EEIM Unit 1 Demand Analysis PDF

ENGINEERING ECONOMICS & INDUSTRIAL MANAGEMENT UNIT 1 DEMAND ANALYSIS INTRODUCTION:- Ordinarily by demand we mean desire. But demand is different from desire. The willingness to have so...

ENGINEERING ECONOMICS & INDUSTRIAL MANAGEMENT UNIT 1 DEMAND ANALYSIS INTRODUCTION:- Ordinarily by demand we mean desire. But demand is different from desire. The willingness to have something can be called as desire. Those desires become demand which is backed by purchasing power, e.g., Ability to pay and willingness to pay for it. It means the following three conditions are necessary for demand. 1) Desire 2) Purchasing power to pay 3) Willingness to pay. Concept of Demand: Goods are demanded because they have utility. Demand is that quantity of a commodity which a person is ready to buy at a particular price and during a specific period of time. When price of sugar is Rs 30 per kg the demand for it is 10 kg per week. The reference of price and time is essential for demand, because demand differs with price and time. Thus following features of demand are clear from the above. 1) Utility is the base of demand. 2) Demand is the relative concept. 3) Reference of price and time is necessary for demand. Individual demand and market demand: Individual demand is a demand by an individual. Individual demand indicates amount of goods purchased by an individual at different prices during a given period of time. This can be explained with the help of following individual demand schedule. Individual demand schedule:- it is a tabular representation of a commodity that is purchased by an individual at various prices in a given period of time. This can be explained with the help of following individual demand schedule. Price of Sugar Demand (Kg). 25 10 26 9 27 8 28 7 29 6 30 5 The given table shows different quantity of sugar purchased by a household at different prices. It can be observed that less quantity of sugar is demanded at rising price and vice versa. For example, when price of sugar is Rs 25/- per kg. Demand for sugar is 10 Kg. But 5 kg of sugar is demanded at price of Rs 30/- per kg. Market demand schedule:- It is tabular representation of quantities of a commodity demanded or purchased at varying prices by all the consumers in the market, at a given period of time. It is obtained by horizontal summation of demand of all individuals at various prices. This can be explained with the help of the following market demand schedule. Market Demand Schedule Price of Sugar (Rs) Quantity of Sugar Demanded Kg. Market Demand Kg. (Per Kg.) Consumer A Consumer B Consumer C (A+B+C) 25 10 11 12 33  26 09 10 11 30 27 08 09 10 27 28 07 08 09 24 29 06 07 08 21 30 05 06 07 18 In the above schedule three are three consumers of sugar, namely, A, B&C. It is clear from the table that market demand for sugar is the total demand of all consumers of sugar at varying prices. For Example, at price Rs 25/- per kg, market demand of sugar (33kg.) = demand of consumer A (10 kg). + demand by B (11 kg). +demand by C (12 kg). Market demand varies inversely with the changes in price. Market demand is always greater than individual demand. Factor Affecting Demand Demand is influenced by the following factors. 1. Price:- Price is one of the most important factors that affect demand. When price rises demand falls and when price falls demand rises. 2. Income:- Income is yet one more important factor that affects demand. Demand depends upon income of individuals in the society. Normally, Demand rises with increasing income of the society. 3) Population:- An increase in population leads to an increase in market demand for goods and services. 4) Tastes, Habits & Fashions:- Some factors such as taste, habit of consumers affect demand, in the market. 5) Price of Substitute and Complementary Goods:- Demand changes due to changes in the price of substitute and complementary goods. For example demand for tea changes because of changes in the price of petrol. 6) Distribution of Income:- Unequal distribution of income and wealth would lead to less demand for goods & services i.e. demand depends on the distribution of National Income and Wealth. 7) Expectation about Future Prices:- If consumers expect a fall in the price of a commodity in the near future, they will demand less at present price and vice versa. It shows that expectations about the future prices affect demand. 8) Advertisement:- The goods which are advertised powerfully on radio, television and newspapers, etc., push up demand. Advertisement is an important factor today that affects demand. 9) Taxation Policy:- Government ‘s taxation policy affects demand. For example, a change in income tax will change consumer’s disposable income and therefore demand. 10) Other Factors:- Change in any climate conditions, traditions, political and social factors also influences demand. Type of Demand 1) Direct Demand:- When a commodity is demanded to satisfy human wants directly, it is direct or conventional demand. For example, the demand for food, clothes have direct demand. Consumer goods have direct demand. 2) Indirect Demand:- Indirect demand is also known as derived demand. When goods are demanded indirectly, i.e., to produce consumer goods, it is indirect demand. For example, the demand for factor of production is indirect demand. 3) Joint Demand:- When two of more goods are demanded jointly to satisfy a single need, it is known as joint demand for example, to make tea, water, sugar, tea powder, milk etc, is jointly demanded. The demand for complementary goods is joint demand. 4) Composite Demand:- The demand for commodities, which is used for satisfying several want at a time, is composite demand. For example, the demand for electricity is composite demand. 5) Competitive Demand:- Competitive demand is when demand for a commodity competes with its substitutes. For example, tea and coffee have competitive demand. UTILITY In practice every individual tries to satisfy his wants with the valuable resource. It is true that human wants are unlimited, so all human wants are cannot be satisfied at a time. However, a particular want can be satisfied fully at a specific time. However, a particular want can be satisfied fully at a specific time. Here, the study of consumer’s behaviour, i.e., utility analysis explains, the want satisfying efforts by a consumer to maximise satisfaction. Generally, utility means usefulness of a commodity, but in Economics, utility means want satisfying power of a commodity. According to Prof. Stanley Jevons, “Utility is the capacity of a commodity to satisfy human want” FEATURES OF UTILITY 1) Relative concept: utility is related to time and place. It differs from time to time and place to place. E.g. Cotton clothes in summer and woollen clothes in winter have greater utility. Similarly, woollen clothes have more utility in Kashmir than in Mumbai. 