Economics

PRODUCER'S EQUILIBRIUM Meaning : Every firm aims at maximization of profits which can be possible only when the firms cost are minimum.Thus, the producers of firms aims at utilising the combination of factors of production at which it's cost are the least. Such combination is called as 'least cost combination'. It is that combination in which output is maximize at given cost.  When the firm is producing desired output with the factor combination having the least cost ,it is said to be in equilibrium. It is stage where producer has no tendency either to expand or contract his output . Producer's equilibrium can be explained in two ways :- a) Marginal productivity analysis by neo -Classical economists. b)Iso -producer analysis by modern economists. Marginal product analysis Ist case - Two factor case Here, the firm uses two combination                      MPP l.          MPP k        ...

LAW OF DIMINISHING RETURNS Meaning  : The law of diminishing returns is one of old laws in economics. Sir Edward West was the first to explain the law. Some classical economists like David Ricardo studied it with the reference to agriculture. Statement : The law of diminishing returns states that when an additional variable factor is applied keeping other factors fixed the marginal return from it must eventually diminish . Explanation : The law can be explained with the help of an example. Suppose, the farmer has certain amount of labour(L) and capital (K) used on fixed factor land. As a result of increased number of employees on the land, the total production shall increase but the increments to the total production will go on diminishing with the addition of every dose. Units of l & k.         TP.           AP.           MP             1.      ...

Law of variable proportion Introduction :The law of Variable proportion of production is one of the fundamental laws of economics given by a French Economist. This law deals with behaviour of production in short run where volume of production can be changed with the use of variable factors . Fixed factors remains constant. Meaning : This law shows that continuous change in proportion of factors of production changes the total product first at increasing rate, then at constant and after a point the output change takes place at diminishing rates. In other words , Law of variable proportion states that as more and more of variable factor is combined with the fixed factor, a stage must ultimately comes when marginal Product of the variable factor starts declining. Assumptions a)The law of variable proportion assumes the techniques of production as constant .If the technology changes ,it will have effects on MP and AP. b)The law operates in short rum because some factors are fixed and pro...

PRODUCTION FUNCTION Meaning : The relationship between the input and resulting output is generally summed up in mathematical form which is called as production function.The word 'function ' in mathematics means the precise relationship that exists between one dependent variable and many independent variables.  The production function formalised the relationship between the maximum quantity of output yielded by productive process and quantities of various inputs used in that process. Production function thus studies the functional relationship between physical inputs and physical outputs of commodity. It is purely technical relationship between material output on one hand and material inputs on the other. It is expressed in terms of following equation:                 Q x =f(l, k) It means that production of commodity X is the function of labour (l) and capital (k). Fixed factors are those the application of which does not change with the cha...

OLIGOPOLY COMPETITION Meaning of Oligopoly : Oligopoly is the market situation with a few seller who competes with each other. It is a form of imperfect competition in which there are only a few firms in the industry producing either an homogenous product or producing close substitutes for one another. The number of firms is more than one but is not so large that any one seller be in position to take decisions regarding his price,output,product. Features of Oligopoly a) Small number of big firms :Oligopoly market is the one in which a small number of big firms dominate the market for products.There is high degree of market concentration. b) Degree of interdependence :In Oligopoly,each firm is so big in size that quite often iy has global presence ,selling its product across all parts of the world. There is very high degree of interdependence among the rival firms with regard to their price and output policy.Price and output of one firm depends on reaction of rival firms in the market ...

MONPOLISTIC FORM OF MARKET Meaning of monopolistic competition : Monopolistic competition is found in the industry where there is large number of sellers , selling differentiated but close substitute goods. The firm has some freedom to fix its price. It has some monopoly and also faces competition from rivals. Features of monopolístic competition a) A large number of sellers : The number of sellers is sufficiently large that there is no feeling of mutual interdependence among them. Each firm acts independently without caring for any effect which it's action may have upon those of its competition. b) Differentiated products :There is large number of buyers who are offered differentiated products and consequently have a preference for products of particular sellers. Different sellers use different methods for creating preference for their own product . It can be done by the differences in material used, design, colour, packaging, trade marks . These are the products which are not a...

