Microeconomics I — Econ 501 · Deep Notes सूक्ष्म अर्थशास्त्र I — Econ 501 · विस्तृत नोट

1.1 Method vs Methodology — the first distinction

Why an MA student must care: in your term paper, in pre-board, in the viva — your defence ultimately rests on methodology. A professor can attack your data or your model; but if you cannot articulate why you used OLS rather than logit, why you assumed rationality, or why your conclusion follows from your premises, you lose the argument regardless of how careful your data work was.

MA विद्यार्थीले किन ध्यान दिनुपर्छ: term paper, pre-board र viva सबैमा defense methodology मा निर्भर हुन्छ। प्राध्यापकले data वा model मा प्रश्न उठाउन सक्छन्; तर "logit होइन OLS किन रोजेँ", "rationality किन मानेँ", "premises बाट निष्कर्ष कसरी निस्कन्छ" भन्न नसक्दा सबै data काम बेकार हुन्छ।

1.2 Positive vs Normative economics — Hume's guillotine

David Hume (1739) drew a sharp logical line: no set of "is" statements can entail an "ought" statement without an additional value premise. This is called Hume's guillotine (or the is-ought problem).

David Hume (१७३९) ले स्पष्ट तार्किक रेखा कोरे: "छ" भन्ने कथनबाट "हुनुपर्छ" भन्ने कथन निकाल्न अतिरिक्त मूल्य-premise चाहिन्छ। यसलाई Hume's guillotine भनिन्छ।

Lionel Robbins (1932) tried to confine economics strictly to positive analysis; Amartya Sen (1987) has argued that the dividing line is fuzzier in practice and that ethical concerns are inseparable from welfare economics. Both views appear in TU exam answers.

Robbins (१९३२) ले अर्थशास्त्रलाई positive मा सीमित गर्न खोजे; Sen (१९८७) ले व्यवहारमा रेखा अस्पष्ट र welfare economics बाट नैतिक सरोकार छुट्याउन नसकिने तर्क गरे।

1.3 Philosophical foundations — Positivism, Rationalism, Empiricism, Constructivism

Free deep-dive: Stanford Encyclopedia of Philosophy — "Philosophy of Economics" (Daniel Hausman). One of the best free sources for this unit.

निःशुल्क गहिरो अध्ययन: Stanford Encyclopedia — Philosophy of Economics।

1.4 Methods of economic analysis

(a) Deductive vs Inductive

(b) Hypothetico-deductive — the modern compromise

Karl Popper (1934). Steps: (i) frame a hypothesis H (theoretical, perhaps deductively derived); (ii) deduce an observable, falsifiable implication I; (iii) collect data; (iv) if I is contradicted, reject H; if not, H is corroborated (but never finally "verified"); (v) revise theory and repeat. This is the standard scientific cycle in modern economics.

Popper (१९३४)। चरण: (i) hypothesis H, (ii) testable implication I, (iii) data, (iv) I गलत भए H अस्वीकार; नभए H corroborated (पूर्ण verify कहिल्यै होइन), (v) theory सुधार। आधुनिक अर्थशास्त्रको मानक चक्र।

(c) Static, Comparative-static, Dynamic

1.5 Methodological individualism vs holism & the role of "ceteris paribus"

Methodological individualism (Mises, Hayek, Schumpeter): social phenomena should be explained by reference to the actions of individuals. "There is no such thing as 'the economy choosing'; only individuals choose."

Methodological holism: macro structures (class, institution, culture) have causal powers not reducible to individual actions (Marx, Durkheim, sometimes Keynes).

Methodological individualism (Mises, Hayek): सामाजिक घटना व्यक्तिगत कार्यबाट व्याख्या। Methodological holism: वर्ग, संस्था, संस्कृतिको स्वतन्त्र कारणात्मक शक्ति।

Ceteris paribus = "other things equal." Almost every micro statement carries this qualifier — "demand falls as price rises, ceteris paribus." It's both indispensable (isolates one channel) and dangerous (real-world experiments seldom hold "other things" fixed). A good methodology spells out what is being held constant and whether that's plausible.

Ceteris paribus = "अरू कुरा उस्तै।" Micro का लगभग सबै कथनमा यो qualifier आउँछ। अपरिहार्य (एउटा मात्र channel छुट्याउँछ) तर खतरनाक (वास्तविक जगतमा अरू कुरा उस्तै हुँदैन)।

2.1 What makes a discipline "scientific"?

A working checklist (Nagel 1961; Popper 1934):

1. Organised body of knowledge — concepts defined, propositions stated.
2. General laws — relations that hold across a class of cases.
3. Repeatable observations — others can in principle replicate the test.
4. Predictive power — testable forecasts beyond the data used to construct the theory.
5. Self-correcting — wrong predictions force theory revision.

Economics scores well on (1), (2), (5), partially on (3), and poorly on (4) compared with physics. Reasons: cannot run controlled experiments on entire economies; non-stationarity (the relationships themselves shift); Lucas critique (agents respond to policy changes, breaking past correlations).

अर्थशास्त्र (१), (२), (५) मा राम्रो, (३) मा आंशिक, (४) मा physics भन्दा कमजोर। कारण: पूरा अर्थतन्त्रमा controlled experiment गर्न नसकिने; non-stationarity; Lucas critique।

Three implicit conditions of this definition: (i) multiple ends; (ii) scarce means; (iii) alternative uses of means. If any is absent, choice (and hence economics) disappears. A man dying of thirst with one cup of water faces a non-economic problem (no alternative use); a country with infinite resources faces a non-economic problem (no scarcity).

तीन शर्त: (i) धेरै लक्ष्य; (ii) सीमित साधन; (iii) साधनको वैकल्पिक प्रयोग। कुनै एक नभए छनोट (र अर्थशास्त्र) हुँदैन।

2.2 Role of assumptions and the "F-twist" debate

Every model rests on simplifying assumptions: perfect competition, rationality, no transaction cost, complete information, representative agent. Three positions on whether they need to be realistic:

1. Friedman's instrumentalism (1953):

   "Truly important and significant hypotheses will be found to have 'assumptions' that are wildly inaccurate descriptive representations of reality… the more significant the theory, the more unrealistic the assumptions." What matters is predictive accuracy. Friedman's famous analogy: a pool player aims as if she knows angular momentum and friction, even though she has never opened a physics textbook — the predictions of "as if she knew Newton" work.

   Friedman (१९५३): "महत्त्वपूर्ण theory को assumption यथार्थ भन्दा टाढै हुन्छ… जति महत्त्वपूर्ण, त्यति unrealistic।" मुख्य कुरा prediction कति सही। Pool खेलाडीले Newton पढेकी नहोस् पनि "Newton जान्ने जस्तै" prediction काम लाग्छ।

2. Samuelson's "F-twist" critique (1963):

   If a theory's predictions are correct, then by basic logic its assumptions cannot be entirely false. Friedman has "twisted" the logical relationship. A theory built on patently false assumptions has only a limited domain of application.

   Samuelson (१९६३): prediction सही भए assumption पूरै गलत हुनै सक्दैन। Friedman ले logic "मरोडे।" Patently गलत assumption को theory को domain सीमित।

3. Behavioural critique (Kahneman, Thaler, Akerlof):

   Where the rationality assumption is systematically false (loss aversion, present bias, framing effects), the theory predicts wrongly. So realism is testable, not optional. The behavioural-economics Nobels (2002, 2013, 2017) ratify this view.

   Behavioural (Kahneman, Thaler): rationality assumption लगातार गलत भएको प्रमाण; theory ले गलत prediction गर्छ। Realism testable, optional होइन।

Practical rule of thumb: ask whether the assumption is (a) a local simplification (we ignore taxes in the basic model — easily added back) or (b) a load-bearing structural claim (representative agent — drops out only if heterogeneity doesn't matter). The first is harmless; the second deserves scrutiny.

