Karthik 2

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Normal profit

Super normal profit

1. Normal profit is normal remuneration or earning of the entrepreneur for his entrepreneurial services. 2. Normal profit is earned by the marginal entrepreneur. 3. Normal profit is included in the cost of production. It is earned when the average cost is equal to price. 4. Normal profit is earned in the long run.

1. Super normal profit is the surplus earned over and above the normal profit. 2. Super normal profit is earned by super marginal entrepreneurs. 3. Super normal profit does not enter into cost of production. 4. Super normal profit is earned in the short run but disappears in the long run.

DISTINGUISH BETWEEN:

Concept of profit:

Normal profit: - Normal profit is normal remuneration or earning of the

entrepreneur for his entrepreneurial services. It is the minimum profit necessary to induce the entrepreneur to supply his services. In short it is the opportunity cost of the entrepreneur. Normal profit is earned by the marginal entrepreneur. Normal profit is included in the cost of production. It is earned when the average cost is equal to price. Normal profit is earned in the long run.

Super normal profit: - Super normal profit is the surplus earned over

and above the normal profit. Super normal profit is earned by super marginal entrepreneurs. Super normal profit does not enter into cost of production. Super normal profit is earned in the short run but disappears in the long run.

Sub-normal profit: - it is a market situation at which price is such that firm average revenue is less than average cost. Thus the firm is actually making loss. However in the case of subnormal profit, losses are bearable (Manageable) as firms average revenue is greater than Average Variable cost. Thus it is a situation where the firm is earning. OMTE X – CLAS SE S – CLAS SE S “T he ho me o f te xt ” home of te xt ”

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Total loss / Shutdown condition: - It is a market condition where price is such that firm average revenue is less than average cost and also it is less than average variable cost. Under this situation the firm has to shut down business as it’s earning are inadequate to meet its current expenses. This is also called unbearable (UN manageable) loss.

- Break Even Analysis

IMPOR TANT : : - It is an important tool to study the Relationship between cost, Revenue and profit at different level of output in the short run. The Break even point is located at that level of output at which total revenue (TR) is equal to total cost (TC). Therefore, Break even point is said to be no profit or no loss zone. From the below diagram Total revenue (TR) is equal to Total Cost (TC) at point “B” corresponding to OQ units of output. Hence point “B” is called Break even point. At point “B” the firm neither makes any profit or nor any loss. Hence this point is called as no profit or loss Point. Beyond the Break even Point “B” the firm starts making profit and downwards to the Break even Point “B” the firm suffers from losses.

TR Profit Loss

TC B TVC

TC

TVC TFC

O

Q

Level of out put

ASSUMPTIONS OF BREAK EVEN ANALYSIS:1. The selling price must remain constant. 2. The volume of production and the volume of sales are equal. OMTE X – CLAS SE S – CLAS SE S “T he ho me o f te xt ” home of te xt ”

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3. There will be no change in operational efficiency. 4. All costs are classified into fixed cost and variable cost. 5. There is only one product, in case of multi product firm, the product mix must be stable. 6. The volume of production and the volume of sales are equal.

Limitation of Break – even analysis:1. The Break – even analysis can be applied only to a single product system. 2. Under the multi product or jointly supplied product system it can be applied only when product – wise cost can be ascertained. But the determination of product – wise cost is extremely difficult. 3. Break – even analysis cannot be usefully applied where historical data cannot be ascertained before – hand. 4. Break – even analysis also cannot be applied where historical data are not relevant for estimating future cost and prices. 5. The Break – even analysis is based upon a number of unrealistic assumptions Eg. Constancy of plant size, technology, production methodology, sales mix etc. 6. The Break – even analysis ignores the time lag between production and sales. Q1. Define a firm. What are the objectives of a firm? Ans. A firm is a production unit organized by the people either as individuals or members of household functioning with the sole aim of providing people with the goods and services either for their own consumption purpose or for export purposes.

Objective of a firm i.

