Mmanagerial Economics

MBA Programme, BIET, Davangere 1
MANAGERIAL ECONOMICS
12MBA12

Definition of Economics:
Introduction
Human beings are constantly interested in acquiring knowledge in the habitual life. In
connection with this men have invented a cipher of concepts during the process of
civilization such as money, fire, wheel and so on. Money is the route cause for the
overall development of economics. The study understanding, analysis and a sound
knowledge of economics are the essential elements for a management aspirant. This is
because; economics and management are the two faces of the same coin. Therefore
they always go together. Besides, every individual desires to obtain the optimum
utilization of sources or resources. This can be easily fulfilled with the sound
knowledge of economics. Therefore everyone in the society should know something
about economics to become a rational citizen.

The term economics is derived from the Greek language that is Oikas (household)
nomos (management, or custom or law), which constitute Economia, which means
household management. The words of wikipedia are as follows: - Economics are the
social sciences that study the production, distribution, and consumption of goods and
services. Later, the term Economia converted into economics. In the primordial
society the term economics was strictly related to the household sector. But with the
explanation of economic activity, the term economics has extended its area to the
other sectors of the economy namely, business sector, national or domestic sector and
international sector. Nowadays economics is rooted among all the layers of the society.
Experts have rightly stated that, Life without history has no root Life without
economics has no fruit.
Definition of Economics: -
At present numerous definitions about economics are available in the field.
But these definitions have failed to give a precise definition. Because economics is
such a gigantic subject that a single definition cannot fulfill it. However some of the
definitions are moderately correct. For this reason Prof. Barbara Wooten rightly
remarked that If there are six economists then there will be seven opinions. This
statement obviously emphasizes the uncertainty of the definitions in the field of
economics. That is the faculty of rational thought a student of economics should
study the major definitions, which are defined by noted economists. The definitions of
economics are broadly divided into four major groups.
Importance of definitions: -
It is useful to analyze the areas of economics
It helps to understand the subject mater of economics
It is the light house to enter into the subject
It highlights the components of economics
It is very essential to study the subject.
1.4 DEFINITIONS
1. Wealth Definition.
2. Welfare Definition.
3. Scarcity Definition.
4. Growth Definition.

WEALTH DEFINITION
This definition has laid a firm foundation in the Field, which was introduced by
Adam Smith (Scottish moral philosopher and a pioneering political economist), who is
popularly noted as the father of economics. The name of the book introduced by him is
An enquiry into the nature and causes of wealth of nations in 1776. He emphasized
on the acquisition of wealth. Therefore, his definition is popularly distinguished as
wealth definition. According to him Economics is a study of earning and spending
activity of money or moneys worth, through the production by division of labor. With
the help of this definition one can evaluate that Adam Smith concentrates on the
wealth of nations with the help maximum production among different sectors of an
economy by dividing the work.
Criticism:
The definition given by Adam smith was strongly criticized by various economists. Few
important points are as follows:
a. It is a science of rich: Ruskin &Carlyle criticized wealth definitions as bread &butter
science, a dismal science, a pig science, a dark science, and so on. Wealth definition
concentrates only on rich people, which neglect the aspects of equality between rich
and poor. Therefore, another new definition came into practice.
2. Consumption: Wealth definition ignores the term consumption, because
Consumption and Production are interrelated. The term consumption is meaningless
without the term production and vice versa. Therefore Adam Smiths definition is a
partial approach in the field of definitions of economics.
3. Welfare: - The term welfare is unnoticed. Welfare of a person or the society is the
whole and sole of the mankind. But Adam Smith explains nonentity about the welfare.
Thus, Wealth definition has a number of problems. But it was the first step in the field
of definitions of economics. So it is the hallmark in the history of economics.
WELFARE DEFINITION:
Prof. Alfred Marshall is the founder of Neo-classical school. The principles of
economics, - which was a distinguished book, published by Alfred Marshall in1890.
According to him, Economics is the study of mankind in the ordinary business of
life. In other simple words --Economics is a study about the earning and spending
activity of money and thereby welfare of the mankind or society. Here welfare
economics studies about the wealth but on the other more important side it relates to
the welfare of the society.
Criticisms: -
Lionel Robbins has criticized the welfare definition. They can be discussed in the
following ways: -
Material welfare: This definition emphasizes on the material things while it ignores the
immaterial things like, services rendered by doctors, lawyers, teachers, mother and
housewife etc.
Measurement of welfare: According to Alfred Marshall the welfare of a person or
happiness can be measured in terms of money or moneys worth. But in reality the
concept of welfare is an immaterial thing, which refers to the state of mind that cannot
be measured in terms of money or moneys worth.
Mixture of economics & non-economics activity: -
Theoretically this definition holds good and occupies a significant place. But in reality
some commodities are injurious to health (drugs) but those goods can also increase
the satisfaction of a consumer. A rational must distinguish between the excellent and
horrific. Economics is neutral between the ends. The welfare definition presented by
Alfred Marshall is the mixture of economics as well as diseconomies, which is the
main drawback of the definition.
Thus, welfare definition is a good attempt to provide a new definition in the field of
economics. He has enhanced the status of economics once again. However it was not
free from the drawbacks consequently, one more definition came into existence.
3. SCARCITY DEFINITION: -
Alfred Marshalls characterization had various drawbacks. Therefore many other
economists have attempted to overcome the problems. In 1932, Prof. Lionel Robbins
published a new book known as The Nature and the significance of economic
Science.
Definition: -
Economics is a science which studies about human behaviors as a relationship
between ends and scarce means which have alternative uses.
Here we see a number of terms. They are as follows:-
Science: - The term science is introduced into the field of economics. There is a cause
and effect relationship in science. Similarly economics combines cause and effect
relationship. For Example, If there is a shortage of anything whether it is a material
(goods) or immaterial (Services), there will be the scope for economics.
2. Human behavior: - Economics studies about the behavior of a human being which
differs from person to person, place to place and time to time.
3. Ends: - Ends are wants or aims. Wants are unlimited in nature. If one want is
satisfied, then another yearn will be created.
4. Scarce means: - The availability of resources to fulfill the human requirements is
scarce in nature. Ex: Money, Food, service etc.
5. Alternative use: - On the one hand man has unconstrained wants but on the other
more important side, he has some degree of resources. Therefore, one has to use the
scarce resources alternatively. Ex: If a person has a bucket of water, suppose he feels
thirsty, he uses water for the drinking purpose. In the subsequent stage if the water is
remaining, at that moment the water is used for cooking, washing etc. Thus most
urgent requirements will be satisfied first and the less urgent wishes will be postponed
to future uses. This adjustment is only because of the scarce resources. Therefore
Robbins used the term alternative use. It is also called problem of choice.
Superiorities: - The first two definitions failed to occupy the significant place in the
field of definition of economics. Therefore Prof. Lionel Robbins introduced the scarcity
definition. His definition is superior in many aspects.
The Term Resources: - The broader term resource, which is freely given by the
nature, has replaced the narrow term source, i.e. Wealth or money,
Science: -Lionel Robbins emphasized on the term science rather than arts. He
said economics is a science because of the cause and effect relationship.
Material and Immaterial Welfare: -The scope of economics is broadened because
it takes into consideration of all types of wants, whether it is material or immaterial.
According to him economics has no business with desires or ends.
Criticisms: -
Scarcity definition is not free from the drawbacks. They can be discussed in the
following ways.
1) Abundance: - Problems of economics arise not only of scarcity but also of plenty.
Ex: over population, floods and so on. Lionel Robbins did not put in plain words
anything about the abundance.
2) Economic problems are ignored: -
Lionel Robbins concentrates on the term science, which is static in nature. Certain
terms like unemployment, poverty, inequality etc., are variables from time to time and
not discussed in his definition. Economic tribulations are very common in the society,
which are to be discussed under the segment of economics.
3) Static definition: -
The greatest drawback of this definition is it is a stagnant definition just like
stagnant water. But economics is a dynamic one, which changes from occasion to
occasion, place-to-place and person-to-person.
4) Growth: - Economic development or the process of progress is a silent element in
the scarcity definition.
Thus Scarcity definition is the modern and approximately appropriate definition in the
field.
Lionel Robbins emphasized that economics is a science as well as an art. This is a
great achievement over the past definitions. Hence, economics is known as the Queen
of Arts. Besides, the drawbacks of scarcity definition are another great step to provide
a proper definition for economics.
4. GROWTH DEFINITION: -
J.M. Keynes, Ben ham and other economists attempted to provide another definition
in the field of economics. However, in 1948 P.A.Samuelson published a book named
Economics. The definition given by P.A.Samuelson is very appropriate definition
when compared to all other definitions because it is the mixture of all the definitions of
the time. According to P.A.Samuelson, Economics is a study of human and society
choose with or without the use of money to employ the scarce productive resources
which could have alternative uses to produce various commodities overtime and
redistribute them for consumption now and in the future among the various people
and groups of a society. In other words, one can explain the definition in the following
way, Economics studies about the efficient use of scarce resources to acquire
maximum satisfaction and by this means stabilized growth.
Summary -
Of all discussions discussed above, the growth definition furnished by Samuelson
appears to be the most satisfactory. It presents the choice, the problems in its
dynamic explanation and also widens the scope of the subject by including such
important problems like consumption, production, income, output, employment and
growth. Besides that, it is applicable to all modern economic systems of all times. This
is the most acceptable definition of economics at the moment. The movement of
economics is a never-ending process. It keeps on sprouting with the changes during
passage of time. Even the growth definition may be replaced by another definition in
the existence to come.

A partial study to Managerial Economics:
Human beings are constantly interested in acquiring knowledge in the habitual life. In
connection with this men have invented a cipher of concepts during the process of
civilization such as money, fire, wheel and so on. Money is the route cause for the
overall development of economics. Post II world war has radically changed the human
civilization. Many Managerial men during that time have faced a bunch of problems;
especially regarding the Managerial and economics. Economics has number of sub-
divisions. Each set of divisions having variety of principles. Economic problems by
themselves do not provide solution for Managerial problems. Therefore a study about
academic theories and Managerial practice is inevitable. There is a special need to
study about the Managerial and economic conditions as well. This is the product of
introduction of Managerial economics.

According to Milton H. Spencer, and Louis Siegel-man Managerial economics is the
integration of economic theory with Managerial practice for the purpose of facilitating
division making and forward planning by the management.

JAMES BATES AND T.R.PARKIN-SON have defined Managerial economics as It is the
study of behavior of firms in theory and practice. It is to some extent study of the way
in firms behave in response to changes in techniques, markets, economic structures,
organizations, habits and tastes and how they themselves bring about the changes in
the Managerial scenario.

We can explain the definitions with a diagram:

The above definition can be classified for explanation into 4 segments.
Economic theory:
Economic theory relates to different kinds of approaches, which are commonly studied
in microeconomics. Such theories are utility theory, production possibility theory,
break-even analysis, net present value, internal rate of return theory and so on, which
are associated in economics.
Managerial practice:
Managerial economics encompasses Managerial practice. Sometimes instead of
merely depending on the theoretical aspects we also take information from the
practical life i.e. collecting the data and analyzing the problems of economics by
visiting number of industries, consulting the Manager and so on, in connection to
changing Managerial scenario.
Decision-making:
Every manager has to take up certain decisions during the course of action. They are
like what is to be produced? How to produce?, where to produce?, when to produce?,
why to produce? Etc. These decisions are to be taken systematically by any
Managerial economist.
Forward planning:
Forward planning means supporting to the day today decision for a long period of time
i.e., once a specific decision is taken then it should be accelerated and reviewed up
frequently. This is popularly called forward planning.
Nature of Managerial Economics:
Managerial economics has certain important characteristics. It is a peculiar subject
where one can see mixture of many disciplines at a time for the convenience of the
aspirants.
Following are the crucial features of Managerial economics.
Economic
theory
Business
Practice
Decision-
making
Forward
Planning
Managerial
Economics

1. Managerial economics - the mixture of both science and art: -
Science is a systematic study of cause and effect relationship, which is also called
experimental study. Managerial economics concentrates on the law of demand where
price is the cause and demand is the effect. Therefore Managerial economics is a
science. Similarly Managerial economics is also an art subject. Art is a systematic
study of human behavior, which changes from time to time and place to place. Here
one + one may be eleven and may equal to two. Therefore Managerial economics can
be studied under human science as well as pure science.

2. Positive or normative science: -
Managerial economics is a normative science because it highlights only on rules and
regulations to be followed by an organization to acquire profit maximization. Return on
investment, bench marking and other Managerial decisions.

3. Qualitative or quantitative: -
It is qualitative in nature, because Managerial economics is the backbone of human
resource management. For example, if the work is higher, the wage is also higher.
Managerial economics can be expressed also in terms of quantity i.e., ten units of
products, 20 leaders, ten cars at 4 Lakhs per car and so on. Thus Managerial
economics is the collaboration of qualitative and quantitative aspects. Since
Managerial economics consist of mathematics and equations. It is also called
programmatic science.
4. Micro or macro: -
Managerial economics is a part of economics. Therefore Managerial economics is
micro in nature, since it is a small part of whole economics.

5. Whether it is a theory of the firm or industry?
Managerial economics is a study of a firm. Here we discuss the fundamental problems
of one organization. Managerial economics related is to the mentality of one manager
of the organization. Here manager will take up certain decision. It consists of profit
maximization, T.Q.M, T.P.M, and JIT. (Just in time) and so on.
Scope of Managerial economics: - Managerial economics can be explained under two
heads
Subject matter of Managerial economics
Relationship with other disciplines
Subject matter of Managerial economics: -
It refers to the topics, which are covered in Managerial economics. However for
convenience following are the important factors. Demand forecasting, Cost and
benefit analysis, Production analysis, Supply analysis and Market analysis, Price and
pricing techniques and Profit management, Capital budgeting
Relationship with other subjects
It is concerned with the interrelation with other academic subjects like Managerial
economics with statistics, mathematics, accounting, human relations, management
subjects, history, and research development and so on.
Let us first discuss the Subject matter of Managerial economics
Demand forecasting: -It refers to the anticipation of future demand for a
product based on present and past experience. Qualitative and quantitative
forecasting techniques are commonly used.
Cost and benefit analysis: -It includes the return on investment and the
stipulated time to get back the amount. It is also a study about the types of cost, cost
curves, marginal costing (Break-Even-Point), and process costing and so on.
Supply analysis: -It refers to the supply of goods, elasticity of supply, supply
and influencing factors, etc.
Market analysis: -Here we study different kinds of markets such as: Short term
market, Long term market, Consumer market, Global market, niche market etc
Price and pricing decisions: - Pricing is a skill that should not be too high or too
low. Here we study price mechanism and other pricing techniques. For example
skimming price, charming price, Floating price, Penetrating price, Discount price,
Wholesale price and retail price, loss leader price etc are very important
Production analysis: -It refers to the input, process, output relationship i.e.
production function. Different theories like, laws of returns, least cost combination,
etc., are studied.
Capital budgeting:-The two important theories of traditional and modern
approach are-Traditional theories are payback period, average rate of return,
accounting rate of return, etc. Modern theories like N.P.V, I.R.R, A.R.R, etc., are
discussed.
Profit management: -Highlights on optimum profit, profit theories, risk & return
analysis, etc
Relationship with other subjects:
Managerial economics and statistics are inter-related: Because Managerial economics
relates to collection of data, correlation with data, regression analysis, time series,
averaging, etc. Therefore they are inter-related.
Managerial economics and mathematics are related: Therefore Managerial economics
is called a programmatic study or quantitative analysis, since it has expressed in
terms of mathematical equations.
Managerial economics and accounting are related: Accounts are the preliminary study
for Managerial economics. It is important to note that when accounting ends, then
Managerial economics begins. Thus they are co-related.
Managerial economics and human relation are related: Managerial economics is
mainly concerned with the behavioral aspects of the people. Successful
managers/Managerial men are those who can attract more number of customers.
Economics and management subjects:
Managerial economics is also related to management concepts like Moslow need
hierarchy, Theory of dynamism, Johari window and other theories.

History and Managerial economics are inter-connected. This is because; the
theoretical aspects of Managerial economics have evolved during a passage of time.
History and economics help us for the further development.
Managerial economics, and research and development are related: This is very
essential for the progress of any Managerial. It is a continuous flow. Similarly
Managerial economics helps us to change the theoretical aspects into practical
aspects.
Fundamentals concepts:
There are five Fundamental problems of Managerial economics. They can be discussed
under the following heads
1. Opportunity cost
Opportunity cost is an important basic concept of Managerial economics. Opportunity
cost is the cost of opportunity of the second best alternative. For example, M.C.A is
the opportunity cost for M.B.A students.

If a farmer has the capacity to produce both ragi and wheat, but he can not produce
both, due to the, scarcity of resources. Therefore he has to sacrifice one product and
concentrate on the other. Here cost of sacrificing product is popularly called
opportunity cost.
It is of various types.
Opportunity cost by benefit
Opportunity cost by total cost
Opportunity cost by calculated risk
Opportunity cost by uncalculated risk and so on.

Thus opportunity cost is an important ingredient of financial management, which is
taken from Managerial economics.

2. Discounting principle:
Another concept, which is used in Managerial, is discounting principle. It has its
importance in valuing the money A received at different points of time. Ex.1 A
rupee to be received today is worth than a rupee to be received tomorrow. Whenever
we compare the present and future value of money we always discount the future
value to make it comparable with the present value. Similarly a gift of thousand
received today is praiseworthy than the Rs 1000 next year. Naturally these kinds of
analysis are based on discounting principle.
3. Time perspective: -
Time plays an important role in fixing the price of a commodity. According to Alfred
marshal therefore four kinds of time: very short period time, short period and long
period, very long period.
Very short time period
Very short time period refers to the time duration of few days or a week. Examples for
such type of period goods are fish, vegetable, food, milk etc. Here elasticity of supply is
vertical, which means producer cannot supply the goods within a week. Therefore
price of the product is depending upon the demand variations i.e., higher the demand
higher the price and vice versa.
Short period:
Here both supply and demand are variable but demand is speeder than supply
variation. Time duration of short period is about 1- 3 months. Examples for such type
of goods are food grains, which can be preserved for few months. Here elasticity of
supply is steep which means producer slowly supplies the goods within a few months.
However the price of the product is depending upon the demand variations i.e., higher
the demand higher the price and vice versa
Long period:
Here both supply and demand are variable but supply is speeder than demand
variation. Time duration of short period is about 3 to 5 years. Examples for such a
type of goods are; furniture, cloths etc. Here elasticity of supply is slant which means
producer sufficiently supplies the goods with in a few months. However the price of
the product is depending upon the supply variations i.e., higher the supply lowers the
price and vice versa.
Very long period:
Very long time period refers to the time duration of 5years and above. Examples for
such a type of goods are luxurious goods. Here the supply influences more on fixing
the price of the product. This can be explained with the above diagram. Here
elasticity of supplies is perfectly elastic, which means producer supply the goods
easily with in time. That is why the price of the product depends upon the supply
variations i.e., higher the supply lowers the price and vice versa.
4. Incremental concept:
It is an important fundamental concept of Managerial economics. Incremental concept
involves the estimation of impact of decision alternative on cost and benefits those
results from the changes in prices, products, investments etc. The fundamental
concepts under incremental principle are of two types.
Incremental cost
Incremental revenue/benefit
1. Incremental cost is defined as the changes in total cost consequent upon the
decision.
2. Incremental benefit is defined as the changes in the total revenue resulting from a
decision. Break-even point analysis is a marginal tool that emphasizes the relationship
among the decision variable such as price cost and volume of sales. Here any point
above BEP is incremental revenue and vice versa
5. Equi- marginal principle:
It is the important fundamental concept of Managerial economics. According to this
concept an input should be allocated in such a way that the value added by the last
unit is the same in all cases. Here the marginal productivity should be same or equal,
which is popularly called equi-marginal productivity.
This can be explained with the help of a formula
EMP= (MP/P) A =(MP/P) B=(MP/P) C=K.
Where EMP =Equi marginal productivity; MP/P=output /input and k= nth product.
a,b,c, are the different products produced during the process of production. In this
concept it is noted that marginal productivity among the activity or product A, B, C,
etc are constant or same even though the profit of one product is more or the profit of
the other product is less. Here producer is concentrating on the production of all the
possible products irrespective of returns. In other words loss of product is
compensated by the gain of the other product. This concept is popularly called
compensating principles this is an important concept of Managerial economics.
Merits of Managerial economics:
1. It is used for day-to-day decision-makings, as well as future development of any
organization.
2. It studies the behavior of firms by combining both theory and practice, which is
very useful to understand the market and market fluctuation.
3. It is very essential to understand certain Managerial aspects of an organization like
price and pricing techniques as well as allocation of remuneration for the factors of
production and so on.
4. It is an important source of information for the project appraisal criteria and it is
the mother discipline of all the other subjects.
5. Managerial economics is inevitable to any person who is interested to live with the
society whether they are educated or uneducated.
Demerits of the study of Managerial economics:
1. Future demand forecasting may not be accurate because it is purely based on
hypothesis or tentative assumption
2. On the job or off the job training in Managerial economics is not mandatory to start
the Managerial. Many successful Managerial men are not the students of Managerial
economics like ambani groups, Infosys, Micro soft networks etc.
3. Life is a game of luck; it is rightly stated that anything can happen to any person
at any time, whether he or she is educated or uneducated. This means any poor can
become rich through proper dedication to work without knowing Managerial
economics.
Functions of Managerial economists
Functions of Managerial economists are divided into two types:
General decision
Specific decision
General decision: -
General decision refers to any kind of decision taken by the manager to overcome the
difficulties of management. This can be broadly divided into two types
Internal decision
External decision
Internal decision: -
Numerous kinds of decisions are to be taken by the manager inside the organization to
overcome the problems. For Example: -what to produce? How to produce? Whom
to produce? Etc. However the following are the important decisions.
Plant layout: - It refers to the allocation of available space efficiently. It consists of
space to preserve raw-material, space allotted to machines, space for processing,
official space, loading and unloading and so on. A Managerial economist is responsible
to analyze the aspects of plant layout.
Quality management: - quality management is taken from Japan (the concept KAIZAN
which means quality management). It contains quality circle, sampling of the product,
and so on. Thus quality management is an important function of a Managerial
economist.
Labor management: - It is the obligation of Managerial economist to fulfill the needs of
employees of the organization. Economists are expected to make the proposals of
factor pricing, especially with the Labor management. For example, decision about
the wages to the workers regarding daily wage or monthly salary, cost of perks and
privileges or any kind of fringe benefits are to be decided properly.
Technological management: - It is related the decisions about the application of
technology Such as Labor intensive, capital-intensive, intensive technology, extensive
technology, information technology and so on. A project appraisal criterion mainly
depends upon the cash flow of the project, which is decided by Managerial economists.
Material management: -It is of two types. They are Raw-material management and
finished goods management. Both concepts concentrate on place management. Place
influences on rent, quasi rent, and other kinds of expenses in any organization. Here a
rational manager has to take up the decisions about material management.
Pricing and profit management: - Manager has to decide about different kinds of price
and different kinds of profit, which can be accessible to a manager.
Economics of scale: - Here manger has to see the opportunity where he can produce
the product at a cheaper rate, which is popularly called economics scale.
Relationship management: - It is of two types. They are internal relationship and
External relationship. Relationship management is also costly in nature. It may be in
terms of cordial relationship, long term accessibility and so on. Here manager is
expected to decide certain additional expenses of the relationship management free
offers, discount and sales, seminars, conferences, free gifts, social welfare services,
supply of free computers etc. Analysis of cost and benefit is another important
decision to be taken by any Managerial economist.
External general decision: -
It is directly related to the decisions about the stakeholders of the organization such
as shareholders, administrative managers, legal authorities and others.
Economic factors: - Economic factors like pricing analysis of aggregate demand and
Aggregate supply, tax procedure inflation analysis etc, could influence on any
Managerial decision-making. Therefore it is the duty of Managerial economist to
understand these aspects.
Political factors: - Politicians, election procedures, elected parties manifestos, and the
governmental rules regarding the Managerial, industry tax holidays, tax reforms and
other important aspects are externally influencing on any Managerial organization.
Managerial economist is expected to analysis all the above factors and take up the
right decisions.
Global factors: - Whole globe is a single village where each and every company is
dependent in many respects. It is the duty of a manager to analyze these aspects.
Social factors: - social factors like culture, caste, family system etc, also influence on
the Managerial. Manager is expected to design the plan regarding these aspects.
Environmental factors: - Environment factors like air, sanitation, greenery, gross,
plantation and vegetation are to be protected. Manager has to carry on all these
aspects to take up the decisions.
Specific decision
The Managerial economist who helps in the decision-making process measures a
number micro and macro variables. Forecasting is the fundamental activity of a
Managerial economist. Indeed, a Managerial economist is greatly helpful to the
management by virtue of his studies of economic analysis. He is an effective model
builder. He deals with the Managerial problems in a sharp manner with a deep
probing. A Managerial economist in a Managerial firm may carry on a wide range of
special duties, such as: -
Demand estimation and forecasting.
Preparation of Managerial / sales forecasts. To provide forecasts of changes in
costs and Managerial conditions based on market research and policy analysis.
Analysis of the market survey to determine the nature and extent of
competition.
Analyzing the issues and problems of the concerned industry.
Assisting the Managerial planning process of the firm.
Discovering new and possible fields of Managerial endeavor and its cost-benefit
analysis as well as feasibility studies.
Advising on pricing, investment and capital budgeting policies.
Evaluation of capital budgets.
Building micro and macro economic models of particular aspects of the firms
activities that are useful in solving specific Managerial problems. Most models may be
prediction oriented.
Directing economic research activity.
Briefing the management on current domestic and global economic issues and
emerging challenges. Interpretation, analysis and reporting of current economic
matters, upcoming developments in Managerial, government and foreign or global
sectors.
The Managerial economist has to acquire a full knowledge about the behavior of the
economy as a whole and the impact of macro-economic policies such as monetary,
fiscal and industrial, adopted by the government from time to time in the growth of
Managerial. This is because a Managerial firm operates in the general economic and
institutional framework of the whole economy and the government policies create a
profound impact on Managerial conditions. So, a Managerial economist should be well
aware of the current and changing trends in the national as well as international
economy. Knowledge of balance of payments position, exchange rates, and import and
export policies of the government is also essential for a Managerial economist.
Summary
With the help of the discussion it is clear that Managerial economics has both positive
and negative aspects. They go hand in hand. But we cannot ignore the advantage of
Managerial economics. Negative aspects of any subject are to be converted into
opportunities. Analysis of negative aspects of Managerial economics may help a
manager to take up further right decisions. Managerial economics is the tool kit of
managers. It is a via media between the financial aspects as well as Managerial
aspects. It is the mother discipline of all the subjects, which has tremendous scope in
the global village.

Objectives of a business firm
Introduction:-
Objective is one of the components of corporate level strategy, after vision and mission
statements. Conventional theory of firm assumes profit maximizing, as the sole
objectives of business firms. Baumol has however argued, There is no reason to
believe that all businessmen pursue the same objective recent researches on this
issue reveal that the objectives that business firms pursue are more than one. Some
important objectives, like Maximization objectives such as profit maximization, sales,
growth, quality, quantity, wealth, welfare and utility maximization as well as Non-
maximization theories like satisfying behavior model, simple model behavior etc. in the
connection the discussion is rally meaningful.

