Q)(AC)
TR = TC
Normal Profits
Stable Equilibrium Perfect Competition Breakeven Firm, Not-for-Profit
173
• Perfect Competition.
• SUBNORMAL
(Continue) Firm AC AVC
Price Industry
Rev, MC
Cost
S
T C
Ei P E
P AR / MR
V
D
Qd, Qs Q Qty
174
At Stable Equilibrium point E: MC = MR = AR < AC & AR > AVC
MC = MR MR = AR AR < AC AR > AVC
Stable Equilibrium Perfect Competition Sub Normal Profits Continue

Principle for Loss-making firms to continue
AC = (AFC) + AVC
C
CQ = (VC) + VQ
E = PRICE
CQ = (VE + EC) + VQ
V
175
CQ = (PARTLY COVERED) + FULLY COVERED

CAPEX + OPEX Q
HENCE, CONTINUE PRODUCTION

Firm
• SUBNORMAL (Shut
Down) AC
MC AVC
Price Industry
Rev,
C
Cost T
S
Ei V
P
P
E AR / MR
Qd, Qs Q Qty
At Stable Equilibrium point E: MC = MR = AR < AC & AR < AVC
MC = MR MR = AR AR < AC AR < AVC
Stable Equilibrium Perfect Competition Sub Normal Profits

176
Shut-Down
Principle for Loss-making firms to SHUTDOWN
AC = (AVC) + AFC
C
CQ = (VQ) + VC
V
CQ = (QE + EV) + VC E = PRICE
177
CQ = (PARTLY COVERED ) + FULLY UNCOVERED

OPEX + CAPEX Q
HENCE, CONTINUE SHUTDOWN

Rev,
Cost
• If (AR = P ≥ AVC(min)), then the firm
could still produce,
MC
• in spite of its TR < TC, i.e., the firm
suffering losses
AC
• If AR = P < AVC(min), the

firm should shut down AVC
P P = AVC = AR =MR
Q Qty
178
Firm 1 Firm 2 Firm 3 Firm 4
Sub NP - Continue Normal Profit Super NP
Industry Sub NP - Shutdown
AC
AC
AVC Rev,
Price Rev, Rev, Cost
Cost Rev,
Cost MC MC Cost AC MC
LAC MC
AC
S AVC AVC AVC

T
Ei C
T C
V AR / MR
P E
P E P E E
P P C
T
V V V
179
Qd, Qs Q Qty Q Qty

Q Qty Qty
Q
A firm has a total cost function
C = (0.1)(q3) – 3q2 + 50q + 100.

The market price is Rs 100/3 per unit of q.
Find ...
180
AR = price = Rs (33.3)
TR = Rs (33.3)(Q)
MR = Rs (33.3)
AR = MR = Rs (33.3)
Perfect Comp.
TC: C = (0.1)(q3) – 3q2 + 50q + 100 AR : p = 33.3
TR : R = 33.3q
AC: c = (0.1)(q 2) – 3q + 50 + 100/q
MR : R’ = 33.3
MC: TC’ = (0.3)(q2) – 6q + 50
Pie = 33.3q - (0.1)(q3) + 3q2 - 50q - 100

Pie = - (0.1)(q3) + 3q2 - 16.7q - 100
Pie’ = 0 V(Pie) = - (0.1)(16.66 3) + 3(16.66)2 - 16.7(16.66) - 100
- (0.3)(q2) + 6q - 16.7 = 0
V(Pie) = Rs - 7.96
q = 3.34 or q = 16.66
units
181
Pie ‘’ = - (0.6)(q) + 6 Sales Max Not compatible, since
TR is a linear function and MR
Pie ‘’ = - (0.6)(3.34) + 6 = 3.99 > 0 cannot be zero
Pie ‘’ = - (0.6)(16.67) + 6 = -3.99 < 0

