PRINCIPLES OF ECONOMICS
Basics of Economics
Prepared by: Tasfiunnoor Pinky (TP), Lecturer, Department of Economics, BUBT
What is Economics?
Economics is the social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity and the incentives that
influence and reconcile those choices.
3 Problems of Economics:
1) What to Produce? Goods and services are the objects that people value and produce to
satisfy human wants. Goods are physical objects such as cell phones and automobiles.
Services are tasks performed for people such as cellphone service and autorepair
service.
2) How to produce? Goods and services are produced by using productive resources that
economists call factors of pro duction. Factors of production are grouped into four
categories:
a) Land
b) Labor
c) Capital
d) Entrepreneurship.
a) Land: The "gifts of nature" that we use to produce goods and services are called land.
In economics, land is what in everyday language we call natural resources. It includes
land in the everyday sense. together with minerals, oil, gas, coal, water, air, forests,
and fish. Our land surface and water resources are renew able and some of our
mineral resources can be recycled. But the resources that we use to create energy are
nonrenewable they can be used only once.
b) Labor: The work time and work effort that people devote to producing goods and
services is called labor. Labor includes the physical and mental efforts of all the
people who work on farms and construction sites and in factories, shops, and
offices.
c) Capital: The tools, instruments, machines, buildings, and other constructions that
businesses use to pro duce goods and services are called capital. In everyday
language, we talk about money, stocks, and bonds as being "capital." These items
are financial capital. Financial capital plays an important role in enabling
businesses to borrow the funds that they use to buy physical capital. But because
financial capital is not used to produce goods and services, it is not a productive
resource.
d) Entrepreneurship: The human resource that organizes labor, land, and capital is
called entrepreneurship. Entrepreneurs come up with new ideas about what and
how to produce, make business decisions, and bear the risks that arise from these
decisions.
3)For Whom to Produce? Who consumes the goods and services
that are produced depends on the incomes that people earn. People with large incomes
can buy a wide range of goods and services. People with small
incomes have fewer options and can afford a smaller range of goods and services. People
earn their incomes by selling the services of the factors of production they own:
i) Land earns rent.
ii) Labor earns wages.
iii) Capital earns interest.
iv)Entrepreneurship earns profit.
These are the 3 Problems of Economics.
Differences between Microeconomics and Macroeconomics
Prepared by: Tasfiunnoor Pinky (TP), Lecturer, Dept of Economics, BUBT
Topics Micro-Economics Macro-Economics
The branch of economics that
The branch of economics that studies
studies the behavior of Whole
the behavior of an individual consumer,
Definition economy (both national and
firm,family is known as
international) is known as
microeconomics.
macroeconomics.
Covers issues like demand, supply, Covers issues like national
Scope production, consumption, economic income, general price level,
welfare etc. money, employment etc.
Values More Theoretical Values More Practical values
To analyze the market and determine To maximize the national
Purpose
the price-level. income and economic growth.
Nature Narrower in nature Broader in nature
Useful in regulating the prices of goods Useful in solving major
Significance and services as well as the factors of economic issues like inflation,
production unemployment and poverty
Example Individual income national income
Differences between Positive Economics and Normative Economics
Topics Positive Economics Normative Economics
Branch of Economics which is Branch of Economics that is Based on
Definition
based on the facts and data opinions and values
Deals with Deals with 'What it is?" Deals with 'what it should be?"
Testing Statements can be tested Statements cannot be tested
Provides solutions to the economic
Economic problems Describes the economic problems
problems
Use of Ethics No Yes
Nature Descriptive Prescriptive
-------------------------------------
Production Possibilities Frontier (PPF)
Definition: The production possibilities frontier (PPF) is the boundary between those
combinations of goods and services that can be produced and those that cannot. To illustrate the
PPF, we focus on two goods at a time and hold the quantities produced of all the other goods and
services constant. That is, we look at a model economy in which everything remains the same
except for the production of the two goods we are considering.
Let's look at the production possibilities frontier for cola and pizza, which represent any pair of
goods or services.
The production possibilities frontier for cola and pizza shows the limits to the production of
these two goods, given the total resources and technology available to produce them. Figure
shows this production possibilities frontier. The table lists some combinations of the quantities of
pizza and cola that can be produced in a month given the resources available.
