ADAM SMITH’S WEALTH DEFINITION

Wealth Definition by Adam Smith: “economics is an enquiry into the nature and causes of wealth
nations". According to Adam Smith “the purpose of study
economics is to increase the wealth of the Nation, its study includes the consumption, production ,
exchange and distribution of wealth."

A definition proposed by Adam smith is “the science related to law of production, distribution and
exchange"
Adam Smith defined Economics as science of wealth. Economists define wealth as one
That has “Value in use” and “Value in exchange”

AUTHOR: T .R .Jain and O.P.Khanna,

Rians Tennenuhaw Eisler

NAME OF THE BOOK: Business economics , An Enquiry into the nature and causes of wealth of Nation in
1776, The Real wealth of Nation.

SPECIFIED PAGE: page 3, page 242.

PUBLICATION: FK publication, Berrett -koehler,2007.

WELFARE
ALFRED MARSHALL was one of the greatest economist and mathematicians of the 20th
century. His famous book,”Principles of Economics” was published in 1890.

Marshall in his book defined economics as a “Study of mankind in the ordinary

business of life, it examines that part of individual and social action which
is most closely connect with the attainment and the use of material
requisites of well being”.

Adapted from:-

NAME OF THE BOOK AUTHOR’S NAME PUBLICATIONS YEAR PAGE NO.

Vimla Kumari Jain

PRINCIPLES OF (V.K Publications,
ECONOMICS T.R JAIN New Delhi) 2006 5
PRINCIPLES OF K.G.C NAIR,
BUSINESS HARIHARAN, CHAND BOOKS,
DECISION GEORGE, YOHANAN TRIVENDRUM 1.2

ROBBIN’S SCARCITY DEFINITION

Prof Lionel Robbins in his book ‘’ THE NATURE AND SIGNIFICANTS OF ECONOMIC SCIENCE” (1932) gave
a new definition to Economics. This is known as the scarcity definition. Robbins defines economics in
the following lines. ” Economics is a science which studies human behaviour as a relationship between
ends and scarce means which have alternative uses “.Following this definition, human beings have
unlimited wants. But the means to satisfy these wants are limited. These limited means have alternate
uses. Thus a fundamental problem arises-the problem of choice or the problem of choosing between
less urgent and more urgent wants. The main shortcoming of the definition is that it makes economics
only a theoretical science, ignoring the realistic side of the science relating to human welfare .

BOOK  PRINCIPLES OF BUSINESS DECISIONS

AUTHORS  Dr KGC NAIR

Dr GEORGE

Dr HARIKUMAR

Dr YOHANNAN

PUBLISHERS  CHAND BOOKS

PAGE NO  1.3

NO OF PAGES  10.10

VALUE
Value = Price * Quantity. Value is the sense is a bit like price, but somehow more important, more
permanent and better. This usage is enshrined in the definition of cynic as one who knows the price of
everything and the value of nothing. Advertisers claim that their goods represent value of money;
politicians claim the same for their policies.

BOOK  OXFORD DICTIONARY FOR ECONOMICS, LONDON

AUTHOR  JOHN BLACK

PAGE NO  492

PAGES  512

PRICE
The amount of money paid per unit for a good or service .This is easy to observe for many goods and
services. In any ordinary shop customers will find displayed a price at which as many or few units as they
wish can be purchased. For some goods and services, however price is less easy to observe. Special
terms may be available for large orders for repeat order or for particular types of customer. In some
markets buyers and sellers haggle over the price of each item. The price of similar goods varies over
time and place and goods with the same name vary in quality. A price mechanism refers to the role of
price in organizing the production and distribution of goods and services in an economy

BOOK  OXFORD DICTIONARY FOR ECONOMICS, LONDON

AUTHOR  JOHN BLACK

PAGE NO  362

PAGES  512

UTILITY
The capacity of goods and services to satisfy human needs. Utility cannot be measured in any definite
quantitative form. It is sufficient to be able to say, however that the utility of the commodity A >B >C
and so on

BOOKS  DICTIONARY OF ECONOMICS

AUTHOR  M C MADIAN

PUBLISHERS  HIMALAYAN PUBLISHING HOUSE

PAGE NO  318

TOTAL PAGES  332

Classification of goods
Economic assets taking a tangible physical form are called to be goods.

Or

Goods are the commodities which are scarce, useful, transferable,

material, visible, and capable of being stored.

There are thousands of varieties of manufactured goods and all goods cannot carry
the same rate or amount of duty. It is also not possible to identify all products
individually. It is, therefore, necessary to identify the numerous products through
groups and then to decide a rate of duty on each group. This is called
‘Classification’ of a good, which means determination of heading or sub-heading
under which the particular product will be covered.

Some classified goods are as follows-

1] CAPITAL GOODS

Goods intended for use in production, rather than by consumer. Some goods, such
as power station and oil drilling equipment , can clearly only be capital goods.
Many goods are infact capable of being used either for production or
consumption. Cars for example, may be used in private homes or for business
purposes in hotels and restaurants.

OR

Capital goods are generally man-made, and do not include natural resources such
as land or minerals, or human capital — the intellectual and physical skills and
labor provided by human workers. In most cases, these goods require a substantial
investment on behalf of the company making a product ; the purchase
of these goods are usually considered a capital expense. Capital goods are
important to businesses, because they use these items to make functional goods for
the buying public or to provide consumers with a valuable service. As a result,
capital goods are sometimes referred to as "producers' goods" or "means of
production."
WWW.WISEGEEK.COM

2] CONSUMER GOODS

Goods designed for use by final consumers. These are mostly bought by
consumers, but some, such as business cars are bought by enterprises, and many
are exported.

