Unit-1

Managerial Economics :- It is a branch of economics involving the application of economic

methods in the organizational decision-making process. Economics is the study of the
production, distribution, and consumption of goods and services. Managerial economics
involves the use of economic theories and principles to make decisions regarding the
allocation of scarce resources. It guides managers in making decisions relating to the
company's customers, competitors, suppliers, and internal operations.

Definition of Manegerial Economics :-

Adam Smith’s Definition of Economics

Adam Smith was a Scottish philosopher, widely considered as the first modern economist.
Smith defined economics as “an inquiry into the nature and causes of the wealth of nations.

Criticism of Smith’s Definition :-

1. The wealth-centric definition of economics limited its scope as a subject and was seen as
narrow and inaccurate. Smith’s definition forced the subject to ignore all non-wealth
aspects of human existence.

2. The Smithian definition prevents the subject from exploring the concept of resource
scarcity. The allocation and use of scarce resources are seen as a central topic of analysis in
modern economics.

Nature of Economics :-

Economics is a science: Science is an organised branch of knowledge, that analyses cause

and effect relationship between economic agents. Further, economics helps in integrating
various sciences such as mathematics, statistics, etc. to identify the relationship between
price, demand, supply and other economic factors.

Positive Economics: A positive science is one that studies the relationship between two
variables but does not give any value judgment, i.e. it states ‘what is’. It deals with facts
about the entire economy.

Normative Economics: As a normative science, economics passes value judgement, i.e.

‘what ought to be’. It is concerned with economic goals and policies to attain these goals.

Economics is an art: Art is a discipline that expresses the way things are to be done, so as to
achieve the desired end. Economics has various branches like production, distribution,
consumption and economics, that provide general rules and laws that are capable of solving
different problems of society.
Scope of Economics :-

Microeconomics: The part of economics whose subject matter of study is individual units,
i.e. a consumer, a household, a firm, an industry, etc. It analyses the way in which the
decisions are taken by the economic agents, concerning the allocation of the resources that
are limited in nature.

Macro Economics: It is that branch of economics which studies the entire economy,
instead of individual units, i.e. level of output, total investment, total savings, total
consumption, etc. Basically, it is the study of aggregates and averages. It analyses the
economic environment as a whole, wherein the firms, consumers, households, and
governments make decisions.

Managerial economics relevance in business decisions :-

Managerial economics plays a crucial role in terms of making strategic decisions. Here are
some key roles of managerial economics in the decision-making process.

 Strategic Planning: Managerial economics lays the foundation for strategic

planning by providing techniques such as incremental principles to analyse
economic factors and market conditions.
 Pricing Decisions: Managerial economics assists business managers in setting
optimal prices by considering costs, demand elasticity, and market conditions.
 Risk Analysis: Using managerial economics in decision-making helps evaluate and
manage risks through techniques such as risk analysis.
 Market Analysis: Using managerial economics in business decision-making gives
managers the knowledge of tools such as the equi-marginal principle, which helps
allocate resources to equalise marginal benefits across activities, maximising
overall utility.
Fundamental Principles of Manegerial Economics :- Discussed below :-

The Incremental Principle :- The Incremental Principle is one of the most important
concepts in managerial economics. It states that decision-makers should always choose the
option that provides the most incremental benefit or the option that provides the greatest
increase in benefits over the next best alternative.

Marginal Principle :- The marginal principle is one of the essential concepts in managerial
economics. It states that businesses should make decisions by considering each option’s
marginal benefits and marginal costs.
Opportunity Cost Principle :- The opportunity cost principle is a cornerstone of managerial
economics. It states that decisions should be based on the opportunity cost of resources,
not just the monetary cost.The opportunity cost principle is relevant to both individuals and
organisations. For individuals, it means that decisions should be based on the opportunity
cost of time and effort.

Discounting Principle :- The Discounting Principle is one of the essential principles of

Managerial Economics. It states that the present value of a stream of future cash flows is
always less than the future value of those cash flows.

Time Perspective Principle :-The Time Perspective Principle is a fundamental principle of

managerial economics that states that an individual’s decisions are influenced by their
perceptions of time.

Equi-Marginal Principle :- The Equi-Marginal Principle is one of the key concepts in

Managerial Economics that shapes the decision-making process. It states that rational
decision-makers will allocate their resources in such a way as to maximise their utility.

Utility Analysis :- Utility analysis in economics is a concept that focuses on understanding

and quantifying the satisfaction or well-being that individuals derive from consuming goods
and services. In economics, "utility" refers to the subjective measure of the happiness,
satisfaction, or benefit that people gain from their choices and consumption.

Types of Utility Analysis

It can be classified into four types: ordinal, cardinal, total, and marginal. Types of utility
analysis can be better understood by reading below.

