ASSIGNMENT( Business Economic)

Aryan Goyal
18/FCBS/BBA(G)IB/003
Opportunity cost
In microeconomic theory, the opportunity cost, also known as alternative cost, of making a
particular choice is the value of the most valuable choice out of those that were not taken.
When an option is chosen from two mutually exclusive alternatives, the opportunity cost is
the "cost" incurred by not enjoying the benefit associated with the alternative choice.
Examples
A concrete example of opportunity cost can make the idea easier to understand. Consider
the owner of a building who decides that her vacant first-floor space will become a
restaurant. The opportunity cost of making such a decision is that the space can no longer be
used for a different purpose, such as a retail store or an office space that's rented to another
party.

Production–possibility frontier
A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve which
shows various combinations of set of two goods which can be produced with the given
resources and technology where the given resources are fully and efficiently utilized per unit
time. One good can only be produced by diverting resources from other goods, and so by
producing less of them. This tradeoff is usually considered for an economy, but also applies
to each individual, household, and economic organization.
For example, if one assumes that the economy's available quantities of factors of
production do not change over time and that technological progress does not occur, if the
economy is operating on the PPF, production of guns would need to be sacrificed to produce
more butter.[1] If production is efficient, the economy can choose between combinations
(points) on the PPF: B if guns are of interest, C if more butter is needed, D if an equal mix of
butter and guns is required.
Supply and demand curves
In microeconomics, supply and demand is an economic model of price determination in
a market. It postulates that, holding all else equal, in a competitive market, the unit price for
a particular good, or other traded item such as labor or liquid financial assets, will vary until it
settles at a point where the quantity demanded (at the current price) will equal the quantity
supplied (at the current price), resulting in an economic equilibrium for price and quantity

Market equilibrium: A situation in a market when the price is such that the quantity
demanded by consumers is correctly balanced by the quantity that firms wish to supply. In
this situation, the market clears

Price elasticity of demand

Price elasticity of demand (PED or Ed) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its
price when nothing but the price changes. More precisely, it gives the percentage change in
quantity demanded in response to a one percent change in price.
Price elasticities are almost always negative, although analysts tend to ignore the sign even
though this can lead to ambiguity. Only goods which do not conform to the law of demand,
such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is
said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value):
that is, changes in price have a relatively small effect on the quantity of the good demanded.
The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than
one.
The variation in demand in response to a variation in price is called the price elasticity of
demand. It may also be defined as the ratio of the percentage change in demand to the
percentage change in price of particular commodity.[1] The formula for the coefficient of
price elasticity of demand for a good is:[2][3][4]

where P is the price of the demanded good and Q is the quantity of the demanded good
Short run Cost curve
The Short-run Cost is the cost which has short-term implications in the production process,
i.e. these are used over a short range of output. These are the cost incurred once and cannot
be used again and again, such as payment of wages, cost of raw materials, etc. n a short-run,
at least one factor of production is fixed while the other remains variable. Therefore, in the short-run,
the level of output can be increased only by increasing the variable factors such as labor, raw
materials while the other factors such as capital, plant size, remains unchanged. The short-run cost
includes both the fixed cost (that do not change with the change in the level of output) and variable
cost (that varies with the variations in the level of output). Some factors remain fixed due to the time
constraints imposed on a company.

For example, Suppose a company observes a sudden surge in the demand for its goods and in
order to meet the increased demand in the short-run, it can increase its level of output only
by varying the variable factors. Such as, the company can employ more labor or purchase the
raw material in bulk, but however, the plant size or the machinery cannot be altered to
enhance the production capacity of the firm. Thus, all the cost incurred on the variable
factors such as labor and raw material constitutes the short-run cost.
From an analytical point of view, the short run costs vary with the change in the total output,
but however, the size of the firm remains the same. Thus, the short-run cost is treated as a
variable cost.