OR

Consumer goods are alternately called final goods, and the second term makes
more sense in understanding the concept. Essentially, consumer goods are things
purchased by average customers, and will be consumed or used right away. This is
in contrast to other types of goods called intermediate goods. The clothing made
from the fabric would be consumer goods, since it has reached its final destination:
the consumer.

WWW.WISEGEEK.COM

3] FINAL GOODS

Goods for use by final uses, including consumers investors, the government, and
exporters, as distinct from intermediate products .it is not at all easy to distinguish
final goods in practice; fuel for example, may be bought by consumers or
businesses.
4] FREE GOODS

A good which is not scarce, so that its availability is not an effective constraint or
economic activity .a good is not a free good merely because its market price is
zero, it may be infact scarce, but be underpriced by the market because of lack of
enforceable property rights over it.

5] FUTURE GOODS

A good to be delivered at a future date .A future contract is an agreement to buy or

sell on future date at a price fixed when the agreement is made.

6] GIFFEN GOODS

A good for which quantity demanded falls when its price falls ,this can be in theory
occur .a giffen good must be inferior and also have poor substitutes .a fall in the
price of a good increases real purchasing power ;if the good is inferior the income
effect of this rise in real income is negative .giffen goods in practice unlikely to be
found ,since narrowly defined classes of goods may be inferior but are unlikely to
have poor substitutes ,while widely defined classes of goods ,may have poor
substitutes but are unlikely to be inferior.

0R

A Giffen Good is a good that experiences increased demand for when the price
rises and decreased demand for when the price falls.

[www.askabout.com]

7] HOMOGENEOUS GOODS

A good which has uniform properties ,any unit being interchangeable with any
other goods.

OR

Two goods are called homogeneous for a consumer if the consumer would always
be willing to give up one unit of one good for one more unit of the other good, and
keep his utility fixed.

www.econlinks.com

8] INFERIOR GOODS
A commodity for which demand declines as income rises and increases when real
income falls ,that is a commodity whose demand curve rises.

[ dictionary of economics ,author-m.c. maidan ,year of publication-1997,pages of book-

330,publisher-himalaya publishing house]

OR

Goods for which demand tends to fall when income rises are called inferior
goods .For example ,when people have higher incomes ,people can afford to fly
.people who can afford to fly are less likely to take the bus long distances .thus
higher income may reduce the number of times someone takes a bus.

[Principle of economics, author- karl e. case,ray c. fair, pages of book-784,page no.-54,publisher-

pearson]

9] INTERMEDIATE GOODS

A good which is not itself a final good ,but is used as an input for production
.intermediate good include fuel and lubricants ,natural and man-made materials
and components .a large proportion of gross output in a modern industrial economy
consists of intermediate goods. For instance, fabric produced from cotton might be
an intermediate good.

10] MERIT GOODS

Goods or services whose consumption is believed to confer benefits on society as

whole greater than those reflected in consumers own preferences for them .merit
goods are sometimes subsidized by the government ,and sometimes provided by
charities.

11] NORMAL GOODS

A good whose consumption increases with income .thus any good is normal which
is not inferior , this applies to most goods.

OR

Goods for which demand goes up when income is higher and for which demand
goes down when income is lower are called normal goods .movie-tickets
,restaurant-meals ,telephone calls ,and shirts are called normal goods.

[Principle of economics,author-karl e. case,ray c. fair,pages of book-784,page no.-54,publisher-

pearson]
12] PRODUCER GOODS

Goods made for the purpose of producing consumer goods and other capital
goods ,e.g. machinery of all kinds .it is synonomous with capital goods.

13] PUBLIC GOODS

A good or services provided for the community by the government or local

authority ,e.g .education, public health services ,libraries ,theatres ,museums etc.

These are some variety of goods that are covered under its classification.

[source:-oxford dictionary of economics,author-john blade,sixth impression-2006,pages-512]

FIRMS

Firms: A firm is a unit that produces a good or service for sale. The firm’s business can be
conducted at more than one location. The objectives of a firm include profit maximization,
avoidance of risk and long run growth. Firms can be broadly classified under three categories
based on ownership: Proprietorship (Owned by a single person.); Partnership (Owned by two or
more people.) and Corporations (Fictitious legal person.)

Proprietorship: A business owned by one person. This type of firm may be a one person
operation or a large enterprise with many employees. In either case, the owner receives all the
profits and is responsible for all the debts incurred by the business.

Partnership: A business owned by two or more partners who share both profits of the business
and responsibility for the firm’s losses according to agreement made between them. The partners
can be individuals, estates, or other business.

Corporations: A business whose identity in the eyes of law is distinct from the identity of its
owners. State law allows the formation of corporations. A corporation is an economic entity that
like a person, can own property and borrow money in its own name. The owners of a corporation
are its shareholders. If a corporation cannot pay its debts, creditors cannot seek payment from
shareholder’s personal wealth. The corporation itself is responsible for its actions. The
shareholder’s liability is limited to the value of the stock they own.

However, many firms are global in their operations (owns and operates producing units) even
though they may have been founded and may be owned by residents of a single country. These
kinds of firms are called multinational firms. Examples: Ford, IBM, Pepsi Co. etc.
Reference: Author: John Black; Year Of Publication: 2006; Name Of The Book: Oxford
Dictionary Of Economics (Indian Edition); Publisher: Oxford, Delhi; Total Pages: 507; Page
No: 176.

Author: Edwin Mansfield; Year Of Publication: 1988; Name Of The Book: Micro-Economics
Theory And Applications Shorter Sixth Edition; Publisher: W.W.Norton And Company; New
York And London; Total Pages: 453; Page No: 141.

Author: William Boyes And Michael Melvin; Year Of Publication: 2008; Name Of The Book:
Textbook Of Economics Sixth Edition Indian Adaptation; Publisher: Biztantra, New Delhi; Total
Pages: 885; Page No: 80, 81.

