Chapter 2

UNIT II
Firms and Market Conduct

Public, Private, Joint and Co-operative sectors, private
corporate sector, MNCS and their Role.
Cost behavior the firm. Types of cost, short run long run,
fixed and variable. Production function short run and long run.
Types and classification of market
Dr. Venkata Rama Raju/ Assistant Professor/ PDPU
Public Sector
The units owned by central, state or local government but also
managed and controlled by them are termed as Public Sector
Enterprises.
Public sector includes services such as the police, military, public
roads, public transit, primary education and healthcare for
the poor.
Public Sector
OBJECTIVES:
To promote rapid economic development through creation and expansion
of infrastructure
To generate financial resources for development
To promote redistribution of income and wealth
To create employment opportunities
To promote balanced regional growth
To encourage the development of small-scale and ancillary industries, and
To promote exports
Role of Public Sector enterprises in India

1. Filling the Gaps in Capital Goods:
At the time of independence, there existed serious gaps in the industrial
structure of the country, particularly in the fields of heavy industries such
as steel, heavy machine tools, exploration and refining of oil, heavy
Electrical and equipment, chemicals and fertilizers, defense equipment,
etc.
Public sector has helped to fill up these gaps. The basic infrastructure
required for rapid industrialization has been built up, through the
production of strategic capital goods.
In this way the public sector has considerably widened the industrial base
of the country.
2. Employment:
Public sector has created millions of jobs to tackle the unemployment
problem in the country.
By taking over many sick units, the public sector has protected the
employment of millions.
Public sector has also contributed a lot towards the improvement of
working and living conditions of workers by serving as a model
employer.

3. Balanced Regional Development:
Public sector undertakings have located their plants in backward parts
of the county.
These areas lacked basic industrial and civic facilities like electricity,
water supply, township and manpower.
Public enterprises have developed these facilities thereby bringing
about complete transformation in the socio-economic life of the
people in these regions.
Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at
Sindri, are few examples of the development of backward regions by
the public sector.

4. Contribution to Public Exchequer:
Apart from generation of internal resources and payment of dividend,
public enterprises have been making substantial contribution to the
Government exchequer through payment of corporate taxes, excise
duty, custom duty etc.
In this way they help in mobilizing funds for financing the needs for
the planned development of the country.

5. Export Promotion and Foreign Exchange Earnings:
Some public enterprises have done much to promote Indias export.
The State Trading Corporation (STC), the Minerals and Metals Trading
Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd.,
the Hindustan Machine Tools, etc., have done very well in export
promotion.
6. Import Substitution:
Some public sector enterprises were started specifically to produce
goods which were formerly imported and thus to save foreign
exchange.
The Hindustan Antibiotics Ltd., the Indian Drugs and Pharmaceuticals
Ltd. (IDPL), the Oil and Natural Gas Commission (ONGC), the Indian
Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved
foreign exchange by way of import substitution.

7. Research and Development:
As most of the public enterprises are engaged in high technology and
heavy industries, they have undertaken research and development
programmes in a big way.
Public sector has laid strong and wide base for self-reliance in the field
of technical know-how, maintenance and repair of sophisticated
industrial plants, machinery and equipment in the country.
Through the development of technological skill, public enterprises have
reduced dependence on foreign.
With the help of the technological capability, public sector undertakings
have successfully competed in the international market.
10
Limitations
1. Poor Project Planning:
Investment decisions in many public enterprises are not based upon
proper evaluation of demand and supply, cost benefit analysis and
technical feasibility.
Lack of a precise criterion and flaws in planning have caused undue
delays and inflated costs in the commissioning of projects.
Many projects in the public sector have not been finished according to
the time schedule.
11
Limitations
2. Over-capitalization:
Due to inefficient financial planning, lack of effective financial control and
easy availability of money from the government, several public
enterprises suffer from over-capitalization.
The Administrative Reforms Commission found that Hindustan
Aeronautics, Heavy Engineering Corporation and Indian Drugs and
Pharmaceuticals Ltd were over-capitalized.
Such over-capitalization resulted in high capital-output ratio and wastage
of scare capital resources
12
Limitations
3. Excessive Overheads:
Public enterprises incur heavy expenditure on social overheads like
townships, schools, hospitals, etc.
In many cases such establishment expenditure amounted to 10 percent
of the total project cost.
Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on townships.
Such amenities may be desirable but the expenditure on them should
not be unreasonably high.
13
Limitations
4. Overstaffing:
Manpower planning is not effective due to which several public
enterprises like Bhilai Steel have excess manpower.
Recruitment is not based on sound labour projections.
On the other hand, posts of Chief Executives remain unfilled for years
despite the availability of required personnel.
14
Limitations
5. Under-utilization of Capacity:
One serious problem of the public sector has been low utilization of
installed capacity.
In the absence of definite targets of production, effective production
planning and control and proper assessment of future needs many
undertakings have failed to make full use of their fixed assets.
In some cases productivity is low on account of poor materials
management or ineffective inventory control.
15
Limitations
6. Lack of a Proper Price Policy:

