MBA management

Theory of Competition and Models of Markets and Economics Topics:

INTRODUCTION TO THEORY OF FIRM


The theory of demand provides an explanation of the consumer’s behavior in order to reduce the demand for a commodity. Similarly, the theory of firm explains the goals and objectives of a firm with a view to determine the supply of a commodity. The theory of demand (through behavior of consumer) and the theory of firm (through the behaviour of firm) together enable us to ascertain the price and output of a commodity or service by the free interplay of the forces of demand and supply in the market in the absence of market intervention. The nature of the demand curve and the price-output business decisions depend upon the type of the market in which the commodity is produced and sold. The market type along with its size, the behavior of markets and transactors therein help in making the analytical evaluation of operational efficiency of business firms. The behavior of the transactors is read in terms of the ‘market strategy and tactics’ chosen by them in a given market environment so as to survive and grow their market share. There is a good deal of market dependence. The market behaviour of one may condition that of other. Non-market environment also affects market behaviour, through Government regulation, consumer’s forum, traders’ guild, manufacture’ association, etc.

CONCEPT OF MARKET


In common parlance, the term ‘markets ‘means a particular place or locality, where goods are bought and sold. We often speak of the Mumbai market, the New York market, the Rani Bagh market and so on. In economics, however, this term is used in a broader sense. If reefers to a complex set of activities by which actual and potential buyers as well as sellers with each other and the price as well as the output are determined. In the process of determining the terms at which the exchange would take place, they may make all sorts of bids and offers, using bargaining and haggling. The term ‘potential’ here implies that if the prevailing price of the commodity happens to be higher or lower than the one at which some transactors plan to deal, those buyers or sellers in the two cases respectively are eliminated from the market. Thus, market determines who buyers and sellers are, what the price will be and what quantities will be brought and sold. Market is actually the essence of business. All business decisions relating to price , output, product style, advertisement ,investment, etc. are taken in the light of actual as well as potential competition by new entrants.`

NATURE OF COMPETITION


Competition has different meanings. The term always denotes the presence in a specific market of two or more seller and two or more buyers of a definite commodity, each seller acting independently of every other seller and each buyer independently of every other buyer. Competition implies freedom in economic life. It has been considered as a healthy sign in consumption, production, distribution and exchange . The presence and the pressure of competitive market forces in the modern business units force the producers to produce as efficiency as possible. Those who are inefficient and not able to cover up their minimum cost of production will automatically leave the market. The more perfect the competition, the more perfect the market will be.

PERFECT COMPETITION


In economic theory, perfect competition has a meaning diametrically opposite to the everyday use of this term as synonymous to rivalry. The perfect competition means complete freedom in economic life and absence of rivalry among firms. It prevails, when all the conditions given here are simultaneously present in the market. However, most of these stringent conditions are unlikely to be present in the real world. The real world consists of various imperfections and monopolistic tendencies. The market is rarely perfect in the actual sense. This suggests that perfect competition is a purely theoretical market from, which is never observed in reality. However, the stock market is close approximation of perfect competition. Here, any particular stock is homogenous, there is no information cost (information is readily available through published prices), free entry and exit conditions for the transactors having insignificant control on price.

The following features serve as a necessary set of assumptions or conditions underlying the model of perfect competition.

• Large Number of Sellers and Buyers.
• Homogenous Product.
• Free Entry and Exit.
• Absence of Government Regulation.
• Perfect Mobility of Factors of Production.
• Perfect Knowledge.
• Absence of Transportation and Selling Costs.

PURE COMPETITION VERSUS PERFECT COMPETETION


Some economists, notably E.H. Chamberlin and F.H. Knight make distinction between pure competition and perfect competition. According to Chamberlin, “Pure competition is unallowed by monopolyelments.it is much simpler and less exclusive concept than perfect competition for the letter may be interpreted to involve perfect in many other respects than in the absence of monopoly e.g. perfect mobility or perfect knowledge or such other perfection as the particulars theorist finds convenient or useful to him.”