Objective of a business firm can be discussed under two heads namely maximization
and non-maximization theories they can be discussed in the following ways:-
Maximization Theories: - maximization theories are concerned in increasing the
relevant concepts like, profit maximization, sales maximization, wealth maximization
etc.
Profit Maximization:-
It refers to improvement in the quantum of assets of organization which is higher than
liabilities. Many economists like walker and others have given almost importance to
this concept. It is of various theories such as theory of uncertainty, theory of
innovation, residual climate and so on. Here each theory explains the importance of
profit in any organization which is very essential for further improvement.
Profit Maximization includes Normal Profit and Super Normal Profit
Normal profit is considered as the least possible reward which in the long run must be
earned by the entrepreneur as compensation for his organizational services as well as
for beings the insurable business risks. Super normal profit depends on the demand
conditions in the business which is uncertain and unpredictable. Thus super normal
profit is reward for being uncertainty and unpredictable risk of business. Sometimes
in a competitive market, super normal profit is also depending due to extraordinary
efficiency on the part of the entrepreneur. Profit means different things to different
people the word profit has different meaning to businessmen, tax collectors, workers
and economists and it is often used in a loose polemical sense that buries its real
significance. In general sense, profit is regarded as income accruing to equity
shareholders, in the same sense as wages accrue to labor; rent accrues to the owner of
the rentable assets and interest accrues to moneylenders. To an accountant, profit
means the excess of revenue over all paid out costs including both manufacturing and
overhead expenses.
This can be discussed with an example, a cab-driver -- the self-employed proprietor of
an independent cab service -- says: "I'm making a 'profit,' but I can't take home
enough to support my family, so I'm going to have to close down and get a job." The
proprietor is ignoring the opportunity cost of her own labor. When those opportunity
costs are taken into account, we will find that he is not really making a profit after all.
This emphasizes on the importance of profit maximization. Therefore, profit can be
measured by computing the differences between total revenue and total cost, total
revenue being the value obtained from the sales of the firms output in a given period,
and the total costs being the value of the firms resources used as inputs for
productions and sale of this output. Based on this definition, the profit of the firm,
can be simply expressed by the following equation.
Profit Maximization can be explained through below diagram.

It is profit and loss account, but it is profit volume ratio or profit or loss account. For
our concerned it is break even point. Here below the break even point loss and above
the break even is profit. Stonier and Hague have drawn normal profit cost element. It
may be observed that as we move from left to right, the vertical distance between AC
curves tend to become narrow in a steady manner. Measurement of profits is not an
easy task. There is a wide variety of generally accepted accounting principles are
adopted.
Some of them are: Depreciation, Valuation of stock, Amortization of long term
intangible assets, Treatment of capital gains and losses. There are two kinds of profit
namely Net profit is the net income earned by an organization after meeting all the
expenses. Gross profits = Total Revenue Total costs. There are various profit
theories in the field few of them are: Risk theory, Uncertainty theory, Innovation
theory, Residual clamant theory and so on.
Conclusion
With the help of the above discussion and appropriate examples it is clear that each &
every owner of an organization wants to earn profit which is the sum total after
deducting or allocating wages, Interest etc. by adopting Residual theory, Which plays
an important role in each organization.
Sales maximization:-
It is introduced by the William Baumol. This theory has given more importance to sale
instead of growth, profit, welfare, wealth, utility maximization etc. Baumol thinks that
sales maximization is must for any management to increase their earnings as well as
bank loans of the organization.
Assumptions of the theory
1) Managers salary or remuneration are definitely increase because their salary or
remunerations are tied up with sales and not profit. They earn more commission on
the basis of sale so they focus on sale more and more product or services of the
organization.
AR=TR
TC=AC
FC
Units
Price
Loss
Gain
BEP
X
Y
2) Increasing sales enables the firm to capture more market and earn business
reputation. Tata Company produced A to Z items which are required by common man.
Sales capture the larger market as well as earn more reputation in the market.
Everybody knows Tatas chairman that is because of sales maximization.
3) Larger sales revenues, i.e. bigger size of sales cause a firm to expand e.g. Reliance
industries through sales they increase their size of the organization as well as
reputation.

Above diagramed is simplified as:-
Sales
Q Q
1
P
r
o
f
i
t
p
p1
Sales increases
profit decreases

From the diagram we can say that OA is trade off curve between the size of sales and
annual profit rate of return on investment. OY axis represents the annual profit rate
the rate of return on investment, OX axis measures the size of sales. OQ
1
is the
optimum sale. Here price decreased from p to p
1.
The manager utility function is the
highest when it is tangent to the trade off curve. IC
2
is tangent at point E. it gives
maximum sales. This means the Business decision favors sales maximizing rather
than profit maximizing level of equilibrium output.
Criticism:-
1) The organization should focus on only sales. They dont see the profit concept,
but in reality sometimes producers incur loss, when they neglect the profit of its
organization.
2) Producers image reduces in front of customer due to the misconception of the
product and hidden negative affect of the product or services. E.g. in credit card
O
A
INDIFF.
CURVE
OP
1

OP
SALES INCREASES
PROFIT DECREASES
E
SALES
PROFIT
S S
1

X
Y
market sellers sell cards for their commission and do not tell the negative aspect of it
which reduces the image of the unit.
3) Company or organization can not run on the basis mere sale so they have to
adopt other aspects like growth, wealth maximization etc.
With the help of the above discussion and appropriate examples it is clear that each &
every owner of an organization wants to expand sales which plays an important role in
each organization.
Growth maximization:-
Growth maximization concept was given by the Oliver William who gives more
concentration on growth of the organization instead of any other maximization
theories like sales, profit, quality, quantity, welfare, wealth, sales etc.
Objectives:-
Some organization adopts this aspect to run their business smoothly. So there are
some objectives or reason behind it to adopt the growth maximization. They are as
under:-
1) Most of the organizations adopt or follow the growth model that is growth=
development + research which commonly followed by the organizations.
2) Growth will strengthen the competitive spirit. It means if the organization maintains
the growth in, they more competitive to compete with the global market players.
3) Oliver Williamson growth model assumed that ceteris prevails which means other
things like sales maximization; quantity maximization, quality maximization etc. are to
be constant. Bank will consider the growth criteria of an organization to give the funds
to the unit.
4) Though Manager not able to reach sales maximization or profit maximization but
they can achieve the growth maximization in an organization.
5) Growth maximization should be achieved through the employees of organization. If
organization achieves growth maximization then it is the growth of the employees.
This can be explained with the help a diagram.

From the above Oliver Williamsons growth maximization diagram, we have seen that
on the ox axis we taken for growth and on OY axis as a profit. The straight line from
left to right show stabilized growth rate. On the stabilized growth rate line we see some
curves go from bottom to top that shows the growth rate of individual or organization.
Y
E
Y
PROFIT
HIGHER THE GROWTH
HIGHER THE PROFIT
GROWTH
O
ST
3

GROWTH LINE
ST
2

ST
1

Thus we can say that when growth automatically affects the profit of the firm. So
there is the direct relationship between the growth and profit of the firm.
Criticism:-
1) Bank will not always consider the growth at the time of giving funds to the
organization for further expansion or any other purpose.
2) Every time ceteris paribus factors not remain same like sales, profit and so on. It
varies according to the time.
Conclusion:-
With the help of discussion it is clear that there are two important theories of the firm-
Mainly maximization and non maximization. Maximization theories are profit
maximization, sales, growth maximization and so on. Growth maximization concept
was given by the Oliver William who gives more concentration on growth of the
organization instead of any other maximization theories. This theory has its own
significance in the theories of a business firm.
Wealth maximization:-
Adam smith highlights the wealth maximization. According to Adam smith, economics
is the earning and spending activities of money or moneys worth by dividing of labor
and their by wealth accumulation. This has led to rebirth and renaissance and
thereafter colonialism. This concept is a real hallmark in the history of world of
economics. Ruskin and other mercantilist have supported the concept of wealth
maximization.
Welfare maximization:-
Carl marks as a socialist highlighted more on the concept of welfare therefore
socialism, communism etc. are the outcome of wealth maximization. A well known
economist named Parato from Italy has emphasized on the concept of welfare.
According to him, welfare is a state where one is better off and none is worst off.
Which is impossible in real world therefore after a certain gap of time, influenced by
Alfred marshal, parato modified the welfare concept like, one is better off and
someone is worst off. In this context many of the experts like Irving fisher, J.S. mill,
David Ricardo have stressed on the concept of welfare maximization which is core
issue of the public sector undertakings of the day ,such as, construction of bridges,
houses, hospitals etc. freely to the general public which is an important component of
welfare maximization theory. Private companies are freely provides books, computers,
scholarships etc, to some of the selected schools and colleges which is also a
component of welfare maximization.
Quality management:-
Japan has many companies which are case study for many companies as well as MBA
students of the world. In connection with this TOYOTA is the role model for the
companies of the world which has introduced various concepts such as CANBAN,
KAIZAN, JIT (just in time), and FLEXITIME and so on. In connection with this TQM
(total quality management) is a separate subject for MBA which consists of SIX SIGMA
concept, benchmarking concept and so on. These concepts have contributed a lot for
the improvement of various companies of the world continuously. Quality
maximization is an important concept because qualitative products are sold globally.
Therefore experts have highlighted more on continuous improvement and quality
maximization.
Quantity maximization:-
J.B. say and J.S. mill and other experts have highlighted more on quality
maximization theory. According to them, supply creates its own demand. It means
exhibition, window dressing creates the demand for the goods in the market. In
addition to that the reason for Great Depression in 1972, economy in America
contributed by excess of supply of meat has resulted has shortage of demand for meat.
However ergonomics has contributed a lot to overcome it therefore still today there is
great opportunity for exhibition show room, malls and so on. Therefore productivity
maximization is quantity maximization has its own significance in maximization
theory.
Utility maximization:-
It is an important concept after modern market system. Utility means power or rate of
satisfaction, satisfaction meaning powers are the rate which is realized after
consuming a product. Both the concepts are similar under utility maximization
principles. Here a company should analyze the level of utility by improve the
organization. Thus utility maximization is one of the concepts of maximization theories
which are followed by most of the service organization.
Non-Maximization theory
1) Satisfying behavior model:-
Cyert March hypothesis is an extension of Simons hypothesis of firms satisfying
behavior or satisfying behavior. Simon had argued that the real business world is
full of uncertainty, accurate and adequate data are not readily available where data
are available managers work under a number of constraints. Under such conditions it
is not possible for the firms to act in terms of rationality postulated under profit
maximization hypothesis. Nor do the firms seek to maximize sales, growth or anything
else. Instead they seek to achieve a satisfactory profit a satisfactory growth and so on.
This behavior of firms is termed as satisfaction behavior. According to Cyert and
March there are five main goals of the firm
a) Production goal) Sales goal) Inventory goal) Share of market goal , e) Profit goal
There are three departments in modern corporate firm like production department,
inventory department, and sales department
a) Production department:-
The production department sets the production goal. The head of the production
department wants that the production process should be smoothen, avoiding
fluctuations. If production is evenly distributed, the plant will never be overworked or
idle. Similarly, on the labor front, the firm will avoid both rush recruitment and layoff
of workers.
b) Inventory department:-
The inventory goal is set by inventory department. For firms which do not have
separate inventory departments, the inventory goal is determined jointly by production
and sales departments.
c) Sales department:-
The sales department determines both sales goal and share of the market goal. This
department usually sets the sales target and decides the strategy to capture a larger
share of the market.
d) Profit goal:-
The profit goal is the ultimate goal of each firm. This is set by top management
keeping in view the expectations of the shareholders, banker and other financial
institution. Since profits generate resources for further expansion of the firm, the top
management sets a profit target which is consistent with the growth objectives of the
firm.
2) Simple model of behaviorism:-
The simple model of behaviorism explains the decision making process in a corporate
firm operating in a duopolistic market. The model assumes that both the firms
operating in the market produce a homogeneous product and thus single price
prevails in the market. Each firm has decides its output independently of what is
being produced by the other firm. However, their joint output decides the price that
will be determined in the market. Inventories of the firms are assumed to be fixed.
Firms future demand function is based on the past observations. Hence future
demand is estimated by extrapolating the sales of the firms in previous years. Forecast
of the competitors reactions of the competitors. The current cost is assumed to be the
same as in the previous period. However, if the profit goal was achieved in the past two
periods the cost be raised to allow for slack payments.
The simple model of Cyert and March assumes that there is just one goal of firm that
is, earning profits. For the current year, profit goal is set at the average level of the
profits earned in the past periods. On the basis of the level of output, price and costs,
the firm obtains estimates of profits. On comparing these estimates of profits with the
profit goals, the firm decides whether it should adopt the profit goal or should look for
some other alternatives course of action.
Demerits of non maximizing theory:-
1) In satisfying behavior model, behaviorists argue that the actions of the firm are
guided by limited or bounded rationality. In a modern corporate firm, entrepreneurial
work is executed by top management. These people have limited information and
limited time and computational ability. Hence the management at the top normally
examines only a few alternatives and chooses the best out of them. This implies that
in a modern firm, decision and actions are based on limited or bounded rationality.
2) In simple model of behaviorism, manager should consider the past profit earned
by the organization and on that basis they go in future but in future it might not be
happen. So it is calculated on the basis of past assumption.
Conclusion:-
With the help of discussion it is clear that there are two important theories of the firm-
Mainly maximization and non maximization. Maximization theories are profit
maximization, sales, wealth, welfare, quality, quantity, utility and growth
maximization and non maximization theories are behavioral theories, satisfying
theory, and simple model of behaviorism and so on. All the above stated theories are
really useful to improve any organization or corporation or industry. This is not the
end of theories owing to necessity many theories may come in the year to come.
Basic forms of ownership
It is broadly divided into two types namely public sector and private sector.
The public sector is the part of economic and administrative life that deals with the
delivery of goods and services by and for the government, whether national, regional or
local/municipal. Public sector activity is ranged from delivering social security,
administering urban planning and organizing national defenses. The organization of
the public sector (public ownership) can take several forms, including:
Direct administration funded through taxation; the delivering organization
generally has no specific requirement to meet commercial success criteria, and
production decisions are determined by government.
Publicly owned corporations (in some contexts, especially manufacturing,
"state-owned enterprises"); which differ from direct administration in that they have
greater commercial freedoms and are expected to operate according to commercial
criteria, and production decisions are not generally taken by government (although
goals may be set for them by government).
Partial outsourcing (of the scale many businesses do, e.g. for IT services), is
considered a public sector model.
Private sector
Private sector is that part of the economy which is both run for private profit and is
not controlled by the state. By contrast, enterprises that are part of the state are part
of the public sector; private, non-profit organizations are regarded as part of the
voluntary sector.
However the following are the other important types
Although forms of business ownership vary by jurisdiction, there are several common
forms:
Sole proprietorship: A sole proprietorship is a business owned by one person. The
owner may operate on his or her own or may employ others. The owner of the
business has total and unlimited personal liability of the debts incurred by the
business.
Partnership: A partnership is a kind of business in which two or more persons
operate for the common goal of making profit. Each partner has total and unlimited
personal liability of the debts incurred by the partnership. There are three typical
classifications of partnerships: general partnerships, limited partnerships, and limited
liability partnerships.
Firm: A business firm is a for-profit, limited liability entity that has a separate
legal personality from its members. A corporation is owned by multiple shareholders
and is overseen by a board of directors, which hires the business's Business staff.
Co-operative: Often referred to as a "co-op business" or "co-op", a cooperative is
a for-profit, limited liability entity that differs from a corporation in that it has
members, as opposed to shareholders, who share decision-making authority. . One of
the most common focuses on the primary profit-generating activities of a business:
Manufacturers produce products, from raw materials or component parts,
which they then sell at a profit. Companies that make physical goods, such as cars or
pipes, are considered manufacturers.
Service businesses offer intangible goods or services and typically generate a
profit by charging for labor or other services provided to government, other businesses
or consumers. Organizations ranging from house decorators to consulting firms to
restaurants and even to entertainers are types of service businesses.
Retailers and Distributors act as middle-men in getting goods produced by
manufacturers to the intended consumer, generating a profit as a result of providing
sales or distribution services. Most consumer-oriented stores and catalogue
companies are distributors or retailers. See also: Franchising
Agriculture and mining businesses are concerned with the production of raw
material, such as plants or minerals.
Financial businesses include banks and other companies that generate profit
through investment and management of capital.
Information businesses generate profits primarily from the resale of intellectual
property and include movie studios, publishers and packaged software companies.
Utilities produce public services, such as heat, electricity, or sewage treatment,
and are usually government chartered.
Real estate businesses generate profit from the selling, renting, and
development of properties, homes, and buildings.
Transportation businesses deliver goods and individuals from location to
location, generating a profit on the transportation costs
Some of them are charity oriented institution such as trusts, funds societies etc
Franchising, a business method that involves licensing of trademarks and
methods of doing business, such as: Chain store, retail outlets which share a brand
and central management , An exclusive right, for example to sell branded merchandise
, Media franchise, ownership of the characters and setting of a film, video game, book,
etc., particularly in North American usage
Conclusion
With the help of the discussion it is clear that the modern business is usually large in
size, oligopolistic, diversified, and global in reach, technology oriented and fast
changing. Since business in our times has succeeded in acquiring great power, if often
disregards consumers interest and thereby undermines social welfare. This attitude of
business towards people sometimes invites government regulation (public sector) of
business activities. Business Environment in a strict sense refers to all external
factors which have a direct or indirect bearing on the activities of business. But in a
broader sense it includes both internal and external environment.
Questions: -
What do you understand by Business economics?
Business economics is the integration of economic theory and business practice for
the purpose of facilitating forward planning and decision making - Elucidate
Discuss the subject mater of Business economics.
Explain the scope of Business economics.
What are the uses of Business economics?
The term economics is derived from which language?
Mention the types of definitions
Who is the father of economics?
Who is the father of welfare of economics?
Who is the father of wealth definition?
Who is the father of growth definition?
Who is the father of scarcity definition?
Define wealth definition
Define welfare of economics
Define growth definition
Define scarcity definition
=================


Conceptual Law of demand
Communities as well as inhabitants are eternally having the drive to acquire different
kinds of goods and services during the span of their life. This urge for getting new
things is something innate and ever present. For example human beings desire to get
water, whenever they feel thirsty. If it is fulfilled, then they drive towards the food like
meals, bread and so on. Once it is completed, then they go gradually for shelter, then
cloth, safety needs, prestige and self -actualization and other needs like cognitive
needs, aesthetic needs and spiritual needs, which are popularly identified, as Maslo
need hierarchy principle. Thus it is a continuous process. However generally, poor
people, who get the food with difficulty, never drive to have the luxurious goods like
gold chain or costly cloth. In connection with this, when do we purchase the goods?
And when do we refuse to purchase the goods? Etc., are the gigantic questions in
nature. This has resulted in the concept of demand and other related issues in the
field of economics.
What is demand?
It is the willingness to purchase a product or any other thing of value when the
demand is created. For example when a person is thirsty then the demand is created
to drink either water, or coffee, or tea. When there is no desire, the demand cannot be
created. For e.g. when a persons hunger to get food is fulfilled then, no other can
make him eat even though the food is very innovative. It is stated that, we can bring
the horse near to the water, but we cannot force the horse, to drink water. Thus in
simple terms, demand is the drive to purchase a product. Prof. J.M.Keynes
emphasized the term effective demand, during the time of great depression in 1930, in
USA. He was dead against to the classical concept of supply created its own
demand. Academicians like A. C. Pigou, Alfred marshal etc., have defined demand in
the following ways. In general we do demand to purchase airplane but we may not
have sufficient cash to purchase. Therefore mere desire or willingness is insufficient to
buy a product but ability to pay is inevitable. This is what Pigou says. According to
him demand is the desires for the commodity backed up by the willingness and
ability to pay. On the other hand sometimes even though certain products like
second-hand cloths on the footpath are cheaply available we do not purchase it, due to
lack of willingness to buy such goods. Thus Prof. Alfred marshal says demand is drive
to buy the product based on both willingness and ability to pay. Once we have the
interest on the subject, it will be incomplete, if we don not study the theories of the
subject. So now let us discuss some of the concepts of demand.
Law of Demand:
Theoretical aspects play an important role for the sound knowledge about the subject.
Prof Alfred marshal introduces the law of demand. The law is very simple. For
example, suppose the price of tomato increases from five rupees to twenty-five rupees;
then we buy one kilo or half a kilo; instead of two or more kilos for the daily use. Thus
according to marshal amount of commodity demanded decreases with every rise in its
price and increases with every fall in its price
This can be explained with the help of a formula that is, price increases, demand
decreases and price decreases demand increases. In the other words demand for the
commodity decreases price also decreases and vice versa. Thus price and demand are
inversely related, whereas demand and price are directly proportional.
Assumptions:
1. Any theory is based on tentative assumptions. The law of demand is not the
exception. Few of them are as follows. Suppose we like pizza too much then we
purchase it even at a high rate. So the theory fails, therefore we assume that ceteris
paribus which means other things remaining the same i.e. other things like taste,
habit, fashion etc should not change during the course of time

2. Another assumption is, when person belong to middle class he will purchase a
cycle but when his income increases will buy a gear vehicle or a car then the theory
fails, so we assume that income of a person is constant.

3. It is also assumed that the satisfaction by purchasing a pen or car or from
broom to computer chips, is measured in terms money i.e. one unit of satisfaction two
units of satisfaction etc., based on the amount of money we pay to purchase a
commodity, which is popularly called cardinal measurement of utility by Alfred
Marshal.
In most of the cases, economists, use statistics to understand the concept properly.
Similarly the law of demand can be explained with the help of a table. A demand
schedule can be constructed that shows the quantity demanded at each given price. A
more elementary way to capture the relationship is in the form of a table. The
numbers in the table below are, what one expects in a demand curve: as price goes
up, the amount people are willing to buy decreases
SCHEDULE
PRICE (000) DEMAND (000)
10 5
20 4
30 3
40 2
50 1
When the price of an apple is ten rupees then the demand for apple is five units. When
the price of apple of raises from ten to twenty rupees then the demand for apple is
only four pieces, similarly when the price of an apple increases from Rs.20/ to Rs.30/
to Rs.40/ to fifty then the demand for the apple reduces to 4 units to 3 to 2 to one
apple. Thus when price of apple increases then the demand for apple will be
decreased. This schedule shows an inverse relationship between the price and the
quantity demanded. If the price of a commodity is Rs. 1, then the demand for
commodity is Rs. 5. If the price of a commodity is Rs 5 then the demand for the
commodity is 1. Thus price rises, demand falls and vice versa.
Economists always use mathematics especially graph sheet to understand the
conceptual ideas. The laws of demand relations are often presented as graph rather
than table.

X
PRICE
Units of Quantity Demanded
O
D
D
I

Y
Law of Demand

The relationship between price and the amount of a product people want to buy is
what economists describe the demand curve.
To follow mathematical convention, how many apples should be on the vertical axis
since quantity depends on price? But Alfred Marshall has mentioned the price of an
apple on the vertical axis. With the above stated Alfred marshals diagram, we can
analyze the Demand line with three characters.
. Demand line has the declining tendency.
. It decreases from left to right.
. It is a straight line.

Salient features of demand curves
It is straight line.
Marshall says that higher the price, lower the demand. Price and demand are
inversely proportional, due to law of diminishing marginal utility. Mathematically it is
called unitary elasticity of demand. Here the relationship between x; and y are linear
in nature. If we see the diagram it is clear that OX axis represents the quantity
demanded and OY represents price. Marshals law of demand states that demand line
is straight-line dew to linear relating between price and demand in general.

But modern economists have identified that, the demand curves may be having special
characteristics, they are commonly found in the following cases;

Demand curves may be concave to the origin, which is similar to the production
possibilities curve. Here the price is high but the demand and price variation is not
exactly inversely proportional the demand for the product is concave to the origin

The Demand line can be expressed with the law of Diminishing Marginal Rate of
Substitution, which is convex to the origin, based on the indifference curve analysis.

X
PRICE
O
D
D
I

Y
Law of Demand
PRICE
O
D
D
I

Y
Law of Demand
In the diagram it is clear that OX axis represents the quantity demanded and OY
represents price. The demand curve is convex to the origin.

Demand curve may be negative, which similar to that of diminishing marginal utility.
Here demand line is cutting the OX axis and entering to the negative quadrant. This
is because demand for woolen product during the time of winter is negative.

Some times demand may be zero or constant for some products. Example: demand
for cotton cloths during rainy season may be constant for zero. This is popularly called
perfectly inelasticity of demand. In other words here demand for the commodity is
constant but the price of the commodity is variable from time to time which is shown
in the diagram

Some other times price of a commodity may be zero, But the demand is infinite.
Example free goods that are buy-one get one free (BOGOF) products If we see the
PRICE
X
O
ED=0
Y
Perfectly Inelasticity
PRICE
X
O
D
D
I

Y
Law of Demand
D
PRICE
X
O
D
I

Y
Law of Demand
diagram it is clear that OX axis represents the quantity demanded and OY
represents price. Here demand line touches the OY axis. This is popularly called
perfectly elasticity of demand. Where price is constant and demand is variable.

Some times DEMAND LINE is Z shaped due to veblan effect.
The diagram states, whenever price decreases subsequently the demand for the
commodity also decreases coincidently. When the price of an inferior goods falls, then
the real income of a consumer increases, then instead of purchasing more of inferior
goods a consumer prefers to superior substitute goods for an inferior commodity.
Therefore demand line is Z shaped.

Determining factors of demand (forces behind the demand curve)
Demand has a number of influencing or determining factors. They are as follows:
Price: - Price of an apple increases demand for apple decreases. Thus price influences
on the demand.
Income: -When the income of a farmer increases, naturally he demands a tractor for
wooden plough. Thus Income influences on demand.
Supply:-When the demand for liquor increases, then, automatically supply will
increase. Thus supply influences on demand.
Market: -Vegetables are not demanded in fish-market. Thus market influences on
demand.
Time: -During summer, demand for cotton clothes may be more. The demand for such
products may be less during winter. Thus time influences on demand.
Advertisement:-we will purchase lux soap more, because it is endorsed by film
artistes. Thus advertisement influences on demand.
Taste:-Demand for junk food may increase due to changing food habits. Thus taste
influences on demand.
PRICE
X
O
ED=00
Y
Perfectly elasticity of demand

PRICE
X
O
Y
Law of Demand
D
D
I

D
2

D
3


Effects of demand
The above factors influence on different effects of demand they are as follows: it is of
two types they are namely change in quantity demanded and change in demand.
If there is any change in the quantity demanded, due to variation in price is called
change in quantity demanded.
Change in quantity demanded is of two types.
First one is Contraction in demanded, which goes like this. Suppose the price of
lottery ticket increases, we purchase very less is referred to as contraction in demand.
Thus contraction in demand is the result of rise in price.

If we see the diagram it is clear that OX axis represents the quantity demanded and
OY represents price. . Due to the rise in price, from point P to P
1
the demand for a
commodity decreases from Q to Q
1
. Therefore, it is said to be contraction in demand.
Here the quantity of demand decreased from OQ to OQ1.

The second concept on change in quantity demanded is extension in demand.
Suppose the demand for apple decreases from Rs.100/ per kilo to Rs.10/per kilo, and
then demand rises. This is called extension in demand. It is must opposite to the
above concept.

