Economics Marathon Session 1 PDF

ECONOMICS MARATHON SESSION 1 BY HIMANSHU SHRIVASTAV NATURE AND SCOPE OF ECONOMICS CHAPTER 1  WANTS RESOURCES TERMINOLOGIES YOU MUST SCARCITY KNOW(BASICS) CHOICE SCALE OF PREFERENCES  The term ‘Economics’...

ECONOMICS MARATHON SESSION 1 BY HIMANSHU SHRIVASTAV NATURE AND SCOPE OF ECONOMICS CHAPTER 1  WANTS RESOURCES TERMINOLOGIES YOU MUST SCARCITY KNOW(BASICS) CHOICE SCALE OF PREFERENCES  The term ‘Economics’ owes its origin to the Greek word ‘Oikonomia’ which means ‘household’. Till 19th century, ORIGIN Economics was known as ‘Political Economy.’ The book named ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776) usually abbreviated as ‘The Wealth of Nations’, by Adam Smith is considered as the first modern work of Economics. WEALTH DEFINITION Adam Smith WELFARE DEFINITION Professor Alfred Marshall had propounded welfare definition in his book “Principles of Economics” in 1890.  1.Classical era (18th centaury)- Adam smith and J B Say. They called economics as science of wealth. Definition 2.Neo classical era (19th centaury)- Alfred Marshall and according A C Pigou They called economics as Science of welfare. 3.Modern era(20th centaury)- In this era economics as a to era science of scarcity was given by lionel robbins and growth and development term was given by Paul a samulson. Economics as a Science and Art MICRO VS MACRO Macroeconomics is also called_________economics. a) applied b) aggregate c) experimental d) none of the above A study of how increases in the corporate income tax rate will affect the national unemployment rate is an example of a) macro-economics. b) descriptive economics. c) micro-economics. d) normative economics. Which of the following does not suggest a macro approach for India? a) Determining the GNP of India. b) Finding the causes of failure of X and co. c) Identifying the causes of inflation in India. d) Analyze the causes of failure of industry in providing large scale employment. Economics as a Positive Science VS Normative Science  The role of an economist is not only to explain and explore. Interdependence of Positive and Normative Science (i.e., positive aspect) but also to admire and condemn (i.e., negative aspect.) BUSINESS ECONOMICS FEATURES Meaning of Economic Problems Causes of Economic Problems  What/How/ for Whom to Produce WHAT TO PRODUCE HOW TO PRODUCE FOR WHOM TO PRODUCE GROWTH AND EFFICIENCY SOCIALIST ECONOMY  The concept of socialist economy was propounded by Karl Marx and Frederic Engels in their work ‘The Communist Manifesto’ published in 1848. In this economy, the material means of production i.e. factories, capital, mines etc. are owned by the whole community represented by the State. All members are entitled to get benefit from the fruits of such socialized planned production based on equal rights. MEANING A socialist economy is also called as “Command Economy” or a “Centrally Planned Economy”. Here, the resources are allocated according to the commands of a central planning authority and therefore, market forces have no role in the allocation of resources. Under a socialist economy, production and distribution of goods are aimed at maximizing the welfare of the community. Hence the central problems are solved through planning under socialist economy.  Collective Ownership: Economic planning: Absence of Consumer Choice: FEATURES Relatively Equal Income Distribution: Minimum role of Price Mechanism or Market forces: Absence of Competition: CAPITALIST ECONOMY  Capitalism, the predominant economic system in the modern global economy, is an economic system in which all means of production are owned and controlled by private individuals for profit. In short, private property is the mainstay of capitalism and profit motive is its driving force. Decisions of consumers and businesses determine MEANING economic activity. Ideally, the government has a limited role in the management of the economic affairs under this system. Some examples of a capitalist economy may include United States and United Kingdom, Hong Kong, South Korea etc. However, many of them are not pure form of capitalism but show some features of being a capitalist economy.  