There is no clear-cut price policy for public enterprises and the
Government has not laid down guidelines for the rate of return to be
earned by different undertakings.
Public enterprises are expected to achieve various socio-economic
objectives and in the absence of a clear directive, pricing decisions
are not always based on rational analysis.
In addition to dogmatic price policy, there is lack of costconsciousness, quality consciousness, and effective control on waste
and efficiency.
16
Limitations
7. Inefficient Management :
Managerial efficiency and effectiveness have been low due to inept
management, uninspiring leadership, too much centralization,
frequent transfers and lack of personal stake.
Civil servants who are deputed to manage the enterprises often lack
proper training and use bureaucratic practices.
Political interference in day-to-day affairs, rigid bureaucratic control
and ineffective delegation of authority hamper initiative, flexibility and
quick decisions.
Motivations and morale of both executives and workers are low due to
the lack of appropriate incentives.
17
Public Sector
Causes for the expansion of public sector enterprises in India
1. Rate of Economic Development
2. Pattern of Resource Allocation
3. Removal of Regional Disparities
4. Sources of Funds for Economic Development
5. Limitations and Abuses of the Private Sector
18
Private Sector
The private sector is the segment of a national economy owned,
controlled and managed by private individuals or enterprises.
The private sector has a goal of making money and employs more
workers than the public sector.
Businesses in the private sector drive down prices for goods and
services while competing for consumers money.
Private-sector workers tend to have more pay increases, more career
choices, greater opportunities for promotions, less job security and lesscomprehensive benefit plans than public-sector workers.
Working in a more competitive marketplace often means longer hours in
a more demanding environment
19
Importance of Private Sector in Indian Economy
The opening up of Indian economy has led to free inflow of foreign

direct investment (FDI) along with modern cutting edge technology,
which increased the importance of private sector in Indian economy
considerably.
The late 1990s and the period thereafter witnessed investments in
sector like manufacturing, infrastructure, agriculture products and most
importantly in Information technology and telecommunication.
In 2014, the government increased foreign investment upper limit from
26% to 49% in insurance sector.
On 25 September 2014, Government of India launched Make in
India initiative in which policy statement on 25 sectors were released
with relaxed norms on each sector.
20
Importance of Private Sector in Indian Economy
Increased quality of life

Increased access to essential items
Lowered prices of essential items
Decreases the percentage of people living below the poverty line in
India
Effected better higher education facilities especially in technical fields
Ensured fair competition amongst market players
21
Roles of Private Sector in India
1. Industrial Development
During the pre-independence period, the private sector has played a
responsible role in Indian economy where it set up and expanded cotton
and jute textiles, sugar, paper, edible oil, tea etc.
The private sector also made a serious attempt to invest on industries
producing wide range of intermediate products which include machine
tools, chemicals, paints, plastic, automobiles, electronics and electrical
goods etc.
The private sector has developed the consumer goods industry
22
2. Agriculture
India is an agro based economy. The share of agriculture and its allied
activities like fishing, poultry, cattle rearing, animal husbandry, dairy
farming etc. to the national income is nearly 22%.
On the other hand, about 60% of the total working population is engaged
in this area.
Large agriculture sector is controlled by the private sector.
23

3. Trading
Both the wholesale and retail trade in India are in the hands of private
sector.
In a big country like India, having a huge size of population, the entire
trading activities are managed by the private sector.
In case of scarcity of any essential commodities, the private
businessmen have their natural tendency in resorting to hoarding and
black marketing of such commodities leading to exploitation of the
consumers.
24
4. Infrastructure
Private sector has been playing dominant role in respect of road
transport, water transport etc.
New Industrial Policy, 1991, the Government has opened some areas like
power generation, air transport etc. for the participation of the private
sector.
25
5. Services Sector
The services sector of the country is almost totally under the control of
the private sector
The entire professional services, repairing services, domestic services,
entertainment services etc. are solely rendered by the private sector
throughout the country.
26
6. Role in the Indian Economy

It contributes to the major portion of national income and employment.
The role of private sector is quite dominant in agriculture and allied
activities, small scale industry, retail trade etc.
27
7. Small Scale and Cottage Industry

In India, small scale and cottage industries are playing an important role
in the industrial development of the country. The entire small scale and
cottage industry is owned and managed by the private sector.
As these industries are mostly labour-intensive in nature, thus they can
utilize the local employment opportunities suitably.
28
Advantages of the private sector:

-More opportunities for promotion as the company grows
-These jobs tend to pay higher
-More prestige, and the private sector is supposedly more efficient
-Less bureaucracy
Disadvantages of the private sector:
-Less job security
-Very competitive atmosphere, high pressure environment
-Workers' rights are sometimes infringed upon
-Fewer benefits than the public sector
29
Joint Sector
Joint Sector is a form of partnership between the public sector and the
private sector.
A joint sector is one which is owned, managed and controlled by the
private sector and the public sector.
Joint sectors are organized to encourage private entrepreneurs to
participate in industrial development jointly with the government.
Is a combination of public and private sector (i.e mixed economy,
Capitalism and socialism)
After industrial policy resolution in 1956, joint sectors are formed.
Ex. Cochin Refineries, Madras Refineries, Gujarat state fertilizers
company.
30
Features
In joint sector financial participation is 26% from government, 25% from

private sector and 49% from public
In case of foreign collaboration, the share of government will be 25%,
Indian investors 20%, foreign investors 20% and public 35%.
JRD Tata suggested a slightly different definition of the joint sector. A
joint sector enterprise is intended to be a form of partnership between
the private sector and the Government in which the State participation of
capital will not be less than 26 per cent, the day today management will
normally be in the hands of the private sector partner, and control and
supervision will be exercised by a board of directors on which
government is adequately represented
31
Characteristics
1. Joint Ownership
2. Joint management
3. Joint Financing
4. Socio-economic objectives
5. Joint accountability
32
Role of joint sector
1. Social control over industries

Effective way to control monopoly and concentration of economic
power and curb business malpractices.
2. Better industrial growth
3. Infrastructure development
4. Balanced regional development
33
Advantages
1. Social control over industries

2. Mobilization of financial, technical and managerial resources.
3. Large financial resources
4. curbing the concentration of economic power in certain private
groups
5. Professional management
6. Large scale production
7. Research and development
34
Disadvantages
1. Difficulty in formation
2. Excessive government control
3. Delay in policy decisions
35
Co-operative sector
Co-operatives
are
autonomous
associations
formed
and
democratically directed by people who come together to meet common
economic, social, and cultural needs.
Founded on the principle of participatory governance, co-ops are
governed by those who use their services: their members.
A co-operative is an voluntary association of persons who own and
manage for their or sometimes communities benefit.
36
Features
1. Voluntary association
2. Open membership
3. Legal entity
4. Equal voting right
5. Service motive
6. Concern for community
37
Role
1. Social development
2. Improving the living and working conditions
3. Cooperatives give members opportunity, protection
empowerment - essential elements in uplifting them
degradation and poverty
and
from
4. cooperatives promote the fullest participation of all people and

facilitate a more equitable distribution of the benefits
38
Advantages
1. Equality in voting rights

2. Limited liability
3. Stable existence
4. Support from the government
5. Easy to form: Cooperative societies act 1912
6. Elimination of middlemen's profit
39
Diasdvantages
1. Limited resources
2. Inefficiency in management
3. Lack of secrecy
4. Government control : Auditing
5. Differences of opinions
40
1. Amul formed in 1946, is a diary co-operative movement in India.

Owned by 2.6million milk producers in gujarat.
2. Adrash co-operative bank
3. Indian coffee house
4. Shri mahila griha udyog lijjat papad
41
MNC
A multinational corporation is an organization that owns or controls

production of goods or services in one or more countries other than
their home country.
MNCs have offices and/or factories in different countries and usually
have a centralized head office where they coordinate global
management.
Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW.
Wal-Mart has operations in 28 countries, including over 11,500 retail
stores that employ over 2.3 million people internationally.
First MNC in India is IBM
Indian MNC : Infosys, Tata motors, Bharati airtel, Rcomm, Sun pharma,
HCL.
42
Having a presence in a foreign country allows a corporation to meet

demand for its product without the transaction costs associated with
long-distance shipping.
Corporations tend to establish operations in markets where their
capital is most efficient or wages are lowest.
43
A multinational corporation is usually a large corporation which produces

or sells goods or services in various countries.
1) Importing and exporting goods and services
2) Making significant investments in a foreign country
3) Buying and selling licenses in foreign markets
4) Engaging in contract manufacturingpermitting a local manufacturer
in a foreign country to produce their products
5) Opening manufacturing facilities or assembly operations in foreign
countries
44
Objectives
1. To expand the business beyond the boundaries of the home country
2. Minimize the cost of production, especially labour cost
3. Avail of competitive advantage internationally
4. Capture foreign market against international competitors
5. Achieve greater efficiency by producing in local market and then
exporting the products
6. Make best use of technological advantages by setting up production
facilities abroad
7. Establish an international corporate image
45
Features of MNC
1. Big Size
2. Huge intellectual capital
3. Operates in many countries
4. Large number of customers
5. Large number of competitors
6. Structured way of decision making
46
MNCs in India
1. Huge market potential: The estimated maximum total sales revenue of
all suppliers of a product in a market during a certain period.
2. FDI attractiveness: FDI attractiveness index is 1.6 and is 9th in the list.
3. Labor competitiveness
4. Macro-economic stability
5. One billion plus population
47
Impact of MNCs on India

