## CA Foundation Business Economics Study Material – Imperfect Competition : Monopolistic Competition

#### CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Imperfect Competition : Monopolistic Competition

IMPERFECT COMPETITION : MONOPOLISTIC COMPETITION

Introduction

• We have studied two models that represent the two extremes of market structures namely perfect competition and monopoly.
• The two extremes of market structures are not seen in real world.
• In reality we find only imperfect competition which fall between the two extremes of perfect competition and monopoly.
• The two main forms of imperfect competition are —
– Monopolistic Competition and
– Oligopoly

Meaning and features of Monopolistic Competition

• As the name implies, monopolistic competition is a blend of competitive market and monopoly elements.
• There is competition because of large number of firms with easy entry into the industry selling similar product.
• The monopoly element is due to the fact that firms produce differentiated products. The products are similar but not identical.
• This gives an individual firm some degree of monopoly of its own differentiated product.
• E.g. MIT and APTECH supply similar products, but not identical.
• Similarly, bathing soaps, detergents, shoes, shampoos, tooth pastes, mineral water, fitness and health centers, readymade garments, etc. all operate in a monopolistic competitive market.

The characteristics of monopolistic competitive market can be summed up as follows:

1. Large number of buyers and sellers
• There are large number of firms.
– So each individual firms can not influence the market.
– Each individual firm share relatively small fraction of the total market.
• The number of buyers is also very large and so single buyer cannot influence the market by demanding more or less.
2. Product Differentiation
• The product produced by various firms are not identical but are somewhat different from each other but are close substitutes of each other.
• Therefore, the products are differentiated by brand names. E.g. – Colgate, Close-Up, Pepsodent, etc.
• Brand loyalty of customers gives rise to an element of monopoly to the firm.
3. Freedom of entry and exit
• New firms are free to enter into the market and existing firms are free to quit the market.
4. Non-Price Competition
• Firms under monopolistic competitive market do not compete with each other on the basis of price of product.
• They compete with each other through advertisements, better product development, better after sales services, etc.

Short Run Equilibrium of a Firm in Monopolistic Competition. (Price-Output Equilibrium)

• Each firm in a monopolistic competitive market is a price maker and determines the price of its own product.
• As many close substitutes for the product are available in the market, the demand curve (average revenue curve) for the product of individual firm is relatively more elastic.

The conditions of equilibrium of a firm are same as they are in perfect competition and monopoly i.e.

1. MR = MC, and
2. MC curve cuts the MR curve from below.

The following figures show the equilibrium conditions and price-output determination of a firm under monopolistic competition.

When a firm in a monopolistic competition is in the short run equilibrium, it may find itself in the following situations —

1. Firm will earn SUPER NORMAL PROFITS if its AR > AC;
2. Firm will earn NORMAL PROFITS if its AR = AC; and
3. Firm will suffer LOSSES if its AR < AC

1. Super Normal Profits (AR > AC):

The firm will earn NORMAL PROFITS if AC curve is tangent to AR curve i.e. when AR=AC

2. Losses (AR < AC):

The firm may continue to produce even if incurring losses if its AR ≥ AVC.

Long Run Equilibrium of a Firm in Monopolistic Competition

• If the firms in a monopolistic competitive market earn super normal profits, it attracts new firms to enter the industry.
• With the entry of new firms market will be shared by more firms.
• As a result, profits per firm will go on falling.
• This will go on till super normal profits are wiped out and all the firms earn only normal profits.

• In the long run firms in a monopolistic competitive market just earn NORMAL PROFITS.
• Firms operate at sub-optimal level as shown by point ‘R’ where the falling portion AC curve is tangent to AR curve.
• In other words firms do not operate at the minimum point of LAC curve ‘L’.
• Therefore, production capacity equal to QQ, remains idle or unused called excess capacity.
• This implies that in monopolistic competitive market —
• Firms are not of optimum size and each firm has excess production capacity
• The firm can expand its output from Q to Q, and reduce its average cost.
• But it will not do so because to sell more it will have to reduce its average revenue even more than average costs.
• Hence, firms will operate at sub-optimal level only in the long run.

## CA Foundation Business Economics Study Material – Monopoly

#### CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Monopoly

MONOPOLY

Introduction:

• ‘Mono’ means single and ‘Poly’ means seller.
• So monopoly refers to that market structure where there is a single firm producing and selling a commodity which has no close substitute.
• As there is no rival firms producing close substitute,
– the monopoly firm itself is industry, and
– its output constitutes the total market supply.

Features of Monopoly Market:

Following are the main features of the monopoly market:

1. Single seller and Large number of buyers
• There is only one seller or producer of a commodity in the market but there are many buyers.
• As a result, the monopoly firm has full control over the supply of the commodity.
2. No close substitutes.
• The commodity sold by the monopolist generally has no close substitutes.
• Therefore, the cross elasticity of demand between monopolist’s commodity and other commodity is zero or less than one.
• As a result monopoly firm faces a downward sloping demand curve.
3. Restrictions to entry for new firms.
• The monopoly firm controls the situation in such a way that it becomes difficult for new firms to enter the monopoly market and compete with monopoly firm.
• There are many barriers to the entry of new firm which can be economic, institutional or artificial in nature.
4. Price maker
• A monopoly firm has full control over the supply of the commodity
• Price is solely fixed by the monopoly firm.
• So, a monopoly firm is a “price maker”.

Sources of Monopoly:

The sources of monopoly may be listed as follows:

• Legal support provided by the government to promote inventions, to produce a particular commodity, etc. by granting patents, copyrights, trademarks, etc. creates monopoly.
2. Control of raw materials.
• If one firm acquires the sole ownership or control of essential raw materials, then the other firms cannot compete.
3. Economies of large scale.
• The monopoly firm may be very big and enjoy economies of large scale of production.
• The cost of production is therefore low, hence it may supply goods at low prices.
• This leaves no scope for new firms to enter the market.
4. Government control on entry
E.g. – In defense production; public utility services like water, transportation, electricity, etc.
• Monopolies are created by forming cartels, pools, syndicates, etc. by the firms producing the same goods to control price and output.

Average Revenue and Marginal Revenue Curves under Monopoly

• Monopoly firm constitutes industry.
• Therefore, the entire demand of the consumers faces the monopolist.
• The demand curve of a monopoly firm is the same as the market demand curve of the commodity.
• As the demand curve of the consumers for a commodity slopes downward, the monopolist faces a downward sloping demand curve.
• This means that monopolist can sell more quantity only by lowering the price of the commodity
• The demand curve facing the monopolist is also his average revenue curve. Thus, average revenue curve of the monopolist slopes downwards
• As the demand curve i.e. average revenue curve slopes downwards, marginal revenue curve will be below it.

• In the figure above, AR curve of the monopolist slopes downward and MR curve lies below it.
• At a quantity OQ, average revenue ie. price is OP (=QT) and marginal revenue is QK which is less than average revenue OP (=QT).

Thus, in case of monopoly —

1. AR and MR are both negatively sloped curves,
2. MR curve lies half way between the AR curve and the Y-axis,
3. AR cannot be zero i.e. AR curve cannot touch X-axis,
4. MR can be zero or even negative i.e. MR curve can touch or cut the X-axis.

Short Run Equilibrium of the Monopoly Firm (Price – Output Equilibrium)

• A monopolist will produce an output that maximizes his total profits.
• A monopolist will maximize his total profits when —
1. Marginal Cost = Marginal Revenue (MC = MR), and
2. Marginal cost curve cuts the marginal revenue curve from below.
• When a monopoly firm is in the short run equilibrium, it may find itself in the following situations —
1. Firm will earn SUPER NORMAL PROFITS if its AR > AC;
2. Firm will earn NORMAL PROFITS if its AR = AC, and
3. Firm will suffer LOSSES if its AR < AC.

1. Super Normal Profits (AR > AC):
The monopoly firm would earn super normal profits if at the equilibrium output AR > AC.

2. Normal Profits (AR = AC):
The monopoly firm would earn normal profits if at the equilibrium output AR = AC.

3. Losses (AR < AC):
The monopoly firm would suffer losses, if at the equilibrium output its AR < AC.

If monopoly firm’s AR > AVC or AR = AVC, it can continue to produce though it suffer losses at the equilibrium level of output. .

Long Run Equilibrium of a Monopoly Firm:

• The long run equilibrium of the monopoly firm is attained where its MARGINAL COST = MARGINAL REVENUE ie. MC = MR.
• The monopoly firm can continue to earn super normal profits even in the long run.
• This is because entry to the market for new firms is blocked.
• All costs are variable costs in the long run and these must be recovered.
• This means that monopoly firm does not suffer loss in the long run.
• However, if it is unable to recover variable costs, it should shut down.

Fig. Shows the long run equilibrium of a monopoly firm.

• Thus, we find that monopoly firm continue to earn super normal profits in long run.
• A monopoly firm does not produce at the lowest point of LAC curve ie. does not produce at optimum level because of absence of competition.
• In other words, it operates at sub-optimum level and therefore, does not produce optimum output.

Price Discrimination:

• A monopoly firm is also the industry.
• A single firm controls the entire supply.
• Therefore, the firm has the power to sell the same commodity to different buyers at different prices.
• When the firm charge different prices to different customers for the same commodity, it is engaged in price discrimination.
E.g. – Electricity supplying firm charge higher rate per unit of electricity from industrial units than domestic consumers.

Conditions for price discrimination:
Price discrimination is possible under the following conditions:

1. Existence of two or more than two sub-markets.
• The monopolist should be able to divide the total market for his commodity into two or more sub-markets.
• Such division of market may be on the basis of income, geographic location, age, sex, etc.
• E.g. on the basis of income, a doctor may charge high fees from rich patients than from poor.
2. Different markets should have different price elasticity of demand.
• The difference in price elasticity of demand in different markets enables the monopolistto discriminate among customers.
• He can charge higher price in inelastic market and lower price in elastic market.
3. No possibility of resale.
• It should not be possible for buyers to purchase the commodity from a cheaper market and sell it in the costlier markets.
• In other words, there should be no contact among the buyers of the two markets.
4. Control over supply.
• The supply should be in full control of the monopolist.

Price-output determination under price discrimination

• Suppose a discriminating monopolist sell his output in market ‘A’ and market ‘B’.
• Market ‘A’ has less elastic demand and market ‘B’ has more elastic demand.
• Suppose the monopolist has only one production facility then he is faced with the questions—
• How much to produce?
• How much to sell in each market?
• How much price to charge in each market?
• The monopolist will first decide profitable level of total output (ie. where MR = MC) and then allocate the quantity between two markets.
• The condition for equilibrium here would be —
1. MC = MRa = MRb. It means that MC must be equal to MR in individual markets separately.
2. MC = AMR (aggregate marginal revenue). It means that the monopolist must be in equilibrium not only in individual markets but also when the two markets are treated as one.

The process of price determination under price discrimination is shown in the following figure —

• In the fig. – MC curve intersect the AMR curve at point E
• Point E shows the total output is OQ.
• When a perpendicular EH is drawn, it intersect MRa at E1 and MRb at E2. These are the equilibrium point of market A and B
• Point Et shows that quantity sold in market A is OQ1 and the price charged is OP1
• Point E2 shows that quantity sold in market B is OQ2 and the price charged is OP2
• Price charged in market ‘A’ is higher than in market ‘B’.
• Thus, a discriminating monopolist chargers a higher price in the market ‘A’ having less elastic demand and a lower price in the market ‘B’ having more elastic demand.
• The marginal revenue is different in different markets.

