Managerial Economics

MANAGERIAL
ECONOMICS
Study material
COMPLEMENTARY COURSE
For
I SEMESTER B.COM/BBA.
(2011 Admission)
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
CALICUT UNIVERSITY P.O. MALAPPURAM, ERALA, IN!IA " #$% #%&
409

School of Distance Education
Managerial Economics-I Sem.B.Com/BBA 2
UNIVERSITY O' CALICUT
SC(OOL O' !ISTANCE E!UCATION
S)*d+ M,)-.i,/
COMPLEMENTARY COURSE
I SEMESTER B.COM/BBA
Managerial Economics
P.-0,.-d 1+2
Mod*/- I, II, V(A) 2 S.i. M.V. P.,3--n,
Asst Pro!essor"
De#t o! Commer$e"
%o&t Colle'e Mada##ally
Mod*/- III, IV 4 V (B) 2 S.i. Vin--s5 A..,
Assista(t Pro!essor"
De#artme(t o! Commer$e"
%o&t Colle'e" Mada##ally
Edi)-d 4 s6.*)ini7-d 1+ 2 !...V-n*8o0,/,n,
Asso$iate Pro!essor"
De#artme(t o! Commer$e"
%o&t Colle'e" Mada##ally
9
Reser&ed

CONTENTS
MO!ULE PARTICULARS PA:E
NO.
1 INTRO!UCTION &
II
DEMAND CONCEPTS
12
III
PRODUCTION
%%
IV
MARKET STRUCTURES AND PRICE
OUTPUT DETERMINATION
;2
V (A) PRICIN: POLICY AN! PRACTICES #0
V (B) BUSINESS CYCLE ##


MO!ULE I
INTRODUCTION
In).od*6)ion
)*H +HUP ,HFR-RPLFV. *DV EHH- %HULYH% IURP D /UHHN 0RU% ,1LNR-RPLD. 23i$3 mea(s
4*R5VH*RO%6. E$o(omi$s is a so$ial s$ie($e I+ LV FDOOH% 4VRFLDO6 EHFD5VH L+ V+5%LHV
PD-NL-% RI VRFLH+7 "+ deals 2it3 as#e$ts o! 3uma( 8e3a&ior It is $alled s$ie($e si($e it studies so$ial #ro8lems !rom a
s$ie(ti!i$ #oi(t o! &ie2 T3e de&elo#me(t o! e$o(omi$s as a 'ro2i(' s$ie($e $a( 8e tra$ed 8a$9 i( t3e
2riti('s o! %ree9 #3iloso#3ers li9e Plato a(d Aristotle E$o(omi$s 2as treated as a 8ra($3 o! #oliti$s
duri(' early days o! its de&elo#me(t 8e$ause a($ie(t %ree9s a##lied t3is term to ma(a'eme(t o! $ity:
V+D+H ;*LF* +*H7 FDOOH% 4<ROLV6 =F+5DOO7 HFo(omi$s 8roade(ed i(to a !ull !led'ed so$ial s$ie($e i(
t3e later 3al! o! t3e >?
t3
$e(tury
!-<ini)ion o< E6onomi6s
Classi$al e$o(omists li9e Adam Smit3" Ri$ardo" Mill Malt3us a(d ot3ers@ so$ialist e$o(omist li9e
*arl MarA@ (eo:$lassi$al e$o(omists li9e Al!red Mars3all" AC Pi'ou a(d Lio(el Ro88i(s a(d moder(
e$o(omists li9e BM *ey(es" Samuelso( a(d ot3ers 3a&e made $o(sidera8le $o(tri8utio( to t3e
de&elo#me(t o! E$o(omi$s He($e a #let3ora o! de!i(itio(s are a&aila8le i( $o((e$tio( 2it3 t3e su8Ce$t
matter o! e$o(omi$s T3ese are 8roadly di&ided i(to
A +ealt3 De!i(itio("
D +el!are De!i(itio("
C S$ar$ity De!i(itio( a(d
D %ro2t3 De!i(itio(
A. =-,/)5 !-<ini)ion
Really t3e s$ie($e o! e$o(omi$s 2as 8or( i( >))E" 23e( Adam Smit3 #u8lis3ed 3is !amous 8oo9
,=- F-T5LU7 L-+R +*H >D+5UH D-% GD5VH RI 0HDO+* RI >D+LR-. HH %HIL-H% HFR-RPLFV DV
+*H V+5%7 RI +*H (ature a(d $ause o! (atio(al 2ealt3 A$$ordi(' to 3im" e$o(omi$s is t3e study o! 2ealt3: Ho2 2ealt3 is
SUR%5FH% D-% %LV+ULE5+H% HH LV FDOOH% DV ,ID+*HU RI HFR-RPLFV. D-% *LV %HIL-L+LR-
LV SRS5ODUO7 FDOOH% ,0HDO+* %HIL-L+LR-. I5+ +*LV %HIL-L+LR- ;DV VHYHUHO7 FUL+LFLJH% E7 *LB*OLB*+L-B
+*H SRL-+V OLNH
Too mu$3 em#3asis o( 2ealt3"
Restri$ted mea(i(' o! 2ealt3"
No $o(sideratio( !or 3uma( !eeli('s"
No me(tio( !or ma(6V ;HOIDUH
ELOH-+ DER5+ HFR-RPLF SUREOHP H+FK
B. =-/<,.- !-<ini)ion
It 2as Al!red Mars3all 23o res$ued t3e e$o(omi$s !rom t3e a8o&e $riti$isms Dy 3is $lassi$ 2or9
,<UL-FLSOHV RI FFR-RPLFV. S5EOLV*H% L- *H V*LI+H% +*H HPS*DVLV IURP ;HDO+* +R 3uma(
2el!are A$$ordi(' to 3im 2ealt3 is sim#ly a mea(s to a( e(d i( all a$ti&ities" t3e e(d 8ei(' 3uma( 2el!are He
D%%V +*D+ HFR-RPLFV ,LV R- +*H R-H VL%H D V+5%7 RI +*H ;HDO+* D-% +*H R+*HU D-%
PRUH LPSRU+D-+ VL%H D SDU+ RI +*H V+5%7 RI PD-. LDUV*all 'a&e #rimary im#orta($e to ma( a(d se$o(dary im#orta($e to
;HDO+* <URI = G <LBR5 ;DV DOVR *RO%L-B LDUV*DOO6V YLH; )*LV %HIL-L+LR-
FODULILH% +*H VFRSH RI HFR-RPLFV D-% UHVF5H% HFR-RPLFV IURP +*H BULS RI EHL-B FDOOH% ,MLVPDO VFLH-FH. E5+
+*LV %HIL-L+io( also $riti$iNed o( t3e 'rou(ds t3at 2el!are $a((ot 8e measured $orre$tly a(d it 2as i'(ored t3e &alua8le
ser&i$es li9e tea$3ers"la2yers"si('ers et$ F(o(:material 2el!areO

C. S6,.6i)+ !-<ini)ion
A!ter Al!red Mars3all" Lio(el Ro88i(s !ormulated 3is o2( $o($e#tio( o! e$o(omi$s i( 3is 8oo9
,)*H >D+5UH D-% ELB-LILFD-FH RI FFR-RPLF EFLH-FH. L- =FFRU%L-B +R *LP ,FFR-RPLFV LV
+*H s$ie($e 23i$3 studies 3uma( 8e3a&ior as a relatio(s3i# 8et2ee( e(ds a(d s$ares mea(s 23i$3 3a&e
DO+HU-D+LYH 5VHV. HH BD&e im#orta($e to !our !u(dame(tal $3ara$ters o! 3uma( eAiste($e su$3 as@
> U(limited 2a(ts: "- *LV %HIL-L+LR- ,H-%V. UHIHUV +R *5PD- ;D-+V ;*LF* DUH ER5-%OHVV RU
u(limited
1 S$ar$ity o! mea(s FLimited Resour$esO P t3e resour$es Ftime a(d mo(eyO at t3e dis#osal o! a
#erso( to satis!y 3is 2a(ts are limited
< Alter(ate uses o! S$ares mea(s: E$o(omi$ resour$es (ot o(ly s$ar$e 8ut 3a&e
alter(ate uses also So o(e 3as to ma9e $3oi$e o! uses
Q T3e E$o(omi$ Pro8lem P23e( 2a(ts are u(limited" mea(s are s$ar$e a(d 3a&e alter(ate
uses" t3e e$o(omi$ #ro8lem arises He($e 2e (eed to arra('e 2a(ts i( t3e order o! ur'e($y
T3e merits o! s$ar$ity de!i(itio( are@ t3is de!i(itio( is a(alyti$al" u(i&ersal i( a##li$atio(" a #ositi&e
study a(d $o(sideri(' t3e $o($e#t o! o##ortu(ity $ost Dut t3is also $riti$iNed o( t3e 'rou(ds t3at@ it is
too (arro2 a(d too 2ide" it o!!ers o(ly li'3t 8ut (ot !ruit" $o(!i(ed to mi$ro a(alysis a(d i'(ores %ro2t3
e$o(omi$s et$
!. Mod-.n !-<ini)ion
T3e $redit !or re&olutio(iNi(' t3e study o! e$o(omi$s surely 'oes to Lord BM *ey(es He de!i(ed
HFR-RPLFV DV +*H ,V+5%7 RI +*H D%PL-LV+UD+LR- RI VFDUHV UHVR5UFHV D-% +*H
%H+HUPL-D-+V RI L-FRPH D-% HPSOR7PH-+.
Pro! Samuelso( re$e(tly 'i&e( a de!i(itio( 8ased o( 'ro2t3 as#e$ts 23i$3 is 9(o2( as %ro2t3
%HIL-L+LR- ,FFR-RPLFV LV +*H V+5%7 RI *R; SHRSOH D-% VRFLH+7 H-% 5S F*RRVL-B ;L+* RU
;L+*R5+ +*H 5VH o! mo(ey to em#loy s$ar$e #rodu$ti&e resour$es t3at $ould 3a&e alter(ati&e uses to #rodu$e &arious
$ommodities a(d distri8ute t3em !or $o(sum#tio(" (o2 or i( t3e !uture" amo(' &arious #erso(s or
'rou#s i( so$iety E$o(omi$s a(alyses t3e $osts a(d t3e 8e(e!its o! im#ro&i(' #atter(s o! resour$es
5VH. LDL- IHD+5UHV RI BUR;+* %HIL-L+LR- DUH L+ LV DSSOLFDEOH e&e( i( 8arter e$o(omy" t3e
i($lusio( o! time eleme(t ma9es t3e s$o#e o! e$o(omi$s dy(ami$ a(d it is a( im#ro&eme(t i( s$ar$ity de!i(itio(
M-,nin8 ,nd !-<ini)ion o< M,n,8-.i,/ E6onomi6s.
Ma(a'erial E$o(omi$s as a su8Ce$t 'ai(ed #o#ularit:y i( USA a!ter t3e #u8li$atio( o! t3e 8oo9
,LD-DBHULDO FFR-RPLFV. E7 :RHO MHD- L- :RHO MHD- REVHUYH% +*D+ PD-DBHULDO FFR-RPLFV
V*R;V 3o2 e$o(omi$ a(alysis $a( 8e used i( !ormulati(' #oli$ies
Ma(a'erial e$o(omi$s 8rid'es t3e 'a# 8et2ee( traditio(al e$o(omi$ t3eory a(d real 8usi(ess #ra$ti$es
i( t2o 2ays Firstly" it #ro&ides (um8er o! tools a(d te$3(iRues to e(a8le t3e ma(a'er to 8e$ome more
$om#ete(t to ta9e de$isio(s i( real a(d #ra$ti$al situatio( Se$o(dly" it ser&es as a( i(te'rati(' $ourse to
s3o2 t3e i(tera$tio( 8et2ee( &arious areas i( 23i$3 t3e !irm o#erates
A$$ordi(' to Pro! E&a( B Dou'las" Ma(a'erial e$o(omi$s is $o($er(ed 2it3 t3e a##li$atio( o!
8usi(ess #ri($i#les a(d met3odolo'ies to t3e de$isio( ma9i(' #ro$ess 2it3i( t3e !irm or or'a(iNatio(
u(der t3e $o(ditio(s o! u($ertai(ty It see9s to esta8lis3 rules a(d #ri($i#les to !a$ilitate t3e attai(me(t
o! t3e desired e$o(omi$ aim o! ma(a'eme(t T3ese e$o(omi$ aims relate to $osts" re&e(ue a(d #ro!its
a(d are im#orta(t 2it3i( 8ot3 8usi(ess a(d (o( 8usi(ess i(stitutio(s

E SH-FHU D-% ELHBOHPD- %HIL-H% PD-DBHULDO FFR-RPLFV DV ,+*H L-+HBUD+LR- RI HFR-RPLF
+*HRU7 ;L+* E5VL-HVV SUDF+LFH IRU +*H S5USRVH RI IDFLOL+D+L-B %HFLVLR- PDNL-B D-% IRU;DU%
SOD--L-B RI PD-DBHPH-+. ma(a'erial e$o(omi$s 3el#s t3e ma(a'ers to a(alyNe t3e #ro8lems !a$ed 8y t3e 8usi(ess u(it a(d to ta9e
&ital de$isio(s T3ey 3a&e to $3oose !rom amo(' a (um8er o! #ossi8le alter(ati&es T3ey 3a&e to $3oose
t3at $ourse o! a$tio( 8y 23i$3 t3e a&aila8le resour$es are most e!!i$ie(tly used Cristo#or I Sa&a'e a(d
: R*- S EPDOO RSL-LR-H% +*D+ ,PD-DBHULDO HFR-RPLFV LV VRPH +*L-B +*D+ FR-FHU-H%
;L+* E5VL-HVV HIILFLH-F7.
"- +*H ;RU%V RI LLF*DHO ID7H.LD-DBHULDO FFR-RPLFV LV +*H V+5%7 RI *R; +R %LUHF+
VFDUHV resour$es i( a 2ay t3at mostly e!!HF+LYHO7 DF*LHYHV D PD-DBHULDO BRDO.
O1>-6)i3-s ,nd Us-s (im0o.),n6-) o< m,n,8-.i,/ E6onomi6s
O1>-6)i3-s2 T3e 8asi$ o8Ce$ti&e o! ma(a'erial e$o(omi$s is to a(alyNe t3e e$o(omi$ #ro8lems !a$ed
8y t3e 8usi(ess T3e ot3er o8Ce$ti&es are0
> To i(te'rate e$o(omi$ t3eory 2it3 8usi(ess #ra$ti$e
1 To a##ly e$o(omi$ $o($e#ts a(d #ri($i#les to sol&e 8usi(ess #ro8lems
< To allo$ate t3e s$ares resour$es i( t3e o#timal ma((er
Q To ma9e all:rou(d de&elo#me(t o! a !irm
S To mi(imiNe ris9 a(d u($ertai(ty
E To 3el#s i( dema(d a(d sales !ore$asti('
) To 3el# i( #ro!it maAimiNatio(
? To 3el# to a$3ie&e t3e ot3er o8Ce$ti&es o! t3e !irm li9e i(dustry leaders3i#" eA#a(sio(
im#leme(tatio( o! #oli$ies et$
Im0o.),n6-2 I( order to sol&e t3e #ro8lems o! de$isio( ma9i('" data are to 8e $olle$ted a(d
a(alyNed i( t3e li'3t o! 8usi(ess o8Ce$ti&es Ma(a'erial e$o(omi$s #ro&ides 3el# i( t3is area T3e
im#orta($e o! ma(a'erial e$o(omi$s may8e relies i( t3e !ollo2i(' #oi(ts0
> It #ro&ides tool a(d te$3(iRues !or ma(a'erial de$isio( ma9i('
1 It 'i&es a(s2ers to t3e 8asi$ #ro8lems o! 8usi(ess ma(a'eme(t
< It su##lies data !or a(alysis a(d !ore$asti('
Q It #ro&ides tools !or dema(d !ore$asti(' a(d #ro!it #la((i('
S It 'uides t3e ma(a'erial e$o(omist
E It 3el#s i( !ormulati(' 8usi(ess #oli$ies
) It assists t3e ma(a'eme(t to 9(o2 i(ter(al a(d eAter(al !a$tors i(!lue($e t3e 8usi(ess
Follo2i(' are t3e im#orta(t areas o! de$isio( ma9i('@
aO Sele$tio( o! #rodu$t
8O Sele$tio( o! suita8le #rodu$t miA
$O Sele$tio( o! met3od o! #rodu$tio(
dO Produ$t li(e de$isio(
eO Determi(atio( o! #ri$e a(d Rua(tity
!O De$isio( o( #romotio(al strate'y
'O O#timum i(#ut $om8i(atio(
3O Allo$atio( o! resour$es
iO Re#la$eme(t de$isio(
CO Ma9e or 8uy de$isio(
9O S3ut do2( de$isio(
lO De$isio( o( eA#ort a(d im#ort
mO Lo$atio( de$isio(
(O Ca#ital 8ud'eti('

S6o0- o< M,n,8-.i,/ / B*sin-ss E6onomi6s
T3e s$o#e o! ma(a'erial e$o(omi$s re!ers to its area o! study S$o#e o! Ma(a'erial E$o(omi$s is
2ider t3a( t3e s$o#e o! Dusi(ess E$o(omi$s i( t3e se(se t3at 23ile ma(a'erial e$o(omi$s deali(' t3e
de$isio(al #ro8lems o! 8ot3 8usi(ess a(d (o( 8usi(ess or'a(iNatio(s" 8usi(ess e$o(omi$s deals o(ly
t3e #ro8lems o! 8usi(ess or'a(iNatio(s Dusi(ess e$o(omi$s 'i&i(' solutio( to t3e #ro8lems o! a
8usi(ess u(it or #ro!it orie(ted u(it Ma(a'erial e$o(omi$s 'i&i(' solutio( to t3e #ro8lems o! (o( #ro!it
or'a(iNatio(s li9e s$3ools" 3os#ital et$" also T3e s$o#e $o&ers t2o areas o! de$isio( ma9i(' FAO
o#eratio(al or i(ter(al issues a(d FDO E(&iro(me(tal or eAter(al issues
A) O0-.,)ion,//in)-.n,/ iss*-s
T3ese issues are t3ose 23i$3 arise 2it3i( t3e 8usi(ess or'a(iNatio( a(d are u(der t3e $o(trol o!
t3e ma(a'eme(t T3ey #ertai(s to sim#le Ruestio(s o! 23at to #rodu$e" 23e( to #rodu$e" 3o2
mu$3 to #rodu$e a(d !or 23i$3 $ate'ory o! $o(sumers T3e !ollo2i(' as#e$ts may 8e said to 8e !all
u(der i(ter(al issues
1. !-m,nd ,n,/+sis ,nd 'o.-6,s)in80 : T3e dema(ds !or t3e !irms #rodu$t 2ould $3a('e i( res#o(se
+R F*D-BH L- SULFH FR-V5PHU6V L-FRPH *LV +DV+H H+F 23i$3 are t3e determi(a(ts o! dema(d A
study o! t3e determi(a(ts o! dema(d is (e$essary !or !ore$asti(' !uture dema(d o! t3e #rodu$t
2. Cos) ,n,/+sis0 : Estimatio( o! $ost is a( esse(tial #art o! ma(a'erial #ro8lems T3e !a$tors $ausi('
&ariatio( o! $ost must 8e !ou(d out a(d allo2ed !or it ma(a'eme(t to arri&e at $ost estimates T3is
2ill 3el#s !or more e!!e$ti&e #la((i(' a(d sou(d #ri$i(' #ra$ti$es
%. P.i6in8 !-6isions2 " T3e !irms aim to #ro!it 23i$3 de#e(ds u#o( t3e $orre$t(ess o! #ri$i('
de$isio(s T3e #ri$i(' is a( im#orta(t area o! ma(a'erial e$o(omi$s T3eories re'ardi(' #ri$e
!iAatio( 3el#s t3e !irm to sol&e t3e #ri$e !iAatio( #ro8lems
;. P.o<i) An,/+sis2 : Dusi(ess !irms 2or9i(' !or #ro!it a(d it is a( im#orta(t measure o! su$$ess Dut
!irms 2or9i(' u(der $o(ditio(s o! u($ertai(ty Pro!it #la((i(' 8e$ome (e$essary u(der t3e
$o(ditio(s o! u($ertai(ty
&. C,0i),/ 1*d8-)in82 " T3e 8usi(ess ma(a'ers 3a&e to ta9e &ery im#orta(t de$isio(s relati(' to t3e
!irms $a#ital i(&estme(t T3e ma(a'er 3as to $al$ulate $orre$tly t3e #ro!ita8ility o! i(&estme(t a(d
to #ro#erly allo$ate t3e $a#ital Su$$ess o! t3e !irm de#e(ds u#o( t3e #ro#er a(alysis o! $a#ital
#roCe$t a(d sele$ti(' t3e 8est o(e
#. P.od*6)ion ,nd s*00/+ ,n,/+sis2 : Produ$tio( a(alysis is (arro2er i( s$o#e t3a( $ost a(alysis
Produ$tio( a(alysis is #ro$eeds i( #3ysi$al terms 23ile $ost a(alysis #ro$eeds i( mo(itory term
Im#orta(t as#e$ts o! su##ly a(alysis are@ su##ly s$3edule" $ur&es a(d !u($tio(s" la2 o! su##ly"
HODV+LFL+7 RI V5SSO7 D-% IDF+RUV L-IO5H-FL-B V5SSO7K
B) En3i.onm-n),/ o. -?)-.n,/ iss*-s
It re!ers to t3e 'e(eral 8usi(ess e(&iro(me(t i( 23i$3 t3e !irm o#erates A study o! e$o(omi$
e(&iro(me(t s3ould i($lude0
> T3e ty#es o! e$o(omi$ system i( t3e $ou(try
1 T3e 'e(eral tre(d i( #rodu$tio(" em#loyme(t" i($ome" #ri$es" sa&i('s a(d i(&estme(ts
< Tre(ds i( t3e 2or9i(' o! !i(a($ial i(stitutio(s li9e 8a(9s" !i(a($ial $or#oratio(s" i(sura($e
$om#a(ies et$
Q Ma'(itude a(d tre(ds i( !orei'( trade
S Tre(ds i( la8our a(d $a#ital mar9et
E %o&er(me(t e$o(omi$ #oli$ies &iN" i(dustrial #oli$y" mo(itory #oli$ies" !is$al #oli$y" #ri$e #oli$y
H+FK

'*n6)ions ,nd R-s0onsi1i/i)i-s o< m,n,8-.i,/ -6onomis)
A ma(a'erial e$o(omist $a( #lay a( im#orta(t role 8y assisti(' t3e ma(a'eme(t to sol&e t3e
di!!i$ult #ro8lems o! de$isio( ma9i(' a(d !or2ard #la((i(' Ma(a'erial e$o(omists 3a&e to study
eAter(al a(d i(ter(al !a$tors i(!lue($i(' t3e 8usi(ess 23ile ta9i(' t3e de$isio(s T3e im#orta(t
Ruestio(s to 8e a(s2ered 8y t3e ma(a'erial e$o(omists i($lude0
> Is $om#etitio( li9ely to i($rease or de$reaseT
1 +3at are t3e #o#ulatio( s3i!ts a(d t3eir i(!lue($e i( #ur$3asi(' #o2erT
< +ill t3e #ri$e o! ra2 materials i($rease or de$reaseT Et$
Q ma(a'erial e$o(omist $a( also 3el# t3e ma(a'eme(t i( ta9i(' de$isio(s re'ardi(' i(ter(al
o#eratio( o! t3e !irm Follo2i(' are t3e im#orta(t s#e$i!i$ !u($tio(s o! ma(a'erial
e$o(omist@
> Sales !ore$asti('
1 Mar9et resear$3
< Produ$tio( s$3eduli('
Q E$o(omi$ a(alysis o! $om#eti(' i(dustry
S I(&estme(t a##raisal
E Se$urity ma(a'eme(t a(alysis
) Ad&ise o( !orei'( eA$3a('e ma(a'eme(t
? Ad&i$e o( trade
U E(&iro(me(tal !ore$asti('
>L E$o(omi$ a(alysis o! a'ri$ulture Sales !ore$asti('
T3e .-s0onsi1i/i)i-s o! ma(a'erial e$o(omists are t3e !ollo2i('@
> To 8ri(' reaso(a8le #ro!it to t3e $om#a(y
1 To ma9e a$$urate !ore$ast
< To esta8lis3 a(d mai(tai( $o(ta$t 2it3 i(di&idual a(d data sour$es
Q To 9ee# t3e ma(a'eme(t i(!ormed o! all t3e #ossi8le e$o(omi$ tre(ds
S To #re#are s#ee$3es !or 8usi(ess eAe$uti&es
E To #arti$i#ate i( #u8li$ de8ates
) To ear( !ull status i( t3e 8usi(ess team
C5i-< C5,.,6)-.is)i6s o< M,n,8-.i,/ o. B*sin-ss -6onomi6s.
Follo2i(' are t3e im#orta(t !eature o! ma(a'erial e$o(omi$s
>O Ma(a'erial e$o(omi$s is Mi6.o -6onomi6 i( $3ara$ter De$ause it studies t3e #ro8lems o! a
8usi(ess !irm" (ot t3e e(tire e$o(omy
1O Ma(a'erial e$o(omi$s lar'ely uses t3e 8ody o! e$o(omi$ $o($e#ts a(d #ri($i#les 23i$3 is
9(o2( as @$(RUA RI =( )LUPB RU @('RCRPL'V RI =( ILUPB.
<O Ma(a'erial e$o(omi$s is 0.,8m,)i6. It is #urely #ra$ti$al orie(ted So Ma(a'erial e$o(omi$s
$o(siders t3e #arti$ular e(&iro(me(t o! a !irm or 8usi(ess !or de$isio( ma9i('
QO Ma(a'erial e$o(omi$s is No.m,)i3- rat3er t3a( #ositi&e e$o(omi$s Fdes$ri#ti&e e$o(omi$sO
Ma(a'erial e$o(omi$s is 0.-s6.i0)i3- to sol&e #arti$ular 8usi(ess #ro8lem 8y 'i&i(' im#orta($e
to !irms aim a(d o8Ce$ti&es
SO M,6.o -6onomi6s is ,/so *s-<*/ to ma(a'erial e$o(omi$s si($e it #ro&ides i(telli'e(t
u(dersta(di(' o! t3e e(&iro(me(t i( 23i$3 t3e 8usi(ess is o#erati('
EO I) is m,n,8-m-n) o.i-n)-d.

M,n,8-.i,/ -6onomi6s ,s , )oo/ <o. d-6ision m,Din8 ,nd <o.E,.d 0/,nnin8.
!-6ision m,Din82 De$isio( ma9i(' is a( i(te'ral #art o! moder( ma(a'eme(t Per3a#s t3e most
im#orta(t !u($tio( o! t3e 8usi(ess ma(a'er is de$isio( ma9i(' De$isio( ma9i(' is t3e #ro$ess o!
sele$ti(' o(e a$tio( !rom t2o or more alter(ati&e $ourse o! a$tio(s Resour$es su$3 as la(d" la8our
a(d $a#ital are limited a(d $a( 8e em#loyed i( alter(ati&e uses" so t3e Ruestio( o! $3oi$e is arises
Ma(a'ers o! 8usi(ess or'a(iNatio(s are $o(sta(tly !a$ed 2it3 2ide &ariety o! de$isio(s i( t3e
areas o! #ri$i('" #rodu$t sele$tio(" $ost $o(trol" asset ma(a'eme(t a(d #la(t eA#a(sio( Ma(a'er
3as to $3oose 8est amo(' t3e alter(ati&es 8y 23i$3 a&aila8le resour$es are most e!!i$ie(tly used !or
a$3ie&i(' t3e desired aims De$isio( ma9i(' #ro$ess i(&ol&es t3e !ollo2i(' eleme(ts@
> )*H L%H-+LILFD+LR- RI +*H ILUP6V REMHF+LYHV
1 T3e stateme(t o! t3e #ro8lem to 8e sol&ed
< T3e listi(' o! &arious alter(ati&es
Q E&aluatio( a(d a(alysis o! alter(ati&es
S T3e sele$tio( 8est alter(ati&e
E T3e im#leme(tatio( a(d mo(itori(' o! t3e alter(ati&e 23i$3 is $3ose(
Follo2i(' are t3e im#orta(t areas o! de$isio( ma9i('@
aO Sele$tio( o! #rodu$t
8O Sele$tio( o! suita8le #rodu$t miA
$O Sele$tio( o! met3od o! #rodu$tio(
dO Produ$t li(e de$isio(
eO Determi(atio( o! #ri$e a(d Rua(tity
!O De$isio( o( #romotio(al strate'y
'O O#timum i(#ut $om8i(atio(
3O Allo$atio( o! resour$es
iO Re#la$eme(t de$isio(
CO Ma9e or 8uy de$isio(
9O S3ut do2( de$isio(
lO De$isio( o( eA#ort a(d im#ort
mO Lo$atio( de$isio(
(O Ca#ital 8ud'eti('
'o.E,.d P/,nnin82 "Future is u($ertai( A !irm is o#erati(' u(der t3e $o(ditio(s o! ris9 a(d
u($ertai(ty Ris9 a(d u($ertai(ty $a( 8e mi(imiNed o(ly 8y ma9i(' a$$urate !ore$ast a(d !or2ard
#la((i('. Ma(a'erial e$o(omi$s 3el#s ma(a'er i( !or2ard #la((i(' For2ard #la((i(' mea(s
ma9i(' #la(s !or t3e !uture A ma(a'er 3as to ma9e #la( !or t3e !uture e' EA#a(sio( o! eAisti('
#la(ts et$T3e study o! ma$ro e$o(omi$s #ro&ides ma(a'ers a $lear u(dersta(di(' a8out
e(&iro(me(t i( 23i$3 t3e 8usi(ess !irm is 2or9i(' T3e 9(o2led'e o! &arious e$o(omi$ t3eories
&iN" dema(ds t3eory" su##ly t3eory et$ also $a( 8e 3el#!ul !or !uture #la((i(' o! dema(d a(d
su##ly So ma(a'erial e$o(omi$s e(a8les t3e ma(a'er to ma9e #la( !or t3e !uture