Ordinal Utility :- The ordinal approach to a consumer's utility asserts that utility or
satisfaction cannot be quantified exactly. The ordinal utility analysis suggests that a
consumer can compare the utility derived from various goods or units without measuring
them precisely.

Cardinal Utility :- cardinal utility analysis measures the intensity of preferences. Cardinal
utility assumes that people can assign a numerical value to the satisfaction or usefulness
they derive from each option. This allows economists to compare the utility derived from
different options quantitatively. Economists use cardinal utility analysis when analyzing the
degree of satisfaction or usefulness individuals derive from consuming a good or service.
This process involves measuring this degree of satisfaction using a unit called "utils."
 Unit – 2

Demand is defined as the quantity of a commodity that a Consumer is capable of buying and
is willing to pay the given price for it at the given time. The Theory of Demand is a Law that
states the relationship between the quantity Demanded of a product and its price, assuming
that all the other factors affecting the Demand are constant.

Factors Affecting Demand

After having discussed the Theory of Demand economics and the Theory of derived
Demand, we will now talk about the various factors affecting the quantity Demanded of a
product.

Price of the Commodity: As stated in the Law of Demand Theory, the price of a commodity
shows an inverse relationship with its quantity Demanded. As the price of the product falls,
its Demand increases.
The Number of Consumers: It is directly related to the quantity Demanded of a commodity.
The more the number of Consumers, the more is the Demand for that product.
Price of Related Goods: There are two types of related goods: Substitutes and
Complementary goods. For example, for milk, the juice is a substitute whereas biscuits are
complementary products. If the prices of milk fall, the Demand for juice (substitute) will
increase and that for biscuits (complementary goods) will lessen.
Income: With the increment in a Consumer’s income, he will become capable of buying
more of a particular commodity, and thereby, his Demand will also rise.
Consumer Expectation: If a Consumer expects that the price of a certain commodity will go
up in the future, he will buy more of that product at present, which will lead to a hike in its
Demand.
Tastes and Preferences: It has a direct relation with the quantity Demanded.

Types of Demand :-
1. Price Demand:
Assuming other factors as constant, a relationship between the price and demand of a
commodity is known as Price Demand. Price Demand can be shown as:
Dx = f(Px)
Where,
Dx = Demand for the given Commodity
f = Functional Relationship
Px = Price of the given Commodity

2. Cross Demand:
Assuming other things remaining as constant, a relationship between the demand of a
given commodity and the price of related commodities is known as Cross Demand.
3. Income Demand:
Assuming other factors as constant, a relationship between the consumer’s income and
the quantity demanded for a commodity is known as Income Demand. Income Demand
can be shown as:
Dx = f(Y)
Where,
Dx = Demand for the given Commodity
f = Functional Relationship
Y = Income of the Consumer
4. Joint Demand:
When demand for two or more goods arises simultaneously for satisfying a particular
want of the consumer, then such type of demand is known as Joint Demand. For
example, the demand for milk, coffee beans, and sugar is a joint demand as all these
goods are demanded together to prepare coffee.
5. Composite Demand:
When a commodity can be used for more than one purpose, then such type of demand is
known as Composite Demand. For example, the demand for water is a composite demand
as it can be used for various purposes like bathing, drinking, cooking, etc.
6. Derived Demand:
The kind of demand for a commodity, which depends on the demand for other goods, is
known as Derived Demand. For example, demand for workers/labour, producing bags is a
derived demand as it depends on the demand for bags.
7. Direct Demand:
When a commodity directly satisfies the demand of consumers, then its demand is known
as Direct Demand. For example, demand for books, stationery, clothes, food, etc., is a
direct demand as these goods directly satisfy the wants.
8. Competitive Demand:
When two commodities are close substitutes of each other and an increase in the demand
for one commodity will decrease the demand for the other commodity, then the demand
for any one of the commodities is known as Competitive Demand.
For example, an increase in demand for tea might decrease the demand for coffee, which
makes the demand for these goods competitive demand. This happens because when
consumers purchase more of one commodity (say tea), it leads to a lesser requirement for
the other commodity (say coffee).
9. Alternative Demand:
Demand for a commodity is known as alternative demand when it can be satisfied by
using different alternatives. For example, there are number of alternatives to satisfy the
demand for clothes like jeans, shirts, trousers, suits, saree, pants, etc.

Determinants of Demand
There are many determinants of demand, but the top five determinants of demand are as
follows:
Product cost: Demand of the product changes as per the change in the price of the
commodity. People deciding to buy a product remain constant only if all the factors related
to it remain unchanged.

The income of the consumers: When the income increases, the number of goods demanded
also increases. Likewise, if the income decreases, the demand also decreases.

Costs of related goods and services: For a complimentary product, an increase in the cost of
one commodity will decrease the demand for a complimentary product. Example: An
increase in the rate of bread will decrease the demand for butter. Similarly, an increase in
the rate of one commodity will generate the demand for a substitute product to increase.
Example: Increase in the cost of tea will raise the demand for coffee and therefore, decrease
the demand for tea.

