Arinjay Academy

Study Maths, Hindi, Accounts, Economics, for K-12 and International Taxation for CA Final Students. Visit Wesite or download app for updates.

You are here: Home / Archives for Economics Class 12

Economics Class 12

/

Monopoly in Economics

“Monopoly” is a  market structure which is formed and differentiated from other markets on the basis of number of sellers, substitute of products, procedure for entry and exit etc. It is the strict opposite of perfect competition. Let’s learn more about Monopoly.

Monopoly – Definition

The word ‘Monopoly’ is derived from Greek words ‘mono’ which means single, and ‘polus’ which means seller. Monopoly refers to a market situation where there is a single seller , selling a product which has no close substitutes. For example, Indian railways is a Monopoly  India.

Features of Monopoly

1. Single Seller

Under Monopoly, there is only one seller , who is selling a certain product. Therefore, the monopoly firm (single seller) and industry (since there is only one seller, he would constitute the industry) are the same entities. The monopolist,  has complete control over the supply and price of the product. However, there are large number of buyers of monopoly product,  and no single buyer can influence the market.

2. No Close Substitute

Th product produced by a monopolist has no close substitute.So the firm has no fear of competition from the existing or new  products.

3. Restrictions on Entry and Exit

There are strong barriers to entry of new firms , and exit of existing firm. As a result, a firm under monopoly can earn abnormal profits and losses in the long run. Such barriers might be due to legal limitations like licensing (it is difficult to obtain license) or patent rights (the product made by monopolist is patented which restricts others from producing it)  or due to restrictions created by other firms in form of cartel.

4. Price Discrimination

A monopolist may charge different prices for their product , from different sets of consumers at the same time. It is known as ‘Price Discrimination’. Price discrimination refers to the practice of the seller charging different prices from different buyers at the same time for the same product.

5. Price Maker

Firm and industry are one and the same thing in such a type of market. So, the firm has complete control over the industry output. As a result, monopolist is a price maker and fixes his own price. He can influence the price in the market by changing the supply of the product.

Reasons for Emergence of Monopoly

A firm enjoys monopoly when it is the only seller of a certain product,  and the product has no close substitutes. The fundamental cause of this is the barrier to entry. The reasons for emergence of such a market are –

  1. Government Licensing – It means that before a firm can enter an industry, it needs to take permission from the government. Licensing is used to assure certain minimum standards of competency. By not granting licenses to new firms, the government aims to ensure that only one firm operates in the market.
  2. Patent Rights – Certain big private companies are engaged in research and development activities. At times, they come up with new products or new technologies. As a reward for their risk and investment in research, government grant them patent rights. The period for which patent rights are granted are known as patent life.
  3.  Cartel – Under cartel, some firms retain their individual identities but coordinate their output pricing policy in order to act as a monopoly. The firms agree among themselves to restrict their total output to the level that maximises their joint profit.
  4. Control on Raw Materials – Monopoly also arises due to sole ownership or control of certain essential raw materials required in a particular industry.

Demand Curve under Monopoly

A monopoly firm is like an industry as there is only one single seller that constitutes the entire market for the product, which has no close substitutes. So, a monopolist has full freedom and power to fix the price for the product. However, the demand of the product is not in the control of the firm. In order to increase the output to be sold, the firm will have to lower the price. As a result, the firm faces a downward sloping demand curve.

(graph 1)

In the figure given above, output is measured along the X-axis and revenue and price is measured along the Y-axis. At OP price level, a seller can sell OQ quantity of product. As the price is reduced to OP1, demand rises to OQ1. So, the demand curve under a monopoly is negatively sloped because more quantity can be sold only at a lower price.

AR & MR Under Monopoly

A firm in monopoly faces a downward sloping demand curve as more output can be sold only by reducing the price. As a result, revenue generated from every additional unit, i.e. MR, is less than price, i.e. AR, of the product. Due to this reason, MR is less AR (MR<AR).

/

Producer’s Equilibrium

Equilibrium refers to a state of rest when no change is required. Like a consumer, a producer also aims to maximize his satisfaction to attain equilibrium. But a producer’s satisfaction is maximized in terms of profits. Let us see how a producer reaches equilibrium.

[Read more…] about Producer’s Equilibrium

/

Revenue Curves under Monopoly and Monopolistic Competition

Monopoly and monopolistic competition are imperfect competition market situations. In Imperfect Competition the price does not remain constant. In monopoly and monopolistic competition, price falls with rise in output. Let us see how the revenue curves behave in these situations.