E6onomi6s Vs M,n,8-.i,/ -6onomi6s
E6onomi6s M,n,8-.i,/ E6onomi6s
> Deali(' 8ot3 mi$ro a(d ma$ro as#e$ts
1 Dot3 #ositi&e a(d (ormati&e s$ie($e
< Deals 2it3 t3eoreti$al as#e$ts
Q Study 8ot3 t3e !irm a(d i(di&idual
S +ide s$o#e
> Deali(' o(ly mi$ro as#e$ts
1 O(ly a (ormati&e s$ie($e
< Deals 2it3 #ra$ti$al as#e$ts
Q Study t3e #ro8lems o! !irm o(ly
S Narro2 s$o#e
S-/< 65-6D F*-s)ions.
'i// in )5- 1/,nDs. (=-i85),8-"1/;)
> )*H IDPR5V ERRN R- HFR-RPLFV ,=- F-T5LU7 L-+R +*H >D+5UH D-% GD5VH RI 0HDO+* RI
>D+LR-. ;DV ;UL++H- E7KKKK
1 K KKKK LV N-R;- DV +*H 4ID+*HU RI HFR-RPLFV.
< 0HOIDUH %HIL-L+LR- RI HFR-RPLFV LV BLYH- E7KKKKK
Q )*H VFDUFL+7 %HIL-L+LR- LV V5BBHV+H% E7KKK
S KKKKK EUL%BHV +*H BDS EH+;HH- +UD%L+LR-DO HFR-RPLF +*HRU7 D-% UHDO E5VL-HVV
SUDF+LFHV
S5o.) ,nsE-. )+0- (=-i85),8- "1)
> De!i(e ma(a'erial e$o(omi$sT
1 +3at is t3e di!!ere($e 8et2ee( 8usi(ess e$o(omi$s a(d ma(a'erial e$o(omi$sT
< +3at is s$ar$ity de!i(itio(T
Q +3at you mea( 8y de$isio( ma9i('T
S +3at is !or2ard #la((i('T
E +3at is e$o(omi$ #ro8lemT
S5o.) -ss,+ )+0- (=-i85),8- "2)
>O De!i(e Ma(a'erial e$o(omi$sT +3at are its 8asi$ $3ara$teristi$sT
1O +3at are t3e res#o(si8ilities o! ma(a'erial e$o(omistT
<O +3at is de$isio( ma9i('T +3at are its eleme(ts or ste#sT
QO Disti('uis3 8et2ee( e$o(omi$s a(d ma(a'erial e$o(omi$sT
Ess,+ )+0- (=-i85),8- ";)
>O De!i(e Ma(a'erial e$o(omi$sT EA#lai( t3e s$o#e o! ma(a'erial e$o(omi$sT
1O EA#lai( role a(d !u($tio(s a(d res#o(si8ilities o! ma(a'erial e$o(omistsT

MO!ULE II
DEMAND CONCEPTS
M-,nin8 o< !-m,nd
Dema(d is a $ommo( #arla($e mea(s desire !or a( o8Ce$t Dut i( e$o(omi$s dema(d is
VRPH+*L-B PRUH +*D- +*LV "- HFR-RPLFV 4MHPD-%6 PHD-V +*H T5D-+L+7 RI BRR%V D-%
ser&i$es 23i$3 a #erso( $a( #ur$3ase 2it3 a reRuisite amou(t o! mo(ey
=FFRU%L-B +R <URIHL%ER- ,Dema(d mea(s t3e &arious Rua(tities o! 'oods t3at 2ould 8e #ur$3ased #er
time #eriod at di!!ere(t #ri$es i( a 'i&e( mar9et T3us dema(d !or a $ommodity is its Rua(tity 23i$3
$o(sumer is a8le a(d 2illi(' to 8uy at &arious #ri$es duri(' a 'i&e( #eriod o! time Sim#ly" dema(d is
t3e 8e3a&ior o! #ote(tial 8uyers i( a mar9et
I( t3e o#i(io( o! E+R-LHU D-% HDB5H ,MHPD-% L- HFR-RPLFV PHD-V %HPD-% EDFNH% 5S E7
H-R5B* PR-H7 +R SD7 IRU +*H BRR%V %HPD-%H%. "- R+*HU ;RU%V %HPD-% PHD-V +*H %HVLUH
EDFNH% E7 +*H 2illi('(ess to 8uy a $ommodity a(d #ur$3asi(' #o2er to #ay He($e desire alo(e is (ot e(ou'3 T3ere
must 3a&e (e$essary #ur$3asi(' #o2er" ie" $as3 to #ur$3ase it For eAam#le" e&eryo(e desires to #osses
De(N $ar 8ut o(ly !e2 3a&e t3e a8ility to 8uy it So e&ery8ody $a((ot 8e said to 3a&e a dema(d !or t3e
$ar T3us t3e dema(d 3as t3ree esse(tials:Desire" Pur$3asi(' #o2er a(d +illi('(ess to #ur$3ase
!-m,nd An,/+sis
Dema(d a(alysis mea(s a( attem#t to determi(e t3e !a$tors a!!e$ti(' t3e dema(d o! a $ommodity or
ser&i$e a(d to measure su$3 !a$tors a(d t3eir i(!lue($es T3e dema(d a(alysis i($ludes t3e study o! la2
o! dema(d" dema(d s$3edule" dema(d $ur&e a(d dema(d !ore$asti(' Mai( o8Ce$ti&es o! dema(d
a(alysis are@
>O To determi(e t3e !a$tors a!!e$ti(' t3e dema(d
1O To measure t3e elasti$ity o! dema(d
<O To !ore$ast t3e dema(d
QO To i($rease t3e dema(d
SO To allo$ate t3e re$ourses e!!i$ie(tly
L,E o< !-m,nd
)*H OD; RI MHPD-% LV N-R;- DV +*H 4ILUV+ OD; L- PDUNH+. La2 o! dema(d s3o2s t3e relatio( 8et2ee(
#ri$e a(d Rua(tity dema(ded o! a $ommodity i( t3e mar9et I( t3e 2ords o! Mars3all ,+*H amou(t
dema(ded i($reases 2it3 a !all i( #ri$e D-% %LPL-LV*HV ;L+* D ULVH L- SULFH.
=FFRU%L-B +R EDP5HOVR- ,VD; RI MHPD-% V+D+HV +*D+ SHRSOH ;LOO E57 PRUH D+ OR;HU
SUL$e a(d E57 OHVV D+ *LB*HU SULFHV. "- R+*HU ;RU%V ;*LOH R+*HU +*L-BV UHPDL-L-B +*H VDPH D-
L-FUHDVH L- +*H SULFH o! a $ommodity 2ill de$reases t3e Rua(tity dema(ded o! t3at $ommodity a(d de$rease i( t3e #ri$e 2ill
i($rease t3e dema(d o! t3at $ommodity So t3e relatio(s3i# des$ri8ed 8y t3e la2 o! dema(d is a(
i(&erse or (e'ati&e relatio(s3i# 8e$ause t3e &aria8les F#ri$e a(d dema(dO mo&e i( o##osite dire$tio( It
s3o2s t3e $ause a(d e!!e$t relatio(s3i# 8et2ee( #ri$e a(d Rua(tity dema(d
T3e $o($e#t o! la2 o! dema(d may 8e eA#lai(ed 2it3 t3e 3el# o! a dema(d s$3edules
Indi3id*,/ d-m,nd S65-d*/-
A( i(di&idual dema(d s$3edule is a list o! Rua(tities o! a $ommodity #ur$3ased 8y a( i(di&idual
$o(sumer at di!!ere(t #ri$es T3e !ollo2i(' ta8le s3o2s t3e dema(d s$3edule o! a( i(di&idual $o(sumer
!or a##le

+3e( t3e #ri$e !alls !rom Rs >L to ?" t3e Rua(tity dema(ded i($reases !rom o(e to t2o I( t3e same
2ay as #ri$e !alls" Rua(tity dema(ded i($reases O( t3e 8asis o! t3e a8o&e dema(d s$3edule 2e $a(
dra2 t3e dema(d $ur&e as !ollo2s@
T3e dema(d $ur&e DD s3o2s t3e i(&erse relatio( 8et2ee( #ri$e a(d dema(d o! a##le Due to t3is
i(&erse relatio(s3i#" dema(d $ur&e is slo#es do2(2ard !rom le!t to ri'3t T3is 9i(d o! slo#e is also
FDOOH% ,-HBD+LYH VORSH.
M,.D-) d-m,nd s65-d*/-
Mar9et dema(d re!ers to t3e total dema(d !or a $ommodity 8y all t3e $o(sumers It is t3e
a''re'ate Rua(tity dema(ded !or a $ommodity 8y all t3e $o(sumers i( a mar9et It $a( 8e eA#ressed i(
t3e !ollo2i(' s$3edule
M,.D-) !-m,nd S65-d*/- <o. -88.
P.i6- 0-.
do7-n(Rs)
!-m,nd 1+ 6ons*m-.s M,.D-)
!-m,nd A B C !
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E
Q
1
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1
<
Q
S
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<
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S
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L
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P.i6- o< A00/-
(In Rs.)
C*,n)i)+
d-m,nd-d
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Deri&atio( o! mar9et dema(d $ur&e is a sim#le #ro$ess For eAam#le" let us assume t3at t3ere are
!our $o(sumers i( a mar9et dema(di(' e''s +3e( t3e #ri$e o! o(e doNe( e''s is Rs>L" A 8uys o(e
doNe( a(d D 8uys 1 doNe(s +3e( #ri$e !alls to Rs?" A 8uys 1 " D 8uys < a(d C 8uys o(e doNe( +3e(
#ri$e !alls to RsE" A 8uys < 8 8uys Q"C 8uys 1 a(d D 8uys o(e doNe( a(d so o( Dy addi(' u# t3e
Rua(tity dema(ded 8y all t3e !our $o(sumers at &arious #ri$es 2e 'et t3e mar9et dema(d $ur&e So last
$olum( o! t3e a8o&e dema-% VF*H%5OH BLYHV +*H +R+DO %HPD-% IRU HBBV D+ %LIIHUH-+
SULFHVLH.LDUNH+ MHPD-%. DV BLYH- EHOR;
Ass*m0)ions o< L,E o< !-m,nd
La2 o! dema(d is 8ased o( $ertai( 8asi$ assum#tio(s T3ey are as !ollo2s
>O )*HUH LV -R F*D-BH L- FR-V5PHUV6 +DV+H D-% SUHIHUH-$e
1O I($ome s3ould remai( $o(sta(t
<O Pri$es o! ot3er 'oods s3ould (ot $3a('e
QO T3ere s3ould 8e (o su8stitute !or t3e $ommodity
SO T3e $ommodity s3ould (ot $o(!er a(y disti($tio(
EO T3e dema(d !or t3e $ommodity s3ould 8e $o(ti(uous
)O Peo#le s3ould (ot eA#e$t a(y $3a('e i( t3e #ri$e o! t3e $ommodity
=5+ do-s d-m,nd 6*.3- s/o0-s doEnE,.dG
Dema(d $ur&e slo#es do2(2ard !rom le!t to ri'3t FNe'ati&e Slo#eO T3ere are ma(y $auses !or
do2(2ard slo#i(' o! dema(d $ur&e0:
1) L,E o< !iminis5in8 M,.8in,/ *)i/i)+
As t3e $o(sumer 8uys more a(d more o! t3e $ommodity" t3e mar'i(al utility o! t3e additio(al
u(its !alls T3ere!ore t3e $o(sumer is 2illi(' to #ay o(ly lo2er #ri$es !or additio(al u(its I! t3e
#ri$e is 3i'3er" 3e 2ill restri$t its $o(sum#tio(
2) P.in6i0/- o< EF*i" M,.8in,/ U)i/i)+
Co(sumer 2ill arra('e 3is #ur$3ases i( su$3 a 2ay t3at t3e mar'i(al utility is eRual i( all 3is
#ur$3ases I! it is (ot eRual" t3ey 2ill alter t3eir #ur$3ases till t3e mar'i(al utility is eRual

%) In6om- -<<-6).
+3e( t3e #ri$e o! t3e $ommodity !alls" t3e real i($ome o! t3e $o(sumer 2ill i($rease He 2ill
s#e(d t3is i($reased i($ome eit3er to 8uy additio(al Rua(tity o! t3e same $ommodity or ot3er
$ommodity
;) S*1s)i)*)ion -<<-6)
+3e( t3e #ri$e o! tea !alls" it 8e$omes $3ea#er T3ere!ore t3e $o(sumer 2ill su8stitute t3is
$ommodity !or $o!!ee T3is leads to a( i($rease i( dema(d !or tea
&) !i<<-.-n) *s-s o< , 6ommodi)+.
Some $ommodities 3a&e se&eral uses I! t3e #ri$e o! t3e $ommodity is 3i'3" its use 2ill 8e
restri$ted o(ly !or im#orta(t #ur#ose For e' 23e( t3e #ri$e o! tomato is 3i'3" it 2ill 8e used o(ly
!or $oo9i(' #ur#ose +3e( it is $3ea#er" it 2ill 8e used !or #re#ari(' Cam" #i$9le et$
#) Ps+65o/o8+ o< 0-o0/-.
Psy$3olo'i$ally #eo#le 8uy more o! a $ommodity 23e( its #ri$e !alls I( ot3er 2ord it $a( 8e
termed as 0.i6- -<<-6).
$) T-nd-n6+ o< 5*m,n 1-in8s )o s,)is<+ *ns,)is<i-d E,n)s
E?6-0)ions )o )5- L,E o< !-m,nd. (E?6-0)ion,/ !-m,nd C*.3-).
T3e 8asi$ !eature o! dema(d $ur&e is (e'ati&e slo#i(' Dut t3ere are some eA$e#tio(s to t3is Ie I(
$ertai( $ir$umsta($es dema(d $ur&e may slo#e u#2ard !rom le!t to ri'3t F#ositi&e slo#esO T3ese
#3e(ome(a may due to@
1) :i<<-n 0,.,do?
T3e %i!!e( 'oods are i(!erior 'oods is a( eA$e#tio( to t3e la2 o! dema(d +3e( t3e #ri$e o!
i(!erior 'ood !alls" t3e #oor 2ill 8uy less a(d &i$e &ersa +3e( t3e #ri$e o! maiNe !alls" t3e #oor 2ill (ot
8uy it more 8ut t3ey are 2illi(' to s#e(d more o( su#erior 'oods t3a( o( maiNe T3us !all i( #ri$e 2ill
result i(to redu$tio( i( Rua(tity T3is #aradoA is !irst eA#lai(ed 8y Sir Ro8ert %i!!e(
2) V-1/-n o. !-mons).,)ion -<<-6).
A$$ordi(' to Ve8le(" ri$3 #eo#le 8uy $ertai( 'oods 8e$ause o! its so$ial disti($tio( or #resti'e
Diamo(ds a(d ot3er luAurious arti$le are #ur$3ased 8y ri$3 #eo#le due to its 3i'3 #resti'e &alue He($e
3i'3er t3e #ri$e o! t3ese arti$les" 3i'3er 2ill 8e t3e dema(d
%) I8no.,n6-.
Some times $o(sumers t3i(9 t3at t3e #rodu$t is su#erior or Ruality is 3i'3 i! t3e #ri$e o! t3at
#rodu$t is 3i'3 As su$3 t3ey 8uy more at 3i'3 #ri$e
;) S0-6*/,)i3- E<<-6).
+3e( t3e #ri$e o! $ommodity is i($reasi('" t3e( t3e $o(sumer 8uy more o! it 8e$ause o! t3e !ear
t3at it 2ill i($rease still !urt3er

&) '-,. o< S5o.),8-
Duri(' t3e time o! emer'e($y or 2ar" #eo#le may eA#e$t s3orta'e o! $ommodity a(d 8uy more at
3i'3er #ri$e to 9ee# sto$9 !or !uture
#) N-6-ss,.i-s
I( t3e $ase o! (e$essaries li9e ri$e" &e'eta8les et$" Peo#le 8uy more e&e( at a 3i'3er #ri$e
$) B.,nd Lo+,/)+
+3e( $o(sumer is 8ra(d loyal to #arti$ular #rodu$t or #sy$3olo'i$al atta$3me(t to #arti$ular
#rodu$t" t3ey 2ill $o(ti(ue to 8uy su$3 #rodu$ts e&e( at a 3i'3er #ri$e
H) '-s)i3,/, M,..i,8- -)6.
I( $ertai( o$$asio(s li9e !esti&als" marria'e et$ #eo#le 2ill 8uy more e&e( at 3i'3 #ri$e
E?6-0)ion,/ !-m,nd C*.3- (0-.3-.s- d-m,nd 6*.3-)
+3e( #ri$e raises !rom OP to OP> Rua(tity dema(ded also i($reases !rom O- to O-> I( ot3er
2ords" !rom t3e a8o&e" 2e $a( see t3at t3ere is #ositi&e relatio( 8et2ee( #ri$e a(d dema(d He($e"
dema(d $ur&e FDDO slo#es u#2ard
C(AN:ES IN !EMAN!
Dema(d o! a $ommodity may $3a('e It may i($rease or de$rease due to $3a('es i( $ertai( !a$tors
T3ese !a$tors are $alled d-)-.min,n)s o< d-m,nd. T3ese !a$tors i($lude@
>O Pri$e o! a $ommodity
1O Nature o! $ommodity
<O I($ome a(d 2ealt3 o! $o(sumer
QO Taste a(d #re!ere($es o! $o(sumer
SO Pri$e o! related 'oods Fsu8stitutes a(d $om#lime(t 'oodsO
EO GR-V5PHUV6 HWSHF+D+LR-V
)O Ad&ertiseme(t et$

!-m,nd '*n6)ion.
T3ere is a !u($tio(al relatio(s3i# 8et2ee( dema(d a(d its &arious determi(a(ts Ie" a $3a('e i( a(y
determi(a(t 2ill a!!e$t t3e dema(d +3e( t3is relatio(s3i# eA#ressed mat3emati$ally" it is $alled
Dema(d Fu($tio( Dema(d !u($tio( o! a $ommodity $a( 8e 2ritte( as !ollo2s0
! I < (P, Y, T, Ps, U)
+3ere" !X -ua(tity dema(ded PX Pri$e o! t3e $ommodity
YX I($ome o! t3e $o(sumer TX Taste a(d #re!ere($e o! $o(sumers
Ps X Pri$e o! su8stitutes UI Co(sumers eA#e$tatio(s G ot3ers
< I Fu($tio( o! Fi(di$ates 3o2 &aria8les are relatedO
E?)-nsion ,nd Con).,6)ion o< !-m,nd.
Dema(d may $3a('e due to &arious !a$tors T3e $3a('e i( dema(d due to $3a('e i( #ri$e o(ly"
23ere ot3er !a$tors remai(i(' $o(sta(t" it is $alled eAte(sio( a(d $o(tra$tio( o! dema(d A $3a('e i(
dema(d solely due to $3a('e i( #ri$e is $alled eAte(sio( a(d $o(tra$tio( +3e( t3e Rua(tity dema(ded
o! a $ommodity rises due to a !all i( #ri$e" it is $alled eAte(sio( o! dema(d O( t3e ot3er 3a(d" 23e( t3e
Rua(tity dema(ded !alls due to a rise i( #ri$e" it is $alled $o(tra$tio( o! dema(d It $a( 8e u(dersta(d
!rom t3e !ollo2i(' dia'ram
+3e( t3e #ri$e o! $ommodity is OP" Rua(tity dema(ded is O- I! t3e #ri$e !alls to P1" Rua(tity
dema(ded i($reases to O-1 +3e( #ri$e rises to P>" dema(d de$reases !rom O- to O-> I( dema(d
$ur&e" t3e area , to 6 is eAte(sio( o! dema(d a(d t3e area , to 1 is $o(tra$tio( o! dema(d As result o!
$3a('e i( #ri$e o! a $ommodity" t3e $o(sumer mo&es alo(' t3e same dema(d $ur&e
S5i<) in !-m,nd (In6.-,s- o. !-6.-,s- in d-m,nd)
+3e( t3e dema(d $3a('es due to $3a('es i( ot3er !a$tors" li9e taste a(d #re!ere($es" i($ome" #ri$e o!
related 'oods et$ " it is $alled s3i!t i( dema(d Due to $3a('es i( ot3er !a$tors" i! t3e $o(sumers 8uy
more 'oods" it is $alled i($rease i( dema(d or u#2ard s3i!t O( t3e ot3er 3a(d" i! t3e $o(sumers 8uy
!e2er 'oods due to $3a('e i( ot3er !a$tors" it is $alled do2(2ard s3i!t or de$rease i( dema(d
S3i!t i( dema(d $a((ot 8e s3o2( i( same dema(d $ur&e T3e i($rease a(d de$rease i( dema(d
Fu#2ard s3i!t a(d do2(2ard s3i!tO $a( 8e eA#ressed 8y t3e !ollo2i(' dia'ram

DD is t3e ori'i(al dema(d $ur&e Dema(d $ur&e s3i!t u#2ard due to $3a('e i( i($ome" taste G
#re!ere($es et$ o! $o(sumer" 23ere #ri$e remai(i(' t3e same I( t3e a8o&e dia'ram dema(d $ur&e D>:
D> is s3o2i(' u#2ard s3i!t or i($rease i( dema(d a(d D1:D1 s3o2s do2(2ard s3i!t or de$rease i(
dema(d
Com0,.ison 1-)E--n -?)-nsion/6on).,6)ion ,nd s5i<) in d-m,nd
SL.
No
E?)-nsion/Con).,6)ion o< !-m,nd S5i<) in !-m,nd
> Dema(d is &aryi(' due to $3a('es i( Dema(d
#ri$e
is &aryi(' due to
$3a('es i( ot3er !a$tors
1 Ot3er !a$tors li9e taste" #re!ere($es"
i($ome et$ remai(i(' t3e same
Pri$e o! $ommodity remai( t3e
same
< Co(sumer mo&es alo(' t3e same
dema(d $ur&e
Co(sumer may mo&es to 3i'3er
or lo2er dema(d $ur&e
!i<<-.-n) )+0-s o< d-m,nd.
Join) d-m,nd2
+3e( t2o or more $ommodities are Coi(tly dema(ded at t3e same time to satis!y a #arti$ular 2a(t" it is
$alled Coi(t or $om#lime(tary dema(dFdema(d !or mil9" su'ar" tea !or ma9i(' teaO
Com0osi)- d-m,nd2
T3e dema(d !or a $ommodity 23i$3 $a( 8e #ut !or se&eral uses Fdema(d !or ele$tri$ityO
!i.-6) ,nd !-.i3-d d-m,nd2
Dema(d !or a $ommodity 23i$3 is !or a dire$t $o(sum#tio( is $alled dire$t dema(dF!ood" $lot3O +3e(
t3e $ommodity is dema(ded as s result o! t3e dema(d o! a(ot3er $ommodity" it is $alled deri&ed
dema(dFdema(d !or tyres de#e(ds o( dema(d o! &e3i$lesO
Ind*s).+ d-m,nd ,nd 6om0,n+ d-m,nd2
Dema(d !or t3e #rodu$t o! #arti$ular $om#a(y is $om#a(y dema(d a(d total dema(d !or t3e #rodu$ts o!
#arti$ular i(dustry 23i$3 i($ludes (um8er o! $om#a(ies is $alled i(dustry dema(d

ELASTICITY OF DEMAND
M-,nin8 o< E/,s)i6i)+
La2 o! dema(d eA#lai(s t3e dire$tio(s o! $3a('es i( dema(d A !all i( #ri$e leads to a( i($rease i(
Rua(tity dema(ded a(d &i$e &ersa Dut it does (ot tell us t3e rate at 23i$3 dema(d $3a('es to $3a('e i(
#ri$e T3e $o($e#t o! elasti$ity o! dema(d 2as i(trodu$ed 8y Mars3all T3is $o($e#t eA#lai(s t3e
relatio(s3i# 8et2ee( a $3a('e i( #ri$e a(d $o(seRue(t $3a('e i( Rua(tity dema(ded Nuts3ell" it s3o2s
t3e rate at 23i$3 $3a('es i( dema(d ta9e #la$e
Elasti$ity RI %HPD-% FD- EH %HIL-H% DV ,+*H de'ree o! res#o(si&e(ess i( Rua(tity dema(ded to a
F*D-BH L- SULFH. )*5V L+ UHSUHVH-+V +*H UD+H RI F*D-BH L- T5D-+L+7 %HPD-%H% %5H
+R D F*D-BH L- SULFH T3ere are mai(ly t3ree ty#es o! elasti$ity o! dema(d0
> Pri$e Elasti$ity o! Dema(d
1 I($ome Elasti$ity o! Dema(d a(d
< Cross Elasti$ity o! Dema(d
P.i6- E/,s)i6i)+ o< !-m,nd
Pri$e Elasti$ity o! dema(d measures t3e $3a('e i( Rua(tity dema(ded to a $3a('e i( #ri$e It is t3e
ratio o! #er$e(ta'e $3a('e i( Rua(tity dema(ded to a #er$e(ta'e $3a('e i( #ri$e T3is $a( 8e measured
8y t3e !ollo2i(' !ormula
Pri$e Elasti$ity X Pro#ortio(ate $3a('e i( Rua(tity dema(ded
Pro#ortio(ate $3a('e i( #ri$e
OR
E# X C3a('e i( -ua(tity dema(ded V -ua(tity dema(ded
C3a('e i( Pri$eV#ri$e
OR
E# X F-1:->OV->
FP1:P>O VP> "
+3ere0 -> X -ua(tity dema(ded 8e!ore #ri$e $3a('e
-1 X -ua(tity dema(ded a!ter #ri$e $3a('e
P> X Pri$e $3ar'ed 8e!ore #ri$e $3a('e
P1 X Pri$e $3ar'e a!ter #ri$e $3a('e
T3ere are !i&e ty#es o! #ri$e elasti$ity o! dema(d FDe'ree o! elasti$ity o! dema(dO Su$3 as #er!e$tly
elasti$ dema(d" #er!e$tly i(elasti$ dema(d" relati&ely elasti$ dema(d" relati&ely i(elasti$ dema(d a(d
u(itary elasti$ dema(d
1) P-.<-6)/+ -/,s)i6 d-m,nd (in<ini)-/+ -/,s)i6)
+3e( a small $3a('e i( #ri$e leads to i(!i(ite $3a('e i( Rua(tity dema(ded" it is $alled #er!e$tly
elasti$ dema(d I( t3is $ase t3e dema(d $ur&e is a 3oriNo(tal strai'3t li(e as 'i&e( 8elo2 FHere -0I KO

2) P-.<-6)/+ in-/,s)i6 d-m,nd
I( t3is $ase" e&e( a lar'e $3a('e i( #ri$e !ails to 8ri(' a8out a $3a('e i( Rua(tity dema(ded Ie t3e
$3a('e i( #ri$e 2ill (ot a!!e$t t3e Rua(tity dema(ded a(d Rua(tity remai(s t3e same 23ate&er t3e $3a('e
i( #ri$e Here dema(d $ur&e 2ill 8e &erti$al li(e as !ollo2s a(d -0I 0
%) R-/,)i3-/+ -/,s)i6 d-m,nd
Here a small $3a('e i( #ri$e leads to &ery 8i' $3a('e i( Rua(tity dema(ded I( t3is $ase dema(d
$ur&e 2ill 8e !atter o(e a(d -0IL1
;) R-/,)i3-/+ in-/,s)i6 d-m,nd
Here Rua(tity dema(ded $3a('es less t3a( #ro#ortio(ate to $3a('es i( #ri$e A lar'e $3a('e i( #ri$e
leads to small $3a('e i( dema(d I( t3is $ase dema(d $ur&e 2ill 8e stee#er a(d -0IM1

&) Uni) -/,s)i6i)+ o< d-m,nd ( *ni),.+ -/,s)i6)
Here t3e $3a('e i( dema(d is eAa$tly eRual to t3e $3a('e i( #ri$e +3e( 8ot3 are eRual" -0I 1, t3e
elasti$ity is said to 8e u(itary.
T3e a8o&e !i&e ty#es o! elasti$ity $a( 8e summariNed as !ollo2s
%.% In6om- E/,s)i6i)+
o< !-m,nd
I($ome elasti$ity o! dema(d s3o2s t3e $3a('e i( Rua(tity dema(ded as a result o! a $3a('e i(
FR-V5PHUV6 i($ome I($ome elasti$ity o! dema(d may 8e stated i( t3e !orm o! !ormula0
Ey X Pro#ortio(ate C3a('e i( -ua(tity Dema(ded
Pro#ortio(ate C3a('e i( I($ome
I($ome elasti$ity o! dema(d mai(ly o! t3ree ty#es0
>O ;ero i($ome Elasti$ity
1O Ne'ati&e i($ome Elasti$ity
<O Positi&e i($ome Elasti$ity
N-.o in6om- -/,s)i6i)+ O I( t3is $ase" Rua(tity dema(ded remai( t3e same" e&e(t3o'3 mo(ey i($ome
L-FUHDVHVLH F*D-BHV L- +*H L-FRPH %RHV-6+ L-IO5H-FH +*H T5D-+L+7 %HPD-%H%
FE'salt"su'ar et$O Here E+ Fi($ome elasti$ityO X 0
N-8,)i3- in6om- -/,s)i6i)+ "I( t3is $ase" 23e( i($ome i($reases" Rua(tity dema(ded !allsE'" i(!erior
'oods Here E+ I M 0.
SL No )+0- N*m-.i6,/
-?0.-ssion
d-s6.i0)ion S5,0- o< 6*.3-
> Per!e$tly elasti$ i(!i(ity HoriNo(tal
1 Per!e$tly i(elasti$ L ;ero Verti$al
< U(itary elasti$ > O(e Re$ta('ular
3y#er8ola
Q Relati&ely elasti$ Y> More t3a(
o(e
Flat
S Relati&ely i(elasti$ Z> Less t3a(
o(e
Stee#

Posi)i3- in6om- E/,s)i6i)+ " I( t3is $ase" a( i($rease i( i($ome may lad to a( i($rease i( t3e Rua(tity
dema(ded ie" 23e( i($ome rises" dema(d also rises FE+ IL0O T3is $a( 8e !urt3er $lassi!ied i( to t3ree
ty#es0
aO U(it i($ome elasti$ity@ Dema(d $3a('es i( same #ro#ortio( to $3a('e i( i($omeie" E+
I 1
8O I($ome elasti$ity 'reater t3a( u(ity0 A( i($rease i( i($ome 8ri('s a8out a more t3a(
#ro#ortio(ate i($rease i( Rua(tity dema(dedie" E+ IL1
$O I($ome elasti$ity less t3a( u(ity0 23e( i($ome i($reases Rua(tity dema(ded is also
i($reases 8ut less t3a( #ro#ortio(ately Ie" E+ I M1
B*sin-ss d-6ision 1,s-d on in6om- -/,s)i6i)+
T3e $o($e#t o! i($ome elasti$ity $a( 8e utiliNed !or t3e #ur#ose o! ta9i(' &ital 8usi(ess de$isio( A
8usi(essma( $a( rely o( t3e !ollo2i(' !a$ts
I! i($ome elasti$ity is 'reater t3a( ;ero" 8ut less t3a( o(e" sales o! t3e #rodu$t 2ill i($rease 8ut
slo2er t3a( t3e 'e(eral e$o(omi$ 'ro2t3
I! i($ome elasti$ity is 'reater t3a( o(e" sales o! 3is #rodu$t 2ill i($rease more ra#idly t3a( t3e
'e(eral e$o(omi$ 'ro2t3
Firms 23ose dema(d !u($tio(s 3a&e 3i'3 i($ome elasti$ity 3a&e 'ood 'ro2t3 o##ortu(ities i( a(
eA#a(di(' e$o(omy T3is $o($e#t 3el#s ma(a'er to ta9e $orre$t de$isio( duri(' 8usi(ess $y$le a(d also
3el#s i( !ore$asti(' t3e e!!e$t o! $3a('es i( i($ome o( dema(d
C.oss E/,s)i6i)+ o< !-m,nd
Cross elasti$ity o! dema(d is t3e #ro#ortio(ate $3a('e i( t3e Rua(tity dema(ded o! a $ommodity i(
res#o(se to $3a('e i( t3e #ri$e o! a(ot3er related $ommodity Related $ommodity may eit3er su8stitutes
or $om#leme(ts EAam#les o! su8stitute $ommodities are )-, ,nd 6o<<--. EAam#les o! $om#lime(t
$ommodities are 6,. ,nd 0-).o/. Cross elasti$ity o! dema(d $a( 8e $al$ulated 8y t3e !ollo2i(' !ormula@
Cross Elasti$ity X Pro#ortio(ate C3a('e i( -ua(tity Dema(ded o! a Commodity
Pro#ortio(ate C3a('e i( t3e Pri$e o! Related Commodity
I! t3e $ross elasti$ity is #ositi&e" t3e $ommodities are said to 8e su8stitutes a(d i! $ross elasti$ity is
(e'ati&e" t3e $ommodities are $om#lime(ts T3e su8stitute 'oods Ftea a(d Co!!eeO 3a&e #ositi&e $ross
elasti$ity 8e$ause t3e i($rease i( t3e #ri$e o! tea may i($rease t3e dema(d o! t3e $o!!ee a(d t3e
$o(sumer may s3i!t !rom t3e $o(sum#tio( o! tea to $o!!ee
Com#leme(tary 'oods F$ar a(d #etrolO 3a&e (e'ati&e $ross elasti$ity 8e$ause i($rease i( t3e #ri$e
o! $ar 2ill redu$e t3e Rua(tity dema(ded o! #etrol
T3e $o($e#t o! $ross elasti$ity assists t3e ma(a'er i( t3e #ro$ess o! de$isio( ma9i(' For !iAi(' t3e
#ri$e o! #rodu$t 23i$3 3a&i(' $lose su8stitutes or $om#lime(ts" $ross elasti$ity is &ery use!ul