2) Subjective concept: Utility of a commodity cannot be same for all individuals. It differs from person to person, due to differences in taste, preference, choice, liking, etc., of the people. E.g. Utility of a book is greater for an educated person than an illiterate person. 3) Ethically neutral: The concept of utility has no ethical consideration. It is morally neutral. A commodity which possesses utility may satisfy any want. It does not make any difference between good, bad, moral or immoral etc. Knife has utility for a housewife to cut vegetables and for a killer to harm somebody. 4) Utility and usefulness are not same: Utility is the want satisfying power of a commodity, whereas usefulness is the benefit derived by a consumer. Utility expresses lever of satisfaction of a consumer and usefulness indicates value in use of a commodity. A commodity which possesses utility may not be useful, e.g. a cigarette has utility for a smoker, but it does not have usefulness as it is injurious to health. 5) Not same as pleasure: Utility and pleasure are different. A commodity may have utility, but its consumption may not provide pleasure or happiness, e.g. an injection has utility for a patient but it is painful, so it does not give pleasure: 6) Utility differs from satisfaction: Utility and satisfaction are inter-related terms but there is a difference. Utility is the capacity of a commodity to satisfy human wants. Satisfaction is the feeling of happiness realised by the consumer. Utility is related to the commodity, whereas satisfaction is experienced by a person. Utility is anticipated satisfaction but satisfaction is the actual realisation. Thus, utility is the starting point of consumption and satisfaction is the end result of consumption. 7) Not easily measurable: Utility is a psychological concept. It is invisible and intangible. It cannot be measured cardinally i.e., in numbers. However, one can ordinally measure it e.g. a thirsty person After drinking water, may drive higher or lower level of utility. 8) Depends upon the intensity of want: The utility of a commodity depends upon the intensity or urgency of a want. The more urgent is the want, the greater is the utility and vice versa. As the urgency of want declines, utility diminishes. E.g. Utility of food is higher for a hungry person and utility decline with the satisfaction of hunger. 9) It is the basis of the demand: Utility forms the basis of demand. If a commodity does not give any utility, a person may not demand it. He will demand a commodity only, if it gives him utility, e.g. Demand for pen is more from students because utility of pen is more for them. TYPES OF UTILITY 1) Form utility: When utility increases due to the change in the shape or structure of existing material, it is called form utility. Toys made out of clay, making furniture from wood, a dress from fabric, etc., are some examples of form utility. 2) Place utility: When utility of commodity increases due to change in the place of utilisation, it is also created with the transfer of goods from the place of production to the place where they are consumed, e.g. Sea sand has more utility in construction work than along the sea shore. 3) Time Utility: When utility of a commodity increases with a change in the time of utilisation, it is called time. e.g. umbrellas have greater utility during rainy season than in winter. Time utility also offers to storing of goods and using at the time of need or scarcity. 4) Service utility: It arises when personal services are rendered by various professionals in the society of others. Services provided by doctors to patients, knowledge given by teach to students, suggestions by lawyers to his clients, etc. are examples of services utility. In this case, production and consumption both take place at the same time. 5) Knowledge utility: It increases when a consumer acquires knowledge about a particular product, e.g. Utility of a mobile phone or computer increases when a person known about its various functions. 6) Possession utility: It arises when the ownership of goods is transferred from one person to another. E.g. Possession utility is enjoyed by the consumers when they purchase goods from sellers. ELASTICITY OF DEMAND Introduction: The law of demand shows that is an inverse relation between price and quantity demanded i.e. when price falls demand is more and when price rises demand is less. The law of demand does not explain the extent of change in demand due to a change in price. In other words the law of demand fails to explain quantitative relation between price & demand. Therefore, Dr Alfred Marshall explained the concept of elasticity of demand. Concept of Elasticity and Demand:- The term elasticity means responsiveness or sensitivity. The concept of elasticity of demand measures the responsiveness of quantity demanded to a change in price. According to Prof. Marshall:- “Elasticity of demand is great or small according to the amount demanded which increases much or little for a given fall in price, and quantity demanded decreases much or little for a given rise in price”. According to P.A. Samuelson:- “Price elasticity is a concept for measuring how much the quantity demanded responds to changing price”. It is clear from the above definitions that elasticity of demand is a technical term which describes the responsiveness of change in the quantity demanded to a fall or rise in its price. In other words, it is the ratio of percentage change in quantity demanded of a commodity to a percentage change in price. Types of Elasticity of Demand: Following are three types of elasticity of demand. 