Consumer expectation: High expectation of income or expectation in the increase in price

of a good also leads to an increase in demand. Similarly, low expectation of income or low
pricing of goods will decrease the demand.

Buyers in the market: If the number of buyers for a commodity are more or less, then there
will be a shift in demand.

Demand Function Individual Demand is a Function of:

Dx=f(Px, I, Pr, E, T)

1) Dx will be Demand of Commodity x (Dx)

2) Function of commodity x (f)

3) Price of good or service (Px)

4) Incomes of consumers (I)

5) Prices of related goods & services (PR )

6) Future Expectation of product (E)

7) Taste patterns of consumers (T)

Market Demand Function :-

Dx= f(Px, I, Pr, Pe, T, N, DI, G)

1) Demand of Commodity x (Dx)

2) Function of commodity x (f)

3) Price of good or service (Px)

4) Incomes of consumers (I)

5) Prices of related goods & services (PR )

6) Expected future price of product (Pe )

7) Taste patterns of consumers (T)

8) Number of consumers in market (N)

9) Distribution of Income (DI)

10) Government Policy (G)

Demand Curve :- The demand curve is a graphical representation of the relationship

between the price of a good or service and the quantity demanded for a given period of
time. In a typical representation, the price appears on the left vertical axis while the
quantity demanded is on the horizontal axis.

Law of Demand :- The law of demand states that the quantity demanded of a good shows
an inverse relationship with the price of a good when other factors are held constant (cetris
peribus). It means that as the price increases, demand decreases.

The law of demand is a fundamental principle in macroeconomics. It is used together with

the law of supply to determine the efficient allocation of resources in an economy and find
the optimal price and quantity of goods.
Exceptions of Law of Demand :-

Shift in demand is a representation of a change in the quantity of a good or service

demanded at every price level due to various economic factors.

Shift in the Demand Curve

Shift has been described below.

o Definition: A shift in the demand curve occurs when there is a change in the quantity
demanded at every price level. This change is caused by factors other than the price
of the good or service itself.
o Causes: Various factors can lead to a shift in the demand curve, including changes in
consumer income, preferences, expectations, the prices of related goods
(substitutes or complements), or external factors like government policies.
o Graphical Representation: On a graph, a shift in the demand curve is illustrated as
the entire curve moving either to the right (increase in demand) or to the left
(decrease in demand).
o Factors Changing: Unlike a movement along the curve, a shift involves changes in
factors other than the price, influencing the overall demand for the product at all
price levels.

Elasticity of Demand :- Elastic demand equates to flexibility in purchasing decisions —

whether in quantities purchased, the chosen brand or product substitution. Inelastic
demand is unwavering, up to a point. For this reason, reducing elasticity is often
considered to be a marketer’s primary goal: to position a product as so essential that
customers will continue to buy in most circumstances.

Types of Elasticity of Demand :-

Price Elasticity of Demand (PED):

When customers are highly sensitive to changes in price, there is a high PED. This means, for
example, that if inflation causes prices to increase, customers will reduce the quantity they
purchase by switching, substituting or skipping. It can also indicate, conversely, that price
reductions may spur additional sales. The formula for PED is:
PED = % change in quantity / % change in price
Or
PED = [(Q2–Q1)/Q1] / [(P2–P1)/P1]
Q1 = initial quantity of demand
Q2 = new quantity of demand
P1 = initial price
P2 = new price

Cross Elasticity of Demand (XED):

Cross elasticity happens when changes in the price of one product prompt changes in
demand for another. The two products must be related, either as complements or
substitutes for each other. When products are substitutes for each other, a rise in the price
of one will usually cause a rise in demand for the other. For example, if coffee prices rise,
then demand for breakfast tea is likely to increase as customers substitute tea for coffee.

XED = % change in quantity for product A / % change in price for product B

Or
XED = [(Q2a – Q1a) / (Q2a + Q1a)] / [(P2b – P1b) / (P2b + P1b)]
Q1a = initial quantity of demand of product A
Q2a = new quantity of demand of product A
P1b = initial price of product B
P2b = new price of product B

Income Elasticity of Demand (YED):

YED — with a “Y” because that’s the notation economists use for income — is the
relationship between demand and a customer’s income. As income decreases, quantity of
demand tends to decline, even if all other factors remain the same, including price.