Ad3-.)is-m-n) E/,s)i6i)+ o< !-m,nd
Ad&ertiseme(t elasti$ity o! dema(d FPromotio(al elasti$ity o! dema(dO measure t3e res#o(si&e(ess
o! dema(d due to a $3a('e i( ad&ertiseme(t a(d ot3er #romotio(al eA#e(ses T3is $a( 8e measured 8y
t3e !ollo2i(' !ormula@
Ad&ertiseme(t Elasti$ity X Pro#ortio(ate I($rease i( Sales
Pro#ortio(ate i($rease i( Ad&ertiseme(t eA#e(diture
T3ere are &arious determi(a(ts o! ad&ertiseme(t elasti$ity" t3ey are@
> Ty#e o! $ommodity: elasti$ity 2ill 8e 3i'3er !or luAury" (e2 #rodu$t" 'ro2i(' #rodu$t et$"
1 Mar9et s3are P lar'er t3e mar9et s3are o! t3e !irm lo2er 2ill 8e #romotio(al elasti$ity
< S LYDO6V UHDF+LR- P LI +*H ULYDOV UHDF+ +R L-FUHDVH L- ILUP6V D%YHU+LVHPH-+ 8y
i($reasi(' t3eir o2( ad&ertiseme(t eA#e(diture" it 2ill redu$e t3e ad&ertiseme(t elasti$ity o! t3e !irm
Q State o! e$o(omy P i! e$o(omi$ $o(ditio(s are 'ood" t3e $o(sumers are more li9ely to res#o(d to t3e
ad&ertiseme(t o! t3e !irm
Ad&ertiseme(t elasti$ity 3el#s i( t3e #ro$ess o! de$isio( ma9i(' It 3el#s to de$idi(' t3e o#timum
le&el o! ad&ertiseme(t a(d #romotio(al $ost I! t3e ad&ertiseme(t elasti$ity is 3i'3" it is #ro!ita8le to
s#e(d more o( ad&ertiseme(t He($e" ad&ertiseme(t elasti$ity 3el#s to de$ide o#timum ad&ertiseme(t
a(d #romotio(al outlay
Im0o.),n6- o< E/,s)i6i)+.
T3e $o($e#t o! elasti$ity o! dema(d is mu$3 o! #ra$ti$al im#orta($e@
> P.od*6)ion: Produ$ers 'e(erally de$ide t3eir #rodu$tio( le&el o( t3e 8asis o! dema(d !or t3eir
#rodu$t He($e elasti$ity o! dema(d 3el#s to !iA t3e le&el o! out#ut
1 P.i6- <i?,)ion: Ea$3 seller u(der mo(o#oly a(d im#er!e$t $om#etitio( 3as to ta9e i(to a$$ou(t t3e
elasti$ity o! dema(d 23ile !iAi(' t3eir #ri$e I! t3e dema(d !or t3e #rodu$t is i(elasti$" 3e $a( !iA a
3i'3er #ri$e
< !is).i1*)ion: Elasti$ity 3el#s i( t3e determi(atio( o! re2ards !or !a$tors o! #rodu$tio( For
eAam#le" i! t3e dema(d !or la8our is i(elasti$" trade u(io( $a( raise 2a'es
Q In)-.n,)ion,/ ).,d-: T3is $o($e#t 3el#s i( !i(di(' out t3e terms o! trade 8et2ee( t2o $ou(tries
Terms o! trade mea(s rate at 23i$3 domesti$ $ommodities is eA$3a('ed !or !orei'( $ommodities
S P*1/i6 <in,n6-: T3is assists t3e 'o&er(me(t i( !ormulati(' taA #oli$ies I( order to im#ose taA o( a
$ommodity" t3e 'o&er(me(t s3ould ta9e i(to $o(sideratio( t3e dema(d elasti$ity
E N,)ion,/i7,)ion: Elasti$ity o! dema(d 3el#s t3e 'o&er(me(t to de$ide a8out (atio(aliNatio( o!
i(dustries
) P.i6- dis6.imin,)ion: A ma(u!a$ture $a( !iA a 3i'3er #ri$e !or t3e #rodu$t 23i$3 3a&e i(elasti$
dema(d a(d lo2er #ri$e !or #rodu$t 23i$3 3a&e elasti$ dema(d
? O)5-.s: T3e $o($e#t elasti$ity o! dema(d also 3el#i(' i( ta9i(' ot3er &ital de$isio(
E'Determi(i(' t3e #ri$e o! Coi(t #rodu$t" ta9e o&er de$isio( et$

!-)-.min,n)s o< -/,s)i6i)+.
Elasti$ity o! dema(d &aries !rom #rodu$t to #rodu$t" time to time a(d mar9et to mar9et T3is is due
to i(!lue($e o! &arious !a$tors T3ey are@
> N,)*.- o< 6ommodi)+" Dema(d !or (e$essary 'oods Fsalt" ri$e"et$"O is i(elasti$ Dema(d !or
$om!ort a(d luAury 'ood are elasti$
1 A3,i/,1i/i)+/.,n8- o< s*1s)i)*)-s O A $ommodity a'ai(st 23i$3 lot o! su8stitutes are a&aila8le" t3e
dema(d !or t3at is elasti$ Dut t3e 'oods 23i$3 3a&e (o su8stitutes" dema(d is i(elasti$
< E?)-n) /3,.i-)+ o< *s-s" a $ommodity 3a&i(' a &ariety o! uses 3as a $om#arati&ely elasti$
dema(dE'Dema(d !or steel" ele$tri$ity et$
Q Pos)0on-m-n)/*.8-n6+ o< d-m,nd" i! t3e $o(sum#tio( o! a $ommodity $a( 8e #ost #o(d" t3e( it
2ill 3a&e elasti$ dema(d Ur'e(t $ommodity 3as i(elasti$ dema(d
S In6om- /-3-/" i($ome le&el also i(!lue($es t3e elasti$ity E' Ri$3 ma( 2ill (ot $urtail t3e
$o(sum#tio( Rua(tity o! !ruit" mil9 et$" e&e( i! t3eir #ri$e rises" 8ut a #oor ma( 2ill (ot !ollo2 it
E Amo*n) o< mon-+ s0-nd on )5- 6ommodi)+" 23ere a( i(di&idual s#e(ds o(ly a small #ortio( o!
3is i($ome o( t3e FRPPR%L+7 +*H SULFH F*D-BH %RHV-6+ PD+HULDOO7 DIIHF+ +*H %HPD-% IRU
+*H $ommodity" a(d t3e dema(d is i(elasti$ Fmat$3 8oA" salt Et$O
) !*.,1i/i)+ o< 6ommodi)+" i! t3e $ommodity is dura8le or re#aira8le at a su8sta(tially less amou(t
Fe'S3oesO" t3e dema(d !or t3at is elasti$
? P*.65,s- <.-F*-n6+ o< , 0.od*6)/)im- Oi! t3e !reRue($y o! #ur$3ase o! a #rodu$t is &ery 3i'3" t3e
dema(d is li9ely to 8e more #ri$e elasti$
U R,n8- o< P.i6-s" i! t3e #rodu$ts at &ery 3i'3 #ri$e or at &ery lo2 #ri$e 3a&i(' i(elasti$ dema(d
si($e a sli'3t $3a('e i( #ri$e 2ill (ot a!!e$t t3e Rua(tity dema(d
>L O)5-.s O t3e 3a8it o! $o(sumers" dema(d !or $om#lime(tary 'oods" distri8utio( o! i($ome a(d
2ealt3 i( t3e so$iety et$" are ot3er im#orta(t !a$tors a!!e$ti(' elasti$ity
M-,s*.-m-n) o< E/,s)i6i)+
T3ere are &arious met3ods !or t3e measureme(t o! elasti$ity o! dema(d Follo2i(' are t3e im#orta(t
met3ods0
> P.o0o.)ion,/ o. P-.6-n),8- M-)5od0 U(der t3is met3od t3e elasti$ity o! dema(d is measured
8y t3e ratio 8et2ee( t3e #ro#ortio(ate or #er$e(ta'e $3a('e i( Rua(tity dema(ded a(d
#ro#ortio(ate $3a('e i( #ri$e It is also 9(o2( as !ormula met3od It $a( 8e $om#uted as
!ollo2s0
ED X Pro#ortio(ate $3a('e i( Rua(tity dema(ded
Pro#ortio(ate $3a('e i( #ri$e
OR
X C3a('e i( Dema(d
Ori'i(al -ua(tity dema(ded
C3a('e i( Pri$e
Ori'i(al #ri$e

1 E?0-ndi)*.- o. O*)/,+ M-)5od0 T3is met3od 2as de&elo#ed 8y Mars3all U(der t3is met3od"
t3e elasti$ity is measured 8y estimati(' t3e $3a('es i( total eA#e(diture as a result o! $3a('es i(
#ri$e a(d Rua(tity dema(ded T3is 3as t3ree $om#o(e(ts
I! t3e #ri$e $3a('es" 8ut total eA#e(diture remai(s $o(sta(t" u(it elasti$ity eAists
I! t3e #ri$e $3a('es" 8ut total eA#e(diture mo&es i( t3e o##osite dire$tio(s" dema(d is elasti$
FY>O
I! t3e #ri$e $3a('es a(d total re&e(ues mo&es i( t3e same dire$tio(" dema(d is i(elasti$ FZ>O
T3is $a( 8e eA#ressed 8y t3e !ollo2i(' dia'ram
< :-om-).i6 o. Poin) m-)5od2 T3is also de&elo#ed 8y Mars3all T3is is used as a measure o! t3e
$3a('e i( Rua(tity dema(ded i( res#o(se to a &ery small $3a('e i( t3e #ri$e I( t3is met3od 2e
$a( measure t3e elasti$ity at a(y #oi(t o( a strai'3t li(e dema(d $ur&e 8y usi(' t3e !ollo2i('
!ormula@
E! I LoE-. s-6)ion o< )5- !-m,nd 6*.3-
U00-. s-6)ion o< !-m,nd 6*.3-.
I( t3e a8o&e dia'ram" AD is a strai'3t li(e dema(d $ur&e 2it3 P as its middle #oi(t Furt3er
it is assumed t3at AD is E $m t3e("
At #oi(t P" ED X PDVPAX<V<X>
At #oi(t P>" ED X P>DVP>AX QSV>SX <XY>"
At #oi(t A" ED X ADVAX EVLX L-IL-L+7
At #oi(t P1" ED X P1DVP1A X >SVQS X >V< X Z>"
At #oi(t D" ED X DVDA X LVE X L

Q A.6 M-)5od0 t3e #oi(t met3od is a##li$a8le o(ly 23e( t3ere are mi(ute F&ery smallO $3a('es i(
#ri$e a(d dema(d Ar$ elasti$ity measures elasti$ity 8et2ee( t2o #oi(ts It is a measure o! t3e
a&era'e HODV+LFL+7 =FFRU%L-B +R 0D+VR-. =UF HODV+LFL+7 LV +*H HODV+LFL+7 D+ +*H
PL%SRL-+ RI D- DUF RI D %HPD-% F5UYH. IRUP5OD +o measure elasti$ity is0
FM [Q [< \ << QQ or C5,n8- in ! ? A3-.,8- P
A3-.,8- ! C5,n8- in P.
+3ere" [Q F*D-BH L- T5D-+L+7 Q RULBL-DO T5D-+L+7
P> X ori'i(al #ri$e -1X (e2 Rua(tity
< >H; SULFH [< F*D-BH L- SULFH
'i// in )5- 1/,nDs. (=-i85),8-"1/;)
> ::::::::: mea(s t3e de'ree o! res#o(si&e(ess o! dema(d to t3e $3a('es i( #ri$e
1 /H-HUDOO7 L-FRPH HODV+LFL+7 IRU D FRPPR%L+7 LVKKKKK
< e# X L i( t3e $ase o! :::::::::::elasti$ity
Q )HD D-% FRIIHH DUHKKKKBRR%V
S FDU D-% SH+URO DUHKKKKKBRR%V
S5o.) ,nsE-. )+0- (=-i85),8- "1)
> +3at you mea( 8y elasti$ityT
1 +3at is #ri$e elasti$ityT
< +3at is i($ome elasti$ityT
Q +3at is $ross elasti$ityT
S +3at is #romotio(al elasti$ityT
S5o.) -ss,+ )+0- (=-i85),8- "2)
> +3at are t3e &arious de'rees o! #ri$e elasti$ityT
1 +3at is t3e im#orta($e o! t3e $o($e#t o! elasti$ityT
< +3at are di!!ere(t ty#es o! elasti$ityT
Ess,+ )+0- (=-i85),8- ";)
> +3at is elasti$ity o! dema(dT State t3e determi(a(ts o! elasti$ityT
1 De!i(e elasti$ity o! dema(dT Dis$uss &arious met3ods !or measuri(' elasti$ityT
'i// in )5- 1/,nDs. (=-i85),8-"1/;)
1 Dema(d 3as t3ree esse(tials:MHVLUHV <5UF*DVL-B SR;HU KKKKK
< KKKKK IV N-R;- DV +*H 4ILUV+ OD; L- PDUNH+.
Q VD; RI %HPD-% V+D+HV +*D+ SULFH D-% T5D-+L+7 %HPD-%H% *DYHKKKUHOD+LR-V*LS
S KKKKKPHD-V UHOD+LR-V*LS EH+;HH- %HPD-% D-% L+V YDULR5V %H+HUPL-D-+V eA#ressed
mat3emati$ally
E "- HFR-RPLFV %HVLUH EDFNH% E7 S5UF*DVL-B SR;HU LV FDOOH%KKKK
) T3e $3a('e i( dema(d due to $3a('e i( #ri$e o(ly" 23ere ot3er !a$tors remai(i(' $o(sta(t" it is
FDOOH%KKK
? T3e dema(d $3a('es due to $3a('es i( ot3er !a$tors" li9e taste a(d #re!ere($es" i($ome" #ri$e o!
related 'oods et$K L+ LV FDOOH% KKKKK
U /H-HUDOO7 %HPD-% F5UYH *DYH KKKKVORSH

S5o.) ,nsE-. )+0- (=-i85),8- "1)
> +3at is dema(dT
1O +3at is dema(d a(alysisT
<O E+D+H +*H ,OD; RI %HPD-%.]
QO +3at is dema(d s$3eduleT
SO +3at is %i!!e( #aradoAT
EO +3at is Ve8le( e!!e$tT
)O De!i(e dema(d !u($tio(T
?O +3at is s3i!t i( dema(dT
UO +3at is eAte(sio( a(d $o(tra$tio(T
>LO +3at is mar9et dema(d s$3eduleT
S5o.) -ss,+ )+0- (=-i85),8- "2)
> De!i(e la2 o! dema(dT +3at are its 8asi$ assum#tio(sT
1 +3y dema(d $ur&e slo#es do2(2ardT
< +3at are t3e eA$e#tio(s to t3e la2 o! dema(dT
Q EA#lai( t3e eAte(sio( a(d $o(tra$tio( o! dema(dT
S EA#lai( t3e s3i!t i( dema(dT
E +3at are di!!ere(t ty#es o! dema(dT
Ess,+ )+0- (=-i85),8- ";)
>O De!i(e dema(d dis$uss &arious determi(a(ts o! dema(dT
1O EA#lai( a(d illustrate s3i!t i( dema(d" eAte(sio( a(d $o(tra$tio( o! dema(d a(d ma9e a
$om#arati&e studyT

DEMAND ESTIMATION AND FORECASTING
!-m,nd Es)im,)ion
Dusi(ess e(ter#rise (eeds to 9(o2 t3e dema(d !or its #rodu$t A( eAisti(' u(it must
9(o2 $urre(t dema(d !or its #rodu$t i( order to a&oid u(der#rodu$tio( or o&er #rodu$tio( T3e
$urre(t dema(d s3ould 8e 9(o2( !or determi(i(' #ri$i(' a(d #romotio( #oli$ies so t3at it is a8le
to se$ure o#timum sales or maAimum #ro!it Su$3 i(!ormatio( a8out t3e $urre(t dema(d !or t3e
ILUP6V SUR%5F+ LV N-R;- DV %HPD-% HV+LPD+LR-
Dema(d Estimatio( is t3e #ro$ess o! !i(di(' $urre(t &alues o! dema(d !or &arious &alues
o! #ri$es a(d ot3er determi(i(' &aria8les
S)-0s in !-m,nd Es)im,)ion
> Ide(ti!i$atio( o! i(de#e(de(t &aria8les su$3 as #ri$e" #ri$e o! su8stitutes" #o#ulatio("
#er$a#ita i($ome" ad&ertiseme(t eA#e(diture et$"
1 $olle$tio( o! data o( t3e &aria8les !rom #ast re$ords" #u8li$atio(s o! &arious a'e($ies et$"
< De&elo#me(t a mat3emati$al model or eRuatio( t3at i(di$ates t3e relatio(s3i# 8et2ee(
i(de#e(de(t a(d de#e(da(t &aria8les
Q Estimatio( o! t3e #arameters o! t3e model Ie" to estimate t3e u(9(o2( &alues o! t3e
#arameters o! t3e model
S De&elo#me(t o! estimates 8ased o( t3e model
Too/s ,nd )-65niF*-s <o. d-m,nd -s)im,)ion in6/*d-sP
> Co(sumer sur&eys
1 Co(sumer $li(i$s a(d !o$us 'rou#s
< Mar9et EA#erime(t
Q Statisti$al te$3(iRues
!-m,nd 'o.-6,s)in8.
A$$urate dema(d !ore$asti(' is esse(tial !or a !irm to e(a8le it to #rodu$e t3e reRuired Rua(tities at
t3e ri'3t time a(d to arra('e 2ell i( ad&a($e !or t3e &arious !a$tors o! #rodu$tio( Fore$asti(' 3el#s t3e
!irm to assess t3e #ro8a8le dema(d !or its #rodu$ts a(d #la( its #rodu$tio( a$$ordi('ly
Dema(d Fore$asti(' re!ers to a( estimate o! !uture dema(d !or t3e #rodu$t It is a( ,REMHF+LYH
assessme(t o! t3e !uture $ourse o! dema(d. "+ LV HVVH-+LDO +R %LV+L-B5LV* EH+;HH- IRUHFDV+ RI
dema(d a(d !ore$ast o! sales Sales !ore$ast is im#orta(t !or estimati(' re&e(ue" $as3 reRuireme(ts a(d
eA#e(ses Dema(d !ore$ast relate to #rodu$tio( i(&e(tory $o(trol" timi('" relia8ility o! !ore$ast et$
L-3-/s o< !-m,nd <o.-6,s)in8
Dema(d !ore$asti(' may 8e u(derta9e( at t3ree di!!ere(t le&els@
> M,6.o /-3-l P Mi$ro le&el dema(d !ore$asti(' is related to t3e 8usi(ess $o(ditio(s #re&aili('
i( t3e e$o(omy as a 23ole
1. Ind*s).+ L-3-/ P it is #re#ared 8y di!!ere(t trade asso$iatio( i( order to estimate t3e dema(d
!or #arti$ular i(dustries #rodu$ts I(dustry i($ludes (um8er o! !irms It is use!ul !or i(ter:
i(dustry $om#ariso(
< 'i.m /-3-/ P it is more im#orta(t !rom ma(a'erial &ie2 #oi(t as it 3el#s t3e ma(a'eme(t i(
de$isio( ma9i(' 2it3 re'ard to t3e !irms dema(d a(d #rodu$tio(

T+0-s o< !-m,nd 'o.-6,s)in8.
Dased o( t3e time s#a( a(d #la((i(' reRuireme(ts o! 8usi(ess !irms" dema(d !ore$asti(' $a( 8e
$lassi!ied i(to s3ort term dema(d !ore$asti(' a(d lo(' term dema(d !ore$asti('
S5o.) )-.m !-m,nd <o.-6,s)in80 S3ort term Dema(d !ore$asti(' is limited to s3ort #eriods"
usually !or o(e year Im#orta(t #ur#oses o! S3ort term Dema(d !ore$asti(' are 'i&e( 8elo2@
> Ma9i(' a suita8le #rodu$tio( #oli$y to a&oid o&er #rodu$tio( or u(der#rodu$tio(
1 Hel#i(' t3e !irm to redu$e t3e $ost o! #ur$3asi(' ra2 materials a(d to $o(trol i(&e(tory
< De$idi(' suita8le #ri$e #oli$y so as to a&oid a( i($rease 23e( t3e dema(d is lo2
Q Setti(' $orre$t sales tar'et o( t3e 8asis o! !uture dema(d a(d esta8lis3me(t $o(trol A 3i'3
tar'et may dis$oura'e salesme(
S Fore$asti(' s3ort term !i(a($ial reRuireme(ts !or #la((ed #rodu$tio(
E E&ol&i(' a suita8le ad&ertisi(' a(d #romotio( #ro'ramme
Lon8 )-.m !-m,nd 'o.-6,s)in80 t3is !ore$asti(' is mea(t !or lo(' #eriod T3e im#orta(t #ur#ose
o! lo(' term !ore$asti(' is 'i&e( 8elo2@
> Pla((i(' o! a (e2 u(it or eA#a(sio( o! eAisti(' o( t3em 8asis o! a(alysis o! lo(' term #ote(tial
o! t3e #rodu$t dema(d
1 Pla((i(' lo(' term !i(a($ial reRuireme(ts o( t3e 8asis o! lo(' term sales !ore$asti('
< Pla((i(' o! ma(#o2er reRuireme(ts $a( 8e made o( t3e 8asis o! lo(' term sales !ore$ast
Q To !ore$ast !uture #ro8lems o! material su##ly a(d e(er'y $risis
Dema(d !ore$asti(' is a &ital tool !or mar9eti(' ma(a'eme(t It is also 3el#!ul i( de$isio(
ma9i(' a(d !or2ard #la((i(' It e(a8les t3e !irm to #rodu$e ri'3t Rua(tities at ri'3t time a(d
arra('e 2ell i( ad&a($e !or t3e !a$tors o! #rodu$tio(
M-)5ods o< !-m,nd 'o.-6,s)in8 (Es),1/is5-d P.od*6)s)
Se&eral met3ods are em#loyed !or !ore$asti(' dema(d All t3ese met3ods $a( 8e 'rou#ed
i(to sur&ey met3od a(d statisti$al met3od
S*.3-+ M-)5od.
U(der t3is met3od" i(!ormatio( a8out t3e desire o! t3e $o(sumers a(d o#i(io(s o! eA#erts are
$olle$ted 8y i(ter&ie2i(' t3em T3is $a( 8e di&ided i(to !our ty#es@
> O#i(io( Sur&ey met3od0 T3is met3od is also 9(o2( as Sales: For$e PCom#osite met3od or
$olle$ti&e o#i(io( met3od U(der t3is met3od" t3e $om#a(y as9s its salesme( to su8mit estimate !or
!uture sales i( t3eir res#e$ti&e territories T3is met3od is more use!ul a(d a##ro#riate 8e$ause t3e
salesme( are more 9(o2led'ea8le a8out t3eir territory
1 EA#ert O#i(io(0 A#art !rom salesme( a(d $o(sumers" distri8utors or outside eA#erts may also 8e
used !or !ore$ast Firms i( ad&a($ed $ou(tries li9e USA" U* et$ma9e use o! outside eA#erts !or
estimati(' !uture dema(d Various #u8li$ a(d #ri&ate a'e($ies sell #eriodi$ !ore$ast o! s3ort or lo('
term 8usi(ess $o(ditio(s
< Del#3i Met3od0 It is a so#3isti$ated statisti$al met3od to arri&e at a $o(se(sus U(der t3is met3od" a
#a(el is sele$ted to 'i&e su''estio(s to sol&e t3e #ro8lems i( 3a(d Dot3 i(ter(al a(d eAter(al eA#erts
$a( 8e t3e mem8ers o! t3e #a(el Pa(el mem8ers are 9e#t a#art !rom ea$3 ot3er a(d eA#ress t3eir
&ie2s i( a( a(o(ymous ma((er

Q Co(sumer I(ter&ie2 met3od0 U(der t3is met3od a list o! #ote(tial 8uyers 2ould 8e dra2( a(d ea$3
8uyer 2ill 8e a##roa$3ed a(d as9ed a8out t3eir 8uyi(' #la(s T3is met3od is ideal a(d it 'i&es
!irst3a(d i(!ormatio(" 8ut it is $ostly a(d di!!i$ult to $o(du$t T3is may 8e u(derta9e( i( t3ree 2ays0
AO Com#lete E(umeratio( P I( t3is met3od" all t3e $o(sumers o! t3e #rodu$t are i(ter&ie2ed
DO Sam#le sur&ey : I( t3is met3od" a sam#le o! $o(sumers is sele$ted !or i(ter&ie2 Sam#le may 8e
ra(dom sam#li(' or Strati!ied sam#li('
CO E(d:use met3od P T3e dema(d !or t3e #rodu$t !rom di!!ere(t se$tors su$3 as i(dustries"
$o(sumers" eA#ort a(d im#ort are !ou(d out
S),)is)i6,/ M-)5ods
It is used !or lo(' term !ore$asti(' I( t3is met3od" statisti$al a(d mat3emati$al te$3(iRues are used
to !ore$ast dema(d T3is met3od is relies o( #ast data T3is i($ludes@
> Tre(t #roCe$tio( met3od0 U(der t3is met3od" dema(d is estimated o( t3e 8asis o! a(alysis o! #ast
data T3is met3od ma9es use o! time series Fdata o&er a #eriod o! timeO Here 2e try to as$ertai( t3e
tre(d i( t3e time series Tre(d i( t3e time series $a( 8e estimated 8y usi(' least sRuare met3od or
!ree 3a(d met3od or mo&i(' a&era'e met3od or semi:a&era'e met3od
1 Re'ressio( a(d Correlatio(0 T3ese met3ods $om8i(e e$o(omi$ t3eory a(d statisti$al te$3(iRues o!
estimatio( i( t3is met3od" t3e relatio(s3i# 8et2ee( de#e(da(t &aria8lesFsalesO a(d i(de#e(de(t
&aria8lesF#ri$e o! related 'oods" i($ome" ad&ertiseme(t et$O is as$ertai(ed T3is met3od is also
$alled t3e e$o(omi$ model 8uildi('
< EAtra#olatio(0 I( t3is met3od t3e !uture dema(d $a( 8e eAtra#olated 8y a##lyi(' 8i(omial
eA#a(sio( met3od T3is is 8ased o( t3e assum#tio( t3at t3e rate o! $3a('e i( dema(d i( t3e #ast 3as
8ee( u(i!orm
Q Simulta(eous eRuatio( met3od0 T3is mea(s t3e de&elo#me(t o! a $om#lete e$o(omi$ model 23i$3
2ill eA#lai( t3e 8e3a&iour o! all &aria8les 23i$3 t3e $om#a(y $a( $o(trol
S Darometri$ te$3(iRues0 U(der t3is" #rese(t e&e(ts are used to #redi$t dire$tio(s o! $3a('e i( t3e
!uture T3is is do(e 2it3 t3e 3el# o! statisti$al a(d e$o(omi$ i(di$ators li9e0
Co(stru$tio( $o(tra$t"
Perso(al i($ome
A'ri$ultural i($ome
Em#loyme(t
%NP
I(dustrial #rodu$tio(
ID-N %HSRVL+ H+FK
'o.-6,s)in8 !-m,nd <o. , N-E P.od*6)
Boel Dea( 3as su''ested siA a##roa$3es !or !ore$asti(' t3e dema(d !or (e2 #rodu$ts
1. E3o/*)ion,.+ A00.o,652 I( t3is met3od" t3e dema(d !or (e2 #rodu$t is estimated o( t3e 8asis o!
eAisti(' #rodu$t E' Dema(d !ore$asti(' o! $olour TV o( t3e 8asis o! dema(d !or 8la$9 G 23ite
TV
2. S*1s)i)*)- A00.o,652 T3e dema(d !or t3e (e2 #rodu$t is a(alyNed as su8stitute !or t3e eAisti('
#rodu$t
%. :.oE)5 6*.3- A00.o,652 O( t3e 8asis o! t3e 'ro2t3 o! a( esta8lis3ed #rodu$t" t3e dema(d !or t3e
(e2 #rodu$t is estimated
;. O0inion Po//in8 A00.o,652 I( t3is a##roa$3" t3e dema(d !or t3e (e2 #rodu$t is estimated 8y
i(Ruiri(' dire$tly !rom t3e $o(sumers 8y usi(' sam#le sur&ey
&. S,/-s E?0-.i-n6- A00.o,652 T3e dema(d is estimated 8y su##lyi(' t3e (e2 #rodu$t i( a sam#le
mar9et a(d a(alyNi(' t3e immediate res#o(se o( t3at #rodu$t i( t3e mar9et
#. Vi6,.io*s A00.o,652 Co(sumers rea$tio(s o( t3e (e2 #rodu$ts are !ou(t out i(dire$tly 2it3 t3e
3el# o! s#e$ialiNed dealers

