QUESTIONS

Q1: What is the difference between Economics and business economics?

Ans: We are aware that Business Economics has evolved from Traditional Economics. Even though there are many similarities between them, but there are
certain differences between the two.
1.Economics focuses primarily with the theoretical aspect whereas Business Economics devotes with the practical aspect. The former is associated with
concepts, theories, models and building theoretical framework. The latter is associated with the applications of the selected theories and concepts to solve
business problems and help the business decision making process.
2.Business Economics is fundamentally micro-economic in nature. It studies the activities of an individual firm or unit. There is an extensive application of the
concepts and theories of microeconomics in it. The Economics has both micro and macro aspects within its purview.
3.Business Economics is essentially normative in nature. But, the Economics is concerned with both positive and normative economics. Positive Economics
explains the economic phenomena as they are, while normative economics discusses as to what they ought to be. Business Economics explains what objectives
and avenues a business should pursue and how they are to be. Therefore, it is normative in nature.
4.Economics studies the complex economic phenomena and rational human behaviour by developing certain meaningful and consistent assumptions,
hypothesis and developing models. Business Economics endeavors to solve real life complex business problems. It selectively
applies economic models with required modifications to solve the business problems.
5.Economics concentrates only the economic aspect of the problems but Business Economics deals with some non-economic aspects of
the problems along with the economic aspects.
6.Business Economics focuses on the theory of profit only. Whereas, the Economics has within its ambit not only profit maximization but
also other aspects like Utility maximization, distribution theories of wage, rent interest and welfare economics as well.
7.The scope of Business Economics is restricted as compared to the scope of the Economics.

Economics is a social science that attempts to explain how the actions and decisions of firms, consumers and workers and governments
affect the operation of the economy. It plays a huge role in our daily lives; it has links to international affairs and politics and is a subject
that is often debated and discussed. It requires a fair deal of analysis and includes topics such as supply and demand, growth, inflation,
globalisation and exchange rates.
Business Economics is more concerned with the actions and decisions taken by firms and focuses on topics such as marketing, staff in the
organisation, accounting and finance, management, strategy and production methods. Business studies students will also have to cover
some Economics, as it affects how businesses operate in their external environments.
Although Business Economics is not free from theory, it is less theoretical than Economics. Business Studies requires less understanding
than Economics, but it by no means an easy subject; instead it involves more learning and therefore has more work to cover, and a great
deal of new terminology to grapple with.
Therefore you might say that Economics course has more depth, with the Business course having more breadth.

Q2: Explain how economics can be used as a tool in decision making?

Ans:
Q3: What is a Business Cycle?
Ans: A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate. It
explains the expansion and contraction in economic activity that an economy experiences over time.

A business cycle is completed when it goes through a single boom and a single contraction in sequence. The time period to
complete this sequence is called the length of the business cycle. A boom is characterized by a period of rapid economic
growth whereas a period of relatively stagnated economic growth is a recession. These are measured in terms of the growth of
the real GDP, which is inflation-adjusted.

Stages of the Business Cycle

 In the diagram above, the straight line in the middle is the steady growth line. The business cycle moves about the line. Below is a more
detailed description of each stage in the business cycle:

1. Expansion
The first stage in the business cycle is expansion. In this stage, there is an increase in positive economic indicators such as employment,
income, output, wages, profits, demand, and supply of goods and services. Debtors are generally paying their debts on time, the velocity of
the money supply is high, and investment is high. This process continues as long as economic conditions are favorable for expansion.

2. Peak
The economy then reaches a saturation point, or peak, which is the second stage of the business cycle. The maximum limit of growth is
attained. The economic indicators do not grow further and are at their highest. Prices are at their peak. This stage marks the reversal point in
the trend of economic growth. Consumers tend to restructure their budgets at this point.
3.Recession
The recession is the stage that follows the peak phase. The demand for goods and services
starts declining rapidly and steadily in this phase. Producers do not notice the decrease in
demand instantly and go on producing, which creates a situation of excess supply in the
market. Prices tend to fall. All positive economic indicators such as income, output, wages,
etc., consequently start to fall.

4.Depression
There is a commensurate rise in unemployment. The growth in the economy continues to
decline, and as this falls below the steady growth line, the stage is called a depression.

5.Trough
In the depression stage, the economy’s growth rate becomes negative. There is further
decline until the prices of factors, as well as the demand and supply of goods and services,
contract to reach their lowest point. The economy eventually reaches the trough. It is the
negative saturation point for an economy. There is extensive depletion of national income
and expenditure.

6.Recovery
After the trough, the economy moves to the stage of recovery. In this phase, there is a
turnaround in the economy, and it begins to recover from the negative growth rate. Demand
starts to pick up due to low prices and, consequently, supply begins to increase. The
population develops a positive attitude towards investment and employment and
production starts increasing.
Employment begins to rise and, due to accumulated cash balances with the bankers, lending also shows
positive signals. In this phase, depreciated capital is replaced, leading to new investments in the
production process. Recovery continues until the economy returns to steady growth levels.

This completes one full business cycle of boom and contraction. The extreme points are the peak and
the trough.
QUESTIONS
Q1: Explain Demand analysis.
Ans:
DEMAND AND SUPPLY ANALYSIS

1.Define Demand.

Demand indicates the quantities of products (goods service) which the firm is willing and financially able to purchase at various prices, holding other
factors constant.

2. Define Determinants of Demand:

An individual’s demand for a commodity depends on his desire and capability to purchase it. Apart from the desire to purchase, there are many other
factors which influence the purchase of a product (demand). These are known as demand determinants.

3. What is meant by Tastes and preferences of Consumers:

The change of tastes and preferences of consumers in favor of a commodity will result in a greater demand for the commodity. The opposite also
holds good i.e. if the tastes and preferences of consumer change against the commodity, the demand will suffer.
4.What are the two kinds of Consumers expectations?

Consumers have two kind of expectations one pertains to their future income and the second is related
to the future prices of the goods and its related goods.

5.Define Advertising

Advertisements provide information about the presence of quality products in the market and induces
customer’s to buy more. It also promotes the latest preferences of the general public to masses.

6.Define the Law of Demand:

The relation of price to quantity demanded / sales is known as the law of demand. Law of demand states
that the higher the price is the lower the demand is and vice versa, holding other factors as constant.

7.Define the price quantity relation.

This price quantity relation can be expressed as demand being a function of price

D=f(p).
8. What Highlights of the law of demand:

1.The relationship between price and quantity demanded is inverse.

2.Price is the independent variable and demand the dependent variable.
3.Law of demand assumes that except for price and demand, other factors remain constant.

9.What is Demand Shift: (Change in demand)

Factors shift the demand for a particular product either on the right side of the demand curve or to the left
side of the demand curve based on the changes in price. These factors, other than the price of a good that
influence demand are known as demand shifters. The shift in the demand either to the left or right is called
the demand shift.

10.What are the Exceptions to law of demand:

11.In share markets on would have noticed that the rise in price of the shares increases, the sales of the
shares while decrease in the price of the shares results in decrease of sale of the shares.

12.Some goods which act as status symbol and have a snob appeal fall under this category. Here when the
price of the product rises
then the appeal of the product also rises and thus the demand. Some example are diamonds and antiques.

3. Finally, ignorance on the part of the consumer may cause the consumer to buy at a higher price, especially when the rise in price is taken to
mean an improvement in quality and a reduction in price as deterioration in quality.

Q2: What is a demand curve?

Ans: The graphical representation of the relationship between the demand of the commodity and price of the commodity, at any given time, is
known as the demand curve.
A demand curve can also be defined as the graphical representation of a demand schedule. A demand schedule is a tabular statement which
represents the various quantity of the commodity that the consumers are ready to buy at every different price, at any given time.
In a graph, the price of the commodity is represented in the vertical axis (Y-axis) and the quantity demanded is represented on the horizontal
axis (X-axis). A commodity’s price and its demand share inverse relationship. This means, higher the price of the commodity, lesser will be its
demand and lower the price, higher will be the demand. Therefore, in a graph, demand curve makes a downward slope.
In the following figures, fig. I is an example of demand schedule and fig. II is its graphical illustration (demand curve).
Movement along a demand curve
The amount of quantity demanded by the consumer changes with the rise and fall in the price of the commodity if other determinants of demand remain
constant. This alternation in demand, when shown in the graph, is known as movement along a demand curve.
Movement along a demand curve can also be understood as the variation in quantity demanded of the commodity with the change in its price, ceteris
paribus.
There can be two types of movement in a demand curve – extension and contraction.
Extension in a demand curve is caused when the demand for a commodity rises due to fall in price. And, contraction in demand curve is caused when the
demand for a commodity falls due to rise in price.
In the above fig. II, let us suppose Rs. 30 is the original price of the soda per bottle and 20,000 units are the original quantity of demand. When
the price falls from Rs. 30 to Rs. 20, the amount of quantity demanded rises from 20,000 units to 30,000 units. With this change in demand,
there is a movement in the demand curve from point B to point C which is known as an extension of the demand curve.
Similarly, when the price of the soda increases from Rs. 30 to Rs. 40, the demand for the soda falls from 20,000 units to 10,000 units. This time,
there is a movement in the demand curve from point B to point A, and this movement is known as a contraction in the demand curve.
Shift in demand curve
The amount of commodity demanded by the consumers may change due to the effect of non-price factors as well. Non-price factors which
influence demand for the commodity may be consumers’ income, the price of related goods, advertisement, climate and weather, the
expectation of rise or fall in price in future, etc.
When the amount of commodity demanded changed due to non- price factors, there is no extension or contraction in the curve but the
formation of the entirely new demand curve. As a result, demand curve shifts from its original position.
For an example, the demand for cold drinks in the market may increase substantially even at same price due to hot weather.
The shift in demand curve is also of two types – rightward shift and leftward shift.
When the demand for a commodity increases at the same price due to favourable changes in non-price factors, the initial demand curve shifts
towards the right, and there is a rightward shift in the demand curve. Similarly, when the demand for a commodity fails at same price due to
unfavourable changes in non-price factors, the initial demand curve shifts towards left, and there is a leftward shift in the demand curve.
In the given fig. III, let us suppose, DD is the initial demand curve where P is the original price and Q is the original quantity of demand of a
commodity. Due to favourable changes in non-price factors, the demand for the commodity in the market has increased from Q to Q2 amount at the
same price. Thus, the demand curve has shifted rightwards and new demand curve D2D2 has formed.
Similarly, due to unfavourable changes in non-price factors, the demand for the commodity has fallen from Q to Q1 amount. Thus, a new demand
curve D1D1 has formed at the left side of the initial curve.
Reasons for rightward shift of curve
 Increase in consumers’ income
 Increase in price of its substitute goods
 Decrease in price of its complementary goods
 Favourable change in taste and preference
 Expectation of rise in price of the commodity in future
 Increase in population

Reasons for leftward shift of curve

  Decrease in consumers’ income
 Decrease in price of its substitute goods
 Increase in price of its complementary goods
 Unfavourable changes in taste and preference
 Expectation of fall in price of the commodity in future
 Decrease in population

Q3: Explain Difference Between Movement and Shift in Demand Curve?