Right to private property: Freedom of enterprise: Freedom of economic choice: FEATURES Profit motive: Consumer Sovereignty: Competition: Absence of Government Interference: MIXED ECONOMY  The mixed economic system depends on both markets and governments for allocation of resources. In fact, every economy in the real world makes use of both markets and governments and therefore is mixed economy in its nature. In a mixed economy, the aim is to develop a system which tries to include the best features of both the controlled economy and the market economy while excluding the demerits of both. It appreciates the advantages of private enterprise and private property with their emphasis on self-interest and profit motive. MEANING Vast economic development of England, the USA etc. is due to private enterprise. At the same time, it is noticed that private property, profit motive and self-interest of the market economy may not promote the interests of the community as a whole and as such, the Government should remove these defects of private enterprise. For this purpose, the Government itself must run important and selected industries and eliminate the free play of profit motive and self-interest. Private enterprise which has its own significance is also allowed to play a positive role in a mixed economy. However, the state imposes necessary measures to control and to regulate the private sector to ensure that they function in accordance with the welfare objectives of the nation.  Co-existence of private and public sector: (a)Private sector: FEATURES (b)Public sector: (c)Combined sector: How do different economies solve their central problems?  CHAPTER 2 THEORY OF DEMAND AND SUPPLY UNIT 1 LAW OF DEMAND AND ELASTICITY OF DEMAND  Demand of a commodity is due to its utility. DESIRE+ABILITY TO PAY+WILLINGNESS TO PAY= EFFECTIVE DEMAND DEMAND ( EXPECTED SATISFACTION = UTILITY MEANING ) UTILITY REALISED = ACTUAL SATISFACTION Desire is a mere wish. 1.Price of the Commodity  2.PRICES OF RELATED GOODS 1.SUBSTITUTE 2.COMPLEMENTARY JOINT AND DERIVED DEMAND 3.Income of the consumer NORMAL GOODS INFERIOR GOODS  Weather a commodity is Inferior goods normal or have negative inferior it differs income effect. from person to person. CONCLUSION Necessary goods Normal goods have no income have positive effect for e.g. income effect. medicine NOMINAL AND REAL INCOME EFFECT FUTURE EXPECTATIONS TASTE AND PREFERENCES commodities in which consumer is interested  it is the behaviour of the consumer to copy the behaviour of others Demonstration effect, a term coined Demonstration byJames Duesenberry, refers to the desire of Effect people to emulate the consumption behaviour of others.  refers to the extent to which the demand for a commodity is increased copy (fashion style association) due to the fact that others are also consuming the same commodity. Bandwagon effect It represents the desire of people to purchase a commodity in order to be fashionable or stylish or to conform to the people they wish to be associated with.  By ‘snob effect’ we refer to the extent to which the demand for a consumers' good is decreased owing to the fact that others are also consuming the same commodity. to be exclusive/different This represents the desire of people to be exclusive; to be different; to dissociate ‘Snob effect’ themselves from the "common herd. " For example, when a product becomes common among all, some people decrease or altogether stop its consumption. Other factors affecting market demand Concept of individual and market demand Reasons behind Downward Slope of the Demand Curve or law of demand price increase or demand decrease and vice versa.....negative relation 1. Law of Diminishing Marginal Utility. satisfaction increase...price decrease....demand increase satisfaction decrease..price increase.....demand decrease negative relation (-ve relation) 2. Substitution Effect. price effect = substitution effect + income effect 3. Income Effect 4. New Consumers Creating Demand when a commodity becomes cheaper , it attracts new consumer group. Thus demand increases. Exceptions to the law of demand 1.Paradox of Goods giffen goods normal goods a normal good can never be a inferior goods but all inferior goods are not giffen goods giffen goods but all giffen robert giffen goods are inferior goods price increase....demand increase 2. Conspicuous goods / Veblen effect Articles of prestige value or snob appeal or articles of conspicuous consumption are used by the rich people as status symbol for enhancing their social prestige or /and for displaying wealth. Conspicuous necessities:  Future the commodity is already expensive at present but it going to be even more expensive in future. Thus, expectations demand at present will increase even at increased price about prices:  Incomplete information and irrational behavior many consumer believe that only if commodity is expensive then only it has more satisfaction Speculative goods  Demand for necessaries necessaries are not affected by law of demand even though they are expensive still those goods will be demanded Change in demand and change in quantity demand page no. 30 (book) Price Elasticity (a) percentage method (b) arc method (c) point method (d) expenditure method