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Page 1: Dibrugarh University - Business Economics Study Guide

B.com 2nd Semester - Business Economics Study Guide for May’ 2015 Exam

1 Kumar Nirmal Prasad; Contact No.: 9577097967; Email: [email protected] For Online notes and Question Paper, log on to dynamictutorial.blogspot.com

Course No. 202 BUSINESS ECONOMICS (BECO VI) - New Course

(For B.Com.General And Six Speciality Courses)

Marks: 80

Hours: 40

Objective: This course is meant to acquaint the students with the principles of Business Economics as are

applicable in business.

Course Contents:

Unit I: Introduction: Meaning, nature, scope, characteristics of Business Economics; Relationship between Business Economics and Traditional Economics; Basic Problems of an economic system, Working of price mechanism. 20: 10

hrs

Unit II: Elasticity of Demand: Concepts, measurements, practical importance of elasticity of demand for business management; Supply theory. 20: 10 hrs

Unit III: Production Function: Law of variable proportions; Isoquants; Economic regions and optimum factor

combination; Expansion path; Returns to scale; Internal and external economies and diseconomies. 20: 10 hrs

Unit IV: Market Structure: Objectives of Business Firms; Perfect competition: Profit maximization and equilibrium

of firm and industry; Short-run and long-run supply curves; Price and output determination. 20: 10 hrs

Business Economics Syllabus (Old Course)

UNIT-I: Introduction to Business Economics:

Meaning, nature, Scope, characteristics of Business Economics; Relationship between Business Economics and

Traditional Economics; Basic Problems of an economic system, working of price mechanism.

UNIT-II: Elasticity of Demand:

Concepts; Measurements; Determining factors and importance; Supply theory.

UNIT-III: Production function:

Law of Variable proportion; lsoquant; Economic region and optimum factor combination; Expansion path; Returns to scale; Internal and external economics and diseconomies.

UNIT-IV: Market Structure:

Objectives of Business firms; Perfect competition: profit minimization and equilibrium of firm and industry, Short –

run and long – run supply Curves, Price and output determination.

UNIT-V: Monopoly:

Determination of price under monopoly; Perfect competition and monopoly; price discrimination. Oligopoly:

characteristics; determining pricing and output; price leadership collasive oligopoloy; kinked demand curve.

Text and Reference Books:

1. Jhingan & Upadhya: Business Economics, Vrinda Publications (P) Ltd, Delhi.

2. John P. Gould, Jr. and Edward P. Lazear: Micro-economics Theory; All India Traveller, Delhi.

3. Browing Edger K. and Browing Jacquelence M: Micro economic Theory and Applications; Kalyani, New

Delhi.

4. Waston Donald S. and Getz Molcolm; Price Theory and its Uses; Khosla Publishing House, New Delhi.

5. Hingan: Business Economics, Vikash Publishers, New Delhi.

6. Soloman: Economics for Business, Pearson, New Delhi.

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2 Kumar Nirmal Prasad; Contact No.: 9577097967; Email: [email protected] For Online notes and Question Paper, log on to dynamictutorial.blogspot.com

7. Mukherjee: Business Economics, Micro and Macro, New Central Book Agency, Hyderabad.

8. Mukherjee: Business Economics, New Central Book Agency, Hyderabad.

1.Basic Problems of Indian Economy

Since 1991, the Indian economy has pursued free market liberalisation, greater openess in trade and increase investment in infrastructure. This helped the Indian economy to achieve a rapid rate of economic growth

and economic development. However, the economy still faces various problems and challenges.

1. Inflation: Fuelled by rising wages, property prices and food prices inflation in India is an increasing problem. Inflation is currently between 8-10%. This inflation has been a problem despite periods of economic slowdown. For example in late 2013, Indian inflation reached 11%, despite growth falling to 4.8%. This suggests that inflation is not just due to excess demand, but is also related to cost push inflationary factors.

2. Poor educational standards: Although India has benefited from a high % of English speakers, there is still high levels of illiteracy amongst the population. It is worse in rural areas and amongst women. Over 50% of Indian women are illiterate. This limits economic development and a more skilled workforce.

3. Poor Infrastructure: Many Indians lack basic amenities lack access to running water. Indian public services are creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before it reaches the market.

4. Balance of Payments deterioration: Although India has built up large amounts of foreign currency reserves the high rates of economic growth have been at the cost of a persistent current account deficit. In late 2012, the current account reached a peak of 6% of GDP. Since then there has been an improvement in the current account. But, the Indian economy has seen imports growth faster than exports. This means India needs to attract capital flows to finance the deficit. Also, the large deficit caused the depreciation in the Rupee between 2012 and 2014.

5. Inequality has risen rather than decreased: It is hoped that economic growth would help drag the Indian poor above the poverty line. However so far economic growth has been highly uneven benefiting the skilled and wealthy disproportionately. Many of India’s rural poor are yet to receive any tangible benefit from the India’s economic growth.

6. Large Budget Deficit: India has one of the largest budget deficits in the developing world. Excluding subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little scope for increasing investment in public services like health and education.

7. Rigid labour Laws: As an example Firms employing more than 100 people cannot fire workers without government permission. The effect of this is to discourage firms from expanding to over 100 people. It also discourages foreign investment.

8. Inefficient agriculture: Agriculture produces 17.4% of economic output but, over 51% of the work force are employed in agriculture. This is the most inefficient sector of the economy and reform has proved slow.

9. Slowdown in growth: 2013/14 has seen a slowdown in the rate of economic growth to 4-5%. Real GDP per capita growth is even lower. This is a cause for concern as India needs a high growth rate to see rising living standards, lower unemployment and encouraging investment. India has fallen behind China, which is a comparable

developing economy.

2. Business or Managerial Economics:

Managerial Economics generally refers to the integration of economic theory with business practice. While economics provides the tools which explain various concepts such as Demand, Supply, Price, Competition etc. Managerial Economics applies these tools to the management of business. In this sense, Managerial Economics is also understood to refer to business economics or applied economics.

Definitions of Managerial Economics

According to Prof. Spencer Sigelman, Managerial Economics deals with integration of economic theory with

business practice for the purpose of facilitating decision making and forward planning by management.

According to Prof. Hauge, Managerial Economics is concerned with using logic of economics, mathematics

& statistics to provide effective ways of thinking about business decision problems.

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According to Prof. Joel Dean, The purpose of Managerial Economics is to show how economic analysis can

be used in formulating business policies.

Nature and characteristics of Managerial Economics:

1. Microeconomics: It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market.

2. Normative economics: It is concerned with varied corrective measures that a management undertakes under various circumstances. It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision-making and optimal utilisation of available resources, come under the banner of managerial economics.

3. Pragmatic: Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed, based on certain exceptions, which are far from reality.

4. Uses theory of firm: Managerial economics employs economic concepts and principles, which are known as the theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory.

5. Takes the help of macroeconomics: Managerial economics incorporates certain aspects of macroeconomic theory. Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the successful functioning of a business enterprise.

6. Aims at helping the management: Managerial economics aims at supporting the management in taking corrective decisions and charting plans and policies for future.

7. A scientific art: Science is a system of rules and principles engendered for attaining given ends. Scientific methods have been credited as the optimal path to achieving one's goals. Managerial economics has been is also called a scientific art because it helps the management in the best and efficient utilisation of scarce economic resources.

8. Prescriptive rather than descriptive: Managerial economics is a normative and applied discipline. It suggests the application of economic principles with regard to policy formulation, decision-making and future planning. It not only describes the goals of an organisation but also prescribes the means of achieving these goals.

Scope of Managerial Economics

The scope of Managerial Economics is so wide that it embraces almost all the problems and areas of the manager and the firm. It deals with demand analysis and forecasting, resource allocation, production function, cost analysis,inventory management , advertising, price system, capital budgeting etc. However, the scope of

managerial economics may be discussed under following points:

a) Demand analysis and forecasting : Demand forecasting is the process of finding the values for demand in future time period. The current values are needed to make optimal current pricing and promotional policies, while future values are necessary for planning future production inventories, new product development etc. Correct estimates of demand is essential for decision making , strengthening market position and enlarging

profits.

b) Cost and Production Analysis: Production deals with the physical aspects of the business investment. It is the process whereby inputs are transformed into outputs. Efficiency of production depends on ratio in which various inputs are employed absolute level of each input and productivity of each input. A production function is the relation which gives us the technically efficient way of producing the output given the inputs. The firm must undertake cost estimation and forecasting to judge the optimality of present output levels and assess the optimal level of production in future.

c) Inventory Management: It refers to stock of raw materials which a firm keeps. If it is high, capital is unproductively tide up which might, if stock of inventory is reduced, be used for other productive purpose . On the other hand, if the level of inventory is low, production will be hampered. Hence, managerial economics with methods such as ABC analysis a simple simulation exercise and some mathematical models with a view to minimize

inventory cost.

