MARKET

The tern market refers not necessary to a place but always to a commodity and the buyers and sellers who are direct competition with one another.

PERFECT COMPETITION

Perfect competition is a market situation in which no seller can influence price by his independent action. In such a market a firm is only a price taker and industry is the price maker.”

FEATURES OF PERFECT COMPETITION

1. VERY LARGE NUMBER OF BUYERS AND SELLERS

2. HOMOGENEOUS PRODUCT

3. FREE ENTRY AND EXIT OF THE FIRM

4. PERFECT KNOWLEDGE

5. PERFECT MOBILITY

6. ABSENCE OF TRANSPORTATION COSTS

7. ABSENCE OF SELLING COSTS

Under perfect competition Industry is the price maker and firm is a price taker. Explain?

• Difference between industry and firm

• PRICE DETERMINATION

• AR & MR CURVE IN PERFECT COMPETITION

MONOPOLY

Monopoly is a market situation where there is a single seller and there is no close substitute of the commodity sold by the monopolist. It is very different for a new firm to enter in a monopoly market.”

FEATURES TO MONOPOLY

• SINGLE SELLER

• NO HOMOGENOUS PRODUCT / NO CLOSE SUBSTITUTES

• RESTRICTIONS ON ENTRY AND EXIT

• FULL CONTROL OVER PRICE / PRICE

• PRICE DISCRIMINATION

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SUPPLY

supply of a commodity refers to a various quantities of a commodity that the producers are willing to sell at different prices of the commodity at a point of time.

STOCK

Stock of a commodity refers to the total quantity of that commodity which at any given time is a available in the market with the seller.

DIFFERENCE BETWEEN STOCK AND SUPPLY

An agriculturist who has produced 500 quintals of wheat during a given period may offer for sale 100 quintals @ of  Rs 200 per quintals, 150 quintals @ of Rs 250 per quintals. In this case stock of wheat is 500 quintals and supply is 250 quintals at different prices.

SUPPLY AND QUANTITY SUPPLY

Quantity supplied refers to a specific quantity of a commodity that the producers are ready to sell at a specific price of the commodity.

INDIVIDUAL AUPPLY SCHEDULE

A individual supply schedule supply schedule is tabular statement which show different quantities of a commodity offered for sale at different prices by individual firm in the market.

INDIVIDUAL SUPPLY CURVE

An Individual supply curve is a graphical representing different quantities of a commodity that would be supplied at different price by individual firm in the market.

MARKET SUPPLY

Market supply refers to the total quantity supplied of a commodity by all the firms in the market at a given price.

MARKET SUPPLY SCHEDULE

Market supply schedule is a tabular statement which show total of various quantities offered for sale by all the firms at different prices.

Factors that affect supply of a commodity are:

• PRICE OF THE COMMODITY
• NUMBER OR FIRMS
• CHANGE IN TECHNOLOGY
• GOVERNMENT POLICY
• EXPECTED FUTURE PRICE
• PRICE OF FACTORS OF PRODUCTION
• GOAL OF THE FIRM
• PRICES OF OTHER GOODS

LAW OF SUPPLY

The law of supply states that other thing remaining constant, when higher the price, greater the quantity supplied. Lower the price, smaller the quantity supplied.”

REASONS FOR LAW SUPPLY

• Profit Motive
• Change in number of firms
• Change in stock

The various exceptions to the law of supply

• Future Expectations
• Agricultural goods
• Perishable goods

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Meaning of profit

Profit refers to the excess of receipts from the sale of goods over the expenditure incurred on producing them.

Producer’s equilibrium

Producer’s equilibrium refers to that price and output combination which brings maximum profit to the producer and profit declines as more is produced.

There are two methods for determination of producer’s equilibrium:

1. Total revenue and total cost approach (TR-TC approach)
2. Marginal revenue and marginal cost approach (MR-MC approach)

Both the conditions are needed for producer’s equilibrium

1. MC=MR
2. MC is greater than MR after MC= MR output level

Relation between price and MC at equilibrium (when price remains constant)

When price remains same at all levels of output, then price (or AR) = MR. as equilibrium is achieved when MC=MR, it means, price is equal to MC at the equilibrium level.

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REVENUE

Revenue of a firm is its sale receipt or money receipt from the sale of a product.”

For example, if a firm gets Rs 16,000 from sale of 100 chairs the amount of Rs 16,000 is known as revenue.

TOTAL REVENUE

Total revenue is a sum of all the sales receipts.” Total revenue refers to total receipts from the sale of a given quantity of a commodity.

AVERAGE REVENUE

Average revenue is the per unit revenue received from the sale of a commodity.

                AR = TOTAL REVENUE

                                QUANTITY SOLD

                AR = PRICE * QUANTITY SOLD

                                QUANTITY SOLD

 MARGINAL REVENUE

Marginal revenue is a change in total revenue which results from the sale of one more of one less unit of output.

Relationship between AR and MR (when price is constant) (in case of perfect competition)

When price remains same at all output levels, no firm is in a position to influence the market price of the product. A firm can sell more quantity of output at the same price. It means the revenue from every additional unit MR is equal to AR. As a result, both AR and MR curves horizontal straight line parallel to the X-axis.

Relationship between TR and MR (when price remains constant)

(Under perfect competition)

When price remains constant, firms can sell any quantity of output at the price fixed by the market. As a result, MR curve is a horizontal straight line parallel to the X-axis. MR remains constant, TR increases at a constant rate.

