MEA Unit 4

8/8/2019 MEA Unit 4

1/59

Managerial Economics &

Accounting

III rd Sem IT

Unit IV

Presented By :Yashwant Misale (BE,MMS)

Faculty MBA Department (DMIETR)

8/8/2019 MEA Unit 4

2/59

New Economic Policy

After Independence in 1947, India adhered

to socialist policies.

The economic liberalization in India refers to economic

reforms in India that started in 1991. In the 1980s, Prime Minister Rajiv Gandhi initiated some

reforms.

In 1991, after the International Monetary Fund (IMF) had

bailed out the bankrupt state of India , the governmentof P.V.Narsimha Rao and his finance minister Manmohan

Singh started breakthrough reforms.

10/23/2010 2MEA:Yashwant Misale

8/8/2019 MEA Unit 4

3/59

Contd

The new neo-liberal policies included opening for internationaltrade and investment, deregulation, initiation of privatization, taxreforms, and inflation-controlling measures.

The overall direction of liberalization has since remained the same,irrespective of the ruling party.

The main objective of the government was to transformthe economic system from socialism to capitalism so that it could

produce high economic growth and industrialize the nation for thewell-being of Indian citizens. Today India is mainly characterizedas a market economy.

The fruits of liberalization reached their peak in 2007, when Indiarecorded its highest GDP growth rate of 9%. With this, India

became the second fastest growing major economy in the world,next only to China.


8/8/2019 MEA Unit 4

4/59

Contd

With this, India became the second fastest growing majoreconomy in the world, next only to China.

An Organization for Economic Co-operation andDevelopment(OECD) report states that the average growth rate7.5% will double the average income in a decade, and morereforms would speed up the pace.

Indian government coalitions have been advised to continueliberalization.

India grows at slower pace than

China, which hasbeen liberalizing its economy since 1978. McKinsey states that

removing main obstacles "would free Indias economy to growas fast as Chinas, at 10 percent a year"


8/8/2019 MEA Unit 4

5/59

International Trade/Foreign Trade

International trade refers to a countrys trade with

other countries.

It consists of exports & imports.

A country receives payments from other countries for

its exports & makes payments to other countries for

its imports.

The difference between total receipts on account ofexports of goods & total payments on account of

imports of goods is called Balance Of Trade.


8/8/2019 MEA Unit 4

6/59

Balance of Trade Trade account of the balance of payments includes exports &

imports of goods in a year.

The difference between the value of exports of goods & value of

imports of goods is called balance of trade.

Ex: If the value of exports of goods is Rs 10,000 in a year & the

value of imports in the same year is Rs 6,000,then balance of trade is

Rs 4,000 .It is a surplus balance of trade as exports are greater than

imports .In other words ,the receipts on account of exports of goods

are greater than the payments on account of imports.

Similarly, if the value of exports in a year is Rs 8,000 & the value ofimports in the same year is Rs 10,000, there is a deficit in the

balance of trade as receipts from exports are less than the payments

on account of imports . This deficit is equal to Rs 2,000.


8/8/2019 MEA Unit 4

7/59

Contd

The important point to note here is that trade account includes

exports & imports only. No other items are included in it.

Exports & Imports of goods are also called transactions of

visible items or merchandise. Therefore balance of trade is also called balance on visibles .

Since Independence, India has generally been having a deficit

balance of trade . This is because during this period our

imports have been continuously rising at a faster rate thangrowth of exports .


8/8/2019 MEA Unit 4

8/59

Contd

Growth in imports has been caused by many factors such as

growing population, increasing consumption requirements,

need for imports of capital goods for development of the

economy , etc.

India's exports too have grown but their rate of growth has

been lower than that of imports .Reasons for slow growth of

exports are many, the important ones being ,low quality &

high cost of our goods which makes them uncompetitive in the

world market & our increasing domestic requirements whichleaves lesser surplus for exports


8/8/2019 MEA Unit 4

9/59

PRICE AND OUTPUT

DETERMINATION

10/23/2010 MEA:Yashwant Misale 9

8/8/2019 MEA Unit 4

10/59

10

Overview

Classification of Markets

Perfect Competition Monopoly

Price output determination under Monopoly

Monopolistic Competition

Duopoly and Oligopoly

10/23/2010 MEA : Yashwant Misale

8/8/2019 MEA Unit 4

11/59

11

Classification of Markets

On the basis of area

On the basis of time

On the basis of Nature of Transactions

On the basis of Volume of Business

On the status of Sellers

On the basis of Regulation

On the basis of Competition

10/23/2010 MEA:Yashwant Misale

8/8/2019 MEA Unit 4

12/59

8/8/2019 MEA Unit 4

13/59

13

PerfectC

ompetition-Features Large numbers of Buyers and Sellers

Homogeneity of Products

Free entry and Exit

Absence of Government Regulation

Perfect Mobility of Factors of Production

Perfect Knowledge

Absence of Transport Cost


8/8/2019 MEA Unit 4

14/59

14

Price output determination under

Perfect Competition Market price is determined based on the

interaction of supply and demand.