YED = % change in quantity / % change in income

Or
YED = [(Q2–Q1)/Q1] / [(Y2–Y1)/Y1]
Q1 = initial quantity of demand
Q2 = new quantity of demand
Y1 = initial income
Y2 = new income

1. Advertising Elasticity of Demand (AED):

This type of elasticity focuses on the relationship between customer demand and a
seller’s advertising. It’s a measure of advertising effectiveness that assesses whether
 increases in advertising elevate customers’ impressions to the point where they
respond by buying more. The formula for AED is:

AED = % change in quantity / % change in advertising

Or
AED = [(Q2–Q1)/Q1] / [(A2–A1)/A1]
Q1 = initial quantity of demand
Q2 = new quantity of demand
A1 = initial advertising expenditure
A2 = new advertising expenditure

Demand Forecasting :- Demand forecasting is the process of estimating future

demand for a product or service, which then informs businesses about the estimated
product or service quantity that consumers may want to purchase over a period of
time. Accurate forecasting is important for businesses to plan production in order to
meet customer demand. Overestimations or underestimations of customer demand
can lead to excess inventory or a short supply of products.

6 types of demand forecasting

There are several methods of demand forecasting. Your forecast may differ based on the
demand forecasting models you use. Best practice is to do multiple demand forecasts. This
will give you a more well-rounded picture of your future sales. Using more than one
forecasting model can also highlight differences in predictions. Those differences can point
to a need for more research or better data inputs.

1. Passive demand forecasting

Passive demand forecasting is the simplest type. In this model, you use sales data from the
past to predict the future. You should use data from the same season to project sales in the
future, so you compare apples to apples. This is particularly true if your business has
seasonal fluctuations.

2. Active demand forecasting

If your business is in a growth phase or if you’re just starting out, active demand forecasting
is a good choice to help you make informed decisions. An active forecasting model takes
into consideration your market research, marketing campaigns, and expansion plans. Active
projections will often consider external factors. Considerations can include the economic
outlook, growth projections for your market sector, and projected cost savings from supply
chain efficiencies. Startups that have less historical data to draw on will need to base their
assumptions on external data.
3. Short-term projections
Short-term demand forecasting looks just at the next three to 12 months. This is useful for
managing your just-in-time supply chain. Looking at short-term demand allows you to adjust
your projections based on real-time sales data. It helps you respond quickly to changes in
customer demand.

4. Long-term projections :- Your long-term forecast will make projections one to four years
into the future. This forecasting model focuses on shaping your business growth trajectory.
While your long-term planning will be based partly on sales data and market research, it is
also aspirational.

5. External macro forecasting

External macro forecasting incorporates trends in the broader economy. This projection
looks at how those trends will affect your goals on a macro-level. An external macro
demand forecast can also give you direction for how to meet those goals. Your company
may be more invested in stability than expansion. However, a consideration of external
market forces is still essential to your sales projections. External macro forecasts can also
touch on the availability of raw materials and other factors that will directly affect your
supply chain.

6. Internal business forecasting

One of the limiting factors for your business growth is internal capacity. If you project that
customer demand will double, does your enterprise have the capacity to meet that
demand? Internal business demand forecasts review your operations.

Demand forecasting methods

There are many different ways to create forecasts. Here are five of the top demand
forecasting methods.

1. Trend projection
Trend projection uses your past sales data to project your future sales. It is the simplest and
most straightforward demand forecasting method.It’s important to adjust future projections
to account for historical anomalies. For example, perhaps you had a sudden spike in
demand last year. However, it happened after your product was featured on a popular
television show, so it is unlikely to repeat. Or your eCommerce site got hacked, causing your
sales to plunge. Be sure to note unusual factors in your historical data when you use the
trend projection method.

2. Market research
Market research demand forecasting is based on data from customer surveys. It requires
time and effort to send out surveys and tabulate data, but it’s worth it. This method can
provide valuable insights you can’t get from internal sales data.
3. Sales force composite
The sales force composite demand forecasting method puts your sales team in the driver’s
seat. It uses feedback from the sales group to forecast customer demand.This method
gathers the sales division with your managers and executives. The group meets to develop
the forecast as a team.

4. Delphi method
The Delphi method, or Delphi technique, is one of the qualitative methods of demand
forecasting that leverages expert opinions on your market forecast. This method requires
engaging outside experts and a skilled facilitator.

5. Econometric
The econometric method requires some number crunching. This quantitative type of
forecasting combines sales data with information on outside forces that affect demand.
Then you create a mathematical formula to predict future customer demand.

Supply refers to the quantity of a good or service that a firm or an industry is willing and
able to produce and sell at various prices over a certain period of time. The supply of a good
or service is determined by several factors, including production costs, technology, input
prices, and the availability of factors of production.

The law of supply states that, other things being equal, an increase in price leads to an
increase in the quantity supplied, and a decrease in price leads to a decrease in the quantity
supplied. This relationship is based on the behavior of firms and the incentives they face.
When the price of a good increases, firms have an incentive to produce and sell more of that
good, as they can earn higher profits. Conversely, when the price of a good decreases, firms
have less of an incentive to produce and sell that good, as their profits decline.

