Business Economics

why does demand curve slope downward

Explain Law of Demand in detail. Why does the demand curve slope downwards? Also discuss types of Demand.

Law of Demand – Explained in Detail

The Law of Demand is one of the fundamental principles of microeconomics. It states that, ceteris paribus (all other things being equal), when the price of a good or service falls, the quantity demanded increases, and

When the price rises, the quantity demanded decreases. In simple terms, there is an inverse relationship between price and quantity demanded in the market.

In other words:- When price falls demand increases. When price increases demand decreases.

Reasons for the Law of Demand

Substitution Effect: When the price of a good falls, then customers shift to the cheaper good compared to dearer substitutes. Consumers are likely to switch to the cheaper option, increasing demand for it.
Income Effect: A fall in price increases the consumer’s real income (purchasing power), enabling them to buy more.
Diminishing Marginal Utility: As a person consumes more units of a good, the additional satisfaction (utility) from each extra unit decreases. People are willing to pay less for more units, leading to a downward-sloping demand curve.

Why Does the Demand Curve Slope Downward?

The demand curve slopes downwards from left to right mainly due to the law of demand, which states that as the price of a good falls, the quantity demanded increases, and vice versa, all else being equal. This downward slope happens for a few key reasons:

Substitution effect: As the price of a good decreases, it becomes relatively cheaper compared to substitutes, so consumers tend to buy more of it. Example:- If the price of the coffee increases then people will buy more tea due to the substitution effect.
Income effect: A lower price increases consumers’ real income (purchasing power), allowing them to buy more of the good.why does demand curve slope downward.
Diminishing marginal utility: As consumers consume more units of a good, the added satisfaction (utility) to his total satisfaction from each additional unit decreases, so they’re only willing to buy more if the price of good decreases.

These factors combine to create the typical downward-sloping demand curve in most markets.

Types of Demand

Demand can be classified in several ways depending on the context. Here are the main types:

1. Price Demand

Refers to the quantity of a good a consumer will purchase in the market at a given price.why does demand curve slope downward
Core concept behind the law of demand. When price falls it’s demand will be increased and vice versa demand and price of goods.

2. Income Demand

Shows how the quantity demanded changes with consumer income.
Normal Goods: Demand increases with income.
Inferior Goods: Demand decreases as income increases. Because he shifts towards the premium goods.

3. Cross Demand

Refers to how the quantity demanded of one good changes due to a price change in another good.
Substitutes: An increase in the price of tea may increase the demand for coffee in the available market.
Complements: A fall in the price of printers may increase the demand for ink.why does demand curve slope downward

4. Composite Demand

When a good is demanded for multiple uses.why does demand curve slope downward
Example: Milk can be used for drinking, making sweets, curd, etc.

5. Joint Demand

When two or more goods are used together by the consumer is called joint demand.
Example: Car and petrol.

6. Direct and Indirect Demand

Direct (Final) Demand: For goods consumed directly (e.g., food, clothing).why does demand curve slope downward
Indirect (Derived) Demand: For goods not consumed directly but used in the production of other goods (e.g., raw materials, labor).

Conclusion of the Law of Demand:

The law of demand concludes that there is an inverse relationship between the price of a good and the quantity demanded, assuming all other factors remain constant. As price decreases, demand increases, and as price increases, demand decreases. This principle is fundamental in economics and helps explain consumer behavior and how markets function. You can check the syllabus of Business Economics on the official website of Gndu.

Important questions of Business Economics

why does demand curve slope downward

Business Economics

different types of costs in economics

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What are the different concepts related to costs? Explain the shape of the long run average cost curve according to traditional Theory. (2016 ) ( 2017 )

Concepts of Costs:- Costs concepts are used in a different way in economics as following:

Money Cost
Real Cost
Accounting Costs
Opportunity Costs
Economic Costs
Social Costs
Private Cost
Explicit Cost
Implicit Cost
Money Cost:- The Expenditure which is incurred in terms of money for the purpose of production is called Money Cost. Example :- wages paid, Taxes, Transportation Charges, Expenditure on raw materials. Different types of costs in economics
Real Cost:- The mental and physical efforts paid for producing a commodity is called real Cost. Which efforts give pain, and discomfort to the Real Owner who supplies the factor of production. It is a subjective concept.
Accounting Cost:- Which costs are recorded in the books of accounts as depreciation and cash payments. It refers to historical costs and pocket costs.
Opportunity Costs:- When we invest money in the form of expenditure to produce one thing, what was given up in terms of money but this money is sacrificed for next best alternatives is called Opportunity cost. Because one project is undertaken but another opportunity is foregone. It is called opportunity costs.
Economic Costs:- Sometimes the owner supplies his own resources of production to the business otherwise his resources could earn some profit which he would have to forego. As self Employed in business for producing commodities. Different types of costs in economics
Social Costs:- Social cost refers to costs which are concerned with the Social cost such as Water Pollution, air pollution and Noise. Which is borne by society like the cost, people have to bear on account of water pollution and noise pollution.
Private Costs:- These are those costs which are borne by individual firms or individual producers as a result of their own decision making in their business operations. In short, Private costs are those costs which is equal to social costs minus external costs.
Explicit Costs:- Which sources are arranged by firms for the purpose of production, and monetary payments are made to those outsiders who supply labour services, material, fuel, transportation service, power and so on are called Explicit Costs.
Implicit Costs:- Some inputs are self owned and self employed by the firms. The firm does not pay any payment to anyone. Rather it forgoes the opportunity to earn income from someone, Example – to whom it could sell and lease out of self owned resources is called implicit Costs.