OY represents price. The DD line explains the demand for a commodity. Here price of
a commodity decreases from point P to P
1
. Therefore the demand increases form Q
to Q
1
. This is extension in demand. This extension in demand results from the fall in
price of a commodity. Above stated effects are properly called change in quantity
demanded.
PRICE
X
O
D
D
I

Y
Extension in demand
P
1

P
Q
1
Q
PRICE
X
O
D
D
I

Y
Contraction in demand
P
1

Q1

P
Q
Change in demand, Suppose there is any change in demand due to the variation in
the determining factors other then price is called change in demand. It is of two types.
They are, first one is Increase in demand and other one is decrease in demand. Let as
discuss them one by one.
Increase in demand
Suppose the income of a consumer increases the consumer purchases rice or pizza to
Ragi bolls is known as increase in demand. Here superior products are preferred for
inferior goods, due to rise in standard of living.

OY represents price. D line is the demand line, that is, before the increase in income
of a consumer. D
1
, D
1
. Line explains the preference of higher demand line due to the
rise income. Thus if the income of a consumer increases, then he prefers higher
demand line, which is also known as increase in demand.
Decrease in demand
If the income of a person decreases then the standard of living declines, suppose a
company closes then the worker of the unit cannot get remuneration. Now he may sell
his gear vehicle and purchase a cycle. This is popularly referred to as Decrease in
demand:

Here OX for demand OY for income. The demand line decreases from DD line to
D
1
D
1
due to the fall in income, which is called decrease in demand. Thus the above
two concepts constitute change in demand.
Two more concepts, which are related to conceptual law of demand, are, more
elasticity of demand and less elasticity of demand.
Income
X
O
D
D
I

Y
Increase in demand.

Income
X
O
D
D
I

Y
Decrease in demand
More elasticity of demand
1. Suppose the price of milk or HLL water purifier decrease slightly then the
demand for the product will be very high which is popularly called more elasticity of
demand. More elasticity of demand: It is also called relatively elasticity demand. When
a small change in price then it results in greater change in demand, is called more
elasticity of demand. In other words, greater change in demand resulted by small
change in price. The proportional change in Q is greater than the proportional change
in P.

OY represents price. Here quantity demanded is greater than the change in price/ Or
ED>1. Here demand variation is grater then the price.

Less elasticity of demand
Suppose the price of a commodity increases drastically the demand for the product
will be relatively less. This is popularly called less elasticity of demand. Greater change
in price results in a smaller change in demand. This is called less elasticity of demand
or relatively inelasticity of demand. In other words, a small change in demand
resulting in greater change in price is referred to as less elasticity of demand/Or E < 1
Inelastic. For instance gold price is increasing drastically but demand variation is
relatively less.

OY represents price. Here the change in price is greater than the quantity
demanded or ED<1. This is called less elasticity of demand
Exceptions of law of demand
Law of demand is not applicable in some cases. They can be discussed under these
heads.
War:
PRICE
X
O
D
Ed>1
Y
More elasticity of demand
PRICE
X
O
D
Ed<1
Y
During the times of anticipated war between two countries, people purchase the
product at high price due to anticipated future shortage.
Demand for necessaries or basics:
Law of demand does not apply for the necessaries like food, shelter, cloth; peoples
demand such commodities irrespective of price.
Prestige goods:
Certain goods like precious stones, motor cars, costly furniture etc, are demanded
more and more even in the high price. This is also an exception to the law of demand.
Ignorance:
Ignorance is the exception of law of demand. Sometimes consumer gives more prices
for a commodity due to ignorance of price levels of a same commodity in the other
different similar markets.
Veblen effect
Veblen goods are costly and shopping goods. Veblen goods are a theoretical group of
commodities for which peoples' preference for buying them increases as a direct
function of their price, instead of decreasing according to the theory of supply and
demand. It is claimed that some types of high-status goods, such as diamonds or
luxury cars, are Veblen goods, in that decreasing their prices decreases people's
preference for buying them because they are no longer perceived as exclusive or high
status products.
[1]
Similarly, a price increase may increase that high status and
perception of exclusivity, thereby making the good even more preferable. The Veblen
effect is named after the economist Torstein Veblen, who first pointed out the concepts
of conspicuous consumption and status-seeking. Some people change vehicle
frequently, probably due to the existence of more attractive alternatives which become
affordable.
Geffens Paradox:
Sir Robert Geffen explained the exception to the law of demand. He classified certain
goods namely ragi, jower, maize, etc are the inferior goods. When the price of an
inferior goods falls, then the real income of a consumer increases, then instead of
purchasing more of inferior goods a consumer prefers to substitute as a superior
goods for an inferior commodity.
Geffen goods = the goods which are identified by Geffen called Geffen goods. Non-
economists sometimes think that certain goods would have such a curve. For example,
some people will buy a luxury car because it is expensive. In this case the good
demanded is actually prestige, and not a car, example primer padmini, so when the
price of the luxury car decreases, it is actually changing the amount of prestige, but
not commodity.
In other words, if the price of a commodity decreases, then the demand for such a
commodity will also decrease, which is just opposite to the law of demand.
In all the above cases the demand curve shifts upward than downward.

PRICE
X
O
D
D
I

Y
Exception to the law of Demand
OY represents price. Here demand line is similar to the supply line, which is opposite
to the demand line, which says that, higher the price higher the demand.

Following are the important Criticisms of law of demand.
Ceteris paribus:
In reality other things like taste, habit, etc changes from place to place,
person to person and so on.
Perfect competition is meaningless:
The supply may not be equal to the demand in the market.
Income of a commodity is also variable from time to time.
Price is variable
Price of a commodity is also variable from time to time.
Money measurement is meaningless:
Demand for a commodity is not necessarily measured in terms of money.

Importance of The law of demand can be discussed in the following ways.
The law of demand and its application to fundamental analysis of commodities rests
upon an understanding of consumer behavior. The factors, which characterize
consumer choice and how individual consumer responses are reflected in the market
place, are key components of the law of demand theory.
Understanding what factors have affected demand in the past will help to develop
expectations about demand in the future and the impact on market price which is very
useful to a manufacturer.
Demand for a particular product or service represents how many people are willing to
purchase a product at various prices. Thus, demand is a relationship between price
and quantity, with all other factors remaining constant.
Generally the relationship between price and quantity is negative. This means that the
higher is the price level the lower will be the quantity demanded and, conversely, the
lower the price the higher will be the quantity demanded.
Market demand is the sum of the demands of all individuals within the marketplace.
Market demand will be affected by other variables in addition to price, such as various
value added services including handling, packaging, location, quality control, and
financing.
The demand for an agricultural commodity is typically derived from the demand for a
finished product.
It is important to understand that a free market economy is driven not by producers
but by consumers. Ultimately the market value for any good or service is determined
by its value to the consumer.
Higher prices mean higher profits and higher profits provide you with the higher
incentive and the means to expand production of those goods and service that
consumers value the most.
So profit driven expansion is the markets response to stronger buyer demand. On the
other hand, when consumers are unwilling to buy what is offered at the current price,
the seller will have to lower the price ultimately resulting in lower profits or losses to
you the producer.
Elasticity is an important concept in understanding the incidence of indirect taxation,
marginal concepts as they relate to the theory of the firm, distribution of wealth and
different types of goods as they relate to the theory of consumer choice and the Lag-
range Multiplier. Elasticity is also crucially important in any discussion of welfare
distribution: in particular consumer surplus, producer surplus, or government
surplus.
Summary
With the help of above discussion, we can summarize that law of demand is an
important concept in the field of exchange. It has a number of sub-components such
as quantity demanded; change in demand, price elasticity of demand etc. Alfred
Marshall introduced this theory. Every economist or a student of economics can really
utilize the law of demand.
The Concepts of Elasticity of Demand
Introduction
In the real life scenario, when you move up the price of most of the things, people will
buy a smaller amount of them. For example, when one airline raises its cost, air
passengers may change to a rival airline. When the producer reduces the price of most
of the substances, people will buy more of them. For example, the falling price of
computers has meant that increasing numbers of families. Widespread sense tells us
that when prices change, so too will the quantities bought. However, commerce needs
to have more specific information than this - they need to have a clear measure of how
the magnitude demanded would alter as a result of a price revolutionize.

In this connection, a vital concept in understanding supply and demand theory is
elasticity. It refers to how the demand and supply change in response to various
stimuli. Alfred Marshall popularized the concept elasticity of demand in the field of
economics. Actually it is taken from science, but it is an important tool to understand
the relationship between the price and demand in economics, which is also based on
the two variables. It is very useful to determine the change in demand with respect to
price. One way of defining elasticity is the percentage in one variable divided by the
percentage change in other variable known as arch elasticity because it calculates, the
elasticity over a range of values, in contrast with point elasticity that uses the
differential calculus to establish the elasticity at a specific point. Thus it is a measure
of relative changes.
Mathematical Definition
The formula used to calculate the coefficient of price elasticity of demand for a given
product is

This simple formula has a problem, however. It yields different values for Ed depending
on whether Qd and Pd are the original or final values for quantity and price. This
formula is usually valid either way as long as you are consistent and choose only
original values or only final values. A more elegant and reliable calculation uses a
midpoint calculation, which eliminates this ambiguity. Another benefit of using the
following formula is that when Ed = 1, it means there will be no change in revenue
when the price changes from P1 (the original price) to P2. Qav means the average of the
original and final values of quantity demanded, and likewise for Pav.

Or, using the differential calculus form

This can be rewritten in the form:

Elasticity of Demand is of five types:
Price Elasticity of Demand
Income elasticity of Demand
Cross Elasticity of Demand
Promotional Elasticity of Demand
Expectational Elasticity of Demand

1. Price Elasticity of Demand
Often, it is useful to know how the quantity supplied or demanded will change when
the price changes. This is known as the price elasticity of demand and the price
elasticity of supply. If a monopolist decides to increase the price of their product, how
will this affect their sales revenue? Will the increased unit price offset the likely
decrease in sales volume? If a government imposes a tax on a good, thereby increasing
the effective price, how will this affect the quantity demanded?
Thus it is really useful, for all normal goods and most inferior goods, a price drop
results in an increase in the quantity demanded by consumers. The demand for a
good is relatively inelastic, when the quantity demanded does not change much with
the price change. Goods and services for which no substitutes exist are generally
inelastic. Demand for an antibiotic, for example, becomes highly inelastic when it
alone can kill an infection resistant to all other antibiotics. Rather than die of an
infection, patients will generally be willing to pay whatever is necessary to acquire
enough of the antibiotic to kill the infection.

Price Elasticity of Demand can be explained with a formula:
Formula:
Price elasticity of demand can be explained with a formula
PED= % change in Demand
_____________________________
% Change in Price

Here PED = Price elasticity demand
D = Change in demand
P = Change in price
^ = For change.
Types of price of Elasticities of demand are:
Perfectly Elasticity of Demand
Perfectly Inelasticity of Demand
More Elasticity of Demand
Less Elasticity of Demand
Unitary Elasticity of Demand- this will be discussed further

2. Income Elasticity of Demand.
Elasticity in relation to variables other than price can also be considered. One of the
most common to consider is income. How would the demand for a good change if
income increased or decreased? This is known as the income elasticity of demand. For
example, how much would the demand for a luxury jewellary increases if average
income increased by 10%? If it is positive, this increase in demand would be
represented on a graph, by a positive shift in the demand curve, because at all price
levels, a greater quantity of luxury item would be demanded.
A negative income elasticity of demand is associated with inferior goods; an
increase in income will lead to a fall in the quantity demanded and may lead to
changes to more luxurious substitutes.
A positive income elasticity of demand is associated with normal goods; an
increase in income will lead to a rise in the quantity demanded. If income elasticity of
demand of a commodity is less than 1, it is a necessity good. If the elasticity of
demand is greater than 1, it is a luxury good or a superior good.
A zero income elasticity (or inelastic) demand occurs when an increase in
income is not associated with a change in the quantity demanded of a good. These
would be sticky goods. (Sticky is a term used describing a situation in which a variable
is resistant to change. For example, nominal wages are often said to be sticky goods.)
Types of Income of Elasticities of Demand
Unitary Elasticity of Demand this will be discussed further.

3. Cross Elasticity of Demand.
Another Elasticity that is sometimes considered is the cross elasticity of demand,
which measures the responsiveness of the quantity demanded of a good to a change in
the price of another good. This is often considered when looking at the relative
changes in demand when studying complement and substitute goods. Complement
goods are goods that are typically utilized together, where, if one is consumed, usually
the other is also used. Substitute goods are those where one can be substituted for the
other, and if the price of one good rises, one may purchase less of it and instead
purchase its substitute.
It is measured as the percentage change in quantity demanded for the first good that
occurs in response to a percentage change in price of the second good. For example, if,
in response to a 10% increase in the price of fuel, the quantity of new cars that are
fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -
20% /10% = -2.
The formula used to calculate the coefficient cross elasticity of demand is

Two goods that complement each other show a negative cross elasticity of demand. In
the example above, the two goods, fuel and cars (consists of fuel consumption), are
complements - that is, one is used with the other. In these cases the cross elasticity of
demand will be negative. In the case of perfect complements, the cross elasticity of
demand is infinitely negative. Where the two goods are substitutes the cross elasticity
of demand will be positive, so that as the price of one goes up the quantity demanded
of the other will increase. For example, in response to an increase in the price of
carbonated soft drinks, the demand for non-carbonated soft drinks will rise. In the
case of perfect substitutes, the cross elasticity of demand is equal to infinity.

Types of Cross of Elasticities of Demand are as follows:
Unitary Elasticity of Demand- Will be discussed further

4. Promotional Elasticities of Demand
most common to consider is advertisement. How would the demand for a good change
if advertisement increased or decreased? This is known as the Promotional Elasticities
of demand. For example, how much would the demand for a luxury vehicles increase if
advertisement increased by 10%? If it is positive, this increase in demand would be
represented on a graph by a positive shift in the demand curve, because at all price
levels, a greater quantity of luxury items would be demanded.
This can be explained with a formula
Promotional Elasticities = %în quantity demanded which is resulted by the, %în
promotion cost on the product
Types of Promotional of Elasticities of Demand are:
Unitary Elasticity of Demand- This will be discussed further

5. Future Expectational Elasticities of demand
most common to consider is Future Expectations. How would the demand for a
commodity change if Future Expectation increased or decreased? This is known as the
Future Expectational Elasticities of Demand. For example, during the time of war, the
demand for many goods may increase. This may be the result of artificial crisis. On
the other hand during the summer cotton cloths are demanded more. During the
anticipated winter the demand for woolen clothes are demanded. Thus the demand
elasticity is influenced by the future expectations.
This can be explained with a formula:
Future Expectational Elasticities of demand = % ^ in quantity demanded which is
resulted by the, % ^ in future expectation about the product:

Types of Future Expectational of Elasticities of demand are:
Unitary elasticity of demand- Will be discussed further

==============
Now let us discuss various types of Elasticities of Demand one by one

Price Elasticity of Demand
The definition to the price elasticity of demand is as follows: According to Alfred
Marshall Elasticity of demand in a market is great or small according to the amount
demanded, increases much or little for a given fall in the price and diminishes much
or little for a given rise in price.
With the help of the above definition is clear that price elasticity of demand refers to
the situation when the quantity demanded increases or decrease with a change in
price of a commodity. In other words, price elasticity of demand shows the rate at
which the demand changes with respect to a change in price.
Price elasticity of demand can be explained with a formula
PED = % change in Demand
_____________________________
% Change in Price

P = Change in price
^ = For change.

Types of Price of Elasticities of Demand are:
Perfectly Elasticity of Demand.
Perfectly Inelasticity of Demand.
More Elasticity of Demand.
Less Elasticity of Demand.
Unitary Elasticity of Demand.

2. Perfectly Elasticity of Demand
When the demand for a commodity, increase or decrease to any extent, irrespective of
any change in price. In other words, elasticity of demand is infinite whereas the price
of a commodity is constant. For example free goods that buy one get one free
products. Change in Price is zero, so elasticity is infinite. Some times price of a
commodity may be zero. But the demand is infinite. This can be explained with the
help of a diagram.

Here OX axis represents the quantity demanded and OY represents price. Here
demand line touches the OY axis. This is popularly called perfectly elasticity of
demand.
3. Perfectly Inelasticity of Demand:
Here the demand for a commodity is constant, whereas the price of a commodity is
variable. Some times demand may be zero or constant for some products. Example:
demand for cotton cloths during rainy season may be constant. This is popularly
called perfectly inelasticity of demand. In other words here demand for the commodity
is constant but the price of the commodity is variable from time to time.

This can be explained with the help of diagram. ED= perfectly inelastic. Here OX for
demand and OY for price. Here demand for a commodity is constant and price is
variable. Here elasticity of demand is O or constant.
3. More Elasticity of Demand:
It is also called relatively elasticity demand. For illustration a small change in price,
results in greater change in demand, is called more elasticity of demand. In other
words, greater change in demand resulted by small change in price. Or, ED > 1, The
proportional change in quantity demanded is greater than the proportional change in
Price. For instance the price of milk or HLL water purifier decreases slightly then the
demand for the product will be very high which is popularly called more elasticity of
demand. This again can be explained with a diagram.

Price
X
O
ED=00
Y

Price
X
O
ED=0
Y

Here OX axis represents the quantity demanded and OY represents price. Here
quantity demanded is greater than the change in price. Programmatically ED>1,
simply demand variation is grater then the price.
4. Less Elasticity of Demand:
Greater change in price results in a smaller change in demand. This is called less
elasticity of demand or relatively inelastic demand. In other words, a small change in
demand resulting in greater change in price is referred to as less elasticity of demand.
Or here Ed is < 1 i.e. Inelastic. The proportional change in quantity is less than the
proportional change with respect to Price. Suppose the price of a commodity increases
drastically the demand for the product will be relatively less. This is popularly called
less elasticity of demand.

OY represents price. Here the steep demand line represents less elastic. Or ED<1.
This is called less elasticity of demand.
5. Unitary Elasticity of Demand:
When the change in demand is equal to the change in price, then it is called as
unitary and of demand. or ED = 1 or Unit elasticity. The proportional change in one
variable is equal to the proportional change in another variable. Marshall says that
higher the price, lower the demand. Price and demand are inversely proportional, due
to law of Diminishing Marginal Utility. Mathematically it is called Unitary Elasticity of
Demand. Here the relationship between X; and Y are linear in nature Marshals law
of demand states that demand line is a straight line in general.

Price
X
O
D
Ed>1
Y
Price
X
O
D
Ed<1
Y

In the diagram OX axis represents the demand and OY for price Q for quantity
demanded and P for price. Here change in price is equal to the quantity
demanded or ED=1.
2. Income Elasticity of Demand
most common to consider is income. How would the demand for a good change if
income increased or decreased? This is known as the income elasticity of demand. For
example, how much would the demand for a luxury jewellary increases if average
income increased by 10%? If it is positive, this increase in demand would be
represented on a graph, by a positive shift in the demand curve, because at all income
levels, a greater quantity of luxury item would be demanded.
A negative income elasticity of demand is associated with inferior goods; an
increase in income will lead to a fall in the quantity demanded and may lead to
changes to more luxurious substitutes.
A positive income elasticity of demand is associated with normal goods; an
increase in income will lead to a rise in the quantity demanded. If income elasticity of
demand of a commodity is less than 1, it is a necessity good. If the elasticity of
demand is greater than 1, it is a luxury good or a superior good.
A zero income elasticity (or inelastic) demand occurs when an increase in
income is not associated with a change in the quantity demanded of a good. These
would be sticky goods. (Sticky is a term used describing a situation in which a variable
is resistant to change. For example, nominal wages are often said to be sticky goods.)
Types of Income of Elasticities of Demand
It is of five types
1. Perfectly Elasticity of Demand: -
any change in income. In other words, elasticity of demand is infinite whereas the
income is constant. Change in Income is zero, so elasticity is. This can be explained
with the help of a diagram.

PRICE
O
D
D
I

Y
Unitary Elasticity of
Demand
Income
X
O
ED=00
Y


Here it is clear that OX axis represents the quantity demanded and OY represents
income. Here elasticity of demand is infinite, whereas the income of commodity is
constant, which a horizontal line explains.
Here the demand for a commodity is constant, whereas the income of a person is
variable. Here ED = perfectly inelastic. Some times demand may be zero or constant
for some products. This is popularly called perfectly Inelasticity of demand. This can
be explained with the help of diagram.

Here OX for demand and OY for income. Here demand for a commodity is constant
and income is variable. Here elasticity of demand is vertical to OX axis.
It is also called relatively Elasticity of Demand. For instance a small change in income
results in greater change in demand is called more elasticity of demand. In other
words, greater change in demand resulted by small change in income. Or ED> 1.

OY represents income. Here quantity demanded is greater than the change in
income/ or ED>1. Here demand line cuts the OY axis.

Greater change in income results in a smaller change in demand. This is called less
elasticity of demand or relatively inelastic demand. In other words, a small change in
Income
X
O
ED=0
Y
O
D
Income
X
Ed>1
Y
demand resulting in greater change in income is referred to as less elasticity of
demand. The proportional change in Quantity is less than the proportional change
in Income.

OY represents income. Here the change in income is greater than the quantity
demanded or ED<1. Here demand line cuts the OX axis

When the change in demand is equal to the change in income is called as unitary and
of demand. or E = 1. The proportional change in one variable is equal to the
proportional change in another variable. Mathematically it is called unitary elasticity
of demand. Here the relationship between X; and Y are linear in nature Marshals
law of demand states that demand line is a straight line in general which cuts the
origin.

Here OX for demand and OY for income Q for quantity demanded and I for income.
I refers variation in income and D for variation in demand. Here change in income is
equal to the quantity demanded or ED=1
3. Cross Elasticity of Demand.
Another Elasticity that is sometimes considered is the cross elasticity of demand,
which measures the responsiveness of the quantity demanded of a good to a change in
the price of another good. This is often considered when looking at the relative
changes in demand when studying complement and substitute goods. Complement
Income
X
O
D
Ed<1
Y
Income
O
D
D
I

Y
Law of Demand
goods are goods that are typically utilized together, where, if one is consumed, usually
the other is also used. Substitute goods are those where one can be substituted for the
other, and if the price of one good rises, one may purchase less of it and instead
purchase its substitute.
It is measured as the percentage change in quantity demanded for the first good that
occurs in response to a percentage change in price of the second good. For example, if,
in response to a 10% increase in the price of fuel, the quantity of new cars that are
fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -
20% /10% = -2.
The formula used to calculate the coefficient cross elasticity of demand is

Two goods that complement each other show a negative cross elasticity of demand. In
the example above, the two goods, fuel and cars(consists of fuel consumption), are
complements - that is, one is used with the other. In these cases the cross elasticity of
demand will be negative. In the case of perfect complements, the cross elasticity of
demand is infinitely negative. Where the two goods are substitutes the cross elasticity
of demand will be positive, so that as the price of one goes up the quantity demanded
of the other will increase. For example, in response to an increase in the price of
carbonated soft drinks, the demand for non-carbonated soft drinks will rise. In the
case of perfect substitutes, the cross elasticity of demand is equal to infinity.

Types of Cross of Elasticities of Demand are:
Unitary Elasticity of Demand- Will be discussed further

It is of five types:-
When the demand for one commodity, increases or decreases to any extent,
irrespective of any change in price of the other commodity that is called Perfectly
Elasticity of Demand. In other words, elasticity of demand is infinite, whereas the price
of the commodity of the other is constant. This can be explained with the help of a
diagram. Change in Price is zero, so elasticity is infinite. Here the demand for the
goods is infinite.

Price
X
O
ED=00
Y


OY represents price. Here elasticity of demand is infinite, whereas the price of the
other commodity is constant.

Here the demand for a commodity is constant, whereas the price of the other
commodity is variable which is similar to that of the previous diagrams.

This can be explained with the help of diagram. Here OX for demand and OY for
price of the other product. Here ED = perfectly inelastic. Some times demand may be
zero or constant for some products. This is popularly called perfectly inelasticity of
demand.
It is also called relatively elasticity demand. When a small change in price of one
commodity, results in greater change in demand for the other commodity, is called
more elasticity of demand. In other words, greater change in demand resulted by small
change in price. Or E > 1

OY represents price. Here quantity demanded is greater than the change in price/ Or
ED>1. Here demand variation is grater then the price. Here demand line cuts the OY
axis

Greater change in price of a commodity results in a smaller change in demand for the
other. This is called less elasticity of demand or relatively inelastic demand. In other
Price
X
O
ED=0
Y
Price
X
O
D
Ed>1
Y
words, a small change in demand resulting in greater change in price is referred to as
less elasticity of demand. Or E < 1 Inelastic

OY represents price. Here the change in price is greater than the quantity
demanded or ED<1. This is called less elasticity of demand. Here demand line cuts the
OX axis
When the change in demand is equal to the change in price of the other is called as
unitary and of demand. Or E = 1. The proportional change in one variable is equal to
the proportional change in another variable. Here the relationship between x; and y
are linear in nature.

Here OX for demand and OY for price Q for quantity demanded and P for price.
P refers variation in price and D for variation in demand. Here change in price is
equal to the quantity demanded or ED=1. Here demand line is a straight line in
general which starts from the origin.
4. Promotional Elasticities of Demand
if advertisement increased or decreased? This is known as the Promotional Elasticities
of demand. For example, how much would the demand for a luxury vehicles increase if
advertisement increased by 10%? If it is positive, this increase in demand would be
represented on a graph by a positive shift in the demand curve, because at all price
levels, a greater quantity of luxury items would be demanded.
This can be explained with a formula
Promotional Elasticities of demand = %în quantity demanded which is resulted by
the, %în promotion or advertisement cost on the product.
Price
X
O
D
Ed<1
Y
Price
O
D
D
I

Y
Law of Demand
Types of Promotional of Elasticities of Demand are:
Unitary Elasticity of Demand- This will be discussed further

2. Income Elasticity of Demand
if advertisement increased or decreased? This is known as the advertisement elasticity
of demand. For example, how much would the demand for a luxury jewellary increases
if average advertisement increased by 10%? If it is positive, this increase in demand
would be represented on a graph, by a positive shift in the demand curve, because at
all advertisement levels, a greater quantity of luxury item would be demanded.
A negative advertisement elasticity of demand is associated with inferior goods;
an increase in advertisement will lead to a fall in the quantity demanded and may lead
to changes to more luxurious substitutes.
A positive advertisement elasticity of demand is associated with normal goods;
an increase in advertisement will lead to a rise in the quantity demanded. If
advertisement elasticity of demand of a commodity is less than 1, it is a necessity
good. If the elasticity of demand is greater than 1, it is a luxury good or a superior
good.
A zero advertisement elasticity (or inelastic) demand occurs when an increase in
advertisement is not associated with a change in the quantity demanded of a good.
These would be sticky goods. (Sticky is a term used describing a situation in which a
variable is resistant to change. For example, nominal wages are often said to be sticky
goods.)
Types of Advertisement of Elasticities of Demand
It is of five types
any change in advertisement. In other words, elasticity of demand is infinite whereas
the advertisement cost is constant. Change in Advertisement is zero, so elasticity is .
This can be explained with the help of a diagram.