Ans: In economics, demand is defined as the quantity of a product or service, that a consumer is ready to buy at various prices, over a period. Demand Curve
is a graph, indicating the quantity demanded by the consumer at different prices. The movement in demand curve occurs due to the change in the price of the
commodity whereas the shift in demand curve is because of the change in one or more factors other than the price.
The demand curve is downward sloping from left to right, depicting an inverse relationship between the price of the product and quantity demanded.
Most of the economics student, find it difficult to understand the difference between movement and shift in the demand curve, so take a look at the article,
and resolve all your confusions right away.
Content: Movement in Demand Curve Vs Shift in Demand Curve Comparison Chart
Definition
Key Differences
 Figure Video
Conclusion

Comparison Chart

BASIS FOR COMPARISON MOVEMENT IN DEMAND CURVE

SHIFT IN DEMAND CURVE

Meaning Movement in the demand curve is when the commodity experience The shift in the demand curve is when, the price of the commodity remains
change in both the quantity demanded and price, causing the curve constant, but there is a change in quantity demanded due to some other
to move in a specific direction. factors, causing the curve to shift to a particular side.

Curve

What is it? Change along the curve. Change in the position of the curve.

Determinant Price Non-price

BASIS FOR COMPARISON MOVEMENT IN DEMAND CURVE
SHIFT IN DEMAND CURVE

Indicates Change in Quantity Demanded Change in Demand

Result Demand Curve will move upward or downward. Demand Curve will shift rightward or leftward.

Definition of Movement in Demand Curve

Movement along the demand curve depicts the change in both the factors i.e. the price and quantity demanded, from one point to another. Other
things remain unchanged when there is a change in the quantity demanded due to the change in the price of the product or service, results in the
movement of the demand curve. The movement along the curve can be in any of the two directions:
 Upward Movement: Indicates contraction of demand, in essence, a fall in demand is observed due to price rise.
 Downward Movement: It shows expansion in demand, i.e. demand for the product or service goes up because of the fall in prices.
Hence, more quantity of a good is demanded at low prices, while when the prices are high, the demand tends to decrease.
Definition of Shift in Demand Curve
A shift in the demand curve displays changes in demand at each possible price, owing to change in one or more non-price determinants such as the
price of related goods, income, taste & preferences and expectations of the consumer. Whenever there is a
shift in the demand curve, there is a shift in the equilibrium point also. The demand curve shifts in any of the two sides:
 Rightward Shift: It represents an increase in demand, due to the favourable change in non-price variables, at the same price.
 Leftward Shift: This is an indicator of a decrease in demand when the price remains constant but owing to unfavourable changes in
determinants other than price.

Key Differences Between Movement and Shift in Demand Curve

The points given below are noteworthy so far as the difference between movement and shift in demand curve is concerned:
1. When the commodity experience changes in both the quantity demanded and price, causing the curve to move in a specific direction, it
is known as movement in demand curve. On the other hand, When, the price of the commodity remains constant but there is a change
in quantity demanded due to some other factors, causing the curve to shift in a particular side, it is known as shift in demand curve.
2. Movement in demand curve, occurs along the curve, whereas, the shift in demand curve changes its position due to the change in the
original demand relationship.
3. Movement along a demand curve takes place when the changes in quantity demanded are associated with the changes in the price of
the commodity. On the contrary, a shift in demand curve occurs due to the changes in the determinants other than price i.e. things that
determine buyer’s demand for a good rather than good’s price such as Income, Taste, Expectation, Population, Price of related goods, etc.
 4. Movement along demand curve is an indicator of overall change in the quantity demanded. As against this, a shift in the demand curve represents
a change in the demand for the commodity.
5. Movement of the demand curve can either be upward or downward, wherein the upward movement shows a contraction in demand, while
downward movement shows expansion in demand. Unlike, shift in the demand curve, can either be rightward or leftward. A rightward shift in
the demand curve shows an increase in the demand, whereas a leftward shift indicates a decrease in demand.
Figure
Movement in Demand Curve

Upward movement of the curve from A to C represents a contraction of demand due to the increase in the price of the commodity from P to P2.
Downward movement of the curve from A to B denotes the expansion of demand due to the reduction in prices of the commodity from P to P1.
Shift in Demand Curve
Price remains unchanged, the rightward shift of the demand curve from D to D1 is termed as an increase in demand, as demand goes up from Q to Q1. The
leftward shift of the demand curve from D to D2 is known as a decrease in demand, as demand goes down from Q to Q2.

Conclusion
Therefore, with the overall discussion, you might have understood, that a movement and shift in the demand curve are two different changes. Movement in
the curve is caused by the variables present on the axis, i.e., price and quantity demanded. On the flip side, a shift in the curve is because of the factors which
are other than those present on the axis, such as competitors’ price, taste, expectations and so on.

QUESTIONS
Q1: Explain Law of Supply.
Ans: What is the Law of Supply?
The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or
services that suppliers offer will increase, and
vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for
sale.
Understanding the Law Of Supply
The chart below depicts the law of supply using a supply curve, which is upward sloping. A, B and C are points on the supply curve. Each point on the curve
reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on.

The supply curve is upward sloping because, over time, suppliers can choose how much of their goods to produce and later bring to market. At any given
point in time however, the supply that sellers bring to market is fixed, and sellers simply face a decision to either sell or withhold their stock from a sale;
consumer demand sets the
price and sellers can only charge what the market will bear. If consumer demand rises over time, the price will rise, and suppliers can choose devoted new
resources to production (or new suppliers can enter the market) which increases the quantity supplied.
Demand ultimately sets the price in a competitive market, supplier response to the price they can expect to receive sets the quantity supplied.
The law of supply is one of the most fundamental concepts in economics. It works with the law of demand to explain how market economies allocate
resources and determine the prices of goods and services.
Practical Examples of How Supply Works
The law of supply summarizes the effect price changes have on producer behavior.
For example, a business will make more video game systems if the price of those systems increases. The opposite is true if the price of video game systems
decreases. The company might supply 1 million systems if the price is $200 each, but if the price increases to $300, they might supply 1.5 million systems.
To further illustrate this concept, consider how gas prices work. When the price of gasoline rises, it encourages profit-seeking firms to take several actions:
expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline;
build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas
stations open longer hours.
The law of supply is so intuitive that you may not even be aware of all the examples around you.
  When college students learn that computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer
engineering will increase.
 When consumers start paying more for cupcakes than for donuts, bakeries will increase their output of cupcakes and reduce their output of donuts in
order to increase their profits.
 When your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases.

Q2: Discuss few determinants of supply.

Ans: 1. The cost of factors of production: Cost depends on the price of factors. Increase in factor cost increases the cost of production, and reduces
supply.

2. The state of technology: Use of advanced technology increases productivity of the organization and increases its supply.

3. External factors: External factors like weather influence the supply. If there is a flood, this reduces supply of various agricultural products.

4.Tax and subsidy: Increase in government subsidies results in more production and higher supply.

5. Transport: Better transport facilities will increase the supply.

 6. Price: If the prices are high, the sellers are willing to supply more goods to increase their profit.

7. Price of other goods: The price of other goods is more than ‘X’
then the supply of ‘X’ will be increased.

Q3: Discuss Elasticity of supply.

Ans: Elasticity of supply of a commodity is defined as the responsiveness of a quantity supplied to a unit change in price of that commodity.

Kinds Of Supply Elasticity

Price elasticity of supply: Price elasticity of supply measures

the responsiveness of changes in quantity supplied to a change in price.

Perfectly inelastic: If there is no response in supply to a change in price. (Es = 0)

 Inelastic supply: The proportionate change in supply is less than the change in price (Es =0-1)

Unitary elastic: The percentage change in quantity supplied equals the change in price (Es=1)

Elastic: The change in quantity supplied is more than the change in price (Ex= 1- ∞)

Perfectly elastic: Suppliers are willing to supply any amount at a given price (Es=∞)

The major determinants of elasticity of supply are availability of substitutes in the market and the time period, Shorter the period higher will
be the elasticity.

Factors Influencing Elasticity Of Supply

1.Nature of the commodity: If the commodity is perishable in nature then the elasticity of supply will be less. Durable goods have high elasticity
of supply.

2.Time period: If the operational time period is short then supply is inelastic. When the the production process period is longer the elasticity of
supply will be relatively elastic.

3. Scale of production: Small scale producer’s supply is inelastic in

nature compared to the large producers.

4. Size of the firm and number of products: If the firm is a large

 scale industry and has more variety of products then it can easily transfer the resources. Therefore supply of such products is highly elastic.

5.Natural factors: Natural calamities can affect the production of agricultural products so they are relatively inelastic.
6. Nature of production: If the commodities need more workmanship, or for artistic goods the elasticity of supply will be high.

Apart from the above-mentioned factors future expectations of the market, natural resources of the country and government controls can also play
a role in determining supply of a good. In the long run, supply is affected by cost of production. If costs are rising, some of the existing producers
may with draw from the field and new entrepreneurs may be scared of entering the field.

QUESTIONS
Q1: Explain consumer demand and price.
Ans: Consumer demand and price
Consumer demand is defined as the ‘..willingness and ability of consumers to purchase a quantity of goods and services in a given period of time, or at a given point
in time..’. Merely being willing to make a purchase does not constitute effective demand – willingness must be supported by an ability to pay. In short, desire needs
purchasing power to turn it into effective demand. Purchasing power is determined by current consumer income (or disposable savings) in relation to the current
price level.
The importance of demand
The fundamental assumption in the theory of free markets is that of consumer sovereignty, with consumer demand the dominant market force. Without
demand there would be no sales, or sales revenue, and no profit. The greater the demand, the greater the incentive for entrepreneurs to enter a market,
and the higher the probability that a market will form.
Determinants of demand

Demand schedules
A demand schedule shows the relationship between price and demand over a hypothetical range of prices. For example, the schedule opposite is based on a
survey of college students who indicated how many cans of cola they would buy in a week, at various prices.
PRICE (£) QUANTITY DEMANDED

1.10 0
1.00 100
90 200

80 300
 70 400
60 500
50 600
40 700
30 800

Q2: Explain consumer behaviour - demand analysis. Ans: The Demand Curve
The quantity of a particular good or service that a consumer or group of consumers want to purchase at a given price is termed as demand. It is the
consumer’s ability or willingness to buy a specific product.