[Read more…] about Revenue Curves under Monopoly and Monopolistic Competition

/

Revenue Curves under Perfect competition

The revenue curve of a firm is majorly represented by the Average Revenue and Marginal Revenue curves of a firm. These curves show the behaviour of the revenue of a firm. Let us see how the revenue curve of a firm behaves under perfect competition

[Read more…] about Revenue Curves under Perfect competition

/

What is Revenue?

Revenue is the amount of money that a producer receives for his commodity. It is very important for us to understand the concept of commodity and how it works.

What is Revenue?

The amount of money that a producer gets in exchange for the sale proceeds is known as revenue. Revenue refers to the amount received by a firm from the sale of a given commodity in the market. For example, a firm gets Rs. 16,000 from the sale of 100 chairs, then the amount of Rs. 16,000 is known as revenue.

The concept consists of three terms – Total Revenue, Average Revenue and Marginal Revenue.

[Read more…] about What is Revenue?

/

Supply Curve

The supply schedule shows the combinations of different quantities of a commodity that a producer is willing to sell at different levels of price. The graphical representation of a supply schedule is known as a Supply Curve.

[Read more…] about Supply Curve

/

Price Elasticity of Supply

Price Elasticity of Supply – Background 

As a Supplier of Commodity, one would like to supply a particular quantity  when the price are high. However, if there is a fall in the price, the supplier would like to sell a different quantity. In other words,  there is a change in the quantity supplied of a commodity (increase or decrease),  due to a change in its price (increase or decrease in price). The extent of change in the quantity supplied of a commodity ,  due a given  change in the price of the commodity , is determined by the Price elasticity of supply of that commodity.  [Read more…] about Price Elasticity of Supply

/

Shift in Supply Curve

The changes in a supply curve can occur due to various factors. One of these changes is known as the shift in supply curve. Let us see what is meant by shift in supply curve.

Shift in Supply Curve

A supply curve is drawn to show the relationship between price and quantity supplied of a commodity assuming all other factors being constant. Although in reality, these factors do not always remain constant and are bound to change at some point. This change in other factors, i.e. factors other the the price of the commodity, cause a shift in the supply curve.

For example, an increase in excise duty on a commodity will raise its cost of production which will lead to a fall in profit thus causing a decrease in the supply of the commodity even though its market price has not undergone any change. Such a decrease in supply cannot be represented by the original supply curve. It will lead to a shift in supply curve.

When supply of a commodity changes due to change in any factor other than the own price of the commodity, it is known as ‘change in supply’. It is graphically represented by a shift in the supply curve.

Shift in Supply Curve

In the diagram given above, supply is OQ at the price OP. Change in other factors leads to a rightward or leftward shift in the supply curve –

  1. Rightward Shift – When supply rises from OQ to OQ1 at the same price OP, it leads to a rightward shift in the supply curve from SS to S1S1.
  2. Leftward Shift – When supply decreases from OQ to OQ2 at the same price of OP, it causes a leftward shiftin the supply curve from SS to S2S2.

Increase in Supply

Increase in supply refers to a rise in the supply of a commodity caused due to any other factor than the own price of the commodity. In such a scenario, the supply may rise at the same price or it may even stay the same at a lower price.

Price (in Rs.) Supply (in units)
20 100
20 150

Shift in Supply Curve

As seen in the diagram and schedule given above, even though the price remains the same, the supply rises from 100 to 150 units, resulting in a rightward shift in the supply curve from SS to S1S1.

Decrease in Supply

Decrease in supply refers to a fall in the supply of a commodity caused due to any other factor than the own price of the commodity. In this case supply may fall at the same price or may even remain the same at a higher price.

Price (in Rs.) Supply (in units)
20 100
20 70

Shift in Supply Curve

As seen in the diagram and the table given above, even though the price of the commodity remains the same, the supply of the commodity decreases from 100 to 70 units, resulting in a leftward shift from SS to S2S2.

Microeconomics Class 12 Notes – Chapter 11

Practice Thousands of Free MCQs of Economics Class 12 

Economics Class 12

/

Movement along the Supply Curve

When a supply curve is considered, there may be many changes in the curve due to the respective changes in the market prices and other factors effecting the supply of a commodity. One of such changes seen in the supply curve is seen as movement along the supply curve.

Movement along the Supply Curve

When the quantity supplied of a commodity changes due to change in its own price, keeping other factors constant, it is known as ‘change in quantity supplied’. It is graphically represented as a movement along the same supply curve.

There can be either a downward movement, i.e. contraction in supply, or an upward movement,i.e. expansion in supply.

Movement along the Supply Curve

In the figure given above, OQ is the quantity supplied at the price OP. Change in price either leads to an upward or a downward movement along the same supply curve –

  1. Upward movement – When price rises to OP1, quantity supplied also rises to OQ1, leading to an upward movement from A to B along the same supply curve SS.
  2. Downward movement – On the other hand, fall in price from OP to OP2, leads to decrease in quantity supplied from OQ to OQ2, resulting in a downward movement from A to C along the same supply curve.