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d) Advertising: Managerial economics helps in determining the total advertising cost and budget, the

measuring of economic effects of advertising and form an integral part of decision making and forward planning.

e) Market Structure and Pricing Policies: Managerial economics helps to clear surplus and excess demand to bring market equilibrium as there is continuos changes in market. Success of business firm depends on correctness of price decisions. Price theory works according to the nature of the market depending on the

number of sellers, demand conditions etc.

f) Resource Allocation: Managerial economics with the help of advanced tools such as linear programming are used to arrive at the best course of action for the maximum use of the available resources and its

substitutes.

g) Capital Budgeting: Capital is scarce and it costs something . Hence, managerial economics helps in decision making and forward planning on allocation of capital to various factors of productions , marketing and

management.

h) Investment Analysis: It involves planning and control capital expenditure. Whether or not to invest funds in purchase of assets or other resources in an attempt to make profit and how to choose among completing uses of funds. Managerial economics help in analysis and decision making on the investment

of funds.

i) Risk and Uncertainty Analysis: As business firm have to operate under conditions of risk and uncertainty both decision making and forward planning becomes difficult. Hence managerial economics helps the business firm in decision making and formulating plans on the basis of past data, current information and future

prediction.

Objectives of Business Economics

Managerial economics provides such tools necessary for business decisions. Managerial economics answers

the five fundamental problems of decision making. These problems are:

(a) What should be the product mix?

(b) Which is the least cost production technique and input mix?

(c) What should be the level of output and price of the product?

(d) How to take investment decisions

(e) How much should be the selling cost. In order to solve the problems of decision- making, data are to be collected and analysed in the light of business objectives. Business economics supplies such data to the business

economist.

As pointed out by Joel Dean "The purpose of managerial economics is to show how economic analysis can be used in formulating business policies" The basic objective of managerial economics is to analyse economic problems of business and suggest solutions and help the managers in decision-making. The objectives of business

economics are outlined as below:

To integrate economic theory with business practice. To apply economic concepts: and principles to solve business problems. To employ the most modern instruments and tools to solve business problems. To allocate the scarce resources in the optimal manner. To make overall development of a firm. To help achieve other objectives of a firm like attaining industry leadership, expansion of the market

share etc. To minimise risk and uncertainty To help in demand and sales forecasting. To help in operation of firm by helping in planning, organizing, controlling etc. To help in formulating business policies.

To help in profit maximisation.

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Uses of Business Economics

Business economics is useful because:

(i) It provides tools and techniques for managerial decisions,

(ii) It gives answers to the basic problems of business management,

(iii) It supplies data for analysis and forecasting,

(iv) It provides tools for demand forecasting and profit planning,

(v) It guides the managerial economist.

Thus, Business economics offers a number of benefits to business managers. It is also useful to individuals,

society and government.

3. Managerial Economics and Traditional Economics:

Relationship

In the words of Haynes “The relation of managerial economics to economic theory is much like that of engineering to physics, or of medicine to biology or bacteriology. It is the relation of an applied field to the more fundamental but more abstract basic discipline from which it borrows concepts and analytical tools. The fundamental theoretical fields will no doubt on the long run make the greater contribution to the extension of human knowledge. But the applied fields involve the development of skills that are worthy of respect in themselves and that require specialized training. The practicing physician may not contribute much to the advance of biological theory but he plays an essential role in producing the fruits of progress in theory. The managerial economist stands in a similar relation to theory with perhaps the difference that the dichotomy between the pure and the “applied”

is less clear in management than it is in medicine.”

Managerial economics has been defined as economics applied in decision-making. It is a special branch of economics bridging the gap between economic theory and managerial practice. The relationship between managerial economics and traditional economics is facilitated by considering the structure of traditional study. The traditional fields of economic study about theory, Micro economics focuses on individual consumers firms and industries. Macro economics focuses on aggregations of economics units, especially national economics. The emphasis on normative economics focuses on prescriptive statements that are established rules on the specified field. Positive economics focuses on description that describes that manner in which economics forces operate without attempting to state how they should operate. The focus of each field of study is sufficiently well defined to warrant the breakdown suggested.

Since each area of economics has some bearing on managerial decision making, managerial economics draws from them all. In practice, some are more relevant to the business firm that others and hence to managerial economics. Both micro-economics and macro-economics are important in managerial economics but the micro economic theory of the firm is especially significant. The theory of firm is the single most important element in managerial economics. However, because the individual firm is influenced by the general economy, that is domain of macro economics. Managerial economics is certainly on normative theory. We want to establish decision rules that will help managers attain the goals of their firm, agency or organization; this is the essence of the word normative. If managers are to establish valid decision rules, however, they must thoroughly know the environment in which they operate for this reason positive or descriptive economics is

important.

Surveys conducted in various countries showed that business economists have found economic concepts such as price elasticity of demand, income elasticity of demand, opportunity casts, the multiplier, propensity to consume, marginal revenue products,. Speculative motive, production function, balanced growth, liquidity preference etc., quite useful and of frequent application. They have also found the following main areas of

economics as useful in their works:

1. Demand theory 2. Theory of the firm-price and output

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3. Business financing 4. Public Finance and Fiscal Policy 5. Money and banking 6. National income and Social accounting 7. Theory of international trade, and

8. Economics of developing countries.

Difference between Managerial Economics and Traditional Economics:

The difference between managerial economics and economics can be understood with the help of the

following points:

1. Managerial economics involves application of economic principles to the problems of a business firm whereas; economics deals with the study of these principles only. Economics ignores the application of economic principles to the problems of a business firm.

2. Managerial economics is micro-economic in character; however, Economics is both macro-economic and micro-economic.

3. Managerial economics, though micro in character, deals only with a firm and has nothing to do with an individual’s economic problems. But microeconomics as a branch of economics deals with both economics of the individual as well as economics of a firm.

4. Economics is both positive and normative science but the Managerial Economics is essentially normative in nature.

5. Economics deals mainly with the theoretical aspect only whereas Managerial Economics deals with the practical aspect.

6. Managerial Economics studies the activities of an individual firm or unit. Its analysis of problems is micro in nature, whereas Economics analyzes problems both from micro and macro point of views.

7. Under Economics we study only the economic aspect of the problems but under Managerial Economics we have to study both the economic and non-economic aspects of the problems.

8. Economics studies principles underlying rent, wages, interest and profits but in Managerial Economics we study mainly the principles of profit only.

9. Sound decision-making in Managerial Economics is considered to be the most important task for the improvement of efficiency of the business firm; but in Economics it is not so.

10. The scope of Managerial Economics is limited and not as wide as that of Economics. Thus, it is obvious that Managerial Economics is very closely related to Economics but its scope is narrow as compared to Economics.

11. Under microeconomics, the distribution theories, viz., wages, interest and profit, are also dealt with. Managerial economics on the contrary is mainly concerned with profi t theory and does not consider other distribution theories.

12. Economics involves the study of certain assumptions like in the law of proportion where it is assumed that “The variable input as applied, unit by unit is homogeneous or identical in amount and q uality”. Managerial economics on the other hand, introduces certain feedbacks. These feedbacks are in the form of objectives of the firm, multi-product nature of manufacture, behavioral constraints, environmental aspects, legal constraints, constraints on resource availability, etc.

Thus managerial economics, attempts to solve the complexities in real life, which are assumed in economics. this is done with the help of mathematics, statistics, econometrics, accounting, operations research,

etc.

4. Price Mechanism

Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein. It is the buyers and sellers who actually determine the price of a commodity. Price mechanism is the outcome of the free play of market forces of demand and supply. However, sometimes the

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government controls the price mechanism to make commodities affordable for the poor people too.

For example, the Government of India recently passed an order to decontrol the prices of diesel and remove it from the jurisdiction of the government. Now the prices will be determined by the demand from

consumers and supply from the oil companies.

Shortcomings of Price mechanism

(1) Imperfection of completion: the working of the price mechanism assumes the existence of perfect completion in the economic system. But in practice, perfect completion does not exist; instead monopolistic forces

prevail in many industries. These reduce supply and raise prices which are against the interests o f the consumers.

(2) Loss of consumer’s sovereignty: it is stated that under market mechanism the consumers enjoyed complete freedom in choice of goods and services. Producers produced those goods and services that are demanded by the consumers. But in the real world consumer’s sovereignty is limited. For instance the demand of consumer is influenced by advertisement, personal selling social customs etc. Further there is in inequality of

incomes among people and consequently the market demand but only the demand of well to do consumers.

(3) Elimination of completion: price mechanism is to encourage completion. But according to critics it is price mechanism itself that accounts for the elimination completion. In their desire of profit, competing firms attempt to eliminate is rightly said that “Monopoly is the mechanism of completion and at the same time its logical

conclusion.” It is the negation of all the values for which market mechanism stands.

(4) Unequal Distribution of Income: the price mechanism through completion brings huge profits to big producers, the landlords, the entrepreneurs and the traders who accumulate vast amount of wealth and luxury the

poor live in poverty and squalor.

(5) Non-utilization if resources: the price mechanism fails to employ the country’s resources fully. Free and cut throat competition, inequalities of income distribution over production and consequent depression lead to wastage also, as frivolous luxury goods are produced poor. Similarly natural resources are exploited for t he short-run effect on the economy, for example soil erosion occurs when forests of timber are cut down by greedy contractors.

(6) Ignores social goods: price mechanism mainly takes into account individual wants but does not provide for social goods and social overheads like education, health, care, transport & communication services. These goods and services needed for the overall economic growth of the system may not be provided/produced by private individuals. This is because in such industries, huge investments are required; having there is a need for

some intervention from some entity to overcome this limitation of the price mechanism.

