Business Economics

Methods of measuring national income ppt

What are the Methods of measuring national income?

What is the definition of national income? Explain the different methods for the measuring of National income or gross production.

Meaning of national income:- National income refers to the income earned by normal residents of a nation during a given period as a result of their productive services. It’s known as a national product.

Definition of national income:- According to Shapiro – National income is the sum of wages, rent, interest and profit which is received by residents of a nation in the form of income during their productive services.

In other words, anyone who pays his service for which he/she has received some money is known as his income. All residents of a nation who obtained income for his service during a particular period of time are included in national income. Methods of measuring national income ppt

This sum of all incomes received by all residents of a country is known as national income.what definition of national income says. We can understand now. methods of measuring national income ppt

Methods of measuring national income or national product.

There are three methods through which we can measure national income or national product.

Production Method
Income Method
Expenditure Method

1.Product Method :- It is a method through which total production of the country is measured during a given period. Which measures the national income. In other words any income which Generated through the production is called the product method.

Under product method three types of classification is done.

Primary Sector:- This sector deals with production of natural resources as agricultural, allied activities, fishing and mining. All these produce goods by exploiting natural resources like land, water, forests and mines etc. Production of these goods are added into national income. methods of measuring national income ppt
Secondary Sector :- This sector deals with the manufacturing sector. In Which enterprise transforms one type of commodity into another type of commodity. Example – sugar from sugarcane. methods of measuring national income ppt
Tertiary Sector:- This sector deals with the service sector instead of product production. Example – Like Banking, transport and electricity.

2. Income Method :- This method measures national income throughout the payments and remuneration which is paid to the residents of the nation for their services paying.

Service income:- This income is received in the form of rent, wages, interest and profit during the period. For Example:- Hotel, transport and insurance.
Productive income :- This income is received in the form of labour, land, capital and enterprise. For Example:- Labour Engaged in manufacturing, Land used for commercial purpose and enterprise engaged in manufacturing goods. methods of measuring national income ppt
Net income from Abroad :- This income refers to the difference between the income received from abroad for rendering their service and income paid for the factor service rendered by non-residents in the domestic territory of a country.
Operating income :- such income includes wages, rent, Interest and profit which can be derived from property and entrepreneurship. It is earned in both the private sector and government sector. methods of measuring national income ppt

3. Expenditure Method :- This is also known as consumption method. Expenditure method is that method which measures the final expenditure on gross product at market price in an accounting year. This expenditure can be incurred by following groups :

Household Sector :- This sector includes private consumption. In which any individual spent on his consumption. This expense is treated as personal expenditure. Which he incurred on final consumption. In which purchases of non-residents are deducted and direct purchases of residents from abroad are added to national income.
Government Final Expenditure:- And expense which is incurred on final consumption of government. This includes employees compensation which is paid by the government. Purchases from abroad are also added. Expenditure incurred for the welfare of the nation is also added on the final consumption of the government. methods of measuring national income ppt
Production Sector:- This sector includes the expenses which are incurred on production. Such types of expenses are incurred on raw material, labour and direct expenses. Which firms are engaged in manufacturing business. methods of measuring national income ppt
Net Exports :- Finally net exports are calculated by ( Export – Import ) statisticians for the purpose of measuring national income. In which all expenditure incurred on Export is calculated and from which expenditure incurred on import is deducted. After which Net export is derived.

Conclusion :- Thus above discussed methods are used in the way of measuring national income. As Production methods, Income Method and Expenditure Method. These are the farthest states of national income. Now we can understand which method of measuring national income is followed in india.you can check the syllabus of Business Economics on the official website of Gndu. methods of measuring national income ppt

Important questions of Business Economics

What are the Difficulties in measuring national income?

Methods of measuring national income ppt

Business Economics

difficulties in measuring national income

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What are the different problems in measurement of national income in underdeveloped countries like India? Explain.

Ans:- Meaning of national income – National income is that income which is earned by normal residents of a nation during a given period as a result of their productive services.

