ENGINEERING ECONOMICS AND ACCOUNTANCY

UNIT-III: Production, Cost, Market Structures & Pricing

By
Dr Gampala Prabhakar
MBA, M.Com, UGC JRF&NET(Management), UGC NET (Commerce), PhD

Assistant Professor
H&S Department
VNR VJIET, Hyderabad
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https://sites.google.com/view/dr-gampala-prabhakar/home
 UNIT-III
Production Analysis: Factors of Production,
Production Function, Production Function with one
variable input, two variable inputs, Returns to Scale,
Different Types of Production Functions - Cobb-
Douglas.
Cost analysis: Types of Costs, Short run and long run
Cost Functions.
Market Structures: Nature of Competition, Features of
Perfect competition, Monopoly, Oligopoly, Monopolistic
Competition.
Pricing: Types of Pricing, Product Life Cycle based
Pricing, Break Even Analysis (Simple problems)
Dr GP, H&S Dept,. VNRVJIET 2
 THEORY OF PRODUCTION
In this chapter we will learn Production, factors of production,
short-run and long-run production, Law of production, Law of
returns to scale.
According to James Bates and J.R. Parkinson “Production is
the organized activity of transforming resources into
finished products in the form of goods and services; and
the objective of production is to satisfy the demand of such
transformed resources”.
 MEANING OF PRODUCTION: Production is a very important economic

