● Total fixed cost

Total fixed cost represents the sum of expenses that remain constant regardless of the
level of production or sales volume in a business. These expenses include items such
as rent, salaries of permanent staff, insurance premiums, and depreciation of assets,
which do not vary with the quantity of output produced.

●Marginal Cost

The concept of marginal cost has an important place in economic theory . Marginal cost
is addition to the total cost caused by producing one more unit of output

MC(n) =TC(n)- TC (n-1)

Thus marginal cost of nth unit of output is the difference between total cost of nth unit
and n-1 th unit. In other words ,it is the ratio of change in total cost and change in level
of output. So,

Marginal cost= Change in total cost/ change in quantity of production

MC=∆TC/∆Q

●Quasi rent

Quasi rent refers to the temporary or short-term surplus earnings derived from a factor
of production, such as land or machinery, when its supply is limited in the short run.
Unlike true economic rent, which arises from fixed factors in the long run, quasi rent
emerges due to temporary scarcity or market imperfections, dissipating over time as
factors adjust to equilibrium.

●non collusive oligopoly

A non-collusive oligopoly is a market structure characterized by a small number of

firms that dominate the industry but do not engage in collusion or explicit
agreements to coordinate their behavior. Instead, each firm independently
determines its pricing, output levels, and other strategic decisions based on market
conditions and the anticipated reactions of competitors. Competition among these
firms is typically intense, leading to dynamic pricing strategies, non-price
competition, and strategic interactions aimed at gaining a competitive advantage.
However, despite the absence of collusion, firms in a non-collusive oligopoly may still
engage in tacit forms of cooperation or strategic behavior to maintain their market
power and influence prices.

●Meaning of profit
Profit is the surplus of income over expenses of production according to a
businessman, trade sets. It is the amount left with them after they have made payments
for all factor services used by them in the process of production. Economist said that
generally two types of profits gross profit and pure or net profit.

Definition of Profit = According to Marshall, in terms of demand and supply of

entrepreneurs. Profit were regarded by him, "as the average remuneration necessary to
being into existence and to keep in existence, a sufficient supply of entrepreneurs

●Duopoly market

A duopoly is a kind of oligopoly: a market dominated by a small number of firms. In the

case of a duopoly, a particular market o industry is dominated by just two firms (this is
in contrast to the more widely-known case of the monopoly when just one company
dominates).In very rare cases, this means they are the only two firms in the entire
market (this almost never occurs); in practice, it usually means Market Structure the
two duopolistic firms have a great deal of influence, and their actions, as well as their
relationship to each other, powerfully shape their industry. Duopolistic markets are
imperfectly competitive, so entry barriers are typically significant for those attempting
to enter the market, but there are usually still other, smaller businesses persisting
alongside the two dominant firms.

●Features of Oligopoly market

1. Few seller: Under Oligopoly, there are a few large firms although the exact number of
firms is undefined. Also, there is severe competition since each firm produces a
significant portion of the total output

2. Interdependence: Under Oligopoly, since a few firms hold a significant share in the
total output of the industry, each firm is affected by the price and output decisions of
rival firms. Therefore, there is a lot of interdependence among firms in an oligopoly.
Hence, a firm takes into account the action and reaction of its competing firms while
determining its price and output levels.

3. Indeterminateness of demand curve: Unlike other market structures, under

Oligopoly, it is not possible to determine the demand curve of a firm. This is because on
one hand, there is a huge interdependence among rivals. And on the other hand there is
uncertainty regarding the reaction of the rivals. The rivals can react indifferent ways
when a firm changes its price and that makes the demand curve indeterminate

4. Importance of advertising and selling cost: Since firms try to avoid price competition
and there is a huge interdependence among firms, selling costs are highly important for
competing against rival firms for a larger market share.

5. Barriers to entry: Oligopolies and monopolies frequents maintain their position of

dominance in a market might because it too costly or difficult for potential rivals to
enter the market. The hurdles are called barriers to entry and the incumbent can erect
then deliberately, or they can exploit natural barriers that exist.

6. Collusive oligopolies: Another key feature of oligopolistic markets is that firms may
attempt to collude, rather than compete f colluding, participants act like a monopoly
and car enjoy the benefits of higher profits over the long term.