MEANING AND FEATURES OF MONOPOLY Meaning of Monopoly : The word Monopoly is a Latin word . It is composed of two words - Mono which means single and poly which means seller. Thus, Monopoly is a form of market organisation for a commodity in which there is only one seller of the commodity. There is no close substitute for commodity sold by only seller and seller has full control over the supply of the commodity . Thus , the seller is the price - maker. Features of Monopoly a) One seller and large number of buyers : A Monopolist may be single seller of one product , a few partners or in the form of joint stock company. The monopolist is the firm as well as industry. No one buyer can influence the price by his individual actions. b) No close substitute : Monopoly can exist only when there is no close substitute of a commodity . If not so, the monopolist cannot charge a price according to his own desire and thus, cannot be a price-maker. c) Restriction on entry of new firms : In a Monop...

CONCEPT OF MARKET Market refers to a mechanism or an arrangement that facilitates contact between buyers and sellers for the sale and purchase of goods and services.By the term ' market ' we mean a commodity whose buyers and sellers are in direct competition with one another. Market is classified on the basis of competition among buyers and sellers. The 4 types of market completion are as under :- a)Perfect competition b)Monopoly c) Monopolistic d) Oligopoly Meaning of perfect competition Perfect competition is the name given to a market in which buyers and sellers compete with one another in purchase and sale of a commodity . No one of them has any individual influence over the price of the commodity and entry to the market is free . Features of perfect competition a) Large number of small, unorganised firms: This is concerned with the seller's side of the market. The market must have such a large number of sellers that no one seller is able to dominate in the market. No s...

SHIFTS AND MOVEMENT Shift in demand curve :It refers to all such situations when demand for commodity increase or decrease due to changes in other factors of demand ,other than own price of commodities. In such situations,quantity demanded of a commodity increases or decreases even when own price of commodity remains constant . Increase in demand -It refers to situation when demand curve shifts to right is described as increase in demand.                           Decrease in demand -It refers to situation when demand curve shifts to left is described as decrease in demand. Forward shift or Increase in demand -Causes a)When income of consumer increases.  b)When price of substitute goods increases.  c)When price of complementary goods falls.  d)When taste of consumer shifts in favour of commodity due to change in fashion.  e)When availability of commodity is expected to reduce in near future. Backw...

LAW OF DEMAND   Statement : If the price of commodity falls ,the amount demanded goes up and vice -versa.There is an inverse  relationship between price of a commodity and amount demanded. This relationship is known as Demand. According to Bilas , "The law of Demand states that other things being equal ,the quantity demanded per unit of time will be greater ,the lower the price and smaller ,higher the price". According to prof. to Samuelson ," Law of Demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same". Assumptions of the Law   a) No change in tastes and preferences of consumers. b) Consumer's income must remain same. c)The prices of the commodities related to commodity in demand should not change . d)There should be no change in the wealth of consumers or their tastes. Explanation : The relationship between the price of commodity and amount demanded is dependent on large number of factors,the ...

Definition of demand Meaning : Demand is made to show the relationship between prices of a commodity and the amount of commodity which consumers want to purchase at those prices. The process through which a consumer obtains the goods and services he wants ti cinsune is known ad demand. Neccessity of demand a) The price of commodity . b) The amount of commodity the consumer or consumers are prepared to buy per unit of time. c)A given time. Features of demand a) Difference between desire and demand :Demand is amount of commodity for which a consumer has willingness and ability to buy .There is difference between need and demand .Demand is not only the need, it also implies that the consumer has money to purchase it. b) Relationship between demand and price : Demand is always at a price . Unless price is stated ,the amount demanded has no meaning .The consumer must know both the price and commodity and he will tell his amount demanded. c) Demand at a point of time : The amount demande...

CONSUMER'S EQUILIBRIUM Meaning : Consumer's equilibrium shows a situation in which the consumer purchases such a combination of commodities that he gets maximum satisfaction from his given income and with given prices of the commodities . Assumptions   a)Prices are given to consumer. b)Consumer's income is also given. c)The consumer knows about the prices of commodities and possible combinations of two commodities which he can choose. d)The consumer can spend his income in small amounts also. e)The consumer is rational and wants to obtain the maximum satisfaction. f)There is perfect competition. Price line : Price line is a line that shows all those combinations which can be bough bt the consumer at given prices.It is also called as Budget line or. Price -Opportunity line or Consumption-Possibility line . Cups of coffee.                            Biscuits (Rupees one per cup).         ...

Indifference curve Definition : Indifference curve ia a diagrammatic presentation of an indifference set of a consumer. It is a locus of all such point which show different combinations of two commodities yielding same level of satisfaction to consumer. Each point on indifference curve indicates one combination of two goods . Each combination yields the same level of satisfaction.   Indifference schedule   It is a table representing the various combinations of goods which give equal satisfaction to the consumer. Combinations.      Cups of tea      Biscuits              A.                          1.                  50             B.                          2.              ...