activity. As we are aware, the survival of any firm in a

competitive market depends upon its ability to produce goods
and services at a competitive cost. One of the principal
concerns of business managers is the achievement of optimum
efficiency in production by minimising the cost of production.
The performance of an economy is judged by the level of its
FACTORS OF PRODUCTION Factors of production refer to
inputs. An input is a good or service which a firm buys for use
in its production process. Production process requires a wide
variety of inputs, depending on the nature of output. The
process of producing goods in a modern economy is very
complex. A good has to pass through many stages and many
hands until it reaches the consumers’ hands in a finished form.
Land, labour, capital and entrepreneurial ability are the four
factors or resources which make it possible to produce goods
and services. Even a small piece of bread cannot be produced
without the active participation of these factors of production.
While land is a free gift of nature and refers to natural
resources, the human endeavour is classified functionally and
qualitatively into three main components namely, labour,
capital and entrepreneurial skills.
1. Land The term ‘land’ is used in a special sense in
Economics. It does not mean soil or earth’s surface alone, but
refers to all free gifts of nature which would include besides
land in common parlance, natural resources, fertility of soil,
water, air, light, heat natural vegetation etc. It becomes difficult
at times to state precisely as to what part of a given factor is
due solely to gift of nature and what part belongs to human
effort made on it in the past.
2) Labour: The term ‘labour’, means any mental or physical
exertion directed to produce goods or services. All human
efforts of body or of mind undergone partly or wholly with a
view to secure an income apart from the pleasure derived
directly from the work is termed as labour. In other words, it
refers to various types of human efforts which require the use
of physical exertion, skill and intellect.
3. Capital:
 We may define capital as that part of wealth of an individual or community
which is used for further production of wealth. In fact, capital is a stock
concept which yields a periodical income which is a flow concept. It is
necessary to understand the difference between capital and wealth. Whereas
wealth refers to all those goods and human qualities which are useful in
production and which can be passed on for value, only a part of these goods
and services can be characterised as capital because if these resources are
lying idle they will constitute wealth but not capital.
 Capital has been rightly defined as ‘produced means of production’ or man-
made instruments of production’. In other words, capital refers to all man
made goods that are used for further production of wealth. This definition
distinguishes capital from both land and labour because both land and labour
are not produced factors. They are primary or original factors of production,
but capital is not a primary or original factor; it is a produced factor of
production. It has been produced by man by working with nature. Machine
tools and instruments, factories, dams, canals, transport equipment etc., are
some of the examples of capital. All of them are produced by man to help in
the production of further goods
4. Entrepreneur: It is not enough to say that production is a
function of land, capital and labour. There must be some factor
which mobilises these factors, combines them in the right
proportion, initiates the process of production and bears the
risks involved in it. This factor is known as the entrepreneur.
He has also been called the organiser, the manager or the risk
taker. But, in these days of specialisation and separation of
ownership and management, the tasks performed by a manager
or organiser have become different from that of the
entrepreneur. While organisation and management involve
decision-making of routine and non-routine types, the task of
the entrepreneur is to initiate production work and to bear the
risks involved in it
 PRODUCTION FUNCTION
 The production function is a statement of the relationship between a firm’s
scarce resources (i.e. its inputs) and the output that results from the use of
these resources. More specifically, it states technological relationship
between inputs and output. The production function can be algebraically
expressed in the form of an equation in which the output is the dependent
variable and inputs are the independent variables. The equation can be
expressed as: Q = f (a, b, c, d …….n) , Where ‘Q’ stands for the rate of
output of given commodity and a, b, c, d…….n, are the different factors
(inputs) and services used per unit of time.
Assumptions of Production Function:
 1. First we assume that the relationship between inputs and
outputs exists for a specific period of time. In other words, Q is
not a measure of accumulated output over time.
2. Second, it is assumed that there is a given “state-of-the-art” in
the production technology. Any innovation would cause change
in the relationship between the given inputs and their output.
For example, use of robotics in manufacturing or a more
The production function can be defined as “
The relationship between the maximum amount
of output that can be produced and the input
required to make that output. It is defined for a
given state of technology i.e., the maximum
amount of output that can be produced with
given quantities of inputs under a given state of
technical knowledge. (Samuelson) It can also
