DEMAND

Demand is a relationship between two variables, price and quantity demanded, with all
other factors that could affect demand being held constant.
Willingness and able to buy: to participate in the market a consumer must not only be willing to buy a good
but also to be able to buy the good as well. For example, John may want to buy a Cadillac CTS. However
unless he has the cash or credit to consummate the purchase his unrealized desires are irrelevant.

demand curve
Law of demand states that, all other factors being equal, as the price of a good or service
increases, consumer demand for the good or service will decrease and vice versa.

The DEMAND CURVE is defined as the relationship between the prices of the good and
the amount or quantity the consumer is willing and able to purchase in a specified time
period, given constant levels of the other determinants--tastes, income, and prices of
related goods, expectations, and number of buyers.

Exception to the law of demand:

Law of demand States that there is an inverse relationship between the price of a good and the demand for
it. In particular, people generally buy more of good when the price is low and buy less when the price is
high. Sometimes the law of demand doesn’t apply in every case and situation. These situations are
referred to as exceptions to the general law of demand. Some of these exceptions are:
1. Giffen goods: Goods that people continue to buy even at high prices due to lack of substitute
products. An example of giffen good is inferior good like potatos, bread, vegetable oil etc… In
these cases, generally when the price falls, the real income or the purchase power of the
consumer increases, and this purchasing power is used to buy other superior goods. But during
the Irish potato famine of the 19 th century, potatos were the largest staple in the irish diet. So in
that case, even there was rice in price of potatos, people were compelled to buy more potatos
and thus the demand for potatosrose also.
2. Conspicuous consumption: This exception to the law of demand is associated with the doctrine
introduced by Thorsten Veblen. In this case, people tend to buy expensive goods to show off
their status or they have desire to own unusual or unique products to show that they are different
 from others (Snob effect). An example of Veblen goods is prestige goods like car, diamond
etc… The price of these goods is so higher, when people buy these kinds of goods that show the
higher prestige value of them. So when the price of these goods falls, the consumers think that
the prestige value of these goods comes down so they buy less and the quantity of demand of
these goods falls also.
3. Speculate products: shows a rise in prices is frequently followed by larger purchases and a fall
in prices by smaller purchases. When share prices rise, people expect further rise and rush to
buy. When prices falls, the wait for further fall and stop buying. This is specially applicable to
purchases of industrial materials.
4. Price illusion: there are certain consumers those who are always guided by the price of the
commodity. They always believe that higher price of good is a better quality good. Hence they
purchase large quality of high priced goods.
 CLASSIFICATION OF DEMAND
Demand is broadly classified as: -
1. Demand for consumer’s goods and producer’s goods - Consumers’ goods are directly used for
final consumption. Meanwhile, producers’ goods are used for further production of other goods,
which may either be in the form of consumers’ or producers’ goods.
2. Demand for perishable and durable goods - Consumers’ and producers’ goods are further classified
as perishable and non-durable goods. Those goods which can be consumed only once are known as
perishable goods, whereas the durable goods can be used more than once during a period of time.
3. Derived and autonomous demands - When the demand for a good is associated with another parent
good, it is called derived demand.
4. Firm and industry demands - Firm demand represents the demand for products of a single
company, while industry demand refers to the demand of an industry.
5. Demand by total market and by market segments - The total market demand for a product refers to
the total demand, while the demand arising from different segments of the market is market segment
demand.
6. Individual demand: it’s the quantity of commodity demanded by an individual consumer at a
particular price during a given period of time.
7. Market demand: It’s the total quantity of a commodity demanded by all the consumers in the
market during a given period of time.
8. Income demand: it indicates the relationship between income of the consumers and quantity of
demanded commodity. If income of consumer increase the demand of goods also increases and
vice-versa.
9. Joint demand:
When two or more commodities are jointly needed to satisfy a single want, then the demand for
such goods are said to be joint demand.
10. Composite demand:
When a commodity is demanded for a number of uses, then the demand for that commodity is said
to composite in nature.
11. Competitive demand:
When two goods are close substitutes of one another, then the demand for such goods is said to be
competitive in nature.
12. Derived demand:
When demand for a commodity gives rise to demand for another commodity, then it is said to be as
a derived demand.
13. Demand for Giffen goods:
It refers to some inferior goods which are demanded in smaller quantities when their price falls.
14. Direct demand:
Goods which yield direct satisfaction to a customer can be termed as the direct demand.