(7) Ignores social cost: While determining his cost of production the producers include only the private cost of production (the price paid to factors of production and other inputs). He fails to include the social costs (e.g. air, water, and noise pollution) on his production process. Since social costs are not included in the market price, the

producer produces an output which is larger than desirable.

The above shortcoming of price mechanism have led the free enterprise economics of West to modify the capital system by regulating and controlling the institutions of private property and freedom of enterprise to serve

the best interests of the community at large.

5. INTRODUCTION – ELASTICITY OF DEMAND

Demand is desire backed by willingness to pay and ability to pay i.e. a wish to have a commodity does not become demand. A person wishing to have a commodity should be willing to pay for it and should have ability to pay for it. Thus a desire becomes demand if it is backed by willingness to pay and ability to pay. Demand is

meaningless unless it is stated with reference to a price.

Decisions regarding what to produce, how to produce and for whom to produce are taken on the basis of price signals coming from the market. The law of demand explains inverse relationship between price and quantity

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demanded. When price falls quantity demanded of that commodity will increase. The deficiency of law of demand

is removed by the concept of elasticity of demand.

MEANING AND DEFINITION OF ELASTICITY OF DEMAND

The term elasticity was developed by Alfred Marshall, and is used to measure the relationship between price and quantity demanded. The law states that the price of a commodity falls, the quantity demanded of that commodity will increase, i.e. it explains only the direction of change in demand and not the extent of change. This

deficiency is removed by the concept of elasticity of demand.

Elasticity means responsiveness. Elasticity of demand refers to the responsiveness of quantity demanded of

a commodity to change in its price.

According to E.K. Estham, “elasticity of demand is a measure of the responsiveness of quantity demanded

to a change in price”.

TYPES OF ELASTICITY: These are three types of elasticity:-

a) Price elasticity b) Income elasticity

Zero income elasticity Negative income elasticity Positive income elasticity

c) Cross elasticity

Price Elasticity: Price elasticity of demand may be defined as the degree of responsiveness of quantity demanded of a commodity in response to change in its price i.e. it measures how much a change in price of a good affects demand for that good, all other factors remaining constant. It is cal culated by dividing the proportionate

change in quantity demanded by the proportionate change in price.

EP= Proportionate change in quantity demanded/ Proportionate change in price

Income elasticity: Income elasticity of demand measures how much a change in income affects demand for that commodity if the price and other factors remains constant.

EY= Proportionate change in quantity demanded/ Proportionate change in income

A product with an income elasticity of more than one will experience a growth in demand that is higher than growth in consumer’s income. Luxury goods tend to have relatively high income elasticity. Low quality goods

have negative income elasticities, as people stop buying them when they can afford to.

There are three types of income elasticity:

Zero income elasticity – Here a change in income will have no effect of quantity demanded. For example: -

salt, matches, cigarettes.

Negative income elasticity – Here an increase in income leads to a decrease in quantity demanded. This

happens in inferior goods.

Positive income elasticity – In this an increase in income will leads to an increase in quantity demanded. For

most goods income elasticity is positive.

Cross elasticity: This measures the change in demand for a commodity due to change in price of another

commodity.

ED= Percentage change in quantity demanded of commodity A/ Percentage change in price of commodity B

If the goods having substitutes the cross elasticity is positive i.e. an increase in the price of X will result in an increase in sales of Y. If the goods are complementary and increase in the price of one commodity will depress the demand for the other. So cross elasticity will be negative. If the goods are unrelated cross elasticity will be zero.

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Because however much the price of one commodity increased demand for the other will not be affected by that

increase. There exist another two types of cross elasticity viz.

Advertisement elasticity and

Elasticity of price expectation.

Advertisement elasticity or Promotional elasticity: The expenditure n advertisement and other sales promotion activities does help in promoting sales, but not in the same degree at all levels of the total sales. The concept of advertisement elasticity is useful in determining the optimum level of advertisement expenditure. It

may be defined as, “the responsiveness of demand t to changes in advertising or other promotional expenses”.

Proportionate change in sales

Proportionate change in advertising and other promotional expenditure

Elasticity of price expectations: The price expectation elasticity refers to the expected change in future

price as a result of change in current price of a product.

pf / pf pf pc

pc/pc pc pf

Where Pc and Pf are current and future price. The coefficient ex gives the measure of expected percentage change in future price as a result of 1 percent change in present price. If ex > 1 it indicates the future change in price will be greater than the present change in price. If ex=1, it indicates that the future change in price will be

equal to the change in current price. In ex > 1, the sellers will sell more in the future at higher prices.

DEGREES OF ELASTICITY

Since the responsiveness of quantity demanded varies from commodity to commodity and from market to

market, it is important to study the degrees of price elasticity. We can identify five degrees of elasticity. They are: -

1. Perfectly elastic demand 2. Perfectly inelastic demand 3. Unitary elastic demand 4. Relatively elastic demand

5. Relatively inelastic demand

1. Perfectly elastic demand: Perfectly elastic demand is the situation where a small change in price causes a substantial change in quantity demanded i.e. a slight decline in price causes an infinite increase in quantity demanded and a slight increase in price leads to demand contracting to zero. The demand is hypersensitive and the

elasticity of demand is infinite.

2. Perfectly inelastic demand: It is the situation where changes in price cause no change in quantity

demanded. Quantity demanded is non-responsive or inelastic.

3. Unitary elastic demand: It refers to that situation where a given proportionate change in price is accompanied by an equally proportionate change in quantity demanded. For example, if price changes by 10%,

quantity demanded also changes by 10%. ep= 10/10 = 1

4. Relatively elastic demand: Demand is said to be relatively elastic when a given proportionate change in

Price causes a more than proportionate change in quantity demanded.

5. Relatively Inelastic demand: Demand is relatively inelastic when a given proportionate change in price causes a less than proportionate change in quantity demanded. Demand curve will be a very steep cu rve. Elasticity is less than 1. For example, If price changes by 20% quantity demanded changes by 10% Then ep = 10/20 = .5 ie;

ep<1

EA =

ex = x ==

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Of the five degrees of elasticity perfectly elastic and perfectly inelastic are extreme cases i.e. rarely found in actual life. Unitary elasticity, relatively elastic and relatively inelastic demand are the most widely used price

elasticties.

FACTORS INFLUENCING PRICE ELASTICITY OF DEMAND

1. Nature of commodity: Elasticity depends on whether the commodity is a necessity, comfort or luxury.

Necessities of life have inelastic demand and comforts and luxuries have elastic demand.

2. Availability of substitutes: Goods with substitutes have elastic demand and goods without substitutes have inelastic demand. For example: coffee and tea are substitutes. If price of tea increases, people may switch

over to coffee. If price of coffee raises people may shift to tea. The demand of salt is inelastic.

3. Uses of the commodity: Certain goods can be put to many uses. Example – electricity. Such goods have

elastic demand because as the price decreases, they will be put to more uses.

4. Proportion of income spent on commodity: For some goods, consumers spend only a small part of their

income. The demand will be inelastic. For eg: - salt and matches

5. Price of goods: Generally cheap goods have inelastic demand and expensive goods have elastic demand.

6. Income of consumers: Very rich people have inelastic demand for goods and poor people have elastic demand. Because rich people will buy the commodity at all levels of prices where poor people there is a change in

quantity of consumption according to change in price.

7. Time period: Elasticity would be more in the long run than in the short run. Because in the long run consumers can adjust their demand by switching over to cheaper substitutes. Production of cheaper substitutes is

possible only in the long run.

8. Distribution of income and wealth in the society: If there is unequal distribution of income, the demand of commodities will be relatively inelastic. If the distribution of income and wealth in the society is equal there will

be elastic demand for commodities.

Measurement of Elasticity of Demand

Elasticity of demand can be measured through three popular methods. These methods are:

1. Percentage method or Arithmetic method

2. Total Expenditure method

3. Graphic method or point method.

1. Percentage method: According to this method elasticity is estimated by dividing the percentage change

in amount demanded by the percentage change in price of the commodity.

2. Total expenditure method: Total expenditure method was formulated by Alfred Marshall. The elasticity of demand can be measured on the basis of change in total expenditure in response to a change in price. It is worth noting that unlike percentage method a precise mathematical coefficient cannot be determined to know the

elasticity of demand.

3. Graphic method: Graphic method is otherwise known as point method or Geometric method. This method was popularized by method. According to this method elasticity of demand is measured on different points on a straight line demand curve. The price elasticity of demand at a point on a straight line is equal to the lower

segment of the demand curve divided by upper segment of the demand curve .

Importance of Elasticity of Demand

1. Determination of price policy: While fixing the price of this product, a businessman has to consider the elasticity of demand for the product. He should consider whether a lowering of price will stimulate demand for his

product, and if so to what extent and whether his profits will also increase a result thereof.

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2. Price discrimination: Price discrimination refers to the act of selling the technically same products at different prices to different section of consumers or in different in sub-markets. The policy of price-discrimination is profitable to the monopolist when elasticity of demand for his product is different in different sub -markets. Those

consumers whose demand is inelastic can be charged a higher price than those with more elastic demand.

3. Shifting of tax burden: To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his product depends upon the degree of elasticity of demand. If the demand is inelastic the larger part of the indirect tax can be shifted upon buyers by increasing price. On the other hand if the demand is

elastic than the burden of tax will be more on the producer.