LONG RUN DYNAMICS
UNDER
PERFECT COMPETITION
182
• Perfect Competition. SUPERNORMAL to NORMAL Profits
Due to Free Entry of Firms
Industry Firm
Rev,
Price Cost
AC
So
1 Sn
Eio Po
Po ARo / MRo
2 3
Pn
Pn ARn / MRn
Ein
D
Qd, Qs Qty
183
• Perfect Competition: SUPERNORMAL changes to NORMAL Profits
Due to Free Entry of Firms How to construct
Industry Firm
Rev,
Price Cost
AC
So
1 Sn
Eio Po
Po ARo / MRo
2 3
Pn
Pn ARn / MRn
Ein
D
Qd, Qs Qty
184
• Perfect Competition. SUBNORMAL to NORMAL Profits
Due to Free Exit of Firms
Industry Rev, Firm

Price Cost AC
D Sn
1 So
Ein Pn
Pn ARn / MRn
2 3
Eio
Po
Po ARo / MRo
Qd, Qs Qty
• Perfect Competition. SUBNORMAL to NORMAL Profits
Due to Free Exit of Firms How to construct
Industry Rev, Firm

Price Cost AC
D Sn
1 So
Ein Pn
Pn ARn / MRn
2 3
Eio
Po
Po ARo / MRo
Qd, Qs Qty
IMPACT OF TIME ON PRICES
UNDER
PERFECT COMPETITION
187
• Perfect Competition. Impact of Time on Prices and Markets
Smp
Ssr
Price
Slr
Emp
Esr
Pmp > Psr > Plr
Elr
Qmp < Qsr < Qlr
188
Qmp Qsr Qlr Qd, Qs

• Perfect Competition: Impact of Time on Prices - Demand Increases
Smp Ssr
Price
∆ Pmp > ∆ Psr > ∆ Plr

Empn
Slr
Esrn
Empo Esro
Elrn
Elro
∆ Qmp < ∆ Qsr < ∆ Qlr

Dn
189
= ∆Qlr
Do
= ∆Qsr
Qmp Qsro Qlro Qlrn

Qd, Qs
Qsrn
• Perfect Competition: Impact of Time on Prices - Demand Decreases
Price
Smp Ssr
∆ Pmp > ∆ Psr > ∆ Plr

Empo
Slr
Esro
Empn Esrn
Elro
Elrn
∆ Qmp < ∆ Qsr < ∆ Qlr
Do
190
= ∆Qlr
Dn
= ∆Qsr
Qmp Qsrn Qlrn Qlro

Qd, Qs
Qsro
Market Dynamics
16 - Cases
191

other changes
192
1 dd = K & ss INC dd = K & ss DEC 1 variable constant & the

DD = K & SS DD = K & SS
Price Price Sn
So So
Sn
Pn En
Po Eo Po Eo
Pn En
193
Do Do
Price falls & Qty increases Price rises & Qty decreases

SS = K & DD SS = K & DD
Price Price
So So
Pn
En Po Eo
Po Eo Pn En
Dn Do
194
Do Dn
Price rises & Qty increases Price falls & Qty decreases

195
4 dd INC < ss INC dd DEC < ss DEC
DIFFERENT PROPORTIONS
SS SS DD
DD
Price Price
Sn
So
So
Sn
Po Eo
Pn En Pn En
Po Eo
196
Dn Do
Do Dn
Price rise < increase in Qty Price fall < decrease in Qty
SS SS DD
DD
Price Price Sn
So En So
Pn
Sn Eo
Po Eo Po
Pn En
Do
Dn Dn
Do
Price fall < the increase in Qty Price rise < the decrease in Qty
197

198
SS DD SS DD
Price Price
So
Sn
Sn
En So
Po Eo Pn
Pn En Po
Do Eo Dn
Dn
Do
Qn Qo Qd, Qs
Qo Qn Qd, Qs
Price fall > the decrease in Qty Price rise > the increase in Qty
199
SS SS DD
DD
Price Price
Sn
So
Sn Pn En So
Po Eo Po Eo
Pn En Dn
Do Do
Dn
Price fall > the increase in Qty Price rise > the decrease in Qty
200

