ONLINE DISCUSSION/QUIZ-6-11-2022–BCF.801MICROECONOMIC THEORY FOR BANKING AND FINANCE

Question 1

The management of society’s resources is important because resources are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire. Essentially, economists analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.The study of economics has many facets, but it is unified by several central ideas. In view of this, clearly discuss the Ten Principles of Economics.

The ten principles of economics is right divided into three categories capturing these principles in a grouping that rightly summarizes how each group affects the economy in general:
1. HOW PEOPLE MAKE DECISION
A. PEOPLE FACE TRADE OFF
Because people’s needs and wants are endless and the resources required to meet these need are in scare supply, people are constantly making decisions to find the best trade off between their needs and wants that gives them the highest benefits giving the limitations presented by resources scarcity. An example of how individuals and households face trade off is in the use of time for individual and the application of family resources. As an individual needing to manage his or her time amongst competing demand on the scarce resource will have to give up some engagement for others depending on how he or she prioritizes the benefits that comes from his or her choices. While the individual choses to be in the church on Sunday morning against watching the world cup match between his most preferred team that is showing at the same time he or she needs to be in the church. The world cup football match has been traded off for the church service.

The household also faces trade off on how to allocate it resources amongst competing needs. Take for example a family that needs to provide for the future of their children education and the need to buy a family car but it has limited resources in terms of the money required. A trade off will need to happen to chose either to use the available funds for the family car or invest the fund for the educationof the kids

The governments at all levels also faces trade offs. In providing social and economic welfare to the people and in its effort to provide security and order governments face trade offs in terms of the cost and benefit of its programs in these areas. Also in regulating the economy, governments have to make a decision as to what direction and impact it seeks to exact within the economy. While some government believe that Taxation is a good way to redistribute the country’s wealth, others believe that taxation is a disincentive to efficiency and investment in the economy. Government have to make a choice about increasing tax to redistribute nation’s wealth or reduce to tax to attract new investment and also encourage reinvestment of profit.

B. THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT
This principle aptly describes the concept of opportunity cost in economics. The economist unlike the accountant believes and rightly so, the cost of a chosen course of action is the benefit of the alternative that was forgone. Economists believe that not including the cost benefit that was given up in chosen a course of action when calculating the total cost of the chosen action could lead to suboptimal decision at the point of making the choice.

When Mr Nwachukwu chose to take on the acquisition of a Masters Degree in the university of Nigeria, the school fees and other living expenses that are explicitly associated with that venture is not the only key cost of that course of action. There alternative use for Mr. Nwachukwu’s time within the periods of the study which could have been put into measurable beneficial ventures. Mr nwachukwu could be using that time to start a new contract, a new business that supplies particular solution to Nigeria economy at a very high financial reward. The benefits of these alternative course of action that was forgone is the real cost of the Master Degree in Finance which was chosen by Mr. Nwachukwu.

C. RATIONAL PEOPLE THINK AT THE MARGIN
This principle explains why people, organization and governments make a decision to acquire more benefits of what they already have either in abundance or something they have a few of. An individual is most likely to acquire an additional unit of an item he already owns by comparing the additional benefit that ownership of additional unit of that item with the cost associated with that decision. For a middle class man who already own two cars, the additional benefit to acquire the third car compared to the cost of the car may not be compelling enough to cause that acquisition to happen. Take a case of utility that is derived from consumption of water for a thirsty man. The man is willing to pay any amount to get the first cup of water because of the value of the benefit of that initial cup of water to quench his thirst, but for every additional cup of water he is offered the marginal benefit declines until to point the man is no longer willing to pay addition money for additional cup that water. The principle also states that the more of an item a man has the less likely he is willing to spend on the additional unit of that item especially when the item is in unlimited supply. However this is not same for rare and scare commodity like diamond, Gold, etc

D. PEOPLE RESPOND TO INCENTIVES
Because rational people make decisions by comparing cost and benefit of their choices they respond to incentives. This principle is core to a lot of economic theory. An illustration is the theory of demand and supply. With the instrumentality of price mechanism it is possible to induce people to buy more of a product and less of it just as same mechanism induces response form suppliers and produce to employ more factors of production and increase quantity produced and supplied into the market.
This same principle is employed by government through the instrument of tax and tariffs. When government wants to stop consumption or importation of certain items all it needs to do is impose penal tariffs and taxes to reduce consumption of this items. Even to stimulate the economy, government can reduce average tax rate in the economy to increase the disposable income in the hands of the people which in turn increases demand for goods.

2. HOW PEOPLE INTERACT
A. TRADE CAN MAKE EVERYONE BETTER OFF
No one is self sufficient with meeting all their needs and wants. In the days of barter it was impossible for people to enjoy everything that they require because trade was at its lowest level but that has changed since introduction of medium of exchange. The life of people all over the world has been impacted by the development and growth of international trade amongst nations.
The living standard of a man living in a third world country where production and technology can be same as that of the man living in a more developed world simply because the man can afford to buy and enjoy the same good stuff the man in the other world enjoys .

Trade has made nations to specialize in the production of goods they have comparative advantage in and trade these for the goods that other countries have comparative advantage thereby ensuring that more goods are produced at best cost that citizens of the world have their welfare impacted through trade.
B. MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITIES
There are the market economy and the communist economy, the difference between the two is that market economy is organised around the household and firms with forces of demand supply determining the price in the market and the price being the allocator of scare resources amongst competing units that have needs. However the communist or central planned economy is a market where resources are planned and allocated by the government. The decision of what to produce and who is to consume what is determined by government through a central system.
It has been proven that the central planning system has been a poor allocator of resources compared toa market driven system. This is the reason why we hardly have any country in the world that currently uses a central planning system as an economic system. The last country that used such system was china but that did not work. The market economy with its prices system has been a toll that has delivered economic growth and development all over the world, rewarding efficiency and punishing wastages.
C. GOVERNMENT CAN SOMETIMES IMPROVE MARKET OUTCOMES
In the previous principle showing how market is the best way to organize economic activities, there is the need to state that it will be impossible for the market to function efficiently without the intervention of government most especially in the area of provision of all the infrastructure, processes and institutions required to establish, and run an efficient market system. It is government that provide the police and other law enforcement apparatus like the courts, and the regulatory frameworks required to ensure that contract are enforced and that the market integrity is maintained.
There have also been cases where the forces of markets have failed and government had to intervened to avert total collapse. In such cases government have to spend huge funds to bail out the key market players who are considered too big to fail.
Other role which government play is using it power to reallocate social benefits to those that the market system have left behind to ensure that there is equity

3. HOW THE ECONOMY WORKS AS A WHOLE
A. A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES
This principles is quite self explanatory. The productive level of a country is directly related to the level of living standard its citizens enjoy. This explains why countries with high productive capacity have per capital income at a level that cannot be thought of for countries that has less productivity. So government of countries where production is low should target increase level of employment of resources to produce more goods and services. This they can do by ensuring the country’s productive work force have access to the best technology, knowledge and other tools required to produce in an advanced environment.
B. PRICES RISE WHEN GOVERNMENT PRINT TOO MUCH MONEY
A key impact of money supply is the impact it has on process of goods and services in the economy. When there are excess money supply in the system it puts more money in the hands of the people more than the products and services available and this increase in demand will cause prices to rise and if production within the economy does not rise to take care of the new level of demand then process will further increase and essential goods becomes too expensive to buy.
A sustained and unabated high prices level will become a major problem especially if real income does not increase.
C. SOCIETY FACE SHORT RUN TRADE OFF BETWEEN INFLATION AND UNEMPLOYMENT
Just like explained in the previous principle, government can on the short run influence level of employment in the positive by increasing level of money supply and reducing tax. These actions will increase the disposable income of the people increase demand of goods and services. It is expected that in the short run the firm might as a result of the increased price for the goods employ new people and increase production to take care of the new demand level. The new labour get paid and there is a general improvement in the economy.

Question 2

The law of Demand and Supply is responsible for price determination in a free market economy. Discuss the process through which equilibrium price is arrived and the factors that cause shifts in the demand and supply curve.

Equilibrium price is that price where the quantity of goods demanded by buyers is equal to the quantity of the goods that the producers and suppliers are happy and willing to supply. The equilibrium price which is also called the clearing price represents the final price determined by market forces of demand and supply. At this price all quantity that is brought to the market will be bought and the buyer is happy to pay that price.
The following factors are responsible for shift in the demand curve

1. Income of the buyers
2. Price of the substitute goods
3. Taste of the consumers
4. Expectation of the buyers
5. Number of the Buyers
The following are the factors responsible for shift in the supply curve:
1. The in put cost for the manufacturer
2. Improvement or otherwise in technology
3. Expectation of the suppliers
4. Number of Suppliers

Question 3
Economists normally assume that the goal of a firm is to maximize profit, and they find that this assumption works well in most cases. Clearly discuss the various types of costs and revenues that can accrue to the firm in the process of production and how they are related to profit

The following are the various type of cost of a typical firm and how they relate to the profit of the company:

EXPLICIT COST VS IMPLICIT COST
Explicit cost is the cost that are directly traceable to the company’s operation and can be accounted for through various activities of the company. This cost can also be referred to as the accountant cost of the firm. This costs can be broken further down to Fixed cost and the variable cost of the firm. The fixed cost is the cost that is related to the firms assets such as its production assets, office and factory spaces, salaries and admin expenses of non direct labour etc. variable cost on the other hand relates to the firms cost that are directly traceable to its products and services cost. Examples of variable costs are : raw material cost, cost of direct labour, cost of heating, cost of packaging materials, Maintenance cost for plants, etc. Explicit cost classification measure the firms total cost by adding Total Fixed Cost with Total Variable Cost.

