MANGERIAL ECONOMICS

(Important Questions and suggested model answers) 1. Define Managerial Economics. Managerial economics is a speciali ed discipline o! management studies w"ic" deals wit" application o! economic t"eor# and tec"ni$ues to %usiness management& 'Managerial economics is a science which studies the economic aspects of behavior of the firm as an enterprise, and helps to allocate scarce resources to their alternative uses in such a manner as to optimize the firms ultimate objective, as an organization and a social institution, under conditions of the imperfect knowledge, risk and uncertaint . !t provides principles, method, and techni"ues of anal sis of economic behaviour and at the same time prescribe wa s and means to optimize economic efficienc .# $. Discuss the nature and scope of Managerial Economics. %hat are the other related disciplines& 'ature and (cope of Managerial Economics) All managerial decisions are %asicall# economic in nature& ("e decisions are eit"er directl# related to Economics or "a)e economic implications* t"e# mig"t not %e %ased simpl# on economic calculations+ and mig"t in)ol)e se)eral non,economic+ social+ political+ legal and tec"nological considerations as well& Managerial economics "elps not onl# to anal# e t"e economic content and implications o! t"e managerial decisions %ut also to integrate se)eral ot"er aspects leading to sound decisions& Managerial economics incorporates elements o! %ot" micro and macroeconomics dealing wit" managerial pro%lems in arri)ing at optimal decisions& It uses anal#tical tools o! mat"ematical economics and econometrics wit" two main approac"es to economic met"odolog# in)ol)ing -descripti)e. as well as -prescripti)e. models&

Managerial economics di!!ers !rom traditional economics in one important respect t"at it is directl# concerned in dealing wit" real people in real %usiness situations& Managerial economics is concerned more a%out %e"a)ior on t"e practical side& Managerial economics deals wit" a t"oroug" anal#sis o! 0e# elements in)ol)ed in t"e %usiness decision ma0ing& Most managerial decisions are made under conditions o! )ar#ing degrees o! uncertaint# a%out t"e !uture& (o reduce t"is element o! uncertaint#+ it is essential to "a)e "omewor0 o! researc"1in)estigation on t"e pro%lem sol)ing %e!ore action is underta0en& 2nowledge o! managerial economics is a %oon to t"e manager1%usinessman1entrepreneur& Modern %usinessman ne)er %elie)es in luc0& 3e %angs on s0il!ul management and appropriate timel# economic decision ma0ing& ("is art is !acilitated %# t"e science o! managerial economics& *ther related disciplines) Managerial economics is closel# related to and draws "ea)il# upon se)eral areas in economics suc" as ("eor# o! t"e 4irm+ Microeconomics+ Macroeconomics+ Industrial Economics+ and so on& Managerial economics is %asicall# micro in nature in t"at it deals wit" t"e !irm.s %e"a)iour in t"ree %asic areas )i & 5tilit# anal#sis+ ("eor# o! t"e 4irm and 4actor pricing& Managerial Economics draws a !ew aspects !rom Macroeconomics suc" as national income+ tec"nolog# !orecasting+ w"ic" are rele)ant to sales1demand !orecasting& 6"ile Industrial Economics anal#ses t"e economic pro%lems o! t"e industr# as a w"ole+ Managerial Economics deals wit" t"e economic aspects o! managerial decision ma0ing at a micro le)el irrespecti)e o! t"e sp"ere o! acti)it#& Macro Economics is not onl# related to %ut is also an integral part o! t"e !unctional areas o! management suc" as production+ !inance+ accounting+ mar0eting+ operations researc" and personnel& (o illustrate+ Capital %udgeting mig"t %e taug"t in !inance and accounting as well as in Economics& 6"ile Economics would anal# e t"e !irm.s in)estment decisions and economic )ia%ilit# o! pro7ects+ !inance would stud# t"eir !inancial )ia%ilit#& E&g& ("e Garland 8ro7ect lin0ing 3imala#an ri)ers to t"e
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sout"ern plateau was considered !easi%le !rom t"e tec"nical point o! )iew+ %ut it was t"oug"t to %e !inanciall# not !easi%le as it in)ol)ed in)estment %e#ond India.s capacit#& Distinguish between Micro and Macro Economics. /& :i!!erence in nature; Microeconomics is t"e stud# o! t"e %e"a)ior o! t"e indi)idual units& Macroeconomics is t"e stud# o! t"e %e"a)ior o! t"e econom# as a w"ole& 9& Microeconomics deals wit" t"e indi)idual incomes and output+ w"ereas macroeconomics deals wit" t"e national income and national output& <& Microeconomics deals wit" t"e pro%lems o! pricing and income distri%ution& Macroeconomics deal wit" t"e pro%lems o! t"e si e o! national income+ economic growt" and general price le)el& =& ("eories o! )alue and economic wel!are are ma7or areas in microeconomics& ("eories o! Income and emplo#ment are core topics in macroeconomics& !s Managerial Economics a +ositive or 'ormative (cience& Discuss. +ositive Economics e,plains the economic phenomenon as -%hat is, what was and what it will be. 'ormative Economics prescribes what it ought to be#. +ositive sciences simpl describe, while normative sciences simpl prescribe. According to 8ro!& Ro%%ins+ economics is a positi)e science& Science is+ a!ter all+ a searc" !or trut" and t"ere!ore+ economics s"ould stud# t"e trut" as it is and not as it oug"t to %e& ("is is %ecause w"en we sa# t"at t"is oug"t to %e li0e t"is+ we presume t"at our point o! )iew is correct& In a stud# o! a pro%lem at a gi)en point o! time+ not onl# economic considerations %ut also man# ot"er considerations suc" as et"ical+ political etc& must %e considered& A polic# decision is ta0en a!ter weig"ing t"e relati)e importance o! all t"ese !actors& ("ere are %ound to %e di!!erences in respect o! polic# prescription
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and it is %etter to 0eep awa# !rom areas w"ic" are contro)ersial and stud# t"e !acts as t"e# are& According to economists li0e Mars"all and 8igou+ t"e ultimate o%7ect o! t"e stud# o! an# science is to contri%ute to "uman wel!are& ("us economics s"ould %e a normati)e science& It s"ould %e a%le to suggest polic# measure to t"e politicians& It s"ould %e a%le to prescri%e guidelines !or t"e conduct o! economic acti)ities& Not onl# economists s"ould %uild up t"e economic t"eor# %ut also at t"e same time t"e# s"ould pro)ide polic# measures&

