Return of scale

As we increase the scale of operations (increasing the factory size) what happens to the output? What rate does it increase?

Output elasticity: percentage change in quantity/percentage change in all inputs

If EQ > 1, we have an increasing returns to scale, increasing rate

If EQ =1, we have an constant returns to scale, constant rate

If EQ < 1, we have an decreasing returns to scale, decreasing rate

There are three stages of production:

The output increases with the increasing input
The output remains same with increasing input
The output decreases with the increasing input

Constant returns to scale: The property whereby long-run average total cost stays the same as the quantity of output changes.

The relationship between the quantity of inputs (workers) and quantity of output (cookies) is called the production function.

This is represented by the cubic production function. Q= a+bL-cL2+dL3

If there’s no stage 1, it is quadratic production function Q= a+bL-cL2

Law of variable proportions

It states that in the shorter run the labour is variable and the capital is fixed.

Law of power production

Q= f(L)

lnQ= ln(aLb)

lnQ = ln a + bln L

ln(a*b) = ln a + ln b

Ln (ab)= bln a

Law of supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises. It’s from the perspective of the supplier/firms/seller’s perspective. It is the manifestation of the behaviour of the supplier. Objective of the seller is profit maximization.

Profit= Total revenue-total cost

Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold. If you want to know how any event or policy will affect the economy, you must think first about how it will affect supply and demand.

Law of demand

Other things equal, when the price of a good rises, the quantity demanded of the good falls. Price is dependent on the quantity. It is the manifestation of the behaviour of the consumer.

Q= f(P)

The Dependent goes on the y axis and the independent goes on the x.

Marshall’s economic theory.

Tastes, number of price of substitute goods.

Along the demand curve, when price changes.

Environmental factors there is a shift in demand curve like a celebrity endorses the process.

With lower prices people will buy in huge quantities which leads to a shift in the demand curve. With increasing income, the demand curve shifts right as people buy in more quantity.

When demand was high, inflation was high and unemployment was low; when demand was low, inflation was low but unemployment was high. When demand was high, inflation was high and unemployment was low; when demand was low, inflation was low but unemployment was high.

Price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.

Consumer surplus measures the benefit to buyers of participating in a market. When there is a surplus the price falls.

Zero elasticity, demand is perfectly inelastic, and the demand curve is vertical. In this case, regardless of the price, the quantity demanded stays the same. As the elasticity rises, the demand curve gets flatter and flatter. At the opposite extreme, demand is perfectly elastic. This occurs as the price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that very small changes in the price lead to huge changes in the quantity demanded.

Supply is usually more elastic in the long run than in the short run. Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity sup- plied is not very responsive to the price.

Total revenue

The total amount paid by buyers, and received as revenue by sellers, equals the area of the box under the demand curve, P*Q.

Average revenue/cost

Total revenue divided by the quantity sold. Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced.

Marginal revenue

The change in total revenue from an additional unit sold. Marginal cost tells us the increase in total cost that arises from producing an additional unit of output.

Elasticity of demand

Sensitivity to price.

Price elasticity of demand= Ep

Ep= Proportionate change in quantity demanded/ proportion change in price

= percentage change quantity demanded/percentage change in price.

=ΔQ/ΔP* P/Q

Magnitude of elasticity= 40%/20%

It is unitless and that’s the main advantage.

Flatter the demand curve, the more elastic it is. Steeper the demand curve, the more elastic it is. Luxury products are more elastic as people want it more.

If price elasticity is one it is unit elasticity. Luxuries have elastic demands.

Inelastic

Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

If the -|Ep| < 1

The demand will fall but not much. Increase the price, total expenditure increases.

Demand is inelastic, then an increase in the price causes an increase in total revenue.

Elastic

Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price.

if Ep>1

If the price is constant throughout the consumption, the people are very sensitive to the price. If price is the only criteria the curve is going to be flat. The price elasticity of demand determines whether the demand curve is steep or flat.

If there are a lot of substitutes in the market the product is elastic. If a large amount of income is spent on a product it means the elasticity is more.

Greater the time period the elasticity will increase.

Consumer’s total expenditure= firm’s revenue

When price rises, the total expenditure falls for elastic products, we should decrease the price to increase the demand which in turn increases the revenue

Demand is elastic: An increase in the price causes a decrease in total revenue.

Market’s equilibrium

One point at which the supply and demand curves intersect; this point is called the equilibrium. The price at which these two curves cross is called the equilibrium price, and the quantity is called the equilibrium quantity. The quantity of goods that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell.

If demand for goods is greater than supply goods, the seller can increase the supply.

Quiz

A perfectly competitive firm

a. chooses its price to maximize profits.

b. sets its price to undercut other firms selling

Law of demand

Other things equal, when the price of a good rises, the quantity demanded of the good falls. Price is dependent on the quantity. It is the manifestation of the behaviour of the consumer.

Q= f(P)

The Dependent goes on the y axis and the independent goes on the x.

Marshall’s economic theory.

Tastes, number of price of substitute goods.

Along the demand curve, when price changes.

Environmental factors there is a shift in demand curve like a celebrity endorses the process.

With lower prices people will buy in huge quantities which leads to a shift in the demand curve. With increasing income, the demand curve shifts right as people buy in more quantity.

Price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.

Consumer surplus measures the benefit to buyers of participating in a market. When there is a surplus the price falls.

Total revenue

The total amount paid by buyers, and received as revenue by sellers, equals the area of the box under the demand curve, P*Q.

Average revenue/cost

Total revenue divided by the quantity sold. Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced.

Marginal revenue

The change in total revenue from an additional unit sold. Marginal cost tells us the increase in total cost that arises from producing an additional unit of output.

Elasticity of demand

Sensitivity to price.

Price elasticity of demand= Ep

Ep= Proportionate change in quantity demanded/ proportion change in price

= percentage change quantity demanded/percentage change in price.

=ΔQ/ΔP* P/Q

Magnitude of elasticity= 40%/20%

It is unitless and that’s the main advantage.

Flatter the demand curve, the more elastic it is. Steeper the demand curve, the more elastic it is. Luxury products are more elastic as people want it more.

If price elasticity is one it is unit elasticity. Luxuries have elastic demands.

Macroeconomics

Economic as a whole. India was organized into small republics.It’s long term.

Why are people behaving a particular way, recovery rate in corporate banks. Owners were basically ladies who were much more sincere.

King is the messenger of God. Once the company gets into welfare.Open markt

As demand increases, the price increases.

Major issues

Economic growth
Unemployment: looking for work and not finding a job.

Inflation

Rise in prices. It’s an increase in the overall level of prices in the economy

Balance of payments:Business interaction with the rest of the world. Inflow and outflow of currency.

Exchange rate: More inflow and outflow. The dollar goes out,the rupee depreciates and the dollar appreciates.

Factors of production

Land, labor, capital and enterprise/organisation.

Stock concept

Current level of wealth and how much growth is the company able to make.They need human resources to convert assets to flow.

Inflation increases and the growth rate decreases. Growth rate is high in developing countries. Rate of economic growth can classify the countries into underdeveloped,developed and developing nations.Anything below 5% in India is considered as recession. Unemployment rate increases if the inflation rate increases.

After the world war, German faced high inflation. Inflation rate negative means the price is going down. For sellers it is a bad situation, it always signifies the demand is low. If demand is high, the price will rise.

Firms can enter (or exit) the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero.