On the other hand implicit cost refers to all other costs that are not directly related to the costs of the firm but these costs which has been identified by the economists as a key and relevant cost that needs to be considered in determining the actual profit of a firm. Implicit cost refers to the opportunity cost to the firm, these are the benefits which the firm could have taken from other course of actions that it did not take in preference to the one it took. When the owners of the firm chose to invest in the production of carbonated water, the revenue it could have earned from an alternative decision becomes and opportunity lost and an opportunity cost for the carbonated water business. In measuring the firms total cost by the economists, the firm’s total cost is Total Explicit cost plus Total Implicit cost.

Other cost classification of the firm are: Marginal Cost, this is the cost of producing additional unit of output for the firm. It can be defined also as the total extra cost of the company divided by additional unit produced in incurring that cost.
Average Total Cost: this is the firms total cost divided by the total units of output.

The Firms revenue is the product of the outputs sales in quantity and the unit price of the output. While the firms Marginal Revenue is the additional revenue received by the firm for selling an addition unit of output in quantity.

The firms total profit is determined by subtracting the firms total cost from its total revenue. The firms Marginal revenue is the revenue earned by selling additional unit of the firm’s product.

Question 4
Economics and Accountants look at costs from different perspectives. Succinctly, discuss accounting cost and profit vs economic cost and profit and differentiate them.

The Accountant views firms cost from the point of view of all the costs that can be easily and with precision be traced to the operations of the company. The accountant classifies theses costs variously but uses the behaviour of these costs as the main classification tool. There are the fixed cost and the variable costs. Costs for the accountant can also be classified as direct and indirect costs or costs can be categorized by the name of the unit that is incurring the costs like the sales cost, marketing cost, operations costs, handling costs etc.
In these same like, the account recognises the firms profit by deducting these costs that can be traced to the company operations from the total profit of the firm which can be traced to the actual sales of the firm’s product.

The economists on the other hand differs with the accountant in identification and measuring of the firm’s total cost. While the economist agrees with the account on the explicit costs he insists that there are other costs such as the opportunity cost though not directly traceable to the firm’s operation nevertheless are very critical in determining the economist profit.

The economist believes that the cost of opportunity lost which is measure by the estimated profit forgone should be added to the cost of the chosen course of action and both deducted from the company profit to determine if the company is covering all its cost.

Question 5
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms. From your understanding discuss the concept of monopoly and why monopolies arise.

A monopoly is a market where there is a single seller of a unique product that has no close substitute. The dominance of a single seller in the market is due mainly to inability or difficulty of other firms to make entry into the market. A monopoly is able to charge arbitrary price and make super normal profit in the industry.

A monopoly can be a natural monopoly where a single firm can supply al the market needs of a product at cost lower than what other few firms combined can deliver to the market. An example is in the distribution of water within a municipality.

The reason why monopolies Arise:

The first reason is where government through its regulatory power gives a single firm the exclusive right to produce a particular product.

Second reason is just in line with the definition of a natural Monopoly where the single firm has huge economies of scale that drives its cost lower such that any other firm entering would make losses as a result of cost disadvantage.

Third reason why monopoly arise is where a firm has control of a key resources required for the manufacturing of a particular goods. Take for instance where a firm has developed a special technology that can only be used for manufacture of a good and this technology is not easily accessible by other intended investors, that firm would have monopoly over the market of that goods

Question 6

Different between monopolies and competition and show how monopolies maximize their profit.

The monopoly and Competition differs in the following way

A. The market size of sellers in monopoly and that of competition is different. While the monopoly is a single/sole seller competition has several sellers
B. The monopoly is able to charge a price that gives it a an excess profit while the competition firm is a price taker.
C. Another difference is the size of the firm in the market, in competition the firms are small in relations to the entire market and cannot influence the market supply of the product. While the monopoly has absolution control of the market supply.
D. In competition there is free entry and exit from the market for a competition market while in monopoly there is usually barrier to entry

The Different between the two summarized below

Characteristic or Event Perfect Competition Monopoly
Market Large number of sellers and buyers producing a homogeneous good or service, easy entry. Large number of buyers, one seller. Entry is blocked.
Demand and marginal revenue curves The firm’s demand and marginal revenue curve is a horizontal line at the market price. The firm faces the market demand curve; marginal revenue is below market demand.
Price Determined by demand and supply; each firm is a price taker. Price equals marginal cost. The monopoly firm determines price; it is a price setter. Price is greater than marginal cost.
Profit maximization Firms produce where marginal cost equals marginal revenue Firms produce where marginal cost equals marginal revenue and charge the corresponding price on the demand curve.
Profit Entry forces economic profit to zero in the long run. Because entry is blocked, a monopoly firm can sustain an economic profit in the long run.
Efficiency The equilibrium solution is efficient because price equals marginal cost. The equilibrium solution is inefficient because price is greater than marginal cost.

To show how monopolies maximize profit we use the following graph

Question 7

For a firm to price discriminate, it must have some market power. Discuss

By market power as prerequisite for effective price discrimination it means that the firm most have enough market influence by its market structure to influence the prices which it sells its product by manipulating the supply or demand of its product. What this means simply is that a firm in a competitive market structure cannot do this effectively. It is only monopolies that can divide its market either physical locations or demographies and charge different prices to these segments and still not run out of business.

Question 8
Discuss the public policy toward monopolies

The fact that price in monopoly exceeds marginal cost suggests that the monopoly solution violates the basic condition for economic efficiency, that the price system must confront decision makers with all of the costs and all of the benefits of their choices. Efficiency requires that consumers confront prices that equal marginal costs. Because a monopoly firm charges a price greater than marginal cost, consumers will consume less of the monopoly’s good or service than is economically efficient .

To ensure that efficiency is restored in the market the public policy towards monopolies is to encourage more competition through Anti Trust laws and the regulation of natural monopolies and in some cases government may opt for public ownership of the industry so that goods and services can get to the people at the right price and quantity.

Government in America has over the years used its anti trust laws to stop mergers and acquisition deals which the regulators believe would stifle competition and increase the chances of customers losing out should such mergers and acquisitions were allowed to go ahead as planned. Also where a company is known to have become too big and large the regulators in America are known to have broken up such companies to allow for competition

Question 9
Oligopoly and monopolistic Competition are special kinds of market in Economics with divers operations. Discuss

Oligapoly

An oligopoly refers to a market with only a few sellers. Monopolistic competition refers to situations where there are many sellers, but the products are highly differentiated.

In an oligopoly, there are only a few firms in the market. While there is no clarity about the number of firms, 3-5 dominant firms are considered the norm. So in the case of an oligopoly, the buyers are far greater than the sellers.
The firms in this case either compete with another to collaborate together, They use their market influence to set the prices and in turn maximize their profits. So the consumers become the price takers. In an oligopoly, there are various barriers to entry in the market, and new firms find it difficult to establish themselves.

Monopolistic Competition
This is a more realistic scenario that actually occurs in the real world. In monopolistic competition, there are still a large number of buyers as well as sellers. But they all do not sell homogeneous products. The products are similar but all sellers sell slightly differentiated products.
Now the consumers have the preference of choosing one product over another. The sellers can also charge a marginally higher price since they may enjoy some market power. So the sellers become the price setters to a certain extent.
For example, the market for cereals is a monopolistic competition. The products are all similar but slightly differentiated in terms of taste and flavours. Another such example is toothpaste.