6e must stri0e a %alance %etween t"ese two e>treme )iews& As 2e#nes put it+ '("e main !unction o! economics is not to pro)ide a %od# o! settled conclusions immediatel# applica%le to polic#& It pro)ides a met"od or a tec"ni$ue o! t"in0ing+ w"ic" ena%les its possessor to draw correct conclusions&? Managerial economics is a %lending o! pure or positi)e science wit" applied or normati)e science& It is positi)e w"en it is con!ined to statements a%out causes and e!!ects and to !unctional relations o! economic )aria%les& It is normati)e w"en it in)ol)es norms and standards+ mi>ing t"em wit" cause, e!!ect anal#sis& One cannot disregard t"e normati)e !unctions o! managerial economics+ t"oug" t"e discipline ma# %e treated primaril# as a positi)e science& Normati)e approac" in managerial economics "as et"ical considerations and in)ol)es )alue 7udgments %ased on p"ilosop"ical+ cultural and religious positions o! t"e communit#& ("e )alue 7udgments and normati)e aspect and counseling in managerial economic studies can ne)er %e dispensed wit" altoget"er& 6e ma# t"us conclude t"at Managerial Economics is %ot" a 8ositi)e and Normati)e Science& .riefl discuss the three fundamental concepts of Managerial Economics.
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Managerial Economics is con!ined to t"e !ollowing t"ree ma7or !ields; (/) 8ricing (9) :istri%ution (<) 6el!are& +ricing) Microeconomics assumes t"e total $uantit# o! resources a)aila%le in an economic societ# as gi)en and see0s to e>plain "ow t"ese s"all %e allocated to t"e production o! particular goods !or t"e satis!action o! c"osen wants& Distribution) ("e t"eor# o! distri%ution %asicall# deals wit" !actor pricing&& In ot"er words+ it is concerned wit" rent+ wages+ and interest+ pro!its+ as t"e respecti)e rewards o! land+ la%our+ capital and enterprise respecti)el#& %elfare) ("e t"eor# o! economic wel!are e>plains "ow an indi)idual consumer ma>imi es "is satis!action w"en production e!!icienc# is ac"ie)ed %# allocation o! resources in suc" a wa# as to ma>imi e output !rom a limited set o! input& %hat are the important uses and limitation of microeconomics& !mportance and /ses) /& It e>plains price determination and t"e allocation o! resources& 9& It "as direct rele)ance in %usiness decision,ma0ing& <& It ser)es as a guide !or %usiness. production planning& =& It ser)es as a %asis !or prediction& @& It teac"es t"e art o! economi ing& A& It is use!ul in determination o! economic policies o! t"e Go)ernment& B& It ser)es as t"e %asis !or wel!are economics& C& It e>plains t"e p"enomena o! International (rade& 0imitations) /& Most o! t"e micro,economic t"eories are a%stract& 9& Most o! t"e microeconomic t"eories are static D %ased on ceteris pari%us+ i&e& 'ot"er t"ings %eing e$ual?& <& Microeconomics unrealisticall# assumes -laisse ,!aire. polic# and pure capitalism&

=& Microeconomics studies onl# parts and not t"e w"ole o! t"e economic s#stem& It cannot e>plain t"e !unctioning o! t"e econom# at large& @& E# assuming independence o! wants and production in t"e s#stem+ microeconomics "as !ailed to consider t"eir -dependent e!!ect. on economic wel!are& A& Microeconomics misleads w"en one tries to generali e !rom t"e indi)idual %e"a)ior& B& Microeconomics in dealing wit" macroeconomic s#stem unrealisticall# assumes !ull emplo#ment& 1ow does Managerial Economists help the Manager in decision making and forward planning& Managerial Economists act as operations researc"ers and s#stems anal#sts in t"e management ser)ices department o! large %usiness !irms usuall# in t"e pri)ate sector& In modern %usiness+ managers constantl# !ace t"e ma7or pro%lem o! c"oice among alternati)e wa#s o! producing goods and allied %usiness decisions& Managerial economists assist t"em in ma0ing a rational c"oice& A Managerial economist is an economic ad)iser to a !irm or %usinessman& A !irm or entrepreneur+ in t"e course o! its1"is %usiness operations+ "as to ta0e a num%er o! decisions w"ic" are )ital to t"e sur)i)al and growt" o! t"e %usiness& Suc" decisions ma# pertain to t"e nature o! t"e product to %e produced+ t"e $uantit#+ $ualit#+ cost+ price and its distri%ution+ planning and di)ersi!ication o! %usiness+ renewal o! worn out e$uipments and mac"iner#+ moderni ation+ etc& ("e Managerial economist "elps t"e %usinessman or t"e manager in arri)ing at correct decisions& In s"ort+ t"e %usiness economist w"ile "elping in t"e decision ma0ing process+ measures a num%er o! micro and macro )aria%les %# appl#ing intelligentl# certain $uantitati)e and $ualitati)e tec"ni$ues to t"e practical aspects and pro%lems encountered %# a %usiness !irm in its %usiness acti)it#& 4orecasting is a !undamental acti)it# o! t"e Managerial economist& Indeed a %usiness economist is greatl# "elp!ul to t"e management %# )irtue o! "is studies o! economic anal#sis& 3e is an e!!ecti)e model %uilder& 3e deals wit" t"e %usiness pro%lems in a s"arp manner wit" a deep pro%ing& A Managerial economist in a %usiness !irm ma# carr# on a wide range o! duties+ suc" as; :emand estimation and !orecasting&
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 8reparation o! %usiness !orecasts* to pro)ide !orecasts o! c"anges in costs and %usiness conditions %ased on mar0et researc" and polic# anal#sis& Anal#sis o! t"e mar0et sur)e# to determine t"e nature and e>tent o! competition& Anal#sing t"e issues and pro%lems o! t"e concerned industr#& Assisting t"e %usiness planning process o! t"e !irm& :isco)ering new and possi%le !ields o! %usiness endea)our and its cost,%ene!it anal#sis as well as !easi%ilit# studies& Ad)ising on pricing+ in)estment and capital %udgeting policies& E)aluation o! capital %udgets& Euilding micro and macro economic models o! particular aspects o! t"e !irm.s acti)ities t"at are use!ul in sol)ing speci!ic %usiness pro%lems& Most models ma# %e prediction oriented& :irecting economic researc" acti)it#& Erie!ing t"e management on current domestic and glo%al economic issues and c"allenges& DEM2'D %hat is Demand& :emand is t"e e!!ecti)e desire or wants !or a commodit#+ w"ic" is %ac0ed up %# t"e a%ilit# (i&e& mone# or purc"asing power) and willingness to pa# !or it& ("e demand !or a product re!ers to t"e amount o! it w"ic" will %e %oug"t per unit o! time at a particular price& ("e demand can %e e>pressed as actual and potential& Consumer demand "as two le)els; a) Indi)idual :emand and %) Mar0et :emand& Mar0et demand is t"e sum total o! indi)idual demand& 8rices are determined on t"e %asis o! mar0et demand& Mar0et demand ser)es as a guidepost to producers in ad7usting t"eir supplies in a mar0et econom#& 3actors influencing individual demands are) 8rice o! t"e products& Income o! t"e %u#er& (astes+ 3a%its and 8re!erences& Relati)e prices o! ot"er goods&
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 Relati)e prices o! su%stitute and complementar# products& Consumer.s e>pectations a%out !uture price o! t"e commodit#& Ad)ertisement e!!ect& 3actors influencing Market Demand) 8rice o! t"e product& :istri%ution o! Income and 6ealt"& Communit#.s common "a%its and scale o! pre!erences& General standards o! li)ing and spending "a%its o! t"e people& Num%er o! %u#ers in t"e mar0et and t"e growt" o! population& Age structure and se> ratio o! t"e population& 4uture e>pectations& Le)el o! ta>ation and (a> structure& In)entions and Inno)ations& 4as"ions Climate and weat"er conditions& Customs Ad)ertisement and Sales propaganda& Demand 3unction) At an# point in time+ t"e $uantit# demanded o! a gi)en product (goods or ser)ices) depends upon a num%er o! 0e# )aria%les or determinants& A demand !unction in mat"ematical terms e>presses t"e !unctional relations"ip %etween t"e demand !or t"e product and its )arious determining )aria%les& :> D Quantit# demanded F ! (8>) D !unction o! price& 3ere all ot"er determining )aria%les are assumed to %e constant+ 0eeping onl# price as )aria%le& I! t"e demand !unction is to %e stated ta0ing into account all )aria%les+ wit"out assuming t"em as constant+ demand !unction is :> F ! (8>+ G 8s G 8c G Hd G(+ A+ N+ u)

