ECONOMICS

SCOPE OF MANAGERIAL ECONOMICS:

The scope of managerial economics is not yet clearly laid out because it is a developing science. Even then the
following fields may be said to generally fall under Managerial Economics:
1. Demand Analysis and Forecasting
. !ost and "roduction Analysis
#. "ricing Decisions$ "olicies and "ractices
%. "rofit Management
&. !apital Management
These divisions of business economics constitute its sub'ect matter.
(ecently$ managerial economists have started ma)ing increased use of *peration (esearch methods li)e +inear
programming$ inventory models$ ,ames theory$ -ueuing up theory etc.$ have also come to be regarded as part of
Managerial Economics.

1.Demand Analysis and Forecastin: A business firm is an economic organisation which is engaged in transforming
productive resources into goods that are to be sold in the mar)et. A ma'or part of managerial decision ma)ing depends on
accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production
schedules and employing resources. .t will help management to maintain or strengthen its mar)et position and profit base.
Demand analysis also identifies a number of other factors influencing the demand for a product. Demand analysis and
forecasting occupies a strategic place in Managerial Economics.
!.Cost and "rod#ction analysis: A firm/s profitability depends much on its cost of production. A wise manager would
prepare cost estimates of a range of output$ identify the factors causing are cause variations in cost estimates and choose
the cost0minimising output level$ ta)ing also into consideration the degree of uncertainty in production and cost
calculations. "roduction processes are under the charge of engineers but the business manager is supposed to carry out the
production function analysis in order to avoid wastages of materials and time. 1ound pricing practices depend much on
cost control. The main topics discussed under cost and production analysis are: !ost concepts$ cost0output relationships$
Economics and Diseconomies of scale and cost control.
$.Pricin decisions% "olicies and "ractices: "ricing is a very important area of Managerial Economics. .n fact$ price is the
genesis of the revenue of a firm ad as such the success of a business firm largely depends on the correctness of the price
decisions ta)en by it. The important aspects dealt with this area are: "rice determination in various mar)et forms$ pricing
methods$ differential pricing$ product0line pricing and price forecasting.
&.Pro'it manaement: 2usiness firms are generally organi3ed for earning profit and in the long period$ it is profit which
provides the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty bearing and
ris) ta)ing. A successful business manager is one who can form more or less correct estimates of costs and revenues li)ely
to accrue to the firm at different levels of output. The more successful a manager is in reducing uncertainty$ the higher are
the profits earned by him. .n fact$ profit0planning and profit measurement constitute the most challenging area of
Managerial Economics.
(.Ca"ital manaement: The problems relating to firm/s capital investments are perhaps the most comple4 and
troublesome. !apital management implies planning and control of capital e4penditure because it involves a large sum and
moreover the problems in disposing the capital assets off are so comple4 that they re-uire considerable time and labour.
The main topics dealt with under capital management are cost of capital$ rate of return and selection of pro'ects.
Concl#sion: The various aspects outlined above represent the ma'or uncertainties which a business firm has to rec)on
with$ vi3.$ demand uncertainty$ cost uncertainty$ price uncertainty$ profit uncertainty$ and capital uncertainty. 5e can$
therefore$ conclude that the sub'ect0matter of Managerial Economics consists of applying economic principles and
concepts towards ad'usting with various uncertainties faced by a business firm
IMPOR)ANCE OF )*E S)+D, OF MANAGERIAL ECONOMICS
The following points indicate the significance of the study of this sub'ect in its right perspective.
1. .t gives guidance for identification of )ey variables in decision0ma)ing process.
. .t helps the business e4ecutives to understand the various intricacies of business and managerial problems and to
ta)e right decision at the right time.
#. .t provides the necessary conceptual$ technical s)ills$ toolbo4 of analysis and techni-ues of thin)ing and other
such most modern tools and instruments li)e elasticity of demand and supply$ cost and revenue$ income and
e4penditure$ profit and volume of production etc to solve various business problems.
%. .t is both a science and an art. .n the conte4t of globali3ation$ privati3ation$ liberali3ation and mar)eti3ation and a
highly competitive dynamic economy$ it helps in identifying various business and managerial problems$ their
causes and conse-uence$ and suggests various policies and programs to overcome them.
&. .t helps the business e4ecutives to become much more responsive$ realistic and competent to face the ever
changing challenges in the modern business world.
6. .t helps in the optimum use of scarce resources of a firm to ma4imi3e its profits.
7. .t also helps in achieving other ob'ectives a firm li)e attaining industry leadership$ mar)et share e4pansion and
social responsibilities etc.
8. .t helps a firm in forecasting the most important economic variables li)e demand$ supply$ cost$ revenue$ price$
sales and profit etc and formulate sound business polices
9. .t also helps in understanding the various e4ternal factors and forces which affect the decision0ma)ing of a firm.
Thus$ it has become a highly useful and practical discipline in recent years to analy3e and find solutions to various
)inds of problems in a systematic and rational manner.
-NO.LEDGE OF DECISION MA-ING AND FOR.ARD PLANNING
Managerial Economist is a specialist and an e4pert in analy3ing and finding answers to business and managerial problems.
A Managerial Economist has to perform several functions in an organi3ation. Among them$ decision0ma)ing and forward
planning are described as the two ma'or functions and all other functions are derived from these two basic functions.
1. Decision/ma0in
The word :decision/ suggests a deliberate choice made out of several possible alternative courses of action after carefully
considering them. Decision0ma)ing is essentially a process of selecting the best out of many alternative opportunities or
courses of action that are open to a management.
!. For1ard "lannin
The term :planning/ implies a consciously directed activity with certain predetermined goals and means to carry them out.