4. Taxation and subsidy policy: The government can impose higher taxes and collect more revenue if the demand for the commodity on which a tax is to be levied is inelastic. On the other hand, in ease of a commodity with elastic demand high tax rates may fail to bring in the required revenue for the government. Govt., should provide subsidy on those goods whose demand is elastic and in the production of th e commodity the law of

increasing returns operates.

5. Importance in international trade: The concept of elasticity of demand is of crucial importance in many aspects of international trade. The success of the policy of devaluation to correct the adverse b alance of payment

depends upon the elasticity of demand for exports and imports of the country.

6. Importance in the determination of factors prices: Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand. This helps the trade unions in knowing that where they can easily get the wage rate increased. Bargaining capacity of trade unions depend upon elasticity of

demand for workers services.

7. Determination of sale policy for supper markets: Super Markets is a market where in a variety of goods are sold by a single organization. These items are generally of mass consumption. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazars. Thus, the policy adopted is to charge a slightly lower price for items whose demand is relatively elastic and the costs are covered by

increased sales.

8. Pricing of joint supply products: The goods that are produced by a single production process are joint supply products. The cost of production of these goods is also joint. Therefore, while determining the prices of

these products their elasticity of demand is considered.

9. Effect of use of machines on employment: The use of machines may reduce the cost of production and price. If the demand of the product is elastic then the fall in price will increase demand significantly. As a result of

increased demand the production will also increase and more workers will be employed.

10. Public utilities: The nationalization of public utility services can also be justified with the help of elasticity of demand. Demand for public utilities are generally inelastic in nature. If the operation of such utilities is

left in the hand of private individuals, they may exploit the consumers by charging high prices.

11. Output decisions: The elasticity of demand helps the businessman to decide about production. A businessman chooses the optimum product- mix on the basis of elasticity of demand for various products. The products having more elastic demand are preferred by the businessmen. The sale of such products can be

increased with a little reduction in their prices.

From the above discussion it is amply clear that price elasticity of demand is of great significance in making

business decisions.

6. Law of Demand

Among the many causal factors affecting demand, price is the most significant and the price - quantity relationship called as the Law of Demand is stated as follows: "The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers, or in other words, the amount demanded

increases with a fall in price and diminishes with a rise in price" (Alfred Marshall).

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In simple words other things being equal, quantity demanded will be more at a lower price than at higher price. The law assumes that income, taste, fashion, prices of related goods, etc. remain the same in a given period. The law indicates the inverse relation between the price of a commodity and its quantity demanded in the market. However, it should be remembered that the law is only an indicative and not a quantitative statement. This means

that it is not necessary that such variation in demand be proportionate to the change in price.

Assumptions to law of demand

The statement of the law of demand, demonstrates that that this law operates only when all other things remain constant. These are then the assumptions of the law of demand. We can state the assumptions of the law

of demand as follows:

1. Income level should remain constant: The law of demand operates only when the income level of the buyer remains constant. If the income rises while the price of the commodity does not fall, it is quite likely that the

demand may increase.

2. Tastes of the buyer should not alter: It often happens that when tastes or fashions change people revise their preferences. As a consequence, the demand for the commodity which goes down the preference scale of the

consumers declines even though its price does not change.

3. Prices of other goods should remain constant: Changes in the prices of other goods often affect the demand for a particular commodity. Therefore, for the law of demand to operate it is imperative that prices of

other goods do not change.

4. No new substitutes for the commodity: If some new substitutes for a commodity appear in the market, its demand generally declines. This is quite natural, because with the availability of new substitutes some buyers will be attracted towards new products and the demand for the older product will fall even though price remains unchanged. Hence, the law of demand operates only when the market for a commodity is not threatened by new

substitutes.

5. Price rise in future should not be expected: If the buyers of a commodity expect that its price will rise in future they raise its demand in response to an initial price rise which violates the law of demand. Therefore, it is

necessary that there must not be any expectations of price rise in the future.

6. Advertising expenditure should remain the same If the advertising expenditure of a firm increases, the consumers may be tempted to buy more of its product. Therefore, the advertising expenditure on the good under

consideration is taken to be constant.

Exceptions of the 'Law of Demand'

The law of demand does not apply in every case and situation. The circumstances when the law of demand

becomes ineffective are known as exceptions of the law. Some of these important exceptions are as under.

1. Giffen goods: Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties of this category like bajra, cheaper vegetable like potato come under this category. Giffens’s Paradox describes a peculiar experience in case of such inferior goods. When the price of an inferior commodity declines, the con sumer,

instead of purchasing more, buys less of that commodity and switches on to a superior commodity.

2. Conspicuous Consumption: Conspicuous Consumption refers to the consumption of those commodities which are bought as a matter of prestige. Naturally with a fall in the price of such goods, there is no distinction in buying the same. As a result the demand declines with a fall in the price of such prestige goods. Gold, Diamond etc

are the examples of such commodities.

3. Conspicuous necessities: Certain things become the necessities of modern life. So we have to purchase them despite their high price. The demand for T.V. sets, automobiles and refrigerators etc. has not gone down in

spite of the increase in their price. So they are purchased despite their rising price.

4. Ignorance: A consumer’s ignorance is another factor that at times induces him to purchase more of the commodity at a higher price. This is especially so when the consumer is haunted by the phobia that a high -priced

commodity is better in quality than a low-priced one.

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5. Emergencies: Emergencies like war, famine etc. negate the operation of the law of demand. At such times, households behave in an abnormal way. Households accentuate scarcities and induce further price rises by making increased purchases even at higher prices during such periods. During depression, on the other hand, no

fall in price is a sufficient inducement for consumers to demand more.

6. Future changes in prices: Households also act speculators. When the prices are rising households tend to purchase large quantities of the commodity out of the apprehension that prices may still go up. When prices are

expected to fall further, they wait to buy goods in future at still lower prices.

7. Change in fashion: A change in fashion and tastes affects the market for a commodity. When a broad toe

shoe replaces a narrow toe, no amount of reduction in the price of the latter is sufficient to clear the stocks.

DETERMINANTS OF DEMAND

1. Price of a commodity: Price of the commodity is the most important factor that determine demand. An increase in price of a commodity leads to a reduction in demand and a decrease in price leads to an increase in

demand.

2. Price of related goods: Demand for a commodity depends on Price of related goods also. Related goods

include both substitutes and complementary goods.

Substitutes are those goods which can be used one another or the goods with same use are substitutes. e.g.:- tea and coffee.When price of tea falls demand for coffee also falls. Because when price of tea falls people buy

more tea and less coffee.

Complementary goods are those goods which can be used only jointly. e.g.: - car, petrol or pen, ink. When price of a commodity raises demand for its complementary goods falls. If x and y are complementary goods we cannot use x without y. When price of x raises demand for x falls and y cannot be used without x and demand for y

also falls.

3. Income of the consumer: Income of the consumer and demand for a commodity are positively related. For normal goods when income increases demand also increases and vice versa. But for inferior goods there is a

negative relationship between income and demand. So when income increases, demand decreases.

4. Taste and Preferences of consumers: Taste and Preferences of consumers also brings out changes in demand for a commodity. Tendency to imitate other fashions, advertisements etc affect demand for a commodity.

It change from person to person, place to place and time to time.

5. Rate of Interest: Higher will be demanded at lower rates of interest and lower will be demanded at

higher rate of interest.

6. Money supply: Demand is positively related to money supply. If the supply of money increases people

will have more purchasing power and hence the demand will increase and vice versa.

7. Business condition: Demand will be high during boom period and low during depression.

8. Distribution of income: Distribution income in the society also affects the demand of commodity. If there

is equal distribution of income demand for necessary goods and comforts will be greater.

9. Government policy: Government policy also affects the demand of commodities.

10. Consumers’ expectations: Consumers’ expectation about a further rise or fall in future price will affect the demand of a commodity. If consumers expect a rise in the price of a commodity in the near future, they may purchase large quantity even though there is some rise in the price. When the price of a commodity decreases,

people expect a further fall in price and postpone their purchase.

7. Supply Theory

Meaning of Supply : “The supply of good is the quantity offered for sale in a given market at a given time at various

prices”. Thus, the important features of supply may be concluded as:-

(i) It is the quantity of commodity offered for sale in the market at various prices.

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(ii) It is flow and is always measured in terms of time.

Determinants of Supply are follows :

(i) Price of the Good

(ii) Price of Related

(iii) Price of Factors of Production

(iv) State of Technology

(v) Government Policy

(vi) Other Factor : Includes various individual policies, exchange policies, trade policy etc. Time is another important factor influencing supply e.g. it is quite difficult to adjust the supply to the changing conditions in the short period. But such adjustments in supply become easy if the time period is long. Again, transparent and

infrastructural facilities positively effect the supply of a good.

Law of Supply: In the Words of Dooley, “The law of supply states that other things remaining the same,

higher the prices the greater the quantity supplied and lower the prices the smaller the quantity supplied”.

Assumption of the Law :

(i) It is assumed that incomes of buyers and sellers remain constant. (ii) It is assumed that the tastes and preferences of buyers and sellers remain constant. (iii) Cost of all the factors of production is also assumed to be constant. (iv) It is also assumed that the level of technology remains constant. (v) It is also assumed that the commodity is divisible.

(vi) Law of supply states only a static situation.