Usually, the term pure competition and perfect competition and perfect competition are used interchangeably, since in both the cases sellers as well as buyers are price takers with no control over the prevailing market price, Further, the demand and supply curves of the firms as well as industry are similar in either situations.

MONOPOLY


Monopoly is a market from, which has always attracted the attention of economists. This word has come from the Greek words, monos (single), polein (selling), which mean alone to sell, Therefore, in literary terms, it implies a market structure, where there is a single seller. In economic theory, monopoly is characterized by sole producer selling a district products for which there are no close substitutes and there are strong barriers to entry. This sole producer (may be known as monopolist) controls the entire supply of the market. Thus, the supply curve of the firm and the industry will be one and the same. Under these circumstances, the monopolist will tend to have complete control over the price of the product sold by him. That is why monopolist is a price maker rather than a price taker and he need not fear the actions and reactions of rivals, at last in the near future. In other words, the monopolist operates unfettered by the competition of rivals. The level up to which the monopolist can raise the price, depends upon the elasticity of demand, while cost condition determine the level, down to which the monopolist can lower the price.

Pure monopoly implies complete absence of competition both in short-run as well as long-run, while under perfect competition, the competition is complete. In the actual world, there is neither pure monopoly nor perfect competition. Between these two extreme opposite limiting cases, lie various real intermediate market situations like monopolistic competition, oligopoly, (increasing order of degree of monopoly and hence imperfections).These market forms differ from each other in respect of degree of imperfections.

ORIGIN OF MONOPOLY (Kinds Of Monopoly)


The origin of monopoly may be legal or technological or both. A firm can continue to enjoy the monopoly power, or competitive advantage, so long as, it can prevent the entry of other firms into the industry. The moment other firms are able to enter into the industry, the position changes radically and the erstwhile monopoly loses its monopoly power leading to a change in the market from affecting check over pricing strategies. Following factors are responsible for creating conditions for the emergence and growth of monopoly

Control over Strategic Raw Material: Ownership and control of entire or most of the supply of basic input and strategic raw materials or exclusive knowledge of production and distribution techniques by a single firm lead to monopoly conditions.

Small size of market: Sometimes, the size of the market or technology is such that output of only one firm of optimum size is sufficient to meet the demand of the entire market comfortably. Under these circumstances, all the firms except the largest and the most efficient.

Patents, Copy Rights and Licenses: Legal backing provided by the Government to produce a particular product through granting of patents ,copy rights, trade marks, licenses, and quota for a given period may create and perpetuate monopoly.

Limit pricing: Sometimes, the existing firm adopts a limit price policy combined with other policies such as heavy advertising or continuous product differentiation to prevent entry by potential firms.

Public Utilities: The Government generally undertakes the production of the product or of the essential services like transportation, electricity, water, communication etc. to avoid the exploitation of the consumers. We often find monopoly tendencies in these services on account of economics of large scale.

Monopolistic Combinations: Monopoly may be the result of combinations. It is possible for a number of competing firms in an industry to come to a voluntary agreement among themselves to eliminate competition in the matter of price, output and market share.

Fiscal Monopoly: There are certain monopolies, created by the Government itself. Printing of currency notes and stamps, minting of coins, etc. are some examples. The nature of these services is that they cannot be entrusted to private enterprises.

MONOPOLISTIC COMPETITION


Monopolistic competition refers to a market structure in which there are many sellers selling similar but differentiated products and there is existence of free entry and free exit of firms. In other words, it is a situation, where there is a keen, but, not perfect competition among sellers producing close, but not perfect substitutes. Consumer goods like tooth pastes, brushes, bathing soaps, detergents, textiles, television sets, refrigerators, automobiles, etc. fall under the category of monopolistic competition in the Indian market. Here, each firm is a monopolist of its own differentiated product. But, the products supplied by the firms are close substitutes of each other. Hence, Price and output decisions of a firm depend upon the policies of the rivals only to some extent.