The circular flow of income

It owns all factors of production.

Land rent is paid, labor is paid wages, capital is paid interest and organization is given profit.

Value of any good/service= profits

Income method = rent+wages+interest+profit

Output= value of all goods and services produced.

expenditure= C+I+G+X

The role of the financial institute is to make a deficit spender a surplus spender.

Investment : buying of capital infrastructure.

When the income distribution was uneven, the demand also varied.

Shifts in demand curve

Buyers now want to purchase a larger quantity of ice cream, and the demand curve for ice cream shifts to the right.
Similarly, any change that reduces the quantity demanded at every price shifts the demand curve to the left.
The price of ingredients falls making profit more profitable. This raises the supply of Sellers who are now willing to produce a larger quantity. Thus, the supply curve for ice cream shifts to the right.

Monopoly

Some markets have only one seller, and this seller sets the price.

Oligopoly

Some markets fall between the extremes of perfect competition and monopoly. One such market, called an, has a few sellers that do not always compete aggressively. Airline routes are an example.

Command-and-control policies regulate behavior directly. In it only the government acts as an entrepreneur.
When two goods are strongly complementary, such as left shoes and right shoes, the indifference curves are right angles. When the price of a good that complements a good decreases, then the quantity demanded of one increases and the demand for the other increases.
When two goods are easily substitutable, such as nickels and dimes, the indifference curves are straight lines. When the price of a substitute good decreases, the quantity demanded for that good increases, but the demand for the good that it is being substituted for decreases.
When the price of both substitute and complement increases the demand of the product falls.
Economic profit as the firm’s total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold.
Accounting profit as the firm’s total revenue minus only the firm’s explicit costs. Accounting profit is larger than economic profit.
Opportunity cost: Amount can no longer be used to buy something else.
Explicit costs: Input costs that require an outlay of money by the firm
Implicit costs: Input costs that do not require an outlay of money by the firm

Question paper

There is considerable interest in whether the minimum wage rate contributes to the nation on payment. So demand and supply diagram for the unskilled labour market, and discuss the effects of a minimum wage. Who is helped and who is hurt by the minimum wage?

Reducing the minimum wage might be one way of reducing the teenage unemployment rate. Policies to reduce the natural rate of unemployment involve structural labor market policies. Disincentives to employment and training, such as minimum wages, and incentives to extended job search, such as high unemployment benefits, tend to raise the natural rate. It is also possible that unemployment displays hysteresis, with extended periods of high unemployment raising the natural rate.

When a minimum wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. There is a surplus of labor. Because there are more workers willing to work than there are jobs, some workers are unemployed.

Suppose that the price of product X falls from 25 to 20$. In response, the demand in quantity of X increases from 100 units to 120 units. The demand from products increases from quantity 200 to 300. Calculate TR cross elasticity between product u and product x. It’s why you constitute a compliment for X? Explain. Does product X follow the law of demand? Explain.

With lower prices people will buy in huge quantities which leads to a shift in the demand curve. With increasing income, the demand curve shifts right as people buy in more quantity.

Following is the table showing substitution, income and price effect of a fall in price. Complete the table based on the information provided below.

Because the price and the quantity demanded or negatively related, the demand curve slopes downwards. The slope will be negative.

A small slope: Demand curve is relatively flat.

A larger slope: Demand curve is relatively steep.

Each of the following situations could exist in the short run. In each case, indicate whether the firm should produce in the short run or shut down in the short run or whether additional information is needed to determine what it should do in the short run.

Price exceeds average total cost at all output levels.

Should produce as they would be making profit.

Profit =Total revenue -Total cost

Average variable cost exceeds price at all output levels.

The variable cost is the cost insured by the firm to make a product for example if there is the lemonade shop, the price of the lemon and sugar will determine the cost of the lemonade.

Average total cost exceeds price at all output levels.

Total cost divided by the quantity of output is called average total cost. Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced.

Because total cost is just the sum of fixed and variable costs, average total cost can be expressed as the sum of average fixed cost and average variable cost.

If total cost is more, it would decrease the margin obtained on the product.

ATC = Total cost/Quantity = TC/Q

Nash equilibrium

Synergy and Dinakar are the only two firms in a specific high-tech industry. This is the following pay of Matrixx answer decide upon the size of research budget:

Note: the order of force measures it and it is still on the decision box is as follows: the first day of his four-day Nako and the second figure recipe of a synergy.

Does synergy have a dominant strategy? Explain.
Does the cool have a dominant strategy? Explain.
Is there a Nash equilibrium for this scenario? Explain.

Nash equilibrium: Rather than increasing production and driving down the price, It’s better to keep production constant.

Coke and Pepsi are competing in the Brazilian soft drink market. Each firm is deciding whether to follow an aggressive advertising strategy, in which the firm significantly increases its spending on media and billboard over last year‘s level, or a restraint strategy in which each firm keeps its advertising spending equal to last year‘s level. The profits associated with its tragedy are as follows:

What is Nash equilibrium for this game?
Is this game an example of a prisoner’s dilemma game?

There are two firms in the market. They can possibly charge only two prices — a low price or a high price. If both charge a low price, they split the market and each earns a profit of $ 500 per day. If both charge a high price, they split the market again but the profit jumps to $ 700 each, per day. If one charges the high price but the other the low one, the firm charging a low price gets most of the business and earns a profit of $ 1000 a day while the one charging the high price is left with a profit of $ 200 per day. Prepare a pay of matrix for these firms. Name the two companies as Firm A and Firm B. Based on the payoff matrix answer the following questions.

What is firm A’s dominant strategy?

Dominant strategy: A strategy that is best for a player in a game regardless of the strategies chosen by the other players.

What is firm B’s dominant strategy?
What is the optimal strategy for each firm? Calculate the Nash equilibrium.

Answer the following questions based on the payoff matrix given below. The payoffs are

profits/losses of the two firms.

What is firm A’s dominant strategy?
What is firm B’s dominant strategy?
What is the optimal strategy for each firm? Calculate the Nash equilibrium.

Coca-Cola and Pepsi are competing in the Brazilian soft drink market. Each firm is deciding whether to follow an aggressive advertising strategy, in which the firm significantly increases its spending on media and billboard advertising over last year’s level, or a restrained strategy in which the firm keeps its advertising spending equal to last year’s level. The profits associated with each strategy are as follows:

Note: The payoffs mentioned in each cell of the decision box, the first payoff is for Coca- Cola and the second figure is the payoff for Pepsi.

What is the Nash equilibrium for this game?

Nash equilibrium: A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

Is this an example of a prisoners’ dilemma game?

A prisoners’ dilemma, provides insight into why cooperation is difficult. prisoners’ dilemma

a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

Consider a firm whose total cost function is TC (Q) =Q^3-6Q^2+13 Q, where Q is the quantity of output produced by the firm.

Write the total variable cost function (TVC (Q)) of the firm.
calculate the marginal cost function (MC (Q)) of the firm.
Find the firm’s average total cost function (ATC (Q)) of the firm.
What is the firm’s minimum average cost?

Marginal

A homogeneous products oligopoly consist of two forms, each of the form has a constant marginal cost MC is equal to 5. The market demand curve is given by P =20 – Q, Q is the industry output, a sum of the quantity supplied by each of the firms.