1. Price Elasticity of Demand: Dr. Marshall has defined price elasticity of demand as below: “Price elasticity of demand is a ratio of proportionate change in the quantity demanded of a commodity to a given proportionate change in its price”. Thus, price elasticity is responsiveness of change in demand due to a change only. Other factor such as income, population, tastes, fashion, prices of substitute and complementary goods are assumed to be constant. Therefore, price elasticity of demand is written as: Ed =% Change in Quantity Demanded % change in Price Price elasticity of demand may have five values infinite, zero, unit, greater than one and less than one. 2) Income elasticity of demand: Income elasticity of demand may be defined as the degree of responsiveness of quantity demanded to change in income only. Other factors including price remain unchanged. It is written as- Ey = % change in Quantity Demanded % change in Income Income elasticity of demand is positive. When demand increases with increasing income. Income elasticity of Demand is negative when, quantity demanded decreases with increase in income. In case of normal goods income elasticity of demand is positive, whereas in case of inferior goods, income, elasticity of demand is negative. Income elasticity of demand can be zero, greater than one and less than one. 3) Cross Elasticity of Demand: Cross elasticity of demand is found in case of substitute goods as well as complimentary goods and non – related goods. In case of substitute goods change in the price of one good, affects the demand for another good. For example, if the price of tea rises, the demand for coffee will rise. So, cross elasticity of demand refers to change in quantity demanded of one commodity, due to change in the price of another commodity. Symbolically Ec= Proportionate change in the demand of commodity A Ec = Δ A Proportionate change in the price of commodity B ΔB (Here A is original commodity and B is price of another related substitute commodity) Types of Price Elasticity of Demand Infinite/Perfectly Elasticity Demand Curve 1. Infinite/Perfectly Elasticity Demand: when change in price leads to infinite change in quantity demanded, it is known as infinite elastic demand. When demand is infinite elastic, demand curve is horizontal straight line parallel to X axis. Symbolically Ed = ∞ 2. Perfectly Inelastic Demand Infinite/Perfectly Elasticity Demand Curve Irrespective of change in price, demand remains the same; it is called as perfectly inelastic demand. For example, as shown in the figure at price OP demand is OD, whereas at price OPI (Higher) and OP2 (Lower) the demand is OD only. It means demand does not change at all. When demand is perfectly inelastic the demand curve is represented by a vertical straight line parallel to Y axis as shown in diagram. Symbolically, Ed = 0 In practical such situation occurs occasionally such as demand for salt. 3. Unitary Elastic Demand Unitary Elastic Demand Curve When a charge in price leads to proportionate change in quantity demanded then demand is unitary elastic. For example, if price falls by 50%. In figure the change in price is PPI and change in demand is QQI. Both the charges are equal to each other. So the demand curve DDI, shows unitary elastic demand. Symbolically, Ed = 1. When the demand curve slopes steadily towards the X axis or is a rectangular hyperbola demand is unitary elastic. 4. Relatively Elastic Demand Relatively Elastic Demand Curve When proportionate change in demand is greater than the change in price, the demand is said to be relatively elastic, for example, if price falls is said to be relatively elastic, for example, if price falls by 50% the demand rises 75%. In the figure, change in demand QQI is greater than the change in price PPI. Hence, the demand curve DDI shows elastic demand. Symbolically, Ed > 1 In this type of the slope of demand curve is flatter. 5. Relatively Inelastic Demand Relatively Inelastic Demand Curve When percentage change in demand is less than percentage change is price, the demand is relatively inelastic. For example, if price falls by 50% the demand will rise by 25%, i.e., less than percentage change in price. In the above figure, the change in price is form OP to OPI is greater than change is demand from OQ to OQI. Therefore, DD is the demand curve which represents inelastic demand. Symbolically, Ed > 1 The slope of demand curve is steeper. Measurement of Price Elasticity of Demand Price elasticity of demand is measured with the help of the following three methods. 1. Ratio or Proportional Method: This ratio method of measuring elasticity of demand is also known as Arithmetic or Percentage method also. This method is developed by Dr. Marshall. In this method we consider percentage change in quantity demanded and divide it by percentage change in the price of the commodity. Thus Ed – Percentage change in demand  Percentage change in price Numerical Illustration Ratio or Proportional Method Price of X Demand (Units) 200 1000 100 1500 Price of commodity X fall from Rs. 200/- to Rs. 100/- and quantity demanded increases from 1000 units to 1500 units. Here percentage change in demand is 50, whereas percentage change in price is also 50. Therefore, 50%,/50% =1, which means Ed is unitary or one, in this example. 2. Total Expenditure Method: The name of Dr. Marshall is associated with the method. This method is also known as Total Expenditure Method or Total Revenue Method. In this method, statistics of total expenditure is used to find out elasticity of demand. Total expenditure at the original price and total expenditure at the new price is compared with each other, and we come to know the elasticity of demand. When price falls or rise, total expenditure does not change or remains, demand is unitary elastic. When price falls, total expenditure increases or price rises and total expenditure decreases, demand is elastic or elasticity of demand is greater than one. When price falls and total expenditure decreases or price rises and total expenditure increases, demand is inelastic or elasticity of demand is less than one. Measurement of elasticity of demand with the help of total expenditure method can be better understood with the help of the following example. Total Expenditure Method Price Demand Total Outlay Elasticity of Demand A 10 12 120 Unitary or 1 08 15 120 B 10 12 120 Elastic or >1 08 20 160 C 10 12 120 Inelastic or > 1 14 112 08 In example A, Original price is Rs 10 per unit and demand is 12 units. Therefore total expenditure incurred is Rs 120/-, Price falls to the level of Rs. 8/- and demand rise up to 15 units. But total expenditure is still Rs. 120/- in this case, total outlay does not change even though there is