',6)o.s A<<-6)in8 !-m,nd 'o.-6,s)in8.
T3e !ollo2i(' are t3e im#orta(t !a$tors 'o&er(i(' dema(d !ore$asti('0
1. Pre&aili(' Dusi(ess $o(ditio(s F#ri$e le&el $3a('e" #er$a#ita i($ome" $o(sum#tio( #atter(" sa&i('"
i(&estme(ts" em#loyme(t et$"
2. Co(ditio( 2it3i( t3e I(dustry FPri$e P#rodu$t:$om#etitio( #oli$y o! !irms 2it3i( t3e i(dustryO
%. Co(ditio( 2it3i( t3e !irm FPla(t $a#a$ity" Ruality" im#orta(t #oli$ies o! t3e !irmO
;. Fa$tors a!!e$ti(' EA#ort trade FE5IM $o(trol" E5IM #oli$y" terms o! eA#ort" eA#ort !i(a($e et$"O
&. Mar9et 8e3a&iour
#. So$iolo'i$al Co(ditio(s FPo#ulatio( details" a'e 'rou#" !amily li!e$y$le" edu$atio(" !amily i($ome"
so$ial a2are(ess et$O
$. Psy$3olo'i$al Co(ditio(s Ftaste" 3a8it" attitude" #er$e#tio(" $ulture UHOLBLR- H+FK
H. Com#etiti&e Co(ditio( F$om#etiti&e $o(ditio( 2it3i( t3e i(dustryO
C.i)-.i, <o. :ood <o.-6,s)in8 M-)5od.
A 'ood !ore$asti(' met3od s3ould satis!y t3e !ollo2i(' $riteria0
> P/,*si1i/i)+:It s3ould 8e reaso(a8le or 8elie&a8le
1 Sim0/i6i)+: It s3ould 8e sim#le a(d easy
< E6onom+ P it s3ould 8e less $ostly
Q A66*.,6+ P it s3ould 8e as a$$urate as #ossi8le
S A3,i/,1i/i)+ PRele&a(t data s3ould 8e easily a&aila8le
E '/-?i1i/i)+ P it s3ould 8e !leAi8le to ado#t reRuired $3a('es
Con6-0) o< R-3-n*-
For t3e #ur#ose o! dema(d a(alysis" it is $o(sidered use!ul to disti('uis3 8et2ee( &arious ty#es o!
re&e(ue0
A3-.,8- R-3-n*- (AR)P
AR mea(s t3e total re$ei#ts !rom sales di&ided 8y t3e (um8er o! u(it sold
ARI TR/C
To),/ R-3-n*- (TR)2
TR mea(s t3e total sales #ro$eeds it $a( 8e as$ertai(ed 8y multi#lyi(' Rua(tity sold 8y #ri$e
TR IPAC
In6.-m-n),/ R-3-n*- (IR)2
IR measures t3e( di!!ere($es 8et2ee( t3e (e2 TR a(d eAisti(' TR
IRIR2"R1 IQR
M,.8in,/ R-3-n*- (MR)P
"+ LV +*H D%%L+LR-DO UHYH-5H ;*LF* ;R5O% EH HDU-H% E7 VHOOL-B D- D%%L+LR-DO 5-L+
RI D ILUP6V #rodu$ts It s3o2s t3e $3a('e i( TR 23e( o(e more or o(e less u(it is sold
MRI R2"R1/C2"C1 I Q&Q;
+3ere" R>X TR 8e!ore #ri$e $3a('e
R1X TR a!ter #ri$e $3a('e
-> X old Rua(tity 8e!ore #ri$e $3a('e
-1 X (e2 Rua(tity a!ter #ri$e $3a('e

T3e relatio(s3i# 8et2ee( AR" TR a(d MR $a( 8e u(dersta(d 2it3 t3e 3el# o! t3e !ollo2i(' ta8le
C*,n)i)+
d-m,nd-d
(C)
AR TR MR
> U U U
1 ? >E )
< ) 1> S
Q E 1Q <
S S 1S >
E Q 1Q :>
) < 1> :<
? 1 >E :S
U > U :)
T5- s)*d+ o< )5- ,1o3- ),1/- .-3-,/s )5,)2
> So lo(' as AR is !alli('" MR 2ill 8e less t3a( AR
1 MR !alls more stee#ly t3a( AR
< TR 2ill 8e risi(' so lo(' as MR is #ositi&e
Q +3ere MR is (e'ati&e" TR 2ill 8e !alli('
S TR 2ill 8e maAimum at t3e #oi(t 23ere MR is ;ero
T3e relatio( 8et2ee( elasti$ity o! dema(d a(d TR $a( 8e summariNed as u(der0
C5,n8- in 0.i6- E/,s)i6i)+ .L1 E/,s)i6i)+ .I1 E/,s)i6i)+ M1
Rises i( #ri$e TR !alls TR u($3a('ed TR rises
Fall i( #ri$e TR rises TR u($3a('ed TR !alls
I($reme(tal Re&e(ue is t3e $3a('e i( total re&e(ue irres#e$ti&e o! $3a('es i( #ri$e It is (ot
$o(!i(ed to t3e e!!e$t o! #ri$e $3a('e it rat3er measures t3e t3e e!!e$t o! ma(a'erial de$isio( o(
total re&e(ue
S-/< 65-6D F*-s)ions
'i// in )5- 1/,nDs. (=-i85),8-"1/;)
> ::::::::: Is D- ,REMHF+LYH DVVHVVPH-+ RI +*H I5+5UH FR5UVH RI %HPD-%.
1 Vi$arious a##roa$3 is mea(t !or t3e !ore$asti(' RI KKK
< KKPH+*R% LV DOVR FDOOH% ,HFR-RPLF PR%HO E5LO%L-B.
Q KKLV +*H EDVH RI PDUNH+L-B SOD--L-B
S5o.) ,nsE-. )+0- (=-i85),8- "1)
+3at you mea( 8y dema(d !ore $asti('T
1 +3at is dema(d estimatio(T
< +3at is Del#3i met3odT
Q +3at are t3e le&els o! !ore$asti('T
S +3at is sur&ey met3odT
S5o.) -ss,+ )+0- (=-i85),8- "2)
+3at are t3e o8Ce$ti&es o! dema(d !ore$asti('T
> +3at are t3e !a$tors a!!e$ti(' dema(d !ore$asti('T
1 +3at are t3e met3ods !or !ore$asti(' dema(d !or t3e (e2 #rodu$tT
< +3at are t3e $riteria !or ideal !ore$asti(' met3odT
Ess,+ )+0- (=-i85),8- ";)
> +3at is dema(d !ore$asti('T State &arious met3ods !or dema(d !ore$asti('T
1 De!i(e dema(d !ore$asti('T Ho2 it di!!ere(t !orm dema(d estimatio(T EA#lai( its
o8Ce$ti&esT

MO!ULE III
PRODUCTION
In).od*6)ion
I( E$o(omi$s t3e term #rodu$tio( mea(s #ro$ess 8y 23i$3 a $ommodityFor $ommoditiesO is
tra(s!ormed i( to a di!!ere(t usa8le $ommodity I( ot3er 2ords" #rodu$tio( mea(s tra(s!ormi('
i(#utsF la8our "ma$3i(es "ra2 materials et$O i(to a( out#ut T3is 9i(d o! #rodu$tio( is $alled
ma(u!a$turi(' T3e #rodu$tio( #ro$ess 3o2e&er does (ot (e$essarily i(&ol&e #3ysi$al $o(&ersio(
o! ra2 materials i( to ta('i8le 'oods it also i($ludes t3e $o(&ersio( o! i(ta('i8le i(#uts to i(ta('i8le
out#uts For eAam#le " #rodu$tio( o! le'al" medi$al "so$ial a(d $o(sulta($y ser&i$es: 23ere la2yers"
do$tors" so$ial 2or9ers $o(sulta(ts are all e('a'ed i( #rodu$i(' i(ta('i8le 'oods
=- 4input LV BRR% RU VHUYLFH +*D+ BRHV L- +R +*H SURFHVV RI SUR%5F+LR- D-% ,out put is
a(y 'ood or
^
ser&i$e t3at $omes out o! #rodu$tio( #ro$ess
'i?-d ,nd 3,.i,1/- in0*)s.
I( e$o(omi$ se(se" a !iAed i(#ut is o(e 23ose su##ly is i(elasti$ i( t3e s3ort ru(
T3ere!ore" all o! its users $a((ot 8uy more o! it i( s3ort ru( Co($e#tually" all its users" $a((ot
em#loy more o! it i( t3e s3ort ru( I! o(e user 8uys more o! it" some ot3er users 2ill 'et less o! it A
&aria8le i(#ut is de!i(ed as o(e 23ose su##ly i( t3e s3ort ru( is elasti$" e'0La8our" ra2 materials et$
All t3e users o! su$3 !a$tors $a( em#loy lar'er Rua(tity i( t3e s3ort ru(
I( te$3(i$al se(se "a !iAed i(#ut remai(s !iAed F$o(sta(tO u# to a $ertai( le&el o! out#ut 23ereas a
&aria8le i(#ut $3a('es 2it3 $3a('e i( out#ut A !irm 3as t2o ty#es o! #rodu$tio( !u($tio(0:
F>O S3ot ru( #rodu$tio( !u($tio(
F1O Lo(' ru( #rodu$tio( !u($tio(
P.od*6)ion <*n6)ion
Produ$tio( !u($tio( s3o2s t3e te$3(olo'i$al relatio(s3i# 8et2ee( Rua(tity o! out #ut a(d t3e Rua(tity o!
&arious i(#uts used i( #rodu$tio( Produ$tio( !u($tio( is e$o(omi$ se(se states t3e maAimum out#ut
t3at $a( 8e #rodu$ed duri(' a #eriod 2it3 a $ertai( Rua(tity o! &arious i(#uts i( t3e eAisti(' state
o! te$3(olo'y I( ot3er 2ords" It is t3e tool o! a(alysis 23i$3 is used to eA#lai( t3e i(#ut : out#ut
relatio(s3i#s I( 'e(eral" it tells t3at #rodu$tio( o! a $ommodity de#e(ds o( t3e s#e$i!ied i(#uts i( its
s#e$i!i$ tem it #rese(ts t3e Rua(titati&e relatio(s3i# 8et2ee( i(#uts a(d out#ut i(#uts are
$lassi!ied as0:
> FiAed i(#ut or !iAed !a$tors
1 Varia8le i(#ut or &aria8le !a$tors
S5o.) .*n ,nd Lon8 .*n
S3ot ru( re!ers to a #eriod o! time i( 23i$3 t3e su##ly o! $ertai( i(#uts FE' 0: #la(t"
8uildi(' "ma$3i(es" et$O are !iAed or i(elasti$ T3us a( i($reases i( #rodu$tio( duri(' t3is #eriod is
#ossi8le o(ly 8y i($reasi(' t3e &aria8le i(#ut I( some I(dustries" s3ort ru( may 8e a matter o! !e2
2ee9s or a !e2 mo(t3s a(d i( some ot3ers it may eAte(t e&e( u# to t3ree or more years
)*H OR-B U5- UHIHUV +R D SHULR% RI +LPH L- ;*LF* , V5S#ly o! all t3e i(#ut is elasti$ @ 8ut (ot
e(ou'3 to #ermit a $3a('e i( te$3(olo'y I( t3e lo(' ru(" t3e a&aila8ility o! e&e( !iAed
!a$tor i($reases T3us i( t3e lo(' ru(" #rodu$tio( o! $ommodity $a( 8e i($reased 8y em#loyi('
more o! 8ot3 "&aria8le a(d !iAed i(#uts
I( t3e stri$t se(se "#rodu$tio( !u($tio( is de!i(ed as t3e tra(s!ormatio( o! #3ysi$al i(#ut i( to
#3ysi$al out #ut 23ere out #ut is a !u($tio( i(#ut It $a( 8e eA#ressed al'e8rai$ally as@
-X! F*"L et$O+3ere
-: Is t3e Rua(tity o! out #ut #rodu$ed duri(' a #arti$ular #eriod
*" L et$ are t3e !a$tors o! #rodu$tio(
! :de(otes t3e !u($tio( o! or de#e(ds o(

T5- 0.od*6)ion <*n6)ions ,.- 1,s-d on 6-.),in ,ss*m0)ionsP
> Per!e$t di&isi8ility o! 8ot3 i(#uts a(d out #ut@
1 Limited su8stitutio( o! o(e !a$tor !or t3e ot3ers
< Co(sta(t te$3(olo'y@ a(d
Q I(elasti$ su##ly o! !iAed !a$tors i( t3e s3ort ru(
Co11"!o*8/,s P.od*6)ion '*n6)ion.
O(e o! t3e im#orta(t tool o! statisti$al a(alysis i( #rodu$tio( !u($tio( t3at measures t3e relatio(
8et2ee( $3a('e i( #3ysi$al i(#ut is $o8:Dou'las #rodu$tio( !u($tio( T3e $o($e#t 2as ori'i(ated i(
USA T3is is more #e$uliar to ma(u!a$turi(' $o($er(s T3e $o8:Dou'las !ormula says t3at la8our
$o(tri8utes a8out )SI i($reases i( ma(u!a$turi(' #rodu$tio( 23ile $a#ital $o(tri8utes o(ly 1SIT3e
!ormula is as !ollo2s0:
OX*L C F>:aO
a
0*HUH 1 LV R5+S5+ V LV +*H T5D-+L+7 RI ODER5U 4G6 LV +*H T5D-+L+7 RI FDSL+DO
HPSOR7H% D-% aFaZ>Oare #ositi&e $o(sta(ts a a(d >:a measure #er$e(ta'e res#o(se o! out#ut to #er$e(ta'e $3a('e i(
la8our a(d $a#ital res#e$ti&ely
T3e #rodu$tio( !u($tio( s3o2s at O(e F>IO#er$e(ta'e $3a('e i( la8our" $a#ital remai(i(' $o(sta(t" is
asso$iated 2it3 L)SI $3a('e i( out#ut Similarly O(e #er$e(ta'e $3a('e i( $a#ital" la8our remai(i('
$o(sta(t" is asso$iated 2it3 a 1LI$3a('e i( out#ut Retur(s to s$ale are $o(sta(t T3at is i! !a$tors o!
#rodu$tio( are i($reased" ea$3 8y >L #er$e(ta'e t3e( t3e out#ut also i($reases 8y >L #er$e(ta'e
T5- /,Es o< 0.od*6)ion
Produ$tio( !u($tio( s3o2s t3e relatio(s3i# 8et2ee( a 'i&e( Rua(tity o! i(#ut a(d its maAimum
#ossi8le out #ut %i&e( t3e #rodu$tio( !u($tio(" t3e relatio(s3i# 8et2ee( additio(al Rua(tities o!
i(#ut a(d t3e additio(al out#ut $a( 8e easily o8tai(ed T3is 9i(d o! relatio(s3i# yields t3e la2 o!
#rodu$tio( T3e traditio(al t3eory o! #rodu$tio( studies t3e mar'i(al i(#ut:out#ut relatio(s3i# u(der
FIO S3ort ru(@ a(d FIIO lo(' ru( I( t3e s3ort ru(" i(#ut:out#ut relatio(s are studied 2it3 o(e &aria8le
i(#ut" 23ile ot3er i(#uts are 3eld $o(sta(t T3e La2 o! #rodu$tio( u(der t3ese assum#tio(s are
FDOOH% , +*H VD;V RI YDULDEOH SUR%5F+LR-. "- +*H OR-B U5- L-S5+ R5+S5+ UHOD+LR-V
DUH V+5%Led assumi(' all t3e i(#ut to 8e &aria8le T3e lo(':ru( i(#ut out#ut relatio(s are studied u(der ^La2s o! Retur(s to
S$ale
L,E o< !iminis5in8 R-)*.ns (L,E o< V,.i,1/- P.o0o.)ions)
T3e La2s o! retur(s states t3e relatio(s3i# 8et2ee( t3e &aria8le i(#ut a(d t3e out#ut i( t3e s3ort
term Dy de!i(itio( $ertai( !a$tors o! #rodu$tio( Fe':La(d" #la(t" ma$3i(ery et$O are a&aila8le i(
s3ort su##ly duri(' t3e s3ort ru( Su$3 !a$tors 23i$3 are a&aila8le i( u(limited su##ly e&e( duri(' t3e
s3ort #eriods are 9(o2( as &aria8le !a$tor I( s3ort:ru( t3ere !ore "t3e !irms $a( em#loy a limited or
!iAed Rua(tity o! !iAed !a$tors a(d a( u(limited Rua(tity o! t3e &aria8le !a$tor I( ot3er 2ords"
!irms $a( em#loy i( t3e s3ort ru( &aryi(' Rua(tities o! &aria8le i(#uts a'ai(st 'i&e( Rua(tity o!
!iAed !a$tors T3is 9i(d o! $3a('e i( i(#ut $om8i(atio( leads to &ariatio( i( !a$tor #ro#ortio(s T3e
La2 23i$3 8ri('s out t3e relatio(s3i# 8et2ee( &aryi(' !a$tor #ro#erties a(d out#ut are t3ere !ore
9(o2( as t3e La2 o! &aria8le #ro#ortio(s
T3e &ariatio( i( i(#uts lead to a dis#ro#ortio(ate i($rease i( out#ut more a(d more u(its o!
&aria8le !a$tor 23e( a##lied $ause a( i($rease i( out#ut 8ut a!ter a #oi(t t3e eAtra out#ut 2ill 'ro2
OHVV D-% OHVV )*H OD; ;*LF* EUL-BV R5+ +*LV +H-%H-F7 L- SUR%5F+LR- LV N-R;- DV6 VD; RI
Dimi(is3i(' Retur(s^
T3e La2 o! Dimi(is3i(' retur(s le&els t3at a(y attem#t to i($rease out#ut 8y i($reasi(' o(ly
o(e !a$tor !i(ally !a$es dimi(is3i(' retur(s T3e La2 states t3at 23e( some !a$tor remai( $o(sta(t
"more a(d more u(its o! a &aria8le !a$tor are i(trodu$ed t3e #rodu$tio( may i($rease i(itially at a(
i($reasi(' rate@ 8ut a!ter a #oi(t it i($reases o(ly at dimi(is3i(' rate La(d a(d $a#ital remai( !iAed i(
t3e s3ort:term 23ereas la8our s3o2s a &aria8le (ature

T3e !ollo2i(' ta8le eA#lai(s t3e o#eratio( o! t3e La2 o! Dimi(is3i(' Retur(s
No o!
+or9ers
Total
#rodu$t
A&era'e
#rodu$t
Mar'i(al
#rodu$t
> >L >L >L
1 11 >> >1
< <E >1 >Q
Q S1 >< >E
S EE ><1 >Q
E )E >1) >L
) ?1 >>) E
? ?S >LS <
U ?S ULS L
>L ?< ?< F:1O
T3e a8o&e ta8le illustrates se&eral im#orta(t !eatures o! a ty#i$al #rodu$tio( !u($tio( +it3 o(e
&aria8le i(#ut: 3ere 8ot3 A&era'e Produ$t FAPO a(d Mar'i(al Produ$t FMPO !irst rise "rea$3 a
maAimum : t3e( de$li(e A&era'e #rodu$t is t3e #rodu$t !or o(e u(it o! la8our It is arri&ed at
8y di&idi(' t3e Total Produ$t FTPO 8y (um8er o! 2or9ers Mar'i(al #rodu$t is t3e additio(al
#rodu$t resulti(' term additio(al la8our It is !ou(d out 8y di&idi(' t3e $3a('e i( total #rodu$t 8y t3e
$3a('e i( t3e (um8er o! 2or9ers T3e total out#ut i($reases at a( i($reasi(' rate till t3e em#loyme(t
o! t3e Q
t3
2or9er T3e rate o! i($rease i( t3e mar'i(al #rodu$t re&eals t3is A(y additio(al la8our
em#loyed 8eyo(d t3e Q
t3
la8our $learly !a$es t3e o#eratio( o! t3e La2 o! Dimi(is3i(' Retur(s T3e
maAimum mar'i(al #rodu$t is >E a!ter 23i$3 it $o(ti(ues to !all " ultimately 8e$omi(' (e'ati&e T3us
23e( more a(d more u(its o! la8our are $om8i(ed 2it3 ot3er !iAed !a$tors t3e total out#ut i($rease
!irst at a( i($reasi(' rate t3e( at a dimi(is3i(' rate !i(ally it 8e$omes (e'ati&e
T3e 'ra#3i$al re#rese(tatio( t3e a8o&e ta8le is s3o2( 8elo2
Sta'e > Sta'e 1 Sta'e <
Y
TP
Out#ut
AP
O MP 5
No o! 2or9er

O5 aAis re#rese(ts t3e u(its o! la8our a(d OY aAis re#rese(ts t3e u(it o! out#ut T3e total
out#utFTPO$ur&e 3as a stee# rise till t3e em#loyme(t o! t3e Q
t3
2or9er T3is s3o2s t3at t3e
out#ut i($reases at a( i($reasi(' rate till t3e em#loyme(t o! t3e Q
t3
la8our TP $ur&e still 'oes o(
i($reasi(' 8ut o(ly at a dimi(is3i(' rate Fi(ally TP $ur&e s3o2s a do2(2ard tre(d
T3e La2 o! Dimi(is3i(' Retur(s o#eratio( at t3ree sta'es At t3e !irst sta'e" total #rodu$t
i($reases at a( i($reasi(' rate T3e mar'i(al #rodu$t at t3is sta'e i($reases at a( i($reasi(' rate
resulti(' i( a 'reater i($reases i( total #rodu$t T3e a&era'e #rodu$t also i($reases T3is sta'e
$o(ti(ues u# to t3e #oi(t 23ere a&era'e #rodu$t is eRual to mar'i(al #rodu$t t3e la2 o! i($reasi('
retur(s is i( o#eratio( at t3is sta'e
T3e La2 o! i($reasi(' Retur(s o#erates !rom t3e se$o(d sta'e o( 2ards At t3e se$o(d
sta'e " t3e total #rodu$t $o(ti(ues to i($rease 8ut at a dimi(is3i(' rate As t3e mar'i(al #rodu$t
at t3is sta'e starts !alli(' "t3e a&era'e #rodu$t also de$li(es T3e se$o(d sta'e $omes to a( e(d
23ere total #rodu$t 8e$ome maAimum a(d mar'i(al #rodu$t 8e$omes Nero T3e mar'i(al
#rodu$t 8e$omes (e'ati&e i( t3e t3ird sta'e So t3e total #rodu$t also de$li(es T3e a&era'e #rodu$t
$o(ti(ues to de$li(e i( t3e t3ird sta'e
Ass*m0)ions o< L,E !iminis5in8 R-)*.ns
T3e La2 o! Dimi(is3i(' Retur(s is 8ased o( t3e !ollo2i(' assum#tio(s@:
Retur(s is 8ased o( t3e !ollo2i(' assum#tio(s@:
> T3e #rodu$tio( te$3(olo'y remai(s u($3a('ed
1 T3e &aria8le !a$tor is 3omo'e(eous
< A(y o(e !a$tor is $o(sta(t
Q T3e !iAed !a$tor remai(s $o(sta(t
L,E o< R-)*.ns )o s6,/-
I( t3e lo(' Pru( all t3e !a$tor o! #rodu$tio( are &aria8le "a(d a( i($rease i( out#ut is #ossi8le
8y i($reasi(' all t3e i(#uts T3e La2 o! Retur(s to s$ale eA#lai(s t3e te$3(olo'i$al relatio(s3i#
8et2ee( $3a('i(' s$ale o! i(#ut a(d out#ut T3e la2 o! retur(s o! s$ale eA#lai( 3o2 a simulta(eous
a(d #ro#ortio(ate I($rease i( all t3e i(#uts a!!e$t t3e total out#ut T3e i($rease i( out#ut may 8e
#ro#ortio(ate " more t3a( #ro#ortio(ate or less t3a( #ro#ortio(ate I! t3e i($rease i( out#ut is
#ro#ortio(ate to t3e i($rease i( i(#ut " it is $o(sta(t Retur(s to s$ale I! It is less t3e( #ro#ortio(ate
it is dimi(is3i(' retur(s to s$ale T3e i($reasi(' retur(s to t3e s$ale $omes !irst "t3e( $o(sta(t a(d
!i(ally dimi(is3i(' retur(s to s$ale 3a##e(s
In6.-,sin8 R-)*.ns )o s6,/-
+3e( #ro#ortio(ate i($rease i( all !a$tor o! #rodu$tio( results i( a more t3a( #ro#ortio(ate i($rease
i( out#ut a(d t3is results !irst sta'e o! #rodu$tio( 23i$3 is 9(o2( as i($reasi(' retur(s to s$ale
Mar'i(al out#ut i($reases at t3is sta'e Hi'3er de'ree o! s#e$ialiNatio(" !alli(' $ost et$ 2ill lead
3i'3er e!!i$ie($y 23i$3 result i($reased retur(s i( t3e &ery !irst sta'e o! #rodu$tio(
Cons),n) R-)*.ns )o s6,/-
Firms $a((ot mai(tai( i($reasi(' retur(s to s$ale i(de!i(itely a!ter t3e !irst sta'e " !irm e(ters a sta'e
23e( total out#ut te(ds to i($rease at a rate 23i$3 is eRual to t3e rate o! i($rease i( i(#uts T3is
sta'e $omes i( to o#eratio( 23e( t3e e$o(omies o! lar'e s$ale #rodu$tio( are (eutraliNed 8y t3e
dise$o(omies o! lar'e s$ale o#eratio(
!iminis5in8 R-)*.ns )o S6,/-
I( t3is sta'e "a #ro#ortio(ate i($rease i( all t3e i(#ut result o(ly less t3a( #ro#ortio(ate i($rease i(
out#ut T3is is 8e$ause o! t3e dise$o(omies o! lar'e s$ale #rodu$tio( +3e( t3e !irm 'ro2s !urt3er"
t3e #ro8lem o! ma(a'eme(t arise 23i$3 result i(e!!i$ie($y a(d it 2ill a!!e$t t3e #ositio( o! out#ut

E6onomi-s o< S6,/-
T3e !a$tors 23i$3 $ause t3e o#eratio( o! t3e la2s o! retur(s t3e s$ale are 'rou#ed u(der e$o(omies
a(d dise$o(omies o! s$ale I($reasi(' retur(s to s$ale o#erates 8e$ause o! e$o(omies o! s$ale a(d
de$reasi(' retur(s to s$ale o#erates 8e$ause o! dise$o(omies o! s$ale 23ere e$o(omies a(d
dise$o(omies arise simulta(eously I($reasi(' retur(s to s$ale o#erates 23e( e$o(omies o! s$ale
are 'reater t3e( t3e dise$o(omies o! s$ale a(d retur(s to s$ale de$reases 23e( dise$o(omies
o&er2ei'3t t3e e$o(omies o! s$ale Similarly 23e( e$o(omies a(d dise$o(omies are i( 8ala($e
"retur(s to s$ale 8e$omes $o(sta(t
+3e( a !irm i($reases all t3e !a$tor o! #rodu$tio( it e(Coys t3e same ad&a(ta'es o!
e$o(omies o! #rodu$tio( T3e e$o(omies o! s$ale are $lassi!ied as @
> I(ter(al e$o(omies
1 EAter(al e$o(omies
In)-.n,/ -6onomi-s o< s6,/-
I(ter(al e$o(omies are t3ose 23i$3 arise !orm t3e eA#la(atio( o! t3e #la(t:siNe o! t3e !irm I(ter(al
e$o(omies o! s$ale may 8e $lassi!ied@:
FaO E$o(omies i( #rodu$tio(
F8O E$o(omies i( mar9eti('
F$O E$o(omies i( e$o(omies
FdO E$o(omies i( tra(s#ort a(d stora'e
A E$o(omies i( #rodu$tio( 0:it arises term
> Te$3(olo'i$al ad&a(ta'es
1 Ad&a(ta'es o! di&isio( o! la8our a(d s#e$ialiNatio(
D E$o(omies i( mar9eti('@:It !a$ilitates t3rou'3
> Lar'e s$ale #ur$3ase o! i(#uts
1 Ad&ertiseme(t e$o(omies @
< E$o(omies i( lar'e s$ale distri8utio(
Q Ot3er lar'e:s$ale e$o(omies
C Ma(a'erial e$o(omies @: It a$3ie&es t3rou'3
> S#e$ialiNatio( i( ma(a'eme(t
1 Me$3a(iNatio( o! ma(a'erial !u($tio(
D E$o(omies i( tra(s#ort a(d stora'e
E$o(omies i( tra(s#ortatio( a(d stora'e $osts arise !orm !uller utiliNatio( o! tra(s#ort a(d
stora'e !a$ilities
E?)-.n,/ E6onomi-s o< s6,/-
EAter(al or #e$u(iary e$o(omies to lar'e siNe !irms arise !rom t3e dis$ou(ts a&aila8le to it due
to@
> Lar'e s$ale #ur$3ase o! ra2 materials
1 Lar'e s$ale a$Ruisitio( o! eAter(al !i(a($e at lo2 i(terest
< Lo2er ad&ertisi(' rate !u( ad&ertisi(' media
Q Co($essio(al tra(s#ort $3ar'e o( 8ul9 tra(s#ort
S Lo2er 2a'e rates i! a lar'e s$ale !irm is mo(o#olisti$ em#loyer o! $ertai( 9i(d o!
s#e$ialiNed la8our

T3us EAter(al e$o(omies o! s$ale are stri$tly 8ased o( eA#erie($e o! lar'e Ps$ale !irms or 2ell
ma(a'ed small s$ale !irms E$o(omies o! s$ale 2ill (ot $o(ti(ue !or e&er EA#a(sio( i( t3e siNe o! t3e
!irms 8eyo(d a #arti$ular limit " too mu$3 s#e$ialiNatio(" i(e!!i$ie(t su#er&isio(" Im#ro#er
la8our relatio(s et$ 2ill lead to dise$o(omies o! s$ale
IsoF*,n) 6*.3-.
)*H +HUPV , "VR:T5D-+. *DV EHH- %HULYH% IURP +*H /UHHN ;RU% iso mea(s êRual^ a(d Lati( 2ord
quantus mea(s ^Rua(tity^ T3e iso:Rua(t $ur&e is t3ere!ore also 9(o2( as^^ eRual #rodu$t
$ur&e ^ôr #rodu$tio( i(di!!ere($e $ur&e A( iso: Rua(t $ur&e is lo$us o! #oi(t re#rese(ti('
t3e &arious $om8i(atio( o! t2o i(#uts P$a#ital a(d la8our Pyieldi(' t3e same out#ut It s3o2s
all #ossi8le $om8i(atio( o! t2o i(#uts" (amely: $a#ital a(d la8our 23i$3 $a( #rodu$e a #arti$ular
Rua(tity o! out#ut or di!!ere(t $om8i(atio( o! t3e t2o i(#uts t3at $a( 'i&e i( t3e same out#ut A(
isoRua(t $ur&e all alo(' its le('t3 re#rese(ts a !iAed Rua(tity o! out#ut
T3e !ollo2i(' ta8le illustrates $om8i(atio( o! $a#ital F*O a(d la8our FLO 23i$3 'i&e t3e
same out#ut say:1Lu(its
)*H FRPEL-D+LR-V RI = 5VHV R-H 5-L+ RI 46 D-% 5-L+V RI 4V6 +R SUR%5FH LV 5-L+V
OLNH;LVH +*H $om8i(atio(s D"C"D a(d E 'i&e t3e same out#ut ::1L u(its
Com8i(atio( Ca#ital La8our Out#ut
A > >1 1L
D 1 ? 1L
C < S 1L
D Q < 1L
E S 1 1L
y
R<XELu(its
la8our R1XQL u(its
R>X1Lu(its
A
T3e a8o&e $ur&e s3o2s t3e !our di!!ere(t $om8i(atio(s o! i(#uts F$a#ital a(d la8ourO 23i$3 'i&e
t3e same out#ut (amely 1Lu(its "QLu(its "ELu(its res#e$ti&ely T3us it #ro&ides !iAed le&el o! out#ut
Furt3er t3e s3a#e o! isoRua(ts re&eal t3e de'ree o! su8stituta8ility o! o(e !a$tor !or a(ot3er to yield
t3e same le&el o! out#ut It also im#lies t3e dimi(is3i(' mar'i(al rate o! te$3(i$al su8stitutio(
Mar'i(al rate o! te$3(i$al su8stitutio( re!ers to t3e rate at 23i$3 o(e out#ut $a( 8e su8stituted !or
a(ot3er i( order to 9ee# t3e out#ut $o(sta(t T3e slo#e o! a( isoRua(t i(di$ates t3e mar'i(al rate o!
te$3(i$al su8stitutio( at t3e #oi(t
P.o0-.)i-s o< IsoF*,n)s
> IsoRua(ts 3a&e a (e'ati&e slo#e0:A( isoRua(t 3as a (e'ati&e slo#e i( t3e e$o(omi$ re'io( or i(
t3e rele&a(t ra('e E$o(omi$ re'io( mea(s 23ere su8stitutio( 8et2ee( i(#ut is te$3(i$ally
#ossi8le t3at 9ee#s same out#ut
A
B
C
D
Ca#ital