What are the corner Tikolo Preme quantities and price? Assuming each form has zero fixed cost, what is the profit on by each of the firms in equilibrium?
Suppose the firms merge and in so doing their marginal cost remains at 5, what will be the equilibrium quantity produced and price after merger.
Compare the profit made by the firm post merger with the combined profit of the two firms before the equilibrium. Explain a comparison.

P =20 – Q

MC= 20-2Q

5= 20-2Q

Q= 7.5

Quantity	price
1	19
2	18
3	17

The average cost of flying a passenger is $500, but the marginal cost is merely the cost of the can of soda that the extra passenger will consume and the small bit of jet fuel needed to carry the extra passenger’s weight.

A person’s willingness to pay for a good is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit, in turn, depends on how many units a person already has. Water is essential, but the marginal benefit of an extra cup is small because water is plentiful. By contrast, no one needs diamonds to survive, but because diamonds are so rare, the marginal benefit of an extra diamond is large.

Q= 15, P= 5

In terms of the general relations among total, average, and marginal quantities, which of the following statements are necessarily true and which or not. Explain your say.

When the total function is rising, the marginal function is rising.
The Wendy Marshall function is rising, the average function is also rising.
When the total function is rising the model function lies above it.

MC = (Change in total cost)/(Change in quantity).

How would a production function that exhibits decreasing marginal product affect the shape of the total cost four? Explain and support your answer with a suitable graph.

What is the marginal rate of substitution (MRS)? Why does MRS diminish along the indifference curve? Suppose at point a on Abhishek‘s indifference curve for goods XNY, he has 10 units of X and 20 units of Y. When he moves down to a point B on the indifference curve, his combination of two goods changes to 12 units of X and 19 units of Y. What is the MRS between points A and B?

A monopolist has a demand curve given by the equation be P=50-2Q, MC is constant at 2 and has no fixed cost.

Derive the marginal revenue curve for the monopolist.
What is the profit maximising choice for output, price for the monopolist?
If this industry was perfectly competitive, calculate the equilibrium price and quantity.
Draw a suitable diagram for the monopolist to show the deadweight loss.

Ron’s Window Washing Service is a small business that operates in the perfectly competitive residential window washing industry in a city. The short run total cost of production is:

stc(q) = 40 + 10q + 0.1q^2, where q is the number of windows washed per day. The prevailing market price is $25 per window.

Calculate the fixed cost for the firm? How do you know it is the fixed cost? State average total cost function.
Graph the average variable cost and the marginal cost function.
What is the quantity of output produced by the firm at the prevailing market price?
Derive the firm’s short run supply curve, assuming that the entire $40 of fixed cost is sunk cost.

Fixed cost means that the cost does not vary in the short run as a level of output varies. Examples of fixed cost property taxes, insurance payments, interest on loans, and other payments to which the firm is committed in the short run. Business managers often refer to fixed costs as overhead cost.

Variable cost is defined as the total cost of the variable factor of production at each level of output. To calculate the variable cost for any given level of output, we simply multiply the amount of units needed to produce the level of output by the cost incurred per hour. Variable cost depends upon the output level produced whereas the fixed cost does not. The total cost is the summation of variable cost and the fixed cost. Average variable cost is the variable cost divided by the quantity of output.

25*quanty/quantity of output

The firm has the following short run production function

Q =50 L + 6L² -0.5 L³

Q = Quantity of output per week

L= Labour (number of workers). Delineate the three stages of production.

Marginal product= Change in output/change in input= 50 L + 12L6L² -0.5 L³

50 L + 6L² -0.5 L³ = 0; Maxima of the curve

MP= 50 + 6L-1.5L²

(Derivative of MP with respective to L, for maximum value put L=0);

0+12-3L

L= 4

Find the roots of the equation which gives the maxima for the curve

-b(-/+) (B²-4ac)^0.5/2a

1st stage: total product rises at a rising rate, the marginal price rises

2nd stage: total product price prices at a falling rate, marginal price falls

The owner of a car wash is trying to decide on the number of people to employ based on the following short run production function: Q = 6L -0.5 L²

Q = number of car washes per hour

L = number of workers

Suppose the price of a basic car wash is five dollars. How many people should be higher if he pays each worker six dollars per hour?

Fixed price = 5

Total revenue = variable Q *fixed price

Marginal revenue = Difference in Total revenue / Difference in labour

Total profit= Total revenue – Total cost

Marginal cost is the amount paid to the labor whereas the marginal revenue is how much profit the labor is contributing to. Marginal cost is the slope of the total cost curve, and marginal revenue is the slope of the total revenue curve. At the maximum profit point, the slope of these two are exactly the same.

Marginal cost= 6

MR= MC

Total revenue = 30L-2.5L²

Marginal revenue= 30-5L

30-5L =6

L= 4.8 which is almost equal to 5.

The international calculator company that produces the handle calculator is in its plans. The choice to keep the number of workers in the plant constant so the only variable factor that can be measured is materials. Over the last seven months period, the data is as follows:

Materials	Quantity
70	450
60	430
89	460
95	490
77	465
100	550
85	490

Q= aM^b

Ln(Q)= ln(aM^b)

Ln Q = ln a + bln M

Convert quantity and the materials into natural log. (Ln)

Anti-log would be the exponential of the number. (exp)

A consumer spends all her income on food and clothing. At the current prices of Pr= Rs 10 and Pe = Rs 5, the consumer maximizes her utility by purchasing 20 units of food and 50 units of clothing.

What is the consumer’s income?

‘What is the consumer’s marginal rate of substitutions of food for clothing at the initial equilibrium?

How does the law variable proportions become the basis of the `U’ shape of the average and marginal cost curves?

If each firm (in a perfectly competitive market) is in long run equilibrium, need the industry be in long run equilibrium? If the firm and the industry are in long run equilibrium, need they also be in short run equilibrium?

If the total product curve is a straight line through origin, what do the average product and marginal product curve look like? What principle would lead you to expect that the total product curve would never have this shape?

Is it possible that diminishing marginal returns would set in after the very first unit of labour is employed? What do the total, average and marginal product curves look like in this case?

Suppose the demand curve for personal computers is — Q = 8000 -100P

Currently, P = $ 36

Calculate the point price elasticity. Is it elastic or inelastic? What will be the effect of a price decrease on total revenue?

The accompanying table shows the demand schedule for vitamin D. Suppose that the marginal cost of producing vitamin D is zero.

Assume that BASF is the only producer of vitamin D and acts as a monopolist. What is the profit maximizing quantity and price that the firm will choose? What would happen to its profit if it produced additional 10 tons of output from the profit maximizing level?
Now assume Roche enters the market by also producing vitamin D and the market is now duopoly. If BASF and Roche agree tti a cartel and decide to share the market equally. What would be the quantity each will produce and their respective profits? Now, does BASF have an incentive to produce 10 additional tons? Explain your answer.

A consumer spends all her income on food and clothing. At the current prices of Pr= Rs 10 and Pc = Rs 5, the consumer maximizes her utility by purchasing 20 units of food and 50 units of clothing.

What is the consumer’s income?
What is the consumer’s marginal rate of substitutions of food for clothing at the initial equilibrium?

Mrs Roberts is asked to rank commodity bundles A,B,D and E each comprising certain amounts of food and clothing as follows:

Item	A	B	C	E
Food	100	30	65	40
Clothing	20	90	30	105

Suppose Mrs Robort says that she is indifferent between A&B and between D&E. Is Mrs Roberts behaviour consistent with the axioms of consumer behavior?
Would Mrs Roberts’ ranking be consistent if D were replaced byD’= (90F, 19C)?
Suppose that Mrs Roberts is indifferent among A, B, & D. What is her marginal rate of substitution?