1. Large amount of tax collection through MNCs
2. Increased revenue
3. Economic growth
4. Employment
5. Foreign relation increased
48
Reasons for the establishment of MNCs

1. To increase market share
2. To secure cheaper premises and labour
3. Employment and health & safety legislations in other countries may
be more relaxed
4. To avoid or minimize the amount of tax to be paid
5. To save on costs of transporting goods to the market place
6. To develop an international brand
49
Advantages of MNCs to the host country

1. Transfer of technology, capital and entrepreneurship
2. Increase in investment level and thus the income and employment in
the host country
3. Greater availability of products for local consumers
4. Increase in exports and decrease in imports
50
Advantages of MNCs to the home country

1. Acquisition of raw materials from abroad
2. Technology and management expertise acquired from competing in
global markets
3. Export of components and finished goods for assembly or
distribution in foreign market
4. Inflow of income from overseas profits, management contracts
51
Disadvantages of MNCs
1. Trade restrictions imposed at the government level
2. Limited quantities of imports
3. Loss to Local Businesses
4. Transfer of capital
5. Impose their Culture
52
Market
A market is a medium that allows buyers and sellers of a specific good

or service to interact in order to facilitate an exchange.
A Market is where buyers and sellers
meet to exchange goods and services
usually in exchange for money
Market may either be a physical marketplace where people come
together to exchange goods and services in person, as in a bazaar or
shopping center, or a virtual market wherein buyers and sellers do not
interact, as in an online market.
53
Types of Market
Invisible market
Market can exist :
Over telephone lines
Online
In emails
54
Types of Market
Consumer market
Markets dominated by products and services designed for the general
consumer.
The consumer market pertains to buyers who purchase goods and
services for consumption rather than resale.
Consumer markets are typically split into four primary categories:
consumer products, food and beverage products, retail products, and
transportation products.
Consumers interact with sellers to buy goods and services
55
Types of Market
Industrial market
Industrial
marketing (or business-to-business
marketing)
the marketing of goods and services by one business to another.
is
Industrial goods are those an industry uses to produce an end product

from one or more raw materials
One business serves as a consumer, purchasing goods or services from
another business.
Not to a final consumer
These other businesses use what they have bought to make new
products
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Types of Market
Commodity market
A commodity market is a market that trades in primary economic
sector rather than manufactured products.
Soft
commodities are
agricultural
as wheat, coffee, cocoa and sugar.
products
such
Hard commodities are mined, such as gold and oil.

Buying and selling products from primary sector of industry
57
Types of Market
Capital market
Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc.
Capital markets help channelize surplus funds from savers to
institutions which then invest them into productive use.
This market trades mostly in long-term securities.
Capital market consists of primary markets and secondary markets.
Primary markets deal with trade of new issues of stocks and other
securities, whereas secondary market deals with the exchange of
existing or previously-issued securities.
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Classification of Market
Area: Local, regional, National, International
Time: Very short, short, long, very long
Competition: Perfect, Imperfect
Function: Mixed, specialized, sample, grading
Commodity: product, stock, bullion
Legality: Legal, illegal
59
Local Market: When the buyers and sellers are limited to an area then the
market is called local market
Regional Market: When the buyers and sellers are concentrated to a
certain region/area. The area is wide than the local market
National Market: When the demand of a commodity is limited to the
boundary of the country.
International Market: When the demand of a commodity crosses the
boundary of a country
60
Very short: Supply of a good is limited. Cannot increase the supply.

Demand determines the price of such commodities.
Short Period: Production can be increased. Demand plays an important
role in price determination.
Long period: Supply can be adjusted to the quantity demanded.
Very long: Both supply and demand can be changed, Demand increases
with increase in tastes, habits, fashion etc.
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Mixed/ general market: where all types of goods are bought and sold.
Found in cities
Specialized Market: Where particular commodity is sold. Eg: vegetables,
cloths
Marketing by sample: When goods are bought and sold on the basis of
samples. Eg: oil seeds, raw cotton
Marketing by Grading: Products of different qualities should be
separated into groups or lots and similar quality products are put into a
grade. Eg : colour
62
Product market: Where particular product is bought and sold. Eg Agri

products sold in agri market
Stock Market: Market where stock and shares, bond, securities etc are
bought and sold
Bullion market: Market where silver and gold are bought and sold. In
this market metallic trading takes place
63
Legal Market: where legal transactions of goods and services take

place. Recognized by the government
Illegal market: Black marketing and smuggling
64
Perfect Competition
Perfect competition is a market structure in which there is
a large number of sellers and buyers , so that no one can affect the
market
having Homogenous product
single price in the market
Free entry and exit from the industry
knowledge of market conditions
Transparent and free information
All firms are price takers: no single firm is large enough to exert
control over product price. A company that must accept the prevailing
prices in the market of its products, its own transactions being unable
to affect the market price.
65
Monopoly
A single seller: the firm and seller are synonymous