व्यवहारिक नियम: assumption (क) local सरलीकरण हो (basic model मा कर छुटाएको — सजिलै थप्न मिल्ने) कि (ख) load-bearing structural दाबी हो — सोध्ने। पहिलो हानिरहित, दोस्रोलाई जाँच गर्ने।

2.3 Falsifiability — Popper's demarcation criterion

Karl Popper, Logik der Forschung (1934) / Logic of Scientific Discovery: a statement is scientific only if it could in principle be shown false by some observation. Astrology, Marxism (as practised), and Freudian psychoanalysis fail this test — they can be "saved" by reinterpretation against any contrary evidence. Newtonian mechanics passes — Mercury's perihelion advance, predicted within tolerance only by Einstein, was the kind of test that could have killed it.

Popper (१९३४): कुनै कथन वैज्ञानिक तब मात्र हुन्छ जब त्यसलाई कुनै अवलोकनले गलत साबित गर्न सकिन्छ। ज्योतिष, अभ्यासमा Marxism, Freudian मनोविश्लेषण — विपरीत प्रमाण आउँदा "पुनर्व्याख्या" गरेर बचाइन्छन्।

Risky predictions: the more a theory forbids, the better it is. A theory that explains every possible outcome explains none.

जोखिम prediction: theory जति बढी निषेध गर्छ, त्यति राम्रो। हरेक सम्भावित परिणाम व्याख्या गर्ने theory ले केही व्याख्या गर्दैन।

2.4 Beyond Popper — Lakatos and Kuhn

2.5 Models in economics — definition, importance, types

Model = a deliberately simplified representation of reality, expressed in equations, diagrams, or words, used to isolate causal mechanisms.

Model = वास्तविकताको जानाजान सरलीकृत प्रतिनिधित्व (समीकरण, diagram वा शब्दमा), कारणात्मक संयन्त्र छुट्याउन प्रयोग गरिने।

Why model?

• Isolate causal mechanisms — reality has too many simultaneous forces.कारणात्मक संयन्त्र छुट्याउने — वास्तविकतामा धेरै शक्ति एकैचोटि।
• Make implicit assumptions explicit — a verbal argument hides its premises; an equation displays them.Implicit assumption लाई explicit बनाउने।
• Generate testable predictions.Testable prediction।
• Enable counterfactual policy analysis — "if we had not had VAT, what would Q be?"Counterfactual नीति विश्लेषण।
• Communicate efficiently — IS-LM is a shared vocabulary across schools.दक्ष संवाद।

Types of model

Choice between models — criteria

1. Purpose: a map of Kathmandu for the postal service differs from one for trekkers. The "right" model is purpose-relative.उद्देश्य।
2. Parsimony (Occam's razor): all else equal, fewer parameters / simpler functional form preferred.Parsimony: कम parameter राम्रो।
3. Tractability: can you actually solve it?Tractability: हल हुने कि नहुने।
4. Predictive fit (out-of-sample).Prediction कति सही।
5. Policy usefulness: does it answer the counterfactual you need?नीतिको लागि उपयोगी।
6. Robustness: small changes in assumptions shouldn't flip the prediction.Robustness।

General features every good model has

1. Explicit assumptions — listed up front.स्पष्ट assumption।
2. Clear variables — endogenous (determined within the model) and exogenous (taken from outside) distinguished.चर स्पष्ट — endogenous र exogenous।
3. Functional forms specified.Functional form स्पष्ट।
4. Logical consistency — no contradictions; an equilibrium exists.तार्किक संगति।
5. Testability — at least some implication is observable.Testability।
6. Parsimony — minimum machinery for the question asked.Parsimony।
7. Closure — number of equations = number of unknowns (so the system has a determinate solution).Closure: समीकरण = अज्ञात।

3.1 Cardinal utility analysis — Marshall

The first formal theory of consumer behaviour, due to Alfred Marshall (Principles of Economics, 1890), builds on Jeremy Bentham's utilitarianism.

पहिलो औपचारिक उपभोक्ता सिद्धान्त — Marshall (Principles, १८९०), Bentham को utilitarianism मा आधारित।

Assumptions

1. Cardinal measurability: utility can be measured in utils (1 util, 5 utils …) just like length or weight.Cardinal measurability: utility लाई util मा नाप्न मिल्ने।
2. Constant marginal utility of money: a rupee's marginal utility doesn't change as the consumer spends more. This lets you compare utilities across people and translate utility into money equivalents.पैसाको MU स्थिर।
3. Independent utilities: $MU_x$ doesn't depend on consumption of $y$. (No complements or substitutes.)Independent utilities।
4. Rationality & introspection: the consumer can rank her own preferences by introspection.Rationality र introspection।
5. Diminishing marginal utility (Gossen's First Law, 1854): $MU$ falls as more of the same good is consumed.घट्दो MU (Gossen, १८५४)।

Total and marginal utility

$TU$ rises as long as $MU > 0$, reaches a maximum at satiation when $MU = 0$, and then falls if $MU < 0$ (consumer feels worse off — too much chocolate cake).

$MU > 0$ हुँदा $TU$ बढ्ने; $MU = 0$ मा अधिकतम (satiation); $MU < 0$ मा घट्ने (अति उपभोग)।

Consumer equilibrium — one commodity

Consumer keeps buying as long as $MU_x \geq P_x \cdot MU_m$ (the marginal utility of one more $x$ is at least its money cost in utility terms). With $MU_m$ constant (assumption 2), this reduces to $MU_x = P_x \cdot k$ for some constant $k$ — equivalently $MU_x / P_x = k$.

$MU_x \geq P_x \cdot MU_m$ हुन्जेल किन्ने। $MU_m$ स्थिर भएकोले $MU_x / P_x = k$।

Two-commodity case — law of equi-marginal utility

Gossen's Second Law: a consumer maximizes utility by allocating expenditure so that the marginal utility per rupee is equal across all goods:

Intuition: if $MU_x/P_x > MU_y/P_y$, shifting one rupee from $y$ to $x$ raises total utility — the consumer must already have shifted. Equilibrium requires equality.

Gossen को दोस्रो नियम: हरेक रुपैयाँको MU सबै वस्तुमा बराबर हुनुपर्ने। $MU_x/P_x > MU_y/P_y$ भए $y$ बाट $x$ मा सर्दा utility बढ्ने — पहिले नै सरिसकेको हुनुपर्ने।

Derivation of demand curve (cardinal)

Hold $P_y$, $M$, $MU_m$ constant; let $P_x$ vary. From $MU_x = P_x \cdot MU_m$ and the diminishing-MU schedule, as $P_x$ falls, the consumer wants more $x$ (where $MU_x$ is lower). Plot $(P_x, x)$ pairs — downward-sloping demand curve. Marshall thus derived the law of demand from utility.

$MU_x = P_x \cdot MU_m$ बाट $P_x$ घट्दा $x$ बढ्ने (घट्दो MU ले)। $(P_x, x)$ plot ले demand curve।

Limitations of cardinal utility

1. Utility is not measurable like length — Hicks & Allen (1934).Utility नाप्न मिल्दैन — Hicks-Allen।
2. Constant marginal utility of money is hard to defend; even Marshall conceded it for "small" purchases only.पैसाको MU स्थिर हुनै पर्दैन।
3. Independent-utility assumption rules out complements and substitutes.Independent utility ले complement/substitute छुटाउँछ।
4. Cannot handle uncertainty, time preference, or interpersonal comparisons rigorously.अनिश्चितता र अन्तर-व्यक्ति तुलनामा कमजोर।

Ordinal theory (next section) requires fewer, weaker assumptions and yields the same demand curve — so it replaced cardinal in mainstream theory by ~1940.

