Monopoly Monopoly is a Market Structure in which there is only one firm producing or selling the product and there

are barriers in the market.

Characteristic of Monopoly 123!Only one firm Product may be homogenous or differentiated arriers in the market "omplete information about the market

Equilibrium of firm

(In Short Run/ Time of start business)

123!-

#irm $arning %bnormal Profit #irm $arning &ormal Profit #irm #acing &ormal 'oss #irm #acing %bnormal 'oss

[Amjad Ali Ei10MBA052] Page 1

Firm Earning bnormal !rofit

("
M"

c
Pe % $

%"

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M" !rofit ) ) ) ) ) 0( 1 0" %( 2 + 1 %" 2 + OPe 2 O+e 1 O% 2 O+e O+ecPe 1 O+e % % "Pe

3n Monopoly price and ,uantity decided according to own wish and take help e,uilibrium point. "n#er !erfect Competition 4nder Perfect competition a firm is called price taker. "n#er Monopoly
[Amjad Ali Ei10MBA052] Page 2

4nder monopoly a firm is called price setter. Firm Earning $ormal !rofit

("
M" %"

Pe $

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M"

!rofit

) ) ) ) )

0( 1 0" %( 2 + 1 %" 2 + OPe 2 O+e 1 OPe 2 O+e O+e%Pe 1 O+e%Pe *

[Amjad Ali Ei10MBA052] Page 3

Firm Facing $ormal %oss ("

M" %" % Pe 6 "
#

%5"

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M" %oss ) ) ) ) ) 0" ) ) ) 'oss 0" 1 0( %" 2 + 1 %( 2 +
O% 2 O+e 1 OPe 2 O+e

O+e % 1 O+e"Pe Pe" % O+e % #" 7 5" 6# % 7 O+e#6 8 #"

[Amjad Ali Ei10MBA052] Page !

Pe" % 8 6# % 'oss Portion should must be less than #.". Firm Facing bnormal %oss 9Shut down position:

("
M" % Pe " $ %" %5"

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M"

%oss ) ) ) ) )

0" 1 0( %" 2 + 1 %( 2 +
O% 2 O+e 1 OPe 2 O+e

O+e % 1 O+e"Pe Pe" %

[Amjad Ali Ei10MBA052] Page ;

Monopolistic Competition Monopolistic "ompetition is a market structure in which there are large number of firms producing or selling differentiated product and there are no barriers in the market.

Characteristic of Monopolistic competition 123!'arge number of buyer < seller 6ifferentiated Product #ree entry and e2it of firms. "omplete market information

[Amjad Ali Ei10MBA052] Page =

3t is a mi2ture of Perfect "ompetition < Monopoly. E&ample of monopolistic Competition Cur'e Price < 6emand "ur>e also called %(

Pe

%( ) M(

Perfect "ompetition Monopolistic "ompetition Oligopoly 6uopoly Monopoly

3n monopolistic all #our cases are same like monopoly ?ust the %( < M( "ur>e more flat. Monopolistic Competition Cur'e

[Amjad Ali Ei10MBA052] Page @

%(

Firm Earning bnormal !rofit

("
M" " Pe % $ %"

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M" !rofit ) ) ) ) ) 0( 1 0" %( 2 + 1 %" 2 + OPe 2 O+e 1 O% 2 O+e O+ecPe 1 O+e % % "Pe

[Amjad Ali Ei10MBA052] Page A

"n#er !erfect Competition 4nder Perfect competition a firm is called price taker. "n#er Monopoly 4nder monopoly a firm is called price setter. Firm Earning $ormal !rofit

("
M" % Pe $ %"

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M"

!rofit

) )

0( 1 0" %( 2 + 1 %" 2 +

[Amjad Ali Ei10MBA052] Page B

) ) )

OPe 2 O+e 1 OPe 2 O+e O+e%Pe 1 O+e%Pe *

Firm Facing $ormal %oss ("

M" %" " Pe 6
#

%5"

M( * +e

%( ) P +

#irm is in e,uilibrium at a point -$. /here M( ) M" %oss ) ) ) ) ) 0" 1 0( %" 2 + 1 %( 2 +