 Factors influencing demand
1. Price of the products.
2. Income of the buyer
3. Tastes, Habits and Preferences.
4. Relative prices of other goods
5. Relative prices of substitute and complementary products
6. Consumer’s expectations about future price of the commodity
7. Advertisement effect.
8. Distribution of Income and Wealth
9. Community’s common habits and scale of preferences
10. General standards of living of the people,
11. spending habits of the people
12. Number of buyers in the market
13. growth of population
14. Age structure and sex ratio of the population
15. Level of taxation and Tax structure
16. Inventions and Innovations
17. Fashions
18. Climate and weather conditions
19. Nature of goods
20. Customs
21. Foreign trade
22. e. Demonstration effect – Sometimes, a consumer is motivated to buy some commodity not because it
has become cheaper or the income has increased, but because the neighbours have purchased it. This is
also called as the “Bandwagon effect”. According to it, demand for X is determined not by its utility,
price or income, but by what other consumers in the society are doing. On the other hand, there are
also consumers who like to behave differently from the others. For instance, when all other consumers
buy more units of X when Px falls, such consumers prefer to buy less of X. This is known as the “Snob
effect”.
 ELASTICITY OF DEMAND
Demand usually varies with price. The extent of variation of demand is not uniform. Sometimes the
demand is greatly responsive to price changes, while at other times, it may be less responsive. Elasticity is the
extent of responsiveness to variation. Two factors are relevant for measuring the elasticity of demand – a)
demand b) the detriment of demand. A ratio is made of the two variables for measuring the elasticity
coefficient.
Elasticity of demand = % change in quantity demanded % change in detriment of demand
TYPES OF ELASTICITY OF DEMAND
1. Income Elasticity of Demand: Income elasticity of demand is defined as the ratio of percentage or
proportional change in the quantity demanded to the percentage or proportional change in income.
2. Cross elasticity of demand: The cross elasticity of demand refers to the degree of responsiveness of
demand for a commodity to a given change in the price of some related commodity. Cross elasticity of
demand between two goods is proportionate change in the quantity demanded of X divided by the
proportionate change in the price of Y.
3. Advertising or Promotional elasticity of demand: AEOD = proportionate change in Demand
divided by proportionate change in ad expenditure.
4. Price Elasticity of Demand: price elasticity of demand measures the responsiveness of the quantity
demand of a good when the price of that same good changes. We calculate the elasticity of demand by
measuring the percentage change in the quantity demand over the percentage change in price of that
good (% change in Qd / % change in price). In general, if the quantity demanded of a good is very
responsive to a change in the good's price, the good is considered to be elastic. In simpler terms, this
implies if we raise the price of an elastic good, there is a significant reduction in the consumption of
that good, and vise versa for a price decrease.
 Factors Affecting the Price Elasticity of Demand
1. Availability of substitutes: the more possible substitutes, the greater the elasticity. Note that the number
of substitutes depends on how broadly one defines the product.
2. Degree of necessity or luxury: luxury products tend to have greater elasticity. Some products that
initially have a low degree of necessity are habit forming and can become "necessities" to some
consumers.
3. Proportion of the purchaser's budget consumed by the item: products that consume a large portion of
the purchaser's budget tend to have greater elasticity.
4. Time period considered: elasticity tends to be greater over the long run because consumers have more
time to adjust their behavoir.
5. Permanent or temporary price change: a one-day sale will elicit a different response than a permanent
price decrease.
6. Price points: decreasing the price from $2.00 to $1.99 may elicit a greater response than decreasing it
from $1.99 to $1.98.
 Marshallian classification of Price elasticity:
1. Unit elasticity of demand (e = 1)
2. Elastic demand - elasticity greater than unity (e > 1)
3. Inelastic demand – elasticity is less than unity (e<1)
 Demand of products shall be Highly Elastic if:
1. if the good is a luxury
2. the longer the time period.
3. the larger the number of close substitutes.
4. the more narrowly defined the market.
 APPLICATIONS of Elasticity of Demand:
1. Effect of changing price on firm revenue
2. Analysis of incidence of the tax burden and other government policies
3. Analysis of advertising on consumer demand for particular goods
4. Analysis of consumption and saving behavior.
5. Income elasticity of demand can be used as an indicator of industry health, future
consumption patterns and as a guide to firms investment decisions.
6. BUSINESS DECISION MAKING: Decision - making is the crucial part of good
running business. Primary answer is good information, experience in interpreting information,
Consultation i.e. seeking the views and expertise of other people also comes handy, and the ability to
differentiate right and wrong and change one’s mind. There are also various techniques available
which help to make information clearer and better analysed, and to add better precision to decision –
making to reduce the amount of subjectivity.
TYPES OF BUSINESS DECISIONS:
a. Programmed Decisions: These are standard decisions which always follow the same routine. As
such, they can be written down into a series of fixed steps which anyone can follow. They could even
be written as computer program
b. Non-Programmed Decisions: These are non-standard and non-routine. Each decision is not quite the
same as any previous decision.
c. Strategic Decisions: These affect the long-term direction of the business eg whether to take over
Company A or Company B
d. Tactical Decisions: These are medium-term decisions about how to implement strategy eg what kind
of marketing to have, or how many extra staff to recruit
e. Operational Decisions: These are short-term decisions (also called administrative decisions) about
how to implement the tactics eg which firm to use to make deliveries.