ELASTICITY OF DEMAND response of demand (a) price elasticity (b) income '' (c) cross '' (d) advertisment ''  PRICE ELASTICITY ARC ELASTICITY INCOME ELASTICITY CROSS ELASTICITY POINT ELASTICITY/GEOMETRIC METHOD EXPENDITURE METHOD ADVERTISMENT ELASTICITY ELASTICITY OF SUPPLY ECONOMICS MARATHON SESSION 2 Unit 2 - THEORY OF CONSUMER BEHAVIOUR 1 utility approach 2 indifference curve 3 budget line 4 consumer equilibrium with indifference curve  utility alfred marshall it is want satisfying power of a commodity  A consumer is one who buys goods and services for satisfaction of wants. The objective of a consumer is to get maximum satisfaction from spending his income on various goods and services, given prices. Suppose a consumer wants to buy a commodity. How much of it should he buy? Two approaches are used for getting an answer to this question. These are: 1. Utility approach 2. Indifference curve approach  Utility. Utility does not mean usefulness. Given by Marshall. The term utility refers to the want satisfying power of a commodity. expected It means realized satisfaction to a consumer when he is willing to spend money on a stock Consumer’s of commodity which has the capacity to satisfy his want. Expected satisfaction is different from equilibrium with realized satisfaction. utility approach Realized satisfaction takes place only after the commodity has been consumed. Expected satisfaction takes place when the commodity has not been bought but the consumer is willing to buy it.  CONCEPT OF TU and MU per unit individual satisfaction - MU total satisfaction after consumption of all the units - TU y TU units MU TU Relationship :- 1 6 6 2 4 10 1. MU decrease TU increase 3 2 12 2. MU=0, TU= max. (point of 4 0 12 equ. satisfaction/equilibrium) 5 -2 10 x 0 3. when MU is -ve , TU starts falling MU  CONSUMER SURPLUS it is the area below the MU curve and above the price line It is the difference of what the consumer is willing to pay and what he pays. It was given by Alfred Marshall. CS=WILLING TO PAY – ACTUALLY PAYS OR CS=TU-PRICE PAID UNITS MU TU PRICE page no 49 , 50 (book)  Social efficiency represents the net gains to society from all exchanges that are made in a particular market. It consists of two components: consumer surplus and producer surplus. MARKET consumer surplus is a measure of consumer welfare. EQUILIBRIUM There is welfare gain to producers as well when they participate in the market, namely producer surplus. AND SOCIAL Producer surplus is the benefit derived by producers from the sale of a unit above and beyond their cost of EFFICIENCY producing that unit. This occurs when the price they receive in the market is more than the minimum price at which they would be prepared to supply. It is represented by the area above the supply curve and below the price line.  For all quantities below OQ, we find that there is a difference between the price that producers are willing to accept for supplying the good and the price that prevails in the market (P). Producer surplus disappears when market price is at equilibrium i.e the price at which sellers are willing to offer for sale is equal to the price that they receive. From figure, we find that at price P, when the market is in equilibrium, social efficiency is achieved with both producers and consumers enjoying maximum possible surplus. Consumer’s Equilibrium with Indifference Curve Approach  Meaning An indifference curve shows different combinations of two goods that yield the same level of utility or satisfaction to the consumer. An indifference curve is downward sloping convex to the origin. Smoothness of the curve implies that the two goods X and Y are perfectly divisible into very small units. Explanation page no. 53 (book) Indifference Map pge no. 54 (book) Properties of IC 1. it is downward slopping because of -ve relationship between goods x and y 2. it is convex to the origin because of decrease in MRSxy (a) concave :- MRS increase (b) straight line :- MRS constant (c) L-shaped of IC :- perfect compliments 3. it niether touches x axis nor touches y axis 4. it never intersect each other as two different ICs have different level of satisfaction it is the line which shows various combination of 2 goods which is consumer can buy with his given income. X Y 0 5 un-attainable region 1 4 2 3 3 2 4 1 attainable region 5 0 Budget Line EQUATION page no. 58 (book) CONSUMER EQUILIBRIUM WITH IC page no. 58 (book) SUPPLY  Meaning of Supply Supply of a commodity means quantity of the commodity which a firm is willing to sell at a given price during a particular time. Like demand, supply definition is complete when it has the following elements: (i) Quantity of a commodity that the producer is willing to offer