FEATURES OF MONOPOLISTIC COMPETITION


A firm under monopolistic competition faces competition from rival firms producing similar products(close substitutes). At the same time, unlike a perfectly competitive firm, it has some influence over the price of the product. That is why, it has downward sloping average revenue and marginal revenue curves. The greater is the difference between average revenue (price) and marginal revenue, the greater is the degree of imperfection and vice-versa. The main features of monopolistic competition are:

Many Sellers: The numbers of firms under monopolistic competition are fairly large, though, it is not as large as found under perfect competition. Each firm shall be a small size firm controlling only a small part of the total market.

Product Differentiation: product differentiation is one of the most distinguishing features of monopolistic competition. According to Chamberlin, it is the basic characteristic of monopolistic competition. H defines product differentiation as follows, “A general class of product is differentiated, if any significant basis exists for distinguishing the goal (or services)of one seller from those of another. Product differentiation may involve qualitative material or workmanship differences in the products.

Sales promotion or Selling Cost: Advertising and other selling expenses have an important role under monopolistic competition on account of imperfect knowledge on the part of buyers. Advertising broadens the market and encourages competition. Salesman salaries, other expenses of sales department, window displays and different types of demonstrations are some examples of selling expenses. Advertisement may, however, be broadly classified as promotional advertisement and competitive advertisement.

Identical Demand and Cost Curves: Demand and cost curves are assumed to be identical under monopolistic competition .This highly simplifying assumption will mean similar effects on the demand and cost conditions of the firms on account of changes in the quality of their products and/or selling costs.

Free Entry and Exit: Under monopolistic competition, there is freedom of entry and exit of the firms in the long run. New firms enter the group .When the existing firms earn super normal profits by differentiating their products, This will result in a decrease in the demand of existing products at least to some extent and/or an increase in the cost.

Other characteristics: Other characteristics of monopolistic competition are actually the basic assumptions of chamberlin’s large group model. These assumptions are mostly same as those of pure competition except that of homogeneous product (which is replaced by the assumption of product differentiation).

(i) The goal of the firm is profit maximization both in the short-run as in the long-run.
(ii) The price of factor inputs and technology are given.
(iii) The firm is assumed to behave as if it possessed information regarding the demand and cost curves with certainty.
(iv) The long-run is assumed to consist of identical short-run periods, independent of on another, so that decisions in one period neither affect future periods nor are affected by past actions.

OLIGOPOLY


Apart from the case of large number of small firms producing differentiated products, we also often find a small number of big firms, whose products may or may not be differentiated. Such situation leads to another market from, termed as oligopoly. This term is derived from two Greek words, ‘oligi’, which means a few and ‘polien’ which means ‘to sell.’ Oligopoly is defined as the market structure in which there are a few and ‘polien’ which means ‘to sell’. Oligopoly is defined as the market structure in which there are a few sellers of the homogeneous or differentiated products, who intensively complete against each other and recognize interdependence in their decision making. Actual number of sellers under oligopoly depends on the size of the market. If there are only two sellers, it’s called duopoly.

FEATURES OF OLIGOPOLY


Some special characteristics are found under oligopoly, which distinguish it from other market forms. Main features of oligopolistic market are:

Few Dominant Firms : Under oligopoly, Few large sellers dominate the market for a product. Each seller has sizeable influence on the market, Every firm possesses a large number of market’s total demand .It uses all resources at its disposal to counter the actions of rival firms to ensure its survival and growth in the market. Thus, each firm acts as a strategic competitor.

Mutual Interdependence: As the number of firms is small, each (sizeable) firm has to to its price, or promotion. This will enable the firm to know how the buyers of its influence the price, output and profits of other firms in the market. On the other hand, it cannot fail to take into account the reactions of other firms to its price and output policy. Therefore, there is a good deal of interdependence of the firm under oligopoly. Successful decision making depends on the prediction of the reactions of the rival firms be as unpredictable as possible to rivals. Since more than one reaction-pattern is possible from other firms, we must make assumption about the reaction of others before providing certain and determinate solution of price-output fixation under oligopoly.