 Cost Concepts
1. Actual cost: The actual cost incurred for acquiring or producing a good or service. Eg. Actual wages
paid, Cost of materials, etc.,
2. Past Costs: Cost incurred in the past and generally contained in the financial accounts
3. Future Costs: Costs that are reasonably expected to be incurred in some future period or periods.
4. Short –run Cost: The cost that vary with o/p when fixed plant and capital equipment remain the
same.
5. Long-run Cost: Vary with o/p when all i/p factors including plant and equipment vary.
6. Sunk cost: The cost once incurred cannot be retrieved.
7. Shut down cost: The costs which could b incurred in the event of suspension of the plant operation
and which would be saved if the operations are continued
8. Abandonment costs: Retiring altogether a plant from service.
9. Urgent Cost: The costs that incurred in order to continue the operations of the firm; Ex: Cost of
materials and Labour
10. Postponable Cost: Cost which can be postponed for sometime; Example: : Maintenance relating to
Building andMachinery
11. Out of Pocket Cost: It refers to the costs that involve current cash payments to outsiders; Example:
salaries paid to the administrative staff, Electric bill
12. Book Costs: It doesn’t require don’t require current cash payments. Book costs can be converted into
out- of- pocket costs by selling the assets and having them on hire. Rent would replace depreciation
and interest
13. Escapable Cost: It refers to costs which can be reduced due to contraction in the activities of a
business enterprise Ex 1.Closing an unprofitable branch &2. Reducing credit sales
14. Historical Cost: It is the cost of a plant at a price originally paidfor it.
15. Replacement Cost: It means the price that would have to be paid currently for acquiring the same
plant; Example: If the price of the machine at the time of purchase say in 1974 was Rs.15,000 and if
the present price.
16. Controllable cost: The costs which can be controlled by an executive on whom the responsibility of
the cost is vested Ex: Direct material and labour cost
17. Non-Controllable Cost: These cannot be controlled and beyond regulation; Example: Overhead cost
18. Direct Cost: Identified easily and indisputably with a unit of operation
19. Indirect cost: The cost that are not traceable. Examples: Common Production cost or Cost of
Multiple Products; Some manufacturing process two or more products emerge from a single raw
material
20. Joint and Alternative Cost: When an increase in the production of one product causes an increase in
the output of other product it is joint cost; When an increase in the o/p of a product is accompanied by
the reduction in other products the products are alternative. Example:Slag and steel –joint .Steelrails
and steel bars- alternative.
21. Fixed Cost: It remains constant in total regardless of changes in volume upto a certain level of o/p.
They will have to be incurred eventhe o/p is nil. If the total production increases fixed costs per unit
will go down and vice versa.
22. Variable cost: Total variable cost vary in direct proportion tochanges in volume. There is linear
relationship between the volume and total variable cost.
23. Semi-Variable cost: Many costs fall between two extremes of being .fixed or variable
24. Mixed Costs: Contain fixed portion that is incurred even when facility is unused & variable portion
that increases with usage. Example: monthly electric utility charge
A. Average Fixed Cost: Afc =ri (Total Fixed Cost ) / (Output)
B. Average Variable Cost: Avc = (Total Variable Cost ) / (Output )
C. Average Total Cost: Atc = ( Total Cost ) / ( Output )
D. Marginal Cost: Mc = (Chg In Total Cost)/( Chg In Output
 Cost-output relationship in the short run
The short run is a period which does not permit alterations in the fixed equipment (machinery, buildings, land
etc) and the size of the organization. As such, if any increase in output is desired, it is possible within the
range permitted by the existing fixed factors of production.
In the short run, because at least one factor of production is fixed, output can be increased only by adding
more variable factors. Hence we consider both fixed and variable costs in the short run.
Fixed costs: Fixed costs are business expenses that do not vary directly with the level of output i.e. they are
treated as independent of the level of production. Examples of fixed costs include the rental costs of buildings;
the costs of leasing or purchasing capital equipment such as plant and machinery; the annual business rate
charged by local authorities; the costs of full-time contracted salaried staff; the costs of meeting interest
payments on loans; the depreciation of fixed capital (due solely to age) and also the costs of business
insurance.

Fixed costs are the overhead costs of a business. They are important in markets where the fixed costs are high
but the variable costs associated with making a small increase in output are relatively low.
 Total fixed costs (TFC) remain constant as output increases
 Average fixed cost (AFC) = total fixed costs divided by output
Average fixed costs must fall continuously as output increases because total fixed costs are being spread over
a higher level of production. In industries where the ratio of fixed to variable costs is extremely high, there is
great scope for a business to exploit lower fixed costs per unit if it can produce at a big enough size. Consider
the new Sony portable play station. The fixed costs of developing the product are enormous, but these costs
can be divided by millions of individual units sold across the world.
A change in fixed costs has no effect on marginal costs. Marginal costs relate only to variable costs.
Variable Costs: Variable costs are costs that vary directly with output. Examples of variable costs include the
costs of intermediate raw materials and other components, the wages of part-time staff or employees paid by
the hour, the costs of electricity and gas and the depreciation of capital inputs due to wear and tear. Average
variable cost (AVC) = total variable costs (TVC) /output (Q).