Supply Elasticity :- The price elasticity of supply is a measure of the degree of responsiveness
of the quantity supplied to the change in the price of a given commodity. It is an important
parameter in determining how the supply of a particular product is affected by fluctuations
in its market price. It also gives an idea about the profit that could be made by selling that
product at its price difference.

Price Elasticity of Supply Formula

After having understood the elasticity of supply definition in economics, we now move to
the elasticity of supply formula which is based on its definition.
ES=%ΔP%ΔQ
Types of Elasticity of Supply
Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic
supply, less than unit elastic, and perfectly inelastic. Read below to know them in more
detail.

1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of
supply is infinite. This means that even for a slight increase in price, the supply
becomes infinite. For a perfectly elastic supply, the percentage change in the price is
zero for any change in the quantity supplied.

2. More than Unit Elastic Supply: When the percentage change in the supply is greater
than the percentage change in price, then the commodity has the price elasticity of
supply greater than 1.

3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in
its quantity supplied is proportionate or equal to the change in its price. The
elasticity of supply, in this case, is equal to 1.

4. Less than Unit Elastic Supply: When the change in the supply of a commodity is
lesser as compared to the change in its price, we can say that it has a relatively less
elastic supply. In such a case, the price elasticity of supply is less than 1.

5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the
percentage change in the quantity supplied is zero irrespective of the change in its
price. This type of price elasticity of supply applies to exclusive items. For example, a
designer gown styled by a famous personality.
 Unit- 3

A product concept, also known as a concept statement, is a description or vision of a

product or service, typically developed at an early stage of the product lifecycle.

Product concepts are built long before any kind of design or engineering work — taking into
account market analysis, customer experience, product features, product-market fit, cost
and more to help bring the concepts to life.

Types of Products :-

Convenience products – A convenience product saves customers time and effort.

Convenience products are goods that customers usually purchase frequently, immediately
and with minimal effort. For example, soap, toilet paper, and batteries — are all examples of
convenience products.

Specialised products – Specialised products are products that consumers actively seek to
purchase because of unique characteristics or loyalty to a specific brand. These consumers
won’t normally accept substitute products. For example, high-end fashion clothing, luxury
vehicles, and famous paintings.

Brand products – The sentiment behind branded products is simple: the more positive the
brand connotation, the more likely it is that a consumer will buy something from it.

"Production may be defined as the creation of utilities. Anatol Murad

"Production is the process that creates utility in goods. A.H. Smith

"Production is the creation of value in a commodity."- Thomas

"Production is the creation of economic utility "- Ely

"Production means an increase in the value of a commodity."- Nicholson

Factors of Production are - (i) land (ii) labour (iii) capital (iv) organisation and enterprise.
Modem economists call all these factors as Input or resources
Production Analysis :-

Production Fuction :- It is the relationship between physical inputs (land, labour, capital,
etc.) and physical outputs (quantity produced). It is a technical relationship (not an
economic relationship) that studies material inputs on one hand and material outputs on
the other hand.

Features of Production Function

1. Complementary: A producer will have to combine the inputs to produce outputs.
Outputs can not get generated without the use of inputs.
2. Specificity: For any given output, the combination of inputs that may be used is clearly
defined. What type of factors are needed for the production of a particular product is
clearly mentioned before the actual production gets started.
3. Production Period: The period of the production process is clearly explained to the
production unit. Each stage of production is given some specific time. Production generally
gets completed over a long period of time.

Types of Production Function

Production function on the basis of the time period can be divided into two categories:
Short Run Production Function and Long Run Production Function. Discussed below :-
1. Short Run Production Function:
Short Run is a period of time where output can only be changed by changing the level of
variable inputs. In the short run, some factors are variable and some are fixed. Fixed
factors remain constant in the short run like land, capital, plant, machinery, etc.
Production can be raised by only increasing the level of variable inputs like labour.
2. Long Run Production Function:
Long Run is a span of time where the output can be increased by increasing all the factors
of production whether it is fixed (land, capital, plant, machinery, etc.) or variable (labour).
Long run is enough time to alter all the factors of production.
Concept of Product
Product or output refers to the volume of the goods that the company produces using
inputs during a specified period of time. The concept of product can be looked at from
three different angles: Total Product, Marginal Product, and Average Product.
1. Total Product:
Total Product (TP) refers to the total quantity of goods that the firm produced during a
given course of time with the given number of inputs. Total Product is also known as Total
Physical Product (TPP) or Total Output or Total Return. For example, if 6 labours produce
10 kg of wheat, then the total product is 60 kg. A company can increase TP in the short
term by focusing primarily on the variable components. But over time, both fixed and
variable elements can be increased to raise TP.