Entry of Firms: On the basis of ease of entry of competitors in the market, oligopoly may be classified as open or closed. Under open oligopoly, new firms are free to enter the market. On the other hand, closed oligopoly is dominated by a few large firms with blockaded entry of new firms.

Leadership: On the basis of presence of price leadership, the oligopoly situation may be classified as partial or full .Partial oligopoly refers to the market situation, where one large firm (called price leader) dominate the market and the other firms (called followers) look to the price leader with regard to the policy of price fixations. Full oligopoly, on the contrary, exists, where no firm is dominant enough to take the role of a price leadership is a conspicuous by its absence.

Agreement: Oligopoly may be classified into collusive and non-collusive oligopoly on the basis of agreement or understanding among the firms. Collusive oligopoly refers to a market situation, where the firms, instead of competing with each other, combine together and follow a common price and follow a common price policy. The collusion may be open or tacit (secret). On the other hand, non-collusive oligopoly implies absence of any agreement or understanding.

Coordination: An oligopoly situation may be classified into organized and syndicated oligopoly on the basis of the degree of coordination found among the firms. Under organized oligopoly, the firms organize themselves into a central association for fixing price, output, quota, etc. On the contrary, syndicated or unorganized oligopoly refers to a situation, where the firms sell their products through the centralized syndicate.

WHAT IS A FIRM


Generally a firm is taken as a production unit producing an output. It considers the market conditions and aims at producing the desired output at the least cost. A firm is an independent unit producing goods and services for sale. According to prof .Watson,” A firm is a unit engaged in production for a sale at a profit and with the objective of maximizing the profit’. A firm is also taken as an income producing unit having some particular characteristics.

Equilibrium of a Firm: By equilibrium, we mean a point of rest. It is also called of no change .Whenever a firm attains a stage from which it does not want to move forward or backward, it is said to be in equilibrium. So we can say that a firm is in equilibrium when it has no firm will be in equilibrium when it is of no advantage to increase or decrease its output,’ Thus we conclude that a firm is in equilibrium when it is earning maximum profits or minimizing losses.

Assumptions of Equilibrium of a Firm: The concept of equilibrium of a firm rests on the following assumptions.

Rational firm: Rational firm always aims at earning maximum profits. In case of losses in the short-run, it earns only minimum losses. The concept of firm’s equilibrium applies only to a rational firm.

Production of one Commodity: It is assumed that a firm produces only a single commodity. Cost of a factor of production is also taken as constant and fixed. In other words, a firm can get the required and desired units of a factor at the given price.

Estimation of Marginal Revenue and marginal Cost: Another assumption of firm’s equilibrium is that it can easily estimate its marginal revenue and marginal costs. Thus total revenue and total costs can also be calculated by a firm.

Conditions for Equilibrium: It is already clear that a firm is in equilibrium only when it earns maximum profit or has minimum losses. This condition for equilibrium applies to all types of markets i.e., under perfect competition, in monopoly and under monopolistic competition. Therefore, we can say that a firm will be willing to stick to its present position only if it earns maximum profits, whatever the form of market may be. There are two methods for determination of a firm. They are:

• Total Revenue and Total Cost Approach
• Marginal Revenue and Marginal Cost Approach

TOTAL REVENUE AND TOTAL COST APPROACH

Total Revenue and Total Cost Approach is the simplest way to determine the equilibrium of a firm. In order to calculate the profit of a firm, we find out the difference between the total revenue and total cost at different levels of output. A firm is said to be in equilibrium when the difference between total revenue and total cost is maximum, Every rational producer will try to maximize his profits. For this purpose, he will increase his production up to the point where the difference between total revenue (TR) and total cost (TC) is maximum. Only in such a position, he does not want any change. We can find the equilibrium of a firm with the help of this approach both under perfect and imperfect market conditions.