In other words national income is the sum of wages, rent, interest and profit of the factor of production. So it is known as the income as a factor of production. difficulties in measuring national income

As it refers to the flow of final goods and services that are produced during a period of year in a country.

Difficulties in the measurement of national income:- Many difficulties are faced when estimating the national income of a country. These difficulties are theoretical as well as practical.

Conceptual Difficulties
Practical Difficulties
Conceptual Difficulties :- These difficulties are as follows.

( i ) Difference between final and intermediate Goods :- As we know that only final goods and services are included in national income. But sometimes it is difficult to decide which good is final and which is intermediate. For example:- wood used to cook it will be treated as final good. But used for the furniture process it will be treated as intermediate goods. difficulties in measuring national income

( ii ) Change in price:- Changing prices by continuing will make it difficult to measure national income. Sometimes the price of goods may be different while they are selling. Which will be an obstacle in the way of measurement of national income.

( iii ) Service without reward :- Paid service is included in the measurement of national income in terms of money. But some services are paid without reward. As tuition paid to own children at home. So such services create obstacles in the way of measurement of national income. Because it is difficult to find paid service for money. difficulties in measuring national income

( iv ) Double Counting :- Sometimes one good is counted two times when national income is measured. For example:- wood Price at the time of selling is ₹ 50. When it sold at ₹100 after making the furniture. It also includes the cost of wood as ₹ 50 in the table cost for the purpose of measuring national income. So it counts double time in national income. Which become the problems of measuring the national income.

( v ) Income of foreign Companies:- Some foreign companies are engaging in manufacturing the products in the country. Such companies a part of their income will carry to their country while a part of income will remain in the country where they are operating. It is also a problem in the way of measuring national income. difficulties in measuring national income

Practical Problems

These are as follows which are arised in the way of national income.

( i ) Existence of Barter System of Exchange:- In the ancient times Barter system existed. In which needy goods are received for spare goods. Which is called a barter system. As goods are exchanged for goods and services are paid in some other kind of consideration. It becomes difficult to make correct final goods and services to estimate the production in the country.

( ii ) Unreliable Statistics:- In underdeveloped countries, sometimes producers give false information to the government to evade income tax. So national income is measured based on such collected statistics. Which becomes the difficulty for measuring national income. difficulties in measuring national income

( iii ) Lack of Occupational Classification:- There is no clear cut classification for occupational. For example :- So during the time of crops ripening, agricultural laborers go to urban areas. So it is difficult to access the correct national income from agricultural earnings and non-agricultural income.

( iv) Production for self Consumption:- Farmers produce some crops for self consumption. Which are final production and consumption. But it is difficult to measure in terms of money consideration Which becomes the obstacles on the way of measuring national income.

Conclusion:- These are the major problems which may arise when national income is measured. During the measuring of national income these problems are unavoidable. So these are bound to occured in the measuring of national income. difficulties in measuring national income you can check the syllabus of business economics on the official website of Gndu.

Important questions of Business Economics

difficulties in measuring national income

Business Economics

Monopolistic Competition

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Elaborate upon the meaning and features of monopolistic competition. How is the output and price determination under monopolistic competition?

Ans:- Meaning of Monopolistic – It is that market where there are a large number of buyers and sellers. Who sells different products for the purpose of control over price and facilitating the increase in market share.

Definition of Monopolistic :- “Monopolistic competition is a market situation where there are many producers but each offers a slightly differentiated product.

By gndupapers.online

In other words:- There is a location where a large producer sells different products to many buyers. Buyer is unable to compare their buying prices as well as available products.

A monopolistic product business operates in a market where it has significant control over a unique product, often due to branding, patents, or market influence. However, unlike a pure monopoly, these businesses face some competition from substitutes.

Features of Monopolistic Competition

Large number of firms and Buyers– There are many large numbers of firms producing different products and also a large number of buyers.
Product Differentiate :- It refers to that situation where the buyer can distinguish one product from the other.
Freedom of Entry and Exit:- Under monopolistic firms have freedom of enter and leave as per their will.
Selling cost:- Many firms advertising for their products with a view to selling more and more.
Imperfect Knowledge:- Buyers and sellers lack perfect knowledge about the price of the product.
Non-price Competition:- Another feature of monopolistic competition is that firms may compete with each other without changing the price of the product.