Explain the shape of the long run average cost curve according to traditional Theory.

Long Run Average Cost Curve:- It describes the minimum cost per unit of production at each level of output. Different types of costs in economics

Its value is determined by dividing long run total cost by the quantity of output produced.

As we know that each firm can use different plants in the long run. As per the demand of production he can change plant capacity as per the requirements. Each plant has its short run average cost curve with the help of which he can estimate long run average cost.Different types of costs in economics

Long run average cost curve is also known by following names as

Envelope curve
Planning Curve

From the following figure we can analysis

Long Run Average cost Curve is tangent to each Short run average Cost curve at some point.

The left of minimum point M of long run average cost. This point of tangency is on the part of the short run average cost curve.
The reason is that the slope of the long run average cost curve is reducing ( Negative ).
As the slopes of short run average costs curve will be negative. Different types of costs in economics
Because at the point of tangency slopes of both the curves are equal.
On the right part of point M the point of tangency will be rising of short run average cost curves.
It is because to the right of point ‘M’ the long run average cost curve is rising.
At point ‘M’ long run minimum average cost and short run minimum average cost are equal to each other.
different types of costs in economics

Conclusion :- Now we can understand the concept of costs and Long run average cost curves from the whole discussion. Which are analysts on the above explanation. You can check the syllabus of Business Economics on the official website of Gndu.

Important questions of Business Economics

different types of costs in economics

Business Economics

short run and long run equilibrium under monopoly market

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What is meant by monopoly? Discuss the short run and long run equilibrium of firms under monopoly. ( 2016 )

Meaning of Monopoly:- “Monopoly is that market situation in which there is a single seller. There is no close substitute for the commodity that it produced. And there are barriers to entry. “

According to the prof. Ferguson, “Monopoly exists when there is only one producer in a market. There are no direct competitors”.

In other Words:- It is that market where there is only one seller and he/she has full control over the price. There are close substitute products. short run and long run equilibrium under monopoly market

Characteristics of Monopoly

One Seller and Large Number of Buyers:- Under monopoly there is only one Single producer of the commodity.
Monopoly is also an industry:- There is no difference between the study of industry and firm.
Barrier to entry for new Firms:- There are some restrictions on the entry of new firms.
No Close Substitute:- There is no close substitute of a commodity which is produced by a Monopoly firm. short run and long run equilibrium under monopoly market
Price Maker:- Monopolistic is a price maker. Who has got control over the supply of the product.
Price Discrimination:- A monopolist may charge different prices for the same products from different customers.

EQUILIBRIUM OF MONOPOLY

A monopolistic may be in equilibrium in two periods through which any business has to go through. As following periods.

SHORT RUN EQUILIBRIUM

LONG RUN EQUILIBRIUM

1.Short Run Equilibrium:- Short run refers to that period in which monopolies cannot change fixed factors, like machinery, plant, etc. Monopolies can increase his output in response to an increase in demand by changing his variable factors. Like Capital, Labour and time. short run and long run equilibrium under monopoly market

A monopolistic will be in equilibrium when he produced that amount of output at which

Marginal Cost is equal to marginal revenue
Marginal Cost curve cuts marginal revenue curve from below.

A Monopolistic in equilibrium may face three situation in short period

( 1 ) Super Normal Profit

( 2 ) Normal Profit

( 3 ) Minimum Loss

( 1 ) Super Normal Profit:-

If the price fixed by the monopolist, Then he will be in equilibrium is more than his average cost ( AC ). Then he will get a super Normal Profit.
If the price of equilibrium output is more than average cost ( AR> AC ) then the monopolist will earn supernormal Profit. short run and long run equilibrium under monopoly market

SUPER NORMAL PROFIT = AR > AC

However, it can be understand with the help of following figure

The Monopolistic is in equilibrium at point E.
Because at this point marginal cost is equal to marginal revenue.
The monopolist will produce OM units of output and Sell it at AM price.
Which is more than average cost BM by AB per unit ( AM – BM = AB ).
In This situation Monopolists will earn Supernormal Profit as ABCP.

