PGDM Chetana Sem II Managerial economics

All about mangerial economincs

1. Suhas Vinayak Vaishampayan.
M.A (Economics), B.Ed, M.B.A,
Ph.D(Management)
Year 2022-202
PGDM Chetana Sem II
[email protected]
Mob 9869198370

2. What is the tile of our course?
Managerial Economics!
There are two words in the Title
Economics
Management
Do You Know meaning of both the words?

3. What is your perception about Economics?
Boring , Theoretical, lengthy, hopeless, no relevance, Why taught? Difficult,
Difficult to score and even pass etc.
Do you feel that every body discuss Economics?
Do you feel that every body discuss Economics? Why?
Relevant to them
What is coming to your mind the moment you read the beautiful word
Economics ?
Inflation
Unemployment
Poverty
Recession/Depression
Population explosion
Inequality
Backwardness etc.
Can you describe then in layman's term?
Problems.
What is Economics?
Economics is Problem Solving.

4. Can you identify the problem which every body and
every country in the world faced at some point of
time and some peoples and economies even are
facing today?
Wealth Definition of Economics given by Adam
Smith
 (1723 – 1790) a Scottish Philosopher and
founder of
 Economics: He wrote a famous book “
Wealth of Nation” in 1776. In that book Adam
Smith defined economics
 as a Science of Wealth.
It studies the process of production, consumption
and accumulation of wealth.
As Adam Smith emphasises wealth in his
definition it is called as wealth definition.
Problem changed. Can you identify it?

5. Dr. Alfred Marshall
 (1842-1924):
In his book
 “Principles of Economics" published in
1890, has defined economics in these terms,
“ Economics is a study of mankind in the ordinary
business of life; it examines that part of individual
and social action which is most closely connected
with the attainment and with the use of the
material requisites of well-being.”
material requisites of well-being means material
welfare.
Emphasis on human welfare is evident in Marshall’s
own words.
Problem changed. Can you identify it?

6. Problem of Scarcity.
What is Scarcity?
Availability is less than requirement.
What is the solution to the problem of scarcity?
Optimum use of resources. It is also called as economising.
Are you making the optimum use of resourcing?
Robbins’ Scarcity Definition:
The most accepted definition of economics was given by Lord Robbins
in 1932 in his book ‘An Essay on the Nature and Significance of
Economic Science.’
According to Robbins, neither wealth nor human welfare should be
considered as the subject-matter of economics.
His definition runs in terms of scarcity: “Economics is the science
which studies human behaviour as a relationship between ends and
scarce means which have alternative uses.”
It is regarded as scarcity definition as he emphasizes scarcity.

7. Scope of Economics went on increasing.
To facilitate its study, What do we do?
It is classified into
Micro and Macro Economics.
Types of Economic analysis:
1)Micro and Macro
 Microeconomics analyze the behavior of
 
individual economic
units, which can be individuals, families, businesses, and the
markets in which they operate. It studies the determination of
price of a product, profit of a firm, rewards of the factors of
production etc
 
Macro economics
 
analyze the behavior of economic
 
aggregates.
That is to say, those variables that are formed of other
variables. For instance, the aggregate production of a country is
formed with the production of all its businesses, families,
individuals, and its public sector. Aggregate supply, Aggregate
demand, price level etc. Other commonly used variables in the
study of macroeconomics are inflation and unemployment.

8. What is Management?
Planning, Staffing, Organizing, Controlling, Directing
Management is the coordination and administration
of tasks to achieve a goal. Such administration
activities include setting the organization’s
strategy and coordinating the efforts of staff to
accomplish these objectives through the
application of available resources.

9. What is Managerial Economics?
 

The development of managerial economics as
a separate discipline has a recent origin.
Joel Dean’s book Managerial Economics
published in 1951 is taken as the pioneer in
this discipline
Managerial Economics is a branch of Micro
economics.

11. Definition of Managerial Economics:
By Spencer and Seligman
“The integration of economic theory and business
practice for the purpose of facilitating decision-
making and forward planning by management
By Dominic Salvatore
 “Managerial economics is the
application of economic theory and the tools of
decision science to examine how an organization
can achieve its aims or objectives most
efficiently.”
Why a Manager should study Managerial
Economics? What is the scope of M.E?