for sale, (ii) Price of the commodity, and (iii) Time during which the quantity is offered for sale. Example. Firm A supplies 50 kg of wheat at price of ` 10 per kg in a month is a statement of supply. LAW OF SUPPLY  Difference between Supply and Stock Stock of a commodity is the total quantity that is available in a market at a certain time. Supply is that part of the stock which a seller is ready to sell at a certain price during a certain time. Thus, supply is that part of stock which is actually brought into the market. For example, a producer has produced 400 pencils. This is the stock of pencils with him. He may be willing to offer for sale 100 pencils at the rate of ` 10 per pencil, 120 pencils at ` 20 each; 150 pencils at ` 30 each and so on. In this case, stock is 400 pencils, but the supply of pencils is different at different prices.  Supply function Supply function is a functional relationship between quantity supplied of a commodity and factors affecting it. The supply function can be written as: SX = f (PX, PZ, T, C, GP) where, SX = Supply of commodity X f = function of PX = Price of commodity X P = Price of related good, Z T = Technological changes C = Cost of production or price of inputs GP = Government policy or excise tax rate. Price of the Commodity Price of Related Good 3.State of Technology 4. Prices of Inputs 5.Government Policy  CHANGE IN SUPPLY/ QUANTITY SUPPLY THEORY OF PRODUCTION Chapter 3: Theory of Production and Cost transfer of input into output is production MEANING creation of utility  Utility VS Usefulness: Utility simply means the ability to satisfy a want. A commodity may have utility but it may not be useful to the consumer. For instance—A cigarette has utility to the smoker but it is injurious to his health. However, demand for a commodity depends on its utility rather than its usefulness. Thus many commodities like opium liquor, cigarettes etc. have demand because of utility, even though, they are harmful to human beings. Factors of Production  Land The term ‘land’ is used in a special sense in Economics. It does not mean soil or earth’s surface alone, but refers to all free gifts of nature which would include besides land in common parlance, natural resources, fertility of soil, water, air, light, heat natural vegetation etc. Land is a gift of nature: No human effort is required for making land available for production. It has no supply price in the sense that no payment has been made to mother nature for obtaining land  (ii) Supply of land is fixed: Land is strictly limited in quantity. It is different from other factors of production in that, no change in demand can affect the amount of land in existence. In other words, the total supply of land is perfectly inelastic from the point of view of the economy. However, it is relatively elastic from the point of view of a firm. Why supply of land it is relatively elastic from the point of view of a firm ? Because the firm can increase the supply of the land by purchasing more of it However, we are not creating new land, but we are increasing the supply of the land by purchasing it hence from the firm point of view it is relatively elastic.  (iii) Land is permanent and has indestructible powers: Land is permanent in nature and cannot be destroyed. According to Ricardo, land has certain original and indestructible powers, and these properties of land cannot be destroyed. (iv) Land is a passive factor: Land is not an active factor. Unless human effort is exercised on land, it does not produce anything on its own.  Labour The term ‘labour’, means any mental or physical exertion directed to produce goods or services. In simple, it refers to various types of human efforts which require the use of physical exertion, skill and intellect.  Characteristics of labour: Human Effort: Labour, as compared with other factors is different. It is connected with human effort whereas others are not directly connected with human efforts. (2) Labour is perishable: Labour is highly ‘perishable’ in the sense that a day’s labour lost cannot be completely recovered by extra work on any other day. In other words, a labourer cannot store his labour.  labour is perishable which cannot be stored (time) a day labour lost cannot be recovered by working extra hours on other day  (3) Labour is an active factor: Without the active participation of labour, land and capital may not produce anything. (4) Labour is inseparable from the labourer: A labourer is the source of his own labour power. When a labourer sells his service, he has to be physically present where they are delivered. The labourer sells his labour against wages, but retains the capacity to work.  (5) All labour may not be productive: (i.e.) all efforts are not sure to produce resources. (6) Labour has poor bargaining power: Labour has a weak bargaining power. Labour has no reserve price. Since labour cannot be stored, the labourer is compelled to work at the wages offered by the employers.  Choice between hours of labour and hours of leisure: A labourer can make a choice between the hours of labour and the hours of leisure. This feature gives rise to a peculiar backward bending shape to the supply curve of labour. The supply of labour and wage rate is directly related. It implies that, as the wage rate increases the labourer tends to increase the supply of labour by reducing the hours of leisure. GRAPH page no. 69 (book)  least cost highly technical combinaation Production Function p= f(l,k)  The term production function means physical relationship between inputs used and the resulting output. Production function is a purely technical relation which connects the quantity of inputs required to produce a good and the quantity of output produced. FIXED AND VARIABLE FACTOR EXPLANATION According to marshall there are FOUR types of production function on the basis of time element. (a) Short-run Production Function fixed factor + variable factor ES 1 (C)Very short run (immediate run) production can't be changed ES=0 (perfectly inelastic) (d)The very long run secular period ES= infinite  (DOS) Diseconomies of scale and Economies of scale(EOS) EOS :- large scale production decreases the per unit cost of production, thus increases the profit DOS :- when large scale production increases per unit cost of production, thus decrease the profit E.g. Economies of scale are when the cost per unit of production (Average cost) decreases because the output (sales) increases. Diseconomies of scale are when the cost per unit of production (Average cost) increases because the output (sales) increases.  COST INDUSTRIES Increasing-cost Industry DOS > EOS In an increasing-cost industry, costs for producers increase as production increases. (diseconomies of scale>economies of scale) gives us diminishing returns to scale. Constant-cost industry DOS = EOS In a constant-cost Industry, the costs of production remains same even if production increases.(economies of scale = diseconomies of scale) gives us constant returns to scale. Decreasing-cost Industry DOS < EOS In a decreasing-cost industry, production costs decline as production increases.(economies of scale >diseconomies of scale) gives increasing returns to scale.  INTERNAL ECONOMIES/DISECONOMIES firms :- firms own qualities , which are better than other firm. so, they take advantage over other firm  EXTERNAL ECONOMIES/DISECONOMIES Concepts of Product  Shape of TP Curve. TP curve starts from the origin, increases at an increasing rate, then increases at a decreasing rate, reaches a maximum and after that it starts falling. Thus, as more units of variable factor is employed, it will not always increase the TP. TP schedule confirms that in the beginning total production increases at an increasing rate. TP starts increasing at a decreasing rate with the employment of the fourth unit of labour. When seventh unit of labour is employed, TP becomes stable at 30 units and with the employment of the eighth unit, it starts declining.  Average Product (AP) or Average Physical Product (APP) It is defined as the amount of output produced per unit of the variable factor (labour) employed. Symbolically, AP =Total Physical Product Labour Input Shape of AP Curve. As the units of variable factor are increased, AP curve starts from the origin, increases at a decreasing rate, reaches a maximum and then starts falling. AP curve is inverted-U shaped. As long as TP is positive, AP is positive.  Marginal Product (MP). It is defined as the change in TP resulting from the employment of an additional unit of a variable factor (labour). Symbolically, MP can be written as: MP =Change in Total Product Change in Labour Input Shape of MP Curve. The MP curve rises initially, reaches a maximum and then starts falling. When TP is maximum, MP is zero. When TP falls, MP is negative In the MP schedule, initially MP value increases till the employment of three units of labour, then MP value starts declining to become zero with employment of seven units of labour and then becomes negative after that. Relationship between TP, AP and MP 1. When AP is maximum, MP = AP. 2. When TP is maximum, MP = 0. 3. When TP is falling, MP is negative. 4. As long as TP is positive, AP is positive. 5. Both AP and MP curves are inverted U-shaped.  Relationship between TP and MP 1.At any point on the TP curve is the slope of the TP curve at that point. The value of slope rises, then falls till TP is maximum. (at that point slope of TP curve is zero) and beyond that it is negative. 