CA Foundation

Part- 1
Paper-4: Business Economics

Section B: Micro Economics

Jatin Dembla
 Table Of Content

Chapter Name Pg No.

Chapter 1: Nature & Scope of Business Economics

Unit 1: Introduction 1
Unit 2: Basic Problems of an Economy & Role of Price Mechanism 3

Chapter 2: Theory of Demand and Supply

Unit 1: Law of Demand and Elasticity of Demand 5
Unit 2: Theory of Consumer Behaviour 9
Unit 3: Supply 12

Chapter 3: Theory of Production and Cost

Unit 1: Theory of Production 14
Unit 2: Theory of Cost 17

Chapter 4: Price Determination in Different Markets

Unit 1: Meaning and Types of Markets 20
Unit 2: Determination of Prices 22
Unit 3: Price Output Determination under Different Market Forms 23

Chapter 5: Business Cycles 26

Economic - AS - Wealth of Nation- 1776
=
Economics 7 Okinomia - Household
Greek word
-
Kinshuk Institute
Chapter 1 Nature & Scope of Business Economics
Unit - 1: Introduction jo
Nature of Business Economics
Definition In Micro Economics we study about-
• Science is a systematized body of

O
-
Science knowledge which establishes cause and
▪ Business Economics may be defined as the use Product Pricing -
-

effect relationships.
of economic analysis to make business decisions
involving the best use of an organizations scare • Business Economics is based largely on
Consumer Behaviour - Micro-Economics. A business manager is
resources. usually concerned about achievement of
Micro
the predetermined objectives of his
Meaning of Economics Factor Pricing - Economics
organisation so as to ensure the long-
term survival and profitable functioning
-

▪ Economics is the study of processes by which - -

of the organisation.
the relatively scarce resources are allocated to Economic condition of a section of people - -
-

• A business unit is influenced by the

satisfy the competing unlimited wants of human
↑

Behaviour of Firms - Macro

external economy environment, including
beings in a society. price levels, income, employment, and
Analysis
government policies like taxation, interest
-
O
rates, and monopoly regulation.
Location of Industry
Human wants are
unlimited • as it involves practical application of rules
An economy exists Art and principles for the attainment of set
In Macro Economics we study about- -
objectives.
because of two facts

o
Resources are scarce National Income and National Output - Use of
Theory of
Markets and
• largely uses the theory of markets and
private enterprise. It uses the theory of
the firm and resource allocation in the
The General Price Level and Interest Rates - Private backdrop of a private enterprise economy.
-

Subject -matter of Economics Enterprises

Micro Economics Macro Economics Balance of Trade and Balance of Payments- Pragmatic in • in its approach as it tackles practical
problems which the firms face in the real
Approach
- world.
is the study of the is the study of External value of Currency
overall - • it incorporates tools from other disciplines
behaviour of -
such as Mathematics, Operations
different individuals economic Interdisciplin
Research, Management Theory,
-
-
-

phenomena or the The overall Level of Savings and Investment - ary - -

Accounting, marketing, Finance, Statistics

and organizations --
economy as a whole. and Econometrics .
-

within an economic
The Level of Employment and Rate of Economic • It suggests the application of economic
-

system. - principles with regard to policy

Growth Normative
formulation, decision-making and future
planning.

Macro Economics Jatin Dembla Page | 1

Kinshuk Institute
Scope Of Business Economics
Micro Economics applied to
Operational or Internal Issues.

• Business Economics makes use of

microeconomic analysis such as, demand
analysis and forecasting, production and
cost analysis, inventory management,
market structure and pricing policies,
resource allocation, theory of capital and
investment decisions, profit analysis and
risk and uncertainty analysis.

Macro Economics applied to

Environmental or External
-

Issues.

• Business Economics also considers

macroeconomics related to economic
systems, business cycles, national income,
employment, prices, saving and investment,
Government’s economic policies and
working of financial sector and capital
market.