To maximize profit:- According to economists, the chief objective of a firm is to maximize profit. All the firms take all possible efforts not only to enjoy profit but also to maximize profit. A firm reaches the point of maximum profit when its marginal revenue (MR) is equal to its marginal cost (MC).

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iii. iv.

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To minimize cost:- This objectives is very much related to the first objective. A firm which is successful in bringing down cost can assure maximum profit. All the firm aims at maximum profit. Maximisation of market sales: - Every goods providing firm try to achieve maximisation of market sales. Then only it can achieve maximum revenue through sales. Long Survival:- All business firms are keen to ensure their survival for a long period. They are content with the steady and gradual growth accompanied by normal profit. Such firm’s aim is to ensure their continuous survival by serving the consumers at reasonable prices. To build up a business empire:- The primary motive behind business it to expand and capture the entire market. Every firm will follow all possible tactics to build up its own empire.

Dumping: Dumping is a device used by the seller to promote export and capture foreign market. It refers to the sale of goods in foreign market at a given price which is lower than the selling price of the same product in the domestic market. Dumping can be practiced by those sellers who enjoy monopoly in domestic market. As such it is possible for them to charge a higher price at a domestic market while selling the same at a relatively lower price in the foreign market. The seller tries to cover the loss in foreign market by charging higher price in domestic market. The purpose behind this discrimination is to compete with the foreign market and to promote export. This would help the seller to widen foreign market.

Dumping can be practiced under the following conditions only:• • •

The seller enjoy monopoly in domestic market and There is perfect competition in the foreign market. The two different market should have different elasticity of demand.

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Define price discrimination and Explain Different types (Forms) of price discriminations. Price Discrimination:- Price discrimination refers to a situation when a monopolist charges different prices from different customers for the same commodity at the same time. E.g. BEST charges different prices for consumption of electricity for domestic use and commercial use.

Different forms of price discriminations:1. Personal price discriminations:- When different prices are

charged form different buyer for the same product or service, it is called personal price discrimination. When the prices are charged on the basis of the status, ability of the person, this king of price discrimination is possible. For eg. A Doctor charges different fees for the same treatment from rich and poor, A teacher conducting private classes charging different fees for different students according to their status. 2. Regional price discrimination:- When different prices are charged in different Market or regions, it is called Regional price discrimination. When price is charged on the basis of elasticity of demand, this kind price discrimination is possible. For eg. In the Market where the demand is elastic, lower price is charged and in market having inelastic demand higher price is charged. 3. Size Price discrimination:- When large quantity of a commodity is purchased, a lower price is charges. When a smaller quantity of a commodity is purchased a higher price is charges. For eg. Whole seller & retailer. 4. Sex Discrimination:- Price discrimination also take place on grounds of sex. For eg. Education is free for girls but not for boys , So there is a sex price discriminations. 5. Trade Price discrimination: - When different prices are charged on the basis of the purpose for which the product is used, it leads to the trade price discrimination. For eg. When electricity is used for domestic purpose a relatively lower price is charged.

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Conditions necessary for price discriminations? Or When are the Price discriminations possible? Ans. The price discriminations are possible under. i.

ii.

iii.

iv. v.

vi.

Monopoly: - Price discrimination is possible only under

monopoly. The practice of price discrimination is peculiar to monopoly only. If this practice is followed in other competitive market, the consumer will leave the seller who charges high price and go to the next seller who charges less. Then price discrimination will break down. No Resale:- One of the essential conditions necessary for price discrimination is the absence of resale of commodities. There should be no possibility of resale of commodity from one consumer to another consumer. Suppose if a particular commodity is given to Mr. A at Rs. 20 per unit and to Mr. B at Rs. 40 per unit. Now if Mr. A buys 2 unit @ Rs. 20 per unit and passes one unit to B, then there is no possibility of price discriminations. Immobility of buyers:- When buyers are not able to move to different markets price discrimination is possible. If the buyer can move from high priced market to low priced market, then price discrimination breaks down. Personal Service:- In case of services where personal attention is necessary and resale is not possible. Price discrimination is possible. For eg. Services of doctor, lawyers etc. Differences in elasticity of demand:- The most important factor that is responsible for the price discrimination is the difference in elasticity of demand for a particular commodity at different markets. Monopolist charge a relatively lower price when the demand is elastic and he charges a relatively higher price when the demand is inelastic. Boundaries and Tariff:- Price discrimination is possible when countries or states are dived by boundaries. It is also possible when different tariffs are introduced on the sales of the products. For eg. In different places same medicines are sold at different price due to different taxes imposed by different states.