Unique product: no close substitutes for the firms product
The firm is the price maker: firm has control over the price because it
can control the quantity supplied
Entry or exit is blocked
66
Monopolistic competition
It may be defined as a combination of both perfect competition and
monopoly
It is the middle point of the two extreme situations
A large number of buyers and sellers
The goods are similar but not exactly identical or homogeneous. But
their use is same
Product differentiation is found due to differences in name, brand,
trademark, design etc
Eg: soaps, medical stores, retail general stores etc
Free entry and exit of firms
Non Price competition
Varying preferences of consumers
67
Oligopoly
Few large firms
Firms produce identical products
Products are close but not perfect substitutes of each other
Entry is hard
Eg: Steel, Cement, Tyres, Automobiles, telephone service provider
Interdependence
Huge advertisement expenditure
Price rigidity
68
Production function
A producer or a firm acquires different inputs like labour, machines, land,
raw materials, etc.
Combining these inputs it produces output. This is called the process of
production.
In order to acquire inputs, it has to pay for them.
production.
That is the cost of
The production function of a firm is a relationship between inputs used

and output produced by the firm.
Production function considers only the efficient use of inputs.
69
A production function is defined for a given technology.

Technological knowledge determines the maximum levels of output that
can be produced using different combinations of inputs.
If the technology improves, the maximum levels of output obtainable for
different input combinations increase.
The inputs that a firm uses in the production process are called factors of
production.
70
consider a firm that produces output using only two factors of production
factor 1 and factor 2.
production function is q = f (x1, x2)
71
SHORT RUN
In the short run, a firm cannot vary all the inputs.
One of the factors factor 1 or factor 2 cannot be varied, and therefore,
remain fixed in the short run.
In order to vary the output level, the firm can vary only the other factor.
The factor that remains fixed is called the fixed input whereas the other
factor which the firm can vary is called the variable input.
Suppose, in the short run, factor 2 remains fixed at 5 units. Then the
corresponding column shows the different levels of output that the firm
may produce using different quantities of factor 1 in the short run.
72
LONG RUN
In the long run, all factors of production can be varied.
A firm in order to produce different levels of output in the long run
may vary both the inputs simultaneously.
So, in the long run, there is no fixed input.
We define a period as long run or short run simply by looking at
whether all the inputs can be varied or not.
73
Total Product
Suppose we vary a single input and keep all other inputs constant.
Then for different levels of employment of that input, we get different
levels of output from the production function.
The relationship between the variable input and output, keeping all
other inputs constant, is referred to as Total Product (TP) of the
variable input.
_
TP f ( x1 , x2 )
This is the total product function of factor 1.
74
Average Product
Average product is defined as the output per unit of variable input.

_
AP1
TP f ( x1 , x2 )
x1
x1
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Marginal Product
Marginal product of an input is defined as the change in output per

unit of change in the input when all other inputs are held constant.
When factor 2 is held constant, the marginal product of factor 1 is
change in output
MP1
change in input
q
x1
76
X2 is fixed at 4
Total product is the sum of marginal products
77
The law of diminishing marginal product says that if we keep

increasing the employment of an input, with other inputs fixed,
eventually a point will be reached after which the resulting addition to
output (i.e., marginal product of that input) will start falling.
Law of variable proportions says that the marginal product of a factor
input initially rises with its employment level, but after reaching a
certain level of employment, it starts falling.
Initially, as we increase the amount of the variable input, the factor
proportions become more and more suitable for the production and
marginal product increases.
But after a certain level of employment, the production process
becomes too crowded with the variable input and the factor
proportions become less and less suitable for the production.
78
SHAPES OF TOTAL PRODUCT CURVE
79
SHAPES MARGINAL PRODUCT AND AVERAGE PRODUCT CURVES
inverse U-shaped.
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RETURNS TO SCALE
Constant returns to scale (CRS) is a property of production function that
holds when a proportional increase in all inputs results in an increase in
output by the same proportion.
f (tx1, tx2) = t.f (x1, x2)
Increasing returns to scale (IRS) holds when a proportional increase in
all inputs results in an increase in output by more than the proportion.
f (tx1, tx2) > t.f (x1, x2).
Decreasing returns to scale (DRS) holds when a proportional increase in
all inputs results in an increase in output by less than the proportion.
f (tx1, tx2) < t.f (x1, x2).
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COSTS
A given level of output, typically, can be produced in many ways. There

can be more than one input combinations with which a firm can produce
a desired level of output
With the input prices given, it will choose that combination of inputs
which is least expensive.
This output-cost relationship is the cost function of the firm.
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Short Run Costs