be defined as the minimum quantities of various
inputs that are required to yield a given
quantity of output”.
Short-Run Vs Long-Run Production Function:
The production function of a firm can be studied in the context of short
period or long period. It is to be noted that in economic analysis, the
distinction between short-run and long-run is not related to any particular
measurement of time (e.g. days, months, or years). In fact, it refers to the
extent to which a firm can vary the amounts of the inputs in the
production process.
A period will be considered short-run period if the amount of at least
one of the inputs used remains unchanged during that period. Thus,
short-run production function shows the maximum amount of a good or
service that can be produced by a set of inputs, assuming that the
amount of at least one of the inputs used remains unchanged. Generally,
it has been observed that during the short period or in the short run, a
firm cannot install a new capital equipment to increase production. It
implies that capital is a fixed factor in the short run. Thus, in the short-
run, the production function is studied by holding the quantities of
capital fixed, while varying the amount of other factors (labour, raw
material etc.) This is done when the law of variable proportion is
studied.
The production function can also be studied in the
long run. The long run is a period of time (or
planning horizon) in which all factors of production
are variable. It is a time period when the firm will
be able to install new machines and capital
equipment’s apart from increasing the variable
factors of production. A long-run production
function shows the maximum quantity of a good or
service that can be produced by a set of inputs,
assuming that the firm is free to vary the amount of
all the inputs being used. The behaviour of
production when all factors are varied is the subject
matter of the law of returns to scale.
Production Function with one variable input:
When deciding how much of a particular input to buy, a firm has to
compare the benefit that will result with the cost of that input.
Sometimes it is useful to look at the benefit and the cost on an
incremental basis by focusing on the additional output that results from
an incremental addition to an input. In other situations, it is useful to
make the comparison on an average basis by considering the result of
substantially increasing an input. We will look at benefits and costs in
both ways.
When capital is fixed but labor is variable, the only way the firm can
produce more output is by increasing its labor input. Imagine, for
example, that you are managing a clothing factory. Although you have a
fixed amount of equipment, you can hire more or less labor to sew and
to run the machines. You must decide how much labor to hire and how
much clothing to produce. To make the decision, you will need to know
how the amount of output q increases (if at all) as the input of labor L
increases
The law of variable proportions which was earlier called as
“Law of diminishing returns has played a vital role in the
modern economics theory. Assume that a firms‟ production
function consists of fixed quantities of all inputs (land,
equipment, etc.) except labour which is a variable input. If
you go on adding the variable input, say, labor, the total
output in the initial stages will increase at an increasing rate,
and after reaching certain level of output the total output will
increase at declining rate. If variable factor inputs are added
further to the fixed factor input, the total output may decline.
This law is of universal nature and it proved to be true in
agriculture.
Assumptions of the Law: The law is based upon the
following assumptions:
1. Only one factor is varied
2. The scale of output is unchanged
 Production Function With Two Variable Inputs
Isoquants analyse and compare the different combinations of
capital & labour and output. The term isoquant has its origin from
two words “iso” and “quants”. “iso‟ is a Greek word meaning
“equal‟ and “quants‟ is a Latin word meaning „quantity ‟. Isoquant
therefore, means equal quantity. An isoquant curve is therefore
called as iso-product curve or equal product curve or production
indifference curve.
Thus, an isoquant shows all possible combinations of two inputs,
which are capable of producing equal or a given level of output.
Since each combination yields same output, the producer becomes
indifferent towards these combinations.
Assumptions: 1. There are only two factors of production, viz.
labour and capital. 2. The two factors can substitute each other up
to certain limit 3. The shape of the isoquant depends upon the
extent of substitutability of the two inputs. 4. The technology is
given over a period.
For example:- Now the firm can combine labor and capital
in different proportions and can maintain specified level of
output say, 10 units of output of a product X. It may
combine alternatively as follows:
In the below table, combination „A‟ represent 1 unit of
capital and 10 units of labour and produces „10‟ units of a
product. All other combinations in the table are assumed to
yield the same given output of a product say „10‟ units by
employing any one of the alternative combinations of the
two factors labour and capital. If we plot all these
combinations on a paper and join them, we will get a curve
called Iso-quant curve as shown below. Labour is on the X-
axis and capital is on the Y-axis. IQ is the Iso-Quant curve
which shows all the alternative combinations A, B, C, D
which can produce 10 units of a product.
Cobb-Douglas Production Function