12. Why a Manager should study Managerial Economics? What is the
scope of M.E?
The study of Managerial Economics enables a Manager to find
solutions to all problems that he has to face in the process of starting
a Business.
Which are these problems?
What business/to produces? This decision vital as resources are scare.
How to produce? This is important as it is concern with efficiency.
For whom to produce? This is important as it is concern with
distribution.
Are we making full and economical use of resources? It will decide
whether business will get profit?
If all the above decision are properly taken then economy will certainly
grow. Rapid economic growth will improve the standard of living
of the people in the economy.
Managerial economics has normative bias as it tell business man what
he should do so that business will prospers and economy will grow.

13. Why a Manager should Study Managerial Economics?
Nature and Scope of Managerial Economics.
The study of Managerial Economics enables a manager
to find solutions to Business problems.
Different problems/issues which a manager has to
resolve are as under
What Business: Demand analysis
Choice of size of the firm, technology etc.: Production
How to sale: Study of market
How to price the product: Pricing practices
How to manage the profit: Profit theories
How to finance the Business: Capital Budgeting.

14. Economics and Managerial
Decision Making
Relationship to other business disciplines

15. Consumer Behaviour- I: Demand, types of demand,
factors affecting demand &
Demand function. Making of
linear demand function &
Linear demand curve. Law of Demand. Consumer’s surplus
What is Demand?
Desire/need/want + Ability to pay + Will to spend
Demand is relative
It should be always refer along with price and time

16. What are the different types of demand?
Individual demand
Market demand
Direct demand
Derived demand
Joint demand
Composite demand
Ex ante demand
Ex post demand
Recurring demand
Seasonal demand

17. Factors Affecting Demand
When you go to market with a list of
commodities to be purchased, you realize that
you did not purchase some commodities from
the list, however you purchase several
commodities which were not there in the list.
These decisions are consciously made.
The thoughts in your mind which determines
whether to purchase or not to purchase a
commodity. These thoughts are several factors
that influence demand.

18. Factors influencing demand are as under
Price of a product
Availability of substitute and complementary products
Prices of substitute and complementary products
Quality of the product
Advertisement
Taste, preferences likes and dislikes
Fashions
Income of a consumer
Distribution of Income
Population
Composition of population
Climatic conditions
Customs and traditions and many more.

19. The law of Demand.
The law is put forward by Dr. Alfred Marshall in his
famous book, ‘Principals of Economics’ which he
published in the year 1980
The law studies the relationship between price and
demand.
Statement of the law: Other things being same, higher
the price, lower the demand and vice versa.
The law can be explain with help of a table and graph

20. Assumption of the Law.
All factors other than price influencing demand
are assumed to remain constant. Such as
Income of the consumer will not change
Population will not change
Customs and traditions will not change
Prices of substitute and complementary will
not change and many more.

21. The law can be explain with the help of a
schedule and graph

22. Exception to the law of Demand
Prestige goods/articles of snob appeal
Giffen goods
High end goods manufacture for niche/rich customer
Expectations about future change in the price.
Can you find other exception?

23. Extension and Contraction

24. Increase and decrease in demand

25. Meaning of Elasticity of Demand
•Responsiveness of demand for a commodity
due to change in its determinant.
•Following are the different kinds of Elasticity of
Demand.
Price Elasticity of Demand.
Promotional Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of Demand
Arc Elasticity of Demand

26. •Definition of Price Elasticity of Demand.
Responsiveness of demand for a commodity due to
change in its price.
•Definition of Income Elasticity of Demand.
Responsiveness of demand for a commodity due to
change in the income of the consumer.
• Definition of Promotional Elasticity of Demand.
Responsiveness of demand for a commodity due to
change in the advertisement expenditure made by the
company .
•Definition of Cross Price Elasticity of Demand.
Responsiveness of demand for a commodity due to
change in prices of substitute and
complementary products.