Criticisms of Law of Supply :

(i) It Explains Only the Static Situation (ii) Expectation of Change in the Prices in (iii) It does not Apply on Agricultural Products (iv) It does not Apply on Artistic

(v) It does not Apply on the Goods of Auction

8. Elasticity of Supply

Meaning: Supply is responsive to price changes. The extent to which supply extends for a given price rise is

known as elasticity of supply. Elasticity of supply may also be defined as the ratio of the percentage change or the

proportionate change in quantity supplied to the percentage or proportionate change in price.

Es = proportionate change in supply/Proportionate change in price or

= (change in quantity supplied/Original quantity supplied) × (Change in price/Original price )

Let Q = Original supply

ΔQ = Change of supply

P = Original price and

ΔP = Change of price, then

Es = (ΔQ/Q) / (ΔP/P) = (ΔQ/Q) × (P/ΔP) = (ΔQ/ΔP) × (P/Q)

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Methods for Measurement of Elasticity of Supply

Elasticity of supply can be measured by using two methods:

1. The point method and

2. The ratio method

The Point Method: On the given supply curve the price elasticity at a point is measured by the distance

along a tangent to the horizontal axis divided by the distance along it to the vertical axis.

The elasticity of supply at point T is measured as RT/OT

In panel (a) RT > OT, therefore Es > 1

In panel (b) RT = OT, therefore Es = 1

In panel (c) RT < OT, therefore Es < 1

The Ratio method: The co-efficient of elasticity of supply is obtained by using the ratio method as follows:

Es = (ΔQ/Q) × (P/ΔP)

The co-efficient of elasticity of supply varies from zero to infinity.

Factors Determining Elasticity of Supply: Elasticity of supply is determined by the following factors:

1. The nature of commodities: Based on nature, commodities are divided into perishable goods and

durable goods. In the case of perishable goods like fish, vegetables etc., the supply is less elastic, whereas in the

case of durable goods the supply tends to be more elastic.

2. Time: The element of time exercises an important influence on the elasticity of supply. In almost every

industry, supply will be more elastic in the long-run than in the short-run.

3. Mobility of Factors: Availability of factors of production and mobility of factors of production also affect

the elasticity of supply. Mobility of factors causes elasticity of supply and vice -versa.

4. Technique of production: The adoption of advanced technology or replacement of capital -intensive

techniques, in the place of traditional or labor intensive techniques makes the supply more elastic.

5. Number of Markets and the Number of Products Produced: If a firm sells its product in different markets,

then its supply will be elastic. This is because of the fact that a fall in price in any one market will induce the firm to

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sell in other markets. Again, when it produces a variety of products, it can easily transfer resources from production

of one product to the others, so that each of his products will be elastic in supply.

6. Scale of Production: Goods can be produced either on a large-scale or on a small-scale. Goods produced

on a large-scale are elastic while goods produced on a small-scale are inelastic.

7. Natural Factors: The supply of agricultural goods are inelastic by nature. The influence of nature is more

pronounced in agricultural production. That is why it is said that ‘Nature does the business and man is merely a

manager.’ The presence of external factors beyond man’s control tends to make the supply of agricultural products

inelastic.

9. Isoquants, its Properties and Economic Region of Production

The word an isoquant is a locus of points, representing different combinations labour and capital .An isoquant Curve. ‘ISO’ is of Greek origin and means equal or same and ‘quant’ means quantity. An isoquant may be defined as a curve showing all the various combinations of two factors that can produce a given level of output. The isoquant shows- the whole range of alternative ways of producing- the same level of output. The modern economists are using isoquant, or ‘ISO’ product curves for determining the optimum factor combination to

produce certain units of a commodity at the least cost.

Properties or Features of Isoquant

The following are the important properties of isoquants:

1. Isoquant is downward sloping to the right. This means that if more of one factor is used less of the other

is needed for producing the same output.

2. A higher isoquant represents larger output.

3. No isoquants intersect or touch each other. If so it will mean that there will be a common point on the two curves. This further means that same amount of labour and capital can produce the two levels of output which

is meaningless.

4. Isoquants need not be parallel to each other. It so happens because the rate of substitution in different isoquant schedules need not necessarily be equal. Usually they are found different and therefore, isoquants may

not be parallel.

5. Isoquant is convex to the origin. This implies that the slope of the isoquant diminishes from l eft to right along the curve. This is because of the operation of the principle of diminishing marginal rate of technical

substitution.

6. No isoquant can touch either axis. If an isoquant touches X axis then it would mean that without using any labour the firm can produce output with the help of capital alone. If an isoquant touches Y axis, it would mean

that without using any capital the firm can produce output with the help of labour alone. This is impossible.

7.Isoquants have negative slope. This is so because when the quantity of one factor (labour) is increased

the quantity of other factor (capital) must be reduced, so that total output remains the same.

Economic Region of Production

Generally, isoquants generated by the production functions are negatively sloped, non intersecting and are convex to the origin. Further, higher isoquants represent higher level of production. In Fig. 7.8(a), the production

functions are depicted in the form of a set of isoquants, which have positively sloped segments also.

Here, one factor has positive marginal product while the other factor has negative marginal product. The oval shape of isoquant means that beyond a certain point, employment of an additional unit of a factor will

necessitate employing additional units of the other factor to produce the same level of output.

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Consider isoquant IQ1 in this figure. Here, A1B1 segment of the isoquant has a negative slope. However, beyond points ‘A’ and ‘B’, this isoquant is positively sloped (either bends backwards or slopes upwards). At point A1, when the isoquant tends to be vertical, the marginal productivity of capital becomes zero. This implies that if the quantity of labour is held constant, with the quantity of capital added, output cannot expand. The additional uni ts of capital become redundant here. A1 A3 and A4 are such other points, where the marginal productivity of capital

becomes zero.

Here, capital has been substituted for labour to the maximum extent. The capital ridge line is formed by the locus of points (A1, A2, A3 and A4 in Fig. 7.8(a)) in an isoquant mapping, where the marginal productivity of capital is zero. Similarly, the labour ridge line is formed by the locus of points (B1, B2, B3 and B4 in Fig. 7.8) in an isoquant

mapping, where the marginal productivity of labour is zero.

At points B1, B2, B3 and B4, the isoquants tend to be horizontal, parallel to the labour axes. On vertical stretches, labour input becomes redundant and makes no contribution to output. This implies that with quantity of capital held constant, an increase usage of labour would not increase output at all. Here, labour has been

substituted for the capital to the maximum extent.

Thus, the locus of points of isoquants where the marginal products of the factors are zero, form the ridge lines. At upper ridge line OA, the marginal product of capital is zero, while the lower ridge line OB implies that the marginal product of labour is zero. The production techniques are technically efficient only in the region inside the

two ridge lines.

This region is also called as the viable or economic region of production. This region is associated with the second stage (stage of operation) discussed under ‘Law of Variable Proportions’ in the next chapter on Production Analysis. Here, the marginal products of factors are positive, but declining. In this efficient range of production, the isoquants are normally shaped (convex to the origin). A profit maximising business firm (paying a positive price for the hired inputs) will definitely operate in the region lying between the two ridge lines. All least cost combinations and the expansion path, thus, necessarily falls between these two ridge lines. The inputs used here are assumed to

be normal and essential for production.

The ridge lines OA and OB in Fig. 7.8(a) are isoclines, because along these lines, the marginal rate of technical substitution is constant. The marginal rate of technical substitution of capital for labour (MRTS K, L) is zero

and hence MRTSL,K is undefined (infinity) along the ridge line OA (since, here, marginal product of capital is zero).

Along this ridge line, the tangents to the isoquants are parallel to the vertical axis. Similarly, the marginal rate of technical substitution of labour for capital (MRTSL, K) is zero and hence MRTSK,L is undefined (infinity) along the ridge line OB (since, here, marginal product of labour is zero). Along this ridge line, the tangents to the

isoquants are parallel to the horizontal axes.

Outside the ridge lines, the marginal products of factors are negative and the methods of production are inefficient, since, these require greater quantities of both the factors for producing the same level of output. The

marginal product of capital becomes negative, if its application goes beyond its zero marginal produ cts.

When the quantity of capital employed relative to the quantity of labour becomes too large, an increase in the quantity of capital with a fixed quantity of labour would result in a fall in the output level. Likewise, when the quantity of labour is increased (with a fixed quantity of capital), beyond its zero marginal product, the level of

output will decline.

Therefore, no rational producer will choose a factor combination in the waste bearing segment lying outside the upper and lower ridge lines, even if the factors are available free of cost. Thus, only the ridge linies enclose the area of rational operation. The economic region of production for a homogenous production function

(e.g., a Cobb Douglas Production Function) is cone shaped on a account of straight ridge lines (Fig. 7.8(b)).

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10. Laws of Return to Scale

The law of variable proportion analyses the behaviour of output when one input factor is variable and the other factors are held constant. Thus it is a short run analysis. But in the long run all factors are variable. When all factors are changed in same proportion, the behaviour of output is analysed with laws of returns to scale. Thus law of returns to scale is a long run analysis. In the long period, output can be increased by varying all the input Factors this law is concerned, not with the proportions between the factors of production, but with the scale of production. The scale of production of the firm is determined by those input factors which cannot be changed in the short period. The term return to scale means the changes in output as all factors change in the same proportion. The law of returns to scale seeks to analyse the effects of scale on the level of output. If the firm increases the units of both factors labour and capital, its scale of production increases. The return to scale may be increasing, constant or diminishing.