Before we go on to understand other concepts regarding the effects on the supply curve due to various factors, it is important to understand the difference between Change in Quantity Supplied of a commodity and Change in Supply.

Change in Quantity Supplied vs Change in Supply

Whenever supply for the given commodity changes due to change in its own price, then such change in supply is known as ‘Change in Quantity Supplied’. Whereas when  the supply for a commodity changes due to factors other than price, it is known as ‘Change in Supply’.

Expansion in Supply

Expansion in supply refers to a rise in the quantity supplied due to increase in the price of the commodity, other factors remaining constant. It leads to an upward movement along the same supply curve. Extension in supply is also known as ‘Increase in Quantity Supplied’.

Price (in Rs.) Quantity (in units)
20 100
25 150

Change in Quantity Supplied vs Change in Supply

As seen in the diagram given above, when the price of the commodity rises from Rs. 20 to Rs. 25, the quantity supplied of a commodity increases from 100 to 150 units, resulting in an upward movement from A to B, along the same supply curve SS.

Contraction in Supply

Contraction in supply refers to a fall in the quantity supplied due to decrease in price of the commodity, other factors remaining constant. It leads to a downward movement along the same supply curve. It is also known as ‘Decrease in Quantity Supplied’.

Price (in Rs.) Quantity (in units)
20 100
15 70

Contraction in Supply

As seen in the diagram given above, as the price of the commodity falls from Rs. 100 to Rs. 70, the quantity supplied of the commodity also falls from 100 to 70 units, resulting in a downwards movement from A to B along the same supply curve SS.

Microeconomics Class 12 Notes – Chapter 11

Practice Thousands of Free MCQs of Economics Class 12 

Economics Class 12

/

Law of Supply

Various economists have extensively studied the behavior of sellers and producers and firms. As a result they arrived at a generalization of their behavior called the Law of Supply.

Law of Supply

Law of supply states that  there is a direct relationship between price and quantity supplied of the commodity, keeping other factors constant i.e. ceterus paribus. 

We know that price is a dominant factor in determining the supply of a commodity. As price of the commodity increases, there is more supply of that commodity in the market and vice versa. This behavior is studied under the law of supply.

Assumptions

While stating the law of supply, the phrase ‘keeping other factors constant’ or ‘ceterus paribus’ are used. This phrase is used to cover the following assumptions on which the law is based.

  1. Price of other goods is constant.
  2. There is no change in the state of technology.
  3. Prices of factors of production remain the same.
  4. There is no change in taxation policy.
  5. Goals of the producer remain the same.
Price (in Rs.) Quantity (in units)
1 10
2 20
3 30
4 40
5 50

Law of Supply graph

The above given graph and table clearly show that more and more units of a commodity are being offered for sale as the price of the commodity is increased. The supply curve SS slopes upwards from left to right, indicating a direct relationship between price and quantity supplied.

Features of Law of Supply

  1. It states the positive relationship between the price of a commodity and its supply assuming that there are no changes in other factors.
  2. The law of supply is a qualitative statement. It does not say anything about the quantity of increase in the supply of the commodity with a certain increase in price. It does not indicate the magnitude of change.
  3. It also does establish any proportional relationship between the price of the commodity and its supply.
  4. The law states a single sided approach where it talks about the change in supply due to the change in price but does not say anything about the change in price due to the change in supply.

Exceptions to the Law of Supply

As a general rule, the supply curve slopes upwards showing that the quantity supplied rises with a rise in price. However, in certain cases,positive relationships between supply and price may not hold true. The various exceptions to the law of supply are –

  1. Future Expectation – If sellers expect a fall in price in the future, then the law of supply may not hold true. In this situation the sellers will be willing to sell even more a a lower price since they expect the price to fall even further therefore increasing their losses.
  2. Agricultural Goods – The sale of agricultural goods are not subject to the law of supply since their production depends on climatic condition. Also, these are perishable goods and need to be sold in a certain time period after which they will have no value. Therefore their supply might increase even at a lower price.
  3. Rare articles – Rare, artistic and precious articles are also outside the scope of the law of supply. For example, supply of rare articles like painting of Mona Lisa cannot be increases even if the prices are increased.
  4. Backward Countries – In economically backward countries, production and supply cannot be increased with increase in prices due to shortage of resources.

Microeconomics Class 12 Notes – Chapter 11

Practice Thousands of Free MCQs of Economics Class 12 

Economics Class 12

/

Determinants of Supply

There are several important factors that are the determinants of the supply of a commodity. A change in any of these factors will largely result in a change in the supply of the commodity.