7. Kinked demand curve: The reaction of rivals to a price change depends on whether
price is raised or lowered. The elasticity of demand, and hence the gradient of the
demand curve, will be also be different.. The demand curve will be kinked, at the current
price Even when there is a large rise in marginal cost, price tends to stick close to its
original, given the high price elasticity of demand for any price rise

●Features of Monopoly market

1. Single seller or producer: A monopolistic market is regulated by a single supplier.

Hence, the market demand for a product or service is the demand for the product or
service provided by the firm. But the number of buyers is assumed to be large.

2. No close substitutes: A monopolist sells a product which does not have any close
substitutes. Therefore, the cross elasticity of demand for such a product is either zero or
very small

3. Firm is also an industry: Under monopoly there is only are firm which, constitutes the
industry Difference between firm and industry comes to an end.

4. Barriers to entry: Another feature of a monopoly market restrictions of entry. These

restrictions can be of any form economical, legal, institutional, artificial, etc.

5. Price maker: Since there is only one firm selling the product it becomes the price
maker for the whole industry. The consumers have to accept the price set by the firm as
there are no other sellers or close substitutes.

6. Downward sloping demand curve: The price elasticity of demand for the monopolist's
product is less than one. Hence, in the monopoly market, the monopolist faces a
downward sloping demand curve.

7. Downward sloping average and marginal revenue curve The average and marginal
revenue curve of the monopoly market is downward sloping curve These curves are
steeper than the curves of monopolistic market.

●Welfare Economics

Marshall and Pigou the neo-classical economists, concentrated on particular sectors of

the economic system in their postulates of welfare economics. It was Professor
Robbins' ethical neutrality view about economics that led to the development of welfare
economics as an important field of economic studies. Kaldor, Hicks and Scitovsky have
laid the foundations of the New Welfare Economics with the help of the compensation
principle avoiding all value judgements. On the other hand, Bargson, Samuelson and
others have developed the concept of the Social Welfare Function without sacrificing
value judgements.

Meaning: Welfare economics is the study of how the allocation of resources and goods
affects social welfare. This relates directly to the study of economic efficiency and
income distribution, as well as how these two factors affect the overall well-being of
people in the economy.

Definition - Scitovsky defined welfare economics as "that part of the general body of
economic theory which is concerned primarily with policy.

●Relationship between Average cost and Marginal cost

The relationship between average cost (AC) and marginal cost (MC) is crucial in
understanding a firm's production process and its efficiency. Here's how they relate:

1. **Definitions:**

- Average Cost (AC): It is the total cost per unit of output, calculated by dividing total
cost (TC) by the quantity of output (Q). AC = TC / Q.

- Marginal Cost (MC): It is the additional cost incurred by producing one more unit of
output. It is calculated as the change in total cost divided by the change in quantity of
output. MC = ΔTC / ΔQ.

2. **Relationship:**

- When marginal cost is below average cost: If MC is less than AC, producing an
additional unit of output adds less to the average cost than the existing level. This
scenario typically occurs when average cost is decreasing. As a result, the average cost
decreases as more units are produced, leading to economies of scale.

- When marginal cost equals average cost: MC equals AC at the minimum point of the
average cost curve. At this point, the firm is producing at the minimum efficient scale,
and average cost is at its lowest.

- When marginal cost is above average cost: If MC exceeds AC, producing an

additional unit of output adds more to the average cost than the existing level. This
typically occurs when average cost is increasing due to diseconomies of scale. In this
case, the average cost increases as more units are produced.

3. **Implications:**

- When MC is below AC, producing more units lowers the average cost, indicating
increasing returns to scale or economies of scale.
 - When MC equals AC, the firm is operating at its most efficient scale, where average
cost is minimized.

- When MC is above AC, producing more units raises the average cost, indicating
decreasing returns to scale or diseconomies of scale.

Understanding the relationship between AC and MC helps firms make production

decisions to optimize their costs and maximize profitability.

