Industrial Economics and Telecommunication Regulations

IETR

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CHAPTER NO. 1

Basic Concepts of ECONOMICS

What is Economics?

Definitions: • Economics tells us how a man utilizes his limited

resources to satisfy his unlimited demands• Economics is the study of scarce resources and of

determination of income and employment• Economics is the science which studies human

behaviour as a relationship between demands and scarce means.

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Needs of Man

• Food Clothing and Shelter

• To get his basic needs he needs MONEY

• To Earn Money he needs to work or put efforts

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• Life Cycle

Economic Problems

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• Unlimited Wants Unending chain of Human wants

Efforts can never satisfy all wants1 need is satisfied there awaits 1 more

• Scarcity of meansMeans: Money, Energy, Time, Physical and Intellectual capacityScarcity: Availability is less than Need

• Alternative uses of meansMoney or time, One can satisfy either this want or that want but not bothEg: Family Time inc.. Rate of Income reduces.. And vice versa..

Topics under this chapter• Demand• Supply• Elasticity of demand and supply• Competition• Monopoly• Oligopoly• Monopolistic competition• Causes creating Monopoly• Price determination under

perfect competition and monopoly

• Price discrimination• Equilibrium of firm under

competition and Monopoly • Function of Money• Demand and supply for money• Price level and inflation• Black Money

MeaningConsequencesMagnitude

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Demand Supply Pricing and Equilibrium

• Law of demand and assumption• Price Elasticity of demand• Factors determining Elasticity• Law of supply and its assumption• Features of perfect competition• Features of monopoly• Price discrimination

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DEMAND and SUPPLY

“Demand for anything means the quantity of that commodity which is bought, at a given price, per unit of time”

“Supply is the amount of good that would be offered for sale at all prices at any one instant of time”

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Law of Demand

• Law of demand states that “ With other factors remaining constant

Demand EXTENDS at Lower Price &

Contracts at Higher Price”

• Demand inversely proportional to Price

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Law Of DemandUnit

Price Of Commodity X (Rupees)

Qty Demande

dOf

Commodity X (Units)

50 1040 2030 3020 4010 505 60

Graph

Price

Qty Demanded

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Assumptions Of Law of Demand

• Climate• Population• Taste• Taxes• Income• Prestige

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Elasticity of Demand• Elasticity of Demand:

The change in demand for a commodity in response to a change in its price is called elasticity of demand.

• Types of Elasticity of Demand:

Price Elasticity (Inelastic, Unitary elasticity, Perfectly Elastic)

Income Elasticity (Income of consumers)

Cross Elasticity (one commodity to another)

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Factors determining Elasticity

• Durability and Nature of Commodity • Urgency of commodity• Advertising Effect• Proportion of Expenditure (news paper) • Consumer capability• Price and Change in price• Other substitute availability • Complementary goods

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Law of Supply

• It states that “ With other things being constant supply varies directly with its price”.

• When the price of a commodity rises its supply expands and when the price falls its supply reduces .

• A rise in price induces the producers to supply more because he can make more profits and vice versa

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Supply Curve

Unit Price Of commodity

X (Rupees.)

Quantity SuppliedOf commodity

X (units)

5 10

10 20

15 30

20 40

25 50

Price

Quantity supplied

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Market and Market Structure

• Perfect competition• Monopoly• Oligopoly• Monopolistic competition

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Features of Perfect Competition

• Perfect knowledge• Free entry and exit• No government interference• No non-price competition• Large number buyers and sellers

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Monopoly and its Merits

Monopoly:Control of single manufacturer over the entire market for a particular product.

Merits of Monopoly:• Price maker• Large number of consumers• Single manufacturer in Market• Entry to the market Restricted

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Oligopoly and Monopolistic competition

• Oligopoly: Oligo means few and poly means sellers• The market form in which there are only a few sellers

is called oligopoly (homogeneous(physically similar products

Eg Pen) )• Monopolistic competition

In this system the number of dealers is quite large but not as large under perfect competition. (not homogeneous products)The same price does not rule in the market throughout.

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Features of Monopoly• Only one seller or producer• Monopolists enjoy supernormal profits• No free entry to the seller in the market• Monopolists decides pricing and service conditions• No close substitute for the product or services

provided by the monopolist• Method of marketing: The monopolist’s needs to

Brand and Advertise his product depending on the threat of competition rather than actual competition

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Price determination

• Under Perfect Competitiondepends on demand as well supply

Eg: Equilibrium Price of footwearPrice

Demand/supply

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Demand Price Supply

1000 100 100

800 200 300

600 300 600300 400 800

100 500 1000

Price determination

• Under Perfect Competition

The above graph shows that the price under competitive conditions is the result of total demand for commodity and the total supply of the industry

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Definitions

• Marginal revenueIt is the extra revenue that an additional unit of product will bring It is the additional income from selling one more unit of a good; sometimes equal to price

• Marginal CostIt is the change in total cost that arises when the quantity produced changes by one unit

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Definitions

• Average CostIs equal to the total cost divided by the total no of goods produced

• Average revenueThe revenue for selling a good per unit of output sold, found by dividing total revenue by the quantity of output

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Price DiscriminationA practice of charging different prices to different groups of consumers is known as Price Discrimination

Forms of Price Discrimination• Personal Discrimination• Local Discrimination• Trade Discrimination• Quality Discrimination• Special Service Discrimination• Time Discrimination (Trunk Calls Day and Night charges)

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Price Discrimination

• Price discrimination depends on Elasticity of demand

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ECONOMICS

CHAPTER NO. 3

Functions of Money

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Functions of Money

• Standard of deferred payments• Liquidity of wealth • Basis of credit• Transfer of wealth• Measure of value• Store of value• Medium of Exchange• Distribution of national income

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Significance of money

• Avoids Inconvenience and difficulties• Economic Instability• Financial Accounting Systems• Public Sector• Price mechanism• Avoids double co-incidence of goods• Link between Future and present

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Money• Demand and supply for money

Transaction MotivePrecautionary MotiveSpeculative Motive

• InflationCauses of InflationMeasures to control money

• Black moneyCreation of Black MoneyMagnitude of Black moneyCauses and consequences of Black money

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