PROPORTIONS
201
PROPORTIONS
SS SS DD
DD
Price Price Sn
So
So
Sn
En
Eo Po Eo
Po En
Dn Do
Do Dn
Price = K & Quantity increases Price = K & Quantity decreases
202

in SAME PROPORTIONS
203
in SAME PROPORTIONS
SS SS DD
DD
Price Price Sn
So Pn So
En
Po Sn
Eo
Po Eo
204
Pn En
Do Dn
Do
Dn
Qo Qd, Qs Qo Qd, Qs
Price falls & Quantity = K Price rises & Quantity = K


other changes


205 Both variables change in

PROPORTIONS

in SAME PROPORTIONS
Find the % changes in price & quantity when demand & supply
decrease, given the following extractable (shuffled) demand &
supply functions:
pd1 - 90 + 0.7qd1 = 0
ps1 - 36 - 0.4qs1 = 0
pd2 - 80 + 0.7qd2 = 0
ps2 - 24 - 0.4qs2 = 0
206
pd1 = 90 - 0.7qd1 pd2 = 80 - 0.7qd2 ps1 = 36 + 0.4qs1 ps2 = 24 + 0.4qs2

Price Do Key:
Dn ps1 = 36 + 0.4qs1
RED Eqn. = Original Data
En ps2 = 24 + 0.4qs2
52 Pn
PURPLE Eqn. = New Data
48 Po Eo
Sn
pd1 = 90 - 0.7qd1
pd2 = 80 - 0.7qd2
So
Qn Qo Qd, Qs
40 60
Original 207
New Change %
Demand pd1 = 90 - 0.7qd1 pd2 = 80 - 0.7qd2 xxx xxx
Supply ps2 = 24 + 0.4qs2 ps1 = 36 + 0.4qs1 xxx xxx
Price 48 52 13 8.33
Qty 60 40 - 20 -33.3 %
THE NOTION OF PRODUCTION EFFICIENCY
UNDER
PERFECT COMPETITION
Derivation of a Firm's Supply Curve
Rev, Price
Cost AVC
MC S
E3 P3 S3
P3
AR3 / MR3
E2 P2 S2
P2
AR2 / MR2
E1 P1 S1
P1
AR1 / MR1 209
E0 P0 S0
P0
AR0 / MR0
Q0 Q1 Q2 Q3 Qty Q0 Q1 Q2 Q3 Qs
Derivation of a Firm's Supply Curve
Rev, Price
Cost AVC
MC S
E3 P3 S3
P3
AR3 / MR3
E2 P2 S2
P2
AR2 / MR2
E1 P1 S1
P1
AR1 / MR1
Q0 Q1 Q2 Q3 Qty Q0 Q1 Q2 Q3 Qs
210
The Shutdown Decision Graphically:
Rev,
Cost
The MC function is the SS curve,
subject to AR ≥ AVC
MC / SS
AC
AVC
P
Shutdown P = AVC = AR =MR
Qty 211
Derivation of the industry's supply curve EQUALLY EFFICIENT FIRMS
Qi = Qa + Qb + Qc
Firm A Firm B Firm C
Industry
SB SC SI
SA
Price Price Price Price
P0
P0 P0 P0
Qa Qty Qb Qty Qty Qi Qty

Qc
(100)
Derivation of the industry's supply curve UNEQUALLY EFFICIENT FIRMS

Qi = Qa + Qb + Qc
Firm A Firm B Firm C
Industry
SC
Price SA Price Price Price SI
SB
P0
P0 P0 P0
Qa Qty Qb Qty Qc Qty Qi Qty

(100)
212
The TC function is: C = (0.1)(q3) – 3q2 + 50q + 100, find the supply function
Solution:
The firm’s MC (only the upward sloping …….) is the firm’s SS situation; hence,
0.3q 2 – 6q + 50 is supply function of this firm, s.t. a particular price level.
Rev,
1. AVC: = 0.1q2 – 3q + 50 Cost
MC/ SS
2. AVC = MC
3. 0.1q2 – 3q + 50 = 0.3q2 – 6q + 50
AC
0.1q2 – 3q = 0.3q2 – 6q
0.1q2 – 0.3q2 = – 6q + 3q AVC
– 0.2q2 = – 3q P
P = AVC = AR =MR
0.2q = 3 Shutdown
4. q = 3/0.2 = 15 units 213