O% 2 O+e 1 OPe 2 O+e

O+e % 1 O+e"Pe Pe" %

0"

O+e %

[Amjad Ali Ei10MBA052] Page 1*

) ) 'oss

#" 7 5" 6# % 7 O+e#6 8 #"

Pe" % 8 6# %

Firm Facing bnormal %oss

("
% " Pe $

M" %" %5"

M( * +e

%( ) P +

#irm is in e,uilibrium at point -$. /here M( ) M"

%oss )
[Amjad Ali Ei10MBA052] Page 11

0" 1 0(

) ) )

%" 2 + 1 %( 2 +
O% 2 O+e 1 OPe 2 O+e

O+e % 1 O+e"Pe Pe" %

Monopoly Equilibrium of Firm in %ong Run

Firm Earning bnormal !rofit

("

'M"
'%"

Pe %

" $

M( * +e

%( +

#irm is in e,uilibrium at point -$. /here M( ) M"

[Amjad Ali Ei10MBA052] Page 12

!rofit

) ) ) ) )

0( 1 0" %( 2 + 1 %" 2 +
OPe 2 O+e 1 O% 2 O+e

O+e"Pe 1 O+e % % "Pe

Monopolistic competition Equilibrium of Firm in %ong Run

Firm Earning $ormal !rofit(

("

'M"
'%"

Pe

% $

M( * +e

%( +

[Amjad Ali Ei10MBA052] Page 13

#irm is in e,uilibrium at point -$. /here M( ) M"

!rofit

) ) ) ) )

0( 1 0" %( 2 + 1 %" 2 +
OPe 2 O+e 1 OPe 2 O+e

O+e%Pe 1 O+e%Pe *

Macro Economics

$ational Income an# Its Concepts &ational income is the aggregate of market >alue of all final goods and ser>ices produce by the country during one year.

Concept of $ational Income 123!Cross 6omestic Product &et 6omestic Product Cross &ational Product &et &ational Product 9C6P: 9&6P: 9C&P: 9&&P:

[Amjad Ali Ei10MBA052] Page 1!

;=-

Personal 3ncome 6isposable Personal 3ncome

9P3: 96P3:

)*

+ross ,omestic !ro#uct

(+,!)

Cross domestic Product is the aggregate of market >alue of all final goods < Ser>ices produce inside the country during one year. -* $et ,omestic !ro#uct ($,!)

&et domestic product 9&6P: is obtained by subtracting depreciation from C6P. 6epreciation is the reduction in the >alue of a capital good due to the wear and tear caused during production. 0he total market >alue of all final goods and ser>ices produced within the political boundaries of an economy during a gi>en period of timeD usually a yearD after ad?usting for the depreciation of capital. $,! . +,! / ,epreciation allo0ance 1* +ross $ational !ro#uct (+$!)

Cross &ational Product is the %ggregate of Market 5alue of all #inal goods < Ser>ices produced by the &ationals of the country. 2* $et $ational !ro#uct ($$!)

&&P ) C&P 1 6epreciation allowance

[Amjad Ali Ei10MBA052] Page 1;

3*

!ersonal Income

(!I)

Personal 3ncome is the aggregate of all incomes actually recei>ed by all indi>iduals of a country during one years Personal income is e,ual to ) &ational income 1 social security "ontribution 1 "orporate 0a2es 1 4ndistributed "orporate Profit 7 0ransfer Payments
9CiftsD PensionD Crants:

4*

,isposable !ersonal Income (,!I) 6P3) Personal 3ncome 1 6irect 0a2

Relationship bet0een +,! an# +$!

C&P ) C6P 7 &et #oreign 3ncome &et #oreign 3ncome ) 3ncome of Eome #actors engaged abroad 1 3ncome of #oreign factors engaged at home

Metho# of Measurement of $ational Income 1- Product or Output Method 2- 3ncome Method 3- $2penditure Method

[Amjad Ali Ei10MBA052] Page 1=

!ro#uct or 5utput Metho#

%ccording to Product Method &ational 3ncome is the aggregate of Market >alue of all final goods and ser>ices produced in >arious sector of the economy. 0he ma?or sector of the economy includes agricultureD ManufacturingD transport and communicationD ser>icesD MiningD #isheryD #orestry etc.