2.Average Product:
Average Product refers to output per unit of a variable input. AP is calculated by dividing
TP by units of the variable factor. For example, if the total product is 60 kg of wheat
produced by 6 labours (variable inputs), then the average product will be 60/6, i.e., 10 kg.
Average Product = Total product / unit of variable factor
3. Marginal Product:
Marginal Product refers to the addition to the total product when one more unit of a
variable factor is employed. It calculates the extra output per additional unit of input while
keeping all other inputs constant. Other names of Marginal Product are Marginal Physical
Product (MPP) or Marginal Return.
MPn = TPn – TPn-1
Here,
MPn = Marginal product of nth unit of the variable factor,
TPn = Total product of n units of the variable factor, and
TPn-1 = Total product of (n-1) units of the variable factor

The two laws of production are the Law of return to scale and the Law of variable
proportion. The rules of production define the technologically feasible methods of
increasing output. The output can be grown in a variety of ways.

Law of return to scale : All variables of production may be changed to boost output. This is

just a long-term possibility. As a result, the rules of returns to scale apply to long-term

production analyses.
Law of variable proportion

As more and more quantities of this component are joined with the other constant
elements, the marginal product of the variable factors will ultimately drop. The law of
diminishing returns of the variable factor, often known as the law of variable proportions,
describes output expansion with one component.

Cost :-
The concept of cost can be effortlessly comprehended by classifying the costs. The process
of grouping costs is based on similarities or common characteristics. A well-defined
classification of costs is certainly essential to mention the costs of cost centers. The different
types of cost concepts are:
Based on the Nature of Expenses
On the basis of nature, the following are the two types of cost:

 Outlay Costs

The authentic payments undergone by an entrepreneur in employing input are

known as outlay costs. It includes costs on payments of fuel, rent, electricity, etc.

 Concept of Opportunity Cost

It is the value of the next best thing you give up whenever a decision is made by you.
Classification in Terms of Traceability
On the basis of traceability, the types of costs are:

1. Direct Costs

A direct cost is a cost that is related to the production method of a good or service. It
is the opposite of an indirect cost.These costs are related to a certain product or a
process. They are also known as traceable costs as they could be traced to a specific
activity. It is the opposite of an indirect cost.

2. Indirect Costs

Indirect costs are expenses that could not be traced back to a single cost object or
cost source. They are also known as untraceable costs. However, they are extremely
important as they affect the total profitability.

Concept of Costs in Terms of Treatment

1. Accounting Costs

Accounting costs are direct costs. They are also known as hard costs. The
entrepreneur pays the cash directly for obtaining resources for production. It
includes the cost of prices that are paid for the machines and raw materials,
electricity bills, etc. These costs are treated as expenses.

2. Economic Costs
 The economic cost is the combination of gains and losses of the products. This
cost is mainly used by economists to compare one with another.

Classification based on the Purpose

1. Incremental Cost

Incremental costs are the changes in future costs and that will occur as a
result after a decision is made.

2. Sunk Costs

Sunk costs are the costs that cannot be recovered after sustaining. It includes
the amount spent on conducting research and advertising.

Types of Cost Concept based on Players and Variability

1. Based on Payers

Private cost implies the cost that is sustained when an individual produces or
consumes something. The business person spends his/ her own private or
business interests. The social cost is the cost to an entire society that results
from a news event or a change in the policies.

2. In Terms of Variability

As the term predicts, fixed costs don't change in the volume of output. These
costs are constant even with an increase or decrease in the volume of services/
goods produced or sold. Variable costs, in simple words, are a cost that varies
according to the outcome of the output.

Cost-Output Relationship in the Short-Run The cost concept made use of in the cost
behaviour are total cost, average cost, and marginal cost. Total cost is the actual money
spent to produce a particular quantity of output. Total Cost is the summation of Fixed Costs
and Variable Costs. TC=TFC+TVC Up to a certain level of production Total Fixed Cost i.e., the
cost of plant, building, equipment etc, remains fixed. But the Total Variable Cost i.e., the
cost of labour, raw materials etc., vary with the variation in output. Average cost is the total
cost per unit. It can be found out as follows. AC=TC/Q The total of Average Fixed Cost
(TFC/Q) keep coming down as the production is increased and Average Variable Cost
(TVC/Q) will remain constant at any level of output.
SAC Curve :-

Revenue, in simple words, is the amount that a firm receives from the sale of the output.
According to Prof. Dooley, ” The Revenue of a firm is its sales receipts or income.‘ In a firm,
revenue is of three types:-

1. Total Revenue
2. Average Revenue
3. Marginal Revenue

Total Revenue
This is simple. The Total Revenue of a firm is the amount received from the sale of the output.
Therefore, the total revenue depends on the price per unit of output and the number of units
sold. Hence, we have

TR = Q x P

Where,

 TR – Total Revenue
 Q – Quantity of sale (units sold)
 P – Price per unit of output
Average Revenue
Average Revenue, as the name suggests, is the revenue that a firm earns per unit of output
sold. Therefore, you can get the average revenue when you divide the total revenue with the
total units sold. Hence, we have,