1 IsoRua(ts are $o(&eA to ori'i(0:
Co(&eA (ature o! IsoRua(t s3o2s t3e su8stituta8ility o! O(e !a$tor !or a(ot3er a(d t3e
dimi(is3i(' mar'i(al rate o! te$3(i$al su8stitutio(
< IsoRua(t $a((ot I(terse$t or 8e ta('e(t to ea$3 ot3er
M,.8in,/ R,)- o< T-65ni6,/ s*1s)i)*)ion (MRTS)
MRTS is t3e rate at 23i$3 mar'i(al u(it o! a( i(#ut $a( 8e su8stituted !or t3e mar'i(al u(its o! t3e
ot3er i(#ut so t3at t3e le&el o! out#ut remai(s t3e same I( ot3er 2ords it is t3e ratio o! mar'i(al u(it o!
la8our su8stituted !or t3e mar'i(al u(its o! $a#ital 2it3out a!!e$ti(' t3e total out#ut T3is ratio
i(di$ates t3e slo# o! IsoRua(ts
Iso6os) C*.3-
Iso$ost $ur&e s3o2s t3e di!!ere(t $om8i(atio( t3at a !irm $a( 8uy 2it3 a $ertai( a( u(it o! mo(ey
9<
$a#ital
91
9>
O L> L1 L< A
La8our
Usually" t3e ma(a'eme(t 3as to i($ur eA#e(diture i( 8uyi(' i(#uts (amely : la8our " ra2 P
materials" ma$3i(ery et$ Furt3er "ma(a'eme(t is eA#e$ted to 9(o2 #ri$e o! i(#uts 23at it $osts to
#rodu$e a 'i&e( out#ut T3ere!ore" it is reRuired to mi(imiNe t3e $ost o! out#ut t3at it #rodu$es
Here ma(a'eme(t is more 3el#!ul to dra2 iso$ost $ur&e t3at re#rese(ts t3e eRual $ost A( iso:$ost li(e
is so $alled 8e$ause it s3o2s t3e all $om8i(atio(s o! i(#uts 3a&i(' eRual total $ost T3e iso$ost li(es
are strai'3t li(es 23i$3 re#rese(ts t3e same $ost 2it3 di!!ere(t i(#ut $om8i(atio(s Su##ose a !irm
de$ides to s#e(d Rs>LL o( out#ut I! o(e u(it o! la8our $osts Rs>L t3e !irm $a( #ur$3ase >Lu(its
o! la8our Similarly" I! a u(it o! $a#ital $ost Rs1S"t3e !irm $a( s#e(d t3e 23ole amou(t o( 8uyi(' Q
u(its o! $a#ital li9e2ise t3e !irm $a( s#e(d #artly o( $a#ital" say 1 u(its a(d #arty o( la8our "say S
u(its !or t3is Rs>LL
T3e !i'ure s3o2s t3at t3e !irm 3as t3e o#tio( to s#e(d t3e total mo(ey eit3er o( $a#ital or la8our or
o( 8ot3" !rom t3is Rs>LL" t3e !irm $a( 8uy eit3er OL" u(its o! la8our or O*" u(its o! $a#ital or
D-7 FRPEL-D+LR- RI +*RVH +;R EH+;HH- +*H HW+UHPHV66D-% V =- LVRFRV+ F5UYH
UHSUHVH-+V t3e same $ost !or all t3e di!!ere(t $om8i(atio( o! i(#uts T3e u#2ard iso$ost $ur&e as re#rese(ted 8y *1 L1 a(d
*< L<s3o2s 3i'3er amou(ts s#e(t o( lar'er Rua(tities o! 8ot3 * a(d L

O0)im*m Com1in,)ion o< in0*)s
A #ro!it maAimiNi(' !irm see9s to mi(imiNe its $ost !or a 'i&e( out#ut or to maAimiNe t3e
out#ut !or a 'i&e( total $ost A $ertai( Rua(tity o! out#ut $a( 8e #rodu$ed 2it3 di!!ere(t I(#ut
$om8i(atio(s O#timum i(#ut $om8i(atio( is t3at 23i$3 8ears least $ost T3us t3e i(#ut $om8i(atio(
t3at results i( t3e mi(imum $ost o! #rodu$tio( is to 8e !ou(d out T3is is 9(o2( as least : $ost i(#ut
$om8i(atio( T3is $a( 8e !ou(d out 8y $om8i(i(' IsoRua(t $ur&es a(d Iso$ost $ur&es T3e
#rodu$tio( !u($tio( is re#rese(ted 8y IsoRua(t $ur&e a(d t3e $ost !u($tio( is re#rese(ted 8y Iso$ost
$ur&e T3e least $ost $om8i(atio( eAists at a #oi(t 23ere IsoRua(t is ta('e(t to Iso$ost
*1 Rs1LL
A Rs>LL
*>
Ca#ital C
P ; IR FQLu(itO
>
D IR FQLu(itO
>
O - L> L1
La8our
T3e !i'ure s3o2s t3e least P$ost $om8i(atio( o! $a#ital e(d la8our T3e IsoRua(t IR>" is
ta('e(t to t3e Iso$ost $ur&e *>"L> at #oi(t ^N^ At t3is #oi(t i( t3e $om8i(atio( is OP o! $a#ital a(d
O- o! la8our T3e #oi(t ^N^ 'i&es t3e ideal $om8i(atio( 23i$3 mi(imiNes $ost o! #rodu$tio( #er u(its
"It is t3e #oi(t at 23i$3 t3e !irm is i( eRuili8rium At t3e #oi(t ^N^ t3e iso$ost li(e *>"L>" re#rese(ti('
Rs>LL is ta('e(t to t3e isoRua(t $ur&e IR>" re#rese(ti(' 1Lu(its o! out#ut A(y ot3er #oi(t o( IR>"
2ould mea( t3e same out#ut "8ut at 3i'3 $ost T3e #oi(t A or D or IR>" 'i&es t3e same out#ut 8ut 2it3
a 3i'3er $ost $om8i(atio( o! i(#uts *1 L1 re#rese(ti(' Rs1LL T3e #oi(t C^ is t3e least $ost #oi(t o!
#rodu$i(' QL u(its !ormed 8y t3e i(terse$tio( o! IR FQL u(itsOa(d * "L FRs1LLO
1 1 1

C*-s)ions2"
(Each question carries a weightage of One-fourth)
> )*H OD; RI YDULDEOH SURSRU+LR- ;DV ILUV+ HWSODL-H% E7KKKK
1 VDER5U LVKKKKK-D+5UH
< KKKKKKKLV FR-VL%HUH% DV SUR%5FH% PHD-V RI SUR%5F+LR-
Q T3e te$3(i$al relatio( 8et2ee( a 'i&e( set o! i(#utV D-% +*H R5+S5+ LV FDOOH% KKKKK
S =OO L-S5+V EHFRPH KKKKKL- +*H OR-B U5-
(Each question carries a weightage of One)
> De!i(e #rodu$tio( !u($tio( T
1 Disti('uis3 8et2ee( !iAed a(d &aria8le i(#utsT
< State t3e Co88:Dou'las #rodu$tio( !u($tio( T
Q EA#lai( t3e term La2 o! retur(T
S +3at is mea(t 8y e$o(omies o! s$aleT
E State t3e ter( isoRua(tsT
) +3at is Mar'i(al Rate o! Te$3(i$al Su8stitutio( T
(Each question carries a weightage of Two)
> EA#lai( t3e #e$uliarities o! !a$tors o! #rodu$tio(T
1 EA#lai( t3e la2 o! &aria8le #ro#ortio( T
< Disti('uis3 8et2ee( isoRua(ts a(d iso$ostsT
Q EA#lai( t3e i(#ut Pout#ut relatio(s3i#T
S Dis$uss t3e term o#timum $om8i(atio( o! i(#utsT
(Each question carries a weightage of One-four)
> Drie!ly eA#lai( t3e $o($e#t o! La2 o! dimi(is3i(' retur(sT Dis$uss its assum#tio( a(d
im#orta($eT
1 EA#lai( t3e &arious e$o(omies a(d dise$o(omies o! s$aleT

MO!ULE IV
MARKET STRUCTURES AND PRICE OUTPUT DETERMINATION
In).od*6)ion
T3e determi(atio( o! #ri$e o! t3e #rodu$t is a( im#orta(t ma(a'erial !u($tio( Pri$e a!!e$ts
#ro!it t3rou'3 its e!!e$t 8ot3 o( re&e(ue a(d $ost #ro!it is $o($er(ed +it3 t3e di!!ere($e 8et2ee(
$ost a(d t3e re&e(ue It al2ays de#e(ds o( $ost a(d &olume o! sales T3ere!ore t3e ma(a'eme(t al2ays
tries to !i(d out t3e o#timum $om8i(atio( o! #ri$e a(d out#ut 23i$3 o!!ers t3e maAimum #ro!it to t3e
!irm T3us #ri$i(' o$$u#ies o( im#orta(t #la$e i( e$o(omi$ a(alysis o! !irms
T3e 9(o2led'e o! mar9et a(d mar9et stru$ture 2it3 23i$3 a !irm o#erates is more 3el#!ul i( #ri$e
out#ut de$isio(s Mar9et i( e$o(omi$ term mea(s a meeti(' #la$e 23ere 8uyers a(d sellers deal
%LUHF+O7 RU L-%LUHF+O7 GODUN D-% GODUN %HIL-HV PDUNH+ DV +*D+ ,D-7 ER%7 RI SHUVR-V ;*R
DUH L-i(timate 8usi(ess relatio(s a(d $arry o( HW+H-VLYH +UD-VDF+LR-V L- D-7 FRPPR%L+7. L DUNH+
stru$tures are di!!ere(t mar9et !orms 8ased o( t3e de'ree o! $om#etitio( #re&aili(' i( t3e mar9et
Droadly t3e mar9et !orms are $lassi!ied i(to t2o ty#es0:
>Per!e$tly $om#etiti&e mar9et
1 Im#er!e$tly $om#etiti&e mar9et
P-.<-6) Com0-)i)ion
T3e term #er!e$t $om#etitio( is used i( 2ider se(se #er!e$t $om#etitio( mea(s all t3e 8uyers a(d
sellers i( t3e mar9et are a2are o! #ri$e o! #rodu$ts T3e !ollo2i(' are t3e $3ara$teristi$s o! #er!e$tly
$om#etiti&e mar9et
> Lar'e (um8er o! 8uyers a(d sellers i( t3e mar9et
1 Homo'e(eous #rodu$t
< Free e(try or eAit
Q All t3e 8uyers a(d sellers i( t3e mar9et 3a&e #er!e$t 9(o2led'e a8out t3e mar9et $o(ditio(s
S Per!e$t mo8ility o! !a$tor o! #rodu$tio(
E A8se($e o! tra(s#ortatio( $osts
+3e( t3e !irst t3ree assum#tio(s are satis!ied t3ere eAists #ure $om#etitio( $om#etitio( 8e$omes
#er!e$t o(ly 23e( all t3e assum#tio(s are satis!ied I( #er!e$t $om#etitio( "t3e dema(d !or t3e out#ut
!or ea$3 #rodu$er is #er!e$tly elasti$ +it3 t3e lar'er (um8er o! !irms a(d 3omo'e(eous
#rodu$ts" (o i(di&idual !irm is i( a #ositio( to i(!lue($e t3e #ri$e
EF*i/i1.i*m P.i6-
T3e dema(d $ur&e (ormally slo#es do2(2ards s3o2i(' t3at more Rua(tity o! $ommodity 2ill
8e dema(ded at a lo2er #ri$e t3a( at a 3i'3er #ri$es Similarly su##ly $ur&e s3o2i(' a( u#2ard tre(d
23ere t3e #rodu$ers 2ill o!!er to sell a lar'er Rua(tity at a 3i'3er #ri$e t3a( at a lo2er #ri$e T3us t3e
Rua(tity dema(ded a(d Rua(tity su##lied &ary 2it3 #ri$e T3e #ri$e t3at te(ds to settle do2( or $omes
to stay i( t3e mar9et F23ere 8ot3 8uyers a(d sellers are satis!iedO is at 23i$3 Rua(tity dema(ded
eRuals Rua(tity su##lied T3e #oi(t so !ormed is 9(o2( as eRuili8rium #oi(t a(d #ri$e is 9(o2( as
eRuili8rium #ri$e

E<<-6) o< )im- on s*00/+
A$$ordi(' to Mars3all "time 3as 'reat i(!lue($e o( t3e determi(atio( o! #ri$e T3e !ollo2i(' are
t3e mar9et #eriods 8ased o( time: mar9et #eriod" s3ort #eriod a(d lo(' #eriod
>Very s3ort #eriodFMar9et #eriodO
1S3ort #eriod
<Lo(' #eriod
Mar9et #eriod or &ery s3ort #eriod may 8e o(ly a day or &ery !e2 days C3a('e i( su##ly is (ot #ossi8le
23ere t3e #eriod is &ery s3ort a(d Rua(tity dema(ded 2ill 8e t3e determi(i(' !a$tor i( t3is
#eriod Furt3er" su##ly $ur&e i( t3e mar9et #eriod is remai( !iAed s3o2i(' &erti$al strai'3t li(e
T3e s3ort #eriod is a #eriod (ot su!!i$ie(t to ma9e a(y $3a('es i( t3e eAisti(' !iAed #la(t $a#a$ity
I($rease i( su##ly i( t3e s3ort #eriod is #ossi8le 8y i($reasi(' t3e &aria8le !a$tors o! #rodu$tio( o(ly
T3e su##ly $ur&e slo#es u#2ard to ri'3t s3o2i(' t3at some i($rease i( su##ly is #ossi8le 23e( t3e
#ri$e i($reases
Lo(' #eriod is a time lo(' e(ou'3 to adCust t3e su##ly to a(y $3a('es i( dema(d T3e lo(' ru(
su##ly $ur&e is less stee# t3e( s3ort ru( su##ly $ur&e s3o2i(' i($rease i( Rua(tity su##lied 23e( #ri$e
$3a('es
P.i6- d-)-.min,)ion Und-. 0-.<-6) 6om0-)i)ion
I( #er!e$t $om#etitio( t3e mar9et #ri$e o! a $ommodity is determi(ed 8y its dema(d a(d
su##ly T3e #ri$e o! a $ommodity determi(es at t3e #oi(t 23ere Rua(tity dema(ded eRuates Rua(tity
su##lied It $a( 8e eA#lai(ed t3rou'3 t3e !ollo2i(' dia'ram
Y
D S
M N
P>
Pri$e
P E
P1 L R
S D
O - 5
-ua(tity dema(ded a(d su##lied
I( t3e a8o&e dia'ram "DD de(otes t3e dema(d $ur&e a(d SS de(otes t3e su##ly $ur&e Dema(d
a(d su##ly $ur&es slo#es i( o##osite dire$tio( I( t3is dia'ram OP is t3e eRuili8rium #ri$e 23ere t3e
dema(d $ur&e eRuates 2it3 t3e su##ly $ur&e I( t3is !i'ure " t3e #oi(t E determi(es t3e eRuili8rium #ri$e
a(d O- is t3e eRuili8rium Rua(tityFrom t3e dia'ram it $a( 8e (oted t3at i! t3e #ri$e i($reases to OP
>
"t3e dema(d 2ill 8e P M a(d su##ly 2ill 8e P NSo MN 2ill 8e
> >
eA$ess su##ly u(der t3is
$ir$umsta($e" t3e !irm 2ill 8e !or$ed to lo2er t3e #ri$e i( order to sell t3e eA$ess sto$9 It t3e !irm
$a( mi(imiNes t3e #ri$e" t3e #ro!it 2ill 8e lo2 T3us 2e $a( say t3at at t3e #oi(t o! eRuili8rium !irm
$a( deri&e maAimum #ro!it At t3e #oi(t o! eRuili8rium" t3ere are t2o $o(ditio(s to 8e satis!ied

>O MCXMR +3ere MC Xmar'i(al CostFCost o! #rodu$i(' a( additio(al u(itO
MRXmar'i(al Re&e(ue realiNed !rom t3e sale o! a( additio(al u(itO
1O MC Cur&e Cuts MR $ur&e !rom 8elo2 t3at is MC Cur&e s3ould 3a&e #ositi&e slo#e
U(der #er!e$t $om#etitio( "t3e !ollo2i(' eRuatio(s are satis!ied
MCXMR" MRXAR Pri$eXARXAC T3ere !ore "Pri$eX MRXMCXARXAC
T3e eRuatio(s $a( 8e satis!ied 2it3 t3e !ollo2i(' dia'rams
MC
Y AC
Pri$e
U D
O S 5
-ua(tity
+3e( t3e !irm is OS Rua(tity o! 'oods" t3e MC $ur&e $uts t3e AC $ur&e at its lo2est At t3e lo2est #oi(t t3e
AC $ur&e is ta('e(tial to t3e dema(d Fie ACXMCXARO $ur&e T3us t3e #ri$e OU is eRual to t3e mar'i(al
$ostFSTO23i$3 is a'ai( eRual to a&era'e $ost FSTOT3e !irms u(der #er!e$t $om#etitio( 2ill 8e t3e $ost e!!i$ie(t
siNe or o#timum siNe 23i$3 'i&es t3e lo2est #ossi8le a&era'e $ost o! #rodu$tio( #er u(it.
!*.in8 )5- M,.D-) 0-.iod
I( &ery s3ort #eriod "su##ly is i(elasti$ "t3us t3e #ri$e de#e(ds o( $3a('es i( dema(d T3e su##ly $ur&e
2ill 8e &erti$al strai'3t li(e #arallel to y:aAis
Y
D> S
D
D1
P>
P
P1 D>
D
D1
O - 5

I( t3e a8o&e dia'ram" SP is t3e su##ly $ur&e It mea(s 23ere e&er t3e #ri$e is "t3e !iAed su##ly is to 8e
sold i( t3e mar9et Here DD is t3e dema(d $ur&e T3e su##ly is S- T3e #oi(t o! eRuili8rium is at
4E6 VR +*H HT5LOLEUL5P LV 1< HHUH +*H %HPD-% DOR-H %H+HUPL-HV +*H SULFH EHFD5Ve
su##ly is !iAed I! t3e dema(d i($reases to D>D>" t3e #ri$e 2ill i($rease !rom OP to OP a(d &i$e &ersa "ie" i! t3e
>
dema(d de$reases to D1D1 " t3e #ri$e 2ill de$rease to OP
1
I! t3e $ommodity is (o(: #eris3a8le" It $a( 8e stored T3e seller does (ot sell t3e 'oods i! t3e #ri$e is
lo2 Dut t3e #ri$e is 3i'3 3e 2ill sell 23ole sto$9 T3e $ur&e 2ill 8e $ur&ed at 8e'i((i(' @t3e( it 2ill
8e$ome a strai'3t li(e U(der &ery s3ort #eriod " t3e dema(d alo(e determi(es t3e #ri$e
!*.in8 s5o.) 0-.iod
I( t3is #eriod "t3e !irm $a( ma9e sli'3t $3a('es i( t3eir su##ly o! 'oods 2it3out $3a('i(' t3e $a#a$ity
o! #la(t
s
Y D>
D
D1
E>
P>
P E
P1 E1 D>
D1 D
S
O -1 - -> 5
I( t3is dia'ram "DD is t3e dema(d $ur&e a(d SS is t3e su##ly F5UYH =+ SRL-+ 4F6 +*H %HPD-% F5UYH
eRuals t3e su##ly $ur&e "t3e eRuili8rium #ri$e is OPI! t3e dema(d is i($reased to D>D> t3e eRuili8rium
#ri$e 2ill 8e OP> a(d i! t3e dema(d de$reased to D1D1 " t3e eRuili8rium 2ill 8e OP1 Dut t3e
Rua(tity 2ill 8e de$reased !rom O- to O-1 T3e !irm i( t3e s3ort ru( $a( #rodu$e out#ut 8y
i($reasi(' t3e &aria8le i(#uts A !irm 'ets maAimum #ro!it 23ere MCXMR T3e #ri$e determi(atio(
8y t3e i(dustry is 'i&e( i( t3e !ollo2i(' dia'ram
Y S
D
D>
P E
P> C
Pri$e D
D>
S
O -> - 5

I( t3e a8o&e dia'ram" it $a( 8e re&ealed t3at t3e #ri$e is determi(ed 8y t3e i(dustry OP.
23e( t3e dema(d is s3i!ted to D>D> t3e( t3e Rua(tity dema(ded is de$reased !rom O- to O-> a(d
also #ri$e de$reases !rom OP to OP> I( t3e $ase o! a !irm" MRXAR" t3us dema(d
XARXMRX#ri$e
In )5- /on8 .*n
I( t3e lo(' ru( " t3e !irms i( t3e i(dustry are ea'er to 'et su#er (ormal #ro!its T3e #ri$e determi(atio(
is eA#lai(ed t3rou'3 t3e dia'ram 'i&e( 8elo2@
I( out#ut de$isio( ma9i(' i( t3e lo(' ru( Lo(' ru( A&era'e Cost FLACO a(d Lo(' ru( Mar'i(al Cost
FLMCO are to 8e ta9e( i( to $o(sideratio( u(der t3is $o(ditio( "t3e !irm is i( eRuili8rium
+3e( ARXMRXLACXLMC
Fi'ure >
Y
D S> S
S1
P> P>
P P
P1 S> S P1
S1 D
O - 5
Y LMC
SMC
SAC
P> AR XMR
> >
Pri$e P LAC
P D ARXMR
P1 AR XMR
1 1
O -1 - -> 5
I( t3e a8o&e dia'ram F>O DD is t3e lo(' ru( Dema(d $ur&e a(d S S s3ort ru( su##ly $ur&e
> >
T3e #ri$e is determi(ed at OPI( t3e !i'ure 1"t3e eRuili8rium out#ut is at #oi(t E At t3is #oi(t
AR
>X
MRXLMC
Out#ut

Mono0o/+
Mo(o#oly mea(s ^single `selling I( 8rie!" mo(o#oly is a mar9et situatio( i( 23i$3 t3ere is o(ly
o(e seller or #rodu$er o! a #rodu$t !or 23i$3 (o $lose su8stitutio( is a&aila8le As t3ere is o(ly o(e
!irm u(der mo(o#oly "t3at si('le !irm $o(stitutes t3e 23ole i(dustry T3e mo(o#olist $a( !iA #ri$e
o! 3is #rodu$t a(d $a( #ursue a( i(de#e(de(t #ri$e #oli$y A mo(o#olist $a( ta9e t3e de$isio(
a8out t3e #ri$e o! 3is #rodu$t For eA0: ele$tri$ity " 2ater su##ly $om#a(ies et$
Features
T3e !ollo2i(' are t3e im#orta(t !eatures o! mo(o#oly 0:
> O(e seller a(d a lar'e (um8er o! 8uyers
1 No $lose su8stitutes !or t3e #rodu$t
< Mo(o#olist is (ot t3e #ri$e ta9er a(d t3e #ri$e ma9er
Q Mo(o#olist $a( $o(trol t3e su##ly
S No e(try o! (e2 !irm to t3e mar9et
E Firm a(d i(dustry are t3e same
Causes o! Mo(o#oly
> Le'al restri$tio(s
1 EA$lusi&e o2(ers3i# or $o(trol o&er t3e ra2 materials
< E$o(omies o! lar'e s$ale #rodu$tio(
Q EA$lusi&e 9(o2led'e o! a #rodu$tio( te$3(iRue
P.i6- !-)-.min,)ion *nd-. Mono0o/+
A mo(o#oly !irm 3as $om#lete $o(trol o&er t3e e(tire su##ly It $a( sell di!!ere(t Rua(tities at
di!!ere(t #ri$es It $a( sell more i! it $uts do2( its #ri$e T3us t3e mo(o#oly !irm !a$es a
do2(2ard slo#i(' dema(d $ur&e or a&era'e re&e(ue FARO$ur&e As t3e si('le !irm $o(stitutes t3e
i(dustry t3e dema(d $ur&e o! t3e mo(o#oly !irm a(d t3e i(dustry 2ill 8e t3e same Dut u(der
SHUIHF+ FRPSH+L+LR- +*H ILUPCV %HPD-% F5UYH LV D *RULJR-+DO V+UDLB*+ OL-H E5+
+*H L-%5V+U76V %HPD-% $ur&e slo#es do2( 2ards Si($e a&era'e re&e(ue !alls 23e( more u(its o! out#ut are sold mar'i(al
re&e(ue 2ill 8e less t3a( a&era'e re&e(ue MR $ur&e t3us de$li(es at a 'reater rate t3a( AR $ur&e
a(d it !alls 8elo2 AR $ur&e
T3ou'3 t3e mo(o#olist 3as t3e !reedom to !iA a(y #ri$e 3e 2ill #re!er a #ri$e out#ut $om8i(atio(
t3at 'i&es 3im maAimum #ro!it He 'oes o( #rodu$i(' so lo(' as additio(al u(its add more to re&e(ue
t3a( to $ost He 2ill sto# at t3at #oi(t 8eyo(d 23i$3 additio(al u(its o! #rodu$tio( add more to $ost t3a(
to re&e(ue I( ot3er 2ords 3e 2ill 8e i( eRuili8rium #ositio( at t3e out#ut le&el at 23i$3 MR eRual MC
a(d MC $uts MR !rom 8elo2

S5o.) R*n Mono0o/+ EF*i/i1.i*m
T3e mo(o#olist 2ill 8e i( s3ort ru( eRuili8rium 23ere t3e out#ut 3a&i(' MR eRual MC
Y
#ri$eV$ost
MC
P P> AC
T L
MR AR
O M 5
Out#ut
I( t3e !ollo2i(' !i'ure t3e mo(o#olist 2ill 8e i( s3ort ru( eRuili8rium at out#ut OM 23ere MR is
eRual to t3e s3ort ru( mar'i(al $ost $ur&e MC
At a( out#ut OM "MP^ is t3e a&era'e re&e(ue F#ri$e O a(d ML is t3e a&era'e $ost o! #rodu$tio(
T3ere!ore P L is t3e mo(o#oly #ro!it #er u(it T3e total #ro!it is eRual to #rodu$t o! #ro!it #er u(it
>
2it3 total out#ut T3e !ollo2i(' are t3e result o! mo(o#oly o#eratio( i( t3e mar9et
I! AR 'reater t3a( AC:results su#er (ormal #ro!it
I! AR eRuals AC results (ormal #ro!it
I! AR less t3a( AC t3at results loss to t3e !irm
Lon8 .*n Mono0o/+ EF*i/i1.i*m
T3e mo(o#olist is t3e si('le #rodu$er a(d t3e (e2 !irms $a((ot $uts t3e i(dustry 23i$3 e(a8les t3e
mo(o#olist to $o(ti(ue to ear( su#er #ro!it i( t3e lo(' ru( I( t3e !i'ure t3e lo(' ru( eRuili8rium o!
t3e mo(o#olist 2ill 8e at t3e out #ut 23ere t3e lo(' ru( mar'i(al $ost $ur&e MC I(terse$ts t3e
mar'i(al re&e(ue $ur&e MR
Y
LMC
P P> LAC
Pri$e $ost
T
MR Dema(dVAC
O Out #ut 5

T3e s3aded re$ta('le ^PP^LI ^ s3o2s t3e lo(' ru( mo(o#olist #ro!it I( t3e lo(' ru( I! t3e $ost is at
a( i($reasi(' tre(d 3e 2ill !iA a 3i'3 #ri$e a(d sell a lar'e Rua(tity T3is 2ill 3el# 3im to ma9e
maAimum #ro!it
!i<<-.-n6- 1-)E--n 0-.<-6) 6om0-)i)ion ,nd Mono0o/+
> U(der #er!e$t $om#etitio( t3ere are ma(y sellers 8ut i( t3e $ase o! mo(o#oly " t3ere is o(ly o(e
seller
1 I(di&idual seller 3as (o $o(trol o&er t3e mar9et su##ly i( t3e $ase o! #er!e$t $om#etitio( Dut i(
t3e $ase o! Mo(o#oly i(di&idual seller $o(trols t3e su##ly
< Produ$ts are ide(ti$al i( t3e $ase o! #er!e$t $om#etitio(" 8ut t3ere is o(ly o(e #rodu$t i( t3e $ase
o! Mo(o#oly
Q U(der #er!e$t $om#etitio(" t3ere are !ree e(try a(d eAit o! !irms Dut t3e Mo(o#olist 8lo$9s t3e
e(try
S T3e Mo(o#olist dis$rimi(ates t3e #ri$e 8ut t3ere is u(i!orm #ri$e i( #er!e$t $om#etitio(
E Firm a(d I(dustry is di!!ere(t i( t3e $ase o! #er!e$t $om#etitio(" t3ey are same i( t3e $ase o!
Mo(o#oly
Mono0o/is)i6 Com0-)i)ion
I( t3e #rese(t +orld mar9et" it $a( 8e see( t3at t3ere is (o mo(o#oly a(d t3ere is (o real $om#etitio(
T3ere is a miA u# o! t3e t2o T3is situatio( is 'e(erally 9(o2( as Mo(o#olisti$ $om#etitio( A$$ordi('
to Pro! E H C3em8erli( o! Ameri$a" Mo(o#olisti$ Com#etitio( mea(s a mar9et situatio( I(
23i$3 $om#etitio( is im#er!e$t T3e #rodu$ts o! t3e !irms u(der mo(o#olist $om#etitio( " are
mai(ly $lose su8stitutes to ea$3 ot3er
'-,)*.-s /Ass*m0)ions o< Mono0o/is)i6 Com0-)i)ion.
T3e !ollo2i(' are t3e im#orta(t !eatures o! Mo(o#olisti$ Com#etitio(
> T3ere are lar'e (um8ers o! #rodu$ers or sellers
1 It deals 2it3 di!!ere(tiated #rodu$ts
< T3ere are !ree e(try a(d eAit o! !irms to t3e mar9ets
Q T3e selli(' $ost determi(es t3e dema(d !or t3e #rodu$ts
S T3ere is (o asso$iatio( o! !irms
E T3ere is (o #ri$e $om#etitio(
) T3ere is la$9 o! 9(o2led'e o! t3e mar9et
P.i6- ,nd O*)0*) d-6isions *nd-. Mono0o/is)i6 Com0-)i)ion
S5o.) .*n 0-.iod
I( s3ort ru( "ea$3 eAisti(' !irm is a mo(o#olist 3a&i(' a do2(2ard slo#i(' dema(d $ur&e !or its
#rodu$t I( order to maAimiNe its #ro!it t3e !irm 2ill #rodu$e t3at le&el o! out#ut at 23i$3 MCXMR i!
#ri$e is more t3a( MR" t3ere 2ill 8e a8(ormal #ro!it
Lon8 OR*n P-.iod
I( t3e lo(' #eriod" (ormal #ro!its 2ill disa##ear Ne2 !irms 2ill e(ter t3e i(dustry a(d
$o(seRue(t eA#a(sio( o! out#ut 2ill de$rease t3e #ri$e a(d o(ly (ormal #ro!it are made 8y t3e
!irms Pro!it are (ormal o(ly 23e( A&era'e Cost FACO eRuals t3e A&era'e Re&e(ue FAROT3e( t3e
eRuili8rium out#ut 2ill 8e at AC a(d MCXMR