:> F :emand !or I& 8 > F 8rice o! I+ 8s F 8rice o! Su%stitute o! I+ 8 c F 8rice o! Complementar# Goods+ Hd F :isposa%le Income+ ( F (aste o! t"e %u#er or pre!erence+ A F Ad)ertising e!!ect+ N F Num%er o! %u#ers u F 5n0nown ot"er determinants& :emand !unction is not t"e $uantit# demanded at a gi)en price+ %ut $uantit# demanded at eac" le)el o! price& a F signi!ies initial demand irrespecti)e o! price (constant parameter)& b F !unctional relations"ip %etween 8 D 8rice and : D :emand (constant parameter) Linear demand !unction is e>pressed as : F a b8& b "as minus (,) sign to denote a negati)e !unction& :emand is decreasing !unction o! price& b is t"e slope ( )ertical lengt" J "ori ontal lengt") o! t"e demand cur)e+ and suggests t"at it is downward sloping& :> F 9K D 98> (:> is Quantit# demanded o! I+ 8> 8rice o! I)
H :> F 9K D 98> @

%hat is law of demand& %hat are its e,ceptions& %h does a Demand = 4urve slope downward& 0aw of Demand< ; Ceteris paribus, t"e "ig"er t"e price o! a commodit#+ t"e smaller is t"e $uantit# demanded and lower t"e price+ larger t"e $uantit# demanded& Ot"er9t"ings remaining unc"anged+ t"e demand )aries in)ersel# to c"anges in price& :> F ! (8>)& ("e demand cur)e is downward sloping indicating an in)erse relations"ip %etween price and demand&
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("e price is measured on t"e H D a>is and :emand on t"e I, a>is& 6"en t"e price !alls+ demand increases& ("e downward slope o! demand cur)e implies t"at t"e consumer K tends to %u# more w"en t"e price !alls& ("us t"e demand cur)e is s"own as downward sloping& %hat are the assumptions underl ing law of demand&

2ssumptions underl ing the law of demand) No c"ange in Consumer.s income& No c"ange in consumer.s pre!erences& No c"ange in t"e 4as"ion& No c"ange in t"e 8rice o! Related Goods& No e>pectation o! 4uture price c"anges o! s"ortages& No c"ange in si e+ age composition+ se> ratio o! t"e population& No c"ange in t"e range o! goods a)aila%le to t"e consumers& No c"ange in t"e distri%ution o! income and wealt" o! t"e communit#& No c"ange in go)ernment polic#& No c"ange in weat"er conditions&

E,ceptions to the 0aw of Demand) Sometimes it ma# %e o%ser)ed+ t"at wit" a !all in price+ demand also !alls and wit" a rise in price+ demand also rises& ("is is apparentl# contrar# to t"e law o! demand& ("e demand cur)e in suc" cases will %e t#picall# unusual and will %e upward sloping&

("ere are !ew suc" e>ceptional cases;, 5iffen 5oods; In t"e case o! certain Gi!!en goods+ w"en price !alls+ $uite o!ten less $uantit# will %e purc"ased %ecause o! t"e negati)e income e!!ect and people.s increasing pre!erence !or a superior commodit# wit" rise in t"eir real income& E&g& staple !oods suc" as c"eap potatoes+ c"eap %read+ pucca rice+ )egeta%le g"ee+ etc& as against good potatoes+ ca0e+ %asmati rice and pure g"ee& 2rticles of (nob appeal 67eblen effect8) Sometimes+ certain commodities are demanded 7ust %ecause t"e# "appen to %e e>pensi)e or prestige goods and "a)e a -sno% appeal.& ("e# satis!# t"e aristocratic desire to preser)e t"e e>clusi)eness !or uni$ue goods& ("ese goods are purc"ased %# !ew ric" people w"o use t"em as status s#m%ol& 6"en prices o! articles li0e diamonds rise+ t"eir demand rises& Rolls Ro#ce car is anot"er e>ample& (peculation) 6"en people are con)inced t"at t"e price o! a particular commodit# will rise !urt"er+ t"e# will not contract t"eir demand* on t"e contrar# t"e# ma# purc"ase more !or pro!iteering& In t"e stoc0
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e>c"ange+ people tend to %u# more and more w"en prices are rising and unload "ea)il# w"en prices start !alling& 4onsumers ps chological bias or illusion; 6"en t"e consumer is wrongl# %iased against t"e $ualit# o! a commodit# wit" reduction in t"e price suc" as in t"e case o! a stoc0 clearance sale and does not %u# at reduced prices+ t"in0ing t"at t"ese goods on -sale. are o! in!erior $ualit#& 9easons for change 6increase or decrease8 in demand) C"ange in income& C"anges in taste+ "a%its and pre!erence& C"ange in !as"ions and customs C"ange in distri%ution o! wealt"& C"ange in su%stitutes& C"ange in demand o! position o! complementar# goods& C"ange in population& Ad)ertisement and pu%licit# persuasion& C"ange in t"e )alue o! mone#& C"ange in t"e le)el o! ta>ation& E>pectation o! !uture c"anges in price&