OPPORTUNITY COST PRINCIPLE

Opportunity cost is the cost related to next best choice available to someone who has picked
between several mutually exclusive choices.it is a key concept in economics.

The opportunity cost of a good or performing an action,also known as the greatest cost is the lost
value of alternate option that could have been choosen,rather than the one that was chosen.If A
gives twice as much as pleasure as B,and there is no C that gives more pleasure than B and is
comparable(such as uses,time,effort or some other resource),than A’s opportunity cost is the
benefit of B because that is the difference in resulting happiness.in this particular scenario,the
opportunity cost of A is not a good indicator of its value because it says that A is worth only as
much as B,which is not the case.

Normally,there would be many uses for the resources of A/B so that there would not be such a
notable difference and so A and B would be similar in benefits,B and C would be similar in
benefits etc.In such a case where difference is minor,the opportunity cost of A is similar to
B,and that would reflect their similar benefits.

Often times,the opportunity cost is seen as what one would have to give up for something else.

Opportunity cost of A (in terms of B) = ,

 Where,

 ΔA is the gain of marginal utility because of a gain of A = 1

 ΔB is the loss of marginal utility because of a loss of B

Opportunity costs can also be thought of as the resources lost, or alternate products forgone,
through taking a particular action or producing a certain product. The lost resources could be
time, effort, money, goods, etc.

Opportunity Cost Principle: Heaberler and Taussing have developed this important cost
principle. This principle studies about the various alternatives and their benefits. According to
this principle the managerial decision must be such that from the selected alternative benefits.

2.Opprtunity cost can also b defined as highest valued alternative that must be forgone when a
choice is made.Economists refer to the forgone opportunities or forgone benefits of the next best
alternative.

Introduction from:wikipedia

2nd definition from:Textbook of economics,by William Boyes and Michael Melvin

Published by “biztantra”

19-A,ansari road,

Darya ganj,

New delhi.

No.of pages:885

Page no. of opportunity cost content: 25

INCREMENTAL POLICY
Economic principles assist in rational reasoning and defined thinking. They
develop logical ability and strength of the character.
One of the important principles in managerial economics is:

MARGINAL AND INCREMENTAL PRINCIPLE:

This principle states that the decision is said to be rational and sound if given the
firms objective of profit maximization, it leads to increase in profit, which is in
either two scenarios:

1. If total revenue increases more than total cost.

2. If total revenue declines less than total cost.

Marginal analysis implies judging the impact of unit change in one variable on the
other. Marginal generally refers to small changes.
 Marginal revenue is the change in total revenue per unit change in the
output sold.
 Marginal cost refers to the change in the total cost per unit change in output
produced. (Where as incremental costs refer to change in total costs due to
change in total output.)

Incremental analysis differs from marginal analysis only that it analysis changes
in the firms performance for a given managerial decision, whereas marginal
analysis often is generated by change in outputs or inputs.

Incremental analysis is the generalization of marginal concept. It refers to

changes in cost and revenue due to a policy change.
For example: (additional cost of installing computer facilities will be incremental
costs and the additional revenue due to access to internet will be incremental
revenue, adding a new business, buying new inputs, processing products, etc)

 Change in output due to change in process, product or investment is

considered as incremental change.

Incremental reasoning highlights the fact that incremental cost, rather than full
cost, should be taken in consideration to assess the profitability of a decision.

Incremental principle states that the decision is profitable:

 If revenue increases more than costs.
 If costs reduce more than revenues.
  If increase in some revenues is more than decrease in others.
 If decrease in some costs is greater than increase in others.

Time value of money

The time value of money is the value of money figuring in a given amount of interest earned
over a given amount of time. The method also allows the valuation of a likely stream of income
in the future, in such a way that the annual incomes are discounted and then added together, thus
providing a lump-sum "present value" of the entire income stream.

All of the standard calculations for time value of money derive from the most basic algebraic
expression for the present value of a future sum, "discounted" to the present by an amount equal
to the time value of money. For example, a sum of FV to be received in one year is discounted
(at the rate of interest r) to give a sum of PV at present: PV = FV − r·PV = FV/(1+r).Some
standard calculations based on the time value of money are:

Present value The current worth of a future sum of money or stream of cash flows given a
specified rate of return. Future cash flows are discounted at the discount rate, and the higher the
discount rate, the lower the present value of the future cash flows. Determining the appropriate
discount rate is the key to properly valuing future cash flows, whether they be earnings or
obligations.
Present value of an annuity An annuity is a series of equal payments or receipts that occur at
evenly spaced intervals. Leases and rental payments are examples. The payments or receipts
occur at the end of each period for an ordinary annuity while they occur at the beginning of each
period for an annuity due.
Present value of a perpetuity is an infinite and constant stream of identical cash flows.
Future value is the value of an asset or cash at a specified date in the future that is equivalent in
value to a specified sum today.
Future value of an annuity (FVA) is the future value of a stream of payments (annuity),
assuming the payments are invested at a given rate of interest.

For example, 100 dollars of today's money invested for one year and earning 5 percent interest
will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid
exactly one year from now both have the same value to the recipient who assumes 5 percent
interest; using time value of money terminology, 100 dollars invested for one year at 5 percent
interest has a future value of 105 dollars. This notion dates at least to Martín de Azpilcueta
(1491-1586) of the School of Salamanca.

Taken from Wikipedia encyclopydia.

Demand
1. A schedule of quantities of a give product which consumers are willing to buy at various
prices in a particular market at given period of time.

2. The entire relationship between quantity of a commodity that buyers wish to purchase per
period of time & the price of commodity.

Reference- V.G. Mankar, Richard g. Lipsey, Douglas D.Purvis, Peter O.Steiner), 1999, 1988,
Business Economics, Economics (sixth edition). Macmillan India limited, Harper & Row, India (New
Delhi), Newyork, 34, G-4.