E.g. – Suppose the single monopoly price is Rs. 40 and elasticity of demand in market A and B is 2 and 4 respectively.

• It is clear from the above example that the marginal revenue is different in different markets when elasticity of demand at the single price is different.
• MR is higher in the market having high elasticity and vice versa.
• In the above example, since marginal revenue in market ‘B’ is more, it will be profitable for monopolist to transfer some units of the commodity from market ‘A’ to ‘B’.
• When monopolist transfers the commodity from market A to B, he is practicing price discrimination.
• As a result, the price of commodity will increase in market A and will decrease in market B.
• Ultimately the marginal revenue in the two market will become equal.
• When marginal revenue becomes equal in the two markets, it will no longer be profitable to transfer the units of commodity from market A to B.

Objectives of Price discrimination:
To earn maximum profit; to dispose off surplus stock; to enjoy economies of scale; to capture foreign markets etc.

Degrees of price discrimination:
Pigou classified price discrimination as follows:

1. first degree price discrimination where the monopolist fix a price which take away the entire consumer’s surplus,
2. second degree price discrimination where the monopolist take away only some part of consumer’s surplus. Here price changes according to the quantity sold. E.g. large quantity sold at a lower price,
3. third degree price discrimination where the monopolist charges the price according to location customer segment, income level, time of purchase etc.

## CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Test Questions

1. The process of economic liberalization in India began mainly in
(a) 1990
(b) 1991
(c) 1992
(d) 1993

2. Partial or complete sale of a public sector enter-prise is called
(a) liberalization
(b) privatization
(c) globalization
(d) none of them

3. Integration of national economies into a world economy is known as :
(a) privatization
(b) globalization
(c) liberalization
(d) all of them

4. Give the full forms of the following:
(b) GDRs
(c) FCCBs
(d) FDI

5. The initial trigger for the policy of economic liberalization in India in 1991 was
(a) foreign exchange crisis
(b) shortage of cash
(c) overpopulation
(d) none of them

6. Which of the following is an example of industrial reforms:
(a) delicensing of industry
(b) simplification of licensing products
(c) permission to public sector units to raise capital from the capital market
(d) all the above.

## CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Objectives of Business

Every business enterprise has certain objectives which regulate and generate its activities. Objectives are needed in every area where performance and results directly affect survival and prosperity of a business. Various objectives of business may be classified into four broad categories as follows:

#### Economic Objectives

Business is basically an economic activity. Therefore, its primary objectives are economic in nature.

The main economic objectives of business are as follows:

1. Earning profits –
A business enterprise is established for earning some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Just as a person cannot live without food, a business firm cannot survive without profit. Profits enable a businessman to stay in business by maintaining intact the wealth producing capacity of its resources. Profit is also necessary for the expansion and growth of business. Profits ensure continuous flow of capital for the modernisation and extension of business operations in future. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.
2. Creating customers –
3. Innovations –
Business is an organ of dynamism and change. In these days of competition a business can be successful only when it creates new designs, better machines, improved techniques, new varieties, etc. Modern science and technology have created a great scope for innovation in the business world. Innovation is not confined to the invention of a new machine. It comprises all efforts made in perfecting the product, minimising the costs and maximising benefits to customers. It involves improvements in management, production, selling servicing, methods of personnel and accounting, etc. Business firms invest money, time and efforts in Research and Development (R&D) to introduce innovations. They develop new technology, introduce new designs and new tools and processes to minimise costs and to satisfy ever increasing wants of customers. In order to create customers business has to explore new markets and attract more customers. It has also to retain old customers by providing better services to them.

#### Social Objectives

Business does not exist in a vacuum. It is a part of society. It cannot survive and grow without the support of society. Business must therefore discharge social responsibilities in addition to earning profits. According to Henry Ford, “the primary aim of business should be service and subsidiary aim should be earning of profit”.

The social objectives of business are as follows:

1. Supplying desired goods at reasonable prices –
Business is expected to supply the goods and
services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices. It is also the social obligation of business to avoid malpractices like hoarding, black marketing and misleading advertising.
2. Fair Remuneration to employees –
Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees in recognition of their contributions. Such sharing of profits will help to increase the motivation and efficiency of employees. It is the obligation of business to provide healthy and safe work environment for employees. Good working conditions are beneficial to the organisation because these help to improve the productivity of employees and thereby the profits of business. Employees work day and night to ensure smooth functioning of business. It is, therefore, the duty of employers to provide hygienic working and living conditions for workers.
3. Employment Generation –
Business should provide opportunities for gainful employment to members of the society. In a country like India unemployment has become a serious problem and the Government is unable to offer jobs to all. Therefore, provision of adequate and full employment opportunities is a significant service to society. If unemployment problem increases, the socio-economic environment cannot be congenial for the growth of business activities.
Business is expected to pay fair return to shareholders and creditors in the form of dividend and interest. Investors also expect safety and appreciation of their investment. They should be kept informed about the financial health and future prospects of business.
5. Social welfare –
Business should provide support to social, cultural and religious organisations. Business enterprises can build schools, colleges, libraries, dharamshalas, hospitals, sports bodies and research institutions. They can help non-government organisations (NGOs) like CRY, Help Age, and others which render services to weaker sections of society.
6. Payment of Government Dues –
Every business enterprise should pay tax dues (income tax, GST, excise duty, customs duty, etc.) to the Government honestly and at the right time. These direct and indirect taxes provide revenue to the Government for spending on public welfare. Business should also abide faithfully by the laws of the country.
Thus, businessmen should pursue those policies and take those actions which are desirable in terms of the objectives and values of our society.

#### Human Objectives

Business is run by people and for people. Labour is a valuable human element in business. Human objectives of business are concerned with the well-being of labour. These objectives help in achieving economic and social objectives of business. Human objectives of business are given below:

1. Labour welfare –
Business must recognise the dignity of labour and human factor should be given due recognition. Proper opportunities should be provided for utilising individual talents and satisfying aspirations of workers. Adequate provisions should be made for their health, safely and social security. Business should ensure job satisfaction and sense of belonging to workers.
2. Developing human resources –
Employees must be provided the opportunities for developing new skills and attitudes. Human resources are the most valuable asset of business and their development will help in the growth of business. Business can facilitate self-development of workers by encouraging creativity and innovation among them. Development of skilled manpower is necessary for the economic development of the country.
3. Participative management –
Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Such participation will also provide valuable information to management for improving the quality of decisions. Workers’ participation in management will usher in industrial democracy.
4. Labour management cooperation –
Business should strive for creating and maintaining cor¬dial employer-employee relations so as to ensure peace and progress in industry. Employees should be treated as honourable individuals and should be kept informed.

#### National Objectives

National objectives of business are as follows:

1. Optimum utilisation of resources –
Business should use the nation’s resources in the best possible manner. Judicious allocation and optimum utilisation of scarce resources is essential for rapid and balanced economic growth of the country. Business should produce goods in accordance with national priorities and interests. It should minimise the wastage of scarce natural resources.
2. National self-reliance –
It is the duty of business to help the Government in increasing exports and in reducing dependence on imports. This will help a country to achieve economic independence. This requires development of new technology and its application in industry.
3. Development of small scale industries –
Big business firms are expected to encourage growth of small scale industries which are necessary for generating employment. Small scale firms can be developed as ancillaries which provide inputs to large scale industries.
4. Development of backward areas –
Business is expected to give preference to the industriali-sation of backward regions of the country. Balanced regional development is necessary for peace and progress in the country. It will also help to raise standard of living in backward areas. Government offers specific incentives to the businessmen who set up factories in notified backward areas.
5. Control over pollution –
Rapid industrialisation has resulted in air, water and noise pollution. Business is responsible for reducing the adverse effect of business on the quality of life. It must make proper arrangements for the disposal of smoke, effluents, wastes, etc. to protect the health and life of people, animals and birds.

Economic Objectives

1. Earning Profit
2. Creating customers
3. Innovations

Social objectives

1. Quality goods at fair prices
2. Fair remuneration to employees
3. Generating employment
5. Social welfare
6. Payments of taxes

Human Objectives

1. Labour welfare
2. Developing Human Resources
3. Participative management
4. Labour management Cooperation

National Objectives

1. Optimum utilisation of resources
2. National self-reliance
3. Development of small scale units
4. Development of backward areas
5. Pollution control

#### Role of Profit in Business

Profit earning is essential in business due to the following reasons:

1. Incentive – Profit is the driving force behind every business. It inspires people to start an enterprise and to work hard for making it successful. Profit is the reward for, undertaking the risk of business.
2. Survival – Profit is essential for the survival of business and it ensures the continuity of an enterprise. In the absence of profits, an enterprise will eat up its own capital and ultimately close down. With the help of profits business can replace obsolete machinery and equipment and thereby maintain its capacity to create wealth. According to Drucker, “profit is the risk premium that covers the costs of staying in business”. Profits help business to face trade cycles and other shocks. Profits are also required to reward various factors of production.
3. Growth – Profits is the biggest source of capital for expansion and growth of business. It serves as a means of self-financing. In addition, profits enable business to attract capital from outside. Nobody likes to invest money in a loss making enterprise.
4. Measure of efficiency – Profit is considered to be the index of success in business. People judge the performance of an enterprise on the basis of profits earned by it.
5. Prestige and recognition – A loss making business enjoys no goodwill. Profits provide economic power and status to businessmen. Higher profits increase the bargaining strength and credit worthiness of business. Moreover, only a profit making business can provide service to society.

Thus, profit earning is an essential and desirable objective of every business. But mere money chasing is not business. According to Drucker, “the problem of any business is not the maximisation of profit but the achievement of sufficient profits to cover the risks of economic activity, and thus, to avoid loss. The businessmen who keep their customers, employees, investors and the society satisfied, will definitely earn good profits”. Urwick has very aptly summed up the relevance of profit motive in business as “earning of profits cannot be the objective of a business any more than eating is the objective of living”. A business cannot survive without profit just as a person cannot live without food. But profits cannot be the sole purpose of business just as eating is not the aim of life. However, profits must be earned by satisfying the wants of customers and after paying workers their dues. In the words of Arvind Mafatlal, “no business or industry is run philanthropically. It has to make a profit for further growth. But this profit cannot be at the expense of labour and the community at large”.

Economic and social objectives of business are not contradictory. They go hand in hand in the long run. No business can earn profits without satisfying customers and other sections of society.

Similarly, business cannot render service without earning profits. Thus, the real objective of business is to earn profit by serving the interests of consumers, employees, investors, Government and the society as a whole.

#### Objections against Profit Maximisation

Despite their indispensable role in business, profits cannot be the be-all and end-all of business.