EQUILIBRIUM OF THE FIRM UNDER PERFECT COMPETITION

Perfect competition is a market in which there is a large number of buyers and sellers. They are selling homogenous goods .There is also free entry and exit of the firms. A firm is a small portion of the whole industry. Price is fixed by the industry. Firm is only a price-taker. It cannot affect price. In other words, a firm can sell as much as it desires only at the given price. That is why the total revenue curve of a firm is an upward sloping line drawn at an angle. The shape of the TR curve tells that the total revenue of the firm is increasing with the increase I production at the same rate. It is generally assumed that the total cost of production continue to rise as output is increased. The rate of increase falls at first and then starts rising. The following diagram shows the application of total revenue & total cost approach for finding out the profit maximizing output.

equilibrium under perfect competition

EQUILIBRIUM OF A FIRM UNDER IMPERFECT COMPETITION

Profit Maximization Case: Under imperfect competition, a firm has control over the price of a commodity. It is, therefore, a price-maker and not a price-taker. Under imperfect competition a firm can sell larger output only at a falling price. Therefore, the total revenue curve continuous to rise from left upwards to the right. But the rate of rise continues to fall as output sold increases. The total cost curve also rises with increasing output. Profit is the vertical distance between the TR and TC. The firm chooses that level of output where the vertical distance between TR and TC is the maximum. This output is shown as below:

equilibrium under imperfect competition

Minimization of Loss Case: A firm can undergo losses also in the short run. In this case, a firm will be in equilibrium when its losses are minimum. For this purpose also we find the vertical distance between TR and the TC curves. A firm is said to be in equilibrium when the distance between the TR and TC curves is minimum. This can be shown as below:

minimization of loss case

Defects of the TR-TC Approach:

Through the total revenue and total cost approach is the simplest approach, yet it suffers from some defects. Its main shortcomings are as under :

• It is very difficult to find the maximum vertical distance between total revenue and total cost curves.

• This approach is based on the total costs and total revenue. It ignores the per unit cost of an output.

• It becomes difficult to find out the equilibrium of an industry with the help of this approach.
Due to these defects, modern economists have used marginal revenue and marginal cost approach in place of the total revenue and total costs approach.

THE MARGINAL REVENUE AND MARGINAL COST APPROACH

Marginal revenue and marginal cost approach is another method to know the equilibrium of a firm. This approach is advocated by modern economists like Mrs. Joan Robinson. Marginal revenue is the addition made to the total revenue by the sale of one more unit of the output. Marginal cost is the addition made to the total cost by producing an additional unit of the output. In order to know the equilibrium level of output, a firm compares its marginal revenue and marginal cost. It will be profitable for a firm to increase its production when marginal revenue exceeds marginal cost. Similarly, if marginal revenue is less that the marginal cost of output, a rational firm will reduce its output. By reducing output, a firm can minimize its losses. In this way, a firm will be in equilibrium only when its marginal revenue equals marginal cost.

EQUILIBRIUM OF A FIRM UNDER PERFECT COMPETITION

Perfect competition is characterized by the presence of large number of buyers and sellers. Firms sell identical goods. Firm has not control over the price. Firm is a price-taker. It can sell as much as it wants only at the given price. In this way, firms can sell varying amounts of output at the fixed and given price .Due to this reason, average revenue (AR) and marginal revenue (MR) are the same. And AR=MR is a horizontal straight line. It is generally assumed that marginal cost falls at first and then starts rising. In below figure the price given to the firm P. MC is the marginal cost curve. Point K1 is the breakeven point because at this point MC curve cuts MR curve from above. This is not a point of firm’s equilibrium because it satisfies only the first of the two conditions of equilibrium. The profit-maximizing output is OM because at this output MR is equal to MC and MC curve cuts MR from below. Thus we can conclude that a firm is in equilibrium only if it satisfies two conditions. These are:

(i) MR=MC
(ii) MC rises to intersect the horizontal MR line.