Q Qty
5A. At tipping point AVC = AR (price) = 0.1(15)2 – 3(15) + 50 = 22.5 – 45 + 50 = Rs 27.5
OR
5B. MC = AR (price) = 0.3(15)2 – 6(15) + 50 = 67.5 – 90 + 50 = Rs 27.5
6. Hence, 0.3q 2 – 6q + 50 is SS function, s.t. the price not being below Rs 27.5
The TC function is: ᵃ = 0.5ᵅ 3 − 2ᵅ 2 + 4ᵅ + 10 , find the supply function
Solution:
The firm’s MC (only the upward sloping …….) is the firm’s SS situation; hence,
1.5q 2 – 4q + 4 is supply function of this firm, s.t. a particular price level.
Rev,
1. AVC: = 0.5q2 – 2q + 4
Cost
2. AVC = MC MC/ SS
3. 0.5q2 – 2q + 4 = 1.5q2 – 4q + 4
0.5q2 – 2q = 1.5q2 – 4q AC
1.5q2 – 0.5q2 = 4q - 2q
1q2 = 2q AVC
q = 2 P
Shutdown
P = AVC = AR =MR
4. q = 2 units Qty

214 Q
5A. At tipping point AVC = AR (price) = 0.5(2)2 – 2(2) + 4 = 2 – 4 + 4 = Rs 2
OR
5B. MC = AR (price) = 1.5(2)2 – 4(2) + 4 = 6 – 8 + 4 = Rs 2
6. Hence, 1.5q 2 – 4q + 4 is SS function, s.t. the price not being below Rs 2
Monopoly
Aspects of a Monopoly firm
Definition:
A Monopoly firm is a SINGLE SELLER situation, in which
there are NO CLOSE SUBSTITUTE
Features:
1. Single Seller (= single owner)
2. No close substitutes
3. Firm and industry are concurrent (= price maker and
taker)
4. the Mon. Firm Cannot determine both: the Price as well
as the Qty to be sold due to the constraint of the dd
function
5. Nature of Edp: if prices are rising then RIE
if prices are falling then RE
6. Objectives: Profit Max; Sales Max; Breakeven ??
Monopoly: Super-Normal Profit (short-run)
Rev,
Cost
MC AC
At E: MC = MR < AR > AC
R
P
MC = MR Stable Eqm
T C
MR < AR Imperfect Comp
E
AR
MR AR > AC Super N.P.
Q Qty
Monopoly: Normal Profit (short-run)
At E: MC = MR < AR = AC
Rev,
Cost
MC MC = MR Stable Eqm
AC
R=C
P=T
AR = AC Normal Profit
E
MR AR
Q Qty
Monopoly: Sub-Normal Profit (short-run)
AC At E: MC = MR < AR < AC
Rev,
Cost MC = MR Stable Eqm
MC
T C
P R
AR < AC Sub N.P.
MR AR
Q Qty
Monopoly: short-run
AC
R,
R,
C
R, C
Sub-NP
Super-NP C Normal Profits
MC AC MC
MC
AC
T C
P R R=C P R
P=T
T C
E E E
MR AR MR AR MR AR
Q Qty Q Qty Q Qty

Monopoly Dynamics
in the Long Run
Monopoly operations in the Long Run
Rev, Technology has changed
MC1 AC1
Cost
Costs have fallen
P1
R1 Quantities have risen
C1
T1 Prices have fallen
E1 R2 AC2
P2 MC2 Supernormal Profits persists
C2
T2
E2
MR AR
Demand for the product persists
Q1 Q2 Qty
Monopoly operations in the Long Run
Rev, Technology has changed
MC1 AC1
Cost
Costs have fallen
P1
R1 Quantities have risen
C1
T1 Prices have fallen
E1 R2 AC2
P2 MC2 Supernormal Profits persists
C2
T2
Demand for the product persists
E2 AR
Demand curve
MR
is kinked =
inflected
Q1 Q2 Qty
Monopolistic Competition
FYBMS Portion: Slide No. 2 till slide No. 5
224
Coined by E.H. Chamberlain (USA - early1939)
It is a blending of :
Monopoly + Competition
Most practiced market format currently
‘Imperfect Competition’ put forth by Joan Robinson

