Basis for

Fiscal Policy Monetary Policy

Comparison
The tool used by the government in which it The tool used by the central bank to
Meaning uses its tax revenue and expenditure policies to regulate the money supply in the
affect the economy is known as Fiscal Policy. economy is known as Monetary Policy.
Administered by Ministry of Finance Central Bank
The change in monetary policy depends
Nature The fiscal policy changes every year.
on the economic status of the nation.
Related to Government Revenue & Expenditure Banks & Credit Control
Focuses on Economic Growth Economic Stability
Policy instruments Tax rates and government spending Interest rates and credit ratios
Political influence Yes No

Expansionary and contractionary fiscal policy: Expansionary fiscal policy is defined as an increase in
government expenditures and/or a decrease in taxes that causes the government's budget deficit to increase or its
budget surplus to decrease. Contractionary fiscal policy is defined as a decrease in government expenditures
and/or an increase in taxes that causes the government's budget deficit to decrease or its budget surplus to increase.

Expansionary and contractionary monetary policy: The BB is engaging in expansionary monetary policy
when it uses any of its instruments of monetary policy in such a way as to cause an increase in the supply of
money. The BB is said to engage in contractionary monetary policy when it uses its instruments to effect a
reduction in the supply of money.
 Basis for
Microeconomics
Comparison
The branch of economics that studies the
Meaning behavior of an individual consumer, firm,
family is known as Microeconomics.
Deals with Individual economic variables
Business
Applied to operational or internal issues
Application
Covers various issues like demand, supply, Covers various issues like, national income,
Scope product pricing, factor pricing, production, general price level, distribution, employment,
consumption, economic welfare, etc.
Helpful in determining the prices of a
product along with the prices of factors of
Importance
production (land, labor, capital,
entrepreneur etc.) within the economy.
It is based on unrealistic assumptions, i.e.
In microeconomics it is assumed that there
Limitations
is a full employment in the society which is
not at all possible.
Macroeconomics
The branch of economics that studies the behavior
of the whole economy, (both national and
international) is known as Macroeconomics.
Aggregate economic variables
Environment and external issues
money etc.
Maintains stability in the general price level and
resolves the major problems of the economy like
inflation, deflation, reflation, unemployment and
poverty as a whole.
It has been analyzed that 'Fallacy of Composition'
involves, which sometimes doesn't proves true
because it is possible that what is true for
aggregate may not be true for individuals too.
 Basis for
Accounting Profit Economic Profit Normal Profit
Comparison
Accounting Profit is the net Economic Profit is the
Normal Profit is the
income of the company earned remaining surplus left after
Meaning least amount of profit
during a particular accounting deducting total costs from total
needed for its survival.
year. revenue.
Economic Profit = Total Total Revenue = Total
Accounting Profit = Total
Calculation Revenue - (Total Explicit + Cost (i.e. explicit and
Revenue - Total Explicit Cost
Total Implicit Cost) implicit)
Helpful in knowing the
Reflects the Profitability of the Shows how well the company is
Advantage future prospects of the
company. allocating its resources.
company.
Why do firms in perfect competition earn normal profit in the long run.
In the long run, all factors of production are variable. Also, two of the assumptions of firms in perfect
competition are free entry and exit, as well as perfect resource mobility.

In the long run, firms making abnormal profit will attract new firms, which will enter freely due to the two
assumptions already stated. This would increase the industry supply (and shift the supply curve to the right)
which will decrease the industry price.

New firms will stop entering the market once existing firms make zero economic profit.
On the other side, in the long run, firms making losses (producing under the break-even price) will exit the
market due to not being able to compete with other firms, which will decrease industry supply (and shift the
supply curve to the left), which will increase the industry price.

Firms will exit until the remaining ones make normal profit again.

So in the long run, all firms in perfect competition earn normal profit (or zero economic profit).

A cartel agreement

A cartel is defined as a group of firms that gets together to make output and price decisions. The conditions that
give rise to an oligopolistic market are also conducive to the formation of a cartel; in particular, cartels tend to
arise in markets where there are few firms and each firm has a significant share of the market. In the U.S., cartels
are illegal; however, internationally, there are no restrictions on cartel formation. The organization of
petroleum‐exporting countries (OPEC) is perhaps the best‐known example of an international cartel; OPEC
members meet regularly to decide how much oil each member of the cartel will be allowed to produce.

Oligopolistic firms join a cartel to increase their market power, and members work together to determine jointly
the level of output that each member will produce and/or the price that each member will charge. By working
together, the cartel members are able to behave like a monopolist. For example, if each firm in an oligopoly sells
an undifferentiated product like oil, the demand curve that each firm faces will be horizontal at the market price.
If, however, the oil‐producing firms form a cartel like OPEC to determine their output and price, they will jointly
face a downward‐sloping market demand curve, just like a monopolist. In fact, the cartel's profit‐maximizing
decision is the same as that of a monopolist, as Figure reveals. The cartel members choose their combined
output at the level where their combined marginal revenue equals their combined marginal cost. The cartel
price is determined by market demand curve at the level of output chosen by the cartel. The cartel's profits are
equal to the area of the rectangular box labeled abcd in Figure . Note that a cartel, like a monopolist, will choose
to produce less output and charge a higher price than would be found in a perfectly competitive market.

Once established, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on
their agreement to limit production. By producing more output than it has agreed to produce, a cartel member can
increase its share of the cartel's profits. Hence, there is a built‐in incentive for each cartel member to cheat. Of
course, if all members cheated, the cartel would cease to earn monopoly profits, and there would no longer be
any incentive for firms to remain in the cartel. The cheating problem has plagued the OPEC cartel as well as other
cartels and perhaps explains why so few cartels exist.
 Characteristics
Market
Structure Number of Number of Barriers Entry and Exit Homogeneous or
Sellers Buyers to Entry Activity Differentiated Product?

Yes, firms have the Homogeneous product, all

Pure Many
Many firms None freedom to enter and goods are perfect substitutes for
Competition buyers
exit consumers

Many firms with

non- Differentiated products, but
Yes, firms have the
Monopolistic interdependent Many close substitutes for consumers
Very low freedom to enter and
Competition pricing and buyers so their demand curves are
exit
quantity elastic
decisions

Few firms with

Difficult entry (often Products can be either
interdependent
Oligopoly Unspecified High due to economies of differentiated or non-
pricing and
scale) differentiated
quantity decision

Pure A single, homogeneous product

Single seller Unspecified Complete entry blocked
Monopoly with no close substitutes

Characteristics
Market Structure Short Run Price Taker or Draw the demand curve
Long Run Profits?
Profits? Price Searcher? facing the firm
Price Taker - the
firm chooses
Pure Competition Available No quantity but takes Perfectly elastic
price from the
market
Very elastic, but not
Monopolistic
Available No Price Searcher perfectly elastic because
Competition
close substitutes exist
Available if entry is blocked
and the colluding cartel
Inelastic, to be an
Oligopoly Available holds together (This is Price Searcher
effective oligopoly
unlikely because cartels tend
to fall apart.)
Inelastic, to be an
Pure Monopoly Available Available Price Searcher
effective monopoly