Price in

Rs

Demand

in Units

Supply In

Units

State of

Market

Pressure

on Price

2 1000 9000 S>D Downward

4 3000 7000 S>D Downward

6 5000 5000 S=D Neutral

8 7000 3000 D>S Upward

10 9000 1000 D>S Upward


8/8/2019 MEA Unit 4

15/59

15

PerfectC

ompetition-Features The Industry is the price maker and the

firm is the price taker

In this case Equilibrium price means AR

=MR


8/8/2019 MEA Unit 4

16/59

16

Equilibrium of the Competitive firm in

the Short runWhen MR=MC the equilibrium Output and

Price is determined.

For survival the firm has to cover atleast thevariable cost .

Therefore the price in the short run is equalto variable cost.

If the price is lower than the AVC ,the firm iscompelled to stop Production.


8/8/2019 MEA Unit 4

17/59

17

Profits of the Competitive firm in the

Short runWhen MR=MC the equilibrium Output and


AR greater than AC then SuperNormalProfits for the firm

When AR=AC then Normal Profits for the

firm


8/8/2019 MEA Unit 4

18/59

18

Consolidation of Perfect Competition

1)At op4 price of the firm will neither cover AFC

nor AVC and hence it has to wind up its

Operations.It is regarded as Shut Down point.

2)At op1 price ,oq1 quantity is the equilibrium

output.E1 indicates the price or AR=AVC only.It

does not cover FC.The firm is ready to suffer

loss in the nitial stage hoping that the price maygo up in the near future to earn profits.


8/8/2019 MEA Unit 4

19/59

19

Consolidation of Perfect Competition

3)At op2 price ,oq2 quantity is the equilibrium output .E2

indicates the price =AR=AC.At this point MR=MC.At

this level of output TAR=TAC hence,the firm is earning

only normal profits.It is break even point of the firm.Thedistance between two equilibrium points E2 and E1

indicates loss minimisation zone.

4) At op3 price and oq3 is the output produced by the firm

.At E3,MR=MC.But AR is greater than AC.For oq3

output ,the total cost is oq3AB.the total revenue is

oq3E3p3.Hence ,p3E3AB is super normal profit region


8/8/2019 MEA Unit 4

20/59

20

Equilibrium of the Competitive firm in the

Long runWhen MR=MC the equilibrium Output and


The firm should produce that level of outputat Which MR=MC and MCCurve Cuts

MR curve from Below


8/8/2019 MEA Unit 4

21/59

21

Equilibrium of the Competitive firm in the

Long runWhen AR is greater than AC there will be

super normal Profits and this lead to entryof new firms

Result

Expansion in output

Increase in supply

Fall in Price

Fall in ratio of profits


8/8/2019 MEA Unit 4

22/59

PRICE AND OUTPUT

DETERMINATION UNDERMONOPOLISTIC

COMPETITON

8/8/2019 MEA Unit 4

23/59

MONOPOLISTICCOMPETITION

Monopolistic competition is a market structure in

which there are many sellers of a commodity, but the

product of each seller differs from that of the other

sellers in one respect or the other.According to J.S. Basins, monopolistic competition

is market structure where there is a large number of

small sellers, selling differentiated but close substitute

products.


8/8/2019 MEA Unit 4

24/59

CHARACTERISTICS OF

MONOPOLISTICCOMPETITION

Large number of firms and buyers

Product differentiation

Freedom of entry and exit of firms

Selling costs

Price control

Limited mobility

Imperfect knowledge

Non-price competition


8/8/2019 MEA Unit 4

25/59

DETERMINATION OF PRICE AND OUTPUT

UNDER MONOPOLISTICCOMPETITION

Firm under monopolistic competition producesup to that limit where its marginal cost is equalto marginal revenue, (MC=MR) and MC curve

cuts MR curve from below. In case of monopolistic competition, price andequilibrium position of firm and group will bestudied in two parts: (1)Firms equilibrium and

(2) Groups equilibrium.