Combinations Pizza Cola
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Figure: Production Possibilities Frontier
The table lists six production possibilities for cola and pizzas. Row A tells us that if we produce
no pizzas, the maximum quantity of cola we can produce is 15 million cans. Points A, B, C, D, E,
and F in the figure represent the rows of the table. The curve passing through these points is the
production possibilities frontier (PPF).
The PPF separates the attainable from the unattainable. Production is possible at any point inside
the orange area or on the frontier. Points outside the frontier are unattainable. Points inside the
frontier, such as point Z, are inefficient because resources are wasted or misallocated. At such
points, it is possible to use the available resources to produce more of either or both goods.
Opportunity Cost:
The opportunity cost of an action is the highest-valued alternative forgone. The PPF makes
this idea precise and enables us to calculate opportunity cost. Along the PPF, there are only two
goods, so there is only one alternative forgone: some quantity of the other good. Given our
current resources and technology, we can produce mote pizzas only if we produce less cola. The
opportunity cost of producing an additional pizza is the cola we must forgo. Similarly, the
opportunity cost of producing an additional can of cola is the quantity of pizza we must forgo. In
Fig, if we move from point C' to point D, we get | million more pizzas but 3 million fewer cans
of cola. The additional 1 million pizzas cost 3 million cans of cola. One pizza cost 3 cans of cola.
We can also work out the opportunity cost of moving in the opposite direction. In Fig, if we
move from point D to point C, the quantity of cola produced increases by 3 million cans and the
quantity of pizzas produced decreases by 1 million. So, if we choose point C over point D, the
additional 3 million cans of cola cost 1 million pizzas. One can of cola costs 1/3 of a pizza.
Increasing Opportunity Cost:
The opportunity cost of a pizza increases as the quantity of pizzas produced increases. The
outward-bowed shape of the PPF reflects increasing opportunity cost. When we produce a
large quantity of cola and a small quantity of pizza— between points A and B in Fig. —the
frontier has a gentle slope. An increase in the quantity of pizzas costs a small decrease in the
quantity of cola—the opportunity cost of a pizza is a small quantity of cola. The PPF is bowed
outward because resources are not all equally productive in all activities. People with many years
of experience working for PepsiCo are good at producing cola but not very good at making
pizzas. So, if we move some of these people from PepsiCo to Dominos, we get a small increase
in the quantity of pizzas but a large decrease in the quantity of cola. Similarly, people who have
spent years working at Domino’s are good at producing pizzas, but they have no idea how to
produce cola. So, if we move some of these people from Domino’s to PepsiCo, we get a small
increase in the quantity of cola but a large decrease in the quantity of pizzas. The more of either
good we try to produce, the less productive are the additional resources we use to produce that
good and the larger is the opportunity cost of a unit of that good.
Demand, Supply and Market Equilibrium
-Prepared by Tasfiunnoor Pinky (TP), Lecturer, Department of Economics, BUBT
Demand: If you demand something, then you
1. Want it,
2. Can afford it, and
3. Plan to buy it
The Law of Demand:
The law of demand states “Other things remaining the same, the higher the price of a good,
the smaller is the quantity demanded; and the lower the price of a good, the greater is the
quantity demanded.”
Demand Curve and Demand Schedule:
The term demand refers to the entire relationship between the price of a good and the quantity
demanded of that good. Demand is illustrated by the demand curve and the demand schedule.
The term quantity demanded refers to a point on a demand curve—the quantity demanded at a
particular price.
The figure shows the demand curve for energy bars. A demand curve shows the relationship
between the quantity demanded of a good and its price when all other influences on consumers’
planned purchases remain the same.
Quantity
Price demanded
($ per (millions of
bar) bars)
A 0.50 22
B 1.00 15
C 1.50 10
D 2.00 7
E 2.50 5
Figure: Demand Curve
The table in Fig. is the demand schedule for energy bars. A demand schedule lists the quantities
demanded at each price when all the other influences on consumers’ planned purchases remain
the same. For example, if the price of a bar is 50¢, the quantity demanded is 22 million a week. If
the price is $2.50, the quantity demanded is 5 million a week. The other rows of the table show
the quantities demanded at prices of $1.00, $1.50, and $2.00. We graph the demand schedule as a
demand curve with the quantity demanded on the xaxis and the price on the yaxis. The points
on the demand curve labeled A through E correspond to the rows of the demand schedule. For
example, point A on the graph shows a quantity demanded of 22 million energy bars a week at a
price of 50¢ a bar.