Variable costs are those associated with changes in short run production .
Average Total Cost (ATC or AC): Average total cost is simply the cost per unit produced
Average total cost (ATC) = total cost (TC) / output (Q)
Marginal Cost: Marginal cost is the change in total costs from increasing output by one extra unit.
The marginal cost of supplying an extra unit of output is linked with the marginal productivity of labour. The
law of diminishing returns implies that the marginal cost of production will rise as output increases.
Eventually, rising marginal cost will lead to a rise in average total cost. This happens when the rise in AVC is
greater than the fall in AFC as output (Q) increases.
Worked example of short run production costs
A simple numerical example of short run costs is shown in the table below.
OUTPUT TC AC MC
1 100 100 100
2 190 95 90
3 270 90 80
4 360 90 90
5 500 100 140
6 660 110 160
7 840 120 180
8 1080 135 240

In the above table, it can be observed that both the AC and MC are diminishing at the first instance. However,
the rate of decline of AC is more than the rate of decline of MC. When the output reaches 3 and 4, AC
remains stagnant, and when the output is 4, MC equals AC. The AC curve is U-shaped indicating the decline
of AC at the first instance, then reaching a stagnant level, and then starting to rise. Similarly, MC also starts
with a declining trend, then equals the AC at the minimum point, and then starts to rise, at an increasing pace
than the AC.
Short Run Cost Curves:
When diminishing returns set in (beyond output Q1) the marginal cost curve starts to rise. Average total cost
continues to fall until output Q2 where the rise in average variable cost equates with the fall in average fixed
cost. Output Q2 is the lowest point of the ATC curve for this business in the short run. This is known as the
output of productive efficiency.

A change in variable costs: A rise in the variable costs of production leads to an upward shift both in marginal
and average total cost. The firm is not able to supply as much output at the same price. The effect is that of an
inward shift in the supply curve of a business in a competitive market.
An increase in fixed costs has no effect at all on variable costs of production. This means that only the average
total cost curve shifts. There is no change at all on the marginal cost curve leading to no change in the profit
maximizing price and output of a business. The effects of an increase in the fixed or overhead costs of a
business are shown in the diagram below.
 PRODUCTION FUNCTIONS
The term “production function” refers to the relationship between the inputs and outputs produced by them.
 PRICING
In business, a systematic approach is required in pricing the commodities produced, and decision making in
this respect is very important, as it leads to a permanent source of revenue to the business, and also survival in
the venture. Again, it is the most important device for the firm to expand its market. If the price U set at too
low a level, the firm may not cover its costs, or at any rate fall short of what it could be. Hence, setting prices
is a complex problem and there is no formula for fixing the prices. It depends on various situations and the
environment of business. Taking all these situations into consideration, business firm has to meet the pricing
in a generalised and codified policy. Generally the pricing policy of a firm should be tailored to various
competitive conditions.

Conditions for Price Discrimination

The main conditions of Price discriminations are:
1. Multiple Demand Elasticity’s: There must be difference in demand elasticities among buyers due to
differences in income, location, available alternatives, tastes or other factors.
2. Market Segmentation: The seller must be able to partition (segment) the total market by segregating
buyers into groups according to elasticity.
3. Market sealing: The seller must be able to prevent, or natural circumstances must exist which will prevent
any significant resale of goods from the lower to the higher price sub-market.
 Objectives of Price Discrimination
The objectives of price discrimination are:
1. To appropriate the consumer’s surplus so that it accrues to the producer rather than to the consumer.
2. To dispose of occasional surplus.
3. To develop a new market.
4. To make the maximum use of the unutilized capacity.
5. To earn monopoly profits.
6. To enter into or retain export markets.
7. To destroy or to forestall competition or to make the competitors amenable to the wishes of the seller
adopting price discrimination. It may be called predatory or discriminatory competition.
8. To raise future sales. This is done by quoting lower rates in the present so that people develop in
future a taste for the allied commodities produced by the same manufacturer.
 TYPES OF PRICE DISCRIMINATION:
1. First degree price discrimination: In first degree price discrimination, price varies by customer's
willingness or ability to pay. This arises from the fact that the value of goods is subjective. A
customer with low price elasticity is less deterred by a higher price than a customer with high price
elasticity of demand. As long as the price elasticity for a customer is less than one, it is very
advantageous to increase the price: the seller gets more money for fewer goods. With an increase of
the price elasticity tends to rise above one. One can show that in the optimum the price, as it varies by
customer, is inversely proportional to one minus the reciprocal of the price elasticity of that customer
at that price. This assumes that the consumer passively reacts to the price set by the seller, and that the
seller knows the demand curve of the customer. In practice however there is a bargaining situation,
which is more complex: the customer may try to influence the price, such as by pretending to like the
product less than he or she really does or by threatening not to buy it.