8/8/2019 MEA Unit 4

26/59

EQUILIBRIUM OF THE FIRM

LONG PERIODSHORT PERIOD

SUPER

NORMAL

PROFIT

NORMALPROFIT

MINIMUMLOSS

NORMAL

PROFIT


8/8/2019 MEA Unit 4

27/59

SHORT PERIOD EQUILIBRIUM

Short-run refers to that time period in which

output can only be increased by changing the

quantity of variable factors. there is no time to

change in fixed factors of production like

machines, plants, factory, building etc.


8/8/2019 MEA Unit 4

28/59

SUPERNORMAL PROFIT

O

E

B

MC

AC

AR

M

R X

Y

M

C

P

Firm is in equilibrium at point E, because at this point MC=MR. Point E indicates that the firms

equilibrium output is OM. Price of equilibrium output is OP(=AM). AM is greater than the BM.

Hence the firm earns super normal profit equivalent to difference between AM and BM. Total

super normal profit is ABCP.

REVENUE

OUTPUT

A


8/8/2019 MEA Unit 4

29/59

NORMAL PROFIT

M XO

PA

MC

AC

AR

MR

E

Y

REVENU

E

OUTPUTFirm is in equilibrium at point E where MC=MR and OM will be equilibrium output. Price

of the equilibrium output is OP(=AM) and average cost is also OP(=AM). It is so

because, AR curve is touching AC curve at point A. Hence AR=AC and firm earns

normal profit.


8/8/2019 MEA Unit 4

30/59

MINIMUM LOSS

O M X

P1

P

MRAR

MC

B

A

Y

AVCSAC

E MR=MC

OUTPUT

REVENUE

LOSS

In this firm will be in equilibrium at point E and MC=MR. Price of equilibrium output OM

is OP1(=AM) and average cost OP(=BM) and AC>AR. Hence a firm suffer a loss

equivalent to BM-AM=AB per unit. But price of equilibrium output OM=AVC as AVC

touches curve AR at point A and at point A firm will have to incur loss of fixed cost

equivalent to AB per unit then the total loss of firm will be BAP1P.


8/8/2019 MEA Unit 4

31/59

LONG PERIOD EQUILIBRIUM

Long period refers to that time period in which

output can be increased by making changes inthe quantity of both fixed as well as variable

factors inputs. In long run each firm will

produce up to that limit where MR=long run

MC. In long run firm earn only normal profit.


8/8/2019 MEA Unit 4

32/59

NORMAL PROFIT

O MX

P

LMC

LAC

Y

AR

MR

A

E MR=MC

OUTPUT

REVENUE


8/8/2019 MEA Unit 4

33/59

In this MC=MR at point E which is equilibrium

point. OM is equilibrium output and OP(=AM) is

the price equilibrium output. At equilibrium

output OM, average revenue curve is tangent toLAC curve at point A which means AR=LAC.

Hence firms earns only normal profit.


8/8/2019 MEA Unit 4

34/59

COMPARISON BETWEEN MONOPOLISTIC

AND PERFECT COMPETITION

Assumption regarding product

Assumption regarding number of buyers and sellers

Assumption regarding degree of knowledge

Implication regarding decision

Implication regarding condition of maximum profit

C

omparison regarding priceComparison regarding profit


8/8/2019 MEA Unit 4

35/59

Assumption regarding shape of demand curve

AR=MR

P

OUTPUT

REVENUE

REVENUE CURVE UNDERPERFECT COMPETITION

MR AR

Y Y

XO

O X

REVENUES CURVESUNDER MONOPOLISTIC

COMPETITION

OUTPUT

REVENUE(RS.)


8/8/2019 MEA Unit 4

36/59

Comparison regarding output

OUTPUT

REVENUE

O Q X

Y

E

LMCLA

C

AR=MR

NORMAL

PROFIT

P P

REVENUE

OUTPUT

P

P

1

O X

Y

B

A

LACLMC

M

R

AR

M N

E


8/8/2019 MEA Unit 4

37/59

COMPARISION BETWEEN MONOPOLISTIC

COMPETITIONAND MONOPOLY

Assumption regarding product

Assumption regarding number of sellers andbuyers

Assumption regarding entry

Assumption regarding degree of knowledge

Implications regarding decisions

Comparison regarding profit


8/8/2019 MEA Unit 4

38/59

Different average and marginal revenue

curves

OUTPUTOUTPUT

O O

Y Y

X X

ARMR MR

AR

REVENUE CURVES UNDER

MONOPOLY

REVENUE CURVES UNDER

MONOPOLISTIC

COMPETITION

REVENUE(RS.)REVENUE

(RS.)