EQUILIBRUIM OF A FIRM UNDR IMPERFECT COMPETITION

Under imperfect competition, AR and MR of a firm are two different things. This is because under imperfect competition, a firm is a price-maker. It can sell more by lowering the price of its output. That is why AR and MR curves of a firm fall downward from left to right. White MC and AC rise from left to right. The conditions of equilibrium of a firm are the same as apply under perfect competition, In other words, a firm will be in equilibrium if it’s MR is equal to MC and MC cuts MR from below:

equilibrium of a firm under imperfect competition

The superiority of the marginal approach shown in the diagram given above is that we can read all the three things directly from the diagram in which a firm is interested. The three things are:

(i) Equilibrium output = OM
(ii) Equilibrium Price = PM
(iii) Total Profit = Area PCNK

EQUILIBRIUM CONDITION OF THE INDUSTRY


Industry is a group of firms producing homogenous goods. The concept of the industry is very important under perfect competition because in this market form, is fixed by the industry. Firm is only a price-taker.

An industry is said to be in equilibrium when it has no tendency either to expand or contract its output over the long run.

An industry likes to stick to a level of output only when the demand for and supply of output produced by the industry are equal. If on a particular price level, demand is more than the supply of output, it will be profitable for the industry to increase production.

Similarly if demand is less than its supply, industry will reduce its output. Thus an industry is in equilibrium only when the demand for and supply of its production are equal to each other at a particular price.

TRADE CYCLES - MEANING AND CHARACTERISTICS


Trade cycles or business cycles are a prominent feature of the capitalist economies. Business cycles refer to the regular fluctuations in economic activity in the economy activity in the economy as a whole. The expansions, recessions, contractions and revivals of aggregate economic activity occur and recur in an unchanged sequence .In Keynes’ words, “A business cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages alternating with periods of bad trade characterized by falling prices and high unemployment percentages”. Thus, a market feature of a business cycle is the boom being followed by a depression, recovery and again boom conditions in a free- enterprise economy which is industrialized.

Trade cycles have the following characteristics:

• One a business cycle is an economy-wide phenomenon. When depression sets in the industrial sector, it cannot be restricted there. Soon it spreads to agriculture, trade and transport sectors; so is the case during boom.

• Two, a business cycle shows a wave-like variation in economic activity. The expression or prosperity is followed by a depression and so on. The economy moves from one extreme to another almost like a pendulum.

• Three, business fluctuations tend to recur. Thy come again and again after the lapse of some time. The time or periodicity is not always the same. Nor are the causes always the same. Some trade cycles may last only two or three years while others may be six to eight years in duration.

• Four, trade cycles are self-reinforcing or cumulative. Once the cyclical movement starts in one direction, it tends to feed on itself. The force of the economic crises tends to increase. Once the prosperity phase starts, it tends to run out of control of the policy makers.

Economists have suggested the following for main criteria for making the different stages or phases of a trade cycle.

• The consumption criterion is that with the onset of a depression, there is a sudden and significant fall in the real consumption of the people in general and the working class in particular. Likewise, the recovery phase shows a definite rise in the per capita real consumption of the people.

• The production criterion is to watch the volume and composition of production of production in the economy. During depression, the capital goods industries show a significant fall in production first and other industries are affected later. The construction industry shows a market downward trend. Similarly in the case of recovery, the demand for consumer goods goes up to encourage the consumer goods output. Later on the capital goods output also picks up.

• The employment criterion is to study the volume of employment in the industrial sector. The onset of a recession is indicated by an unusual lay-off of workers in the major industries. The open unemployment percentage as measured by the proportion of unemployed to the whole labour force goes up significantly. The start of recovery is clear when more and more jobs are made available by the manufacturing firms.