change in price. Therefore, demand is unitary elastic. In example B, at the price Rs 10/-, 12 units are demanded. So total original expenditure is Rs 120/- Price falls to Rs 8/- per unit and demand rises to the level of 20 units. Therefore, total expenditure incurred on commodity rises to Rs 160/- total expenditure under this new condition of change in price, is greater than original expenditure. Hence, in this example, demand is elastic or elasticity of demand is greater than one. In example C, original total outlay is Rs 120/- with a change in price to Rs.8/- per unit, demand expands to the extent of 14 units. Nevertheless, total expenditure Rs 112/-, which is less than original expenditure. Therefore, in this example demand tends to be inelastic or elasticity of demand is less than one. FACTORS OF PRODUCTION Introduction: To produce any commodity, we require production factors like land, labour, capital, entrepreneur etc. in economics we call these factors as factors as factors of production. Definition: Prof. Adam Smith: “Production is a creation of physical assets”. Prof. Marshall: “Production is a creation of utilities.” Prof. Mayers: “any action undertaken for the exchange of commodities and services is production”. Classification of Factors of production: For the production process we require following four factors of production. They are land, labour, capital and entrepreneur. For the efforts in production, they get reward in the form of rent, wages, interest and profit, respectively. Factors of Production a) Land b) Labour c) Capital d) Entrepreneur Land – Meaning and Features: in ordinary language the word ‘land’ refers to the surface of the earth. But in economics the word land is a wider concept. Land is primary natural and original factor of production. Land is a free gift of nature. According to Dr. Alfred Marshall, “By land we mean not merely land in the strict sense of the word best the whole of materials and forces which gives freely for men’s aid in land, air light and heat”. Thus, according to Marshall, land, means all free gifts that nature had given to mankind. It includes: a) On the surface of earth: all the natural resources like water, river, and forest agriculture land, mountains etc. b) Below the surface of earth: natural resources like coal, gold, silver, iron etc. c) Above the surface of earth: Natural resources like air, sunlight, heat etc. Feature of Land: 1) Free gift of nature: Land is material source which nature has provided as a free gift to mankind. Land is not created with human efforts; thus supply price of land is zero from the society point of view. Thus land has no cost of production. 2) Passive factor of production: Land is a passive factor of production. Land becomes productive when the other factors of production such as labour, capital etc., are used with it. 3) No geographical mobility: Land cannot move one place to another, but it has occupational mobility, that it can be put into some other alternative etc, E.g., agriculture land can be used for construction of houses. Therefore, it is least mobile factor of production. 4) Inelastic supply: The total land surface is determined be nature and is fixed in supply. Men cannot increase or decrease the total volume of land. The availability of land at any time is fixed. Thus, supply of land is perfectly inelastic. 5) Permanent and indestructible factor: Land is indestructible factor. It cannot be destroyed completely. Fertility of land may diminish but perfectly inelastic. 6) Heterogeneity: Land is heterogeneous factor and not a homogeneous factor. Land differs in quality and there are different grades in land. As a result, superior land commands a higher rent as compared to inferior land. 7) Diminishing marginal returns: Land is subjects to the law of Diminishing Returns. As more and more units of labour and capital are added to the same price of land, the total output increases but at the diminishing rate. 8) Derived demand: the demand of land is indirect. Demand for land depends on the demand of other goods and services. E.g., the demand for agriculture land is derived from the demand for agriculture products. 9) Site value: Land is a natural factor; value of land depends upon location. Land situated near urban area fetch higher price than the land located near rural areas. Labour: Labour is the most active and living factor of production, without which production process is not possible. According to Marshall, “Any exertion of mind or body undergone partly or wholly with a view to earning some return other than the pleasure derived directly from the work.” In other words, any exertion of human body and mind with a view to earn money is labour. E.g., when students play football, it involves operation, but it is not labour, for it has no economic motive. But a football coach, who teaches them the game, does it for his livelihood so his exertion is labour. Feature of labour: 1) Inseparable from the body of the worker: Labour and his work always goes together. Hence, labourer must be present himself where he supposed to tender his services. 2) Human and active factor of production: Labour being a human factor has feeling, likes and dislikes. Therefore, he cannot be treated as a machine. Other factors become productive only after the application of labour. So labour is the most active factor of production. 3) Labour tells his labour and not himself: As quoted by Alfred Marshall, the worker tells his labour, but he himself remains his own property. The worker does not sell himself. He sells his labour only. 4) Restricted mobility: according to Adam Smith, “Of all the luggage’s, the labour is the most difficult to be transported”. Labour can move from one country to another country in the same way. Labour can change his business easily, but due to the family attachment, housing problem, climate etc., restricts geographic mobility of labour. 5) Efficiency of labour: Efficiency of labour differs from worker to worker. These differences are on account of a number of factors such as training, education, surrounding, culture, physical strength etc. thus, labour is a heterogeneous factor of production, that’s why labour is categorized under different classes such as skilled labour, semi – skilled labour and unskilled labour. 6) Perishable factor: labour is perishable in nature. If a worker is absent for a day, the days labour has gone. The amount of labour lost is lost forever. Labour cannot be stored and used for future. 