MANAGERIAL ECONOMICS

SCOPE OF MANAGERIAL ECONOMICS: a) DEMAND ANALYSIS & FORECASTING: It involves analysing potential of demand from various geographic and customer segments. It involves forecasting of sales which is the starting point of all planning. All business plan commence with sales forecasting and therefore it is the most important farecast which a business undertakes. Al the other plans like capacity paln, raw material procurement, man power plans, working requirement plans are all based on correct estimation of sales. Since the market is uncertain all planning which is based on sales forecast is done under different scenarios. Which means forecasting under highly optimistic condition is scenario 1 & under highly persimistic condition would be scenario 2 7 3rd scenario would be in between. b) COST ANALYSIS: Cost analysis involves segmentation of cost into fixed and variable. Fixed cost remains static for a certain time period & also up to a certain level of activity or production. It has no direct co-relation with production. Variable cost on the other hand varies directly with the level of output & therefore higher the production higher is the variable cost. All cost vary in the long run. Eg: of variable cost: cost of consumption of raw material, cost of power & fuel, cost of wages linked to production, etc. Fixed cost would be in nature of interest cost in bank for borrowing for a long term loan, cost of rent, depreciation & salries paid to management staff are illustrations/ examples of fixed cost. The purpose of bifurcating cost in fixed & variable is to compute the level o f contribution which will help a business in taking decisions involving price reduction. (Contribution= Sales Variable cost). A business can reduce price up to the level of positive contribution & nothing beyond that. In other words if there is negative contribution in that case additional sales would result in higher losses. c) PRODUCTION & SUPPLY ANALYSIS: Managerial economics is also concerned with analysing what to produce and in what quantities. In a multi product company it is advisable to compute the contribution for different products & focus on producing & selling the product which gives highest contribution margin. Supply involves the cost & availability of various inputs which goes into manufacturing procurement of inputs like raw material is essential because on an average 70% on the cost of the finished/ product is only the cost of the material. d) PRICING DECISIONS POLICIES & PRACTICES: Generally the selling price of the product is market determine & therefore it is a given factor on which a company does not have much control. However as a strategyfor sales certain pricing policies are adopted. For eg: ini the case of innovative company which brings new products in the market from time to time may adopt a strategy of skimming the market which means

pricing the product at high price. This proportionate to its cost so that the initial investment is recovered in research & development as well as sizeable profits are made before competition enters the market. On the other hand a company may follow a strategy of penetrative pricing which involves keeping the selling price very low so that the product is consumed by the masses as well as it becomes unattractive for the competitors to enter a market. Such business operate on thin margin& they keep competition away for a long period. Cost class pricing is also undertaken mainly by the public sector undertaken which enjoy entry barriers in their industry on account of certain controls by the government. Eg: mass transportation business like railways and local public transport control by the government. In such cases operating inefficiencies are passed on to the consumer by scaling up prices and operate on cost class basis. e) PROFIT MANAGEMENT: It is the most important objective of any commercial enterprise & profit budgets are prepared to achieve this objective. Since profits depend upon growth in top line as well a s control over cost, therefore profit budgets are prepared under various scales forecast. f) CAPITAL MANAGEMENT: capital involves investing in business which comes from owners in form of equity as well as lenders in form of debt. Equity therefore comprises of owners funds in the business provided by the promoters, their friends and associates as well as private equity players & venture funds. Private equity entities are investors to promoters till the stage of Initial Public Offering (IPO) of shares which take splace after the company achieves profit for 3yrs. Venture funds also provide equity mainly to startup which are involved in highly innovative business where the risk is high & therefore the initial mortality is also high. Debt is borrowed funds which come from banks & financial execution in the form of term loans or working capital& also from direct market borrowings through a debenture issue. Borrowings can be done from other investors through a fixed deposits scheme where investors having moderate risk profile would invest. Borrowings are risky compared to equity from point of view of lenders because to the company does not have stable earnings then servicing of interest & repayment of principle amount becomes uncertain & the lender will have to file a petition in high court for winding up the company. Therefore high borrowing exposes a company to ultimate risk of liquidation. However from the point of view of cost borrowings are comparatively at a lesser cost from the post tax basis because interest paid on borrowings is a business expenditure which is available for a write off & therefore the after tax cost of interest would be only 8.4%. if the pre tax cost is 12% charged by a bank for a company if the tax increased by 30%. Dividends are an appropriation of profits & therefore the company first pays tax & distribute dividends after paying the dividend distribution tax also.