The profit maximisation objective is undesirable on account of the following reasons:

• Profit maximisation overstresses the end result and overlooks the means employed to achieve the profits. It considers profit as the ultimate goals of business rather than a means to the real end. The ultimate aim of business should be social welfare. If profit maximisation is considered as the ultimate aim of business, businessmen might try to maximise profits by socially undesirable means such as profiteering, black-marketing, hoarding, exploitation of workers and consumers, etc.
• Profit maximisation overstresses the reward for owners and ignores the interests of other stakeholders. Profit is the reward for capital and profit maximisation gives the impression that a business concern is the domain only of owners. In reality, no business can succeed without the fullest co-operation of labour, consumers, Government and the community at large. Profit maximisation objective overlooks the stake of these groups in business.
• Profit maximisation misguides managers to the point where they may endanger the survival of the business. In order to maximise current profits, managers may undermine the firm’s future. They may ignore research and development, executive development, pushing of the most easily saleable products, and other long-term investments. Such activities threaten the long-term success of the enterprise.
• Profit maximisation has capitalistic overtones. The advocates of socialism decry the goal of profit maximisation on the ground that profit maximisation results in the exploitation of poor by the rich. It also accentuates inequalities in the distribution of income and wealth.
• Profit maximisation is inconsistent with the modern trends in business. Diffusion of share
ownership, professionalisation of management, growth of institutional shareholding and the emergency of a distinctive technostructure are some of these trends. The main goal of the technostructure (control by managers and technologists), is survival and growth of business. Profit maximisation may endanger long term growth and, therefore, the technostructure prefers long-term growth. These professionals regard profit maximisation as unrealistic, inappropriate and even immoral.

A truly successful business can be built only if the objective of service to the society is constantly followed. If this is done profits will come automatically, but if the whole emphasis is on making money business may not survive and succeed for a long period. The guiding principle of business should be profit through service. Every business should provide a proper balance between profit motive and social service.

## CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Nature of Business, Profession and Employment

NATURE OF BUSINESS, PROFESSION AND EMPLOYMENT

#### Meaning and Nature of Business

Business is an activity, in which different persons exchange something of value, whether goods or services, for mutual gain or profit. It is an organised or systematic activity involving the satisfaction of human wants. Business involves regular or recurring purchase and sale of goods and services with the purpose of earning profits through the satisfaction of human needs. Repeated dealings rather than a single isolated transaction constitute business. Business may be distinguished from other activities by the fact that goods and services created or purchased are meant for sale and not for personal consumption.
Various experts have defined business in different ways. Some of the popular definitions of business are given below:

• L.H. Haney : “Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods”.
• B.O. Wheeler – “Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.”
• L.R. Dicksee – “Business is a form of activity pursued primarily with the objective of earning profits for the benefit of those on whose behalf the activity is conducted.”
• James Stephenson – “Economic activities performed for earning profits are termed as Business”.
• Keith and Carlo – “Business is a sum of all activities involved in the production and distribution of goods and services for private profits”.
• Urwick and Hunt – “Business is any enterprise which makes, distributes or provides any article or service which the other members of the community need and are able and willing to pay for.”
• R.N. Owens – “Business is any enterprise engaged in the production and distribution of goods for sale in market or rendering services for a price.”

The salient features of business are given below:

1. Creation of utilities – Business makes goods more useful to satisfy human wants. It adds time, place, form and possession utilities to various types of goods. In the words of Roger, “a business exists to create and deliver value satisfaction to customers at a profit”. Business enables people to satisfy their wants more effectively and economically. It carries goods from place of surplus to the place of scarcity (place utility). It makes goods available for use in future through storage (time utility).
2. Dealings in goods and services – Every business enterprise produces and/or buys goods and services for selling them to others. Goods may be consumer goods or producer goods. Consumer goods are meant for direct use by the ultimate consumers, e.g., bread, tea, shoes, etc. Producer goods are used for the production of consumer or capital goods like raw materials, machinery, etc. Services like transport, warehousing, banking, insurance, etc. may be considered as intangible and invisible goods. Services facilitate buying and selling of goods by overcoming various hindrances in trade.
3. Continuity in dealings – Dealings in goods and services become business only if undertaken on a regular basis. According to Peterson and Plowman, “a single isolated transaction of purchase and sale will not constitute business. Recurring or repeated transaction of purchase and sale alone mean business.” For instance, if a person sells his old scooter or car it is not business though the seller gets money in exchange. But if he opens a shop and sells scooters or cars regularly, it will become business. Therefore, regularity of dealings is an essential feature of business.
4. Sale, transfer or exchange – All business activities involve transfer or exchange of goods and services for some consideration. The consideration called price is usually expressed in terms of money. Business delivers goods and services to those who need them and are able and willing to pay for them. For example, if a person cooks and serves food to his family, it is not business. But when he cooks food and sells it to others for a price, it becomes business. According to Peter Drucker “any organisation that fulfills itself through marketing a product or service is a business”.
5. Profit motive – The primary aim of business is to earn profits. Profits are essential for the survival as well as growth of business. Profits must, however, be earned through legal and fair means. Business should never exploit society to make money.
6. Element of risk – Profit is the reward for assuming risk. Risk implies the uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Business enterprises function in uncertain and uncontrollable environment. Changes in customers’ tastes and fashions, demand, competition, Government policies, etc. create risk. Food, fire, earthquake, strike by employees, theft, etc. also cause loss. A businessman can reduce risks through correct forecasting and insurance. But all risks cannot be eliminated.
7. Economic activity – Business is primarily an economic activity as it involves production and distribution of goods and services for earning money. However, business is also a social institution because it helps to improve the living standards of people through effective utilisation of scarce resources of the society. Only economic activities are included in business. Non-economic activities do not form a part of business.
8. Art as well as science – Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

#### Meaning and Nature of Profession

The term profession means an occupation which involves application of specialised knowledge and skills to earn a living. The persons who are engaged in profession are called professionals. They render personal services of a specialised nature to their clients. The service is based on professional education, training and experience. Professionals receive fee for their services. Chartered Accountancy, medicine, law, tax consultancy are examples of professions. .

The main features of a profession are as follows :

1. Specialised body of knowledge – Every profession has a specialised and systematised body of knowledge. Members of the profession are required to learn this knowledge.
Restricted entry – Entry to a profession is allowed only to those who have completed the prescribed education and have passed the specified examination.
2. Formal training – A profession provides facilities for formal education and training to those who want to acquire professional qualification.
3. Professional association – Every profession has its own association. A professional associa¬tion is a statutory body and its membership is essential. The association regulates entry in the profession, grants certificate of practice, formulates and enforces code of conduct. For example, The Institute of Chartered Accountants of India (ICAI) regulates the accountancy profession in India.
4. Service motive – Professionals are expected to emphasise services to their clients rather than economic gain.
5. Code of conduct – The activities of a professional are regulated by a formal code of conduct. The code is prescribed by the professional association of which he is a member.

Names of various Professions and their Respective Associations are given below:

 S.No. Professions Professional Professional associations 1. Medical Profession Doctors Medical Council of India 2. Law Profession Lawyers Bar Council of India 3. Accounting Profession Chartered Accountants The Institute of Chartered Accountants of India (ICAI) 4. Company Secretary Profession Company Secretaries The Institute of Company Secretaries of India (ICSI) 5. Cost Accounting Profession Cost Accountants The Institute of Cost and Works Accountants of India (ICWAI) 6. Engineering Profession Engineers The Institution of Engineers (India)

#### Meaning and Nature of Employment

Employment means an economic activity, where people work for others in exchange for some remuneration. The persons who work for others are called ’employees’. The persons or organisations which engage others to work for them are called ‘employers’. The remuneration by an employer to his employee is known as wages or salary. The employee performs the work assigned to him by his employer as per the terms and conditions of employment. There is an oral or written agreement between the employer and the employee. The employee acts under the guidance and control of his employer. The employer may be a Government (department) undertaking or a private firm. Employment thus includes all types of jobs in Government offices and private enterprises. When a professionally qualified person works as an employee he is also said to be in employment. For example, a doctor may be employed in a hospital, a chartered accountant may be working as an accountant in a company and a lawyer may serve as a law officer in a bank.

The main features of employment are as follows:

• In employment, a person works for others called employer.
• An employee provides personal service.
• There is a service agreement or contract between the employee and the employer. It contains the terms and conditions of employment.
• The employee has to obey the order of the employer.
• No capital investment is made by the employee.
• The employee gets wage or salary for his/her service.

Various examples of employment are as follows:

• A teacher teaching in a school or college.
• An engineer employed in Municipal Corporation of Delhi.
• An accountant working in the accounts department of a company.
• A person working as the plant manager of a factory.
• A nurse or doctor working in a hospital.

#### Distinction between Business, Profession and Employment

1. Mode of establishment – A business enterprise is established when an entrepreneur takes a decision to carry on some business activity. In a profession, on the other hand, the membership or enrollment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service.
2. Nature of work – A business exists to provide goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.
3. Qualifications – No formal education is compulsory in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In case of employment, the qualifications required depend upon the nature of the job. .
4. Main objective – In business, the basic motive is to earn profits. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why, a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.
5. Investment – Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering services. There is no need for capital in case of employment.
6. Risk – There is an inherent element of risk in business and profession but practically no risk is involved in case of employment. There can be loss in business but in profession and employment return is never negative.
7. Reward – Profit is the reward of a businessman while professional fee is the reward of a professional. The reward in case of employment is wage or salary. Wage/salary and fee are more regular and fixed than profits.
8. Transfer of interest – It is possible to transfer ownership interest in business. But no such transfer is possible in case of profession and employment.
In spite of the above differences, there is a closed inter-relationship between business, profession and service. A large business enterprise employs a large number of persons in order to achieve its objectives. It also requires the services of professional experts such as chartered accountants, lawyers, architects, cost accountants, etc. Modern business has become very complex. Trained and experienced managers and other experts are required for efficient business operations. Professionals and other employees provide the necessary manpower for efficient running of business concerns. Thus, business, profession and employment are complementary to one another.

## CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Economic and Non-Economic Activities

Every human being is busy in some activity or the other throughout the day. Every person gets up from bed in the morning, brushes his/her teeth, takes bath and eats breakfast. Then a child goes to School or College to study. An adult goes to work on the job and a housewife works at home. In the evening a person comes back home, watches television, eats dinner and goes to bed at night. All these activities in which a person engages from morning to evening are known as ‘human activities’.

ECONOMIC AND NON-ECONOMIC ACTIVITIES

All human activities may broadly be classified into two categories:

1. Economic activities and
2. Non-economic activities

Economic activities are undertaken with the object of earning money and acquiring wealth. These activities result in the production of economic goods and services. Business is an economic activity but it differs from other economic activities such as those of an employee, and self employed persons like doctors, lawyers, chartered accountants, etc.

Non-economic activities are inspired by sentiments and emotions such as love for the family, desire to help the poor and love for the country. These activities are not undertaken for monetary gain but for one’s satisfaction and happiness.

#### Economic Activities

Economic activities refer to all those human activities which are undertaken to earn a living and thereby satisfy human wants. The main object of these activities is to earn income and create wealth. The money earned through work is used to satisfy wants. For example, a teacher teaches in a school or college, a doctor attends to patients in his clinic and a shopkeeper sells goods to his customers. Economic activities are concerned with the production, distribution and exchange of goods and services. These activities create utilities and result in the production of wealth. Economic activities are also called occupations.

The main characteristics of economic activities are as follows:

1. Economic motive – Economic activities are undertaken to earn money and acquire wealth The main motive behind these activities is to make an economic gain. These activities are performed by human beings for earning livelihood.
2. Productive – Economic activities involve production, distribution and exchange of goods and services for satisfying human wants. These activities are directly related to creation of wealth.
3. Economic resources – Economic activities make use of economic resources such as land, labour, capital, etc.
4. Rational use – Economic activities require proper allocation of scarce resources so as to obtain maximum output from them. These activities involve optimum utilisation of land, labour, capital and other factors of production. Welfare of society can be maximised when best possible use of resources is made.
5. Economic growth – Economic activities determine the level of economic development of a country and the standard of living of its citizens.
6. Legally valid – Human activities performed for economic gain are called economic activities only when they are lawful. Unlawful activities such as gambling, black marketing, theft, dacoity, smuggling etc., are opposed to public interest. Therefore, these activities cannot be called economic activities.
7. Socially desirable – Economic activities are desirable for society. They must be in accordance with the expectations and norms of society.