Ordinal theory ले कम assumption मा उही demand curve दिने भएकोले १९४० सम्म mainstream बन्यो।

3.2 Ordinal preferences — the modern starting point

A consumer chooses from bundles $x = (x_1, x_2, \ldots, x_n) \in \mathbb{R}^n_+$. We don't assume she can measure happiness — just that she can rank bundles. Write $x \succeq y$ for "$x$ is at least as good as $y$"; $x \succ y$ for strict preference; $x \sim y$ for indifference.

उपभोक्ताले bundle $x = (x_1, \ldots, x_n) \in \mathbb{R}^n_+$ बाट छनोट गर्छिन्। खुसी नाप्न पर्दैन — bundle rank गर्ने सक्षमता मात्र चाहिने। $x \succeq y$ = "$x$ कम्तीमा $y$ बराबर राम्रो।"

Preference axioms — what we assume about $\succeq$

From preferences to a utility function

Implication: $U$ and $\ln U$ represent the same preferences and yield identical demand. Marginal utility numbers are not meaningful; only their ratios (MRS) and signs matter.

तात्पर्य: $U$ र $\ln U$ ले उही demand दिन्छन्। MU को संख्या अर्थहीन — अनुपात (MRS) र चिन्ह मात्र अर्थपूर्ण।

Indifference curve and MRS

Indifference curve = locus of bundles with the same utility level. Slope of an IC:

Indifference curve = समान utility को bundle को रेखा। IC को slope:

Diminishing MRS follows from strict convexity of preferences: as you move along an IC, giving up $y$ for more $x$ requires ever less $y$ per unit of $x$. Equivalently, IC is convex to the origin.

Diminishing MRS strict convexity बाट। IC origin तर्फ convex।

Concave vs Quasi-concave utility

$U$ is concave if $U(\lambda x + (1-\lambda)y) \geq \lambda U(x) + (1-\lambda) U(y)$. $U$ is quasi-concave if the upper contour set $\{x : U(x) \geq c\}$ is convex for every $c$. Convex preferences correspond to quasi-concave utility — concavity is not required. So $U = xy$ (concave) and $V = \sqrt{xy}$ (quasi-concave but not concave at low values) represent the same preferences.

Convex preference $=$ quasi-concave $U$। Concavity आवश्यक छैन। $U = xy$ र $V = \sqrt{xy}$ ले उही preference दिन्छन्।

3.3 Common utility functional forms

Cobb-Douglas — the canonical worked example

3.4 Budget set, budget line, and consumer's equilibrium

The budget constraint

The boundary $p_x x + p_y y = M$ is the budget line with slope $-p_x / p_y$. Intercepts: $M/p_x$ on the $x$-axis, $M/p_y$ on the $y$-axis.

Budget line slope $-p_x/p_y$; intercept $M/p_x$, $M/p_y$।

Shifts of the budget line

1. Income $M$ rises (prices unchanged): parallel outward shift; slope unchanged.आय बढ्दा: parallel बाहिर सर्ने।
2. Both prices double, $M$ unchanged: parallel inward shift; the bundle set is the same as if $M$ were halved.दुवै मूल्य दोब्बर: parallel भित्र।
3. Both prices and income double: budget line unchanged. Demand is homogeneous of degree 0 in $(p, M)$.दुवै मूल्य र आय दोब्बर: budget line उही। Demand $(p,M)$ मा degree-0 homogeneous।
4. Only $p_x$ falls: budget line rotates outward around the $y$-intercept; $x$-intercept moves right.$p_x$ मात्र घटे: $y$-intercept वरिपरि बाहिर rotate।
5. Lump-sum subsidy / kinked budget: in-kind transfers, ration cards, multi-part tariffs create non-linear budget sets.In-kind transfer, ration card ले kinked budget।

Consumer's equilibrium — interior

Interpretation of $\lambda$

$\lambda^*$ is the marginal utility of income: by the envelope theorem, $dU^*/dM = \lambda^*$. If we relax the budget by Re 1, optimal utility rises by $\lambda^*$ utils.

$\lambda^*$ = आयको marginal utility। Envelope theorem: $dU^*/dM = \lambda^*$।

Corner solutions and kinks

When the FOC $MRS = p_x/p_y$ has no interior solution (perfect substitutes; $U = \ln x + y$ with $M < p_y$), the consumer is at a corner. With $U = \min(ax, by)$ the kink is in the IC itself; the consumer chooses where the budget line crosses the diagonal $ax = by$, regardless of relative prices.

Perfect substitutes र similar मा corner solution; perfect complements मा kink।

3.5 Income-consumption curve, Engel curve, price-consumption curve

Income-Consumption Curve (ICC)

Fix prices; vary $M$. Connect the optimum points. The ICC traces how the bundle changes with income.

मूल्य स्थिर, $M$ फेर्ने; optimum बिन्दु जोड्ने। आय अनुसार bundle कसरी फेरिन्छ देखाउँछ।

• Normal good: ICC slopes upward in $x$.Normal: ICC माथि।
• Inferior good: ICC bends back — $x$ falls as $M$ rises.Inferior: ICC पछाडि।
• For Cobb-Douglas, ICC is a straight line from the origin: $y/x = (1-\alpha)/\alpha \cdot p_x/p_y$ — both goods rise proportionally with income.Cobb-Douglas मा ICC origin बाट सीधा रेखा।

Engel curve

Plot $x^M(p, M)$ against $M$ alone (prices fixed). The Engel curve is the income–quantity relationship.

$x^M(M)$ को curve।

Engel's law (Ernst Engel, 1857): the share of household expenditure on food declines as income rises. Empirically robust — fits Nepal's NLSS data well (food share ~60% in poorest quintile, ~30% in richest).

Engel को नियम (१८५७): आय बढ्दा खानामा खर्च हिस्सा घट्ने। नेपालको NLSS data मा empirical रूपमा सही (गरिब quintile ~६०%, धनी ~३०%)।

Price-Consumption Curve (PCC) → Demand curve

Fix $M$ and $p_y$; vary $p_x$. Connect optima. The PCC's projection onto $(x, p_x)$ space is the Marshallian demand curve.

$M, p_y$ स्थिर, $p_x$ फेर्ने; PCC लाई $(x, p_x)$ मा project गर्दा Marshallian demand curve।

3.6 Price effect = Substitution + Income — the Slutsky decomposition

When $p_x$ falls, two things happen simultaneously: (i) $x$ becomes relatively cheaper than $y$, so the consumer substitutes toward $x$ even if utility were held constant; (ii) real purchasing power rises, so she can afford more of everything. Decomposing into SE + IE is the most-asked Group A question.

$p_x$ घट्दा एकैसाथ: (i) $x$ अरूको तुलनामा सस्तो (SE), (ii) real क्रयशक्ति बढ्ने (IE)। Group A को सबभन्दा बढी सोधिने प्रश्न।

Two compensation methods

The Slutsky equation

For own-price effect ($i = j$): the substitution term is always $\leq 0$ (Hicksian own-price slope is non-positive); the income term has the sign of $\partial x/\partial M$ — positive for normal goods, negative for inferior. So:

Own-price ($i=j$): SE सधैं $\leq 0$; IE को चिन्ह $\partial x/\partial M$ ले।

• Normal: $\partial x^M / \partial p_x = SE^{(-)} - x \cdot IE^{(+)} = $ negative + negative = strictly negative. Demand curve slopes down.Normal: SE र IE दुवै ऋणात्मक → demand तल झर्ने।
• Inferior, not Giffen: $SE^{(-)} - x \cdot IE^{(-)} = $ negative + positive, but $|SE| > |x \cdot IE|$. Net still negative.Inferior (non-Giffen): SE र IE विपरीत; SE ले जित्ने।
• Giffen: inferior and $|x \cdot IE| > |SE|$. Net positive — demand curve slopes up.Giffen: inferior र IE ले SE जित्ने → demand माथि।

Empirical Giffen: Jensen & Miller (2008, AER) documented Giffen behaviour for rice in Hunan and wheat in Gansu, China — very poor households where these staples constitute > 70% of caloric intake.