A Change in Demand / Factors of Demand/ Determinants of Demand:
When any factor that influences buying plans changes, other than the price of the good, there is a
change in demand. The Figure illustrates an increase in demand. When demand increases, the
demand curve shifts rightward and the quantity demanded at each price is greater.
Figure: Change in demand
Six main factors bring changes in demand. They are
• Changes in the prices of related goods
• Expected future prices
• Income
• Expected future income
• Population
• Preferences
• Changes in the prices of related goods
The quantity of energy bars that consumers plan to buy depends in part on the prices of substitutes
for energy bars. A substitute is a good that can be used in place of another good. For example, a
bus ride is a substitute for a train ride. A complement is a good that is used in conjunction with
another good. Hamburgers and fries are complements, and so are energy bars and exercise.
• Expected Future Prices
If the expected future price of a good rises and if the good can be stored, the demand for the good
today increases.
• Income
Consumers’ income influences demand. When income increases, consumers buy more of most
goods; and when income decreases, consumers buy less of most goods. Although an increase in
income leads to an increase in the demand for most goods, it does not lead to an increase in the
demand for all goods. A normal good is one for which demand increases as income increases. An
inferior good is one for which demand decreases as income increases. As incomes increase, the
demand for air travel (a normal good) increases and the demand for bus trips (an inferior good)
decreases.
• Expected Future Income and Credit
When expected future income increases or credit becomes easier to get, demand for the good
might increase now. For example, a salesperson gets the news that she will receive a big bonus at
the end of the year, so she goes into debt and buys a new car right now, rather than wait until she
receives the bonus.
• Population
Demand also depends on the size and the age structure of the population. The larger the
population, the greater is the demand for all goods and services; the smaller the population, the
smaller is the demand for all goods and services.
• Preferences
Demand depends on preferences. Preferences determine the value that people place on each good
and service.
Supply
If a firm supplies a good or service, the firm
1. Has the resources and technology to produce it,
2. Can profit from producing it, and
3. Plans to produce it and sell it.
Law Of Supply:
The law of supply states “Other things remaining the same, the higher the price of a good,
the greater is the quantity supplied; and the lower the price of a good, the smaller is the
quantity supplied.”
Supply Curve and Supply Schedule:
The term supply refers to the entire relationship between the price of a good and the quantity
supplied of it. Supply is illustrated by the supply curve and the supply schedule. The term
quantity supplied refers to a point on a supply curve—the quantity supplied at a particular price.
Figure shows the supply curve of energy bars. A supply curve shows the relationship between the
quantity supplied of a good and its price when all other influences on producers’ planned sales
remain the same. The supply curve is a graph of a supply schedule.
Supply Schedule
Figure: Supply Curve
Change in Supply/ Factors of Supply/ Determinants of Supply:
When any factor that influences selling plans other than the price of the good changes, there is a
change in supply. Six main factors bring changes in supply. They are
• changes in the prices of factors of production
• The prices of related goods produced
• Expected future prices
• The number of suppliers
• Technology
• The state of nature
• Prices of Factors of Production:
The prices of the factors of production used to produce a good influence its supply. If the price of
a factor of production rises, so supply decreases.
• Prices of Related Goods Produced:
The prices of related goods that firms produce influence supply. For example, if the price of
energy gel rises, firms switch production from bars to gel. The supply of energy bars decreases.
Energy bars and energy gel are substitutes in production—goods that can be produced by using
the same resources. If the price of beef rises, the supply of cowhide increases. Beef and cowhide
are complements in production—goods that must be produced together.
• Expected Future Prices:
If the expected future price of a good rises, the return from selling the good in the future
increases and is higher than it is today. So, supply decreases today and increases in the future.
• The Number of Suppliers:
The larger the number of firms that produce a good, the greater is the supply of the good. As new
firms enter an industry, the supply in that industry increases. As firms leave an industry, the
supply in that industry decreases.