How output and price determination under Monopolistic Competition

Under monopolistic competition every firm would like to get maximum profit. We know that profit is maximum when MR is equal to MC.

Under monopolistic competition, firms have to lower their prices if they want to sell more units of output. A firm produces up to that limit where its marginal cost is equal to marginal revenue under the monopolistic competition.

There are two times under which PRICE determination under monopolistic competition can be made.

Short Run
Long Run
Short Run:- Under the short period no firm can increase or decrease its fixed factor of production such as machines, plants, factory building.

In the short run a firm will be in equilibrium when (i) MC = MR (ii) MC curves cut MR Curve from Below. The profit of a firm depends upon the demand of products and efficiency of the firm. In this time period firms may face three situation

Super Normal Profit
Normal profit
Losses

Super Normal Profit:-

Above graph shows that the firm is in equilibrium at point E. Where at this point MC=MR. This equilibrium price AM is greater than average cost BM. Thus, the firm earns supernormal profit equivalent to the difference between AM and BM. Total super normal profit of the firm in equilibrium is ABCP, the shaded areas.

Super Normal Profit = AR > AR

Normal Profit:- We can understand normal profit with the help of the following diagram.

In the short run a firm may earn Normal Profit. Following graph is in equilibrium at point E Where MC=MR and OM will be in equilibrium output. Price of equilibrium output is OP and Average cost is also OP=AM. Therefore, the AR Curve is touching the AC Curve at point A. Thus, in the position of equilibrium AR is equal to AC and the firm earns normal profit.

Normal Profit = AR = AC

Minimum Loss:- we can analyse with the help of the following diagram.

In the short period firms may have incurred a loss of fixed cost. This is a minimum loss of the firm. The firm will be in equilibrium at point E. At this point MC=MR.

If price or average revenue is less than the average cost ( AR < AC ), The firm will incur minimum loss, However the firm will continue its production as long as the prevailing price covers average variable cost. Hence the firm will incur a loss equivalent to BM – AM = AB per unit. The total loss of the firm will be the shaded area as BAP, P. Which can be understood from the above graph.

Minimum Loss = AC – AVC

2. Long Run

Equilibrium in Monopolistic Competition,

How output and price determination under monopolistic competition can be made?

Long run is that period in which a firm can change its production capacity in response to change in demand. In the long run the firm will produce upto that limit where marginal revenue is equal to the long run marginal cost. In the long run firms earn Normal profit. No one firm can get super normal profit in the long run. There are the following reasons.

(I) If a firm earns supernormal profit, then several firms will be attracted to enter into business as free entry. In result of which total supply will be increased in the market. As a result, firms will be deprived of the super normal profit due to the entry of many firms. Because profit will be distributed.

(Il) If new firms will charge lower price for their products for the purpose of maximum sale. The old firms are also required to lower their product price for existing in the market. Due to which profit will be distributed again in new and old firms. Then these firms will get only normal profits.

(Ill) Due to the free entry in industry many firms will enter. In result of which installation cost will be raised. But the prices of their products will be lower. So they will get normal profit instead of super profit.

However, From the above graph we can understand the profit of the firm and equilibrium of the firm in the long Run. Here LAC Long Run Average Cost and LMC Long Run Marginal Cost. AR is an Average Revenue and MR is a Marginal Revenue. Where MC=MR is equal, which is an equilibrium point. OM is the equilibrium output and OP is the equilibrium Price. This is an equilibrium point where AR=LAC. Thus, the firm earns normal profit in the long Run.

Monopolistic Competition
MR= LMC
Price ( AR ) = LAC but > LMC

Conclusion:- Now we are able to understand any firm can earn Supernormal Profit, Normal Profit and Minimum Loss in the Short Run. Whereas in the long Run any firm normally earns Normal Profit instead of Super Normal Profit. As in the short Run all factors of production cannot be changed whereas in the Long Run firms can Change their factor of production. How output and price determination under monopolistic competition can be found? You can check the syllabus of Business Economics on the official website of Gndu.