• The price-level criterion judges the different phases on the basis of the general price level. Prosperity is generally associated with rising prices and depression with falling prices. The general price index, both when it rises and falls markedly, shows cyclical changes.

PHASES (OR STAGES) OF A TRADE CYCLE


A business cycle is short-term picture of the behaviour of real output in a private enterprise economy. Industrialized economies having free-market mechanism have economic growth over the long period. But the process of economic growth is often shaken by business cycles which show up-turn and down-turn of income, output and employment. A business cycle can be shown to be a wave-like path of the economy’s real output as shown in figure. Economists often describe a business cycle with the help of distinct phases or stages. The four phases of a business cycle are: (i) slump, (ii) recovery, (iii) boom and (iv) deflation.

phases of trade cycle

We can describe the four phases of a typical trade cycle as follows:

(i) Slump or Depression: This is the most critical and fearful stage of a trade cycle. Harberler has described depression as “ a state of affairs in which real income consumed or volume of production per head and the rate of employment are falling and are sub- normal in the sense that there are idle resources and unused capacity, especially unused labour.” Depression or slump leads to redistribution of the national income. Profits and wages fall faster relatively to rent and other fixed incomes of shareholders go down fast.

(ii) Recovery: Recovery shows the upturn of the output and employment of the economy from the state of depression. Recovery is most probably the result of the fresh demand for plant and equipment arising from the consumer goods industries which had been postponing this investment during depression. The capital goods have a limited life. They wear out completely after some time and need replacement. This replacement demand starts the recovery process .Although prices remain more or less stable, wages and other incomes show a noticeable rise.

(iii) Boom or Prosperity: During the recovery phase, rise in output and incomes of the people induces substantial increase in aggregate spending. This has a multiplier effect. As effective demand increases, income rises faster than before. The whole process becomes self-reinforcing. The cumulative process of rising investment and employment forges ahead. As investors become more confident, expanding productive activity takes the economy to a boom or prosperity phase. According to Haberler, Prosperity is “A state of affairs in which the real income consumed, real income produced and the level of employment are high or rising, and there are no idle resources or unemployed workers or very few of either.”

(iv) Recession: The end of prosperity phase comes because of certain tendencies in the private- enterprise economy prevalent during the boom conditions.

Firstly, as price rise, wages tend to lag behind .As a result, purchasing power of workers, who form a majority of the people, tends to lag behind the supply of consumer goods.

Secondly, expansion of production is hampered by shortages of some inputs and bottlenecks in production.

Thirdly, excessive demand for labour and material pushes up both the factor and the product prices but in a disproportionate fashion.

Fourthly, the non-availability of credit beyond a particular rate of expansion might also act as a serious break on prosperity. Situation where the business cycle takes a downward turn from the state of boom. Output, Profits and employment start falling gradually. Business psychology is pessimistic.

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Review Questions
  • 1. Explain the concept of market. What characteristics (elements) have to be considered while identifying a market form.
  • 2. Distinguish between perfect and imperfect competition.
  • 3. Discuss the various criteria for classifiying the markets. Explain different market forms on the basis of various aspects of the market strucuture in the form of a table or a chart. What is the operational use of price and quantity cross elasticity of demand?
  • 4. Write short notes on (i)Elements of market strucutre, (ii)Market mecanism, (iii)Market fialure, (iv)Externalities, (v)Public goods, (vi)Market intervation
  • 5. What are the features of perfect competition? Do you agree with the view that it is a myth? If it is so, then why do economists use it or explaining the behaviour of firms?
  • 6. Distinguish between pure and perfect competition.
  • 7. How does monopoly arise? What are its distinguishing characteristics?
  • 8. What is monopolistic comptetion? View its examples and salient features. Why is it impossible or deficient to define the "industry" in this case?
  • 9. Explain the features of Oligopoly. How is it different from monopoly. What are various types of oligolpoly markets.
  • 10. What is a firm? So how a firm maximizes its profit under perfect comptetion?
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