ROLE OF MANAGERIAL ECONOMIST

I.

A MANGERIAL ECONOMIST PERFORMS THE FOLLOWING FUNCTIONS:

a) ADVISES THE MANAGEMENT ON ENVIRONMENTAL ISSUES LIKE GDP GROWTH EXPECTATION: GDP growth is important for all companies because it reflects whether the whole economy of the country is growing or in a static condition. If GDP growth is muted then the overall corporate growth would also be subdued and therefore all long term plans would dovetail the GDP Growth of the company. b) INFLATION: Inflation is a phenomena which results into a continuous rise in prices of different products & services which affects the masses adversely by reducing the purchasing power of mind. Therefore due to erosion of purchasing power the lifestyle or the living standard of people would come down and the poor strata of the society would be majorly affected. Therefore all central banks globally take inflation seriously and try to control inflation. Traditionally monitory measures are used to control inflation by making money more expensive which may result into curbing demand. The RBI takes monitory measures by increasing the policy rates called the Repo rate which is the rate at which banks borrow funds from RBI. RBI also tries to curb the lendable funds of banks by imposing higher rate of CRR (Cash Reserve ratio) so that the funds are available in a lesser quantity in the banking system for lending. c) INTEREST RATES: They move in same direction as inflation & therefore they increase with inflation. Higher interest rate depresses new investments because entrepreneurs find it more risky to start new projects through borrowings at higher rates of interest. Therefore the overall grown rate reduces & inflation is expected to come down after a lag. d) INVESTMENT CLIMATE: investment climate is important for new capacity creation because businessmen do not increase investments when the overall investment climate is unfavourable. Industries which rely upon exports also try to

factor in the global economic scenario because exports are adversely affected if the global economies are not doing well. e) EMPLOYMENT NUMBERS: It involves the overall level of employment which has a direct or indirect bearing on the consumer obtained off take of the companys product. The government therefore has to ensure that job creation is at a high level so that the population entering the job market are adequately placed. Incentives are therefore provided to SME sector because this sector has high employment potential. f) SAVINGS RATE: It denotes the saving capacity of the country as a whole presently in india the avings rate is about 36% which reflects high savings by global standards coming from individuals, corporate sector & the government. Savings provide funds for investments. Savings must be channelized or inverted into productive sectors through market intermediaries like the stock market, the banking sector & insurance as well as mutual funds. Savings which are blocked into purchase of precious metals like gold & silver or invested in purchasing land become up productive investments because they do not create employment& economic activity. All investments do no tonly depend upon domestic savings also on foreign funds. In the 12th 5 yr plan investments of 1 trillion dollars is supposed to be invested in infrastructure. Therefore a large quantum of of funds would be expected from foreign entities for funding projects in the power sector as well as other infrastructure projects.

II.

EXTERNAL ECONOMY:

a) OVERSEAS MARKET: Indian entrepreneurs look at the overseas market when the domestic market is near saturation & when the competition locally becomes acute. The managerial economist is expected to find out the demand prospects for the companys products in the export market a s well as examining issues like landed cost of the product as well import restrictions if any in the overseas market. b) EXCHANGE RATE: Exchange rate is the value of the domestic currency in terms of the currency of the country with which trade is to be established. For eg: for Indian exporters who are exporting to countries where the billing is done in U.s dollars then the Rupee dollar rate is important. If dollar appreciates then it is beneficial to the exporter 7 if the dollar weakens then the situation becomes unfavourable forimporters. c) IMPORT/EXPORT SITUATION: The managerial economist would also advice the management about any restrictions placed by the government from time to time on imports / exports of certain commodities. For eg: at present there are restrictions on exports of sugar, oilseeds, & other commodities which are in short supply in the

