2. Introduction to Basic Principles of Economics
• Economics-various definitions
• Concept of Need – hierarchy
• Market - Concept of price determination under particular market
conditions –perfect competition market & monopoly market, causes
• Price discrimination-concept, types
• Concept of cost-total cost, fixed and variable cost, direct and indirect
cost
• Cost index – definition, types
3. Definitions - Economics
• “The branch of knowledge concerned with the production,
consumption, and transfer of wealth”.
• “A social science that studies how individuals, governments, firms and
nations make choices on allocating scarce resources to satisfy their
unlimited wants”.
• “Economics is the study of how individuals and groups make decisions
with limited resources as to best satisfy their wants, needs, and
desires”.
• “The study of the production, distribution and consumption of wealth
in human society”.
5. Market
• Cournot, a French economist – “Economists understand by the term
market not any particular market place in which things are bought
and sold but the whole of any region in which buyers and sellers are
in such free interaction which one another that the price of the same
goods tend to equality easily and quickly”.
6. Perfect Market
• “A market is said to be perfect when all the potential sellers and
buyers are promptly aware of the prices at which transactions take
place and all the offers made by other sellers and buyers, and when
any buyer can purchase from any seller and conversely.”
• Under such a condition, the price of the commodity would remain
same all over the market (which is the essential characteristic of a
perfect market)
7. Imperfect Market
• A market is said to be imperfect when some buyers and sellers or
both are not aware of the offers being made by others.
• Naturally, therefore, different prices come to prevail for the same
commodity at the same time in an imperfect market.
8. Pure competition
• Pure competition is said to exist when the following conditions are
fulfilled
Large no of buyers & sellers (no single seller or buyer can influence
the price)
Homogeneous product (same quality product from all sellers)
9. Perfect competition
• Large no of buyers and sellers
• Homogeneous product
• Free entry & exit (no restrictions legal or otherwise on
entry & exit of new firms)
• Perfect knowledge of prices that are been offered and
accepted
• Absence of transportation cost
• Perfect mobility of factors of production (essential for
firms to adjust their supply to demand)
10. Imperfect competition
• Monopolistic competition – no of sellers not large, product not
homogeneous, same price doesn't rule the market
• Oligopoly – only a few sellers of a product
• Monopoly – a single seller or producer controls the entire market
11. Price discrimination
• Price discrimination is the practice of charging a different price for the
same good or service.
• There are three of types of price discrimination – first-degree,
second-degree, and third-degree price discrimination.
12. First degree
• First-degree discrimination, alternatively known as perfect price
discrimination, occurs when a firm charges a different price for every
unit consumed.
• The firm is able to charge the maximum possible price for each unit
which enables the firm to capture all available consumer surplus for
itself. In practice, first-degree discrimination is rare.
13. Second degree & Third degree
• Second-degree price discrimination means charging a different price
for different quantities, such as quantity discounts for bulk purchases.
• Third-degree price discrimination means charging a different price to
different consumer groups.
• For example, rail and tube travelers can be subdivided into commuter
and casual travelers, and cinema goers can be subdivide into adults
and children. Splitting the market into peak and off peak use is very
common and occurs with gas, electricity, and telephone supply, as
well as gym membership and parking charges. Third-degree
discrimination is the commonest type.