7) Less bargaining power: Individual worker has bargaining power. They are helpless to accept the low wages offered to them, rather than remaining unemployed. However, in modern days trade unions fights for the rights of the labour. Labour can form a trade union, and through trade union they can put forward their demands for better working conditions, higher wages etc. 8) Inelastic Supply of labour: Supply of labour is relatively inelastic during the short period of time this is because working population is between the age group i.e. 15-59. Supply of labour cannot be quickly increased or decreased to meet the changes in the demand for it. Meaning and Features of Capital Capital is the third important factor of production. In ordinary language, we identify capital with money invested in a business. Even though capital in a business is expressed in terms of the amount of money used. To start a business, this amount has to converted into capital goods like building, machinery, raw material, fuel etc, to get production started. Definition: According to Bohm Bawark, an Austrian economist, “Capital is a produced means of production.” Capital refers to the stock of capital assets which yield income. Features of Capital: 1) Manmade factor: Capital is a man-made factor of production. Man produces the capital in the form of plant, machinery, building vehicles etc. hence it is a manmade factor. 2) Mobile factor of production: capital has highest mobility. It has both geographical as well as occupational mobility: capital of every type can be easily transferred from one place to another or from one country to another country. 3) Passive factor of production: Capital is passive factor of production. It becomes product only with the help of labour and capital. Thus, it cannot produce anything on its own. However, it increases the efficiency of the factors of production. 4) Productive factor: Capital is more productive as compared to other factors of production; use of capital not only improves efficiency of land and labour, but also increases the total production. Thus, capital is most important factor in a production process, without capital production process is not possible. 5) Durability: Capital assets like machinery are durable in nature. Which contributes to production over a period of time? 6) Derived demand: Human wants are directly satisfied by the capital goods. But with the help of goods production of consumer goods is possible. Thus, it has derived demand. 7) Elastic supply: The supply of capital goods is elastic. Depending on requirements the capital can be increased or decreased. It demands increases, supply of capital can be increased. Thus, supply of capital can be increased by increasing saving and investment. 8) Capital is part of wealth: Those things in which we find the qualities like utility, scarcity, transferability and externality termed as wealth. All capital is wealth because capital possesses all the characteristic of wealth. But all wealth is not capital. Because all those things which we termed as wealth cannot be used in production process. Types of Capital The capital can be classified mainly into four groups: 1) On the basis of ownership: a) Private capital b) public capital 2) On the basis of durability: a) Fixed capital b) working capital 3) On the basis of mobility: a) Sunk capital b) Floating capital 4) On the basis of nature: a) Real capital b) Money capital 1) On the basis of Ownership: a) Private or Personal Capital: It is that capital which is owned by individual or institute that is group of individuals. E.g., a firm owned by individual, machinery etc. b) Public of Social Capital: When capital is owned collectively by the society or the government, it is public or social capital. E.g., municipal school, municipal hospital, railways etc. 2) On the basis of durability: a) Fixed Capital: it is that capital which is used in a production process again and again. It is durable in nature. E.g., machinery, factory building etc. b) Working of Circulating Capital: It is that type of capital which is used in a production process only once. It is also known as variable capital. E.g., raw material, power fuel. 3) On the basis of mobility: a) Sunk capital: When capital is used for specific purpose, it is sunk capital. E.g., warship machine, Xerox machine, road roller, railways lines. It cannot be used for any other purpose. b) Floating capital: It is that capital which has several alternatives uses. E.g., electricity, coal, petrol, etc. 4) On the basis of Nature: a) Real capital: -It is physical capital used in the production process. E.g. machinery raw material, equipment etc. it is used to produce other goods. b) Money capital: - it is a capital in the form of money. Real capital like raw material, machinery can be purchased with the help of money capital. Entrepreneur Meaning:- Entrepreneur plays an important role in the process of production. Production is combined effect of land, labour, capital and entrepreneur. It is not possible to carry out the production process, Without the service of an efficient entrepreneur. The entrepreneur himself may or may not have his own land, labour or capital. But to make the production possible he has to combine all factors of production in appropriate manner. He not any combines all factors of production, but organizes and supervises the production by undertaking all risks. In short, “the entrepreneur is the initiator, organizer, the controller and risk bearer of a business.” According to F.H. Knight, “an entrepreneur is a person who perform dual function of risk taking and control”. According to Schumpeter, “entrepreneur is associated with innovation”. Thus, the job as an entrepreneur is a highly specialized job. Other factors get their fixed reward in the form of rent, wages interest: but an entrepreneur cannot guarantee his own income (Profit). The remuneration of an entrepreneur can be positive, negative or zero. Qualities of Entrepreneur Entrepreneur is regarded as a “certain of a ship”. It is the entrepreneur who co –ordinates all factors of production. To be a successful businessman, an entrepreneur should possess the following qualities. 1) Efficient: - He should be highly intelligent, able and efficient so as to solve the problems rising in industry. 