Empirical Giffen: Jensen-Miller (२००८, AER) — चीनको Hunan मा चामल, Gansu मा गहुँ, जहाँ गरिब परिवारको ७०%+ क्यालोरी यिनैबाट।

Hicks vs Slutsky decomposition — the diagrams

Draw the original budget line $B_0$ with optimum $E_0$ on IC $U_0$. Lower $p_x$: new budget $B_1$ with new optimum $E_2$ on $U_1$. For Hicks: draw a budget parallel to $B_1$ tangent to $U_0$ — call its tangency point $E_1^H$. Movement $E_0 \to E_1^H$ is SE; $E_1^H \to E_2$ is IE. For Slutsky: draw budget parallel to $B_1$ passing through $E_0$. Its optimum $E_1^S$ defines SE; $E_1^S \to E_2$ is IE. Slutsky's intermediate bundle costs more than Hicks' because $E_0$ is no longer on the lowest IC reachable.

Hicks: नयाँ मूल्यमा पुरानै IC लाई tangent budget। Slutsky: नयाँ मूल्यमा पुरानै bundle $E_0$ बाट जाने budget।

3.7 Marshallian, Hicksian, indirect utility, expenditure — duality

Key identities

Properties

Slutsky symmetry: $\partial x_i^H / \partial p_j = \partial x_j^H / \partial p_i$ — a non-obvious testable restriction. Negative semi-definiteness: the substitution matrix has non-positive eigenvalues, so the law of demand for compensated demand is iron-clad.

Slutsky symmetry र NSD — empirical रूपमा testable।

Expenditure functions for common forms

Compensating variation (CV) and equivalent variation (EV) of a price change can be computed directly from the expenditure function:

CV र EV expenditure function बाट सिधै निकाल्न मिल्ने:

CV uses the old utility level; EV uses the new. For a price fall, CV is the maximum amount the consumer would pay to bring the new prices about; EV is the minimum she would accept to forgo them.

CV: नयाँ मूल्य पाउन तिर्न तयार अधिकतम; EV: नयाँ मूल्य गुमाउन स्वीकार्य न्यूनतम।

3.8 Revealed preference theory — Samuelson (1938)

Samuelson asked: do we actually need utility? Observed choices alone, under a few consistency axioms, pin down demand and even welfare statements. The approach is sometimes called "behaviourist ordinalist" (Tapas Majumdar).

Samuelson को प्रश्न: utility चाहिन्छ नै? Observed choice का consistency axiom ले demand र welfare दुवै निकाल्न पुग्छ — "behaviourist ordinalist।"

Deriving the law of demand from RP — Samuelson's original argument

Suppose at prices $p^0$ income $M^0$ consumer chose $x^0$, and at $p^1, M^1$ she chose $x^1$. The Slutsky-compensated income at new prices for $x^0$ is $M^1' = p^1 \cdot x^0$. WARP applied to budgets $(p^0, M^0)$ and $(p^1, M^1')$ gives:

i.e., compensated demand moves opposite to the compensated price change. The own-price compensated demand effect is non-positive — exactly the negative semi-definiteness of the Slutsky matrix derived without ever invoking utility.

WARP बाट $(p^1 - p^0)(x^1 - x^0) \leq 0$ — compensated demand को law of demand utility बिना नै सिद्ध।

Strengths: doesn't require utility; testable on observational data; foundation for cost-of-living indices (Konüs).

Weaknesses: assumes consumer faces real budgets and chooses uniquely; ignores demand correspondence (multiple optima); empirically, GARP violations are observed at the individual level.

शक्ति: utility बिना testable। कमजोरी: unique choice मान्ने।

3.9 Lancaster's Characteristics Theory (1966)

Kelvin Lancaster turned consumer theory inside out: a consumer doesn't value goods directly — she values the characteristics they provide. A car bundles transport-km, comfort, status, fuel cost. Bread bundles calories, taste, fibre, gluten. The same good can deliver multiple characteristics; the same characteristic can come from multiple goods.

Lancaster (१९६६): उपभोक्ताले वस्तु लाई होइन, वस्तुले दिने characteristics लाई मूल्याङ्कन गर्छ।

Set-up

Let $z_k$ denote the amount of characteristic $k$ consumed; $x_j$ the quantity of good $j$; $a_{kj}$ the amount of characteristic $k$ produced by one unit of good $j$. Characteristic technology is linear:

Utility $U(z_1, z_2, \ldots)$ is defined over characteristics, not goods. Budget remains $p \cdot x \leq M$.

$z_k = \sum_j a_{kj} x_j$; $U$ characteristics माथि।

The "efficiency frontier" in characteristic space

For each Re 1 of spending, every good $j$ provides $a_{kj}/p_j$ of characteristic $k$. Plot the per-rupee characteristic bundles of all goods; the consumer can mix them; the efficient combinations trace a frontier in $(z_1, z_2)$ space. The consumer picks the most-preferred bundle on this frontier, then backs out the underlying goods quantities.

हरेक रुपैयाँले हरेक वस्तुले $a_{kj}/p_j$ characteristic दिने। यी points को convex hull frontier; उपभोक्ता त्यसमा optimum रोजेर $x$ निकाल्ने।

What's powerful about this approach

1. New product / variety: introducing a new good shifts the frontier outward without any price change. Standard theory cannot explain this; Lancaster can.नयाँ variety: मूल्य नफेरिए पनि frontier सर्ने।
2. Hedonic pricing: house prices regressed on bedrooms, location, area — each characteristic gets an implicit price. Used in CPI quality adjustment and real-estate analysis.Hedonic pricing: घरको मूल्यलाई कोठा, स्थान, क्षेत्रफलमा विभाजन। CPI quality adjustment मा प्रयोग।
3. Substitution & complementarity through characteristics: goods that share characteristics are substitutes regardless of "industry."विशेषता मार्फत substitution।

Limitations: linearity of characteristic-production assumption is strong; characteristics not always observable; subjective weight on characteristics may itself depend on consumption.

सीमा: Linearity assumption बलियो; characteristics सधैं नदेखिने।

Lancaster, K. (1966). "A New Approach to Consumer Theory." JPE 74:132-157.

3.10 Linear Expenditure System (LES) — Stone (1954)

Empirical demand systems convert theory into an econometric specification. The LES is the workhorse: it has only a few parameters per good, fits household-survey data well, and integrates back to a recognizable utility function.

Empirical demand system ले theory लाई econometric specification मा परिणत गर्छन्। LES सबभन्दा प्रयोग हुने।

Derivation from Stone-Geary utility

Start from the Stone-Geary utility function:

$\gamma_i$ is the committed or subsistence quantity of good $i$ — the minimum the household consumes regardless of price. $\beta_i$ is the marginal budget share of "supernumerary" (above-subsistence) income.

$\gamma_i$ subsistence, $\beta_i$ supernumerary आयको marginal share।

Read it: expenditure on $i$ = (cost of subsistence $i$) + (its share of supernumerary income). Linear in $M$ and in prices — hence "linear expenditure system."