Important questions of Business Economics

Business Economics

price determination under perfect competition

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How is the price and output of a firm and industry determined under perfect competition?

Ans:-

Meaning of perfect competition:- Perfect competition is that market where there are a large number of buyers and large numbers of sellers available to sell and purchase homogeneous products.

In other words:- It is a location where homogeneous products are dealt by many buyers and sellers. Individual sellers have no control over the price in perfect competition.

Features of Perfect Market

Large number of buyers and sellers
Homogeneous Products
Free entry and exit
Perfect knowledge
Same price
No advertise cost

Meaning of Firm:- It is an enterprise unit engaged in the production for sale with the objective of maximizing the profit.

Price determination under perfect competition by firm

As we know that in the perfect competition no one firm has control over the price in the market to sell its products. So every firm is bound to take price whatever is prevailing in the industry market. So in the perfect market price is determined through the demand and supply of products. price determination under perfect competition

In other words “Firm is price taker not a price maker”.

Every firm is a part of an industry so whatever price is determined in the industry, firms have to take the same price. Such price is determined with the force of supply and demand of goods in the market. Thus individual firms cannot determine the price in perfect competition.

Meaning of industry:- It involves many firms which produced homogeneous products in the market called industry.

So Industry is a price maker.

Price determination under perfect competition in industry

Price of a commodity is determined by industry and not by any one, a firm or seller. Aggregate of all firms is known as industry. price determination under perfect competition

Price of the commodity is determined by the industry at which point “where Market demand for the commodity is equal to aggregate supply by the industry”

In simple words, “Equilibrium of price is determined at that point where total demand is equal to total supply.

However we can understand the price determination under the perfect competition concept with the following example. price determination under perfect competition

Price per unit (₹)	Market Supply of good –X	Market Demand for good –X
5	50	10
4	40	20
3	30	30
2	20	40
1	10	50

Table indicate following data

Table tells us that at the highest price ₹5 per dozen, and supply is 50 dozen but demand is only 10 dozen.
As we know that suppliers will be more supplied at the highest price.
But demand will be less at the highest price.
This is due to the competition among the homogeneous products.
Thus supply is more than demand.
But when prices fall, supply also declines but demand will rise.
As when price falls upto ₹ 3 from ₹5. Then demand will rise and demand supply will be in equilibrium.
If more prices decline as ₹2 then demand will be increased. Due to the competition among buyers. price determination under perfect competition

Now we can understand through Figure

Good units are shown on the x axis and the price shown on the Y axis.
DD is the demand curve and it slopes downward from left to right.
In which DD shows us that when price rises, demand falls. As when price ₹5 then demand upto 10 units.
When price decreases from ₹5 to ₹1 then demand increases upto 50 units.
So relation of demand curve is negative with the Price.
SS is the supply curve.
It slopes upwards from left to right.
SS curve shows us that when price is high as ₹5 then supply also is high in the industry. When price declines upto ₹1 then supply also decreases upto 10 units.
In addition, supply curve relation with price is always positive.
DD and SS intersect each other at point E.
In other words supply and demand are equal at E point.
Thus at Point E will be equilibrium Price as ₹3.
So price under perfect competition is determined where Demand and Supply curves cut each other.

It is clear from the figure that Every Supplier would like to supply at the highest price for the purpose of maximizing profit. price determination under perfect competition

But Every customer would like to purchase more at a lower price. So these competitions remain in the perfect market. price determination under perfect competition

As we know in a perfect market there are many firms for homogeneous products which alone cannot determine the price of a product in a perfect market. But according to the industry in which supply and demand will adjust itself. And the price of a commodity will be determined by itself where equilibrium will be established through demand and supply. You can check the syllabus of business economics under BCom-ll on the official website of Gndu. price determination under perfect competition

Conclusion:- At last we can say that demand and supply intersects each other at that point where equilibrium will be established. No single firm can determine the price of a commodity. Thus, price will be determined as per the industry supply and demand in the perfect market. Now we are able to understand price determination under perfect competition. price determination under perfect competition.