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit maximizing firm?

Average revenue would be when the flight service charges $500 to carry a passenger. This is called average revenue. But suppose there’s a passenger who is willing to pay $300 the aircraft should accommodate him if there are free seats because only the cost of extra beverage and the fuel to carry the passenger along with the other passengers will be the extra expenses. This is the marginal revenue.

A monopolist has an inverse demand curve 13= 10-Q. What will be the revenue maximising output level for the monopolist?

What is the marginal revenue function and calculate the level of revenue for this output.

Explain what you understand by the following terms:

Isoquant:
Marginal Rate of Technical Substitution: The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other. Indifference curves represent a consumer’s preferences.

if the quantity of one good decreases, the quantity of the other good must increase for the consumer to be equally happy. For this reason, most indifference curves slope downward.

Point A is on the same indifference curve as point B, the two points would make the consumer equally happy.

What is the economic significance of the marginal ratio of technical substitution?

Is it possible for a firm to have one positive accounting profit and negative economic profit? Explain your answer with a suitable example.

Suppose market demand curve for widgets is P = 72 — 6Q, where P is the price and Q output for the industry. The industry is a duopoly, with firm 1 producing q1 and firm 2 producing q2; thus the industry supply is Q = q1 + q2. The marginal and average cost for each duopolist is 36.

Write the profit equation of each of the duopolists.
If the firms behave as Cournot supposed, calculate the equilibrium quantity of output by each firm
Calculate the profit made by each firm.
If the firms behave as Bertrand (an economist) supposed, what are the values of profit, output by each firm and what is the industry price?
If the two firms collude and act as a monopolist, what are the values of Q and P?

Price	Quantity	Revenue
66	1	66
60	2	120
54	3	162
48	4	192
42	5	210
36	6	216
30	7	210
24	8	192
18	9	162
12	10	120
6	11	66
0	12	0

The oligopolistic market has only a small group of sellers, a key feature of oligopoly is the tension between cooperation and self-interest. Oligopolists are best off when they cooperate and together act like a monopolist—producing a small quantity of output and charging a price above marginal cost. Yet because each oligopolist cares only about its own profit, there are powerful incentives at work that hinder a group of firms from maintaining the cooperative outcome. Duopoly is the simplest type of oligopoly. An oligopoly with only two members, called a duopoly.

Total revenue (and total profit) = quantity *Price

Industry supply, Q = q1 + q2

P 1=72 — 6(Q-Q2)

P 2= 72 — 6(Q-Q1)

The equilibrium quantity would then be 12 units.

Q1	Q2	Cost (P1=72 — 6(Q-Q2))	Cost (P2=72 — 6(Q-Q1))
1	5	66	42
2	4	60	48
4	2	54	54
5	1	48	60
3	3	42	66

Both firms will get the same profit if Firm 1 sells 4 units and firm 2 sells 2 units.

Quantity	Price 1	Revenue
1	66	66
2	60	120
4	54	216
5	48	240
3	42	126

For monopolists, the total profit is maximized at a quantity of 6 units and a price of $36 per unit.

Our two producers produce a total of 6 units, which sell at a price of $36 a unit. Once again, price exceeds marginal cost, and the outcome is socially inefficient.

A cartel must agree not only on the total level of production but also on the amount produced by each member. Firm 1 and Firm 2 must agree on how to split the monopoly production of units.

The Nash equilibrium would be obtained when both produce 3 units.

Suppose the price of capital, PK is equal to Rs.2 and price of labour, PE is equal to Rs.5 in maximum possible investment, E is equal to 20. Find

Slope of the iso-cost
Equation of the iso-cost

The cost of opportunity is Rs.2.

A monopoly firm is faced with two markets, a and B. The demand function into two markets are:

Q is equal to 16-0.5 PA and QB is equal to 22 – PB. The firm‘s total cost function is TC is equal to 10+ 2Q+Q^2. Find out:

Profit maximising output for market A and market B.
The profit maximising price in market A and market B.
Total profit earned by the monopolist.

Budget Equation

Suppose a person has Rs.300 to spend on two goods supplied (in kgs) and oranges (in kgs). The price of apples is rupees 100 per KG and price of oranges is Rs.60 per KG.

Use the information to plot the customers budget equation.
What is the opportunity cost of apples in terms of oranges?
What is the opportunity cost of oranges in terms of apples?
If the price of oranges increases just to Rs.80 per KG, calculate the opportunity cost of apples in terms of oranges.

Total income: 300

Cost of apples: 100 rupees per KG.

Price of oranges: Rs.60 per KG

Budget equation: (100* Apple+ 60* oranges)

What is the budget equation? Suppose income of a consumer consuming only good X and Y is given as Px and Py, respectively. Construct the budget equation of the consumer. Graph the budget line.

The budget constraint shows the various bundles of goods that the consumer can afford for a given income. Here the consumer buys bundles of X and Y. The more X he buys, the less Y he can afford.

Budget equation: (Y*Px+X*Py)

Ann has $4 to spend on goods 1 and 2. Good 1 costs $2 per unit and good2 costs $1. Let

ql and q2 denote the quantities of goods 1 and 2:

Write Ann’s budget equation?
Draw a graph of her budget line.
Calculate the slope of the budget line.
What is the opportunity cost of consuming a unit of good 2 in terms of good 1?

Good 1 will be 1 unit (g1) for 2 dollars.

Good 2 will be 2 units (g2) for 1 dollar each.

Budget equation is 2*g1+2*g2= 4

The slope means the relative price.

Good 1 costs two times as much as good 2, so the opportunity cost of a good 1 is 2 units of Good 2.

Perfect competition

How is the short run industry supply curve drive in a perfectly competitive market?

Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price.

State important assumptions of perfect competition.

How is the monopolist’s demand curve different from a demand curve of a firm under perfect competition?

Monopolistic competition does not have all the desirable properties of perfect competition. There is the standard deadweight loss of monopoly caused by the markup of price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policymakers to correct these inefficiencies is limited. In a monopolistically competitive market, if firms are making profits, new firms

enter, causing the demand curves for the incumbent firms to shift to the left. Similarly, if firms are making losses, some of the firms in the market exit, causing the demand curves of the remaining firms to shift to the right. Because of these shifts in demand, monopolistically competitive firms eventually find themselves in the long-run equilibrium shown here. in this long-run equilibrium, price equals average total cost, and each firm earns zero profit.

Briefly contrast the difference between equilibrium market outcomes in a monopoly, oligopoly, and perfect competition.

Economists who study industrial organization divide markets into four types: monopoly, oligopoly, monopolistic competition, and perfect competition. All the sellers have one objective and that is the profit maximisation.

Profit = total revenue – total cost

Profit= Price per unit * the quantity sold – cost per unit * quantity bought for

Monopoly	Oligopoly	Perfect Competition
The sole seller of a product without close substitutes, it can earn positive economic profit, even in the long run.
One firm	Few Firms/sellers	Many firms
	Similar/identical products	Identical products
Example: Cable TV, tap water	Example: Tennis ball, Cigarettes	Example: Wheat, milk
	P>MC	P = MC Maximise profit
no entry in the long term	entry in the long term	entry in the long term
Can earn profit in the long term	Cannot earn profit in the long term	cannot earn profit in the long term

if the many firms sell differentiated products, the market is monopolistically competitive.

