This tutorial covers most of the topics of managerial economics including micro, macro, and managerial economic relationship; demand forecasting, production. GENERAL FOUNDATION OF MANAGERIAL ECONOMICS. Economics can be broadly divided into two categories namely, microeconomics. Managerial Economics, ME Study Materials, Engineering Class handwritten notes, exam notes, previous year questions, PDF free download.
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MBA - I Semester General Foundations of Managerial Economics - Economic Approach Write short notes on Marginal Product and Average product. 4. Managerial Economics can be viewed as an application of that part of Study of Managerial Economics essentially involves the analysis of certain major. Download Managerial Economics Notes for MBA. Students can Download MBA 1st Sem Managerial Economics Notes Pdf will be available.
Mr Ian Davies defines development as 'Simply how happy and free the citizens of that country feel. Oneof the implications of the high population growth is increase in thenumber of young age dependent population. It refers to the feeling of self-respect and independence. Specific characteristics may include: To satisfy endless wants an economist has also to suggest ways and means as to how the existing resources are to be rationally allocated, and how the means can be further increased to secure maximum satisfaction of want for better living. To Achieve desirable employment level: It is used inter changeably withNational dividend, National output and National expenditure.
Expenditure on raw materials and intermediate goods should not beincluded. The three methods stated give the same result. The differencecomes only as regards to a level at which the national income iscalculated or non-availability of statistics or overlooking of certainitems. Otherwise income, expenditure and output are the samething looking from three different angles.
There are certain difficulties in the measurement of National Income. Butthere are certain things, which are not exchanged for money. Forexample, unpaid service of housewives. Thus exclusion of this typeof services involves an underestimation of the National Income. In this case, it is difficult to measure National Income.
This leads to underestimation of National Income. This makes difficult to compute National Income correctly.
However, index numbers are not always accurate. Besides it is very difficult to compare index numbers of different countries precisely. Apart from the above difficulties, under developed countries facemany other problems also.
They are, e. It also helps to suggest measures. Thus it is used to assess the saving and investmentpotentiality of the community. Economic development has attracted attention of many economists.
Keynes etc. All of them have Babasab patil notes After theSecond World War, economists started systematic study of theproblems and process of economic development in developingcountries of Africa, Asia and Latin America.
In the process of study,the main concern of developed and wealthy nations is to maintainhigh rate of their economic growth and save it from adverse effectsof trade cycle. Similarly, the main concern of developing countriesis to reduce inequalities of income and wealth, to reduce povertylevels and to achieve rapid economic development. Different economists have expressed their different views regardingthe concept of economic development.
According to JosephSchumpeter, "No simple answer is feasible. The literal meaning of developmentis a passage from a lower to higher stage. In general, economicdevelopment implies an improvement in material terms, that is interms of goods and services that are available to the people. Meier and Baldwin"Economic development is a process whereby an economys realnational income increases over a long period of time". Similarly,another developmental economist M.
Todaro has definedeconomic development as a multidimensional process involvingmajor changes in social structure, popular attitudes and nationalinstitutions, as well as the acceleration of economic growth, thereduction of inequality and eradication of absolute poverty. The meaning of economic development and economic growth is notthe same, though, they look alike.
Economic growth refers to theincrease in GNP or per capita income. The growth is measurable likeexpansion in labour force, in capital, in saving and consumptionwhile economic development refers to the underlying determinantsof economic growth, such as changes in techniques of production,social attitudes and institutions.
In short, economic developmentrefers to the problems of under developed countries and economicgrowth to those of advanced countries. The meaning of economic development is very wide and it is gettingmore and more precise with the passage of time. The widelyaccepted indicators of economic development are as follows; Babasab patil notes Development Economist Simon Kuznets, Meier and Baldwin have used national income as an index of economic development.
The "Real National Income" refers to the countrys total output of final goods and services in real terms rather than in monetary terms. But this indicator has certain inherent problems like changes in value of money and growth of population.
For example, if rate of population growth is higher than the rate of increase in Real National Income, economic development retards instead of advancement.
Another index of economic development is the use of rates of growth in per capita GNP. Development strategies have therefore focussed on rapid industrialization at the cost of agriculture and rural development.