'i8*.- R
Y AC
MC
P
Pri$eV Cost
-
MR AR
O M A
I( t3e a8o&e dia'ram " t3e eRuili8rium out#ut is OM 23ere MC XMR a(d ACXAR A8(ormal #ro!it
disa##ears 8e$ause TCXTRFTotal $ostXTotal Re&e(ueO
!i<<-.-n6- 1-)E--n P-.<-6) Com0-)i)ion ,nd Mono0o/is)i6 Com0-)i)ion
P-.<-6) Com0-)i)ion Mono0o/is)i6 Com0-)i)ion
>OProdu$ts are ide(ti$al
1O It is (ot a real $o($e#t
<O Lar'e Num8er o! 8uyers a(d sellers
QO Per!e$t 9(o2led'e o! mar9et Co(ditio(
SO Selli(' Cost do (ot #lay a(y role
EOT3ey are #ri$e ta9ers
)O Dema(d $ur&e is 3oriNo(tal
?OAR"MR $ur&es are #arallel to A aAis a(d
#ri$e X dema(d X ARXMR
>O Produ$ts are di!!ere(tiated
1O It is real $o($e#t
<O Duyers a(d Sellers are (ot so lar'e
QO La$9 o! #er!e$t 9(o2led'e o! mar9et Co(ditio(
SO Selli(' $ost 3as a( im#orta(t role
EO T3ey are #ri$e mar9ers
)O Dema(d $ur&e is do2(2ard slo#i('
?O Pri$e X dema(d XARXDut MRZAR
O/i8o0o/+
Oli'o#oly is a situatio( i( 23i$3 t3ere are so !e2 sellers t3at ea$3 o! t3em is $o(s$ious o! t3e
results u#o( t3e #ri$e o! t3e su##ly +3i$3 3e i(di&idually #la$es u#o( t3e mar9et A$$ordi('
to B Sti'ler Ôli'o#oly is t3at situatio( i( 23i$3 a !irm 8ases its mar9et #oli$y i( #art o( t3e
eA#e$ted 8e3a&ior o! a !e2 $lose re&els^ Furt3er "t3ey may #rodu$e 3omo'e(eous or di!!ere(tiated
#rodu$ts

C5,.,6)-.is)i6s
Oli'o#oly is a disti($t mar9et $o(ditio( It 3as t3e !ollo2i(' !eatures0
> T3e !irms are i(ter de#e(de(t i( de$isio( ma9i('
1 Ad&ertisi(' s3ould 8e e!!e$ti&e
< Firms s3ould 3a&e 'rou# 8e3a&ior
Q I(determi(ate(ess o! dema(d $ur&e
S T3e (um8er o! !irms or #rodu$ers or sellers are &ery small
E Produ$t are ide(ti$al or $lose su8stitutes to ea$3 ot3er
) T3ere is a( eleme(t o! Mo(o#oly
P.i6- !-)-.min,)ion Und-. O/i8o0o/+
Pri$i(' ma(y 8e i( $o(ditio( o! i(de#e(de(t #ri$i(' "Pri$i(' u(der #ri$e leaders3i# a(d #ri$i(' u(der
$ollusio(
Ind-0-nd-n) 0.i6in8 (inD-d !-m,nd Mod-/ o. P.i6- .i8idi)+ Mod-/)
*i(9ed dema(d $ur&e 2as !irst i(trodu$ed 8y #ro! Paul M S2eeNy to eA#lai( #ri$e
ri'idity u(der oli'o#oly A( oli'o#olist al2ays 'uesses a8out 3is $om#etitors rea$tio( T3ey
assume t3at i! o(e de$ides to de$rease t3e #ri$e " t3e ot3ers 2ill also redu$e t3e #ri$e T3e
assum#tio( 8e3i(d t3e 9i(9ed $ur&e is t3at ea$3 oli'o#olist 2ill a$t a(d rea$t i( a 2ay t3at 9ee#
$o(ditio( tolera8le !or all t3e mem8ers o! t3e i(dustry I! o(e !irm redu$es t3e #ri$e o! t3e
#rodu$t "t3e ot3ers 2ill 8e $om#elled to redu$e t3e #ri$e Dut some times" I! o(e i($reases t3e #ri$e"
t3e ot3er 2ill (ot i($rease t3e #ri$e T3e !irms i( Oli'o#oly do (ot i($rease t3e #ri$es due to t3e
#ossi8ility o! losi(' t3e $ustomers to ri&als 23o do (ot raise t3eir #ri$es Firms usually do (ot
$3a('e t3eir #ri$e i( res#o(se to small $3a('es i( $osts
T3e 9i(9ed dema(d $ur&e 3as t2o se'me(ts ieFiO t3e relati&ely elasti$ #ortio( o! t3e
dema(d $ur&e a(dFiiOt3e relati&ely i(elasti$ #ortio( o! t3e dema(d $ur&e T3e !ollo2i(' dia'ram 2ill
'i&e you t3e $lear idea0
'i8*.- 10
Y
D
P M
Pri$e
D
O - 5
Out#ut

*i(9ed dema(d $ur&e DD 2it3 a 9i(9 at #oi(t M T3e #ri$e #re&aili(' i( t3e mar9et is OP a(d t3e
!irm #rodu$es O- out#ut Here D" M is t3e relati&ely elasti$ o! t3e dema(d $ur&e a(d MD Is t3e
relati&ely i(elasti$ #ortio( T3is di!!ere($e i( t3e elasti$ities o! dema(d due to t3e #arti$ular
$om#etiti&e rea$tio( #atter( assumed 8y t3e *i(9ed dema(d Cur&e 3y#ot3esis
P.i6in8 *nd-. P.i6- L-,d-.s5i0
T3e #ri$e leaders3i# mea(s t3e leadi(' !irm determi(es t3e #ri$e a(d ot3ers !ollo2 it All t3e
!irms i( t3e i(dustry adCusts " t3e #ri$e !iAed 8y t3e #ri$e leader
T3e lar'e !irm " 23o !iAes t3e #ri$e " is 9(o2( as t3e #ri$e ma9er a(d t3e !irms" 23o !ollo2 it
are 9(o2( as #ri$e Pta9ers T3e #ri$e leaders3i# may 8e !our ty#es T3ey are 0
> Domi(a(t #ri$e leaders3i# 0:I( t3is situatio( " t3ere eAists ma(y small !irms a(d o(e lar'e !irm
a(d t3e lar'e !irm !iAes t3e #ri$e a(d t3e small !irms i( t3e mar9et a$$e#t t3at #ri$e
1 Darometri$ Pri$e Leaders3i# 0: U(der t3is situatio( o(e re#uted a(d eA#erie($ed !irm !iAes
t3e #ri$e a(d ot3ers may !ollo2 it
< A''ressi&e Pri$e Leaders3i# 0PU(der t3is mar9et $o(ditio(" o(e domi(ati(' !irm !iAes t3e
#ri$e a(d t3ey $om#el all ot3ers i( t3e i(dustry to !ollo2 t3e #ri$e
;. E!!e$ti&e Pri$e Leaders3i# 0: U(der t3is $o(ditio( " t3ere are small (um8er o! !irms i( t3e
i(dustry
P.i6- "O*)0*) d-)-.min,)ion Und-. P.i6- L-,d-.s5i0
I( order to determi(e t3e #ri$e a(d out#ut u(der #ri$e leaders3i# 2e 3a&e to
ma9e t2o assum#tio(s T3ey are"
> T3ere are t2o !irms PL a(d F" i( 23i$3 t3e $ost o! #rodu$tio( o! L is less t3a( t3at o! F a(d
1 Produ$t are ide(ti$al
T3e !ollo2i(' dia'ram 2ill 'i&e t3e $lear #i$ture o! #ri$e out#ut determi(atio(
'i8*.- 11
Y MCF
MCL
P1
P>
E
1
Pri$e
PVDVAR
E
>
MR
O -
1
-
>
5
R

I( t3e a8o&e dia'ram " MC a(d MC are t3e mar'i(al $ost $ur&es o! t3e !irms F a(d L res#e$ti&ely
>
Dy a(alysi(' t3is dia'ram it $a( 8e 9(o2( t3at t3e !irm L 2ill !iA at #oi(t E1 " 23ere MCXMR T3e
#ri$e o! t3e !irms F a(d L are OP a(d OP a(d t3e out#ut are OR a(d O- res#e$ti&ely
> 1 > 1
P.i6in8 Und-. Co//*si3- O/i8o0o/+
T3e term Collusio( mea(s ^to #lay to'et3er^ To a&oid t3e $om#etitio( amo(' t3e !irms"
mo(o#olisti$ !irms arri&e at a !ormal a'reeme(t $alled $artel It is $ommo( sales a'e($y !ormed to
elimi(ate $om#etitio( a(d !iA su$3 a #ri$e a(d out#ut t3at 2ill maAimiNe #ro!it o! mem8er !irms T3e
!irms out#ut a(d #ri$e are determi(ed 8y t3is $artel T3e !ollo2i(' dia'ram 2ill 'i&e t3e idea more
$lear or to ma9e a( assum#tio( t3at t3ere are o(ly t2o !irms &iN !irm S a(d !irm T
Firms S Firms T I(dustry
MC MC
>
MC
P
>
P
1
C
>
a$
>
e
>
a$
1
C
1
E
C
1
MR PDXAR
O -
>
o -1 O - 5
Fi'ure >1 Fi'ure>< Fi'ure><
I( t3e a8o&e dia'ram" MC de(otes t3e mar'i(al $ost $ur&e o! i(dustry a(d MC
>
a(d
MC
1
are t3e MC !or t3e !irm S a(d T MR is Mar'i(al Re&e(ue Cur&e T3e i(dustry is i(
eRuili8rium at #oi(t E a(d eRuili8rium out#ut is O- a(d t3e #ri$e is OP T3e eRuili8rium out#ut o!
t2o !irms are determi(ed 8ased o( t3is o2( MC $ur&e T3e s3are o! out#ut o! ea$3 !irm 2ill 8e
o8tai(i(' 8y dra2i(' a #arallel li(e t3rou'3 E to t3e 5 aAis
T3e #oi(ts E> a(d E1 determi(es t3e le&el o! out#ut !or t3e !irm S a(d t3e !irm T res#e$ti&ely
O-
>
a(d O- determi(e t3e mar9et s3are o! !irms a(d Firm T res#e$ti&ely Here " 2e $a( say t3at "
1
O- HO- XO-" OP HOP XOP
> 1 > 1
P.i6- !is6.imin,)ion
A mo(o#olist is i( a #ositio( to !iA t3e #ri$e o! 3is #rodu$t He e(Coys t3e $o(trol o! su##ly o!
t3e #rodu$t A mo(o#olist is a8le to $3ar'e di!!ere(t #ri$e !or 3is #rodu$ts to t3e di!!ere(t
F5V+RPHUV )*LV LV N-R;- DV SULFH %LVFULPL-D+LR- =FFRU%L-B +R LUV :R*- SREL-VR-
4+*H DF+ RI VHOOL-B t3e same arti$le " #rodu$ed u(der si('le $o(trol at di!!ere(t #ri$es to di!!ere(t 8uyers is 9(o2( as
#ri$e dis$rimi(atio( T3is is also 9(o2( as di!!ere(tial #ri$i('

T+0-s o< P.i6- !is6.imin,)ion
> Pri$e relati&ely elasti$ #ortio( o! t3e dema(d $ur&e o! t3e !irst de'ree P$3ar'i(' di!!ere(t #ri$e !or
di!!ere(t #erso(s !or t3e same #rodu$t
1 Pri$e dis$rimi(atio( o! t3e se$o(d de'ree PU(der t3is" t3e 8uyers are $lassi!ied i(to di!!ere(t
di&isio(s
< Pri$e dis$rimi(atio( o! t3e t3ird de'ree PHere " t3e mar9ets are di&ided a$$ordi(' to elasti$ity o!
dema(d
Condi)ions o< P.i6- !is6.imin,)ion
T3ere are t3ree $o(ditio(s to 8e satis!ied to a##ly t3e #ri$e dis$rimi(atio( T3ey are 0
> T3ere must 8e more t3a( o(e se#arate mar9et
1 T3e mar9ets must 3a&e di!!ere(t elasti$ity o! dema(d
< T3e mar9et s3ould 8e su$3 t3at (o 8uyer o! t3e mar9et may e(ter t3e ot3er mar9et a(d &i$e
&ersa
!*m0in8
+3e( mo(o#olist 2or9s i( 3ome mar9et as 2ell as !orei'( mar9et" 3e is a8le to dis$rimi(ate t3e
#ri$e 8et2ee( t3ese t2o mar9ets I! 3e 3as mo(o#oly i( 3ome mar9et " a(d 3e !a$es $om#etitio( i( to
!orei'( mar9et " 3e 2ill 8e a8le to $3ar'e 3i'3er #ri$es !or 3is #rodu$ts i( 3ome mar9et T3is #ra$ti$e is
9(o2( as ^Dum#i('^ or ^#ri$e dum#i(' ^

COST CONCEPTS
In).od*6)ion
T3e term cost sim#ly mea(s $ost o! #rodu$tio( It is t3e eA#e(ses i($urred i( t3e #rodu$tio( o!
'oods It is t3e sum o! all mo(ey:eA#e(ses i($urred 8y a !irm i( order to #rodu$e a $ommodity T3us
it i($ludes all eA#e(ses !rom t3e time t3e ra2 material are 8ou'3t till t3e !i(is3ed #rodu$ts rea$3 t3e
23olesaler
A ma(a'erial e$o(omist must 3a&e a #ro#er u(dersta(di(' o! t3e di!!ere(t $ost $o($e#t 23i$3 are
esse(tial !or $lear 8usi(ess t3i(9i(' T3e $ost $o($e#t 23i$3 are rele&a(t to 8usi(ess o#eratio( a(d
de$isio( $a( 8e 'rou#ed o( t3e 8asis o! t3eir #ro#ose u(der t2o o&erla##i(' $ate'ories0
> Co($e#t used !or a$$ou(ti(' #ur#ose
1 Co($e#t used i( e$o(omi$s a(alysis o! t3e 8usi(ess
T+0-s o< Cos) (o. Cos) Con6-0)s)
T3ere are se&eral ty#es o! $ostsF or $ost $o($e#tsOFollo2i(' are t3e im#orta(t items0:
Mon-+ Cos) 0 mo(ey $ost mea(s t3e total mo(ey eA#e(ses i($urred 8y a 8usi(ess !irm o( t3e &arious
items e(tered i(to t3e #rodu$tio( o! a #arti$ular #rodu$t For eAam#le " mo(ey #ayme(ts made o(
2a'es a(d salaries to 2or9ers a(d ma(a'erial sta!!" #ayme(ts !or ra2 materials #ur$3ased" eA#e(ses
o( #o2er a(d li'3t "i(sura($e "tra(s#ortatio( "ad&ertiseme(t @a(d also #ayme(ts made o( t3e #ur$3ase
o! ma$3i(ery a(d eRui#me(ts et$ $o(stitute mo(ey $ost o! #rodu$tio( Mo(ey $ost is also $alled
(omi(al $ost
R-,/ Cos) 2 Real $ost mea(s t3e real $ost o! #rodu$tio( o! a #arti$ular #rodu$t It is t3e (eAt 8est
alter(ati&e sa$ri!i$ed i( order to o8tai( t3at #rodu$t It also de(o+HV +*H 4HIIRU+V6 RI ;RUNHUV D-%
sa$ri!i$es o! o2(ers u(der'o(e i( t3e #rodu$tio( o! a #arti$ular #rodu$t
O00o.)*ni)+ Cos)2 O##ortu(ity $ost re!ers to t3e $ost o! !ore'oi(' or 'i&i(' u# a( o##ortu(ity It is
t3e $ost o! t3e (eAt 8est alter(ati&e It im#lies t3e i($ome o! 8e(e!it !ore'o(e 8e$ause a $ertai( $ourse
o! a$tio( 3as 8ee( ta9e( As Adam smit3 o8ser&ed " i! a 3u(ter $a( 8a' a deer or a 8ea&er i( t3e
si('le day " t3e $ost o! deer is a 8ea&er a(d t3e $ost o! 8ea&er is a deer A ma( 23o marries a 'irl is
!ore'oi(' t3e o##ortu(ity o! marryi(' a(ot3er 'irl A !ilm a$tress $a( eit3er a$t i( !ilms or do
modeli(' 2or9 S3e $a((ot do 8ot3 t3e Co8s at t3e same time Her a$ti(' i( t3e !ilm results i( t3e loss
o! a( o##ortu(ity o! doi(' modeli(' 2or9 Li9e2ise " i! a( old 8uildi(' is #ro#osed to 8e used !or a
8usi(ess" 23ere re(t o! t3e 8uildi(' is t3e o##ortu(ity $ost T3e o##ortu(ity $ost $o($e#t 2as !irst
de&elo#ed 8y a( Austria( e$o(omist" +ieser
T3e o##ortu(ity $ost $o($e#t #lays a( im#orta(t role i( ma(a'erial de$isio(s It is use!ul
i( determi(atio( o! relati&e #ri$es o! di!!ere(t 'oods It is also use!ul i( !iAi(' t3e #ri$e o! a( out#ut
!a$tor A8o&e all" it 3el#s i( t3e 8est allo$atio( o! a&aila8le resour$es
S*nD Cos) 2 Su(9 $osts are t3ose 23i$3 3a&e already 8ee( i($urred a(d 23i$3 $a((ot 8e $3a('ed
8y a(y de$isio( made (o2 or i( t3e !uture T3ese are #ast or 3istori$al $osts
In6.-m-n),/ 6os)2 T3ese are additio(al $osts i($urred due to a $3a('e i( t3e le&el or (ature o! a$ti&ity
!i<<-.-n)i,/ Cos) 2 It re!ers to t3e $3a('e i( $ost due to $3a('e i( t3e le&el o! a$ti&ity or #atter( o!
#rodu$tio( or met3od o! #rodu$tio(

E?0/i6i) Cos)2 EA#li$it $osts are t3ose $osts" 23i$3 are a$tually #aid For #aid i( $as3O T3ey are #aid
out $osts
Im0/i6i) Cos)2 Im#li$it $osts are t3ose $osts" 23i$3 are (ot #aid i( $as3 to a(yo(e T3ese are (ot
a$tually i($urred" 8ut are $om#uted !or de$isio(:ma9i(' #ur#ose T3ese are t3e $osts" 23i$3 t3e
e(tre#re(eur #ays to 3imsel! For eAam#le" re(t $3ar'ed o( o2(ed #remises" 2a'es o! e(tre#re(eur"
i(terest o( o2(ed $a#ital et$ Im#li$it $osts are also 9(o2( as im#uted $osts or 3y#ot3eti$al $osts
A66o*n)in8 6os)2 A$$ou(ti(' $osts re#rese(t all su$3 eA#e(ditures" 23i$3 are i($urred 8y a !irm
o( !a$tors o! #rodu$tio( T3us " a$$ou(ti(' $osts are eA#li$it $osts I( s3ort" all items o! eA#e(ses
a##eari(' o( t3e de8it side o! tradi(' " #ro!it a(d loss a$$ou(t o! a !irm re#rese(t t3e a$$ou(ti(' $ost
Si($e all t3e eA#e(ses o( #rodu$tio( are i( mo(ey terms" t3e a$$ou(ti(' $osts are mo(ey $osts or
(omi(al $osts
E6onomi6 Cos)
E$o(omi$ $ost re!ers total o! eA#li$it $ost a(d im#li$it $ost T3us it i($ludes t3e #ayme(t !or !a$tors o!
#rodu$tio(Ft3at is re(t" 2a'es et$O a(d t3e #ayme(ts !or t3e sel! o2(ed !a$tors Fi(terest o( o2(ed
$a#ital" re(t o( o2(ed #remises" salary to e(tre#re(eur et$O
!i<<-.-n6- 1-)E--n A66o*n)in8 Cos) ,nd E6onomi6 Cos)
A$$ou(ti(' $ost mea(s t3e eA#e(ses i($urred 8y t3e !irm o( #rodu$tio( a(d sale o! 'oods or ser&i$e
T3ese are #aid 8y t3e !irm to t3e outsiders For eAam#le" #ayme(t made !or 2a'es" ra2 materials" !uel"
#o2er" 8uildi(' et$ are t3e a$$ou(ti(' $osts A$$ou(ti(' $ost is t3e mo(ey #aid !or $o(tra$tual
#ayme(ts It i($ludes #ayme(ts a(d $3ar'es made 8y t3e e(ter#rise to t3e su##liers o! resour$es It
is t3e eA#li$it $ost Dut e$o(omi$ $ost i($ludes (ot o(ly eA#li$it $ost 8ut also im#li$it or im#uted $ost
Im#li$it $ost i($ludes re(t $3ar'ed o( o2(ed #remises" i(terest $3ar'ed o( o2(ed $a#ital" 2a'es #aid to
e(tre#re(eur et$ Im#li$it $ost is (ot i($luded i( a$$ou(ti(' $ost A$$ou(ti(' $ost i($ludes o(ly
eA#li$it $osts 23i$3 are re$orded i( t3e 8oo9s o! a$$ou(t Im#li$it $ost 2ill (ot 8e re$orded i( t3e 8oo9s
RI DFFR5-+ )*5V +*H HFR-RPLV+6V FR-FHS+ RI FRV+ LV PRUH FRPSUH*H-VLYH DV FRPSDUH%
+R DFFR5-+D-+6V $o($e#t o! $ost
A$$ou(ti(' $ost are 'e(erally used !or !i(a($ial re#orti(' a(d $o(trol E$o(omi$ $osts are used
!or de$isio(:ma9i('
I( s3ort" a$$ou(ti(' $osts i(&ol&e o(ly $as3 #ayme(ts made 8y t3e e(tre#re(eur O( t3e ot3er
3a(d" e$o(omi$ $osts i($lude all t3ese a$$ou(ti(' $osts #lus t3e im#li$it $ost
So6i,/ Cos) o< P.od*6)ion(o. So6i,/ Cos))
I( t3e #rodu$tio( o! 'oods" $osts 2ill 8e i($urred (ot o(ly 8y t3e o2(ers 8usi(ess 8ut also 8y t3e
so$iety Cost i($urred 8y a so$iety i( terms o! resour$es used i( t3e #rodu$tio( o! a $ommodity is
9(o2( as so$ial $ost o! #rodu$tio( It is t3e o##ortu(ity $ost 8or(e 8y a 23ole so$iety or
$ommu(ity So$ial $osts i($lude (ot o(ly t3e $ost 8or(e 8y t3e o2(ers o! a 8usi(essFor #rodu$ersO 8ut
also t3e $ost #assed o( to t3e so$iety For eAam#le" #rodu$tio( o! $ertai( $ommodities F$3emi$al"
ru88er" #etroleum" steel et$O $auses e(&iro(me(t #ollutio( Pollutio( $aused 23ile #rodu$i(' a
$ommodity im#oses a so$ial $ost o( t3ose reside(ts 23o su!!er ill 3ealt3 Some i(dustries lea&e
2astes 23i$3 t3e adCoi(i(' areas 3a&e to 8ear A $ost t3at is (ot 8or(e 8y t3e !irm 8ut is i($urred 8y
ot3ers i( t3e so$iety is $alled eAter(al $ost So$ial $ost i($ludes eAter(al $osts a(d #ri&et $ost
F8e$ause !irms are also a#art o! so$ietyO T3us" so$ial $ost is t3e total $ost o! t3e so$iety o( a$$ou(t
o! #rodu$tio( o! a $ommodity For eAam#le" t3e so$ial $ost o! liRuor sold 8y a !irm i($ludes t3e $ost
i($urred 8y t3e !irm F#ri&ate $ostO a(d t3e $ost li9e eA#e(diture o! additio(al #oli$e !or$e to deal 2it3
t3e dru(9e( #eo#le a(d su$3 ot3er i($ide(tal eA#e(ses !or t3e so$iety Ta9e a(ot3er eAam#le +3e(

#eo#le 'o !or #i$(i$ i( t3e #ar9 a(d t3ro2 2ra##ers" t3e( t3ey im#ose a real $ost o( t3e reside(ts o!
t3at area 23o 3a&e to $lea( u# t3e #ar9 T3is is so$ial $ost T3us so$ial $ost i($ludes real $ost 23i$3 is
t3e $ost 8or(e 8y t3e so$iety" dire$tly or i(dire$tly due to t3e #rodu$tio( o! 'oods I( s3ort so$ial
$osts are t3ose $osts "23i$3 are i($urred 8y t3e so$iety i( #rodu$i(' $ommodities a(d ser&i$es It is
t3e sum o! #ri&ate $osts o! #rodu$tio( a(d e$o(omi$ dama'e u#o( so$iety
P.i3,)- Cos) o< P.od*6)ion(P.i3,)- Cos)s)
Pri&ate $ost are t3e $osts i($urred 8y a !irm i( #rodu$tio( a $ommodity or ser&i$e All t3e a$tual $osts
i($urred 8y a !irm or #rodu$ers are #ri&ate $osts Pri&ate $osts i($lude 8ot3 eA#li$it $ost a(d
im#li$it $ost Pri&ate $osts 3a&e to 8e 8or(e 8y o(ly t3ose #erso(s or !irms 23o ma9e de$isio( T3ese
do (ot i($lude t3e e!!e$t o! t3e #rodu$ed $ommodity o( t3e so$iety
!i<<-.-n6- 1-)E--n P.i3,)- Cos) ,nd So6i,/ Cos)
Pri&ate $osts are t3e $osts i($urred 8y a !irm 23ile #rodu$i(' a $ommodity or ser&i$e Dut
so$ial $osts are t3ose $osts " 23i$3 are i($urred 8y t3e so$iety i( #rodu$i(' $ommodities or ser&i$es
So$ial $osts i($lude #ri&ate $osts a(d eAter(al $osts Pri&ate $osts i($lude 8ot3 eA#li$it a(d im#li$it
$osts Pri&ate $osts do (ot i($lude eAter(al $osts
T3e $o($e#t o! so$ial $ost e(a8les to u(dersta(d t3e so$ial im#li$atio( o! t3e utiliNatio(
o! s$ar$e resour$es amo(' t3e di!!ere(t se$tio(s o! t3e so$iety T3e e$o(omi$ o#timum is t3e yardsti$9
i( matters o! #ri&ate $ost" 8ut so$ial o#timum is t3e 'o&er(i(' !a$tor i( t3e $ase o! so$ial $ost
'i?-d ,nd V,.i,1/- Cos) 2"
'i?-d Cos)2 FiAed $ost are t3ose $osts 23i$3 do (ot &ary 2it3 t3e &olume o! #rodu$tio( T3ese $osts
remai( !iAed or $o(sta(t u# to a $ertai( le&el o! #rodu$tio( E&e( i! t3e #rodu$tio( is Nero" a !irm
2ill 3a&e to i($ur !iAed $osts EAam#les are re(t" i(terest" de#re$iatio(" i(sura($e" salaries et$ T3e
!iAed $osts are also $alled su##leme(tary $osts" $a#a$ity $osts or #eriod $osts or o&er3ead $osts
A&era'e !iAed $ostF!iAed $ost #er u(itO $3a('es 2it3 a $3a('e i( t3e Rua(tity o! #rodu$tio( I!
t3e &olume o! #rodu$tio( i($reases" a&era'e !iAed $ost 2ill de$rease I! t3e Rua(tity o! #rodu$tio(
de$rease" a&era'e !iAed $ost 2ill i($rease T3us" t3ere Is a( i(&erse relatio(s3i# 8et2ee( !iAed $osts
a(d Rua(tity o! #rodu$tio(
A&era'e !iAed $ost is o8tai(ed 8y di&idi(' total !iAed $ost 8y total out#ut Total !iAed $ost $ur&e
a(d a&era'e !iAed $ost $ur&e are s3o2( 8elo2 0
TFC
TFC AFC
#ri$e
#i$e AFC
Out#ut Out#ut
From t3e a8o&e 'ra#3 it is $lear t3at t3e total !iAed $ost $ur&e is 3oriNo(tal to t3e O5 aAis O( t3e
ot3er 3a(d t3e a&era'e !iAed $ost $ur&e slo#es !rom le!t to ri'3t T3is im#lies t3at as t3e out#ut
i($reases " t3e a&era'e !iAed $ost !alls