Macro Economics Jatin Dembla Page | 2

 Kinshuk Institute
Chapter 3 Theory Of Production And Cost
Unit - 1: Theory Of Production
c
-

Meaning of Production Labour Capital

Production is the outcome of the combined activity Labor refers to mental or physical exertion for Capital has been rightly defined as ‘produced
-

of the four factors of production viz, land, labour, producing goods or services, aiming to secure means of production’ or ‘man-made instruments
-

capital and organization. In simple terms production, income beyond pleasure directly derived from the of production’.
-

means ‘creation of utility’. i.e. Utility of form, utility work.

-
Stages of capital formation:
of place, utility of time and personal utility. Characteristics of labour:
---
1. Savings -
Factors Of Production Land is a free gift of nature X • Individual income significantly impacts
-
Land their ability to save, with higher incomes
Human Effort often leading to increased savings due to
In Economics, 'land' refers to all natural resources, -
decreased consumption propensity.
including soil fertility, water, air, light, and heat,
Labour is perishable
2. Mobilisation of savings -
- - -

not just soil or earth's surface.

-

-
• Availability of appropriate financial
Characteristics of land: Labour is an active factor products and institutions is a necessary
- precondition for mobilisation of savings.
Land is a free gift of nature
- Labour is inseparable from the labourer
-
3. Investment
-
Supply of land is fixed
-
Labour power differs from labourer to labourer • Capital formation is achieved when real
-
savings are converted into real capital
-Land is permanent and has indestructible powers All labour may not be productive
assets, and an economy should have an
-
entrepreneurial class willing to invest in
Land is a passive factor productive ventures.
- Labour has poor bargaining power
-
Land is immobile
- Labour is mobile
-

Land has multiple uses There is no rapid adjustment of supply of labour to

-
- the demand for it
Land is heterogeneous
Choice between hours of labour and hours of
- -
leisure
Macro Economics Jatin Dembla Page | 14
Kinshuk Institute

Entrepreneur: Objectives of an enterprise Cobb-Douglas Production Function

An entrepreneur, also known as the organizer, Organic - Economic - Social -

Paul H. Douglas and C.W. Cobb of the U.S.A.
- -

manager, or risk taker, is responsible for objectives objectives objectives studied the production function of the American
mobilizing and combining factors, initiating -Labour
manufacturing industries. -
production processes, and bearing associated Y
Human objectives National objectives It stated as Q= KLa C(1-a)
risks. - = Capital
- where Q is output, L the quantity of labour, C
Functions of Entrepreneur Production Function quantity of capital, K and a are positive constants.

Initiating business enterprise ▪The production function is a statement of the Law of Variable Proportions -
-
and resource co-ordination relationship between a firm's scarce resources (i.e.
-
its inputs) and the output that results from the use The law of variable proportion or the law of
• An entrepreneur initiates a business by
of these resources. diminishing returns is relevant when some factors
identifying opportunities, conceiving
project ideas, deciding on scale,
▪The production function can be algebraically are kept fixed and others are varied. It is
products, and processes, and then owns expressed in the form of an equation in which the
applicable to the short-run.
and manages the enterprise. output is the dependent variable and inputs are the
independent variables. Total product -

Risk bearing or uncertainty

--
▪The equation is: • is the total output resulting from the
bearing
-
Q = f (a, b, c, d ....... n) efforts of all the factors of production
• Entrepreneurs bear ultimate ▪Where 'Q' stands for the rate of output of given combined together at any time.
responsibility for business success and commodity and a, b, c, d ....... n, are the different
survival, as plans may not be realized due factors (inputs) and services used per unit of time. Average product -

to the dynamic economy and daily

Short-Run Vs Long-Run Production Function • is the total product per unit of the
changes. - -
variable factor.
Short-Run 𝑻𝒐𝒕𝒂𝒍 𝑷𝒓𝒐𝒅𝒖𝒄𝒕
Innovations • AP= -