In the short run, some of the factors of production cannot be varied, and
therefore, remain fixed.
The cost that a firm incurs to employ these fixed inputs is called the
total fixed cost (TFC).
Whatever amount of output the firm produces, this cost remains fixed for
the firm.
To produce any required level of output, the firm, in the short run, can
adjust only variable inputs.
Accordingly, the cost that a firm incurs to employ these variable inputs is
called the total variable cost (TVC).
Total cost (TC) of a firm
TC = TVC + TFC
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Short Run Costs

The short run average cost (SAC) incurred by the firm is defined as the
total cost per unit of output. We calculate it as
SAC = TC/q
The average variable cost (AVC) is defined as the total variable cost per
unit of output. We calculate it as
AVC = TVC/q
average fixed cost (AFC) is
AFC =TFC/q
SAC = AVC + AFC
84
Short Run Costs

The short run marginal cost (SMC) is defined as the change in total cost
per unit of change in output
SMC = change in total cost/change in output
=TC/ q
85
Short Run Costs
In short run, marginal cost is the increase in TVC due to increase in

production of one extra unit of output.
86
Shapes of the Short Run Cost Curves
Total fixed cost, however, is independent of the amount of output

produced and remains constant for all levels of production.
As output increases, total variable cost and total cost increase.
87
AFC is the ratio of TFC to q. TFC is a constant. Therefore, as q increases,

AFC decreases
AFC curve is a rectangular hyperbola.
TFC
= AFC quantity
= OF Oq1
= the area of the rectangle OFCq1
88
89
According to the law of variable proportions, initially, the marginal

product of a factor increases as employment increases, and then after a
certain point, it decreases.
This means initially to produce every next unit of output, the requirement
of the factor becomes less and less, and then after a certain point, it
becomes greater and greater.
As a result, with the factor price given, initially the SMC falls, and then
after a certain point, it rises. SMC curve is, therefore, U-shaped.
The TVC at a particular level of output is the sum of all marginal costs up
to that level.
90
For the first unit of output, SMC and AVC are the same. So both SMC
and AVC curves start from the same point.
Then, as output increases, SMC falls. AVC being the average of
marginal costs, also falls, but falls less than SMC.
Then, after a point, SMC starts rising. AVC, however, continues to fall as
long as the value of SMC remains less than the prevailing value of AVC.
Once the SMC has risen sufficiently, its value becomes greater than the
value of AVC. The AVC then starts rising. The AVC curve is therefore Ushaped.
As long as AVC is falling, SMC must be less than the AVC and as AVC,
rises, SMC must be greater than the AVC. So the SMC curve cuts the
AVC curve from below at the minimum point of AVC.
91
SAC is the sum of AVC and AFC. Initially, both AVC and AFC decrease
as output increases.
Therefore, SAC initially falls. After a certain level of output production,
AVC starts rising. Now AVC and AFC are moving in opposite direction.
Here, initially the fall in AFC is greater than the rise in AVC and SAC is
still falling. But, after a certain level of production, rise in AVC overrides
the fall in AFC. From this point onwards, SAC is rising.
SAC curve is therefore U-shaped.
It lies above the AVC curve with the vertical difference being equal to
the value of AFC.
92
Long Run Costs
In the long run, all inputs are variable.

The total cost and the total variable cost therefore, coincide in the long
run.
Long run average cost (LRAC) is defined as cost per unit of output, i.e.
LRAC=TC/q
Long run marginal cost (LRMC) is the change in total cost per unit of
change in output.
93
Shapes of the Long Run Cost Curves
As IRS operates, average cost falls as the firm increases output.