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Cost Definition:
Cost:
Cost has been defined in the terminology given by the
Chartered Institute of Management Accountants
(CIMA) as ‘the amount of expenditure incurred or
attributed on a given thing’. Simply, it can be
defined as that which is given or scarified to obtain
something. Thus the cost of an article is its purchase
or manufacturing price, i.e. it would consist of its
direct material cost, direct labour cost, direct and
indirect expenses allocated or apportioned to it.

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Types of Costs
Opportunity cost: The opportunity cost is measured in terms of
the forgone benefits from the next best alternative use of a given
resource. For example the inputs which are used to manufacture
a car may also be used in the productions of military equipment.
Main points of opportunity cost are:
1. The opportunity cost of any commodity is only the next
best alternative forgone.
2. The next best alternative commodity that could be produced
with the same value of the factors, which are more or less the
same.
 3. It helps in determining relative prices of factor inputs at
different places.
 4. It helps in determining the remuneration to services.
5. It helps the manager to decide what he should produce in
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Explicit cost- An explicit cost is a cost that is directly
incurred by the firm, company or organization during the
production. The explicit cost is kept on record by the
accountant of the firm. Salaries, wages, rent, raw material
are few example of the explicit cost. The explicit cost is also
known as out- pocket cost. This cost is handy in calculating
both accounting and economic profit.
Implicit cost- The implicit cost is directly opposite to it, as
it is the cost that is not directly incurred by the firm or
company. In implicit cost outflow of cash doesn’t take place.
It is not in the record and is heard to be traced back. The
interest on owner’s capital or the salary of the owner are the
prominent example of the implicit cost. The implicit cost is
also known as imputed cost. Through implicit cost , only the
economic profit is calculated.
Dr GP, H&S Dept,. VNRVJIET 27
Fixed Cost- Fixed cost are the amount spent by the
firm on fixed inputs in the short run. Fixed cost are
thus, those costs which remain constant, irrespective
of the level of output. These costs remain unchanged
even if the output of the firm is nil. Fixed costs
therefore, are known as Supplementary costs or
Overhead costs.
Variable Costs- Variable costs are those cost that
change directly as the volume of output changes. As
the production increases variable cost also increases,
and as the product decreases variable costs also
decreases, and when the production stops variable
cost is zero.
Dr GP, H&S Dept,. VNRVJIET 28
Semi Variable Cost- This type of cost lies in between fixed and
variable cost. It is neither perfectly variable nor perfectly fixed in
relation to changes in output. This type of costs include a portion of
fixed cost and a portion of variable cost, this is known as semi variable
cost. For example- electricity bill generally include both a fixed charge
(meter rent) and a variable charge(charge based on units consumed)
and the total payment made is semi variable cost.
Differential cost is the difference between the cost of two alternative
decisions, or of a change in output levels. The concept is used when
there are multiple possible options to pursue, and a choice must be
made to select one option and drop the others.
 A differential cost can be a variable cost, a fixed cost, or a mix of the two
– there is no differentiation between these types of costs, since the
emphasis is on the gross difference between the costs of the alternatives
or change in output.
 Since a differential cost is only used for management decision making,
there is no accounting entry for it. There is also no accounting standard
that mandates how the cost is to be calculated.
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Sunk Cost- Sunk costs are costs which cannot be altered in any way.
Sunk costs are costs which have already been uncured. For example,
cost incurred in constructing a factory. When the factory building is
constructed cost have already been incurred. The building has to be
used for which originally envisaged. It can not be altered when
operation are increased or decreased . Investment of machinery is an
example of sunk cost.
Total cost-Total cost is the total expenditure incurred in the production
of goods and services.
TC= TFC+TVC
Average cost- Average cost is not actual cost, It is obtained by
dividing the total cost by the total output.
AC= Total Cost/Units Produced
Marginal cost- The cost incurred on producing one additional unit of
commodity is known as marginal cost. Thus it shown a change in total
cost when one more or less unit is produced
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 Market Structures
Market is a place where buyer and seller meet, goods and services are
offered for the sale and transfer of ownership occurs. A market may be
also defined as the demand made by a certain group of potential buyers
for a good or service. The former one is a narrow concept and later one
is a broader concept. Economists describe a market as a collection of
buyers and sellers who transact over a particular product or product class
(the housing market, the clothing market, the grain market etc.). For
business purpose we define a market as people or organizations with
wants (needs) to satisfy, money to spend, and the willingness to spend it.
Broadly, market represents the structure and nature of buyers and sellers
for a commodity/service and the process by which the price of the
commodity or service is established. In this sense, we are referring to the
structure of competition and the process of price determination for a
commodity or service. The determination of price for a commodity or
service depends upon the structure of the market for that commodity or
service (i.e., competitive structure of the market). Hence the
understanding on the market structure and the nature of competition34are
Different Market Structures:
Market structure describes the competitive environment in the market for
any good or service. A market consists of all firms and individuals who
are willing and able to buy or sell a particular product. This includes
firms and individuals currently engaged in buying and selling a
particular product, as well as potential entrants. The determination of
price is affected by the competitive structure of the market. This is
because the firm operates in a market and not in isolation. In making
decisions concerning economic variables it is affected, as are all
institutions in society by its environment

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PERFECT COMPETITION
Perfect competition refers to a market structure where competition among the sellers and
buyers prevails in its most perfect form. In a perfectly competitive market, a single market
price prevails for the commodity, which is determined by the forces of total demand and
total supply in the market.
 Characteristics Of Perfect Competition:
a) A large number of buyers and sellers: The number of buyers and sellers is large and
the share of each one of them in the market is so small that none has any influence on
the market price.
b) Homogeneous product: The product of each seller is totally undifferentiated from
those of the others.
c) Free entry and exit: Any buyer and seller is free to enter or leave the market of the
commodity.
d) Perfect knowledge: All buyers and sellers have perfect knowledge about the market
for the commodity.
e) Indifference: No buyer has a preference to buy from a particular seller and no seller to
sell to a particular buyer.
f) Non-existence of transport costs: Perfectly competitive market also assumes the non-
existence of transport costs.
g) Perfect mobility of factors of production: Factors of production must be in a position
to move freely into or out of industry and from one firm to the other. 36
Perfect competition: The individual firm
AR(Average revenue) curve and MR(Marginal Revenue) curve
under perfect competition becomes equal to D(Demand) curve and
it would be a horizontal line or parallel to the X-axis. The curve
simply implies that a firm under perfect competition can sell as
much quantity as it likes at the given price determined by the
industry i.e. a perfectly elastic demand curve.