domestic market. The re could be import restrictions if there is a glut in the domestic market. d) CAPITAL FLOWS: Capital Flows are inward foreign exchange flows through FDI, FII & NRI groups. Foreign direct investment comes into projects with a joint venture partners in india or a fully owned foreign company established in India. The percentage of share holding in the venture depends upon rules framed by the FIPB (Foreign Investment Promotional Board) (The department of ministry of Finance). For eg: in the banking industry (private sector banks) the FIPB ceiling is 74%, in the Insurance sector the ceiling is 26% & the Telecom sector it is also 26%. FDI flows are more stable because the investment comes into projects which cannot be closed down overnight and the funds repatriated abroad. FDI also brings technology & creates employment. Therefore, it is more desirable compared to flows under FII. FII or Foreign Institutional Investors are allowed to invest in the capital market under equity & debt segments. FII flows are temporary because there are no restrictions on repatriation by selling the shares in the stock market. This happens when either the Indian stock markets are not fairing well or there is redemption pressure in their domestic market. Therefore, FII funds are not taken as long term investments because the vary nature of in market investments is volatile & for number of f of Indian markets. FII may press sales in India to take care redemption pressure elsewhere. The 3rd source of NRIs who are very prosperous as an ethnic group throughout the world. NRIs can bring money to India through bank deposit by opening NRE a/c or FCNR a/c (Non Resident External A/c OR Foreign Currency Non Residency A/c). Funds also come in the stock market in the secondary market & primary market. NRI funds are attractive on account of better interest rates in India compared to the western countries and teh political condition in India is also stable.

III.

DOMETSIC MARKET a) CUSTOMER PROFILE: The managerial economist is expected to define the customer of the company in terms of demographic parameters like age, gender, income, education, etc. He is also expected to forecast whether the population of the target customer would increase 3-5 yrs down the line or it may reduce. This factor is important from the growth in the domestic market since the target customers population would determine the size of the market & therefore for the entire industry in which the company operates it becomes an important factor. b) GEOGRAPHICAL SEGMENTATION: Most companies operate in geographical clusters & therefore, it becomes relevant to find out the pockets where the target customer is located. However in present times due to technology & better logistics this had lost importance.

c) TRACKING COMPETITION: It is an important activity for all companies because the company does not want to be left behind the competition & therefore all competitors move are monitored whether it is price reduction or product development or launching of new products or variations in the existing product. There are dedicated teams which exclusively monitor in the market place the strategic moves by the competitors.

IV.

SPECIFIC FUNCTIONS a) CAPEX PLANNING: CAPEX stands for capital expenditure which means investment in fixed assets for the purpose of expansion of capacity, diversification into new activities, acquiring another company for the purpose of faster growth (faster in organic growth). Capital expenditure decisions are important & involve substantial risks because the returns are well into the future and there is uncertainty since the environment is volatile & therefore the decisions are not taken by one person but a committee which has representatives for the department like finance, marketing, production, R&D & H.R a swell as the managerial economist as one of the functionary of the committee. In most cases there would be many alternatives & the committee would shortlist a few projects depending upon factors like the pay back period or the net present value of the project as well as the internal rate of return. Capital expenditure decisions are not easily reversible because funds once omitted to a project which is implemented cannot be salvaged without a loss. the returns a uncertain and would come in the distant future which is again uncertain. Therefore an interdisciplinary committee would decide on the project & recommend the short listed projects to the board of directors which will ultimately approve one project. b) PROCUREMENT POLICIES: It refers to purchasing raw materials & other inputs which are important decisions because raw material cost generally comes to 70-75% of the total cost of production. Therefore the efficient purchasing can result into cost saving of the for the company which is very material. The company does not have any control on procurement of material & therefore it has to scout around globally for appropriate sources of supply. c) PREPARATION OF CASH BUDGET: Cash budgets are short term estimates of cash position of the company prepared on monthly or quarterly basis. Cash inflows and outflows are estimated and net position of cash at the end of the month or quarter is forecasted. Cash inflows arise when sales receivables are realised. Similarly there are expenses of a recurring nature like payment s to suppliers, payments to power & fuel, payments to wages & salaries, transportation & logistics, etc. Cash budget will enable the company to find out in advance whether there would be cash surplus or cash deficit at the end o f a certain period. If there is cash deficit then additional working capital can be arranged from the bank for if there is cash surplus then it can be invested in short term money market instruments.

d) LONG TERM FINANCIAl INVESTMENTS: If a company generates high amounts of cash an a sustain basis then the company will have surplus cash on the balance sheet which requires to be invested in long term & if no long term projects are in pipe-line then the fund scan be returned to share holders through a high dividend or buy-back. e) MARKET RESEARCH: Market research involves gauging the demand for the product before teh product is launched through test marketing. Other important features which can b estimated through a market survey involve pricing of the products, product features & the end use of the product. Test marketing is done in a select geographical area and the test market results are used to extrapolate at other places like the metropolitian cities which are much larger compared to the venue of the test market. Traditionally in india test marketing is done at pune, Hyderabad and Bangalore because these places have population which is representative of the whole country. f) PUBLIC RELATIONS: public relations is crucial from the point of view of every company because it involves building of a favourable image of the company in the eyes of various stakeholders. A companys stakeholders are its cutomers, shareholders, suppliers, government departments and the society at large. PR activity therefore is a continuous process since it results into favourable customer disposition towards the companys brand. Customer complaints have to be attained properly and grievances should be redressed immediately.

