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Busines Economics - Unit-5 - IMBA - Osmania University

  2. COURSE NO. DSC – 102 BUSINESS ECONOMICS COURSE OBJECTIVES : 1. The purpose of this course is to apply micro economic concepts and tools for analyzing business problems. 2. To make students aware of cost concepts. 3. To make accurate decision pertaining to individual firms. 4. To understand tools and techniques of micro economics. 5. To make the student understand market structure and dynamics. UNIT - I : BUSINESS ECONOMICS NATURE AND SCOPE : Introduction to Business Economics-Characteristics-Nature and scope, concept of opportunities Cost- Incremental Cost- Time perspective-Discounting and Equi-Marginal Principle. UNIT – II : DEMAND CONCEPTS & ELASTICITY OF DEMAND : Concept of Demand, Determinants of Demand- Law of Demand- Exception to the law of demand- Elasticity of Demand- Types of demand elasticity- Uses of demand elasticity-Concept of Supply- Determinants of Supply-Law of Supply-Elasticity of Supply. UNIT – III : PRODUCTION AND COST CONCEPTS : Theory of production- Production function- Input output combination-Short run production laws, Law of diminishing marginal returns to scale- ISO-quant curves, ISO-cost curves UNIT – IV : BUDGET LINE : Cost concepts- Cost classification-CVP Analysis-short run cost curves and long run cost curves Experience curve-Economies and diseconomies to the scale- Economies of scope. UNIT – V : MARKET STRUCTURES AND PRICING : Concept of market structures- Perfect competition market and price determination- Monopoly and abnormal profits- Monopolistic Competition-Price Discrimination-Oligopoly-Features of oligopoly- Syndicating in oligopoly - Kinked demand curve- Price leadership and market positioning. SUGGESTED BOOKS : 1. Dominik Salvotore, “(2015) Principal of Micro Economics 7th Ed. oxford University Press. 2. Dr. D N Mithani, (2018) Managerial Economics Theory and Appliocation, HPH 3. Varshiney & Maheswari, Managerial Economics, Juptan Publication, New Delhi 4. Lipsey and Crystal (2008) Economics International 15th Ed.Oxford University Press. 5. Kutosynnis (1979) Modern Micro Economics 5th Ed Mac Millan Publishers 6. Rubin field and Mehathe (Micro Economics 7th Ed. Pearson Publishers. 3-Apr-22 2
  3. UNIT – V MARKET STRUCTURES AND PRICING Concept of market structures Perfect competition market and price determination Monopoly and abnormal profits Monopolistic Competition Price Discrimination Oligopoly-Features of oligopoly Syndicating in oligopoly Kinked demand curve
  4. Concept of market structures  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.  The four popular types of market structures include perfect competition, oligopoly market, monopoly market, and monopolistic competition. 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.  Consumers in this type of market have full knowledge of the goods being sold. They are aware of the prices charged on them.  In the real world, the pure form of this type of market structure rarely exists.  This market is unrealistic.
  5. 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.  Sellers consider the price charged by their competitors and ignore the impact of their own prices on their competition.  In the short term, the monopolistic company maximizes its profits and enjoys all the benefits as a monopoly.  The company initially produces many products as the demand is high.  Therefore, its Marginal Revenue (MR) corresponds to its Marginal Cost (MC).  However, MR diminishes over time as new companies enter the market with differentiated products affecting demand, leading to less profit.
  6. 3. 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.  A price increase may influence others not to take any action in the anticipation consumers will not opt for their products. Therefore, strategic planning by these types of players is a must. 4. 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.
  7. Perfect competition market and price determination  In a Perfectly competitive Market, several influential factors determine the Price of commodities.  if the demand is high and supply is low, then the Price will increase.  if the supply is more than demand, then the Price will drop. Equilibrium of both the industry and the firm is significant in Price Determination under a Perfect Competition Market.  A Market situation with many homogeneous product suppliers is called Perfect Competition. A single Company provides a small portion of total production and is not powerful enough to affect Market Prices.  Market demand represents the sum of the quantities required by individual buyers at different Prices. The Market supply is also the sum of the quantities offered by individual companies in the sector. All sellers and buyers accept fixed Prices.  the main issue for profit maximization companies in a Perfectly competitive Market is not to determine the Price of the product, but to adjust the production to the Market Price in order to maximize the profit.