Examples of economic activities

• Production of goods by a manufacturer in a factory.
• Distribution of goods by a wholesaler to retailers.
• Selling of goods by a retailer to customers.
• Transportation of goods and passengers by railways/roadways/airlines/ships.
• Storage of goods by a warehouse keeper.
• Acceptance of deposits and lending of money by a banker.
• Insurance of risks by an insurance company.
• A clinic run by a doctor.
• Legal services provided by a lawyer in a court.
• Audit services provided by a chartered accountant in his office.
• Working of a Government officer.
• Services of a teacher in a school/college.
• Working of a farmer in his fields to self his produce.
• Working of a nurse in a hospital.

Economic Activities at a Glance Characteristics

1. Economic motive
2. Productive
3. Rational use
4. Economic resources
5. Economic growth
6. Legally valid
7. Socially desirable

Examples

1. Manufacturing goods in a factory.
2. Selling goods in a shop.
3. A doctor treating patients in his clinic.
4. A lawyer providing legal advice in his own office.
5. A professor teaching in a university.
6. A clerk working in a Government office.

#### Non-Economic Activities

Activities which are undertaken to satisfy social, religious, cultural and sentimental requirements are called non-economic activities. The object of these activities is not to earn monetary gain or reward. People engage in non-economic activities for reasons of love, sympathy, religion, patriotism, etc. For example, a mother looks after her children, a student donates blood, an old man goes to temple daily, a rich man donates money to Prime Minister Relief Fund, a young man helps a blind girl to cross the road, etc.

It is the object of any activity that distinguishes between economic and non-economic activities. The primary objective of economic activities is to earn livelihood and create wealth. On the other hand, the main objective of non-economic activities is to get some sort of social, cultural, religious or recreational satisfaction. The output of economic activities can be measured in terms of money e.g., the salary of a teacher, the fee of a doctor and the profits of a businessman. But the result of non-economic activities cannot be measured in terms of money.

The same activity may be economic as well as non-economic. For example, a nurse attending a patient in a hospital is an economic activity as the nurse works for a salary. But when the same nurse attends to her sick mother at home it is a non-economic activity because the object is not to earn money. Thus, the activity of the same person may be economic at one-time or place and non-economic at another time or place. The dividing line is not the activity or the person who is doing it but the objective for which it is undertaken.

Thus, non-economic activities are undertaken due to the following considerations :

1. Love and affection – for example taking dinner with the family, cooking food for family.
2. Personal satisfaction – for example meditating in a park.
3. Physical needs – for example morning walk by a person.
4. Religious obligation – for example praying in a temple.
5. Social obligations – for example helping victims of an accident, flood or earthquake.
6. Patriotism – donating blood for injured army men.

DISTINCTION BETWEEN ECONOMIC AND NON-ECONOMIC ACTIVITIES

 S.No. Point of Distinction Economic Activities Mon-Economic Activities 1. Objective Economic objective – To earn a living and acquire wealth Sentimental and emotional objectives – To obtain some sort of personal satisfaction. 2. Expectation Money income is expected from these activities Money income is not expected from these activities 3. Relationship Directly related to income and wealth Not related to income and wealth. 4. Measurement of outcome Result can be measured in terms of money Result cannot be measured in terms of Money 5. Logic Guided by rational considerations of cost and benefit Guided by sentiments and emotions without regard to gain or sacrifice 6. Resources Involve proper allocation and optimum use of resources Optimum allocation and use of resources not essential 7. Types or examples Business, Profession and employment Family-oriented, religious, social, cultural and national.

Economic activities are also known as ‘occupations’. Economic activities or occupations may be classified into three broad categories as follows:

## CA Foundation Business Economics Study Material – Perfect Competition

#### CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Perfect Competition

PERFECT COMPETITION

Introduction:

Perfect competition is a market structure where there are large number of firms (seller) which produce and sell homogeneous product. Individual firm produces only a small portion of the total market supply.

Therefore, a single firm cannot affect the price.
– Price is fixed by industry.
– Firm is only a price taker.
– So the price of the commodity is uniform.

Features of perfect competition

Following are the main features of perfect competition:

1. Large number of buyers and sellers:
• The number of buyers and sellers is so large that none of them can influence the price in the market individually.
• Price of the commodity is determined by the forces of market demand and market supply.
2. Homogeneous Product:
• The product produced by all the firms in the industry are homogeneous.
– They are identical in every respect like colour, size, etc.
– Products are perfect substitutes of each other.
3. Free entry and exit of the firms from the markets:
• New firms are free to enter the industry any time.
• Old firms or loss incurring firms can leave industry any time.
• The condition of free entry and exit applies only to the long run equilibrium of the industry.
4. Perfect knowledge of the market:
• Under perfect competition, all firms (sellers) and buyers have perfect knowledge about the market.
• Both have perfect information about prices at which commodities can be sold and bought.
5. Perfect mobility:
• The factors of production can move freely from one occupation to another and from one place to another.
6. No transport cost:
• Transport cost is ignored as all the firms have equal access to the market.
7. No selling cost:
• Under perfect competition commodities traded are homogeneous and have uniform price.
• Therefore, firm need not make any expenditure on publicity and advertisement.

Equilibrium of the Industry:

• Industry is a group of firms producing identical commodities.
• Under perfect competition, price of a commodity is determined by the interaction between market demand and market supply of the whole industry.
• The equilibrium price is determined at a point where demand for and supply of the whole industry are equal to each other.
• No individual firm can influence the price.
• Firm has to accept the price determined by the industry.
• Therefore, the firm is said to be price taker and industry, the price maker.

Equilibrium of the industry is illustrated as follows:

The above table and fig. shows that at a price of ₹ 6 per unit, the quantity demanded equals quantity supplied.
The industry is at equilibrium at point ‘E’, where the equilibrium price is ₹ 6 and equilibrium | quantity is 60 units.

Equilibrium of a firm:

• We have already seen that under the perfect competition, the price of the commodity is determined by the forces of market demand and market supply le. price is determined by industry.
• Individual firm has to accept the price determined by the industry. Hence, firm is a PRICE TAKER.

• In the table – the equilibrium price for the industry has been fixed at ₹ 6 per unit through the inter-action of market demand and supply.
• Table – shows that the firm has no choice but to accept and sell their commodity at a price that has been determined by the industry ie. ₹ 6 per unit.
• The firm cannot charge higher price than the market price of ₹ 6 per unit because of fear of loosing customers to rival firms.
• There is no incentive for the firm to lower the price also.
• Firm will try to sell as much as it can at the price of ₹ 6 per unit.
• Table – shows that firm’s AR = MR = Price.

• Fig. shows that being a price taker firm, it has to sell at a given price i.e. ₹ 6 per unit.
• Therefore, firm’s demand curve is a horizontal straight line parallel to X-axis i.e. a perfectly elastic demand curve.
• We know that price of a commodity is also the AR for the firm.
• Therefore, demand curve also shows the AR for different quantities sold by the firm.
• As every additional unit is sold at a given price i.e. ₹ 6 per unit, the MR = AR and the two curves coincides.
• Thus, in a perfectly competitive market a firm’s AR = MR = Price = Demand Curve

Conditions for equilibrium of a firm:

• In perfect competition, the firms are price takers and output adjusters.
• This is because the price of the commodity is determined by the forces of market demand and market supply ie. by whole industry and individual firm has to accept it.
• Therefore firm has to simply choose that level of output which yields maximum profit at the prevailing prices.
• The firm is at equilibrium when it maximises its profit.
• The output which helps the firm to maximise its profit is called equilibrium output.
• There are two conditions for the equilibrium of a firm. They are —
1. Marginal Revenue should be equal to the marginal cost i.e. MR = MC. (First order condition)
2. Firm’s marginal cost curve should cut its marginal revenue curve from below i.e. marginal cost curve should have positive slope at the point of equilibrium. (Second order condition)
• If MR > MC, there is incentive to produce more and add to profits.
• If MR < MC, the firm will have to decrease the output as cost of production of additional units is high.
• When MR = MC, it is equilibrium output which maximises the profits.

• Fig. shows that OP is the price determined the industry and firm has to accept it.
• At prevailing price OP the firm faces horizontal demand curve or average revenue curve.
• Since the firm sells every additional unit at the same price, marginal revenue curve coincides with average revenue curve.
• In the fig. at point ‘A’, MR = MC but second condition is not fulfilled.
• Therefore, OQ1 is not equilibrium output. Firm should expand output beyond OQ1 because
– it will result in the fall of marginal cost, and
• In the fig. at point ‘B’ not only
MR = MC
but MC curve cuts the MR curve from below Le. it has positive slope.
• Therefore, OQ2 is the equilibrium level of output and point ‘B’ represents equilibrium of firm.

Supply curve of the firm in a competitive market

In a perfectly competitive industry, the MC curve of the firm is also its supply curve. This can be explained with the help of following figure.

• The fig. shows that at the market price OP1 the firm faces demand curve D,.
• At OP1 price the firm supplies OQ1 quantity because here MC=MR.
• If the price rises to OP2 the firm faces demand curve D2.
• At OP2 price the firm supplies OQ2 quantity.
• Similarly at OP3 and OP4 price corresponding supplies are OQ3 and OQ4 respectively.
• Thus, the firm’s marginal cost curve indicates the quantities of output which it will supply at different prices.
• It can be observed that the competitive firm’s short run supply curve is identical only with that portion of MC curve, which lies above the AVC.
• Hence, price ≥ AVC.

Short Run Equilibrium of a Competitive Firm. (Price – Output Equilibrium)

A competitive firm in the short run attains equilibrium at a level of output which satisfies the following two conditions:

1. MC = MR, and
2. MC curve cuts the MR curve from below.

When a competitive firm, is in short run equilibrium, it may find itself in any of the following situations —

1. it break evens i.e. earn NORMAL PROFITS where Average Revenue = Average Cost i.e. AR = AC.
2. it earns profit i.e. earn SUPER NORMAL PROFITS where Average Revenue > Average Cost i.e. AR > AC.
3. it suffer LOSSES where Average Revenue < Average Cost i.e. AR < AC.

Normal Profits (AR = AC):
A firm would earn normal profits if at the equilibrium output AR=AC.

Super Normal Profits (AR > AC):
A firm would earn super normal profits if at the equilibrium output AR > AC.

Losses (AR < AC):
A firm suffer losses, if at the equilibrium level of output, its AR < AC.

• When the firm incur losses, a question arises whether it should continue to produce or should it shut down ?
• The answer to this lies in the cost structure of the firm.
• Total cost of a firm = Total Fixed Costs + Total Variable Costs
• Fixed costs once incurred cannot be recovered even if the firm shuts down.
• Therefore, whether to shut down or not depends on variable costs alone.
• If AR (Price) > AVC or AR = AVC, the firm can continue to produce even though it suffer losses at the equilibrium level of output.
• If AR (Price) < AVC, the firm should shut down.