●Relationship between Average Revenue and Marginal revenue under perfect

competition

Under perfect competition, the relationship between average revenue (AR) and
marginal revenue (MR) is straightforward due to the uniform price charged by all
firms in the market. Here's how they relate:

1. **Definition:**

- Average Revenue (AR): It is the revenue earned per unit of output sold, calculated
by dividing total revenue (TR) by the quantity of output (Q). AR = TR / Q.

- Marginal Revenue (MR): It is the additional revenue earned by selling one more
unit of output. In perfect competition, MR equals the market price, as each additional
unit sold fetches the same price. Therefore, MR is constant and equal to the market
price.

2. **Relationship:**

- Under perfect competition, the firm faces a horizontal demand curve at the
market price (P). This means that the AR curve is also horizontal and coincides with
the market price.

- Since MR represents the change in total revenue resulting from the sale of one
additional unit, it is equal to the price of the product (P) under perfect competition.
Therefore, MR equals AR and is constant.

3. **Implications:**

- Both AR and MR are constant and equal to the market price in perfect
competition.

- Since MR equals the market price and remains constant, the MR curve is also a
horizontal line at that price level.
 - Firms maximize profits by producing at the level of output where MR equals
marginal cost (MC), as long as MR exceeds MC. This occurs where the MC curve
intersects the horizontal MR curve.

In summary, under perfect competition, AR and MR are equal to the market price
and remain constant, leading to a simple and predictable relationship between the
two.

●The Uncertainly Theory of Profit

Prof. Frank H. Knight regards profit as the reward of bearing non- insurable risks and
uncertainties. He classified risk in to (a) Insurable Risk and (b) Non-insurable Risk

Certain risks are measurable and predictable in as much as the probability of their accurance
can be statistically calculated. The risk of fire, theft of merchandise and death by accident are
insurable. Such risks are brane by the insurance company. There are certain unique risks
which are uncertain and incalculable. The probability of their occurrence cannot be
statistically computed because of t'e presence of uncertainty in them. Such risks unpredictable
and insurance company would no be willing cover then. Such unforeseen risks relate to
change in prices, demand, supply, depression phases of trade cycle, technological changes,
changes in degree of competition, changes or government policies etc. No insurance
company. Company can calculate the loss expected from such risks and hence they are non-
insurance. Therefore knight said that these risks are uninsurable and uncertain. Thus, profit is
an exclusive reward of for the entrepreneur for making business decision under unpredictable
and uncertain economic condition. In short, according to Knight, profit is the reward of
bearing non-insurable risk and uncertainties.

Criticisms

(1) There are many factors which influence on profit not only uncertainly of business
determinants of profit.

(2) It does not include a clear notion of entrepreneurship. His sale function is regarded as one
of the uncertainly-beaoring. But in modern business corporation ownership is separate from
control.

(3) The theory does not solve the problem of allocation distribution in short theory
cannot gives solution to distribution of profit among Holders of corporations

(4) Profit is related to a business firm for which changes population and capital are
unpredictable

(5) Uncertainly bearing cannot be looked upon as a separate factor production like land
labour, capital. It is a psychological concept with forms port of real cost of production

●difference between Monopoly market and perfect competition

Certainly, here's a concise comparison between monopoly market and perfect
competition:

**Monopoly Market:**

1. **Single Seller:** Only one seller or producer exists, controlling the entire market
supply.

2. **Price Maker:** The monopolist has complete control over setting prices, often
resulting in higher prices and lower quantities supplied compared to competitive
markets.

3. **High Barriers to Entry:** Entry into the market is restricted due to factors such as
patents, control over resources, or economies of scale.

4. **Product Differentiation:** Products may be unique or have no close substitutes,

giving the monopolist significant market power.

5. **Limited Output:** Monopolists may restrict output to maintain higher prices and
profits, leading to allocative inefficiency and deadweight loss.

6. **Potential for Price Discrimination:** Monopolists may charge different prices to

different consumers based on their willingness to pay, increasing profits but potentially
leading to consumer welfare concerns.

**Perfect Competition:**

1. **Many Sellers:** Numerous sellers or producers exist, each with a negligible market
share, leading to intense competition.

2. **Price Taker:** Firms are price takers, meaning they accept the market price as given
and have no control over it.