Demand The law of demand states that other things remaining equal demand varies inversely with price. In other words if the price increases the demand will reduce and vice versa. For the price to impact demand, other things have to remain constant. The other things or other factors are as under 1) Income of the target group 2) Price of Substitutes and demand for complimentary products 3) Availability of Credit 4) Available credit limit

5) General Price level The chief characteristics of law of demand would therefore be 1) Inverse relationship with price 2) Price being independent and dependent variable 3) Other factors have to be constant Exceptions to the law of demand It does not apply under the following circumstances 1)Veblen Goods: In case of Veblen goods(the term Veblen is named after the economist Veblen who propounded this theory that states that certain goods are purchased by effluent strata of society which are said to be products which give the purchaser a feeling of ostantiouness.in other words these goods are purchased for the feeling of exclusivity and therefore the price is of no consequence for the demand of these products on the contrary if these products become cheap the demand will virtually vanish because the quality of exclusivity will vanish because the quality of exclusivity will be lost. 2) Speculative Market :In a Speculative market it will not apply in a speculative market where the specutors behave in a manner which is contrary to the law of demand. Therefore in a rising market the demand for share increases and there is a mad rush to purchase the share the earliest as any delay would result in a lost opportunity of purchasing shares at a lower value since the price trend is increasing .Similarly in a falling market speculators offload the shares at the earliest because any delay would result into a higher loss since the prices fall rapidly. 3) Giffin Goods: The term giffin is also named after the economist who propounded this theory which states that certain products are cheap but important.Theconsumption pattern is set therefore any price increase wl not discourage the consumer from purchasing nor will the consumer purchase a higher quantity if price fall. Market research and Law of demand Market research has found that there are two types of consumer behavious found in the market place 1) Individual Consumer who has no competency to find out the quality of product. Such a consumer will produce a branded product if the consumer wants quality then a expensive product is associated with good quality therefore over here price is not taken into consideration but quality is important for which consumer is ready to pay a higher price and therefore the low demand will not apply in this case

2) On the other hand industrial consumers which purchase in bulk and have the means to find out the quality of the product through lab testing of such consumers would purchase from the lowest price source. Price Elasticity of Demand Elasticity of demand means the extent to which demand can be impacted by price. It also means the sensitivity of demand to a chance in price.A high Elasticity would mean that price will not have much of an impact on demand which happens in case of essential products.On the other hand if demand is elastic in that case a slight variation in price would impact demand. Types of price elasticity 1. Perfectly elastic demand: under this situation a slight change in prize will result into a substantial change in demand for the product and therefore manufacturer will not have pricing power and will have to absorb any additional cost without posing the same to the consumer in terms of higher selling price E.g.: biscuits 2. Perfectly inelastic demand: under which price will not have any impact on demand which happens in case of essential products .the term essential is a relative term because what is essential for one segment of population need not be the same for the other .eg all vice products will have an inelastic demand and therefore manufactures can pass an additional cost to the consumer. The demand from the target group is pretty strong. 3. Relatively elastic demand : under which price variation would have a greater impact on the demand in other words the demand would change in a greater proportion compared to the change in price 4. Relatively inelastic demand: under this a change in price will have a relatively lower impact on demand and therefore manufactures cannot increase sales under these product category only by reducing the selling price. Therefore the strategy has to be product improvement or better distribution instead of lowering the prices.

Factors determining price elasticity of demand

1. Nature of commodity or product: if the product is an essential product with a strong demand then it could be relatively priced inelastic because the customer would product even at higher prices and would scarifies allocation of money toward other products. 2. Extent of use: the elasticity of demand also depends on the extent of the use of the product if the product is used by many industries the price elasticity would tend towards being relatively elastic. 3. Range of substitutes: if a product has many close substitutes then the demand would be relatively elastic because the consumer has a choice in switching over to a cheaper substitute if the price of main product increases on the other if there are no close substitutes in that case the demand would tend to be more inelastic . 4. Income level: if the product is consumed by the higher income bracket..in that case the demand would be relatively inelastic because price becomes a non issue for the higher income group. 5. Proportion of income spent on the product:if the product is a low valve item that is the total allocation of the domestic monthly budget on the product is negligible then the demand would be relatively inelastic because the price increase would not make a material difference in purchase decision.

