The recent empirical studies have found that the short-run average variable cost curve has a saucer-type shape rather than U-shape of the traditional economic theory. The saucer-type shape of the average variable cost curve implies that there is a flat stretch over a certain range of output in it. It has been pointed out that [&hellip;]

Reserve Capacity

Q = F (L, K) Types of Production Function Short-Run Production Function: Long-Run Production Function

Production Function

Principal: Individual who employs one or more agents to achieve an objective. Agent: Individual employed by a principal to achieve the principal’s objective. A principal–agent problem arises when agents pursue their own goals rather than the goals of the principal. The Principal–Agent Problem in Private Enterprises Most large companies are controlled by management. Individual stockholders, [&hellip;]

Principal–Agent Problem

As knowledge of new and more efficient methods of production becomes available, technology changes. Furthermore, new inventions may result in the increase of the efficiency of all methods of production. Advance in technological knowledge that enables the firms to produce more output with the same quantities of inputs is called optimal techniques of production or [&hellip;]

Optimal Techniques of Production

The Production-Possibility Curve of The Firm Each product (X and Y) is assumed to be produced by two factors, L and K. For each product we have a production function; X = f1 (L, K) Y = f2 (L, K) Each production function may be presented by a set of isoquants with the usual properties. [&hellip;]

Multi Product Firms

Assumptions of the law: (i) The firm operates in the short run. (ii) There is no change in technology of production. (iii) The production process allows the different factor ratios to produce different levels out output. (iv) All the units of variable factor are equally efficient. (v) Full substitutability of factors of production is not [&hellip;]

Law Of Variable Proportions

When a fall in the price of one of the two variable factors leads to the decline in the quantity purchased of the other factor, the two factors are said to be substitutes of each other in production. In case of substitute factors, the increase in the use of one factor actually reduces the marginal [&hellip;]

Factor Price Changes and Effects

The expansion path describes the combinations of labour and capital that the firm will choose to minimize costs at each output level. As long as the use of both labour and capital increases with output, the curve will be upward sloping. Fig. 1 In Fig. 1 , the expansion path (from the origin through points [&hellip;]

Expansion Path and Long Run Cost

In the theory of production, we are concerned with the elasticity of substitution between factors (or inputs) in the production of goods. Thus, in the theory of production we are concerned with what may be called elasticity of technical substitution. The relative change in the factor-proportions (or input ratios) as a consequence of the relative [&hellip;]

Elasticity of Input Substitution

Economies of Scope arise when production of different products within one firm leads to the lower average cost of production than if they were produced in independent firms. In general, economies of scope are present when the joint output of a single firm is greater than the output that could be achieved by two different [&hellip;]

Economies and Diseconomies of Scope

As output increases, the firm’s average cost of producing that output is likely to decline, at least to a point. This can happen for the following reasons: 1. If the firm operates on a larger scale, workers can specialize in the activities at which they are most productive. 2. Scale can provide flexibility. By varying [&hellip;]

Economies and Diseconomies of Scale

The concept of moral hazard applies not only to problems of insurance, but also to problems of workers who perform below their capabilities when employers cannot monitor their behaviour (“job shirking”). In general, moral hazard occurs when a party whose actions are unobserved affects the probability or magnitude of a payment. For example, if I [&hellip;]

Moral Hazard

Adverse selection arises when products of different qualities are sold at a single price because buyers or sellers are not sufficiently informed to determine the true quality at the time of purchase. As a result, too much of the low-quality product and too little of the high-quality product are sold in the marketplace. To understand [&hellip;]

Adverse Selection Problem

EFFECT OF PRICE CHANGES: Let us consider, what happens to the consumption of food and clothing when the relative prices of food changes. As Figure 1 (a) shows, the consumption of clothing may either increase or decrease. The consumption of both food and clothing can increase because the decrease in the price of food has [&hellip;]

Effects of Changes in Relative Prices and Money Incomes

Uncertainty Theory of Profit Criticism: Knight’s theory of profit is more elaborate than other theories, because it combines the conception of risk, of economic change and of the role of businessmen’s ability.