Important questions of Business Economics

Price determination under perfect competition

Business Economics

Law of variable proportions

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Explain in detail the Law of Variable proportion / Return to a factor Proportion. Give its causes

Ans:- Meaning of law of variable:- Law of variable proportion Refers to “When one factor is increased while other factors of production are constant then total output will increase”.

Definition of law of variable proportion:-

According to leftwich “The law of variable proportion states that if the input of one resource is increased while the input of other resources are constant, total output will increase”.

In other words:- A single variable of inputs is increased in the production process while the other factor of inputs remains constant causing an increase in production. law of variable proportions.

On account of change in proportion of factors is called the law of variable proportions. Due to change in proportion of input factor causing change in production at first phase is increasing then after it becomes constant then beyond this it becomes diminishing in the production of process function. law of variable proportions

Law of variable proportion \| Return to a factors
A Single Variable Factor ( Other Factors Constant )
It ia a Short Run Analysis

The law of variable proportions has three different phases.

Increasing Return to a Factor
Constant Return to a Factor
Diminishing Return to a Factor

Increasing Return to a Factor:- It is a situation in which total output tends to increase at an increasing rate when more of the variable factor is combined with the fixed of production. In which marginal product is increasing and cost marginal product must be diminishing. law of variable proportions

Explanation

Table shows the operations of increasing return to a factor.

Units Of Labour	Units Of Capital	Total Product	Marginal Product
1	1	4	4
2	1	10	6
3	1	18	8
4	1	28	10
5	1	40	12

Figure shows

This table shows that more and more units of labour are combined with the fixed amount of capital.

Total marginal product is increasing at the increasing rate. While the total product increased in production. law of variable proportions

Note:- Increasing to a factor leads to Diminishing cost. As a law of increasing return, When the output is increased, average cost per unit goes on diminishing.

Causes of increasing Return to Scale

( I ) Fixed Factor:- Underutilization remains of fixed factor. Its full utilisation calls for greater application of the variable factor.

Example – A small plant manufacturing cloth. The size of the plant is fixed in a short period. Five workers are required to get maximum output out of this plant. If a firm hires only two workers then production would be inefficient. The plant would be more efficiently utilised if more workers are added. law of variable proportions

( II ) Increase in efficiency :- Due to increase in variable units of input leads to possibility of division of labour and specialisation. Division of labour increases efficiency and efficiency leads to more production.

( lll ) Better Coordination between factors :- Additional application of variable factor of input tends to improve the efficiency of constant factor of input. Due to which production will be increased. law of variable proportions

Constant Return to a Factor:- It is the stage when increasing application of the variable factor results in no increase in the marginal product of the factor. Rather, the marginal product of the factor tends to stabilise.

In other words:- Constant return to a factor occurs when additional application of the variable factor increases output also increases at the constant rate. law of variable proportions

Constant Cost :- Cost of production will remain constant at the constant Return of Law. gndupapers.online

Following Table shows proper Understanding

gndupapers.online

Units of Labour	Units of capital	Total Product	Marginal Product
1	1	5	5
2	1	10	5
3	1	15	5
4	1	20	5
5	1	25	5

Table shows that as more and more units of labour are combined with the fixed amount of capital, total output increases only at the constant rate. Marginal product of the variable factor remains constant. law of variable proportions

We can also understand the graph of constant return of factor

Figure A. As Total product increases at the constant rate indicated by an upward sloping straight line TO curve.

Figure B. Shows constant marginal product of the variable factor, indicated by horizontal straight line MP.

Causes of Constant Return to a Factor

( I ) Fixed Factor :- With the increasing of variable factor production is increased, however, a stage comes when the fixed factor gets optimally utilised. Here the marginal product of the variable factor is maximised and tends to remain constant.

( ll ) Factor Ratio :- It is an Ideal factor Ratio between fixed and variable factor. Hence, Marginal product of the factor stabilises at its maximum.