As shown in the figure, the demand curve is downward sloping which means the consumers will buy more when the price decreases and the same
consumers will buy less when the price increases.
It is not only price, the demand for a good or a service is also influenced by other factors such as the price of substitute goods and complementary
goods.
Determinants of Demand
The key determinants that affect the demand function are as follows −
 Income − A rise in consumer’s income will tend to increase the demand curve (shift the demand curve to the right). A fall will tend to
decrease the demand for normal goods.
 Consumer Preferences − Favorable change leads to an increase
in demand, unfavorable change leads to a decrease in demand.
 Number of Buyers − More the number of buyers, more will be
the demand. Fewer buyers lead to a decrease in demand.
 Substitute Goods (goods that can be used to replace each other) − The price of substitutes and demand for the other
good are directly related. Example − If the price of coffee rises,
the demand for tea will also rise.
 Complementary Goods (goods that can be used together) − The prices of complementary goods and their demand are inversely related.
Example − if the price of printer increases, the demand for computer sheets will decrease.
Demand Function
The demand function relates to the price and quantity. It shows how many units of a good will be purchased at different prices. At higher prices, less
quantity will be purchased.
The graphical representation of the demand function has a negative (-ve) slope. The market demand function is calculated by totaling up all of the
individual demand functions.
Demand Function of an Individual
The individual demand function has a functional relationship between individual demand and the factors affecting individual demand.
It is expressed as −
 D x x r
= f (P , P , Y, T, F)

Where,
Dx = Commodity Demand x; Px = Commodity x”s price; Pr = Related Goods’ Price;
F = Expectation of Change in Price in future. Y = Consumer’s Income;
T = Tastes and Preferences.

Demand Function of Market

The market demand function has a functional relationship between market demand and the factors affecting market demand.
The market demand function can be expressed as −
Dx = f(Px, Pr, Y, T, F, PD, S, D)
Where,
Dx = Market demand of commodity x; Px = Price of given commodity x;
Pr = Related Goods’ Price; Y = Consumer’s Income;
T = Tastes and Preferences;
F = Expectation of Change in Price in future;
PD = Size and Composition and Size of population; S = Season and Weather;
D = Income Distribution.
 Q3: Discuss consumer buying behaviour.
Ans: Consumer Buying Behavior
Consumer buying behavior is the study of an individual or a household that purchases products for personal consumption. The process of buying
behavior is shown in the following figure −

Stages of Purchasing Process

A consumer undergoes the following stages before making a purchase
decision −
Stage 1 − Needs / Requirements
It is the first stage of the buying process where the consumer recognizes a problem or a requirement that needs to be fulfilled. The requirements can
be generated either by internal stimuli or external stimuli. In this stage,
the marketer should study and understand the consumers to find out what kinds of needs arise, what brought them about, and how they led the
consumer towards a particular product.
Stage 2 − Information Search
In this stage, the consumer seeks more information. The consumer may have keen attention or may go into active information search. The
consumer can obtain information from any of the several sources. This include personal sources (family, friends, neighbors, and acquaintances),
industrial sources (advertising, sales people, dealers, packaging), public sources (mass media, consumer-rating and organization), and experiential
sources (handling, examining, using the product). The relative influence of these information sources varies with the product and the buyer.
Stage 3 − Evaluation of Alternatives
In this stage, the consumer uses information to evaluate alternative brands from different alternatives. How consumers go about evaluating
purchase alternatives depends on the individual consumer and the specific buying situation. In some cases, consumers use logical thinking, whereas
in other cases, consumers do little or no evaluating; instead they buy on aspiration and rely on intuition. Sometimes consumers make buying
decisions on their own; sometimes they depend on friends, relatives, consumer guides, or sales persons.
Stage 4 − Purchase Decision
In this stage, the consumer actually buys the product. Generally, a consumer will buy the most favorite brand, but there can be two factors, i.e.,
purchase intentions and purchase decision. The first factor is the attitude of others and the second is unforeseen situational factors. The consumer
may form a purchase intention based on factors such as usual income, usual price, and usual product benefits.
Stage 5 − Post-Purchase Behavior
In this stage, the consumers take further steps after purchase based on their satisfaction and dissatisfaction. The satisfaction and dissatisfaction depend
on the relationship between consumer’s expectations and the product’s performance. If a product is short of expectations, the consumer is
disappointed. On the other hand, if it meets their expectations, the consumer is satisfied. And if it exceeds their expectations, the consumer
is delighted.
The larger the gap between the consumers’ expectations and the product’s performance, the greater will be the consumer’s dissatisfaction.
This suggests that the seller should make product claims that faithfully
represent the product’s performance so that the buyers are satisfied.
Consumer satisfaction is important because the company’s sales come from two basic groups, i.e., new customers and retained customers. It usually
costs more to attract new customers than to retain existing customers and the best way to retain them is to get them satisfied with the product.
Marketing concepts focus on finding right products for the customers instead of finding right customers for the products. It is based on four pillars −
target market, customer requirements, incorporated market, and profitability. Marketing concepts start with a well-defined market, focus on customer
needs, co-ordinate all the inter-related activities that will affect customers, and increase the profits by bringing more satisfied customers.

Market concept focuses on achieving organizational goal by creating a company that is more effective and efficient than competitors by creating,
delivering, and communicating customer value to its selected target markets.
Production Concept
According to production concept, consumers prefer to buy those products that are widely available and inexpensive. Executives of production-
oriented businesses usually concentrate on achieving high production efficiency, low cost, and mass distribution for effective results. Consumers
are interested more in product availability and low prices. This type of business orientation is effective in developing countries.

Example − Local mobile companies in developing countries provide cell phones at much cheaper cost than the branded companies and due to
this, people in these countries prefer to purchase cell phones from them.

Product Concept
According to product concept of business, consumers favor those products that provide them better quality, performance and innovative
features.
Managers in product-oriented organizations mainly focus on making superior products and improving them time to time. In product concept, it
is considered that the consumers are aware of the quality of the products and they have an ability to evaluate good quality and performance.

Selling Concept
According to the selling concept, consumers, if left on their own, will usually not buy enough. An organization must therefore integrate an
aggressive selling and promotional effort to get a competitive edge in the market. According to this concept, the company constitutes effective
selling and promotion tools in order to encourage more buying.

The purpose of marketing is to sell more things to more people, more regularly, in order to make more profit.
 Customer Concept
According to the customer concept, companies focus on individual customers. They provide individual offers, services, and establish direct
channels of communication with them. These companies collect information on each customer's past transactions, demographics, media and
supply preferences. They believe in profitable growth by capturing a large share of each customer’s expenditure by building high customer loyalty
and customer lifetime value.

QUESTIONS
Q1: Price Elasticity of Demand and Price Elasticity of Supply. Explain.
Ans: Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the
ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price
elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price
elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the
elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to
price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or
supply, as (Figure) summarizes.
Before we delve into the details of elasticity, enjoy this article on elasticity and ticket prices at the Super Bowl.
To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and
price. This is called the Midpoint Method for Elasticity, and is represented in the following equations:

The advantage of the Midpoint Method is that one obtains the same elasticity between two price points whether there is
a price increase or decrease. This is because the formula uses the same base (average quantity and average price) for
both cases.
Calculating Price Elasticity of Demand
Let’s calculate the elasticity between points A and B and between points G and H as (Figure) shows.
Calculating the Price Elasticity of Demand
 We calculate the price elasticity of demand as the percentage change in quantity divided by the percentage change in price.

Therefore, the elasticity of demand between these two points is 6.9– 15.46.9–15.4 which is 0.45, an amount smaller than one, showing
that the demand is inelastic in this interval. Price elasticities of demand
are always negative since price and quantity demanded always move in opposite directions (on the demand curve). By convention, we
always talk about elasticities as positive numbers. Mathematically, we take the absolute value of the result. We will ignore this detail from
now on, while remembering to interpret elasticities as positive numbers.
This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by
0.45%. A
change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a
4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded. Price elasticities of
demand are negative numbers indicating that the demand curve is downward sloping, but we read them as absolute values. The following Work It Out
feature will walk you through calculating the price elasticity of demand.
Finding the Price Elasticity of Demand
Calculate the price elasticity of demand using the data in (Figure) for an increase in price from G to H. Has the elasticity increased or decreased?

Therefore, the elasticity of demand from G to is H 1.47. The magnitude of the elasticity has increased (in absolute value) as we moved up along the
demand curve from points A to B. Recall that the elasticity between these two points was 0.45. Demand was inelastic between points A and B and
elastic between points G and H. This shows us that price elasticity of demand changes at different points along a straight-line demand curve.

Calculating the Price Elasticity of Supply

Assume that an apartment rents for ?650 per month and at that price the landlord rents 10,000 units are
rented as (Figure) shows. When the price increases to ?700 per month, the landlord supplies 13,000 units into
the market. By what percentage does apartment supply increase? What is the price sensitivity?

Price Elasticity of Supply

We calculate the price elasticity of supply as the percentage change in quantity divided by the percentage
change in price.
Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another
percentage change—nothing more—and we read it as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. The
greater than one elasticity of supply means that the percentage change in quantity supplied will be greater than a one percent price change. If you’re starting
to wonder if the concept of slope fits into this calculation, read the following Clear It Up box.

Is the elasticity the slope?

It is a common mistake to confuse the slope of either the supply or demand curve with its elasticity. The slope is the rate of change in units along the curve, or
the rise/run (change in y over the change in x). For example, in (Figure), at each point shown on the demand curve, price drops by ?10 and the number of units
demanded increases by 200 compared to the point to its left. The slope is –10/200 along the entire demand curve and does not change. The price elasticity,
however, changes along the curve. Elasticity between points A and B was 0.45 and increased to 1.47 between points G and H. Elasticity is the percentage
change, which is a different calculation from the slope and has a different meaning.