  8. Pricing under Perfect Competition will be considered in three different periods Market Period Short Run Long Run  Market Period: In a Market period, the time span is so Short that no one can increase its output. The Market period of the stock may be an hour, a day or a few days or even a few weeks depending upon the nature of the product.  Short Run: Short term means that amount of time is not enough to change the fixed input or the number of companies in the industry, but it is enough to change the output by changing the variable input. In the Short term, there are two distinct costs: (i) fixed costs and (ii) variable costs.  Long Run: A Long term is a time period Long enough to allow you to change both variable and fixed factors. Therefore, in the Long run, all factors are variable and not fixed. Therefore, in the Long run, companies can change production by increasing fixed equipment.
  9. Conditions for Company Equilibrium  To achieve Equilibrium, a Company must meet two conditions:  You need to make sure that the marginal revenue is equal to the marginal cost (MR = MC).  If MR> MC, the Company has an incentive to expand production and sell additional units.  If MR<MC, the Company needs to reduce production because additional units generate more costs than revenue.  Only when MR = MC does the Company achieve maximum profit.
  10. Equilibrium of the Firm in a Perfectly Competitive Market  When there is profit maximization, the firm is said to be in Equilibrium.  The input that provides the highest output to that particular firm, is known as the Equilibrium output.  In such a state, there are no factors to increase or reduce the output.  The firm is the Price taker in a competitive Market.  They produce homogenous commodities.  Therefore, influencing the pricing factors isn't on the will of the firms.  They strictly follow the Price structure, as stated by the industry.  This is how Price and output Determination under Perfect Competition is done.  In a Perfectly Competitive Market or industry, the Equilibrium Price is determined by the forces of demand and supply.  Market Equilibrium takes place when both the demand and supply balance each other.
  11. Monopoly and abnormal profits  Under monopoly, a seller has the capacity to influence the price of this product for the sole supplier in the market.  In a monopoly market, the seller is faced by a large number of competing buyers. But, being the sole supplier, the monopolist has a strong hold over price determination. Features of Monopoly  Single firm: Monopoly is the single producer in the market. Thus, under monopoly, firm and industry are identical.  No substitute: There are no closely competitive substitutes for the product. So the buyers have no alternative or choice. They have either to buy the product or go without it.  Price-maker: A monopolist is a price-maker and not a price-taker. In fact, his price fixing power is absolute. He is in a position to fix the price for the product as he likes.  Downward sloping supply curve: A monopoly firm itself being the industry, it faces a downward sloping demand curve for its product. That means it cannot sell more output unless the price is lowered  Entry barriers: A pure monopolist has no immediate rivals due to certain barriers to entry in the field. There are legal, technological, economic or natural obstacles, which may block the entry of new firms.  Price-cum-output determination: Since a monopoly company has a complete control over the market supply in the absence of a close or remote substitute for his product, he can fix the price as well as quantity of output to be sold in the market.
  12. Monopolistic Competition  Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes.  A firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. Monopolistically competitive markets have the following characteristics:  There are many producers and many consumers in the market, and no business has total control over the market price.  Consumers perceive that there are non-price differences among the competitors' products.  Firms operate with the knowledge that their actions will not affect other firms' actions.  There are few barriers to entry and exit.[4]  Producers have a degree of control over price.  The principal goal of the firm is to maximize its profits.