2. Second degree price discrimination: In second degree price discrimination, price varies according to
quantity sold. Larger quantities are available at a lower unit price. This is particularly widespread in
sales to industrial customers, where bulk buyers enjoy higher discounts.
Additionally to second degree price discrimination, sellers are not able to differentiate between
different types of consumers. Thus, the suppliers will provide incentives for the consumers to
differentiate themselves according to preference. As above, quantity "discounts", or non-linear
pricing, is a means by which suppliers use consumer preference to distinguish classes of consumers.
This allows the supplier to set different prices to the different groups and capture a larger portion of
the total market surplus.
In reality, different pricing may apply to differences in product quality as well as quantity. For
example, airlines often offer multiple classes of seats on flights, such as first class and economy class.
This is a way to differentiate consumers based on preference, and therefore allows the airline to
capture more consumer's surplus.
3. Third degree price discrimination: In third degree price discrimination, price varies by attributes
such as location or by customer segment, or in the most extreme case, by the individual customer's
identity; where the attribute in question is used as a proxy for ability/willingness to pay.
Additionally to third degree price discrimination, the supplier(s) of a market where this type of discrimination
is exhibited are capable of differentiating between consumer classes. Examples of this differentiation are
student or senior discounts. For example, a student or a senior consumer will have a different willingness to
pay than an average consumer, where the reservation price is presumably lower because of budget constraints.
Thus, the supplier sets a lower price for that consumer because the student or senior has a more elastic price
elasticity of demand (see the discussion of price elasticity of demand as it applies to revenues from the first
degree price discrimination, above). The supplier is once again capable of capturing more market surplus than
would be possible without price discrimination.
Note that it is not always advantageous to the company to price discriminate even if it is possible, especially
for second and third degree discrimination. In some circumstances, the demands of different classes of
consumers will encourage suppliers to ignore one or more classes and target entirely to the rest. Whether it is
profitable to price discriminate is determined by the specifics of a particular market.
 EXAMPLE ON PRICE DISCRIMINATION
There is a good example on price discrimination which happens in day to day routine
Suppose u have some health related problem and you know the medicine which is been prescribed by the
doctor. And the medicine comes in regular strength and extra strength. The only difference in regular and
extra strength is regular is 200mg and extra is 300 mg and all the things are same .And you take regular
strength 3 times a day and extra strength 2 times a day overall you are taking 600mg in whole day. But there
is difference in price between these two versions where regular strength comes for 50Rs and the extra
strength comes for 85Rs . By introducing the extra strength version the company was able to charge more for
an identical product, to people with more money who do not read boxes too carefully
This examples shows that two same things can be sold at different prices in the market.
 market
A market is a place where commodities are bought and sold at retail or wholesale prices. In economics,
however, the term “market” does not refer to a particular place as such but it refers to a market for a
commodity or commodities. Thus, the market is an arrangement whereby buyers and sellers come in close
contact with each other directly or indirectly; to sell and buy goods is described as market. Hence, the term
“market” is used in economics in a typical and a specialized sense. They are:
1. It does not refer only to a fixed location. It refers to the whole area of operation of demand and
supply.
2. It refers to the conditions in which transactions between buyers and sellers take place.
3. A group of potential sellers and potential buyers are required at different places for creating market
for a commodity.
4. Markets may be physically identifiable, e.g., the cutlery market in Pondicherry situated at Jawaharlal
Nehru Street.
5. Existence of different prices for a specific commodity means existence of different markets.
 Classification of Markets
I. Markets on the basis of time
1. Very short-period market
2. Short-period market
3. Long-period Market
4. Very long-period or secular market
II. Market on the basis of regulation
III. Market on the basis of Goods Dealt: Markets may be classified into two. They are:
1. Product market: A ‘product market’ or ‘commodity market’ refers to an arrangement in effecting
buying and selling of commodities. In fact, each commodity has its market. Thus, we speak of the
cotton market, the wheat market, the rice market, etc. Markets for precious metals such as gold
and silver are called the bullion exchanges or bullion markets. Markets for capital change such as
government securities bonds, shares, etc., are called the Stock Exchange.
2. Factor market: Factor markets are markets in which factors of production such as land, labour and
capital are transacted. There are, markets called labour market, land market, and capital market.
The households or the consumers are the buyers in the product markets. Their demand is the
direct demand for the consumption goods. The firms or the producers are the buyers in the factor
markets. Their demand for productive resources or factors or production is a derived demand. In
the product market, the commodity price of a specific commodity is determined individually in
the concerned commodity market by the interaction society. Factor prices such as rent of land,
wages of labour and interest for capital are determined in the factor markets as the price of each
factor is determined by the interaction between its demand and supply in its respective market.
Thus, factor markets, facilitate distribution of income in the form of rents wages, interest and
profits.
IV. Markets based on geographical area:
1. Local markets: Markets pertaining to local areas are called local markets. When commodities are
bought and sold at one place or in one locality only, then it is known as local markets.