Uncertainty Theory of Profit

Risk Theory of Profit

Ricardian Theory of Rent Intensive Cultivation: A farmer with a given piece of land keeps on engaging more and more workers as long as the marginal revenue product (MRPL) exceeds market wage rate. Criticism Ricardo’s theory has been criticized on several grounds:

Ricardian Theory of Rent

Modern Theory of Wages Modern theory of wages regards wages as a price of labour. A labour sells his services, which is utilized as a factor in the process of production. According to this approach also wages are determined by the interaction of market forces of demand and supply of labour. To further understand this [&hellip;]

Modern Theory of Wages

Modern Theory of Rent

Marginal Productivity Theory of Wages: Assumptions: Diagrammatic Representation: Explanation:

Marginal Productivity Theory of Wages

Loanable Fund Theory of Interest Demand for Loan-able Funds: The demand for loanable funds has primarily three sources: Supply of Loanable Funds: Determination of Interest Rate: Criticisms:

Loanable Fund Theory of Interest

Classical Theory of Interest Demand for Capital: Supply of Capital: Equilibrium Rate of Interest: Criticisms: The theory of Interest of the classical economists has been severely criticised by Keynes and others. The important criticisms are as under: 1. Interest is purely a monetary phenomenon: According to Keynes—Interest is purely a monetary phenomenon, a payment for [&hellip;]

Classical Theory of Interest

Meaning, Definitions, Nature &amp; Scope Of Economics MEANING AND DEFINITIONS OF ECONOMICS The&nbsp; word&nbsp; &#8216;Economics&#8217;&nbsp; has&nbsp; been&nbsp; derived&nbsp; from&nbsp; two&nbsp; Greek&nbsp; words&nbsp; ‘Oikos’&nbsp; (meaning&nbsp; a house)&nbsp; and&nbsp; ‘Nemein’&nbsp; (meaning&nbsp; to&nbsp; manage).&nbsp; Economics&nbsp; meant&nbsp; managing&nbsp; a&nbsp; household with&nbsp; the&nbsp; limited&nbsp; funds&nbsp; available&nbsp; in&nbsp; the&nbsp; house&nbsp; in&nbsp; an&nbsp; economical&nbsp; manner.&nbsp; Alternatively, economics is the study of how [&hellip;]

Meaning, Definitions, Nature and Scope Of Economics

Price Discrimination under Monopoly Conditions for Price Discrimination: Degrees of Price Discrimination &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The-degree of price discrimination sets the limit within which monopolists can charge different prices. We can distinguish between 3-degrees of price discrimination. First Degree Price Discrimination: In Fig. 1 above Firms usually don’t know the reservation price (Maximum price that a customer [&hellip;]

Discriminating Monopoly

Oligopoly Characteristics of oligopoly: Forms of Oligopoly Markets Collusive Oligopoly: Non-collusive Oligopoly:

Oligopoly

Monopolistic Competition Determination Equilibrium under Monopolistic Competition Short &#8211; run Equilibrium of a Monopolistic Competitive Firm: Long-run Equilibrium of a Monopolistic Competitive Firm:

Monopolistic Competition

Monopoly Market Determination of Price and Equilibrium under Monopoly Conditions of Equilibrium: Short Run Equilibrium TR-TC Method: Equilibrium of a firm following the TR-TC method in short run: Loss Minimizing Equilibrium: MR-MC Method

Monopoly Market

Cost in the Short-Run The short-run costs of a firm are divided into fixed and variable costs. Therefore, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TC = TFC + TVC &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Where, TC = total cost &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TFC &nbsp;= total fixed cost &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TVC = total variable cost Fixed Cost (FC): Variable Cost (VC) Total Fixed Cost (TFC) [&hellip;]

Short-Run Cost Curves

Revenue Revenue is the money payment received from the sale of a commodity. In other words, the revenue of a firm is its sale receipts or money receipts which is received from the sale of a product. Revenue is different from the profit. Revenue = Costs &#8211; Profit Measures of Revenue Total Revenue Curve Total [&hellip;]