When we are at the upper end of a demand curve, where price is high and the quantity demanded is low, a small change in the quantity demanded, even in,
say, one unit, is pretty big in percentage terms. A change in price of, say, a dollar, is going to be much less important in percentage terms than it would have
been at the bottom of the demand curve. Likewise, at the bottom of the demand curve, that one unit change when the quantity demanded is high will be
small as a percentage.
Thus, at one end of the demand curve, where we have a large percentage change in quantity demanded over a small percentage change in price, the
elasticity value would be high, or demand would be relatively elastic. Even with the same change in the price and the same change in the
quantity demanded, at the other end of the demand curve the quantity is much higher, and the price is much lower, so the percentage
change in quantity demanded is smaller and the percentage change in price is much higher.
That means at the bottom of the curve we’d have a small numerator over a large denominator, so the elasticity measure would be much
lower, or inelastic.
As we move along the demand curve, the values for quantity and price go up or down, depending on which way we are moving, so the
percentages for, say, a ?1 difference in price or a one unit difference in quantity, will change as well, which means the ratios of those
percentages and hence the elasticity will change.
Key Concepts and Summary
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. We compute it as the
percentage change in quantity demanded (or supplied) divided by the percentage change in price. We can describe elasticity as elastic (or very
responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied
respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change
in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change
in price leads to an equal percentage change in quantity demanded or supplied.

Q2: What Factors Influence a Change in Supply Elasticity?

Ans: Supply elasticity is a measure of the responsiveness of an industry or a producer to changes in demand for its product. The availability of
critical
resources, technology innovation, and the number of competitors producing a product or service also are factors.
Understanding Elasticity of Supply
Elasticity of supply is a measure of a producer's ability to cope effectively with changes in demand. A number of factors can affect it.
 Availability of resources is a factor. If a company depends on an increasingly scarce resource to produce its product, it may be unable to step up
production when demand increases. Moreover, the resource will become increasingly expensive, forcing a corresponding increase in the producer's price
or decrease in its production, or both.
 Technology innovation is a factor in many industries. More efficient production reduces costs and allows for larger production numbers at lower
prices.
 The number of competitors is a factor. An increase in the number of suppliers makes the price of a product or service more elastic. If one supplier
can't meet demand, others will rush to fill the gap.
 Flexibility is a big factor. If a resource becomes scarce, can another resource be substituted? Can production be ramped up quickly in response to
greater demand? Efficient producers can respond more quickly to increased demand.

Factoring in Price Elasticity

The price of any product or service also is elastic or inelastic in relation to its supply. This is determined by measuring the percentage change in its supply
and the percentage change in its price over a period of time. Dividing the change in supply by the change in price results in a numerical value. If that
number is more
than one, the product shows price elasticity. If it is less than one, the product is inelastic.
If supply is elastic, so is price. A greater supply of a product or service reduces its cost. A scarcer supply forces prices up.

The most notorious example of price elasticity may be seen in the price of gasoline at the pump. In 2008, demand for fuel soared worldwide, with big
increases in developing nations like China. A government chart shows that the price of crude increased to above
$3 per gallon, while the price to American consumers increased to more than $4 per gallon. With increases in production and inventories, prices fell off a
cliff. By early 2009, the price of crude was below $1 per gallon and the price to consumers was under $1.75.
The price of gasoline is elastic. That is, consumers must buy it no matter what the price is. Its supply is also elastic. If demand increases, the industry
will increase production to meet it.

Q3: What are major factors affecting elasticity of demand of a commodity?

Ans: Some of the major factors affecting the elasticity of demand of a commodity are as follows:
A change in price does not always lead to the same proportionate change in demand. For example, a small change in price of AC may affect its demand to
a considerable extent/whereas, large change in price of salt may not affect its demand. So, elasticity of demand is different for different goods.
Various factors which affect the elasticity of demand of a commodity are:
1. Nature of commodity:
Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be a necessity, a comfort or a luxury.

i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is generally inelastic as it is required for
human survival and its demand does not fluctuate much with change in price.
ii.When a commodity is a comfort like fan, refrigerator, etc., its demand is generally elastic as consumer can postpone its
consumption.
iii.When a commodity is a luxury like AC, DVD player, etc., its demand is generally more elastic as compared to demand for
comforts.
iv.The term ‘luxury’ is a relative term as any item (like AC), may be a luxury for a poor person but a necessity for a rich person.
2.Availability of substitutes:
Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices
will induce the buyers to go for its substitutes. For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-
versa. Thus, availability of close substitutes makes the demand sensitive to change in the prices. On the other hand, commodities
with few or no substitutes like wheat and salt have less price elasticity of demand.
3.Income Level:
Elasticity of demand for any commodity is generally less for higher income level groups in comparison to people with low
incomes. It happens because rich people are not influenced much by changes in the price of goods. But, poor people are highly
affected by increase or decrease in the price of goods. As a result, demand for lower income group is highly elastic.
4.Level of price:
Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV, etc. have highly elastic demand as
their demand is very sensitive to changes in their prices. However,
demand for inexpensive goods like needle, match box, etc. is inelastic as change in prices of such goods do not change their demand by a
considerable amount.
5.Postponement of Consumption:
Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic demand as their consumption can be postponed in case of
an increase in their prices. However, commodities with urgent demand like life saving drugs, have inelastic demand because of their immediate
requirement.
6.Number of Uses:
If the commodity under consideration has several uses, then its demand will be elastic. When price of such a commodity increases, then it is generally
put to only more urgent uses and, as a result, its demand falls. When the prices fall, then it is used for satisfying even less urgent needs and demand
rises.
For example, electricity is a multiple-use commodity. Fall in its price will result in substantial increase in its demand, particularly in those uses (like AC,
Heat convector, etc.), where it was not employed formerly due to its high price. On the other hand, a commodity with no or few alternative uses has
less elastic demand.
7.Share in Total Expenditure:
Proportion of consumer’s income that is spent on a particular commodity also influences the elasticity of demand for it. Greater the proportion of
income spent on the commodity, more is the elasticity of demand for it and vice-versa.
Demand for goods like salt, needle, soap, match box, etc. tends to be inelastic as consumers spend a small proportion of their income on such goods.
When prices of such goods change, consumers continue to purchase almost the same quantity of these goods. However, if
the proportion of income spent on a commodity is large, then demand for such a commodity will be elastic.

8.Time Period:
Price elasticity of demand is always related to a period of time. It can be a day, a week, a month, a year or a period of several years.
Elasticity of demand varies directly with the time period. Demand is generally inelastic in the short period.
It happens because consumers find it difficult to change their habits, in the short period, in order to respond to a change in the price of the given
commodity. However, demand is more elastic in long rim as it is comparatively easier to shift to other substitutes, if the price of the given commodity rises.
9.Habits:
Commodities, which have become habitual necessities for the consumers, have less elastic demand. It happens because such a commodity becomes a
necessity for the consumer and he continues to purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples of habit-forming
commodities.
Finally, it can be concluded that elasticity of demand for a commodity is affected by number of factors. However, it is difficult to say, which particular factor
or combination of factors determines the elasticity. It all depends upon circumstances of each case.
QUESTIONS

Q1: Do you feel that demand forecasting is crucial for today's business environment? Why?
Ans: Demand Forecasting:
Demand forecasting is the act of using various methods to determine what amount of demand a product will face in the future. Demand can be forecasted
mathematically and by looking at the business environment.
Yes, demand forecasting is crucial for today's business environment.
In today's highly competitive business environment, it is crucial for all businesses to forecast the demand that they are likely to face. This allows them to stay
ahead of the competition by providing to consumers whenever consumers show an increased demand.
At the same time, demand forecasting also helps to avoid overproduction. Because of this, unnecessary costs can be avoided.

Q2: What is The Right level To Forecast At?

ANS: Determination of the forecast keys ultimately needs to be tied to the organizational processes that demand forecasting serves.
Historically, demand forecasting has been established along the product, location and period dimensions. It is important to evaluate multiple options that will
achieve greater forecast accuracy:
o You might find that you can produce more accurate results when generating forecasts at the lowest level by having your model capture true consumer
demand signals. In this case you can roll such forecasts up to the needed level.
 o On the other side, due to sparsity of data, you might learn that forecasting at the higher level is a better option. In this case, to serve your downstream purposes,
you can spread the data to the required level.
It is essential to revisit these decisions on a periodic basis. With marketing incentives being tied to CRM outputs, customer segment might be an important
dimension for demand forecasting. In an omnichannel setting, you might find that extending your location dimension to geographic area might add more value.
Therefore, continue to assess demand shaping activities and adjust your forecasting process accordingly.

Q3: Explain Demand forecasting.

Ans: Demand forecasting is a combination of two words; the first one is Demand and another forecasting. Demand means outside requirements of a product or
service. In general, forecasting means making an estimation in the present for a future occurring event.
Here we are going to discuss demand forecasting and its usefulness.
Demand Forecasting
It is a technique for estimation of probable demand for a product or services in the future. It is based on the analysis of past demand for that product or service in
the present market condition. Demand forecasting should be done on a scientific basis and facts and events related to forecasting should be considered.

Therefore, in simple words, we can say that after gathering information about various aspect of the market and demand based on the past, an attempt may be made
to estimate future demand. This concept is called forecasting of demand.
For example, suppose we sold 200, 250, 300 units of product X in the month of January, February, and March respectively. Now we can say that there
will be a demand for 250 units approx. of product X in the month of April, if the market condition remains the same.
Usefulness of Demand Forecasting
Demand plays a vital role in the decision making of a business. In competitive market conditions, there is a need to take correct decision and make
planning for future events related to business like a sale, production, etc. The effectiveness of a decision taken by business managers depends upon the
accuracy of the decision taken by them.
Demand is the most important aspect for business for achieving its objectives. Many decisions of business depend on demand like production, sales,
staff requirement, etc. Forecasting is the necessity of business at an international level as well as domestic level.
Demand forecasting reduces risk related to business activities and helps it to take efficient decisions. For firms having production at the mass level, the
importance of forecasting had increased more. A good forecasting helps a firm in better planning related to business goals.

There is a huge role of forecasting in functional areas of accounting. Good forecast helps in appropriate production planning, process selection, capacity
planning, facility layout planning, and inventory management, etc.

Demand forecasting provides reasonable data for the organization’s capital investment and expansion decision. It also provides a way for the formulation
of suitable pricing and advertisement strategies.
Following is the significance of Demand Forecasting:
 Fulfilling objectives of the business
 Preparing the budget
 Taking management decision
 Evaluating performance etc.
Moreover, forecasting is not completely full of proof and correct. It thus helps in evaluating various factors which affect demand and enables management
staff to know about various forces relevant to the study of demand behaviour.
The Scope of Demand Forecasting
The scope of demand forecasting depends upon the operated area of the firm, present as well as what is proposed in the future.
Forecasting can be at an international level if the area of operation is international. If the firm supplies its products and services in the local market then
forecasting will be at local level.
The scope should be decided considering the time and cost involved in relation to the benefit of the information acquired through the study of demand.
Cost of forecasting and benefit flows from such forecasting should be in a balanced manner.
Types of Forecasting
There are two types of forecasting:
 Based on Economy
 Based on the time period
1.Based on Economy
There are three types of forecasting based on the economy:

 Macro-level forecasting: It deals with the general economic environment relating to the economy as measured by the Index
 of Industrial Production(IIP), national income and general level of employment, etc.
 Industry level forecasting: Industry level forecasting deals with the demand for the industry’s products as a whole. For example demand for cement in
India, demand for clothes in India, etc.
 Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For example, demand for Birla cement, demand for Raymond
clothes, etc.