Answer to question 1
To understand all the insights of economics, for example, to find the answer to inquiries like what economics is all about, what central idea economics has, and so on, we need to understand the ten principles of economics analyzed by Prof. N. Gregory Mankiw.
1. People face trade-offs
In economics nothing is free. It means that if one has to get a particular thing he likes, he has to give up another thing that he likes. Making decisions thus requires trading off one goal against another. Decision-making is in the heart of economics and it decides for the well-being of the society and nation. While making different decisions from the individual, societal, regional, national and international levels, needs a trade-off. Consider a parent deciding how to spend their family income. They can buy food, clothing, or a family vacation or they can save some of the family income for the future of their children’s college education. When they choose to spend extra income on one of these goods, they have that much less amount to spend on some other goods.
2. The Cost of Something is what you sacrifice to get it: as people face trade-offs so they have to make a comparison between the cost and benefits of alternative course of action. When one spends a year listening to lectures, reading textbooks and writing papers, he cannot spend the time working at a job. Here earning money from a job is given up for enlarging intellectual ability. In economics, the cost of the sacrificed alternative to get the best one is opportunity cost and plays an important role in making decisions. As the subject matter of economics, we should decide with the least opportunity cost.
3. Rational People Thinks At The Margin: one of the basic assumptions followed by economists in the economic analysis is the rationality of the people. Economists assume that individuals or consumers are rational and rationality guides them to react systematically and purposefully to maximize the benefits from available opportunities.
This issue concerned with the decisions of producers as well as individuals, for example, the decision of the firm to hire certain number of workers or units of output to be manufactured and what goods and services are to buy to achieve their optimization goals. Here the principle is explaining that rational people can get maximum profit with the help of marginal analysis. All the rational stakeholders make a decision only in case where the marginal benefit of the decision or action exceeds marginal cost.
4. People Respond to Incentives: the incentive is the thing that induces a person to react. People are rational; they make a comparism between marginal values so they always respond to incentives. In economics, incentives play a crucial role as it studies the economic behavior of human beings living in societies. Economists can analyze the behavior or participants in the economy with the help of incentives. For example, when the price of apple increases, people decide to eat fewer apples. But apple sellers may decide to employ more workforces and produce more apples. Here rise in price provides an incentive to both the participants of the market economy. The incentive for buyers is to consume less and for sellers to produce more. There is a greater role of incentive in public policymaking also. When economists or think tanks do not succeed to judge how their policies influence incentives, they often create redundant or unwanted consequences.
5. Trade can make everyone better off
People, societies, and nations interact with each other in different forms. While interacting with each other, economic interactions are the subject matter of economics. Trade is the main economic activity through which people interact with each other. In trade and commerce, there is neither gainer nor looser. It means the two individuals can make each country and every individual better off.
Trade partners are simply looking like competitors but they always contribute in the sense of growing expansion and specialization at the individual levels. Let’s take an example given by Prof. Mankiw.

If an individual belonging to a family seeks a job then he osr she has to compete with other families who are also searching for a job. The families in society are also in competition in different activities at different undertakings. For example, they may struggle or compete at the time of shopping. Each family wants to get the best at the possible lowest prices. Thus each family in the economy competes between them in different activities.
6. Markets are usually a good means to systemize economic activity: there are large numbers of buyers as well as sellers in the market. If such a market is free then these large numbers of buyers and sellers are interested primarily in their interest. They are always guided by their interest. Though they make their decisions based on their self-interest, the market economy provides a frame that ensures the continuous functioning of their self-interest and organizational ecoconomic activities to promote overall economic well-being.
The notion of a central planning economy is that only the government could organize economic well-being for the country as a whole. The number of countries that once followed a centrally planned economic system has vacated the system and is now following market economies. Decisions of the central planning authority are replaced in the market economy through the open and self-guided interaction of millions of firms and households.
7. Governments can sometimes improve market outcomes: one can say that if the invisible hand of the market is so great, why do we need government, so one purpose of studying economics is to show and analyze the accurate responsibility and applicability or scope of public policy or policies of the authorities. One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Market economies most importantly need institutions to enforce property rights so individuals can own and control scarce resources. So the market economy needs proper government intervention to promote economic efficiency, and equity, and avoid market failure. Economists define the term market failure as a situation in which the market fails to produce an efficient allocation of resources. It may be due to market power and externality and to control them well designed government policies are required.
8. A country’s standard of living is based on its capacity to produce goods and services: the standard of living in any particular country is not the same as it is in another country. There are huge differences in the living standards of people from one country to another. It is due to the productive capacity and productivity of the country. If the worker in any nation or area is able to produce a larger volume of production at a particular point in time or period then the majority of the people’s living standards will be expected to upgrade. In nations where the productivity of the labour force is low and inefficient then the majority of people will suffer from shortages and other types of macroeconomic problems. The expansion rate of the country’s productivity also affects the growth rate of its average income.
9. Prices rise when the government supplies excess money: A continuous and substantive rise in the price level of all goods and services is called inflation.
When government prints large quantities of the currency, the value of the money falls. In the 1920s there was hyperinflation due to the increase in money supply by triple quantity every month. The economic history of the united state also points to a similar end.
Recent evidence also shows low inflation as a result of a slow money supply. So based on the economic history of the world, it is concluded that all cases of the growth of the quantity of money supply in the economy.
10. Society faces a short-run tradeoff between inflation and unemployment:
Another result that occurs when there is more money circulating is a lower rate of unemployment. Economists use the Philips Curve to trace the correlation between the two, which helps them to understand market and business cycles. The Philips Curve aims to push inflation and unemployment in opposite directions.
Policymakers can impact inflation and unemployment by altering how much money is printed, as well as the amount of government taxes. Therefore, the policies that are implemented by the governments and policymakers have a direct impact on the market and economy and can severely affect the rates of inflation and unemployment.

Answer to question 2
An equilibrium price is a balance of demand and supply factors. There is a tendency for prices to return to this equilibrium unless some characteristics of demand and supply change. Changes in the equilibrium price occur when either demand and supply, or both shifts or move. Equilibrium price is the price at which there is no unsold stock left neither is any demand unfulfilled. Thus, it is also known as the market clearing price.
Once the equilibrium price and quantity are reached, we attain a stable equilibrium. Stable equilibrium adjusts any disturbance in the demand and supply, and restores the original equilibrium. Other things remaining the same, when the price falls below the equilibrium price, the demand increases and supply decreases.
There arises a shortage of goods which in turn increases the price to equilibrium price.
Similarly, when the price rises above the equilibrium price, the demand decreases and supply increases. There arises a surplus of goods which in turn decreases the price to equilibrium price. Thus, the market restores the equilibrium price on its own.
However, the prices are not determined only by the forces of demand and supply. Other factors such as the price of substitute goods, price of related goods, government policies, competition in the market, etc, also play an important role in the determination of the prices

Answer to question 3

The following points highlight the eight main types of cost and revenues acrue to the firm in the process of production and how they relates to profit.
1. real cost
2. 2. opportunity cost
3. money cost
4. production cost
5. selling cost
6. 6. fixed and variable cost
7. fixed costs or supplementary cost
8. Average cost
Real Cost: the term real cost of production” refers to the physical quantities of various factors used in producing a commodity. in other words, real cost signifies the aggregate of real productive resources absorbed in the production of a commodity or a service.
marshall has described “real cost” as the production of commodity generally requires many different kinds of labour and the use of capital in many forms. Furthermore, he had said that the real cost of production connotes the toil, trouble and sacrifice of factors in producing a commodity.
Thus, the Marshallian concept of real cost has only a philosophical significance. In practice, however, it is difficult to measure it. it has little significance in the analysis of price determination although more significance from the social point of view. the main difficulty with this concept is that the efforts and sacrifices implicit in the real cost of production are purely subjective and cannot be subject to accurate monetary measurement. Prof. Handerson and quant have observed that “real cost leads us\ into the quagmire of unreality and dubious hypothesis.
Opportunity Cost: The opportunity cost is also known as “transfer cost” or “alternative cost”. Prof. Lipsey has defined it as “the opportunity cost of using any factor is what is currently forgone by using it”. The utility of the study of opportunity cost lies in the theory of production. The factor must be paid at least that price which they are able to obtain in the alternate use. If the opportunity cost in another field is more the labour will shift from one industry to those industries where transfer earning is more. But the main drawback of this concept is that it is not applicable to a specific factor i.e., a factor which can be put to single use. Since the factor is a single use factor, it can have no alternative or opportunity cost.
Money cost: money cost is the monetary expenditure on inputs of various kinds. It is that total money expenses incurred by a firm in producing a commodity. They include wages and salaries of labour; cost of raw-materials, expenditure on machines and equipment, depreciation and obsolescence, charges on machines building and other capital goods: rent on building: interest on capital invested and borrowed: normal profits of business: expenses on power, light, fuel, advertisement and transportation insurance charges and all types of taxes.
Production cost: production cost have been called as the total amount of money spent in the production of goods. They include the cost of raw materials and freight thereon, the cost of manufacture. They also include the cover of other overheads expenses like rent, interest on capital, taxes, insurance and other incidental expenses like the cost of repair and replacements. They include both prime costs and supplementary costs.

Selling cost: these are the costs of advertisement and salesman ship. These costs are incurred to attract customers, expand market and capture more businesses and retain the existing business. These costs are the essential costs of the competitive economy.
Selling costs are an important aspect of an imperfect market and have no place in a fully competitive market where the dealers are supposed to be fully aware of the quantity of goods and the conditions of the market.

6. fixed and variable costs: cost refer to the prices paid to the factors of production, we find prices paid to fixed factors, and the prices paid to the variable factors which are termed as the fixed costs and variable costs, respectively. Thus, the cost of production of a commodity is composed of two types of costs, i.e., variable costs and fixed costs, also called prime and supplementary costs respectively.