Social indicators like improvement in literacy rate, health condition and housing are given only casual importance. Similarly, the problems of unemployment and inequality of income are given only secondary importance. Thus, many countries witnessed falling standard of living of masses irrespective of increase in per capita income. Besides, few rich people instead of sharing it with the poor enjoy the fruits of development.
Even the World Bank, which used to emphasize economic growth as a goal of development during 80s, shifted its emphasis to a better quality of life. Todaro, a development economist writes, "Development must therefore be conceived of as a multi-dimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty.
Sustenance means ability to meet the basic needs such as food, housing, clothing, primary education, health care etc. Most of the people in developing countries are not capable of fulfilling their basic needs due to poverty.
It refers to the feeling of self-respect and independence. However,most of developing countries are dependent economically andtechnologically on advanced countries due to the poverty and lowliteracy rate.
Freedom from servitude refers to ability and freedom of the people to choose greater leisure, have more goods and services and also lead a religious life if people want. Therefore, the three main objectives of development are: This means raising income, providing more jobs, better education and greater attention to cultural and humanistic values. It means to free oneself from ignorance, human misery and servitude3.
Mahbub ul Haq is the pioneer of introducing this concept. They are life expectancy at birth,adult literacy and GDP per head. HDI ranks each country from 0scale to 1 on the basis criterion of development. The HDI classifiesthe countries into three groups by using three criterion of Babasab patil notes The HDI for Nepal is 0. In HDI for Nepal was 0. Human Development in South Asia, Economists agree that HDI is dependable and considered as a mostrecent medium for measuring economic development of countries.
The HDI evaluates economic development both from economic andsocial aspects. It emphasizes the need of investment in socialaspects like, education and health in order to achieve higher level ofeconomic development. Countries can be classified into developed and developing countries.
Countries having high GNP per capita, higher living standard of thepeople, higher life expectancy and higher quality of education andknowledge are grouped under the category of developed countries. The main characteristics of develped countries are as follows; a High Development of Industrial and Service Sector: Main sources of national income in developed countries are industry and service sector. Agriculture is subsidiary income of Babasab patil notes But agriculture is also highly capital intensive.
Capital plays dominant role in production. Mechanization is adopted in production. Goods are produced in large scales for export. Specialization and division of labour are introduced for improving quality of the products. All the goods are produced to make high profit. Goods are produced using advanced software technologies. This makes possible to produce quality product at cheaper price. Developed countries enjoy high growth rate of National Income and per capita income due to development in industrial sector.
The adult literacy rate is quite high in developed countries. More than 90 per cent of adult are literate. Characteristics of Developing Countries. Under developed countries or developing countries or leastdeveloped countries are one, which have lower standard of living. According to the United Nations, an under - developed country isone in which per capita real income is much lower when comparedwith the per capita incomes of the USA, Canada, Australia andWestern Europe.
But this definition considers only one aspect ofunder development. Low level of living standard, absolute poverty,low per capita income, low consumption level, low level of use oftechnology, poor health service, occurrence of high birth rate andhigh death rates are some of the characteristics of developingcountries.
The main characteristics of developing countries are as follows: Underdeveloped countries are characterized by low per capita income. Based on per capita GNP, the World Bank has classified countries as low income, middle income and high-income countries.
The countries having income Babasab patil notes Nepal falls under low-income category. Most of low-income countries lie in Asia and Africa. Most of the underdeveloped countries are unable to utilize their available resources. In under developed countries available natural resources are either unutilized or underutilized. Many of the under developed countries have rich natural resources like land, water, forest, mineral etc.
To utilize these resources, under developed countries do not possess necessary capital, manpower and infrastructure and technology. For example, Nepal is rich in water resources. Similarly many African countries are very rich in mineral resources like, iron, copper, tin, bauxite and gold. South America has vast forest resources. Thus, under developed countries have natural resources but they are unutilized and some times mis-utilized.
In Nepal, one of the causes of mis-utilization of resources is due to lack of good governance. Nepal Human Development Report indicates that the persistence of poverty and the crisis in good governance are the major dominant concern of Nepal. Underdeveloped countries are characterized as "capital poor"countries. In these countries not only present capital stock is poorbut also the current rate of capital formation is very low.