It is a deli2erate acti3ity. It is a "rorammed action. 4asically "lannin is concerned 1it5 tac0lin '#t#re sit#ations
in a systematic manner.
Forward planning implies planning in advance for the future. It is associated 1it5 decidin t5e '#t#re co#rse o'
action o' a 'irm. It is "re"ared on t5e 2asis o' "ast and c#rrent e6"erience o' a 'irm.
S#mmary
Managerial economics is a new and a highly speciali3ed branch of economics. .t brings together economic theory and
business practice. .t assists in applying various economic theories and principles to find solutions to business and
management problems.
PORTERS 5 FORCES MODEL
Porter7s 'i3e 'orces model helps in accessing where the power lies in a business situation. Porter7s Model is
actually a 2#siness stratey tool that helps in analy3ing the attractiveness in an industry structure. .t let you
access current strength of your competitive position and the strength of the position that you are planning to
attain.
Porters Model is considered an important part of planning tool set. 5hen you/re clear about where the power
lies$ you can ta)e advantage of your strengths and can improve the wea)nesses and can compete efficiently and
effectively.
Porters model o' com"etiti3e 'orces assumes that there are 'i3e com"etiti3e 'orces that identifies the
competitive power in a business situation. These 'i3e com"etiti3e 'orces identi'ied 2y t5e Mic5ael Porter are:
1. Threat of substitute products
. Threat of new entrants
#. .ntense rivalry among e4isting players
%. 2argaining power of suppliers
&. 2argaining power of 2uyers
1. )*REA) OF S+4S)I)+)E PROD+C)S
)5reat o' s#2stit#te "rod#cts means how easily your customers can switch to your competitors product.
)5reat o' s#2stit#te is 5i5 when:
There are many substitute products available
!ustomer can easily find the product or service that you/re offering at the same or less price
;uality of the competitors/ product is better
1ubstitute product is by a company earning high profits so can reduce prices to the lowest level.
.n the above mentioned situations$ C#stomer can easily s1itc5 to s#2stit#te "rod#cts. 1o substitutes are a
threat to your company. 5hen there are actual and potential substitute products available then segment is
unattractive. "rofits and prices are effected by substitutes so$ there is need to closely monitor price trends. .n
substitute industries$ if competition rises or technology moderni3es then prices and profits decline.
!. )*REA) OF NE. EN)RAN)S
A ne1 entry o' a com"etitor into your mar)et also wea)ens your power. )5reat o' ne1 entry de"ends #"on
entry and e6it 2arriers. Threat of new entry is high when:
!apital re-uirements to start the business are less
Few economies of scale are in place
!ustomers can easily switch <low switching cost=
>our )ey technology is not hard to ac-uire or isn/t protected well
>our product is not differentiated
There is variation in attractiveness of segment depending upon entry and e4it barriers. That segment is more
attractive which has high entry barriers and low e4it barriers.
1ome new firms enter into industry and low performing companies leave the mar)et easily. 5hen both entry
and e6it 2arriers are high then profit margin is also high but companies face more ris) because poor
performance companies stay in and fight it out. 5hen these barriers are low then firms easily enter and e4it the
industry$ profit is low. The worst condition is when entry barriers are low and e4it barriers are high then in good
times firms enter and it become very difficult to e4it in bad times.
$. IND+S)R, RI8ALR,
Ind#stry ri3alry mean the intensity of competition among the e4isting competitors in the mar)et. .ntensity of
rivalry depends on the number of competitors and their capabilities. Ind#stry ri3alry is 5i5 15en:
There are number of small or e-ual competitors and less when there/s a clear mar)et leader.
!ustomers have low switching costs
.ndustry is growing
E4it barriers are high and rivals stay and compete
Fi4ed cost are high resulting huge production and reduction in prices
These situations ma)e the reasons for advertising wars$ price wars$ modifications$ ultimately costs increase and
it is difficult to compete.
&. 4ARGAINING PO.ER OF S+PPLIERS
4arainin Po1er o' s#""lier means how strong is the position of a seller. ?ow much your supplier have
control over increasing the "rice of supplies. S#""liers are more "o1er'#l 15en
1uppliers are concentrated and well organi3ed
a few substitutes available to supplies
Their product is most effective or uni-ue
1witching cost$ from one suppliers to another$ is high
>ou are not an important customer to 1upplier
5hen suppliers have more control over supplies and its prices that segment is less attractive. .t is best way to
ma)e win0win relation with suppliers. .t/s good idea to have multi0sources of supply.
(. 4ARGAINING PO.ER OF 4+,ERS
4arainin Po1er o' 4#yers means$ ?ow much control the buyers have to drive down your products price$
!an they wor) together in ordering large volumes. 4#yers 5a3e more 2arainin "o1er 15en:
Few buyers chasing too many goods
2uyer purchases in bul) -uantities
"roduct is not differentiated
2uyer/s cost of switching to a competitors/ product is low
1hopping cost is low
2uyers are price sensitive
!redible Threat of integration
4#yer7s 2arainin "o1er may be lowered down by offering differentiated product. .f you/re serving a few
but huge -uantity ordering buyers$ then they have the power to dictate you.
Mic5ael Porters 'i3e 'orces model provides useful input for 15*T Analysis and is considered as a strong tool
for industry competitive analysis.
ECONOMIES AND DISECONOMIES OF SCALE
I IN)ERNAL ECONOMIES OR REAL ECONOMIES
.nternal Economies are those economies which arise because of the actions of an individual firm to economi3e
its cost. They arise due to increased division of labor or speciali3ation and complete utili3ation of indivisible
factor inputs. "rof. !airncross points out that internal economies are open to a single factory or a single firm
independently of the actions of other firms. They arise on account of an increase in the scale of output of a firm
and cannot be achieved unless output increases. The following are some of the important aspects of internal
economies.
1. They arise @with inA or @insideA a firm.
. They arise due to improvements in internal factors.
#. They arise due to specific efforts of one firm.
%. They are particular to a firm and en'oyed by only one firm.
&. They arise due to increase in the scale of production.
6. They are dependent on the si3e of the firm.
7. They can be effectively controlled by the management of a firm.
8. They are called as @2usiness 1ecrets @of a firm.