(UK, late 1939): 2
2
5
Monopolistic Competition
• Collective Commodity Demand Curves

aspirational
Number of Product drives
Sellers Differentiation and
Selling Cost CONSTRAINING
Group Concept FACTORS
Interdependence Competition
D1
D
among Sellers Strategies P
Different objectives & R

Pricing strategies d
possible d1
Qty
226
MONOPOLISTIC COMPETITION - GROUP DYNAMICS
R1 R2 R3 R4
D2 D1
Price
R2
R1
R3
R4 d1
d2
2
Qty 2
7
• Manufacturing Selling Cost
It Cost
is the cost incurred while It is the cost incurred while
PRODUCING the product MARKETING the produced product
Rent, Wages, Interest & Profits There are various formats of selling costs
like advertisements, packaging, service
and so on.
It is concerned with the SUPPLY of It is concerned with the DEMAND for the
the product product
Costs Price
ATC
APC
d5
T1 T3
dd23
T2 d6
d4
M1 M3 ASC d1
Pf
M2
S1
S2 S3
Qty Qty
Q1 Q2 Q3
MONOPOLISTIC COMPETITION (SHORT RUN) - SUPERNORMAL PROFITS
MC
Rev/Cost
AC
D
P R
T C
E AR = d
MR
Q Output
2
2
9
MONOPOLISTIC COMPETITION (SHORT RUN) - NORMAL PROFITS
MC
Rev/Cost
AC
D
P R
E AR = d
MR
Q Output
2
3
0
MONOPOLISTIC COMPETITION (SHORT RUN) : SUB-NORMAL PROFITS
MC
AC
Rev/Cost
D
T C
P
R
E AR = d
MR
Q Output
2
3
1
MONOPOLISTIC COMPETITION (LONG RUN) - ENTRY & PRICE-CUTTING
Rev/Cost D1 DF
DO
MC AC
R1
RO
MRF RF
dO
EF
dF
Q1 QF QO Output
23
2
Price Leadership Models
Slide No. 3 not for FYBMS
Dominant Firm Price Leadership Model
Shared Market Dominant Firm

Price
R, C
SSF
AC
MC
Es A
P
P1 S1 D1 P1 R
P2 T
S2 D2 C
P3 P2
D3 AR
D MR
Q Qty
Qd , Q s
Low Cost Firm Price Leadership
Rev,
MC1 AC1
Cost
R1
P1
T1
C1
E1 AC2
R2
P2 MC2
T2 C2
E2
MR AR
Q1 Q2 Qty
1
INTERNAL
ECONOMIES
and
DISECONOMIES
OF SCALE
2
INTERNAL ECONOMIES OF SCALE
• They are benefits that accrue to A SINGLE
FIRM as it expands.
• They cause a reduction in the firm’s average cost
of production as output increases.
• Some of the sub-types are:

Technical Economies; Managerial Economies;
Financial Economies; Risk Bearing Economies;
Research Economies; Marketing Economies;
Commercial Economies.
3
INTERNAL DISECONOMIES OF SCALE
• They are problems which are experienced by A
SINGLE FIRM as it expands production beyond a
particular limit.
⚫ The over-expansion of a firm’s output would lead to
rise in costs and thus covert economies into
diseconomies.
⚫ This occurs due to factors like:
⚫ fixed factor fatigue and / or breakdown; and
⚫ possible use of inferior or less efficient inputs, due
to a lack of sufficient better quality inputs.
4
INTERNAL TECHNICAL ECONOMIES OF SCALE
• An expanding firm can afford to use superior