Peoplehave low capacity to save due to low level of income. In most underdeveloped countries gross investment is only 5 - 6 per cent of grossnational income. Rapid population growth is one of the common features of alldeveloping countries. In all countries, death rate is declining due tomodern medical facilities but birth rate is not falling.
The birth ratein developing countries is approximately 40 per thousand. Thuseven if these countries increase GNP to some extent; they are notsufficient to feed increasing population.
Lack of female education,employment, easy access to family planning and traditional value of Babasab patil notes Oneof the implications of the high population growth is increase in thenumber of young age dependent population. The workingpopulation is required to support the children, which decreasessaving and investment for capital formation.
Under developed countries suffer from the problem ofunder-employment and disguise unemployment. Asnon-agricultural employment is limited people remain unemployedduring off-seasons. Even if people are working they do not getsufficient work to increase productivity. Excessive pressure ofpopulation results in disguise unemployment. One of the features of underdeveloped economy is dualisticeconomy.
This means that market economy and subsistenceeconomy exist side by side. The developed market economy isfound in urban areas and rural areas are characterized bysubsistence economy. In urban areas, handful of the people enjoysall modern facilities like cellular phone, car, houses etc.
Their lifestyle is lavish. In rural areas, people are living with bare minimumnecessities of life. In some underdeveloped countries, foreigncompanies are utilizing valuable natural resources of the countryand enjoying the major portion of profit from it. On the contrary,the native are given minimum wage for their labour. Thesecompanies make huge profit, which are taken to their own country. They contribute very little to the development of underdevelopedcountries.
In developing countries people have very little means to developtheir hidden talent of entrepreneurship. Low level of literacy,ineffective government policies, lack of market, lack ofinfrastructure, limited resources, social rigidities and lack of securityare responsible for hesitation of people to undertake new initiativeand venture in entrepreneurship. Only small group of peopleengage in trading and industry including service industry andfinancial sector.
In Singapore and Indonesia, however, immigrantpeople from under developed countries have contributed in theeconomic development of these countries. For instance Chineseimmigrants in Singapore and Indonesia have played crucial role in Babasab patil notes Lack of physical infrastructure is common feature ofunderdeveloped countries.
Mobility of people and goods has been hampered by the absence ofquick transport and communication. Similarly, necessary capital forinvestments is not easily available. People have to depend ontraditional sources of borrowing. Peoples health condition is poordue to lack of easy access of health care. The under developed countries rely on primitive methods ofproduction, which takes more efforts and less production.
Theirtechnological backwardness is reflected in high average cost ofproduction, poor quality of product, low productivity of labour andcapital. Limited availability of capital, illiteracy, lack of skilledmanpower and research are responsible for technologicalbackwardness.
These countries depend on imported technology,which in many cases are not suitable for the country. The low labour efficiency is another feature of under developedcountries. Due to the illiteracy, poor health, lack of training andspecialization, people earn very little from their hard work.
There isalso occupational immobility of labour due to caste system. Inmany countries caste system has been abolished. But in rural areasstill occupation is classified on the basis of caste. Another problem of under developed countries is exploitation ofchildren and women labourers. Though child labour is illegal and itexist extensively in various industries, mining, restaurants anddomestic works. Prevalence of low status of women in the society isanother problem.
Women are discriminated in work and wage. Equalwage for equal work remains only in the law. This problem is more Babasab patil notes Strict implementation of law is lackingin many cases. J Lack of Dignity of Labour: Another problem of underdeveloped countries is lack of dignity oflabour.
The white-collar jobs are given undue importance incomparison to labour oriented jobs. The civil employee enjoys manyprivileges and prestige. Manual workers are looked down even ifthey contribute a lot in national economy. Agriculture labourers inNepal toil under scorching heat and rain to produce differentagricultural products and contribute to national income and feed thepeople.
However, their labour is not given so much importance aswhite-collar jobs. Traditional values and social structure areresponsible for this. The main occupation of the people in developing countries isagriculture.
A large number of people between 70 to 90 per cent oftotal population derive their livelihood from agriculture.
Due tosluggish growth of non-agricultural sector, people are forced towork in agriculture even if they get meager return.