-*

Income Metho#

%ccording to income method national income is the aggregate of the following items. 1- /ages < Salaries 2- (ents of EousesD 'andD uildings 3- 3nterest on capital !- Profits of unincorporated enterprises ;- Profits of incorporated enterprises 9like di>idend: =- 4ndistributed corporate profit @- "orporate 0a2es A- 3ndirect ta2es B- 6epreciation 1*1* &et income from abroad

E&pen#iture Metho#

[Amjad Ali Ei10MBA052] Page 1@

%ccording to e2penditure Method &ational income is the aggregate of following four items. 9i: 9ii: 9iii:
9i>:

"onception $2penditure 3n>estment $2penditure Co>ernment $2penditure &et $2penditure

Payment:

9": 93: 9C: 9 6e>elopment 7 &on 6e>elopment: 9F 1 M:9F ) $2port $arningD M ) 3mport

G G

) )

&ational 3ncome " 7 3 7 C 7 9F 1 M:

,ifficulties in Measurement of $ational Income 1arter 0ransaction

2- Ser>ices /ithout (eward 3- Self "onsumed Production !- 3ncome $arned 0hrough illegal acti>ities ;- Part time Hobs =- &on "o-Operation of Public @- &on Maintenance of accounts A- Price changes Circular Flo0 of $ational Income 0he circular flow of &ational income shows how &ational income mo>es between
[Amjad Ali Ei10MBA052] Page 1A

household sector and usiness sector in the economy. 0his circular flow also includes some leakages and in?ections which effect &ational income in a positi>e and negati>e way.

0here are three types of 'eakages and 3n?ections. %ea6ages 123%ea6ages( In7ections( Sa>ings 0a2es 3mports In7ections 3n>estments Co>ernment $2penditures $2ports

leakages cause reduction in national income in?ections cause increase in national income

Inflationary an# ,eflationary +aps 1- %ggregate Supply "ur>e 2- %ggregate 6emand "ur>e

[Amjad Ali Ei10MBA052] Page 1B

ggregate Supply Cur'e %ggregate supply cur>e shows aggregate of goods and ser>ices produced and supplied at >arious price le>els. %ggregate supply cur>e can be shown with the following diagram. Price 'e>el 9P: %S /here Gf &ational income %t full employment le>el.

Gf

%S

%ggregate supply cur>e has 7 >e relation with price. ggregate ,eman# Cur'es %ggregate demand cur>e shows the aggregate of goods and ser>ices consumed or demand at different price le>els. %ggregate 6emand shown with following diagram.

Price 'e>el 9P:

%6" has in>erse relation with price.

%6

*
[Amjad Ali Ei10MBA052] Page 2*

%6

I#eal Situations

Price 'e>el

9P:

%S

Pi Pi 9ideal price le>el:

Means e,uality of %S" <%6".

%6

* $ote(

Gf

%SD%6

3n this situation aggregate 6emand cur>e intersects aggregate supply cur>e at full employment le>el and the price le>el determined by this situation is called ideal price le>el.

Inflationary +ape

3nflationary gaps occur when aggregate demand cur>e intersects aggregate supply cur>e at a higher point than full employment le>el of income. 3t can be shown with following diagram.

%S $

[Amjad Ali Ei10MBA052] Page 21

Pe 3nflationary Cap Pi
%6

Gf

%SD%6

$ote(

3n the diagram the difference between e,uilibrium price and ideal price is inflationary gap because e,uilibrium price is higher than ideal price.

,eflationary +ap

6eflationary gap occurs when aggregate demand cur>e intersects aggregate supply at less than full employment le>el of income .3t shown with following diagram.

P
[Amjad Ali Ei10MBA052] Page 22

%S

6eflationary Cap

Pi Pe

%6

G1

Gf

%SD %6

Price are less than recei>ed le>el

3n this diagram e,uilibrium price is less than ideal price and the difference is called deflationary gap.