LAW OF DEMAND
In economics, the law of demand is an economic law that states that consumers
buy more of a good when its price decreases and less when its price increases.

Market demand is represented by a downward sloping curve with price on the vertical axis
and quantity on the horizontal axis.
Law of demand states that the amount demanded of a commodity and its price are inversely
related, other things remaining constant. That is, if the income of the consumer, prices of the
related goods, and tastes and preferences of the consumer remain unchanged, the consumer’s
demand for the good will move opposite to the movement in the price of the good.

"If the price of the good increases, the quantity demanded decreases, while if price of the good
decreases, its quantity demanded increases."

Reference: en.wikipedia.org/wiki/Law_of_demand

Demand curve
A graph illustrating how much of a given product would be willing to buy
at different prices.Demand curves have a negative slope indicating that
lower prices cause quantity demanded to increase.

Source-principles of economice.

Author-CASE N FARE

PAGE NO-51,52

EDITION -8

PAGE-800

The demand curve is the graph depicting the relationship between the price of a

certain commodity, and the amount of it that consumers are willing and able to
purchase at that given price. It is a graphic representation of a demand schedule.

(GOOGLE IMAGE)
 P – price(at p1 price the quantity demanded is q1)
 (at p2 price the quantity demanded is q2)
 Q - quantity of good
 S - supply
 D – demand
 authors: Paweł Zdziarski (faxe), Astarot
 created with en:Inkscape
 Source -wikipedia

SOURCE –NET MBA

 The quantity demanded of a good usually is a strong function of price. A

tabular representation is made in respect to the quantity demanded and price.

PRICE ELASTICITY OF DEMAND

Price Elasticity of Demand= % change in quantity demanded/% change in prize

It measures sensitivity of quantity demanded to price changes.It tells us what the

percentage change in the quantity demanded for a good will be following a 1

percent increase in the price of that good.

It can also be written Ep=%(∆Q)/%(∆P)

%∆Q simply means percentage change in Q and %∆P means percentage change
in P.It can also be written as Ep=P/Q*(∆Q/∆P).

1.AUTHOR-Robert.S.Pindyck,Daniel L.Rubinfield

Year-1989,Title-MICROECONOMICS,Publisher-Collier Macmillan
Publishers,London,Total no. of pages-657,Page No-27
2.AUTHOR-William Boyes,Michael Melvin,Year-2008,

Title-TEXTBOOK OF ECONOMICS,Publisher-biztantra,New Delhi

Total No. of Pages-885,Page No.-475.

3.AUTHOR-Karl E.Case,Ray C.Fair,Year-2009,

Title-PRINCIPLES OF ECONOMICS,Publisher-Pearson Education,Inc and Dorling

Kindersley Publishing,Inc.New Delhi ,Total No. of Pages-784,Page No.-96

CROSS ELASTICITY OF DEMAND

Cross Elasticity of Demand=% change in quantity Y demanded/%change in price

of X.It measures the response of quantity of one good demanded to a change in
the price of another good.

1.AUTHOR-Robert.S.Pindyck,Daniel L.Rubinfield

Year-1989,Title-MICROECONOMICS,Publisher-Collier Macmillan
Publishers,London,Total no. of pages-657,Page No-27

2.AUTHOR-William Boyes,Michael Melvin,Year-2008,

Title-TEXTBOOK OF ECONOMICS,Publisher-biztantra,New Delhi

Total No. of Pages-885,Page No.-475.

3.AUTHOR-Karl E.Case,Ray C.Fair,Year-2009,

Title-PRINCIPLES OF ECONOMICS,Publisher-Pearson Education,Inc and Dorling

Kindersley Publishing,Inc,New Delhi ,Total No. of Pages-784,Page No.-96
 INCOME DEMAND
Demand is also affected by the amount of income that consumers avail

and they are ready to spend. For more increase in the consumer
income would case the demand curve for the demand curve to shift to
the right.

For example the income of the upper middle classes in India

increased rapidly in 1990’s. As a result of which 1991 reforms leading to
the entry of many foreign companies in the country.Increase in the
income of the young engineering and management graduates resulted
in increased demand for a variety of branded consumer goods.

REFERENCE:
BOOK:Managerial Economics (4 th edition) 2006
AUTHOR:Craig H.Petersen,W.Cris Lewis,
Sudhir.K.Jain
PUBLISHER: Petersen Lewis Jain
PAGE NO. : 70

LAW OF SUPPLY
The positive relationship between price and quantity of a good supplied: an increase in market price will
lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in
quantity supplied.
THE LAW OF SUPPLY

A microeconomic law stating that, all other factors being equal, as the price of a good or service
increases, the quantity of goods or services offered by supplier increases and vice versa.

Market supply is represented by an

upward sloping curve with price on the
vertical axis and quantity on the
horizontal axis.

In economics, the law of supply is the tendency of suppliers to offer more of a good at a higher price. The
relationship between price and quantity supplied is usually a positive relationship. A rise in price is
associated with a rise in quantity supplied.

What are the determinants of supply?

Price of the product

A producer is always aimed on maximizing his profit and minimizing his cost. A higher price
increases his willingness to supply and vice-versa.

Technology changes
Technology aids a producer in minimizing his cost of production; mass production is possible
with technology

Resource supplies
The producer also has to pay for other resources such as raw materials and labor. if his money is
short on supplying a certain number of products because of an increase in resource supplies, then
he has to reduce his supply.

Tax/ subsidy
A producer aims to minimize his profit, but an increase in tax will only increase his expenses,
decreasing his capacity to buy resource supplies and forcing him to reduce his supply.

Expectations about future price

Again, the producer is aimed at maximizing his profit. A future decline in price would tell the
producer to lessen his supply so that he will not endure a loss when the prices go down and vice-
versa.