3. **Low Barriers to Entry:** Entry and exit into the market are easy, with no significant
barriers such as low startup costs and easy access to resources.

4. **Homogeneous Products:** Products are identical or highly similar, with no

differentiation between them.

5. **Efficient Allocation of Resources:** Firms produce at the point where marginal cost
equals market price, leading to allocative efficiency.

6. **No Price Discrimination:** Price discrimination is not possible due to the presence
of identical products and the inability of firms to influence prices.

In summary, while monopoly markets are characterized by a single seller with

significant market power and high barriers to entry, perfect competition features
numerous sellers with no market power and easy entry and exit, resulting in efficient
outcomes.
●Thought of Amartya Sen on welfare economics

Famines: Prof. Sen analysed famines with his theoretical approach to welfare
measurement. He argues that famines can occur even when the supply of food is not
significantly lower. In this view lack of opportunities and capabilities are responsible for
poverty and famines. In other words hunger is essentially a problem of functioning
failures. It is perhaps a mistake to see the development of education, health care and
other basic achievements only or primarily as expansion of 'Human Reserves the
accumulation of 'Human Capital', as if people were just the means of production and
not it's ultimate end the bettering of human life does not have to be justified by showing
that a person with a better life is also a better producer Hence Health is a supreme
elements of economic Development

Education and Health:

According to Prof Sen education and health can be valuable to the freedom of a person
in at least five district ways

(a) Intrinsic Importance Education and health are valuable achievement in themselves

(b) Instrumental Social Role: Education and health encourage demand for social needs

(c) Instrumental personal Role: A persons education and health to do many things

(d) Instrumental Process Role: The education and health broadens the horizon of the
people and generate benefits

(e) Empowerment and Distributive Role: With better health and education, disadvanged
groups can better exists oppression and inequality

There is a very close interlin cages between poverty and poor health. A vicious circle is
operating here i.e. poverty causes poor health and poor health causes poverty, hence
improvement in health core services, can be important step Therefore, a good health
core is highly needed of human life. The components of good health areas as follows

(a) Nutrition diet

(b) Hygienic condition of living

(c) Safe drinking water

(d) Information about good health core

(e) Existence of hospitals and medical treatment facilities.

(f) Financial ability to incase the medical expenses.

Poverty:Prof. Sen Argues that while there may be externalities in poverty. they are not
the fundamental focus of poverty education, poverty is an ethical issue, and the
capabilities and functioning of the poor are the major concerns related to poverty. Prof.
Sen has also stressed the need for an appropriate measure of poverty, since both head
count ration and income gap measure suffer from certain limitations Prof. Sen provided
a measure of poverty

PH [F+(1-1) G] where sen's Poverty Index

H =Head count Ration

I = Poverty Gap ration

G = Gini-Coefficient of the Distribution of income of the poor.

Inequality:Prof Amartya Sen analysis of economic inequality has enriched the

understanding of the concept of economic inequality. He exposed the limitation of
earlier theories which equated the concept of inequality with income and asset
distribution. In his Inequality Re- examined (1992) emphasized that discussion of
inequality is influenced by the choice of a focal variable. The appropriate measure to
Prof. Sen will be same sort of a quality of life measure, like the Human Development
Index, which related to the actual condition of the people. This has widened the scope
of inquiry considerably and helped in the formulation of a meaningful development
strategy. Another dimension of extreme inequality and injustice emphasized by Prof.
Sen is the concept of gender bias in as household and in a society. According to him
high levels of gender inequality and female deprivation are the most serious social
failures Prof. Sen also argues that the well-being of women is closely interlinked to
population policy and how it brings about a change in the fertility pattern.

● Price discrimination by a monopolist

Price discrimination by a monopolist refers to the practice of charging different prices to

different consumers for the same product or service, based on their willingness to pay.
Here's how it works:

1. **Market Segmentation:** The monopolist divides the market into distinct segments
based on factors such as geographic location, demographics, or purchasing behavior.

2. **Price Discrimination Types:**

- **First-degree price discrimination:** Also known as perfect price discrimination,

involves charging each consumer the maximum price they are willing to pay. This
maximizes the monopolist's profits but is challenging due to information constraints.