E,plain 7eblen effect and draw up the market demand curve for veblen effect product. 66$:$;;<8 ("orstein Me%len argued t"at t"e a!!luent class in t"e societ# "as a tendenc# to demonstrate t"eir superiorit# o! -"ig" class. E# spending on !ri)olous goods and ser)ices D super lu>ur# items suc" as diamonds+ !i)e star "otels+ palatial %uildings+ %usiness or e>ecuti)e class o! air tra)el& ("oug" t"e mar0et demand !or suc" a commodit# tends to rise w"en its price !alls+ t"e indi)idual demand o! t"e sno%%is" %u#er will !all& 6"en a prestige good loses its sno% )alue+ its mar0et demand !rom t"e sno%%is" %u#ers will decrease wit" !all in its price* and t"e demand ma# %e added up !rom t"e new common %u#ers& In certain %randed goods suc" as -Ra# Ean. or -Le)is. products i&e& e>clusi)e or designer products+ t"ere e>ists an in"erent parado>& Initiall# t"ese goods are meant to ser)e t"e Me%len e!!ect& At "ig" prices+ t"ere is limited %ut good demand !rom t"e ric"er sections& Eut w"en t"ese goods are
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produced in larger $uantit#+ t"eir prices !all& It will carr# mass appeal to upper middle class& So t"e demand will e>pand initiall#& 4urt"er increase in output will lead to !urt"er price reduction& Eut at t"is price+ t"e product loses its e>clusi)it# or sno% e!!ect and t"e ric"er sections e>clusi)e demand will !all& ("e product will now %e purc"ased on account o! its !unctional utilit# and will %e competing in t"e mar0et wit" ot"er similar goods& ("e demand cur)e :: "as c"anging slopes at a and b points& At price 8/+ t"e demand is Q/& 6"en t"e price is lowered to 89+ demand is Q9& A !urt"er reduction o! price to 8<+ leads to a !all in demand as t"e %rand loses e>clusi)it# appeal& A!ter t"at t"e product demand is determined 7ust %# its !unctional utilit#& 1ow is an indifference curve techni"ue an improvement over Marshallian utilit anal sis& ("e indi!!erence cur)e approac" is considered superior to t"e Mars"allian utilit# anal#sis o! consumer demand in t"e !ollowing respects; !t is more realistic& Mars"all assumes cardinal measurement o! utilit#+ w"ic" is unrealistic& ("e indi!!erence cur)e tec"ni$ue ma0es an ordinal comparison o! utilit# and t"e le)el o! satis!action& !t uses the concept of scale of preferences with lesser assumptions than the Marshallian concept of utilit . ("e scale o! pre!erence is laid down on t"e %asis o! a consumer.s tastes and li0ings+ independent o! "is income& 5nli0e Mars"all+ t"e 3ic0sian scale o! pre!erence needs no in!ormation as to "ow muc" satis!action is gained %ut it aims onl# at 0nowing w"et"er a consumer.s satis!action le)el is greater t"an+ less t"an or e$ual to+ %etween t"e )arious com%inations o! two goods& !t dispenses with the assumption of constant marginal utilit of mone . Mars"allian anal#sis assumes t"at to t"e consumer t"e marginal utilit# o! mone# remains constant& In t"e indi!!erence cur)e anal#sis+ suc" assumption is not needed& !t is wider in scope) Mars"allian demand t"eor# deals wit" a single commodit# ta0en e>clusi)el#& 3ic0.s ordinal approac"+ considers at least two goods in com%ination& ("us+ t"e complementarit#.s and su%stituta%ilit# aspects o! goods are %eing e>plicitl# considered in 3ic0sian anal#sis&
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!t uses concept of Marginal 9ate of (ubstitution which is scientific and measurable) ("e utilit# approac" is %ased on t"e law o! diminis"ing marginal utilit#& On t"e ot"er "and+ t"e indi!!erence cur)e approac" rests on t"e principle o! diminis"ing marginal rate o! su%stitution& ("e concept o! marginal rate o! su%stitution is superior to t"at o! marginal utilit# %ecause it considers two goods toget"er and also %ecause it is a ratio e>pressed in p"#sical units o! two goods and as suc"+ it is practicall# measura%le& ("e replacement o! t"e law o! M5 %# MRS is a positi)e c"ange in a more scienti!ic manner& !t e,presses the conditions of consumer e"uilibrium in a better wa ) In Mars"allian anal#sis+ t"e consumer e$uili%rium condition is M5> F M5#& Since utilit# cannot %e measured numericall#+ t"is condition is impractica%le& 8> 8# In 3ic0sian anal#sis+ t"e e$uili%rium condition is e>pressed as MRS># F 8>18# w"ic" is measura%le& It is more compre"ensi)e as it recogni es t"e !act t"at e$uili%rium in purc"asing one commodit# depends on t"e price o! ot"er goods and t"eir stoc0s as well&

!t anal ses the price effect in a better wa ) ("e Mars"allian demand cur)e "as no means to separate t"e price e!!ect into income and su%stitution e!!ects& In t"e indi!!erence cur)e anal#sis+ t"e price consumption cur)e ena%les us to "a)e t"e %i!urcation o! price e!!ect into income and su%stitution e!!ects& It e>amines t"e 8"enomenon o! Gi!!en 8arado>& Mars"all )iews t"e Gi!!en 8arado> as an e>ception to t"e law o! demand+ w"ereas t"e case o! Gi!!en goods is incorporated in t"e price consumption cur)e to e>amine t"e consumer.s t#pical %e"a)ior caused %# negati)e income e!!ect& ("us t"e unsol)ed riddle a%out Gi!!en goods in t"e utilit# anal#sis is sol)ed %# t"e indi!!erence cur)e anal#sis& It represents t"e law o! demand in a %roader and more precise wa#& %hat are the shortcomings of the indifference curve approach& !t does not provide an positive change in the utilit anal sis.
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!t retains the Marshallian assumption of diminishing marginal utilit ) !t unrealisticall assumes perfect knowledge of utilit with the consumer. !t is weak in structure. !t has limited scope. !t is introspective. !t is not applicable to indivisible goods. !t assumes transitivit condition.

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E02(=!4!=> *3 DEM2'D :emand usuall# )aries wit" price& ("e e>tent o! )ariation o! demand is not uni!orm& Sometimes t"e demand is greatl# responsi)e to price c"anges+ w"ile at ot"er times+ it ma# %e less responsi)e& Elasticit# is t"e e>tent o! responsi)eness to )ariation& (wo !actors are rele)ant !or measuring t"e elasticit# o! demand D a) demand %) t"e detriment o! demand& A ratio is made o! t"e two )aria%les !or measuring t"e elasticit# coe!!icient& Elasticit# o! demand F N c"ange in $uantit# demanded N c"ange in detriment o! demand 5nless speci!ied+ elasticit# o! demand means price elasticit# o! demand& Logicall#+ "owe)er+ t"e concept o! elasticit# s"ould measure t"e responsi)eness o! demand to c"anges in )aria%les concerned wit" demand !unction& ("us t"ere can %e man# 0inds o! elasticit# o! demand& Most important are 8rice elasticit# o! demand Income elasticit# o! demand Cross elasticit# o! demand Marshallian classification of +rice elasticit ) 1. /nit elasticit of demand 6e ? 18 $. Elastic demand @ elasticit greater than unit . 6e A 18 B. !nelastic demand C elasticit is less than unit 6eD18 E,plain with graphs how modern economists have classified price elasticit of demand. %hat are the managerial uses of price elasticit of demand& +rice elasticit of demand) 9atio Method) ("e e>tent o! responsi)eness o! demand !or a commodit# to a gi)en c"ange in price+ ot"er demand determinants remaining constant+ is termed as t"e price elasticit# o! demand& It is t"e ratio o! relati)e c"ange in demand )aria%les to price )aria%les&
/@

Coe!!&o! price elasticit# e F N c"ange in $uantit# demanded N c"ange in price OQ J O8 F OQ > 8 8roportionate c"ange in price& Q 8 O8 Q Q F Original demand+ PQ F c"ange in demand 8 F Original 8rice+ P8 F c"ange in price

OR F

8roportionate c"ange in $uantit# demanded

("e a%o)e met"od is also 0nown as percentage met"od+ w"en t"e ratio is e>pressed as a percentage& e = NPQ NP8 9evenue Method) Mars"all suggested t"at t"e easiest wa# o! ascertaining w"et"er or not t"e demand is elastic+ is to e>amine t"e c"ange in total outla# o! t"e consumer or total re)enue o! t"e seller corresponding to c"ange in price o! t"e product& (otal Re)enue (or (otal outla#) F 8rice > Quantit# purc"ased (or sold) According to t"is met"od+ i! t"e total re)enue remains unc"anged wit" a c"ange in t"e price+ t"e demand is unit elastic+ as demand c"anges in t"e same proportion as price& 6it" a !all in price+ i! t"e total re)enue rises+ or wit" a rise in price+ t"e total re)enue !alls+ t"e elasticit# is more t"an unit#& 6it" a rise in price+ t"e total re)enue also rises and wit" a !all in price+ total re)enue also !alls+ t"e demand is less t"an unit#&