V,.i,1/- Cos)2
Varia8le $osts are t3ose $osts" 23i$3 $3a('e 2it3 t3e Rua(tity o! #rodu$tio( +3e( t3e out#ut
i($reases" &aria8le $ost also i($reases +3e( t3e out#ut de$reases " t3e &aria8le $ost also de$reases
T3us " t3ere is a dire$t relatio(s3i# 8et2ee( &aria8le $ost a(d &olume o! #rodu$tio(
Varia8le $osts are also 9(o2( as #rime $osts or dire$t $osts EAam#les are materials" 2a'es" #o2er"
stores et$ Prime or &aria8le $ost $o(sist o! dire$t material $ost" dire$t la8our $ost a(d ot3er dire$t
eA#e(ses
B*sin-ss 6os) ,nd <*// 6os)
Dusi(ess $ost i($lude all t3e eA#e(ses 23i$3 are i($urred to $arryout a 8usi(ess It i($ludes all t3e
#ayme(ts a(d $o(tra$tual o8li'atio(s made 8y t3e !irm to'et3er 2it3 t3e 8oo9 $ost o! de#re$iatio( o(
#la(t a(d eRui#me(t T3ese $ost $o($e#ts are used !or $al$ulati(' 8usi(ess #ro!its a(d losses a(d !or
!ili(' retur(s !or i($ome: taA a(d also !or ot3er le'al #ur#oses
T3e $o($e#t o! !ull $osts "i($ludes 8usi(ess $osts" o##ortu(ity $osts a(d (ormal #ro!itsT3e
o##ortu(ity $ost i($ludes t3e eA#e$ted ear(i('s !rom t3e se$o(d 8est use o! t3e resour$es"or t3e mar9et
rate o! i(terest o( t3e total mo(ey $a#ital a(d also t3e &alue o! t3e e(tre#reu(ers o2( ser&i$es 23i$3 are
(ot $3ar'ed !or i( t3e $urre(t 8usi(essNormal #ro!it is a (e$essary mi(imum ear(i(' i( additio( to t3e
o##ortu(ity $ost"23i$3 a !irm must 'et to remai( i( its #rese(t o$$u#atio(
To),/ 6os), A3-.,8- 6os) ,nd M,.8in,/ 6os)
Total $ost mea(s t3e sum o! total !iAed $ost a(d total &aria8le $ost I( ot3er 2ords it is t3e a''ra'ate
mo(ey $ost o! #rodu$tio( o! a $ommodity
A&era'e $ost is t3e $ost #er u(it o! out#utT3at is total $ost di&ided 8y (um8er o! u(its #rodu$ed
A&era'e $ostXtotal a&era'e !iAed $ostHtotal a&era'e &aria8le $ost
Mar'i(al $ost is t3e additio(al $ost to total $ost 23e( a( additio(al u(it is #rodu$ed
S5o.) .*n ,nd Lon8 .*n 6os)s
S3ort ru( $ost are t3ose $osts 23i$3 may &ary 2it3 out#ut 23ile !iAed !a$tors remai( $o(sta(tOut#ut
may &ary 8y $3a('i(' t3e &aria8le !a$tors o(ly Dut o( t3e ot3er 3a(d lo(' ru( is a #eriod 23i$3 is
e(ou'3 to adCust all i(#ut !a$tors T3us lo(' ru( $osts are t3ose $osts 23i$3 &ary 2it3 out#ut 23e( all
i(#ut !a$torsF!iAed a(d &aria8leO are &aria8le
Cos) <*n6)ion
T3e relatio(s3i# 8et2ee( $ost a(d out#ut is te$3(i$ally 9(o2( as $ost !u($tio( 23ere O
TC X ! F-O TCX Total $ost"
!X !u($tio( o!"
-X-ua(tity #rodu$ed
R-3-n*- Con6-0)
S HYH-5H PHD-V +*H F5UUH-+ L-FRPH RU VLPSO7 4VDOHV UHFHLS+V6. I( ot3er 2ords it is t3e mo(ey
&alue o! out#ut sold i( t3e mar9et Furt3ur it 3as 'reat rele&a($e i( e$o(omi$s a(d 8usi(ess
T+0-s o< .-3-n*-
Mai(ly t3ere are !our mai( $o($e#ts o! re&e(ue
> Total re&e(ue
1A&era'e re&e(ue
<Mar'i(al re&e(ue
Q I($reme(tal re&e(ue
To),/ .-3-n*- mea(s t3e #rodu$t o! #ri$e o! t3e $ommodity to t3e total Rua(ity o! out#uts #rodu$ed i(
a $urre(t 8usi(ess #eriod A3-.,8- .-3-n*- is o8tai(ed 8y di&idi(' t3e total re&e(ue 2it3 (um8er o!
u(its soldM,.8in,/ .-3-n*- is t3e additio(al re&e(ue to total re&e(ue 23e( a( additio(al u(it is
#rodu$ed

In6.-m-n),/ R-3-n*-
I($reme(tal re&e(ue sim#ly re!ers to i($rease i( re&e(ue It is t3e di!!ere($e 8et2ee( t3e (e2 total
re&e(ue a(d t3e eAisti(' total re&e(ue It measures t3e im#a$t o! de$isio( alter(ati&es o( t3e total
re&e(ue T3e !ormula !or measuri(' i($reme(tal re&e(ue is as !ollo2s0
IR X R :R
1 >
+3ere" IR X I($reme(tal re&e(ue
R X Ne2 total re&e(ue
1
R X Old or eAisti(' total re&e(ue
>
Su##ose t3e #rese(t &olume o! #rodu$tio( is SLLLL u(its a(d t3e selli(' #ri$e is Rs< T3e
eAisti(' total re&e(ue is Rs>SLLLL Fie"SLLLL A <O Su##ose t3e !irm 3as de$ided to i($rease t3e
#rodu$tio( to )SLLL u(its T3e !irm eA#e$ts t3at t3e )SLLL u(its $a( 8e sold at a #ri$e o! Rs1SL T3e(
t3e total re&e(ue F(e2O 2ould 8e Rs>?)SLLFie")SLLLA1SOI( t3is $ase t3e i($reme(tal re&e(ue 2ould
8e Rs<)SLL Fi:e>"?)"SLL:>"SL"LLLO As a result o! t3e de$isio( ta9e( to i($rease t3e #rodu$tio(
!rom SL"LLL u(its to )S"LLL u(its" t3ere is a( i($rease i( t3e total measure 8y Rs <)"SLLT3is is t3e
i($reme(tal re&e(ue It may 8e (oted t3at i($reme(tal re&e(ue 2ill result (ot !rom $3a('e i( #ri$e
alo(e 8ut !rom a(y de$isio( alter(ati&e
C*-s)ions
(Each question carries a1/4 weightage)
> . Mo(ey $ost are also 9(o2( as:::::::::::::::::::::::T
1 :::::::::::Costs do (ot &ary 2it3 t3e &olume o! #rodu$tio( T
< ::::::::::$ost is more use!ul !or de$isio( ma9i(' T
Q +3e( t3e mar'i(al re&e(ue is:::::::::::::::total re&e(ue is maAimum T
S ::::::::::::Is t3e di!!ere($e 8et2ee( t3e (e2 total re&e(ue a(d t3e eAisti(' total re&e(ue T
(Each question carries a weightage of 1)
1. De!i(e su(9 Cost T
2. Disti('uis3 8et2ee( A$$ou(ti(' $ost a(d e$o(omi$ $ostT
%. De!i(e !iAed $ost T
;. +3at is eA#li$it Cost T
&. +3at are So$ial $osts T
#. +3at is Mar'i(al re&e(ue
(Each question carries a weightage of 2)
1. Disti('uis3 8et2ee( mar'i(al $ost a(d i($reme(tal $ost T
2. Disti('uis3 8et2ee( lo(' ru( $ost a(d s3ort ru( $ost T
%. State t3e relatio( s3i# 8et2ee( TC" AC a(d MC T
;. Disti('uis3 8et2ee( mar'i(al re&e(ue a(d i($reme(tal re&e(ue T

MO!ULE V (A)
PRICING POLICY AND PRACTICES.
Formulati(' #ri$e #oli$ies a(d setti(' t3e #ri$e are t3e most im#orta(t as#e$ts o! ma(a'erial
de$isio( ma9i(' Pri$e i( !a$t" is t3e sour$e o! re&e(ue 23i$3 t3e !irm see9s to maAimiNe A'ai(" it is
t3e most im#orta(t de&i$e a !irm $a( use to eA#a(d t3e mar9et I! t3e #ri$e is set too 3i'3" a seller may
#ri$e 3imsel! out o! t3e mar9et I! it is too lo2" 3is i($ome may (ot $o&er $osts" or at 8est" !all s3ort o!
23at it $ould 8e I( ot3er 2ords" i! t3e Com#a(y #ri$es too mu$3" it 2ill ma9e !e2er sales I! it $3ar'es
too little" it 2ill sa$ri!i$e #ro!its So t3e #ri$e must 8e !iAed Cudi$iously
M-,nin8 o< 0.i6-
Pri$e is t3e mo(ey &alue o! t3e 'oods a(d ser&i$es I( ot3er 2ords" it is t3e eA$3a('e &alue o! a
#rodu$t or ser&i$e i( terms o! mo(ey To t3e seller" #ri$e is a sour$e o! re&e(ue To t3e 8uyer" #ri$e is
t3e sa$ri!i$e o! #ur$3asi(' #o2er
',6)o.s 8o3-.nin8 0.i6-s ,nd 0.i6in8 d-6ision
Pri$e is &ery im#orta(t to 8ot3 t3e 8uyer a(d t3e seller I( t3is $o((e$tio(" it may 8e (oted t3at i(
e$o(omi$ t3eory" t2o #arties s3ould 8e 'e(erally em#3asiNed ie Duyers a(d sellers I( #ra$ti$e"
3o2e&er" as #oi(ted out 8y OAe(!eldt" $ertai( ot3er #arties are also i(&ol&ed i( t3e #ri$i(' #ro$ess" ie
Ri&al seller" #ote(tial ri&als" middleme( G 'o&er(me(t All t3ese #arties also eAer$ise t3eir i(!lue($e i(
#ri$e determi(atio(
Fa$tors 'o&er(i(' #ri$es may 8e di&ided i(to eAter(al !a$tors a(d i(ter(al !a$tors
In)-.n,/ ',6)o.s2
T3ese are t3e !a$tors 23i$3 are 2it3i( t3e $o(trol o! t3e or'a(iNatio( Various i(ter(al !a$tors are as
!ollo2s
> Cos)2 T3e #ri$e must $o&er t3e $ost o! #rodu$tio( i($ludi(' materials" la8our" o&er3ead"
admi(istrati&e a(d selli(' eA#e(ses a(d a reaso(a8le #ro!it
1 O1>-6)i3-s2 0*LOH ILWL-B +*H SULFH +*H ILUP6V REMHF+LYHV DUH +R EH +DNH- L-+R
FR-VL%HUD+LR- O8Ce$ti&es may 8e maAimum sales" tar'eted rate o! retur(" sta8ility i( #ri$es" i($rease mar9et s3are"
meeti(' or #re&e(ti(' $om#etitio(" #roCe$ti(' ima'e et$
< O.8,ni7,)ion,/ <,6)o.s2 I(ter(al arra('eme(t o! t3e or'a(iNatio( Or'a(iNatio(al me$3a(ism is to
8e ta9e( i(to $o(sideratio( 23ile de$idi(' t3e #ri$e
Q M,.D-)in8 Mi?2 Ot3er eleme(t o! mar9eti(' miA" #rodu$t" #la$e" #romotio(" #a$e a(d #oliti$s are
i(!lue($i(' !a$tors !or #ri$i(' Si($e t3ese are i(ter$o((e$ted" $3a('e i( o(e eleme(t 2ill i(!lue($e
t3e ot3er
S P.od*6) di<<-.-n)i,)ion2 O(e o! t3e o8Ce$ti&es o! #rodu$t di!!ere(tiatio( is to $3ar'e 3i'3er #ri$es
E P.od*6) /i<- 6+6/-2 At &arious sta'es i( t3e Produ$t Li!e Cy$le" &arious strate'i$ #ri$i(' de$isio(s
are to 8e ado#ted" e' I( t3e i(trodu$tio( sta'e Usually !irm $3ar'es lo2er #ri$e a(d i( 'ro2t3 sta'e
$3ar'es maAimum #ri$e
) C5,.,6)-.is)i6s o< 0.od*6)2 Nature o! #rodu$t" dura8ility" a&aila8ility o! su8stitute et$ 2ill also
i(!lue($e t3e #ri$i('

E?)-.n,/ ',6)o.s.
T3ese !a$tors are 8eyo(d t3e $o(trol o! or'a(iNatio( T3e !ollo2i(' are t3e mai( eAter(al !a$tors
> !-m,nd2 I! t3e dema(d !or a #rodu$t is I(elasti$ it is 8etter to !iA a 3i'3er #ri$e a(d i! dema(d
is elasti$" lo2er #ri$e may 8e !iAed
1 Com0-)i)ion2 Num8er o! su8stitutes a&aila8le i( t3e mar9et a(d t3e eAte(t o! $om#etitio( a(d
t3e #ri$e o! $om#etitio( et$ are to 8e $o(sidered 23ile !iAi(' a !irm #ri$e
< !is).i1*)ion 65,nn-/s2 Co(!li$ti(' i(terest o! ma(u!a$turers a(d middlema( is o(e o! t3e o! t3e
im#orta(t !a$tor t3at a!!e$t t3e #ri$i(' de$isio( Ma(u!a$turer 2ould desire t3at middlema(
s3ould sell t3e #rodu$t at a mi(imum mar9 u#
Q :-n-.,/ -6onomi6 6ondi)ions0 Duri(' i(!latio( a !irm !or$ed to !iA a 3i'3er #ri$e a(d i(
de!latio( !or$ed to redu$e t3e #ri$e
S :o3-.nm-n) Po/i6+0 +3ile ta9i(' #ri$i(' de$isio(" a !irm 3as to ta9e i(to $o(sideratio( t3e
taAatio( #oli$y" trade #oli$ies et$ o! t3e %o&er(me(t
E R-,6)ion o< 6ons*m-.s2 I! a !irm !iAes t3e #ri$e o! its #rodu$t u(reaso(a8ly 3i'3" t3e $o(sumer
may 8oy$ott t3e #rodu$t
P.i6in8 Po/i6i-s.
Pri$e must (ot 8e too 3i'3 or too lo2 Pri$e setti(' is a $om#leA #ro8lem T3e #ri$i(' de$isio(
is $riti$al (ot o(ly i( t3e 8e'i((i(' 8ut it must 8e re&ie2ed a(d re!ormulated !rom time to time
Pri$e #oli$ies #ro&ide t3e 'uideli(es 2it3i( 23i$3 #ri$i(' strate'y is !ormulated a(d im#leme(ted
It re#rese(ts t3e 'e(eral !rame 2or9 2it3i( 23i$3 #ri$i(' de$isio( are ta9e( Pri$e #oli$ies are
t3ose ma(a'eme(t 'uideli(es t3at $o(trol t3e day to day #ri$i(' de$isio( as a mea(s o! meeti(' t3e
o8Ce$ti&es o! t3e !irm su$3 as maAimiNatio( o! #ro!it" maAimiNatio( o! sales" tar'eted rate o! retur("
sur&i&al" sta8ility o! #ri$es" meeti(' or #re&e(ti(' $om#etitio( et$
S)-0s i( !ormulati(' #ri$i(' #oli$ies0
> Sele$ti(' t3e tar'et mar9et or mar9et se'me(t o( 23i$3 mar9eter 2ould $o($e(trate more
1 Studyi(' t3e $o(sumer 8e3a&ior a(d $olle$ti(' i(!ormatio( relati(' to tar'et mar9et sele$ted
< Studyi(' t3e #ri$es" #romotio( strate'ies et$o! t3e $om#etitors a(d t3eir im#a$t o( t3e mar9et
se'me(t
Q Assi'(i(' a role to #ri$e i( t3e mar9eti(' miA
S Colle$ti(' t3e $ost o! ma(u!a$turi(' t3e #rodu$t at di!!ere(t le&els o! dema(d
E FiAi(' suita8le Fstrate'i$O #ri$e a!ter determi(i(' t3e #ri$e o8Ce$ti&es a(d a$$ordi(' to a sele$ted
met3od o! #ri$i('
O1>-6)i3-s o< 0.i6in8 0o/i6+.
Pri$i(' de$isio(s are usually $o(sidered a #art o! t3e 'e(eral strate'y !or a$3ie&i(' a 8roadly
de!i(ed 'oal De!ore determi(i(' t3e #ri$e itsel!" t3e ma(a'eme(t s3ould de$ide t3e o8Ce$ti&es
+3ile setti(' t3e #ri$e" t3e !irm may aim at o(e or more o! t3e !ollo2i(' o8Ce$ti&es

> P.o<i) m,?imi7,)ion0 Si($e t3e #rimary moti&e o! 8usi(ess is to ear( maAimum #ro!it" #ri$i('
al2ays aim at maAimiNatio( o! #ro!it t3rou'3 maAimiNatio( o! sales
1 M,.D-) s5,.-2 For maAimiNi(' mar9et s3are a !irm may lo2er its #ri$e i( relatio( to t3e
$om#etL+RUV6 #rodu$t
< T,.8-) .-)*.n in in3-s)m-n)0 T3e !irm s3ould !iA t3e #ri$e !or t3e #rodu$t i( su$3 a 2ay t3at it
2ill satis!y eA#e$ted retur(s !or t3e i(&estme(t
Q M--) o. 0.-3-n) 6om0-)i)ion2 I( order to dis$oura'e $om#etitio( a !irm may ado#t a lo2 #ri$e
#oli$y
S P.i6- s),1i/i7,)ion2 A(ot3er o8Ce$ti&e o! #ri$i(' is to sta8iliNe t3e #rodu$t #ri$es o&er a
$o(sidera8le #eriod o! time
E R-so*.6- mo1i/i7,)ion0 Com#a(y may !iA t3eir #ri$es i( su$3 a 2ay t3at su!!i$ie(t resour$es
are made a&aila8le !or t3e !irms eA#a(sio(" de&elo#me(tal i(&estme(t et$
) S0--d *0 6,s5 6o//-6)ion2 Some !irms try to set a #ri$e 23i$3 2ill e(a8le ra#id $as3 re$o&ery
as t3ey may 8e !i(a($ially ti'3t or may re'ard !uture is too u($ertai( to Custi!y #atie(t $as3
re$o&ery
? S*.3i3,/ ,nd 8.oE)52 A( im#orta(t o8Ce$ti&e o! #ri$i(' is sur&i&al a(d a$3ie&i(' t3e eA#e$ted
rate o! 'ro2t3 Pro!it is less im#orta(t t3a( sur&i&al
U P.-s)i8- ,nd 8oodEi//2 Pri$i(' also aims at mai(tai(i(' t3e #resti'e a(d e(3a($i(' t3e
'ood2ill o! t3e !irm
10. A65i-3in8 0.od*6) PF*,/i)+ /-,d-.s5i00 Some Com#a(ies aim at esta8lis3i(' #rodu$t Ruality
leader t3rou'3 #remium #ri$e.
M-)5ods o< 0.i6in8.
> Cost Plus #ri$i('
1 Tar'et #ri$i('
< %oi(' rate #ri$i('
Q Customary #ri$i('
S Follo2 u# #ri$i('
E Di!!ere(tial #ri$i('
) Mar'i(al $ost #ri$i('
? Darometri$ #ri$i('
> Cos) 0/*s 0.i6in82 T3is is t3e most $ommo( met3od used !or #ri$e U(der t3is met3od" t3e #ri$e
is !iAed to $o&er all $osts a(d a #redetermi(ed #er$e(ta'e o! #ro!itie" t3e #ri$e is $om#uted 8y
addi(' a $ertai( #er$e(ta'e to t3e $ost o! t3e #rodu$t #er u(it T3is met3od is also 9(o2( as mar'i(
#ri$i(' or a&era'e $ost #ri$i(' or !ull $ost #ri$i(' or mar9 u# #ri$i(' T3e 8usi(ess !irm u(der
oli'o#oly a(d mo(o#olisti$ mar9et are !ollo2i(' t3is #ri$i(' #oli$y
2. T,.8-) 0.i6in80 T3is is &aria(t o! !ull $ost #ri$i(' U(der t3is met3od" t3e $ost is added 2it3 t3e
#redetermi(ed tar'et rate o! retur( o( $a#ital i(&ested I( t3is $ase t3e $om#a(y estimates !uture
sales" !uture $ost a(d $al$ulates a tar'eted rate o! retur( o( $a#ital i(&ested T3is is also $alled as
rate o! retur( #ri$i('

%. M,.8in,/ 6os) 0.i6in80 U(der t3e mar'i(al $ost #ri$i('" t3e #ri$e is determi(ed o( t3e 8asis o!
mar'i(al $ost or &aria8le $ost I( t3is met3od" !iAed $osts are totally eA$luded
Q !i<<-.-n)i,/ 0.i6in82 U(der t3is met3od" t3e same #rodu$t is sold at di!!ere(t #ri$es to di!!ere(t
$ustomers" i( di!!ere(t #la$es" a(d at di!!ere(t #eriods T3is met3od is $alled dis$rimi(atory #ri$i('
or #ri$e dis$rimi(atio( EAam#les" Ci(ema t3eater" tele#3o(e 8ills et$
&. :oin8 .,)- 0.i6in80 u(der t3is met3od" #ri$es are mai(tai(ed at #ar 2it3 t3e a&era'e le&el o!
#ri$es i( t3e i(dustry Ie" u(der t3is met3od a !irm $3ar'es t3e #ri$es a$$ordi(' to 23at $om#etitors
are $3ar'i(' Firm a$$e#ti(' t3e #ri$e #re&aili(' i( t3e i(dustry i( order to a&oid #ri$e 2ar T3is
met3od is also $alled a$$e#ta($e #ri$i(' or #arity #ri$i('
#. C*s)om,.+ 0.i6in82 i( t3e $ase o! some $ommodities t3e #ri$es 'et !iAed 8e$ause t3ey 3a&e
#re&ailed o&er alo(' #eriod o! time EAam#les" t3e #ri$e o! $u# o! tea or $o!!ee I( s3ort t3e #ri$es
are !iAed 8y $ustom T3e #ri$e 2ill $3a('e o(ly 23e( t3e $ost $3a('es si'(i!i$a(tly It is also $alled
$o(&e(tio(al #ri$i('
$. 'o//oE *0 0.i6in80 t3is is t3e most #o#ular #ri$e #oli$y U(der t3is" a !irm determi(es t3e #ri$e
#oli$y a$$ordi(' to t3e #ri$e #oli$ies o! $om#etitors I! t3e $om#etitors redu$e t3e #ri$e o! t3e
#rodu$t" t3e !irm also redu$es t3e #ri$e o! its #rodu$t I! t3e $om#etitors i($rease t3e #ri$e" t3e !irma
also !ollo2 t3e same
H. B,.om-).i6 0.i6in80 t3is is t3e met3od o! leaders3i# #ri$i(' I( t3is ty#e o! #ri$e leaders3i#"
t3ere is (o leader !irm Dut o(e !irm amo(' t3e oli'o#olisti$ !irms a((ou($es a #ri$e $3a('e !irst
T3is is !ollo2ed 8y ot3er !irms i( t3e i(dustry T3e 8arometri$ #ri$e leader (eed (ot 8e a domi(a(t
!irm 2it3 t3e lo2est $ost or e&e( t3e lar'est !irm i( t3e i(dustry 8ut t3ey res#o(ds to $3a('es i(
8usi(ess e(&iro(me(ts ra#idly O( t3e 8asis o! a !ormal or i(!ormal ta$it a'reeme(t" t3e !irms i( t3e
i(dustry a$$e#t a !irm as #ri$e leader 23o may a$t !irstly u#o( t3e e(&iro(me(tal or mar9et $3a('es
P.i6in8 o< , n-E 0.od*6). (M-)5ods ,nd s).,)-8+)
I( #ri$i(' a (e2 #rodu$t" 'e(erally t2o ty#es o! strate'ies are su''ested T3ey are@
1. SDimmin8 0.i6- s).,)-8+
T3is is do(e 2it3 a 8asi$ idea o! 'ai(i(' a #remium !rom t3ose 8uyers 23o al2ays ready to #ay
a mu$3 3i'3er #ri$e t3a( ot3ers A$$ordi('ly a #rodu$t is #ri$ed at a &ery 3i'3 le&el due to
i($urri(' lar'e #romotio(al eA#e(ses i( t3e early sta'es T3us s9immi(' #ri$e re!ers to t3e 3i'3
i(itial #ri$e $3ar'ed 23e( a (e2 #rodu$t is i(trodu$ed i( t3e mar9et Reaso(s !or $3ar'i(' t3is
#ri$e are@
A +3e( t3e dema(d o! (e2 #rodu$t is relati&ely i(elasti$
D +3e( t3ere is (o $lose su8stitutes
C Elasti$ity o! dema(d is (ot 9(o2(
D +3e( t3e 8uyers are (ot a8le to $om#are t3e &alue a(d utility
E To attra$t t3e 3i'3 i($ome $ustomers
F To re$o&er early t3e RGD a(d #romotio(al eA#e(ses
% +3e( t3e #rodu$t 3as disti($ti&e Rualities" luAuries et$

2. P-n-).,)ion 0.i6- s).,)-8+
T3is is t3e #ra$ti$e o! $3ar'i(' a lo2 #ri$e ri'3t !rom t3e 8e'i((i(' to stimulate t3e 'ro2t3 o! t3e
mar9et a(d to $a#ture lar'e s3are o! it Si($e t3e #ri$e is lo2er" t3e #rodu$t Rui$9ly #e(etrates t3e mar9et"
a(d $o(sumers 2it3 lo2 i($ome are a8le to #ur$3ase it Reaso(s !or ado#ti(' t3is #oli$y are0
A Produ$t 3as 3i'3 #ri$e elasti$ity i( t3e i(itial sta'e
D T3e #rodu$t is a$$e#ted 8y lar'e (um8er o! $ustomers
C E$o(omies o! lar'e s$ale #rodu$tio( a&aila8le to !irm
D Pote(tial mar9et !or t3e #rodu$t is lar'e
E Cost o! #rodu$tio( is lo2
F To i(trodu$e #rodu$t i(to mar9et
% To dis$oura'e (e2 $om#etitors
H Most o! t3e #ros#e$ti&e $o(sumers are i( lo2 i($ome $lass
inds o< 0.i6in8 (0.i6in8 s).,)-8i-s)
Pri$i(' #oli$y mea(s a #oli$y determi(ed !or (ormal $o(ditio(s o! t3e mar9et Pri$i(' strate'y is a
#oli$y determi(ed to !a$e a s#e$i!i$ situatio( a(d is o! tem#orary (ature Sim#ly #ri$i(' #oli$ies
#ro&ide 'uideli(es to $arry out #ri$i(' strate'y Follo2i(' are t3e im#orta(t #ri$i(' strate'ies
> Ps+65o/o8i6,/ 0.i6in80 Here ma(u!a$turers !iA t3eir #ri$es o! a #rodu$t i( t3e ma((er t3at it
may $reate a( im#ressio( i( t3e mi(d o! $o(sumers t3at t3e #ri$es are lo2 E' Pri$es o! Data
s3oe as RsUUUU T3is is also $alled odd #ri$i('
1 M,.D *0 0.i6in8. T3is met3od o! #ri$i(' is !ollo2ed 8y 23ole salers a(d retailers +3e( t3e
BRR%V DUH UHFHLYH% +*H UH+DLOHUV D%% D FHU+DL- SHUFH-+DBH RI +*H ;*ROH VDOHU6V
SULFH
< Adminis)-.-d 0.i6in80 Here t3e #ri$i(' is do(e o( t3e 8asis o! ma(a'erial de$isio(s a(d (ot o(
t3e 8asis o! $ost" dema(d" $om#etitio( et$
Q O)5-. 0.i6in8 s).,)-8i-s0 %eo'ra#3i$al #ri$i('" 8ase #oi(t #ri$i('" No(e #ri$i('" dual #ri$i('"
#rodu$t li(e #ri$i(' et$ are some ot3er #ri$i(' strate'ies
Ro/- o< Cos) in P.i6in8
Most o! t3e 23olesale a(d retail or'a(iNatio(s add some #er$e(ta'e o! #ro!it or mar9 u# total
$ost #er u(it to arri&e at selli(' #ri$e A$$ordi(' to Hall a(d Hit$3" 8usi(ess !irms u(der t3e
$o(ditio(s o! oli'o#oly a(d mo(o#olisti$ $om#etiti&e mar9et do (ot determi(e #ri$e a(d out#ut 2it3
t3e 3el# o! t3e #ri($i#le MCXMR t3ey determi(e #ri$e a(d out#ut o( t3e 8asis o! !ull a&era'e $ost
o! #rodu$tio( Cost o! #rodu$tio( $o(sists o! !iAed a(d &aria8le $osts I( t3e s3ort ru( t3e !irm may
(ot $o&er t3e !iAed $ost 8ut it must $o&er at least &aria8le $ost I( lo(' ru( all $osts must 8e $o&ered
i! t3e e(tire $ost is (ot re$o&ered" t3e !irm 2ill i($ur losses" a(d t3e !irm must sto# t3eir #rodu$tio(
T3us $osts #ro&ide t3e 8asis !or #ri$i(' I! t3e $ost i($rease #ri$e also i($reases Cost re#rese(ts a
resista($e #oi(t !or lo2eri(' o! #ri$e" ie" 8elo2 23i$3 #ri$i(' s3ould (ot 8e do(e Cost also
determi(es t3e #ro!it mar'i( at &arious le&el o! out#ut
Ro/- o< !-m,nd <,6)o. in 0.i6in8
I( t3e $ase o! #ri$i(' o! a #rodu$t" dema(d #lays a si'(i!i$a(t role I( some $ases dema(d o$$u#ies
a &ital role t3a( $ost T3e dema(d is t3e !a$tor 23i$3 determi(es t3e sales a(d #ro!it +e 9(o2 as
#er la2 o! dema(d" dema(d a(d #ri$e 3a&e i(&erse relatio(s3i# To i($rease t3e dema(d" t3e !irm
3as to redu$e t3e #ri$e Similarly to de$rease t3e dema(d t3e !irm 3as to i($rease t3e #ri$e t3e
elasti$ity o! dema(d is to 8e $o(sidered i( determi(i(' t3e #ri$e o! t3e #rodu$t I! t3e dema(d !or
t3e #rodu$t is elasti$" t3e !irm $a( !iA lo2er #ri$e I! t3e dema(d is i(elasti$" t3e !irm $a( !iA a
3i'3er #ri$e.

