Module III

Theory of Production and

Market structure
 What is Market?

Market is generally understood to mean a

particular place or locality where good are sold
& purchase.
 Essential of Market

 Commodity :- Which deal with.

 Buyers & sellers.
 Place:- Be it certain region
country.
 Communication between buyers & Sellers
 Classification of Market
Structure
From of Market No. of Firms Nature of Product Price elasticity of Degree of control
Structure demand for individual over price
firm
Perfect A large Homogeneous Infinite None
competition Number of Product
firm
Monopolistic A Large no. Differentiated Large Some
of firm product (but they
are close
substitutes)
Pure Oligopoly Few Firms Homogeneous Small Some
Product
Differentiated Few firm Differentiated Small Large
oligopoly product
(with product
differ)
Monopoly one Unique product Very small Very small
without close
substitute
 Cost Curve &
Revenue concept
 Cost Curve
 Cost Curve:- The cost curve is a graph
showing the relationship between the cost of
an item & the volume of output. When the
volume of production is low , unit costs are
high, but they falls as the level of production
rises.
There are three main cost:-
1. Total cost
2. Average cost
3. Marginal cost
 Cost Curve
 Total cost:- Fixed cost & variable cost when
added together make up the total
cost of business.
 Fixed Cost:- It is independent of output, it means they
do not change with changes in output,
fixed cost are also known as overheads cost & it
include:- Rent, insurance, maintenance cost, taxes.
 Variable cost::- It is a cost which is change with the
change of output. It is also known as
prime costs or direct cost.
Total cost = Fixed cost + Variable cost
 Cost Curve
1. Average Cost:- Average cost is a statistical
nature, it is not actual cost, It is obtained
by dividing the total cost by the total output.
Average cost = Total cost
Quantity
2. Marginal Cost:- Marginal cost addition to the total
cost caused by producing one more unit of output.
Marginal cost= Total cost
Total Quantity
Total, Average, Marginal Cost
Schedule
Output Total Cost(1) Average Cost (3) Marginal cost(2)

1 20 20 20

2 30 15 10

3 35 11.6 5

4 38 9.5 3

5 40 8 2

6 62 10.3 22
Graphically Representation of Total,
Average,& Marginal cost curve
 Revenue Concept
 Total Revenue:- Total revenue may be defined as
the total receipt of the firm from it
sales. It can be obtained by multiplying the price per
unit of the commodity with the total number of unit of
the commodity sold to the customer.
Total Revenue= Price per unit*Total No. of unit.
Average Revenue:- Revenue per unit of the
commodity sold, It can be easily calculated by dividing
total revenue by the number of unit sold.
Average Revenue = Total Revenue
Total output sold
 Revenue Concept
Marginal Revenue:- Marginal revenue at any level
of firm output is the revenue added to the total
revenue by selling an additional unit of firm’s product.
Marginal Revenue = The difference between the
total revenue when ‘n’ units are sold & the new
total revenue when n+1 units are sold
Total, Average, Marginal Revenue
Schedule
No. of output Total revenue Average revenue Marginal revenue

1 10 10 10

2 19 9.5 9

3 27 9 8

4 34 8.5 7

5 40 8 6

6 45 7.5 5

7 49 7.0 4

8 52 6.5 3

9 54 6.0 2

10 55 5.5 1
Graphically Representation of
Total, Average,& Marginal Revenue
Price & Output
Determination Under
Perfect competition
 Perfect Competition
 Perfect competition is that there should be a
large number of firm.
 Perfect competition buyer or seller are fully
aware of the nature of the product.
 In Perfect competition product is Homogenous
no seller can change a price of the commodity.
 Characteristic of Perfect
Competition
 A large number of buyers & sellers.
 Homogeneous Product.
 Free entry & Free exit of the firm.
 Perfect Knowledge.
 Absence of artificial restriction.
 No government intervention.
 No existence of transport cost.
 Perfect mobility of factor of production.
 Price Determination
Price Determination under Perfect competition to
analyzed under three different time period:-

1. Market Period or very Short Period.

2. Short run
3. Long run
 Market Period or very Short
Run
 The supply is, therefore taken as fixed in this period.
The price in the market period is thus determined
more by demand than supply.
 Supply curve is perfectly inelastic supply remains an
inactive factor.
y S