पढ्ने तरिका: $i$ मा खर्च = (subsistence $i$ लागत) + (supernumerary आयको $i$ हिस्सा)।

Income and price elasticities (LES)

Applications

LES has been fit to Nepal's NLSS data to estimate Engel elasticities of food, education, health, and energy across rural vs urban households. CBS uses similar systems for CPI weight construction. The Almost Ideal Demand System (AIDS — Deaton & Muellbauer 1980) is a more flexible successor.

नेपालको NLSS data मा LES बाट खाद्य, शिक्षा, स्वास्थ्य, ऊर्जाको Engel elasticity अनुमान। AIDS (Deaton-Muellbauer १९८०) पछिको लचिलो विकास।

CBS Nepal — NLSS data · Wikipedia · Stone-Geary

3.11 Market demand and the limits of representative consumer

Market demand $X(p, \overline M) = \sum_h x_h^M(p, M_h)$ — summed over households $h$. In general the market demand does not behave like the demand of a single "representative consumer" unless distributional assumptions hold. Sonnenschein-Mantel-Debreu (1973-74): market excess demand can have any shape consistent with Walras' law; aggregation imposes virtually no restrictions on market demand.

Market demand सबै परिवारको योग। Sonnenschein-Mantel-Debreu (१९७३-७४) ले देखाए: market excess demand को कुनै निश्चित आकार छैन।

Behavioural critiques (preview): Allais paradox (independence axiom of expected utility fails); Ellsberg paradox (people prefer known to unknown probabilities); framing effects (same choice presented differently gets different answers); endowment effect (people value what they own more). All to be covered in Micro II.

Behavioural आलोचना (Micro II): Allais paradox, Ellsberg paradox, framing, endowment effect।

4.1 Production technology — formal axioms

The firm's production possibility set $Y \subset \mathbb{R}^n$ contains all technologically feasible input-output combinations. By convention inputs are negative components, outputs positive. Standard axioms (Mas-Colell, ch. 5):

फर्मको production possibility set $Y \subset \mathbb{R}^n$ — input ऋणात्मक, output धनात्मक मानेर। मानक axioms:

In practice we work with the production function $Q = f(L, K, \ldots)$, which is the upper envelope of $Y$ — the maximum output achievable from a given input bundle.

व्यवहारमा production function $Q = f(L, K, \ldots)$ — दिएको input bundle बाट निकाल्न मिल्ने अधिकतम output।

4.2 Short run vs Long run · TP, AP, MP

Short run (SR): at least one input is fixed (typically capital $\bar K$). Long run (LR): all inputs variable. The distinction is analytical, not calendrical — an airline's LR for buying a new jet (~2 years) differs from a tailor's LR for buying a sewing machine (~2 weeks).

SR: कम्तीमा एक input स्थिर। LR: सबै input चर। यो analytical फरक हो, calendar फरक होइन।

Total, Average, Marginal Product (SR, $K = \bar K$)

Geometric relationships

• $AP_L$ at any $L$ = slope of ray from origin to TP curve at that $L$.$AP_L$ = origin बाट TP को त्यो बिन्दु सम्मको ray को slope।
• $MP_L$ at any $L$ = slope of tangent to TP curve at that $L$.$MP_L$ = TP को tangent slope।
• $MP_L = AP_L$ where $AP_L$ is at its maximum (tangent = ray ⇒ both equal).$AP_L$ maximum मा $MP_L = AP_L$।
• $MP_L > AP_L \Rightarrow AP_L$ rising; $MP_L < AP_L \Rightarrow AP_L$ falling. ("Average is pulled up/down by the marginal.")$MP_L > AP_L$ → $AP_L$ बढ्ने; उल्टो भए घट्ने।
• $MP_L = 0$ at TP maximum.TP maximum मा $MP_L = 0$।

Law of variable proportions — three stages

As $L$ rises (with $K$ fixed), classical theory identifies three stages:

4.3 Isoquants and MRTS (LR analysis)

Isoquant = locus of $(L, K)$ combinations producing the same output $\bar Q$:

Slope = $-MP_L / MP_K = -MRTS_{LK}$.

Why isoquants are downward-sloping & convex

Strict monotonicity in inputs (more $L$, holding $K$, raises $Q$ beyond $\bar Q$) plus strict quasi-concavity of $f$ together give convex isoquants — diminishing $MRTS_{LK}$.

$f$ strictly monotone र strictly quasi-concave भएकोले isoquant तल झर्ने र convex।

Elasticity of substitution

$\sigma$ measures how easily $L$ and $K$ substitute. High $\sigma$: substitutes are close; flat isoquants. Low $\sigma$: factors are near-complements; sharply curved L-shaped isoquants. The numerical value matters: empirical $\sigma$ for capital-labour aggregates in developed economies clusters around 0.4–0.7 (i.e., much less than the Cobb-Douglas value of 1).

$\sigma$ ले $L$ र $K$ कति सजिलै प्रतिस्थापन हुन्छन् देखाउँछ। $\sigma$ ठूलो → flat isoquant; $\sigma$ सानो → L-shaped।

4.4 Functional forms — Cobb-Douglas, CES, Leontief, linear

Cobb-Douglas — properties at a glance

Output elasticities: $\dfrac{\partial \ln Q}{\partial \ln L} = \alpha$, $\dfrac{\partial \ln Q}{\partial \ln K} = \beta$. Returns to scale: $f(\lambda L, \lambda K) = \lambda^{\alpha + \beta} Q$. CRS iff $\alpha + \beta = 1$.

Output elasticity $\alpha, \beta$। RTS: $\alpha + \beta$।

CES — deriving $\sigma$

Limits: $\rho \to 0$ ⇒ $\sigma \to 1$ ⇒ Cobb-Douglas. $\rho \to 1$ ⇒ $\sigma \to \infty$ ⇒ linear (perfect substitutes). $\rho \to -\infty$ ⇒ $\sigma \to 0$ ⇒ Leontief.

सीमा: $\rho \to 0$ Cobb-Douglas; $\rho \to 1$ linear; $\rho \to -\infty$ Leontief।

4.5 Homogeneous, Homothetic functions & Euler's theorem

Application — Product exhaustion theorem (Wicksteed, 1894)

Adding up problem: how is the surplus distributed if RTS is not constant? Under IRS, paying MPs over-exhausts (impossible — firm must lose money or charge above MC); under DRS, surplus left over. Resolved by recognising that perfect competition with free entry forces firms to the CRS portion of their LR cost curves.

Adding-up problem: IRS मा factor payment ले output भन्दा बढी हुने; DRS मा बाँकी हुने। Free entry ले CRS portion मा ल्याउने।

4.6 Producer's equilibrium — three formulations

(a) Cost minimization given output (Least-cost combination)

Conditional input demands $L^c(w, r, \bar Q)$ and $K^c(w, r, \bar Q)$ are solutions to the FOCs.

Conditional input demand $L^c, K^c$ — FOC का solution।

(b) Output maximization given cost

Max $f(L, K)$ s.t. $wL + rK = \bar C$. Same tangency condition: $MRTS = w/r$. This is the producer's analogue of the consumer's UMP.

Cost स्थिर मा output max — उही tangency।

(c) Profit maximization (LR)

Unconditional input demands $L^*(w, r, p)$, $K^*(w, r, p)$ come from these FOCs. They depend on output price $p$ (whereas conditional demands depend on $\bar Q$).

Unconditional input demand $L^*, K^*$ — output price $p$ माथि निर्भर।

4.7 Expansion path & the cost function

Expansion path

As $\bar Q$ varies (with $w, r$ fixed), the locus of cost-minimizing $(L^c, K^c)$ traces the expansion path. For homothetic $f$ (e.g., Cobb-Douglas), the expansion path is a ray from the origin — input proportions don't change with scale. For non-homothetic $f$, the path bends.