Price of other goods produced

A producer may not only produce on product but other products as well. A producer's money is
limited and if he increases his supply in one product, he would have to decrease his supply in the
other product, not unless his sales increase.

REFERENCE WEBSITE URL:

http://en.wikipedia.org/wiki/Law_of_demand

http://wiki.answers.com/Q/What_are_the_determinants_of_supply\

REFERENCE BOOK:

AUTHOR: KARL E. CASE, RAY C. FAIR

YEAR: 2009
 TITLE: PRINCIPLES OF ECONOMICS

PUBLISHER: DORLING KINDERSLEY (INDIA) PVT. LTD., LICENSEES OF PEARSON EDUCATION

PLACE OF PUBLISH: INDIA

PAGE NO: 60

TOTAL NO OF PAGES: 784

   Author Name of  Total  Specified
the Book  Page
Factors of Production : M.C.Madian Dictionary 330 170
Any resources used in the of
production of goods or Economics
services, the top factors of
production can be broadly
classified into three main
groups-labour or human
services , caapital or Man
made means of production
can be sub -divided in
vaarious ways for example
labour with vaarious
aamount of human capital
or laand with various
minerals content and also
thier is Fixed factors and
Immobile factors
         
Short Run : M.C.Madian Dictionary 330 428
A period in which something of
cannot be changed which Economics
could be changed given
more time . In the Short run
for example a firm can buy
more materials or fuel and
continue more unskilled
workers , but doesnot have
time to bulid new plant or
recruit and train more
skilled workers and
managers .The Short run is
contrasted with the medium
run,in which more things
but not everything can be
changed with the long run
,in which everything can be
changed that can be ever be
changed at all . Short Run
supply and demand curves
are typically are less elastic
than the corresponding long
run curves .

SHORT RUN
In economics, the concept of the short-run refers to the decision-making time
frame of a firm in which at least one factor of production is fixed. Costs which are
fixed in the short-run have no impact on a firm decisions. For example a firm can
raise output by increasing the amount of labor through overtime.

ECONOMICS:Economics is the social science that is concerned with the

production, distribution, and consumption of goods and services. Economics aims
to explain how economies work and how economic agents interact. Economic
analysis is applied throughout society, in business, finance and government, but
also in crime,[3] education,[4] the family, health, law, politics, religion,[5] social
institutions, war,[6] and science.

A generic firm can make three changes in the short-run:

 Increase production
 Decrease production
 Shut down

In the short-run, a profit maximizing firm will:

 Increase production if marginal cost is less than price;

 Decrease production if marginal cost is greater than price;
 Continue producing if average variable cost is less than price, even if
average total cost is greater than price;
 Shut down if average variable cost is greater than price. Thus, the average
variable cost is the largest loss a firm can incur in the short-run.

SIMPLE EXPLANATION WITH EXAMPLE:

"The short run is a period of time in which the quantity of at least one input is
fixed and the quantities of the other inputs can be varied. The long run is a period
of time in which the quantities of all inputs can be varied.

I find examples helpful, so we'll consider a hockey stick manufacturer. A company

in that industry will need the following to manufacture sticks:

 Raw materials such as lumber

 Labor
  Machinery
 A factory

Suppose the demand for hockey sticks has greatly increased, prompting our
company to produce more sticks. We should be able to order more raw materials
with little delay, so we consider raw materials to be a variable input. We'll need
extra labor, but we can likely increase our labor supply by running an extra shift
and getting existing workers to work overtime, so this is also a variable input. The
equipment on the other hand, may not be a variable input. It may be time
consuming to implement the use of additional equipment. It depends how long it
would take us to buy and install the equipment and how long it would take us to
train the workers to use it. Adding an extra factory is certainly not something we
could do in a short period of time, so this would be the fixed input

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Short-run

http://economics.about.com/cs/studentresources/a/short_long_run.html

PRODUCTION FUNCTION
A production function is an equation, table, or graph showing the maximum output of a commodity that
a firm can produce per period of time with each set of inputs. Both inputs and outputs are measured in
physical rather than in monetary units. Technology is assumed to remain constant during the period of
the analysis.

AUTHOR: DOMINICK SALVATORE

YEAR: 2007
TITLE: MANAGERIAL ECONOMICS IN A GLOBAL ECONOMY
PUBLISHER: THOMSON

PLACE OF PUBLISH: BABA BARKHA NATH PRINTERS, HARYANA

PAGE NO: 239

TOTAL PAGES: 754

MARGINALPRODUCT:
The amount added to the total product by the addition of

One more unit of capital and labor.

Mp=tpn-tpn-1

George .j .Stigler in his theory of price makes five preposition regarding

The marginal product

1. The sum of the n marginal units is equal to the total product of n units of
capital and labor.

2. When the average product is increasing the marginal product is greater than
the

Average product, but it doesn’t follow that the marginal product increases when
the average product increases.

3. When the average product is decreasing, the marginal product is less than the
average product.

4. When the average product is at maximum, the marginal product is equal to the

Average product.
5. The addition or subtraction of a fixed sum from all of the total products will
have no effect on marginal product.

REFERENCE: DICTIONARY OF ECONOMICS, oxford dictionary of economics

EDITEDBY: ML .MADIAN

PUBLISHER: HIMALAYA PUBLISHING HOUSE

PLACE: MUMBAI

YEAR:2005

AVERAGE PRODUCT:
Average product is the output produced perunit of variable

Factor input employed.a.p is obtained by dividing the total product by the

Number of fctors employed.