Long run Equilibrium of a Competitive Firm

• In a perfectly competitive market there is no restriction on the entry or exit of firms.
• Therefore, if existing firms are earning super normal profits in the short run, they will attract new firms to enter the industry.
• As a result of this, the supply of the commodity increases. This brings down the price per unit.
• On the other hand, the demand for factors of productions rises which pushes up their prices and so the cost of production rises.
• Thus, the price line or AR curve will go down and cost curves will go up.
• As a result of this, price line or AR curve becomes tangent to long run average cost curve. This wipes out super normal profit.
• Hence, in long run firms earn only normal profits.

• Fig. Shows that long run LMR = LMC = LAC = LAR = Price
• The firm is at equilibrium at point E1
• E1 is the minimum point of LAC curve. Thus firm produces equilibrium output OQ1 at the minimum or optimum cost.
• In the long run under competitive market —
– Firms earn just normal profits, and
– competitive firms are of optimum size because they produce at optimum cost Le. at the lowest point of long run average cost curve.

## CA Foundation Business Economics Study Material – Determination of Prices

#### CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Determination of Prices

Determination of Equilibrium Price

• We know that law of demand reveals, if other conditions remain unchanged, more quantity of a commodity is demanded in the market at a lower price and less quantity is demanded at a higher price. Therefore, demand curve slopes downward.
• Similarly, the law of supply reveals, if other conditions remain unchanged, more quantity of a commodity is supplied in the market at a higher price and less quantity is supplied at a lower price. Therefore, supply curve slopes upward.
• Demand and supply are the two main factors that determine the price of a commodity in the market. In other words, the price of a commodity is determined by the inter-action of the forces of demand and supply.
• The price that will come to prevail in the market is one at which quantity demanded equals 1 quantity supplied.
• This price at which quantity demand equals quantity supplied is called equilibrium price.
• The quantity demanded and supplied at equilibrium price is called equilibrium quantity.

The process of price determination is illustrated with the help of following imaginary schedule and diagram.

The above table shows that at a price of ₹ 3 per unit, the quantity demanded equals quantity supplied of the commodity. At ₹ 3 two forces of demand and supply are balanced. Thus, ₹ 3 is the equilibrium price and equilibrium quantity at ₹ 3 is 300 units.

• The equilibrium between demand and supply can also be explained graphically as in Fig.
• In Fig. the market is at equilibrium at point ‘E’, where the demand curve and supply curve intersect each other. Here quantity demanded and supplied, are equal to each other.
• At point ‘E’, the equilibrium price is ₹ 3 per unit and equilibrium quantity is 300 units.
• If the price rises to ₹ 4 per unit, the supply rises to 400 units but demand falls to 200 units. Thus, there is excess supply of 200 units in the market.
• In order to sell off excess supply of 200 units the sellers will compete among themselves and in doing so the price will fall.
As a result the quantity demand will rise and quantity supplied will fall and becoming equal to each other at the equilibrium price ₹ 3.
• Similarly, if the price falls to ₹ 2 per unit, the demand rises to 400 units but supply falls to 200 units. Thus, there is excess demand of 200 units in the market.
• As the price is less there is competition among the buyers to buy more and more. This competition among buyers increases with the entry of new buyers.
• More demand and less supply and competition among buyers will push up the price.
• As a result, quantity demanded will fall and quantity supplied will rise and become equal to each other at the equilibrium price of ₹ 3.

Effects of Shifts in Demand and Supply on Equilibrium Price

While determining the equilibrium price, it was assumed that demand and supply conditions were constant. In reality however, the condition of demand and supply change continuously.
Thus, changes in income, taste and preferences, changes in the availability and prices of related goods, etc. brings changes in demand conditions and cause demand curve to shift either to right or left.
In the same way, changes in the technology, changes price of labour, raw materials, etc., changes in the number of firms, etc. brings changes in supply conditions and cause supply curve to shift either to right or left.

(a) Change (shift) in Demand and Supply remaining constant.

• In Fig.- DD and SS are the original demand and supply curves respectively intersecting each other at point E.
• At point E, the equilibrium price is OP and the demand and supply (ie. equilibrium quantity) are equal at OQ.
• When the demand increases, the demand curve shifts upwards from DD to D1D1 supply remaining the same.
As a result, the equilibrium price rises from OP to OP1 and the equilibrium quantity increases from OQ to OQ1 as shown at point E1.
• When the demand decreases, the demand curve shifts downwards from DD to D2D2, Supply remaining the same.
• As a result, the equilibrium price falls from OP to OP2 and the equilibrium quantity decreases from OQ to OQ2 as shown at point E2.

(b) Change (shift) in Supply and Demand remaining constant.

• In Fig. – DD and SS are the original demand and supply curves respectively inter-sections each other at point E.
• At point E, the equilibrium price is OP and the demand and supply (i.e. Equilibrium quantity) are equal at OQ.
• When the supply increases, the supply curve shifts to the right from SS to S1S1 demand remaining the same.
• As a result, the equilibrium price falls from OP to OP1 and the equilibrium quantity increases from OQ to OQ1 as shown at point E1.
• When the supply decreases, the supply curve shifts to the left from SS to S2S2, demand remaining the same.
• As a result, the equilibrium price rises from OP to OP2 and the equilibrium quantity decreases from OQ to OQ2 as shown at point E2.

Effects of Simultaneous Shifts in Demand and Supply on Equilibrium Price

Sometimes demand and supply conditions may change at the same time changing the equilibrium price and quantity. The changes in both demand and supply simultaneously can be discussed with the help of following diagrams:

• In Fig. – DD and SS are the original demand and supply respectively intersecting each other at point E at which the equilibrium price is OP and the equilibrium quantity is OQ.
• Fig. (a) shows that the increase in demand is equal to increase in supply. The new curves D1D1 and S1S1 intersect at E1. Therefore, the new equilibrium price is equal to old equilibrium price OP. But equilibrium quantity increases.
• Fig. (b) shows that the increase in demand is more than increase in supply. The new curves D1D1 and S1Sintersect each other at point E, which shows that new equilibrium price OP1 is higher than old equilibrium price OP. But equilibrium quantity increases.
• Fig. (c) shows that the increase in supply is more than increase in demand. The new curves D1D1 and S1Sintersect each other at point E1 which shows that new equilibrium price OP1 is lower than old equilibrium price OP. But equilibrium quantity increases.

## CA Foundation Business Economics Study Material – Meaning and Types of Markets

#### CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Meaning and Types of Markets

MEANING OF MARKET

• In ordinary language, a market refers to a place where the buyers and sellers of a commodity gather and strike bargains.
• In economics, however, the term “Market” refers to a market for a commodity. E.g. Cloth market; furniture market; etc.
According to Chapman, “the term market refers not necessarily to a place and always to a commodity and buyers and sellers who are in direct competition with one another”.
• According to the French economist Cournot, “Market is not any particular place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with each other that the prices of the same goods tend to equality easily and quickly”,

The above mentioned definitions reveals the following features of a market:

1. A region. A market does not refer to a fixed place. It covers a region, which may be a town, state, country or even world.
2. Existence of buyers and sellers. Market refers to the network of potential buyers and sellers who may be at different places.
3. Existence of commodity or service. The exchange transactions between the buyers and sellers can take place only when there is a commodity or service to buy and sell.
4. Bargaining for a price between potential buyers and sellers.
5. Knowledge about market conditions. Buyers and sellers are aware of the prices offered or accepted by other buyers and sellers through any means of communication.
6. One price for a commodity or service at a given time.

Classification of Market:

Markets may be classified on the basis of different criteria. In Economics, generally the classification is made as pointed out in the following chart—

TYPES OF MARKET STRUCTURES

Market can be classified on the basis of area, volume of business, time, status of sellers, regulation and control.
The main types of markets can be summed up as follows:

1. Perfect Competition:
• Perfect competition market is one where there are many sellers selling identical products to many buyers at a uniform.
2. Monopoly:
• Monopoly market structure is a market situation in which there is a single seller of a commodity selling to many buyers.
• The commodity has no close substitutes available.
• A monopolist therefore, has a considerable influence on the price and supply of his commodity.
3. Monopolistic Competition:
• Monopolistic competition is a market situation in which there are many sellers selling differentiated goods to many buyers.
4. Oligopoly:
Oligopoly is a market situation in which there are few sellers selling either homogeneous or differentiated goods.

Table: Features of major types of markets

 Points Market Types Perfect Competition Monopoly Monopolistic Competition Oligopoly i. Number of sellers Many One Many Few ii. Product Homogeneous Unique having no substitutes Differentiated Homogeneous or Differentiated iii. Selling Cost No Negligible High High iv. Degree of control over price No Control. Price taker. Full control. Price maker Limited due to product differentiation. Limited v. Demand (or AR) Curve Horizontal straight line parallel to x-axis Downward sloping Downward sloping Indeterminate vi. Price elasticity of demand Infinite P = MC Small P > MC Large P > MC Small

CONCEPTS OF TOTAL REVENUE, AVERAGE REVENUE AND MARGINAL REVENUE

Total Revenue: (TR)

• Total revenue may be defined as the total amount of money received by the firm by selling a certain units of a commodity.
• It is obtained by multiplying the price per unit of a commodity with the total number of units sold.
• Total Revenue = Price per unit X Total No. of units sold
TR = P X Q
• E.g. A firm sells 100 units of a commodity @ ₹ 15 each, then its total revenue is ₹ 15 X 100 units = ₹ 1,500

Average Revenue: (AR)

• Average revenue is the revenue per unit of the commodity sold.
• It is simply the total revenue divided by the number of units of output sold.
• E.g. A firm earns total revenue of ₹ 2,000 by the sale of 100 units of a commodity, then its average revenue is ₹ 20 (₹ 2000 -MOO units)
• By definition average revenue is the price per unit of output. To prove it

Marginal Revenue (MR):

• Marginal revenue refers to the addition to total revenue by selling one more unit of a commodity.
• Marginal revenue may also be defined as the change in total revenue resulting from the sale of one more unit of a commodity
• E.g. If a firm sells 100 units of a commodity @ ₹ 15 each, its TR is ₹ 1,500. Now, if it increases the sale by ten units i.e. it sells 110 units @ ₹ 14 each, its TR is ₹ 1,540. Thus,

Where
∆TR is the change in total revenue
∆Q is the change in the quantity sold
• For one unit change – MRn = TRn – TRn-1
Where
MRn = Marginal Revenue from ‘n’ units
TRn = Total Revenue of ‘n’ units
TRn-1 = Total Revenue from ‘n-1’ units
n = any give number

MARGINAL REVENUE, AVERAGE REVENUE, TOTAL REVENUE AND ELASTICITY OF DEMAND

The relationship between AR, MR and price elasticity of demand can be examined with the formula —

Figure: The relationship between AR, MR, TR & elasticity of demand.

The above figure reveals the following on a straight line demand curve (or AR curve):

1. When e > 1, marginal revenue is positive and therefore total revenue is rising,
2. When e = l, marginal revenue is zero and therefore total revenue is maximum, and
3. When e < l, marginal revenue is negative and therefore total revenue is falling.

BEHAVIOURAL PRINCIPLES

Principle 1: A firm should not produce at all if its total revenue is either equal to or less than its total variable cost.
Principle 2: It will be profitable for the firm to expand output so long as marginal revenue is more than marginal cost till the point where marginal revenue equals marginal cost.
Also the marginal cost curve should cut its marginal revenue curve from below.