Revenue Concepts, AR, MR and TR

Production Function Q = F (L, K) Types of Production Function Short-Run Production Function Long-Run Production Function Measures of Production There are mainly the following three measures of production: Total Physical Product (TPP): TPP = ∑MPP (Sum of MPP of all the units of a variable factor) Or TPP = MPP1 + MPP2 + MPP3 [&hellip;]

Production Concepts

Cost in Long Period: The Long Run Average Cost Curve Long-Run Marginal Cost Curve Relationship between Average Cost and Marginal Cost:

Long-Run Cost Curves

The Concept of Returns to Scale When all the factors of production (labour, capital etc.) are increased in the conditions of constant techniques, three production possibilities arise: Increasing returns to scale, Constant returns to scale, and Decreasing returns to scale Increasing Returns to Scale: Constant Returns to Scale: Decreasing Returns to Scale

Laws of Returns to Scale

Law of Demand The demand for a commodity increases with a fall in its price and decreases with a rise in its price, other things remaining the same. The law of demand thus, merely states that the price and demand of a commodity are inversely related, provided all other things remain unchanged or as economists [&hellip;]

Law of Demand and its exceptions

Elasticity of Demand a) The Price Elasticity: Where, Ed is the symbol for price elasticity of demand. To illustrate the use of this formula, let us assume that at a price Rs. 5 per kilogram of wheat, the quantity of wheat demanded is 12 kilograms. When the rice falls to Rs. 4 per kilogram, the [&hellip;]

Elasticity of Demand and its measurements

Cost Cost may be defined as the monetary value of all sacrifices made to achieve an objective i.e. to produce goods and services. Cost is very important in business decision making. Cost of production provides the floor to pricing. Cost Function A cost function shows the functional relationship between output and cost of production. Cost [&hellip;]

Cost Concepts

Consumer Surplus In the Graph, at price OP the consumer buys OM units of goods X. OP x OM = Area of OMSP, is the price paid, but the consumer is willing to pay price equal to OMSA. So, Consumer Surplus = OSMA &#8211; OMSP = Area of PSA. Measurement of Consumer’s Surplus Measurement of [&hellip;]

Consumer Surplus and its measurement

Indifference Curve Analysis Terms Related to Indifference Curve Analysis Indifference Schedule: An indifference schedule shows the different combinations of two or more goods which give the same level of satisfaction to the consumer and therefore, he is indifferent as to which bundle, he should choose. Indifference Curve An Indifference Curve (IC) is the curve of [&hellip;]

Indifference Curve Analysis

Law of Diminishing Marginal Utility (DMU): Exceptions to the Law/ Limitations of the Law: The law of Diminishing Marginal utility does not apply in following cases: Criticism of the Law Law of Diminishing Marginal utility has been criticized by modern economists on following grounds: Law of Equi-Marginal Utility Assumptions of Law of Equi-Marginal Utility Explanation [&hellip;]

Laws of Utility Analysis

Utility Approaches to Utility Cardinal Approach: This approach is based on following assumptions: Ordinal Approach: This approach is based on following assumptions: Measures of Utility Total Utility (TU): Marginal Utility (MU): MUn= TUn–TUn-1 Where, MUn = Marginal utility of nth unit TUn = Total utility of n units TUn-1 = Total utility of n – [&hellip;]

Utility Analysis

The Optimum Tariff Introduction: Illustration of the Optimum Tariff and Retaliation: Figure 1

The Optimum Tariff

Say’s Law of Market Introduction: Two Main Propositions of Say’s Law: At the same time, while general overproduction was considered impossible according to Say’s Law, it also denied the possibility of a deficiency in aggregate demand. Similarly, it also denied the possibility of general unemployment. For, if resources are less than fully employed, there are [&hellip;]

Say’s Law of Market

Perfect competition Introduction: Characteristics or Features of Perfect Competition: 1.Large Number of Buyers and Sellers: There are large number of buyers and sellers but have no effect on price. It means that no single buyer or seller can affect the price by changing his demand or supply as they all contribute a very small proportion [&hellip;]

Econo-dictionary