- **Second-degree price discrimination:** Involves charging different prices based on

quantity or usage. For example, offering discounts for bulk purchases or premium
pricing for additional features.
 - **Third-degree price discrimination:** Involves charging different prices to different
consumer groups based on their price elasticity of demand or willingness to pay. This is
the most common form of price discrimination.

3. **Profit Maximization:** Price discrimination allows the monopolist to capture more

consumer surplus and increase profits compared to charging a single price to all
consumers. By charging higher prices to consumers with a higher willingness to pay, the
monopolist can extract more value from the market.

4. **Conditions for Price Discrimination:** Price discrimination requires the monopolist

to have market power, the ability to segment the market, and prevent arbitrage (resale of
goods between market segments). It is more feasible when:

- Consumers have different price elasticities of demand.

- The monopolist can identify and separate market segments.

- Arbitrage is prevented through barriers such as legal restrictions or product

differentiation.

5. **Examples:** Examples of price discrimination include student discounts, senior

citizen discounts, airline pricing (e.g., business class vs. economy class), and
pharmaceutical pricing (e.g., different prices for branded vs. generic drugs).

6. **Regulation:** Price discrimination may be subject to regulation or scrutiny,

particularly if it is deemed to be anticompetitive or harms consumer welfare. Antitrust
laws may restrict certain forms of price discrimination to ensure fair competition.

●Marginal productivity theory of distribution

The marginal productivity theory of distribution was propounded by the German

economist T. H. VonThunen. But later on many economists like Devid Ricardo, Karl
Mcnger, Walras, Wickstcad, Edgeworth, Prof. Jevance, J. B. Clark etc. thereafter, Prof.
Marshall and Prof. J.R Hicks contributed for the development of this theory.

The marginal productivity theory of distribution, suggests some broad principles

regarding the distribution of the national income among the four factors of production.

According to this theory, the price (or the earnings) of a factor tends to equal the value
of its marginal product Thus, rent is equal to the value of the marginal product (VMP) of
land, wages are equal to the VMP of labour and so on. The neo-classical economists
have applied the same principle of profit maximisation (MC = MR) to determine the
factor price. Just as an entrepreneur maximises his total profits by equating MC and MR
he also maximises profits by equating the marginal product of each factor with its
marginal cost Definitions: Prof. J. B.Clark states that according to the theory of marginal
productivity, each factor of production gets return according to its marginal productivity.
In other words, it can be said that the price of each factor of production tend to be equal
to its marginal productivity.

Assumptions of the Theory:The marginal productivity theory of distribution is based on

the following assumptions

. The theory assumes the perfect competition in both product and factor markets. It
means that both the price of the product and the price of the factor (labour) remains
unchanged.

-The marginal product of a factor would diminish as additional units of the factor are
employed while keeping other factors

-All the units of a factor are assumed to be divisible and homogeneous

-The possibility of the substitution of different factors. It means that the factors like
labour, capital and others can be freely and easily substituted for one another

-It is assumed that the production technique remains unchanged.

-To employ the different factors in such a way and in such a proportion that he gets the
maximum profits

-The theory assumes full employment for factors. Otherwise, each factor cannot be paid
in accordance with its marginal product.

-The theory is based on the assumption of perfect mobility of factors of production. The
payment to each factor according to its marginal productivity completely exhausts the
total product, leaving neither a surplus nor a deficit at the end.

-It is assumed that the theory is applicable on long period.

● Schumpeter's Innovation Theory of Profit

Definition: The Innovation Theory of Profit was proposed by Joseph A Schumpeter, who
believed that an entrepreneur can earn economic profits by introducing successful
innovations

In other words, innovation theory of profit posits that the main function of an
entrepreneur is to introduce innovations and the prof in the form of reward is given for
his performance According to Schumpeter, Innovation refers to any new policy that an
entrepreneur undertakes to reduce the overall cost of production or increase the
demand for his products.