• Technology:
The term “technology” is used broadly to mean the way that factors of production are used to
produce a good. A technology change occurs when a new method is discovered that lowers the
cost of producing a good. For example, new methods used in the factories that produce computer
chips have lowered the cost and increased the supply of chips.
• The State of Nature:
The state of nature includes all the natural forces that influence production. It includes the state
of the weather and, more broadly, the natural environment. Good weather can increase the supply
of many agricultural products and bad weather can decrease their supply. Extreme natural events
such as earthquakes, tornadoes, and hurricanes can also influence supply.
Market Equilibrium
An equilibrium is a situation in which opposing forces balance each other. Equilibrium in a
market occurs when the price balances buying plans and selling plans. The equilibrium price is
the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity
is the quantity bought and sold at the equilibrium price.
Elasticity of Demand and Supply
Prepared by: Tasfiunnoor Pinky (TP), Lecturer, Dept of Economics, BUBT
Elasticity: Elasticity is a measure of the responsiveness of quantity demanded or quantity
supplied to a change in one of its determinants.
The Price Elasticity of Demand:
The law of demand states that a fall in the price of a good raises the quantity demanded.
The price elasticity of demand measures how much the quantity demanded responds to a
change in price. Demand for a good is said to be elastic if the quantity demanded responds
substantially to changes in the price. Demand is said to be inelastic if the quantity
demanded responds only slightly to changes in the price. The price elasticity of demand for
any good measures how willing consumers are to buy less of the good as its price rises.
Computing the Price Elasticity of Demand:
Economists compute the price elasticity of demand as the percentage change in the
quantity demanded divided by the percentage change in the price. That is,
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
%𝛥𝑄𝑑
Or, 𝐸𝑝 = %𝛥𝑃
For example, suppose that a 10 percent increase in the price of an icecream cone causes the
amount of ice cream you buy to fall by 20 percent. We calculate your elasticity of demand as
20%
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
10%
Or, 𝐸𝑝 = 2
In this example, the elasticity is 2, reflecting that the change in the quantity demanded is
proportionately twice as large as the change in the price. Because the quantity demanded of a
good is negatively related to its price, the percentage change in quantity will always have the
opposite sign as the percentage change in price. In this example, the percentage change in price
is a positive 10 percent (reflecting an increase), and the percentage change in quantity demanded
is a negative 20 percent (reflecting a decrease). For this reason, price elasticities of demand is
sometimes reported as negative numbers. Here, we follow the common practice of dropping the
minus sign and reporting all price elasticities of
demand as positive numbers. (Mathematicians call this the absolute value.) With this convention,
a larger price elasticity implies a greater responsiveness of quantity demanded to changes in
price.
Other Demand Elasticities:
In addition to the price elasticity of demand, economists use other elasticities to
describe the behavior of buyers in a market.
The Income Elasticity of Demand:
The income elasticity of demand measures how the quantity demanded changes as consumer
income changes. It is calculated as the percentage change in quantity demanded divided by the
percentage change in income. That is,
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒
%𝛥𝑄𝑑
Or, 𝐸𝐼 = %𝛥𝐼
As we discussed,
In case of normal goods, Higher income raises the quantity demanded. Because quantity
demanded and income move in the same direction, normal goods have positive income
elasticities.
A few goods, such as bus rides, are inferior goods, Higher income lowers the quantity demanded.
Because quantity demanded and income move in opposite directions, inferior
goods have negative income elasticities.
𝐸𝐼 > 0; 𝐺𝑜𝑜𝑑 𝑖𝑠 𝑛𝑜𝑟𝑚𝑎𝑙 𝑔𝑜𝑜𝑑
𝐸𝐼 < 0; 𝐺𝑜𝑜𝑑 𝑖𝑠 𝑖𝑛𝑓𝑒𝑟𝑖𝑜𝑟 𝑔𝑜𝑜𝑑
Cross-Price Elasticity of Demand: It is a measure of how much the quantity demanded of one
good responds to a change in the price of another good, computed as the percentage change in
quantity demanded of the first good divided by the percentage change in the price of the second
good.
