Financial Concepts for Loans and Real Estates

About the competition of market a good example came in light in 1984. It was Upjoh’s patent on ibuprofen-a painkiller that the company still markets under the brand name Motrin-expired. It got the good popularity soon. The most people who use ibuprofen, like most people who use aspirin, now purchase a generic version made by one of many producers.

The shift to perfect competition, not coincidentally, is accompanied by a sharp fall in the market price. When its patent expired, Upjohn immediately cut the price of Motrin by 35 percent, but as more companies started selling the generic drug, the price of ibuprofen eventually fell by another two-thirds.

Ten years later the patent on the painkiller naproxen-sold under the brand name Naprosyn-expired. The generic version of naproxen was soon selling at only one-tenth of the original of naprosyn.

It was Paul Krugman and Robin Wells who wrote about this competition in Perfect Competition of Micro Economics.

On the other hand, there is monopoly. It happens when one seller constitutes the whole industry, market comes under the monopoly. Monopoly exists when there is a single seller or producer.

There are some features and example of Monopoly –

Single seller or producer:

Mono is known as one. Poly is used for one seller.

No close substitutes

Barrier for entry of firm

Demand curve monopoly shows, a monopoly seller are the sole producer in the industry; it has total control over the price and production. So, the demand curve will be downwards slopping. It can increase the price if it is ready to sacrifice the demand a title and can decrease the price if it wants the sales to increase.

Competition ends under monopoly. It is the highest position of competition where all firms convert into single firm. Under the monopoly of market buyers are depended on sellers. There is no meaning of demand under monopoly.

We can say that production is an activity which transforms the input into output. For example, there is need of labour and machinery to manufacture car. It is the technical aspect between input and output. The function of production express the relationship between quantity of output produced and quantity of input required. Production function can be expressed as:

Q = f (L,K)
L = Labour
K = Capital
Q = Output

Production function has four ways:

Law of variable proportion:

We can understand it as:

Total Product (TP), which is produced by a firm; Average Product (AP), it is the divided quantity of variable factors which is used to produce.

AP = TP/Q

AP = Average Product
TP = Total Product
Q = Number of Variable Factors

Marginal Product (MP) – Law of variable proportion is also known as law of diminishing returns. When variable factors are increased in equal doses, keeping the fixed factor constant, the total product will increase.

Law of Variable Proportion is an old economic principle, which was the firs redefined version of Marshall. Most of the examples of production function involve manufacturing sectors and agriculture.

Law of Return to scale:

It is known as long run production function also. The Law of Returns to Scale will show the change in the output when all the factors of production are increased together. It describes the relationship between output and scale of input.

Law of Economies of Scale:

It exists when larger output is associated with low per unit cost. It has been divided into two economies – Internal Economies and External Economies.

At last, economies of scale exist when large output is associated with low per unit cost. Economies of scale have two parts, internal and external economies of scale. Dis-economies of scale arise to a firm beyond optimum level, as the firm may face problem like lack of co-ordination, management, marketing etc. Economies of scope are decline in the average cost due to change in the product mix of output. A production process becomes chapter when there are more than one products produced instead of one as there is more efficiency in distribution of making.

“Managerial Economics” term is very old. The word has taken place in last fifty years or so. Economics is the study of human behaviour in production, distribution and consumption of material goods. Management is the disciplinary work of organizing and allocating a firm’s resources and objectives. So, these two definitions give the appropriate understanding of managerial economics.

Managerial economics is interchangeable with Business Economics. In spite of, there are some differences between these two terms.

Business Economics is known to understand for running any business.

Managerial Economics emphasizes on the function of managerial function of a business firm.

We can take some definition of Managerial Economics to clear its essence. Dean writes in his book Managerial Economics Text book, “Managerial Economics is the use of economic analysis in the formulation of business policies.” So, he emphasizes it as business policies.

On the other hand, Spencer and Seigelman, define it, “the integration of economic theory with business practice to facilitate decision making and forward planning.” So, the definition reveals it as business practices, decision making and forward planning.

Scope of Managerial Economics:

We will conclude it as a manager decision. So, for a manager there is different areas in which decision are required to be taken. These can be classified as:

Decision relating to demand – We already know, every manager is concerned with the demand for his product. So, a manager takes decision regarding the quality and quantity of his product. There are many economic tools which are applied during the decision making – Demand, Elasticity of Demand and Demand Forecasting.

Decision related to cost and production – Every manager has to analyze the cost and various laws governing production that is also a part of managerial economics.

Decision relating to price and market – We can’t escape with market analysis. So, Market analysis is the part of managerial economics. A manager should have various market structures and various pricing policies.

Decision relating to profit management – Maximum profit is the essence of every firm. So, these can be related to profit management.

Macro economic factor – A firm depends on socio-economic environment. So, to understand macro level factors there are needed of macro factors.

Significance of Economic Analysis:

All the economic has been divided into two categories – Macro and Micro. Micro economics are related to consumer products, individual products, whereas Macro is attached with aggregate demand, national income.

The same situation comes in a business man life. There is also needed of priority of business and products. A business man decides market segmentation, product segmentation and takes proper decision.

Definite and indefinite results are the outcome of market. These are inevitable in market society. This can be called as uncertainty.