-INDS OF IN)ERNAL ECONOMIES.
1. )ec5nical Economies
a. Economies o' s#"erior tec5ni9#es:
2. Economies o' increased dimension:
c. Economies o' lin0ed "rocess: .t is -uite possible that a firm may not have various processes of production
with in its own premises. Also it is possible that different firms through mutual agreement may decide to wor)
together and derive the benefits of lin)ed processes$ for e4ample$ in diary farming$ printing press$ nursing
homes etc.
d. Economies arisin o#t o' researc5 and 2y : "rod#cts:
e. In3entory Economies. Inventory management is a part of better materials management. A big firm can save
a lot of money by adopting latest inventory management techni-ues.
. Manaerial Economies.
They arise because of better$ efficient$ and scientific management of a firm. 1uch economies arise in two
different ways.
a. Deleation o' details The general manager of a firm cannot loo) after the wor)ing of all processes of
production. .n order to )eep an eye on each production process he has to delegate some of his powers or
functions to trained or speciali3ed personnel and thus relieve himself for co0ordination$ planning and e4ecuting
the plans. This will enable him to bring about improvements in production process and in bringing down the
cost of production.
2. F#nctional S"eciali;ation. .t is possible to secure economies of large scale production by dividing the wor)
of management into several separate departments. Each department is placed under an e4pert and the rest of the
wor) is left into the hands of specialists. This will ensure better and more efficient productive management with
scientific business administration. This would lead to higher efficiency and reduction in the cost of production.
#. Mar0etin or Commercial economies :
)5ese economies 1ill arise on acco#nt o' 2#yin and sellin oods on lare scale 2asis at 'a3ora2le
terms.
%. Financial Economies
)5ey arise 2eca#se o' t5e ad3antaes sec#red 2y a 'irm in mo2ili;in 5#e 'inancial reso#rces. A large
firm on account of its reputation$ name and fame can mobili3e huge funds from money mar)et$ capital mar)et$
and other private financial institutions at concessional interest rates. .t can borrow from ban)s at relatively
cheaper rates. .t is also possible to have large overdrafts from ban)s. A large firm can float debentures and issue
shares and get subscribed by the general public.
& La2or Economies.
)5ese economies 1ill arise as a res#lt o' em"loyin s0illed% trained% 9#ali'ied and 5i5ly e6"erienced
"ersons 2y o''erin 5i5er 1aes and salaries. As a firm e4pands$ it can employ a large number of highly
talented persons and get the benefits of speciali3ation and division of labor.
6. )rans"ort and Storae Economies
)5ey arise on acco#nt o' t5e "ro3ision o' 2etter% 5i5ly orani;ed and c5ea" trans"ort and storae
'acilities and t5eir com"lete #tili;ation. A large company can have its own fleet of vehicles or means of
transport which are more economical than hired ones. 1imilarly$ a firm can also have its own storage facilities
which reduce cost of operations.
7. O3er *ead Economies
)5ese economies 1ill arise on acco#nt o' lare scale o"erations. The e4penses on establishment$
administration$ boo)0)eeping$ etc$ are more or less the same whether production is carried on small or large
scale. ?ence$ cost per unit will be low if production is organi3ed on large scale.
<. Economies o' 8ertical interation
A 'irm can also rea" t5is 2ene'it 15en it s#cceeds in interatin a n#m2er o' staes o' "rod#ction. .t
secures the advantages that the flow of goods through various stages in production processes is more readily
controlled. 2ecause of vertical integration$ most of the costs become controllable costs which help an enterprise
to reduce cost of production.
9. Ris0/2earin or s#r3i3al economies
)5ese economies 1ill arise as a res#lt o' a3oidin or minimi;in se3eral 0inds o' ris0s and #ncertainties
in a 2#siness.
Di3ersi'ication o' o#t"#t .nstead of producing only one particular variety$ a firm has to produce multiple
products .f there is loss in one item it can be made good in other items.
Di3ersi'ication o' mar0et: .nstead of selling the goods in only one mar)et$ a firm has to sell its
products in different mar)ets. .f consumers in one mar)et desert a product$ it can cover the losses in
other mar)ets.
Di3ersi'ication o' so#rce o' s#""ly: .nstead of buying raw materials and other inputs from only one
source$ it is better to purchase them from different sources. .f one person fails to supply$ a firm can buy
from several sources.
Di3ersi'ication o' t5e "rocess o' man#'act#re: .nstead adopting only one process of production to
manufacture a commodity$ it is better to use different processes or methods to produce the same
commodity so as to avoid the loss arising out of the failure of any one process.

... E=)ERNAL ECONOMIES OR PEC+NIAR, ECONOMIES
E6ternal economies are t5ose economies 15ic5 accr#e to t5e 'irms as a res#lt o' t5e e6"ansion in t5e
o#t"#t o' 15ole ind#stry and t5ey are not de"endent on t5e o#t"#t le3el o' indi3id#al 'irms. These
economies or gains will arise on account of the over all growth of an industry or a region or a particular area.
They arise due to benefit of locali3ation and speciali3ed progress in the industry or region. "rof. 1tonier B
?ague points out that e4ternal economies are those economies in production which depend on increase in the
output of the whole industry rather than increase in the output of the individual firm The following are some of
the important aspect of e4ternal economies.
1. They arise :outside/ the firm.
. They arise due to improvement in e4ternal factors.
#. They arise due to collective efforts of an industry.
%. They are general$ common B en'oyed by all firms.
&. They arise due to overall development$ e4pansion B growth of an industry or a region.
6. They are dependent on the si3e of industry.
7. They are beyond the control of management of a firm.
8. They are called as @open secrets @of a firm.