Supply Law of supply: The law of supply states that other things remaining constant that more would be supplied at a higher price and vice versa. The logic behind this is that the suppliers increase their profits when the price is higher and therefore they are willing to supply at a higher quantity when the price is buoyant The other factors which impact supply are as under: 1. Factor productivity and state of technology: higher factor productivity results into increase and output which improves supple. Technology increases output or reduces cost which enables suppliers to supply a higher quantity. Be reduced if factor prices reduce. 2. Factor prices: if factor prices increase the profit margins would reduce unless the suppliers have pricing power therefore supplies would be reduced if factor prices reduce. 3. Price of related products:- if the product has close substitutes then the supply of the main product would reduce if the price of the substitutes falls. This is because the consumer mayprefer substitutes which become more attractive at a lower price. 4.Expectation of future prospects of prices cost and savings:- if the supplier anticipates or expects future prices to come down then he may increase supplies at present because a price fall in future means lower profit at that time. If in future cost prices are to be increased on account of more expensive raw materials then the supplier starts talking raw materials so that he can pass on the additional cost to the consumer in future. When he is able to increase the selling price of the product and thereby improve his margin of profits if the supplier anticipates increase in sales on account of lesser imports due to a change in government policies he will postpone sales at present to take advantage of market conditions in the near future

Limitations of laws of supplies :

1. Future price expectations: if the suppliers expects buoyancy in future prices to a substantial extent in that case even the current good prices will not prompt him to supply in higher quantities to that extent it becomes an exception to the law of supply. 2. In case of agricultural products the law of supply will not apply because even increase in demand of agricultural products may not enable the farmers to supply in higher quantities because there is a time lack between sowing the crop and harvesting the product and consequentially supply cannot be increased overnight unless there are buffer stocks 3. Incase of subsistence farming: subsistence farmers are very poor or marginal farmers with limited needs therefore if the price of agricultural products grown by them increases he supply would actually decrease because subsistence farmer would consume a certain portion of his own product and would sell the remain portion

because higher prices would enable the farmer to receive same sales proceeds at a lower quantity supply.

Oligopoly
Definition: - Oligopoly is a market aberration where there are few and large size suppliers and a large number of buyers. The number of suppliers is small which is a relative term and hence for a country like India which is having a large geographical expansion, even 15-20 suppliers in an industry pan India is considered to be an oligopoly. The suppliers under an oligopoly have pricing power which is the key advantage under oligopoly. The other feature is the output of each supplier relative to the total output of the industry is substantial. Therefore any cutback on production has an impact on the market price of the product. Under oligopoly each supplier can track the moves of the other suppliers and therefore competition would not be on the basis of pricing. Any price increase by one supplier would be followed by a counter move by the other suppliers and therefore competition based on pricing is short lived. Therefore competition under oligopoly is non-price competition and would be based on product features and factors like after sales services, better credit period and innovation. Oligopoly comes into being on account of entry barriers in an industry which could take place on account of the following factors:1 Technology: Technology for certain products is not available easily and the companies which discovered the technology or knowhow are not prepared to sell the technology and therefore the number of players in the industry are limited. Unless technology transfers take place through joint ventures, the oligopolistic situation continues. Eg : Manufacture of Coca Cola concentrates, Nylon 6 manufacturing, etc. 2 .Investment: Certain products require a very huge investment and therefore it is the preserve of very large manufacturers who can shoulder the risk of failure which may entail a substantial loss. Therefore high investment coupled with high risk also gives rise to oligopoly; since mid-sized manufacturers cannot think of entering those areas and therefore players in such industries are highly limited. Eg : Oil exploration Investment as an impediment has however lost some of its importance because capital movements globally has become free in recent times and therefore even 1st generation entrepreneurs with a commercially viable proposition are able to raise the required finance through venture capitalists and private equity players.