2. Regional markets: Goods are sold within a particular region, is known as regional market. For
example, most of the films produced in regional languages in India have their regional markets only.
3. National markets: Goods in a National market are demanded and sold on a nationwide scale. A large
number of items such as TV sets, cars, scooters, fans, vanaspati ghee, cosmetic products, etc.,
produced by big companies have national markets. A good network of transport and communication
and banking facilities are required in promoting national markets.
4. World markets: In world markets goods are traded internationally. In international markets, goods are
exchanged between buyers and sellers from different countries and we use the terms “exports” and
“imports” of goods.
VI. Type of market structures formed by the nature of competition: Traditionally the nature of competition is
adopted as the fundamental criterion for distinguishing different types of market structure. The degree of
competition may vary among the sellers as well as the buyers in different market situations. Usually, the
market structures are classified in accordance with the nature of competition among the sellers. The nature of
competition among the sellers is viewed on the basis of two major aspects: (1) the number of firms in the
market; and (2) the characteristics of products, such as homogeneous or differentiated. On supply side of the
market, the main types of market are:
1. PERFECT COMPETITION: Perfect competition in economic theory has a meaning diametrically
opposite to the everyday use of the term. In practice, businessmen use the word competition as
synonymous to rivalry. In theory, perfect competition implies no rivalry among firms. Perfect
competition, therefore, can be defined as a market structure characterised by a complete absence of
rivalry among the individual firm.
2. Imperfect Competition: Number of sellers are restricted.
 FEATURES OF PERFECT COMPETITION
1. Large number of buyers and sellers: There must be a large number of firms in the industry. Each
individual firm supplies only a small part of the total quantity offered in the market. As a result, no
individual firm can influence the price. Similarly, the buyers are also numerous. Hence, no individual
buyer has any influence on the market price. The price of the product is determined by the collective
forces of industry demand and industry supply. The firm is only a 'price taker'. Each firm has to adjust
its output or sale according to the prevailing market price.
2. Homogeneity of products: In a perfectly competitive industry, the product of any one firm is
identical to the products of all other firms. The technical characteristics of the product as well as the
services associated with its sale and delivery are identical.
3. Free entry & exit: There is no barrier to entry or exit from the industry. Entry or exit may take time
but firms have freedom of movement in and out of the industry. If the industry earns abnormal profits,
new firms will enter the industry and compete away the excess profits. Similarly, if the firms in the
industry are incurring losses some of them will leave the industry which will reduce the supply of the
industry and will thus raise the price and wipe away the losses.
4. Absence of government regulation: There is no government intervention in the form of tariffs,
subsidies, relationship of production or demand. If these assumptions are fulfilled, it is called pure
competition which requires the fulfilment of some more condition.
5. Perfect mobility of factors of production: The factors of production are free to move from one firm
to another throughout the economy. It is also assumed that workers can move between different jobs.
Raw materials and other factors are not monopolised and labour is not unionised. In short, there is
perfect competition in the factor market.
6. Perfect knowledge: It is assumed that all sellers and buyers have complete knowledge of the
conditions of the market. This knowledge refers not only to the prevailing conditions in the current
period but in all future periods as well. Information is free and costless. Under these conditions
uncertainty about future developments in the market is ruled out.
7. Absence of transport costs: In a perfectly competitive market, it is assumed that there are no
transport costs.
 MONOPOLY
The term monopoly is derived from Greek words 'mono' which means single and 'poly' which means seller.
So, monopoly is a market structure, where there only a single seller producing a product having no close
substitute.
Causes of Monopoly
Monopoly may arise due to the following reasons:
1. The Government may grant a license to any particular person or persons for operating
public utilities like a gas company or an electricity undertaking.
2. A producer may possess certain scarce raw materials, patent rights, secret methods of
production, or specialized skill which might give him monopoly power. For example,
Hoechst held a monopoly for some time in oral medicines for diabetes because they
were the first to find out the methods of reducing blood sugar by an oral dose.
3. The necessity of having large resources, as is the case where the minimum efficient
scale of operations is very large, may often create monopoly. For example, it is so for
making some chemicals.
4. Ignorance, laziness and prejudice of the buyers may create monopoly in favor of a
particular producer.
 FEATURES OF MONOPOLIST:
1. This single seller may be in the form of an individual owner or a single partnership or a Joint
Stock Company. Such a single firm in market is called monopolist.
2. Monopolist is price maker and has a control over the market supply of goods. But it does not
mean that he can set both price and output level.
3. A monopolist can do either of the two things i.e. price or output. It means he can fix either price or
output but not both at a time.
4. A monopolist may arise due to economies of scale, barriers to entry, or governmental
regulation.
5. In such an industry structure, the producer will often produce a volume that is less than the amount
which would maximize social welfare.
6. Profit Maximiser: Maximizes profits.
7. Price Maker: Decides the price of the good or product to be sold.
8. High Barriers to Entry: Other sellers are unable to enter the market of the monopoly.
9. Single seller: In a monopoly there is one seller of the good that produces all the output.Therefore, the
whole market is being served by a single company, and for practical purposes, the company is the
same as the industry.