Thus, innovation can be classified into two categories, The first category includes all
those activities which reduce the overall cost of production such as the introduction of
a new method or technique of production, the introduction of new machinery innovative
methods of organizing the industry, etc.
The second category of innovation includes all such activities which increase the
demand for a product. Such as the introduction of a new commodity or new quality
goods the emergence or opening of a new market, finding new sources of raw material a
new variety or a design of the product, etc.

The innovation theory of profit posits that the entrepreneur gains profit if his innovation
is successful either in reducing the overall cost of production or increasing the demand
for his product

Often, the profits earned are for a shorter duration as the competitors imitate the
innovation, thereby ceasing the innovation to be new or novice. Earlier, the entrepreneur
was enjoying a monopoly position in the market as innovation was confined to himself
and was earning larger profits. But after some time, with the others imitating the
innovation, the profits started disappearing

An entrepreneur can earn larger profits for a longer duration if the law allows him to
patent his innovation. Such as a design of a product is patented to discourage others to
imitate it. Over the time, the supply of factors remaining the same, the factor prices tend
to rise as a result of which the cost of production also increases. On the other hand,
with the firms adopting innovations the supply of good sand services increases and
their prices fall. Thus, on one hand the output per unit cost increases while on the other
hand the per unit revenue decreases.

There is a point of time when the difference between the costs and receipts gets
disappear. Thus, the profit in excess of the normal profit disappears. This innovation
process continues and also the profits continue to appear or disappear.

● Keynesian Liquidity Preference Theory of Interest

J. M. Keynes had written liquidity preference theory in his format book. "The General
Theory of Employment, Interest and Money in 1934. According to Keynes, "The rate of
interest as the reward of not hoarding but the reward for porting with liquidity for
specific period. It is not the price which brings into equilibrium the demand for
resources to invest with the readiness to obtain from consumption. It is the price which
equilibrates the desire to hold wealth in the form of cash with the available quantity of
cash, In other word the rate of interest is determined by the demand for and the supply
of money.

According to Keynes, The rate of interest is the premium which has to be offered to
induce people to nold the wealth in some from other than hoarded money. "The higher
the liquidity preference, the higher will be rate of interest that will have to paid to the
holders of cash to induce them to part with their liquid cossets. The lower the liquidity
preference. He lower will be the rate of interest that will be paid to the cash holders.

●Total Variable cost

Total variable cost represents the cumulative expenses that vary with the level of
production or output in a business. It includes costs such as raw materials, direct labor,
utilities, and packaging. As production increases, total variable cost increases
proportionally, reflecting the variable nature of these expenses.

● Marginal Revenue: Marginal revenue is defined as the extra revenue earned by

producing and selling an extra unit of output.

Marginal revenue is the net revenue obtained by selling an additional unit of the
commodity. "Marginal revenue is the change in total revenue which results from the sale
of one more or one less unit of output. Ferguson. Thus, marginal revenue is the addition
made to the total revenue by selling one more unit of the good.

A.Koutsoyiannis, "The marginal revenue is the change in total revenue resuiting from
selling an additional unit of the commodity."

MR =TR(n)-TR(n-1)

Where MR stands for marginal revenue, TR, for total revenue earned by selling n units of
product and TR for total revenue earned by selling n-1 units of product.

Marginal revenue can also calculate as

ATR=∆TR/∆Q

Where ∆ stands for changes.

●Collusive oligopoly

A collusive oligopoly occurs when a small number of firms in an industry conspire to

coordinate their actions, such as pricing or output levels, to maximize joint profits.
Collusion may involve explicit agreements or tacit understandings and often leads to
higher prices and reduced competition, potentially harming consumer welfare.

● Features of Monopolistic competition

1. A large number of firms: There are large numbers of firms selling closely related, but
not homogeneous products. Each firm acts independently and has a limited share of
the market. So, an individual firm has limited control over the market price, Large
number of firms leads to competition in "he market.

2. Product differentiation: Each firm is in a position to exercise some degree of

monopoly (in spite of large number of sellers) through product differentiation Product
differentiation refers to differentiating the products on the basis of brand, size, colour,
shape, etc. The product of a firm is close, but not perfect substitute of other firm

Implication of Product differentiation' is that buyers of a product differentiate between

the same products produced by different firms Therefore they are also willing to pay
different prices for the same product produced by different firms. This gives some
monopoly au power to an individual firm to influence market price of its product.