## CA Foundation Business Economics Study Material Chapter 5 Business Cycles – MCQs

#### CA Foundation Business Economics Study Material Chapter 5 Business Cycles – MCQs

MULTIPLE CHOICE QUESTIONS

1. The term business cycle refers to –
(a) fluctuations in aggregate economic activity over time.
(b) ups and down in the production of goods
(c) increasing unemployment
(d) declining savings

2. Expansion phase all but one of the following characteristics.
(a) Increase in national output
(b) Increase in consumer spending
(c) Excess production capacity of industries
(d) Expansion of bank credit

3. Which one of the following is not the characteristic of business cycle?
(a) They are recurrent
(b) They are not at regular intervals
(c) They have uniform causes
(d) All the above

4. The turning points of the business cycle are
(a) Expansion and Peak
(b) Peak and Contraction
(c) Contraction and Trough
(d) Peak and Trough

5. _____ refers to the top or the highest point of business cycle.
(a) Expansion
(b) Peak
(c) Expansion and Peak
(d) None of the above

6. Involuntary unemployment is almost zero in the _____ phase of business cycle.
(a) Expansion
(b) Contraction
(c) Trough
(d) Depression

7. The economy is said to be overheated at the _____ phase of business cycle.
(a) Expansion
(b) Peak
(c) Contraction
(d) Depression

8. Cost of living increases when business cycle is _____
(a) expanding
(b) contracting
(c) at peak
(d) at lowest point

9. There is large scale of involuntary unemployment in the _____ phase of business cycle.
(a) expansion
(b) peak
(c) contraction
(d) none of the above

10. Fall in the level of investments, fall in production, fall in employment, fall stock prices, etc. are found during _____ phase of business cycle.
(a) expansion
(b) boom
(c) peak
(d) contraction

11. All but one are the endogenous factors of business cycle
(a) War
(b) Changes in government spending
(c) Money supply
(d) Fluctuations in investments

12. _____ is the severe form of recession with lowest level of economic activity.
(a) Upswing
(b) Depression
(c) Downswing
(d) Peak

13. Fall in the interest rates is a typical feature of
(a) recovery
(b) boom
(c) depression
(d) contraction

14. During depression _____ industry suffer from excess production capacity.
(a) capital goods
(b) consumer durable goods
(c) non-durable goods
(d) both ‘a’ and ‘b’

15. The great depression of _____ caused enormous misery and human sufferings
(a) 1929 – 33
(b) 1919 – 23
(c) 1940 – 53
(d) 1950 – 63

16. The lowest level of economic activity is called _____
(a) contraction
(b) trough
(c) recovery
(d) none of the above

17. There is end of pessimism and the beginning of optimism at ______
(a) expansion
(b) peak
(c) trough
(d) depression

18. Which of the following is not the features of business cycle?
(b) Business cycle vary in intensity
(c) Business cycle vary in length
(d) Business cycle have no set pattern

19. The trough of a business cycle occur when _____ hits its lowest point.
(a) the money supply
(b) the employment level
(c) inflation in the economy
(d) aggregate economic activity

20. Industries that are most adversely affected by business cycles are the _____
(a) Durable goods and services sector
(b) Non-durable goods and services
(c) Capital goods and Non-durable goods sectors
(d) Capital goods and durable goods sectors

21. _____ indicators change before the economy itself changes.
(a) Lagging
(b) Coincident
(d) concurrent

22. _____ indicators change after the economy as a whole changes.
(a) Lagging
(b) Coincident
(d) Concurrent

23. Changes in stock prices, profit margins and profits, manufacturing activity, etc. are examples of _____ indicator.
(b) Lagging
(c) Concurrent
(d) Coincident

24. A variable that moves later than aggregate economic activity is called _____
(b) a coincident variable
(c) a lagging variable
(d) a cyclical variable

25. While _____ indicators forecast economic fluctuation, _____ indicators confirm the trends.
(b) lagging ; coincident

26. A variable that occur simultaneously with the business cycle movements is _____ indicator.
(b) Lagging
(c) Coincident
(d) Cyclical

27. Coincident indicators show _____
(a) the current state of business cycle
(b) the rate of change of expansion
(c) the rate of change of contraction
(d) all the above

28. At the time of Great Depression of 1930s, the global GDP fell by around _____
(a) 12%
(b) 14%
(c) 15%
(d) 10%

29. Which one of the following is not correct about business cycle?
(a) They occur simultaneously in all industries and sectors
(b) They affect not only output level but also other related variables
(c) They are international in character
(d) None of the above

30. Which of the following describes best a typical trade cycle?
(a) Economic expansions are followed by economic contractions
(b) Inflation is followed by rising income and employment
(c) Economic expansions are followed by economic growth and development
(d) Stagflation followed by rising employment

31. During upswing, the unemployment rate and output _____
(a) rises ; falls
(b) rises ; rises
(c) falls ; rises
(d) falls ; falls

32. Which of the following does not occur during expansion phase?
(a) Consumer spending increases
(b) Employment increases as demand for labour rises
(d) None of the above

33. When aggregate economic activity is declining, the economy is said to be in _____
(a) contraction
(b) an expansion
(c) a trough
(d) a turning point

34. Which one of the following is not an example of coincident indicator?
(a) GDP
(b) inflation
(c) retail sales
(d) New orders for plant and machinery

35. Which one of the following is an example of lagging indicator?
(a) personal income
(b) new orders for plant and equipment
(c) the consumer price index
(d) slower deliveries

36. _____ is of the view that fluctuations in economic activities are because of fluctuations in aggregate effect demand.
(a) Keyens
(b) Schumpeter
(c) Nicholas Kaldor
(d) Joan Robinson

37. High rate of investment brings _____
(a) high level of employment
(b) increase in the aggregate demand
(c) increase in output
(d) all the above

38. If any unemployment exists during expansion phase of business cycle, it is _____ un employment.
(a) voluntary and frictional
(b) technological and structural
(c) frictional and structural
(d) structural and involuntary

39. The most probable outcome of increase in aggregate demand is _____
(a) expansion of economic activity
(b) contraction of economic activity
(c) stable economic activity
(d) volatile economic activity

40. According to _____ a trade cycles is a purely monetary phenomena
(a) Keyens
(b) Hawtrey
(c) Schumpeter
(d) Nicholas Kaldor

41. Optimistic and pessimistic mood of the business community also affects the economic activities is the view of _____
(a) Hawtrey
(b) Schumpeter
(c) Pigou
(d) Keyens

42. According to _____ trade cycles occur due to onset of innovations
(a) Hawtrey
(c) JM Keyens
(d) Schumpeter

43. Business cycles appear due to present fluctuations in prices affecting the output and employment in future is _____
(a) Cobweb theory by Nicholas Kaldor
(b) Ordinal theory by Allen & Hicks
(c) Cobweb theory by J.M. Keyens
(d) None of the above

44. Production of _____ goods fall during the war times.
(a) arms and ammunition
(b) non-durable and capital
(c) capital and weapons
(d) capital and consumer

45. During war times most of the productive resources are diverted for the production of
(a) capital goods
(b) consumer goods
(c) weapons and arms
(d) service

46. Economic recession is characterized by all of the following except _____
(a) Decline in investments, employment
(b) Increase in the price of inputs due to increased demand for inputs
(c) Investors confidence is shaken
(d) Demand for goods, services decline

47. Production of new and better goods and services using new technology results in _____
(a) expansion of employment
(b) increase in the incomes and profits
(c) boost to economy
(d) all the above

48. Understanding the business cycle is important for business managers because _____
(a) they affect the demand for their products
(b) they affect their profits
(c) to frame appropriate policies and forward planning
(d) all the above

49. Businesses whose fortunes are closely linked to the rate of economic growth called _____
(c) Both ‘a’ and ‘b’
(d) None of the above

50. If the population growth rate is higher than the economic growth rate it will result in _____
(a) higher income ; lower savings ; lower employment
(b) lower income ; lower savings ; lower investment
(c) higher investment ; lower income ; higher saving
(d) lower income ; lower savings ; higher employment

## CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – MCQs

#### CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – MCQs

MULTIPLE CHOICE QUESTIONS

1. In economics the term market refers to –
(i) a particular place
(ii) a commodity
(iv) bargaining for a price
(a) only i
(b) only ii
(c) ii & iii
(d) ii, iii and iv

2. Price depends on –
(a) utility and scarcity
(b) Cost of production
(c) transferability
(d) all the above

3. The basic behavioural principle which apply to all market conditions –
(a) A firm should produce only if its TR $$\ge$$ TVC
(b) A firm should produce at a level where its MC = MR
(c) MC curve cuts the MR curve from below.
(d) All the above

4. Total revenue can be found out by –

5. When marginal revenue is zero, total revenue will be –
(a) lowest
(b) highest
(c) negative
(d) zero

6. If MR < 0, then the TR will be –
(a) rising
(b) highest
(c) falling
(d) zero

7. The change in the total revenue that results from a one unit change in sales is –
(a) Total Revenue
(b) Average Revenue
(c) Marginal Revenue
(d) both c and d

8. The revenue per unit of called as – one commodity sold is
(a) Total Revenue
(b) Marginal Revenue
(c) Average Revenue
(d) None of the above

9. AR can be found out by the formula –

10. Which of the following is not correct –

11. Which concept of revenue is called price?
(a) TR
(b) AR
(c) MR
(d) None of these

12. If a producer sells 4 units of a good at ₹ 10 per unit and 5 units at ₹ 8 per unit, marginal revenue would be –
(a) 0
(b) 1
(c) 2
(d) 3

13.

(i) Total Revenue
(ii) Marginal Revenue
(iii) Average Revenue
(iv) Price
(a) i & iii
(b) ii & iv
(c) ii & iii
(d) iii & iv

14. Which of the following statement is incorrect –
(a) Demand and supply determine price of a commodity
(b) At equilibrium price quantity demanded equals quantity supplied.
(c) Demand factor influences price more.
(d) Equilibrium price can change.

Use the following figure to answer questions 15-16

15. In the figure above at the equilibrium point E –
(a) demand is more than supply
(b) supply is more than demand
(c) demand and supply are equal
(d) none of the above

16. In the above figure equilibrium point, quantity and price are –
(a) E , OQ , OP
(b) E , ES , EP
(c) ES , ED, OQ
(d) E , EP , ED

17. When demand and supply increase equally, then –
(a) both equilibrium price and equilibrium quantity remain unchanged.
(b) both equilibrium price and equilibrium quantity increase
(c) equilibrium price remains unchanged but equilibrium quantity increases
(d) equilibrium price changes but equilibrium quantity remains unchanged.

18. If increase in demand is more than increase in supply, then –
(a) equilibrium price will fall but equilibrium quantity will increase
(b) equilibrium price will increase but equilibrium quantity will decrease
(c) both equilibrium price and equilibrium quantity will increase
(d) both equilibrium price and equilibrium quantity will decrease

19. When demand increases equilibrium price will increase only if –
(a) supply also increases
(b) supply also decreases
(c) supply remains same
(d) if the elasticity remains the same

20. The equilibrium price remains constant only if demand and supply
(a) increase unequally
(b) decrease unequally
(c) increase equally
(d) none of the above

21. The price will decrease if demand remains same and –
(a) supply increases
(b) supply decreases
(c) supply is more than the previous level
(d) none of these

22. In the short period equilibrium price is –
(i) higher than long run price
(ii) higher than market price
(iii) lower than market price
(iv) lower than long run price
(a) i & ii
(b) ii & iii
(c) iii & iv
(d) i & iii

23. The inter-action of market demand and supply curves determines the –
(a) equilibrium price
(b) reserve price
(c) both a & b
(d) none of these

24. Uniform price for homogeneous product at any one time is the essential condition of –
(a) monopolistic competition
(b) oligopoly
(c) perfect competition
(d) duopoly

25. For maximizing profit, the condition is –
(a) AR = AC
(b) MR = AR
(c) MR = MC
(d) MC = AC

26. MC = MR = AR means equilibrium position of a firm –
(a) in the long period
(b) in the short period under imperfect com-petition
(c) in the short period under perfect competition
(d) under perfect competition.