technology (like modern machinery) to reduce its costs
and thereby develop a competitive edge over its rivals.
• Consider:
Machine ‘A’ can produce 10,000 chocolates a day,
Machine ‘B’ can produce 1,000 chocolates a day;
But Machine ‘A’ does not require ten times
the supporting factors as Machine ‘B’
5
INTERNAL TECHNICAL DISECONOMIES OF SCALE
• Technology is continuously up-graded.
• Firms cannot constantly change technologies, as

they have currently invested heavily in superior
technology (like modern machinery).
• If rival firms up-grade technology, the firm under

consideration may not be able to retain and / or
increase its market share.
6
INTERNAL MANAGERIAL ECONOMIES OF SCALE
• They arise from a firm’s specialization and

mechanization of its management strategies, as it
expands it’s scale of production or operations.
• Small Firm Manager = Foreman = Worker
wastes time on small jobs
(eg., Grade II Hotel Manager)
• Large Firm specialized management cadres
task delegation saves time
improves efficiency …..
(eg., a Five-Star Hotel has Managers for various activities)
7
INTERNAL MANAGERIAL DISECONOMIES OF SCALE
• As production or operation scale increases,

the management cadre is overworked.
• Managers become unable to supervise
efficiently.
• Due to laxity of control cost increases.
• Illustration, a very able teacher may not be
able to deliver efficiently if the class size is
beyond a particular strength.
8
INTERNAL FINANCIAL ECONOMIES OF SCALE
• Big firms have more credible and so investors

are ready to trust their monies with them.
• As a firm’s operations level increases, larger
financial resources are available to it at lower
costs.
• For instance:
Companies like Tata, Reliance, Birla are
more credible than smaller firms and so
investors offer the required finances at
reasonable rates.
9
INTERNAL FINANCIAL DISECONOMIES OF SCALE
• Big firms can misuse their financial credibility.

• They can become heavily indebted.
• They can misuse the funds at their disposal.
• As the debt component increases, the firm’s
debt-servicing expenditures also increase.
• Recall:
The recent Satyam scandal in India and the
financial imprudence displayed by some large
firms that led to the current recession.
10
INTERNAL MARKETING ECONOMIES OF SCALE
• When a firm increases it’s scale of operations,

it can indulge in mass marketing strategies
and thus reduce its per unit selling costs.
• Big firms can hire the best advertising
companies, own or hire warehousing facilities
and use modern transportation facilities.
• eg., AMUL’s beverage marketing campaign is

far more expensive and impacting than a
small beverage firm which has limited
commercial influence.
11
INTERNAL MARKETING DISECONOMIES OF SCALE
• Very large firms can indulge in excessive

marketing outlays and this could cause their
overall costs to increase and so their prices rise.
• They concentrate more on out-beating each other

in sales and may not concentrate on improving
manufacturing strategies or product quality.
• The Coke – Pepsi commercial war is a case in

point.
12
INTERNAL RISK-BEARING ECONOMIES OF SCALE
• An expanding firm can diversify its output taking

on as well as eliminating risks impacts strength
and stability.
• If one product of the firm is not faring well, its other

products can provide the finances to tide over.
• Hindustan Unilever Ltd. simultaneously markets

Lux soaps, Pepsodent and Close Up, Lipton Tea,
Sunsilk and Dove shampoos, Vim soap, Surf and so
on. Thus, HUL can cover business risks far better
than a smaller firm like Nirma
13
INTERNAL RISK BEARING DISECONOMIES OF SCALE
• As a firm expands and diversifies its output,

it could end up having too many unsold
outdated products with it.
• It will thus lose its competitive edge and
consequently its market share will reduce.
• TATA is now shedding-off its non-core

competence commodities to improve its
concentration on a few commodities to
enhance its market status even further.
14
INTERNAL LABOUR ECONOMIES OF SCALE
• As firm’s scale increases division of labour and

specialization takes place improves speed, skill,
dexterity more output per unit input
• e. g. Garment industry: Small scale vs. Large scale
15
INTERNAL LABOUR DISECONOMIES OF SCALE
• As the firm increases its size its labour force

requirement increases unionization of labour
more labour demands and even agitations.
• The problem of disguised unemployment emerges.
• Ultimately firm’s costs increase and market share

falls.
• Some Indian Public Sector Undertakings are facing

such situations even today.
16
INTERNAL RESEARCH ECONOMIES OF SCALE
• Big firms can afford to have its own R & D