Measure to Remo'e inflationary an# ,eflationary gaps 0here are two methods. )* -* Fiscal !olicy Monitory !olicy

Measure to Remo'e Inflationary +ap

[Amjad Ali Ei10MBA052] Page 23

3n case of inflationary gap contractionary #iscal and monitory policy are re,uired which means that go>ernment e2penditure should be reduced and go>ernment earning should be increased through ta2es and other measures and in case of monitory policy the circulation of money and credit should be reduced to reduced inflation in the economy.

Measure to Remo'e ,eflationary +ap 3n case of deflationary gap e2pansionary #iscal and monitory policies are re,uired 3n "ase of #iscal policy go>ernment e2penditure should be increased and ta2es should be decreased. 3n case of monitory policy circulation of money and credit should be increased in ordered to increase prices and economic acti>ity in the economy.

Fiscal !olicy #iscal policy is the policy of regulating and controlling re>enue and e2penditure of the go>ernment to achie>e macro economics ob?ecti>e. 8u#get( udgeting is the picture of #iscal policy
udget 6eficit is also called deficit #inancing.

8u#get ,eficit ( 6ifference etween (e>enue and $2penditures is "alled udget 6eficit.

udget
[Amjad Ali Ei10MBA052] Page 2!

(e>enue

$2penditures

6eficit #inancing

"urrent $2p.

6e>elopment $2p.

0a2 (e>enue

&on 0a2 (e>enue

3nternal

$2ternal

6irect 0a2es orrowing

3ndirect 0a2es

ank orrowing

Public 6ebt I

5b7ecti'es of Fiscal !olicy/ Macro Economics 5b7ecti'es 123!;=Eigh growth of national income #air 6istribution of national income Eigh $mployment Price Stability (eduction in regional disparities 6iscouraging Production and "onsumption of unnecessary goods

[Amjad Ali Ei10MBA052] Page 2;

@-

(eduction in deficit in balance of payment

Instruments/ Tools of Fiscal !olicy %%utomatic I uilt in StabiliJers 9&on 6iscretionary 0ools: 6iscretionary 0ools

utomatic /$on ,iscretionary Tools 123!Progressi>e ta2ation 4nemployment allowance Support price policy "orporate and #amily sa>ing

,iscretionary Tools 123!"hanges in ta2 rates "hanging public works e2penditure "hanging in transfer payment "redit aids

8usiness Cycles 0he fluctuation in economic acti>ities comprising &ational income and employment is called business cycle or trade cycle. !hases

[Amjad Ali Ei10MBA052] Page 2=

123!-

(eco>ery oom I peek (ecession 6epression

$conomic %cti>ities

(eco>ery

oom 6epression

(ecession

0ime

oom

(eco>ery

(ecession

6epression

Features 1One business cycle is said to be completed when it passes through all the four phases. 20here is no hard and #ast rule regarding time period for the completion of a trade

[Amjad Ali Ei10MBA052] Page 2@

cycle whoe>er the research has shown that it takes from two to ten years for its completion. 3!0he reco>ery phase is said to be longer than the recession phase. $>ery ne2t oom or 6epression will be at higher le>el of economic acti>ity than pre>ious one. 8usiness Cycle an# Fiscal !olicy 0he role of go>ernment in controlling fluctuations comes in the form of changes in #iscal policy in the period of boom go>ernment operates a contractionary #iscal policy in which it increases the ta2 rates and re>enue and decreases its e2penditure. /here as in the time of depression go>ernment operate e2pansionary #iscal policy in which it decreases ta2 rates and its re>enue and increases its e2penditure to mo>e out the economy from depression. Monitory !olicy Monitory policy is the policy of controlling supply and demand for money and credit in the economy.
Monitory policy is the policy of central ank and #iscal policy is the policy of go>ernment.

Features of Monitory !olicy 1"reation and e2pansion of financial institutions.