Advertisement
X
O
ED=00
Y

advertisement. Here elasticity of demand is infinite, whereas the advertisement of
commodity is constant, which a horizontal line explains.
Here the demand for a commodity is constant, whereas the advertisement of a product
is variable. Here ED = perfectly inelastic. Some times demand may be zero or constant
for some products. This is popularly called perfectly Inelasticity of demand.

advertisement. Here demand for a commodity is constant and advertisement is
variable. Here elasticity of demand is vertical to OX axis.
It is also called relatively Elasticity of Demand. For instance a small change in
advertisement results in greater change in demand is called more elasticity of demand.
In other words, greater change in demand resulted by small change in advertisement.
Or ED> 1

OY represents advertisement. Here quantity demanded is greater than the change in
advertisement/ or ED>1. Here demand line cuts the OY axis.
Greater change in advertisement results in a smaller change in demand. This is called
less elasticity of demand or relatively inelastic demand. In other words, a small change
in demand resulting in greater change in advertisement is referred to as less elasticity
of demand. Or E < 1 the proportional change in Quantity is less than the
proportional change in Advertisement

Advertisement
X
O
ED=0
Y
Advertisement
X
O
D
Ed>1
Y

OY represents advertisement. Here the change in advertisement is greater than the
quantity demanded or ED<1. Here demand line cuts the OX axis
When the change in demand is equal to the change in advertisement is called as
unitary and of demand. Or E = 1. The proportional change in one variable is equal to
the proportional change in another variable. Mathematically it is called unitary
elasticity of demand. Here the relationship between X; and Y are linear in nature
Marshals law of demand states that demand line is a straight line in general which
cuts the origin.

Here OX for demand and OY for advertisement Q for quantity demanded and A for
advertisement. I refers variation in advertisement and D for variation in
demand. Here change in advertisement is equal to the quantity demanded or ED=1

=================
5. Future Expectational Elasticities of demand
most common to consider is Future Expectations. How would the demand for a
commodity change if Future Expectation increased or decreased? This is known as the
Future Expectational Elasticities of Demand. For example, during the time of war, the
demand for many goods may increase. This may be the result of artificial crisis. On
the other hand during the summer cotton cloths are demanded more. During the
anticipated winter the demand for woolen clothes are demanded. Thus the demand
elasticity is influenced by the future expectati0ns.
This can be explained with a formula:
Advertisement
X
O
D
Ed<1
Y

Advertisement
O
D
D
I

Y
Law of Demand
Future Expectational Elasticities of demand = % ^ in quantity demanded which is
resulted by the, % ^ in future expectation about the product:
Types of Future Expectational of Elasticities of demand are:
Unitary elasticity of demand- Will be discussed further
It is of five types
any change in income. In other words, elasticity of demand is infinite whereas the
future expectations are constant. Change in Future expectations is zero, so elasticity
is oo. This can be explained with the help of a diagram.

future expectations. Here elasticity of demand is infinite, whereas the future
expectations of commodity are constant, which a horizontal line explains.
Here the demand for a commodity is constant, whereas the future expectations of a
person are variable. Here ED = perfectly inelastic. Some times demand may be zero or
constant for some products. This is popularly called perfectly Inelasticity of demand.

future expectations. Here demand for a commodity is constant and future expectations
are variable. Here elasticity of demand is vertical to OX axis.
F. Expectation
X
O
ED=0
Y
Future
Expectation
X
O
ED=00
Y


It is also called relatively Elasticity of Demand. For instance a small change in future
expectations results in greater change in demand is called more elasticity of demand.
In other words, greater change in demand resulted by small change in future
expectations. Or ED> 1

OY represents future expectations. Here quantity demanded is greater than the
change in future expectations/ or ED>1. Here demand line cuts the OY axis.
Greater change in future expectations results in a smaller change in demand. This is
called less elasticity of demand or relatively inelastic demand. In other words, a small
change in demand resulting in greater change in future expectations is referred to as
less elasticity of demand. Or E < 1 the proportional change in Quantity is less than
the proportional change in Future expectations

OY represents future expectations. Here the change in future expectations is
greater than the quantity demanded or ED<1. Here demand line cuts the OX axis

When the change in demand is equal to the change in future expectations are called
as unitary and of demand. Or E = 1. The proportional change in one variable is equal
to the proportional change in another variable. Mathematically it is called unitary
elasticity of demand. Here the relationship between X; and Y are linear in nature
Marshals law of demand states that demand line is a straight line in general which
cuts the origin.

F. Expectation
X
O
D
Ed<1
Y
F. Expectation
X
O
D
Ed>1
Y

Here OX for demand and OY for future expectations Q for quantity demanded and
I for future expectations. I refers variation in future expectations and D for
variation in demand. Here change in future expectations is equal to the quantity
demanded or ED=1
Different Methods are found to understand the Elasticities of Demand.
They are as follows
1. Percentage method
2. Graphical method
3. Line method
4. Point method
5. Algebraic method.
First one is percentage method.
Here the relationship between demand and the price is estimated through converting
it into hundred. This is as follows.

PED= % change in Demand
_____________________________
% Change in Price

P = Change in price
^ = For change.

The second important method is to understand is graphical method. Here the graphs
are commonly used to understand the Elasticities of demand

Here OX for demand and OY for price Q for quantity demanded and P for price
Horizontal line represents the perfectly Elasticities of demand. Vertical line represents
the perfectly in-Elasticities of demand. Slant line represents the relatively elasticity of
demand. The steep line represents the relatively in-Elasticities of demand line and the
middle line represents the unitary elasticity of demand

Future
Expectation
O
D
D
I

Y
Law of Demand


Point method
The third important method is to understand is point method. Here the points are
commonly used to understand the Elasticities of demand

Here OX for demand and OY for price Q for quantity demanded and P for price.
Here point A represents perfectly elasticity of demand. Point E-represents the
perfectly in-Elasticities of demand. Here point-B represents the relatively elasticity of
demand. The point D represents the relatively in-Elasticities of demand line and the
point- C represents the unitary elasticity of demand

The forth-important method is Line method. Here the lines are used to determine the
Elasticities of demand. This can be explained with the help of the diagram.

Here OX for demand and OY for price Q for quantity demanded and P for price
Horizontal line represent s the perfectly Elasticities of demand. Vertical line represents
the perfectly in-Elasticities of demand. Slant line represents the relatively elasticity of
demand the steep line represents the relatively in-Elasticities of demand line and the
middle line represents the unitary elasticity of demand
Algebraic Method
Algebraic equations are commonly used to understand the concepts of Elasticities of
demand. This can be explained with the help of a formula. Here, if we see the formula,
one can understand the demand for a product is influenced by the price of a
commodity
Law of Demand
Price
O
D
D
I

Y

PRICE
O
A
Y
B
D
E
C

PRICE
O
D
D
I

Y

Or, using the differential calculus form: =

This can be rewritten in the form:

Importance of the Elasticities of demand
Importance of The Elasticities of demand can be discussed in the following ways.
The Elasticities of demand and its application to fundamental analysis of
commodities rests upon an understanding of consumer behavior. The factors, which
characterize consumer choice and how individual consumer responses are reflected in
the market place, are key components of this economic theory. Understanding what
factors have affected demand in the past will help to develop expectations about
demand in the future and the impact on market price.
Demand for a particular product or service represents how much people are willing to
purchase at various prices. Thus, demand is a relationship between price and
quantity, with all other factors remaining constant.
Generally the relationship between price and quantity is negative. This means that the
higher is the price level the lower will be the quantity demanded and, conversely, the
lower the price the higher will be the quantity demanded.
Market demand is the sum of the demands of all individuals within the marketplace.
Market demand will be affected by other variables in addition to price, such as various
value added services including handling, packaging, location, quality control, and
financing. The demand for an agricultural commodity is typically derived from the
demand for a finished product. It is important to understand that a free market
economy is driven not by producers but by consumers. Ultimately the market value for
any good or service is determined by its value to the consumer.
Higher prices mean higher profits and higher profits provide you with the higher
incentive and the means to expand production of those goods and service that
consumers value the most. So profit driven expansion is the markets response to
stronger buyer demand. On the other hand, when consumers are unwilling to buy
what is offered at the current price, the seller will have to lower the price ultimately
resulting in lower profits or losses to you the producer. Losses reduce the producers
incentive to produce things that have weak demand, which will ultimately force
production cuts as farmers lose more and more money.
Summary
With the help of above discussion, we can summarize that law of demand is an
important concept in the field of exchange. It has a number of sub-components such
as quantity demanded; change in demand, price elasticity of demand etc. free market
economy is driven not by producers but by consumers. Ultimately the market value for
any good or service is determined by its value to the consumer who can influence on
the demand for the product. Corresponding to this any rational producer should know
something about the all the concepts of demand and other related aspects of demand.
Law of demand and other related aspects are really useful to any consumer as well as
marketing agent and the producer of the product. Elasticity is an important concept
in understanding the incidence of indirect taxation, marginal concepts as they relate
to the theory of the firm, distribution of wealth and different types of goods as they
relate to the theory of consumer choice and the Lag-range Multiplier. Elasticity is also
crucially important in any discussion of welfare distribution: in particular consumer
surplus, producer surplus, or government surplus and so on.


Demand forecasting
Introduction
Every firm eventually has to sell its products. Questions that arise in this context are,
for example: What sales channels should the firm use? How should a product be
priced in the different channels? How can the firm prevent cannibalization across
channels? And how should prices be adjusted, due to seasonality or after initial
demand has been observed? Every organization uses forecasting to answer the above
stated questions and to organize and plan its activities. Forecast plays a key role in
operational decisions, market planning, and budgeting and financial analysis. This
course considers how forecasts are used in an organization to help its short-term
operational decisions and its longer term marketing activities. In this course, we
focus the analysis of demand forecasting in different market condition.
Definition
"Forecasting is usually a mob scene, a combination of sales and marketing and
various other groups who all chip in their two cents. By statistically processing these
forecasts ... we've found that we can improve accuracy by 40 to 60 percent."-Says
Phillip Yelland, Principle Investigator, Management Science Project, Sun Microsystems
Meaning
Demand forecasting means the analysis of the anticipated future demand or sales of
the product, based on the past history and present scenario.
Objectives of the demand forecasting
To describe the various approaches to forecasting and how they should be
evaluated
To demonstrate how to develop and use various quantitative forecasting
Methods, in particular exponential smoothing and regression
To teach the basics of price theory
To show the opportunities that exist for revenue optimization in different
business contexts
Stages involved in demand forecasting

Step 6 Monitor the forecast
Step 5 Prepare the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast
The diagram shows the steps involve in forecasting the demand for the product. Step
one Determine purpose of forecast, Step two Establish a time horizon, Step three
Select a forecasting technique, Step four Gather and analyze data, Step five is to
Prepare the forecast, Step six monitor the forecast, which are very essential to prepare
for the demand analysis for future.

The forecast

Sales force
opinion
methods: -
-Simple method
-Delphi method
-Agency method
Scenario writing
Subjective
approach

a. Qualitative method
Individual
survey
-Complete
enumeration
-End user
method
-Sample
method

Experts
survey

-Pilot study
-Test
marketing
-Clinic survey

Market survey: -
-Trail and error
-Market
segmentation
-Study of
market
-Market share
analysis
-Product life
cycle
-Colour
combination

b. Quantitative method
Trend Project
Method Graphical
method
-Seasonal
-Secular
-Random
-Cyclical
. Co-relation
-Regression
-Averages

Statistical method

Barometric method

-Leading series
-Co-incident series
-Lagging series

Scientific method

-Algebraic method
-Static equation
-Dynamic equations
-Simultaneous
Game theory
equation
Methods of Demand Forecasting
Forecasting Methods
All forecasting methods can be divided into two broad categories: qualitative and
quantitative. Many forecasting techniques use past or historical data in the form of
time series Qualitative forecasting techniques generally employ the judgment of
experts in the appropriate field to generate forecasts.
Qualitative research is a field of inquiry that crosscuts disciplines and subject matters.
It involves an in-depth understanding of human behavior and the reasons that govern
human behavior. Unlike quantitative research, qualitative research relies on reasons
behind various aspects of behavior. Simply put, it investigates the why and how of
decision making, as compared to what, where, and when of quantitative research.
Survey method: - is a research method that relies less on interviews, observations, and
small numbers of questionnaires, focus groups, subjective reports and case studies
but is much more focused on the collection and analysis. It is of three types namely,
Complete enumeration, -End user method, -Sample method. Here, a Search for
survey respondent by name, View survey respondent contact detailsincludes name
and address, Analyze how an individual respondent answered questions, Review
timestamps of when each respondent submitted their online survey etc are made.

Sales force opinion methods: -it refers to the opinion gather by the group of salesmen
who are well versed with the market. It is of three types namely, Simple method, where
only one person will identify the demand for the product in future. The Delphi
technique was developed at RAND Corporation in the 1950s to help capture the
knowledge of diverse experts. To forecast with Delphi the administrator should recruit
between five and twenty suitable experts and poll them for their forecasts and reasons.
The administrator then provides the experts with anonymous summary statistics on
the forecasts, and experts reasons for their forecasts. The process is repeated until
there is little change in forecasts between rounds two or three rounds are usually
sufficient. The Delphi forecast is the median or mode of the experts final forecasts.
Agency method is related to a situation in which agents will respond about the
demand analysis about the future. Qualitative forecasting methods offer a way to
generate forecasts in such cases. Other important qualitative forecasting methods are:
the scenario writing, and the subject approach.
Scenario writing
Under this approach, the forecaster starts with different sets of assumptions. For each
set of assumptions, a likely scenario of the business outcome is charted out. Thus, the
forecaster would be able to generate many different future scenarios (corresponding to
the different sets of assumptions). The decision maker or businessperson is presented
with the different scenarios, and has to decide which scenario is most likely to prevail.
Subjective Approach
The subjective approach allows individuals participating in the forecasting decision to
arrive at a forecast based on their subjective feelings and ideas. This approach is
based on the premise that a human mind can arrive at a decision based on factors
that are often very difficult to quantify. "Brainstorming sessions" are frequently used
as a way to develop new ideas or to solve complex problems. In loosely organized
sessions, participants feel free from peer pressure and, more importantly, can express
their views and ideas without fear of criticism. Many corporations in the United States
have started to increasingly use the subjective approach.
Experts survey: The expert survey is a vital part of the overall project. We talk
individuals a year with an expertise in entrepreneurship entrepreneurs themselves,
educators, business support advisors, financiers, accountants and lawyers, academics
and policy makers. Their views, combined with the data that we collect from the main
adult population survey, make sure about the policy recommendations. It is of various
types to name a few, Pilot study (is a trail and error study or preliminary study), -Test
marketing, -Clinic survey, etc.
Market survey: - It is very essential to gather vital information about current market
trends, customers, competitors, and potential areas of growth, enterprises around the
world. It is of various types some of them are as follows: -Market segmentation and
study, -Study of market, -Market share analysis, -Product life cycle, -product Colour
combination strategy and so on.
Quantitative research is the systematic scientific investigation of properties and
phenomena and their relationships. The objective of quantitative research is to develop
and employ mathematical models, theories and/or hypotheses pertaining to market
phenomena. The process of measurement is central to quantitative research because it
provides the fundamental connection between empirical observation and mathematical
expression of quantitative relationships. it can be broadly divided into three types
Trend Project Method (time series)
A time series is simply a set of observations measured at successive points in time or
over successive periods of time. Forecasts essentially provide future values of the time
series on a specific variable such as sales volume. Division of forecasting methods into
qualitative and quantitative categories is based on the availability of historical time
series data. In a time series, measurements are taken at successive points or over
successive periods. The measurements may be taken every hour, day, week, month, or
year, or at any other regular (or irregular) interval. While most time series data
generally display some random fluctuations, the time series may still show gradual
shifts to relatively higher or lower values over an extended period.
Professional forecasters often refer to the gradual shifting of the time series as the
trend in the time series. A trend emerges due to one or more long-term factors, such
as changes in population size, changes in the demographic characteristics of
population, and changes in tastes and preferences of consumers.
Assumptions of Time Series Models
There is information about the past;
This information can be quantified in the form of data;
The pattern of the past will continue into the future.

The diagram explains different types of growth variations, which are also used in
demand forecasting. The data collected will be presented in the form of graph, which
helps us to understand sensitivity of the problem.
Time
Y
g
h
X
g
h
Seasonal
variation
gh
Cyclical
variation
gh
Random
variation
gh
Secular
variation
gh
G
ro
w
th
Averages
The moving averages method is probably the most widely used smoothing technique.
In order to smooth the time series, this method uses the average of a number of
adjoining data points or periods. This averaging process uses overlapping observations
to generate averages. Suppose a forecaster wants to generate three-period moving
averages. The forecaster would take the first three observations of the time series and
calculate the average. Then, the forecaster would drop the first observation and
calculate the average of the next three observations. This process would continue until
three-period averages are calculated based on the data available from the entire time
series. The term "moving" refers to the way averages are calculatedthe forecaster
moves up or down the time series to pick observations to calculate an average of a
fixed number of observations. In the three-period example, the moving averages
method would use the average of the most recent three observations of data in the
time series as the forecast for the next period. This forecasted value for the next
period, in conjunction with the last two observations of the historical time series,
would yield an average that can be used as the forecast for the second period in the
future.
Weighted moving averages
Weighted moving averages are a variant of moving averages. In the moving averages
method, each observation of data receives the same weight. In the weighted moving
averages method, different weights are assigned to the observations on data that are
used in calculating the moving averages. Suppose, once again, that a forecaster wants
to generate three-period moving averages. Under the weighted moving averages
method, the three data points would receive different weights before the average is
calculated. Generally, the most recent observation receives the maximum weight, with
the weight assigned decreasing for older data values.
Scientific method
Scientific method refers to the body of techniques for investigating phenomena,
acquiring new knowledge, or correcting and integrating previous knowledge. It is
based on gathering observable, empirical and measurable evidence subject to specific
principles of reasoning.

A scientific method consists of the collection of data through
observation and experimentation, and the formulation and testing of hypotheses.
Scientific methods are of various types few of them are as follows, -Algebraic method,
-Static equation, -Dynamic equations, simultaneous, Game theory
Game theory
Game theory has been touted in textbooks and research papers as a way to obtain
better forecasts in situations involving negotiations or other conflicts. A Goggle search
for game theory and forecasting or prediction identified 147,300 sites.
Popular methods, which are used in different industries
The diagram explains the degree of use of different methods in popular industries. It is
clear that opening method is commonly practiced by most of the organizations. The
application of econometric predictive model is less used.
Importance of demand forecasting
It Drives all plans
It Allows operating levels to be set to respond to demand variations
It Allows a manager to plan (personnel, purchasing, finance) to better control
waste, inefficiency and conflicts, and avoid fire-fighting
It Reduces the need for slack resources (inventory, staffing) to meet uncertain
demand
The role of demand forecasting in revenue management is untamed
It helps to carry out exploratory analysis of time series/ data
It helps to develop a meaningful causal model of demand
Ability to understand the implication of a markdown strategy
It helps to determine profit-maximizing prices
Effective forecasting helps stabilize an operation.
Applications of demand forecasting
Demand cleansing. Promotions, markdowns, weather and entry errors are just
some of the factors that can distort your forecasts. Demand Forecasting has built-in
demand cleansing so that forecasters won't be misled by these anomalies.
Seasonal profiling. How do you account for seasonal curves? Demand
Forecasting helps you identify trends and seasonal patterns to get a clear picture of
the selling curve for a specific time period, product and location. Seasonal profile
management in Demand Forecasting automatically accounts for seasonal curves
related to moving holidays, has advanced profiling science that selects and assigns the
best profile from multiple profile/aggregation iterations and can optionally do an
automatic refresh of profiles just before a SKU comes into its next season.
Demand Forecasting. Whether initializing a forecast for the first time, re-
initializing after a structural change in demand history or periodically updating the
forecast based on recent demand, Demand Forecasting uses our Universal Forecast
Method that dynamically senses demand and adapts the proper forecasting
components from multiple forecast methodologies to fit the demand signal that gives
the best forecast.
Exception management. Without an efficient, proactive approach to resolve
forecast errors, managing exceptions can be time-consuming and costly. Our
Advanced Exception Management gives you the flexibility to adjust the logic and
business rules that govern the creation and management of exceptions.
Conclusion
Thus demand forecasting has a tremendous efficacy in the business scenario.
Hundreds of methods of demand forecasting are practiced in a variety of
organizations, depending on the necessity of the production units as well as products.
This tool improves productivity by enabling automatic detection and self-correction of
many problems.
========
Questions
State the law of demand?
What are the tentative assumptions of law of demand?
Discuss the different kinds of demand curves.
What is Griffins paradox?
What is Veblen effect?
Mention few exceptions of law of demand.
State the applications of law of demand.
What is demand forecasting?
Which are the different methods of demand forecasting?
Which are the qualitative methods of demand forecasting?
Which are the Quantitative methods of demand forecasting?
Discuss the Applications of demand forecasting.

Reference
Anderson, David R., Dennis J. Sweeney, and Thomas A. Williams as an Introduction to
Management Science: Quantitative Approaches to Decision Making. 8th ed.
Minneapolis/St. Paul: West Publishing, 1997.
Statistics for Business and Economics 7th ed. Cincinnati: South Western College
Publishing, 1999.

CHAPTER 3
THEORIES OF PRODUCTION
Value for any good or service is determined by its value to the consumer who can
influence on the demand for the product. Corresponding to this any rational producer
should know something about the all the concepts of demand and additional
associated aspects of demand. Law of demand as well as law of supply and other inter-
connected aspects, are really useful to any consumer as well as marketing
representative and the producer of the product. It is interesting to note that law of
demand influenced by the consumer and law of supply influenced by the producer. In
this connection a study on production is meaningful.

What is production?
Production in economics is generally understood as the transformation of something
into some other thing to sell. In the other words the inputs are converted into the
output. For, example, raw materials are converted to finish or semi finished goods.
Semi finished goods are converted into finished goods. Thus there is a common
relationship between the input and output. Thus production, as we know is the result
of co-operative working of the various factors of production or inputs of production
like land, labor, or any other factors of production.

What do you mean by Inputs?
In the traditional production theories, resources used for the production are known
as factor of production. But now a day those inputs are popularly called Ms of
production. Experts have identified many modern factors production like man,
material, market, machine mind, mobility motivation, muscle power, management,
media, measurement, mankind, moderation, management, merchandising and so on.
Now Let us discuss the Functional relationship
In mathematics a function is the expression of the precise relationship existing
between a numbers of variables, where the value of one variable depends on the value
of the others. The production function formalizes the relationship between the
quantity of output yielded by a productive process and the quantities of the various
inputs used in that process. In economics the technological relationship or functional
relational ship between input and output is called production function for ex ample if
we see the formula, it is stated that, P=f (a, b, c, ------ ---n) Here P represents the
production; F for functional relationship, A.B.C.D. are the respective inputs; N is
the n
th
input.
Now let us study some of the Theories of production one by one
Alfred Marshall explains two theories in the field of production, they are first one is
Law of variable proportion (short term) theories and the second one is law of returns
(long term) theories.
The Laws of returns, consists of three sub theories namely:
a) Diminishing marginal return
b) Constant marginal return
c) Increasing marginal return
The other important theory is the least cost of combination, which was introduced by
J.R. hicks and RGD Allen.
PA Samuelson introduces the concept of production possibilities curve.
Linear programming was introduced by Dant-zig.
Now let us first take up the discussion of laws of returns introduced by Alfred
Marshall, which is of three types and the first one is D.M.R. That is, the law of
diminishing marginal returns.
Law of diminishing marginal returns
The law of diminishing marginal returns is an important theory in the field of
production, the credit of popularizing this theory straightaway goes to Alfred marshal.
According to Prof: Marshall "an increase in the capital and labor applied in the
cultivation of land causes in general, as a less than a proportionate increase in the
amount of produce increased, unless it happens to co-inside with an improvement in
the art of agriculture"

The above definition can be explained like this, As we go on Appling more and more
doses of capital and labor to a particular land the marginal productivity comes down,
when other things remain equal". The law of diminishing returns may be stated as
follows if we keep the quantity of one or more factors of production constant and
gradually increase the quantities of the other variable factors then after a point the
corresponding return to every additional unit of variable factors will begin to finish. In
other words, the additional quantities of the variable factors will, after a point, yield
diminishing return.

Assumptions:
Ceteris paribus
To prove diminishing marginal returns we should assume that the other things remain
equal. Other things like taste, habits etc
Constant technology:
Unless the technology remains constant this law cannot be proved. Technological
knowledge is constant.
Availability of land:
Availability of land is constant. According to Alfred Marshall; land is neither
destructive nor constructive, which means the availability of land is constant.
Movement of technology:
The technology knowledge is moveable from place to place because of free trade where
we cannot practice any kind of prohibitions like visa, passport, etc
Perfect competition
He assumes the barter system. Here the number of producers is equal to the number
of consumers. With the help of these assumptions, we can prove diminishing marginal
returns.
List
Explanation:
Unit Marginal returns (000)
1 3
2 2
3 1
4 0
5 -1
In the above list it is oblivious that 1st column represents unit of production. A
producer keeps on producing the subsequent units one by one, then the unit of
production increases, which represents diminishing marginal returns. Here in the first
unit of production the profit of a producer is very high. It decreases with the additional
unit of production. When we keep on doing same business, the profit will be negative,
cost of investment will be high or it increases.

Explanation:
Here OX represents units; OY represents marginal returns. The line in the diagram
represents the diminishing marginal returns line, which has the declining tendency
from left to right with the additional units of production. Thus diminishing marginal
returns is an important theory in the field of production introduced by Alfred marshal.
Criticisms
Economic theories are based on hypothesis, which may not be true in reality. In this
connection above stated assumptions are meaningless. They can be discussed in the
following ways.
Ceteris paribus: -Ceteris paribus is meaningless because other things like taste,
habits, etc do not remain same.
Technologies are not constant:-Technology does not remain constant, as it changes
from time to time.
Availability of land is not constant: -Deforestation helps in getting more cultivable
land, therefore the availability of land is not constant but it is variable.
Perfect competition:
Number of producers is not equal to the number of consumers. Therefore perfect
competition is not possible
Free trade:-Free trade is not possible because of the government regulation.
Summary
With the help of the above discussion it is clear that diminishing marginal returns is
applied technique of diminishing marginal utility. However it is a real landmark in the
field of production. It is applicable to any segment of the production- primary sector,
secondary sector, tertiary, service, etc. Thus it has the universal application.}
The second important theory of laws of returns is-
Constant marginal returns
The law of Constant marginal returns an important theory in the field of production,
the acknowledgment of popularizing this theory right away goes to Alfred marshal.
According to Marshall -When increased doses of labor and capital in the field of
production, yield in the same return as before then the law of constant return is said
to operate"
Meaning:
If a producer goes on Appling supplementary and additional unit of a same factor of
production into a same piece of land, the marginal returns will be constant throughout
the production.
Assumptions are similar as stated in the previous law of return such as:
1 ceteris paribus
2 constant technologies
3 availability of land is constant
Marginal
return
X
O
Y
Diminishing marginal returns
DMR
Units of Quantity
4. Free trade
5 perfect competitions

We can understand this with an agenda. Here the first column represents units of
production. Second column represents marginal returns. Among all the additional
units of production, the marginal return is constant, which is called constant marginal
returns. It can be explained with the following diagram

Explanation:
Here OX represents units and OY represents marginal returns. The line represents
the constant marginal returns line. This explains the constant return for every unit
throughout the process of production.
Criticisms
1. Ceteris paribus is meaningless
2 Technological knowledge is not constant
3 Land can be increased through deforestation.
4 Free trade is not possible
5 Perfect competition is impossible
With the rally round of the conversation it is clear that a constant marginal return is
an important technique in the field of production. It is a real milestone in the meadow
of production. It is applicable to any segment of the production- primary sector,
secondary sector, tertiary, service, etc. Thus it has the universal application.}
Increasing marginal returns
The law of increasing marginal returns another important theory in the field of
production, the credit of popularizing this theory once yet again goes to Alfred
Marshal. According to Marshall an increase in labor and capital leads generally
efficiency of work of labor and capital
Meaning:
As we go on applying more and more unit of labor and capital to a same price of land
then the productivity increases.
Assumptions
1 ceteris paribus
2 constant technologies
1 10
2 10
3 10
4 10
5 10
Marginal
return
Units of Quantity
X
O
Y
Constant Marginal returns
CMR
3 availability of land is constant
4. Free trade
5 perfect competitions
List

If we see the schedule we can easily understand the concept. Here 1st column
represents the unit of production, 2
nd
column marginal returns. With the every
additional unit of production, the marginal return also increases proportionately.