2.Based on the Time Period

Forecasting based on time may be short-term forecasting and long- term forecasting
 Short-term forecasting: It covers a short period of time, depending upon the nature of the industry. It is done generally for six months or less than one
year. Short-term forecasting is generally useful in tactical decisions.
 Long-term forecasting casting: Long-term forecasts are for a longer period of time say, two to five years or more. It gives information for major
strategic decisions of the firm. For example, expansion of plant capacity, opening a new unit of business, etc.
Q1: Define Average Product (AP) and Marginal Product (MP). And How do total product, average product and marginal product change due to a change in the
use of one input, keeping other inputs constant?
Ans: AP is the total product per unit of a variable input. MP is the change in total product consequent upon a change in variable input.
For simplicity, we are assuming that labour is the only variable input while other inputs are constant. Now, if number of labourers is increased with fixed inputs,
initially total product (TP), average product (AP) and marginal product (MP) will increase as TP increases at an increasing rate.
Further employment of labour will cause TP to increase at a diminishing rate. Consequently, AP and MP will decline. When TP becomes maximum, MP becomes
zero. Now, more employment of labour will lead to a fall in TP and MP will be negative.

Q2: Explain theory of production.

Ans: Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its
“outputs” or “products”) it will produce, and how much of each kind of labour, raw material, fixed capital
good, etc., that it employs (its “inputs” or “factors of production”) it will use. The theory involves some of the most fundamental principles of economics. These
include the relationship between the prices of commodities and the prices (or wages or rents) of the productive factors used to produce them and also the
relationships between the prices of commodities and productive factors, on the one hand, and the quantities of these commodities and productive factors that
are produced or used, on the other.
The various decisions a business enterprise makes about its productive activities can be classified into three layers of increasing complexity. The first layer includes
decisions about methods of producing a given quantity of the output in a plant of given size and equipment. It involves the problem of what is called short-run cost
minimization. The second layer, including the determination of the most profitable quantities of products to produce in any given plant, deals with what is called short-
run profit maximization. The third layer, concerning the determination of the most profitable size and equipment of plant, relates to what is called long-run profit
maximization.
Minimization of short-run costs The production function
However much of a commodity a business firm produces, it endeavours to produce it as cheaply as possible. Taking the quality of the product and the prices of the
productive factors as given, which is the usual situation, the firm’s task is to determine the cheapest combination of factors of production that can produce the desired
output. This task is best understood in terms of what is called the production function, i.e., an equation that expresses the relationship between the quantities of factors
employed and the amount of product obtained. It states the amount of product that can be obtained from each and every combination of factors. This relationship can
be written mathematically as y = f (x1, x2, . . ., xn; k1, k2, . . ., km). Here, y denotes the quantity of output. The firm is presumed to use n variable factors of production; that
is, factors like hourly paid production workers and raw materials, the quantities of which can be increased or decreased. In the formula the quantity of the first variable
factor is denoted by x1 and so on. The firm is also presumed to use m fixed factors, or factors like fixed machinery, salaried staff, etc., the quantities of which cannot be
varied readily or habitually. The available quantity of the first fixed factor is indicated
in the formal by k1 and so on. The entire formula expresses the amount of output that results when specified quantities of factors are employed. It must be noted that though the quantities of the
factors determine the quantity of output, the reverse is not true, and as a general rule there will be many combinations of productive factors that could be used to produce the same output. Finding
the cheapest of these is the problem of cost minimization.
The cost of production is simply the sum of the costs of all of the various factors. It can be written:

in which p1 denotes the price of a unit of the first variable factor, r1 denotes the annual cost of owning and maintaining the first fixed factor, and so on. Here again one group of terms, the first,
covers
variable cost (roughly“direct costs” in accounting terminology), which can be changed readily; another group, the second, covers fixed cost (accountants’ “overhead costs”), which includes items not
easily varied. The discussion will deal first with variable cost.
The principles involved in selecting the cheapest combination of variable factors can be seen in terms of a simple example. If a firm manufactures gold necklace chains in such a way that there are
only two variable factors, labour (specifically, goldsmith-hours) and gold wire, the production function for such a firm will be y = f (x1, x2; k), in which the symbol k is included simply as a reminder
that the number of chains producible by x1 feet of gold wire and x2 goldsmith-hours depends on the amount of machinery and other fixed capital available. Since there are only two variable factors,
this production function can be portrayed graphically in a figure known as an isoquant diagram (Figure 1). In the graph, goldsmith-hours per month are plotted horizontally and the number of feet of
gold wire used per month vertically. Each of the curved lines, called an isoquant, will then represent a certain number of necklace chains
produced. The data displayed show that 100 goldsmith-hours plus 900 feet of gold wire can produce 200 necklace chains. But there are
other combinations of variable inputs that could also produce 200 necklace chains per month. If the goldsmiths work more carefully
and slowly, they can produce 200 chains from 850 feet of wire; but to produce so many chains more goldsmith-hours will be required,
perhaps 130. The isoquant labelled “200” shows all the combinations of the variable inputs that will just suffice to produce 200 chains.
The other two isoquants shown are interpreted similarly. It is obvious that many more isoquants, in principle an infinite number, could
also be drawn. This diagram is a graphic display of the relationships expressed in the production function.

Figure 1: Isoquant diagram of hours of labour and feet of gold wire used per month

Substitution of factors
The isoquants also illustrate an important economic phenomenon: that of factor substitution. This means that one variable factor can
be substituted for others; as a general rule a more lavish use of one variable factor will permit an unchanged amount of output to be
produced with fewer units of some or all of the others. In the example above, labour was literally as good as gold and could be
substituted for it. If it were not for factor substitution there would be no room for further decision after y, the number of chains to be
produced, had been established.
The shape of the isoquants shown, for which there is a good deal of empirical support, is very important. In moving along any one isoquant, the
more of one factor that is employed, the less of the other will be needed to maintain the stated output; this is the graphic representation of factor
substitutability. But there is a corollary: the more of one factor that is employed, the less it will be possible to reduce the use of the other by using
more of the first.
This is the property known as “diminishing marginal rates of substitution.” The marginal rate of substitution of factor 1 for factor 2 is the number of
units by which x1 can be reduced per unit increase in x, output remaining unchanged. In the diagram, if feet of gold wire are indicated by x1 and
goldsmith-hours by x2, then the marginal rate of substitution is shown by the steepness (the negative of the slope) of the isoquant; and it will be seen
that it diminishes steadily as x2 increases because it becomes harder and harder to economize on the use of gold simply by taking more care. The
remainder of the analysis rests heavily on the assumption that diminishing marginal rates of substitution are characteristic of the production process
generally.
The cost data and the technological data can now be brought together. The variable cost of using x1, x2 units of the factors of production is written
p1x1 + p2x2, and this information can be added to the isoquant diagram (Figure 2). The straight line labelled v2, called the v2-isocost line, shows all
the combinations of input that can be purchased for a specified variable cost, v2. The other two isocost lines shown are interpreted similarly. The
general formula for an isocost line is p1x1 + p2x2 = v, in which v is some particular variable cost. The slope of an isocost line is found by dividing p2 by
p1 and depends only on the ratio of the prices of the two factors.
 Figure 2: Isoquant diagram for two factors of
production, x1 and x2 (

Three isocost lines are shown, corresponding to variable costs amounting to v1, v2, and v3. If 200 units are to be produced, expenditure of v1 on variable
factors will not suffice since the v1- isocost line never reaches the isoquant for 200 units. An expenditure of v3 is more than sufficient; and v2 is the lowest
variable cost for which 200 units can be produced. Thus v2 is found to be the minimum variable cost of producing 200 units (as v3 is of 300 units) and the
coordinates of the point where the v2 isocost line touches the 200-unit isoquant are the quantities of the two factors that will be used when 200 units are
to be produced and the prices of the two factors are in the ratio p2/p1. It may be noted that the cheapest combination for the production of any quantity
will be found at the point at which the relevant isoquant is tangent to an isocost line.
Thus, since the slope of an isoquant is given by the marginal rate of substitution, any firm trying to produce as cheaply as possible will always purchase
or hire factors in quantities such that the marginal rate of substitution will equal the ratio of their prices.

The isoquant–isocost diagram (or the corresponding solution by the alternative means of the calculus) solves the short-run cost minimization problem by
determining the least-cost combination of variable factors that can produce a given output in a given plant. The variable cost incurred when the least-cost
combination of inputs is used in conjunction with a given outfit of fixed equipment is called the variable cost of that quantity of output and denoted
VC(y). The total cost incurred, variable plus fixed, is the short-run cost of that output, denoted SRC(y). Clearly SRC(y) = VC(y) + R(K), in which the
 second term symbolizes the sum of the annual costs of the fixed factors available.