/A

+oint elasticit method or 5eometric Method) ("e simplest wa# o! e>plaining t"e point met"od is to consider a straig"t line demand cur)e& E>tend t"e demand cur)e to meet t"e two a>es& 6"en a point is plotted on t"e demand cur)e+ it di)ides t"e line segment into lower and upper segments& 8oint elasticit# is measured %# t"e ratio o! t"e lower segment o! t"e demand cur)e %elow t"e gi)en point to t"e upper segment a%o)e t"e gi)en point& +oint elasticit ? 0ower (egment below the given point /pper segment above the given point. ("is measure is called -point elasticit#. measurement %ecause it e!!ecti)el# measures elasticit# o! demand at a point on t"e demand cur)e assuming in!initesimall# small c"anges in price and $uantit# )aria%les& 2rc elasticit method) (o calculate price elasticit# o)er some portion o! t"e demand cur)e rat"er t"an at a point+ t"e concept o! arc elasticit# o! demand is used& Arc elasticit# is measured on a range on t"e demand cur)e %etween two points& ("e !ormula !or arc elasticit# is PQ 8/ G 89 w"ere+ 8/ is t"e original price+ p9 F new price earc F ,,,,,> ,,,,,,,,,, Q/ original $uantit# demanded E8 Q/ G Q9 Q9 new demand P 8 F 89 D 8/+ P Q F Q9 D Q/ 4or practical decision ma0ing+ it is %etter to use arc elasticit# measure w"en price c"anges more t"an @N& 4or all t"eoretical purposes+ point elasticit# rat"er t"an arc elasticit# is commonl# used&

/B

%hat are the factors influencing elasticit of demand& 1. 'ature of the commodit D according to t"e nature o! satis!action t"e goods gi)e& Lu>ur# goods are price elastic& $. 2vailabilit of close substitutes C demand will %e elastic& B. 'umber of uses the commodit can be put to C Single use goods will "a)e less elastic demand %ut demand %ecomes elastic i! it can %e put to se)eral uses& <. 4onsumers income C demand !rom low income group will %e elastic w"ile !rom )er# ric" persons+ relati)el# inelastic& F. 1eight of price and range of price change C "ig"l# priced goods+ demand less elastic wit" small c"ange in price& Eut wit" large c"anges+ demand will %e elastic& G. +roportion of e,penditure H. Durabilit of the commodit . I. !nfluence of habit and custom J. 4omplementar goods. Goods w"ic" are 7ointl# demanded are less elastic& 1;. =ime C less elastic during s"ort periods generall#& 11. 9ecurrence of demand. 1$. +ossibilit of postponement. !ncome Elasticit of Demand) Income elasticit# o! demand is de!ined as t"e ratio o! percentage or proportional c"ange in t"e $uantit# demanded to t"e percentage or proportional c"ange in income& Income elasticit# F N c"ange in $uantit# demanded N c"ange in income& *9 E K , M K EM or E K . M E M K F em F NP Q N PM

/C

4ross elasticit of demand) ("e cross elasticit# o! demand re!ers to t"e degree o! responsi)eness o! demand !or a commodit# to a gi)en c"ange in t"e price o! some related commodit#& ("e cross elasticit# o! demand %etween two goods is measured %# di)iding t"e proportionate c"ange in t"e $uantit# demanded o! I %# t"e proportionate c"ange in t"e price o! H& Cross elasticit# o! demand ; demand for L price of >. Ec or e ># F PQ> > P8# Q> 8# F PQ> > P8# 8> Q> 8roportionate or percentage c"ange in 8roportionate or percentage c"ange in the

2dvertising or +romotional elasticit of demand) e2 ? +ercentage or proportionate change in sales +ercentage or proportionate change in ad e,penditure. 2rc 2dvertising elasticit ) EK , 21 M 2$ E2 K1 M K$ %hat is demand forecasting& :emand !orecasting is not a speculati)e e>ercise into t"e un0nown& It is essentiall# a reasona%le 7udgment o! !uture pro%a%ilities o! t"e mar0et e)ents %ased on scienti!ic %ac0ground& :emand !orecasting is an estimate o! t"e !uture demand& It cannot %e "undred per cent precise& Eut+ it gi)es a relia%le appro>imation regarding t"e possi%le outcome+ wit" a reasona%le accurac#& It is %ased on t"e statistical data a%out past %e"a)ior and empirical relations"ips o! t"e demand determinants& It is %ased on mat"ematical laws o! pro%a%ilit#&

/L

%hat are the criteria of a good forecasting method& 4riteria of a good forecasting method) Qoel :ean la#s down t"e !ollowing criteria o! a good !orecasting met"od; 2ccurac ) 4orecast s"ould %e accurate as !ar as possi%le& Its accurac# must %e 7udged %# e>amining t"e past !orecasts in t"e lig"t o! t"e present situation& +lausibilit ; It implies management.s understanding o! t"e met"od used !or !orecasting& It is essential !or a correct interpretation o! t"e results& (implicit ) A simpler met"od is alwa#s more compre"ensi)e t"an t"e complicated one& Econom ) It s"ould in)ol)e lesser costs as !ar as possi%le& Its costs must %e compared against t"e %ene!its o! !orecasts& Kuickness) It s"ould #ield $uic0 results& A time consuming met"od ma# dela# t"e decision ma0ing process& 3le,ibilit ) Not onl# t"e !orecast is to %e maintained up to date+ t"ere s"ould %e possi%ilit# o! c"anges to %e incorporated in t"e relations"ips entailed in !orecast procedure+ time to time& E,plain the surve methods of demand forecasting& Market (urve or *pinion +oll) A mar0et sur)e# is also called an opinion sur)e# or opinion poll& 6"ile conducting an opinion poll+ t"e respondents s"ould %e c"osen correctl# a!ter ascertaining w"ose opinion is )alua%le in t"e matter& 4or e>ample+ in order to estimate t"e demand !or newl# designed electric meters+ t"e opinion o! t"e engineers in t"e purc"ase and ser)ice departments o! electric companies is important and not t"at o! t"e ultimate consumers w"o "a)e no sa# in t"e matter&