A.P=totalproduct/no.of variable factor units(n)

REFERENCE:PRINCIPLES OF BUSINESS DECISIONS

AUTHOR:KGC.NAIR,HARIKUMAR,GEORGEE,YOHANAN

PUBLISHER:CHAND BOOKS

PLACE TRIVENDRUM

PAGE NO:5.4

ISOCOST LINE
The Isocost Line

It shows the various combination of two inputs that the firm can hire with a given
total cost outlay.
 --DOMINICK SALVATORE

The Isocost Line shows the combinations of capital and labor that will end up costing the same amount.
Thus, given a budget of $C,

C = wL + rK (Is cost eqn.)

Or K = C/r - (w/r)L

Where C/r = Intercept

- (w/r) = Slope of the isocost

Key Concepts for Isocosts

The isocost function is the set of all combinations of capital and labor that can be purchased for a
specified total cost

Changes in the budget amount, $C, cause the isocost line to shift in a parallel manner

Changes in either the price of labor or capital cause both the slope and one intercept of the isocost
function to change

Reference: www.wikipedia.com

Author: Dominick Salvatore

Year: 2008

Title: managerial economics principles and world wide applications

Publisher: oxford university press

Place: New York

Page no: 647

Total no of pages: 666

MARGINAL REVENUE
Marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is
the additional income from selling one more unit of a good; sometimes equal to price. It can also
be described as the change in total revenue per the change in the number of units sold. Marginal
revenue is equal to the change in total revenue over the change in quantity when the change in
quantity is equal to one unit. This can also be represented as a derivative when the units of output
are arbitrarily small. (Total revenue) = (Price that can be charged consistent with selling a given

quantity) times (Quantity) .

For a firm facing perfectly competitive markets, price does not change with quantity sold

, so marginal revenue is equal to price. For a monopoly(no competitors), the price

received will be the profit maximizing quantity, for which marginal revenue is equal to marginal
cost(MC) will be lower for a monopoly than for a competitive firm, while the profit-maximizing
price will be higher. When demand is elastic, marginal revenue is positive, and when demand is
inelastic, marginal revenue is negative. When the price elasticity of demand is equal to1,
marginal revenue is equal to zero.

Example: A promoter has properly estimated the demand curve for seats at an event to be

Q = 40,000 − 2000P ,

Where P is the price of a seat. The inverse demand curve, which determines price as a function
of quantity, is therefore represented by P(Q) = 20 − Q / 2000.

We therefore have

TR(Q) = 20Q − Q2 / 2000.

Marginal revenue is the slope of total revenue:

MR(Q) = 20 − Q / 1000.
Definition from : oxford dictionary of economics edited by john black.

2006 Indian edition,

No. of pages:507, located in 287th page

Dictionary of economics edited by m.c. madian

By Himalaya publishers

1997 edition No. of pages: 330, located in 186&187th pages.

Example from : Wikipedia the encyclopedia

FIXED COST

The part of total cost which does not depend on the level of current production.
This includes items such as management costs and the costs of plan security.
Fixed cost do not affect the profit maximizing level of output in the short run
though in longer run a firm which can not cover its fixed costs will become
insolvent and exit. It is also called overhead cost or unavoidable cost.

In economics, fixed costs are business expenses that are not dependent on the

level of goods or services produced by the business .They tend to be time-related,
such as salaries or rents being paid per month. 

 From a pure economics perspective, fixed costs are not permanently fixed; they
will change over time, but are fixed in relation to the quantity of production for
the relevant period. For example, a company may have unexpected and
unpredictable expenses unrelated to production; and warehouse costs and the
like are fixed only over the time period of the lease.
 Fig:1 Fig:2

As per fig 1 total fixed cost is constant throughout the change in volume.

As per fig 2 fixed cost per unit changes with the change in volume. We can derive
that fixed cost per unit is inversely proportional to the volume.

Reference-

 John Black, 2006, Oxford Dictionary of Economics, Oxford University Press,

New Delhi, Page no.178
 Richard G. Lipsey ; Douglas D.Purvis ; Peter O.Steiner(1988),Economics(6th
ed.) ,Harper & Row Publishers, New York, Total pages-989.specified page-
196.
 http://en.wikipedia.org/wiki/Fixed_cost
 http://www.allbusiness.com/glossaries/fixed-cost/4951608-1.html

VARIABLE COST
 A cost that varies directly with output, rising as more is produced and
falling as less is produced is called VARIABLE COST. It’s also known as
direct or avoidable cost. Varaiable cost is the sum of all marginal cost of
all units produced.

Eg.- labor is the variable factor of production, then wage bill is a variable cost.
 Figure I Figure II

Total variable cost Variable cost per unit

As per figure I total variable cost increases with increase in volume. Total variable
cost is directly proportional to the volume.

As per figure II variable cost per unit is constant.

References:-

-Richard G. Lipsay ; Douglas D.Purvis ; Peter O.Steiner(1988), Economics(6th ed.)

,Harper & Raw Publishers. Total pages-989.specified page-196.

- John Black, 2006, Oxford Dictionary of Economics, Oxford University Press, New
Delhi, Page no.179

-Garrison, Ray H; Eric W. Noreen, Peter C. Brewer (2009). Managerial

Accounting (13e ed.). McGraw-Hill Irwin. ISBN978-0-07-337961-6

-webpage- www.investorwords.com/variable cost

BREAK EVEN ANALYSIS

Break Even Analysis refers to the calculation to determine how much product a company must sell in
order to break even on that product. It is an effective analysis to measure the impact of different
marketing decisions. It can focus on the product, or incremental changes to the product to determine
the potential outcomes of marketing tactics.
Break-even point for a product is the point where total revenue received equals the total costs
associated with the sale of the product (T R = TC) A break-even point is typically calculated in
order for businesses to determine if it would be profitable to sell a proposed product, as opposed
to attempting to modify an existing product instead so it can be made lucrative.