Cons*m-. Ps+65o/o8+ ,nd P.i6in8
+3ile !iAi(' t3e #ri$e o! #rodu$t" t3e ma(a'eme(t s3ould 'i&e im#orta($e to $o(sumer #sy$3olo'y
A$tually dema(d o! t3e #rodu$t is 8ased u#o( t3e 8e3a&ior o! $o(sumers Some $o(sumer may 8uy
a #rodu$t o! 3i'3 Ruality e&e( t3ou'3 t3e #rodu$ts are 3i'3ly #ri$ed Co(sumers t3i(9 t3at 3i'3ly
#ri$ed #rodu$ts are o! 3i'3 Ruality I! t3e #ri$e o! #rodu$t is less" $o(sumer 2ill t3i(9 t3at su$3
#rodu$t is o! lo2 Ruality I! t3e #ri$e is too 3i'3" t3e $o(sumer may 8oy$ott t3e #rodu$t a(d t3ey
2ill 'o !or su8stitute #rodu$t o! lo2 #ri$e I! t3e #ri$e is too lo2 t3e $o(sumers t3i(9 t3at t3e 'oods
are o! i(!erior Ruality T3ey 2ill (ot 8uy it T3e im#orta(t eleme(ts t3at i(!lue($e t3e $o(sumer
#sy$3olo'y are@ #ri$e o! t3e #rodu$t" a!ter sales ser&i$e" ad&ertiseme(t a(d sales #romotio(" #erso(al
i($ome" !as3io(s So $o(sumer are ma(y ty#es" t3ey !ollo2 di!!ere(t a##roa$3es to !irms #rodu$t
So i( $ase o! #ri$e determi(atio(" t3e $o(sumer #sy$3olo'y must 'i&e( due 2ei'3ta'e

MO!ULE V (D)
USINESS CYCLE
In).od*6)ion
T3e e$o(omi$ #ro'ress t3e 2orld 3as 8ee( a$3ie&ed is (ot a steady a(d $o(ti(uous mo&eme(t
!or2ard E$o(omi$ a$ti&ities !a$ed !lu$tuatio(s at more or less re'ular i(ter&als T3ere 2ere u#2ard
s2i('s a(d do2(2ard s2i('s A #eriod o! #ros#erity 2as 'e(erally !ollo2ed 8y a #eriod o!
de#ressio( T3ese u#s a(d do2(s i( t3e e$o(omi$ a$ti&ity mo&i(' li9e a 2a&e at re'ular i(ter&als is
9(o2( as 8usi(ess $y$le Dusi(ess $y$le sim#ly mea(s t3e 23ole $ourse o! 8usi(ess a$ti&ity 23i$3
#asses t3rou'3 t3e #3ases o! #ros#erity a(d de#ressio( %e(erally t3ere are t2o 8road #3ases" &iN
#ros#erity a(d de#ressio(
T3e mo&eme(t is li9e t3e s2i(' o! a #e(dulum A mo&eme(t i( o(e dire$tio( te(ds automati$ally to
'e(erate a mo&eme(t i( t3e o##osite dire$tio( T3e #eriod o! 8usi(ess #ros#erity alter(ate 2it3 #eriod
o! de#ressio( T3e #eriod o! 8usi(ess #ros#erity $o(tai(s 2it3i( itsel! t3e seed o! t3e $omi(' #eriod
o! de#ressio( O($e de#ressio( rea$3ed t3e t3rou'3" re$o&ery starts a(d soo( 'ro2s i(to 8oom or
#ros#erity At t3e #ea9 o! t3e 8oom re$essio( 'ri#s t3e e$o(omy 23i$3 soo( slides i(to de#ressio( To
8e s#e$i!i$" t3ere are !our #*DVH6V YLJ UHFRYHU7 ERRP UHFHVVLR- D-% %HSUHVVLR-
T3e Dusi(ess $y$le i(!lue($e 8usi(ess de$isio( T3e $y$les a!!e$t (ot o(ly t3e e$o(omy i(
'e(eral" 8ut ea$3 i(di&idual 8usi(ess !irm T3e #eriod o! #ros#erity #romotes 8usi(ess It #ro&ides
(e2 i(&estme(t o##ortu(ities Li9e2ise" a #eriod o! de#ressio( sla$9e(s 8usi(ess A ma(a'er 23o
is al2ays $o(!ro(ted 2it3 t3e #ro8lem o! !or2ard #la((i(' ta9es i(to $o(sideratio( t3e #3ase o! t3e
8usi(ess $y$le T3is 3el#s to ta9e ad&a(ta'e o! t3e $3a($e a3ead or to redu$e t3e $3a($e o! 3ea&y
losses to t3e !irm
P5,s-s o< 1*sin-ss 6+6/-
Boom
T3is is also 9(o2( as #ros#erity #3ase T3e #rodu$ts i( t3is #3ase !et$3 a( a8o&e (ormal
#ri$e 23i$3 is a8o&e 3i'3er #ro!it T3is attra$ts more a(d more i(&estors T3e eAisti(' #rodu$tio(
$a#a$ity is utiliNed at its !ull $a#a$ity More a(d more (e2 ma$3i(es are made use o! t3e 8usi(ess o! t3e
$a#ital 'oods i(dustry also s3oots u# T3e #ri$e o! t3e !a$tors o! #rodu$tio( i($reases Additio(al
2or9ers are em#loyed at 3i'3er 2a'e rate T3e i($reasi(' $ost te(de($y o! t3e !a$tors o! #rodu$tio(
leads to a $o(ti(uous i($rease i( #rodu$t $ost T3e !iAed i($ome 'rou# o( t3e salaried $lass !i(d it
di!!i$ult to $o#e 2it3 t3is i($rease i( #ri$es T3e i($ome does (ot i($rease a$$ordi('ly a(d t3ey are
(o2 $om#elled to redu$e $o(sum#tio( T3e dema(d is (o2 more or less sta'(a(t or it e&e(
de$reases T3us 8oom or #ros#erity rea$3es its #ea9
R-6-ssion
O($e t3e e$o(omy rea$3es t3e #ea9: t3e $ourse $3a('es A do2(2ard te(de($y i( dema(d is
o8ser&ed 8ut t3e #rodu$ers 23o are (ot a2are o! it 'oes o( #rodu$i(' !urt3er T3e su##ly (o2
eA$eeds dema(d No2 t3e #rodu$ers $ome to (oti$e t3at t3eir sto$9 #ili(' u# T3ey are $om#elled to
'i&e u# t3e !uture i(&estme(t #la(s T3e order !or (e2 eRui#me(ts a(d ra2 materials are
$a($elled A 8usi(ess e&e( $uts do2( its eAisti(' 8usi(ess +or9ers are retre($3ed Ca#ital 'oods
#rodu$ers 23o lose orders Da(9ers i(sist o( re#ayme(t sto$9 a$$umulate a(d Dusi(ess !ailure
i($rease i(&estme(t $eases a(d u(em#loyme(t leads to !all i( i($ome "eA#e(diture "#ri$es " #ro!its a(d
i(dustrial a(d trade a$ti&ities Desire !or liRuidity i($rease all arou(d #rodu$ers are $om#elled to
redu$e #ri$e so t3at t3ey $a( !i(d mo(ey to meet t3eir o8li'atio(s Co(sumers 23o eA#e$t a still !urt3er
de$li(e i( #ri$es #ost#o(e t3eir $o(sum#tio( Sto$9 'oes o( #ili(' u# Some !irms are !or$ed
i(to 8a(9ru#t$y T3e !ailure o! o(e !irm a!!e$ts ot3er !irm 2it3 23om it 3as 8usi(ess $o((e$tio(s
T3ere is a 'e(eral distress T3is #3ase o! t3e 8usi(ess $y$le is 9(o2( as t3e Re$essio( It is t3e #eriod o!
utmost :su!!eri(' !or a 8usi(ess

!-0.-ssion
U(derem#loyme(t o! 8ot3 me( a(d material is t3e $3ara$teristi$s o! t3is #3ase %e(eral dema(d !alls
!aster t3a( #rodu$tio( Produ$ers are $om#elled to see t3eir 'oods at a #ri$e 23i$3 2ill (ot e&e( $o&er
+*H I5OO FRV+ LD-5IDF+5UHV RI ER+* SUR%5FHU6V BRR%V D-% FR-V5PHUs 'oods are !or$ed to
redu$e t3e&olume o! #rodu$tio( As a result 2or9ers are t3ro2( out T3e remai(i(' 2or9ers are #oorly #aid
T3e dema(d !or 8a(9 $redit is at its lo2est 23i$3 results i( idle !u(ds T3e i(terest rates also de$li(e
T3e !irms t3at $a((ot #ay o! t3eir de8ts are 2ou(d u# Pri$es o! s3ares a(d se$urities !all do2(
Pessimism #re&ails i( t3e e$o(omy t3e less $o(!ide(t i(&estors are (ot ready to ta9e u# (e2 i(&estme(t
#roCe$ts T3e a''re'ate e$o(omi$ a$ti&ity is at its 8ottom
R-6o3-.+
De#ressio( #3ase does (ot $o(ti(ue i(de!i(itely De#ressio( $o(tai(s i( itsel! t3e 'ems o!
re$o&ery T3e rule 2or9ers (o2 $ome !or2ard to 2or9 at lo2 2a'es As t3e #ri$es are at its lo2est t3e
$o(sumers" 23o #ost#o(ed t3eir $o(sum#tio( eA#e$ti(' a still !urt3er !all i( #ri$e " (o2 starts
$o(sumi(' T3e 8a(9s" 2it3 a$$umulated $as3 reser&es" (o2 $ome !or2ard to 'i&es loa(s at easier
terms a(d lo2er rates As dema(d i($reases t3e sto$9 o! 'oods 8e$ome i(su!!i$ie(t T3e e$o(omi$
a$ti&ity (o2 starts #i$9i(' u# I(&estme(t #i$9 u# Em#loyme(t a(d out#ut slo2ly a(d steadily
8e'i(s to rise I($reased i($ome i($reases dema(d" resulti(' i( rise i( #ri$es" #ro!its i(&estme(t"
em#loyme(t a(d i($omes T3e 2a&e o! re$o&ery o($e i(itiated soo( 8e'i(s to !eed u#o( Itsel! Sto$9
mar9ets 8e$ome li&e t3us 3aste(i(' t3e re&i&al O#timism de&elo#s amo(' t3e e(tre#re(eurs Da(9
loa(s a(d dema(d !or $redit starts risi(' T3e de#ressio( #3ase at its t3rou'3 t3e( 'i&e( 2ay to
re$o&ery
C5,.,6)-.is)i6s o< , 1*sin-ss 6+6/-
1. T3e $y$le is sy($3ro(i$ T3e u#2ard a(d do2(2ard mo&eme(ts te(d to o$$ur at all t3e same #eriod i(
all i(dustries T3e 2a&e o! #ros#erity or de#ressio( 'e(erate a 2a&e i( ot3er i(dustries +3e(
i(dustry #i$9 u# to #ro&ides more em#loyme(t " more i($ome et$ to 2or9ers a(d it 'i&es (e2
orders !or ra2 materials a(d $a#ital 'oods T3is 3el# ot3er !irms also to #ros#er
2. A 8usi(ess $y$le is a 2a&e:li9e mo&eme(t T3e #eriod o! #ros#erity a(d de#ressio( $a( 8e
alter(ately see( i( a $y$le
3. Cy$li$al !lu$tuatio(s are re$urri(' i( (ature T3e &arious #3ases are re#eated is !ollo2ed 8y
de#ressio( a(d t3e de#ressio( a'ai( i( !ollo2ed 8y a 8oom

4. Dusi(ess $y$les are $umulati&e a(d sel! Prei(!or$i(' i( (ature Ea$3 mo&eme(t !eeds o( itsel! a(d
9ee#s u# t3e mo&eme(t i( t3e same dire$tio( O($e 8ooms starts it 'oes o( 'ro2i(' till !or$es
a$$umulate to re&erse t3e dire$tio(
5. T3ere $a( 8e (o i(de!i(ite de#ressio( or eter(al 8oom #eriod Ea$3 #3ase $o(tai( i( itsel! t3e seed
!or ot3er #3ase T3e 8oom" 23e( it rea$3es its #ea9" tur(s to re$essio(
6. Dusi(ess $y$les are #er&asi&e i( t3eir e!!e$ts T3e $y$li$al !lu$tuatio(s a!!e$t ea$3 a(d e&ery #art o!
t3e e$o(omyDe#ressio( or #ros#erity !elt i( o(e #art o! t3e e$o(omy ma9es its im#a$t i( ot3er
#art also T3e $y$li$al mo&eme(ts are e&e( i(ter(atio(al i( $3ara$ter T3e me$3a(ism o!
i(ter(atio(al trade ma9es t3e 8oom or de#ressio( i( o(e $ou(try s3ared 8y ot3er $ou(tries also
7. Prese($e o! a $risis T3e u# a(d do2( mo&eme(ts are (ot symmetri$al T3e do2(2ard mo&eme(ts are (ot
symmetri$al T3e do2(2ard mo&eme(t is more sudde( a(d &iole(t t3a( t3e u#2ard mo&eme(t
T+0-s o< B*sin-ss C+6/-
Pro! Bames Art3ur $lassi!ied 8usi(ess $y$le i(to < #arts as !ollo2s0
> M,>o. ,nd Mino. T.,d- C+6/-s2 MaCor trade $y$les are t3ose t3e #eriod o! 23i$3 is &ery lar'e
Mi(or trade $y$les are t3ose 23i$3 o$$ur duri(' t3e #eriod o! a maCor $y$le Pro! Ha(so(
determi(es t3e #eriod o! a maCor $y$le 8et2ee(? years a(d << years T2o or t3ree mi(or $y$les o$$ur
duri(' t3e #eriod o! a maCor $y$le Period o! a mi(or $y$le is QL mo(t3s
2. B*i/din8 C+6/-2 Duildi(' Cy$les are t3ose trade $y$les 23i$3 are related 2it3 $o(stru$tio( i(dustry
#eriod o! su$3 $y$le ra('e !rom >S to 1L years
%. Lon8 =,3-s2 Period o! a lo(' 2a&e is o! SL years It 2as dis$o&ered 8y a Russia( e$o(omist
*o(dratie! O(e or t2o maCor trade $y$le o$$ur duri(' t3e #eriod o! a lo(' 2a&e
S65*m0-)-. dis)in8*is5-d % )+0-s o< ).,d- 6+6/- ,s <o//oEs2
> S5o.) i)65in C+6/-2 T3e #eriod o! t3is $y$le is &ery s3ort" a##roAimately Q mo(t3s duratio(
2. Lon8-. >*8/,. 6+6/-2 T3is $y$le 3as a( a&era'e US years duratio(
%. V-.+ /on8 ond.,)i-< =,3-2 It ta9es more t3a( SL years to ru( its $ourse
C,*s-s o< B*sin-ss C+6/-
T2o 9i(ds o! eleme(t or !or$es 8ri(' a8out 8usi(ess $y$le T3ey are i(ter(al a(d eAter(al I(ter(al
!or$es are eleme(ts 2it3i( t3e &ery s#3ere o! 8usi(ess a$ti&ity itsel! a(d i($lude su$3 t3i('s as
#rodu$tio( "i($ome"dema(d" $redit" i(terest rates" a(d i(&e(tories EAter(al !or$es are eleme(ts outside
t3e (ormal s$o#e o! 8usi(ess a$ti&ity a(d i($lude #o#ulatio( 'ro2t3 "2ars" 8asi$ $3a('es i( t3e
-D+LR-6V F5UUH-F7 D-% -D+LR-DO HFR-RPLF SROLFLHV =V ;ell as !loods" drou'3ts a(d ot3er
$atastro#3es t3at 3a&e e!!e$t o( 8usi(ess a$ti&ity
Im#orta(t $auses 'i&i(' 8irt3 to 8usi(ess $y$le may 8e summariNed as !ollo2s0
> EA#a(sio( o! loa(s a(d $o(tra$tio( o! loa(s 8y 8a(9s0
1 Mo(etary diseRuili8rium
< C3a('e i( t3e &olume o! i(&estme(t or de$rease i( t3e mar'i(al e!!i$ie($y o! $a#ital
Q U(der $o(sum#tio( or eA$essi&e sa&i('
S La$9 o! adCustme(t 8et2ee( dema(d a(d su##ly
E Deali('s o! e(tre#re(eurs
) I((o&atio(
? Seaso(al !lu$tuatio(s

Con).o/ o< B*sin-ss C+6/-
T3e 8usi(ess $y$le leads to 'reater u(em#loyme(t a(d #o&erty T3e &arious ste#s t3at $a( 8e ta9e(
to a$3ie&e e$o(omi$ sta8ility are FiO mo(etary #oli$y a(d FiiO !is$al #oli$y
Mon-),.+ Po/i6+
Mo(etary #oli$y re!ers to t3e #ro'rams ado#ted 8y t3e $e(tral 8a(9 to $o(trol t3e su##ly o! mo(ey T3e
$e(tral 8a(9 may resort to o#e( mar9et o#eratio(s" $3a('es i( 8a(9 rate or $3a('es i( t3e
&aria8le reser&e ratio T3e o#e( mar9et im#lies t3e #ur$3ase a(d sale o! 'o&er(me(t 8o(ds a(d
se$urities I( t3e 8oom #eriod t3e $e(tral 8a(9 sells 'o&er(me(t 8o(ds a(d se$urities to t3e #u8li$
23i$3 3el#s to 2it3dra2 mo(ey !rom t3e #u8li$ Duri(' #eriods o! de#ressio( t3e $e(tral 8a(9
#ur$3ases 'o&er(me(t se$urities 23i$3 i($rease t3e $as3 su##ly i( t3e e$o(omy T3is 3el#s to i($rease
i(&estme(t T3e $e(tral 8a(9 #ur$3ase 'o&er(me(t se$urities 23i$3 i($rease t3e $as3 su##ly i( t3e
e$o(omy T3is 3el#s to i($rease i(&estme(t T3e $e(tral 8a(9 may $3a('e t3e 8a(9 rate or redis$ou(t
rate T3e 8a(9 rate is t3e rate at 23i$3 $ommer$ial 8a(9s 8orro2 !rom $e(tral 8a(9 +3e( t3e
$e(tral 8a(9 i($reases t3e 8a(9 rate t3e $ommer$ial 8a(9s i( tur( 2ill raise t3eir dis$ou(t rates !or t3e
#u8li$ T3is dis$oura'es #u8li$ 8orro2i(' a(d it redu$es i(&estme(t Duri(' t3e de#ressio( t3e 8a(9
rate is lo2ered 23i$3 2ill e(d u# t3e i($reased i(&estme(t T3e $e(tral 8a(9 $a( re'ulate t3e mo(ey
su##ly 8y $3a('i(' t3e &aria8le reser&e ratio +3e( t3e $e(tral 8a(9 2a(ts to redu$e t3e $redit
$reatio( $a#a$ity o! $ommer$ial 8a(9s" it 2ill i($rease t3e ratio o! t3e de#osits to 8e 3eld 8y t3e
$ommer$ial 8a(9 as reser&e 2it3 t3e $e(tral 8a(9
'is6,/ Po/i6+
T3is im#lies t3e &ariatio( i( taAatio( a(d #u8li$ eA#e(diture #ro'ramme 8y t3e 'o&er(me(t to a$3ie&e
$ertai( o8Ce$ti&es TaAatio( 3el#s to 2it3dra2 $as3 !rom t3e #u8li$ A( i($rease i( taA results i(
redu$tio( o! #ri&ate dis#osa8le i($ome TaAes s3ould 8e redu$ed duri(' t3e de#ressio( 2ill stimulate
#ri&ate se$tor Duri(' 8oom #eriods #u8li$ eA#e(diture must 8e $urtailed "so t3at $as3 !lo2 $a(
8e redu$ed T3e !is$al #oli$y o! t3e 'o&er(me(t to re'ulate #ur$3asi(' #o2er to $o(trol 8usi(ess $y$le
is 9(o2( as $ou(ter t3e $y$li$al !is$al #oli$y Cou(ter:$y$li$al !is$al #oli$y i( t3e 8oom #eriod im#lies
a redu$tio( i( t3e #u8li$ eA#e(diture a(d 3ea&y taAes a(d a sur#lus 8ud'et T3e 8ud'et sur#lus $a( 8e
used to elimi(ate #re&ious de!i$its T3is im#lies a( i($rease i( #u8li$ eA#e(diture" redu$tio( i( taAatio(
a(d de!i$it 8ud'eti(' duri(' t3e de#ressio( T3e mo(etary #oli$y #ro&es more e!!e$ti&e to $o(trol
8oom t3a( to de#ressio( A #ro#er miA o! !is$al a(d mo(etary #oli$y 2ill 8e more !ruit!ul i( t3e $o(trol
o! 8usi(ess $y$les
B*sin-ss 'o.-6,s)in8
A !ore$ast o! sales o! de#e(ds u#o( e$o(omi$ !ore$asts T3is is 8e$ause t3e sales o! almost e&ery !irm
is a!!e$ted 8y t3e state o! 'e(eral 8usi(ess Periods o! de#ressio( a(d 8oom 3a&e a( i(!lue($e o( t3e
sales &alue Sales may 8e at a( i($rease duri(' t3e #ros#erity 8ut mi'3t de$li(e duri(' t3e de#ressio(
T3e 8usi(essma( s3ould ta9e i(to $o(sideratio( t3e 8usi(ess $y$le 3e is !a$i(' so t3at 3e $a( 3a&e a(
e!!e$ti&e !ore$ast o! sales T3e im#orta(t met3ods o! !ore$asti(' are F>O Tre(d ProCe$tio( F1O Leadi('
I(di$es" a(d F<O E$o(ometri$ Models
T.-nd 0.o>-6)ion
A 'ra#3 s3o2i(' t3e a$tual mo&eme(t o! a series is $o(stru$ted a(d t3e a##are(t tre(d o! t3e data o(
!uture is #roCe$tedFeAtra#olatedOT3is is 8ased o( t3e assum#tio( t3at t3ose !or$es 23i$3 $o(tri8uted
#ast 2ill $o(ti(ue to 3a&e t3e same e!!e$t
L-,din8 Indi6-s
)*H6 VHD%L-B "-%LFHV6 UHIHU +R FHU+DL- VH-VL+LYH VHULHV ;*LF* +H-% +R +5U-
5S;DU% RU %R;-;DU% L- a(ti$i#atio( o! ot3er series I! o(e 9(o2s a series 23i$3 2ould relia8ly lead say "$ommodities" #ri$e
i(di$es et$ It 2ould (ot 8e di!!i$ult to #ur$3ase ra2 materials i( ad&a($e i! #ri$es are eA#e$ted to rise

Certai( im#orta(t Leadi(' I(di$es areF>ONe2 orders !or dura8le 'oods@F1ODuildi(' $o(tra$ts@F<ONum8er
o! (e2 i($or#oratio(s@FQO+3ole sale #ri$es o! 8asi$ $ommodities " Ne2 order #la$ed 2it3
ma(u!a$tures" 8uildi(' $o(tra$tors et$ 3a&e early re!le$tio( o! t3e $omi(' dema(d !or #rodu$ts" ra2
materials" la8our loa(s "a(d $a#ital
E6onom-).i6 Mod-/s
E$o(ometri$s $om8i(es E$o(omi$s a(d mat3emati$s It is t3e s$ie($e o! e$o(omi$
measureme(t E$o(ometri$s eA#lai(s #ast e$o(omi$ a$ti&ity 8y deri&i(' mat3emati$al eRuatio(s t3at
2ill eA#ress t3e most #ro8a8le i(ter:relatio(s3i# 8et2ee( asset o! e$o(omi$ &aria8le Dy $om8i(i(' t3e
rele&a(t &aria8le t3e e$o(ometri$ia(s #ro$eed to #redi$t t3e !uture $ourse o! o(e or more o! t3ese
&aria8les o( t3e 8asis o! esta8lis3ed relatio(s3i#
T-65niF*-s o< E6onomi6 'o.-6,s)in8
T3ere are se&eral met3ods or te$3(iRues o! e$o(omi$ a(d 8usi(ess !ore$asti('" Im#orta(t met3ods may
8e 8rie!ly dis$ussed as !ollo2s0
> N,i3- M-)5od2 T3is is o(e O! t3e oldest a(d $rudest met3ods o! !ore$asti(' 8usi(ess situatio(
T3is met3od is (ot 8ased o( a(y s$ie(ti!i$ a##roa$3 ProCe$tio( are made #urely 8y 'uess2or9
a(d sometimes 8y me$3a(i$al i(ter#retatio( o! 3istori$al data T3is met3od i($ludes su$3
te$3(iRues as tossi(' t3e $oi(" sim#le $orrelatio( a(d e&e( some ot3er sim#le mat3emati$al
te$3(iRues
Ad&a(ta'es o! Na_&e Met3od
aO It is sim#le met3od
8O It is less $ostly
$O It is suita8le small !irms
Disad&a(ta'e o! Na_&e Met3od
aO It is (ot a s$ie(ti!i$ met3od
8O It is (ot al2ays relia8le
2. S*.3-+ T-65niF*-s0: O(e o! t3e sim#lest !ore$asti(' de&i$e is to sur&ey 8usi(ess !irms or
i(di&iduals a(d to determi(e 23at t3ey 8elie&e 2ill o$$ur is sur&ey te$3(iRues U(der sur&ey
te$3(iRues "i(ter&ie2s a(d mailed Ruestio((aires are used !or !ore$asti(' tools T3ese are 3el#!ul i(
ma9i(' s3ort:term !ore$asts T3ese te$3(iRues may 8e used !or !ore$asti(' t3e o&erall le&el o!
e$o(omi$ a$ti&ity or some s#e$ial #ortio( o! it or t3ey may 8e used 2it3i( t3e !irm !or !ore$asti('
!uture sales
Ad3,n),8-s
aO T3is met3od is sim#le a(d less $ostly
8O T3ese te$3(iRues #ro&ide su8sta(tial amou(t o! Rualitati&e i(!ormatio( t3at may 8e use!ul i(
e$o(omi$ a(d 8usi(ess !ore$asti('
$O T3ese te$3(iRues are usually used to su##leme(t ot3er Rua(titati&e !ore$asti(' met3ods
!is,d3,n),8-s
aO +3e( t3e o#i(io(s di!!er it 2ill $reate #ro8lem
8ONot use!ul !or lo(' term !ore$asts

%. E?0-.) o0inion m-)5od
It is a Rualitati&e te$3(iRue U(der t3is met3od a( eA#ert or i(!ormed i(di&idual uses #erso(al or
or'a(iNatio(al eA#erie($e as a 8asis !or de&elo#i(' !uture eA#e$tatio(s
;.T.-nd P.o>-6)ion m-)5od
U(der t3is met3od 3istori$al data is used to #redi$t !uture 8usi(ess a$ti&ity Here a$tual data are
#rese(ted o( a 'ra#3 #a#er a(d !ore$asts !or t3e !uture are #re#ared o( t3e 8asis o! a(alysis o! tre(d o!
t3is data
Ad3,n),8-s
aO Very sim#le a(d less eA#e(si&e
8O More relia8le
!is,d3,n),8-s
+3e( sudde( !lu$tuatio(s i( data o$$ur" t3is met3od 2ill (ot 8e suita8leSimiliarly it reRuires
$o(sidera8le te$3(i$al s9ill a(d eA#erie($e
Smoo)5in8 )-65niF*-s(E?0on-n)i,/ smoo)5in8O
U(der t3is met3od smoot3ed a&era'e o! se&eral #ast o8ser&atio(s are $o(sidered say" mo&i(' a&era'e"
eA#o(e(tial smoot3i(' a&era'e et$T3is met3od is &ery $3ea# a(d i(eA#e(si&e Dut it $a((ot #ro&ide
a$$urate !ore$asts
B,.om-).i6 T-65niF*-s
I( t3is met3od #rese(t e&e(ts or de&elo#me(ts are used !or #redi$ti(' t3e !uture Furt3er " 3ere
2e a##ly $ertai( sele$ted e$o(omi$ a(d statisti$al i(di$ators i( time series to #redi$t &aria8les T3ey are
leadi('" la''i(' a(d $oi($ide(t i(di$ators I! $3a('es i( o(e series o! data $o(siste(tly o$$ur #rior to
$3a('es i( a(ot3er series:leadi(' i(di$ators $a( 8e s3o2(" I! $3a('es i( o(e series o! data $o(siste(tly
o$$ur a!ter $3a('es i( a(ot3er series: t3ere is la''i(' i(di$ators" I! t2o series o! data !reRue(tly i($rease
or de$rease at t3e same time a(d o(e series may 8e re'arded as a $oi($ide(t i(di$ator o! t3e ot3er:t3ere
is $oi($ide(tal i(di$ators T3is met3od is t3e most $om#leA a(d s$ie(ti!i$ o(e
E6onom-).i6 M-)5ods
FFR-RPH+ULFV LV +*H FRPEL-D+LR- RI ,ecRQR D-% ,!etrics. ;*LF* PHD-V PHDV5UHPH-+ RI
HFR-RPLF &aria8les T3is met3od $om8i(es t3e e$o(omi$ t3eory" statisti$al tools a(d mat3emati$al model 8uildi('
to a(alyse e$o(omi$ relatio(s It #redi$ts t3e !uture a$ti&ity o( #ast e$o(omi$ a$ti&ity 8y usi('
mat3emati$al a(d statisti$al te$3(iRues
aO T3ese met3ods are more relia8le
8O It is #ossi8le to $om#are !ore$asts 2it3 a$tual results T3e model $a( modi!ied to im#ro&e
!uture !ore$asts
$O T3ese met3ods i(di$ate 8ot3 dire$tio( a(d ma'(itude o! $3a('e i( t3e &aria8les
dOT3ese met3ods 3a&e t3e a8ility to eA#lai( e$o(omi$ #3e(ome(a
In0*) O*)0*) T,1/- M-)5od0
T3is is a(ot3er a##roa$3 o! e$o(omi$ !ore$asti(' T3is met3od e(a8les t3e !ore$aster to tra$e t3e
e!!e$ts o! i($reases i( dema(d !or o(e #rodu$t to ot3er i(dustries A( i($rease i( t3e dema(d !or
automo8iles 2ill !irst lead to a( i($rease i( t3e out#ut o! t3e auto i(dustry T3is" i( tur(" 2ill lead to a(
i($rease i( t3e dema(d !or steel" 'lass" #lasti$s" ru88er a(d u#3olstery !a8ri$ I( additio(" se$o(dary
im#a$t 2ill o$$ur as t3e i($rease i( t3e dema(d !or u#3olstery !a8ri$

S-/< 65-6D F*-s)ions
'i// in )5- 1/,nDs. (=-i85),8-"1/;)
"-KKKKSULFL-B ILWH% FRV+ DUH HWFO5%H%
OLWL-B *LB* SULFH %5UL-B +*H L-+UR%5F+LR- LV FDOOH%KKKKKK
)*H ILUP F*DUBHV SULFH L- +5-H ;L+* +*H L-%5V+U76V SULFH LV FDOOH%KKK
LH+*R% RI F*DUBL-B OR; SULFH L-L+LDOO7 FDOOH%KKKKK
KKKKKSULFL-B LV %R-H R- +*H EDVLV RI PD-DBHULDO %HFLVLR-V -R+ R- +*H EDVLV RI FRV+
%HPD-% H+FKK
S5o.) ,nsE-. )+0- (=-i85),8- "1)
> +3at is #ri$i(' #oli$yT
1 +3at is $ost #lus #ri$i('T
< +3at is tar'et #ri$i('T
Q +3at is mar'i(al $ost #ri$i('T
S +3at is #ri$e dis$rimi(atio(T
E +3at you mea( 8y s9immi(' #ri$eT
) +3at is #e(etratio( #ri$e strate'yT
? +3at is #sy$3olo'i$al #ri$i(' or $3arm #ri$i('T
S5o.) -ss,+ )+0- (=-i85),8- "2)
> Me(tio( &arious met3od o! #ri$i('T
1 +3at are t3e o8Ce$ti&es o! #ri$i(' #oli$yT
< +3at is t3e role o! $ost a(d dema(d !a$tors i( #ri$e determi(atio(T
Q EA#lai( t3e #ri$i(' strate'ies o! (e2 #rodu$tsT
S +3at is t3e role o! $o(sumer #sy$3olo'y i( #ri$i('T
Ess,+ )+0- (=-i85),8- ";)
> De!i(e #ri$i(' #oli$yT +3at are t3e !a$tors to 8e $o(sidered 23ile ma9i(' #ri$i(' de$isio(T
1 EA#lai( im#orta(t met3ods o! #ri$i('T

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