7. Fixed costs or supplementary costs: these are the amount spent by the firm on fixed inputs in the short-run. Fixed costs are those costs which remain constant, irrespective of the level of output. These costs remain constant unchanged even if the output of the firm is nil. Fixed costs, therefore, are known as “supplementary costs” or “overhead cost’. Fixed cost, in the short-run, remains fixed because the firm does not change its size and the amount of fixed factors employed. They include payments of rent for building, interest paid on capital, insurance premiums, depreciation and maintenance allowances, administrative expenses, property and business taxes, license fees etc.
8. Average and marginal cost: average cost is also known as cost per unit. If the total cost of production is divided by the total number of units produced, we get the average cost. In order words, average cost at any output = total cost/unit of output.
Average cost is therefore the sum of average variable cost and average fixed cost. It is also called average total cost. If the total cost of producing 120 units of a commodity is 32400 then average cost will be 2400/120=320. On the other hand, average cost helps in fixing or determining the total quantity for sale. The difference between average revenue and average cost shows the profit per unit. If the profit is multiplied with the total production (units of production) we get the total gross profit.
Answer to question number 4
Profit is one of the most widely watched financial metrics in evaluating the financial health of a company. It is the financial gain or revenue generated from business or investment activities in excess of any expenses. Economic profits and accounting profits are two types of profits. Economic profit refers to total revenue from sales minus opportunity costs from all inputs. Implicit costs which are typically the cost of a company’s resources are also part of the equation.
Accounting profit, on the other hand, represents the total earnings of a company, which includes explicit costs. It is the net income for a company or revenue minus expenses.
Economic profit can be calculated once the total amount of revenue earned and the total cost involved are known. This can be done using the formula: Economic profit = Total Revenue (Total Explicit costs + Total Implicit cost).
For example, the implicit costs could be the market price a company could sell natural resources for versus using that resource. But accounting profit is also known as a company’s earned profit, net income, or bottom line. Unlike economic profit, accounting profit is reported on a company’s income statement. It is the profit earned after various costs and expenses are subtracted from total revenue or total sales, as stipulated by generally accepted accounting principles (GAAP).

Difference between Economic Profit and Accounting Profit
Economic profit is more of a theoretical calculation based on alternative actions that could have been taken. While accounting profit calculates what actually occurred and the measurable results for the period.
Accounting profit is the profit after subtracting explicit costs (such as wages and rents). While economic profit includes explicit costs as well as implicit cost (what the company gives up pursuing a certain path). As such, accounting profit represents company’s true profitability, while economic profit is indicative of its efficiency.
Answer to question 5
A monopoly is a company that exists in a market with little or no completion and can therefore set its own terms and prices when facing consumers, making them highly profitable. While monopolies are both frowned upon as well as legally suspect, there are several routes that a company can take to monopolize its industry sector.
Using intellectual property rights, buying up the competitor or hoarding a scarce resource, among others, are ways to monopolize the market.
The easiest way to become a monopoly is by the government granting a company exclusive rights to provide goods and services. Government-created monopolies are intended to result in economies of scale that benefits consumers by keeping cost down. Having access to a scarce resource is another reason monopolies arise. Mergers and acquisitions are other ways monopolies arise or a mear-monopoly even in the absence of a scarce resource. In such cases, economies of scale create economic efficiencies that allow companies to drive down prices to a point where competitors simply can’t survive. Monopolies therefore arise due to various reasons, such as that it is simply better for only one firm to operate in certain industries. This is because this one firm can increase its production to such a level that significant economies of scale set in. this allows the firm to reduce its price so much that no other firm can enter.
Monopolies equally arise due to decisions taken by firms to reduce competition in the market. The largest firms in an industry can combine together to give to a single larger firm which can act as a monopoly in their market. Or a firm can reduce its prices so much that no other firm can exist with it.
Another reason could be government intervention. Certain industries are kept as monopolies by the government to keep the industry efficient. Similarly, when government provide patents to firms, it allows such firms to act as monopolies, at least for some time.

Answer to question 6
Market by its very nature, leads to the formation of both perfect and imperfect competition within it. Imperfect competition can be further categorized into oligopoly, monopoly, and monopolistic competition.
Monopoly is most likely to be found in the public utility sector. Also, the combined effect of various characteristics of the monopoly market ensures that the market player is a sole price setter. Buyers cannot influence prices. Price is set by the firm taking into account the demand elasticity of a product, product demand, and maximization of profit.
Monopoly includes such a market structure that is characterized by the presence of a single seller. The product or service on offer is also unique. No competition is experienced by the seller as it is a sole entity in that market without any other close substitute. In a monopoly market, the seller has the discretion to charge different prices to different sets of customers, thereby practicing price discrimination. However, in a competitive market, sellers in this market cannot adopt a price discrimination policy for their customers.
The difference between monopoly and competition are in these areas, monopoly does not involve any entity apart from a single seller and consumers. The market for the particular product or service is created by the firm, in the first instance. While in completion, a particular product is offered by a handful of entities in the market, there is competition among these entities. In monopoly market, demand and supply are entirely calibrated by the firm. It is all the more likely that it is skewed in favour of the seller, which in competition, the firms do not exert control over demand and supply owing to the completion between market players.
Given the nature of monopoly, both entry and exit are difficult, while on the account of competition, entry and exit are free and easier. Product predictability is high due to the presence of only one seller in a monopoly market, while in competition, more number of players in a monopolistic market makes product predictability low
How Monopoly Maximizes Profit
A monopolist can determine its profit-maximizing price and quantity by analyzing the marginal revenue and marginal cost of producing an extra unit. The profit-maximizing choice for monopolies will therefore be to produce at the quantity where Marginal Revenue equal Marginal Cost: that is, MR=MC

Answer to question 7
Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. In pure price discrimination, the seller charges each customer the maximum price they will pay. In more common forms of price discrimination, the seller places customers in groups based on attributes and charges each group a different price.
Price discrimination is most valuable when the profit that is earned as a result of separating the markets is greater than the profit that is earned as a result of keeping the markets combined. Whether price discrimination works and for how long the various groups are willing to pay different prices for the same product depends on the relative elasticity of demand in the sub-markets. Consumers in a relatively inelastic submarket pay a higher price, while those in a relatively elastic sub-market pay a lower price.
With price discrimination, the company looking to make the sales identify different market segments, such as domestic and industrial users, with different price elasticity. Markets must be kept separate by time, physical distance, and nature of use.
For example, the Microsoft office schools edition is available for a lower price to educational institutions than other users. The markets cannot overlap so that consumers who purchase at a lower price in the elastic sub-market market could resell at a higher price in the inelastic sub-market. The company must also have monopoly power to make price discrimination more effective.
Answer to question 8
Public policy towards monopoly aims generally to strike the balance implied by economic analysis. Where rationales exist, as in the case of natural monopoly, monopolies are permitted and their practices are regulated. in other cases, monopoly is prohibited outright. Societies are likely to at least consider taking action of some kind against monopolies unless they appear to offer cost or other technological advantages. Although economists are hesitant to levy blanket condemnations on monopoly, they are generally sharply critical of monopoly power where no rationale for it exists. When firms have substantial monopoly power only as the result of government policies that that block entry, there may be little defense for their monopoly positions.
Where natural monopoly exists, the price charged by the firm and other aspects of its behavior may be subject to regulation. Water or natural gas, for example, is often distributed by a public utility, that is, a monopoly firm, at price regulated by a state or local government agency. Typically, such agencies seek to force the firm to charge low prices, and to make less profit than it would otherwise seek.
The combining of competing firms into a monopoly firm or unfairly driving competitors out of business is generally forbidden by the government. Regulatory efforts to prevent monopoly fall under the purview of the nation’s antitrust laws. The antitrust laws give the government various ways to promote competition.

Answer to question 9
An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power. Oligopolies often result from the desire to maximize profit, which can lead to collusion between companies. perfect competition and monopoly are at opposite ends of the competition spectrum. Monopoly arises when a single firm sells a product for which there are no close substitutes. Microsoft, for example has been considered a monopoly because of its domination of the operating system market.
Monopolistic competitive markets feature a large number of competing firms, but the products that they sell are not identical. Oligopolistic markets are the dominated by a small number of firms. Oligopolies are characterized by high barriers to entry with firms choosing output, pricing, and, other decisions of the other firms in the market. Oligopolistic firm face two conflicting temptation: to collaborate as if they were a single monopoly, or individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic firms and markets can also take on elements of monopoly and of perfect competition.
Both monopolistic competition and oligopoly depict an imperfect competition. The following are some of the major differences between these two market structures:
a. Dominance: there are a few cases where it is the dominance of type of structure a market has. The most prominent example of oligopoly market is petroleum industry, wherein, despite having a large number of companies, the market is dominated by few major companies.
b. Barriers to Entry: oligopoly as has been earlier discussed, presents high barriers to entry as compared to the monopolistic competition, but it is a matter of degree. The key element that can give rise to oligopoly market is a requirement for government authorization, especially in circumstances where entry is restricted to only few firms. On the other hand, it can also be representative of monopolistic competition if a large number of firms are allowed to enter into a market.
c. Market Size and Control: the main difference between both market structures is a relative size and market control of the firms on the basis of a number of competitors in a particular market. However, there is no dividing line between these structures. For example, there is no clear definition of how many firms should there be in a market in order for it to be a monopolistic competition or oligopoly market.
d. Geographical Area: this is another feature that distinguishes the monopolistic competition from oligopoly. it is a key factor to identify a market structure. it is possible that a particular industry falls into a category of oligopoly market if it lies in a small city, and a monopolistic competition if it has a presence in a large city.