𝑵𝒐.𝒐𝒇 𝒖𝒏𝒊𝒕𝒔 𝒐𝒇 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑭𝒂𝒄𝒕𝒐𝒓𝒔

-
•1. The short-run is a period of time in which at least one of the -

• Schumpeter argues that entrepreneurs' inputs used remains unchanged during that period.
-

primary role is to introduce innovations, •2. In the short run, a firm cannot install a new capital Marginal product
equipment to increase production.
which include improved products,
processes, raw materials, technology, •3. The behaviour of production is the subject matter of the • is the change in total product per unit
law of variable proportion. change in the quantity of variable factor.
novel business models, and expansion into
Long-Run
unexplored markets. • 𝑴𝑷𝒏 = 𝑻𝑷 𝒏 − 𝑻𝑷 𝒏 𝟏 .
•1. The long run is a period of time in which all factors of
-
production are variable.
-
• 2. It is a time period when the firm will be able to install new
machines and capital equipments apart from increasing the
variable factors of production.
•3. The behaviour of production is the subject matter of the
law of returns to scale.
Macro Economics Jatin Dembla Page | 15
Kinshuk Institute

Relationship between Average Product Returns to Scale Isoquants

and Marginal Product
▪It describes the relationship between inputs and It show various combinations of two factors
when -average product rises as a result of an increase in output in the long run when all inputs are changed in
-
which the firm can buy with given expenditure or
the quantity of variable input, marginal product is more the same proportion. outlay.
than the average product.
-

-
Figure shows various iso-cost lines representing
Constant

o
It occurs when the inputs increase by some different combinations of factors with different
Returns to proportion and the output also increases by the
when average product is maximum, marginal product is Scale outlays. AB, CD and EF are Iso-cost lines.
same proportion. It is also called linear homogeneous
equal to average product. In other words, the marginal
-

a +b= 1 production function

product curve cuts the average product curve at its
-

maximum.
Col-DopTortat
Increasing It occurs when the inputs increase by some
Returns to proportion and the output increases more than
Scale proportionately.
a+ b7
when- average product falls, marginal product is less than
- Decreasing It occurs when the inputs increase by some
the average product.
-
Returns to proportion and the output increases less than
Scale proportionately.
a + b4)
- Isoquants

-
Least Cost Combination
▪Isoquants or product indifference curves show all
those combinations of different factors of For producing a given output, the tangency point of
production which give the same output to the the relevant isoquant (representing the output)
producer. with an iso-cost line represents the least cost
-
- IQ is Isoquant curve. combination of factors.
C is the tangency point of the given isoquant with
an iso-cost line represents the least cost
the total product increases at an increasing rate upto
-

a point (in figure upto point F), marginal product also combination of factors for producing a given
Stage 1 rises and is maximum at the point corresponding to X output.
the point of inflexion and average product goes on
rising.
*
•the total product continues to increase at a
diminishing rate until it reaches its maximum at point
- X
Stage 2 H, where the second stage ends. In this stage, both
marginal product and average product of the variable X
X
factor are diminishing but are positive

total product declines, MP is negative, average

product is diminishing. This stage is called the stage
-

Stage 3
of negative returns since the marginal product of the
variable factor is negative during this stage.

Macro Economics Jatin Dembla Page | 16

Kinshuk Institute
Chapter 3 Theory Of Production And Cost
Unit - 2: Theory Of Cost
Cost Analysis Indirect costs - Cost Function
► It refers to the study of behaviour of cost in • are those which cannot be easily and ► the mathematical relation between cost and
definitely identifiable in relation to a plant, -
relation to one or more production criteria. It the various determinants of cost. It expresses
product, process or department. They not -

concerned with the financial aspects of production. visibly traceable to any specific goods, the relationship between cost and output.
services, processes, departments or Economists are generally interested in two types
Types of Cost operations. of cost functions; the short run cost function
and the long run cost function.
Outlay costs and Opportunity costs Incremental cost -
T -