( lll ) Variable Factor :- A combination of fixed factor and variable factor a stage comes when there is best division of labour. Where variable factor is most efficiently Utilised. Here marginal product tends to be constant at its maximum. law of variable proportions

Diminishing Return to a Scale:- It refers to a situation in which total output tends to increase at the diminishing rate when more variable factor is combined with the fixed factor of production. In such a situation marginal products must be diminishing.

In other words :- As more and more units of labour are employed on a given piece of land, the marginal product of the additional units of labour will go on diminishing. law of variable proportions

Note Increased Cost:- The law of diminishing return gives the cost of production is increased.

Following Table shows proper understanding

Diminishing Return to a Factor

Units of Labour	Units of capital	Total Production	Marginal Production
1	1	5	5
2	1	8	3
3	1	10	2
4	1	11	1
5	1	11	0
6	1	10	– 1

Tables show that as more and more units of labour are combined with fixed capital, the total capital increases only at a decreasing rate. Or it may even stop increasing at all or further start diminishing. Marginal product of the variable factor is diminishing and beyond a point it becomes zero or Even Negative.

We can properly understand with the help of Following Figure.

Figure:- A Total Product is increasing at the decreasing rate as indicated by the slope of the TP curve. At point p It becomes maximum and beyond that, it starts reducing. law of variable proportions

Figure:- B Shows diminishing marginal product of the variable factor, indicated by downward sloping MP curve. Beyond a point it becomes zero or Even negative. law of variable proportions

Conclusion:- we can understand the concept law of variable proportion or Return to a factor. Which includes Increasing, constant and Diminishing law of return to a factor. Here some causes of these are discussed also for the proper understanding. You can check the syllabus of Business Economics for BCom-ll on the official website of GNDU.

law of variable proportions

Essential question of Business Economics

law of variable proportions

Business Economics

law of Returns to Scale

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Explain the law of Returns to Scale. Explain the reasons for returning to scale.

Ans:- Meaning of law of return to scale- Return to scale describes the changes in production due to the all input units are varied by the same proportion.

Definition of return to scale:- “The Return to scale refers to changes in total output as a result of changes in total input factor by the same proportion. Increasing returns to scale or diminishing cost refers to a situation when all factors of production are increased in the manufacturing, then output increases at a higher rate. It means if all inputs are doubled, The, output will also increase at a faster rate than double. Hence, it is said to be increasing returns to scale.

In other words:- Law of return to scale refers to increase in output as a result of increase in all factors of production in the same proportion. Such an increase in output is known as Return to scale. It is a long run concept. law of Returns to Scale

Production function

P= f ( L, K )

L= Labour K= capital

If both the factors of production i.e labour ( L) and capital (K) are increased in the same proportion (m) then production function will be written as:

P= f ( ml, mk )

There are three aspect of Return to scale

Increasing Return to Scale
Constant Return to Scale
Diminishing Return to Scale

1.Increasing Return to Scale:- When all factors of inputs are increased causes greater increase in output than input increase. Understand with the following figure.

Then increasing returns to scale occurred. The above Figure Shows that a 10% increase in all factor inputs causes a 15% increase in output. Again 15% increase in all factor increase causes 25% increase in output. Thus, any percentage increase in all input factors is causing a greater percentage increase in output. By gndupapers.online law of Returns to Scale

Causes of Increasing Return to Scale

There are two types of Causes

Internal causes
External Causes

Internal Causes

Internal Causes

Real Economies:- It deals with the reduction in the physical quantity of inputs due to labour skills, labour specialisation and labour division. law of Returns to Scale
Inventory Economies:- A big enterprise enjoys inventory economies. Because they purchase a large stock as a result of which they get a discount. When the raw material is scarce in the market and then they sell at the highest price. The firm has no need to worry at all. So they get an increasing return.
Managerial Economies:- A firm produces efficient and talented managers by using advanced machines. Thus all production will be increased due to decentralised work of the firm. law of Returns to Scale
Transport and Storage Economies:- A big firm has its own trucks which carry its raw material and finished production carrying to the market. Transport and storage help it to sell its products at favourable prices. law of Returns to Scale

External Economies.