$\bar Q$ फेर्दा $(L^c, K^c)$ को locus = expansion path। Homothetic $f$ मा origin बाट सीधा ray।

Deriving the cost function

$C^*(Q; w, r) = w L^c(w, r, Q) + r K^c(w, r, Q)$ traced along the expansion path.

Shephard's lemma for production

Mirror of the consumer-side result:

Useful empirically: estimate the cost function, differentiate to get input demands without re-estimating.

Cost function estimate गरेर derivative ले input demand।

4.8 Cost curves in the short run and long run

Short-run cost decomposition ($K$ fixed)

Geometric relationships (the cost-curve "rules")

1. $AFC = TFC/Q$ falls monotonically toward zero (spreading overhead).$AFC$ शून्यतर्फ झर्ने।
2. $AVC$ is typically U-shaped (mirror of $AP$ rising-then-falling).$AVC$ U-shaped।
3. $ATC$ is also U-shaped, lying everywhere above $AVC$ (difference is $AFC$).$ATC$ U-shaped, $AVC$ माथि।
4. $MC$ cuts $AVC$ and $ATC$ at their respective minima — when $MC > AVC$, $AVC$ is rising; when $MC < AVC$, $AVC$ is falling.$MC$ ले $AVC$ र $ATC$ लाई minima मा काट्ने।
5. $MC = w/MP_L$ (in SR with only $L$ variable). So $MC$ minimum is where $MP_L$ is maximum.$MC = w/MP_L$ (SR मा); $MC$ min मा $MP_L$ max।
6. $AVC = w/AP_L$. So $AVC$ minimum is where $AP_L$ is maximum.$AVC = w/AP_L$।

Long run — envelope

In the LR all inputs vary. Each plant size has its own SR cost curves; the firm picks the cheapest plant for each output level. The LRAC is the lower envelope of all SRAC curves. At each $Q$, LRAC = SRAC for the cost-minimizing $K$ at that $Q$.

LR मा सबै input variable। हरेक plant size को आफ्नो SRAC; LR मा सबभन्दा सस्तो plant। LRAC = SRAC को lower envelope।

LRAC shape depends on returns to scale:

• IRS → LRAC falling. Sources: fixed cost spread, specialization, indivisibilities, network effects.IRS → LRAC तल झर्ने।
• CRS → LRAC flat.CRS → LRAC flat।
• DRS → LRAC rising. Sources: managerial diseconomies, communication frictions, increasing input prices at scale.DRS → LRAC उक्लने।
• U-shaped LRAC (typical) → IRS at low $Q$, CRS at medium, DRS at high. The minimum point defines the minimum efficient scale (MES) — a central concept in industrial organisation. Industries where MES is small relative to market demand support many firms (perfect competition); industries with very large MES tend toward natural monopoly.U-shaped LRAC: सानो $Q$ मा IRS, बीचमा CRS, ठूलोमा DRS। Minimum efficient scale (MES) industrial organization को मूल अवधारणा।

Internal vs External economies

Economies of scope

A multi-product firm has economies of scope if $C(Q_1 + Q_2) < C(Q_1) + C(Q_2)$ for separate-firm production. Source: shared inputs, joint products. Why a single bank does deposits + loans + remittance services rather than three specialized firms.

Economies of scope: एक फर्मले धेरै product उत्पादन गर्दा छुट्टाछुट्टै फर्मले गर्दा भन्दा सस्तो। साझा input, joint product।

4.9 Empirical estimation of cost functions

Common parametric forms fitted to plant-level data:

Estimation issues:

• Identification: if firms simultaneously choose $Q$ and inputs, OLS is biased. Need instruments or panel methods.Identification: OLS biased हुने; instrument चाहिने।
• Accounting vs economic cost: accounting profit excludes opportunity cost of owner's labour and capital — economic profit subtracts these.Accounting vs economic cost।
• Survivor analysis: Stigler's method — only firms close to the LR optimal scale survive long. Compute the distribution of firm sizes over time; firms whose size class is shrinking are inefficient. Indirect but data-cheap.Survivor analysis (Stigler): समयसँग आकार वर्गको हिस्सा घटे inefficient।
• Engineering cost studies: use plant-design data to construct expected cost curves before firms are built. Used in regulated industries.Engineering cost: plant design data बाट।

Nepal-specific empirical work: NRB and CBS studies on cement (4 plants), sugar (3 plants), brick (200+ small plants) have documented strongly U-shaped LRAC with small MES — fits the prevalence of medium-scale firms.

नेपालमा empirical कार्य: NRB, CBS को सिमेन्ट, चिनी, ईंट अध्ययन — U-shaped LRAC, सानो MES।

5.1 Perfect competition

Assumptions

1. Large number of buyers and sellers — each too small to influence price.धेरै क्रेता-विक्रेता — कसैले मूल्य प्रभाव पार्न नसक्ने।
2. Homogeneous product — buyers see no difference between sellers.समान वस्तु।
3. Free entry and exit in LR.Free entry/exit (LR)।
4. Perfect information — all buyers and sellers know all prices.पूर्ण सूचना।
5. Perfect factor mobility.पूर्ण factor mobility।
6. No transaction costs, no externalities.Transaction cost र externality छैन।

Implications: each firm is a price-taker facing horizontal demand $d = P$. $AR = P = MR$. Profit-max condition reduces to $P = MC$.

तात्पर्य: हरेक फर्म price-taker; $AR = P = MR$। Profit-max मा $P = MC$।

Short-run firm equilibrium & the shutdown rule

Industry short-run supply = horizontal sum of firms' MC-above-AVC curves.

Industry SR supply = सबै फर्मको MC (AVC माथिको) को horizontal योग।

Long-run equilibrium and the zero-profit condition

In LR, free entry and exit drive economic profit to zero. Conditions for LR equilibrium:

1. $P = MC$ (profit max);
2. $P = \min ATC$ (zero profit — entry/exit drives $P$ to the bottom of the LRAC);
3. Industry quantity demanded = industry quantity supplied at this $P$.

Long-run industry supply — three cases

• Constant-cost industry: entry/exit doesn't change input prices (industry is small relative to factor markets). LR supply is horizontal.Constant-cost: LR supply horizontal।
• Increasing-cost industry: as the industry expands, it bids up the price of a specialized input (e.g., skilled labour, land in a specific region). LR supply slopes up. Most empirically realistic case.Increasing-cost: LR supply उक्लने।
• Decreasing-cost industry: industry expansion creates positive external economies (shared suppliers, labour pool) — input prices fall. LR supply slopes down. Rare but historically documented for Silicon Valley, Italian industrial districts.Decreasing-cost: LR supply झर्ने।

Welfare in perfect competition

PC equilibrium achieves allocative efficiency ($P = MC$ — last unit's social value equals marginal cost of producing it) and productive efficiency ($P = \min ATC$ — produced at lowest cost). It maximizes total surplus ($CS + PS$). This is the First Welfare Theorem in its simplest form.

PC equilibrium ले allocative efficiency ($P = MC$) र productive efficiency ($P = \min ATC$) दुवै पुरा गर्छ। CS + PS अधिकतम। First Welfare Theorem को सरल रूप।

5.2 Monopoly

Definition & sources

Single seller with no close substitutes; entry blocked. The monopolist faces the entire market demand curve, so $P$ depends on $Q$.