• Outlay costs involve actual expenditure • refers to the additional cost incurred by a Cost Function is divided into two-
of funds. firm as a result of a business decision.
Short-run cost Long-run cost
• Opportunity cost is concerned with the function function
cost of the next best alternative Sunk costs -
Fixed or Long run cost of
opportunity which was foregone in order -

• are already incurred once and for all, and constant costs production is
to pursue a certain action.
cannot be recovered.
-

which are not a the least

function of possible cost of
Accounting costs
output. These producing any
-

- Historical cost -
• explicit costs and includes all the are inescapable given level of
payments and charges made by the • refers to the cost incurred in the past on -
or output when all
entrepreneur to the suppliers of various the acquisition of a productive asset. -
uncontrollable. individual
productive factors. factors are
Replacement cost - -
variable.
-

Economic costs = Oc + ALIC + ER • is the money expenditure that has to be -

• take into account explicit costs as well as incurred for replacing an old asset.
implicit costs. A firm has to cover its
economic cost if it wants to earn normal Private costs -
profits.
• are costs actually incurred or provided for
by firms and are either explicit or implicit.
Direct costs -

• are those which have direct relationship Social cost -

with a component of operation. They are
readily identified and are traceable to a • refers to the total cost borne by the
particular product, operation or plant. society on account of a business activity
and includes private cost and external cost.

Macro Economics Jatin Dembla Page | 17

Kinshuk Institute

Average Fixed cost

41- Su
31 40
• AFC is obtained by dividing the total fixed
-

21-30
cost by the number of units of output
20 1-10"-20 produced.
𝑻𝑭𝑪
• AFC=
𝑸

Average variable cost

Stair-step costs
Fixed Cost • is found out by dividing the total variable
• remain fixed over certain range of output; cost by the number of units of output
• Fixed or constant costs which are not a
but suddenly jump to a new higher level when produced.
function of output. These are inescapable or &

output goes beyond a given limit.

uncontrollable. • AVC=
𝑻𝑽𝑪
2 Per Mit 𝑸

Average total cost

• is the sum of average fixed cost and average
variable cost.
𝑻𝑪
• ATC= or ATC = AFC + AVC
𝑸 I Y

Marginal cost
• is the addition made to the total cost by the
Variable costs production of an additional unit of output.
Total cost = Fc + V ∆𝑻𝑪
• MC= or MCn = TCn – TCn-1
• Variable costs are a function of output in • a business is defined as the actual cost that ∆𝑸
the production period. must be incurred for producing a given Relationship between Average Cost and
quantity of output. Marginal Cost

When average cost falls as a result of an

-
increase in output, marginal cost is less than

#
-

average cost.
-
FC

VC
When average cost rises as a result of an
-
increase in output, marginal cost is more than
-

Semi-variable costs average cost.

-

• are neither perfectly variable, nor

absolutely fixed in relation to the changes
When average cost is minimum, marginal cost
in the size of output.
is equal to the average cost.
- -

Macro Economics Jatin Dembla Page | 18

Kinshuk Institute

Kinds of Internal Economies and Diseconomies

00000
Technical Managerial Commercial Financial Risk bearing
economies and economies and economies and economies and economies and
diseconomies diseconomies diseconomies diseconomies diseconomies

Kinds of External Economies and Diseconomies

Long run Average Cost Curve(LAC) Cheaper raw Technological

Development of Growth of ancillary
material and external
skilled Labour industries
• The long run average cost curve, often called capital equipments economies.
a planning curve, is so drawn as to be tangent
to each of the short run average cost
curves.
Better
• The LAC curve is tangent to each of the transportation and Economies of
short run average cost curves. Every point
- marketing Information.
on the long run average cost curve will be a facilities
tangency point with some short run AC curve

Economies of Scale and Diseconomies

of Scale

► When increase in scale is upto optimum level,

then it is economies of scale. On the other
hand, increase in scale beyond the optimum
level, results in diseconomies of scale.