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Perfect competition: The firm and the industry
Price is determined by the market forces, that is, demand and
supply for a given product or service. As discussed above, firms
have no control over the prices they charge for their products. The
ultimate price that determines the quantity demanded is equal to the
quantity supplied. This price is also called equilibrium price, as it
balances the forces of demand and supply. The figure shows how
the price is determines. DD is the demand curve and SS is the
supply curve. Rs. 6 is the price at which DD and SS intersect each
other. At Rs. 6, 60 units are supplied and demanded.
If the price increases to Rs.8, supply will also increase and hence
the price is likely to fall down.
If the price decreases to Rs. 4, supply will decrease and hence the
price is likely to go up.

Dr GP, H&S Dept,. VNRVJIET 38

Dr GP, H&S Dept,. VNRVJIET 39
Price-Output Determination Under Perfect Competition
In this market, the price is determined by supply and demand
forces. Marshal who propounded the theory says that the price is
determined by the equilibrium between demand and supply.
The pricing of commodity under perfect competition can be
determined in three periods of time.
a) Very short period (Market Period)

Market period is too short period to

increase the supply. The market
period is so short that supply of the
commodity is limited to existing
stock. During the market period, say a
single day, the supply of a commodity
is perfectly inelastic.
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b) Short Period
Short period is not too long period to install new
capital equipments. It is also not sufficient
period to permit the new firms to enter the
industry to increase the supply of the
commodity in the market. Hence the firm can
increase the supply of a commodity in the short
period only by making intensive use of the
given plants and equipments and increasing the
units of variable factors.
As a result of this, the short period supply of a
commodity will be relatively less elastic.
In the diagram MS is the market period supply curve. DD is the initial demand curve. It
intersects MS curve at E. The price is OP and output OM. Suppose demand increases,
the demand curve shifts upwards and becomes D1D1. In the very short period, supply
remains fixed on OM. The new demand curve D1D1 intersects MS at E1. The price
will rise to OP1. This is what happened in the very short-period.
As the price rises from OP to OP1, firms expand output. As firms can vary some
factors but not all, the law of variable proportions operates. This results in new short-
run supply curve SS. It interests D1 D1 curve at E2. The price will fall from OP1 41 to
 c) Long Period
In Long run, the Firm‟s output (supply) can be
changed by both the variable factors and fixed
factors i.e. all factors become variable. There is
enough time for new Firms to enter the Industry.
Further, if the demand is increased, the supply can
be increased or decreased according to the
demand. For Long run equilibrium, long run
marginal cost (LMC) is equal to MR and LMC
curve cut the MR curve from below. In case of
long run equilibrium, all the firms will earn only
normal profits.
Take the case when the Firm earn super-normal profit-Then the existing Firm will increase
their production and new Firm will enter the Industry. Consequently, the total supply will
increase and price fall down and further results in normal profit for the firm
On the contrary, if the firm is incurring losses, Then some Firm will leave the Industry
which will reduce the total supply. And due to decrease in supply, price will rise and once
again Firm will begin to earn normal profit. Firm equilibrium is at the minimum point of its
LAC and at this point the Firm will get the normal profits. If AR (price) rises to OP1, then
Firm‟s LMC cuts its MR1 at E1 and the firm gets super-normal profit but again come to OP
yielding normal profits as stated before. And at price OP2, firm incurs losses but again rise
to level OP to maintain the equilibrium at normal profit
Firm‟s equilibrium: MC=MR=AR= min LAC
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 MONOPOLY
“mono” means single and “poly” means seller. The term monopoly
refers to that market in which a single firm controls the whole supply
of a particular product which has no close substitutes. Monopoly
emerges in firms such as transport, water and electricity supply etc.
Features:
1.Single person or a firm: A single person or a firm controls the total
supply of the commodity. There will be no competition for monopoly
firm. The monopolist firm is the only firm in the whole industry.
2.No close substitute: The goods sold by the monopolist shall not have
close substitutes. Even if price of monopoly product increases, people
will not go in far substitute. For example: If the price of electric bulb
increases slightly, consumer will not go in for kerosene lamp.
3.Large number of Buyers: Under monopoly, there may be a large
number of buyers in the market who compete among themselves.
4.Price Maker: Since the monopolist controls the whole supply of a
commodity, he is a price-maker, and then he can alter the price. 43
5. Supply and Price: The monopolist can fix either the supply or the price. He cannot
fix both. If he charges a very high price, he can sell a small amount. If he wants to sell
more, he has to charge a low price. He cannot sell as much as he wishes for any price
he pleases.
6. Downward Sloping Demand Curve: The demand curve (average revenue curve) of
monopolist slopes downward from left to right. It means that he can sell more only by
lowering price
Monopoly refers to a market situation where there is only one seller. He has complete
control over the supply of a commodity. He is therefore in a position to fix any price.
Under monopoly there is no distinction between a firm and an industry. This is because
the entire industry consists of a single firm.
Under monopoly, demand curve is average revenue curve.