एक्लो बिक्रेता; entry block। पूरै बजार demand curve मा बस्ने।

Revenue and elasticity

Important consequences:

1. A monopolist never operates in the inelastic portion of demand ($|\varepsilon| < 1$): there, $MR < 0$, raising $Q$ reduces revenue. Profit-max requires $|\varepsilon| > 1$.$|\varepsilon| < 1$ मा monopolist कहिल्यै काम गर्दैन ($MR < 0$)।
2. Monopoly has no supply curve: $Q^*$ depends on demand shape ($MR$), not on $MC$ alone — shifting demand can give same $P$ with different $Q$ or vice versa.Monopoly को supply curve हुँदैन।

Welfare cost of monopoly — Harberger triangle

Compared with PC, monopoly produces less ($Q_M < Q_C$) and charges more ($P_M > P_C$). The shaded triangle between $D$ and $MC$ from $Q_M$ to $Q_C$ is the deadweight loss (DWL). Harberger (1954) estimated US-economy-wide DWL from monopoly at ~0.1% of GDP — small. Modern estimates (Cowling-Mueller 1978; recent markup studies) put it higher (1-5%) once X-inefficiency, rent-seeking, and product-quality distortions are added.

Monopoly ले PC भन्दा कम $Q$, बढी $P$ — DWL त्रिकोण। Harberger (१९५४) ले US मा ०.१% GDP अनुमान; आधुनिक अनुमान X-inefficiency र rent-seeking सहित १-५%।

Profit max with a specific or ad valorem tax

Specific tax $t$: $MC$ shifts up by $t$. New optimum: $MR = MC + t$. Both $P$ rises and $Q$ falls; for linear demand, $P$ rises by $t/2$ (consumer absorbs half).
Ad valorem tax $\tau$: $MR$ is multiplied by $(1 - \tau)$. Algebraically equivalent revenue can come from different $(t, \tau)$ pairs, but ad valorem is more efficient for a monopoly — it reduces the optimal $Q$ by less for the same revenue, because monopoly's pre-tax markup is already a wedge.

Specific tax $t$: $MC$ माथि सर्ने। Ad valorem $\tau$: $MR$ लाई $(1-\tau)$ ले गुणन। Monopoly मा ad valorem बढी कुशल।

5.3 Price discrimination under monopoly

Definition (Pigou 1920): charging different buyers different prices for the same good (or different units of the good to the same buyer) when the price differences do not reflect cost differences.

Pigou (१९२०): उही वस्तुलाई फरक उपभोक्तालाई फरक मूल्य (वा एकैलाई फरक एकाइमा फरक मूल्य) — मूल्य फरक लागत फरकले नहुने।

Conditions required

1. Firm has some market power (downward-sloping demand).केही monopoly शक्ति।
2. Markets / buyers can be identified and separated.बजार/उपभोक्ता पहिचान र छुट्याउन सकिने।
3. No arbitrage: low-price buyers cannot resell to high-price buyers.Arbitrage रोक्न सकिने।
4. Different markets have different elasticities of demand.फरक elasticity।

Pigou's three degrees

Third-degree: deriving the optimal prices

Welfare effects of price discrimination

Compared with uniform monopoly pricing, third-degree PD has ambiguous total welfare effects. If it increases total output (e.g., serves a market that wouldn't be served at all under uniform price), it can raise welfare. If output stays the same (Robinson 1933 — linear demands), PD is welfare-reducing because it just redistributes surplus from low-elasticity to high-elasticity buyers without efficiency gain. First-degree always raises output to the efficient level but transfers all surplus to the firm.

Third-degree PD ले कुल output बढाए welfare बढ्ने; नबढाए घट्ने। First-degree ले output competitive स्तरमा पुर्‍याउँछ तर सबै surplus फर्मलाई।

5.4 Multi-plant monopoly

One firm operates multiple plants with different cost functions $C_1(q_1)$, $C_2(q_2)$, etc. How does it allocate production?

Application: a cement company with plants in different provinces; an integrated electricity system dispatching from several power stations (economic dispatch in power-system planning).

प्रयोग: फरक प्रदेशमा plant भएको सिमेन्ट कम्पनी; integrated विद्युत system मा power station बीच economic dispatch।

5.5 Monopolistic competition — Chamberlin (1933)

Edward Chamberlin (Harvard) and Joan Robinson (Cambridge) independently in 1933 broke the textbook dichotomy of "PC vs monopoly." Real markets — restaurants, hotels, brand-name clothing, retail — have many sellers (like PC) but differentiated products (like monopoly). Chamberlin's model captures this.

Chamberlin (Harvard) र Joan Robinson (Cambridge) ले १९३३ मा "PC vs monopoly" को द्विभाजन तोडे। रेस्टुरेन्ट, होटल, brand कपडा — धेरै बिक्रेता तर differentiated।

Assumptions

1. Many sellers, each small.धेरै सानो बिक्रेता।
2. Product differentiation — real (quality, features) or imagined (branding, location, packaging).वस्तु differentiation।
3. Free entry and exit in LR.Free entry/exit।
4. Each firm assumes its actions don't affect rivals (no strategic interaction — unlike oligopoly).Strategic interaction छैन।
5. "Symmetric" assumption: all firms have identical demand and cost (large-group case).सबै फर्म identical (Chamberlin को "large group")।

Two demand curves — $dd$ and $DD$

A central Chamberlinian construct. Each firm faces:

• $dd$ curve (perceived): firm assumes rivals hold their prices fixed. Very elastic — if I cut my price, I steal many of rivals' customers.$dd$: अरूको मूल्य स्थिर मानेर — धेरै elastic।
• $DD$ curve (actual / share of market): when all firms change price together, each gets only its market share. Much steeper.$DD$: सबैले सँगै फेर्दा — कम elastic।

$dd$ and $DD$ intersect at the current price. The firm chooses where $MR$ (derived from $dd$) equals $MC$. But because all firms do this, actual outcomes lie on $DD$, not $dd$.

$dd$ र $DD$ हालको मूल्यमा काटिन्छन्। फर्मले $dd$ बाट $MR$ निकालेर $MC = MR$ मा सर्छ; तर सबैले एकैसाथ गर्ने भएकाले वास्तविक outcome $DD$ मा।

Short-run equilibrium

$MR$ (from $dd$) $= MC$. Firm can earn positive profit (or loss, depending on cost relative to price).

$MR = MC$; profit/loss दुवै सम्भव।

Long-run equilibrium — Chamberlin tangency

Free entry erodes profit. New firms entering shifts each existing firm's $DD$ leftward (smaller market share). Process continues until $DD$ is tangent to $ATC$ at the chosen output. At this point: $P = ATC$ (zero profit), $MR = MC$ (profit max). But $P > MC$ — output is below the efficient level. This is the Chamberlin tangency solution.

Free entry ले profit ० सम्म ल्याउँछ। $DD$ बायाँ सर्दा $ATC$ लाई tangent गर्ने बिन्दुमा LR equilibrium। $P = ATC$ (profit ०), $MR = MC$, तर $P > MC$।

Excess capacity theorem

In LR, MC equilibrium is to the left of $\min ATC$. The difference is excess capacity — the firm operates below the cost-minimizing scale. Chamberlin saw this as the "social cost of product variety": consumers get variety but pay slightly higher per-unit cost.