-INDS OF E=)ERNAL ECONOMIES
Economies o' concentration or Alomeration
)5ey arise 2eca#se in a "artic#lar area a 3ery lare n#m2er o' 'irms 15ic5 "rod#ce t5e same commodity
are esta2lis5ed. .n other words$ this is an advantage which arises from what is called :+ocali3ation of
.ndustry/.
Economies o' In'ormation
These economies will arise as a result of getting -uic)$ latest and up to date information from various sources.
Economies o' Disinteration
These economies will arise as a result of dividing one big unit in to different small units for the sa)e of
convenience of management and administration.
Economies o' Go3ernment Action
These economies will arise as a result of active support and assistance given by the government to stimulate
production in the private sector units.
Economies o' .el'are
These economies will arise on account of various welfare programs under ta)en by an industry to help its own
staff.
DISECONOMIES OF SCALE
5hen a firm e4pands beyond the optimum limit$ economies of scale will be converted in to diseconomies of
scale. *ver growth becomes a burden. ?ence$ one should not cross the limit. *n account of diseconomies of
scale$ more output is obtained at higher cost of production. The following are some of the main diseconomies of
scale
1. Financial diseconomies. . As there is over growth$ the re-uired amount of fiancCe may not be available
to a firm. !onse-uently$ higher interest rates are to be paid for additional funds.
!. Manaerial diseconomies E4cess growth leads to loss of effective supervision$ control management$
coordination of factors of production leading to all )inds of wastages$ indiscipline and rise in production
and operating costs.
$. Mar0etin diseconomies. Dnplanned e4cess production may lead to mismatch between demand and
supply of goods leading to fall in prices. 1toc)s may pile up$ sales may decline leading to fall in revenue
and profits.
&. )ec5nical diseconomies 5hen output is carried beyond the plant capacity$ per unit cost will certainly go
up. There is a limit for division of labor and speciali3ation. 2eyond a point$ they become negative.
?ence$ operation costs would go up.
(. Diseconomies o' ris0 and #ncertainty 2earin. .f output e4pends beyond a limit$ investment increases.
The level of inventory goes up. 1ales do not go up correspondingly. 2usiness ris)s appear in all fields of
activities. 1upply of factor inputs become inelastic leading to high prices.
>. La2or diseconomies. An unwieldy firm may become impersonal. !ontact between labor and
management may disappear. 5or)ers may demand higher wages and salaries$ bonus and other such
benefits etc. .ndustrial disputes may arise. +abor unions may not cooperate with the management. All of
them may contribute for higher operation costs.
II E=)ERNAL DISECONOMIES.
5hen several business units are concentrated in only place or locality$ it may lead to congestion$$ environmental
pollution$ scarcity of factor inputs li)e$ raw materials$ water$ power$ fuel$ transport and communications etc
leading to higher production and operational costs.
DIFFEREN) -INDS OF COS) CONCEP)S .
1. Money Cost and Real Cost
5hen cost is e4pressed in terms of money$ it is called as money cost .t relates to money outlays by a firm on
various factor inputs to produce a commodity. 5hen cost is e4pressed in terms of physical or mental efforts put
in by a person in the ma)ing of a product$ it is called as real cost.
!. Im"licit or Im"#ted Costs and E6"licit Costs
E4plicit costs are those costs which are in the nature of contractual payments and are paid by an entrepreneur to
the factors of production Ee4cluding himselfF in the form of rent$ wages$ interest and profits$ utility e4penses$
and payments for raw materials etc.
$. Act#al costs and O""ort#nity Costs
They are the actual e4penses incurred for producing or ac-uiring a commodity or service by a firm. *pportunity
cost of a good or service is measured in terms of revenue which could have been earned by employing that good
or service in some other alternative uses.
&. Direct costs and indirect costs
Direct costs are those costs which can be specifically attributed to a particular product$ a department$ or a
process of production.
(. Past and '#t#re costs.
"ast costs are those costs which are spent in the previous periods. *n the other hand$ future costs are those
which are to be spent. in the future. "ast helps in ta)ing decisions for future.
>. Marinal and Incremental costs
Marginal cost refers to the cost incurred on the production of another or one more unit .It im"lies additional
cost inc#rred to "rod#ce an additional #nit o' o#t"#t .t has nothing to do with fi4ed cost and is always
associated with variable cost.
?. Fi6ed costs and 3aria2le costs.
Fi4ed costs are those costs which do not vary with either e4pansion or contraction in output. They remain
constant irrespective of the level of output. They are positive even if there is no production. They are also called
as supplementary or over head costs.
*n the other hand$ variable costs are those costs which directly and proportionately increase or decrease with
the level of output produced. They are also called as prime costs or direct costs.
<. Acco#ntin costs and economic costs.
Accounting costs are those costs which are already incurred on the production of a particular commodity. .t
includes only the ac-uisition costs. They are the actual costs involved in the ma)ing of a commodity. *n the
other hand$ economic costs are those costs that are to be incurred by an entrepreneur on various alternative
programs. .t involves the application of opportunity costs in decision ma)ing.
DE)ERMINAN)S OF COS)S
1. )ec5noloy
Modern technology leads to optimum utili3ation of resources$ avoid all )inds of wastages$ saving of time$
reduction in production costs and resulting in higher output. *n the other hand$ primitive technology would lead
to higher production costs.
2. Rate o' o#t"#t: @t5e deree o' #tili;ation o' t5e "lant and mac5ineryA
!omplete and effective utili3ation of all )inds of plants and e-uipments would reduce production costs and
under utili3ation of e4isting plants and e-uipments would lead to higher production costs.
$.Si;e o' Plant and scale o' "rod#ction
,enerally spea)ing big companies with huge plants and machineries organi3e production on large scale basis
and en'oy the economies of scale which reduce the cost per unit.
&. Prices o' in"#t 'actors
. ?igher mar)et prices of various factor inputs result in higher cost of production and vice0versa.
(. E''iciency o' 'actors o' "rod#ction and t5e manaement
?igher productivity and efficiency of factors of production would lead to lower production costs and vice0versa.
>. Sta2ility o' o#t"#t
1tability in production would lead to optimum utili3ation of the e4isting capacity of plants and e-uipments. .t
also brings savings of various )inds of hidden costs of interruption and learning leading to higher output and
reduction in production costs.
?. La1 o' ret#rns
.ncreasing returns would reduce cost of production and diminishing returns increase cost.
<. )ime "eriod
.n the short run$ cost will be relatively high and in the long run$ it will be low as it is possible to ma)e all )inds
of ad'ustments and read'ustments in production process.
Thus$ many factors influence cost of production of a firm.
MA(GET1
P+RE COMPE)I)ION
.t is a part of perfect competition. !ompetition in the mar)et is said to be pure when the following conditions
are satisfied:
1. "revalence of a large number of buyers and sellers.
. The commodity supplied by each firm is homogeneous.
#. Free entry and e4it of firms.
%. Absence of any )ind of monopoly element.
Dnder these conditions no individual producer is in a position to influence the mar)et price of the product.
According to "rof. E.?. !hamberline 0 B+nder P#re Com"etition% t5e indi3id#al sellers mar0et 2ein
com"letely mered 1it5 t5e eneral one% 5e can sell as m#c5 as 5e "lease at t5e oin "riceC.
PERFEC) COMPE)I)ION
A perfectly competitive mar)et is one in which the number of 2#yers and sellers are 3ery lare% all enaed
in 2#yin and sellin a 5omoeneo#s "rod#ct 1it5o#t any arti'icial restriction and "ossessin "er'ect
0no1lede o' mar0et at a time. According to 2ilas$ @the perfect competition is characteri3ed by the presence
of many firms: They all sell identically the same product. The seller is the price H ta)erA.
FEA)+RES OF )*E PERFEC) COMPE)I)ION
1. E6istence o' 3ery lare n#m2er o' 2#yers and sellers
)5e n#m2er is so lare t5at no 2#yer or seller can in'l#ence t5e "rice in t5e mar0et.
!. *omoeno#s "rod#cts
Different firms constituting the industry produce homogenous goods. They are identical in character. ?ence$ no
firm can raise its price above the general level.
$. Free entry and e6it o' 'irms
There is absolute freedom to firms to get in or get out of the industry. .f the industry is ma)ing profits$ new
firms are attracted into the industry.
&. E6istence o' sinle "rice
Each unit bought and sold$ in the mar)et commands the same price since products are homogeneous.
(. Per'ect 0no1lede o' t5e mar0et
All sellers and buyers will have perfect )nowledge of the mar)et. 1ellers cannot influence buyers and buyers
cannot influence sellers.
>. Per'ect mo2ility o' 'actors o' Prod#ction
Factors of production are free to move into any use or occupation in order to earn higher rewards. 1imilarly$
they are also free to come out of the occupation or industry if they feel that they are under remunerated.
?. F#ll and #nrestricted com"etition
"erfectly competitive mar)et is free from all sorts of monopoly$ oligopoly conditions. 1ince there are very large
number of buyers and sellers$ it is difficult for them to 'oin together and form cartels or some other forms of
organi3ations. ?ence$ each firm acts independently.
<. A2sence o' trans"ort cost
All firms will have e-ual access to the mar)et. Mar)et price charged by the sellers should not vary because of
differences in the cost of transportation.
D. A2sence o' arti'icial Go3ernment controls
The ,overnment should not interfere in matters pertaining to supply and price. .t should not place any barriers
in the way of smooth e4change. "rice of a commodity must be determined only by the interaction of supply and
demand forces.
1E. )5e mar0et "rice is 'le6i2le o3er a "eriod o' time
Mar)et price changes only because of changes in either demand or supply force or both. Thus$ price is not
affected by the sellers$ buyers$ firm$ industry or the ,overnment.
11. Normal Pro'it
As the mar)et price is e-ual to cost of production$ the firm can earn only normal profits under perfect
competition. Iormal profits are those which are 'ust sufficient to induce the firms to stay in business. .t is the
minimum reasonable level of profit which the entrepreneur must get in the long run. .t is a part of total cost of
production because it is the price paid for the services of the entrepreneur$ i.e.$ profit is an item of e4penditure to
a firm.