  13. Industries Exhibiting Features of Monopolistic Competition Examples of industries in monopolistic competition include the following: Clothing and apparel Sportswear products Restaurants Hairdressers PC manufacturers Television services
  14. PRICE DISCRIMINATION FORMS OF PRICE DISCRIMINATION Personal discrimination:  Generally, depending upon the economic status of buyers, different prices may be charged to different buyers in providing similar services.  For example, a surgeon may charge a high operation fee to a rich patient and a lower fee to a poor one.  Similarly, lawyers may charge different fees to different types of clients depending on theirincome status. Age discrimination:  Price discrimination may be based on the basis of age of the buyers.  Usually, buyers are grouped into children and adults.  Thus, for instance, a barber may charge lower rates for children’s haircuts than those for adults.  In railways and bus transport services, it is a commonly adopted form of price discrimination that persons below 12 years of age are charged at half the rates. Gender discrimination:  In selling certain goods, producers may discriminate between male and female buyers by charging low prices to females.  For instance, a tour organizing firm may provide seats to ladies at concessional rates.
  15. Locational or territorial discrimination:  When a monopolist charges different prices in different markets located at different places, it is called locational or geographical discrimination.  For instance, a film producer may sell distribution rights to different film distributors in different territories at different prices. Size discrimination:  On the basis of size or quantity of the product, different prices may be charged.  For instance, an economy size toothpaste tube is relatively cheaper than a small size tube.  Similarly, a product is sold in the retail market at a higher price than in the wholesale market by the producer. Quality variation discrimination:  On the basis of some qualitative differences, different prices may be charged for the same product.  For instance, a publisher may sell a deluxe edition of the same book at a higher price than its paperback edition.  Quality variation may be in the form of material used, the nature of packing, colour, style, etc.  Thus, jellies packed in tins are sold at a lower price than in bottles.
  16. Special service or comforts:  Price discrimination may also be resorted to on the basis of special facilities or comforts.  Railways, for instance, charge different fares for the first class and second class travel.  Similarly, cinema houses keep different admission rates for stalls, upper stalls, dress circle and balcony. Use discrimination:  Sometimes, depending on the kind of use of the product, different rates may be charged.  For instance, an electricity distribution company may charge low rates for domestic consumption of electricity while still lower rates for industrial use as compared to the higher rates for light and fan. Time discrimination:  On the basis of the time of service, different rates may be charged.  For instance, cinema houses charge lower rates of admission for morning and matinee shows than for regular shows.  Similarly, the telephone company charges half-rates for trunk-calls at night. Nature of commodity discrimination:  Sometimes, because of the nature of a commodity, price discrimination may be made.  For instance, freight charges by the railways are different for coal and iron for the same distance
  17. Oligopoly Three conditions for oligopoly have been identified. First, an oligopolistic market has only a few large firms. This condition distinguishes oligopoly from monopoly, in which there is just one firm. Second, an oligopolistic market has high barriers to entry. This condition distinguishes oligopoly from perfect competition and monopolistic competition in which there are no barriers to entry. Third, oligopolistic firms may produce either differentiated or homogeneous products. Examples of oligopolistic firms include automobile manufacturers, oil producers, steel manufacturers, and passenger airlines.
  18. Features of oligopoly  Few Sellers: There are a few sellers supplying either homogeneous products or differentiated products.  Homogeneous or Distinctive Product: The oligopoly firm may be selling a homogeneous product.  For example, steel/aluminium/copper.  These can be a unique or distinctive product.  For example, automobile-passenger cars.  Blockaded Entry and Exit: Firms in the oligopoly market face strong restrictions on entry or exit.  Imperfect Dissemination of Information: Detailed market information relating to cost, price and product quality are usually not publicized.  Interdependence: The firms have a high degree of interdependence in their business policies about fixing of price and determination output.  Lack of Uniformity: Lack of uniformity in the size of different oligopolies is also a remarkable characteristic.
  19.  Lack of Certainty: Lack of certainty is also an important feature.  In oligopolistic competition, the firms have two conflicting motives: (i) to remain independent in decision-making, (ii) to maximize profits, despite the fact that there is a high degree of independence among rivals in determining their course of business.  To pursue these ends, they act and react to the price output variation of one another in an unending atmosphere of uncertainty.  Price Rigidity: In an oligopolistic market, each firm sticks to its own price.  This is because, it is in constant fear of retaliation from rivals if it reduces the price.  It, therefore, resorts to advertisement competition rather than price cut.  Hence, there is price rigidity in an oligopolistic market.  Kinked Demand Curve: According to Paul Sweezy, firms in an oligopolistic market have a kinked demand curve for their products.  The kinked demand curve or the average revenue curve is made of two segments: (i) the relatively elastic demand curve and (ii) relatively inelastic demand curve.