9K

1. 9epresentative sample; 4or conducting a sur)e#+ a sample population is selected !rom t"e total population& It can t"en %e classi!ied into di!!erent groups+ eac" wit" its own c"aracter& A percentage o! eac" group can %e sur)e#ed in order to get )ar#ing opinions& ("e sample population "as to %e as representati)e o! t"e total population as possi%le& ("e degree o! t"e accurac# o! t"e sur)e# would depend upon t"e representati)e c"aracter o! t"e sample population& $. 2 case; A student was as0ed to !ind out t"e image o! a %ig cotton te>tile mill as "er pro7ect& ("e pro7ect report including t"e sur)e# "ad to %e completed wit"in AK da#s wit"out an# !inancial commitment on t"e part o! t"e compan# under stud#& A stud#+ under suc" constraints+ would naturall# "a)e its own limitations& ("e student c"ose t"e met"od o! strati!ied sampling+ con!ined to a %ig cit#+ t"e "ead$uarters o! t"e compan#& ("e population was %roadl# classi!ied into; (i) emplo#ees su%,grouped into di!!erent strata+ ta0ing a !ew samples !rom eac"& (ii) all w"olesalers (iii) a !ew retailers in t"e cit#+ selected on t"e %asis o! t"eir s"are in sales (i)) customers )isiting retail outlets responded to t"e $uestionnaire ()) di!!erent strata o! general population+ w"ic" at one time or t"e ot"er purc"ased t"e products o! t"e mill D regrouped according to age+ income+ education and status+ selecting a !ew samples !rom eac" group& 6it"in t"ese constraints a sample o! 9KK persons was collected& ("e results were $uite encouraging& Discuss the popular time series anal sis techni"ues used for demand forecasting. =ime series anal sis) (ime series anal#sis "elps to identi!#; (/) a long,run mo)ement o! t"e )aria%le* (9) seasonal !luctuations w"ic" are oscillator# %ut con!ined to one #ear* (<) c#clical mo)ements w"ic" are oscillator# and periodic& ("e )alues o! t"e mo)ements are repeated %etween pea0s and troug"s& A time series is dis,aggregated into !our components or elements (i) (rend (() (ii) Seasonal component (S) (iii) C#cle (C) and (i)) an irregular or random component& ("e !irst t"ree are s#stematic w"ile t"e last one is uns#stematic& ("e residue a!ter eliminating t"e s#stematic components !alls in random component& ("ese components can %e written in two !orms additi)e or multiplicati)e D (GSGCGR OR (SCR& In t"e additi)e !orm it is assumed t"at t"ere is no interaction among t"e di!!erent components w"ereas in t"e multiplicati)e !orm t"ere is interaction& ("e multiplicati)e !orm can %e written in t"e additi)e !orm %# ta0ing t"e log as 'log # F log ( G log S G log C G log R&?
9/

A common met"od o! decomposition is to calculate t"e trend and eliminate it !rom t"e original series %# di)iding t"roug"out as (SCR1(* in t"e same wa# ot"er elements can %e separated out& In t"e additi)e !orm an element is remo)ed %# su%tracting it !rom t"e series& Muc" depends on t"e purpose& 4or e>ample+ i! t"e growt" rate o! a )aria%le+ sa# agricultural production+ is to %e estimated+ calculating t"e trend e$uation directl# ma# not gi)e t"e correct results+ as agriculture is su%7ect to %ot" seasonal and c#clical !luctuations& ("us+ %ot" t"e !luctuations are to %e remo)ed !irst in order to attain %etter accurac#& ("e decomposition o! time series anal#sis "as certain implicit assumptions; /) ("e order o! remo)al s"ould %e trend+ seasonal+ and c#clical& I! t"e order is c"anged+ c"anged )alues will result& 9) E!!ects are independent o! eac" ot"er* and <) ("e trend is linear and t"e c#cle is regular& Criticism o! t"e Met"od; ("ese assumptions "a)e %een $uestioned& Separation o! trend and c#cle ma# %e du%ious as %ot" ma# %e t"e result o! t"e same set o! !actors& Irregular )ariations ma# outweig" t"e ot"ers and t"e p"enomenon o! t"e %usiness c#cle ma# not %e )er# rele)ant in a planned econom#& ("e decomposition o! t"e time series is an arti!icial attempt imposed %# t"e anal#st& As a descripti)e de)ice t"is ma# %e ade$uate+ %ut as an e>planator# de)ice !or isolating di!!erent !acts+ t"e sc"eme is seriousl# de!icient& It is %ecause+ t"e deterministic "#pot"esis underl#ing t"e s#stematic part is open to dou%t !rom t"e point o! )iew o! %e"a)ior o! economic agents& Eecause o! t"ese s"ortcomings+ in recent #ears+ t"e emp"asis in t"e stud# o! time series "as s"i!ted to anal#sis o! pro%a%ilistic processes&

99

M*'*+*0!(=!4 4*M+E=!=!*' K. Monopolistic 4ompetition is a blend of perfect competition and monopol . Discuss. 1ow is price@output determined under monopolistic competition& Monopolistic competition as t"e name suggests entails t"e attri%utes o! %ot" monopol# and competition& 4ollowing are t"e main !eatures; 0arge number of sellers; ("ere are !airl# large num%ers o! sellers& ("e# sell closel# related %ut not identical products& ("e large num%er o! !irms in t"e same line o! production leads to competition& Competition is 0een %ut impure %ecause t"ere is no "omogeneit# o! products o!!ered& ("ere are less c"ances o! collusion %etween t"em to eliminate competition and rig prices+ as t"e num%er is $uite large& ("e $uantit# supplied %# an indi)idual !irm is relati)el# small compared to t"e total mar0et s"ared %# all t"e !irms& ("us t"ere is )er# limited degree o! control o)er t"e mar0et price %# an# !irm& In determining pricing and output polic#+ eac" !irm can a!!ord to ignore reaction %# ri)als& ("e num%er o! !irms %eing large enoug"+ t"e impact o! suc" an action %# an indi)idual !irm+ is insigni!icant& +roduct Differentiation) ("e !irm.s independence under monopolistic competition is attri%uted to t"e degree o! product di!!erentiation it adopts& It is essentiall# competition wit" di!!erentiated products& ("e most distinguis"ing !actor o! monopolistic competition is t"at t"e products are all %randed and identi!ied& ("ere is no "omogeneit# o! products t"oug" t"e# ma# %e similar& ("roug" suc" product di!!erentiation+ eac" seller ac$uires certain degree o! monopol# power& 0arge number of bu ers)

9<

("ere are numerous %u#ers& Eut %u#ers "a)e pre!erence !or speci!ic %rands& Eu#ers are literall# patrons o! a particular seller& Eu#ing "ere is %# c"oice not %# c"ance& 3ree entr ) Entr# and e>it o! %u#ers is !reel# possi%le& ("ere are no %arriers& ("ere is unrestricted entr# o! new !irms into t"e group till it reac"es complete e$uili%rium& ("is ma0es t"e competition sti!! %ecause o! close su%stitutes %ut wit" di!!erent %rand names produced %# new entrants& ("is mar0et situation is more similar to per!ect competition t"an monopol#& Owing to unrestricted entr# o! new !irms+ a%normal pro!its are usuall# competed awa# in t"e long run& 4irms will see0 to reali e pure economic pro!its once again %# ad)ertising and inno)ation in products and processes resorting to non, price competition D competition in product )ariation as well as increase in ad)ertising e>penditure& (elling costs) Ad)ertising and ot"er !orms o! sales promotion are an integral part o! monopolistic competition& ("ese outla#s are termed as selling costs& ("is 0ind o! "ea)# e>penditure on sales promotion is %ecause products are identi!ied and di!!erentiated %# t"eir %rand names unli0e in per!ect competition+ w"ere products are "omogenous wit"out %rand name+ needing no ad)ertisement at all and !irms e>periencing per!ectl# elastic demand cur)es& Selling e!!orts are re$uired to a!!ect a s"i!t in demand in order to capture a %etter s"are o! t"e mar0et& Increase in demand is ac"ie)ed t"roug" ad)ertisement and sales promotional e!!orts i&e& %# increase in selling costs& Success in ac"ie)ing t"is increase+ depends on "ow e!!ecti)e is t"e product di!!erentiation and pre!erence ac"ie)ed t"roug" ad)ertisement& =wo dimensional competition) ("ere are two aspects in monopolistic competition; (/) t"ere cannot %e too muc" )ariation in price and t"e product "as to %e competiti)el# prices& 3ence price competition& (9) ("ere is non,price competition in terms o! product di!!erentiation and spending on selling costs in order to capture a %igger s"are o! t"e mar0et&
9=