27. Under perfect competition –
(a) MC = Price
(b) MC > Price
(c) MC < Price
(d) none of these

28. All but one are correct about perfect competition –
(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Differentiated product
(d) Uniform price

29. An increase in demand for a commodity causes –
(a) an increase in equilibrium price
(b) an increase in equilibrium quantity
(c) both a & b
(d) none of these

30. Which of the following is/are the features of perfect competition ?
(i) Large number of buyers and sellers
(ii) Identical product
(iii) Free entry and exit
(iv) No transportation cost
(a) i, ii and iii
(b) ii, iii and iv
(c) i, ii, and iv
(d) i, ii, iii and iv

31. The demand curve of a commodity faced by a competitive firm is –
(a) very elastic
(b) perfectly inelastic
(c) very inelastic
(d) perfectly elastic

32. In the short period, a perfectly competitive firm earns –
(a) normal profit
(b) super normal profit
(c) can incur losses
(d) all the above

The questions 33 to 35 are based on the above diagram

33. Figure (A) shows the equilibrium position –
(a) of an industry
(b) of a firm
(c) of a perfectly competitive industry
(d) of a perfectly competitive firm

34. Figure (B) shows the equilibrium –
(a) of a firm
(b) of a long run perfectly competitive firm
(c) of a short run competitive firm
(d) none of these

35. In figure (B) L, M and N represents –
(a) SMC, SAC and STC
(b) LMC, SAC and AR = AC
(c) SMC, LAC and AR = AC
(d) LMC, LAC and AR = MR

36. The following figure shows that –

(a) a firm is a price maker
(b) a firm is price taker
(c) an industry is price taker
(d) none of these

37. The figure above shows that the firm belong to –
(a) Imperfect competitive market
(b) monopoly
(c) oligopoly
(d) Perfectly competitive market

38. The firm’s short run supply curve is its marginal cost curve above its average variable cost curve is correct about –
(a) perfect competition
(b) oligopoly
(c) monopoly
(d) duopoly

39. Under perfect competition the price of commodity
(a) can be controlled by a firm
(b) cannot be controlled by a firm
(c) controlled up to some extent by a firm
(d) none of the above

40. AR and MR curve coincide in –
(a) Monopoly
(b) Monopolistic Competition
(c) Perfect Competition
(d) Oligopoly

41. Consider the following figure-

(a) super normal profit
(b) normal profit
(c) loss
(d) shut down point

42. Perfectly elastic demand curve implies that –
(a) the firm has no control over price
(b) the firm can sell any quantity at the ruling price
(c) the firm is price taker and output adjuster at ruling price
(d) all a, b and c.

43. Under perfect competition, if the AR curve lies below the AC curve, the firm would –
(a) make only normal profit
(b) incur losses
(c) make super normal profit
(d) firm cannot determine profit

44. Short run supply curve of a perfectly competitive firm is represented by –
(a) short run MC curve
(b) short run AC curve
(c) the part of the MC curve that lies above AVC
(d) none of these

45. Firms are of optimum size in the long period in case of –
(a) Monopoly
(b) Perfect competition
(c) Monopolistic competition
(d) All the above

46. The condition of the long run equilibrium for a competitive firm is –
(a) MC = MR = AR
(b) MC = AC = AR
(c) MC = MR = AC
(d) MC = MR = AR = AC

47. In the long run, firms only earn normal profits is a feature of –
(a) perfect competition
(b) monopoly
(c) both a & b
(d) none of these

48. Odd one out of the following :
(a) Firms are of optimum size and earn normal s profits only in long run.
(b) Firms sell identical product at uniform price
(c) Firms are not of optimum size and earn super normal profits in long run.
(d) Firms are free to move in or out of the industry.

49. The industry’s demand curve and the average revenue curve are same in case of –
(a) perfect competition
(b) monopoly
(c) oligopoly
(d) none of the above

50. All the characteristics of monopolistic competition except –
(a) Large number of buyers and sellers
(b) Freedom of entry and exit
(c) Excess production capacity in long run
(d) Full control over price of commodity

51. There is no difference between firm and industry in case of –
(a) pure monopoly
(b) pure oligopoly
(c) duopoly
(d) perfect competition

52. Find the odd out –
(a) Monopoly may be the result of control over raw materials
(b) Monopoly may be the result of business combines
(c) Monopoly may be the result of patents, copyrights, etc.
(d) Monopoly may be the result of control over demand of commodity

53. The demand curve of consumers for product produced by firm is indicated by –
(a) the average cost curve of a firm
(b) the marginal cost curve of a firm
(c) the average revenue curve of a firm
(d) the average revenue curve of an industry.

54. If in the long run super normal profits can be made by a firm, it means the firm belongs to
(a) perfect competition market
(b) monopolistic competition market
(c) monopoly market
(d) oligopoly market

55. If e >1 on average revenue curve –
(a) MR is positive and TR is rising
(b) MR is negative and TR is falling
(c) MR is zero and TR is maximum
(d) none of these

56. When MR is zero the elasticity of demand on AR curve is –
(a) e < 1 and TR is maximum
(b) e = 1 and TR is maximum
(c) e > 1 and TR is rising
(d) none of these

57. Entry to the market for new firms is blocked in –
(a) perfect competition
(b) monopoly
(c) oligopoly
(d) monopolistic competition

58. When the firm charges different prices to different customers for the same commodity, it is engaged in –
(a) price determination
(b) price rigidity
(c) price discrimination
(d) none of these

59. Lux Supreme, Rexona, Dove Soap, Pears Soap, Liril Soap, etc. indicates –
(a) perfectly competitive market
(b) monopoly market
(c) monopolistic competitive market
(d) duopoly market

60. If price and marginal revenue are same then the demand curve must be –
(a) perfectly inelastic and vertical
(b) highly elastic and downward sloping
(c) perfectly elastic and horizontal
(d) highly inelastic and downward sloping

61. Perfectly elastic demand curve signifies that –
(a) the firm has no control over price of commodity
(b) the firm has to sell any amount of commodity at prevailing price
(c) the firms average revenue and marginal revenue coincide
(d) all the above

62. If under perfect competition, the demand curve lies above the average cost curve, the firm would –
(a) make normal profits
(b) incur losses
(c) make super normal profits
(d) profit is indeterminate

63. If a monopoly firm is charging price ₹ 20 per unit and elasticity of demand is 5, then, MR will be –
(a) ₹ 10
(b) ₹ 12
(c) ₹ 14
(d) ₹ 16

64. Monopoly price is the function of –
(a) MC of production
(b) price elasticity of demand
(c) neither (a) nor (b)
(d) both (a) and (b)

65. Railways is an example of –
(a) perfect competition
(b) monopoly
(c) oligopoly
(d) monopolistic competition

66. Highly elastic negatively sloped demand curve is related to –
(a) monopoly
(b) monopolistic competition
(c) perfect competition
(d) both (a) and (b)

67. The cross elasticity of demand for monopolist’s product is –
(a) zero
(b) less than zero
(c) infinite
(d) unity

68. A market situation in which there are only few firms producing differentiated product which are close substitutes is –
(a) monopolistic competition
(b) oligopoly
(c) duopoly
(d) perfect competition

69. The cross elasticity of demand for the product of a firm under perfect competition is –
(a) zero
(b) less than zero
(c) infinite
(d) unity

70. Demand curve of a firm is indeterminate in case of –
(a) monopoly
(b) oligopoly
(c) duopoly
(d) none of these

71. Under monopolistic competition the cross elasticity of demand for the product of a single firm is –
(a) infinite
(b) highly elastic
(c) highly inelastic
(d) zero

72. At every level of output AR = MR in case of –
(a) perfect competition
(b) monopoly
(c) oligopoly
(d) all the above

73. Kinked demand curve is related to –
(a) monopoly
(b) pure competition
(c) oligopoly
(d) none of these

74. A single movie theatre in a small town or city means –
(a) perfect competition
(b) monopoly
(c) monopolistic competition
(d) both (a) and (b)

75. According to kinked demand curve theory, the upper segment of the demand curve is –
(a) highly elastic
(b) highly inelastic
(c) unitary elastic
(d) perfectly inelastic

76. A firm under perfectly competitive market wants to double its sales. The firm would –
(a) lower the price of commodity
(b) improve the quality of commodity
(c) offer double the quantity for sale at ruling price

77. For maximization of profits, MR = MC is the first order condition –
(a) only under monopoly
(b) only under perfect competition
(c) both under monopoly as well as perfect competition
(d) in any type of market

78. Which of the following statements are correct with regard to firm’s equilibrium –
(i) MR = MC
(ii) MC curve cuts the MR curve from below
(iii) TR = TC
(iv) MR = AR
(a) i & ii
(b) ii & iii
(c) iii & iv
(d) none of these

79. A firm under monopolistic competition is in long run equilibrium –
(a) at the minimum point of the long run AC curve
(b) at the falling segment of the long run AC curve
(c) at the rising segment of the long run AC curve
(d) when Price = MC

80. The AR curve is tangent to the minimum point of AC curve in the long run, if there is –
(a) perfect competition
(b) oligopoly
(c) monopoly
(d) monopolistic competition

81. In the long run, one firm operates at the optimum level while other operates at sub-optimum level. Such firms belong to –
(a) monopoly and perfect competition
(b) perfect competition and monopolistic competition
(c) monopolistic competition and oligopoly
(d) oligopoly and monopoly

82. Which one of the following gives the correct relationship between MR, AR and price elasticity

83. Marginal revenue will be negative if elasticity of demand is –
(a) equal to zero
(b) less than zero
(c) greater than one
(d) less than one

84. The phenomena of excess production capacity is associated with –
(a) Perfect competition
(b) Monopolistic competition
(c) Monopoly
(d) Oligopoly

85.