10. Price Discrimination: A monopolist can change the price and quality of the product. He sells more
quantities charging less price for the product in a very elastic market and sells less quantities charging
high price in a less elastic market.
 Types of Monopoly:
1. Perfect Monopoly: It is also called as absolute monopoly. In this case, there is only a single seller
of product having no close substitute; not even remote one. There is absolutely zero level of competition.
Such monopoly is practically very rare.
2. Imperfect Monopoly: It is also called as relative monopoly or simple or limited monopoly. It
refers to a single seller market having no close substitute. It means in this market, a product may have a
remote substitute. So, there is fear of competition to some extent.
E.g: Mobile (Cell phone) telecom industry (e.g. voda phone) is having competition from fixed landline
phone service industry (e.g. BSNL).
3. Private Monopoly: When production is owned, controlled and managed by the individual, or
private body or private organization, it is called private monopoly. e.g. Tata, Reliance, Bajaj, etc. groups in
India. Such type of monopoly is profit oriented.
4. Public Monopoly: When production is owned, controlled and managed by government, it is
called public monopoly. It is welfare and service oriented. So, it is also called as 'Welfare Monopoly' e.g.
Railways, Defense, etc.
5. Simple Monopoly: Simple monopoly firm charges a uniform price or single price to all the
customers. He operates in a single market.
6. Discriminating Monopoly: Such a monopoly firm charges different price to different customers
for the same product. It prevails in more than one market.

7. Legal Monopoly: When monopoly exists on account of trade marks, patents, copy rights,
statutory regulation of government etc., it is called legal monopoly. Music industry is an example of legal
monopoly.
8. Natural Monopoly: It emerges as a result of natural advantages like good location, abundant
mineral resources, etc. e.g. Gulf countries are having monopoly in crude oil exploration activities because of
plenty of natural oil resources
9. Technological Monopoly: It emerges as a result of economies of large scale production, use of
capital goods, new production methods, etc. E.g. engineering goods industry, automobile industry, software
industry, etc.
10. Joint Monopoly: A number of business firms acquire monopoly position through
amalgamation, cartels, syndicates, etc, it becomes joint monopoly. e.g. Actually, pizza and burger making
firm are competitors of each other in fast food industry. But when they combine their business that leads to
reduction in competition. So they can enjoy monopoly power in market.
 Advantages of monopoly
2. Monopolies can afford to invest in latest technology and machinery in order to be
efficient and to avoid competition. Monopoly avoids duplication and hence wastage
of resources.
3. A monopoly enjoys economics of scale as it is the only supplier of product or service
in the market. The benefits can be passed on to the consumers.
4. Due to the fact that monopolies make lot of profits, it can be used for research and development and
to maintain their status as a monopoly.
5. Monopolies may use price discrimination which benefits the economically weaker sections of the
society. For example, Indian railways provide discounts to students travelling through its network.

Disadvantages of monopoly
1. Poor level of service.
2. No consumer sovereignty.
3. Consumers may be charged high prices for low quality of goods and services.
4. Lack of competition may lead to low quality and out dated goods and services.
 Monopsony
Monopsony is a market situation in which there is only one buyer. The main features of monopsony are:-
1. There is only one buyer of the goods or service.
2. Rivalry from buyers who offer substitutive outlets is so remote as to be insignificant.
3. As a result, the buyers is in a position to determine the price he pays for the goods or
services be buys.
 MONOPOLISTIC COMPETITION
Monopolistic competition refers to a market situation in which there are many producers producing goods
which are close substitutes of one another. The
Distinguishing characteristics of monopolistic competition are:
1. Product Differentiation,
2. existence of many firms supplying the market, and
3. the goods made by them are close substitutes.
 OLIGOPOLY
When more than two or a few sellers are found in a monopolistic position is called Oligopoly.
Important characteristics of an oligopolistic situation are:
1. Every seller can exercise an important influence on the price-output policies
of his rivals.
2. Every seller is so influential that his rivals cannot ignore the likely adverse
effect on them of a given change in the price-output policy of any single
manufacturer.
3. The rival consciousness on the part of the seller of the fact of
interdependence is the most important feature of oligopolistic situation.
4. The demand curve under oligopoly is indeterminate, due to the fact that any
step taken by his rivals may change the demand curve.
5. The demand curve under oligopoly are more elastic than under simply
monopoly and not perfectly elastic as under perfect competition.
 DUOPOLY
It is a market condition in which two monopolists are operating.
Duopoly may be of two types:
1. Duopoly without Product Differentiation: Under duopoly the
simplest cases will be those selling an identical commodity and there
is no product differentiation and there will be collusion between the
two duopolists. They may agree on a price assign quotas and divide
the territory in which each is to market his goods. In case, if, there is
no agreement between the two, a constant price war will be the most
probable consequence. The important factors to be considered in this
context will be the costs and gains in driving out the rival, the
relative sizes of the two firms, the demand elasticity and mobility of
the purchasers, the promptitude with which the rival reacts to
changes in the other’s policy and the extent to which price
concession can be kept secret, and so on.