Increasing Returns to Scale

When inputs are increased in a given proportion and output increases in a greater proportion, the returns to scale are said to be increasing. In other words, proportionate increase in all factors of production results in a more than proportionate increase in output It is a case of increasing returns to scale. For example, if the inputs are increased by 40% and output increased by 50%, return to scale are increasing (= >1). It is the first stage of

production.

If the industry is enjoying increasing returns, then its marginal product increases. As the output expands,

marginal costs come down. The price of the product also comes down.

Constant Return to Scale

When inputs are increased in a given proportion and output increases in the same proportion, constant return to scale is said to prevail. For example, if inputs are increased by 40% and output also increases by 40%, the return to scale are said to be constant ( = 1). This may be called homogeneous production function of the first degree. In case of constant returns to scale the average output remains constant. Constant returns to scale operate

when the economies of the large scale production balance with the diseconomies.

Decreasing Returns to Sale

Decreasing returns to scale is otherwise known as the law of diminishing returns. This is an important law of production. If the firm continues to expand beyond the stage of constant returns, the stage of diminishing returns to scale will start operate. A proportionate increase in all inputs results in less than proportionate increase in output, the returns to scale is said to be decreasing. For example, if inputs are increased by 40%, but output

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increases by only 30%, ( = < 1), it is a case of decreasing return to scale. Decreasing return to scale implies

increasing costs to scale.

11. Law of Variable Proportions

The law of variable proportion is one of the fundamental laws of economics. It is also known as the 'Law of Diminishing Marginal Returns' or the 'Law of Diminishing Marginal Productivity.' This Law of variable proportion shows the input-outPut relationship or production function with one variable factor, i.e., a factor, which can be changed, while other factors of production are kept constant. Thi s is explained with the help of the following example:

Suppose a farmer has 20 acres of land to cultivate. The land has some fixed investment, Le., capital in the form of a tube well, farmhouse and farm maehinery. The amount of land and capital is suppose d to be fixed factors of production. However, the farmer can vary the number of workers employed on its land. Labour is thus the variable factor of production. The change in the number of workers will change the output.

The point worth noting here is that the law does not state that each and every increase in the amount of the variable factor that is employed in the production process will yield diminishing marginal returns. It is, however, possible that preliminary increases in the amount of a variable factor may yield increasing marginal returns. While increasing the amount of the variable factor, a point will " be reached though, where the; marginal increases in

total output or the marginal retums will begin declining.

Assumptions for Law of Variable Proportions

The law of variable proportions functions is based on following assumptions:

a) Constant technology: The technology is assumed to be constant because technological changes will result into rise of marginal and average product.

b) Snort-run: The law operates in the short-run because it is here that some factors are fixed and others are variable. In the long-run, all factors are variable.

c) Homogeneous input: The variable input employed is homogeneous or identical in amount and quality. d) Use of varying amount of variable factor: It is possible to use various amounts of a variable factor on

the fixed factors of production.

Three Stages of Production

A graphic description of the production function is shown in following figure 4.1. The total, marginal and average product curves in Figure 4.1, demonstrates the law of variable proportions. The figure also shows three stages of production associated with law of variable proportions. The total product curve is divided info three

segments popularly known as three stages of production, which are as follows:

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Stage I

The figure 4.1 shows stage 1 as the segment from the origin to pointX 2. Here, total product (TP) rises at an increasing rate. At this point, the marginal product (MP) of X equals its average product (AP). X2 is, also the point at which the average product is maximised. In this stage, the production function is characterised first by increasing marginal returns from the origin to point X1and then by diminishing marginal returns, from X1to X2. It should not be assumed that in stage 1, only increasing marginal returns take place. Because increasing returns may occur until a certain point, and thereafter diminishing returns may take place. Stage I should not therefore be identified w ith increasing marginal returns only. Here, both AP and MP increase. In this stage, a firm can move towards optimum combination of factors of production and increasing returns, by adding more and more variable units to fixed

factors.

Stage II

The stage II is depicted by the figure in the range from X2 to X3. In othcr words, stage II begins where the average product of the variable factor is maximised. It continues till the point at which total product is maximised and marginal product is zero. Here, TP rises at diminishing rate. This stage is thus, called the stage of diminishing

returns, where a firm decides its level of production.

Stage III

Finally, we have stage III, which is depicted by the area beyond X3 where the total product curve starts decreasing. Here, too much variable input is being used as related to the available fixed inputs and thus variable inputs' are overutilized. The efficiency of both variable inputs and fixed inputs decline through out this stage. In this range, the marginal product of the variable factor is negative. It starts from the point where MP is nil and TP is maximum and

covers the whole range of negative marginal productivity. The following Table 4.2 shows the various stages.

12. Internal and External Economies

Now-a-days, goods are produced on a very large scale in modern factories. When the production is carried on a large scale the producer derives a number of advantages or economies. These advantages of large scale production are called economies of scale. This is the reason why entrepreneurs try to expand the size of their

factories. Marshall divides the economies of scale into groups – (i) internal economies and (ii) external economies.

Internal Economies: A producer drives a number of advantages when he expands the size of his factory. These advantages are called internal economies. They arise because of increase in the scale of production (i.e. output that can be produced). These are secured only by the firm expanding its size. They are dependent on the

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efficiency of the organizer and his resources. So internal economies are those advantages which are obtained by a producer when he increases or expands the size of his firm. Internal economies are divided into various classes as

follows.

a. 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.

b. Technical economies: Businesses with large-scale production can use more advanced machinery (or use existing machinery more efficiently). 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.

c. 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 e asier to find potential lenders

and to raise money at lower interest rates.

d. 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.

e. Managerial economies: As a firm grows, there is greater potential for managers to specialise 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.

External Economies: When the number of factories producing the same commodity like sugar increases, we say that the particular industry (sugar industry) has developed. When the industry as a whole develops, every firm in the industry derives man advantages. These advantages are called external economies. They are enjoyed by all the firms in the industry. They are not the property or monopoly of any firm. The following are the main types of

external economies.

a. Economies of localization: When a number of firms producing the same commodity are concentrated at one place, each firm derives the advantages of localization. They are, availability of capital, skilled labour, cheap

transport, repairing facilities and other services.

b. Economies of information: If the industry grows in size, it will be profitable to publish technical books and journals relation to that particular industry. As a resut every producer will be well -informed about the latest developments in their fields of production. Besides, al the firms can jointly establish research institutions. Every

firm can make the best use of the results of research.

c. Economies of specialization: When the industry grows in size, different firms may specialize in different arieties of products. For example, the case of cotton textile industry, some firms may specialize in the production of

shirting cloth, some others in dhotis and so on. As a result, the efficiency of the firm increases.

13. Internal and External Diseconomies of Scale

The term diseconomies of scale refer to a situation where an increase in the size of the firm leads to a ri sing average cost. Diseconomies of scale may be classified into internal diseconomies and external diseconomiesof

scale.

The major internal diseconomies of scale arise from its size of the firm, technical causes and managerial problems. When a firm achieves a size where it is producing at the lowest possible average cost it is said to be at its optimum size. The optimum size will very over time as technological progress change the technique of production. In addition to this, more loaded men and machinery leads to machine fault and human failure cause breakdown of production. When the size increases management becomes more complex and difficult. Managerial

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function of co-ordination, consultation and interdepartmental decision making will get delayed due to the size. There will be possibility of delay in implementation of decision within the organization. Delay in communication will

reduce the involvement of the employees.

There are some external diseconomies of scale in the form of disadvantages.

There is shortage of labour which causes a wage rise. Increase in the demand for raw materials will also bid up prices. When there is heavy localization of industries, the land for expansion will become increasingly scarce.

Scarcity will cause an increase in the price to purchase land or to rent. Transport costs may also rise because of increased congestion. The change in output will cause a movement along the long run average cost curve. One of the most

significant influences is external economies of scale. If external economies are experienced, the long run average cost will shift down (output will be now be cheaper toproduce). Whereas external diseconomies of scale are encountered the long run average cost curve will move up (output wi ll now be costlier to produce). Improved

technology would lower the long run average cost curve.

14. Perfect Competion and Its Features

Perfect competition refers to ‘Market in which no participant can influence prices, it is characterized by free flow of information, no barrier to entry or exit & there should be large number of buyer and seller’. But in

reality perfect competition is very rare and may not even exist.

The definition of perfect competition which underlines the conclusion that perfectly competitive economy is Pareto efficient. Under these conditions the price of goods produced equals to marginal cost & all goods will be produced in least costly way. So, some economists have therefore argued that the goal of competition policy should not be perfect competition. The major drawback to use of perfect competition is policy goal is that it is not clear that perfect competition is desirable unless it can be achieved in all market.

Features: Perfect competition is a market situation wherein the following conditions are present

1. Large Number of buyer and large number of seller: In perfect competition there are large number of buyer & large number of seller. Due to this there is free competition among then to buy and sell goods. There is single price of a commodity. This price is accepted by every buyer and every seller. No single seller or buyer influence this price. Everyone is a price taker.

2. Free entry- Free exit: In perfect competition there is free entry & free exit. It means ‘Any person who

want to enter into competition or interested to leave competition should be allowed to do so. There should not be any political, economical, social, technological barrier on the path of new entry.