Explanation:
If we see the diagram we can easily analyze the concept. Here OX for unit, OY for
marginal returns. The line represents the increasing marginal returns line, which
explains the increasing returns for every unit of during the process of production.

Criticisms
Ceteris paribus is meaningless
1 Technological knowledge is not constant.
2 Availability of land is not constant
3 Free trade not possible in reality.
4 In reality perfect competition is impossible
The above discussion is clearly states that an increasing marginal return is an
important technique in the field of production. It is a real hallmark in the field of
production. It is applicable to any segment of the production whether it is primary
sector, secondary sector, tertiary, service, etc. Thus it has the universal application.
Here one can easily understand all the laws of returns with the help of these following,
small formulas, namely:-

1. DMR =or= Increasing marginal cost =or= Benefit < cost.
2. CMR =or= Constant marginal cost =or= Benefit = cost.
3. IMR =or= Diminishing marginal cost = or=Benefit > cost.
In the process of production all these laws of returns are very common, like DMR,
CMR, and IMR. They are appropriate to any field of production. These theories are
1 1
2 2
3 3
4 4
5 5
Marginal
return
Units of Quantity
X
O
Y
Increasing Marginal returns
IMR
useful to determine the long-term business objectives. The law of variable proportion
is very useful to short run objectives. Following diagram combines all the situations of
production.

Here OX of units, OY to MR, and OY, to marginal cost. The upper part of the diagram
is the combination, of IMR, CMR and DMR. Therefore the above curve represents the
laws of return curve. The lower part of the diagram is a cost curve, which consists of
Increasing Marginal Cost, CMC and DMC, which show the way to U shaped cost
curve.

Law of variable proportion
The law of variable proportion is an important theory in the field of production, the
credit of popularizing this theory again straightaway goes to Alfred marshal.
According to Ben ham The proportion of one factor in a combination of factors is
increased after a point the remaining variables will also vary.
Meaning:
With the help on the above definition, the proportional relationship among the
marginal returns, total returns and the average return is called law of variable
proportion.
Assumption
Ceteris paribus:
It is assumed that other things like tastes, habit remain same.
Technology us constant
It is assumed that the technological knowledge is constant.
DMR
It is assumed that the marginal return diminishes or DMR is hold good.
Cardinal measurement:
It is assumed that the utilities can be measured in terms of numbers or units.
This can be explained with the help of the schedule.

Marginal
return
Units of Quantity
X
O
Y
Marginal returns
IMR CMR
DMR
Cost
IM Cost
CM Cost
DM Cost
List
Units/N MR TR AR = TR / N
1 3 3 3=3/1
2 2 5 2.5=5/2
3 1 6 2=6/3
4 0 6 1.5=6/4
5 -1 5 1=5/5
This can be explained with the help of the schedule. Here the first column represents
units, 2
nd
column marginal returns, and 3rd column total returns. The last column
represents the average returns. If the units of production increase, the all variable will
also either increase order or decrease.
In the first case, all the variables are constant at 3 units of production. When we go on
producing, more and more units a particular product, then MR decreases, whereas TR
increases till MR and tends to negative. The last column represents AR, shows average
relationship between total production and units.

Here OX for units and OY for MR, TR & AR. In this diagram, DMR declines from left to
right. Here we can divide the diagram into 3 parts. In the first stage, average revenue
and marginal revenue. Unit whereas total return. In the second stage, the marginal
return is O, whereas total return is very high. Average return line lies in between.
Finally, all the revenue lines, namely MR, TR, AR have the diminishing trend from left
to right. Thus the proportionate relationship among these variables is called law of
variable proportion.
Criticisms
Ceteris paribus is not true. In reality, other things like tastes, habits etc do not
remains constant.
Technology is not constant. Technological knowledge is not constant.
DMR is meaningless. This law is based on DMR theory which itself is meaningless.
Cardinal measurement is meaningless. In reality returns cannot be measured in terms
of numbers. It is clear with the help of the above discussion that, law of variable
proportion is an important law in the field of production introduced by after Marshall.
It is a good guideline either to continue production or to stop production during the
process of production.
Least cost combination
Alfred Marshalls theories of production have a number of loop holes. Basic
weakness of the theory is it is purely a one-factor model (labor) to over this many
experts have identified new theories in the field of production. Regarding this, Prof.
J.R. Hicks and R.G.D Allen have introduced a theory called producers equilibrium.
Marginal
return
Units of Quantity
X
O
Y
Law of variable proportions
Variable total cost
Average cost
DMR
The other names of the theory are law of substitution, least cost combination and so
on. J.R. Hicks and R.G.D. Allen do introduce the geometrical device popularly called
indifference curve technique which is applicable to the filed of production in terms of
ISO (=equal) quantity curves and ISO (=equal) cost curves.
According to J.R. Hicks An ISO product curve is obtained by the list of combinations
to inputs of production, the schedule being so arranged that a producer is indifferent
to the combinations preferring none of any other.

Meaning: ISO-product curves are the curves derived from the list of combination of
two inputs, which give equal production. A producer can get equilibrium at a point
where ISO product curve is tangent to the ISO cost line.
Meaning: Least cost combination consists of 3 components.
1) Iso Quantity curve / product line.
2) Iso Cost line.
3) Equilibrium stage.
1) Iso-quantity curve is derived from the list of combinations of labour and capital,
which gives equal production. This concept can be explained with the help of a List.
Combination X factor Y factors D.M.R.S.
A 1 18 ------
B 2 13 1:5
C 3 9 1:4
D 4 6 1:3
E 5 4 1:2
F 6 3 1:1

Here the first column represents combination. 2
nd
and 3
rd
column represents X and Y
factors. The last column represents D.M.R.S., where ratio of one is constant and the
other diminishes.

We can easily understand the gist of the theory with the help of the diagram. Here
OX for X factor, OY for Y factor. It is a quantity curve obtained by the list of
combination of two factors, which give equal returns. Therefore, the combinations like
A, B, C, D, E, F. give equal profit. It is a curve because of the D.M.RS.
Assumptions
Ceteris paribus:
It is assumed that other things like; taste, habit, etc remain constant.
Ordinal measurement of factors
The factors of production are measured in terms of ranks or orders.
Two factors:
Y factor
X factor
X
O
A=
=F
Y
Law of indifference
=B
=C
=D E
Least cost combination is the combination of two factors
Transitivity:
It is assumed that all the combinations give equal returns or profit to the producer.
Preference:
The producer should prefer more of one factor and the less of the other factor.
DMRS:
The arrangement of two factors is followed by the DMRS.
Equal product curves
Some of the features of ISO products curves are they are convex the origin, they
neither touch nor intersect each other; they are infinite in number etc.

ISO production curves are derived from the combination of two factors, which give
equal profit and production. Higher the ISO product curve gives higher returns, lower
the ISO product curve gives lesser returns.
ISO cost curve:
ISO cost lines, are followed by the capacities of the cost of production of a producer,
which varies from time to time.

We can easily understand the concept with the help of the diagram:

Here OX for X factor, OY for Y factor. Here the higher ISO-cost line represents
higher capacity of investment and vice versa.
Least cost combination can be explained with the help of a diagram.
It is a condition at which the equal product curve is tangent to an ISO cost line. The
point E in the diagram is also called producers equilibrium or least cost combination.

PRICE
X
O
D
IC
I

Y
Law indifference
IC
2

IC
3

PRICE
X
O
ISO COST LINE
P
I

Y
P

This can be explained with the help of a diagram, here OX for X factor, OY for Y
factor. At point E, a producer can get equilibrium, because ISO product curve is
tangent to ISO cost line.
Criticisms
Ceteris paribus is meaningless:
In reality, other things like tastes, habits etc do not remain the same.
Preference:
No producer necessarily prefers the factors in terms of more of X and less of Y.
DMRS is meaningless:
DMRS, similar to DMR, which has a number of problems, therefore it is meaningless.
Ordinal measurement:
No producer observes the ranks or orders of the factors. Without knowing the orders,
they invest the inputs by practice.
Summary
With the help of the discussion, it is clear that least cost combination is an important
technique introduced by J.R. Hicks and R.G.D. Allen in the field of production. The
contributions of this theory are really a gift in the field of production.
Economies of Scale
Introduction
A company needs to determine the net effect of its decisions affecting its efficiency,
and not just focus on one particular source. Economies of scale tend to occur in
industries with high capital costs in which those costs can be distributed across a
large number of units of production. A common example is a factory, where, an
investment in machinery is made, and one worker, or unit of production, begins to
work on the machine and produces a certain number of goods. If another worker is
added to the machine he or she is able to produce an additional amount of goods
without adding significantly to the factory's cost of operation. Thus, while a decision to
increase its scale of operations may result in decreasing the average cost of inputs.
The creation of a better transportation network, results in a subsequent decrease in
cost for a company working within that industry. Thus cost variation is a common
phenomenon. In this connection the study of economics of scale is really meaningful.

According to peter Louis An economics of scale refers to the notion of increasing
efficiencies of the production of goods as the number of goods being produced
increases. Typically the average costs of producing a good will diminish as each
Y factor
X factor X=
O
IC
I

Y
IC
2

IC
3

E
additional good is produced, since the fixed costs are shared over an increasing
number of goods.

As seen in the website namely about.com Economics of Scale is a term that is used to
describe the reduction in cost-per-unit as more units are produced. (For example, if
a company makes 500 widgets, they cost the company 10 cents a piece to produce.
Another company makes 100,000 widgets, and can therefore purchase the materials
necessary to make them for much cheaper than its competitors, so each widget only
costs this company 5 cents a piece to produce).
Meaning
Economics of scale means reduction in the cost of production. In addition to
specialization and the division of labor, within any company, there are various inputs
(like men material, method, marketing etc.) that help to reduce the cost, which may
result in the production of goods and/or services, which is known as economics of
scale. The initial investment of capital is diffused (spread) over an increasing number
of units of output, and therefore, the marginal cost of producing a good or service
decreases as production increases. If costs increase by a lesser amount, there are
positive economies of scale
Where Are Economies of Scale?
Lower input costs: When a company buys inputs in bulk - for example, potatoes used
to make French fries at a fast food chain - it can take advantage of volume discounts.
(In turn, the farmer who sold the potatoes could also be achieving ES if the farm has
lowered its average input costs through, for example, buying fertilizer in bulk at a
volume discount.)
Costly inputs: - Some inputs, such as research and development, advertising,
Business expertise and skilled labor are expensive, but because of the possibility of
increased efficiency with such inputs, they can lead to a decrease in the average cost
of production and selling. If a company is able to spread the cost of such inputs over
an increase in its production units, ES can be realized. Thus, if the fast food chain
chooses to spend more money on technology to eventually increase efficiency by
lowering the average cost of hamburger assembly, it would also have to increase the
number of hamburgers it produces a year in order to cover the increased technology
expenditure.
Specialized inputs: As the scale of production of a company increases, a company can
employ the use of specialized labor and machinery resulting in greater efficiency. This
is because workers would be better qualified for a specific job - for example, someone
who only makes French fries - and would no longer be spending extra time learning to
do work not within their specialization (making hamburgers or taking a customer's
order). Machinery, such as a dedicated French fry maker, would also have a longer life
as it would not have to be over and/or improperly used.
Learning inputs: Similar to improved organization and technique, with time, the
learning processes, that may be training and development etc, related to production,
selling and distribution can result in improved efficiency - practice makes perfect!
Types of economics of scale
Alfred Marshall made a distinction between internal and external economies of scale.
When a company reduces costs and increases production, then it is said to be internal
economies of scale. External economies of scale occur outside of a firm, namely,
reduction in logistics costs, tax holidays and so on within an industry.
Main types of internal economies of scale
Internal economies of scale relate to the lower unit costs a single firm can obtain by
growing in size itself. There are five main types of internal economies of scale.
Bulk-buying economies
As businesses grow they need to order larger quantities of production inputs. For
example, they will order more raw materials. As the order value increases, a business
obtains more bargaining power with suppliers. It may be able to obtain discounts and
lower prices for the raw materials.
Technical economies
Businesses with large-scale production can use more advanced. This may include
using mass production techniques, which are a more efficient form of production. A
larger firm can also afford to invest more in research and development.
Financial economies
Many small businesses find it hard to obtain finance and when they do obtain it, the
cost of the finance is often quite high. This is because small businesses are perceived
as being riskier than larger businesses that have developed a good track record. Larger
firms therefore find it easier to find potential lenders and to raise money at lower
interest rates.
Marketing economies
Every part of marketing has a cost particularly promotional methods such as
advertising and running a sales force. Many of these marketing costs are fixed costs
and so as a business gets larger, it is able to spread the cost of marketing over a wider
range of products and sales cutting the average marketing cost per unit.
Business economies
As a firm grows, there is greater potential for managers to specialize in particular
tasks (e.g. marketing, human resource management, finance). Specialist managers are
likely to be more efficient as they possess a high level of expertise, experience and
qualifications compared to one person in a smaller firm trying to perform all of these
roles.
Diseconomies of Scales:
Simply diseconomies of scale refer to increase in cost of production. In the increase in
unit cost of production as firm increases its capacity of production. This is a long-term
phenomenon. The important reason why a firm may experience pricing unit cost as its
scale of production increases; it is the reduced co-ordination and expanded
operations.
This can be explained with the help of theories of a diagram.

Cost
Units of Quantity
X
O
Higher cost
Y
Economics and Diseconomies of scale
Lowered cost
The above diagram states that, when the cost curve decreases then it is economies of
scale and when the cost curve increases then it is diseconomies of scale. Here OY =
cost, OX = units scale is represented by saucer sapped cost curves. Thus higher the
cost curve represents dis-economics of scale and lower the cost curve represents
economics of scale.
Components of Economics of scale

A. Internal Economics
Real Economics Pecuniary Economics

Production
Economics
Marketing
Economics
Business
Economics
Transport and
Storage Economics

Pecuniary Economics)= Non-Monetary Economics:
Such as: -
Bulk buying of material at competitive price.
Lower cost of Capital (interest)
Advertising at large scale at lower rate.
Less per unit rate of transportation.
Lower wages and salaries due o monopsony
(single buyer) ford icon,

Explanation to the chart
Economics of scale can be explained with the help of a chart. The concept can be
divided into 2 parts
Internal Economics
External Economics
Internal Economics refers to cost reduction
by using internal resources. They can be
discussed in following ways.
It is again divided into two parts
Real Economics
Pecuniary Economics
Real Economics:
Its the cost reduction in terms of monetary
benefits, its again divided into 4 types:
Production Economics
Marketing Economics
Business Economics
Transport and Storage Economics
a) Production Economics refers to reducing the cost of input i.e. factors of
production.
i. Land Cost (rent) is to be given at a cheaper rate to increase the profit of a
firm.
ii. Labor (Wages) a rational manager should think of cheap labor.
iii. Capital, Technology: Technological knowledge, the efficient workers, can
reduce the cost of production.
iv. Market, Muscle Power, Motivation, Mobility
b) Marketing Economics refers to the reduction of cost through marketing
activities. It is related to Advertising Economics, Distribution Channel, Sales
B. External Economics
1. Economics of Location:
2. Economics of Bi-products:
3. Political Environment:
4. Social Environment:
5. Global Environment:
6. Technological Environment:

Promotion, Bug-off Products, Economics of variations in models and designs, Research
and Methodology and so on.
c) Business Economics refers to the division of labor, specialization, teamwork /
task force span of control, centralization and de-centralization.
d) Transport And Storage Economics:
Land Ways Roadways, Railways
Water Ways Inland Water ways, Ocean Transport.
Air Ways Air India, Indian Airlines and so on.
Storage: Godown = village, Storage = District, Warehouse =State level, Buffer Stocks
=National storages etc., Cost can be reduced among all the above stated heads, which
is called economics of scale,
2. Pecuniary Economics (Non-Monetary Economics):
Here non-monetary aspects are considered. Its the cost reduction of an organization
by non-monetary benefits such as: -
Bulk buying of material at competitive price.
Lower cost of Capital (interest)
Advertising at large scale at lower rate
Less per unit rate of transportation
Lower wages and salaries due o monopsony (single buyer)
B. External Economics:
This refers to the reduction in the cost of production by using external facilities. They
are:
1. Economics of Location: Suppose a firm is situated in the city center, the
infrastructural facilities like transportation, water supply, and electricity will be
cheaply available and it is very costly in the remote areas.
2. Economics of Bi-products: Suppose a large industry is utilizing the bi-products
then the loss of production will be compensated by gain.
3. Political Environment: Politicians may provide the industrial clusters which can
support the industrialist and that can save time, money etc. On the other hand
government can support the industrialists by providing exhibitions free, trade tax,
holidays and so on. Thus political environment can externally help the economics of
scale.
4. Social Environment: Socio-cultural activities may reduce the cost of production for
example expansion of temples, church, masszid etc. may induce the demand for
Agarbathi, candles, flower etc. This may reduce the transportation cost.
5. Global Environment: Countries are marching towards globalization, which means
several things for several people, or whole globe is a single village. Where there is the
free movement of goods and services from place to place without barriers. This can
certainly reduce the cost of production of any organization.
6. Technological Environment: Many new establishing companies need not invest on
the research and development individually. Instead they can just imitate the invention
of an already establishing organization.
This refers to the reduction in the cost of production by using external facilities.
Why are economies of scale important? (Uses)
Large business: - A large business can pass on lower costs to customers through lower
prices and increase its share of a market. This poses a threat to smaller businesses
that can be undercut by the competition.
Profit margins:- A business could choose to maintain its current price for its product
and accept higher profit margins.
A company needs to determine the net effect of its decisions affecting its efficiency,
and not just focus on one particular source.
Economies of scale give big companies access to a larger market by allowing them to
operate with greater geographical reach.
Economies of Scope:
Economics of scope is the reduction in cost resulting from the joint production of two
or more goods or services by the same firm. In other simple words its the cost
reduction by expanding many more units with the help of bi-products. Example:
Sugar Cane producer {farmer} can also start sugar industry.
Summary
Thus with the help of the above discussion it is clear that economics of scale is an
important concept in the field of cost analysis. Any rational organizer can easily utilize
the above chart to reduce the cost of production. This is the real highlight on the
possible areas of reduction in the cost of production. Reduction is cost of production
automatically enhances the profit of the organization.

LAW OF SUPPLY

INTRODUCTION:
The Objectives of business firms may be different but their basic business
activity is the same. They all produce or buy and sell goods and services that are in
supply. In the mean while Supply is infact, the basis of all productive activities.
Supply is the mother of production. Increasing supply for a product offers a high
business prospects in future and vice versa.
DEFINITION:
According to Marshal, amount of commodity supplied increases with every rise
in its price and decreases with every fall in its price.
MEANING:
The term supply implies a desire for a commodity backed by the ability and
willingness to sell for it. Unless a person has adequate storing power or resources and
the preparedness to sell his resources, his desire to sell a commodity would not be
considered as his supply. Supply in economics has a slightly different meaning to the
word "supply" as it's used in everyday conversation. In the latter, "supply" is most
often used as a verb - to provide someone with something. In economics, however,
supply is defined as the amount of a good (or a service) that a producer is willing and
able to supply across a range of prices.
The term supply for a commodity (i.e., quantity supplied) always has a
reference to a price, a period of time, and a place. A meaningful statement regarding
the supply for a commodity should, therefore, contain the following information.
a) The quantity supplied
b) The price at which a commodity is supplied.
c) The time period over which a commodity is supplied.
d) The market area in which a commodity is supplied.
LAW OF SUPPLY
The law of supply is one of the fundamental laws of economics. The law of
supply states that the supply for a commodity increases when its price decrease and
falls when its price rises, other things remaining constant. This is an empirical data
.As the law states, there is a proportion relationship between price and quantity
supplied. This law holds under the condition that other things remain constant.
Other things include other determinants of supply viz, consumers income, price of the
substitutes, and compliments, tastes and preferences of the consumer etc. These
factors remain constant only in the short run. In the long run they tend to change.
The law of supply is based on the law of increasing marginal utility.
ASSUMPTIONS OF THE LAW OF SUPPLY
The law of supply will apply only when certain conditions are fulfilled. This law is
based upon the following assumption or conditions.
1) Income of the buyer remains constant.
2) Ceteris paribus.
3) Tastes and preferences of the consumers remain the same.
4) Price of related goods (substitutes and compliments) remains the same.
5) Consumer does not know about any new substitute product.
6) There is no expectation of change in the price of commodity in near future.
The law of supply can be presented through a supply schedule. Supply schedule is a
series of prices in descending (or ascending) order and the corresponding quantities
which consumers would like to buy per unit of time.

This table represents seven alternative prices of tea and the corresponding quantities
(no of cups of tea) supplied per day. At each price, a unique quantity is supplied. As
the table shows, as price of tea per cup increases, daily supply for tea increases. This
relationship between quantity supplied of a product and its price is the basis of the
law of supply.

The Supply curve: The law of supply can also be presented through a supply curve. A
supply curve is a locus of points showing various alternative price-quantity
combinations. Supply curve shows the quantities of a commodity which a producer
would sell at different prices per unit of time, under the assumptions of the law of
supply.

Explanation:
Here OX axis represents the cup of tea supplied per day, OY axis represents the price
per cup. The curve SS is the supply curve. It shows the law of supply. Each point on
the supply curve shows a unique price quantity combination. The combinations read
upward along the supply curve showing increasing price of tea and increases price of
tea per cup and increasing number of cups of tea sold by an individual per day.
Thus, supply curve shows a functional relationship between the alternative price of a
commodity and its corresponding quantities which a producer would like to sell during
a specific period of time, say per day, per week, per month, per season, per year.

Price /-
cup of tea
No. of cups of tea
Supplied by a consumer
/day
7 7
6 6
5 5
4 4
3 3
2 2
1 1
Price
Units
S Supply
Y
OS
X
Determining factors of supply (forces behind the curve)
Supply has a number of influencing or determining factors. They are as follows:
Price: - Price of an apple increases, supply for apple also increases. Thus price
influences on supply.
Income: - When the income of a farmer increases, naturally producer will supply more
tractors instead of wooden ploughs. Thus Income influences on supply.
Demand:-When the demand for liquor increases, then, automatically supply will
increase. Thus demand influences on supply.
Market: -Vegetables are not supplied in fish-market. Thus market influences on
supply.
Time: -During summer, supply of cotton clothes may be more. The supply of such
products may be less during winter. Thus time influences on supply.
Advertisement:- advertisement increases awareness about the product. Thus
advertisement influences on supply.
Taste:-Supply for junk food will increase due to change of taste and habits. Thus taste
influences on supply.
Effects of supply
The above factors influence on different effects of supply they are as follows: it is of
two types they are namely change in quantity supplied and change in supply. If there
is any change in the quantity supplied, due to variation in price is called change in
quantity supplied. Change in quantity supplied is of two types.

First one is Contraction in supply: - Thus contraction in supply is the result of fall in
price.

If we see the diagram it is clear that OX axis represents the quantity supplied and
OY represents price. Fall in price, from point P to P
1
the supply for a commodity
also decreases from Q to Q
1
. Therefore, it is said to be contraction in supply. Here
the quantity of supply decreased from OQ to OQ1.

Second one is expansion in supply: - Thus expansion in supply is the result of rise in
price.

PRICE
X
O
S
sI

Y
Contraction in supply
P
1

Q1

P
Q

OY represents price. Rise in price, from point P to P
1
the supply for a commodity
also increases from Q to Q
1
. Therefore, it is said to be expansion in supply. Here the
quantity of supply increased from OQ to OQ1.

Change in supply,
Change in supply, Suppose there is any change in supply due to the variation in the
determining factors other then price is called change in supply. It is of two types. They
are, first one is Increase in supply and other one is decrease in supply. Let as discuss
them one by one.
Increase in supply
Suppose the profit of a producer increases, then, producer supplies rice or pizza to
Ragi bolls is known as increase in supply. Here superior products are preferred for
inferior goods, due to rise in standard of living.

OY represents income. S line is the supply line, that is, before the increase in income
of a producer. S
1
, S
1
. Line explains the preference of higher supply line due to the
rise income. Thus if the income of a producer increases, then he prefers higher supply
line, which is also known as increase in supply.
Decrease in supply
Suppose the profit of a producer decreases, then, producer supplies Ragi bolls to
Rice or pizza is known as decrease in supply. Here inferior products are preferred for
superior goods, due to fall in standard of living.
PRICE
Units of Quantity
X
O
S
Y
Expansion in supply
P
1

Q1

P
Q
S
1

Income
Units of Quantity
X
O
S
1

S
1

Y
Increase in supply

S
S

OY represents income. S line is the supply line, that is, before the decrease in income
of a producer. S
1
, S
1
. Line explains the preference of lower supply line due to the fall
in income. Thus if the income of a producer decreases, then he prefers lower supply
line, which is also known as decrease in supply.

The Concepts of Elasticity of Supply
Introduction
In the real life scenario, when you move up the price of most of the things, supplier
will sell a bigger amount of them. Widespread sense tells us that when price changes,
so too will the quantities sold. However, commerce needs to have more specific
information than this - they need to have a clear measure of how the magnitude
supply would alter as a result of a price revolutionize.

In this connection, a vital concept in understanding supply and supply theory is
elasticity. It refers to how the supply changes in response to various stimuli. Alfred
Marshall popularized the concept elasticity of supply in the field of economics.
Actually it is taken from science, but it is an important tool to understand the
relationship between the price and supply in economics, which is also based on the
two variables. It is very useful to determine the change in supply with respect to price.
One way of defining elasticity is the percentage in one variable divided by the
percentage change in other variable known as arch elasticity because it calculates the
elasticity over a range of values, in contrast with point elasticity that uses the
differential calculus to establish the elasticity at a specific point. Thus it is a measure
of relative changes.
Mathematical Definition
The formula used to calculate the coefficient of price elasticity of supply for a given
product is
Elasticity of demand =%change in quantity supplied /%change in price
=Delta qs/ qs/ /delta PS /PS

This simple formula has a problem, however. It yields different values for Ed depending
on whether Qs and Pd are the original or final values for quantity and price. This
formula is usually valid either way as long as you are consistent and choose only
original values or only final values. A more elegant and reliable calculation uses a
Income
Units of Quantity
X
O
S
1

S
1

Y
Decrease in supply

S
S
midpoint calculation, which eliminates this ambiguity. Another benefit of using the
following formula is that when Ed = 1, it means there will be no change in revenue
when the price changes from P1 (the original price) to P2.