AR=TRQ

Where,

 AR – Average Revenue
 TR – Total Revenue
 Q – Total units sold

Marginal Revenue
Marginal Revenue is the amount of money that a firm receives from the sale of an additional
unit. In other words, it is the additional revenue that a firm receives when an additional unit is
sold. Hence, we have

MR = TRn – TRn-1 or MR=ΔTRΔQ

Where, MR – Marginal Revenue, ΔTR – Change in the Total revenue , ΔQ – Change in the
units sold, TRn – Total Revenue of n units, TRn-1 – Total Revenue of n-1 units
 Unit - 4

Market structure, in economics, refers to how different industries are classified and
differentiated based on their degree and nature of competition for goods and services.

Types of Market Structure :- Types of Market Structures

1. Perfect Competition

Perfect competition occurs when there is a large number of small companies competing
against each other. They sell similar products (homogeneous), lack price influence over the
commodities, and are free to enter or exit the market.

2. Monopolistic Competition

Monopolistic competition refers to an imperfectly competitive market with the traits of

both the monopoly and competitive market. Sellers compete among themselves and can
differentiate their goods in terms of quality and branding to look different. In this type of
competition, sellers consider the price charged by their competitors and ignore the impact
of their own prices on their competition.

Oligopoly

An oligopoly market consists of a small number of large companies that sell differentiated or
identical products. Since there are few players in the market, their competitive strategies
are dependent on each other.

For example, if one of the actors decides to reduce the price of its products, the action will
trigger other actors to lower their prices, too. On the other hand, a price increase may
influence others not to take any action in the anticipation consumers will opt for their
products. Therefore, strategic planning by these types of players is a must.

Monopoly

In a monopoly market, a single company represents the whole industry. It has no

competitor, and it is the sole seller of products in the entire market. This type of market is
characterized by factors such as the sole claim to ownership of resources, patent and
copyright, licenses issued by the government, or high initial setup costs.
Price discrimination is a selling strategy that charges customers different prices for the
same product or service based on what the seller thinks they can get the customer to agree
to. In pure price discrimination, the seller charges each customer the maximum price they
will pay. In more common forms of price discrimination, the seller places customers in
groups based on certain attributes and charges each group a different price.

First-Degree Price Discrimination

First-degree discrimination, or perfect price discrimination, occurs when a business charges
the maximum possible price for each unit consumed.

Second-Degree Price Discrimination

Second-degree price discrimination occurs when a company charges a different price for
different quantities consumed, such as quantity discounts on bulk purchases.

Third-Degree Price Discrimination

Third-degree price discrimination occurs when a company charges a different price to
different consumer groups. For example, a theater may divide moviegoers into seniors,
adults, and children, each paying a different price when seeing the same movie.

Pricing Under Monopoly

The equilibrium point of the firm determines to price under monopoly. The firm will attend
to its equilibrium when it maximizes profit or produces a profit maximising level of output.
To determine the equilibrium and pricing under a monopoly firm, there are two approaches:

 Total Revenue (TR) and Total Cost (TC) Approach

 Marginal Revenue (MR) and Marginal Cost (MC) Approach
Total Revenue (TR) and Total Cost (TC) Approach: As per this approach a monopoly firm will
reach it’s equilibrium when the difference between TR and TC is maximum, and it will define
the pricing under monopoly.

Pricing under Monopolistic Competition :- Price-output determination under Monopolistic

Competition: Equilibrium of a firm
In monopolistic competition, since the product is differentiated between firms, each firm does
not have a perfectly elastic demand for its products. In such a market, all firms determine the
price of their own products. Therefore, it faces a downward sloping demand curve. Overall, we
can say that the elasticity of demand increases as the differentiation between products
decreases.
Kinked Demand Curve :-
A cartel is a situation when two or more firms agree to control the level of supply of
products and services to reduce competition and drive up the market price.
Let's look at an example to comprehend the concept more clearly.

Assume James and Nick are separately running two businesses that are responsible for
selling coffee to the entire town. They competed and were able to generate acceptable
sales on their own. One day, they agreed to limit the supply after reaching an agreement,
which raised the price of coffee. Hence, they both colluded to influence the cost of coffee.
Types of Cartels :-
Price Fixing 2. Differentiating Operation Area 3. Controlling Amount of Output

Price leadership occurs when a leading firm in a given industry is able to exert enough
influence in the sector that it can effectively determine the price of goods or services for
the entire market. This type of firm is sometimes referred to as the price leader.

Types of Price Leadership

There are three primary models of price leadership: barometric, collusive, and dominant.

Barometric
The barometric price leadership model occurs when a particular firm is more adept than
others at identifying shifts in applicable market forces, such as a change in production
costs. This allows the firm to respond to market forces more efficiently. For instance, the
firm may initiate a price change.