Departments.
• They develop new products & methods of production.
• Thus, they gain a cutting edge in the market.
• Firms like Ranbaxy,

Infosys, Sony can be
cited as examples of firms
indulging in the cost-cutting
strategy of in-house R & D.
17
INTERNAL COMMERCIAL ECONOMIES OF SCALE
• Large firms get advantages in the purchase of raw

materials and in the sale of goods as they have:
• Bargaining advantages when buying / selling in
bulk,
• Prompt delivery, careful attention from dealers.
Instances:
• Cadbury buys cocoa, milk, sugar etc. in bulk at
discounted prices, or,
• SAIL guarantees its customer-firms prompt delivery.
18
INTERNAL COMMERCIAL DISECONOMIES OF SCALE
• Individual consumer’s tastes ignored due to:

• mass production or standardized production.
• eg., Classic Henry Ford Quote on Car color
• Production lacks personal touch:
• Big businesses are generally managed by paid
employees. The personal touch needed in industrial
relations are missing. Hence, labour-Management
tensions build up.
• Compare the consumer-friendly approach in a local
Grocery shop and in a massive retail mall.
19
AVERAGE
COST
Impact on short run Average Cost (AC)
AC curve
Internal DoS
Internal EoS
Optimum level of production OUTPUT
20
EXTERNAL
ECONOMIES
and
DISECONOMIES
OF SCALE
21
EXTERNAL ECONOMIES OF SCALE
• They are those advantages which accrue to each

member-firm as THE INDUSTRY grows.
• They accrue due to factors outside the influence
of a single firm.
• They lead to decreasing long run average costs
for firms within the industry.
22
ECONOMIES OF CONCENTRATION
These are advantages of a localized industry; they

include:
• Availability of skilled labour,
• Better transport and credit facilities,
• Benefits from subsidiary.
• Sharing of common stock of knowledge and
experience.
• Scattered firms cannot enjoy such economies.
• Example : Growth of Bangalore as an IT hub.
23
ECONOMIES OF INFORMATION
These economies include:

• Publication of trade and technical journals.
• Drawing of research results from common
central pool of research institutions.
• Firms in a scattered industry cannot have such
facilities.
• Example: The story of the growth of the
Silicon Valley in the USA
24
ECONOMIES OF DISINTEGRATION
• When an industry grows it become possible to split up
some of the processes which are taken over by
specialized firms.
• They can enjoy internal economies of scale and thereby

produce efficiently and at lowered costs.
• Example: Growth of the Electronic Industry.

Different firms specialize in the production of
components, through the outsourcing strategy
25
EXTERNAL DISECONOMIES OF SCALE
• They are those disadvantages which accrue to

each member-firm as THE INDUSTRY
grows.
• They accrue due to factors outside the influence

of a single firm.
• They lead to increasing long run average costs

for firms within the industry.
EXTERNAL DISECONOMIES OF SCALE
When an industry expands:
• Intensification of competition among firms for
limited resources cost of production increases.
• Housing becomes scarce and so expensive and

unaffordable for many the mushrooming of
slums and other informal housing facilities.
• Traffic jams are frequent, causing the pollution

problem to get aggravated
27
EXTERNAL ENVIRONMENTAL DISECONOMIES
Production requires private costs that can damage the
surroundings, but ….
….. the firms involved do not pay for the resultant social
costs.
•An upstream pulp mill discharges effluents in the river
reduces the scope for fishing poses an externality to the
fishing industry.
•Steel factory produces smoke health problems of people in
neighbouring areas
•nuclear plants radioactive atmosphere.
•The death of the Mithi River in Mumbai, is a case in point.
28
AVERAGE LONG RUN AVERAGE COST
COST
1
LAC
Ex Eco
Ex DisEco
2
IRS
CRS LAC
DRS
O OUTPUT
30
Bibliography
1. Ammer & Ammer, Dictionary of Business and Economics