Most of farmersare operating on subsistence farming forcing them to be in thevicious circle of poverty. As family members have no alternativejobs, people are forced to carry agricultural operation. This hasresulted sub-division and fragmentation of land holding. The smallsize of land holding again obstructs the use of modern farmingmachinery, which is essential to improve productivity of land. The underdeveloped countries are also trapped in party politics.
Thepolitical parties instead of working for the benefit of the people mayengage in mis-utilization of power for personal benefit. Corruption,lack of transparency in government work, lack of justice, slacknessin implementation of law and order, insecurity of life and wealth,mis-appropriation of countrys resources are responsible for despairand frustration among the people.
Lack of peoples participation indecision making which shape their lives lead to failure of the system. Political instability is the major cause of economic backwardness inmany underdeveloped countries.
For instance, Tamil problem in SriLanka, Maoist problem in Nepal, occasional communal violence inIndia, Indonesia, have disrupted and retarded economic growth ofthese countries Babasab patil notes PART B: Geographical FeatureGeographical Location and Area: Nepal is located between 26 22 north and 30 27 north latitude and 80 4east to 88 12 east longitude. The total area of the country is , sq. The average length of thecountry is km stretched East to West. The width of the country is notuniform.
Mean width is km North to South. Physical Feature: Ecologically it can be divided into three major divisions ascending from south tonorth.
They are the Tarai plains, the Hills and the Mountains. The broad belt of low and flat land stretching East to West Mechi to Mahakali in the southern part of Nepal is called Tarai. It has been formed out of fine andfertile soil brought down and deposited by the rivers flowing from the north. Itis 25 to 32 km broad.
The region comprises 25 per cent of the total land area. This region is also called greenery of Nepal, because it has 40 per cent ofcultivable land. Wide varieties of crops such as paddy, maize, wheat, sugarcane,vegetables, tobacco, tropical fruits are grown in the region. Around As this region is most suitable forcultivation and open to Indian border, the population of the region is increasingat a very fast rate. This region is densely populated.
It is the region lying between the Himalayas and Tarai. The altitude of thisregion varies from meters to metres above the sea level.
The Kathmandu andPokhara valleys lie in midland region. The Churia range extends upto KoshiRiver. This range is also known as Siwalik range. The altitude of the Mahabharat range varies from meter to meterhigh.
Most of areas are covered by forest.
It is also the biggest physical region. It covers 42 per cent of land area. About one tenth of land is suitable forcultivation. In fact, before the construction of concrete houses, there was muchfertile land where cultivation of cereal crops, cash crops and vegetables weregrown particularly in Kathmandu valley. Now most of the fertile land has beenused for construction of office building or residential houses.
It occurs in the northern part of Nepal. The altitude ranges between 4,meters to meters above the sea level. It covers 25 per cent of land area. A large number of peaks and mountains lie in this region including the highestpeak on the Earth "Sagarmatha" Mt. Similarly, some of the main Himalayanranges like Kumbhakarna, Mahalangoor, Rolwaling, Ganesh, Annapurna,Dhaulagiri etc, are situated in this region.
The mountains over meters issnow covered. The big glaciers and big rivers originate from this region. Approximately 2 per cent of land are suitable for cultivation and about 7.
There are many well-known peaks in the region and people come fromdifferent parts of the world for mountaineering and trekking. The region hasgreat potential for adventure tourism, particularly mountaineering. Rivers, Lakes and Glaciers: Most of them are flowing from North to South.
The Babasab patil notes The Karnali River is thesecond largest and longest river. The rivers in Churia range depend on monsoon rainfall and are mostly dry inwinter. The rivers originating from Mahabharat range depends on spring andrainwater.
There are many beautiful lakes.
The Gosaikund, Suryakund,Bhairavkund are religiously famous lakes of Nepal. The huge masses of ice moving along mountain valley are known as glaciers. Most of them are located in the eastern Himalaya. The biggest is Khumbuglacier in Mahalangur Himalaya.
The Langtang glacier of Langtang Himal is thelargest one. Nepal has monsoon type of climate. But, being a mountainous country, theclimatic condition differs from one part to another, generally on the basis ofaltitude - higher the altitude cooler the climate.
There are three main seasonsin Nepal. March to July is summer season, which is characterized by high temperature. InTarai, temperature exceeds 30 C. Temperature decreases along with increasein altitude. Days are sunny, windy and dusty.