2. MP curve rises initially, reaches a maximum and declines after that. 3. When TP increases at increasing rate, MP increases. 4. When TP increases at decreasing rate, MP decreases and is positive. 5. When TP is maximum, MP is zero. 6. When TP falls, MP is negative. Its economic meaning is that additional labourer slows down the production process.  Relationship between AP and MP 1. Both AP and MP curves are derived from the TP curve since,AP =TP/L 2. When MP > AP, AP rises. [MP curve lies above AP curve. MP achieves its maximum point and starts falling still AP rises. When both AP and MP curves are rising, MP curve rises at a faster rate. The reason for rise in both AP and MP values is under utilisation of the fixed factor.] 3. When MP = AP, AP is maximum. MP curve cuts AP curve at its maximum point. 4. When MP < AP, AP falls. [MP curve lies below AP curve. When both AP and MP curves are falling, MP curve falls at a faster rate. The reason for all in both AP and MP values is full utilisation of the fixed factor.] 5. Both AP and MP curves are inverted ‘U’ shaped curve. 6. When MP is at its maximum, it is called point of inflexion.  RETURNS TO SCALE(LONG RUN PRODUCTION FUNCTION) In the long run, output can be increased by increasing all factors in the same proportion. Generally, laws of returns to scale refer to an increase in output due to increase in all factors in the same proportion. Such an increase is called returns to scale. It has three aspects : Increasing returns to scale (EOS>DOS) Constant returns to scale (EOS=DOS) Diminishing returns to scale. (EOS1 IRS α+β=1 CRS α+β 1, MR is positive (iii) When eD < 1, MR is negative  Meaning of Perfect Competition Perfect competition is a market structure characterized by complete absence of rivalry among individual firms. Perfect competition is defined as a market structure in which an individual firm cannot influence the prevailing market price of the product on its own. A good example of perfect competition is the agriculture market. Otherwise, it is an ideal situation which rarely exists in the real world.  Implication. The perfectly competitive firm is then a ‘price-taker’ and can sell any amount of the commodity at the established price. d is then the demand curve facing a firm. It is infinitely elastic and given by a horizontal line. d is also the price line or AR curve.  Features of Perfect Competition 1. A Large Number of Buyers and Sellers. 2. Homogeneous Product 3. Free Entry or Exit of Firms.  4. Perfect Knowledge. 5. Perfect Mobility of Factors of Production. 6. Absence of Transportation Cost.  Meaning of Monopoly ‘Mono’ means ‘one’ and ‘poly’ means ‘seller’. Monopoly is a market structure in which there is a single firm producing all the output. Example: Government has the monopoly in providing water supply, railways, etc. Features of Monopoly A Single Firm. The monopolist is the only producer of the good. (b) No Close Substitutes. (c) Price Maker with Constraint more can be sold at lower prices  Monopolistic Competition Monopolistic Competition is defined as a market structure in which there are many firms selling closely related but unidentical commodities. Examples: detergents, automobiles, textiles, soft drinks, T.V. sets, etc. Features of Monopolistic Competition Large Number of Buyers and Sellers. many sellers selling differentiated There are a large number of buyers and sellers of the commodity but not so large products as in perfect competition. Each firm is supplying a small percentage of total market supply of the product. (b) Product Differentiation. The products of the sellers are differentiated but are close substitutes of one another. Product differentiation can be real or artificial. Its effect is that sellers can differentiate their products.  (c) Free Entry or Exit of Firms. Firms can freely move in and out of a ‘group’. In monopolistic competition, the concept of industry is undefined as products are differentiated. Instead of industry, the word ‘group’ should be used. d) Imperfect Knowledge. Buyers and sellers do not have perfect or complete knowledge of market conditions. Buyer’s preferences are guided by advertising and other selling activities undertaken by the sellers. (e) Selling Cost. A firm under monopolistic competition incurs selling cost which is the cost of promoting the demand for its product. Examples of selling costs are advertisements, window displays, salesmen’s salaries, etc. Elastic Demand Curve under Monopolistic Competition influence the demand for a good. (f) High Transportation Cost. Cost of transporting the commodity from one place to another is very high under monopolistic competition.  