N’

Price N

N’’
 Short Run
 Supply of the commodity in this period can be
adjusted to the changed demand, through only
partially.
 The supply will be adjusted to the demand with
the help of existing capital equipment.
 Long Run
 The supply of the commodity can be adjusted
fully to the changed demand.
 The supply will be adjusted to the demand not
only with the existing , but also with the
additional capital equipment.
Average & Marginal Revenue
curve under perfect
Competition
Price & Output
Determination Under
Monopoly
 Monopoly
 Monopoly:- The word monopoly is made up of
two word Mono & Poly.
Mono means single while poly means selling .
 If there is only one single seller of a product in
the market, that situation will be referred to as
monopoly.
Characteristic of Monopoly

 There is a single producer or seller of a

product.
 There are no close substitutes for the product.
 Strong barriers to the entry into the industry
exit.
 Price Determination

Price Determination under Monopoly to analyzed

under three different time period:-

1. Short run
2. Long run
Average & Marginal Revenue
curve under Monopoly

 Short Run
 Pricing & output decisions under monopoly are
based on profit maximization hypothesis.
Graphically Representation
 Long Run

Graphically Representation
Price & Output
Determination Under
Monopolistic
 Monopolistic

 Monopolistic competition is defined as market

setting in which a large number of sellers sell
differentiated product.
 Important feature of
monopolistic competition
 Large number of firm
 Product differentiated.
 Some influences over the price.
 Non Price competition.
 Product Variation.
 Freedom of entry & Exit.
 Short Run Equilibrium of the
firm under monopolistic
competition
 In the short period the firm under monopolistic
competition will have average fixed cost,
average variable cost, average total cost,
average marginal cost.
In the short run it is possible for some firms
to earn Abnormal Profit, for some firm to earn
Normal Profit, while some may even losses.
The firm is Earning Abnormal
Profit
The firm is Earning Normal
Profit
The firm is incurring loss
 Long Run
The firm earn only Normal
Profit
Price & Output
Determination Under
oligopoly
 Oligopoly
 The term oligopoly is derived from two Greek
words “oligos” meaning a few & “Pollen”
meaning to sell. Oligopoly is that form of
imperfect competition where there are a few
firms in the market, producing either a
homogenous product or producing product
which are close but not perfect substitutes of
each other.
Classification of oligopoly

 Perfect oligopoly& imperfect oligopoly.

 Open oligopoly& Close oligopoly.
 Partial oligopoly & Full oligopoly.
 Tight oligopoly & Loses oligopoly.
 Law of Return
 The law of return refers to the amount of extra
output by adding to a fixed inputs (factor)
more & more of variable input.
There are 3 types of law of return:-
1. Law of increasing return.
2. Law of constant return.
3. Law of diminishing return.
Example:- We add increasing quantities of some
variable factor ( say labor & capital)
to a fixed variable (land) & the resulting
production increase more than proportionately,
we shall associate such a tendency with law of
increasing return.
When however, the resulting production
increases exactly in the same proportions in
which variable factors are increased, it is a case
of constant returns.
The resulting production increases less
than proportionately with the addition of
increased quantity of the variable factors, it is a
case of law of diminishing return
 Relationship in Average
output & Marginal Output in
Law of Return
 In law of return when marginal output increase,
the average output is also rise, but marginal
output rises more readily than the average
output.
When marginal output is diminishing the
average output is also diminishing but marginal
output diminishing more rapidly than the
average output.
 Table of Total output,
average output, Marginal
output
Doses of Total Average Marginal
Labor & output output output
Capital
1 120 120 120
2 260 130 140
3 400 133.33 140
4 520 130 120
5 620 124 100
6 700 116 80
7 760 108 60
 Graphically Representation
 dg

Unit of product

Doses of labor & capital

 Three stages of law
 Stage 1: Law of Increasing return.
 Stage 2: Law of diminishing return.
 Stage 3: Law of Negative return.
 Return to Scale
 Return to scale refer to the behaviors of
production of return when all factors of
production are increased or decreased in the
same proportion.

Constant

Marginal Return Diminishing

Scale of Production
 Factors of Production
 Meaning:- The term “ Factors of production”
refers to those good & services
which aid the productive process.