SPECIAL FEA)+RES OF PERFEC) COMPE)I)ION
i. .t is an e4treme form of mar)et situation rarely to be found in the real world.
ii. .t is a mere concept$ a myth$ an illusion and purely theoretical in nature.
iii. .t is a hypothetical model.
iv. .t is an ideal mar)et situation.
MONOPOL,
Meanin and de'inition:
The word monopoly is made up of two syllables H :M*I*/ means single and @"*+>A means to sell. Thus$
monopoly means e4istence of a single seller in the mar)et. Mono"oly is t5at mar0et 'orm in 15ic5 a sinle
"rod#cer controls t5e 15ole s#""ly o' a sinle commodity 15ic5 5as no close s#2stit#tes. Monopoly may
be defined as a condition of production in which a person or a number of persons acting in combination have
the power to fi4 the price of the commodity or the output of the commodity. .t is a situation where there e4ists a
single control over the mar)et producing a commodity having no substitutes and no possibilities for any one to
enter the industry to compete.
According to "rof. 5atson H @A monopolist is the only producer of a product that has no close substitutesA.
FEA)+RES OF MONOPOL,
1. Anti/)5esis o' com"etition
Absence of competition in the mar)et creates a situation of monopoly and hence the seller faces no threat
of competition.
!. E6istence o' a sinle seller
There will be only one seller in the mar)et who e4ercises single control over the mar)et.
$. A2sence o' s#2stit#tes
There are no close substitutes for his product with a strong cross elasticity of demand. ?ence$ buyers have
no alternatives.
&. Control o3er s#""ly
?e will have complete control over output and supply of the commodity.
(. Price Ma0er
The monopolist is the price H ma)er and in ta)ing decisions on price fi4ation$ he is independent. ?e can
set the price to the best of his advantage. ?ence$ he can either charge a high price for all customers or adopt
price discrimination policy.
>. Entry 2arriers
Entry of other firms is barred somehow. ?ence$ monopolist will not have direct competitors or direct
rivals in the mar)et.
?. Firm and ind#stry is same
There will be no difference between firm and an industry.
<. Nat#re o' 'irm
The monopoly firm may be a proprietary concern$ partnership concern$ Joint 1toc) !ompany or a public
utility which pursues an independent price0output policy.
D. E6istence o' s#"er normal "ro'its
There will be place for supernormal profits under monopoly$ because mar)et price is greater than cost of
production.
There are different )inds of monopolies H "rivate and public$ pure monopoly$ simple monopoly and
discriminatory monopoly. .t is to be clearly understood that with the e4ception of public utilities or institutions
of a similar nature$ whose price is set by regulatory bodies$ monopolies rarely e4ist. Just li)e perfect
competition$ pure monopoly does not e4ist. ?ence$ we ma)e a detailed study of simple monopoly and
discriminatory monopoly in the foregoing analysis.
PRICE DISCRIMINA)ION MA, )A-E )*E FOLLO.ING FORMS: @4ASIS OF PRICE
DISCRIMINA)IONA
1. Personal di''erences:
This is nothing but charging different prices for the same commodity because of personal differences arising out
of ignorance and irrationality of consumers$ preferences$ pre'udices and needs.
!. Place:
Mar)ets may be divided on the basis of entry barriers$ for e.g. price of goods will be high in the place where
ta4es are imposed. "rice will be low in the place where there are no ta4es or low ta4es.
$. Di''erent #ses o' t5e same commodity:
5hen a particular commodity or service is meant for different purposes$ different rates may be charged
depending upon the nature of consumption. For e.g. different rates may be charged for the consumption of
electricity for lighting$ heating and productive purposes in industry and agriculture.
&. )ime:
1pecial concessions or rebates may be given during festival seasons or on important occasions.
(. Distance:
(ailway companies and other transporters$ for e.g.$ charge lower rates per GM if the distance is long and higher
rates if the distance is short.
>. S"ecial orders:
5hen the goods are made to order it is easy to charge different prices to different customers. .n this case$
particular consumer will not )now the price charged by the firm for other consumers.
?. Nat#re o' t5e "rod#ct:
"rices charged also depends on nature of products e.g.$ railway department charge higher prices for carrying
coal and lu4uries and less prices for cotton$ necessaries of life etc.
<. F#antity o' "#rc5ase:
5hen customers buy large -uantities$ discount will be allowed by the sellers. 5hen small -uantities are
purchased$ discount may not be offered.
D. Geora"5ical area:
2usiness enterprises may charge different prices at the national and international mar)ets. For e4ample$
dumping H charging lower price in the competitive foreign mar)et and higher price in protected home mar)et.
1E. Discrimination on t5e 2asis o' income and 1ealt5:
For e.g.$ A doctor may charge higher fees for rich patients and lower fees for poor patients.
11. S"ecial classi'ication o' cons#mers:
For E.g.$ Transport authorities such as (ailway and (oadways show concessions to students and daily travelers.
Different charges for . class and .. class traveling$ ordinary coach and air conditioned coaches$ special rooms
and ordinary rooms in hotels etc.
1!. Ae:
!inema houses in rural areas and transport authorities charge different rates for adults and children.
1$. Pre'erence or 2rands:
!ertain goods will be sold under different brand names or trade mar)s in order to attract customers. Different
brands will be sold at different prices even though there is not much difference in terms of costs.
1&. Social and or "ro'essional stat#s o' t5e 2#yer:
A seller may charge a higher price for those customers who occupy higher positions and have higher social
status and less price to common man on the street.
1(. Con3enience o' t5e 2#yer:
.f a customer is in a hurry$ higher price would be charged. *therwise normal price would be charged.
1>. Discrimination on t5e 2asis o' se6:
.n selling certain goods$ producers may discriminate between male and female buyers by charging low prices to
females.
1?. I' "rice di''erences are minor% c#stomers do not 2ot5er a2o#t s#c5 discrimination.
1<. Pea0 season and o'' "ea0 season ser3ices
?otel and transport authorities charge different rates during pea) season and off0pea) seasons.