OLIGOPOLY Meaning and Types of Oligopoly Oligopoly is a market situation in which an industry has only a few firms (or few large firms producing most of its output) mutually dependent for taking decisions about price and output. Oligopolistic industries can be classified into various ways. Some are following: oligopoly 1. few 1. Perfect or Imperfect Oligopoly 2. dominant If in an oligopoly market, the firms produce homogeneous products, it is 3. significant share called perfect oligopoly. If the firms produce differentiated products, it is 4. large called imperfect oligopoly. 2. Non-collusive or Collusive Oligopoly If in an oligopoly market, the firms compete with each other, it is called a non-collusive, or non-cooperative oligopoly. If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly, or cooperative oligopoly. 3. Duopoly When there are only two firms producing a product, it is called duopoly. It is a special case of oligopoly.  Features of Oligopoly elastic (a) Few Dominant Firms. kink inelastic (b) Mutual Interdependence. kinked demand curve or (c) Barriers to Entry. indeterminate demand curve (d) Homogeneous or Differentiated Products.  (e) Demand Curve. In an oligopoly, due to high degree of interdependency amongst oligopolistic firms, that we cannot define the demand curve faced by an oligopolist. Hence, the solution is indeterminate. (f ) Price Rigidity. In oligopolistic firms, prices are administered. Rival firm takes time to react to the changed price, due to which the price remains rigid in this market. (g) Non-price competition. Firms try to avoid price competition for the fear of price war. They use other methods like advertising, better services to customers, etc. to compete with each other. DITERMINATION OF PRICES page no. 102,103 (book)  PRICE OUTPUT DITERMINATION UNDER DIFFERENT FORMS OF MARKET Equilibrium of the Firm: The firm is said to be in equilibrium when it In the equilibrium state, the maximizes its profit. The firm has no incentive either output which gives to increase or decrease its maximum profit to the firm output. is called equilibrium output. Conditions for equilibrium of a firm:(PERFECT COMPETITION) (i) The marginal revenue should be equal to the marginal cost. i.e. MR = MC. (ii) The MC curve should cut MR curve from below. In other words, MC should have a positive slope. Profits Normal profits: When a firm just meets its average total cost, it earns normal profits. Here AR = ATC LOSS Can a monopolist incur losses? Price-output determination under monopolistic competition: BUSINESS CYCLES  What is Inflation? increase in money supply / increase in purchasing power  Deflation decrease in money supply / decrease in purchasing power MEANING The business cycle is the natural rise and Alternate name: fall of economic Economic cycle or growth that occurs trade cycle over time.  Great Depression of 1930: Examples of Business Information Technology bubble burst of 2000: Cycles Recent Example of Business Cycle: Global Economic Crisis (2008-09): Great Depression of 1930: The world economy suffered the longest, deepest, and the most widespread depression of the 20th century during 1930s. It started in the US and became worldwide. The global GDP fell by around 15% between 1929 and 1932. Production, employment and income fell. As far as the causes of Great Depression are concerned, there is difference of opinion amongst economists. While British economist John Maynard Keynes regarded lower aggregate expenditures in the economy to be the cause of massive decline in income and employment, monetarists opined that the Great Depression was caused by the banking crisis and low money supply. Many other economists blamed deflation, over- indebtedness, lower profits and pessimism to be the main causes of Great Depression. Whatever may be the cause of the depression, it caused wide spread distress in the world as production, employment, income and expenditure fell. The economies of the world began recovering in 1933. Increased money supply, huge international inflow of gold, increased governments’ spending due to World War II etc., were some of the factors which helped economies slowly come out of recession and enter the phase of expansion and upturn. Information Technology bubble burst of 2000: Information Technology (IT) bubble or Dot.Com bubble roughly covered the period 1997-2000. During this period, many new Internet–based companies (commonly referred as dot-com companies) were started. The low interest rates in 1998–99 encouraged the start-up internet companies to borrow from the markets. Due to rapid growth of internet and seeing vast scope in this area, venture capitalists invested huge amount in