3. Homogeneous product: It is important characteristic because in perfect competition all products must

be homogeneous. It means they should similar in respect of shape, size, color, weight, design, etc… 4. Perfect knowledge about market condition : In perfect competition buyer & seller both should have

perfect knowledge about market conditions. They must have knowledge about different seller & the prices they are charging. It is also necessary for buyer to stop their own exploitation.

5. Perfect mobility of factors of production: All factor of production should be perfe ctly mobile. It means

producer should be free to use the factor in any manner as they desire.

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6. No Transportation cost : Cost incurred for carrying goods from the place of production to the place of consumption is called as ‘Transportation cost’. It defers from producer to producer. To have uniform price transport cost should not be added in the price of commodity.

7. No Government intervention : In perfect competition government play passive role. Government

should not be interfering with any decision of producer or consumer. It should not introduce any tax or policies or

concession at market.

Equilibrium of a Firm under Perfect Competition

A firm is an organisation which produces and supplies goods that are demanded by the people. According to Prof. S.E. Lands-bury, “Firm is an organisation that produces and sells goods with the goal of maximising its profits. In the words of Prof. R.L. Miller, “Firm is an organisation that buys and hires resources and sells goods and

services.”

A firm is in equilibrium when it has no tendency to change its level of output. It needs neither expansion nor contraction. It wants to earn maximum profits. In the words of A.W. Stonier and D.C. Hague, “A firm will be in

equilibrium when it is earning maximum money profits.”

Equilibrium of the firm can be analysed in both short-run and long-run periods. A firm can earn the

maximum profits in the short run or may incur the minimum loss. But in the long run, it can earn only normal profit.

Short-run Equilibrium of the Firm:

The short run is a period of time in which the firm can vary its output by changing the variable factors of production in order to earn maximum profits or to incur minimum losses. The number of firms in the industry is fixed because neither the existing firms can leave nor new firms can enter it. The firm is in equilibrium when it is earning maximum profits as the difference between its total revenue and total cost.

For this, it essential that it must satisfy two conditions:

(1) MC = MR, and

(2) the MC curve must cut the MR curve from below at the point of equality and then rise upwards.

The short-run equilibrium of the firm can be explained with the help of the marginal analysis as well as with

total cost-total revenue analysis.

Marginal Revenue and Marginal Cost Approach of Equilibirium: This analysis is based on the following assumptions:

a) All firms in an industry use homogeneous factors of production. b) Their costs are equal. Therefore, all cost curves are uniform. c) They use homogeneous plants so that their SAC curves are equal. d) All firms are of equal efficiency. e) All firms sell their products at the same price determined by demand and supply of the industry so that

the price of each firm is equal to AR = MR.

Determination of Equilibrium:

Given these assumptions, suppose that price OP in the competitive market for the product of all the firms in the industry is determined by the equality of demand curve D and the supply curve S at point E in Figure 1(A) so

that their average revenue curve (AR) coincides with the marginal revenue curve (MR).

At this price, each firm is in equilibrium at point L in Panel (B) of the figure where (i) SMC equals MR and AR, and (ii) the SMC curve cuts the MR curve from below. Each firm would be producing OQ output and earning normal profits at the maximum average total costs QL. A firm earns normal profits when the MR curve is tangent to

the SAC curve at its minimum point.

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If the price is higher than these minimum average total costs, each firm will be earning supernormal profits. Suppose the price rises to 0Ргwhere the SMC curve cuts the new marginal revenue curve MR2 (=AR2) from below at point A which now becomes the equilibrium point. In this situation, each firm produces OQ 2 output and earns

supernormal profits equal to the area of the rectangle P2 ABC.

If the price falls below OP1the firm would make a loss because the SAC would be higher than the price. In the short-run, it would continue to produce and sell OQ1 output at OP1price so long as it covers its AVC. S is thus the shut-down point at which the firm is incurring the maximum loss equal to SK per unit of output. If the price falls below OP1 the firm will close down because it would fail to cover even the minimum average variable cost. OP 1 is

thus the shut-down price.

We may conclude from the above discussion that in the short-run each firm may be making either

supernormal profits, or normal profits or losses depending upon the price of the product.

Long-run Equilibrium of the Firm:

In the long-run, it is possible to make more adjustments than in the short-run. The firm can adjust its plant capacity and scale of operations to the changed circumstances. Therefore, all costs are variable. Firms must earn

only normal profits. In case the price is above the long-run AC curve firms will be earning supernormal profits.

Attracted by them, new firms will enter the industry and supernormal profits wi ll be competed away. If the price is below the LAC curve firms will be incurring losses. As a result, some of the firms will leave the industry so that no firm earns more than normal profits. Thus “in the long-run firms are in equilibrium when they have adjusted their plant so as to produce at the minimum point of their long-run AC curve, which is tangent (at this

point) to the demand (AR) curve defined by the market price” so that they earn normal profits.

It’s Assumptions: This analysis is based on the following assumptions:

a) Firms are free to enter into or leave the industry. b) All firms are of equal efficiency. c) All factors are homogeneous. They can be obtained at constant and uniform prices. d) Cost curves of firms are uniform. e) The plants of firm: are equal having given technology.

f) All firms have perfect knowledge about price and output.

Determination:

Given these assumptions, each firm of the industry will be in the following two conditions.

(1) In equilibrium, its short-run marginal cost (SMC) must equal to its long-run marginal cost (LMC) as well as its short-run average cost (SAC) and its long-run average cost (LAC) and both should be equal to MR=AR=P. Thus the first equilibrium condition is:

SMC = LMC = MR = AR = P = SAC = LAC at its minimum point, and

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(2) LMC curve must cut MR curve from below.

Both these conditions of equilibrium are satisfied at point E in Figure 3 where SMC and LMC curves cut from below SAC and LAC curves at their minimum point E and SMC and LMC curves cut AR = MR curve from below.

All curves meet at this point E and the firm produces OQ optimum quantity and sell it at OP price.

Since we assume equal costs of all the firms of industry, all firms will be in equilibrium m the long-run. At

OP price a firm will have neither a tendency to leave nor enter the industry and all firms will earn normal profit.

Business Economics Question Papers

2012 ( May )

( General / Speciality )

Course : 202

( Business Economics )

Full Marks : 80

Pass Marks : 32

1. Answer as Directed: 1x8=8

a) Business Economics is micro/macro economics in nature. b) Business Economics is also know as ________________. c) Draw a perfectly inelastic demand curve. d) Give an example of Joint Demand. e) If marginal product is zero, how much will be the total product? f) Total revenue = price x ________________. g) Mention the type of market where a particular commodity is sold at uniform price.

h) Give an example if selling cost.

2. Answer the following questions in brief: 4x4=16

a) Mention four chief characteristics of Business economics. b) What is demand? Mention the assumptions which are necessary for law of demand analysis. c) Write four factors on which supply of a commodity depends.

d) Write short notes on internal economics.

3. (a) Explain how economic theories are applied to Business Economics. 11

Or

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(b) Explain the basic problems of an economic system. 11

4. (a) Explain the percentage or proportional method of measuring price elasticity of demand. The price of per kilogram mango is Rs. 20 and demand for it is 40 kilograms. Now price of mango falls to Rs. 16 per kilogram and demand for mango increases to 44 kilograms. Find out price elasticity of demand using percentage or proportional method. 5+6=11

Or

(b) What is price elasticity of demand? Explain the importance of price elasticity of demand. 4+7=11

5. (a) What is the law of variable proportions? Explain the law of variable proportions with the help of suitable

diagram. 4+8=12

Or

(b) Explain the iso – product curve with the help of suitable diagram. Mention the properties of iso – product curve.

6+6=12

6. (a) What are the objectives of a business firm? Explain the profit maximization hypothesis. 4+7=11

Or

(b) What are the characteristics of perfect competition market? Explain how price is determined under perfect

competition market. 4+7=11

7. (a) What are the necessary conditions for price discrimination? How does a discriminating monopoly determine

output and price? 4+7=11

Or

(b) Explain any two models applied for determining price under Oligopoly market. 11

2013 ( May )

( General / Speciality )

Course : 202

( Business Economics )

Full Marks : 80

Time : 3 hours

1. Answer as directed: 1x8=8

a. Defining the problems is one of the steps of business decission making process.(true/false) b. Business Economics is specially associated with the business firms. (true/false) c. Demand for commodity means

Desire for a commodity Need for a commodity Desire for a commodity backed by ability to pay for it Ability to pay for a commodity (choose the correct answer)

d. ‘Income of people’ is one of the factors determining market demand. (true/false) e. If all factors of production would have been perfectly divisible, increasing return to scale would not

have occurred. (true/false) f. Isoquants, like indifference curves does not slop downwards from left to right. (true/false) g. The price at which quantity demanded equals quantity supplied is called____ price.

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h. Which rule of revenue and cost is followed by the monopolist to earn maximum profit?

2. Answer the following questions: 4x4=16

a) What are the basic problems of an economic system? b) Mention four chief determinants of price elasticity of demand. c) Discuss briefly four characteristics of isoquants.

d) What do you mean by minimum support price?