27. •Methods of measuring Price elasticity of
demand.
•Ratio Method.
Proportionate change in Quantity demanded
------------------------------------------------------------
Proportionate change in price
Ed= (∆Q/Q) / (∆P/P)
Ed= ∆Q/ ∆P X P/Q
Arc Price elasticity of demand =
{∆Q/(Q1+Q2)/2}/{∆P/(P1+P2)/2}

28. Total outlay method.
Original 10 100 1000
Change I 5 200 1000 E=1
Change II 20 50 1000 E=1
Change I 5 150 750 E ˂1
Change II 20 70 1400 E ˂1
Change I 5 300 1500 E˃1
Change II 20 30 600 E˃1

29. Geometric Method
Ed=
Length of lower segment
---------------------------------
Length of upper segment

31. Q 1: The demand function for a product is estimated as PQ= 40 – 4P. If the current market
price is Rs.8, what is the price elasticity of demand?
Q 2: The demand and supply functions of a commodity are given as follows: Qs = 500P –
500 Qd = 1,150 – 50P. At equilibrium price and output calculate elasticity of demand.
Q 3: The demand schedule of a perishable good is given below:
What is the arc price elasticity of demand?
Q 4: The supply and demand functions of a commodity are estimated as
follows: Qd = 1,600 – 200P Qs = 1,000P – 2,000 At equilibrium,
the elasticity of demand for the commodity is
Q 5: .The demand function for a commodity is estimated to be
Qd = 5,50,000 – 55P. Calculate elasticity od demand.
Q 6: Price of the product is Rs. 500 at which demand was 7000.
Company raise the price in order to recover growing cost of production
to Rs. 575 due to which demand decline to Rs. 6500. Find out elasticity
of demand. Was it a correct decision of the company?
Price Quantity demanded
8 40
10 30

32. Types of elasticity of demand

34. Unitary elastic demand

35. Uses of elasticity of demand:
•Marketing Manager
•Finance ministry
•Trade union
•HR Manager
•Judiciary: The concept is often used by the court to reach a decision
in business anti trust cases for example in a well known cellophane
case, the Du Pond company was accused of monopolizing the
market for cellophane. In its defense Du Pond argued that
cellophane was just one of flexible packaging material that include
cellophane, wax paper, aluminum foil and many others. Based on
the high cross elasticity of demand between cellophane and these
other products, Du Pond successfully argued that the relevant
market was not cellophane but flexible packing material. Since Du
pond had less than 20% of this market, the court concluded in 1953
that Du Pond had not monopolize the market.

36. What will determine whether the demand for a
commodity is elastic or inelastic
•Nature of a commodity
•Proportion of consumers expenditure on the
consumption of a product
•Recurring demand
•Customs and traditions
•Time
•Postponement of consumption
•Income of a consumer
•Durability of a commodity
•Availability of substitute

37. Meaning and factors affecting Supply:
Meaning: Quantity of a commodity which a producer or
seller is able and willing to offer in the market for sale
at a price during a given period of time. Supply is also
relative and referred along with price and time.
Factors influencing supply:
Price
Cost of production
Technique of production
Transport cost
Government policy
Climatic condition

38. The law of supply
•Background: Formulated by Dr. Marshall, studies the
relationship between price and supply.
•Statement: Other things remaining same higher the
price higher the supply and vice versa.
•Explanation of the law: The law can be stated with the
help of a table and diagram
•Assumption of the Law: All factors other than price are
expected to remain constant, such as technology,
government policy, climatic conditions etc.
•Exceptions to the law: Supply of labour
•Supply of saving to earn fixed income per unit of time.

41. Determination of Equilibrium price with the help of
graph.

Y axis.
X axis
E
D1
S1
D
S
P
Q
O

42. Determination of Equilibrium price with the help of Table.
Price Quantity suppliedQuantity
demanded
80 1300 700 S ˃ d Down ward pressure on price
70 1200 800 S ˃ d Down ward pressure on price
60 1100 900 S ˃ d Down ward pressure on price
50 1000 1000 Equilibrium
40 900 1100 S ˂ d Upward pressure on price
30 800 1200 S ˂ d Upward pressure on price
20 700 1300 S ˂ d Upward pressure on price

43. What is production?
•Producing goods
•Producing services
•Converting raw material to finished product.
•Converting input into output
•Input ----- process ------ output.
•Can you give example of each?
•Why these goods or services are produce?
•What is production?
•Production is creation of utility.
•What is production function?
•Production function is an Engineering concept. It studies the
relationship between physical quantity of input and physical
quantity of output.