2) Organizer: - He should be a good organizer. He should have the ability to combine all the factors of production in appropriate manner. Thus, he should be a good co-ordinator. 3) Leader ship: - Entrepreneur should possess the quality of leadership. The key of successful business is brilliant leadership. He should put the right person at right job. The important function of a leader is to give right direction to different factors of production. 4) Decision Maker: He should be a quick decision maker. He should have capacity to take quick decisions regarding the location of industry, investment, nature of product, sale of the product etc. 5) Self Confident: - He should be self-confident and should be able to develop confidence in others, regarding his integrity and honesty, which will help to maintain goodwill and reputation of his firm in the market. 6) Bold and Courageous: - entrepreneur should be capable to face difficulties, adverse circumstances with confidence. 7) Knowledgeable: - He should have complete knowledge about his business, market condition, new technology, ups and downs in the market etc. 8) Innovator: - entrepreneur should be a good innovator. He should introduce new technique of production which minimizes cost of production and which minimizes cost of production and explores the market for his product. 9) Vision and Foresight: - He should be a person who has vision foresight and a drive to move ahead of other he must be a man with imagination and judgement so that he may be able to estimate the changes likely to take place in the market trends. Function of an Entrepreneur In modern Economy, an entrepreneur has to perform various functions. They are broadly classified into three categories. a) Organizing function 1) Factor co- ordination 2) Decision making 3) Planning 4) Supervision 5) Factor payment b) Risk and uncertainly bearing faction 1) Insurable risk 2) Non – Insurable Risk c) Innovation function A) Organizing function: An entrepreneur has to perform following functions to organize business. 1) Factor co- ordination:- An entrepreneur has co- ordinate the other factors of production i.e. land, labour and capital in the most optimum manner. So that he can minimize the cost of production and maximize the total output. 2) Decision making:- An entrepreneur has to undertake several decisions, regarding how to produce, at what cost to produce, where to sell. How much to produce, etc. thus, entrepreneur is a decision making factor in a production process. 3) Planning: Planning is an important function of an entrepreneur. He has to plan before starting production process. During the production process also he has to make some desirable changes and after production of goods he has to plan about sell of his product, thus, planning is a continuous process. 4) Supervision: An entrepreneur is also a supervisor of his business. He should supervise the entire functioning of the business. He should keep on monitoring the working of factor imputes. 5) Making factor payments: entrepreneur pays fixed contractual rewards to all factors of production, i.e. land, labour, and capital. He should distribute the rewards according to their contribution in the production process. B) Risk and Uncertainty bearing function: It is the unique and most important function performed by an entrepreneur. It is responsibility of entrepreneur to undertake the risk and uncertainties in the business. Entrepreneur bears two types of risk. 1) Insurable Risk: It is that risk which is insured by the insurance company such as risk due to fire, risk due to flood, risk due to accident etc. the loss due to such risk can be avoided. 2) Non – Insurable Risk or Uncertainties: Non – insurable risk or uncertainties mean unexpected risk which cannot be issued by insurance company e.g. risk due to change in demand for the product, availability of close substitute for the product, change in government policy, war – like condition etc. C) Innovative Function: According to Schumpeter, the introduction of innovation is the soul of entrepreneur function; it is the duty of entrepreneur to do innovations. To discover new technology of production, finding of new market, finding of new place to bring out the change in shapes and cover of the product and also to find out new sales promotion. Thus, Entrepreneur performs a variety to function; therefore he is rightly described as the captain of the industry. Introduction:-In common language the term market means a specific place where buyers and seller of a commodity meet and exchange their goods. But in Economic, market does not necessarily means a place, but it is an arrangement through which buyers and sellers come in contact with each other directly or indirectly and exchange of goods takes place among them. Definition of Market: To quote Cournet “Economist understand by the term market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such close contract with one another that prices of the same goods tend to equality, easily and quickly”. Types of market On the basis of degree of competition market are classified as follows: a) Perfect competition b) Pure competition c) Monopoly d) Monopolistic competition Perfect competition: A perfectly competitive market is one which has a large number of buyers and sellers of a homogeneous product. According to John Robinson “Perfect competition prevails when the demand for the output of each producer is perfectly elastic”. This indicates that the number of sellers is large. So the output of any one seller is a negligible small portion of the total output of the commodity. Feature of Perfect Competition: 1. Large number of sellers/sellers are price takers: There are many potential sellers selling their large commodity in the market. Their number is so large that a single seller cannot influence the market price because each seller sells a small fraction of total market supply. The price of the product is determined on the basis of market demand and market supply of the commodity which is accepted by the firms, thus seller is a price taker and not a price maker. 2. Large number of buyers: There are many buyers in the market. A single buyer cannot influence the price of the commodity because individual demand is a small fraction of total market demand. 3. Free entry and exit: New firms can enter and exit the market without any restrictions. 