business economics 06 09 10 5

8/6/2019 Business Economics 06 09 10 5

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SUPPLY

SUPPLY refers to a schedule of quantities

of a commodity that will be offered for sale

at different prices. Meyers defines Supply, as a schedule of

the amount of a good tht would be offered

for sale at all possible prices at any one

instant of time or during any period of

time.


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Supply is different from Stock.

Stock means the total volume of a productwhich can be brought to market for sale.Whereas, Supply means the quantity ofthe product which is actually brought tomarket for Sale.

For perishable goods, Stock and supplywill be the same.

For others, both will differ.


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Law of Supply

Other things remaining the same, as a

price of a commodity rises, its supply also

rises, as the price falls, its supply alsodecreases.

Higher the price, the larger is the supply,

lower the price, supply will come down.


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Supply Curve..

Supply Schedule:

Price Per Unit Quantity produced &

Rs. Supplied5 1000

8 5000

10 10000

12 15000 units

X= Quantity Y= price


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Changes in Supply..

The Change in supply refers to Increase or

decrease in Supply.

If the price increases, supply expands. If the

price falls, the supply contracts.

In these cases, the supply curve shifts.

With the price remaining the same, the supply

may increase or decrease.


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Causes for Change in Supply..

May be due to cost of production;

For agricultural commodities it depends onnatural factors like rainfall, climate etc.

Changes in technology, methods ofproduction may lead to change.

Political disturbances will affect.


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Elasticity of Supply

The degree of responsiveness to change in theprice of the goods.

A relative change in the quantity supplied of acommodity in response to a relative change inthe price of a commodity.

Measurement= Proportionate change insupply of a commodity

----------------------------------------------------

Proportionate change in the price of a

commodity


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Factors determining Elasticity of

Supply Nature of Commodity: In the case of perishablegoods, the supply is inelastic and in the case ofconsumer goods, it is elastic.

Time Period: In the short period, it is inelasticand in the long period it is elastic.

Scale of Production: In small scale of productionthe supply is inelastic and in large scaleproduction, it is elastic.


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Techniques of Production: High capital

intensive industries, supply is inelastic and

high labour oriented industries, supply is

elastic.

Natural factors: The natural factors like,

rainfall, climate etc. will make the product

elastic or inelastic.


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REVENUE

The amount of money, which the firm

receives by the sale of the output in the

market is known as its Revenue.

It spends costs while producing, and it

receives money while selling.

Revenue depends upon the price per unit

of the product.


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Classification of Revenue

Total Revenue: Means, the total sales

receipts of the output sold over a period of

time.

It is the result of factors like, the price per

unit of the product and the number of

quantities sold.

Example, 1000 units sold at Rs.10 will be

Rs.10,000/-


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Average Revenue: This is revenue per unit

of the commodity sold.

It is calculated by dividing the totalrevenue by the number of units sold.

Ex, Rs.10,000/1000=Rs.100 per unit.


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Marginal Revenue: It is the addition made

to the total revenue by selling one more

unit of commodity.

Ex, 10 units is sold @ Rs.15=Rs.150/-. If

he sells one more unit for Rs.14,

11*14=Rs.154.

Rs.4 is called marginal revenue.


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Relationship between Average

Revenue and Marginal Revenue.. When the AR remains constant, MR will

also remain constant.

A firm can sell large quantities only atlower prices. In this case, the MR also

falls.


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PRODUCT DECISIONS

It is a marketing management concept.

Some product will have long life and some short

life cycle.

The producer should decide, what he should

produce more, less or discontinue.

The product policy decision, based on consumer

demand is important managerial capacity. Good Product provide steady and continuous

market for producers and have long life cycle.


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The Product: It means anything which is

tangible or intangible which provide utility

for the user.

It may be visible or invisible.

Providing of Service is also a product.

For producers product is goods or service,which possesses utility and can be

exchanged for value.


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For Consumers, it is the expectation of satisfying

a want.

For ex, when he buys a book, it is not the book

he is buying but the expectation of acquiringknowledge from the book.

* For Society, it dislikes the production of merely

pleasing products which give immediate

satisfaction but which sacrifices social interests

in the long run, like plastics, nuclear bombs etc.


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Product is total of physical, economic,

social and psychological benefits.

Product is defined as bundle of utilitiesconsisting of various product features and

accompanying services.


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Classification of Products

Industrial goods: These are used for the

production and are processed further to

make it fit for consumption.

Ex, Raw materials, Packing Materials,

Components (Spare parts), Accessories

(Tools), Installation (Capital goods).

* Consumer Goods: Which are ultimately

consumed by the consumers. Ex, clothing.


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Convenience goods: Goods which areregularly consumed, and are available atconvenient places for purchase. Ex, Food.

Shopping Goods: These are not frequentlypurchased. Before buying, the consumersvisit shops which have identical goods,study the price, quality etc.

Specialty Goods: Which are of high valueand purchased rarely. Ex, vehicles.


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Product Policy

It is a guideline to be followed by the

product managers to achieve the following

objectives:

Launching the Product

Maintaining the existing product range

Developing new products

Maximizing the Profit.


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Can be further divided into:

Product mix analysis

Elasticity of demand for the product Product elimination

R&D for new products

Analysis of the competition

Product life cycle


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The elements are:

Product planning and development

Product Line

Product standardization

Product Branding

Product life cycle

Product style Product Packaging

Product positioning.


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MARKET

It is a place or geographical area, wherebuyers with money, and sellers with goodsmeet to exchange goods for money.

Characteristics of Market: Existence of buyers and sellers of commodity

Establishment of contact between them.Distance is not a constraint.

Buyers and sellers deal with the same product

There should be a price for the product dealt.