Now let us discuss various types of Elasticities of Supply one by one

Price Elasticity of Supply
The definition to the price elasticity of supply is as follows: According to Alfred
Marshall Elasticity of supply in a market is great or small according to the amount
supplied, increases much or little for a given fall in the price

With the help of the above definition is clear that price elasticity of supply refers to the
situation when the quantity supplied increases or decrease with a change in price of a
commodity. In other words, price elasticity of supply shows the rate at which the
supply changes with respect to a change in price.
Price elasticity of supply can be explained with a formula:-

PES = % change in Supply
_____________________________
% Change in Price

Here PES = Price elasticity supply
S = Change in supply
P = Change in price
^ = For change.

Types of Price of Elasticities of Supply are:
Perfectly Elasticity of Supply.
Perfectly Inelasticity of Supply.
More Elasticity of Supply.
Less Elasticity of Supply.
Unitary Elasticity of Supply.

4. Perfectly Elasticity of Supply
When the supply for a commodity, increase or decrease to any extent, irrespective of
any change in price. In other words, elasticity of supply is infinite whereas the price of
a commodity is constant. For example free goods that buy one get one free products.
Change in Price is zero, so elasticity is infinite. Some times price of a commodity may
be zero. But the supply is infinite. This can be explained with the help of a diagram.

Price
Units of Quantity
X
O
ED=0
0
Y
Perfectly elasticity of
demand

Here OX axis represents the quantity supplied and OY represents price. Here supply
line touches the OY axis. This is popularly called perfectly elasticity of supply.

5. Perfectly Inelasticity of Supply:
Here the supply for a commodity is constant, whereas the price of a commodity is
variable. Some times supply may be zero or constant for some products. Example:
supply for cotton cloths during rainy season may be constant. This is popularly called
perfectly inelasticity of supply. In other words here supply for the commodity is
constant but the price of the commodity is variable from time to time.

This can be explained with the help of diagram. ES= perfectly inelastic. Here OX for
supply and OY for price. Here supply for a commodity is constant and price is
variable. Here elasticity of supply is O or constant.

3. More Elasticity of Supply:
It is also called relatively elasticity supply. For illustration a small change in price,
results in greater change in supply, is called more elasticity of supply. In other words,
greater change in supply resulted by small change in price.

Here OX axis represents the quantity supplied and OY represents price. Here
quantity supplied is greater than the change in price. Programmatically ES>1, simply
supply variation is grater then the price.
5. Less Elasticity of Supply:
Greater change in price results in a smaller change in supply. This is called less
elasticity of supply or relatively inelastic supply. In other words, a small change in
supply resulted by the in greater change in price is referred to as less elasticity of
supply. Or here ES is < 1 i.e. Inelastic. The proportional change in quantity, is less
Price
X
O
ED=0
Y
Price
Units of Quantity
X
O
S
ES>1
Y
More Elasticity
than the proportional change with respect to Price. Suppose the price of a commodity
increases drastically the supply for the product will be relatively less. This is popularly
called less elasticity of supply.

OY represents price. Here the steep supply line represents less elastic. Or ES<1
This is called less elasticity of supply.
5. Unitary Elasticity of Supply:
When the change in supply is equal to the change in price, then it is called as unitary
and of supply. Or ES = 1 or Unit elasticity. The proportional change in one variable is
equal to the proportional change in another variable. Marshall says that higher the
price, higher the supply. Price and supply are equally proportional, due to law of
increasing Marginal Utility. Mathematically it is called Unitary Elasticity of Supply.
Here the relationship between X; and Y are linear in nature Marshals law of supply
states that supply line is a straight line in general which starts from the origin.

In the diagram OX axis represents the supply and OY for price Q for quantity
supplied and P for price. Here change in price is equal to the quantity supplied or
ES=1. The proportional change in one variable is equal to the proportional change in
another variable. So it is called unitary elasticity of supply

Applications of supply
We business men must consider the behaviors of sellers. Discussing sellers is
somewhat easier because we can safely assume that sellers have only one motivation:
to maximize their profits. Sellers will be motivated to do more of anything that
increases profits and less of anything that decreases profits. Their total profits are
calculated as the difference between their total revenues and their total costs of
production. In connection with this the statement of law of supply is really
Price
Units of
Quantity
X
O
S
ES<1
Y
Less elasticity
PRICE

Units of Quantity
O
S
Y
Unitary Elasticity
X
meaningful.
Power supply is a major problem in the world. An analysis of supply of power will help
us to understand the proper utilization of scarce resources and thereby it can be
supplied at a cheaper rate to the customer and thereby enhancement of productivity.
Supply of food is another major problem. Analysis of supply will help us to identify the
causes for the Shortage of food, and the remedies to overcome the food crisis. Supply
variation is a common phenomenon, which can be easily stabilized with the help of
supply analysis.
We can easily identify the reasons for the rapid variations in the prices of gold or liquid
gold, or any other similar products with the help of analysis of law of supply an
elasticity of supply.
Conclusion
With the help of the above discussion it is clear that law of supply plays a vital role in
any economy. It is an important ingredient of market scenario. Commodities price is
driven by supply and demand. This is as true as the law of risk and reward which
directly influences on the law of supply. The concept of Supply creates its own
demand is believed since the time immoral. That is why the law of supply has great
importance in any economy.
Cost concepts
Introduction
There are three centers in any organization. They are investment center profit center
and cost center. Cost center plays a vital role in the process of any organization. A
cost center is part of an organization that does not produce direct profit and adds to
the cost of running a company. Examples of cost centers include research and
development departments, marketing departments, help desks and customer
service/contact centers. This results in needed study on cost and other related
concepts of cost.
What is cost?
Wikipedia says that, In economics, business, and accounting, a cost is the value of
money that has been used up to produce something, and hence is not available for use
anymore. In business, the cost may be one of acquisition, in which case the amount of
money expended to acquire it is counted as cost. In this case, money is the input that
is gone in order to acquire the thing. This acquisition cost may be the sum of the cost
of production as incurred by the original producer, and further costs of transaction as
incurred by the acquirer over and above the price paid to the producer. Thus Costs
are expenses. The company has to pay during the production of its product.
Types of costs
There are 3 main types of costs, these are: fixed costs, variable costs, and average
costs
Fixed costs: -
Costs that doesnt change over a period of time and don't vary with output. E.g.
salaries, rent, tax, insurance, heating and lighting fixed costs can also be called
indirect costs, as they are not directly associated with the final product. Fixed costs
have to be paid even if the company is not producing any goods.
Variable costs: -
Costs vary directly with output so when output increases, variable costs also increase.
E.g. raw materials, electricity Variable costs can also be called direct costs as they are
directly associated with Production.
Marginal cost
Marginal cost is the change in total cost that arises when the quantity produced
changes by one unit. In general terms, marginal cost at each level of production
includes any additional costs required to produce the next unit. If producing
additional vehicles requires, for example, building a new factory, the marginal cost of
those extra vehicles includes the cost of the new factory.
The average cost
Average cost is constructed to capture the relation between cost per unit and the level
of output. A productively efficient firm organizes its factors of production in such a
way that the average cost of production is at lowest.
Total cost
It is the sum total of all the costs incurred during the process of production. Here
average cost contains the total. Therefore we consider the average cost more than the
total cost.
In reality different kinds of costs are found. Few of them are as follows: - opportunity
cost, implicit cost, explicit cost, average variable cost, historical cost, etc.
Cost curves
In economics, a cost curve is a graph of the costs of production as a function of total
quantity produced during the process of production. Mostly Cost curves are U
shaped. There are a few different types of cost curves in economics.
Why cost curves are U shaped?

The above two columns represents the relationship between units of production and
the marginal cost incurred during the process of production. The schedule highlights
that, during the initial stage of production the cost of production is at Rs. Ten
thousand imaginary figure, which is very high among all the above stated statistics.
Thereafter the Cost declines to six to three and again it increases to the maximum
level. Thus cost of production during the initial stages of production is very high and
substantially diminishes and finally increases to the maximum limit.
This can be explained with a diagram.

During the initial stages of production the cost of production is very high.
Subsequently the cost of production diminishes and constant. In the end of the
process of production the cost of production is again very high. That is the reason why
the cost curves are U shaped.
Relationship among cost curve:
All cost curves are U-shaped. This can be explained with the help of a diagram
Unit Marginal cost
(000)
1 10
2 6
3 3
4 3
5 6
6 10
X
Marginal
cost
U shaped Cost curves
Cost
IM Cost
CM Cost
DM Cost
Units
Y

Here OX = units OY = cost. The map is consisting of 4 diagrams. First three diagrams
represent U shapes. Cost curves. Here among the three U shaped cost curves first is
marginal cost curve, which is very fast among all the remaining curves. Here the
analogy is made that the Marginal Cost is similar to that of seconds needle of the
clock. Therefore the speed of marginal cost is very high during the process of
production. The second important curve represents. Average cost, which is broader
than MC curve. It is noted that average cost curve represents the total cost curve
during the short period of time. This is because average cost is equal to total cost
divided by the number of units. In other simple words, if we want to analyze average
cost we are bound to understand total cost. Total cost includes average cost. Therefore
average cost is broader than M.C. it is identified that this curve is similar to that of
minutes needle in the clock. Average variables cost is another U shaped cost curve. It
is also identified as long term cost curve. It is still broader than average cost curve.
This curve is similar to hours needle of the clock.

Note: Its very important to note that MC should always cut any of the U shaped cost
curves from below at the least point of above curves. In above diagram another
diagram is found which is distinguished from above all the diagrams i.e. fixed cost.
Here fixed cost is incompletely U shaped and moderately L shaped. It is identified that
when fixed cost curve cuts MC curve then the fixed cost progress constantly. Therefore
after cutting MC it would not go as U shaped cost curve but it travels horizontal to x-
axis.
Long term cost Curve:
Long run cost curve is put together on the amalgamation of different short run cost
curves. This can be explained with help of below diagram.

AC
Cost
Units
X
O
MC
Y
Cost curves
AVC
FC
Cost
Units
X
O
AC
1

Y
Long run Cost curves
C
AC
3

LRA curve
AC
2

B
A

In the diagram, OX = units, OY = cost. We can understand long term cost curve with
the help of average curves map. Here long term cost curve is made up of many short-
term cost curves. Suppose we support all the least points of short run cost curves, we
get long run cost curves. Here A, B, C, represents least points of average cost curve. It
is also expressed as the short run cup and long run sourer shaped cost curves.
Note: Long run Cost curve is also referred to as Average variable cost curve.
Observations on the relationship between the short run and long tem cost curves.
1. They neither touch x-axis nor y axis.
2. Both are U shaped.
3. Short run cost curve are cup shaped whereas the long run cost curves are
triangular shaped.
4. We have to consider only least point of short run average cost curve to constitute
long term cost curve.
5. Short run cost curves are smaller.
6. Long run curve are wider.
7. Long run average cost curve represents steep curves without which long run cost
curves cannot be drawn.
8. LRCC is similar to that of hours needle whereas short run cost curve is similar to
that minutes needle.
9. Many short run cost curve is required to get one long run cost curve.
Summary
When large companies hire thousands of employees per year, for those above stated
costs can take a significant portion of the Human Resource budget and the total
operating expenses. Successful start-ups and dot-coms are also feeling this
importance. Whether the units are using the new electronic methods or the
traditional hiring tactics, having a standard and effective way of measuring your cost
per hire is essential to evaluating companies effectiveness and efficiency.
Questions
1) What do you mean by production?
2) Discuss the Laws of Returns, stated by the Alfred Marshall.
3) Write a note on law of variable proportions.
4) Explain the Least cost combination.
5) Describe the concept of production possibilities curve
6) What is the efficacy of linear programming in Microeconomics?
7) Enumerate the importance of production theories.
8) Discuss the objective and constraints of linear progammes.
9) Explain the importance of production function.
10) What are the economics of scale?
11) Distinguish between economics and diseconomies of scale
12) Discuss the internal economics of scale
13) Describe the external economics of scale
14) What is the efficacy of economics of scale?
15) What is cost?
16) Discuss the different kinds of costs.
17) Why the cost curves are U shaped?
18) Distinguish between the cup and saucer shaped cost curves.
19) Explain the relationship between average cost and Marginal cost.
20) What is the utility of cost curves?

===

Exchange:
Exchange is the third important economic activity, immediate after consumption and
production, identified by classical economists. Exchange refers to the transfer of goods
and services from place to place. The term exchange consists of numerous
components.
Important components are as follows.
Trade: The process of transferring the goods and services from person to person, time-
to-time and place-to-place or for some kind of remuneration like -returns-profit-money
etc
Money: Money may be anything, which is used as a medium of exchange, which is
accepted by both the parties of exchange.
Material: This refers to any kind of goods or commodities, which are exchanged from
person to person to fulfill the human drives. Goods may be basics, comforts,
luxurious, perishable, non-perishable, capital, Fast moving Consumer Goods, new
goods etc.
Men are both suppliers and Consumers: Consumer is a person or buyer who
purchases the goods by paying certain amount of cash, to fulfill his / her needs. Men
also consists producers or suppliers who can supply the goods to a particular place.
Market: Market is a place where buyers and sellers meet each other.

Types of Markets:
Market is divided into various types. The following are the important types of markets.
1) Place Oriented Markets: It is of various types, such as city market, rural market,
urban market, national market, international market. Here place is the mechanism
rod for a market, such as local market, national market, global market etc.
2) Time Based Markets: Suppose a market is based on time is called time-based
market. Such as i) Very Short Period: Suppose the product is sold within a short
period of time. E.g. Milk, Fruits. ii) Short Run Period: Here time duration is more. E.g.
Food grains,. Here demand is the influencing factors on the price of a commodity.
Goods oriented market. Suppose of a market is based on goods is called goods
oriented market. Fish market, vegetable market, etc are the best examples for the
Goods oriented market
Competition Based Market
Suppose a market is based on competition between buyers and sellers they it is called
Competition Based Market. It is of 2 types.
a) Perfect Competition
b) Imperfect Competition
1) Perfect Competition: - Number of buyer is equal to number of seller is said to be
perfect competition. For instance 100 sellers of food grains should be equal to 100
buyers of food grains.
2) Imperfect Competition: - Number of buyer is not equal to number of seller is said to
be imperfect competition. it is of 2 types:
Seller oriented and buyer oriented competition.
Seller oriented competition refers to situation where sellers are influencing more on
any market It is of 4 types.
a) Monopoly: Here one-seller controls the market, and introducer of monopoly
situation like farmers, agriculturists.
Duopoly: There are 2 sellers controlling the complete market. The concept coined by
Antoine Augustin Cournot.
c) Oligopoly: Here few sellers are controlling entire market. Augustin coined this
concept. {Antoine Augustin Cournot (28 August 1801- 31 March 1877) was a French
economist, philosopher and mathematician}
d) Monopolistic: Here many sellers are controlling entire market coined by Edward
Chamberlain.
Buyers Oriented Market
Suppose buyers control the market then it is said to be buyers oriented market. They
are as follows:
a) Monopsony: - In economics, a monopsony (from Ancient Greek (monos) "single" +
(opsnia) "purchase") is a market form with only one buyer, called "monopolist," facing
many sellers. Here only one person will purchase all the products produced. Example:
Identity cards of one particular institution.
b) Duopoly: An economic condition, similar to a duopoly, in which there are only two
large buyers for a specific product or service. Sometimes referred to as a buyer's
duopoly, members of a Duopoly have great influence over sellers and can effectively
lower market prices for their supplies. Here two persons are purchasing the product.
c) Oligopoly: An oligopoly is a market form in which the number of buyers is small
while the number of sellers could be large. This typically happens in market for inputs
where a small number of firms are competing to obtain factors of production. Here few
persons are purchasing the products.
Perfect Competition:
Exchange has a number of components. Important components are trade, money,
market material etc. Perfectly competitive industry is highly unlikely to exist in its
entirely given the strong assumptions made about the operation of the market. All
markets are competitive to one degree or another, but the vast majority of markets
are characterized as imperfectly competitive. We do, though get closer to perfect
competition in many markets for agricultural and other primary commodities. These
are the only markets where there are enough sellers of products that are near perfect
substitutes for each other.

Definition: According to the standard economics definition of efficiency (Pareto
efficiency), perfect competition would lead to a completely efficient outcome. The
analysis of perfectly competitive markets provides the foundation of the theory of
supply and demand. Perfect competition is a market equilibrium in which all
resources are allocated and used efficiently, and collective social welfare is maximized.
Perfect competition is an economic model that describes a hypothetical market form in
which no producer or consumer has the market power to influence prices.

Meaning:
Perfect competition refers to a situation where the numbers of buyers are equal
to sellers.
Features of Perfect Competition:
1. Numbers of buyers are equal to number of sellers.
2. Free entry free exit.
3. Price taker
4. Homogeneous products.
5. No selling cost.

Revenue lines under perfect competition
In business, revenue or revenues (turnover in Europe) is income that a company
receives from its normal business activities, usually from the sale of goods and
services to customers. Some companies also receive revenue from interest, dividends
or royalties paid to them by other companies.
Types of Revenues
Revenues are divided into various types. This is the source of profit and progress of
the organization. For the convince factor these are the different kinds of revenues of a
competitive market.
Total Revenue: - It is the sum total of all the revenue gained out of process of
production which contains gross revenue, net revenue, average revenue etc.
Average Revenue: It is the division of total revenue over number of units produced.
Therefore experts consider only average revenue for calculation of profit, which
contains the total revenue. It is also called maximum revenue.
Marginal Revenue
Marginal Revenue (MR) is the extra revenue that an additional unit of product will
bring to a firm. It can also be described as the change in total revenue/change in
number of units sold.
More formally, 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 (or the change in
output in the bracket where the change in revenue has occurred). This is also called
minimum revenue.
Revenue differs from company to company depending on the factor of comptition.

Revenue lines under perfect competition

The diagram highlights about the revenue lines under perfect competition. Here very
important to make a message of that, revenue lines under perfect competition are
similar to that of perfectly elasticity of demand, due to homogeneity of products and
constant pricing. Another point to be prominent is, average revenue {maximum} is
similar to that of marginal {minimum} revenue. This is due to constant profit of the
firm.
Equilibrium:
PRICE
Units of Quantity
X
O
MR=AR ED=

Y
Revenue under perfect competition
Equilibrium under perfect competition can be expressed with the juncture of
marginal cost and marginal revenue. This is also called break-even point, that is
popularly called Marginal Costing.

Here OX is units of quantity of output, OY =price/cost of production, Here cost of
production is assumed to be same due to similar quality, similar products or
homogeneity of products. When all the products are homogeneous the price is also
constant. While price is constant the benefit of organization or revenue of
organization is also constant.
Therefore minimum revenue and maximum revenue are same. Marginal revenue is
equal to Total revenue or Average Revenue
Here equilibrium is derived at a point where MC cuts MR from below. According to
Alfred Marshalls law of equilibrium 1) MC should cut Revenue. 2) MC should cut MR
from below. Since the two laws are fulfilled i.e. MC cuts MR. MC should cut MR from
below, Point E is the equilibrium in above diagram.

Price and output determination under perfect competition:
Pricing under perfect competition can be discussed under two heads. i.e. short term
pricing and long term pricing.
Short Run Pricing: The price and output of the product is determined for few months
i.e. five to six months are treated as short term pricing. It can be discussed under
three headings. Namely,
a) Normal Profit stage
b) Super Normal Profit stage
c) Loss stage

1) Normal Profit:
Under perfect competition since the producer is a price taker, producer cannot get the
addition profit even though it is stated as normal profit. Here the cost = benefit are
equal, under perfect competition which can be expressed with the help of diagram.

Oligopoly

Units of Quantity of output
O
PRICE
X
MR=AR
ED=
Y
Equilibrium under perfect competition
MC
E

Explanation: OX = Units, OY = price, point E states the point of Equilibrium where MC
should cut MR from below. Condition for Normal Profit is Cost equal to Benefit Here C
is Average Cost. ED is Average Revenue. Since, MR is equal to AR; AR is measured at
the same point of equilibrium at point E. Therefore AR is pointed at E. and AC is also
pointed at E. Consequently Benefit is equal to Cost. In addition to that elasticity of
supply is constant or zero due to short interlude of time. Therefore OP = Price and OQ
is output. Thus under perfect competition the BEP itself is treated as normal profit.

Super Normal Profit:
Perfect Competition can also several times experience the super normal profit stage in
assured circumstances, which can be expressed with help of diagram

Explanation: - Here OX = Units, OY = price, point E states the point of Equilibrium
where MC cuts MR from below. Condition for super Normal Profit is Cost lesser than
Benefit. Here C is represented as Average Cost. Benefit is represented as Average
Revenue. Since, MR is equal to AR; AR is measured at the same point of equilibrium.
Therefore AR is pointed at E. and in the mean time AC is pointed at L. Therefore
Benefit is greater to Cost. In addition to that elasticity of supply is constant or zero
due to short period of time. Since PP
1
LE is the area of profit, OP
1
= Price and OQ is
output.
Stages of Loss:
Perfect competition can also experience the stage of loss in indefinite circumstances,
which can be explained with the help of a diagram
O
AC
PRICE
X
MR=AR
ED=
Y
MC
E
Q
ES=0
O
L
MR=AR
Q
PRICE
X
ED=
MC
E
AC ES=0
P
P
1

Industry
Y
1

Firm
PRICE
Units
Demand
Supply
Y

Here OX = Units, OY = price, point E states the point of Equilibrium where MC cuts
MR from below. Condition for stage of loss is Cost greater than Benefit. Here Cost
means Average Cost. Benefit is represented as Average Revenue. Since, MR is equal to
AR; AR is measured at the same point of equilibrium. Therefore AR is pointed at E.
and at the mean time AC is pointed at L. Therefore Benefit is lesser than to Cost. In
addition to that elasticity of supply is constant or zero due to short period of time.
Since PP
1
EL is the area of loss, OP
1
= Price and OQ is output.
Long period of time
Normal Profit is the only stage found under perfect competition during long period of
time. This is because in the long term whenever there is the supernormal profit, due to
free entry and exit, many producers do come and start the same product business and
compete in the market. That is the reason why the producer who are already
sustaining the supernormal profit may share the market with the new entrants, and
sacrifice the profit and the profit reduces to normal profit stage. This is understood by
seeing left part of the below diagram.
On the other hand suppose a producer is incurring a loss cannot survive in the long
run instead the producer will close down the operation. A producer who is getting
normal profit will sustain in the market even in the long run. Therefore in the long run
normal profit stage is only opportunity to a producer in the market. This can be
explained with the help of the following information.
Normal Profit:
Here the cost and benefit are equal, under perfect competition,
Here Equilibrium of the Industry will be the Equilibrium of a firm, which can be
expressed, with help of diagram.

MC
Q
L
MR=AR
X
ES=0
PRICE
O
ED=
E
AC
P
P
1

Y
AVC
Q
AC
Firm
E
O
PRICE
X
MR=AR
ED=
Y
MC
Y
D
ES>1
ES>1
ES>
1
Industry
P
R
I
C
E

is Average Cost. ED is Average Revenue. Since, MR is equal to AR, AR is measured at
the same point of equilibrium at point E. Therefore AR is pointed at E. and AC is also
pointed at E. Consequently Benefit is equal to Cost. Therefore OP = Price and OQ is
output. Thus under perfect competition even in the long term pricing the BEP is
treated as normal profit.
Significance
Some agricultural markets, with numerous suppliers and almost perfectly
substitutable products have been suggested as approximations for the perfect-
competition model. The extent of its applicability may be dependent on the market in
question. Agricultural policies in many countries undermine the requirements for
complete Pareto efficiency to apply.
Perhaps the closest thing to a perfectly competitive market would be a large auction of
identical goods with all potential buyers and sellers present. By design, a stock
exchange resembles this, not as a complete description (for no markets may satisfy all
requirements of the model) but as an approximation. The flaw in considering the stock
exchange as an example of Perfect Competition is the fact that large institutional
investors (e.g. investment banks) may solely influence the market price.
This, of course, violates the condition that "no one seller can influence market price".
eBay (eBay Inc. (NASDAQ: eBay) is an American Internet company that manages
eBay.com, an online auction and shopping website in which people and businesses
buy and sell goods and services worldwide.) auctions can be often be seen as perfectly
competitive. There are very low barriers to entry (anyone can sell a product, provided
they have some knowledge of computers and the Internet), many sellers of common
products and many potential buyers. In the eBay market competitive advertising does
not occur, because the products are homogeneous and this would be redundant.
However, generic advertising (advertising which benefits the industry as a whole and
does not mention any brand names) may occur
Conclusion:
With help of above discussion it is clear that perfect competition has laid a firm
foundation in the field of competitive market. Even though its out of fashion, or order,
it is the base or fundamental concept for the coincident concurrent markets, such as
monopolistic competition oligopoly etc
MONOPOLY
Introduction
Monopoly is an important market condition of imperfect competitive market.
Agriculture is the best example for monopoly competition since the primitive society,
where infinite sellers are competing with one seller. Another best example for the
origin of monopoly is Common salt (sodium chloride), which historically gave rise to
natural monopolies. Until recently, a combination of strong sunshine and low
humidity or an extension of peat marshes was necessary for winning salt from the sea,
the most plentiful source. Changing sea levels periodically caused salt "famines" and
communities were forced to depend upon those who controlled the scarce inland
mines and salt springs, which were often in hostile areas (the Dead Sea, the Sahara
desert) requiring well-organized security for transport, storage, and distribution. This
has resulted to Monopoly, which in turn led to the sole-trading concern. In this
connection discussion will be meaningful.
Definition:
Wikipedia says, in economics, a monopoly (from the Latin word monopolies - Greek
language monos, =one + polein, = to sell) is defined as a persistent market situation
where there is only one provider of a product or service.
Meaning:
Monopoly refers to market situation where one seller can control the entire market.
Special features of monopoly
One seller =There is only single seller.
No entry = Difficult to enter market
Price Maker = Seller Sets the price
Homogeneity of products and heterogeneity
No selling cost
Affected by law of demand The higher the price, less will be sold.