4. Homogenous product: Firm produce and sell identical product units of a given product, in perfectly competitive market, i.e., units of a commodity produced by each of them is uniform, in respect of size, shape, colour, quality, etc. thus commodities have perfect substitute for each other. 5. Perfect knowledge: the buyers as well as sellers in the perfectly competitive market have perfect knowledge of the market condition. Such knowledge will prevent the buyers from paying a higher price and a seller charging different price than what is prevailing in the market. 6. Single price: In perfect competition all units of a commodity have uniform or a single price. it is determined by the forces of demand and supply. 7. Perfect mobility of factor of production: Under perfect competition the factors of production that is land, labour, capital and organisation, enjoy complete freedom to move from one place to another and form one occupation to another. This they will not face any problem in production of any commodity. 8. No transport cost: There is no transport cost under perfect competition. It is assumed that in perfect completion all the firms are close to each other. There will not be any difference in transport cost and price will remain uniform. 9. Non government intervention: Laissez faire policy prevails under perfect competition which means there is no government, transportation price determination of goods etc. After analyzing all the features of perfect competition, it is clear that perfect competition is ideal form of market, but it is very difficult to realize the above conditions practically. Thus, perfect competition is an imaginary concept. Pure Competition: Pure competition is a part and parcel of perfect competition. According to Chamberlin, “a market becomes pure when monopoly is kept away.” Pure competition has certain conditions of perfect competition. They are 1) Large number of sellers 2) Large numbers of buyers 3) Free entry and exit 4) Homogenous product 5) Single price. Price Determination under Perfect Competition Equilibrium price: Equilibrium price is the price at which quantity demanded is equal to quantity supplied. The price of the product under perfect competition is influenced by both buyers and sellers and equilibrium is determined by the interaction of demand and supply forces. According to Marshall, demand and supply are like two blades of pair of scissor. Just as cutting of cloth is not possible with the use of one blade, the equilibrium price of commodity cannot be determined, either by the forces of demand or by supply alone. Bothe together determines the price. We can study this with the help of the following table and graph.  Demand and Supply Schedule Given table shows the effect of price on Price Per Unit Quantity Demanded Quantity Supplied market demand and market supply. The table 5 100 500 shows that when price of the commodity is 4 200 400 Rs.5, quantity demanded is 100 units and 3 300 300 quantity supplied is 500 units. Since supply is 2 400 200 more than demand, price falls to Rs 4/- and 1 500 100 Rs 3/-, respectively and quantity demand is extend to 200 and 300 units whereas supply contracted to 400 and 300 units, respectively. It seen that quantity demanded and that quantity supplied both are equal at Rs 3 where quantity demanded is 300 units whereas supplied is 30 units. Thus, Rs.3 will be an equilibrium price. If further price falls to Rs 2 and 1, quantity demanded will expand to 400 and 500 units, respectively and quantity supplied will contract to 200 and 100 units respectively. Since demand is more than supply, competition among buyers will increase and price will rise up to Rs 2 and Rs 3. Thus equilibrium price will be Rs 3 per units because demand and supply both are equal at this price. E – Equilibrium OP- Equilibrium price OQ- Equilibrium quantity demanded and supplied. On the ‘X’ axis we measure quantity demanded and quantity supplied and on the ‘Y’ axis we measure price of the commodity. In the above diagram ‘DD’ is a downward slopping demand curve indicating inverse relationship between price and quantity demanded. ‘SS’ is an upward slopping supply curve indicates direct relationship between price and quantity supplied. Both the curve intersects each other at point ‘E’. At this point the equilibrium price is Rs 3/- and equilibrium demand and supply is 300 units. Monopoly – Meaning and its Features ‘Mono’ means single and poly means ‘seller’. Thus monopoly means single seller who has complete control over the supply of the commodity. There is no close substitute of the commodity. Due to absence of competition, monopolist is a price maker and not a price taker. According to H.L. Ahuja, “monopoly is said to exist when one firm is the sole producer or seller of a product which has no close substitute.” According to Chemberlibn, A monopoly refers to a single firm, which has control over the supply of a product, which has no close substitute. Feature of Monopoly 1) Single seller: In a monopoly market there is a single seller or a single producer. Under monopoly he has no rivals and he faces no competition. 2) No close substitute: there are any close substitutes for the commodity sold in the market. Likewise other firms may not produce the same product. Hence, monopolists do not face any competition. 3) Barriers of entry: Under monopoly the entry of other firm is strictly restricted. The seller has complete hold over the supply in the market. Such provision protects the monopoly powers. 4) No distinction between firm and the industry: Under monopoly there is only one seller, there is no distinction between the firm and the industry. Thus, under monopoly the firm is an industry. 5) Control over the market supply: the monopolist has complete hold over the market supply. He is a sole producer of the commodity. Therefore entry barriers such as natural, economic, technological or legal do not allow competitors to enter the market. 6) Price maker: The firm under monopoly is price maker and not the price taker. He can change any price for the commodity as he has complete control over the supply of the product. 7) Super normal profit: the monopolist always wants to earn supernormal profit. His decision regarding the price and the level of output are guided by the profit maximization motive. Thus, sometimes at high prices, he suppliers the product as per demand and sometimes he controls teh supply of the product and sells the product at high prices. 