3.Patents: Patents have become a very potent entry barrier because the patent holder enjoys exclusive marketing rights for a number of years and thereby creating oligopolies as well as monopolies in certain cases. 4.Brands: Brands also create entry barriers in an industry because brands become a very important factor in marketing and therefore the product could be a low technology product, easy to manufacture but virtually impossible to sell without a brand. Eg : Cadburys chocolates 5Controlover key raw materials: There are certain products which give the manufacturer an advantage if there is a captive source of certain raw material availability. Eg : In manufacturing Aluminium, Bauxite is a key raw material and manufacturers having Bauxite mines stand in an advantageous position. The other requirement for aluminium manufacturing is power, since 70% of cost of production of aluminium is power. Therefore captive supply of power is essential. Even in the case of steel manufacturing, access to Iron Ore and Coal is essential. Therefore Tata steel is at an advantage as compare to Essar steel, since the former has captive source of Iron mines. 6.Govt policies amongst others: Traditionally in India govt policies reserved certain products for the public sector undertakings and only after 1991 when the economy was opened up, many of these industries were allowed entry of the private sector companies. Eg : Oil Exploration, Oil marketing, Telecom, Power were essentially the domain of PSUs. 7.Economies of scale: There are certain products which can be manufactured only on a large scale since they are low-margin, high volume products. This also becomes an entry barrier on account of limited size of the market which becomes a barrier to absorb the production of more number of manufacturers. The problem becomes more severe since the project will have to operate at a huge capacity from day 1 and therefore midsized manufacturers cannot take the risk of heavy investment in fixed assets on account of the risk of market failure. Industries under Oligopoly:All important industries are under oligopoly starting from thecore sector industries like Steel, cement, Power, Petroleum production, Crude oil. Other industries like soft drinks, telecom, shipping, automobile- 4 wheelers and 2 wheelers, commercial vehicles, aluminium, cigarettes, cosmetics, infant food manufacturing, banking, insurance, handset manufacturing are other examples of products under oligopoly. Oligopsony:-It is the reverse of oligopoly (i.e) there are 100s of suppliers and few large buyers. Here the buyers call the shots or dictate terms to the seller in case of oligopsony. Eg : Ancillary suppliers supplying to 2 wheeler majors like Bajaj Auto, Hero Motor Corp and TVS Motors.

Monopoly
Definition: It is an extreme form of market inflation where a single manufacturer dominates a industry or there are a few manufacturing units all under the same ownership and control of the monopolist. Example: Oil market companies in India Under monopoly those is a absolute advantage of pricing the product especially when the elasticity of demand is in favor of the monopolist that is the product enjoys inelastic demand rivalry from competition is virtually nonexistent and would be in the form of substitutes who have no close resemblance to the main product. Causes of Monopoly It arises on account of similar factors like oligopoly which are as under 1.Government policy :- government on account of political reasons and ideology intentionally did not allow the private sector to enter certain critical industries like mass transportation , electricity generation , oil exploration , defence production with a view to either maintain their absolute ownership and control on these products or wanted the masses to get the benefits of subsidised pricing for these products which may not be possible for a private sector company to provide hence even today the diesel prices are not deregulated and consequently the private sector companies having petroleum product vending outlets are not able to make any dent in the government market for petroleum products Industries like railways , oil exploration and defence production to a large extent continue to be with PSU 1. Control over critical raw material also becomes a reason for perpetration of monopolies 2. Large resources required for certain projects which also had to be subsidized on account of mass consumption . Following are the disadvantages of monopoly -Absolute pricing power which can b detrimental to consumers interest if the monopolist is in the private sector -Consumer choice is restricted

-Absence of competition results into inefficiencies in production resulting into higher cost which can be easily passed on to the consumer in terms of higher selling prices -A monopoly supplier of a critical product to the economy makes the country vulnerable to the risk of failure in case the supplier suspends production for any reason.

IS MONOPOLY ESSENTIAL OR EVIL Monopoly by and large has various disadvantages however it also has certain positives 1. Example a monopolist has large financial resources and can therefore undertake R&D expenses of a large magnitude for original research over a sustained period which may benefit the society at large 2. Selling expenses like product promotion and advertising can be saved under monopoly because the consumer is aware of the single source of supply and therefore product visibility is taken for granted 3. In case of public utility services monopoly is essential because a large segment of population relies on public utilities which are subsidized only under a monopolistic situation where the monopolist is the government 4. In case of import of critical items monopoly houses like MMPC and SHTC are required because they are in a better position to negotiate favorable terms with the foreign exporter which may not be possible if direct imports are made by several actual users