Managerial Economics & Accounting

III rd Sem IT
Unit IV

Presented By :Yashwant Misale (BE,MMS)

Faculty MBA Department (DMIETR)
 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 government
of P.V.Narsimha Rao and his finance minister Manmohan
Singh started breakthrough reforms.

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 Contd
 The new neo-liberal policies included opening for international trade
and investment, deregulation, initiation of privatization, tax reforms, 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 transform the economic
system from socialism to capitalism so that it could produce
high economic growth and industrialize the nation for the well-being of
Indian citizens. Today India is mainly characterized as a market
economy.
 The fruits of liberalization reached their peak in 2007, when India
recorded its highest GDP growth rate of 9%. With this, India became the
second fastest growing major economy in the world, next only to China.

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 Contd
 With this, India became the second fastest growing major
economy in the world, next only to China.
 An Organization for Economic Co-operation and
Development(OECD) report states that the average growth rate
7.5% will double the average income in a decade, and more
reforms would speed up the pace.
 Indian government coalitions have been advised to continue
liberalization.
 India grows at slower pace than China, which has
been liberalizing its economy since 1978. McKinsey states that
removing main obstacles "would free India’s economy to grow
as fast as China’s, at 10 percent a year"
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 International Trade/Foreign Trade
 International trade refers to a country’s 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 of
exports of goods & total payments on account of
imports of goods is called Balance Of Trade.

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 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 of
imports 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.

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 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 than
growth of exports .

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 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 which
leaves lesser surplus for exports

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 PRICE AND OUTPUT
DETERMINATION

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 Overview

• Classification of Markets
• Perfect Competition
• Monopoly
• Price output determination under Monopoly
• Monopolistic Competition
• Duopoly and Oligopoly

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 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

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 Concepts to refresh
• What is AC and MC?

• What is MR and MC?

• Fixed Vs Variable Cost?

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 Perfect Competition-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

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 Price output determination under
Perfect Competition
• Market price is determined based on the
interaction of supply and demand.
Price in Demand Supply In State of Pressure
Rs in Units Units Market 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

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 Perfect Competition-Features
• The Industry is the price maker and the
firm is the price taker

• In this case Equilibrium price means AR

=MR

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Equilibrium of the Competitive firm in
the Short run
When MR=MC the equilibrium Output and
Price is determined.
For survival the firm has to cover atleast the
variable cost .
Therefore the price in the short run is equal to
variable cost.
If the price is lower than the AVC ,the firm is
compelled to stop Production.

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 Profits of the Competitive firm in the
Short run
When MR=MC the equilibrium Output and
Price is determined.
AR greater than AC then Super Normal
Profits for the firm
When AR=AC then Normal Profits for the
firm

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 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 may
go up in the near future to earn profits.

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 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.The
distance 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

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 Equilibrium of the Competitive firm in the
Long run
When MR=MC the equilibrium Output and
Price is determined.
The firm should produce that level of output
at Which MR=MC and MC Curve Cuts
MR curve from Below

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 Equilibrium of the Competitive firm in the
Long run
When AR is greater than AC there will be super
normal Profits and this lead to entry of new
firms
Result
Expansion in output
Increase in supply
Fall in Price
Fall in ratio of profits

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PRICE AND OUTPUT DETERMINATION UNDER
MONOPOLISTIC COMPETITON
 MONOPOLISTIC COMPETITION
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.”

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CHARACTERISTICS OF MONOPOLISTIC
COMPETITION
 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

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 DETERMINATION OF PRICE AND OUTPUT
UNDER MONOPOLISTIC COMPETITION
Firm under monopolistic competition
produces up to that limit where its
marginal cost is equal to marginal
revenue, (MC=MR) and MC curve cuts
MR curve from below. In case of
monopolistic competition, price and
equilibrium position of firm and group will
be studied in two parts: (1)Firm’s
equilibrium and (2) Group’s equilibrium.

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 EQUILIBRIUM OF THE FIRM

SHORT PERIOD LONG PERIOD

SUPER
NORMAL MINIMUM
NORMAL
NORMAL
PROFIT PROFIT LOSS PROFIT

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 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.

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 SUPER NORMAL PROFIT
Y
MC
AC
A
P
C B
REVENUE

E AR

M
O R X
M
OUTPUT
Firm is in equilibrium at point E, because at this point MC=MR. Point E indicates that the firm’s
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.

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 NORMAL PROFIT
Y MC

AC
A
P
REVENU
E
E
AR

MR
O
M X
OUTPUT
Firm 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.

