ASSIGNMENT OF BUSINESS ECONOMICS

SEMESTER - I

Answer of Q. 1
Monopolistic competition is a market structure which combines elements of monopoly and
competitive markets and it is found in real life market ranging from sandwich bars, fast food
shops, coffee stores, restaurants, bars and even small scale nurseries. In monopolistic
competition a firm have many competitors, but each of them offer a slightly different products.
For example there are various saloon or hairdressers in market like VLCC, LAKME, JAVED
Habib but each one of them is offering different quality in terms of hair cutting which puts them
in their reputation order. Here products differentiation lies in terms of their service to customers.
Another example can be taken of restaurants that offer food of various quality of food at various
price. Product differentiation is key element in this type of competition. It is different from
perfect market since products sold in monopolistic market are not perfect substitute of each
other.
Important feature of this type of competition are -:
1. Many number of firms - : It has large numbers of sellers and buyers for example you
can find a lot of brands in food chain like burger king, dominos, pizza hut, and many
more.
2. Freedom of entry & exit- Organizations are free to enter and exit, because very less or
limited number of government rules or restrictions. Many food chains & local restaurants
frequently enters and exit from business.
3. Differentitated Products -: Firms have differentiated products on basis of quality, style,
services, trademarks, brand names. Different food chains & restaurants have different
quality, services and prices.
4. Inelastic Price Demand -: Firms have inelastic price demand, they themselves decide
price because of product differentiation like there is lot of price difference in price of
burger you eat at local shop and that of burger king. However if price of products are
higher than buyers switch to other seller due to close suitability. For example people may
go for Macaloo tikki if burger king burger price increases.
5. Normal profit in long run - :Firms make normal profit in long run but could make
supernormal profit in short term for example during vacations restaurants and hotels
charges higher for their services and foods.
6. Efficiency - : Monopolistic markets are more efficient than monopoly but less effective
than perfect competition. Like food chains have to launch new food items to retain their
customers.
Long run describes time in which all inputs are variable, i.e. time in which there are no fixed
factor of production with respect to changes in output level. In a long run equilibrium
monopolistic market comes closer to perfect competition because freedom of entry and exit
allows firms to enjoy only normal profits.

To maximize profit in long run marginal cost must be equal to Marginal revenue i.e. MR = MC.
In long run equilibrium in perfect market profit maximization of output marginal cost equals
marginal revenue at output rate i.e. equilibrium quantity of Q unit of output.
MC
Price cost
Per unit AC
P MR

Q
Long run equilibrium under perfect competition
Whereas in monopolistic competition/market which is type of imperfect competition profit
maximization in long run equilibrium depends on producing quantity Q c at price Pc.Unlike
perfect market equilibrium in long run monopolistic market have Pc and Qc as equilibrium
points. MC

Pc
AC

MR D
Qc
Long run equilibrium under monopolistic competition
In other words, in monopolistic market as the demand curve is not perfectly elastic, or, as the
demand curve is negative sloping, the AR curve becomes tangent to the left of the lowest point
of the AC curve. Each firm thus produces at a cost higher than the minimum and gets only
normal profit. as the monopolistically competitive firm operates to the left of the minimum point
of its AC curve, this market is considered as an inefficient market.
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Answer to Question 2
Various types of Cost- :

Total Fixed Cost (TFC) – Total fixed cost don’t change with change in output. These remain
constant even when no output E.g. Cost of land, depreciation cost, factory bulding cost, taxes.it
is represented by straight line on graph.
Total Variable cost (TVC) – It depends on change in output.Its is directly proportional to
output. E.g. cost of raw material, employee wages. It increase and decrease along with increase
and decrease in output. It is represented by a curve line with ups and downs indicating increase
or decrease.

Total Cost (TC) – It is sum of total fixed cost and total variable cost, as fixed cost is constant ,
so any change in variable cost changes total cost i.e. Total cost (TC) = Total fixed cost
(TFC)+Total Variable Cost (TVC)

Average fixed cost (AFC) – It is calculated as total fixed cost divided by number of units
manufactured by firm. i.e. (Total fixed Cost (TFC) / Quantity (Q)). It is represented by
downward sloping line since with increase in quantity it reduces.

Average Variable cost (AVC) – It is calculated as total variable cost divided by number of units
manufactured by firm. i.e. (Total Variable Cost (TVC) / Quantity (Q)).It is U shaped curve due
to increasing return in start and then diminishing returns.

Average Total Cost (AC) – It is sum of Average fixed cost and Average variable cost, as fixed
cost is constant , so any change in variable cost changes total cost i.e. Average Total cost (AC) =
Average fixed cost (AFC)+ Average Variable Cost (AVC). It is U-shaped on graph. It is high
initially and decreases with increase in output quantity and when firm ensure optimum utilization
of resource then at this point it becomes minimum, however after minimum point at quantity Q,
it again start increasing with increase in quantity.

Marginal Cost (MC) – It refers to change in total cost divided by total change in output. I.e.
Marginal Cost (MC) = ΔTC /ΔQ. It is slope of total cost and represents rate of change in total
cost as output quantity changes. It helps to decide whether more unit need to be made or not.