2. Collins Reference, Dictionary of Economics
3. Dwett, Modern Economic Theory,
4. Hansen, A Dictionary of Economics and Commerce
5. International Encyclopedia of Social Sciences (Vol 4)
6. Lipsey, An Introduction into Positive Economics
7. Mansfield, Microeconomics
8. Marshall, A, Principles of Economics
9. McGraw-Hill, Dictionary of Modern Economics
10. Mukherjee, S, Modern Economic Theory (3rd Edition)
11. Palgrave Dictionary of Economics (Vol 2)
12. Pearce, The Dictionary of Modern Economics
13. Samuelson, Economics (11th Edition)
14. Taylor, A New Dictionary of Economics
15. Whitehead, G, Economics Made Simple
31
Thank You
32

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REGRESSION

• Converts data clumps into comprehensible information.

Understanding the impact of

All economic phenomena has to be understood in terms of

DEPENDENT VARIABLE (Y)

Y is also called a STOCHASTIC Variable since ....

• Functional relationships b/w the 2 variables can be expressed

Positive / Direct: Negative / Inverse:

• Data informs about the variational relationship between X & Y

Positive / Direct relationship: Negative / Indirect / Inverse

Unorganised / Organised data can be converted into an equation,

Regression converts data into a LINEAR equation: Y = mX + h

Significance of ‘h’ ???

Econometrics, NOTATIONALLY and NOT CONCEPTUALLY changes this

2 20 -1 0 0 1 20.5 -0.5 0.25 0

4 23 1 3 3 1 19.5 3.5 12.25 9

15 100 -5 10 113.5 116

ᵈᵈᵉᵉ � ᵉᵈᵈᵈ � ᵽᵼ %⇒ ᵉᵉᵉᵉ � ᵈᵈᵉ

For Given Data: R2 = 0.02 or 2%

Hence, the given X cannot explain

Y For more of X we get Y For more of X we get

It is the DESIRE backed by:

To PAY THECURRENT MARKET PRICE

Price of the Price Ed Edp

Income Income Ed EdY

Price of a Cross Ed Exy

Promotions Promotional Ed EdA

% ∆ ᵄ ��� < ��� % ∆ ᵃ

Perfectly Elastic Demand

∆�ᵆ ∆�ᵇ ∆�ᵇ

∆�ᵇ ∆�ᵇ ∆�ᵇ

• Price Elasticity of Demand

20 330 25 At Px = 20, Edp = ?

• Income Elasticity of Demand

Income Demand Dx = 7000 + 0.3Y

• Promotional Elasticity of Demand

Promo Exp. Demand

80 900 At A = 50, EdA = ?

• Cross Elasticity of Demand

Competitive Goods Supportive Goods

• Cross Elasticity of Demand

Substitute Goods Complementary Goods

Form or STRUCTURAL utility

Form Place Time

TPP: Total Physical Product

APP: Average Physical Product

MPP: Marginal Physical Product

1st Calculate TPP

Then Calculate APP

1st Calculate TPP

Then Calculate MPP

QL TPP APP MPP

QL TPP APP MPP

QL TPP APP MPP

1. Lack of rivalry a. product backfires

2. Sole access to resources b. Opportunity cost

3. Novelty Value c. Increasing selling costs

4. IPR protection d. Better products from past exp

% ∆ ᵄ �� < �� % ∆ ᵃ

ᵽ .�� ᵇᵇ = ᵇᵆ ᵀᵁᵁᵁᵂᵂᵁᵂᵃ �ᵀᵂᵂᵁᵂᵂᵂᵂᵂ

ᵽ .�� ᵇᵇ = ᵇᵆ ᵀᵁᵁᵁᵂᵂᵁᵂᵃ � ᵀᵂᵂᵁᵂᵂᵂᵂᵂ