Because of heat, stormsfrequently originate in this season. June - September is rainy season. Monsoon blows from southeast direction andbrings rain to the country.
The southern slopes of Mahabharat and Churiaranges in eastern Nepal receive heavy rainfall of over cm. The Pokharavalley receives the highest amount of rainfall over cm and Himalayanranges get less than 50cm, which is mostly in the form of snow. October to February is the winter season.
The temperature gets very low and itbecomes cold in most of the areas of the country. The temperature in Taraibelt is about 15 C and Himalayan region far below 0 C. Morning is foggy orfrosty. The western wind brings some rainfall, which decreases from westtowards east. Heavy snowfall takes place in high mountains.
Types of climate: There are five types of climates in Nepal. In the Tarai and upto the altitude of m, climate is very hot during summerand cold in winter. Rainfall varies between cm in the east and cm in thewest.
Between to m of altitude, the climate is moderately hot duringsummer and cooler during winter. The rain varies from cm to cm.
Thisis most pleasant climate. Warm in summer and cold in winter. The average rainfall is about cm,which occurs more in east and less in the west. The lower part of Himalayan region between m and m of altitude hasalpine climate, which is slightly warm in summer and winter is very cold.
Therainfall varies from 50cm to cm and sometime snowfall. Above m the climate is very cold round the year. The precipitation is lowand is in the form of snow. Snowstorms in the afternoon are very frequent inmany parts of the country having this climate. Characteristics of Nepali Economy. Nepal is one of the least developed countries in the world.
The main featuresof Nepali economy are widespread poverty, low human development,under-utilization of resources, ineffective administration, corruption, lack ofsecurity and low status of women and girls.
The main charac0teristics of Nepalieconomy are as follows;Geographical Characteristic. Nepal is a mountainous country. Nearly 83 per cent of land is hilly andmountainous terrain. Ecologically, the country is divided into three regions; theMountain region, Hill region and Tarai region.
In the mountain regions,development of transport and communication is very difficult and expensive. Thus, many VDCs still lack basic facilities like health, drinking water, electricityand communication.
Besides, in almost every rainy season villages suffer fromnatural disaster like landslides and flash flood. Being landlocked country, Nepalhas to depend on India to get access to sea which sometimes face difficulty dueto disagreement in transit problem between the two countries. Except in Tarairegion river transportation is not possible in mountain region due to fastflowing rivers. Nepal is rich in varieties of vegetation due to its varied climateacross the country. People from different parts of the world can easily adjust inNepal.
Similarly different types of crops can be cultivated in various parts of thecountry. The main natural resources of the country are fertile soil, water and mineralresources. Proper utilization of valuable and rare herbs is lacking due toabsence of effective policy. Rampant smuggling of forest products iswidespread in many parts of the country.
Similarly, Nepal is very rich in water Babasab patil notes Likewise, mineral resources is also not properly explored and exploited due tolack of effective policy. As for soil, indiscriminate use of chemical fertilizer hasspoiled its quality much to the distress of farmers in many parts of the country. Economic Characteristics: The economic characteristics include poverty, investment, saving, agriculture,industry, trade and technology etc.
The Human Poverty refers to lack of capabilities, lack of political stability,inability to participate in decision-making, lack of personal security andinability to participate in the life of a community.
Poverty is wide spread inNepal. About 42 per cent of people livebelow the poverty line. Most of the people are very poor and can not even getbasic necessities of life.
HumanPoverty Index in rural areas is The agriculture is main basis of Nepali economy. Nearly 40 per cent of GrossDomestic Product is contributed by agriculture sector. Similarly 60 per cent ofeconomically active people depend on agriculture. Among them 40 per cent arefemale. The women in rural Nepal are intimately involved in agriculturalproduction process.
Although women participate extensively in agriculturalproduction but their productivity, however, remains constrained in several ways. Women have limited access to information, credit and complementary servicesthan men.
Agricultural policy has not taken appropriate consideration of Babasab patil notes Besides, the necessary inputs arerequired for the improvement of agriculture which is not available to all farmers. The farmers are facing problems of not only inputs but also market for output. The competition with imported agricultural products is depriving farmers to gettheir due price in the market.