The formula for a break even analysis is:

Break even point ($) = (Total Fixed Costs + Total Variable Costs).
Total Variable Costs = Variable cost per unit x units sold
Unit contribution (contribution margin) = Price per unit - Variable cost per unit.

Reference:en.wikipedia.org/wiki/break_even _analysis

Basic Price

Definition:
The basic price is the amount receivable by the producer from the purchaser for a unit of
a good or service produced as output minus any tax payable, and plus any subsidy
receivable, on that unit as a consequence of its production or sale; it excludes any
transport charges invoiced separately by the producer.

Context:
The amount received by the producer from the purchaser for a unit of good or service
produced as output. It includes subsidies on products and other taxes on production. It
excludes taxes on products, other subsidies on production, suppliers’ retail and
wholesale margins, and separately invoiced transport and insurance charges. Basic
prices are the prices most relevant for decision making by suppliers.

http://www.imf.org/external/np/sta/tegppi/index.htm.

PRODUCT LINE PRICING:

PART OF YOUR PRODUCT PRICING
STRATEGY

DEFINITION

Pricing is one of the most important elements of the marketing mix and has the most effect on
whether or not the strategy is successful. Product line pricing (PLP) is a pricing strategy used
to sell different products in the same product range at different price points based on features
or benefits.

P R O D U C T - L I N E P R I C I N G – The setting of prices for all items in a product line

involving the lowest-priced product price, the highest price product, and price differentials for
all other products in the line.

P R O D U C T L I N E P R I C I N G is a pricing strategy that uses one product with various

class distinctions. An example would be a car model that has various model types that change
with performance and quality. This pricing process is evaluated through consumer value
perception, production costs of upgrades, and other cost and demand factors.

Product line pricing requires a different look at setting price. With a line of products to price,
you need to consider the whole product mix, the product life cycle within the mix, and
your product positioning strategy.

Within the product mix or line, there are typically price points that reflect the price level:
high, medium or low.

 Common Examples of Product Line Pricing

a) Car wash options are common examples of product line pricing.
Product line pricing is seen from gas pumps to car dealerships and from ice cream shops to fast
food restaurants. A basic car wash may be shown as one price, a super wash with wash and wax
will cost a little more, and a full-service premium wash will be the most expensive.

b) For example, most computer manufacturers have basic models, business models and
premium high graphic and/or gaming models. Each of those model levels has its own
price point. Automotive manufacturers have economy models, environmental models,
luxury models, work models, and more.

c) For example, you may charge a base price for a basic model, the next product up might
have more features or be a better quality - it would be a higher price, and so on throughout
 the line (think of beds and the number of coils, or the type of cover, etc. or think of
televisions with size and the number of pixels as a differentiation in the product line).

d) For example, most computer manufacturers have basic models, business models and
premium high graphic and/or gaming models. Each of those model levels has its own
price point. Automotive manufacturers have economy models, environmental models,
luxury models, work models, and more.

 When to use Product Line Pricing

 Product line pricing is used when a primary product is offered with different features or benefits,
essentially creating multiple "different" products or services. For example, a car could be the primary
product. It could come standard, with a sunroof and navigation system or fully stocked with all the
features and add-ons. Each product would then be priced accordingly.

 Use this strategy only if you have more than two products in the line and if you have clear
enough differentiation of features and benefits - if the customer cannot distinguish between
the products, this strategy will fail.

Additionally, understand your product positioning strategy: is your product line targeted
for commodity or luxury markets (the line needs to bytargeted to the same, or linked,
markets).

Use this strategy through the growth, maturity and declining stages of the
product's life-cycle; if used in the introduction phase, there might not be enough early
recognized value between the products in the product line.

With this particular pricing strategy, it is important to build strong product differentiation within
the line so that buyers can understand what they're paying for and why.

source

 Goal of Product Line Pricing

 The goal of product line pricing is to maximize profits. The more features offered, the more
consumers will pay. The goal is to draw enough interest in the primary product that the upgraded
product will be sold (at a greater price) based off the interest in the "basic" primary product. By using
PLP, some individual products may not make profits, but the goal is for the product line as a whole to
turn a profit.

 Factors Involved in PLP

 The biggest factor in the success of product line pricing is the success of the primary product. A
customer won't get his ice cream cone upgraded to have sprinkles and whipped cream unless he
enjoyed the ice cream itself. Products must also be priced correctly. One product in the line cannot
 be too much more money than the others, or it will not adhere to the pricing plan.
 Specific Types of Product Line Pricing Plans
 Specific types of product line pricing strategies include optional-feature pricing (as with cars), and
two-part pricing, which could be an amusement park that charges for general admission but then
also charges for particular rides. Product bundling is pricing a product so that if a product is bought
with all available features it would be cheaper then buying accessories or feature upgrades
individually.
Refrences-
Definitions:
http://www.ehow.com/facts_6003881_product-line-pricing-strategy_.html
www.coolavenues.com
http://wiki.answers.com/Q/What_is_Product_Line_Pricing
Other information andExamples :
http://www.ehow.com/facts_6003881_product-line-pricing-strategy_.html
http://www.more-for-small-business.com/product-line-pricing.html

CYCLICAL PRICING

ADAM SMITH FATHER OF ECONOMICS

Defined Economics as ‘science of wealth’.
 BASIC CONCEPTS REGARDING PRICE:

1) Price: It is the quantity of money that has to be exchanged for one unit of a
good or service.

2) Price Control: It is the measure taken by the government to prevent price

rise. Direct fixing of prices is a measure applicable to special conditions. It
does not itself eradicate inflation. However, other methods of control on
margins between costs and prices are commonly used by government to
keep the prices under check.