44. What are the different factors of
production?
•Land
•Labour
•Capital
•Power
•Raw material
•Equipments
•Plant
•Building
Can you classify them in to classes?
Fixed and Variable

45. Input output relationship
How can we change the production/ Output?
We can change the out by changing variable inputs
keeping fixed input same. This can be done in the short
period. It is studied with the help of law which is called
as the Law of variable proportion. In other words the
law of variable proportion studies short period
production function.
We can also change output by changing both inputs.
This is possible in the long period and is studied with
the help of the laws which are called as Laws of returns
to scale. In other words the laws of returns to scale
studies long perid production function.

46. Some Important Concepts.
•Total product/production
•Average Product/production
•Marginal Product/production

47. The Law of Variable proportion. Change in output with one
variable input
Units of labourTotal Production
Average
Production
Marginal
Production
X Y Y Y
0 0
1 70 70 70
2 150 75 80
3 240 80 90
4 328 82 88
5 413 83 85
6 497 83 84
7 570 81 73
8 635 79 65
9 675 75 40
10 695 70 20
11 705 64 10
12 705 59 0
13 695 53 -10
14 675 48 -20
15 645 43 -30

48. Graphical representation of the production schedule

49. •Why Marginal production is rising?
•, What are the reasons?
•Why Marginal production is falling?
•What are the reasons?
•Can Marginal Production become negative?
•If yes, What are the reasons?
•What is stage I?
•What is stage II?
•Which is the area of operation?
•What is stage III?
•How many workmen company will hire so as to
maximized profit.

50. Profit maximization
•In order to maximized profit, a firm should
employ each input until the marginal revenue
product of input equals the marginal resource
cost of hiring the input.
MRPι = w(Wage) MRPκ = r(rental price of capital)

51. Laws of returns to scale:
•In the long run as all factor inputs are variable, we
study input output relationship when all factors
employment can be increased.
•In simple words we study what will happen to output if
we double the inputs.
•There are three possibilities
•If input is doubled out put is more than doubled. It is
called as law of increasing returns to scale
•If input is doubled out put is also doubled. It is called
as law of constant returns to scale.
•If input is doubled out put is less than doubled. It is
called as law of diminishing returns to scale.

52. Graphical representation of the laws of
returns to scale

53. •Why a firm experiences increasing returns to
scale?
•Why a firm experiences constant returns to
scale?
•Why a firm experiences diminishing returns to
scale?

54. •Why a firm experience increasing returns to scale:
Advantages of large scale production are greater
than disadvantages of large scale production.
•Why a firm experience constant returns to scale:
• Advantages of large scale production are equal to
disadvantages of large scale production.
•Why a firm experience diminishing returns to scale:
Advantages of large scale production are less than
disadvantages of large scale production.

55. Economies and diseconomies of scale.
•Why a firm gets advantages of large scale production:
1)Economies of large scale in terms of getting raw material at less price.
Discount from bulk purchase.
2)Division of labour and specialization
3)Lower cost of raising capital
4)Management efficiencies
5)Economies in maintaining inventory of replacement parts and
maintenance personal
6) spreading of promotional and research and development cost.
•Disadvantages of large scale production:
1)Management bottle necks, coordination and control problem
2) Firm is too big to manage with efficiency
3) Disproportionate rise in staff and indirect labour
4) Input market imperfection. Due to market imperfections cost of inputs
are high.

56. Isoquant
Isoquant
shows the
various
combination
of two
inputs(say
labour and
capital) that a
firm can use to
produce
specific level
of output.

57. Characteristics of Isoquant.
Higher Isoquant shows higher or
larger output and vice versa.
Negatively sloping: It slopes down
wards from left to right.
Marginal rate of technical
substitution falls: If firm wants to
reduce input Y, it must increase
the quantity of X input in order to
produce the same level of output.
Two isoquant can not intersect
each other.