Determinants of Supply

1. Price of the given commodity

The most important factor in determining the supply of a commodity is its price. As a general rule, the price of a commodity and the supply of the commodity are directly related. This means that as the price of the commodity increases, its supply will also increase and vice versa. This occurs as higher profits can be made at higher prices, therefore it compels the firm to offer a higher quantity of goods.

2. Prices of Other goods

We know that resources have alternate uses. Therefore, the quantity of a commodity that is supplied depends not only on its price but also on the prices of other commodities. If the price of another commodity increases, it becomes more profitable than the given commodity. As a result, the firm shifts its limited resources to the production of other goods rather than the given commodity.

3. Prices of factors of production

When or the amount to be payed to the factors of production increases, the cost of production of the commodity also increases. As a result, the profitability of the commodity decreases, and thus the seller reduces the supply of the commodity. Similarly if the prices of factors of decrease, the profitability of the commodity increases and the seller increases the supply of the commodity.

4. State of Technology

The state or level of technology also influences the supply of the commodity in the market. Advanced technology allows the producer to produce the commodity at a lower cost of production thus increasing its profitability. As a result the supply of the commodity is increased. However, technological degradation or complex and outdated technology will increase the cost of production and will lead to decrease in supply.

5. Government Policy

The government’s taxation policy has effect on the quantity of commodity supplied. Increased taxes raise the cost of production thus reducing the supply of the commodity due to lower profit margin. Whereas, tax concessions and subsidies cause an increase in the supply of the commodity as they make it more profitable for the firms to supply goods.

6. Goals of the firm

Usually, the goal or objective of a firm is profit maximization and because of that the supply of a commodity increases only at higher prices. But, with change in trend, some firms are willing to supply more at the same prices which do not maximize profits. The objective of such firms is to capture extensive markets and to enhance their status and brand name.

Determinants of Market Supply

The determinants of supply given above apply to both individual and market supply. Apart from the determinants of supply given above, market supply has some other factors determining the quantity of commodity supplied.

1. Number of firms in the market

When the number of firms in the industry increases, market supply also increases due to large number of producers producing that commodity. However, market supply will decrease if some of the producers start leaving due to losses.

2. Future expectations regarding price

If sellers expect a rise in price in the near future, the current market supply will decrease so that the supply can be increased when the prices are high. On the other hand, if the sellers fear that the price will fall in the near future, they will increase the supply of the commodity to avoid losses in the future.

3. Means of transportation and communication

Proper infrastructural development like improvement in the means of transportation and communication help in maintaining adequate supply of the commodity.

Microeconomics Class 12 Notes – Chapter 11

Practice Thousands of Free MCQs of Economics Class 12 

Economics Class 12

/

Supply Schedule

Supply is the quantity of a commodity that a producer is willing and able to offer for sale at a given price during a given period of time. The quantity of a commodity being supplied by a firm can be represented in many ways, one of these is a supply schedule.

Supply Schedule

Supply schedule is a tabular statement showing number of units of a commodity being supplied at various levels of price, during a given period of time. There are two types of supply schedules –

  1. Individual
  2. Market

Individual Supply Schedule

Individual supply schedules refer to a tabular statement showing various quantities of a commodity that a producer is willing to sell at various levels of price, during a given period of time.

Price (in Rs.) Quantity supplied of Good X
1 5
2 10
3 15
4 20
5 25

As seen in the schedule given above, quantity supplied of commodity X increases with increase in price. The firm is willing to offer for sale 5 units of X at a price of Rs. 1. When the price rises to Rs. 2, supply also rises to 10 units.

Market Supply Schedule

Market supply schedule refers to a tabular statement showing various amounts of a commodity that all the producers are willing to offer for sale at various levels of price, during a given period of time. It is obtained by adding all the individual supplies at each and every level of price.

Market supply can be expressed as –

Sm=SA+SB…

Where Sm is the market supply and SA+SB… are the individual supply of supplier A, supplier B and so on.

Price (in Rs.) Individual Supply (units) Market Supply (units)

(SA+SB)
SA SB
1 5 10 5+10 = 15
2 10 20 10+20 = 30
3 15 25 15+25 = 40
4 20 35 20+35 = 55
5 25 40 25+40 = 65

As we can see in the table given above, market supply is obtained by adding the supplies of suppliers A and B at different prices. At price of Rs. 1, market supply is 15 units. When price rises to Rs. 2, market supply rises to 30 units, So, it also shows a direct relationship between price and quantity supplied.

Microeconomics Class 12 Notes – Chapter 11

Practice Thousands of Free MCQs of Economics Class 12 

Economics Class 12

error: Content is protected !!