►Economies of scale is of two types-

• Internal economies of scale which accrue to a
firm when it engages in large scale production.
• External economies of scale accrue to a firm
due to factors which are external to a firm.

Macro Economics Jatin Dembla Page | 19

 Kinshuk Institute
Chapter 4 Price Determination In Different Markets
Unit - 1: Meaning & Types of Markets
-

Meaning of Market On the basis of time On the basis of Regulation

►Market is the whole set of arrangements for
-Very short period market: a period of time in
- Regulated Market: In this market, transactions
buying and selling of a commodity or service.
which supply is fixed and cannot be increased or are statutorily regulated so as to put an end to
The elements of a market are:
decreased. unfair practices. Eg. Stock exchange.
- Buyers and sellers;
 A product or service;
-
 Bargaining for a price; -Short-period Market: the supply of output may -
Unregulated Market: It is also called a free
- be increased by increasing the employment of market as there are no stipulations on the
-
 Knowledge about market conditions; and
variable factors with the given fixed factors and transactions.
 One price for a product or service at a given
-
time. state of technology.
On the basis of volume of Business
Long-period Market: all factors become variable -

Classification of Market -
and the supply of commodities may be changed by Wholesale Market: The wholesale market is the
On the basis of geographical area altering the scale of production. -
- market where the commodities are bought and

Very long-period or secular period is one when sold in bulk or large quantities.
Local Markets: When buyers and sellers are ~
-
limited to a local area or region, the market is secular movements are recorded in certain Retail Market: When the commodities are sold
-

called a local market. factors over a period of time. in small quantities, it is called retail market.

-
Regional Markets: Regional markets cover a On the basis Nature of Transactions
wider area such as a few adjacent cities, parts of On the basis of competition
states, or cluster of states. Spot or cash Market: those markets where
-
Perfectly competitive market and
goods are exchanged for money payable either
National Markets: The trade policy of the
-

- immediately or within a short span of time.

government may restrict the trading of a Imperfectly competitive market.
-

commodity to within the country.

-Forward or Future Market: transactions involve
contracts with a promise to pay and deliver goods
at some future date.

Macro Economics Jatin Dembla Page | 20

Kinshuk Institute

Types of Market Total Revenue refers to the amount of money which a firm realizes by selling certain units of a commodity.

TR=P× Q
Perfect Competition
-

Average Revenue refers to the revenue earned per unit of output.

-
• Very large number of sellers. AR=TR/Q
• No product differentiation.
-

-
• Price elasticity of demand of a firm is infinite. Marginal Revenue refers to the change in total revenue resulting from the sale of an additional units of a
-
commodity.
• No degree of control over price.
-
MR=∆TR/∆Q

Monopolistic Competition MR =
TRETRn -

TR & Price Elasticity of Demand

• Large number of Sellers.

Relationship Between A R, MR,

-

-• Slight product differentiation.

-• Price elasticity of a firm is large. MR= 𝐴𝑅 × , Where e = price elasticity of demand
• Some degree of control over price.
Thus if e = 1, MR = 𝐴𝑅 ×
-
= 0.
- -

Oligopoly and if e >1, MR will be positive

- -

• Small numbers of sellers. and if e <1, MR will be negative

- - -

• Price elasticity of demand of a firm is small.

-

-
• Some degree of control over price.
• Product differentiation is none to substantial.

Monopoly

Behavioural principles
~• Only single seller.
-• Extreme product differentiation.
• Price elasticity of a firm is small.
-• Degree of control over price is very
The firm will maximize profits at the point at
considerable. which marginal revenue is equal to marginal
-
cost
-

Macro Economics Jatin Dembla Page | 21

Kinshuk Institute
Chapter 4 Price Determination in Different Markets
Unit - 2: Determination Of Prices

Equilibrium Price Changes In Demand & Supply Simultaneous Changes in Demand & Supply

Increase in demand,
causing an increase in
equilibrium price and -
quantity

The supply and demand curves shift in the same direction

as follows:
It is the price at which the quantity demanded of Decrease in demand
▪When both demand and supply increase, the equilibrium
a commodity equals the quantity supplied of the resulting in a 2
quantity increases but the change in equilibrium price is

commodity there is no unsold stock or no decrease in price and uncertain.

unsupplied demand. quantity demanded ▪When both demand and supply decrease, the equilibrium
quantity decreases but the change in equilibrium price is
uncertain.