Introduction to the analysis A detailed study of indifference curve analysis was given by Prof. Hicks and Allen in the year 1928.They strongly criticized the cardinal utility analysis and gave thein own approach to consumer's demand known as indifference curve analysis . Later on, JR Hicks wrote down indifference curve in more detailed form published in 1939. According to JR Hicks and Allen , a consumer makes comparisons of his satisfaction obtainable from the combinations of different commodities. Given the choice of two commodities, a consumer can easily tell us which of the two he prefer the most. The consumer is able to put the choice of commodities in order as first , second and third as he views these combinations from point of view of his satisfaction through the indifference curve analysis.  Assumptions of the analysis  a) Rationality :The consumer behaviour should be rational .It means that he tries to obtain maximum satisfaction out of his expenditure on consumer g...

Conditions set for consumer's equilibrium using MU analysis   One commodity case a)Here, first of all rupee worth of MU actually received by consumer is equal to MU of money as specified by the consumer.                               MU x               _________  =      MU m                   P x Which means that rupee worth of MU actually received is exactly equal to the rupee worth of satisfaction as desired by consumer. b) Marginal utility of money (MUm) remains constant. As ,it is the measuring rod of rupee worth of satisfaction. c)Law of diminishing marginal utility holds good.In case MU tends to rise ,consumption of a commodity will never reach an end.Equilibrium will never be stuck. Two commodity case a) Rupee worth of marginal utility should be the same across good x and good y and equal to marginal u...

Law of equimarginal utility Generalisation of the law This principle applies to all of the commodities consumer is consuming i.e the MU of expenditure of last unit of money on all of them must be same. MU of expenditure on a commodity is defined as the ratio of MU of commodity to it's price. The generalised equilibrium condition for consumer's equilibrium is  MU of A                 MU of B.              MU of C ___________   =     ____________   =   ___________ Price of A           Price of B          Price of C The ratio of MU of A and MU of B represent the rate at which consumer is willing to substitute A for B while the ratio of price of A and price of B represents the rate at which he can substitute A for B in market. The ratio between MU and price of commodity must be same in all cases.  Import...

Law of equimarginal utility Introduction : In cardinal utility analysis, consumer's equilibrium is given by law of equimarginal utility.It was given by H.H Hossen ,an Austrian economist .It came to be known as Gossen's second law . It was great law of substitution also .                                                          Statement : This principle states that to get maximum utility from expenditure of limited income ,the consumer purchases such amount of each commodity that last unit of money spent on each of them affords him the same level of satisfaction or same marginal utility.  Meaning : The consumer is faced with a choice among different commodities out of his limited income where he would get maximum satisfaction only if he allocates his income on purchase of combinations of such commodities which will give him equal level...

Law of diminishing marginal utility Assumptions a) The units of commodity used for consumption should not be differ in respect of size and quality. b)The commodity units should not be very small. Example - milk should be in glass not in spoons . c)Consumption must be continuous. d)No change in mental condition of the consumer during consumption. e)Fashion or taste remains the same . f)The price of the commodity should be same. Exceptions or limitations a)The law does not apply to rare things like old coins,rare paintings etc. b)This law does not apply to things which satisfy consumer's taste for display of his wealth like jewellery. c)This law does not apply to public goods such as telephones. d)This law does not apply to intoxicants like liquor,drugs. e)This law does not apply to good books ,music,poetry etc . f)This law does not apply to the consumer who consumed goods for the first time. Importance a)This law is the basis of law of demand because law of demand is in existence be...

LAW OF DIMINISHING MARGINAL UTILITY Introduction : German economist GOSSEN was the first to explain this law .It is also called as Gossen's first law . Definition : This law simply tells us that we obtain less and less utility from the successive units of a commodity as we consume more and more of it.  Statement : Law of diminishing marginal utility states that as more and more units of commodity are consumed,the marginal utility derived from every additional units must decline. It is therefore called as Fundamental law of satisfaction or Fundamental psychological law . Explanation : Every want needs to be satisfied upto a limit after which the intensity of want becomes zero .As we consume more and more units of commodity to satisfy our need ,the intensity of every commodity is less than that of the units obtained earlier.This can be understand better with the help of table. Units of apples                        ...