Relationship between AR and MR (when price falls with rise in output)

(Under imperfect competition)

When firms can increase their volume of sales only by decreasing the price, then AR falls with increase in sale. IT means revenue from every additional unit MR will be less than AR. As a result, both AR and MR curves slope downwards from left to right.

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MEANING OF COST OR PRODUCTION COST

Money expenditure incurred by a firm in production of a commodity is called the cost of production.

COST FUNCTION

A cost function studies the functional relationship between cost and output

SELLING COST

Selling cost refers to the expenditure incurred by the producer in order to promote sale of the commodity

REAL COST

Real cost refers to the pain, discomfort and disutility involve in supplying the factors of production by their owner.

 EXPLICIT COST

These are those cash payment firm makes to outsider for their goods and services.

For Example: wages are paid to the workers, payment made for raw material and semi manufacture good, interest pay on loan, depreciation allowances.

IMPLICIT COST

Implicit costs are cost of self owned and self employed resources.

For example: interest on his own capital, rent on the land owned by him, wages for his own labor.

MONEY COST

The amount spent on in terms of money for the production and sale of commodity is called money cost. For example: value of raw material, interest, rent, wages, electricity or motive power charges, depreciation, publicity expenses, insurance, packing transportation cost etc.

TYPES OF MONEY COST

• TOTAL COST: Total cost of production is the sum of all expenditure incurred in producing a given volume of output.

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CONCEPT OF PRODUCTION FUNCTION

Production function is an expression of the technological relationship between physical inputs and physical output of a commodity.

PERIOD IN PRODUCTION

• VERY SHORT PERIOD
• SHORT PERIOD
• LONG PERIOD

Variable factors and Fixed factors

Variable factors

Variable factors refers to those factors, which can be changed in the short run, for example raw material, casual labour, power fuel etc. Variable factors very directly with the level of output . As output increase, requirement for variable factors also rises.

Fixed factors

Fixed factors refers to those factors, which cannot be changed in the short run. For example plant and machinery, building, land etc.

CONCEPT OF PRODUCTION

• TOTAL PHYSICAL PRODUCT (TPP) OR TOTAL PRODUCT (TP): “Total physical product is the total quantity of goods and services produced by a firm with the given inputs during a specified period of time.”

• AVERAGE PRODUCT (AP): “Average product is the amount of output produced per unit of the variable factor employed.”

• Marginal product (MP): “Marginal product is the change in total production due to application of one more or one less unit of variable factor.”

THE LAW OF VARIABLE PROPORTION

In a production process when only one factor is varied and all other factors remain constant, as more and more units of variable factor are employed, the proportion between fixed and variable factors goes on changing. So it is termed as the law of variable proportions. This law states that if you go on using more and more units of variable factor (labour) with fixed factor (capital), the total output initially increases at an increasing rate but beyond a certain point, it increases at a diminishing rate and finally it falls.

REASONS OF INCREASING RETURNS

• Utilization of fixed factor
• Increased efficiency of variable factor
• Indivisibility of fixed factor

REASONS OF DIMINISHING RETURNS

• Optimum combination of factors
• Imperfect substitutes

REASONS OF NEGATIVE RETURNES TO A FACTOR

• Limitation of Fixed factor
• Poor coordination between variable and fixed factor
• Decrease in efficiency of variable factor

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DEFINATION OF ELASTICITY OF DEMAND

“The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and changes in consumer’s income.”

PRICE ELASTICITY OF DEMAND: “The price elasticity of demand is the degree of responsiveness of the demand for a commodity to change in its price.”

INCOME ELASTICITY OF DEMAND: “The Cross elasticity of demand is the degree of responsiveness of the demand for a commodity X to change in its price of commodity Y.”

CROSS ELASTICITY OF DEMAND: “The Cross elasticity of demand is the degree of responsiveness of the demand for a commodity X to change in its price of commodity Y.”

• PERFECTLY ELASTIC DEMAND: “It is a situation where demand for the commodity that is price remains constant. ED=INFINITE.

SCHEDULE:

• PERFECTLY IN ELASTIC DEMAND: When demand for a commodity remain constant in response to change in price of the commodity. ED=0

SCHEDULE:

• UNIT ELASTIC DEMAND: When percentage change in demand is equal to percentage change in price, then demand for the commodity is said to be unit elastic. ED=1

SCHEDULE

• MORE THAN UNIT ELASTIC DEMNAD: When percentage change in demand is more than percentage change in price, the demand is said to be more than unit elastic demand. ED>1

SCHEDULE:

DEFINATION OF ELASTICITY OF DEMAND

“The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and changes in consumer’s income.”

PRICE ELASTICITY OF DEMAND: “The price elasticity of demand is the degree of responsiveness of the demand for a commodity to change in its price.”

INCOME ELASTICITY OF DEMAND: “The Cross elasticity of demand is the degree of responsiveness of the demand for a commodity X to change in its price of commodity Y.”

CROSS ELASTICITY OF DEMAND: “The Cross elasticity of demand is the degree of responsiveness of the demand for a commodity X to change in its price of commodity Y.”

• PERFECTLY ELASTIC DEMAND: “It is a situation where demand for the commodity that is price remains constant. ED=INFINITE.

SCHEDULE:

PERFECTLY IN ELASTIC DEMAND: When demand for a commodity remain constant in response to change in price of the commodity. ED=0

SCHEDULE:

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