[Amjad Ali Ei10MBA052] Page 2A

23!;-

% suitable interest rate policy. 6ebt management 9Public 6ebt: Proper ad?ustment between supply and demand for money. "redit control 93: 933: +uantitati>e Measures +ualitati>e Measures

9uantitati'e Measures 123Open Market operation ank (ate policy 5ariable reser>e rate

)*

5pen Mar6et 5peration Open Market operations are the sale and purchase of go>ernment securities through

financial institutions in order to increase the money supply. 0hese securities are purchased back from the public while to decrease money supply more securities are sold to the public through financial institutions. -* 8an6 Rate !olicy 0he ank rate is that rate of interest at which central bank pro>ides loan to

commercial banks if the purpose is to increase the supply of credit the bank rate is reduced. /here as to decreased the supply of credit the bank rate is increased. 1* :ariable Reser'e Ratio

[Amjad Ali Ei10MBA052] Page 2B

"ommercial anks are directed to keep a certain portion of their demand and time deposits to meet their daily cash re,uirements. 3f the purpose is to increase credit supply their reser>e ratio is decreased where as to decreased credit supply this reser>e ratio is increased.

9ualitati'e Measures 1Selecti>e "redit "ontrol.

)*

Selecti'e Cre#it Control Selecti>e credit control means different interest rates for different sectors or public

re,uirements for loans on preference basis. #or $2ample % low rate of interest may be charged for the a farmers to purchase seedsD #ertiliJersD Pesticides machinery etc. Similarly a low interest rate may be charged for public on loans for EousesD "ar #inancingD #oreign 6e>elopment.

"nemployment n# its 6in#s 1$mployed

[Amjad Ali Ei10MBA052] Page 3*

23!)*

4nemployed &ot in 'abour #orces 'abour #orce Employe# 0he employed are those persons who perform any paid work and those who

ha>e ?obs but are absent from work due to illness strike or >ocations. -* "nemploye# 4nemployed are those persons who are not employed but are acti>ely looking for work not labour force. 1* $ot in %abour Force
0he persons who are not in labour force include retiredD aged and not looking for work.

2*

%abour Force 0he labour force include those persons who are either employed or unemployed. %abour Force . Employe# ; "nemploye#

"nemployment Rate
0he unemployment rate is e,ual to the number of unemployed people I labour force

4nemployment (ate

&umber of unemployed people 'abour #orces

[Amjad Ali Ei10MBA052] Page 31

56un<s %a0 -#or e>ery two persons that C6P falls relati>e to potential C6P the unemployment rate rises about one percentage point. #or e2ample it mean that if C6P begins at 1**K of its potential le>el and falls to BAK of its potential the unemployment rate rises by 1K point. #or e2ample = K to @ K. =in# of unemployment 1- #rictional 4nemployment 2- Structural 4nemployment 3- "yclical 4nemployment !- 6isguised 4nemployment ;- 5oluntary 4nemployment =- 3n>oluntary 4nemployment )* Frictional "nemployment #rictional unemployment arises because of mo>ement of people between regions and ?obs. 3t is possible that in a full employed country there is a frictional unemployment at a moderate le>el. -* Structural "nemployment Structural unemployment arises due to a mismatch between supply and demand for workers when structure and technology of the economy changes.

[Amjad Ali Ei10MBA052] Page 32

1*

Cyclical "nemployment "yclical 4nemployment arises when demand for labour decreases in recession due to a fall in aggregate demand.

2*

,isguise# "nemployment 6isguised unemployment arises when people seem to work but their work do not contribute to the producti>ity. #or e2ampleL 3n rural area if fi>e worker are needed but that works is done by ten workers then fi>e workers are called disguised unemployed.

3*

:oluntary "nemployment 5oluntary unemployment arises when people do not want to work at e2isting wage rates and they considered that the wage rate is lower than their education skill or e2perience.

4*

In'oluntary "nemployment 3n>oluntary unemployment arises when people are willing to work at e2isting wage rates but they do not find work due to low demand for labour. 3n this situation markets e2isting rate is higher than market clearing wage rate due to minimum wage laws or labour unions.

[Amjad Ali Ei10MBA052] Page 33

:oluntary "nemployment

/age (ate

S'

$,uilibrium /age (ate $ /e --------------------- ************ 5oluntary 4nemployment

6'

'0 In'oluntary "nemployment /age (ate S'

'abour #orce

3n>oluntary 4nemployment

Minimum /age (ate

/m /e --------------------6'

'0

'abour #orce

[Amjad Ali Ei10MBA052] Page 3!

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