O Increase in supply,
resulting in decrease -

O
in equilibrium price
and increase in
quantity supplied

The supply and demand curves shift in the opposite

Decrease in supply (
directions as follows:
causing an increase in When demand increases and supply decreases, the
Stable Equilibrium
the equilibrium price equilibrium price rises but nothing certain can be said
A state where the quantity that firms sell is equal
and a fall in quantity about the change in equilibrium quantity.
to the quantity that the consumers desire to buy.
demanded When demand decreases and supply increases, the
equilibrium price falls but nothing certain can be said
about the change in equilibrium quantity.

Macro Economics Jatin Dembla Page | 22

Kinshuk Institute
Chapter 4 Price Determination in Different Markets
Unit - 3: Price-Output Determination Under Different Market Forms
Perfect Competition ~ Short run supply curve of the firm in a competitive ▪ Losses:
market A firm in equilibrium
 There are large number of buyers and sellers can minimize losses
-
X
who compete among themselves. while maintaining
output at MR = MC, X
 All goods must sell at a single market price. meeting variable and
-

 Every firm is free to enter the market or to go fixed costs, and

-

out of it. attempting to continue

short-run production.
 There is perfect knowledge of the market
-

conditions on the part of buyers and sellers.

 Perfectly competitive markets have very low
▪ One interesting thing about the MC curve of a firm
transaction costs.
- in a perfectly competitive industry is that it depicts
 All firms individually are price takers. the firm’s supply curve.
-
Marginal cost and supply curves for a price-taking
Price Determination
firm
Equilibrium of the
Industry Can a competitive firm earn profits?  The output is produced at the minimum
An industry in economic -
X feasible cost.
terminology consists of -

a large number of ▪ Supernormal Profits:  Consumers pay the minimum possible price
-

independent firms. A firm's average revenue -

which just covers the marginal cost i.e. MC =
-

equals its average total cost, X AR. (P = MC).

Equilibrium of the Firm
-

indicating normal or zero  Plants are used to full capacity in the long
The firm is said to be in economic profits. Supernormal -
run, so that there is no wastage of resources
equilibrium when it profits occur when average
i.e. MC = AC.
maximizes its profit. revenues exceed total cost. -

 Firms earn only normal profits i.e. AC = AR.

The output which gives -

 Firms maximize profits (i.e. MC = MR), but

maximum profit to the ▪ Normal profits: -

the level of profits will be just normal.

firm is called When a firm just meets its -

average total cost, it earns  There is optimum number of firms in the

equilibrium output.
⑧ industry.
-

normal profits. Here AR = ATC.

-

X  In other words, in the long run, LAR = LMR =

- -

P = LMC = LAC and there will be optimum

-
allocation of resources.

Macro Economics Jatin Dembla Page | 23

 Kinshuk Institute

Monopoly ▪ AR and MR are both negatively by sloped (downward

sloping) curves.
The word ‘Monopoly’ means “alone to sell”.
-
MR is O
half AR
▪The slope of the MR curve is twice that of the AR
Monopoly is a situation in which there is a single - -

curve. MR curve lies half-way between the AR curve

seller of a product which has no close -

and the Y axis. i.e. it cuts the horizontal line between

substitute. Pure monopoly is never found in Y axis and AR into two equal parts.
practice.
▪AR cannot be zero, but MR can be zero or even
--
negative.
Features - Conditions for the Equilibrium of an individual
firm:
Single seller of the product: In a monopoly Long run (i) MC = MR
-
market, there is only one firm producing or
equilibrium of (ii) MC curve must cut MR curve from below.
a monopolist
supplying a product.
X

Barriers to Entry: there are strong barriers to X

-
entry. The barriers to entry could be economic,
institutional, legal or artificial.