=he 5roup) ("e !irms in)ol)ed in monopolistic competition are termed as 'group? and not 'industr#?& A group is a cluster o! !irms producing )er# related %ut di!!erentiated products& Monopolistic competition is c"aracteri ed %# product di!!erentiation& 4irms produce similar %ut not identical goods& 6e cannot concei)e o! an industr# D suc" as automo%ile or %ic#cle industr# in an anal#tical sense D in t"e monopolistic competition& On account o! product di!!erentiation+ products o! eac" !irm+ is identi!ia%le and eac" !irm is an industr# in itsel!+ 7ust li0e a monopol# !orm& In realit#+ ma7or companies control a large num%er o! products o)er a wide spectrum o! t"e industrial econom#& ("ere are a )ariet# o! product groups suc" as + Automo%iles+ (e>tiles+ 4ootwear+ Soaps and :etergents+ 4oods and Ee)erages+ :rugs and C"emicals+ Cosmetics+ Con!ectioner#+ 8aper+ Electronics+ Computers+ Cement+ Metals and Metal 8roducts+ Construction etc& K. -2 firm under monopolistic competition is a price maker#. E,plain how price is determined under monopolistic competition. 'A !irm under monopolistic competition is a price ma0er& 5nli0e per!ect competition+ t"ere is pricing pro%lem& ("e !irm "as to determine a suita%le price !or its product w"ic" #ields ma>imum total pro!it& Assuming a gi)en )ariet# o! products and constant selling outla#s+ w"en price is t"e onl# )aria%le !actor#+ s"ort run anal#sis o! price ad7ustment+ is similar to pure monopol#& ("e mar0et s"are o! an indi)idual !irm in t"e total mar0et o! all t"e !irms in t"e group is insigni!icant to cause an# serious e!!ect on t"e mar0et s"are o! ot"ers %# an# downward price re)ision %# t"e !irm to increase t"e mar0et s"are& In t"e long run+ "owe)er+ a ma7or di!!erence is noticea%le in t"e e$uili%rium process+ due to entr# o! new !irms competing awa# t"e a%normal pro!its& ("is causes c"ange in demand conditions and ot"er !actors associated wit" t"e process o! group e$uili%rium& +rice determination in the short run) In t"e s"ort run+ t"e !irm can adopt an independent price polic# wit" least consideration !or t"e )arieties produced and t"e prices c"arged %# ot"er
9@

producers& ("e !irm %eing rational in determining t"e price will see0 to ma>imi e t"e total pro!its& ("ere is a de!inite demand sc"edule as t"e $ualit# o! t"e product is gi)en& ("e product is di!!erentiated& So t"e demand cur)e or sales cur)e is downward sloping& ("e demand cur)e o! a !irm in monopolistic competition is more elastic t"an in pure monopol#& ("e degree o! elasticit# depends on t"e num%er o! !irms in t"e group and t"e e>tent o! product di!!erentiation& I! t"e num%er o! !irms is large+ t"e demand will %e "ig"l# elastic+ w"ile it will %e less elastic i! t"e num%er is small& In order to ma>imi e its total pro!its in t"e s"ort run+ t"e !irm produces t"at le)el o! output at w"ic" marginal cost is e$ual to marginal re)enue (MC F MR)& E$uili%rium output is determined at t"e point o! intersection o! MR and MC& 4igure;

6e "a)e assumed t"e case o! a !irm wit" "#pot"etical cost and re)enue data in a monopolisticall# competiti)e mar0et& 4or simplicit# sa0e+ it is assumed t"at demand and cost conditions are identical !or all t"e !irms in t"e group& ("ese are %old assumptions made %# C"am%erlin& No dou%t t"ese assumptions )er# muc" simpli!# t"e model %ut t"e# are not altoget"er unrealistic& In t"e case o! retail s"ops suc" as pro)ision stores and c"emist s"ops+ standardi ed products will tend to "a)e more or less identical demand and cost conditions+ as t"eir product di!!erentiation is con!ined to onl# location di!!erences&

9A

E$uili%rium point E is determined w"ere SMC F SMR+ O8 price+ OQ output+ R 8AEC pro!it& +rice determination in the 0ong@run) 6"en !irms earn super,normal pro!its in t"e s"ort,run+ some new !irms will %e attracted to enter t"e %usiness+ as t"e group is open& On account o! ri)als. entr#+ t"e s"are o! t"e !irm in t"e total mar0et will %e reduced due to competition !rom an increasing num%er o! close su%stitutes& Graduall#+ in t"e long run+ t"e !irm will earn onl# normal pro!its& Monopolistic competition implies se)ere competition %etween a large num%ers o! !irms producing close su%stitute products& 3ence t"is mar0et situation is more similar to per!ect competition t"an monopol#& Owing to t"e unrestricted entr# o! new !irms+ monopol# pro!its are usuall# competed awa# in t"e long run& Conse$uentl#+ !irms will resort to non,price competition i&e& competition in product )ariation as well as %# increasing t"eir ad)ertising e>penditure (selling costs)& *0!5*+*0> Oligopol# is a mar0et situation comprising onl# a !ew !irms in a gi)en line o! production& ("e price and output polic# o! oligopolistic !irms are interdependent& ("e oligopol# model !its well into suc" industries as automo%ile+ manu!acture o! electrical appliances etc& in our countr#& In an Oligopolistic mar0et+ t"e !irms ma# %e producing eit"er "omogenous products or product di!!erentiation in a gi)en line o! production& ("e !ollowing are t"e distinguis"ing !eatures o! an oligopolistic mar0et;, 4ew Sellers; 3omogeneous or di!!erentiated products supplied %# a !ew !irms& Interdependence; 4irms "a)e a "ig" degree o! dependence in t"eir %usiness policies+ price and output !i>ation& 3ig" cross elasticit#.s; 4irms under oligopol# "a)e "ig" degree o! cross elasticit#.s and are alwa#s in !ear o! retaliation %# ri)als& 4irms consider t"e possi%le action and reaction o! its competitors w"ile ma0ing c"anges in price or output&