PRE/REF+ISI)E CONDI)IONS FOR PRICE DISCRIMINA)ION @.*EN PRICE
DESCRIMINA)ION IS POSSI4LEA
1. E6istence o' im"er'ect mar0et:
Dnder perfect competition there is no scope for price discrimination because all the buyers and sellers will have
perfect )nowledge of mar)et. Dnder monopoly$ there will be place for price discrimination as there are buyers
with incomplete )nowledge and information about the mar)et.
!. E6istence o' di''erent derees o' elasticity o' demand in di''erent mar0ets:
A Monopolist will succeed in charging higher price in inelastic mar)et and lower price in the elastic mar)et.
$. E6istence o' di''erent mar0ets 'or t5e same commodity:
This will facilitate price discrimination because buyers in one mar)et will not be )nowing the prices charged for
the same commodity in other mar)ets.

&. No contact amon 2#yers:
.f there is possibility of contact and communication among buyers$ they will come to )now that discriminatory
practices are followed by buyers.
(. No "ossi2ility o' resale:
Monopoly product purchased by consumers in the low priced mar)et should not be resold in the high priced
mar)et. "revention of re e4change of goods is a must for price discrimination.
>. Leal sanction:
.n some cases$ price discrimination is legally allowed. For E.g.$ The electricity department will charge different
rates per unit of electricity for different purposes. 1imilarly charges on trun) callsK boo) post$ registered posts$
insured parcel$ and courier parcel are different.
?. 4#yers ill#sion:
5hen consumers have an irrational attitude that high priced goods are of high -uality$ a monopolist can resort
to price0discrimination.
<. Inorance and let5ary:
Due to la3iness and lethargy consumers may not compare the price of the same product in different shops.
.gnorance of consumers with regard to price variations would enable the monopolist to charge different prices.
D. Pre'erences and PreG#dices o' 2#yers:
The monopolist may charge different prices for different varieties or brands of the same product to different
buyers. For e.g. low price for popular edition of the boo) and high price for delu4e edition.
1E. Non/)rans'era2ility 'eat#res:
.n case of direct personal services li)e private tuitions$ hair0cuts$ beauty and medical treatments$ a seller can
conveniently charge different prices.
11. P#r"ose o' ser3ice:
The electricity department charges different rates per unit of electricity for different purposes li)e lighting$
AE?$ agriculture$ industrial operations etc. railways charge different rates for carrying perishable goods$
durable goods$ necessaries and lu4uries etc.
1!. Geora"5ical distance and tari'' 2arriers:
5hen mar)ets are separated by large distances and tariff barriers$ the monopolist has to charge different prices
due to high transport cost and high rate of ta4es etc.