58. Iso cost curve
X Y
20 0
18 1
16 2
14 3
12 4
10 5
8 6
6 7
4 8
2 9
0 10

60. What is cost?
Cost means sacrifice or foregoing which has already occurred or
has potential to occur in future with an objective to achieve a
specific purpose measured in monetary term.
What are the different types of cost?
Fixed Cost
Variable cost, Marginal Cost, Total Cost, Opportunity Cost
Explicit and Implicit Cost, Economic Cost
Accounting Cost
Replacement Cost
Social Cost
Historic and Future Cost
Sunk Cost

61. Fixed Cost: What is Fixed Cost?
Cost which does not change with output.
Cost which will remains same in spite of change in the output.
Example: Technology, Machinery, Land, Building etc.
It is of two types Total Fixed Cost and Average Fixed cost
Total Fixed Cost
------------------------------
AFC =
Quantity
How total cost curve looks like?
It is horizontal or parallel to X- axis
How Average Fixed Cost curve look like?
It looks like rectangular hyperbola.

62. What is variable cost?
Cost which varies with output or Cost which changes with
production is called as variable cost. Example raw material labour,
Power etc.
It of two types.
Total Variable Cost and Average Variable Cost.
AVC =TVC / Quantity
How total variable cost curve looks like?
It slopes upwards starting from origin
How Average Cost curve looks like?
U shape in the sort period and Soccer shape in the long period.
Why?

63. •If we add TFC and TVC
• We get TC
•How the TC curve look like?
•Starts from some point on Y axis and parallel to
TVC.
•Why?
•If TC is divided by quantity we get AC.
•How average Cost curve looks like?
•It is U shape in the short period and soccer
shape in the long period.
•Why?

64. •If we add TFC and TVC
•We get TC.
•How TC curve looks like?
•It starts from some point on Y axis, slope up
ward from left to right and parallel to TVC .
•If TC is divided by quantity we get AC
•How AC curve looks like?
•It is U shape in the short period and soccer
shape in the long period.
•Why?

65. Y
X
TFC
TVC
TC
O
Quantity
C
o
s
t

66. What is Marginal Cost?
•Addition made to total cost by producing one more
unit of output.
MCn = TCn – TC (n-1)
Quantity Total CostMarginal cost
0 0
1 10 10
2 18 8
3 25 7
4 30 5

67. SHAPE OF AVERAGE COST CURVE AND
MARGINAL COST CURVE

68. Average cost Curves

69. Imaginary cost Table
Quanti
ty
TC TFC TVC AC AFC AVC MC
0 120 X X X X
1 265
2 264
3 161
4 85
5 525
6 120
7 97
8 768
9 97
10 127

70. Solution.
Quanti
ty
TC TFC TVC AC AFC AVC MC
0 120 120 0 X X X X
1 265 120 145 265 120 145 145
2 384 120 264 192 60 132 119
3 483 120 363 161 40 121 99
4 568 120 448 142 30 112 85
5 645 120 525 129 24 125 77
6 720 120 600 120 20 100 75
7 799 120 679 114.1417.1497 79
8 888 120 768 111 15 96 89
9 993 120 873 110.3313.3397 105
10 1120120 1000112 12 100 127

71. Imaginary Cost Table:
Quan
tity
TCTFCTVCACAFCAVCMC
0 60 X X X X
1 80
2 30
3 35
4 35
5 135
6 40
7 40
8 336
9 50
10 200

72. Imaginary Cost Table: Division: A
Quan
tity
TC TFCTVCAC AFCAVCMC
0 60 60 0 X X X X
1 80 60 0 80 60 20
2 90 60 30 45 30 15 30
3 10560 45 35 20 15 25
4 14060 80 35 15 20 35
5 19560 13539 12 27 45
6 24060 18040 10 30 45
7 34060 28048.578.5740 100
8 39660 33649.57.542 56
9 51060 45056.666.6650 14
10 52060 46052 6 46 10

73. •Opportunity Cost:
•Revenue sacrifice in the next best alternative use of resources is called
as opportunity cost.
•Explicit Cost:
•Cost which is actually incurred by a firm. It is recorded in the books of
accounts of the company. Payment are actually made and money goes
out of company’s cash box. For example payment of wages, interest
•Implicit cost:
•This cost is not incurred but is imputed. For example rent paid for the
premise of the owner of business used for business.
•Economic Cost:
•It is addition of explicit and implicit cost. It is used by economist to
check the economic viability of the business.
•Accounting Cost:
•All explicit cost are accounting cost. It is recorded in the books of
accounts of the company by cost accountant
•Replacement Cost:
•Replacement cost refers to the current price of buying or replacing any
input at present.