Market structure
The Market Structure refers to the characteristics of the market either organizational or
competitive, that describes the nature of competition and the pricing policy followed in the
market.Thus, the market structure can be defined as, the number of firms producing the
identical goods and services in the market and whose structure is determined on the basis of
the competition prevailing in that market.
The term “ market” refers to a place where sellers and buyers meet and facilitate the selling
and buying of goods and services. But in economics, it is much wider than just a place, It is a
gamut of all the buyers and sellers, who are spread out to perform the marketing activities.

The major determinants of the market structure are:

1. The number of sellers operating in the market.
2. The number of buyers in the market.
3. The nature of goods and services offered by the firms.
 4. The concentration ratio of the company, which shows the largest market shares held
by the companies.
5. The entry and exit barriers in a particular market.
6. The economies of scale, i.e. how cost efficient a firm is in producing the goods and
services at a low cost. Also the sunk cost, the cost that has already been spent on the
business operations.
7. The degree of vertical integration, i.e. the combining of different stages of production
and distribution, managed by a single firm.
8. The level of product and service differentiation, i.e. how the company’s offerings
differ from the other company’s offerings.
9. The customer turnover, i.e. the number of customers willing to change their choice
with respect to the goods and services at the time of adverse market conditions

Scale of production
"Scale of production is set by the size of plant, the number of plants installed and the technique of production
adopted by the producer".

Classifications/Types:

The scale of production is classified as under:

(i) Small Scale Production.

(ii) Large Scale Production.

(iii) Optimum Scale of Production.

(i) Small Scale Production: If a firm produces goods with small sized plants, the scale of production is said to be
small scale production. Small scale of production is associated with low capital output and capital labor ratios. In
small scale of production, the economies of scale do not occur to the firm.

(ii) Large Scale of Production: If a firm uses more capital and larger quantities of other factors, it is said to be
operating on large scale production. Large scale production enjoys both internal and external economies of
scale.

(iii) Optimum Scale of Production. The optimum scale of production refers to that size of production which is
accompanied by maximum net economics of scale, it is a scale at which the cost of production per unit is the
lowest.
Market failure
In economics, market failure is a situation in which the allocation of goods and services by a
free market is not efficient, often leading to a net social welfare loss. Market failures can be
viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are
not efficient – that can be improved upon from the societal point of view.
Market failure is the economic situation defined by an inefficient distribution of goods and
services in the free market. Furthermore, the individual incentives for rational behavior do
not lead to rational outcomes for the group. Put another way, each individual makes the
correct decision for him/herself, but those prove to be the wrong decisions for the group. In
traditional microeconomics, this is shown as a steady state disequilibrium in which
the quantity supplied does not equal the quantity demanded.

Economic efficiency
Economic efficiency implies an economic state in which every resource is optimally allocated
to serve each individual or entity in the best way while minimizing waste and inefficiency.
When an economy is economically efficient, any changes made to assist one entity would
harm another. In terms of production, goods are produced at their lowest possible cost, as
are the variable inputs of production.
There are two main strains of thought on economic efficiency, which respectively emphasize
the distortions created by governments (and reduced by decreasing government
involvement) and the distortions created by markets (and reduced by increasing government
involvement). These are at times competing, at times complementary—either debating
the overall level of government involvement, or the effects of specific government
involvement.

Oligopoly Kinked demand curve

In an oligopolistic market, firms cannot have a fixed demand curve since it keeps changing as
competitors change the prices/quantity of output. Since an oligopolist is not aware of the
demand curve, economists have designed various price-output models based on the behavior
pattern of other firms in the industry. In this article, we will look at the kinked demand curve
hypothesis. In many oligopolist markets, it has been observed that prices tend to remain inflexible
for a very long time. Even in the face of declining costs, they tend to change infrequently. American
economist Sweezy came up with the kinked demand curve hypothesis to explain the reason behind
this price rigidity under oligopoly.

According to the kinked demand curve hypothesis, the demand curve facing an oligopolist
has a kink at the level of the prevailing price. This kink exists because of two reasons:
1. The segment above the prevailing price level is highly elastic.
2. The segment below the prevailing price level is inelastic.