  20. Syndicating in oligopoly  This classification is done on the basis of a degree of coordination found among the firms.  When the firms come together and sell their products with the common interest is called as a Syndicate Oligopoly.  Syndicated oligopoly refers to that situation where the firms sell their products through a centralized syndicate.  Whereas, in the case of an Organized Oligopoly, the firms have a central association for fixing the prices, outputs, and quotas.  Business syndicates or trusts may be formed by the competing firms and agree to charge a uniform price, thereby to eliminate price retaliation or price cut competition.  Such business collusion implies conversion of an oligopoly into a monopoly.  Business collusion is considered illegal under anti-trust laws, such as the Competition Act, 2002, in India
  21. Kinked demand curve  The kinked demand curve or the average revenue curve is made of two segments: (i) the relatively elastic demand curve and (ii) relatively inelastic demand curve.  To the given price OP, there is a kink at point K on the demand curve DD.  Thus, DK is the elastic segment and KD is the inelastic segment of the curve.  Here, the kink implies an abrupt change in the slope of the demand curve.  Before the kink point, the demand curve is flatter, after the kink it becomes steeper.
  22.  Above the kink at a given price, demand curve is more elastic and blow the kink less elastic.  The kink leads to uncertainness of the course of demand for the product of the seller concerned.  Companies thinks it worthwhile to follow the prevailing price and not to make any change in it, because raising of price would contract sales as demand tends to be more elastic at this stage.  There is also the fear of losing buyers to the rivals who would not raise their prices.  On the other hand, a lowering of price would imply an immediate revenge from the rivals on account of close interdependence of price output movement in the oligopolistic market.  Hence, the seller will not expect much rise in his sale with price reduction.
  23. Price Leadership  A traditional leader in the oligopoly market announces price changes from time to time which other competitors follow.  The dominant firm may assume the price leadership.  There is barometric price leadership when a smaller firm tries out a new price, which may or may not be recognized by the larger firms.  The price leadership of a firm depends on a number of factors, such as:  (a) Dominance in the Market: Dominating position in the market is achieved by the firm when it claims a substantial share of the market.  (b) Initiative: When the firm develops a product or a new sales territory.  (c) Aggressive Pricing: When the firm charges lower prices aggressively and captures a sizeable market.  (d) Reputation: When the firm acquires reputation for sound pricing policies and accurate decisions due to its longstanding in the business, the other firms may accept its leadership.
  24. Market Positioning  Market Positioning refers to the ability to influence consumer perception regarding a brand or product relative to competitors.  The objective of market positioning is to establish the image or identity of a brand or product so that consumers perceive it in a certain way.  For example: A handbag maker may position itself as a luxury status symbol A TV maker may position its TV as the most innovative and cutting- edge A fast-food restaurant chain may position itself as the provider of cheap meals  For example, the positioning statement of Volvo: “For upscale American families, Volvo is the family automobile that offers maximum safety.”
  25. Types of Positioning Strategies There are several types of positioning strategies. A few examples are positioning by: Product attributes and benefits: Associating your brand/product with certain characteristics or with certain beneficial value Product price: Associating your brand/product with competitive pricing Product quality: Associating your brand/product with high quality Product use and application: Associating your brand/product with a specific use Competitors: Making consumers think that your brand/product is better than that of your competitors.
  26. Creating an Effective Market Positioning Strategy 1. Determine company uniqueness by comparing to competitors  Compare and contrast differences between your company and competitors to identify opportunities. Focus on your strengths and how they can exploit these opportunities. 2. Identify current market position  Identify your existing market position and how the new positioning will be beneficial in setting you apart from competitors. 3. Competitor positioning analysis  Identify the conditions of the marketplace and the amount of influence each competitor can have on each other. 4. Develop a positioning strategy  Achieve an understanding of what your company is, how your company is different from competitors, the conditions of the marketplace, opportunities in the marketplace, and how your company can position itself.