QUESTIONS
Q1: Explain cost analysis.
Ans: Costs
Companies incur costs in many ways. Costs result from the production of goods, the purchase of inventory, the operating of the business, and the purchase of assets.
These costs include the fixed and variable costs associated with production, depreciation and investment costs, and general and administrative costs. Costs also
include opportunity costs, sunk costs and marginal costs. Cost analysis identifies and investigates the sources and components of these costs. Cost analysis has several
different names, including cost allocation, cost-benefit analysis and cost-effectiveness analysis.
What Cost Analysis Reveals
Cost analysis helps a company determine the expected costs and benefits of a particular asset, new product, or plan of action before it makes the requisite
investment. An in-depth cost analysis can reveal hidden costs embedded in a company's normal way of doing business and the unanticipated costs of certain actions.
Identifying and then stripping out costs can help a company increase its profitability and long-term viability. Cost analysis also aids companies in changing their
service and product delivery procedures to those that are more cost-efficient and effective.
Q2: Explain Revenue analysis.
Ans: Revenues
Companies generate revenues from sales of their products and services. To generate more revenues, companies can increase the prices of existing products
and services, offer add-on services for an additional price, or introduce new products or services at a higher price point. Companies can also increase
revenues by increasing the quantity sold. Firms accomplish this by lowering prices or increasing their marketing efforts to stimulate demand.
What Revenue Analysis Reveals
Revenue analysis helps companies determine how to increase their revenues significantly. When combined with cost analysis, it helps companies do this
while keeping costs at a minimum. Revenue analysis aids companies in assessing which course of action produces the highest increase in revenue with the
least effort. For example, a company determines that it takes a series of press releases, website testimonials, and well-placed classified ads to drastically
increase sales of a particular product, but it also determines that adding a low-cost add-on to a higher priced service would have the same effect.
Break-Even
The break-even point for a product or service occurs when revenue generated by the product equals the costs incurred in producing, selling and delivering
the product. Break-even analysis blends cost and revenue analysis to help companies determine if a new product or service makes financial sense. While
companies may focus solely on cost analysis for the purpose of cost reduction, most companies use revenue analysis combined with cost analysis to choose
the revenue option that produces the most profit.
QUESTIONS
Q1: Explain different types of market structures.
Ans: Four Types of Market Structures
The purpose is to build an understanding of the importance of market structure. Such market structures refer to the level of competition in a market. Four types of
market structures are perfect competition, monopolistic competition, oligopoly, and monopoly.
One thing we should remember is that not all these types of market structures exist. Some of them are just theoretical concepts. There are other determinants of
market structures such as the nature of the goods and products, the number of sellers, the number of consumers, the nature of the product or service, economies of
scale, etc.
Explain Different Types of Market Structures
The different types of market structures are explained as follows:
I . Perfect competition market structure: In a perfectly competitive market, the forces of supply and demand determine the number of goods and services produced
as well as market prices set by the companies in the market.
2.Monopolistic competition market structure: Unlike perfect competition, monopolistic competition does not assume the lowest possible cost production. That little
difference in the definition leaves room for huge differences in how the companies operate in the market. The companies under a monopolistic competition structure
sell very similar products with slight differences they use as the basis of their marketing and advertising.
3.Monopoly competition market structure: Monopolies and completely competitive markets sit at either end of market structure extremes. However, both minimize
cost and maximize profit. Where
there are many competitors in perfect competition, in monopolistic markets, there's just one supplier. High barriers to entry into the monopoly market leave a
"mono-" or lone company standing so there is no price competition. The supplier is the price-maker, setting a price that increases profits.
4.Oligopoly competition market structure: Not all companies aim to sit as a single building in a city. Oligopolies have companies that collaborate, or work
together, to limit competition and dominate a different market or industry. The companies under oligopoly market structures can be small or large. However,
the most powerful firms often have patents, finance, physical resources which control over raw materials that create barriers to entry for new firms.
Four Types of Market Structure and Examples
As we learnt the four types of market structure and examples above, now we are going to know their examples.
Examples of Perfect Competition Market Structure:
 Foreign exchange markets.
 Agricultural markets.
• Internet-related industries.
Examples of Monopolistic Competition Market Structure:
 Restaurants
 Hairdressers
• Clothing
• TV programmes

Types of Market Structure Economics

The four types of market structure economics differ because of the following characteristics:
 • The number of producers is huge in the perfect and monopolistic competition.
• There are only few in oligopoly, and one in monopoly.
• The degree of product differentiation.
• The barriers to entry of new producers
• The pricing power of the producer
• The level of non-price competition (e.g., advertising) are all low in perfect competition, highest in monopoly, moderate in monopolistic
competition and high in oligopoly.

Q2: How will you Define Market Structures in Economics?

Answer: The market structure is best defined as the organizational and other characteristics of a market. We focus on those characteristics which affect the
nature of competition and pricing, but it is important not to place too much force simply on the market share of the existing firms in an industry. Generally,
the term "market" refers to a particular place where goods are purchased and sold, but, in economics, the market is used in a wide perspective.
Market structure in economics refers to the degree and nature of competition in the market for goods and services. The structures of
the market both for goods and services are determined by the nature of competition prevailing in a particular market.

Q3: Explain market structure.

Ans: Market structure refers to the nature and degree of competition in the market for goods and services. The structures of market both for goods market
and service (factor) market are determined by the nature of competition prevailing in a particular market.
Meaning of Market:
Ordinarily, the term “market” refers to a particular place where goods are purchased and sold. But, in economics, market is used in a wide
perspective. In economics, the term “market” does not mean a particular place but the whole area where the buyers and sellers of a product are
spread.
This is because in the present age the sale and purchase of goods are with the help of agents and samples. Hence, the sellers and buyers of a
particular commodity are spread over a large area. The transactions for commodities may be also through letters, telegrams, telephones, internet,
etc. Thus, market in economics does not refer to a particular market place but the entire region in which goods are bought and sold. In these
transactions, the price of a commodity is the same in the whole market.
According to Prof. R. Chapman, “The term market refers not necessarily to a place but always to a commodity and the buyers and sellers who are in
direct competition with one another.” In the words of A.A. Cournot, “Economists understand by the term ‘market’, not any particular place in which
things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the price of
the same goods tends to equality, easily and quickly.” Prof. Cournot’s definition is wider and appropriate in which all the features of a market are
found.
Characteristics of Market:
The essential features of a market are:
(1)An Area:
In economics, a market does not mean a particular place but the whole region where sellers and buyers of a product ate spread. Modem modes
of communication and transport have made the market area for a product very wide.
(2)One Commodity:
In economics, a market is not related to a place but to a particular product.
Hence, there are separate markets for various commodities. For example, there are separate markets for clothes, grains, jewellery, etc.
(3)Buyers and Sellers:
The presence of buyers and sellers is necessary for the sale and purchase of a product in the market. In the modem age, the presence of buyers
and sellers is not necessary in the market because they can do transactions of goods through letters, telephones, business representatives,
internet, etc.
(4)Free Competition:
There should be free competition among buyers and sellers in the market. This competition is in relation to the price determination of a product
among buyers and sellers.
(5)One Price:
The price of a product is the same in the market because of free competition among buyers and sellers.
On the basis of above elements of a market, its general definition may be as follows:
The market for a product refers to the whole region where buyers and sellers of that product are spread and there is such free competition that
one price for the product prevails in the entire region.
Market Structure:

Meaning:
Market structure refers to the nature and degree of competition in the market for goods and services. The structures of market both for
goods market and service (factor) market are determined by the nature of competition prevailing in a particular market.
Determinants:
There are a number of determinants of market structure for a particular good.
They are:
(1)The number and nature of sellers.
(2)The number and nature of buyers.
(3)The nature of the product.
(4)The conditions of entry into and exit from the market.
(5)Economies of scale.
They are discussed as under:
1.Number and Nature of Sellers:
The market structures are influenced by the number and nature of sellers in the market. They range from large number of sellers in
perfect competition to a single seller in pure monopoly, to two sellers in duopoly, to a few sellers in oligopoly, and to many sellers of
differentiated products.
2.Number and Nature of Buyers:
The market structures are also influenced by the number and nature of buyers in the market. If there is a single buyer in the market, this is
buyer’s monopoly and is called monopsony market. Such markets exist for local labour employed by one large employer. There may be
two buyers who act jointly in the market. This is called duopsony market. They may also be a few organised buyers of a product.
This is known as oligopsony. Duopsony and oligopsony markets are usually found for cash crops such as rice, sugarcane, etc. when local factories
purchase the entire crops for processing.
3.Nature of Product:
It is the nature of product that determines the market structure. If there is product differentiation, products are close substitutes and the market is
characterised by monopolistic competition. On the other hand, in case of no product differentiation, the market is characterised by perfect
competition. And if a product is completely different from other products, it has no close substitutes and there is pure monopoly in the market.
4.Entry and Exit Conditions:
The conditions for entry and exit of firms in a market depend upon profitability or loss in a particular market. Profits in a market will attract the
entry of new firms and losses lead to the exit of weak firms from the market. In a perfect competition market, there is freedom of entry or exit of
firms.
But in monopoly and oligopoly markets, there are barriers to entry of new firms. Usually, governments have a monopoly in public utility services
like postal, air and road transport, water and power supply services, etc. By granting exclusive franchises, entries of new supplies are barred. In
oligopoly markets, there are barriers to entry of firms because of collusion, tacit agreements, cartels, etc. On the other hand, there are no
restrictions in entry and exit of firms in monopolistic competition due to product differentiation.
5.Economies of Scale:
Firms that achieve large economies of scale in production grow large in comparison to others in an industry. They tend to weed out the other firms
with the result that a few firms are left to compete with each other. This leads to the emergency of oligopoly. If only one firm
attains economies of scale to such a large extent that it is able to meet the entire market demand, there is monopoly.
Forms of Market Structure:
1.Perfect Competition
2.Monopoly
3.Duopoly
4.Oligopoly
5.Monopolistic Competition
1. Perfect Competition Market
A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous product without any
artificial restrictions and possessing perfect knowledge of market at a time. In the words of A. Koutsoyiannis, “Perfect competition is a market structure characterised
by a complete absence of rivalry among the individual firms.” According to R.G. Lipsey, “Perfect competition is a market structure in which all firms in an industry are
price- takers and in
which there is freedom of entry into, and exit from, industry.”
Characteristics of Perfect Competition:
The following are the conditions for the existence of perfect competition:
(1) Large Number of Buyers and Sellers:
The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the
industry as a whole. The demand of individual buyer relative to the total demand is so small that he cannot influence the price of the product by his individual action.
Similarly, the supply of an individual seller is so small a fraction of the total output that he cannot influence the price of the product by his action alone. In other
words, the individual seller is unable to influence the price of the product by increasing or decreasing its supply.
Rather, he adjusts his supply to the price of the product. He is “output adjuster”. Thus no buyer or seller can alter the price by his individual action. He has to accept
the price for the product as fixed for the whole industry. He is a “price taker”.
(2)Freedom of Entry or Exit of Firms:
The next condition is that the firms should be free to enter or leave the industry. It implies that whenever the industry is earning excess profits, attracted by these
profits some new firms enter the industry. In case of loss being sustained by the industry, some firms leave it.
(3)Homogeneous Product:
Each firm produces and sells a homogeneous product so that no buyer has any preference for the product of any individual seller over others. This is only possible if
units of the same product produced by different sellers are perfect substitutes. In other words, the cross elasticity of the products of sellers is infinite.
No seller has an independent price policy. Commodities like salt, wheat, cotton and coal are homogeneous in nature. He cannot raise the price of his product. If he
does so, his customers would leave him and buy the product from other sellers at the ruling lower price.
The above two conditions between themselves make the average revenue curve of the individual seller or firm perfectly elastic, horizontal to the X-axis. It means that
a firm can sell more or less at the ruling market price but cannot influence the price as the product is homogeneous and the number of sellers very large.
(4)Absence of Artificial Restrictions:
The next condition is that there is complete openness in buying and selling of goods. Sellers are free to
sell their goods to any buyers and the buyers are free to buy from any sellers. In other words, there is no
discrimination on the part of buyers or sellers.
Moreover, prices are liable to change freely in response to demand- supply conditions. There are no
efforts on the part of the producers, the government and other agencies to control the supply, demand or
price of the products. The movement of prices is unfettered.
(5)Profit Maximisation Goal:
Every firm has only one goal of maximising its profits.
(6)Perfect Mobility of Goods and Factors:
Another requirement of perfect competition is the perfect mobility of goods and factors between
industries. Goods are free to move to those places where they can fetch the highest price. Factors can
also move from a low-paid to a high-paid industry.
(7)Perfect Knowledge of Market Conditions:
This condition implies a close contact between buyers and sellers. Buyers and sellers possess complete
knowledge about the prices at which goods are being bought and sold, and of the prices at which others
are prepared to buy and sell. They have also perfect knowledge of the place where the transactions are
being carried on. Such perfect knowledge of market conditions forces the sellers to sell their product at
the prevailing market price and the buyers to buy at that price.
(8)Absence of Transport Costs:
Another condition is that there are no transport costs in carrying of product from one place to another.
This condition is essential for the existence of perfect competition which requires that a commodity
must have the same price everywhere at any time. If transport costs
are added to the price of the product, even a homogeneous commodity will have different prices depending upon transport costs from the place of
supply.
(9) Absence of Selling Costs:
Under perfect competition, the costs of advertising, sales-promotion, etc. do not arise because all firms produce a homogeneous product.
Perfect Competition vs Pure Competition:
Perfect competition is often distinguished from pure competition, but they differ only in degree. The first five conditions relate to pure competition while
the remaining four conditions are also required for the existence of perfect competition. According to Chamberlin, pure competition means, competition
unalloyed with monopoly
elements,” whereas perfect competition involves perfection in many other respects than in the absence of monopoly.” The practical
importance of perfect competition is not much in the present times for few markets are perfectly competitive except those for staple
food products and raw materials. That is why, Chamberlin says that
perfect competition is a rare phenomenon.”
Though the real world does not fulfil the conditions of perfect competition, yet perfect competition is studied for the simple reason that it helps us in
understanding the working of an economy, where competitive behaviour leads to the best allocation of resources and the most efficient organisation of
production. A hypothetical model of a perfectly competitive industry provides the basis for appraising the actual working of economic institutions and
organisations in any economy.
2. Monopoly Market:
Monopoly is a market situation in which there is only one seller of a product with barriers to entry of others. The product has no close substitutes. The
cross elasticity of demand with every other product
is very low. This means that no other firms produce a similar product. According to D. Salvatore, “Monopoly is the form of market organisation in which
there is a single firm selling a commodity for
which there are no close substitutes.” Thus the monopoly firm is itself an industry and the monopolist faces the industry demand curve.
The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes, and incomes of his customers. It
means that more of the product can be sold at a lower price than at a higher price. He is a price-maker who can set the price to his maximum
advantage.
However, it does not mean that he can set both price and output. He can do either of the two things. His price is determined by his demand curve,
once he selects his output level. Or, once he sets the price for his product, his output is determined by what consumers will take at that price. In any
situation, the ultimate aim of the monopolist is to have maximum profits.
Characteristics of Monopoly:
The main features of monopoly are as follows:
1.Under monopoly, there is one producer or seller of a particular product and there is no difference between a firm and an industry. Under monopoly
a firm itself is an industry.
2.A monopoly may be individual proprietorship or partnership or joint stock company or a cooperative society or a government company.
3.A monopolist has full control on the supply of a product. Hence,
the elasticity of demand for a monopolist’s product is zero.
4.There is no close substitute of a monopolist’s product in the market. Hence, under monopoly, the cross elasticity of demand for a monopoly product
with some other good is very low.
5.There are restrictions on the entry of other firms in the area of monopoly product.
6.A monopolist can influence the price of a product. He is a price- maker, not a price-taker.
7.Pure monopoly is not found in the real world.
8.Monopolist cannot determine both the price and quantity of a product simultaneously.
9.Monopolist’s demand curve slopes downwards to the right. That is why, a monopolist can increase his sales only by decreasing the price of his product
and thereby maximise his profit. The marginal revenue curve of a monopolist is below the average revenue curve and it falls faster than the average
revenue curve. This is because a monopolist has to cut down the price of his product to sell an additional unit.
3. Duopoly:
Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both the sellers are completely independent and no agreement
exists between them. Even though they are independent, a change in the price and output of one will affect the other, and may set a chain of reactions. A
seller may, however, assume that his rival is unaffected by what he does, in that case he takes only his own direct influence on the price.
If, on the other hand, each seller takes into account the effect of his policy on that of his rival and the reaction of the rival on himself again, then he
considers both the direct and the indirect influences upon the price. Moreover, a rival seller’s policy may remain unaltered either to the amount offered
for sale or to the price at which he offers his product. Thus the duopoly problem can be considered as either ignoring mutual dependence or recognising
it.
4. Oligopoly:
Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products. It is difficult to pinpoint the number of firms
in ‘competition among the few.’ With only a few firms in the market, the action of one firm is likely to affect the others. An oligopoly industry produces
either a homogeneous product or heterogeneous products.
The former is called pure or perfect oligopoly and the latter is called imperfect or differentiated oligopoly. Pure oligopoly is found primarily among
producers of such industrial products as aluminium, cement, copper, steel, zinc, etc. Imperfect oligopoly is found among producers of such consumer goods
as automobiles, cigarettes, soaps and detergents, TVs, rubber tyres, refrigerators, typewriters, etc.
Characteristics of Oligopoly:
In addition to fewness of sellers, most oligopolistic industries have several common characteristics which are explained below:
(1) Interdependence:
There is recognised interdependence among the sellers in the oligopolistic market. Each oligopolist firm knows that changes in its price, advertising, product
characteristics, etc. may lead to counter- moves by rivals. When the sellers are a few, each produces a considerable fraction of the total output of the
industry and can have a noticeable effect on market conditions.
He can reduce or increase the price for the whole oligopolist market by selling more quantity or less and affect the profits of the other sellers. It implies
that each seller is aware of the price-moves of the other sellers and their impact on his profit and of the influence of his price-move on the actions of rivals.
Thus there is complete interdependence among the sellers with regard to their price-output policies. Each seller has direct and
ascertainable influences upon every other seller in the industry. Thus, every move by one seller leads to counter-moves by the others.
(2)Advertisement:
The main reason for this mutual interdependence in decision making is that one producer’s fortunes are dependent on the policies and fortunes of the other
producers in the industry. It is for this reason that oligopolist firms spend much on advertisement and customer services.
As pointed out by Prof. Baumol, “Under oligopoly advertising can become a life-and-death matter.” For example, if all oligopolists continue to spend a lot on
advertising their products and one seller does not match up with them he will find his customers gradually
going in for his rival’s product. If, on the other hand, one oligopolist advertises his product, others have to follow him to keep up their sales.
(3)Competition:
This leads to another feature of the oligopolistic market, the presence of competition. Since under oligopoly, there are a few sellers, a move by one seller
immediately affects the rivals. So each seller is always on the alert and keeps a close watch over the moves of its rivals in order to have a counter-move. This is
true competition.
(4)Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. However, in the long run, there are some types of
barriers to entry which tend to restraint new firms from entering the industry.
They may be:
(a) Economies of scale enjoyed by a few large firms; (b) control over essential and specialised inputs; (c) high capital requirements due to plant costs,
advertising costs, etc. (d) exclusive patents and licenses; and (e) the existence of unused capacity which makes the industry unattractive. When entry is
restricted or blocked by such natural and artificial barriers, the oligopolistic industry can earn long-run super normal profits.
(5)Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms. Finns differ considerably in size. Some may be small, others very large. Such
a situation is asymmetrical. This is very common in the American economy. A symmetrical situation with firms of a uniform size is rare.
(6)Demand Curve:
It is not easy to trace the demand curve for the product of an oligopolist. Since under oligopoly the exact behaviour pattern of a producer cannot be
ascertained with certainty, his demand curve cannot be drawn accurately, and with definiteness. How does an individual seller s demand curve look like in
oligopoly is most uncertain because a seller’s price or output moves lead to
unpredictable reactions on price-output policies of his rivals, which may have further repercussions on his price and output.
The chain of action reaction as a result of an initial change in price or output, is all a guess-work. Thus a complex system of crossed conjectures emerges as a
result of the interdependence among the rival oligopolists which is the main cause of the indeterminateness of the demand curve.
If the oligopolist seller does not have a definite demand curve for his product, then how does he affect his sales. Presumably, his sales
depend upon his current price and those of his rivals. However, a number of conjectural demand curves can be imagined.
For example, in differentiated oligopoly where each seller fixes a separate price for his product, a reduction in price by one seller may lead to an
equivalent, more, less or no price reduction by rival sellers. In each case, a demand curve can be drawn by the seller within the range of competitive
and monopoly demand curves.
Leaving aside retaliatory price movements, the individual seller’s demand curve under oligopoly for both price cuts and increases is neither more
elastic than under perfect or monopolistic competition nor less elastic than under monopoly. It may still be indefinite and indeterminate.
This situation is shown in Figure 1 where KD1 is the elastic demand
curve and MD is the less elastic demand curve. The oligopolies’
demand curve is the dotted kinked KPD. The reason is quite simple. If a seller reduces the price of his product, his rivals also lower the prices of their
products so that he is not able to increase his sales.