D+MPING POLIC,
It re'ers to sellin o' oods at lo1er "rices in t5e com"etiti3e International mar0et and at 5i5er "rices in
t5e "rotected domestic mar0et. Iormal dumping policy is 'ustified because a commodity is sold in both
national and international mar)ets. ?ence$ output will be naturally high. +arge scale production enables the firm
to reduce average cost.
MONOPOLIS)IC COMPE)I)ION
"rof. !hamberlin is the main architect of the theory of Monopolistic !ompetition. This mar)et e4hibits the
characteristics of both competition and monopoly. 1ince modern mar)ets are combined and integrated with
monopoly power and competitive forces they are called as Monopolistic !ompetition. It is a mar0et str#ct#re
in 15ic5 a lare n#m2er o' small sellers sell di''erentiated "rod#cts 15ic5 are close% 2#t not "er'ect
s#2stit#tes 'or one anot5er. Dnder this mar)et$ the products produced and sold are different$ but they are close
substitutes for one another. This leads to competition among different sellers. Thus$ in this mar)et situation
every producer is a sort of monopolist and between such @mini0monopolistsA there e4ists competition. .t is one
of most popular and realistic mar)et situation to be found in the present day world. A number of e4amples may
be given for this )ind of mar)et. Tooth paste$ blades$ motor cycles and bicycles$ cigarettes$ cosmetics$ biscuits$
soaps and detergents$ shoes$ ice H creams etc.

C*ARAC)ERIS)ICS OF MONOPOLIS)IC COMPE)I)ION
1. E6istence o' a lare N#m2er o' 'irms:
Dnder Monopolistic competition$ the number of firms producing a product will be large. The si3e of each firm
is small. Io individual firm can influence the mar)et price. ?ence$ each firm will act independently without
worrying about the policies followed by other firms. Each firm follows an independent price0output policy.
!. Mar0et is c5aracteri;ed 2y im"er'ections
.mperfections may arise due to advertisements$ differences in transport cost$ irrational preferences of
consumers$ ignorance about the availability of different brands of products and prices of products etc.$ sellers
may also have inade-uate )nowledge about mar)et and prices e4isting at different segments of mar)ets.
$. Free entry and e6it o' 'irms
Each firm produces a very close substitute for the e4isting brands of a product. Thus$ differentiation provides
ample opportunity for a firm to enter with the group or industry. *n the contrary$ if the firm faces the problem
of product obsolescence$ it may be forced to go out of the industry.
&. Element o' mono"oly and com"etition
Every firm en'oys some sort of monopoly power over the product it produces. 2ut it is neither absolute nor
complete because each product faces competition from rival sellers selling different brands of the product.
(. Similar "rod#cts 2#t not identical
Dnder monopolistic competition$ the firm produces commodities which are similar to one another but not
identical or homogenous. For E.g. toothpastes$ blades$ cigarettes$ shoes etc$
>. Non/"rice com"etition
.n this mar)et$ there will be competition among @Mini0monopolistsA for their products and not for the price of
the product. Thus$ there is @product competitionA rather than @price competitionA.
?. De'inite "re'erence o' t5e cons#mers
!onsumers will have definite preference for particular variety or brands loyalty owing to the special features of
a product produced by a particular firm.
<. Prod#ct di''erentiation
The most outstanding feature of monopolistic competition is product differentiation. Firms adopt different
techni-ues to differentiate their products from one another. .t may ta)e mainly two forms:

a. Real "rod#ct di''erence:
.t will arise H
i. 5hen they are produced out of materials of higher -uality$ durability and strength.
ii. 5hen they are e4traordinary on the basis of wor)manship$ higher cost of material$ color$ design$ si3e$
shape$ style$ fragrance etc.
iii. 5hen personal care is ta)en to produce it.

2. Imainary "rod#ct di''erence:
"roducers adopt different methods to differentiate their products from that of other close substitutes in the
following manner.
i. "roper location of sales depots in busy and prestigious commercial centers.
ii. 1elling goods under different trade mar)s$ patenting rights$ different brands and pac)ing them in
attractive wrappers or containers.
iii. "roviding convenient 5or)ing hours to customers.
iv. ?ome delivery of goods with no e4tra cost.
v. !ourteous treatment to customers$ -uic) and prompt delivery of goods in time and developing cordial$
personal and friendly relations with them.
vi. *ffering gifts$ discounts$ luc)y dip schemes$ special prices$ guarantee of repairs and other free
services$ guarantee of products$ fair dealings$ sales on credit or credit cards B debit cards etc.
vii. Agreement to ta)e bac) goods if they are unsatisfactory.
viii. Air conditioned stores etc.

D. Sellin Costs
All t5ose e6"enses 15ic5 are inc#rred on sales "romotion o' a "rod#ct are called as sellin costs. .n the
words of "rof. !hamberlin H @selling !osts are those which are incurred by the producers <sellers= to alter the
position or shape of the demand curve for a productA. .n short$ selling costs represents all those selling activities
which are directed to persuade buyers to change their preferences so as to ma4imi3ed the demand for a given
commodity. 1elling costs include e4penses on sales depots$ decoration of the shop$ commission given to
intermediaries$ window displays$ demonstrations$ e4hibitions$ door to door canvassing$ distribution of free
samples$ printing B distributing pamphlets$ cinema slides$ radio$ T.L.$ newspaper advertisements <informative
and manipulative advertisements= etc.

1E. )5e conce"t o' Ind#stry H Prod#ct Gro#"s
"rof. !hamberlin introduced the concept of group in place of industry. .ndustry in economics refers to a number
of firms producing similar products. Dnder monopolistic competition no doubt$ different firms produce similar
products but they are not identical. ?ence$ "rof. !hamberlin has made an attempt to redefine the industry.
According to him$ the monopolistically competitive industry is a :group/of firms producing a @closely relatedA
commodity referred to as @product groupA thus group refers to a collection of firms that produce closely related
but not identical products.