74. •Social Cost:
•Social cost of the firm are those that the society in general has
to bear because of the firm’s activities. For example pollution.
•Historical Cost:
•Cost incurred at the time of purchasing an asset. It is also
regarded as sunk cost. For example cost of machinery.
•Future Cost:
•Cost which are likely to occur in future. Future cost can be
budgeted or planned.
•Sunk Cost:
•Sunk cost is an economic term for a sum paid in the past, which
should no longer be relevant in the decision making process. It
can not be retrieved.
•Direct Cost:
•Cost that can be attributed to a particular activity.
•Indirect Cost:
•Cost that may not be attributed to any particular activity. It is
distributed over all activities.

75. What is Break Even analysis/ Cost
volume profit analysis.
•It examines the relationship among the total revenue, total cost and
total profit at various levels of output.
•What is Total Revenue:?
•It is defined as total amount of money received by a firm from
goods sold during a certain time period.
•TR = P*Q
•What is Average Revenue?
• It is defined as revenue earned per unit of output sold
•AR = TR/Q
•What is Marginal Revenue?
• Addition made to total revenue by selling one more unit of a
commodity/output.
•MRn =TRn – TR(n-1). It can also found out by taking first derivative
of TR function.

76. Profit
Loss
Quantity
X axis.
Y axis
Total Revenue
Total Cost
O
Break even analysis: Graphical Method.

77. Algebraic Method
•P : Price of the good.
•Q : Quantity produce.
•AVC : Average variable cost.
•AFC : Average fixed cost.
•TFC : Total fixed cost.
•What is Contribution Margin?
•It is the difference between price and AVC. It represents that portion
of the price of a commodity produced by the firm that can cover the
fixed cost and contribute to profit.
•What is Break even condition?
•It is TR = TC
•TR = P*Q
•TC = TFC + TVC
•TC = TFC + (AVC * Q)
•P*Q = TFC + (AVC*Q)
•Break Even Quantity Q = TFC/(P-AVC)

78. •Types of markets: perfect competition,
monopoly, oligopoly & monopolistic
competition – features and price
determination

79. What is market?
•Buying and selling
•Place where buying and selling takes place.
•Meaning of market/Definition of market:
•Market refers to institutional arrangement
through which buyers and sellers are coming
in close contact with each other for buying
and selling, where buyers want is fulfilled and
sellers makes money.

80. Can you identify markets which you visits?
•Classification of markets:
•On the basis of commodities sold
•On the basis of competition
•On the basis of quantity of commodity sold
•On the basis of Geography
•On the basis of time and many more.
•We are required to study classification of market on the basis of
Competition.
•1 Monopoly market
•2Competitive market or perfect competition market
•3 Duopoly market
•4 Oligopoly market
•5 Monopolistic competitive market or imperfect competition market

81. Competitive market or Perfect
competition market: Features:
•1 Large number of buyers and sellers
•2 Products are homogeneous
•3 Free entry and exit
•4 Perfect knowledge of the market
•5 Free mobility of the factors of production
•6 No transport cost
•7 No government intervention.

82. •Nature of the demand curve, Average revenue curve
and Marginal revenue curve.
All are parallel to X axis and are same since AR, MR and
Price are same in competitive market.
Y
X
O
AR=MR=P
Quantity
Price,
AR,MR

83. Equilibrium Condition of Industry and a firm
•Equilibrium Conditions of Industry
Industry is in equilibrium when number of firm in Industry will
remain same. It means no new entry and exit.
Number of firm in Industry will remain same when each firm in
industry is making normal profit. No attraction for outside firm to
enter at the same time existing firms will not leave the Industry
since they are making normal profit.
Normal profit is the minimum profit which an entrepreneur must
get without which he will not do the business.
Normal profit is always a part of cost in economics.
•Equilibrium Conditions of a firm
Marginal revenue is equal to Marginal Cost
Marginal cost curve must intersect Marginal revenue curve from
below.

84. •Normally in competitive market firms are
making normal profit in the long run. However
in the short period firms can make
supernormal profit, normal profit or even may
incur loss.
•In the next graph firm A is earning
supernormal profit
•Firm B is earning normal profit and
•Firm C is incurring loss.