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 Price-Output Determination Under Monopoly
The monopolistic firm attains equilibrium when its marginal
cost becomes equal to the marginal revenue. The monopolist
always desires to make maximum profits. He makes
maximum profits when MC=MR. He does not increasing his
output if his revenue exceeds his costs. But when the costs
exceed the revenue, the monopolist firm incur loses. Hence
the monopolist curtails his production. He produces up to
that point where marginal cost is equal to the marginal
revenue (MR=MC). Thus, the point is called equilibrium
point. The price output determination under monopoly may
be explained with the help of a diagram.
In the diagram, the quantity supplied or demanded is shown along X-axis. The cost or
revenue is shown along Y-axis. AC and MC are the average cost and marginal cost
curves respectively. AR and MR curves slope downwards from left to right. AC and
MC are U shaped curves. The monopolistic firm attains equilibrium when its marginal
cost is equal to marginal revenue (MC=MR). Under monopoly, the MC curve may cut
the MR curve from below or from a side. In the diagram, the above condition is
satisfied at point E. At point E, MC=MR. The firm is in equilibrium. The equilibrium
output is OM. Up to OM output, MR is greater than MC and beyond OM, MR is less
than MC. Therefore, the monopolist is will be in equilibrium at output OM where
MR=MC and profits are maximized. 45
The above diagram (Average revenue) = MQ or OP
Average cost = MR Profit per unit = Average Revenue-Average
cost=MQ-MR=QR
Total Profit = QR x SR=PQRS
 If AR > AC; Abnormal or super normal profits.
If AR = AC; Normal Profit
If AR < AC ; Loss