The AR and MR for 6 units would be –
(a) 55 and 30 respectively
(b) 30 and 55 respectively
(c) 60 and 30 respectively
(d) 30 and 60 respectively

Use the following data to answer Qs. 86 – 87

86. The total revenue of the of 2 units would be –
(a) ₹ 10
(b) ₹ 16
(c) ₹ 18
(d) can not be determined

87. The marginal revenue of 3rd unit would be –
(a) ₹ 10
(b) ₹ 6
(c) ₹ 4
(d) ₹ 2

88. Suppose the price of a commodity determined in a competitive market is ₹ 5, then the marginal revenue of the 4th unit sold would be –
(a) ₹ 20
(b) ₹ 15
(c) ₹ 10
(d) ₹ 5

89. A monopoly firm faces a downward sloping demand curve because –
(a) it has an inelastic demand
(b) it sells large quantities to few buyers
(c) it is same as the industry
(d) consumers prefer its product

90. At the quantity where MR equals MC, the AFC is ₹ 7; AVC is ₹ 23 and the price is ₹ 30, hence, the firm –
(a) should continue production in short run
(b) should continue production in long run
(c) should shut down
(d) none of these

91. A firm has to take decision whether to produce 15th unit of output but finds its marginal cost of 15th unit to be ₹ 25 and marginal revenue of 15th unit to be ₹ 18 hence firm –
(a) should produce 15th unit
(b) should cut down its output level
(c) should further expand production beyond 15th unit
(d) can not determine output level

Use the following data for Qs. 92-94
A perfectly competitive firm has the following cost schedule

92. if the market price is ₹ 13, to maximize profits the firm should produce –
(a) 8 units
(b) 7 units
(c) 6 units
(d) 9 units

93. At the market price of ? would be – 6, the maximum profits
(a) ₹ 5
(b) ₹ 10
(c) ₹ 15
(d) ₹ (-) 24

94. Suppose the price falls choose to produce – to ₹ 7, the firm would
(a) 5 units
(b) 6 units
(c) 7 units
(d) 8 units

95. A competitive firms MC curve and AVC curve are given to, show which region of the curves show the firm’s supply curve in the short run.

(a) region HE
(b) region EG
(c) region EF
(d) region IE

96. A firm making zero economic profit –
(a) earns super normal profits
(b) incur losses
(c) earns a normal profits
(d) profit or loss is indeterminate

97. If average variable cost exceeds the market price, the firm should produce –
(a) zero output with fixed costs
(b) zero output without fixed cost
(c) less output without fixed costs
(d) zero output with or without fixed cost

98. An individual firm is only output adjuster at ruling market price in –
(a) monopoly
(b) oligopoly
(c) perfect competition
(d) monopolistic competition .

99. There are few firms selling homogeneous or differentiated products in –
(a) Perfect competition
(b) Oligopoly
(c) Monopolistic competition
(d) None of these

100. Kinked demand curve shows-
(a) Fall in price
(b) rise in price
(c) Stability in price
(d) both (a) and (b)

101. In the above figure, the demand curves facing a seller under perfect competition, monopolistic ‘ competition and Monopoly are-
(a) AR2 ; AR1, AR
(b) AR1, AR2, AR
(c) AR, AR2, AR1
(d) AR, AR1, AR2

102. The demand curve is undefined under _____ market structure.
(a) oligopoly
(b) monopoly
(c) perfect competition
(d) monopolistic competition

103. When demand is elastic, MR is _____
(a) negative
(b) positive
(c) zero
(d) one

104. The market that induces formation of cartels is _____
(a) Perfect Competition
(b) Monopoly
(c) Oligopoly
(d) None of these

105. Match the following ;

(a) A-2 ; B-3 ; C-1 ; D-4
(b) A-4 ; B-1 ; C-2 ; D-3
(c) A-1 ; B-2 ; C-3 ; D-4
(d) A-2 ; B-1 ; C-4 ; D-3

106. A bilateral monopoly is one which-
(a) there are two products with one producer
(b) there are international monopoly agree-ments
(c) monopoly is shared between the people
(d) a monopolist is facing a monopsonist

107. The characteristic of monopolistic competition which is compatible with monopoly is-
(a) One seller and large number of buyers
(b) Full control over price
(c) Freedom of entry and exit
(d) Demand Curve slopes downward

108. If the demand curve of a firm is a horizontal straight line-
(a) a firm can sell any quantity at prevailing price
(b) a firm can sell only specific quantity at prevailing price
(c) all firms can sell equal amount of a com-modity
(d) firms can differentiate their products

109. When demand curve is inelastic ; MR is-
(a) negative
(b) positive
(c) zero
(d) one

110. A rational producer will always operate on the _____ portion of the demand curve
(a) elastic
(b) inelastic
(c) unitary elastic
(d) perfectly inelastic

111. Firms have chronic excess production capacity in _____ market
(a) duopoly
(b) perfect competition
(c) monopolistic competition
(d) oligopoly

112. The theory of monopolistic competition is developed by-
(a) H.E. Chamberlin
(b) Mrs.JoanRobinson
(c) Dr. Marshall
(d) Nicholoas Kaldor

113. The point where P = AC is called –
(a) profit earning point
(b) loss making point
(c) breakeven point
(d) shut down point

114. TR is a straight positively sloping line from origin is under-
(a) perfect competition
(b) monopoly
(c) duopoly
(d) oligopoly

115. If a monopolist resorts to price discrimination, price will be higher in the market where demand is-
(a) unitary elastic
(b) elastic
(c) inelastic
(d) none of these

116. Under collusive oligopoly, price is often decided by-
(a) the industry
(b) the firm
(d) none of these

117.

In the figure above, If OP is price, then ACO represents-

(a) TC
(b) TR
(c) TR at OP price
(d) TR at OY price

118. Slope of firm’s demand curve = ∞ under perfect competition means demand curve is_____
(a) horizontal
(b) vertical
(c) positive
(d) negative

119. Price exceeds MC under monopoly, but not under perfect competition because-
(a) in perfect competition AR = MR
(b) in perfect competition AR = MC
(c) in monopoly AR > MR
(d) all the above

120. In the long run, a monopolist produces _____ level of output and charge a _____ price than a firm under perfect competition market
(a) lower ; higher
(b) lower; lower
(c) higher ; lower
(d) higher ; higher

121. TR minus total explicit cost is called
(a) profit
(b) economic profit
(c) supernormal profit
(d) accounting profit

122. Under perfect competition when price line (AR) passes through minimum point of AVC curve is called _____
(a) minimum losses point
(b) shut down point
(c) breakeven point
(d) profit point

123. At the shut down point, losses of a firm under perfect competition are equal to-
(a) AVC
(b) TFC
(c) AC
(d) MC

124. In the long run under monopolistic competition, profit maximizing profit is _____
(a) less than least cost output
(b) more than least cost output
(c) equal to least cost output
(d) none of the above

125. “Purchase only made-in-India jadi-booti toothpaste” will impact the different of market more towards
(a) monopoly
(b) duopoly
(c) oligopoly
(d) none of the above

126. A monopolist can determine –
(a) price
(b) output
(c) either price or output
(d) both price and output

127. A monopolistic firm has a position of ATC = price in the _____
(a) short run equilibrium
(b) very short run equilibrium
(c) long run equilibrium
(d) any period of time

128. In perfect competition, in the long run, if new firms enter the industry the supply curve shifts to the right resulting in ______
(a) fall in price
(b) rise in price
(c) no change in price
(d) none of the above

129. The difference between least cost output and profit maximizing output is called _____
(a) reserve capacity
(b) excess capacity
(c) normal capacity
(d) abnormal capacity

130. The kink occurs at-
(a) any price
(b) prevailing price
(c) any quantity
(d) to be determined price

131. Doctors, lawyers, consultants, services like power supply, telecommunication fees to different patients/clients. This is a ______ price discrimination.
(a) first degree
(b) second degree
(c) third degree
(d) both second and third degree

132. Charging different prices by monopolist to customers in geographically separate market is a degree of price discrimination.
(a) first
(b) second
(c) third
(d) price discrimination is not possible in separate markets

133. Monopolist charging a price that takes away the entire consumer surplus is a case of _____ degree of price discrimination.
(a) first
(b) second
(c) third
(d) none of the above

134. Which of the following statements refer to Trice leadership?
(a) Existence of perfect competition
(b) A form of price collusion
(c) Stiff competition
(d) The maintenance of a monopolistic price

135. How many sellers usually exist in an oligopoly market?
(a) A large number of sellers
(b) One seller
(c) Few sellers
(d) Two sellers

136. Which of the following is not correct?
(a) if e > 1, MR is +ve
(b) if e < 1, MR is – ve
(c) if e = 1, MR = 0
(d) if e = 0, MR = 0

137. Long-run supply curve in the constant cost industry-
(a) slopes downward to the right
(b) slopes upward to the right
(c) is horizontal straight line
(d) none of the above

138. The concept of group equilibrium is related to-
(a) Paul Sweezy
(b) Chamberlin’s monopolistic competition
(c) Perfect competition
(d) none of the above

139. Dumping is an example of price discrimination which is _____ price discrimination
(a) of first degree
(b) of second degree
(c) of third degree
(d) international

140. _____ is the market structure where there is a single buyer.
(a) Monopsony
(b) Monopoly
(c) Oligopsony
(d) Duopoly

141. At all the level of output AR = MR in _____
(a) a perfect competition market
(b) a monopoly market
(c) a oligopoly market
(d) all the above

142. The long run supply curve of an increasing cost industry
(a) slopes downwards towards right
(b) slopes down towards left
(c) slopes up towards right
(d) none of these

143. The long run supply curve sloping down towards right belongs to _____ industry
(a) increasing cost
(b) decreasing cost
(c) constant cost
(d) none of these

144. Under perfect competition, the MC curve at equilibrium will be-
(a) constant
(b) rising
(c) falling
(d) none of these

145. Market price is the price that prevails in a _____
(a) very short period market
(b) short period market
(c) long period market
(d) secular period market

146. The market in which normal price prevails is a _____ market.
(a) Market period
(b) short period
(c) long period
(d) secular period

(a) Monopoly
(b) Monopolistic Competition
(c) Oligopoly
(d) Perfect Competition

148. Which of the following is not a characteristics of a “price taker”?.
(a) TR = P X Q
(b) AR = Price
(c) Negatively sloped demand curve
(d) Marginal Revenue = Price

149. In monopolistic competition, a firm is in long run equilibrium _____
(a) at the lowest point of the LAC curve
(b) at the falling part of the LAC curve
(c) at the rising part of the LAC curve
(d) when, price = MC

150. The sale of branded goods is common situation is case of _____
(a) perfect competition
(b) monopolistic competition
(c) monopoly
(d) pure competition

151. Which market explains that Marginal Cost is equal to price for attaining equilibrium.
(a) Perfect Competition
(b) Monopoly
(c) Oligopoly
(d) Monopolistic Competition

152. When AR = ₹ 10 and AC = ₹ 8 the firm makes
(a) Normal Profit
(b) Net Profit
(c) Gross Profit
(d) Supernormal Profit

153. A firm’s AVC curve is rising, its MC curve must be ______
(a) constant
(b) above the TC curve
(c) above the AVC curve
(d) all the above

154. When a market is in equilibrium or has cleared it means _____
(a) No shortages exist
(b) Quantity demanded equals quantity sup-plied
(c) A price is established that clears the market
(d) All the above

155. If a competitive firm doubles its output, its total revenue-
(a) doubles
(b) more than doubles
(c) less than doubles
(d) none of these

156. Which is the first order condition for the profit of a firm to be maximum?
(a) AC = MR
(b) MC = MR
(c) MR = AR
(d) AC = AR

157. Full capacity is utilized only when there is
(a) Monopoly
(b) Perfect Competition
(c) Price Discrimination
(d) Oligopoly

158. The upper portion of the kinked demand curve is relatively-
(a) More elastic
(b) More inelastic
(c) Less elastic
(d) Inelastic

159. In the very short run period, the price of the commodity is influenced most by-
(a) demand
(b) supply
(c) cost
(d) production

160. Long run normal prices is that which is likely to prevail-
(a) all the times
(b) in market period
(c) in short-run period
(d) in long-run period

161. The degree of monopoly power is measured in terms of difference between-
(a) Marginal Cost and the price
(b) Average Cost and Average Revenue
(c) Marginal Cost and Average Cost
(d) Marginal Revenue and Average Cost