ANSWER TO QUESTION 1
PRINCIPLE 1: PEOPLE FACE TRADE-OFFS:
To get something we want, we usually have to give up something else we want. Maki
ng decisions necessitates weighing one goal against another. Every day, we make tra
deoffs. One must decide how to spend their time, money, activities, and so on.
Do I want to spend the evening reviewing the business market analysis or the evening
Reviewing the finances?
Should I spend two hours exercising or reading a book, or one hour on each? All of
these are questions we ask ourselves when faced with tradeoffs.
Another tradeoff that society must make is one between efficiency and equality.
Efficiency means that society is getting the most out of its limited resources.
Equality means that those benefits are distributed evenly among the members of society.
PRINCIPLE 2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT :
Because people must make trade-offs, making decisions necessitates weighing the
costs and benefits of various options. The opportunity cost of an item is what you
give up in order to obtain it. Assume you’ve been working on a million-dollar online
tech company that’s finally ready to go public. It requires your complete attention
beginning immediately. You also have a two-week trip to Italy planned outside of the
country. The opportunity cost of traveling to Italy is far greater than the cost of
canceling the trip, staying in the country, and launching your company.
PRINCIPLE 3: RATIONAL PEOPLE THINK AT THE MARGIN:
Rational people systematically and purposefully do the best they can to achieve
their objectives, given the available opportunities. Economists use the term marginal
change to describe a small incremental adjustment to an existing plan of action.
Thinking on the margin is so important in making business decisions. You invest your
money into efforts that are going to maximize your profits. For every economic
decision that you make, you need to look at the marginal return for that decision.
Should I hire one additional salesperson? Should I spend an additional dollar on pay-
per-click marketing? Should I send out another email newsletter to my clients? Will
that extra email add value at the very least margin or would it not be worth the time
and effort?
PRINCIPLE 4: PEOPLE RESPOND TO INCENTIVES:
An incentive is something that motivates someone to take action. In order to
understand how markets work, incentives must be considered. For example, when
gas prices begin to rise, a new homebuyer may decide to relocate closer to the metro
to save money on gas. A family-owned business may decide to relocate to a state
without an estate tax. In business, offering incentives such as variable income, where
an individual can obtain more personal rewards for successfully creating a product or
making a sale, frequently drives up production for highly motivated employees.
PRINCIPLE 5: TRADE CAN MAKE EVERYONE BETTER OFF :
Trade allows each person to specialize at what he or she does best, whether it’s farming, sewing, or
home building. If we were to cut ourselves off from the market, we would have to grow our own
food, make our own clothes, and build our own houses. By trading with each other we can maximize
our time, efforts and buy a greater variety of goods and services at a lower cost. Each business
specializes in the production of certain products or services. We utilize the strengths and skill sets of
others for our own advantage. Countries as well as families and businesses benefit from the ability
to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a
greater variety of goods and services. Trade creates larger markets, which allows for greater
specialization, lower costs and higher incomes.
PRINCIPLE 6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY
The decisions of millions of firms and households replace the decisions of a central planner in a
market economy. Firms make decisions about who to hire and what to produce. Households choose
which companies to work for and what to buy with their earnings. Buyers look at the price to
determine how much to demand in any market, and sellers look at the price to determine how much
to supply. When a government prevents prices from naturally adjusting to supply and demand, the
invisible hand’s ability to coordinate the decisions of the economy’s households and firms is
hampered.
PRINCIPLE 7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES:
The invisible hand can work its magic only if the government enforces the rules and maintains the
institutions that are key to a market economy. Market economies need institutions to enforce
property rights so individuals can own and control scarce resources confidently. A café won’t serve
food unless they are assured a customer will pay before they leave. A farmer won’t grow food if he
expects his crops to be stolen. A government can also help to promote efficiency and equality.
Market failure is a situation when the market on its own fails to produce an efficient allocation of
resources. One possible cause of market failure is an externality, which is the impact of one person’s
actions on the well being of a bystander. Market Power is another possible cause. It refers to the
ability of a single person or firm to unjustly influence market prices.
PRINCIPLE 8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES:
Almost all differences in living standards are due to differences in a country’s productivity; the
amount of goods and services produced by each unit of labor input. Most people live on less in
countries where workers are less productive. Most people enjoy a higher standard of living in
countries where workers can produce a large quantity of goods and services per hour. Similarly, the
rate of growth in a country’s productivity determines the rate of growth in its average income.
Productivity can be increased by providing workers with the tools they need to produce goods and
services, as well as by ensuring workers are well educated and have access to the best technology
available.
PRINCIPLE 9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY:
Inflation is defined as an increase in the overall price level of the economy. In most cases, large or
persistent inflation is caused by an increase in the quantity of money. Inflation will rise if a
government prints too much money to pay off its national debt. Bonds’ value would be reduced as
inflation rose. Inflationary pressures can create uncertainty. Inflationary periods discourage firms
from investing and can lead to lower economic growth. Because high inflation imposes various costs
on society, economic policymakers all over the world should strive to keep inflation at a low level.
PRINCIPLE 10: SOCIETY FACES A SHORT-RUN TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT:
An economists projection is that increasing the amount of money in the economy stimulates the
overall level of spending and thus the demand for goods and services. Over time, higher demand
may cause firms to raise their prices, but it also encourages them to hire more workers and produce
a larger quantity of goods and services. An increased level of hiring workers means lower
unemployment. As a short-run trade-off, over a period of a year or two, many economic policies
push inflation and unemployment in the opposite directions. This short-run trade-off plays a key role
in the analysis of the business cycle. The cycle is an irregular and largely unpredictable fluctuation in
economic activity. It is measured by the number of people employed or the production of goods and
services.

ANSWER TO QUESTION 2:
Price is dependent on the interaction between demand and supply components of a market. Demand and supply represent the willingness of consumers and producers to engage in buying and selling. An exchange of a product takes place when buyers and sellers can agree upon a price.
Equilibrium price: When a product exchange occurs, the agreed upon price is called an equilibrium price, or a market clearing price. Graphically, this price occurs at the intersection of demand and supply as presented in Image 1.
In Image 1, both buyers and sellers are willing to exchange the quantity Q at the price P. At this point, supply and demand are in balance. Price determination depends equally on demand and supply.
Image 1. Figure 1, Graph showing price equilibrium curves

It is truly a balance of the market components. To understand why the balance must occur, examine what happens when there is no balance, such as when market price is below that shown as P in Image 1.
At any price below P, the quantity demanded is greater than the quantity supplied. In such a situation, consumers would clamour for a product that producers would not be willing to supply; a shortage would exist. In this event, consumers would choose to pay a higher price in order to get the product they want, while producers would be encouraged by a higher price to bring more of the product onto the market.
The end result is a rise in price, to P, where supply and demand are in balance. Similarly, if a price above P were chosen arbitrarily, the market would be in surplus with too much supply relative to demand. If that were to happen, producers would be willing to take a lower price in order to sell, and consumers would be induced by lower prices to increase their purchases. Only when the price falls would balance be restored.
A market price is not necessarily a fair price, it is merely an outcome. It does not guarantee total satisfaction on the part of buyer and seller. Typically, some assumptions about the behaviour of buyers and sellers are made, which add a sense of reason to a market price. For example, buyers are expected to be self-interested and, although they may not have perfect knowledge, at least they will try to look out for their own interests. Meanwhile, sellers are considered to be profit maximizers. This assumption limits their willingness to sell to within a price range, high to low, where they can stay in business.
Change in equilibrium price
When either demand or supply shifts, the equilibrium price will change. The examples below show what happens to price when supply or demand shifts occur.
Example 1: Unusually good weather increases output
When a bumper crop develops, supply shifts outward and downward, shown as S2 in Image 2, more product is available over the full range of prices. With no immediate change in consumers’ willingness to buy crops, there is a movement along the demand curve to a new equilibrium. Consumers will buy more but only at a lower price. How much the price must fall to induce consumers to purchase the greater supply depends upon the elasticity of demand.
Image 2. Figure 2, Graph showing movement along demand curve