Percentage change in quantity demanded of good 2
Cross Price Elasticity of demand= Percentage change in the price of good 1
%∆𝑄𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 2
Or, Cross Price Elasticity of demand= %∆𝑃 𝑜𝑓 𝑔𝑜𝑜𝑑 1
Whether the crossprice elasticity is a positive or negative number depends on whether the two
goods are substitutes or complements. As we discussed, substitutes are goods that are typically
used in place of one another, such as Pepsi and Mojo. An increase in prices of Pepsi induces
people to buy Mojo instead. Because the price of Pepsi and the quantity of Mojo demanded
move in the same direction, the crossprice elasticity is positive for substitutes. Conversely,
complements are goods that are typically used together, such as computers and software. In this
case, the crossprice elasticity is negative, indicating that an increase in the price of computers
reduces the quantity of software demanded.
𝐸𝐶𝑃 > 0; 𝐺𝑜𝑜𝑑𝑠 𝑎𝑟𝑒 𝑠𝑢𝑏𝑠𝑡𝑖𝑡𝑢𝑡𝑒 𝑖𝑛 𝑛𝑎𝑡𝑢𝑟𝑒
𝐸𝐶𝑃 < 0; 𝐺𝑜𝑜𝑑𝑠 𝑎𝑟𝑒 𝐶𝑜𝑚𝑝𝑙𝑒𝑚𝑒𝑛𝑡 𝑖𝑛 𝑛𝑎𝑡𝑢𝑟𝑒
The Price Elasticity of Supply: The law of supply states that higher prices raise the
quantity supplied. The price elasticity of supply measures how much the quantity supplied
responds to changes in the price. It is a measure of how much the quantity supplied of a
good respond to a change in the price of that good, computed as the percentage change in
quantity supplied divided by the percentage change in price.
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑆𝑢𝑝𝑝𝑙𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
%𝛥𝑄𝑠
Or, 𝐸𝑝 = %𝛥𝑃
Difference between Price Elasticity of Demand and Income Elasticity of demand
Topics Price Elasticity of demand Income Elasticity of demand
It is the ratio of the percentage it is the ratio of the percentage
change in quantity demanded change un the quantity demanded
Definition
to the percentage change in to the percentage change in
the price of a commodity income of the consumer
The coefficient of income elasticity
The Coefficient of Price
Coefficient is positive for normal goods and
elasticity is always negative
negative for inferior goods
the range of price elasticity is the range of income elasticity is
Range
from 0 to ∞ from - ∞ to + ∞
Variables Change in the income of the
Change in price of the good
considered consumers
the income elasticity of demand
the Price elasticity of demand represents types of income
Representation represents different degrees elasticities to identify the nature of
of price elasticities. goods whether they are normal
goods or inferior goods.
Price Elasticity of Demand= Income Elasticity of Demand=
(Percentage change in (Percentage change in Quantity
Calculation
Quantity Demanded)/ Demanded)/ (Percentage Change
(Percentage Change in Price) in Income)
if the price of tea rises, the if the income rises, demand for
Example
demand for tea falls cars increases (normal good)
Market Structure
Prepared by: Tasfiunnoor Pinky (TP), Lecturer, Dept of Economics, BUBT
Market: A market is a system where buyers and sellers interact with each other to exchange
goods, services with prices determined by the forces of demand and supply.
Types of market:
1) Perfect Competitive Market:
A perfect Competitive market is an ideal market situation in which buyers and sellers are so
numerous and well informed that each can act as a price-taker, able to buy or sell any desired
quantity without affecting the market price.
A theory of market structure based on four assumptions:
(1) There are many sellers and buyers;
(2) sellers sell a homogeneous good;
(3) buyers and sellers have all relevant information;
(4) entry into or exit from the market is easy.
The theory of perfect competition is built on four assumptions, which are described below:
1. There are many sellers and many buyers. This assumption speaks to both demand (the
number of buyers) and supply (the number of sellers). Given many buyers and sellers, each
buyer and each seller may act independently of other buyers and sellers, respectively, and
each is such a small a part of the market as to have no influence on price.