No close-substitutes: A monopoly firm controls

-

market supply, sets prices, sells no substitutes,

Price Decrimin Short run equilibrium of a The long-term
Imperfect Competition-Monopolistic Competition firm under Monopolistic equilibrium of a firm in
and faces a steep downward demand curve. Competition – With losses monopolistic competition

~Market power: A monopoly firm has market -Large number of sellers: In a monopolistically competitive
market, there are large number of independent firms who Oligopoly
power i.e. it has the ability to charge a price individually have a small share in the market.
above marginal cost and earn a positive profit. Oligopoly is an important form of imperfect
-Product differentiation: the products of different sellers -

competition. Oligopoly is often described as

are differentiated on the basis of brands. Because competing -

Relationship between AR and MR products are close substitutes, demand is relatively elastic, ‘competition among the few’. Prof. Stigler
-

but not perfectly elastic as in perfect competition.

-

defines oligopoly as that “situation in which a

-Freedom of entry and exit: Barriers to entry are firm bases its market policy, in part, on the
comparatively low and new firms are free to enter the expected behavior of a few close rivals”.
-
market if they find profit prospects and existing firms are
free to quit.

-Non-price competition: firms are often in fierce competition

with other firms offering a similar product or service, and
therefore try to compete on bases other than price,

Macro Economics Jatin Dembla Page | 24

 Kinshuk Institute

Types of Oligopoly: Kinked Demand Curve

-Pure oligopoly or perfect oligopoly occurs when

the product is homogeneous in nature.

Open and closed oligopoly: In an open oligopoly

market new firms can enter the market and
-

compete with the existing firms. But, in closed

oligopoly entry is restricted.

Collusive and Competitive oligopoly: When few

firms of the oligopoly market come to a common ▪ Paul A. Sweezy propounded the kinked demand curve
model of oligopoly. The price will be kept unchanged
understanding or act in collusion with each
- -
for a long time due to fear of retaliation and price
other either in fixing price or output or both, it
tend to be sticky and inflexible.
is collusive oligopoly.
-

Other important market forms

Partial or full oligopoly: The dominating firm
will be the price leader. In full oligopoly, the ▪Duopoly, a subset of oligopoly, a market situation in which there
are only two firms in the market.
-

market will be conspicuous by the absence of -

price leadership.
-
▪Monopsony is a market characterized by a single buyer of a
-

product. Or service and is mostly applicable to factor markets in

-

Syndicated and organized oligopoly:

Syndicated oligopoly refers to that situation which a single firm is the only buyer of a factor.

where the firms sell their products through a

▪Oligopsony is a market characterized by a small number of large
centralized syndicate. Organized oligopoly -

buyers and is mostly relevant to factor markets.

-

refers to the situation where the firms -

organize themselves ▪Bilateral monopoly is a market structure in which there is only a

-
single buyer and a single seller i.e. it is a combination of
monopoly market and a monopsony market.

Macro Economics Jatin Dembla Page | 25

Kinshuk Institute
Chapter 5 Business Cycles
~
-

Meaning Of Business Cycles Trough and Depression Features Of Business Cycles

-
► These rhythmic fluctuations in aggregate
• Depression is the severe form of recession and is
>
-
economic activity that an economy experiences Business cycles occur periodically although they do not
characterized by extremely sluggish economic
exhibit the same regularity. The duration of these
over a period of time are called business cycles
- --
activities. Demand for products and services
cycles varies. The intensity of fluctuations also varies.
-

decreases, prices are at their lowest and decline rapidly

-

or trade cycles. -

forcing firms to shut down several production facilities.