8/8/2019 MEA Unit 4

39/59

CONCLUSION

In monopolistic competition every firms enjoys

super normal profit, normal profit, minimum

loss in short run but in long run a firm enjoys

only normal profit.


8/8/2019 MEA Unit 4

40/59

Price Determined UnderOligopoly


8/8/2019 MEA Unit 4

41/59

The Term Oligopoly has been derived fromtwo Greek words.

Oligi which means few and Polien means

sellers.

Thus Oligopoly is an abridged version of

monopolistic competition . It is a competitionamong few big sellers each one of them sellingeither homogenous or hydrogenous products.


8/8/2019 MEA Unit 4

42/59

Oligopoly refers to a market situation where there ra few sellers (2 to 10) in a market, selling

homogenous or differentiated products. Oligopolyis often described as Competition among few.

When the products of a few sellers are homogenous

it is known as Pure Oligopoly When theproducts of few sellers are differentiated , butclose substitutes of each other it is known asDifferentiated Oligopoly .


8/8/2019 MEA Unit 4

43/59

What are some examples of Oligopoly?

Automobiles

Steel

Soup

Cereals


8/8/2019 MEA Unit 4

44/59

What determines if a market is an

Oligopoly?

The concentration ratio


8/8/2019 MEA Unit 4

45/59

What concentration ratio

constitutes an Oligopoly?

There is no magic number, but if a largepercentage of the sales are from the 4 largest

firms, its an Oligopoly


8/8/2019 MEA Unit 4

46/59

What is an example of a high

concentration ratio?

Out of 151 firms in the aircraft industry theleading 4 constitutes 79% of total sales


8/8/2019 MEA Unit 4

47/59

Characteristics Of Oligopoly

Few Sellers

Homogeneous or Differentiated Product

Interdependence : Importance of Advertising and Selling costs

Price Rigidity

Restriction to Entry


8/8/2019 MEA Unit 4

48/59

HOW PRICES ARE DETERMINED?

Interdependent Pricing

Price wars

Price Leadership Formal Agreement : Cartel


8/8/2019 MEA Unit 4

49/59

1. Interdependent Pricing

Some economists have assumed that

oligopolistic firms ignore interdependence .When interdependence disappears from

decision making the demand curve facing the

oligopolistic becomes determinate.


8/8/2019 MEA Unit 4

50/59

8/8/2019 MEA Unit 4

51/59

3. Price Leadership

Another approach is that the firms in anOligopoly would accept one firm as a leader andwould follow him in setting prices. Such a leaderfirm may be dominant or low-cost firm producing

a very large proportion of the total production andhaving a great influence over the market.

The form of price leadership:

i. Leadership of dominant firm

ii. Barometric price leadership

iii. Exploitative or Aggressive leadership


8/8/2019 MEA Unit 4

52/59

4. Formal Agreement : Cartel

A group of firms that collude to limit

competition in a market by negotiating and

accepting agreed-upon price and market

shares.

Two models of imperfect cartels:

i. Joint-Profit Maximizing Cartels

ii. Market-sharing cartels


8/8/2019 MEA Unit 4

53/59

Kinked Demand Curve Model

According to the kinked demand curve

hypothesis, the demand curve facing the

Oligopolistic has a Kink at the level of the

prevailing price. The kink is formed at the

prevailing price level because the segment of

the demand curve above the prevailing price

level is highly elastic and the segment of thedemand curve below the price level is

inelastic.


8/8/2019 MEA Unit 4

54/59


8/8/2019 MEA Unit 4

55/59

Game Theory

A theory of strategy ascribed to a firms

behavior in oligopoly

What is the Prisoners Dilemma?

-A series of individual choices within a

small group, each ones choice effects the

outcome of the others.


8/8/2019 MEA Unit 4

56/59

- An example of the Prisoners Dilemma is the

Payoff Matrix

56

Both Sam

and Bill confess

Sam confesses

and Bill doesnt

Bill confesses

and Sam doesnt

Neither Sam

nor Bill confesses


8/8/2019 MEA Unit 4

57/59

8/8/2019 MEA Unit 4

58/59

THANK YOU

Have A Nice Day


8/8/2019 MEA Unit 4

59/59

/ /

MEA Unit 4

Documents

Transcript of MEA Unit 4