In Image 2, price falls from P1 to P2 if a bumper crop is produced. If the demand curve in this example was more vertical (more inelastic), the price-quantity adjustments needed to bring about a new equilibrium between demand and the new supply would be different.
To understand how elasticity of demand affects the size of adjustment in prices and quantities when supply shifts, try drawing the demand curve (or line) with a slope more vertical than that depicted in Image 2. Then compare the size of price-quantity changes in this with the first situation. With the same shift in supply, equilibrium change in price is larger when demand is inelastic than when demand is more elastic.
The opposite is true for quantity. A larger change in quantity will occur when demand is elastic compared with the quantity change required when demand is inelastic.
Example 2: Consumers lower their preference for beef
A decline in the preference for beef is one of the factors that could shift the demand curve inward or to the left, as seen in Image 3.
Image 3. Figure 3. Graph showing movement along supply curve

With no immediate change in supply, the effect on price comes from a movement along the supply curve. An inward shift of demand causes price to fall and also the quantity exchanged to fall. The amount of change in price and quantity, from one equilibrium to another, is dependent upon the elasticity of supply.
Imagine that supply is almost fixed over the time period being considered. That is, draw a more vertical supply curve for this shift in demand. When demand shifts from D1 to D2 on a more vertical supply curve (inelastic supply) almost all the adjustment to a new equilibrium takes place in the change in price.
Price stability
Two forces contribute to the size of a price change: the amount of the shift and the elasticity of demand or supply. For example, a large shift of the supply curve can have a relatively small effect on price if the corresponding demand curve is elastic. That would show up in Example 1 above, if the demand curve is drawn flatter (more elastic).
In fact, the elasticity of demand and supply for many agricultural products are relatively small when compared with those of many industrial products. This inelasticity of demand has led to problems of price instability in agriculture when either supply or demand shifts in the short-term.
Price level
The two examples above focus on factors that shift supply or demand in the short-term. However, longer-term forces are also at work, which shift demand and supply over time. One particular supply shifter is technology. A major effect of technology in agriculture has been to shift the supply curve rapidly outward by reducing the costs of production per unit of output.Technology has had a depressing effect on agricultural prices in the long-term since producers are able to produce more at a lower cost. At the same time, both population and income have been advancing, which both tend to shift demand to the right. The net effect is complex, but overall the rapidly shifting supply curve coupled with a slow moving demand has contributed to low prices in agriculture compared to prices for industrial products.
At various levels of a market, from farm gate to retail, unique supply and demand relationships are likely to exist. However, prices at different market levels will bear some relationship to each other. For example, if hog prices decline, it can be expected that retail pork prices will decline as well. This price adjustment is more likely to happen in the long-term once all participants have had time to adjust their behaviour.In the short-term, price adjustments may not occur for a variety of reasons. For example, wholesalers may have long-term contracts that specify the old hog price, or retailers may have advertised or planned a feature to attract customers.
Market prices are dependent upon the interaction of demand and supply.An equilibrium price is a balance of demand and supply factors. There is a tendency for prices to return to this equilibrium unless some characteristics of demand or supply change. Changes in the equilibrium price occur when either demand or supply, or both, shift or move.

ANSWER TO QUESTION 3
The following points highlight the eight main types of costs involved in cost of production and revenue.
The costs are:
1. Real Cost:
The term “real cost of production” refers to the physical quantities of various factors used in producing a commodity. In other-words—Real cost signifies the aggregate of real productive resources absorbed in the production of a commodity or a service.
Marshall has described “real cost” as the production of a commodity generally requires many different kinds of labour and the use of capital in many forms.
The exertions of all the different kinds of labour that are directly or indirectly involved in making it, together with the abstinences or rather the waiting’s required for saving the capital used in making it ; all these efforts and sacrifices together will be called the real cost of production of a commodity. Further, he had said that the real cost of production connotes the toil, trouble and sacrifice of factors in producing a commodity.
Thus, the Marshallian concept of real cost has only a philosophical significance. In practice, however it is difficult to measure it. It has little significance in the analysis of price determination although more significance from the social point of view.
The main difficulty with this concept is that the efforts and sacrifices implicit in the real cost of production and purely subjective and cannot be subjective to accurate monetary measurement Prof. Handerson and Quant have observed that “the real cost leads us into the quagmire of unreality and dubious hypothesis.”
2. Opportunity Cost:
The opportunity cost is also known as ‘transfer cost’ or ‘alternate cost’.Prof. Lipsey has defined it as “the opportunity cost of using any factor is what is currently forgone by using it.”
Whereas Mrs. Joan Robinson has defined opportunity cost in terms of transfer cost. According to her, ‘The price which is necessary to retain a given unit of factor in a certain industry may be called its transfer earning or transfer price.” The utility of the study of opportunity cost lies in the theory of production. The factor must be paid at least that price which they are able to obtain in the alternate use. If the opportunity cost in another field is more the labour will shift from one industry to those industries where transfer earning is more. But the main drawback of this concept is that it is not applicable to a specific factor i.e., a factor which can be put to single use. Since the factor is a single use factor, it can have no alternative or opportunity cost.
3. Money Cost:
‘Money Cost’ is the monetary expenditure on inputs of various kinds. It is that total money expenses incurred by a firm in producing a commodity. They include wages and salaries of labour; cost of raw-material, expenditure on machines and equipment, depreciation and obsolescence charges on machines building and other capital goods; rent on building; interest on capital invested and borrowed ; normal profits of business, expenses on power, light, fuel, advertisement and transportation, insurance charges and all types of taxes.
The money cost includes both:
(a) Implicit Costs
(b) Explicit Costs
(a) Explicit Costs:
This includes those payments which are made by the producer to those factors of production which do not belong to the producer himself. These costs are mostly in the nature of contractual payment made by the producer to the owner of those factors whose services were bought by him for the purpose of production, e.g., the payment made for raw- materials, power, light, fuel the wages and salaries paid to the workers and other staff, the rent paid on the land and the interest paid on the borrowed capital etc. Payments on all such accounts will be included in explicit cost.
(b) Implicit Costs:
Implicit costs are also known as imputed costs. These costs arise in the case of those factors which are possessed and supplied by the producer himself. Here we cannot assign exact money value but can term them in imputed values, e.g., a producer may contribute his own building or premises for running the business, his own capital and working also as Managing Director of the firm.
As such he is entitled to get rent on his own premises, interest on capital contributed by him and also salary for his work as Managing Director. All these items will be included in the implicit costs.
4. Production Costs:
Production costs have been called as the total amount of money spent in the production of goods. They include the cost of raw materials and freight thereon, the costs of manufacture, i.e., the wages of workers engaged in the manufacture of the commodity and salaries of the manager and other office staff including those of peons etc.
They also include and cover other overheads expenses like—rent, interest on capital, taxes, insurance and other incidental expenses like—cost of repairs and replacements. They include both prime costs and supplementary costs.
5. Selling Costs:
Selling costs are the costs of marketing, advertisement and salesman¬ship. These costs are incurred to attract customers, expand market and capture more business and retain the existing business. These costs are the essential costs of the competitive economy.
They are especially important in the case of imperfect competition in which goods are not identical but substitutes. The manufacturers resort to what is called product differentiation in order to change the demand curve of a particular seller to his advantage. Selling costs are an important aspect of an imperfect market and have no place in a fully competitive market where the dealers are supposed to be fully aware of the quality of the goods and the conditions of the market.
6. Fixed and Variable Costs:
Cost refer to the prices paid to the factors of production, we find prices paid to fixed factors, and the prices paid to the variable factors which are termed as the fixed costs and the variable costs respectively. Thus, the cost of production of a commodity is composed of two types of costs, i.e., Variable Costs and Fixed Costs, also called Prime and Supplementary Costs respectively.
7. Fixed Costs or Supplementary Costs:
Fixed Costs or Supplementary Costs are the amount spent by the firm on fixed inputs in the short-run. Fixed costs are 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”. Fixed Costs, in the short-run, remain fixed because the firm does not change its size and the amount of fixed factors employed.
These costs are overhead costs in the sense that they are to be incurred even if the firm is closed down temporarily and the current production is nil. Further, they do not change as the output increases. Thus, fixed costs are also referred to as “Unavoidable Contractual Costs” which occur even if there is no output. In brief, the costs incurred on the business plant are called fixed costs.
8. Average and Marginal Cost:
We have examined earlier that what is the total cost i.e., Fixed Cost + Variable Cost taken together is called Fixed Total Cost. Now, we are going to discuss what is Average and Marginal Costs? Average Cost is also known as cost per unit. If total cost of production is divided by the total number of units produced, we get the average cost.
In other-words, Average Cost at any output = Total Cost/ Units of Output Average cost is the sum of average variable cost and average fixed cost. It is also called average total cost. On the other-hand, Average Cost helps in fixing or determining the total quantity for sale. The difference between average revenue and average cost shows the profit per unit. If the profit is multiplied with the total production (Units of production) we get the total or gross profit.
Marginal Cost: Marginal Cost is the cost of producing and additional unit of output. In other-words, marginal cost is the addition made to the total cost by producing one more unit of output.
Significance of Average Cost and Marginal Cost in the Theory of Value:
Average Cost and Marginal Cost along with the Average and Marginal Revenue help the firm to achieve equilibrium. Under the conditions of perfect Competition Average Revenue and Marginal Revenue coincide with each other and their curves are parallel to X-axis. Average Cost and Marginal Cost determines the level of output. Marginal Cost is helpful in determining the level of output whereas Average Cost determines the profits and losses of the firm.
In the long period, firm attain equilibrium where Average Cost = Marginal Cost = Average Revenue = Marginal Revenue. But in monopoly, the Average Revenue and Marginal Revenue Curves are downwards sloping curves. The output is determined where Marginal Cost is equal to Marginal Revenue but afterwards Marginal Cost must be rising. The profits and losses are calculated by the difference between Average Revenue and Average Cost. Thus, both Average Cost and Marginal Cost play a vital role in determining the prices of the product.
ANSWER TO QUESTION 4:
There are two distinct categories of cost: explicit and implicit. Out-of-pocket expenses are charges that are actually made. Explicit costs include salaries that a company pays to its staff and office rent.
Implicit costs are less obvious but no less significant. They stand for the opportunity cost of utilising resources the company already owns. Small businesses frequently rely on resources provided by the owners, such as using the first floor of a home as a retail space or working for the company without receiving a formal pay. Implicit costs also permit depreciation of products, resources, and machinery required for a business to function.
These two definitions of cost are important for distinguishing between two conceptions of profit—accounting profit and economic profit. Accounting profit is a cash concept. It means total revenue minus explicit costs—the difference between naira cash brought in and naira paid out. Economic profit is total revenue minus total cost, which includes both explicit and implicit costs.
The distinction is significant. Even though a company pays income taxes based on its accounting profit, its economic profit determines whether or not it is financially successful.
Let’s take a look at an example in order to understand better how to calculate implicit costs.
Udodi currently works for a corporate law firm. He is considering opening his own legal practice chamber, where he expects to earn #200,000 per year once he gets established. To run his own firm, he would need an office and a law clerk. He has found the perfect office, which rents for #50,000 per year. A law clerk could be hired for #35,000 per year. If these figures are accurate, would Udodi’s legal practice be profitable?
Step 1. First we’ll calculate the costs. We’ll use what we know about explicit costs:
Explicit costs= office rental+ Law clerks salary
Explicit cost= #50,000+ #35,000
Explicit cost = #85,000
Step 2. Subtracting the explicit costs from the revenue gives you the accounting profit.
Accounting Profit= Revenues – Explicit costs
Accounting Profit= #200,000- #85,000
Accounting Profit= #115,000.
But these calculations consider only the explicit costs. To open his own practice, Udodi would have to quit his current job, where he is earning an annual salary of #125,000. This would be an implicit cost of opening his own firm.
Step 3. You need to subtract both the explicit and implicit costs to determine the true economic profit:
Economic profit = Total revenues−Explicit costs−Implicit costs
Economic profit = #200,000−#85,000−#125,000
Economic profit= -10,000
Udodi would be losing #10,000 per year. That does not mean he would not want to open his own business, but it does mean he would be earning #10,000 less than if he worked for the corporate firm.
Implicit costs can include other things as well. Maybe Udodi values his leisure time, and starting his own firm would require him to put in more hours than at the corporate firm. In this case, the lost leisure would also be an implicit cost that would subtract from economic profits.