Dr GP, H&S Dept,. VNRVJIET 46

 MONOPOLISTIC COMPETITION
Perfect competition and pure monopoly are rare phenomena in the real
world. Instead, almost every market seems to exhibit characteristics of
both perfect competition and monopoly. Hence, in the real world, it is
the state of imperfect competition lying between these two extreme
limits that work. Edward. H. Chamberlain developed the theory of
monopolistic competition, which presents a more realistic picture of the
actual market structure and the nature of competition.
Features/Characteristics:
1. Existence of Many firms
2. Product Differentiation
3. Large Number of Buyers
4. Free Entry and Exist of Firms
5. Selling costs
6. Imperfect Knowledge
7. The Group
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Price – Output Determination Under Monopolistic
Competition
Under monopolistic competition, Since different firms produce
different varieties of products, different prices for them will be
determined in the market depending upon the demand and cost
conditions. Each firm will set the price and output of its own
product. Here also the profit will be maximized when marginal
revenue is equal to marginal cost(MR=MC). The demand curve for
the firm in case of monopolistic competition is just similar to that
of monopoly.
The degree of elasticity of demand of a firm in monopolistic
competition depends upon the extent to which the firm can resorts
to product differentiation. The greater the ability of the firm to
differentiate the product, the less elastic the demand is. The firm’s
influence to increase the price depends upon the extent to which it
can differentiate the product.
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a) Short-run
In the short-run, the firm is in equilibrium when marginal Revenue = Marginal Cost. In
the figure, AR is the average revenue curve. MR marginal revenue curve, MC marginal
cost curve, AC average cost curve, MR and MC interest at point E where output is OM
and price MQ (i.e. OP). Thus, the equilibrium output is OM and the price is MQ or OP.
When the price (average revenue) is above average cost, a firm will be making
supernormal profit. From the figure it can be seen that AR is above AC in the
equilibrium point. As AR is above AC, this firm is making abnormal profits in the
short-run. The abnormal profit per unit is QR, i.e., the difference between AR and AC
at equilibrium point and the total supernormal profit is OR x OM. This total abnormal
profits is represented by the rectangle PQRS. The firm may make supernormal profits
in the short-run if it satisfies the following two conditions.
a) MR = MC

b) AR > AC

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b) Long–run
More and more firms will be entering the market having been
attracted by supernormal profits enjoyed by the existing firms in
the industry. As a result, competition become s intensive on one
hand, forms will compete with one another for acquiring scare
inputs pushing up the prices of factor inputs. On the other hand, on
the entry of several firms, the supply in the market will increase,
pulling down the selling price of the products. In order to cope with
the competition, the firms will have to increase the budget on
advertising. The entry of new firms continue till the supernormal
profits of the firms completely eroded and ultimately firms in the
industry will earn only normal profits. Those firms which are not
able to earn at least normal profits will get closed. Thus in the long-
run, every firm in the monopolistic competitive industry will earn
only normal profits, which are just sufficient to stay in the business.
It is be noted that normal profits are part of average costs.
Dr GP, H&S Dept,. VNRVJIET 50
In the long-run, in order to achieve equilibrium position, the
firm has to fulfill the following conditions:
a) MR = MC
b) b) AR = AC at the level of equilibrium level of output.

Dr GP, H&S Dept,. VNRVJIET 51

 OLIGOPOLY
The term oligopoly is derived from two Greek words, oligos
meaning a few, and pollen meaning to sell. Oligopoly is the form
of imperfect competition where there are a few sellers in the
market, producing either a homogeneous product or producing
products, which are close but not perfect substitute of each other.
Features:
1. Monopoly Power
2. Interdependence of Firms
3. Conflicting Attitude of Firms
4. Few firms. In this market, only few sellers are found
5. Nature of product
6. Interdependence among firms
7. Large number of consumers

Dr GP, H&S Dept,. VNRVJIET 52

 TYPES OF PRICING
Firms set prices for their products through several alternative
means. The important pricing methods followed in practice
are shown in the chart.

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 PRODUCT LIFE CYCLE BASED PRICING
Companies must adapt to the stages of the product life cycle to
effectively sell and promote their products. Depending on the
product life cycle stage, a company will develop branding
techniques and an appropriate pricing model. Understanding
each stage helps businesses increase profits.
The stages of a product life cycle govern how a product is
priced, distributed, and promoted. A new product goes through
multiple stages during the course of its life cycle, including an
introduction stage, growth stage, maturity stage and a decline
stage. As a product ages, companies look for new ways to brand
it, and also explore pricing changes. Market and competitor
research help businesses assess the proper course of action to
maintain product profitability.

Dr GP, H&S Dept,. VNRVJIET 54

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Review Questions :
1. Explain different types of markets based on competition.
2. What is perfect competition? How to decide price- output under
perfect competition.
3. Define monopoly. Explain price output determination under
monopoly.
4. Differentiate monopoly and monopolistic competition with
appropriate examples.
5. Explain different pricing methods in brief.
6. What is PLC? Who producers fix prices based on PLC? Explain.

Dr GP, H&S Dept,. VNRVJIET 56

 Thank You

Dr GP, H&S Dept,. VNRVJIET 57