Price and output determination under monopoly
It is of two types
a) Short Term Pricing
1) Super Normal Profit
2) Normal Profit
3) Stage of Loss
b) Long Term Pricing
Super Normal Profit=since it is the sole trading
Short run pricing under monopoly:
Under monopoly revenue lines are similar to law of demand because monopolist
is a price maker. Whenever he increases the price then the demand for the commodity
decreases. Owing to this factor minimum revenue is different from maximum revenue.
Minimum revenue is also called marginal revenue, which is less elastic which goes
faster than average revenue. Average revenue is also called maximum revenue where
elasticity of demand is more than one (Ed > 1). With the help of revenue line and cost
line we can identify the price and output determination under monopoly. Here normal
profit is not necessarily at the point of equilibrium, which is similar to that of perfect
competition, but normal profit is always above the point of equilibrium, due to single
ownership. This can be explained, with the help of a diagram.
Normal Profit Stage


is Average Cost. ED is Average Revenue. Since, MR is different to AR, AR is measured
at point L. Here AR is more elastic and MR is less elastic. Therefore AR is pointed at
L. and AC is also pointed at E. Consequently minimum break even is at point L due to
sole trading concern. In addition to that elasticity of supply is constant or zero due to
short interlude of time. Therefore OP = Price and OQ is output. Thus under monopoly
the BEP is not treated as normal profit but it is at point L. Note: It is noted that
monopolist during stage of normal profit never show the area of profit, but it is
presumed that point P itself is the point of equilibrium as well as normal profit.
Therefore OQ is output where Q, ES is supply line OP is the Price.
Monopoly always experience the super normal profit stage in assured circumstances,
which can be expressed with help of diagram

MC
Q
L
AR
X
ES=0
PRICE
O
ED<1
AC
P
Y
MR
E
L
AC
MC
Q
AR
X
ES=0
PRICE
O
ED<1
P
P
1

Y
MR E
cuts MR from below. Condition for super Normal Profit is Cost is lesser than Benefit.
Here C is represented as Average Cost. Benefit is represented as Average Revenue.
Since, MR is different to AR; AR is measured at point L. Here AR is more elastic and
MR is less elastic. Therefore AR is pointed at L. and in the mean time AC is pointed at
E. Therefore Benefit is greater than to Cost. In other words point L is greater than
point E. In addition to that elasticity of supply is constant or zero due to short period
of time. Since PP
1
LE is the area of profit, OP
1
Stages of Loss: Monopoly can also experience the stage of loss in indefinite
circumstances. For instance, if we assume that hydro electricity is monopoly, during
the drought the unit cannot generate electricity, so naturally during a short span of
time the unit will incurs loss, which can be explained with the help of a diagram.
Stage of Loss:

means Average Cost. Benefit is represented as Average Revenue. Since, MR is not
equal to AR, AR is measured at L point of equilibrium. Therefore AR is pointed at L.
and at the mean time AC is pointed at K. Therefore Benefit is lesser than to Cost. That
is point K is greater than the revenue point L. In addition to that elasticity of supply is
constant or zero due to short period of time. Since PP
1
LK is the area of loss, OP
1
=
Price and OQ is output.
Long period of time: -Normal Profit is the only stage found under perfect competition
during long period of time. This is because in the long term whenever there is the
supernormal profit, due to free entry and exit. But under monopoly due to entry
barriers, producer in the long term will naturally get super normal profit.
Monopoly always experiences the super normal profit stage in assured circumstances,
which can be expressed with help of diagram

MR
MC
Q
L
AR
X
ES=0
PRICE
O
ED<1
AC
P
P
1

Y
AVC
E
K

Since, MR is different to AR, AR is measured at L point of equilibrium. Therefore AR is
pointed at L. and in the mean time AC is pointed at E. Therefore Benefit is greater
than to Cost. In other words point L is greater than point E. Since PP
1
LE is the area
of profit, OP
1
Negative aspects
It is often argued that monopolies tend to become less efficient and innovative over
time, becoming "complacent giants", because they do not have to be efficient or
innovative to compete in the marketplace.
The theory of contestable markets (a contestable market is a market in which
competitive pricing can be observed) argues that in some circumstances (private)
monopolies are forced to behave as if there were competitive.
Positive aspects
Some argue that it can be good to allow a firm to attempt to monopolize a market,
since practices such as dumping can benefit consumers in the short term.
When monopolies are not broken through the open market, often a government will
step in, either to regulate the monopoly.
AT&T and Standard Oil are debatable examples of the breakup of a private monopoly.
When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other
companies were able to compete effectively in the long distance phone market and
began to take phone traffic from the less efficient AT&T
Types of monopoly
Natural monopoly: - A natural monopoly is a monopoly that exists because the cost of
producing the product (i.e., a good or a service) is lower due to economies of scale.
The telecommunications industry has in the past been considered to be a natural
monopoly. Like railways and water provision, the existence of several companies
supplying the same area would result in an inefficient multiplication of cables,
transformers, pipelines etc. However the perception of what constitutes a natural
monopoly is now changing - in part because of the impact of new technology in
reducing traditional barriers to entry within markets.
Artificial monopoly: - An artificial monopoly is a very large firm that has no advantage
in production efficiency over smaller firms but nonetheless manages to drive all of its
L
AC
MC
Q
AR
X

PRICE
O
ED<1
P
P
1

Y
MR E
competitors out of business, remaining the sole producer in the industry. A typical
example is the Standard Oil Trust
Public monopoly: - A government monopoly may be run by any level of government -
national, regional, local. In many countries, the postal system is run by the
government with competition forbidden by law in some or all services. Also,
government monopolies on public utilities and railroads have historically been
common, though recent decades have seen a strong privatization trend throughout the
industrialized world.
Private monopoly = A private monopoly is obliged to pay at least some attention to
satisfying its customers needs. Any product, which is controlled by the private
individual, is called private monopoly e.g. lux liril etc.
Legal monopoly: - A legal monopoly, statutory monopoly, or de jure monopoly is a
monopoly that is protected by law from competition. They will have his or her own
patent rights, trademarks etc. A company is one, which the government has granted
exclusive rights to offer a particular service in a specific region. In return, the company
agrees to have its policies and prices regulated.
Price discrimination under monopoly
A seller charging competing buyers different prices for the same "commodity" or
discriminating in the provision of "allowances This kind of price discrimination may
hurt competition by giving favored customers an edge in the market that has nothing
to do with the superior efficiency of those customers.
However, price discriminations generally are lawful, particularly if they reflect the
different costs of dealing with different buyers or result from a sellers attempts to
meet a competitors prices or services.
Price discrimination also might be used as a predatory (greedy) pricing tactic -- setting
prices below cost to certain customers -- to harm competition at the suppliers level.
This can be explained with the help of a diagram.

The diagram is divided into three divisions namely firm a, firm b and the entire
industry. The industry diagram shows that the industry has supernormal profit. The
firm- b, diagram represents maximum price on the same product. And the firm-a
Firm -b
L
AC
MC
Q
AR
X
PRICE
O
P
P
1

Y
MR
E
P
1

P
Y
1
Y
2

AR
2

AR
1
Firm -a Industry
diagram represents the minimum profit supported by the organization. Thus the price
differs from person to person time to time and place-to-place is popularly called price
discrimination under monopoly.
Causes for Price Discrimination:
Variation in quality
Demand for the product
Cost of raw material
Age groups
Sex discrimination
Place discrimination
Time discrimination
Personnel discrimination
Free on Board
One Pricing
Advantages of Price Discrimination
Firms will be able to increase revenue. This will enable some firms to stay in business
who otherwise would have made a loss. For example price discrimination is important
for train companies who offer different prices for peak and off peak Increased revenues
can be used for research and development, which benefit consumer. Some consumers
will benefit from lower fares. Old people benefit from lower train companies; old people
are more likely to be poor.
Conclusion
With the help of the above discussion it is clear that monopoly is an important
competitive market situation. But monopoly has negatively influences on
concentration of wealth and resources in hands of a few people. That would be
resulted in the gap between the rich people and poor people. i.e. haves and have not s.
Influenced by this factor experts have identified many more competitive markets. Thus
it is a real identification in the history of bloodthirsty marketplace.
Duopoly:
Introduction
It is an important technique in this modern world. It is originated against the
popularity of monopoly. It was introduced to overcome the obstacles of monopoly
competition market. Cournot competition is an economic model used to describe
industry structure. It so called after Antoine Augustin Cournot (1801-1877) after he
observed competition in a spring water duopoly. In connection with this, the
discussion is useful. (French philosopher, mathematician and economist, Augustin
Cournot has been rightly hailed as one of the greatest of the Proto-Marginality. The
unique insights of his major economics work, Researches into the Mathematical
Principles of Wealth (1838) were without parallel.)
Definition
A true duopoly is a specific type of oligopoly where only two producers exist in one
market. In reality, this definition is generally used where only two firms have
dominant control over a market. In the field of industrial organization, it is the most
commonly studied form of oligopoly due to its simplicity. Says wikipedia,
Meaning:
It is a market with two sellers each seller knows that whatever he does will affect his
rivals policies, each seller attempt to make correct guess of his rivals motive and
action. The action by one will have a reaction from the others.
Features
There two firms and all firms produce a homogeneous product;
Firms do not cooperate, in general.
Firms have market power;
The number of firms is fixed; or no entry
Firms compete in quantities, and choose quantities simultaneously;
There is strategic behavior by the firms.
Assumptions
An essential assumption of this model is that each firm aims to maximize profits,
based on the expectation that its own output decision will not have an effect on the
decisions of its rivals. Price is a commonly known decreasing function of total output.
All firms know N, the total number of firms in the market, and take the output of the
others as given. Each firm has a cost function. Normally the cost functions are
treated as common knowledge. The cost functions may be the same or different among
firms. The market price is set at a level such that demand equals the total quantity
produced by both firms. Each firm takes the quantity set by its competitors as a given,
evaluates its residual demand, and then behaves as a monopoly
Price and output determination: this can be discussed under two heads irrespective of
time
1. Co-Operating Pricing
2. Competitive Pricing
Co-Operating Pricing:
Suppose both of sellers mutually agree to fix the price of a commodity, and then both
of them will get Super Normal Profit, which can be explained with the help of mirror
image diagram.

]

Explanation
The above diagrams are divided into two parts the right part represents the
supernormal profit of producer A and the left part represents the supernormal profit of
producer B, OX = units, OY = price, E = equilibrium where MC cuts MR from below.
Condition for supernormal profit is Cost < Benefit, cost is nothing but AC which is
greater to benefit is referred to as AR and therefore E < L or benefit is greater than
P
E
MC
Q
L
AR
X
ES=0
PRICE
O
ED<1
AC
Y
MR
AR
1

E1
MR
1

AC
1

MC
1

Es
1

Q
1

L
1

P
1

Producer =A Producer =B
cost. Therefore price is increased from P to P1. Therefore PP1 < LE is area of Super
Normal Profit. Therefore OX is Output and OP1 is price. Suppose we keep a mirror on
OY axis vertically, and then the image is shown as the diagram, where the power value
represents the stage of supernormal of the producer B.
Competitive pricing:
Kinky demand line (cornered demand line):- under oligopoly and duopoly demand
lines or revenue lines are kinky in nature, because of the price war between the two
producers. (That is improper co-ordination between two sellers, but if they are co-
operative they will have normal revenue line). Paul Marlor Sweezy first identified kinky
demand lines or cornered demand lines. (April 10, 1910 February 27, 2004) He was
a Marxist economist and a founding editor of the magazine Monthly Review. His work
on the former is best exemplified by his discovery of the "kinked" demand curve for
oligopoly (1939) and his prize-winning study on the English coal industry (1938).

Here OX = Coffee, OY = Tea Producer. The above diagram represents two colliding
demand lines such as perfectly inelastic demand line and relatively elastic demand
line i.e. Ed=0 and Ed > 1. Generally the revenue line is like normal demand line, but
sometimes due to eagerly anticipated profit, one producer may either decrease or
increase the price without informing the co-producer of the same business. This may
result in collusive (colliding) of two demand lines, which results in kinky demand line.

K
O
PRICE
X
Y
Ed>1
Ed= 0
K
O
PRICE
X
Kinky (cornered) demand line
Y
MR
AR
When there is an improper understanding between two sellers in business always they
have kinky demand line. According to law of revenue Marginal Revenue goes faster
than the Average revenue, where both are in the form of kinky demand curves.
Pricing under Competitive Duopoly:

We have two quadrants first quadrant represent profit level of producer A. and the
second quadrant represents profit of producer B. Due to improper understanding
between two sellers always there is uncertainty of demand and there by it leads to
uncertainty of average revenues.
When producer A decreases the price from K2 to K3, then the Producer B will
also decrease from K1 to K. As a result producer A will also reduce the price. Thus
there cannot be any certainty among the profit between two producers. Prof. Von
Neumann and Morgenstern have identified this concept as game theory under price
rigidity. (Von Neumann and Morgenstern were the first to construct a cooperative
theory of n-person games. They assumed that various groups of players might join
together to form coalitions, each of which has an associated value defined as the
minimum amount that the coalition can ensure by its own efforts)
Conclusion: Duopoly is also used in the broadcast television and radio industry,
referring to a single company owning two outlets in the same city. This usage is
technically incompatible with the definition of the word; in as much as there are
generally more than two owners of broadcast television stations markets with
duopolies. In the United States, this has been frowned upon when using public
airwaves, as it gives too much influence to one company. With the help of
discussion duopoly is an important market condition, which is commonly found in our
every day business life.
Oligopoly
Introduction
Oligopolies have been around us as long as commerce has. The members of an
oligopoly change the nature of a free market. While they cannot dictate price and
availability like a monopoly can, they often turn into friendly competitors, since it is
in all the members' interest to maintain a stable market and profitable prices.
Augustin (Antoine Augustin Cournot (28 August 1801- 31 March 1877) was a French
economist, philosopher and mathematician) coined this concept. Oligopoly is the best
suitable example of the day. An oligopoly is much like a monopoly, in which only little
companies exerts control over most of the market. In an oligopoly, there are at least
few firms controlling the market.
Definition:
Filler defines Oligopoly as Competition among the few. In an oligopolistic making
firm may be producing either as homogeneous product. An oligopoly usually depends
PRICE
O
X
ED=
Y
KC
K
1

K
2
KC
K
2
C
K
3

Producer -B
Producer -A
on high barriers to entry. It often leads to lack of price competition, which is a problem
from the point of view of consumers = Wikipedia says.
Meaning:
Oligopoly refers to situation where few sellers are competing with infinite buyers. The
retail gas market is a good example of an oligopoly because a small number of firms
control a large majority of the market. E.g., Tire Industry, Beverages, Software
industry so on and so forth.
An oligopoly is a market form in which a market or industry is dominated by a small
number of sellers (oligopolists). The word is derived from the Greek for few sellers. This
is due to few participants in this type of market. Each oligopolistic is aware of the
actions of a others. The decision of one firm influenced by the decisions of other
.Strategic planning by oligopolists always involves by the responses of the other
market participants. This causes marketers and industries to be at the highest risk for
collusion.

Features
There are few firms and all firms that produce a homogeneous product;
Firms do not cooperate, in general.
Firms have market power; and they are price makers
The number of firms is fixed; and the entry is limited.
Firms compete in quantities, and choose quantities simultaneously;
There is strategic behavior by the firms.
Revenue lines under oligopoly is kinky in nature

Above the kink, demand is relatively elastic because all other firms prices remain
unchanged. Below the kink, demand is relatively inelastic because all other firms will
introduce a similar price cut, eventually leading to a price war. Therefore, the best
option for the producer is to produce at point E which is the equilibrium point and,
incidentally, at the kink point. Here AR is demand.
Price and Output determination under Oligopoly
It is of two types:
1) Co-operative Pricing
2) Competitive Pricing (Irrespective of time duration)

Co-operative Pricing:
Here supernormal profit is commonly found to all the players.
Under oligopoly price of the product can be fixed with the help of mutual consent or
understanding of the different producers. This can be explained with the help of a
diagram.

X
Y
K
AR=D
O
OUTPUT
PRICE

Here the diagram is divided into two divisions. Right side of the diagram represents
the industry and left part of the diagram, which consists of three producers namely A,
B, C represents the different players of oligopoly. In the Right diagram, OX = output,
OY = price. E = equilibrium where MC cuts MR from below. The condition for super
normal profit is, Cost is greater than Benefit. Here cost is represented as average cost
and benefit is represented as average revenue. Therefore, AC < AR or E < L,. Therefore
PP
1
LE is the area of SNP. Therefore OQ is output. OP1 is price.
Owing to the mutual consent, the profit of the industry under oligopoly is shared
among all the players of oligopoly Participants of oligopoly are shown in the left part of
the diagram. Here P
1
P
2
P
3
P
4
is the area of profit, which can be distributed among all
the players of oligopoly. That is why P
2
p
3
RS is SNP area of Producer A, RSTU is SNP
area of Producer B and UTP
1
P is SNP area of Producer C. This kind of sharing can be
continued among all the players of the game under co-operative condition.
Competitive pricing under oligopoly:
Under competitive or collusive oligopoly, producers are reluctant to fix the price of
their respective products. This is because no producer is cared about the competitor.
Because of this reason they always have kinky revenue lines, which are the collusion
of more elastic and inelastic of demand lines. Therefore there is no assurance about
the guaranteed profit like super normal profit under competitive oligopoly. Since it is
very difficult to identify the profit area, Prof. Carnot has explained just the average
revenue lines, which are related to the respective producers.

ES=0
E AC
AR
MC
MR
L
P
2

U
O
R P
P
1

T S
Q
O
Y
1

P
3

QUANTITY OF OUTPUT
Of producer A, B, C
Different firms of oligopoly
X
Y
Y
2

Y
3

Industry
Output
PRICE
K
1

X
Y
KC
K
2

KC
K
2
C
K
3

Producer -B Producer -A
Producer -c

In the above diagram, OX is output and OY is price. Different demand lines represent
average revenues, which explain the possible revenues or profits of different player or
the producers of the product. Different k points represent different cornered points
of revenue. This shows that the revenue of the players is uncertain due to price
rigidity. Here the producers are not consistent and co-operative in fixing the price of
the commodity. Simply the above diagram says that the market determines the price
and output but not by price maker or producers under collusive market.
Firms often collude in an attempt to stabilize unstable markets, so as to reduce the
risks inherent in these markets for investment and product development. There are
legal restrictions on such collusion in most countries. There does not have to be a
formal agreement for collusion to take place (although for the act to be illegal there
must be a real communication between companies) - for example, in some industries,
there may be an acknowledged market leader which informally sets prices to which
other producers respond, known as price leadership.
Conclusion:
Oligopolistic competition can give rise to a wide range of different outcomes. In some
situations, the firms may collude to raise prices and restrict production in the same
way as monopoly. Where there is a formal agreement for such collusion, this is known
as a cartel. Thus oligopoly is an important imperfect competition concept. Concepts
show the important profits, like, co-operative pricing and variation in profits due to
competitiveness between producers.
Monopolistic Competition
Introduction:
Prof. Chamberlain (he is an American economist Edward Chamberlain (lived 1899-
1967) coined Monopolistic Competition. He has written a book called the theory of
monopolistic competition in 1933. It is the most appropriate imperfect competitive
market of the day. It is the combination of two extremities i.e. perfect competition
(infinite buyers and sellers) and monopoly single sellers and infinite buyers).
Monopolistic competition has two very important special features: namely
Advertisement Cost (or selling cost) and Product differentiation. (I.e. identical products
are different in character). This is the faculty of rational thought the discussion is
really thought provoking.
Definition:
According to Chamberlain, The demand for each good is not perfectly elastic.
Monopolistic firms command brand loyalty and therefore are not price-takers. Under
this form of competition, total product equals the sum of marginal cost and marginal
revenue.
Meaning
Here many sellers are competition with too many buyers. Monopolistic competition
differs from perfect competition in that production does not take place at the lowest
possible cost. Because of this, firms are left with excess production capacity.
Chamberlain (USA) and Robinson (Great Britain developed this market concept
Features:
Advertisement Cost:
They are a unique feature of monopolistic competition. Since products are
differentiated and may be varied from time to time advertising and other forms of sales
promotion become an integral part in making the goods.
Product Differentiation (also known simply as "differentiation") is the process of
distinguishing the differences of a product or offering from others, to make it more
attractive to a particular target market. This involves differentiating it from
competitors' products as well as one's own product offerings. the major sources of
product differentiation are as follows, Differences in quality which are usually
accompanied by differences in price, Differences in functional features or design,
Ignorance of buyers regarding the essential characteristics and qualities of goods they
are purchasing . Sales promotion activities of sellers and, in particular, advertising,
Differences in availability (e.g. timing and location)
Free entry and free exit: - In this circumstance any producer can enter into the
business and any bankrupt can close down the operation.
Large number of buyers: - here the numbers of sellers are large in number the can not
be countable.
Pricing:
1) Short term pricing which is of three types.
a) Normal Profit.
b) Super Normal Profit.
c) Stage of Loss.
2) Long run pricing.
Price determined during the long period of time is long run pricing. Under
monopolistic competition we find normal profit stage, because of free entry and exit.
Short run pricing under monopolistic competition:
Normal Profit
Under monopolistic competition revenue lines are similar to law of demand because
here producer is a private monopolist and a price maker. Whenever he increases the
price then the demand for the commodity decreases. Owing to this factor minimum
revenue is different from maximum revenue. Minimum revenue is also called marginal
revenue, which is less elastic which goes faster than average revenue. Average revenue
is also called maximum revenue where elasticity of demand is more than one (Ed > 1).
With the help of revenue line and cost line we can identify the price and output
determination under monopolistic competition. Here normal profit is not necessarily at
the point of equilibrium, which is similar to that of perfect competition, but normal
profit is always above the point of equilibrium, due to monopolistic feature. This can
be explained, with the help of a diagram.

Normal Profit Stage

MC
Q
L
AR
X
ES=0
PRICE
O
ED<1
AC
P
Y
MR
E

is Average Cost. ED is Average Revenue. Since, MR is different to AR, AR is measured
at point L. Therefore AR is pointed at L. and AC is also pointed at E. Consequently
minimum break even is at point L due to private sole trading concerns. In addition to
o that elasticity of supply is constant or zero due to short interlude of time. Therefore
OP = Price and OQ is output. It is presumed that point P itself is the point of
equilibrium as well as normal profit. Therefore OQ is output where Q, ES is supply
line OP is the Price.
Monopolistic competition always experiences the super normal profit stage in assured
circumstances, which can be expressed with help of diagram

Since, MR is different to AR; AR is measured at L point of equilibrium. Therefore AR is
pointed at L. and in the mean time AC is pointed at E. Therefore Benefit is greater
than to Cost. In other words point L is greater than point E. In addition to that
elasticity of supply is constant or zero due to short period of time. Since PP
1
LE is the
area of profit, OP
1
Stages of Loss:
Monopoly can also experience the stage of loss in indefinite circumstances. For
instance, if we assume that hydro electricity is monopoly, during the drought the unit
L
AC
MC
Q
AR
X
ES=0
PRICE
O
ED<1
P
P
1

Y
MR E

cannot generate electricity, so naturally during a short span of time the unit will
incurs loss, which can be explained with the help of a diagram.
Stage of Loss:

means Average Cost. Benefit is represented as Average Revenue. Since, MR is not
equal to AR; AR is measured at L point of equilibrium. Therefore AR is pointed at L.
and at the mean time AC is pointed at K. Therefore Benefit is lesser than to Cost. That
is point K is greater than the revenue point L. In addition to that elasticity of supply is
constant or zero due to short period of time. Since PP
1
LK is the area of loss, OP
1
=
Price and OQ is output.
Long period of time
Normal Profit is the only stage found under monopolistic competition during long
period of time. This is because in the long term whenever there is the profit, due to
free entry and exit, many producer come and start the same production and the
supernormal profit will be reduced to normal profit and during the long run loss the
company will close and few of them will remain those who get normal profit.
Normal Profit
Under monopolistic competition revenue lines are similar to law of demand because
here producer is a private monopolist and a price maker. Whenever he increases the
price then the demand for the commodity decreases. Owing to this factor minimum
revenue is different from maximum revenue. Minimum revenue is also called marginal
revenue, which is less elastic which goes faster than average revenue. Average revenue
is also called maximum revenue where elasticity of demand is more than one (Ed > 1).
With the help of revenue line and cost line we can identify the price and output
determination under monopolistic competition. Here normal profit is not necessarily at
the point of equilibrium, which is similar to that of perfect competition, but normal
MR
MC
Q
L
AR
X
ES=0
PRICE
O
ED<1
AC
P
P
1

Y
AVC
E
K
profit is always above the point of equilibrium, due to monopolistic feature. This can
be explained, with the help of a diagram.

Normal Profit Stage

is Average Cost. ED is Average Revenue. Since, MR is different to AR; AR is measured
at point L. Therefore AR is pointed at L. and AC is also pointed at E. Consequently
minimum break even is at point L due to private sole trading concerns. In addition to
that elasticity of supply is constant or zero due to short interlude of time. Therefore
OP = Price and OQ is output. It is presumed that point P itself is the point of
equilibrium as well as normal profit. Therefore OQ is output where Q, ES is supply
line OP is the Price.
Conclusion:
With the help of the above discussion it is clear that monopolistic competition is an
important competitive market situation. But monopoly has negatively influences on
concentration of wealth and resources in hands of a few people. That would be
resulted in the gap between the rich people and poor people. i.e. haves and have not s.
Influenced by this factor experts have identified the above stated monopolistic
competitive markets which is the simple mixture of perfect competition and monopoly.
Thus it is a real identification in the history of bloodthirsty marketplace at present.
Questions
1) What do you mean by oligopoly?
2) What are the features of oligopoly?
3) How the price and output are determined under competitive market?
4) How the price and output are determined under co-operative market?
5) What is duopoly?
6) What are the salient features of duopoly?
MC
Q
L
AR
X
ES=0
PRICE
O
ED<1
AC
P
Y
MR
E
7) Discuss the price and output determination under duopoly
8) Discuss the co-operative duopoly pricing.
9) Explain the importance of duopoly.
10) What is monopolistic competition?


Pricing techniques
I ntroduction:
Pricing decisions have a strategic importance. In any business organization
pricing owns the very flexibility of a mixing program, because it is only the element in
a making mine which is asking for demand and sales revenue. Price is the only
variable factor which determinants the revenue for income of an organization. Pricing
is an important function of marketing. Price is the exchange value of a product. It is
the amount of money or other products needed to acquire a product. Barter is the
exchange of products for other products. When developing a marketing program, an
organization can compete on the basis of price and non-price factors. In this
connection the discussion about price and pricing is really meaningful.
Definition:
According to Alfred Marshall Price is the exchange value of a product or
services. The consumer, the price is an agreement between the seller and the buyer
concerning, what each into receive Price with the mechanism. Device for
translating into quantitative terms is (Rs and Price) the perceived value of a product to
the customers at a point of time.
Meaning:
Price is the value of a product, which is popularly called maximum retail price,
which consists of both inner value (Cost of production) and market value. Pricing is
one of the four p's of the marketing mix. The other three aspects are product,
promotion, and place. It is also a key variable in microeconomic price allocation
theory. Price is the only revenue (profit center) generating element amongst the 4 ps,
the rest being cost centers. Pricing is the manual or automatic process of applying
prices to purchase and sales orders, based on factors such as: a fixed amount,
quantity break, promotion or sales campaign, specific vendor quote, price prevailing
on entry, shipment or invoice date, combination of multiple orders or lines, and many
others. Automated systems require more setup and maintenance but may prevent
pricing errors.
Pricing:
Pricing is a technique. It should not be too high level or too low but the price of a
commodity should be reasonable. Under capitalistic pattern pricing plays a vital role,
because of consumer security. Producers are expected to follow the instruction of
consumers. Pricing depends on bargaining power. Higher the bargaining power lowers
the price and vice versa. Thus pricing is an important element of Business economics.
Importance of pricing
Pricing involves asking questions like:-
What are the pricing objectives?
Do we use profit maximization pricing?
How to set the price?: (cost-plus pricing, demand based or value-based pricing,
rate of return pricing, or competitor indexing)
Should there be a single price or multiple pricing?
Should prices change in various geographical areas, referred to as zone pricing?
Should there be quantity discounts?
What prices are competitors charging?
Do you use a price skimming strategy or a penetration pricing strategy?
What image do you want the price to convey?
Do you use psychological pricing?
How important are customer price sensitivity (e.g. "sticker shock") and elasticity
issues?
Can real-time pricing be used?
Is price discrimination or yield management appropriate?
Are there legal restrictions on retail price maintenance, price collusion, or price
discrimination?
Do price points already exist for the product category?
How flexible can we be in pricing
Answer to above all the questions is the analysis of price and pricing techniques.
Pricing is also useful to determine the future profits, and to analyze demands supply
for product, enhancement of Market, consumers justification, and to control the
people through government and so on.
Objectives of pricing:
1. To expand the Growth in sales.
2. To enhance the Net shares. Or current profit maximization
3. To Control of the Cash flow.
4. Predetermined profit level.
5. Quantity maximization
6. Survival of the organization
Pricing Policies:
Any rules and regulation prescribed to find the price of a product is called pricing
policy. Pricing policy refers to fixing price for a right product at a right place and at a
right time. A price policy is the standing answer of the firm to recurring problems of
pricing.