ANSWER TO QUESTION 5
A monopoly market is a form of market where the whole supply of a product is controlled by a single seller. There are three essential conditions to be met to categorize a market as a monopoly market.
There is a Single Producer – The product must have a single producer or seller. That seller could be an individual, a joint-stock company, or a firm of partners. This condition has to be met to eliminate any competition.
There are No Close Substitutes – There will be a competition if other firms are selling similar kinds of products. Hence in a monopoly market, there must be no close substitute for the product.
Restrictions on the Entry of any New Firm – There needs to be a strict barrier for new firms to enter the market or produce similar products.
The above 3 conditions give a monopoly market the power to influence the price of certain products. This is the true essence of a monopoly market.Features of a Monopoly Market Some characteristic of a monopoly market are as follows.
• The product has only one seller in the market.
• Monopolies possess information that is unknown to others in the market.
• There are profit maximization and price discrimination associated with monopolistic markets.
• Monopolists are guided by the need to maximize profit either by expanding sales production or by raising the price.
• It has high barriers to entry for any new firm that produces the same product.
• The monopolist is the price maker, i.e., it decides the price, which maximizes its profit. The price is determined by evaluating the demand for the product.
• The monopolist does not discriminate among customers and charges them all alike for the same product.
Some of the monopoly market examples are our local gas company, railways, Facebook, Google, Patents, etc.
Reasons for the Existence of Monopoly Market Monopolies arise in the market due to the following three reasons.
• The firm owns a key resource, for example, Debeers and Diamonds.
• The firm receives exclusive rights by the government to produce a particular product. Like patents on new drugs, the copyright for books or software, etc.
• One producer can be more efficient than others due to the cost of production. This gives rise to increasing returns on sale. Few examples are GEGU electric power, Dangote group company.

ANSWER TO QUESTION 6
Table 0.1 below summarizes the differences between the models of perfect competition and monopoly. Most importantly we note that whereas the perfectly competitive firm is a price taker, the monopoly firm is a price setter. Because of this difference, we can object to monopoly on grounds of economic efficiency; monopolies produce too little and charge too much. Also, the high price and persistent profits strike many as inequitable. Others may simply see monopoly as an unacceptable concentration of power.
Table 0.1 Characteristics of Perfect Competition and Monopoly
Characteristic Perfect Competition Monopoly
Market Large number of sellers and buyers producing a homogeneous good or service, easy entry. Large number of buyers, one seller. Entry is blocked.
Demand and marginal revenue curves The firm’s demand and marginal revenue curve is a horizontal line at the market price. The firm faces the market demand curve; marginal revenue is below market demand.
Price Determined by demand and supply;
Each firm is a price taker.
Price equals marginal cost. The monopoly firm determines price; it is a price setter. Price is greater than marginal cost.
Profit maximization Firms produce where marginal cost equals marginal revenue Firms produce where marginal cost equals marginal revenue and charge the corresponding price on the demand curve.
Profit Entry forces economic profit to zero in the long run. Because entry is blocked, a monopoly firm can sustain an economic profit in the long run.
Efficiency The equilibrium solution is efficient because price equals marginal cost. The equilibrium solution is inefficient because price is greater than marginal cost.