Excess capacity theorem: LR मा $\min ATC$ भन्दा कम output मा फर्म चल्ने। यो variety को "सामाजिक लागत।"

Critique

• "Symmetric large group" is artificial — real differentiated markets have asymmetric firms."Symmetric large group" अप्राकृतिक।
• Ignores advertising as both differentiation tool and entry barrier.Advertising को भूमिका अनदेखा।
• Doesn't explain location choice; spatial models (Hotelling 1929) are better for that.Spatial choice को व्याख्या कम।
• Modern monopolistic competition (Dixit-Stiglitz 1977) replaces the two-curve construction with a CES-aggregate utility for differentiated varieties — workhorse of new trade theory and new economic geography.आधुनिक Dixit-Stiglitz (१९७७) ले CES aggregate utility बाट प्रतिस्थापित — new trade theory र NEG को आधार।

5.6 Peak-load pricing

Boiteux (1949), Steiner (1957): a public utility (electricity, water, telephony, transport) has costly-to-build, fixed capacity but variable demand across the day or season. Peak users impose the capacity-building cost; off-peak users use already-built capacity.

Boiteux (१९४९), Steiner (१९५७): public utility (बिजुली, पानी, टेलिफोन, यातायात) मा निश्चित क्षमता तर माग समय अनुसार फरक। Peak user ले क्षमता निर्माण लागत झेल्ने; off-peak ले बनिसकेको प्रयोग।

Two-period model

Let $b$ = marginal capacity cost (per unit capacity per year), $w$ = marginal operating cost (per unit production). Capacity $K$ must satisfy $K \geq \max(Q_{\text{peak}}, Q_{\text{off}})$. Demands: $D_p(p_p)$ peak, $D_o(p_o)$ off-peak.

$b$ = क्षमता लागत, $w$ = operating cost; क्षमता $K$ peak demand सम्म।

Why it's efficient: charging peak users only $w$ over-uses the system at peak (requiring more capacity than socially optimal); charging off-peak users also $b$ under-uses already-built capacity (DWL from off-peak demand turned away).

किन कुशल: peak मा $w$ मात्र भए over-use, off-peak मा $b$ पनि भए under-use।

Nepal applications:

• NEA TOD (Time-of-Day) tariff: day vs evening vs night rates for industrial users — explicit peak-load design. Currently structured around 17:00-23:00 peak, 23:00-05:00 off-peak.NEA TOD tariff: दिन/साँझ/रात फरक दर — peak-load design।
• Pre-FY2017 load-shedding era: implicit peak-load rationing by quantity, not price.Load-shedding युगमा परिमाण rationing।
• Mobile telecom — peak vs off-peak voice rates.Mobile telecom को peak/off-peak rate।
• Highway tolls — congestion pricing on Kathmandu Ring Road remains under discussion.सडक toll मा congestion pricing।

NEA Tariff Rate 2080/81 (current)

5.7 Transfer pricing

In a vertically integrated firm, one division sells inputs to another. The transfer price is the internal accounting price for this transaction. Question: what price should management charge?

Vertically integrated फर्ममा एक विभागले अर्कोलाई input बेच्छ। Transfer price = आन्तरिक मूल्य।

Two cases — no external market vs with external market

Why this matters: tax authorities scrutinize transfer prices because multinationals can shift profit to low-tax jurisdictions by mispricing internal transactions. OECD's Transfer Pricing Guidelines (latest 2022) require the arm's-length principle: transfer prices should approximate what unrelated parties would have agreed. Nepal's Inland Revenue Department has adopted these standards since 2013 amendments.

कर अधिकारीले transfer price मा निगरानी राख्ने कारण: multinational ले कम-कर देश तर्फ profit shifting गर्न मूल्य फेरबदल गर्न सक्छन्। OECD को arm's-length principle। नेपालको IRD ले २०१३ देखि लागू।

5.8 Dumping

Definition: selling abroad at a price below either (a) the home-market price, or (b) the cost of production. A form of international price discrimination.

परिभाषा: स्वदेशी मूल्य वा उत्पादन लागत भन्दा कम मूल्यमा निर्यात — अन्तर्राष्ट्रिय price discrimination।

Three types (Viner 1923)

• Sporadic dumping: one-off, to clear excess inventory or recover variable cost. Short-lived, limited impact.Sporadic: inventory खाली गर्न।
• Predatory dumping: sell below cost in foreign market to drive out rivals; after monopolizing, raise price. Long-run profitable. Hard to prove empirically.Predatory: प्रतिस्पर्धी मार्न; पछि एकाधिकार।
• Persistent dumping: ongoing price discrimination across countries with different demand elasticities. Most common; perfectly rational for a profit-max monopolist with segmented markets.Persistent: देश बीच elasticity फरक भएकोले लगातार फरक मूल्य।

Conditions for profitable persistent dumping

1. Monopoly (or near) at home, competition abroad.स्वदेशमा monopoly, विदेशमा प्रतिस्पर्धा।
2. Higher elasticity abroad (consumers have substitutes).विदेशमा elasticity बढी।
3. No reimport of cheap exports back home.पुन: आयात रोक्न सकिने।

WTO Anti-Dumping Agreement

Article VI of GATT 1947 (preserved in WTO 1994) permits importing countries to impose anti-dumping duties if: (a) dumping is proven (price comparison test), (b) there is material injury to domestic industry, (c) causal link between dumping and injury. Nepal joined WTO in 2004. Indian anti-dumping duties on Nepalese vegetable oils (2017) are a regional example.

WTO Anti-Dumping Agreement (GATT Article VI): dumping साबित + domestic industry मा material injury + कारणात्मक सम्बन्ध भए anti-dumping duty। नेपाल २००४ देखि WTO सदस्य।

5.9 Policy implications — tax, subsidy, price and quantity rationing

Tax — specific vs ad valorem, PC vs monopoly

In PC with linear $S$ and $D$: per-unit tax $t$ raises $P$ by $t/2$ (each side shares half); DWL $= \frac{1}{2} t \Delta Q$.

In monopoly: tax further reduces $Q$ from already-distorted level. DWL adds to the existing Harberger triangle. Ad valorem is preferred over specific for the same revenue because it imposes less distortion (Suits-Musgrave result).

PC मा per-unit tax: $P$ $t/2$ ले बढ्ने; DWL $= t \Delta Q / 2$। Monopoly मा कर थप distortion; Ad valorem बढी कुशल (Suits-Musgrave)।

Subsidy

Mirror of tax. Per-unit subsidy $s$ on producers shifts $S$ down by $s$. Both $P$ falls and $Q$ rises. Welfare gain to consumers + producers; cost to government may exceed it (DWL of subsidy in PC with no externality). With positive externality (vaccination, education), subsidy can be welfare-improving — Pigovian logic.

Subsidy: $S$ तल; $P$ घट्ने $Q$ बढ्ने। बिना externality DWL; positive externality सहित welfare बढाउने (Pigovian)।

Price ceiling (max price)

Binding ceiling ($P_{\max} < P^*$): quantity demanded $> $ quantity supplied → shortage. Allocation by queueing, rationing, black market, favouritism. Welfare effect ambiguous: some consumers gain (those who get the good cheaply), others lose (those who don't get it at all); producers lose. Classic Nepal example: petrol queues during 2015 Indian border blockade — official price unchanged while demand exploded; explicit quota rationing introduced.

Binding price ceiling: shortage; queue, rationing, black market। नेपाल उदाहरण: २०७२ नाकाबन्दीको पेट्रोल लाइन।

Price floor (min price)

Binding floor ($P_{\min} > P^*$): quantity supplied $> $ quantity demanded → surplus. Government may buy surplus (minimum support price for paddy in Nepal; EU CAP historically), or accept unemployment (binding minimum wage).

Binding price floor: surplus; सरकारले किन्ने (न्यूनतम समर्थन मूल्य) वा बेरोजगारी (न्यूनतम ज्याला)।

Quantity rationing

Direct quota on per-capita quantity. Welfare costs depend on whether the ration is binding (some buyers want more), tradable (if so, equivalent to a tax), and how the ration is allocated (lottery vs queue vs administrative).

Per-capita quota; binding र tradable भए कर बराबर।

Recap diagram