What is the size of the deadweight loss in a competitive market with no government intervention?

In a competitive market, price equals average total cost (P = ATC). This conclusion arises because free entry and exit drive economic profit to zero in the long run.

The government gets the revenue from a tax, whereas a private firm gets the monopoly profit.

Monopoly profit is given by (Average total cost – Monopoly price).

Demand equation and curve

An ABC marketing consulting firm that a particular brand of portable stereo has the following demand curve.

Q= 10000-200p+0.03pop+0.6I+0.2A

Q= quantity demanded

p= price

pop= population

I= disposable income

A= advertising expenditure

pop= 10⁶

p= price= 300

I= 30*10³

A= 15,000

Q= 45000, p=?

45000= 61000- 200p

p= 80

Joy’s frozen yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of various outlets of jpy, it was found that the demand curve is

Q= 200-300P+120P+65T-250Ac+400Aj

Q= number of cups served/ week

P= average price paid for each cup

I= per capita income

T= average outdoor temperature

Ac= company’s monthly advertising

Aj= Joy’s monthly advertising

P= 1.50, I=10, T=60, Ac= 15, Aj= 10

Q = 5100

If the competitor increases the advertising expenditure by 5000, what will happen to Joy’s sale?

1 unit increase of per capita income means an increase of the quantity by 120.

1 unit = 1000

Joy’s sale will decrease by 1250 inr (-5*250).

What should be Joy’s advertisement expenditure expected to counteract this effect?

1250/400 = 3.125 units or 3125

Joy increased the advertisement cost by 1 unit, the sale of the cup would go by 400 cups and he lost 1250 cups.

Suppose a firm has the following demand equation:

Q= 1000-3000P+10A

Q= quantity demanded

p= price

A= Advertisement expenditure

P= 3$

A= 2000 $

Q=12,000

Suppose the firm drops the price to $2.50 would it be beneficial?

R1= 12000*3 = 36000

R2= 13500*2.5= 33,500

Where R is revenue

Suppose the firm increased the price to $4 while increasing the advertising expenditure by $400. Would it be beneficial?

The demand function for a cola type drink is Q= 20-2p. Calculate point price elasticities and price of 5 and 9.

Ep = =ΔQ/ΔP* P/Q

Q= 20-2p

Q(P=5)= 20-2*5= 10

Ep = -2* 5/10 = -1

Q(P=2) = 20-2*9= 2

Ep = -2*9/2 =

Assume that we are a market survey agency. A client comes to us and tells us that he wishes to open a pizzeria either in college campus or in the very near vicinity of a college campus. Can you tell me how many pizzas we will sell per day?

Quantity is the dependent variable or the Y variable.

A_d= f(P)

Q= f(x₁, x₂x₃)

Where x is the independent variable or the causing variables.

Q_d= f(P, I, P_s, L)

Q_d /Y= A+ bP+cI + DP_s+eL

Finding a,b,c,d,e helps know the equation

Hypothesis 1: Price influences the quantity demanded

Hypothesis 2: Income influences the quantity demanded for pizza

Hypothesis 3: Price of soft drink influences the quantity demanded for pizza

Hypothesis 4: Location influences the quantity demanded for pizza

Q= 26.66 – 0.0877P + 0.138I -0.075P_s – 0.544L

If the price increases by one unit, the demand for pizza decreases by -0.08 units.

P= 110, I= 14, P_s= 100, L= Urban (1)/Rural(0)

Q= 10.81 for urban.

E_p= (Change in quantity * price) / (change in price * quantity)

Or (Logarithmic change in Q/logarithmic change in P)

= -0.087*(110/10.81)

Price elasticity of demand= -0.89

The client should increase the price as the magnitude of the price elasticity of demand is less than 1.

Income elasticity of demand (E_Y) = (Change in quantity * Y) / (change in Y * quantity)

= 0.138204*(14/10.81)

Cross price elasticity (E_c) = (Change in quantity of pizza * price of pizza) / (change in price of pizza * quantity of pizza)

= (-0.0759*100)/10.81

= – 0.70

The R² > 0.5 explains variance and is considered a good model.

Adjusted R² is what variance is explained by the addition of a new variable.

Standard deviation= -(0.0877-0)/0.018

ln Q= a -blnP + clnY -dlnP_s

-b is the price elasticity, c is the income elasticity, -d is the cross price elasticity

What do you understand by the ceteris Paribus assumption? Why is the ceteris Paribus assumption so important when constructing a demand supply curve?

Economists use the term ceteris paribus to signify that all the relevant variables, except those being studied at that moment, are held constant. The Latin phrase literally means “other things being equal.” The demand curve slopes downward because, ceteris paribus, lower prices mean a greater quantity demanded.

Although the term ceteris paribus refers to a hypothetical situation in which some variables are assumed to be constant, in the real world many things change at the same time.

Define income elasticity of demand. What does it measure? What does it mean if the income elasticity is positive, negative, small, large?

The law of demand tells about the behaviour of the consumer. If the price rises, quantity demanded falls.

Elasticity is understanding the behaviour of the consumer in proportion forms.

Q= 20-2P

If the prices increase by a small proportion, what will be the effect on the quantity sold.

E_p= (proportion change in quantity demanded / proportion change in price)

(percentage change in quantity demanded/percentage change in price)

(20% / 20%)

So the magnitude can be less than one, greater than one or equal to 1 or 0.

If the percentage change in quantity demanded is positive, the percentage change in price has to be negative. Both move in the opposite direction according to the law of demand and the sign is always negative.

The unit of price elasticity of demand is unitless.

In elastic, a small change of price leads to a huge change in quantity and in elastic there a small change in price leads to a large increase in quantity.

Inelastic demand
Elastic demand

Total consumer expenditure = P*Q

Elastic demand: P rises, TE falls

P falls, TE rises

Inelastic demand: P rises, rises

P falls, TE decreases

The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

suppose that a 10 percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 20 percent. Elasticity of demand: (20 percent /10 percent)= 2

reflecting that the change in the quantity demanded is proportionately twice as large as the change in the price.

Because the quantity demanded of a good is negatively related to its price, the percentage change in quantity will always have the opposite sign as the percent- age change in price. In this example, the percentage change in price is a positive 10 percent (reflecting an increase), and the percentage change in quantity demanded is a negative 20 percent (reflecting a decrease).

A larger price elasticity implies a greater responsiveness of quantity demanded to changes in price.

Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why?

water or diamonds
insulin or nasal decongestant spray
food in general or breakfast cereal
gasoline over the course of a week or gasoline over the course of a year personal computers or IBM personal computers

Given the following demand schedule, graph Diane’s demand curve for Gatorade.

Price of Gatorade	quantity of Gatorade Demanded
$1.50.	0
1.25	10
1.00	20
.75	30
.50	40

When we list the determinants of demand, we do not include supply as one of the determinants. Why is that?

Supply curve shows what happens to the quantity supplied of a good when its price varies, holding constant all other determinants of quantity supplied. When one of these other determinants changes, the supply curve shifts.

Price
Input prices
Technology
Expectations Number of sellers

Determines the demand of the product.

Define cross-price elasticity of demand. What does it measure? What does it means if the cross-price elasticity is negative; positive?