Different technique of pricing:
Multiple product pricing:
It refers to a pricing policy, where one seller, for the different products fixes different
prices, depending upon the demand for the product. E.g. Tata Industry is producing,
different products like Tata tea, Tata salt Tata tools etc. this can be explained
diagrammatically.

AR=D
AR=D
AR=D
AC=D
P
R
I
C
E
AC=S
E
Product D Product A
Product B Y
O
X
Industry

Let us consider two parts of the diagram, one is industry another one is individual
products like A, B, C Units. Here vertical anis is quantity in units. OY = price. E =
equilibrium where aggregate demand cuts aggregate demand. Break even is measured
at this point. Equilibrium stage is elaborated to other parts of diagram. Here
producer is expecting Super Normal Profit, which is more than that of market
equilibrium, by selling the product A. But contrarily the profit margin is relatively low
in the case of product D. still he may get supernormal profit. Thus one seller, for the
different products fixes different prices, depending upon the demand for the product,
which is popularly called multi-product pricing.

Cost plus pricing:
1. It is the combination of all the cost incurred during the process of
production. It is also called total cost pricing. It also indicates mark-up pricing. Here
different types of cost such as marginal cost, fixed cost variable cost advertisement
cost etc., are added to fix the price of a commodity.

Pricing for a New Product:
Suppose price of a product is fixed for newly invented / discovered product is
called new product pricing. It is of various types. The below diagram represents, the
levels of price in different types of prices: -

Types of pricing Features
Skimming price High price
Retention Price Government max. Price
Flexible Price Medium price
Floating Price Stock-sensex price
Discounted Price Reduced price
Supportive Price Govt. min, price
Penetrating Price Low price
Loss Leader Price Loss price

Pricing strategy for a new product should be developed so that the desired impact on
the market is achieved while the emergence of competition is discouraged. Two basic
strategies that may be used in pricing a new product are skimming pricing and
penetration pricing.
Skimming Price:
Charge a high price because you have a substantial competitive advantage. However,
the advantage is not sustainable. The high price tends to attract new competitors into
the market, and the price inevitably falls due to increased supply. Manufacturers of
digital watches used a skimming approach in the 1970s. Once other manufacturers
were tempted into the market and the watches were produced at a lower unit cost,
other marketing strategies and pricing approaches are implemented.
Skimming pricing is the strategy of establishing a high initial price for a product
with a view to skimming the cream off the market at the upper end of the demand
curve. It is accompanied by heavy expenditure on promotion. A skimming strategy
may be recommended when the nature of demand is uncertain, when a company has
expended large sums of money on research and development for a new product, when
the competition is expected to develop and market a similar product in the near
future, or when the product is so innovative that the market is expected to mature
very slowly.

The high price also helps segment the market. Only non-price-conscious customers
will buy a new product during its initial stage. Later on, the mass market can be
tapped by lowering the price. If there are doubts about the shape of the demand curve
for a given product and the initial price is found to be too high, price may be slashed.

For a financially weak company, a skimming strategy may provide immediate relief.
This model depends on selling enough units at the higher price to cover promotion and
development costs.
At the time of its introduction in 1978, Smith Kline Beechams anti-ulcer drug,
Tagamet, was priced as high as $10 per unit. By 1990, the price came down to less
than $2; it was sold for about 60 cents in 1994. The decision about how high a
skimming price should be depends on two factors: (a) the probability of competitors
entering the market and (b) price elasticity at the upper end of the demand curve
Limitations
A price skimmer must be careful with the law. Price discrimination is illegal in
many jurisdictions. Marketers see this legal distinction as quaint since in almost all
cases market characteristics correlate highly with product characteristics. If using a
skimming strategy, a marketer must speak and think in terms of product
characteristics in order to stay on the right side of the law.
The inventory turn rate can be very low for skimmed products. This could cause
problems for the manufacturer's distribution chain. It may be necessary to give
retailers higher margins to convince them to enthusiastically handle the product.
Skimming encourages the entry of competitors. When other firms see the high
margins available in the industry, they will quickly enter.
The manufacturer could develop negative publicity if they lower the price too
fast and without significant product changes. Consumers will feel it would have
been better to wait and purchase the product at a much lower price. This negative
sentiment will be transferred to the brand and the company as a whole.
High margins may make the firm inefficient. There will be no incentive to keep
costs under control. Inefficient practices will become established making it difficult to
compete on value or price.
This can be explained with a diagram.

Explanation
Y
Price is coming down from the peak
=Skimming price
O
X
Units
P
R
I
C
E
The diagram represents that the initial price is very high; during the course of action it
tends to diminish.
Penetrating Price:
It is the strategy of entering the market with a low initial price so that a greater share
of the market can be captured. The penetration strategy is used when an elite market
does not exist and demand seems to be elastic over the entire demand curve, even
during early stages of product introduction. High price elasticity of demand is
probably the most important reason for adopting a penetration strategy. The
penetration strategy is also used to discourage competitors from entering the market.
One may also turn to a penetration strategy with a view to achieving economies of
scale. Savings in production costs alone may not be an important factor in setting low
prices because, in the absence of price elasticity, it is difficult to generate sufficient
sales. Finally, before adopting penetration pricing, one must make sure that the
product fits the lifestyles of the mass market. For example, although it might not be
difficult for people to accept imitation milk, cereals made from petroleum products
would probably have difficulty in becoming popular. How low the penetration price
should be differs from case to case.
Du. Pont, Dow Chemical Company stresses penetration pricing. It concentrates on
lower-margin commodity products and low prices, builds a dominant market share,
and holds on for the long haul. Texas Instruments also practices penetration pricing.
Texas Instruments starts by building a large plant capacity. By setting the price as low
as possible, it hopes to penetrate the market fast and gain a large market share.
Penetration pricing reflects a long-term perspective in which short-term profits are
sacrificed in order to establish sustainable competitive advantage. Penetration policy
usually leads to above-average long-run returns that fall in a relatively narrow range.
Price skimming, on the other hand, yields a wider range of lower average return.
Penetrating Price can be explained with a diagram.

Explanation
The diagram represents that the initial price is very low; and during the course of
action it tends to increase.
Relationship with penetration pricing, and skimming pricing
The diagram pricing strategy matrix highlights about four types of pricing in any
market. The diagram says that when the price and quality are low then it is said to be
economy pricing, when price is low and quality is high is said to be penetration
Y
Price is going to peak
From the bottom
=Penetrating price
O
X
Price
Units
pricing, when the high price and low quality are meeting is known as skimming and
price and quality are very high then it is premium pricing.

Fixed Pricing:
When the price of the product is fixed and cannot be bargained is known as fixed
pricing. Ex. branded items. It is of three types
Cost oriented pricing, which includes cost plus (or full cost) pricing.
Marginal (or incremental / direct) cost pricing.
Competition oriented pricing such as going rate pricing, loss leader
pricing, trader association pricing.
Pricing based on other economic considerably like the administered
pricing, dual pricing, and price discrimination.
Floating Price:
Suppose the price floats sensationally (Suppose the price changes per second) Ex.
Stock Exchange. Currency exchange rate is determined by free market forces, rather
than being fixed by a government that results in floating price.
Discounting Price:
Suppose the price of the product is discounted to Maximum Retail Price is called
discounted price. Best example is trade discounts especially wholesale dealers.
Supportive Price:
Suppose price of a commodity is controlled and fixed by government to help the
producer. For Example vegetable vendors, Sugar cane and so on.
Loss Leader Pricing:
This approach is widely used in vegetable concerns. This pricing may be
confused with pricing, which results in losses but is a policy, which aims at increasing
profit. The definition of loss leader therefore can at but be little complicated according
to Haynes & Henry loss leader pricing is an item which produces a less than
customers contribution or a negative contribution to overhead. But which is affected
to create profit on increase future, sales or sales of other items. A loss leader is a
product that has a price set below the operating margin. This results in a loss to the
enterprise on that particular item, but this is done in the hope that it will draw
customers into the store and that some of those customers will buy other, higher
margin items.
Economy Pricing:-This is a no frills low price. The cost of marketing and manufacture
are kept at a minimum. Supermarkets often have economy brands for soups,
spaghetti, etc.
Psychological Pricing:-This approach is used when the marketer wants the consumer
to respond on an emotional, rather than rational basis. For example 'price point
perspective' 99 cents not one dollar
Product Line Pricing:-Where there is a range of product or services the pricing reflect
the benefits of parts of the range. For example car washes. Basic wash could be $2,
wash and wax $4 and the whole package $6.
Optional Product Pricing:-Companies will attempt to increase the amount customer
spend once they start to buy. Optional 'extras' increase the overall price of the product
or service. For example airlines will charge for optional extras such as guaranteeing a
window seat or reserving a row of seats next to each other.
Captive Product Pricing:-Where products have complements, companies will charge a
premium price where the consumer is captured. For example a razor manufacturer
will charge a low price and recoup its margin (and more) from the sale of the only
design of blades which fit the razor.
Product Bundle Pricing:-Here sellers combine several products in the same package.
This also serves to move old stock. Videos and CDs are often sold using the bundle
approach.
Promotional Pricing:-Pricing to promote a product is a very common application. There
are many examples of promotional pricing including approaches, as BOGOF (Buy One
Get One Free).
Geographical Pricing:-Geographical pricing is evident where there are variations
inprice in different parts of the world. For example rarity value, or where shipping
costs increase price.
Value Pricing:-This approach is used where external factors such as recession or
increased competition force companies to provide 'value' products and services to
retain sales e.g. value meals at McDonalds.
Product life cycle Pricing:-Suppose the price is fixed on the stage of the product life
stage is called Product life cycle pricing. This is explained with the help of the below
diagram.

The introduction pricing as explained earlier may be skimming and penetrating price.
During the growth and maturity stage retention price, fixed price flexible price are
S
a
le
s
Time
used. During the decline stage loss leaders pricing, discounted price, psychological
price etc are used

Explanation
The diagram represents the loss leader pricing which is based on the product life
pricing. It is identified here is when the product is in the declining stage then the
producer, modifies the product and sells the product. This is popularly called
modification pricing. For example, floppy is modified as Compaq disk, again modified
as pen drive etc.
Uses of price mechanism
The Price Mechanism is perhaps the most basic feature of the market economy for
allocating resources to various uses. It is the system in a market economy whereby
the decisions of producers determine the supply of commodity and the decisions of
buyers determine the demand. The interaction between the consumers demand for a
good and the supply of that good by a producer determine the price.
The price mechanism can only function fully within a free market economy thereby
ensuring the allocation of all resources without the need for government intervention.
Adam Smith referred to this pursuit of self-interest as the Invisible Hand.
Summary
The concepts of pricing are really useful to understand market sensations and to act
accordingly to earn maximum profit. To analyze the effectiveness of the price
mechanism within the free market it should be compared to alternative market prices.
The economy works on the principle that instead of having to rely on the decisions of
millions of individuals, the government actively manages the economy in the interests
of society. It directs the nations resources in accordance with specific national goals.
Questions
1. What is price?
2. What is pricing?
3. What is the difference between skimming and penetrating price?
4. Which are the different kinds of pricing techniques?
5. What are the objectives of pricing?
6. Discuss the utility of pricing techniques.
Product modification
Time
Price\sales
Y
O
X

BREAK EVEN ANALYSIS
INTRODUCTION:-
The break even analysis has considerable significance for economic research, business
decision making, business management, investment analysis and public policy. The
break analysis even analysis is an important technique to trace the relationship
between cost, revenues and profit at the varying levels as output or sales.
DEFINITION:-
ACCORDING TO Joel DEAN,
The break even analysis presents flexible projections of the impact of the volume of
output upon cost, revenue and projects. As such, it provides an important bridge
between business behavior and economic theory of the firm.
MEANING:-
In break even analysis the break even point is located at the level as the output or
sales at which the net income or profit is zero. At this point total cost is equal to the
total revenue. Hence, the BEP is no profit-no loss zone.
OBJECTIVES:-
1. To understand the functional relationship
2. To understand the relationship among cost
3. To understand the relationship among revenue
4. To understand the relationship among rate of output
BREAKK EVEN CHART:-
In recent years the break even charts have been widely used by business economist,
government agencies and even trade unions.
The break even chart is a group of the total short run relation to the volumes of total
cost and of total revenue to the rate of output and sales.
The BEC graphically shows cost and revenue relations to the volume of output. In
thus depicts profit output relationship. Here the BEC is also called project group.

In the above diagram OX is output or sales and OY axis represents total cost and total
revenues. The area between TR curve and TC curve depicts the project function. It
follows that the firm incurs loss when it produce output below OQ level. OQ level as
output is at break even point of no profit, no loss when it expands further output, it
makes profit.
The break even chart is an excellent instrument panel for guidance of the business
manager or businessman in determining the profitable output and controlling the
business.
AN ALTERNATIVE FORM OF BREAK EVEN CHART:-
Sometimes an alternative form of the break even chart is drawn the variable cost
function from the horizontal axis and the adding total fixed cost function or curve as
shown in the below diagram.

We get similar information as in the traditional break even chart. However this
alternative form of BEC is better for providing a ready reference to the contribution to
fixed cost and profit.

FORMULA OR Proforma METHOD FOR DETERMINIG BEP:-Viewing in terms of per
unit cost and revenue.
The BEP is located at the level of output at which the price or average revenue is
equal to the average cost. Thus, the selling price should cover the average cost in fall
as well as part as the fixed cost. The price as the excess other (AVC) is regarded as a
contribution margin per unit which contributes towards the fixed cost. Thus, the BEP
is spotted at a point where a sufficient number as units of output produced so that its
total contribution margin becomes equal to the fixed cost. Hence we may give the
formula as under.

Where, BEP= break even point, TFC=total fixed cost, P= selling price, AVC=average
variable cost

BEP IN TERMS OF SALES VOLUME:-
When the firm is multi product firm then BEP is to be measured in terms of sales
volume by expressing the contribution margin to sales. Thus,

Here the contribution ratio is measured as
contribution ratio
CR=
ASSUMPTIONS OF BREAK EVEN ANALYSIS:-
1. The cost function and revenue function are linear.
2. The total cost is divided into fixed and variable costs.
3. The selling price is constant.
4. The volume of sales and volume of production are identical.
5. Average to marginal productivity of factors is constant.
6. The product mix is stable in the case of multi product firm.
7. Factor price is constant.
MERITS OF BREAK EVEN ANALYSIS:-
1. BEA provides microscopic view of the profit structure of the firm.
2. Empirical cost functions required in BEA can be as a great help for cost control in
business.
3. The BEA when it provides a flexible set of productions of costs and revenue under
expected future conditions can serve the purpose of profit prediction and becomes a
tool for profit making.
4. The BEA can be useful in determining the target project sales volume.
5. It is useful in arriving at make or buy decision.
In short, BEA is highly significant in business decision making pertaining to pricing
policies, sales projection, capital budgeting etc. However the techniques are to be used

DEMERITS OF BREAK EVEN ANALYSIS:-
1. It is static and not dynamic.
2. It is unrealistic and based on numbers of assumption which are not real.
3. It has many short comings.
4. It scope is limited to short run only.
5. It assume horizontal demand curve with the given price of a product.
6. It is difficult to handle selling costs in the break even analysis.
7. The traditional BEA is very simple.
c) The following information is extracted form the records of ABC Ltd. FC = 50,000,
selling price/unit=10rs, VC=6Rs.find the following:- i) P/V Ratio. ii) BEP in values,
BEP in units, margin of safety when an actual sales is 15000
Solution to the problem
1) Step
Sales variable cost==contribution
10-6=4=contribution
2
)
Step
Priced volume ratio=c/salesX100
4/10X100=.4
Bep in values =fixed cost /pv ratio
3) Step
Bep in units =fixed cost/priced volume ratio
50000/4=12,500 units x selling
12500X10=125000
5) Step
Margin of safety=actual sales BE sales
15000-12500units
Or 50000/.4=125,000rs

CONCLUSION:-
The break even analysis is a guide part to firms economic performance and
expression. BEP indicates zero profit position which is the start marching point
towards profitability of the business venture. BEA is determined when total revenue
equalizes total cost. At this point marginal cost equals marginal revenue.

Problems related to business economics

PROBLEMS ON market EQUILIBRIUM based on variation
1)
Qd = 40,000-20p

= 40,000-20*400
Solution:

= 40,000-8,000
40,000-20p = 20,000+30p Qd = 32,000
-20p-30p = 20,000-40,000 Qs= 20,000+30p
-50p = -20,000 = 20,000+30*400
P = -20,000/-50 = 20,000+12,000
P= 400 Qs= 32,000

X 300 400 500 600
Y 34,000 32,000 30,000 28,000
From the above table we can come to know that an increase in price leads to decrease
in demand.

From the above table we can come to know that an increase in price leads to increase
in sales.

X 300 400 500 600
Y 29,000 32,000 35,000 38,000
Qd = 40,000-20p
Qs = 20,000+30p

Qd= 40,000-20p
Qs= 20,000+30p
0
5000
10000
15000
20000
25000
30000
35000
40000
0 200 400 600 800

X axis represents quantity demanded and y axis represents price. The line slops
downward from right to left is demand line and the other is supply line which is
showing an upward slop. From the above graph we can conclude that both demand
line and supply line intersect at a point i.e. at 400 and 32000. This point is called
equilibrium point.
Conclusion:
it is clear that both demand line and supply line will intersect at a point called
equilibrium

2)
Qd= 30,000-20p Qd= 30,000-20p
Qs=20,000+30p = 30000-20(200)
30000-20p=20000+30p Qd= 26000
-20p-30p=20000-30000 Qs= 20000+30p
-50p=-10000 = 20000+30(200)
P=-10000/-50 Qs= 26000
P=200

X 100 200 300
Y 28000 26000 24000
From the above table it is clear that when price goes on decreases the demand
increases i.e when price is at 300 the demand is at 24000 when price declines to
100the demand increases to 28000.

X 100 200 300
Qd=30000-20p
Qs= 20000+30p

Y 23000 26000 29000
From the above table it is clear that when price increaese supply also increases i.e
when price is at 100 supple ts at 23000 and when price increases to 300 even the
supply also increases to 29000.

Here x axis represents quantity demanded and y axis represents price. The line slops
downward from right to left is demand line and the other is supply line which is
showing an upward slop. From the above graph it is clear that both demand line and
supply line are intersecting at a same point i.e 200 and 26000 which is the point of
market equilibrium.
Conclusion: it is clear that both demand line and supply line will intersect at a point
called equilibrium.

3), Qd=400-4p where p = 10 Qd= 400-4p where p=12
= 400-4*10 = 400-4*12
Qd= 360 Qd = 352
Qd= 400-4p where p= 15 Qd= 400-4p where p= 20
=400-4*15 = 400-4*20
Qd= 340 Qd= 320

X 10 12 15 20
Y 360 352 340 320
The above table shows that when price is at 10 the demand is at 360. When price
increases to 20 the demand decreases to 320.
Qd=400-4p

Here X axis represents quantity demanded and y axis represents price. It shows a
decling demand line from left to right.
Conclusion: from the above problem it is clear that when there is an increace in price
for a commodity there will a dicline in the demand.
4)Qd=1500+0.09 AE-0.03p where AE= 10,000
=1500+0.09*10000-0.03p

Qd=2400-0.03p where p= 10,000 Qd=2400-0.03p where p=
12,000
=2400-0.03*10,000 = 2400-0.03*12,000
Qd=2100 Qd = 2040
Qd=2400-0.03p where p= 15,000 Qd=2400-0.03p where p= 20,000
= 2400-0.03*15,000 = 2400-0.03*20,000
Qd= 1950 Qd= 1800

X 10000 12000 15000 20000
Y 2100 2040 1950 1800

Qd=2400-0.03p
Qd=2400-0.03p

here X axis represents quantity demanded and y axis represents price. itshows a
Conclusion: from the above problem it is clear that when there is an increace in price

5) Qd=2400-0.03p where p= 10,000 Qd=2400-0.03p where p=
9,000
= 2400-0.03*10000 = 2400-0.03*9000
Qd =2100 Qd =2130
Qd= 2400-0.03p where p= 8,000 Qd=2400-0.03p where p =
7,000
= 2400-0.03*8000 = 2400-0.03p*7000
Qd = 2160 Qd = 2190
where p=6,000
=2400-0.03*6000
Qd =2220

X 6000 7000 8000 9000 10000
Y 2220 2190 2160 2130 2100
Qd= 2400-0.03p

Here X axis represents quantity demanded and y axis represents price. it shows a
Conclusion:From the above problem it is clear that when there is an increace in price

Income and supply relation
Problem on Nithya foods.
Solution: (i)
Q=500+0.02(i) where i=10,000 Q=500+0.02(i) where i=20,000
= 500+0.02(10000) = 500+0.02(20000)
= 500+200 = 500+400
=700 = 900
Q=500+0.02(i) where i=25,000
= 500+0.02(25000)
= 1000
(ii) 500+0.02(15000)= 800
500+0.02(25000)=1000
(iii) 500+0.02(15000)=800
500+0.02(20000)=900
500+0.02(25000)=1000

X 10000 15000 17500 20000 25000
Y 700 800 850 900 1000
In the above table we have income i.e. Rs.10000/- and supply is 700, and when
income is Rs.25000/- supply is at 1000.
.

Here X axis represents income and y axis represents supply. The graph shows a
upward sloping line.
Conclusion: As and when the income increases there is an increase in supply also.

6) Qs=20+30p where p= 40 0+30p where p= 30
= 20+30*40 = 20+30*30
Qs = 1220 Qs = 920
where p= 50
= 20+30*50 = 1520

X 30 40 50
Y 920 1220 1520

Here X axis represents supply and y axis represents price. The supply line is rising
from left to right.
Conclusion: From the above problem it is clear that when there is an in price for a
commodity there will an increace in the quantity supply.
Qs= 20+30p

PROBLEMS ON DEMAND FORECASTING [REGRATION]
LEAST SQURE METHOD
1) Analyze the future method with the help of statistics
Years Sales(f) X fx x
2
2003 10 -2 -20 4
2004 20 -1 -20 1
2005 30 0 0 0
2006 40 1 40 1
2007 50 2 100 4
2008 3
f=150 fx=100 x
2
=10

Y=mx+c c=f/n 150/5= 30
= 10*3+30 M= fx/x
2
100/10=10
Y= 60
2)Solution;
Years Sales(f) x fx x
2

2005 10 -1 -10 1
2006 20 0 0 0
2007 30 1 30 1
2008 2
2009 3
2010 4
2011 5
2012 6
60 20 2
Y=mx+c c=60/3 =20
2008 =10*2+20 m=20/2 =10
=40
2009=10*3+20 =50 2010= 10*4+20= 60 2011= 10*5+20= 70
2012=10*6+20 = 80
X 2008 2009 2010 2011 2012
Y 40 50 60 70 80
Here table explains the relationship between demand in different years. First colounm
represents the year second couum represents the seles of the product during different
years From the above table it is clear that as the the demand increases the

Conclusion: Here X axis represents years and y axis represents demand. The above
graph shows a increasing demand line.
3) find out the demand for the product for next 2 years
Years Sales(f) x Fx x
2

1990 83 -2 -166 4
91 92 -1 -92 1
92 71 0 0 0
93 90 1 90 1
94 165 2 330 4
95 200 3 600 9
96 4
97 5
701 762 19

Y=mx+c c=701/6= 117
1996= 40*4+117 =277 m=762/19= 40
1997=40*5+117=317
X 90 91 92 93 94 95 96 97
Y 83 92 71 90 165 200 277 317

Conclusion: Here X axis represents years and y axis represents demand.

4) find the demand for next month/year
Years f x fx x
2
05 5 -2 -10 4
06 10 -1 -10 1
07 15 0 0 0
08 20 1 20 1
09 25 2 50 4
10 3
75 50 10
Y=mx+c c=75/5=15 m= 50/10=5
= 5*3+15
Y=30

X 05 06 07 08 09 10
Y 5 10 15 20 25 30

Conclusion: Here X axis represents years and y axis represents demand.
MOVING AVERAGES
1) the table shows the monthly demand over 6months peroid for a product.
Month Demand 3months moving
total
3months moving
average
1 120
2 130
3 110 120+130+110=360 360/3=120
4 140 130+110+140=380 380/3=126.67
5 110 110+140+110=360 360/3=120
6 130 140+110+130=380 380/3=126.67

126.67 is the 7
th
month demand for the above given product.

Conclusion: Here in the above graph the X axis represents months and y axis
represents demand. The curve with red color is 3 months moving total and the curve
with black line is 3 months moving average.
Weighted moving average demand forecasting

Month Demand 3months total
weight
3months average
weight
1 120
2 130
3 110 120+130+110=710 710/3=118.33
4 140 770 128.33
5 110 720 120
6 130 750 125

Demand forecaste for 7
th
month is


Conclusion: Here in the above graph the X axis represents months and y axis
represents demand. The curve with green color is 3 months total and the curve with
blue line is 3 months weighted average.

Example: The price of coffee increases from Rs.50per k.g. to Rs.70per k.g. and as a
result the demand for tea increases from 5Rs to 10Rs . What Ed. of tea for coffee
c) The following information is extracted form the records of ABC Ltd. FC = 50,000,
selling price/unit=10rs, VC=6Rs.find the following:- i) P/V Ratio. ii) BEP in values,
BEP in units, margin of safety when an actual sales is 15000 (10)

Solution to the problem
1) Step
Sales variable cost==contribution
10-6=4=contribution
2
)
Step
Priced volume ratio=c/salesX100
4/10X100=.4
Bep in values =fixed cost /pv ratio
3) Step
Bep in units =fixed cost/priced volume ratio
50000/4=12,500 units x selling
12500X10=125000
5) step
Margin of safety=actual sales BE sales
15000-12500units
Or 50000/.4=125,000rs

Dr. Narasimha Murthy M.S. a postgraduate in Economics and Business
Administration from Mysore University. He is a Sanskrit scholar. He has obtained M.
Phil, Degree at Madurai Kamaraj University, Madurai. At present, he is working as an
Assistant Professor, and HOD at BMS First Grade College, Konanur, Hassan. He has
conducted as well as attended many National level and State level seminars.
(msnemails@ gmail.com)

Dr. Narasimha Murthy M.S.

M.A., M.B.A. M.phil,Ph.d.
Assistant Professor and HOD
Bms First Grade College, Konanur, Hassan
E-mail: msnemails@ gmail.com

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