11. More elastic demand c#r3e
"roduct differentiation ma)es the demand curve of the firm much more elastic. .t implies that a slight reduction
in the price of one product assuming the price of all other products remaining constant leads to a large increase
in the demand for the given product.
OLIGOPOL,
The term oligopoly is derived from two ,ree) words @*ligoiA means a few and :"oly/ means to sell. +nder
olio"oly% 1e come across a 'e1 "rod#cers s"eciali;in in t5e "rod#ction o' identical oods or
di''erentiated oods com"etin 1it5 one anot5er. The products traded by the oligopolists may be
differentiated or homogeneous. .n the case of former$ we can give the e.g.$ of automobile industry where
different model of cars$ ambassador$ fiat etc.$ are manufactured. *ther e4amples are cigarettes$ refrigerators$
T.L. sets etc.$ pure or homogeneous oligopoly includes such industries as coo)ing and commercial gas cement$
food$ vegetable oils$ cable wires$ dry batteries$ petroleum etc.$ .n the modern industrial set up there is a strong
tendency towards oligopoly mar)et situation. To avoid the wastes of competition in case of competitive
industries and to face the emergence of new substitutes in case of monopoly industries$ oligopoly mar)et is
developed. e.g.$ an electric refrigerator$ automatic washing machines$ radios etc.
C*ARAC)ERIS)ICS OF OLIGOPOL,
1. Interde"endence:
Each and every firm has to be conscious of the reactions of its rivals. 1ince the number of firms is very few$ any
change in price$ output$ product etc.$ by one firm will have direct effect on the policy of other firms. Therefore$
economic calculations must be made always with reference to the reactions of the rival firms$ as they have a
high degree of cross elasticity/s of demand for their products.
!. Indeterminateness o' t5e demand c#r3e:
Dnder oligopoly$ there will be the element of uncertainty. Firms will not be )nowing the particular factors which
could affect demand. Iaturally rise or fall in the demand for the product cannot be speculated. !hanges that
would be ta)ing place may be contrary to the e4pected changes in the product curve.. Thus$ the demand curve
for the product will be indeterminate or indefinite. "rof. 1wee3y e4plains it as a )in)y demand curve.

$. Con'lictin attit#de o' 'irms:
Dnder oligopoly$ on the one hand$ firms may reali3e the disadvantages of competition and rivalry and desire to
unite together to ma4imi3e their profits. *n the other hand firms guided by individualistic considerations may
continuously come in clash and conflict with one another. This creates uncertainty in the mar)et.
&. Element o' mono"oly and com"etition:
Dnder oligopoly$ a firm has some monopoly power over the product it produces but not on the entire mar)et.
2ut monopoly power en'oyed by the firm will be limited by the e4tent of competition.
(. Price riidity:
,enerally$ prices tend to be stic)y or rigid under oligopoly. This is because of the fact that if one firm changes
its price$ other firms may also resort to the same techni-ue.
>. Aressi3e or de'ensi3e mar0etin met5ods:
Firms resort to aggressive and sometimes defensive mar)eting methods in order to either increase their share of
the mar)et or to prevent a decline of their share in the mar)et. .f one adopts e4tensive advertisement and sales
promotion policy it provo)es others to do the same. "rof. 2oumal rightly remar)s in this connection0 @Dnder
oligopoly$ advertising can become a life and death matter where a firm which fails to )eep up with the
advertising budget of its competitors may find its customers drifting off to rival firmsA.
?. Constant str#le:
!ompetition is of uni-ue type in an oligopolistic mar)et. ?ence$ competition consists of constant struggle of
rivals against rivals.
<. Lac0 o' #ni'ormity:
+ac) of uniformity in the rise of different oligopolies is another remar)able feature.
D. Small n#m2er o' lare 'irms:
The numbers of firms in the mar)et are small. 2ut the si3e of each firm is big. The mar)et share of each firm is
sufficiently large to dominate the mar)et.
1E.E6istence o' 0in0ed demand c#r3e :
A )in)ed demand curve is said to occur when there is a sudden change in the slope of the demand curve. .t
e4plains price rigidity under oligopoly.
D+OPOL,
D#o"oly is a mar0et 1it5 t1o sellers e6ercisin control o3er t5e s#""ly o' commodities. .t is a two0firm
industry. .n the words of !ohen and !yret H @5hen there are e4actly two sellers in the mar)et$ there is a special
case of oligopoly called DuopolyA. Each seller )nows what ever he does will affect his rival/s policies. Each
seller attempts to ma)e a correct guess of his rivals motives and actions. The action by one will have a reaction
from the other.
4ILA)ERAL MONOPOL,
2ilateral monopoly is a special type of mar)et situation in which a single seller faces a single buyer$ i.e.$ a
monopsonist is facing a monopolist. 1uppose that in a town$ there is only one steel factory offering employment
for labor in the area and suppose a trade union controls the entire labor supply$ the trade union which controls
the supply of lab our is the monopoly and the steel factory which is the sole buyer of labor is the monopsony.
MONOPSON,
Monopsony refers to a mar)et with a single buyer who buys the entire amount produced. A monopsony may be
created when all the consumers of commodity are organi3ed together. 1uppose there is only one cotton mill in a
region. .t becomes a monopsonist buyer of raw cotton$ while the suppliers of cotton to the mill will be the large
number of cotton growers.Just as the monopolist aims at ma4imi3ing his profit$ in the same manner the
monopsonist aims at ma4imi3ing his consumer/s surplus$ and the consumer/s surplus is ma4imum when the
marginal cost is e-ual to marginal utility. A monopsonist too can adopt price discrimination paying different
prices to different sellers according to the elasticity of supply.
D+OPSON,
Duopsony is an economic condition similar to a duopoly$ in which there are only two large buyers for a specific
product or service. Members of a duopsony have great influence over sellers and can effectively lower mar)et
prices for their advantage.
For e4ample$ let/s imagine a town in which only two restaurants operate. There are only two employment
options for waiters and chefs. 2ecause the restaurants have less competition for finding employees$ they can
offer lower wages. The chefs and waiters have no choice but to accept the low pay$ unless they choose not to
wor). This shows that firms that are part of a duopsony have the power not only to lower the cost of supplies$
but also to lower the price of labor.
OLIGOPSON,
1imilar to an oligopoly$ this is a mar)et in which there are a few large buyers for a product or service. This
allows the buyers to have a great deal of control over the sellers and can effectively push down the price.