Collusive
The collusive price leadership model may emerge within markets that have oligopolistic
conditions. Collusive price leadership occurs as a result of an explicit or implicit agreement
among a handful of dominant firms to keep their prices in mutual alignment.

Dominant
The dominant price leadership model occurs when one firm controls the vast majority of
the market share in its industry. Within the industry, there are other, smaller firms that
provide the same products or services as the leading firm. However, in this model, these
smaller firms cannot influence prices.
 Unit – 5

National income is referred to as the total monetary value of all services and goods that are
produced by a nation during a period of time. In other words, it is the sum of all the factor
income that is generated during a production year. National income serves as an indicator
of the nation's economic activity.

• Gross Domestic Product(GDP) - the total monetary or market value of all the
finished goods and services produced within a country's borders in a specific time
period.
• NDP (Net Domestic Product) – Value of net output of economy during a year.

NDP = GDP at factor cost – Depreciation

• NNP( Net National Product) – Value of total output of consumption goods and
investment goods.
• NNP = GNP – DEPRECIATION
• Domestic Income – Income generated by factors of production :- Wages, interests,
rent, dividends, partnership etc

Private Income – Income obtained by private individuals from any source.

• The addition includes :-

• Pensions
• Unemployment allowances
• Security benefits
• Lottery
• Provident Fund, Life Insurance etc.
• Disposable Income – The income that actually remains with the individuals to
dispose off as they wish.

DI = Personal Income – Personal taxes

• Methods of National Income :-

• Product Approach – In this approach National Income is measured as a flow of
goods and services. Value of money for all final goods and services is produced in
an economy during a year
• Income Approach – NI is measured as a flow of factor incomes. Income received by
basic factors like labour capital, entrepreneurship.
• Expenditure Approach – NI is measured as a flow of expenditure incurred by the
society in a particular year.
Flow of Income in 2 sector economy :- It is defined as the flow of payments and receipts for
goods, services, and factor services between the households and the firm sectors of the
economy.

Flow of Income in 3 sector economy :- Here we will concentrate on its taxing, spending
and borrowing roles. Government purchases goods and services just as households and
firms do. Government expenditure takes many forms including spending on capital
goods and infrastructure (highways, power, communication), on defence goods, and on
education and public health and so on. These add to the money flows which are shown
in Fig. 6.3 where a box representing Government has been drawn. It will be seen that
government purchases of goods and services from firms and households are shown as
flow of money spending on goods and services.
Flow of Income in 4 sector economy :- Purchases of foreign-made goods and services by
domestic households are called imports. Figure 6.4 illustrates additional money flows
that occur in the open economy when exports and imports also exist in the economy. In
our analysis, we assume it is only the business firms of the domestic economy that
interact with foreign countries and therefore export and import goods and services.

Inflation :- Inflation is a rise in prices, which can be translated as the decline of purchasing
power over time. The rate at which purchasing power drops can be reflected in the average
price increase of a basket of selected goods and services over some time.

Types of Inflation :- Demand-Pull Inflation

This type of inflation is caused due to an increase in aggregate demand in the economy.

Causes of Demand-Pull Inflation:

 A growing economy or increase in the supply of money – When consumers feel

confident, they spend more and take on more debt. This leads to a steady increase in
demand, which means higher prices.
 Asset inflation or Increase in Forex reserves– A sudden rise in exports forces a
depreciation of the currencies involved.
 Government spending or Deficit financing by the government – When the
government spends more freely, prices go up.

Cost-Push Inflation : This type of inflation is caused due to various reasons such as:
 Increase in price of inputs
 Hoarding and Speculation of commodities
  Defective Supply chain
 Increase in indirect taxes
 Depreciation of Currency
 Crude oil price fluctuation
Built-in Inflation
This type of inflation involves a high demand for wages by the workers which the firms
address by increasing the cost of goods and services for the customers.

Business Cycle :- The business cycle is the increases and decreases in the economy over
time. Factors such as trade, interest rates, investments and production costs can all
influence the business cycle.

Phases of Business Cycle

1. Expansion: When a nation’s GDP an upward move or recovers with time, this period of
growth is remarked as economic expansion. During this phase, the various economic
indicators like consumer spending, income, demand, supply, employment, output, and
business returns shoot up.
2. Peak: During the expansion phase, the GDP spikes to its highest level; this is considered the
economy’s peak. At this point, economic factors like income, consumer spending, and
employment level remain constant.
3. Contraction: Next comes the phase of economic slowdown; it occurs when the stagnant
peak GDP starts tumbling down towards the trough. With this, the nation’s production,
employment level, demand, supply, income level, and other economic parameters
plummet.
4. Trough: This is the stage at which the GDP and other economic indicators are at their
lowest. During this phase, the economy gets stuck at a negative growth rate. Additionally,
the demand for goods and services reduces.