85. Graphical representation of equilibrium of a firm and industry in
a competitive market

86. Monopoly:
•Pure Monopoly: Market where there is only one producer producing and
selling a commodity which does not have close and remote substitute
•Imperfect Monopoly: Market where there is only one producer producing and
selling a commodity which does not have close substitute
•Simple Monopoly: Monopoly firm charging uniform price to all sellers in the
market.
•Discriminating Monopoly: Monopoly firm charging different prices to different
buyers for the same product. Examples: Indian Railways, Hotels, Airlines etc.
•Technical Monopoly: Monopoly power emerge due to technology. Examples:
Apple, Microsoft etc.
•Natural Monopoly: Monopoly power emerge due to natural factors. Examples:
M.F.Hussain Painting, Lata Mangeshkar etc.
•Legal Monopoly: Monopoly power emerge due to law such as patient, copy
write etc.
•Public Monopoly: Monopoly firm owned by government. Examples: ONGC
•Private Monopoly: Monopoly firm owned by private firm or individual.
Examples: Reliance petro.

87. Characteristics of Monopoly:
•Single producer.
•No close and remote substitute available
•Large number of buyers
•Price maker
•Control over the supply
•Downward sloping demand curve
•Industry and firm are same
•Barriers to entry

88. Is Monopoly Good or bad?
•Why Good? Why Indian Railways is a Public Monopoly?
1:Economies of scale
2: Avoid duplication of cost
3:Optimum use of national resources
4:Economies of scale may keep the cost low
5: For national security
•Why Monopolies are Bad?
1:Waste scarce resources of the economy.
2:Monopoly have excess capacity
3:Quality of the product produce by them is always sub standard
and customer has no choice to buy it.
4:Lot of inefficiency.
5:Charge high price for their product.

89. •What is Price Discrimination?
•Charging different prices to different buyers for the same product
•i)
   Price Discrimination of First Degree: 
In this case seller is able to
charge different prices for different units of the same product from
the same consumer Thus, in case of first degree of price
discrimination the consumer surplus is zero.
•ii) 
  
Price Discrimination of Second Degree:
 
Seller divides the
consumers in different groups on the basis of their ability to pay.
Thus consumer with lower paying capacity having lower consumer
surplus is charge is lower price and consumer with higher paying
capacity and having higher consumer surplus is asked to pay higher
price.
•iii)
 
Price Discrimination of Third Degree:
 
In case of third degree of
price discrimination monopolist divides his market into different
sub-markets and charges different price in different sub markets.
However, the sub market where the monopolist will charge more
and the sub market where it will charge less is depend on the price
elasticity of demand of the commodity produced by it in different
sub-market.

90. •Why the demand curve is down ward sloping?
•It is only possible for a monopolist to sell more by reducing
the price.
•Demand curve and Average Revenue curve are same since
Price and Average Revenue are same in Monopoly.

Price Quantity
demanded
Total RevenueAverage
Revenue
20 1 20 20
19 2 38 18
18 3 54 18
17 4 68 17
16 5 80 16
15 6 90 15
14 7 98 14

91. Marginal Revenue is less than Average
Revenue in Monopoly
Price Quantity
demanded
Total
Revenue
Average
Revenue
Marginal
revenue
20 1 20 20 20
19 2 38 19 18
18 3 54 18 15
17 4 68 17 14
16 5 80 16 12
15 6 90 15 10
14 7 98 14 8

92. Demand curve Average Revenue Curve and Marginal
Revenue Curve
Y
X
O
Price, AR
and MR
Quantity

93. Equilibrium Condition of a firm and
Industry in Monopoly:
•In Monopoly equilibrium of firm and industry is
same as in this market industry consist of only
one firm.
•Equilibrium Condition of a firm
•1 Marginal revenue is equal to Marginal Cost
•2 Marginal cost curve must intersect Marginal
revenue curve from below.
•When Monopoly firm is in equilibrium, it is
earning supernormal profit in the long run.
However in the short run firm can incur normal
profit, supernormal profit or even may incur loss.