9B

 Eac" !irm tries to attract customers towards its product %# incurring e>cessi)e ad)ertisement e>penditure& It is onl# under oligopol# t"at ad)ertising comes !ull# into its own& Constant struggle; Competition in Oligopol# consists o! constant struggle o! ri)als against ri)als and is uni$ue& Lac0 o! uni!ormit#; ("ere is lac0 o! uni!ormit# in t"e si e o! di!!erent oligopolies& Lac0 o! certaint#; In oligopolistic competition !irms "a)e two con!licting moti)es D /) to remain independent in decision ma0ing and 9) to ma>imi e pro!its despite %eing interdependent& (o pursue t"ese ends+ t"e# act and react to t"e price,output )ariation o! one anot"er in an unending atmosp"ere o! uncertaint#& 8rice rigidit#; Eac" !irm stic0s to its own price due to constant !ear o! retaliation !rom ri)als in case o! reduction in price& ("e !irm rat"er resorts to non,price competition %# ad)ertising "ea)il#& 2in0ed :emand Cur)e; According to 8aul Swee #+ !irms in an oligopolistic mar0et+ "a)e a 0in0# demand cur)e !or t"eir products& N!'NED DEM2'D 1>+*=1E(!( *3 2' *0!5*+*0> M29NE=) ("e 0in0ed :emand Cur)e or t"e A)erage Re)enue Cur)e o! an Oligopol# 4irm+ "as two segments; /) t"e relati)el# elastic segment and (9) relati)el# inelastic segment&

9C

O5(85( Corresponding (o t"e gi)en price O8+ t"ere is a 0in0 at point 2 on t"e demand cur)e ::& :2 is t"e elastic segment+ w"ile 2: is t"e inelastic segment o! t"e cur)e& 2in0 implies an a%rupt c"ange in t"e slope o! t"e demand cur)e& :emand cur)e is !latter %e!ore t"e 0in0 and steeper a!ter t"e 0in0& ("e 0in0 indicates t"e indeterminateness o! t"e course or demand !or t"e product o! t"e seller concerned& 3e t"in0s it wort"w"ile to !ollow t"e pre)ailing price and not to ma0e an# c"ange& In t"is case+ rising o! price+ would contract sales considera%l# as demand tends to %e more elastic to c"ange in price& Lower o! price+ on t"e ot"er "and+ will lead to retaliation !rom ri)als owing to close interdependence o! price,output mo)ement in t"e oligopolistic mar0et& 3ence+ seller will not e>pect muc" rise in sales %ecause o! price reduction& An important point in)ol)ed in 0in0ed demand cur)e is t"at it accounts !or t"e 0in0ed a)erage re)enue cur)e to t"e oligopol# !irm& ("e 0in0ed a)erage re)enue cur)e in turn+ implies a discontinuous marginal re)enue cur)e MA D ER& ("us+ t"e 0in0# marginal re)enue cur)e e>plains t"e p"enomenon o! price rigidit# in t"e t"eor# o! oligopol# prices& In an oligopolistic mar0et+ once a general price le)el is reac"ed+ w"et"er %# collusion or %# price leaders"ip or t"roug" some !ormal agreement+ it tends to remain unc"anged o)er a long period o! time& ("e price rigidit# is on account o! price interdependence indicated %# t"e 0in0ed demand cur)e& :iscontinuit# o! t"e oligopol# !irm.s marginal re)enue cur)e at t"e point o! e$uili%rium price+ t"e price output com%ination at t"e 0in0 tends to remain unc"anged e)en t"oug" marginal cost ma# c"ange& ("e !irm.s marginal cost cur)e can !luctuate %etween MC/ and MC9 wit"in t"e range o! t"e gap in t"e MR cur)e wit"out distur%ing t"e e$uili%rium price and output position o!
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t"e !irm& ("e price remains t"e same at t"e le)el o! O8+ and output OQ+ despite c"ange in t"e margin costs&

+E93E4= 4*M+E=!*' %hat are the features of perfect competition& E,plain.

%hat are !(*"uants& %hat are their propertiesS %hat is the difference between !(*"uant curve and !ndifference curve& -ISO. means -e$ual.& -$uant. stands !or -$uantit#.& ("e e$ual product cur)e is called Iso,$uant or -production iso,$uant.& It represents all t"e com%inations o! two !actor inputs w"ic" produce a gi)en $uantit# o! product& It signi!ies a de!inite measura%le $uantit# o! output& Eac" Iso,$uant cur)e stands !or a speci!ic $uantit# o! output& A num%er o! cur)es can %e drawn !or di!!erent speci!ic $uantities o! output& All t"ese cur)es toget"er !orm t"e Iso,$uant map& Iso,$uant measures a $uantum o! production resulting !rom alternati)e com%ination o! two )aria%le inputs& Difference between !so@"uant curve and !ndifference curve 1. Indi!!erence cur)e re!ers to two commodities& Iso,$uant cur)e relates to com%ination o! two !actors o! production& 9& Indi!!erence cur)e indicates le)el o! satis!action& Is,$uant cur)e indicates $uantit# o! output& <& No numerical measurement o! satis!action is possi%le& So it cannot %e la%eled& Iso,$uant cur)e can %e easil# la%eled+ as p"#sical units out output are measura%le&

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=& ("e e>tent o! di!!erence o! satis!action is not $uanti!ia%le in t"e Indi!!erence map& Eut in Iso,$uant map+ we can measure t"e e>act di!!erence %etween $uantities represented %# one cur)e and anot"er& +roperties of !so@"uants) !so"uants have a negative slope. In order to maintain one le)el o! output+ w"en t"e amount o! one !actor is increased+ t"at o! t"e ot"er is decreased& At eac" point on t"e iso,$uant cur)e+ we get a com%ination o! two !actors+ w"ic" gi)e t"e same le)el o! output& !so"uants are conve, to the origin. ("e slope o! t"e iso$uant measures t"e marginal rate o! tec"nical su%stitution o! one !actor input (sa# la%our) !or t"e ot"er !actor inpur (sa# capital)& MR(S measures t"e rate o! reduction in one !actor !or an additional unit o! anot"er !actor in com%ination !or producing t"e same $uantit# o! output& ("e con)e>it# o! t"e iso$uant cur)e suggests t"at MR(S is diminis"ing+ meaning+ w"en $uantit# o! one !actor is increased+ t"e less o! anot"er !actor will %e gi)en up+ 0eeping t"e output constant& !so@"uants do not intersect. Eac" Iso$uant represents a speci!ic $uantum o! output& I! two Iso$uants intersect eac" ot"er+ it would lead to a logical contradiction as Iso$uant representing a smaller $uantit# cannot %e on a line representing a larger $uantit#& !so"uants do not intercept either L or > a,is. I! an Iso$uant touc"es an# a>is+ it means t"at an# one !actor can %e ta0en as ero& Since it is not possi%le to produce a product wit" a single !actor+ Iso$uants do not meet eit"er a>is& !so@"uant is an oval shape curve. I! relati)el# small amount o! one !actor is com%ined wit" relati)el# large amount o! anot"er !actor+ marginal producti)it# tends to %e negati)e resulting in decline in total output& In suc" cases+ t"e end portion o! t"e cur)es are regarded as uneconomical and t"e cur)es are o)al s"aped& =angents of !so@"uants in an !so@"uant map represent the loci of e"uilibrium when different "uantities of output are produced b the firm at minimum costs under the situation of two variable factor@inputs with their fi,ed price ratio.
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Sol)ed 8ro%lem in Iso$uants; Re!er to 8ro%lems&

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