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Write short notes on Wastes of monopolistic competitions:-

Ans. Critics say that the monopolistic competition leads to many types of economic and social waste. That is why monopolistic competition has been described as “Wasteful Competition” following are some of the wastes of monopolistic competition. 1. Excess Capacity:- A firm achieves optimum output when the lowest point of average cost curve coincides with price at the point of equilibrium. This leads to optimum utilization of resources and optimum output. But in case of monopolistic competition, the equilibrium is achieved before the lowest point of the average cost is reached. 2. Unemployment:- As the firm’s capacity is not fully utilized, it fails to provide maximum jobs and becomes a cause for unemployment. Unemployment leads to less income, less consumption, less savings and ultimately slows down economic activities. 3. Wastage of advertisement:-The firms under monopolistic competition indulge in product differentiation to attract consumers. They spend a considerable amount of income on product differentiation which would have been utilised for other purposes. The large sum of money which is spent in the form of selling cost is also a social waste. According to economists, selling cost does crease adverse effects. 4. Cross transport:- The firms under monopolistic competition involve in inter regional competition. It results in waste of resources in the form of cross transport. For eg. A firm in Delhi searches market in Chennai while the Chennai firm finds market in Delhi. It leads to heavy expenditure of transport. 5. Exploitation of consumers:- The firms under monopolistic competitions indulge in product differentiation, advertisement, salesmanship etc., It results in heavy expenditure. The ultimate victim of such heavy expenditure is the consumer who pays higher prices. Though the prices are high, there is no guarantee that the advertised products carry the expected standard as they are projected to be.

Project planning:- Project planning involves conceding, Generating, evaluating, selecting the most profitable investments. OMTE X – CLAS SE S – CLAS SE S “T he ho me o f te xt ” home of te xt ”

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It is a plan for investment fund and these with_ Determine the worthiness of investment project. Estimating rate of returns from these project. Estimating the cost of capital and availability of capital funds.

Simply speaking, Project planning is a means for 1. Organising the work of the project and to find the resources requirement. 2. Allotting the resources, a signing responsibility to different department. 3. Integrating and co - ordinating the entire process 4. Estimating the time for the completion of the project.

What is the importance of Project Planning?

Project planning is an important exercise in investment planning on account of following reason.

1. 2. 3. 4. 5.

The capital expenditure decision has long term effects. If involves huge investment out lay. The decisions once taken are not easily reversible. It involves high degree of risk. Project planning helps to have best utilizations of resources.

What are the stages of Project Planning? The following are various stage of project planning.

1. Search for new investment proposal: - The planner has to collect

2. i. ii. iii. iv.

addition information about Government rules and regulation, new market, new product and the commercial geographic of various nation. He is also required to analysis the performance of the existing industries in order to have market information. Project classification:- The planner is then required to classify the investment proposal in order to have complete details of this investment plans. Investment proposal are classified in to following types. Replacement for maintenance. Replacement for modernization. Expansion of existing product Expansion of existing market.

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3. 4. 5.

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Conduction innovation that is research and development Investment to improve environment. Analysis cost and benefit:- The project planner is required to have complete idea of the cash flows and cost of capital. The planner has to estimate the cash in flows and cash outflows. Measurement of Investment worth:- The planner is then required to use various investment criteria for comparison and solution of a project. Feasibility study:- It is an analysis of financial, Marketing, technical and economic aspect of the project. The planner has to find out the feasibility of his investment proposal he has to understand the financial, marketing condition problems to put his plan into reality. Decision making:- It is an important step in the project and this is a first step taken to start the project. Implementation:- It involves integration and Co – ordination of various activities in order to have successful implementation of the project.

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