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 Y
MINIMUM LOSS
LOSS SAC AVC
MC

P B
REVENUE A
P1

E MR=MC
AR
MR
O M X
OUTPUT
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 BAP 1P.

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 LONG PERIOD EQUILIBRIUM

Long period refers to that time period in

which output can be increased by making
changes in the 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.

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 NORMAL PROFIT
Y
LMC

LAC
A
REVENUE P

E MR=MC AR

MR

O X
M

OUTPUT

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 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
to LAC curve at point A which means AR=LAC.
Hence firms earns only normal profit.

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 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
 Comparison regarding price
 Comparison regarding profit
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 REVENUE CURVE UNDER REVENUES CURVES
Y Y UNDER MONOPOLISTIC
PERFECT COMPETITION
COMPETITION

AR=MR

REVENUE P REVENUE(RS.)

MR AR
O
O X OUTPUT X
OUTPUT

 Assumption regarding shape of demand curve

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 Comparison regarding output
LAC
Y Y LMC
LMC
LA
C P B
P E P A
AR=MR P
REVENUE 1
REVENUE
E AR
NORMAL
PROFIT
M
O X O R
Q M N X
OUTPUT OUTPUT

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COMPARISION BETWEEN MONOPOLISTIC
COMPETITION AND MONOPOLY

 Assumption regarding product

 Assumption regarding number of sellers
and buyers
 Assumption regarding entry
 Assumption regarding degree of
knowledge
 Implications regarding decisions
 Comparison regarding profit
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 REVENUE CURVES UNDER
REVENUE CURVES UNDER
MONOPOLISTIC
MONOPOLY COMPETITION
Y Y

REVENUE
REVENUE(RS.)
(RS.)

AR

MR AR MR

O O
X X
OUTPUT OUTPUT

 Different average and marginal revenue

curves
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 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.

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 Price Determined Under
Oligopoly

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The Term “Oligopoly” has been derived from two
Greek words.
‘Oligi’ which means few and ‘Polien’ means sellers.

Thus Oligopoly is an abridged version of

monopolistic competition . It is a competition
among few big sellers each one of them selling
either homogenous or hydrogenous products.

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 What are some examples of Oligopoly?

• Automobiles

• Steel

• Soup

• Cereals

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 What determines if a market is an
Oligopoly?

• The concentration ratio

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 What concentration ratio
constitutes an Oligopoly?

• There is no magic number, but if a large

percentage of the sales are from the 4 largest
firms, it’s an Oligopoly

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45
 What is an example of a high
concentration ratio?

• Out of 151 firms in the aircraft industry the

leading 4 constitutes 79% of total sales

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 Characteristics Of Oligopoly

• Few Sellers
• Homogeneous or Differentiated Product
• Interdependence :
• Importance of Advertising and Selling costs
• Price Rigidity
• Restriction to Entry

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47
 HOW PRICES ARE DETERMINED?

• Interdependent Pricing
• Price wars
• Price Leadership
• Formal Agreement : Cartel

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 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.

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 2. Price Wars

• Some economists assume that an oligopolistic is

able to predict the counter moves of his rivals,
and they provide a determinant solution to the
price and output problem.
• The objectives of price wars :
i. To seize the major part of the total sales
ii. To expand the monopoly power after victory
iii. To threaten the rivals so that they they accept its
leadership.
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 3. Price Leadership

• Another approach is that the firms in an Oligopoly

would accept one firm as a leader and would follow
him in setting prices. Such a leader firm may be
dominant or low-cost firm producing a very large
proportion of the total production and having 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
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 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

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 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 the
demand curve below the price level is
inelastic.
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 Game Theory

• A theory of strategy ascribed to a firm’s

behavior in oligopoly
• What is the Prisoner’s Dilemma?
- A series of individual choices within a
small group, each one’s choice effects the
outcome of the others.

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- An example of the Prisoner’s Dilemma is the
Payoff Matrix
Both Sam Sam confesses
and Bill confess and Bill doesn’t

Bill confesses Neither Sam

and Sam doesn’t nor Bill confesses
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 Cournot’s Duopoly Model
• Augustin Cournot, the French economist,
developed the earliest model of duopoly in 1838.
• Following assumptions are:
i. Two sellers
ii. Prefectly substitute commodity
iii. Indentical cost
iv. No entry
v. Absence of inter-dependence.

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 THANK YOU
Have A Nice Day

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