The trade is important to import necessary material for economic developmentand export Nepali products for earning foreign exchange. Lack ofdiversification in exportable products and continuously increasing volume ofimport is creating problems of adverse balance of trade. Nepals main items ofexport are carpet, ready-made garments, handicrafts, wool and woolenproducts, silver products and paper products.
The export of these products isnot increasing due to several problems associated with the trade policy. Theexport of traditional agricultural products is also declining due to lowproduction and quality. Due to low per capita income and wide spread poverty both saving andinvestment is very low.
During the period of - 99, the economy hasslowed down with compare to early nineties. Political instability, frequentchanges in government, Maoist problem and rampant corruption in all fields ledto slower GDP growth of per capita income, government revenue, expenditure,investment and saving. The average annual national saving was recorded at Model Paper M.
Sc Final Model Paper M. Com Model Paper B. Com I Model Paper B. Com Hons Model Paper B. Com Model Paper M. Com Prev. TOP Managerial Economics. Share On:. You might also like. International Financial Management. IT fro Management. A change in income causes the demand curve to shift reflecting the change in demand. Income elasticity of demand is a measurement of how far the curve shifts horizontally along the X-axis.
Income elasticity can be used to classify goods as normal or inferior. With a normal good demand varies in the same direction as income. With an inferior good demand and income move in opposite directions. Goods can be complements, substitutes or unrelated. A change in the price of a related good causes the demand curve to shift reflecting a change in demand for the original good.
Cross price elasticity is a measurement of how far, and in which direction, the curve shifts horizontally along the x-axis. A positive cross-price elasticity means that the goods are substitute goods. How would you measure price elasticity of demand? Measurment of price elasticity of demand: Point-price elasticity One way to avoid the accuracy problem described above is to minimise the difference between the starting and ending prices and quantities.
This is the approach taken in the definition of point- price elasticity, which uses differential calculus to calculate the elasticity for a small change in price and quantity at any given point on the demand curve: Arc elasticity A second solution to the asymmetry problem of having a PED dependent on which of the two given points on a demand curve is chosen as the "original" point and which as the "new" one is to compute the percentage change in P and Q relative to the average of the two prices and the average of the two quantities, rather than just the change relative to one point or the other.
Loosely speaking, this gives an "average" elasticity for the section of the actual demand curve— i. As a result, this measure is known as the arc elasticity, in this case with respect to the price of the good.
The arc elasticity is defined mathematically as This method for computing the price elasticity is also known as the "midpoints formula", because the average price and average quantity are the coordinates of the midpoint of the straight line between the two given points. How would you interpret price elasticity of demand? That is, the demand for a good is called: As the two accompanying diagrams show, perfectly elastic demand is represented graphically as a horizontal line, and perfectly inelastic demand as a vertical line.
Calaulate price elasticity of demand from the following data. To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. It's best to calculate these one at a time. Calculating the Percentage Change in Quantity Demanded The formula used to calculate the percentage change in quantity demanded is: In percentage terms this would be Now we need to calculate the percentage change in price.
Calculating the Percentage Change in Price Similar to before, the formula used to calculate the percentage change in price is: Discuss the various types of price elasticity of demand. Types of Price Elasticity 1. Perfectly inelastic demand when there is no change in demand in response to change in price demand is perfectly inelastic.
The value of PED is more than 1. What do you mean by consumer surplus? Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay.
If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they spent to buy it. An example of a good with generally high consumer surplus is drinking water. People would pay very high prices for drinking water, as they need it to survive. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus.
Explain the shape of cost curves in short and long run. In economics, a cost curve is a graph of the cost of production as a function of total quantity produced.
In a free market economy ,productively efficient firms use these curves to find the optimal point of production, where they make the most profits. There are various types of cost curves, all related to each other. The two basic categories of cost curves are total and per unit or average cost curves.
Short-run average variable cost curve SRAVC Average variable cost which is a short-run concept is the variable cost typically labor cost per unit of output: Short run average cost equals average fixed costs plus average variable costs. Average fixed cost continuously falls as production increases in the short run, because K is fixed in the short run. The shape of the average variable cost curve is directly determined by increasing and then diminishing marginal returns to the variable input conventionally labor.