( 2 ) NORMAL PROFIT:- IN this situation Monopolistic price ( AR ) is equal to its average cost. Then he will only earn normal profits.

Normal Profit = AR = AC

However, we can understand with the following figure.

In this figure, the Firm is equilibrium at point E.
Where MC = MR and OM is the equilibrium output.
At this point AC curve touches average revenue AR curve at point A.
At this point ‘A’ price OP ( = AM ) is equal to the average Cost ( = AM ) of the commodity. short run and long run equilibrium under monopoly market
Monopoly firms, therefore, earn only normal profit in equilibrium situations.
As at equilibrium output its AC = AR.

( 3 ) Minimum Loss:- Monopolies may also incur loss. As if price falls due to depression or fall in demand. Because in such a short period he may bear loss. Because he can cover his AVC only. But he can bear the loss for fixed costs.

In this situation, equilibrium price is equal to average variable cost ( AVC ) and the Monopolistic bears the loss of fixed costs.

However, we can understand from the following figure.

The monopolistic is in equilibrium at point E. Where MR = MC and produces OM output.
The price of equilibrium output OM is Fixed at OP1 ( = BM ).
At this price, the Average variable cost (AVC) curve touches the AR Curve at point B.
It means the firm will cover only the Average Variable Cost from the prevailing price. The firm will bear the loss of fixed costs.
The firm will bear total loss equivalent to ABP1P as shown by the shaded area.
Even though monopolisation will fix prices lower than OP1, he would prefer to discontinue Production. short run and long run equilibrium under monopoly market

LONG RUN EQUILIBRIUM OR PRICE DETERMINATION UNDER LONG RUN

IN THE LONG RUN, Monopolistic will be in equilibrium at a point where marginal cost is equal to the marginal revenue as ( LMC = MR ) IN the Long Run. In the long run supply of fixed assets of production can be increased due to which production can be increased. Whereas variable factors of production are also increased in both Long Period and Short Period.

Normally in the monopoly in the long run the price is more than the long run average cost. Due to not close substitute monopolies will earn supernormal profit.

Monopolies will fix the price in such a way to earn SuperNormal Profit.

From the following figure we will understand how to earn supernormal profit in the long run.

Point E indicates the equilibrium of the monopoly. Where MR = LMC.
Om is the output and ON is the equilibrium price. short run and long run equilibrium under monopoly market
BM is the average cost.
Price Average Revenue AM being more than long run average Cost BM.
The monopolist will get Super Normal Profits.
The monopolist earns supernormal Profit by AB = AM – BM per unit.
Total Super normal profit will be ABPN as shown by shaded area. short run and long run equilibrium under monopoly market

Conclusions:- Under monopoly a producer will earn Supernormal profit or Normal Profit or Minimum Loss in the Short Run. But in the long run monopolisation will earn SuperNormal Profit. Because there is no competitor near the business. So a monopoly seller is the price maker and taker. Thus, throughout these two periods monopolists will face the above mentioned situation in the ongoing market. You can check the syllabus of Business Economics on the official website of Gndu. short run and long run equilibrium under monopoly market

Important questions of Business Economics

short run and long run equilibrium under monopoly market

Business Economics

Difference between gdp and ndp

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Discuss on National Income. Gross and Net Domestic Product in detail.

Meaning of national income:- National income refers to the income which is 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.

National Income, Gross Domestic Product (GDP), and Net Domestic Product (NDP):

1. National Income:

Definition: National Income refers to the total value of all goods and services produced by a country’s residents (both domestic and abroad) over a specific period (usually a year), after adjusting for depreciation and indirect taxes.

Components: National Income includes:

Wages and salaries (compensation of employees)
Rent
Interest
Profits
Mixed income of self-employed

Key Measures of National Income:

Gross Domestic Product (GDP)
Net Domestic Product (NDP)
Gross National Product (GNP)
Net National Product (NNP)
National Income at Factor Cost

Uses of National Income:

Indicator of economic health. Difference between gdp and ndp
Helps in policy-making and planning.
Basis for comparing the economic performance of countries.
Guides investment and business decisions.

2. Gross Domestic Product (GDP):

Definition: GDP is the total market value of all final goods and services produced within a country’s borders during a given time period.

Gross Domestic Product (GDP) is the total monetary value of all goods and services produced within a country’s borders over a specific time period, usually a year or a quarter.