ANSWER TO QUESTION 7
Price Discrimination:
Price discrimination exists when the same product is sold at different prices to different buyers. The cost of production is either the same, or it differs but not as much as the difference in the charged prices. The product is basically the same, but it may have slight differences (for example, different binding of the same book; different location of seats in a theatre; different seats in an aircraft or a train).
The identical product, produced at the same cost is sold at different prices, depending on the preference of the buyers, their income, their location and the ease of availability of substitutes. These factors give rise to demand curves with different elasticity in the various sectors of the market of a firm.
It is also common to charge different prices for the same product at different time periods. For example, a new product is often sold at a high price, accessible only to the rich, while subsequently it is sold at lower prices that can be afforded by lower- income consumers.
The following are the necessary conditions that must be fulfilled for the implementation of price-discrimination:
1. The market must be divided into sub-markets with different price elasticity.
2. There must be effective separation of the sub-markets, so that no reselling can take place from a low-price market to a high- price market. This condition shows why price discrimination is easier to apply with commodities like electricity or gas, and services like services of a doctor, transport, a show, which are ‘consumed’ by the buyer and cannot be resold.
The reason for a monopolist (or any other firm) to apply price discrimination is to obtain an increase in his total revenue and his profits. By selling the quantity defined by the equation of his MC and his MR at different prices the monopolist realizes higher total revenue and hence higher profits as compared with the revenues he would receive by charging a uniform price.
Price Discrimination by Degrees:
First Degree Discrimination:
The simplest kind of discrimination of the first degree is one where, for some reason, consumers buy only one unit each from the firm. Knowing exactly how willing they are, the firm charges each one a price so high that the consumers almost, but not quite, refuse to pay the prices. If all of the consumers have different tastes, the firm has a different price for each one. The lowest price is determined by costs.
When consumers buy more than one unit of the firm’s product, they are willing to buy more units at lower prices. The firm must then adjust the units of sale. With first -degree price discrimination, the firm extracts the consumer’s entire surplus. The firm succeeds in getting all the area under the demand curve as revenue. Each consumer pays a price equal to the marginal utility of that unit for each unit consumed.
Discrimination of the first degree is the limiting, or extreme case. Obviously, it could occur only rarely, where a firm has only a few buyers and is shrewd enough to know the maximum prices they will pay. Doctors sometimes charge different fees C according to the incomes of their patients. Universities may approach first-degree price discrimination by charging a high tuition.
Second Degree Discrimination:
In discrimination of the second degree, the firm captures parts of buyer’s consumers’ surpluses, but not all of them. The schedules of rates typically charged by public utilities can be regarded as a form of second-degree discrimination. The price varies according to the number of units purchased by a consumer.
Second- degree price discrimination is necessarily practiced in markets where there are many buyers, sometimes hundreds or thousands of them. The same rate or price schedule must be offered to all buyers. Because tastes and incomes differ, the firm can seize only a small part of the consumer’s surplus of those buyers whose desires for the service are stronger and whose incomes are higher. Second -degree discrimination, furthermore, is limited to services sold in blocks of small units- cubic feet of gas, kilowatt of electricity, minutes of telephoning- that can easily be metered, recorded, and billed.
Third Degree Discrimination:
Third-degree price discrimination means that the firm divides customers into two or more classes or groups, charging a different price to each class of customers.
Public utility companies practice price discrimination of the third degree by grouping their customers into separate markets, such as residential, commercial and industrial. Each market is further subdivided into sub-markets, such as different times of the day and different uses of the service. Prices differ from one sub-market to another and, besides, second-degree discrimination is practiced within each sub-market.
Segmenting the market is a logical extension of product differentiation.
The objective of price discrimination is to secure maximum profits by adjusting the price and the output in each distinct sub-market according to the demand conditions. Assuming constant cost conditions in each market, the monopolist has to decide how much total output is to be produced and its distribution in each market and also what prices should be charged in different markets.
Such price discrimination is not possible in a competitive environment since the firms do not enjoy any market control.
For successful price discrimination, three essential conditions need to be satisfied.
They are:
1. Monopoly must have Effective Control over Total Supply:
It implies that the product of monopolist should not have close substitutes so that the monopolist controls effectively the market supply. In other words, there should be no meaningful option avail¬able to buyers for substituting the monopolist product.
2. More than Two Distinguishable Markets Completely Separate from Each Other:
Another requirement for price differentiation is that the monopolist should operate in more than one market. It means that there should be at least two completely distinguishable markets. It, however, does not mean that the markets should be at two different geographical locations. What is required is that the monopolist should be in a position to keep the two groups of buyers separate under all the conditions.
The condition of two separate markets is essential for preventing consumers of one market to buy from the other market. If this is not ensured, the consumers will re-sell the product in expensive market after purchasing from the cheaper one.
For this purpose, sometime, monopolist creates an artificial differen¬tiation in the product variants so that they look different and can satisfy the expectations of different groups of buyers. This can be done by way of different brand names, different packaging, advertisement and, so on.
At times, market may be separated through geographical bound¬aries. For example, export market is separated from domestic markets because of geographical boundaries. A monopolist can easily charge a low price for exports vis-a-vis domestic sale.
3. Differences in Price Elasticity of Demand:
Another basic condition of price differentiation is that the price elasticity of demand of different markets must be different. In other words, one of the two markets must be more elastic than that of other. As such, the monopolist will charge a higher price from the market which is inelastic and a lower one from the elastic market.

ANSWER TO QUESTION 8
Public Policy towards Monopoly
A monopolist, the sole producer of a good or a service that has no close substitutes, can establish its prices itself. Such prices are higher than those that would result from free competition, but they do not rise without any limit. There is a restraint on market power: consumer demand decreases if a price increases. A monopolist can choose, for the same level of profits, to produce a large quantity of goods to be sold at low prices or a small quantity of goods to be sold at high prices. Monopolies tend to pose severe economic problems and we will discuss those in detail in this article.
The best policy may be to prevent a monopoly from emerging, or to break it up if it already exists. The government policies used to prevent or to eliminate monopolies are called antitrust policy. Antitrust laws apply to manufacturing, transportation, distribution, and marketing. Public policy toward monopoly generally recognizes two important dimensions of the monopoly problem. On the one hand, the combining of competing firms into a monopoly creates an inefficient and, to many, inequitable solution. On the other hand, some industries are characterized as natural monopolies; production by a single firm allows economies of scale that result in lower costs.
Public policy toward monopoly aims generally to strike the balance implied by economic analysis. Where rationales exist, as in the case of natural monopoly, monopolies are permitted — and their prices are regulated. In other cases, monopoly is prohibited outright. Societies are likely to at least consider taking action of some kind against monopolies unless they appear to offer cost or other technological advantages.
One key source of monopoly power, after all, is economies of scale. In the case of natural monopoly, the alternative to a single firm is many small, high-cost producers. We may not like having only one local provider of water, but we might like even less having dozens of providers whose costs — and prices — are higher. Where monopolies exist because economies of scale prevail over the entire range of market demand, they may serve a useful economic role. We might want to regulate their production and pricing choices, but we may not want to give up their cost advantages.
The efficiency and behavior of a monopolistic enterprise, whether private or public, depends much on the framework in which it operates, and especially on the existence of performance enhancing incentives and penalties. We should acknowledge that neither the superior performance of a public monopoly to a private monopoly nor the contrary has ever been proven empirically. In addition to introducing greater competition, it is also equally important that one gets the privatization process right. In many countries, privatization seems an unavoidable outcome of constraints, particularly financial ones. Once decided for privatization, proper sequencing of the privatization and its coordination with the regulatory reforms are important. The best procedure is that structural and regulatory reforms are implemented upfront and prior to privatization. It is not easy to find a balance for each country and each sector between restrictive rules and adoption of a more flexible framework that allows for evolution of the rule but adds uncertainty. Generally speaking, detailed a priority regulation is better suited to relatively stable, technologically mature, and monopolistic sectors, such as water, than to sectors undergoing rapid technological evolution, such as telecommunications. However, in developing countries with weak administrative and judicial systems or poor track records concerning credibility, the use of detailed and relatively inflexible concession agreements with fairly precise upfront regulation may be preferable to more flexible rules subject to more discretion on the part of the regulator. This may be more likely to reassure investors than the creation of an autonomous regulatory agency with discretionary rulemaking powers.
ANSWER TO QUESTION 9
OLIGOPOLY AND MONOPOLISTIC COMPETITION:
Oligopoly and monopolistic competition have some similarities, but also have a few important differences. Both are examples of imperfect competition on the market structure continuum between ideals of perfect competition and monopoly. However, oligopoly contains a small number of large firms and monopolistic competition contains a large number of small firms. The dividing line between oligopoly and monopolistic competition can be blurred due to the number of firms in the industry.
Oligopoly is a market structure containing a small number of relatively large firms, with significant barriers to entry of other firms. Monopolistic competition is a market structure containing a large number of relatively small firms, with relative freedom of entry and exit. While it might seem as though the difference between oligopoly and monopolistic competition is clear cut, such is not always the case.
A comparison between these two market structures is offers a little insight into each.
• Many or Few: The primary difference between oligopoly and monopolistic competition is the relative size and the market control of each firm based on the number of competitors in the market. However, there is no clear-cut dividing line between these two market structures. It is not possible to say that some number like 50 firms is the dividing line, such that 50 firms make it an oligopoly and 51 make it monopolistic competition.

While one industry containing only 3 firms is clearly oligopoly and another industry with 30,000 firms is undoubtedly monopolistic competition, the structure of an industry with 30 firms or 300 firms is not as obvious.

Such industries might have characteristics of both oligopoly and monopolistic competition. As the number of firms decreases, the firms tend to behave more like oligopoly and less like monopolistic competition.
• Dominance by a Few: In some cases status depends more on the dominance of a few firms rather than the total number of firms in the industry. An industry with 3,000 relatively equal firms is most assuredly monopolistic competition. However, an industry with 3,000 firms, that is dominated by 3 relatively large firms, is most likely oligopoly. For example, the petroleum extraction industry has thousands of firms, but a handful of the largest firms dominate the market, making it an oligopoly.
• Geographic Area: In other cases, the geographic size of the market is the prime determinant of market structure. A particular industry might be monopolistic competition in a large city, but oligopoly in a smaller town. Retail sales offer an example. Larger cities usually have hundreds, even thousands, of shopping alternatives, including discount super centers, mom-and-pop stores, shopping malls, and nation-wide chains. Such a market is monopolistic competition. Smaller towns, however, tend to have fewer stores, perhaps a single super center or shopping mall and a handful of stores located in a small downtown area. Such a market is oligopoly.
• Barriers to Entry: A key difference between oligopoly and monopolistic competition is barriers to entry. Oligopoly barriers are high. Monopolistic competition barriers are low. However, entry barriers are a matter of degree. The need for government authorization is one entry barrier that can create oligopoly, especially if entry is limited to only a few firms. However, it can also create monopolistic competition if a larger number are allowed entry. Other barriers, such as start-up cost and resource ownership, also limit entry to different degrees, leading to either oligopoly or monopolistic competition. Moreover, these entry barriers can change over time, transforming oligopoly into monopolistic competition or vice versa.