So the demand curve for the individual seller’s product will be less elastic just below the present price P (where KD1and MD curves are shown to
intersect). On the other hand, when he raises the price of his product, the other sellers will not follow him in order to earn larger profits at the old
price. So this individual seller will experience a sharp fall in the demand for his product.
Thus his demand curve above the price P in the segment KP will be highly elastic. Thus the imagined demand curve of an oligopolist has a comer or kink at
the current price P. Such a demand curve is much more elastic for price increases than for price decreases.
(7) No Unique Pattern of Pricing Behaviour:
The rivalry arising from interdependence among the oligopolists leads to two conflicting motives. Each wants to remain independent and to get the maximum
possible profit. Towards this end, they act and react on the price-output movements of one another in a continuous element of uncertainty.
On the other hand, again motivated by profit maximisation each seller wishes to cooperate with his rivals to reduce or eliminate the element of uncertainty.
All rivals enter into a tacit or formal agreement with regard to price-output changes. It leads to a sort of monopoly within oligopoly.
They may even recognise one seller as a leader at whose initiative all the other sellers raise or lower the price. In this case, the individual seller’s demand
curve is a part of the industry demand curve, having the elasticity of the latter. Given these conflicting attitudes, it is not possible to predict any unique pattern
of pricing behaviour in oligopoly markets.
5. Monopolistic Competition:
Monopolistic competition refers to a market situation where there are many firms selling a differentiated product. “There is competition which is keen, though
not perfect, among many firms making very similar products.” No firm can have any perceptible influence on the price-output policies of the other sellers nor
can it be influenced much by their actions. Thus monopolistic competition refers to competition among a large number of sellers producing close but not
perfect substitutes for each other.
It’s Features:
The following are the main features of monopolistic competition:
(1)Large Number of Sellers:
In monopolistic competition the number of sellers is large. They are “many and small enough” but none controls a major portion of the total output. No
seller by changing its price-output policy can have any perceptible effect on the sales of others and in turn be influenced by them. Thus there is no
recognised interdependence of the price-output policies of the sellers and each seller pursues an independent course of action.
(2)Product Differentiation:
One of the most important features of the monopolistic competition is differentiation. Product differentiation implies that products are different in some
ways from each other. They are heterogeneous rather than homogeneous so that each firm has an absolute monopoly in the production and sale of a
differentiated product.
There is, however, slight difference between one product and other in the same category.
Products are close substitutes with a high cross-elasticity and not perfect substitutes. Product “differentiation may be based upon certain characteristics of
the products itself, such as exclusive patented features; trade-marks; trade names; peculiarities of package or container, if any; or singularity in quality,
design, colour, or style. It may also exist with respect to the conditions surrounding its sales.”
(3)Freedom of Entry and Exit of Firms:
Another feature of monopolistic competition is the freedom of entry and exit of firms. As firms are of small size and are capable of producing close
substitutes, they can leave or enter the industry or group in the long run.
(4)Nature of Demand Curve:
Under monopolistic competition no single firm controls more than a small portion of the total output of a product. No doubt there is an element of
differentiation nevertheless the products are close substitutes. As a result, a reduction in its price will increase the sales of the firm but it will have little
effect on the price-output conditions of other firms, each will lose only a few of its customers.
Likewise, an increase in its price will reduce its demand substantially but each of its rivals will attract only a few of its customers.
Therefore, the demand curve (average revenue curve) of a firm under monopolistic competition slopes downward to the right. It is elastic but not perfectly
elastic within a relevant range of prices of which he can sell any amount.
(5)Independent Behaviour:
In monopolistic competition, every firm has independent policy. Since the number of sellers is large, none controls a major portion of the total output. No
seller by changing its price-output policy can have any perceptible effect on the sales of others and in turn be influenced by them.
(6)Product Groups:
There is no any ‘industry’ under monopolistic competition but a
‘group’ of firms producing similar products. Each firm produces a distinct product and is itself an industry. Chamberlin lumps together firms producing very
closely related products and calls them product groups, such as cars, cigarettes, etc.
(7)Selling Costs:
Under monopolistic competition where the product is differentiated, selling costs are essential to push up the sales. Besides, advertisement, it includes
expenses on salesman, allowances to
sellers for window displays, free service, free sampling, premium coupons and gifts, etc.
(8) Non-price Competition:
Under monopolistic competition, a firm increases sales and profits of his product without a cut in the price. The monopolistic competitor can
change his product either by varying its quality, packing, etc. or by changing promotional programmes.
The features of market structures are shown in Table 1.
Q1: Explain Market Failure.
Ans: Market failure occurs when the price mechanism fails to account for all of the costs and benefits necessary to provide and consume a good. Market failure
occurs when the price mechanism fails to account for all of the costs and benefits necessary to provide and consume a good. The market will fail by not
supplying the socially optimal amount of the good.
Prior to market failure, the supply and demand within the market do not produce quantities of the goods where the price reflects the marginal benefit of
consumption. The imbalance causes allocative inefficiency, which is the over- or under-consumption of the good.
The structure of market systems contributes to market failure. In the real world, it is not possible for markets to be perfect due to inefficient producers,
externalities, environmental concerns, and lack of public goods. An externality is an effect on a third party which is caused by the production or consumption of a
good or service.
During market failures the government usually responds to varying degrees. Possible government responses include:
 legislation – enacting specific laws. For example, banning smoking in restaurants, or making high school attendance mandatory.
 direct provision of merit and public goods – governments control the supply of goods that have positive externalities. For example, by supplying high
amounts of education, parks, or libraries.
 taxation – placing taxes on certain goods to discourage use and internalize external costs. For example, placing a ‘sin-tax’ on tobacco products, and
subsequently increasing the cost of tobacco consumption.
  subsidies – reducing the price of a good based on the public benefit that is gained. For example, lowering college tuition because society benefits from
more educated workers. Subsidies are most appropriate to encourage behavior that has positive externalities.
 tradable permits – permits that allow firms to produce a certain amount of something, commonly pollution. Firms can trade permits with other firms to
increase or decrease what they can produce. This is the basis behind cap-and-trade, an attempt to reduce of pollution.
 extension of property rights – creates privatization for certain non-private goods like lakes, rivers, and beaches to create a market for pollution. Then,
individuals get fined for polluting certain areas.
 advertising – encourages or discourages consumption.
 international cooperation among governments – governments work together on issues that affect the future of the environment.

Q2: Discuss causes of Market failure.

Ans: Market failure occurs due to inefficiency in the allocation of goods and services. A price mechanism fails to account for all of the costs and benefits involved
when providing or consuming a specific good. When this happens, the market will not produce the supply of the good that is socially optimal – it will be over or
under produced.
In order to fully understand market failure, it is important to recognize the reasons why a market can fail. Due to the structure of
markets, it is impossible for them to be perfect. As a result, most markets are not successful and require forms of intervention.
Reasons for market failure include:
 Positive and negative externalities: an externality is an effect on a third party that is caused by the consumption or production of a good or service. A
positive externality is a positive spillover that results from the consumption or production of a good or service. For example, although public education
may only directly affect students and schools, an educated population may provide positive effects on society as a whole. A negative externality is a
negative spillover effect on third parties. For example, secondhand smoke may negatively impact the health of people, even if they do not directly
engage in smoking.
 Environmental concerns: effects on the environment as important considerations as well as sustainable development.
 Lack of public goods: public goods are goods where the total cost of production does not increase with the number of consumers. As an example of a
public good, a lighthouse has a fixed cost of production that is the same, whether one ship or one hundred ships use its light. Public goods can be
underproduced; there is little incentive, from a private standpoint, to provide a lighthouse because one can wait for someone else to provide it, and
then use its light without incurring a cost. This problem – someone benefiting from resources or goods and services without paying for the cost of the
benefit – is known as the free rider problem.
 Underproduction of merit goods: a merit good is a private good that society believes is under consumed, often with positive externalities. For example,
education, healthcare, and sports centres are considered merit goods.
  Overprovision of demerit goods: a demerit good is a private good that society believes is over consumed, often with negative externalities. For example,
cigarettes, alcohol, and prostitution are considered demerit goods.
 Abuse of monopoly power: imperfect markets restrict output in an attempt to maximize profit.
When a market fails, the government usually intervenes depending on the reason for the failure.

Q3: Explain Externalities.

Ans: An externality is a cost or benefit that affects an otherwise uninvolved party who did not choose to be subject to the cost or benefit.
In economics, an externality is a cost or benefit resulting from an activity or transaction, that affects an otherwise uninvolved party who did not choose to be
subject to the cost or benefit. An example of an externality is pollution. Health and clean-up costs from pollution impact all of society, not just individuals within
the manufacturing industries. In regards to externalities, the cost and benefit to society is the sum of the value of the benefits and costs for all parties involved.
Negative vs. Positive
A negative externality is an result of a product that inflicts a negative effect on a third party. In contrast, positive externality is an action of a product that
provides a positive effect on a third party.

Negative Externality: Air pollution caused by motor vehicles is an example of a negative externality

Externalities originate within voluntary exchanges. Although the parties directly involved benefit from the exchange, third parties can experience
additional effects. For those involuntarily impacted, the effects can be negative (pollution from a factory) or positive (domestic bees kept for honey
production, pollinate the neighboring crops).
Economic Strain
Neoclassical welfare economics explains that under plausible conditions, externalities cause economic results that are not ideal for society. The third parties
who experience external costs from a negative externality do so without consent, while the individuals who receive external benefits do not pay a cost. The
existence of externalities can cause ethical and political problems within society.
In regards to externalities, one way to correct the issue is to internalize the third party costs and benefits. However, in many cases, internalizing the costs is
not financially possible. Governments may step in to correct such market failures
Externality Impacts on Efficiency
Economic efficiency is the use resources to maximize the production of goods; externalities are imperfections that limit efficiency.
Economic Efficiency
In economics, the term “economic efficiency” is defined as the use of resources in order to maximize the production of goods and services. An economically
efficient society can produce more goods or services than another society without using more resources.
A market is said to be economically efficient if:
 No one can be made better off without making someone else worse off.
 No additional output can be obtained without increasing the amounts of inputs.
 Production proceeds at the lowest possible cost per unit.
Externalities
An externality is a cost or benefit that results from an activity or transaction and affects a third party who did not choose to incur the
cost or benefit. Externalities are either positive or negative depending on the nature of the impact on the third party. An example of a negative externality is
pollution. Manufacturing plants emit pollution which impacts individuals living in the surrounding areas. Third parties who are not involved in any aspect of the
manufacturing plant are impacted negatively by the pollution. An example of a positive externality would be an individual who lives by a bee farm. The third
parties’ flowers are pollinated by the neighbour’s bees. They have no cost or investment in the business, but they benefit from the bees.

Externalities and Efficiency

Positive and negative externalities both impact economic efficiency. Neoclassical welfare economics states that the existence of externalities results in outcomes
that are not ideal for society as a whole. In the case of negative externalities, third parties experience negative effects from an activity or transaction in which they
did not choose to be involved. In order to compensate for negative externalities, the market as a whole is reducing its profits in order to repair the damage that
was caused which decreases efficiency.
Positive externalities are beneficial to the third party at no cost to them. The collective social welfare is improved, but the providers of the benefit do not make
any money from the shared benefit. As a result, less of the good is produced or profited from which is less optimal society and decreases economic efficiency.
In order to deal with externalities, markets usually internalize the costs or benefits. For costs, the market has to spend additional funds in order to make up for
damages incurred. Benefits are also internalized because they are viewed as goods produced and used by third parties with no monetary gain for the market.
Internalizing costs and benefits is not always feasible, especially when the monetary value or a good or service cannot be determined.
Externalities directly impact efficiency because the production of goods is not efficient when costs are incurred due to damages.
Efficiency also decreases when potential money earned is lost on non-paying third parties.
In order to maximize economic efficiency, regulations are needed to reduce market failures and imperfections, like internalizing externalities. When market
imperfections exist, the efficiency of the market declines.