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PERFECT COMPETETION..

Defined as a market form where all sellers

are selling homogeneous product at a

uniform price.

Where there are infinite number of sellers

that no one is big enough to have any

appreciable influence over market price.


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Characteristics of Perfect

Competition.. Large number of buyers and sellers: In perfect

competition, there will be large number of buyers andsellers for the identical product.

Neither a single buyer or seller can influence the price.

The price is determined by market forces, demand andsupply.

Sellers accept this price and adjust the production tomaximise their profits.

Thus, in Perfect competition, the Sellers are Price takersand NOT price fixers and quantity adjusters.


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Homogeneous Product: The products

must be identical in all respects, same in

quantity, size, taste etc.

The Products of different firms are perfect

substitutes and the cross elasticity is

infinite.


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Perfect knowledge about market conditions:

Both buyers and sellers are fully aware of the

current prices and hence price cannot be

changed by either of them.

* Free entry and exit: There must be complete

freedom for entry of new firms or the exit of old.

When existing firms, make huge profits, new

entrants will come and vice versa.


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Perfect mobility of factors of production:

The factors of production should be free to move

from one industry to another to get better

returns.

* No transport cost: Since the product is available

at the same price at all locations, it is assumed

that there will not be any transport cost. If

transport is charged, the firms near to the market

will charge less price.


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Absence of Govt. or artificial restrictions:

It is assumed that there are no Govt.

controls or restrictions on supply, pricingetc.

There is also no collusion among buyers

and sellers.

The price is free to change according to

demand and supply.


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Firm and Industry..

A firm is a manufacturing unit.

It is engaged in the production of a goods whichsatisfy human wants.

It is an enterprise using factors of production andproduce a commodity.

It may be big or small.

Industry refers to group of firms engaged in theproduction of a specific commodity.

The manufacturing process of all firms in theindustry will be identical to produce sameproduct.


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Price and Output Determination..

Maximising Profit is main concern of all firms.

Normal profit are the minimum income which the

entrepreneur should get in order to stay in

business.

Normal profits are always included in cost.

Normal profits are not covered in maximising

profits. It is over the normal profit which the

entrepreneur is interested.


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Equilibrium of Firm-Total Revenue

and Total cost..

Attaining equilibrium is fundamental aim.

It is a situation where the firm is earning

maximum profits.

A firm is said to be in equilibrium when it has no

tendency either to increase or contract its output

which gives maximum profits.

Hence it is a situation where firm is earningmaximum profits at fairly reasonable levels of

output.


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Advantages of Perfect

Competition..

The consumer has perfect knowledge, andhence he will not purchase at higher price.

The price is equal to the minimum average

cost, beneficial to the consumer.

Firms are price takers and producers willnot incur more on advertisement and

promotions. In the long run, maximum economic

efficiency in production is achieved.


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MONOPOLY

It is a market structure, in which there is a

single seller for the product and has no

close substitute and there are barriers to

entry by new firms.

Here a single producer is facing a large

number of buyers for his product.

He can change price and can earn huge

profits.


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Characteristics of Monopoly..

Single Seller: Since there is one singleseller, he can control the price, productionetc., but he cannot control the demand as

there are more buyers. No close substitute: The buyers have no

alternative or choice.

Price: Since monopolist has control oversupply, he can increase price, usedifferent price for different consumers.


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No entry: There is no freedom to other

firms to enter. The barriers may be legal,

technological, economic or natural

obstacles.

Firm and Industry: Under monopoly, there

is no difference, since there is only one

firm that constitute the whole industry.


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Causes for Monopoly..

Natural: Some minerals are available only

in certain regions.

Ex, South Africa has monopoly overDiamonds, Oil in Middle East.

Technical: A firm can have specialised

knowledge on manufacture etc.

Ex, Coco Cola.


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Legal: It is achieved through Patent, Trade

Mark, etc.

Large Amount of Capital: Certainindustries are capital intensive. This may

give rise to monopoly.

State: Govt. will have sole right of

producing and selling certain goods.

Ex, Electricity and Railways.


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Price and Output Determination..

A monopolist firm tries to maximise profits.

The Price is determined by the Firm itself.

He is a price creator in the market. In perfect competition, the firm is price

taker and can sell any quantity at the price

given by the industry. Here, the firm is a

quantity adjuster.


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Advantages of Monopoly

Large scale production possibilities, which

will end in reduction of costs and the

benefit may be passed on to consumer.

Monopolist have vast financial resources,

which will be used for R&D.

The weaker firm can come together and

can form monopoly.


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Disadvantages of Monopoly..

Price will always be higher;

He restricts the output to create demand to

get more profits. Different prices for different consumers

He promotes his self interest

Wealth is concentrated in few hands.


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Methods for controlling Monopoly..

Legislative Method: By Laws, the govt. cancontrol. Like MRTP Act.

Controlling price and output: Govt will fix price

like Pharmaceuticals industries. Taxation: By following differential taxation

system, can be controlloed.

Nationalisation: By nationalising the companies

the Govt. can take over those companies whichare exploiting consumers.

Consumers Association.


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Price Discrimination

Means the practice of selling the same

commodity at different prices to different

buyers.

The sale of technically similar products at

prices which are not proportional to

marginal cost.


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Conditions for Price

Discrimination..

The demand must not be transferable from

the high priced market to low priced

market.

The monopolist should keep he two

markets separate so that the commodity

will not be moving from one market to

another.


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Types of Discrimination..

Personal: Charging Different price to

different people.

Local; Charging different price to differentmarkets.

According to Trade or Use: Different price

charged to different use. Ex, Electricity for

domestic and industrial use.

business economics 06 09 10 5

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