3. Selling Cost: Under monopolistic competition, products are differentiated and these
differences are made known to the buyers through selling costs. Selling costs refer to
the expenses incurred on marketing, sales promotion and advertisement of the
product. Such costs are incurred to persuade the buyers to buy a particular brand of the
product in preference to competitor's brand. Due to this reason, selling costs constitute
a substantial part of the total cost under monopolistic competition.

It must be noted that there are no selling costs in perfect competition as there is perfect
knowledge among buyers and sellers. Similarly, under monopoly, selling costs are of
small amount (only for informative purpose) as the firm does not face competition from
any other firm.

4. Freedom of entry and exit: Under monopolistic competition firms are free to enter
into or exit from the industry at anytime the wish. It ensures that there are neither
abnormal profits not any abnormal losses to a firm in the long run. However, it must be
noted that entry under monopolistic competition is not as easy and free as under
perfect competition

5. Lack of perfect knowledge: Buyers and sellers do not have perfect knowledge about
the market conditions. Selling casts create artificial superiority in the minds of the
consumers and it becomes very difficult for a consumer to evaluate different products
available in the market. As a result, a particular product (although highly priced) is
preferred by the consumers even if other less priced products are of same quality.

6. Price maker: A firm under monopolistic competition is neither a price- taker nor a
price-maker. However, by producing a unique product or establishing a particular
reputation, each firm has partial control over the price. The extent of power to control
price depends upon how strongly the buyers are attached to his brand.

7. Non-price competition: In addition to price competition, non-price competition also

exists under monopolistic competition Non-Price Competition refers to competing with
other firms by offering free gifts, making favourable credit terms, etc., without changing
prices of their own products

Firms under monopolistic competition compete in a number of ways to attract

customers. They use both Price Competition (competing with other firms by reducing
price of the product) and Non-Price Competition to promote their sales.

●Economic cost- Economic cost refers to the total expense incurred by a firm or
individual in producing or acquiring goods and services, including both explicit costs
(such as wages, rent, and materials) and implicit costs (such as the opportunity cost of
using owner-supplied resources). It reflects the value of resources used in economic
activities.

● Loanable Funds Theory of Interest

The Loanable funds theory explains the determination of inter in terms of demand and
supply of loanable funds or credit Expounded by Wicksell the theory was elaborated by
Oh Robertson, Pigou, Lindal, Mirdal and other neo classical economists. As per theory
the rate of interest is the price of credit which it determined by the demand and supply
for loanable funds.

According to Prof. Lerner, "It is the price which equates the supply of credit or saving
and the net increase in the amount of money in a period, to the demand for credit or
investment and ne hoarding in the period".

Demand for Lonable Fund

The demand for loanable funds has primarily three sources i.e. government,
businessman and consumers, hoarding (accumulation and consumption.

(a) Investment

The government borrows funds for constructing public works or for war preparations.
The businessmen borrow for the purchase of capital goods and for starting investment
projects and purchase technology, raw material etc. Such type of investment increased,
demand is also investment, moreover such investment interest elastic and depend
mostly on the expected rate of profit as compared with the rate of interest.

(b) Consumption: The demand for loanable funds on the part of consumers is for the
purchase of durable consumer goods like scooters, house, TV marriage etc. Individual
borrowings are also interest elastic. The tendency to borrow is more at a lower rate that
at a higher interest in order to enjoy their consumption soon.

c) Hoarding (accumulation): Lonable funds are demanded for the purpose of hoarding
them in liquid form or as idle cash they are also interest elastic.

Supply of Lonable funds

The supply of loanable funds comes from savings, dishoardings and bank credit

(a) Saving: Private savings, individual and corporate are the main source of saving.
Though personal savings depend upon the income level, they are regarded as interest
elastic. The higher the rate of interest, the greater will be the inducement to save and
vice-versa. Corporate savings are the undistributed profits of a firm which also depend
on the current rate of interest to some extent. High interest rate encourage savings.