8) Price Discrimination: This implies charging different prices for the same product to different buyers. The monopolist succeeds in increasing his profit by depositing the technique of price discrimination. Types of monopoly 1) Natural monopoly: Natural monopoly emerges due to availability of natural resources. A particular type of natural resource is available, therefore that region enjoy monopoly in the product which requires that natural resource. Natural advantages like good location, old establishment, involvement of huge investment, business reputation, etc. confirm natural monopoly of many firms, e.g., tea from Assam. 2) Public monopoly: Public monopoly refers to sole ownership of the supply of goods or services by the government. Such monopoly functions with the primary motive of providing maximum welfare to the society, thus, it is also known as welfare monopoly. It is based on profit motive, e.g., Indian railway. 3) Private monopoly: Private monopoly refers to sole ownership of the supply of goods or services by the private firm or individual. The main objective of private monopoly is profit maximization, for e.g., Tata group and Reliance group. 4) Legal monopoly: When monopoly is created by law, it is known as legal monopoly. Legal provisions like patents, trademarks, copy rights etc, give rise to legal monopolies e.g. some producers use a particular trademark for their product and they take legal permission from the government for that brand, thus law forbids the potential competitors to imitate the design, form and shape of product. If any firm tries to violate the right action can be taken against them e.g., Parle- G etc. 5) Simple Monopoly: It is that organization which charges a simple uniform price for all consumers. There is no price discrimination among the consumers. 6) Discriminating monopoly: When different prices are charged to different customers for the same product or services, it is known as price discrimination or discriminating monopoly. e.g., a doctor or a lawyer may charge different fees to the people. 7) Voluntary monopoly: When number of big business companies acquires monopoly through voluntary agreement, business firm join together through trust, cartels, syndicates etc. they are called joint monopolies. Mergers and amalgamations may also lead to monopoly e.g., OPEC (Oil Producing and Exporting Countries). This is also known as Joint Monopoly. Monopolistic Competition – Definition and its Features Another type of market structure is monopolistic competition, which is very realistic in nature. In this market there are some features of monopoly and some features of perfect competition acting together. This mixture of two markets gives birth to a new form of market known as Monopolistic Competition; Prof. E. H. Chamberlin coined this concept in his book, “theory of Monopolistic Competition” which was published in 1933. Definition: According to Chamberlin, “Monopolistic competition refers to competition among a large number of sellers producing close but perfect substitute.” “When markets, which have a large number of producers producing differentiated products which are close substitute to each other, engage in non price competition, we call it as a Monopolistic Competition Market.” Following are the features of Monopolistic competition 1) Fairly large number of buyers: In this market there are fairly large numbers of buyers. Consequently, no single buyer can influence the price of the product by changing his individual demand. 2) Fairly large number of sellers: The number of sellers in a monopolistic competition is large. It is still smaller than that in a perfectly competitive market. Since the number of sellers is large. Each seller has a limited control supply. The seller has complete control over his brand. This control is possible because of patents, trade mark, copyright etc., that the producer possesses. Thus, each producer enjoys an element of monopoly on one hand and on the other they have to face competition from sellers selling close substitute in the market. 3) Product differentiation: the most important feature of Monopolistic Competition is product differentiation. Each product in this market is different from other product in some form or the other. The differences could be in its colour, shape, wrapper, after- sales services etc. their products, through different, are close substitute to each other e.g., Haman soap is close substitute to Lux soap. Producers also adopt various techniques such as discounts, gifts, advertisements etc, to attract the consumers. This is known as product differentiation. In this market producers compete with each other on the basis of product differentiation and not on the price differentiation. Therefore, Monopolistic is also known as non- price competition. 4) Close Substitute: In Monopolistic competition goods have close substitute to each other. For e.g. Gold spot is close substitute to Limca. 5) Selling Cost: The uniqueness of this market lies in the fact that a difference is made between cost of production and selling cost. Product differentiation leads to emergence of selling cost. Thus, the cost that producer have to incur, in order to differentiate their product is known as selling cost. Hence, medium such as television, radio, newspapers, magazine, exhibitions, incentives and salaries of sales representatives etc., are used by firms to increase the sales. The price of the product include cost of product include cost of production `as well as selling cost. 6) Free entry and exist: Under Monopolistic Corporation, there is freedom of entry and exist i.e new firms are free to enter the market, if there is super normal profit. Similarly, they can leave the market, if they find it difficult to survive. 7) Demand curve of seller: due to product differentiation and availability of close substitute, demand curve is highly price elastic and downward slopping. It means a slight change in price of the product will bring about a change in quantity demanded 8) Concept of group: Chamberlin introduced the concept of group as the substitute for industry concept. The firm producing identical product, are clubbed together in one industry under perfect competition. However, in the Monopolistic Competition the products are differentiated. All the firms producing close substitutes are taken together in a ‘group concept’. For example – group of firms producing medicines, cement etc.