Long-run average cost curve LRAC Typical long run average cost curve The long-run average cost curve depicts the cost per unit of output in the long run—that is, when all productive inputs' usage levels can be varied. All points on the line represent least-cost factor combinations; points above the line are attainable but unwise, while points below are unattainable given present factors of production.. This curve is constructed to capture the relation between marginal cost and the level of output, holding other variables, like technology and resource prices, constant.
The marginal cost curve is U-shaped. Long-run marginal cost curve LRMC The long-run marginal cost curve shows for each unit of output the added total cost incurred in the long run, that is, the conceptual period when all factors of production are variable so as minimize long-run average total cost. Stated otherwise, LRMC is the minimum increase in total cost associated with an increase of one unit of output when all inputs are variable.
The long-run marginal cost curve is shaped by economies and diseconomies of scale, a long-run concept, rather than the law of diminishing returns , which is a short-run concept. The long-run marginal cost curve tends to be flatter than its short-run counterpart due to increased input flexibility as to cost minimization.
The long-run marginal cost curve intersects the long-run average cost curve at the minimum point of the latter. Graphing cost curves together Q8. Discuss the concept of break even point.
A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return. In currency units sales proceeds to reach break-even, one can use the above calculation and multiply by Price, or equivalently use the Contribution Margin Ratio Unit Contribution Margin over Price to compute it as: Discuss the features of perfect competition.
Also explain the condition of profit maximization by a firm Ans. In economic theory, perfect competition describes such markets that no participants are large enough to have the market power to set the price of a homogeneous product. Specific characteristics may include: What do you mean by Monopoly? In a monopoly there is one seller of the good who produces all the output therefore, the whole market is being served by a single firm, and for practical purposes, the firm is the same as the industry.
Market power is the ability to affect the terms and conditions of exchange so that the price of the product is set by the firm price is not imposed by the market as in perfect competition. Although a monopoly's market power is high it is still limited by the demand side of the market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve.
Consequently, any price increase will result in the loss of some customers. In a monopoly, market, a firm is itself an industry. Therefore, there is no distinction between a firm and an industry in such a market. A monopolist can change the price and quality of the product. He sells more quantities charging less price against the product in a highly elastic market and sells less quantities charging high price in a less elastic market.
What are the sources of monopoly? Sources of monopoly power Monopolies derive their market power from barriers to entry - circumstances that prevent or greatly impede a potential competitor's entry into the market or ability to compete in the market. There are three major types of barriers to entry; economic, legal and deliberate.
Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority. Economies of scale: Monopolies are characterised by declining costs over a relatively large range of production. Declining costs coupled with large start up costs give monopolies an advantage over would be competitors. Monopolies are often in a position to cut prices below a new entrant's operating costs and drive them out of the industry. Further the size of the industry relative to the minimum efficient scale may limit the number of firms that can effectively compete within the industry.
If for example the industry is large enough to support one firm of minimum efficient scale then other firms entering the industry will operate at a size that is less than MES meaning that these firms cannot produce at an average cost that is competitive with the dominant firm.
Finally, if long run average cost is constantly falling the least cost way to provide a good or service is through a single firm. Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of firms in an industry.
Large fixed costs also make it difficult for a small firm to enter an industry and expand. Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or fiscal muscle to use the best available technology.
In plain English one large firm can sometimes produce goods cheaper than several small firms. No substitute goods: A monopoly sells a good for which there is no close substitutes. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.
A prime source of monopoly power is the control of resources that are critical to the production of a final good. Network Externalities: The use of a product by a person can affect the value of that product to other people.
This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words the more people who are using a product the higher the probability of any individual starting to use the product.
This effect accounts for fads and fashion trends. It also can play a crucial role in the development or acquisition of market power.
The most famous current example is the market dominance of the Microsoft operating system in personal computers. Legal rights can provide opportunity to monopolise the market in a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control over the production and selling of certain goods.
Property rights may give a firm the exclusive control over the materials necessary to produce a good. A firm wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force. In addition to barriers to entry and competition, barriers to exit may be a source of market power.
Barriers to exit are market conditions that make it difficult or expensive for a firm to leave the market. High liquidation costs are a primary barrier to exit. Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A firm will shut down if price falls below minimum average variable costs. What do you mean by monopolistic competion?