2. Each firm produces and sells a homogeneous product: Each firm sells a product that is
indistinguishable from all other firms’ products in a given industry. (For example, a buyer of
wheat cannot distinguish between Farmer Stone’s wheat and Farmer Gray’s wheat.) As a
consequence, buyers are indifferent to the sellers.
3. Buyers and sellers have all relevant information about prices, product quality, sources
of supply, and so forth: Buyers and sellers know who is selling what, at what prices, at hat
terms. In short, they know everything that relates to buying, producing, and selling the
product.
4. Firms have easy entry and exit: New firms can enter the market easily, and existing
firms can exit the market easily. There are no barriers to entry or exit.
Example: No Real-world example of perfect competitive market exists. A Quasi example can
be agricultural product market.
2) Imperfect Competitive Market
An Imperfect competitive market is any market that is not perfectly competitive market, where
individual firms have some control over the price of their product due to factors like product
differentiation, limited competition, or barriers to entry.
There are some types of Imperfect Competitive market, which are described below:
a) Monopoly Market:
A market situation with one seller having the sole power of the market. This type of market acts
as a price-searcher.
The theory of monopoly is built on three assumptions:
1. There is one seller. In effect, the firm is the industry. Contrast this situation with
perfect competition, where many firms make up the industry.
2. The single seller sells a product that has no close substitutes. Because there are no
close substitutes for its product, the single seller—the monopolist or monopoly firm—
faces little, if any, competition.
3. The barriers to entry are extremely high. In the theory of perfect competition, a
firm can enter the industry easily. In the theory of monopoly, entering the industry is
very hard (if not impossible). Extremely high barriers keep out new firms.
Example: Electricity service provided by Government (BPDB), Water Service provided by
Government (WASA).
Barriers to Entry: A Key to Understanding Monopoly:
If a firm is a single seller of a product, why don’t other firms enter the market and produce the
same product? Legal barriers, economies of scale, or one firm’s exclusive ownership of a
scarce resource may make it difficult or impossible for new firms to enter the market.
i) LEGAL BARRIERS: Legal barriers include public franchises, patents, and government
licenses. A public franchise is a right that government grants to a firm and that permits the
firm to provide a particular good or service and excludes all others from doing so (thus
eliminating potential competition by law). Entry into some industries and occupations
requires a governmentgranted license. Some cities also use licensing as a form of legal
barrier.
ii) ECONOMIES OF SCALE: In some industries, low average total costs (low unit costs) are
obtained only through large-scale production. Thus, if new entrants are to compete in the
industry, they must enter it on a large scale. But having to produce on this scale is risky and
costly, and it therefore acts as a barrier to entry.
iii) EXCLUSIVE OWNERSHIP OF A NECESSARY RESOURCE: Existing firms may
be protected from the entry of new firms by the exclusive or nearly exclusive ownership of a
resource needed to enter the industry.
b) Monopolistic Market:
A market structure with many firms selling similar but differentiated products. It is a form of
imperfect competition, featuring low barriers to entry and exit, where firms compete on price,
quality and marketing.
Example: Restaurants, Clothing stores and hair salons.
c) Oligopoly Market:
Oligopolistic competition describes a market structure where a small number of firms dominate
the industry.
Example: Sim Operators in Bangladesh (Teletalk, Banglalink, Grameenphone, Robi)
d) Monopsony:
Monopsony is a market situation where there is only one buyer for many sellers. The single
buyer has significant power to influence prices.
Example: Sugar mill (Single Buyer) in a city which hires Labor (sellers of physical labor) from
the village.
e) Oligopsony:
An Oligopsony is an imperfect market structure with a few large buyers dominating many
sellers.
Example: Fast food Chain Shops like KFC, Mc-Donald’s, Burger Lab etc. are significant
buyers of meat which they buy from different sellers.
THIS NOTE HAS BEEN PREPARED USING THE REFERRED BOOKS:
PARKIN, MANKIW AND ARNOLD. FOR MORE CLEAR CONCEPTS, YOU
CAN GO THROUGH THE TEXT BOOK ALONG WITH CLASS LECTURE.
PLEASE GO THROUGH THE CLASS LECTURE FOR MATHEMATICAL
EXAMPLES. THIS HAND-NOTE IS ONLY FOR THE THEORETICAL
PART ONLY.
GOOD LUCK