(b) Dishoarding: Dishoarding may represent not only purchase of old assets or
securities from others out of idle cash balances of one's own funds for net investment
or for consumption in purchase in excess of net disposable income. Such funds are
directly related to the rate of interest. The higher rate of interest the larger the funds that
will be coming out of hoards and vice-versa.

(c) Bank Credit Bank credit is an important source of the supply of loanable funds.
Banks are used deposits for the credit creations. Its also interest elastic to some extent
more funds are lent at a higher than at a lower rate of interest.

In above figure curve H. DS, and I represent den and for mon curve Hoarding
consumption and investment respectively, Similarly curve DH. M and 5 curves are
dishoarding, hank credit and saving respectively. The lateral summation of curves H. DS
and I give us the aggregate demand curve for lonable funds DD curve and De M and S
are laterally added up have the aggregate supply curve s of lonable funds. Its
determination, the total demand curve for Lonable funds DD and total supply curve of
lonable funds 55 interest each other at point E and give OR rate of interest. At this rate
OQ amount of funds are borrowed and lent.

Criticisms

(1) The demand and supply schedules for lonable funds determine the equilibrium rate
of interest OR which does not equate each component on the supply with the
corresponding component on the demand side. Thus the equilibrium rate OR reflect
unstable equilibrium, for stable equilibrium, it is essential that investment
equal to savings at the equilibrium rate OR.

(2) The lonable funds theory states that the supply of lonable funds can be increased by
relasing cash balances of savings and treased by absorbing cash balances into savings.
This implies that the cash balences are fairly elastic. But this does not seem to be a
correct view because the total cash balances available with the community are fixed
and equal the total supply of money at any time

(3) As per theory savings as interest elastic, but generally people save not to earn rate of
interest but to satisfy precautionary motive: So savings are interest inelastic

(4) The lonable funds has been criticized for combining monetary factors with real
factors like saving and investment with monetary factors like band credit and
dishoarding without: bringing in changes in the level of income. This makes the theory u

● Modern Theory of Rent

According to the modern theory of rent, the rent of a factor, from the point of view of any
industry, is the difference between its actual earnings and transfer earnings (Rent
Present Earnings Transfer Earnings) Transfer earnings refers to the amount of money,
which a factor of production could earn in its next best-paid use (opportunity cost.
Suppose an hector of land under cotton cultivation yields an income of 15000. If the
same area is put into its next best use. namely paddy cultivation, it earns an income
12000 than it is transfer earning (opportunity cost). Then the rent of that hectare if land
is 3000 (15000-12000). According to modern theory, rent in the sense of surplus arises
when the supply, there are three possibilities

(1) supply of land may be perfectly inelastic, i.e. it is represented by a vertical line which
shows in following figure. The demand for land is a derived demand of the products of
land. If the population of the country increases, the demand for food will increases
resulting in increased demand for land a rise in its rent, and vice versa. It is known that
the demand for a factor depends upon its marginal productivity, which is subject to the
law of diminishing marginal returns. Therefore, the demand curve of land slopes
downward from left to right as shown in the figure The supply of land, on the other hand,
is fixed so far as the community is concerned, although individuals can increase their
land area by acquiring more land from others or reduce it by parting with it. Therefore,
the supply of land is perfectly inelastic The interaction of demand and supply of land
determines its rent. If demand for land increases from D0 to D2. Then the rent also
increases from decreases from Do to D₂, then, the rent decreases R. Here the transfer
earnings will be zero, fixed and it has only one use. In this case, the entire income from
land is surplus and hence, it is called rent.
(2) The supply of land may be perfectly elastic to an individual framer In that
case, it will be represented by a horizontal straight line, shown in figure. If any
factor has a perfectly elastic supply, it will earn no surplus or reward. Hence, in
this case, the actual earnings and the transfer earnings would be the same and
there would be o surplus (rent). However, in real life, no factor has a perfectly
elastic supply.

(3) The supply of land may fall between two extremes, le. it may be elastic but not
perfectly elastic. In this case, a part of income from land is rent in the sense of
surplus over transfer earnings, and remaining part is not rent. The total earnings
are OTPM and transfer earnings are OSPM. Then, SRP the shaded area in the
figure, is the surplus or rent.