It’s a key indicator used to measure the size and health of a country’s economy. When GDP grows, it typically means the economy is doing well, and when it shrinks, it may indicate economic trouble. Difference between gdp and ndp

Gross Domestic Product (GDP) is the total monetary value of all goods and services produced within a country’s borders over a specific time period, usually a year or a quarter.

There are three main ways to calculate GDP:

Production approach – Total value of goods and services produced.
Income approach – Total income earned by people and businesses.
Expenditure approach – Total spending on goods and services (consumption + investment + government spending + exports – imports0

There are three main ways to calculate GDP:

Production approach – Total value of goods and services produced.
Income approach – Total income earned by people and businesses.
Expenditure approach – Total spending on goods and services (consumption + investment + government spending + exports – imports).

Types of GDP:

Nominal GDP: Measured at current market prices.
Real GDP: Adjusted for inflation, measured at constant prices.

Methods of Calculating GDP:

Production Method: GDP = Value of Output – Value of Intermediate Consumption
Income Method: GDP = Wages + Rent + Interest + Profits
Expenditure Method: GDP = C + I + G + (X – M)
Where:
C = Consumption, I = Investment, G = Government spending, X = Exports, M = Imports Difference between gdp and ndp

Limitations of GDP:

Doesn’t account for income inequality.
Ignores non-market transactions (e.g., household work).
Doesn’t consider environmental degradation.
Excludes black market/underground economy.

3. Net Domestic Product (NDP):

Definition: NDP is GDP minus depreciation (also known as the consumption of fixed capital).

Formula: NDP = GDP – Depreciation

Explanation: Depreciation refers to the wear and tear or obsolescence of capital goods over time. NDP provides a more accurate measure of a country’s productive capacity and sustainable output. Difference between gdp and ndp

Importance:

Gives insight into the actual productive efficiency of an economy.
Useful for understanding long-term economic growth.
Helps evaluate the true value of net investment in the economy.

Net Domestic Product (NDP) is an economic indicator that measures the total value of goods and services produced within a country in a given period (usually a year), after accounting for depreciation of capital goods (like machinery, buildings, etc.).

Formula:

NDP = GDP – Depreciation

GDP (Gross Domestic Product): The total market value of all final goods and services produced within a country. Difference between gdp and ndp
Depreciation: Also known as “consumption of fixed capital,” it’s the reduction in value of capital goods over time due to wear and tear, obsolescence, etc.

Why is NDP Important?

It gives a more accurate measure of an economy’s actual productive capacity.
It shows how much output is available for consumption or investment after maintaining the capital stock.

If you want, I can give examples or compare it with related terms like Net National Product (NNP) or Gross National Product (GNP).

Key Differences between GDP and NDP:

DEFINITION:

GDP:- In gdp considered the total value of goods and services produced in the country. Difference between gdp and ndp
NDP:- NDP refers to the value equal to the total value of final goods minus the depreciation.
NDP = GDP – Depreciation
GDP includes the depreciation. Difference between gdp and ndp
Whereas NDP excludes the depreciation.
GDP involves Broad Economic measurement.
Whereas NDP- Focus on sustainability and net output.

Conclusion :-

Gross Domestic Product (GDP) and Net Domestic Product (NDP) are important economic indicators that help measure a country’s economic performance.

GDP reflects the total value of all goods and services produced within a country, showing the overall economic strength.
NDP is derived from GDP by subtracting depreciation (wear and tear of capital goods), giving a more accurate picture of the economy’s sustainable production level. Difference between gdp and ndp

In summary, GDP gives a broad overview of economic activity, while NDP provides insight into how much of that output is actually adding to the economy after accounting for the loss of value in assets. Both are crucial for understanding economic health and planning for long-term growth. You can check the syllabus of Business Economics on the official website of Gndu. Difference between gdp and ndp

Important questions of Business Economics

Business Economics

Methods of measuring national income ppt

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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.

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

Explain Law of Demand in detail. Why does the demand curve slope downwards? Also discuss types of Demand.

Law of Demand – Explained in Detail

Reasons for the Law of Demand

Why Does the Demand Curve Slope Downward?

Types of Demand

1. Price Demand

2. Income Demand

3. Cross Demand

4. Composite Demand

5. Joint Demand

6. Direct and Indirect Demand

Conclusion of the Law of Demand:

why does demand curve slope downward

What are the different concepts related to costs? Explain the shape of the long run average cost curve according to traditional Theory. (2016 ) ( 2017 )

different types of costs in economics

different types of costs in economics

short run and long run equilibrium under monopoly market

Discuss on National Income. Gross and Net Domestic Product in detail.

1. National Income:

2. Gross Domestic Product (GDP):

3. Net Domestic Product (NDP):

Formula:

Why is NDP Important?

Key Differences between GDP and NDP:

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

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