--

-
Since companies are unable to sustain their work force,
Phases Of Business Cycle there is mounting unemployment which leaves the
Business cycles have distinct phases of expansion, peak,
consumers with very little disposable income. --
contraction and trough. These phases seldom display
►The business cycles or the periodic booms and smoothness and regularity. The length of each phase is
-

slumps in economic activities reflect the upward also not definite.

- - Recovery
and downward movements in economic variables.
A typical business cycle has four distinct phases.
-

• The economy cannot continue to contract endlessly. It

These are: reaches the -lowest level of economic activity called
-
Business cycles generally originate in free market
trough and then starts recovering.
-
economies. They are pervasive as well. Disturbances in
- one or more sectors get easily transmitted to all other
Expansion (also called Boom or Upswing) sectors.
- -

• state continues till there is- full employment of The broken line (marked ‘trend’) represents the
resources and production is at its maximum steady growth line or the growth of the economy when
possible level using the available productive there are no business cycles Repercussions of business cycles get simultaneously felt
- -

on nearly all economic variables viz. output, employment,

-

--

Peak investment, - consumption, interest, trade and price

-
levels.
-

-
• The term peak refers to the top or the highest
-

point of the business cycle. This is the end of

-

expansion and it occurs when economic growth

-

has reached a point where it will stabilize for a

Business cycles have serious consequences on the well-
short time and then move in the reverse
being of the society
-

direction. -
-
-
-
Contraction

• During contraction, there is fall in the levels of

- -

investment and employment. The consequence is

-

a discrepancy or mismatch between demand and

-

supply. Supply far exceeds demand. Initially,

this happens only in few sectors and at a slow
pace, but rapidly spreads to all sectors

Macro Economics Jatin Dembla Page | 26

 Kinshuk Institute

Causes Of Business Cycles

Money Supply Relevance Of Business Cycles in
Internal Causes: The Internal causes or endogenous -
-
factors which may lead to boom or bust are: Business Decision Making
• According to Hawtrey, trade cycle is a purely
monetary phenomenon. Unplanned changes in
supply of money may cause business
► Business cycles affect all aspects of an economy.
Fluctuations in Effective Demand fluctuation in an economy. Business cycles have tremendous influence on
-
business decisions. The stage of the business cycle is
• According to Keynes, fluctuations in economic crucial while making managerial decisions regarding
activities are due to fluctuations in aggregate Psychological factors expansion or down-sizing. However, it should be kept
effective demand (Effective demand refers to the -
willingness and ability of consumers to purchase
in mind that business cycles do not affect all sectors
goods at different prices). • According to Pigou, modern business uniformly. Some businesses are more vulnerable to
activities are based on the anticipations of
-

- changes in the business cycle than others. Businesses

business community and are affected by
-
waves of optimism or pessimism. Business whose fortunes are closely linked to the rate of
Fluctuations in Investment fluctuations are the outcome of these economic growth are referred to as "cyclical"
-

- psychological states of mind of businessmen. businesses.

• According to some economists, fluctuations in
investments are the prime cause of business cycles. External Causes: The External causes or exogenous
Investment spending is considered to be the most -

volatile component of the aggregate demand. factors which may lead to boom or bust are:
Economic Indicator
I

G
Variations in government spending
-

• Fluctuations in government spending with its impact

O Wars
Post War
Reconstruction
Leading
logging
Indicator
Coincidit
or
-
Concurrent
on aggregate economic activity result in business Indicator
fluctuations. Government spending, especially during
and after wars, has destabilizing effects on the Stock Prin
unenplonet, Inductor
GOP ,
economy. - /
Profit,
O 6
Capital ,
Inflation
Technology Labour cost
Natural Factors Consumer
shocks
Good Production
-
Macroeconomic policies

• Macroeconomic policies (monetary and fiscal

O
policies) also cause business cycles. Expansionary
policies, such as increased government spending Population
and/or tax cuts, are the most common method of growth
boosting aggregate demand.

Macro Economics Jatin Dembla Page | 27