Jack, a fisherman, goes out with a boat and a net early each morning. At 7:00 a.m., Jack takes his day’s catch to the fish market and sells it at the market price. As a result of new information about the beneficial effects on health of a fish-rich diet, the demand for fish increases. How will Jack’s supply of fish respond to the increased demand and higher price for his product in the short run and in the long run?

Freshbake and Dreambake both sell wedding cakes. Assume current wedding cake sales to be Q_F=650 and Q_D= 620

The demand curves for the two competitors are:

Dreamebake:

P_D = 700— 0.5Q_D

Freshbake:

P_F = 750— 0.3Q_F

Calculate the point price elasticities for Freshbake and Dreambake.
Freshbake reduced the price of wedding cakes, thereby increasing sales from 1,650 to 1734
units and reducing Dreambake’s sales to 610 units. What is the cross elasticity between Freshbake and Dreambake wedding cakes?
Does the price reduction by Freshbake make sense with regard to revenue?

Define the law of demand. With the help of suitable diagrams, explain the concepts of movement along the demand curve and shift in the demand curve?

A lady always spends one third of her income on clothes. Find the income and price elasticity of demand for her demand for clothes. What if she starts spending one fourth of her income on clothes?

Find the profit maximizing output and price under monopoly, given the demand and the total cost function of the monopolist. Also find the total profit of the firm.

Demand function = P = 500 —5Q

Cost Function = TC = 50 + 20Q + Q²

A monopoly maximizes profit by choosing the quantity at which marginal revenue equals marginal cost (point A). It then uses the demand curve to find the price that will induce consumers to buy that quantity (point B).

Suppose the demand curve for personal computers is Q = 8000 — 100P

Currently, P =Rs 3, 600. Calculate the point price elasticity. Is it elastic or inelastic? What will be the effect of a price decrease on total revenue?

Price elasticity of demand = (percentage change in quantity demanded/percentage change in demand)

Find the profit maximizing output and price under monopoly, given the demand and the total cost function of die monopolists Also find the total profit of the firm.

Demand function = P = 405 —4Q

Cost Function = TC = 40 + 5Q + Q^2

Minimum wage

What is the minimum wage and example of? What are the minimum wages introduced?

What is the purpose of the minimum wage law in any nation?

Short run

Explain how the short run supply curve of a typical firm in a competitive industry is determined?

How does a competitive firm maximise profit in the short run?

In the short run, the firm produces on the MC curve if P > AVC
But shuts down if P < AVC.

A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market. The short-run and long-run decisions differ because most firms cannot avoid their fixed costs in the short run but can do so in the long run. That is, a firm that shuts down temporarily still has to pay its fixed costs, whereas a firm that exits the market does not have to pay any costs at all, fixed or variable.

For example, consider the production decision that a farmer faces. The cost of the land is one of the farmer’s fixed costs. If the farmer decides not to produce any crops one season, the land lies fallow, and he cannot recover this cost. When making the short-run decision of whether to shut down for a season, the fixed cost of land is said to be a sunk cost. By contrast, if the farmer decides to leave farming altogether, he can sell the land. When making the long-run decision of whether to exit the market, the cost of land is not sunk. (We return to the issue of sunk costs shortly.)

Now consider what determines a firm’s shutdown decision. If the firm shuts down, it loses all revenue from the sale of its product. At the same time, it saves the variable costs of making its product (but must still pay the fixed costs).

Shut down if TR <VC.

The firm shuts down if total revenue is less than variable cost. By dividing both

sides of this inequality by the quantity Q, we can write it as Shut down if

TR/Q <VC/Q.

The left side of the inequality, TR/Q, is total revenue P × Q divided by quantity Q,

Shut down if P , Average variable cost

Suppose we are analysing the market for hot chocolate. When will be the impact on the equilibrium price and quantity of each of the following events affecting the hot chocolate market?

Winter starts and the weather turns sharply colder
The price of coffee falls
The price of whipped cream balls
The price of cocoa beans increases.

What is the difference between accounting profit and economic profit?

What is the significance of “invisible hand” in a competitive market?

Describe how the government is involved in creating a monopoly. Why might the government create one? Give an example.

What is meant by optimum level of output? The following is the cost function of ABC

limited, Pune —TO -=200+5Q+2Q2

Find the optimum level of output ABC can produce.
Suppose the firm is producing 8 units of output. Should the firm increase or decrease the output?

Amos McCoy is currently raising corn on his 100 acre farm and earning an accounting profit of $ 100 per acre. However, if he raised soybeans, he can earn $200 per acre. Is he currently earning an economics profit? Why or Why not?

Draw indifference curves reflecting each of the following preference rankings.

“I would rather watch only baseball or only football rather Can divide my leisure time
between them”.
“I prefer a mixture of swimming and tennis to being restricted to one of them”.
“I hate eating either bread or cheese alone, but I love eating bread with cheese sandwiches”.
“I do not care whether I have regular coffee or instant coffee, as long as it is coffee”.

What is the relevance of the minimum of the Average Cost Curve? The cost function of

MNO public limited is —Q = 500 + 10Q + 5Q2

Find the output that minimizes average cost?
Suppose the firm is producing 7 units of output should it increase or decrease the output.

Determine whether each of the following is explicit or implicit cost.

Payment for labour purchased in the labour market.
A firm’s use of a warehouse that it owns and could rent to another firm. Rent paid for the use a warehouse not owned by the firm
The wages that owners could earn if they did not work for themselves.

What will happen if Daftar Enterprises reacts to the decrease mentioned in part b by lowering its price to Rs 37?

If the index forecast was wrong, and it turns out to be only 140 next year, what will be the effect on Daftar Enterprises sales?

Daftar Enterprises produces a line of metal office file cabinets. The company’s economist, having investigated a large number of past data, has established the following equation of demand for these

cabinets justify your answer from following data: Q= 10000 + 60B — 100P + 50C

Where

Q = Annual number of cabinets sold

B = Index of non residential construction

P= Average price per cabinet charged by Daftar Enterprises

C = Average price per cabinet charged by competitor

It is expected that next year’s non residential construction index will stand at 160. Daftar Enterprises average price will be Rs 40 and the competitors average price will be Rs 35.

Forecast next year’s sales
What will be the effect if the competitor lowers its price to Rs 32?

Would you expect cross price elasticity between the following pairs of products to be positive, negative or zero? Infer from the following

Television sets and VCRs
Rye bread and Whole wheat bread
Construction of residential houses and furniture
Breakfast cereals and men’s shirts

With the help of suitable diagrams explain the relationship between price elasticity of demand and revenues for a firm.

Let the market demand be given by the following inverse demand function P (Q) = 50 — 2Q, where Q = qi + q2. The cost function for each of the two firms in the industry is

C(q1) = 2q1. The firms are Cournot competitors:

Derive the best response function of firm 1.
Find for each firm in the Cournot equilibrium firm output and firm profits.
What is the price that clears the market in the Cournot equilibrium?
Is the outcome efficient? Why?

You can either spend spring break working at home for $80 per day for five days or go to Florida for the week. If you stay home, your expenses will total about $100. If you go to Florida, the airfare, hotel, food, and miscellaneous expenses will total about $ 700. What’s your opportunity cost of going to Florida?

How do you think each of the following affected the world price of oil? (Use demand and supply analysis) —

Oil was discovered in the North Sea
Sports utility vehicles and minivans became popular.
The use of nuclear power declined

How can cross price elasticities of demand be used to help define the relevant firms in an industry? The cross elasticity between product A and product B is 8. Do you think that product A is likely to face an elastic and inelastic demand curve? Explain. Usually, what sign are the cross elasticities for complementary.