3. (a) What do you mean by business decision-making process? Discuss the various phases or steps of business

decision-making process. 4+7=11

Or

(b) Discuss the relationship between Business Economics and Traditional Economics. 11

4. (a) What is cross-elasticity of demand? Discuss the importance of cross-elasticity of demand in business decision

making. 4+7=11

Or

(b) What is price elasticity of demand? Explain perfectly elasticity demand with the help of diagrams. 4+7=11

5. (a) Discuss the causes of increasing return to scale and decreasing return to scale. 11

Or

(b) Discuss about internal economies and external economies. 11

6. (a) Explain Baumal’scales maximization hypothesis as an objective of modern business firm. 11

Or

(b) State the features of a perfectly competitive market. Explain the conditions of short-run equilibrium of a firm

under perfect competition. 5+6=11

7. (a) How does a businessman fix his equilibrium price in monopoly market? For the fixtion of this price, what are

the influences of different factors? Discuss.

Or

(b) What is meant by price leadership? Discuss how the oligopolists determine price with the help of price

leadership.

2014 ( May )

( General / Speciality )

Course : 202

( Business Economics )

Full Marks : 80

Pass Marks : 32

The figures in the margin indicate full marks for the questions.

1. Answer as directed : 1x8=8

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(a) Making successful forecast is one of the responsibilities of a Managerial Economist. (Write True /

False)

(b) Price mechanism is based on two strong opposite forces. (Write True / False)

(c) Perfect elasticity of demand curve is parallel / vertical to the base.(Choose the correct answer)

(d) ‘Nature of the commodity’ is not a factor which determine elasticity of supply. (Write True / False)

(e) Iso-product curve should never be horizontal or vertical along base or OX-axis. (Write True / False)

(f) What is production function?

(g) How many production firms are there in a monopoly market?

(h) Under which market form a firm is a price taker?

2. Answer the following questions in brief : 4x4=16

(a) Mention four characteristics of Business Economics.

(b) Give four justifications of downward slope of demand curve.

(c) Explain the concepts of short-run and long-run in production function.

(d) What do you mean by ‘price leadership’?

3. (a) What is price mechanism? Discuss the importance of price mechanism in business economics. 4+7=11

Or

(b) Discuss the various problems of business economics. 11

4. (a) Define price elasticity of demand. Discuss the factors determining the price elasticity of demand. 4+7=11

Or

(b) Define elasticity of supply. Discuss the factors determining the elasticity of supply. 4+7=11

5. (a) What is iso-product curve? Discuss its main characteristics. 4+7=11

Or

(b) What is called production expansion path? Discuss how it can be expressed with the help of budget line and iso-

product curve. 4+7=11

6. (a) State the features of a perfectly competitive market. Explain the importance of perfect competitive market.

6+6=12

Or

(b) Discuss the equilibrium price determination in the long-run under perfect competition with the help of suitable

diagram. 12

7. (a) What is price discrimination? Discuss the possibilities of price discrimination under monopoly market.

3+8=11

Or

(b) What is oligopoly market? Discuss how the price is determined under oligopoly market with the help of kinked

demand curve model. 3+8=11

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BUSINESS ECONOMICS 2008

1. What is elasticity of demand? Describe the factors which determine elasticity of demand.

Or

Refer unit-I answer to question No.7.

2. Draw an isoquant and explain its properties. Identify the economic region of production with the help of

isoquant curve.

Or

Discuss the laws of returns to scale.

3. Mention the objectives of a business firm. Analyse the equilibrium of a business firm under perfect competition in the short period with the help of suitable diagram.

Or

What is monopoly market? How does a monopolist determine the price of his commodity under condition of price

discrimination? Illustrate your answer with suitable diagram.

4. Critically examine the marginal productivity theory of distribution.

Or

What is rent? Explain the Ricardian theory of rent.

5. What do you mean by interest? Describe the liquidity preference theory of interest propounded by Keynes.

Or

Discuss the uncertainty bearing theory of profit. How is the risk theory of profit different from the uncertainty

bearing theory of profit?

BUSINESS ECONOMICS 2009

1. What do you mean by elasticity of demand? Give a brief idea about the various factors that affect price elasticity of demand. Mention the importance of income elasticity of demand in business decision.

Or

Explain the concept of cross elasticity of demand with the help of suitable example and diagram. What is the

practical usefulness of the concept?

2. Explain with example the law of variable proportion. In which stage output is decided?

Or

What do you mean by internal and external economics? Explain the different factors responsible for internal

economics.

3. What are the characteristics of perfect competition? Explain with the help of diagram the determination of

normal price under perfect competition.

Or

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Explain with diagram how price and output are determined under monopoly.

4. Give the meaning of real wage and money wage. Explain with suitable diagram about determination of wage rate

under perfect competitive market.

Or

Give the meaning of Quasi-rent. Mention two similarities of rent and quasi rent. “Rent as a price for the use of land,

like other factor prices, is determined by the demand for and supply of land”. Discuss.

5. Explain the classical theory of interest and point out its limitations.

Or

What are the natures of profits? Explain the various elements of gross profit. Assess the risk -bearing theory of

profit.

Business Economics 2010

1. (a) what are the basic problems of an economic system? Explain how these basic problems are solved in a free market economy.

Or

(b) Explain the method of measurement of price elasticity of demand at a point on the demand curve. Mention the

importance of price elasticity of demand in business decision-making.

2. (a) Explain isoquants with diagram. Why is marginal rate of technical substitution between factors (MRTSLK)

always diminishing?

Or

(b) Draw and give reasons for the U-shape of long-run average cost curve (LAC). Explain the modern view that LAC

is L-shaped rather than U-shaped.

3. (a) Explain and evaluate Baumol’s hypothesis of Sales Revenue Maximisation as an objective of modern

business firms.

Or

(b) Mention the main features of oligopoly. Explain how a cartel determines price and output under collusive

oligopoly.

4. (a) Explain the Marginal Productivity Theory of factor pricing. What are its main shortcomings?

Or

(b) Discuss the modern theory of rent. How is it an improvement over Ricardian theory of rent?

5. (a) Explain Keynesian theory of interest. Mention some of the criticisms made against this theory.

Or

(b) Distinguish between risk and uncertainty and explain the uncertainty bearing theory of profit.

Business Economics2011

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1. (a) Discuss the nature and scope of business economics.

Or

(b) Explain the concept of income elasticity of demand and mention its practical significance.

2. (a) Explain the law of variable proportions with diagram.

Or

(b) Explain the internal and external economies of large-scale production.

3. (a) Discuss Cyert-March hypothesis of Satisfying Behaviour as an objective of modern business firms.

Or

(b) Write the features of perfect competition. Explain the process of price-output determination, under perfect

competition in the long-run.

4. (a) Explain the process of wage rate determination in a perfectly competitive labour market.

Or

(b) Discuss the Ricardian theory of rent determination and mention some of the criticisms of the theory.

5. (a) Discuss the Loanable Fund theory of interest. Is it an improvement over the Classical theory of interest?

Or

(b) Distinguish between normal profit and supernormal profit. Explain Schumpeter’s Innovation theory of profit.

Important Questions for May’ 2015 Exam

Unit 1

Q. What is business economics? Discuss the nature and scope of business economics.

Q. Discuss the relationship between Business Economics and Traditional Economics. Or Explain how economic

theories appllied in business economics.

Q. What is Price Mechanism? Explain its importance and Limitations.

Q. Write short notes on:

Steps in business decision making process Price mechanism Basic problems of an economic system

Traditional Economics vs Business Economics

Unit 2

Q. What is price elasticity of demand? What are its determinants? Explain the importance of price elasticity of

demand.

Q. What is law of Demand? Mention the assumptions which are necessary for law of demand analysis. What are

the exceptions to the law of demand?

Q. What is Elasticity of Supply? Mention its determinants .

Q. What are various types of elasticity of demand? Mention various degrees of elasticity with diagram.

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Q. Write short notes on:

Methods of measurement of Elasticity of demand Supply theory

Methods for measurement of elasticity of demand

Unit 3

Q. What is an lsoquant? Explain its properties. Identify the economic region of production with the help of

lsoquant curve.

Q. Explain with diagram the law of variable proportion. In which stage output is decided?

Q. Discuss the laws of returns to scale.

Q. What do you mean by internal and external economics? Explain the different factors responsible for internal

economics.

Q. Write short notes on:

Expansion Path

Why is marginal rate of technical substitution between factors (MRTSLK) always diminishing?

Unit 4

Q. What are the objectives of a business firm? Discuss Cyert-March hypothesis of Satisfying Behaviour as an

objective of modern business firms.

Q. What is perfectly competitive market? What are its characteristics? Explain the process of price -output

determination, under perfect competition.

Q. Analyse the equilibrium of a business firm under perfect competition with the help of suitable diagram.

Q. Write short notes on:

Profit maximisation Hypothesis

Baumal’s sales maximization hypothesis

Unit 5 (Old Course Only)

Q. What is monopoly market? What are its features? How does a monopolist determine the price of his

commodity under condition of price discrimination? Illustrate your answer with suitable diagram.

Q. Explain with diagram how price and output are determined under monopoly.

Q. Mention the main features of oligopoly. Explain how a cartel determines price and output under collusive

oligopoly.

Q. What is oligopoly? What are its features? Explain the models applied for determining price under oligopoly market.

Q. Write short notes on:

Monopoly vs. oligopoly vs. perfect competition Kinked demand curve

Conditions for price discrimination


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