As long as DRS operates, the average cost must be rising as the firm
increases output.
The average cost remains constant as long as CRS operates.
In a typical firm IRS is observed at the initial level of production. This is
then followed by the CRS and then by the DRS. Accordingly, the LRAC
curve is a U-shaped curve.
Its downward sloping part corresponds to IRS and upward rising part
corresponds to DRS. At the minimum point of the LRAC curve, CRS is
observed.
94
Shapes of the Long Run Cost Curves
As long as average cost is falling, marginal cost must be less than the
average cost.
When the average cost is rising, marginal cost must be greater than the
average cost. LRMC curve is therefore a U-shaped curve.
95
BREAK-EVEN ANALYSIS
The main objective of break-even analysis is to find the cut-off
production volume from where a firm will make profit.
Let
s = selling price per unit
v = variable cost per unit
FC = fixed cost per period
Q = volume of production
The total sales revenue (S) of the firm is given by the following formula:
S = s*Q
The total cost of the firm for a given production volume is given as
TC = Total variable cost + Fixed cost
= v * Q + FC
96
BREAK-EVEN ANALYSIS
The intersection point of the total sales revenue line and the total cost line
is called the break-even point.
97
BREAK-EVEN ANALYSIS
Profit = Sales (Fixed cost + Variable costs)
= s *Q (FC + v * Q)
Break-even quantity =Fixed cost /(Selling price/unit Variable cost/unit)
=FC/(s-v)
Break-even sales
= Fixed cost*Selling price/unit / (Selling price/unit Variable cost/unit)
=FC*s/(s-v)
98
BREAK-EVEN ANALYSIS
The contribution is the difference between the sales and the variable
costs. It indicates how much of a company's revenues will be
contributing (after covering the variable expenses) to the company's
fixed expenses and net income.
Contribution = Sales Variable costs
Contribution/unit = Selling price/unit Variable cost/unit
The margin of safety (M.S.) is the sales over and above the break-even
sales.
M.S. = Actual sales Break-even sales
= Profit sales /Contribution
M.S. as a per cent of sales = (M.S./Sales) *100
99
BREAK-EVEN ANALYSIS
Alpha Associates has the following details:
Fixed cost = Rs. 20,00,000
Variable cost per unit = Rs. 100
Selling price per unit = Rs. 200
Find
(a) The break-even sales quantity,
(b) The break-even sales
(c) If the actual production quantity is 60,000, find (i) contribution; and
(ii) margin of safety by all methods.
100
BREAK-EVEN ANALYSIS
a) Break-even quantity =FC /(s-v)= 20,000 units
(b) Break-even sales =FC*s/(s v) = Rs. 40,00,000
(c)
(i) Contribution = Sales Variable cost
= s Q v Q = 200 * 60,000 100 * 60,000
= Rs. 60,00,000
(ii) Margin of safety = Sales Break-even sales
= 60,000 *200 40,00,000
= Rs. 80,00,000
101
BREAK-EVEN ANALYSIS
PROFIT/VOLUME RATIO measures the Profitability of the firm.
P/V ratio = Contribution/Sales
=(Sales - Variable costs)/Sales
The relationship between BEP and P/V ratio is as follows:
BEP =Fixed cost /(P/V ratio)
The following formula helps us find the M.S. using the P/V ratio:
M.S. =Profit /(P/V ratio)
102
BREAK-EVEN ANALYSIS
Consider the following data of a company for the year 2007:
Sales = Rs. 1,20,000
Fixed cost = Rs. 25,000
Variable cost = Rs. 45,000
Find the following:
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.
103
BREAK-EVEN ANALYSIS
(a) Contribution = Sales Variable costs = Rs. 75,000
(b) Profit = Contribution Fixed cost
= Rs. 50,000
(c) BEP
P/V ratio = Contribution/Sales
= 75,000/1,20,000 * 100 = 62.50%
BEP =Fixed cost / (P/V ratio)
= 25000/ 62.50*100 = Rs. 40,000
(d) M.S. = Profit / (P/V ratio)
= 50 000/ 62.50*100 = Rs. 80,000
104
BREAK-EVEN ANALYSIS
Consider the following data of a company for the year 1998:
Sales = Rs. 80,000
Fixed cost = Rs. 15,000
Variable cost = 35,000
Find the following:
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.
105
Profit Maximization
Total
revenuetotal
perspective
cost
The profit-maximizing output

is the one at which this
difference
reaches
its
maximum.
the linear total revenue curve
represents the case in which
the firm is a perfect competitor
in the goods market, and thus
cannot set its own selling
price.
106
Profit Maximization
Marginal revenuemarginal
perspective
cost
Marginal
profit equals
marginal
revenue (MR) minus marginal cost
(MC).
Since total profit increases when
marginal profit is positive and total
profit decreases when marginal
profit is negative, it must reach a
maximum where marginal profit is
zero
Total economic profit is represented
by the area of the rectangle PABC.
d Profit / dQ = (dTR/ dQ)

(dTC/dQ) = 0
therefore maximum profit
occurs where MR = MC
107
MR > MC
If marginal revenue exceeds marginal cost, the production of an
additional unit of output adds more to revenue than to costs.
In this case, a firm is expected to increase its level of production to
increase its profits.
MR < MC
If marginal cost exceeds marginal revenue, the production of the last unit
of output costs more than the additional revenue generated by the sale of
this unit.
In this case, firms can increase their profits by producing less.
A profit-maximizing firm will produce more output when MR > MC and
less output when MR < MC.
108
If MR = MC, however, the firm has no incentive to produce either more or

less output.
The firm's profits are maximized at the level of output at which MR = MC.
109
Profit Maximization
A change in fixed costs has no effect on

the profit maximizing output or price.
Profits are maximized when the slope of
the revenue function is equal to the
slope of the cost function
110
Profit = (profit per unit) x no of units

= (P ATC) x Q
111
If a firm can sell all it wishes without having any effect on market price,
marginal revenue will be equal to price
If a firm faces a downward-sloping demand curve, more output can only
be sold if the firm reduces the goods price
If price falls as a firm increases output, marginal revenue will be less than
price
112
The Shut-Down Decision