these companies. Due to over-optimism in the market, investors were less cautious. There was a great rise in their stock prices and in general, it was noticed, that companies could cause their stock prices to increase by simply adding an "e-" prefix to their name or a ".com" to the end. These companies offered their services or end products for free with the expectation that they could build enough brand awareness to charge profitable rates for their services later. As a result, these companies saw high growth and a type of bubble developed. The "growth over profits" mentality led some companies to engage in lavish internal spending, such as elaborate business facilities. These companies could not sustain long. The collapse of the bubble took place during 1999 –2001. Many dot- com companies ran out of capital and were acquired or liquidated. Nearly half of the dot – com companies were either shut down or were taken over by other companies. Stock markets crashed and slowly the economies began feeling the downturn in their economic activities. Recent Example of Business Cycle: Global Economic Crisis (2008-09): The recent global economic crisis owes its origin to US financial markets. Following Information Technology bubble burst of 2000, the US economy went into recession. In order to take the economy out of recession, the US Federal Reserve (the Central Bank of US) reduced the rate of interest. This led to large liquidity or money supply with the banks. With lower interest rates, credit became cheaper and the households, even with low creditworthiness, began to buy houses in increasing numbers. Increased demand for houses led to increased prices for them. The rising prices of housing led both households and banks to believe that prices would continue to rise. Excess liquidity with banks and availability of new financial instruments led banks to lend without checking the creditworthiness of borrowers. Loans were given even to sub-prime households and also to those persons who had no income or assets. Houses were built in excess during the boom period and due to their oversupply in the market, house prices began to decline in 2006. Housing bubble got burst in the second half of 2007. With fall in prices of houses which were held as mortgage, the sub - prime households started defaulting on a large scale in paying off their instalments. This caused huge losses to the banks. Losses in banks and other financial institutions had a chain effect and soon the whole US economy and the world economy at large felt its impact.  Business cycles occur periodically although they do not exhibit the same regularity. The duration of these cycles vary. The intensity of fluctuations also varies. Business cycles have distinct phases of expansion, peak, FEATURES contraction and trough. These phases seldom display smoothness and regularity. The length of each phase is also not definite. OF Business cycles generally originate in free market economies. They are pervasive as well. Disturbances in one or more BUSINESS sectors get easily transmitted to all other sectors. Although all sectors are adversely affected by business cycles, some sectors such as capital goods industries, CYCLES durable consumer goods industry etc, are disproportionately affected. Moreover, compared to agricultural sector, the industrials sector is more prone to the adverse effects of trade cycles..  Business cycles are exceedingly complex phenomena; they do not have uniform characteristics and causes. They FEATURES are caused by varying factors. Therefore, it is difficult to make an accurate prediction of trade cycles before their occurrence. OF Repercussions of business cycles get simultaneously felt on nearly all economic variables viz. output, employment, BUSINESS investment, consumption, interest, trade and price levels. Business cycles are contagious and are international in character. They begin in one country and mostly spread CYCLES to other countries through trade relations. For example, the great depression of 1930s in the USA and Great Britain affected almost all the countries, especially the capitalist countries of the world. Business cycles have serious consequences on the well- being of the society.  Economic Indicators Coincident or Leading Indicators Lagging Indicators concurrent Indicators  future Leading Indicators  with the business Lagging Indicators Coincident or concurrent Indicators  Internal Causes Fluctuations in Effective Demand Fluctuations in Investment Variations in government spending CAUSES OF Macroeconomic policies Money Supply Psychological factors BUSINESS External Causes CYCLES War Post War Reconstruction Technology shock Natural Factors Population growth  THANK YOU