Notes:

Ceteris Paribus: It is derived from a Latin word that means “all other things remain the same” or “all things remain unchanged or kept constant” and is often used in economics books. When defining a model, it is presumed that everything else is the same.

The assumption is important because of the following points:

1. to figure out what’s causing it.

2. to identify and separate all independent variables that influence the dependent variable.

3. In real-world scenarios, it’s difficult to separate causal relationships among economic variables since most economic variables are influenced by one or more causes, but models often rely on the assumption of independent variables.

Short run: capital is fixed and labour is variable.

when we increase / vary in the labour unit , in short run we encounter law of variable proportions.

This happens as labour is variable and capital is fixed.

Law of variable proportion: It diminates three stages of production :

1. Total ouput rises at at rising rate that means the marginal product in the initail stage rises.

2. Total output rises at a falling rate that means the marginal product starts falling

3. Total output falls. that means the marginal products turns negative.

Which means we can vary the only the labour unit, the phenomenon that we experience in the long run is popular to as Law of Variable Proportion.

Long Run: Capital and labour both are variable.

Q=f(L,K) , both are variable.

Quantity is function of both labour and capital.

L=Labour

K=capital

Q=Quantity of the output

Which means we can vary the factory size, the phenomenon that we experience in the long run is popular known as Returns to scale.

The reason we are changing the factory size when we change the capital , it means we are changing the scale of operations. Hence, as we increase the scale of operation, which means we are increasing the factory size further means increasing capital.

So , as we increase the scale of operation, we ask the question what happens to output.

If the output also increase, but increase at what rate?

Does it increases at increasing rate, or does it increase at a decreasing rate or does it increase at constant rate ?

Combining called as RTS. (RTS is applied only on the concept of Long Run)

Hence: Output increases at Increasing rate : Increasing RTS

Output increses at decreasing Rate : Decreasing RTS

Constant: then It is constant RTS.

RTS is measured with Output elasticity (Eq).

% change in Q/% change in all inputs.

Eq>1: we have a increasing RTS.

Eq=1: constant RTS.

Eq<1: decreasing RTS.

Another way of looking at the concept is to look at the production function:

Q=f(X,Y)

If the input increases by some proportion k, output is expected to increase by some proportion h.

so , hQ=f(X<Y)

if h>k, the firm experirnces increases RTS. [Eq>1]

if h=k, constant RTS. [Eq=1]

if h<k, decreasing RTS. [Eq<1].

Short Run Production Function:

Here, capital is fixed and labour is variable.

when we increase / vary in the labour unit , in short run we encounter law of variable proportions.

This happens as labour is variable and capital is fixed.

Law of variable proportion: It diminates three stages of production :

1. Total ouput rises at at rising rate that means the marginal product in the initail stage rises.

2. Total output rises at a falling rate that means the marginal product starts falling

3. Total output falls. that means the marginal products turns negative.

Which means we can vary the only the labour unit, the phenomenon that we experience in the long run is popular to as Law of Variable Proportion.

Example, In factory, lets model the data, as we know in the short run, keeping the capital, labour is variable.

Collect the units of labour and output.

Modelled the data.

On Y axis: units of output

On X axis: take the labour.

Looking at the law of variable proportion, the kind of curve / the realtionship we will encounter is in the first stage, the output increses at a increases rate, and then in the second stage, reaching at a particular point, it increases at a diminishing rate, then we reach at a third stage where it starts falling. Hence, it has two inflextion point at which the curve is changing its directions.

Demand forecasting : Trend : we said that Trend is nothing but the relationship of desonsalised data as a function of time, we saw that if the trend is such that the there is no inflection point in the trend there is zero inflection point , as no changing the direction at all then, the form of the trend is Straight line.

ds=a+bt,

when the trend is such , the trend is changing the direction once, then

ds=f(t,tsquare)

ds=a+bt+ctsquare

trend becomes quadratic trend

trend is going up and coming down and again going up,

ds=f(t,t^2, t^3)

this becomes a cubic trend.

ds=a+bt+ctsquare+dtcube.

Now, looking at the law of variable proportion and relating the same as it is changing direction twicw, two inflection point : the form of total product is cubic

Q= a+bL+CLsquare +dLcube ; cubic production function.

Quadratic Production Function:

It is possible that the data employed in the estimate will exhibit diminishing marginal returns but it doesnot have a stage 1, such an estimate is represented by a Quadratic function of the form and sometimes refer to as engineering curve.

Q= a+bL-cL^2

Linear production Function:

Only one stage

Q=a+BL.

This linear function exhibits no diminishing Returns.

The total product (TP) will be a straight line with slope b, and both MP and AP lines will be horizontal and equal.

Power Production function

Express as stated below:

Quantity is a function of labour, now express it as power production function as stated below:

Q=f(L)

Q=aL^b

where a is some constant “a”, L to the some power b.

if b=1, linear relationship and if it is anything other than 1, this production function gives a non-linear relationship.

We express production function in the form of power production function because we sort of sort of condemn it a linear kind of linear kind of relationship, but it may not be a straight line of relationship hence we express this as above.

Taking natural log on both the side of the equation :

Q=aL^b

lnQ=ln(a L^b)

lnQ=lna+bln L

Benefit : taking log in the power production function is that it has linearised an otherwise nonlinear function.

Avantages : include many independent variables, can be transformed into linearised function by taking log.

Cobb douglas Production Function :

when it comes to power production function,

Q=aL^b

lnQ=ln(a L^b)

lnQ=lna+bln L

it can include many independent variable :

Q=aL^alpha K^Beta

lnQ=ln(aL^alpha K^Beta)

lnQ=lna+alphalnL+betalnK

The two input used by the author were number of manual workers (L) and fixed capital (K)

The formula for the production function , which was suggested by Cobb was of the form Q=aL^betaK^(1-beta)

Properties of Cobb Douglas

To make this equation useful, both inputs must exist for Q to be a positive number.

and the exponents summed to 1 constructed.

b+1-b=1(RTS =constant, happens in long run )

equation

Q= aL^bK^c (improvised )

b+c>1: increasing RTS

b+c<1 : Decreasing RTS

Now, we basically do a regression as lnQ=f(lnl, lnK)

data being collected for Q, Ln l, and Ln k

after running a regression, wwe expect to get a and equation

lnQ=a+blnL+clnK

how do we interpret let say “c”, it is interpreted as if lnK rises by 1unit then lnQ rises by “c” unit. Or we are saying that if lnK=1, then change in lnQ is equal to “c”.

Therefor the ration change in ln Q to change in lnK =c/1= c

we can say that logarithmic change in Q/logarithmic change in K equals c.

so we know that whenever we compare this in term of logarithm, it becomes proportion change in quantity of output/ proportionate change in capital equals “c”.

From our elasticity study , we understand that the definition is elasticity hence the “c” represents elasticity formulation, it is the output elaticity due to capital or capital elasticity of output .

Capital elasticity of output is represented by “c”.

similarly we interpret “b” as ln L rises by 1 unit then lnQ rises by “b” unit.

hence , change in ln Q/change in lnL=b/1=”b”

we can say that logarithmic change in Q/logarithmic change in L equals b. hence b is labour elasticity of output.