If the firm is making losses----NO Shut Down---Why?
Because even if the firm shuts down, it will still have to pay its fixed costs
(in the short run).
The firm should stay open even though its making losses because its
revenues still partially offset the fixed costs.
The case the firms total revenues (TR) exceed the firms total variable costs
(TVC).
TR > TVC
Pq > AVCq
p > AVC
This shows that the firm should stay open if the price (at its optimally
chosen quantity) is greater or equal to its average variable cost.
If the price is below the average variable cost, the firm should shut down.
113
Suppose that the demand curve for a sandwich is

q = 100 10P
If sandwich can be produced at a constant average and marginal cost of
$4, then, calculate the quantity where profit is maximum
Solving for price, we get
P = -q/10 + 10
This means that total revenue is
TR = Pq = -q2/10 + 10q
Marginal revenue will be given by
MR = dTR/dq = -q/5 + 10
MR = MC
-q/5 + 10 = 4
q = 30
114
Types of organizational form

Business
Private
sector
Individual
ownership
Partnership
Joint
sector
Collective
ownership
Joint hindu
family
Public
sector
Departmen
tal
organizatio
ns
Corporatio
n
Public
limited
companies
Statutory
corporation
s
Governmen
t
companies
cooperativ
es
Private
limited
companies
115
Joint hindu family

A type of partnership
The head of the family manages the business, other members help him.
Profits are shared by all members of the family according to their share or
contribution in the business
Members are free to leave the business
Business continues even after death of the head of the family
Registration of business is not necessary
116
Departmental Undertaking
Departmental Undertaking form of organization is primarily used for
provision of
essential services such as railways, postal services,
broadcasting , Ordnance Factories etc.
A departmental undertaking is organized, managed and financed by the
Government.
It is controlled by a specific department of the government. Each such
department is headed by a minister.
This form is considered suitable for activities where the government
desires to have control over them in view of the public interest.
Indian Railways are managed by the Ministry of Railways.
Post and Telegraph services are run as a department, in the Ministry of
Communication.
117
Departmental Undertaking
MERITS
(a) Fulfillment of Social Objectives
(b) Control Over Economic Activities
(c) Contribution to Government Revenue
DEMERITS
(d) The Influence of Bureaucracy
(e) Excessive Parliamentary Control
(f) Lack of Professional Expertise
(g) Inefficient Functioning
118
Statutory Corporation
Statutory Corporation (or public corporation) refers to a corporate body
created by the Parliament or State Legislature by a special Act which
define its powers, functions and pattern of management.
Its capital is wholly provided by the government.
Examples: Life Insurance Corporation of India, State Trading Corporation,
State Electricity Boards, Airports Authority of India and State Financial
Corporation etc.
It works on profit objective and as such its activities are commercial in
nature.
119
Statutory Corporation
MERITS
(a) Expert Management
(b) Internal Autonomy
(c) Responsible to Parliament
(d) Easy to Raise Funds
DEMERITS
(e) Government Interference
(f) Rigidity
120
GOVERNMENT COMPANIES
As per the provisions of the Indian Companies Act, a company in which
51% or more of its capital is held by central and/or state government is
regarded as a Government Company.
These companies are registered under Indian Companies Act, 1956 and
follow all those rules and regulations as are applicable to any other
registered company.
The Government of India has organized and registered a number of its
undertakings as government companies for ensuring managerial
autonomy, operational efficiency and provide competition to private
sector.
Eg: NTPC, Hindustan shipyard, BHEL
121
GOVERNMENT COMPANIES
MERITS
(a) Simple Procedure of Establishment
(b) Efficient Working on Business Lines
(c) Efficient Management
(d) Healthy Competition
DEMERITS
(e) Lack of Initiative
(f) Change in Policies and Management
122
Private limited company

Restricts the right of the members to transfer shares
Limits the number of members to fifty
Prohibits any invitation to the public to subscribe for its shares
Minimum number for a private limited company is two
123
Public limited company

A public limited company (PLC) is the legal designation of a limited
liability company which has offered shares to the general public and has
limited liability.
Minimum of seven shareholders and the upper limit is open for any
number
Being a public company allows a business to sell shares to investors in
order to raise capital.
More legal control as compared to private
124

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UNIT II

Firms and Market Conduct

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of Public Sector enterprises in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of Public Sector enterprises in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of Public Sector enterprises in India

Role of Public Sector enterprises in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of Public Sector enterprises in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of Public Sector enterprises in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of Public Sector enterprises in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

6. Lack of a Proper Price Policy:

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Importance of Private Sector in Indian Economy

The opening up of Indian economy has led to free inflow of foreign

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Importance of Private Sector in Indian Economy

Increased quality of life

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

6. Role in the Indian Economy

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Roles of Private Sector in India

7. Small Scale and Cottage Industry

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Advantages of the private sector:

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

In joint sector financial participation is 26% from government, 25% from

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Role of joint sector

1. Social control over industries

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

1. Social control over industries

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

Dr. Venkata Rama Raju/ Assistant Professor/ PDPU

4. cooperatives promote the fullest participation of all people and