2. Duopoly with Product Differentiation: There is no fear of immediate
retaliatory measures by the rivals. If one producer changes his price-
output policy, there is less danger of price-war. The firm with better
products can earn supernormal profits.
 OLIGOPOLY
Oligopoly is a market situation comprising only a few firms in a given line of production. The price and
output policy of oligopolistic firms are interdependent. The oligopoly model fits well into such industries as
automobile, manufacture of electrical appliances etc. in our country. In an Oligopolistic market, the firms may
be producing either homogenous products or product differentiation in a given line of production. The
following are the distinguishing features of an oligopolistic market:-
1. Few Sellers: Homogeneous or differentiated products
supplied by a few firms.
2. Interdependence: Firms have a high degree of dependence
in their business policies, price and output fixation.
3. High cross elasticity’s: Firms under oligopoly have high
degree of cross elasticity’s and are always in fear of retaliation by rivals. Firms consider the possible action
and reaction of its competitors while making changes in price or output.
4. Incurring advertisement expenditure: Each firm tries to
attract customers towards its product by incurring excessive advertisement expenditure. It is only under
oligopoly that advertising comes fully into its own.
5. Constant struggle: Competition in Oligopoly consists of
constant struggle of rivals against rivals and is unique.
6. Lack of uniformity: There is lack of uniformity in the size
of different oligopolies. • Lack of certainty: In oligopolistic competition firms have two conflicting motives –
1) to remain independent in decision making and 2) to maximize profits despite being interdependent. To
pursue these ends, they act and react to the price-output variation of one another in an unending atmosphere
of uncertainty.
7. Price rigidity: Each firm sticks to its own price due to
constant fear of retaliation from rivals in case of reduction in price. The firm rather resorts to non-price
competition by advertising heavily.
8. Kinked Demand Curve: According to Paul Sweezy, firms
in an oligopolistic market, have a kinky demand curve for their products.
 Wages
The term wages means payments made for the services of labour. A wage may be as a sum of money paid
under contract by an employer to a worker for services rendered. A wage is a form of remuneration paid by an
employer to an employee calculated on some piece or unit basis. Compensation in terms of wages is given to
workers and compensation in terms of salary is given to employees. Compensation is a monetary benefit
given to employees in return for the services provided by them.
WAGE DIFFERENTIALS
In practice, wage rates differ enormously. The average wage is as hard to define as the average person. A
hedge-fund manager may earn 400 million a year, while a hedge-fund junior may earn 400 a week. A doctor
may earn 20 times more than a lifeguard even though both are saving lives. There are major differences in
earnings among broad industry groups. Sectors with small firms such as farming, retail trade, or private
households tend to pay low wages, while the larger firms in manufacturing pay twice as much. But within
major sectors there are large variations that depend on worker skills and market conditions-fast-food workers
make much less than doctors even though they all provide services.
There has to be a difference in the wage of men/women in the same organization/firm based on their work
experience and rank. It is essential to maintain a wage difference to indicate that with more wage come more
responsibility in the organization/firm.
 Causes for Wage Differentials
Waging depends on the market conditions. Wage has to be maintained at par with the wage given in similar
organisations . This has to be done to have good employee retention. Employing an employee is considered as
an investment to increase the productivity of the organisation. A good employee is considered as an asset to
the organisation . Further, promoting a good employee has to be done to over a period of time to have
employee retention.
The main causes which create differences in wages in different employments are:-

1. Difference in efficiency: These may be due to different inborn qualities, education, training, and
conditions under which work is performed. Hence, wages should vary according to efficiencies.
2. Existence of Non-competing Groups: The non-computing groups arise due to the difficulties in the
way of mobility of labour from low-paid to high-paid employments. These difficulties may be due to
geographical, social or economic reasons. Besides, they may arise from lack of transport facilities,
existence of family ties and caste barriers.
3. Difficulty of Learning a Trade: The number of those who can master difficult trades is small. Their
supply is inelastic less than demand for them and their wages are normally will be higher.
4. Future Prospects: An occupation provides opportunities for future promotion, then people will
accept a lower pay, as against another occupation offering higher initial rewards where chances of rise
in future are less.
5. Nature of Job: Hazardous and dangerous occupations generally offer higher emoluments.
6. Regularity of Job: Regularity or irregularity of employment also exerts a strong influence on the
level of wages.
7. Collective Bargaining: The differences in the strength and militancy of trade unions also account for
differences in wages in different industries.
8. Difference in efficiency: Every person efficiency differs from each other because of inborn quality,
education, working condition and so on. Hence, wages should vary according to efficiencies.
9. Sex: Man and woman are physically different. So there wages are different.
10. Firm size: Firm size also effect wages. Big firms give more wages than smaller one.
11. Age: Age also influences on wages.