Cost

Seller are there to maximise profits and MP=TR-TC

TR=P/Unit*Quantity

TC=C/Unit*Quantity

Accountant looks at cost is different from the economist way look at cost.

accounted will say after calculating such as wage rate is 100/hr, if wage rate increases to 110/hr, he will say that the cost as increased.

Economist will not analysed the cost in such superficial manner, he will start with an assumption, that the price of the inputs is constant, then he will say yes, we have to precisely understand, if price of the inputs is constant, the change in change in cost because of change in productivity. He attempt to understand the productivity. cost=productivity hence we have Laws in short run that is law of variable proprtions and the law was productivity.

That is Law of variable proportion: It diminates three stages of production :

1. Total ouput rises at at rising rate that means the marginal product in the initail stage rises.

2. Total output rises at a falling rate that means the marginal product starts falling

3. Total output falls. that means the marginal products turns negative.

Which means we can vary the only the labour unit, the phenomenon that we experience in the long run is popular to as Law of Variable Proportion.

Total cost, at any Cost/ or fixed cost level of input Y axis , the output on X axis, will be same. It will be horizontal cost as fixed costs remains the same.

Total Variable Cost is the cost of labour and we just understood going to depict the change in the productitivity. As it is subjected to the law of variable proportion.

3 stages of production. (in terms of Cost)

1. Total ouput rises at at rising rate that means the marginal product in the initail stage rises and the cost will rise at a falling rate.

2. Total output rises at a falling rate that means the marginal product starts falling and the marginal cost is goining to rise at a rising rate.

3. Total output falls. that means the marginal products turns negative and the cost will further rise.

TC=Total Fixed Cost +Total Variable Cost.

MC= difference between like what will happen to the output if add 1 more unit. fall and rise is Steeper curve rises . Its Qudratic function of output.

AC= fall and rise Gradual curve and U shaped . Its Qudratic function of output.

Hence the curve will be U shaped for the TC , MC and AC if plotted in the 2D dimensions.

Whereas the Total Cost and Total Variable Cost Curve is the Cubic function of the output.

TC=f(Q)

TC=a+bQ+cQsquare+dQcube

Marginal Cost: Change in total cost/change in quantity of output,

basically dTC/dQ.

AC= TC/Q.

Long Run Cost:

Production in the Long Run:

Capital and labour both are variable.

Q=f(L,K) , both are variable.

Quantity is function of both labour and capital.

L=Labour

K=capital

Q=Quantity of the output

Which means we can vary the factory size, the phenomenon that we experience in the long run is popular known as Returns to scale.

So , as we increase the scale of operation, we ask the question what happens to output.

If the output also increase, but increase at what rate?

Does it increases at increasing rate, or does it increase at a decresing rate or does it increase at constant rate ?

Combining is called RTS. (RTS is applied only on the concept of Long Run)

Hence: Output increases at Increasing rate : Increasing RTS

Output increases at decreasing Rate : Decreasing RTS

Constant: then It is constant RTS.

RTS is measured with Output elasticity (Eq).

% change in Q/% change in all inputs.

Eq>1: we have an increasing RTS. Decreasing Costs. the productivity is rising therefore the cost is declining

Eq=1: constant RTS. Cost is also constant cost., the productivity remained same.

Eq<1: decreasing RTS. Cost is increasing. the productivity is falling therefore the per unit cost is rising

Economies of Scale

Therefore, when we experience decreasing cost, when productivity is rising in the long run and there is a decrease in cost, in economics, we call economies of scale.

As we expand the scale of operation and the productivity is rising, per unit cost decline, hence, repaying economies of scale.

As we expand the scale of operation and productivity is falling, increase cost or decrease RTS, this phenomenon is called diseconomies of scale.

Reason of experience EOS:

specialisation and division of labour brings down the per unit costs

indivisibilities and container principle should be read as 1 , as just like a huge container, it can contain a certain amount of material so similarly once you reach a particular scale of product, the efficiency increases, hence, per unit cost comes down with believe with greater efficiency of large machines and can produce by products more , The multi-stage production ensures that there is specialisation and division of labour. Then with the spreading overheads and bring the per unit costs, similarly financial economies can help in bringing down the per unit cost.

External reasons can also lead to EOS.

As the organization becomes bigger and bigger eventaully one of the promising reason to experience the diseconomies of scale as they are incapable of managing the departments.

It can happens due to External diseconomies of scale.

Tracing the path is essential .

Long run average cost:

EOS>> LRAC is decreasing as per unit cost is decreases

Constant costs >> LRAC is constant per unit cost is constant

DEOS>> LRAC is increases as per unit cost increases.

Relationship between long-run average cost and marginal cost curves.

If every last unit is produced at a lower rate/ lower cost, the MC declines and AC also declines because AC is spread over all the other units. MC talks about the last produced item. Similarly if we have a downward sloping LRAC curve, under this situation, it is natural , only under One condition, AC will come down only if every additional unit is being manufactured at lower and lower cost. The MC will be below the AC.

EOS: the LRMC is below the LRAC.

In DEOS, AC contains information of all the other units, and MC talks about the last additional unit, so if every additional unit is being manufactured at higher and higher cost, then only AC will come up . The MC will be above the AC.

DEOS: The LRMC will be above the the LRAC

Constant :

LRAC=LRMC, then only we have constant cost.

Hence, initially EOS and gradually constant to DEOS.

Relationship between long-run and short run average costs:

LRAC= envelope curve as it comprises of many short run.

eneveloping all the short run is also known as planning curve. helps in identuty the points and also how to increase the span of operation to achieve EOS.

Revenue:

Total Revenue= Price/unit* Quantity

Average Reveneue= Total Reveneue/Quantity= Price/unit* Quantity/Quantity= Price/Unit.

Marginal Revenue= change in Total Revenue/change in Quantity : MR is the change in the total revenue when the quantity sold rises by one unit.

when the firm is price taker: Huge competition and the competition for us to buy the same product is bought us as every seller is a price taker.

In that case, TR , quantity is changed and price/unit remains the same.

Horizontal curve AR and MR.

TR is on Y axis, Quantity is on X axis, its a straight line going from the origin.

AR : TR/Q

AR is nothing but the price when firm is price taker.

MR= change in Total Revenue/change in Quantity

MR is same as AR hence the horizontal curve.

Revenue curves when price varies with the output(downward sloping demand curve)

when the firm has some power in the market that is monopoly player in the entire market. Also if we think price should not be only the criterion in buying decison for the item purchase, attempting to change the buying behaviour of the consumers.

In such case ,

AR : TR/Q

AR is price/unit

MR= change in Total Revenue/change in Quantity

MR is different from the AR. It is below the AR. At some point in time, it negative and zero as well.

TR : is goes up and then comes down.

Midpoint of the demand curve, price elasticity = unity: MR reaches Zero,

price elasticity>Q, elastic: MR is positive : RV

price elasticity <Q, inelastic : MR is negative: RV is declining

A monopolist would like to be in the elastic part in the demand curve.

Law of demand

Price elasticity of demand

Average revenue/cost

Inelastic

Demand is inelastic, then an increase in the price causes an increase in total revenue.

Elastic

Market’s equilibrium

Quiz

Law of demand

Price elasticity of demand

Average revenue/cost

Macroeconomics

Major issues

Factors of production

Stock concept

The circular flow of income

Shifts in demand curve

Monopoly

Oligopoly

Question paper

Nash equilibrium

Marginal

Budget Equation

Perfect competition

Demand equation and curve

Minimum wage

Short run

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