94. Graphical representation of Monopoly
equilibrium; Determination of price and
equilibrium output:

95. Monopoly Firm making normal profit:

96. Monopoly Firm incurring loss:

97. Oligopoly Market.
•What is oligopoly?
•When there are few producers producing and selling products which are close
substitute of each other Oligopoly is said to exist. Few may be ten to fifteen.
•Characteristic of oligopoly:
•Few players
•Products are homogeneous or differentiated
•Interdependence or rivalry among the firm: The action of each firm affects other
firm in industry and vice versa.
•Non price competition: Firm compete on the basis of product differentiation,
advertising, services etc. This is referred as non price competition.
•Sources of oligopoly:
1: Economies of scale
2: Huge capital investment
3: Few companies may own a patent for the exclusive right to produce a commodity
4: Established firm may have a loyal following of customers based on product quality
and service that new firm find it difficult to match
5: Few firm may have control over the entire supply of raw material
6: Government may give a franchise to only a few firm to operate in the market.
These factors also act as barriers for the entry of new firms.

98. Sources of oligopoly:
1: Economies of scale
2: Huge capital investment
3: Few companies may own a patent for the exclusive
right to produce a commodity
4: Established firm may have a loyal following of
customers based on product quality and service that
new firm find it difficult to match
5: Few firm may have control over the entire supply of
raw material
6: Government may give a franchise to only a few firm to
operate in the market.
These factors also act as barriers for the entry of new
firms.

99. Kinky Demand curve Model
•Kinky Demand curve Model was introduce by Paul
Sweezy in 1939 in an attempt to explain the price
rigidity. Sweezy postulated that if oligopolist raised the
price, it would lose most of its customers because
other firms in the industry would not follow by raising
their prices. On the other hand an oligopolists could
not increase its share of the market by lowering its
price because its competitors would quickly match
price cut. As a result, according to Sweezy, oligopolists
face a demand curve that has a kink at the prevailing
price and is highly elastic for price increase but much
less elastic for price cut.

100. Kinky Demand curve
Price
QuantityO
X - axis
Y- axis

101. Cartel
•Cartel is a formal (explicit) agreement among firms. Formation of a cartel normally
involves agreement on price fixation, total industry output, market share , allocation of
customers, allocation of territories, establishment of common sells agencies, division of
profits or any combination of these. The immediate impact of cartel is a hike in price
and reduction in supply. Cartels can be of two types:- (1):- centralized cartel and (2):-
market sharing cartel
•Centralized cartel- It is an arrangement by all the members where a centralized body
decides on price with an objective of maximizing joint profits.
•Market sharing cartel- It is an arrangement by all the members to divide the market
share among them and fix the price independently.
•Informal and tacit collusion:- In this case, firms don’t declare a cartel but, informally
agree to charge a same price and compete on non price aspects. Collusion normally
results in high price and lower output and provides sellers an advantage similar to that
of monopoly.
•The agreed upon price under collusion may have been fixed on the basis of going rate or
the price charged by the largest or the most sophisticated player. Such kind of price
determination is known as price leadership.
•Dominant firm:- often an oligopoly market is dominated by few firms among which one
may be the largest player. The highlight of this situation is that other companies
acknowledge the leadership of this largest firm for price determination.
•Barometric firm:- sometimes, market is as such that no single player is large to emerge
as a leader but there may be a firm which has a better understanding of the market. The
firm act like a barometer for a market, it has better industry intelligence and can
preempt an interpret its external environment in an effect manner.

102. Monopolistic Competition:
•Monopoly means absent of competition.
•Competition means absence of monopoly.
•Monopolistic Competitive market is a market where element of monopoly
and competition exist side by side.
•In this market there are few firms producing differentiated product which
are substitutes of each other.
•Product differentiation can be real or imaginary/illusory. Real product
differentiation means products are really different. Illusory product
differentiation means product are superficially different. Only impression is
created that products are different.
•For creating product differentiation company will have to incur high selling
cost. It means company is required to spend lots of money on
advertisement.
• If company is successful in product differentiation, firm can enjoy
monopoly power. However company also knows that there are close
substitutes available in the market, firm has to face competition. It means
in this market each company has to face competition at the same time it
also face competition. It means that element of monopoly and
competition is present simultaneously.

103. Equilibrium of firm and Industry in monopolistic
competitive market.
Equilibrium
conditions
Are MR=MC
and MC
curve must
intersect
MR curve
from below.

104. Long run Equilibrium
In the long run,
monopolistic
competition
comes closer to
perfect
competition
because
the freedom of
entry and
exit allows firms
to enjoy
only normal
profit.