 Definition:- L.M. Fraser “ Factors of production

is a group or class of productive resources”
No Production is possible without the
active participation & co-operation of the factors
of production.
 Factors of production

1. Land
2. Labour.
3. Capital.
4. Organization.
 Land
 The term land is very comprehensive &
includes all things which is not made man.
 It includes within itself several things such as
land surface, air, water, minerals, forests, rivers,
lakes, seas, etc.
 Labour
 The term labour refers to all those activities
physical & mental, which are undertaken by
man by exchange for a monetary reward.
 Example:- If a person undertakes certain
physical & mental activities for his own
recreation, they cannot be termed as labour
 Capital
 The term capital in economics refers to that
part of the saved up wealth which is utilized in
the production of further wealth.
 It include cash, machine, tools, row material
etc. which are used for further production of
wealth.
 Organization
 Organization refers to combine the three factors
of production , assigning work to each, bearing
the risk, etc.
 Organizer assign work to the three factors
supervises their working & undertakes the risk
inherent in the production.
 Types & Forms of business
Organization
 Single Proprietorship.
 Partnership.
 Joint Stck Company.
 Co. Operative Enterprise.
 State Enterprise.
Sole or Single Proprietorship
 This refer to that form of business organization
in which there is only one single owner of the
business.
 He bears the entire risk of the business.
 If the firm earn profit goes to him only.
 If the firm suffers a loss, the entire burden goes
to him.
 It is a oldest & Simplest form of the
organization.
 Characteristics of Single
Proprietorship
1. Low cost of Production.
2. Close contract with customer.
3. Close contract with workers.
4. Promptness in decision.
5. Security of trade secrets.
6. Full control.
7. Direct Motivation.
 Disadvantages
1. Unlimited Liability.
2. Limited Economic Resources.
3. Limited of Organization Control.
4. Inability to face competition from bigger units.
5. Limited area of Operation.
6. No Large Scale Economics
 Partnership
 A partnership is that form of organization in which two
or more partners jointly own an enterprise & agree to
share the profit in the pre determined proportion.
 Partnership based on partnership deed the number of
partners, their relationship, their capital contribution,
their right, & duties, the method of sharing the profit all
these are clearly mentioned in the partnership
agreement.
 Advantages of Partnership
 No difficulty in setting up parnership.
 Availability of large capital.
 Uses of diverse talents.
 Risk sharing.
 Availability of easier & larger credit.
 Easy formation & Easy disoluation.
 Disadvantages Of
Partnership
 Unlimited Liability.
 Lack of Efficiency.
 Delay in decision making.
 Instability.
 Limited on transfer of share.
 Joint Stock Company
 It is also known as the corporate form of
business.
 A joint stock company is an association of
individual as shareholders who are autorized
by the government to run a particular
business.
 Joint stock company raises its capital in two
ways:-
1. Through Share.
2. Through Debentures.
 Advantages of joint stock
company

 Adequacy of capital.
 Economics of large scale production.
 Limited Liability.
 Specialized management.
 Suitable for large enterprises
Disadvantages of joint stock
company
 Difficulty of Establishment.
 Manipulation by Directors.
 Delay in decision.
 Lack of interest in company matters.
 Joint stock company “ Democratic “ only in
name.
Co-Operative Enterprise
 The term co- operative means “ To work
together” but in economics it carries a slightly
different but wider meaning.
 “ Co operation may be defined as that type of
economic organization in which a number of
persons with common economic objectives
organize themselves on a basis of equality for
the fulfillment of those objectives in practice.
 Characteristics of co
operative enterprise
1. To work together on a organized basis.
2. This organization is purly voluntary.
3. Nearness of members to each other.
4. Equality.
5. Self dependent
6. Economy
7. Democratic organization.
8. Each for all & all for each
 State/ Public Enterprise
 The State Enterprise refer to those business
enterprises whose ownership & Management are
directly in the hands of the government such
enterprises are the exclusive property of the state &
are directly managed by it.
 State Enterprise are financed by the government &
also managed by government.
 These type of enterprise are financially independent.
 The objective of State Enterprise is to provide service
to the society.
 Example:- Railways & Telegraphs department are
government enterprise.