3) Price Discrimination: It is the practice of charging different prices from

different consumers for the same good where the price differences do not
reflect the differences in cost of supply . To practice any form of price
discrimination, it must be possible to prevent arbitrary increase in prices,
since otherwise buyers at a lower price could re-sell to buyers at a higher
price. In such a situation both the parties would gain, obviating the need for
price discrimination.
Discrimination may be of three forms:
a) Personal discrimination ;
b) Local or geographical discrimination; and
c) Trade or purpose discrimination.

A monopolist does not always charge the same price from all the purchasers
of his commodity or service. He charges different prices from different
classes of people. He may divide his sale among a number of markets and
charge different price in each market. This peculiar feature of monopoly
is known as price discrimination.
As Benham says “A monopolist can divide his sales among a number of
different markets to charge a different price in each market. This is known
as price discrimination.”
4) Pricing of New Products: The most dynamic pricing in business occur when
new products, with uncertain market dimensions, are introduced. The price
pattern tends to be determined by the maturity of the product. The price is
that of a high cost low-volume product specially seeking out new uses and
demands. This phase can be long or short, depending on the novelty of the
product and the imagination of the seller or potential user. With the
uncovering of latent demand, it becomes possible to shift from experimental
to volume output, with declining costs and price reductions.
In new chemical products, drastic price revisions are as a rule associated
with major turning points in the industry. The cycles of business pricing to
which changes in technology or product preference give rise, are frequently
so compelling as to over-ride the influence of the business cycle. With little
regard for general market conditions, the appearance of the maturity phase is
the single stable pricing as long as sellers remain few and, by virtue of a
total demand that has a known pattern, are in a position to sustain a price
policy.

5) Pricing Policy: It is the policy or rules adopted by a firm enterprise which

determines the prices it sets for its products. For example, it is argued that
public enterprises should adopt marginal cost pricing policies. In analysing
the pricing policies of private sector firms economists believe that, if a
firm’s objective is to maximise profits, its pricing policy will consist of
setting a price in such a manner that the marginal cost equals marginal
revenue.

6) Price Mechanism: Price mechanism in a capitalist/ mixed economy system

functions in such a manner that the adjustments in the economic field take
place automatically without any directions or dictations from a central
authority. Price becomes the coordinator both of production and
consumption. In a free economy, the price mechanism tends to harmonise
the interests of both the consumers and the producers.
In modern welfare economies guided by the principle of welfare of the
common man, the state intervenes to protect the interests of the consumers
from self seeking and profit greedy enterpreneurs who may combine to
extract higher prices from the consumers.

7) Price Support: It is a system of government support by which market prices

are fixed at a little above the free market levels. Here the government
purchases unsold surpluses to support the price and thereby raises farmers’
income. This system is in practice in India and many other countries.
 8) Price System: It plays a vital role in the functioning of the free capitalistic
economies. A rise in the price of a product raises the profits of the existing
dealers and manufacturers and thus it is an invitation for the potential entrant
to join the industry. Likewise there is an exit of labour and capital from an
industry, the price of which shows a download trend. Its working may not
always be conductive to the maximisation of the human welfare. The rich
may get their most superfluous wants satisfied, while the basic needs of the
poor may be neglected. That is why socialist states do not leave the price
fixation to the competitive forces of demand and supply of the market.

9) Price Theory: It is that part of economics which analyses the ways in which
prices are determined in a free market economy and role they play in solving
the problems of resource allocation. The principal objective of price theory
is the creation and sustenance of the market. The essential elements in a
market are the behavior of sellers and the ways in which they interact.

CYCLICAL PRICING

I examine price markups in monopolisticly-competitive markets that

experience fluctuations in demand because the economy experiences cyclical
fluctuations in productivity. Markups depend positively on the average
income of purchasers in the market. For a nondurable good average income of
purchasers is procyclical; so the markup is procyclical. For a durable good,
however, the average income of purchasers is likely to decrease in booms
because low income consumers of the good concentrate their purchases in boom
periods; so the markup is likely countercyclical. This is particularly true
for growing markets. I find markups make the aggregate economy fluctuate
more in response to productivity if goods are sufficiently durable.

In simple words cyclical pricing means pricing according to the market conditions.

The term business cycle (or economic cycle) refers to economy-wide fluctuations
in production or economic activity over several months or years. These
fluctuations occur around a long-term growth trend, and typically involve shifts
over time between periods of relatively rapid economic growth (expansion or
boom), and periods relative stagnation or decline (contraction or recession).

These fluctuations are often measured using the growth of rate of real gross
domestic product. Despite being termed cycles, most of these fluctuations in
economic activity do not follow a mechanical or predictable periodic pattern.
So the pricing which is done on the basis of market fluctuations or business cycle
is known as cyclical pricing.

For example prices of land, housing and rent increases during boom market
conditions.

Cyclical pricing is different from seasonal pricing. Seasonal pricing is done on the
basis of seasons. Like prices for air conditionor is high during summer because the
demand for air conditionor is more or high during summer and vice versa.

Bibliography
http://www.nber.org/papers/w3050

National Bureau of Economics Research

Economics Dictionary – B.N AHUJA

Different types of Profit

Accounting profit

Accounting profit is the difference between price and the costs of bringing to market whatever it is that
is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the
component costs of delivered goods and/or services and any operating or other expenses.

In the accounting sense of the term, net profit (before tax) is the sales of the firm less costs such as
wages, rent, fuel, raw materials, interest on loans and depreciation. Costs such as depreciation,
amortization, and overhead are ambiguous.

Economic Profit

In economics, economic profit is the difference between a company's total revenue and its opportunity
costs. It is the increase in wealth that an investor has from making an investment, taking into
consideration all costs associated with that investment including the opportunity cost of capital.

An economic profit arises when revenue exceeds the opportunity cost of inputs, noting that these costs
include the cost of equity capital that is met by "normal profits." A business is said to be making an
accounting profit if its revenues exceed the accounting cost of the firm.