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Cost Variable Cost Total Cost Cost
Cost Cost
0 100 0 100 100 0 100 -
1 100 25 125 100 25 125 25
2 100 40 140 50 20 70 15
3 100 50 150 33.34 16.67 50 10
4 100 60 160 25 15 40 10
5 100 80 180 20 16 36 20
6 100 110 210 16.67 18.33 35 30
7 100 150 250 14.28 21.42 35.70 40
8 100 300 400 12.5 37.5 50 150
9 100 500 600 11.11 55.55 66.66 200
10 100 900 1000 10 90 100 400
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Answer to Question No. 3(A)
Price elasticity of demand is a measure of how much the quantity demanded of a good respond
to changes in the price of that good, computed as percentage change in quantity demanded
divided by percentage change in price . It is determined by following factors-:
 Availability of substitutes – more substitutes more elasticity in demand.
 Necessities or luxury – luxury products are more price elastic
 Type of market – narrow or broad, narrow defined markets are more elastic.
 Time horizons – over long time goods have more elastic demand.

Practical applications of price elasticity of demand for different stakeholders in production

processes are as below -:

1. Production Planning – if demand of products is inelastic then planner can plan to produce
specific quantities of goods, while if demand is elastic then he has to produce different
quantities.
2. Fixing price of different goods – if demand of good is inelastic then a producer can fix
higher price for his goods and if demand is elastic then he needs to lower the price of his goods.
3. Helps in fixing the rewards for factor inputs - Factor rewards refer to price paid for their
services in production process. If the demand for any product is elastic then the producer needs
to pay higher reward for it and vice versa.
4. Wage bargaining by employees/Trade Unions – If demand is inelastic then trade unions
succeeds in raising wages since employer cannot dispense without their services on other hand
company may reduce manpower cost if demand is elastic.
5. Automation – If demand is inelastic then employer might go for automation to complete the
demand and reduce cost of products to maximize his profit.
6. Agricultural Bumper crops – Everyone knows that the demand for most agricultural
commodities is highly inelastic. As a result, an increase in the output of wheat or jute due to
good harvest (or productivity rise due to technological progress) may lead to a sharp fall in their
prices. This will lead to a fall in the revenue of the farmers. So help the farmers the government
will have to impose restriction of agricultural out.
7. It tells producers what price to charge and consumers what price to pay -: It help in
making decisions based on the responsiveness of quantity demanded to a change in price For
instance, a consumer won't stop buying insulin if the price goes up by a dollar or even 100 but if
there are two vending machines side-by-side one offering a can of coke at 0.99 while the other at
1 of course you are going to buy from the former one.
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 Answer to Question No. 3(B)

Comparison basis Shift in Demand Curve Movement in Demand Curve

Meaning Occurs when price is constant but there Occurs when there is change in demanded
is change in demand of product due to quantity along with change in price, while
factors such as consumer income, price others factors remain same. i.e. if price
of related goods, consumer choices and increases then demand decreases and if
preferences, expectations, seasons, price falls then demand increases.
technology.

Graphical representation Change in position of curve i.e. demand change along demand curve i.e. position of
curve position change with change in demand curve remain same but it expands
other factors but not with change in and contract along with change in price as
price. price increases it contracts and when price
decreases it expands

D1 D2 D3 P3 D1
D2
P2 P2

P1 P1 D3
D1 D2 D3
O
Q1 Q2 Q3
Q3 Q2 Q1
Determining Factors Income of customers, taste, preferences, Price of product
seasons, technology, quality, distribution
of income. Fall or rise in relatable goods
price
Curve Motion Shift towards rightward or leftward Moves towards upward or downward

Five factors that would bring about shift in demand curve for Maggie noodles.

1. Focus on use of “Indigenous products” – Since Nestle brand that manufacture Maggie
noodles is a Swiss company , so other competitor in market like Patanjali are focusing on
providing indigenous noodles option which may cause an decrease in demand of Maggie
Noodles.

2. Ban by FSSAI – on detection of lead in excess and presence of MSG (Mono sodium
glutamate) FSSAI put ban on Maggie, also it was a betrayal with customers, which created a
consumer confidence slump affecting demand of Maggie.
3. New players in market – when FSSAI put ban on Maggie new players like yippee noodles,
wai wai noodles, Patanjali Atta Maggie got a good chance to make their way to capture a good
market share and gain customer confidence , leading to decrease in customer base of Maggie
noodles and affecting its demand.

4. Taste and brand loyalty – Still after ban of FSSAI 82% of people readopted Maggie after its
relaunch due to trust on Maggie and its taste which had always been attractive for customer so
even after increase in price customers demand Maggie.

5. Various Variants of Maggie and increase in income – With increase in income of customer
Maggie is no more limited to urban cities and rich class, today Maggie is popular in suburban
areas and lower middle class is also consuming it, moreover Atta variants and vegetable Maggie
variants had given it addition of new customers. Affecting demand of Maggie positively.