Real Economies:- These firms are shared in by a number of firms and industry. These external economies include managerial techniques, Developed financial areas and roads. And some projects are shares and jointly operated by their experts employees.
Economies of information:- Developed system of communication of a country will be helpful in increasing return in production. law of Returns to Scale

2. Constant Return to Scale

Constant Return to Scale occurs when a percentage increase in all factors of input increase causes the same increase in output.

Above figure shows that a 10% increase in all factors of inputs causes a 10% increase in output. Again 20% increase in inputs causes 20% increase in output. Therefore, any percentage increase in inputs matched with an equal percentage increase in output is called constant return.

Causes of Constant Return to scale

( I ) Economies of scale give rise to increasing return to scale.

( II ) Diseconomies of scale lead to Decreasing Return to Scale.

( III ) This constant Return to Scale exists after the phase of increasing return to scale exhausts itself and before the phase of Decreasing return to scale sets in. Means when all skills and advancement of machines are exhausted. Due to which products return remains constant.

( IV ) Constant Return to Scale arises when economies are exactly balanced by Diseconomies. law of Returns to Scale

3. Diminishing Return to Scale:- Diminishing Return to Scale occurs when a percentage increase in all factors of inputs causes a lesser increase in output. As 15% increase in all factors of inputs causes only 10% increase in output.

Above figure shows that 15% increase in all factor inputs causes only 10% increase in output. Again 25% increase in factor inputs causes 16.50% increase in output. Thus, Return to scale is thus diminishing.

Causes of Diminishing Return to Scale

External Diseconomies
External Diseconomies

( 1 ) Unwieldy Management :- At the biggest firm management is difficult to carry out its managed functions. It becomes difficult to supervise the work spread all over the firm. Due to which proper control is not possible in the business and as a result of which return is decreased. law of Returns to Scale

( 2 ) Technical Difficulties:- At certain points technical improvement can be carried out. But after that it becomes difficult to improve on it. Which becomes in economies causes Diseconomies of scale. And returns also declined in the firm.

B. External Diseconomies

( I ) These Diseconomies are suffered by all firms. When the area of a firm expands beyond the limit then firms operating in that industry suffer external Diseconomies. Example:- Firms experience great difficulties in procuring raw material. Because of the large demand for raw materials, it has become scarce and expensive.

Cost of land for the new firms becomes prohibitive.

A Brief Of Law of Returns To Scale

Return To Scale Involves
Change In All factors of production in the same proportion
Law of Returns Always Long Run Analysis
Non-homogeneous production Function

Conclusion :- Now we can understand the scale of Return in the production. Which passes through three stages. As increasing, diminishing and constant phases of return. We can also understand its causes due to which they occurred in the business.

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Essential question of business economics which you must learn.

Business Economics

Consumer Equilibrium through Indifference Curve

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What is the indifference curve approach? And tell the Consumer equilibrium through the Indifference Curve Analysis.

Meaning of Indifference curve:- An indifference curve is that line of points which shows different combinations of two commodities which yield equal satisfaction to the consumer.

Definition

According to the leftwich:- “A single indifference curve shows the different combinations of X and Y two commodities that yield equal satisfaction for the consumer and he/she doesn’t want to change in his situation”.

In other words:- The combination Each of points on the price line of the indifference curve represents equal satisfaction to the consumer on the indifference curve for two commodities. Consumer Equilibrium through Indifference Curve

Consumer’s Equilibrium Through Indifference Curve Analysis

Every consumer would like to get maximum satisfaction out of his given expenditure. A consumer may find out his position with the help of indifference curve as to how much he should spend his limited income on the different goods so that he may get maximum satisfaction.

In other words:- Consumer’s equilibrium refers to that situation in which he is not willing to make any change on expenditure with his given income and given prices.

Assumption

Prices of the goods are constant.
Income of consumers is also constant.
Consumers know the price of all things.
Consumers can spend his income in small quantities.
Market contains perfect competition.
Goods are classify as divisible.

