In the real world, market is neither perfectly competitive nor a monopoly. The great majority of imperfectly competitive producers in the real world produce goods, which are neither completely different nor completely same. They produce goods, which are analogous to those produced by their rivals. This means that the goods produced in the market are close substitutes. It follows that such producers must be concerned about the way in which the action of these rivals affects their own profits. This kind of market is known as ‘Monopolistic Competition’ or group equilibrium. Here there is competition, which is keen, though not perfect, between firms manufacturing very similar products. According to Chamberlin, “Monopolistic competition is a challenge to the traditional viewpoint of economics that competition and monopoly are alternatives…By contrast it is held that most economic situations are composites of both competition and monopoly.” Monopolistic Competition is that market category in which Continue reading
Economics Principles
Role of SMEs in Economic Development
All over the world, there is growing evidence that Small and medium-sized enterprises (SMEs) play an important role in the national economic development of any country. SMEs are becoming more and more a subject of high attention in the developing countries, countries in transition but also in the countries with developed economies. In market economies, SMEs are the engine of economic development. Thanks to their private ownership, entrepreneurial spirit, their flexibility and adaptability as well as their potential to react to challenges and changing environments, SMEs contribute to sustainable growth and employment generation in a significant manner. Until latest, the private sectors of many emerging economies were missing the middle level of development. Investors, policymakers, and professionals dedicated most of their efforts to big companies of over 500 employees, larger enterprises or multinationals. Large Enterprises and MNCs were target of TAX incentives and subsidies whereas organizations like World Bank and Continue reading
Income Elasticity of Demand – Concept and Types
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as the ratio of the percentage change in the demand for a commodity to the percentage change in income. Income elasticity of demand can be expressed as follows: Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income For example, consumer’s income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is: ey = 5/25 x 100/2 = 10. It means that 1 percent increase in income results 10 percent increase in demand and vice versa. The income elasticity may be positive or negative or zero depending upon the nature of a commodity. As a Continue reading
Consumer’s Surplus – Definition, Significance and Criticisms
The concept of consumer’s surplus is one of the most important idea in economic theory especially in demand and welfare economics. This law was first developed by French engineer A.J Dupuit in 1844 to measure the social benefits of public commodities like canals, bridges, national highways, etc. This concept was further refined and popularized by Dr. Alfred Marshall in 1890. The essence of the concept of consumer’s surplus is that people generally get more satisfaction or utility from the consumption of commodities than the actual price they pay for them. It has been found that people are willing to pay more price for the commodity than they actually pay for them. This extra satisfaction which the consumers obtain from buying a commodity has been called consumer’s surplus by Marshall. The amount of money which a person is prepared to pay for a commodity indicates the amount of utility he derives Continue reading
Isoquants or Equal Product Curves
Isoquant literally means equal quantity or the same amount of output. The Isoquant is a locus of points showing that different combinations of factor-inputs give the same quantity of output. The Isoquant is also called Equal Product Curve. Let us consider an Isoquant schedule. An Isoquant schedule shows that different combinations of factor inputs give same quantity of output. Factor Combination Units of Factor X Units of Factor Y Quantity of Output A 1 9 20 units B 2 6 20 units C 3 4 20 units D 4 3 20 units Let us plot the graph with factor X shown on the X-axis and factor Y on the Y-axis. Plotting the factor combinations; viz. points A, B, C and D respectively and joining these points we get the curve. This is an Isoquant representing 20 units of output. Thus different points on the same Isoquant curve show that different Continue reading
Pricing under Different Market Structures
Price-fixation is an important managerial function in all business enterprises. If the price set is quite high, the seller may not find enough number of consumers to buy his product. If the price fixed is too low, the seller may not be able to cover his cost. Thus, fixing appropriate price is a major decision-taking function of any enterprise. Price-decisions, no doubt, need to be reviewed from time to time. Market Structures and Pricing Decisions A firm operates in a market and not in isolation. Under Perfect Competition price is determined by the forces of demand and supply. The point of intersection between demand and supply curves is the point of equilibrium which determines the equilibrium price. Each firm under perfect competition is a price taker and not a price maker. The Average Revenue Curve of a firm under perfect competition is horizontal and that AR = MR. Further there Continue reading