CONSUMER’S EQUILIBRIUM

The consumer’s equilibrium is found at the tangent of the price line and a convex on the indifference curve. Consumer Equilibrium through Indifference Curve

Two Main Conditions Of Consumer’s Equilibrium are

Price line should be tangent to indifference curve on price line
Indifference curve should be convex to the point of origin.

Price line should be tangent to indifference curve on price line.

AB is a price line.
IC1, IC2, IC3 are indifference curves.
A consumer can buy any of the combination, C, D and E apple and Oranges shown on the price line AB.
He can’t get any combination on IC3 as it is away from price line AB.
He can buy combinations of those goods which are only on the price line AB for getting maximum equal satisfaction.
Out of C, D and E combinations, the consumer will be in equilibrium at combination D ( 2 Apple + 4 Oranges ) because at this point the price line ( AB ) is tangent to the highest indifference curve IC2.
The consumer can also buy C or E combinations as well but these will not give him maximum satisfaction being situated on lower indifference curve IC1.
It means the consumer’s equilibrium is a point that tangent on the price line and of the indifference curve.

B) Indifference curve must be convex to the origin

It is the second condition of equilibrium that represents the indifference curve must be convex to the point of origin. It means that the marginal rate of substitution of good X for good Y should be diminishing. If there is a point of consumer equilibrium of consumer, the indifference curve will be concave and not convex to the origin, then it will not be a permanent position of equilibrium. Consumer Equilibrium through Indifference Curve

AB is a price line.
IC is an indifference curve.
At point ‘E’ the marginal rate of substitution and price ratio of apples and oranges are equal. But point E is not a permanent equilibrium point because at this point, the marginal rate of substitution increases instead of diminishing.
In other words, at point E, the indifference curve is concave to its point of origin ‘O’ so it is a violation of the second condition of equilibrium. Consumer Equilibrium through Indifference Curve
So permanent equilibrium will not be permanent at point E.
Thus, the consumer is in equilibrium at point E1 on IC1 indifference Curve.
At point E1, Price line AB is tangent to IC1 Curve. Which is convex to the points of origin on the indifference curve.

Conclusion:- Thus, as per the above analyst consumer can be in equilibrium in the two conditions, when price line should be tangent to the indifference curve and Indifference curve must be convex to the origin. Consumer Equilibrium through Indifference Curve. You can download the syllabus of Business Economics on the official website of Gndu.

In summary, indifference curve analysis provides a more realistic and refined approach to understanding consumer behavior Compared to utility cardinal measurement, emphasizing preferences, trade-offs, and rational decision-making. Consumer Equilibrium through Indifference Curve

Important questions of Business Economics of BCom-lI sem

Law of Diminishing Marginal Utility

Assumption and Exception of Marginal Utility

Business Economics

What are the Methods of measuring national income?

What are the different problems in measurement of national income in underdeveloped countries like India? Explain.

difficulties in measuring national income

Elaborate upon the meaning and features of monopolistic competition. How is the output and price determination under monopolistic competition?

Features of Monopolistic Competition

How output and price determination under Monopolistic Competition

Losses

How is the price and output of a firm and industry determined under perfect competition?

Features of Perfect Market

Price determination under perfect competition by firm

In other words “Firm is price taker not a price maker”.

Price determination under perfect competition in industry

Table indicate following data

Now we can understand through Figure

Important questions of Business Economics

Explain in detail the Law of Variable proportion / Return to a factor Proportion. Give its causes

Definition of law of variable proportion:-

Law of variable proportion | Return to a factors

A Single Variable Factor ( Other Factors Constant )

It ia a Short Run Analysis

Explanation

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What is the indifference curve approach? And tell the Consumer equilibrium through the Indifference Curve Analysis.

Definition

Consumer’s Equilibrium Through Indifference Curve Analysis

Assumption

CONSUMER’S EQUILIBRIUM

Price line should be tangent to indifference curve on price line.

B) Indifference curve must be convex to the origin

Important questions of Business Economics of BCom-lI sem

Consumer Equilibrium through Indifference Curve

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