ASSIGNMENT ON MANAGERIAL ECONOMICS

ASSIGN-MENT ON MANAGE-RIAL ECO-

NOMICS

BY RAHUL GUPTA

Question 1: What is pricing policy? What are the internal and external factors of the policy?

Introduction:Standard procedure used by a firm to set wholesale and

retail prices for its products or services. See also pricing strat-egy. Price planning that takes into view factors such as a firm's overall marketing objectives, consumer demand, prod-uct attributes, competitors' pricing, and market and economic trends.

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Pricing Factors to Con-sider:

Determine primary and secondary market seg-ments. This helps you better understand the offering's value to consumers. Segments are important for posi-tioning and merchandising the offering to ensure maximized sales at the established price point.

Assess the product's availability and near substi-tutes. Under pricing hurts your product as much as overpricing does. If the price is too low, potential cus-tomers will think it can't be that good. This is particu-larly true for high-end, prestige brands. One client un-derpriced its subscription product, yielding depressed response and lower sales. The firm underestimated the uniqueness of its offering, the number of close substi-tutes, and the strength of the consumer's bond with the product. As a result, the client could increase the price with only limited risk to its customer base. In fact, the initial increase resulted in more subscribers as the new price was more in line with its consumer-perceived value.

Survey the market for competitive and similar products. Consider whether new products, new uses for existing products or new technologies can com-pete with or, worse, leapfrog your offering. Examine all possible ways consumers can acquire your product. I've worked with companies that only take into ac-count direct competitors selling through identical channels. Don't limit your analysis to online distribu-tion channels.

Competitors may define your price range. In this case, you can price higher if consumers perceive your prod-uct and/or brand is significantly better; price on parity if your product has better features; or price lower if your product has relatively similar features to existing products. An information client faced this situation with a premium product. Its direct competitors estab-lished the price for a similar offering. As the third player in this segment, its choices were price parity with an enhanced offering or a lower price with simi-lar features.

ASSIGNMENT ON MANAGERIAL ECONOMICS

Examine market pricing and economics. A paid, ad-free site should generate more revenue than a free ad-supported one, for example. In considering this op-tion, remember to incorporate the cost of forgone rev-enue, especially as advertisers find paying customers more attractive.

Calculate the internal cost structure and under-stand how pricing interacts with the offering. I rec-ommended a content client promote its advertising-supported free e-zines to incent readers to register. The client believed the e-zines had no value as the content was repurposed from another product, so it didn't advertise them. Yet the repurposed content was exactly what readers viewed as a benefit. By under-valuing its offering, the client missed an opportunity to increase registrations and, hence, advertising rev-enues with a product that effectively had no develop-ment costs.

Test different price points if possible. This is impor-tant if you enter a new or untapped market, or en-hance an offering with consumer-oriented benefits. To determine price, MarketingExperiments.com tested three different price points for a book. It found the highest price yielded the greatest product revenue. Interestingly, the middle price yielded greater revenue over time, as it generated more customers to whom other related products could be marketed.

Monitor the market and your competition continu-ally to reassess pricing. Market dynamics and new products can influence and change consumer needs.

Internal Factors: Market-ing Objectives:

Marketing decisions are guided by the overall objectives of the company. While we will discuss this in more detail when we cover marketing strategy in a later tutorial, for now it is important to understand that all marketing decisions, includ-ing price, work to help achieve company objectives. Corpo-rate objectives can be wide-ranging and include different ob-

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jectives for different functional areas (e.g., objectives for pro-duction, human resources, etc). While pricing decisions are influenced by many types of objectives set up for the market-ing functional area, there are four key objectives in which price plays a central role. In most situations only one of these objectives will be followed, though the marketer may have different objectives for different products. The four main marketing objectives affecting price include:

Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. This level of re-turn along with an estimate of sales will help deter-mine appropriate pricing levels needed to meet the ROI objective.

Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs. This is most likely to occur with new products where the organiza-tional objectives allow a new product to simply meet its expenses while efforts are made to establish the product in the market. This objective allows the mar-keter to worry less about product profitability and in-stead directs energies to building a market for the product.

Market Share – The pricing decision may be impor-tant when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objec-tive the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market (we will discuss this marketing strategy in fur-ther detail in our next tutorial). For existing products, firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are will-ing to compete on price.

ASSIGNMENT ON MANAGERIAL ECONOMICS

Maximize Profits – Older products that appeal to a market that is no longer growing may have a com-pany objective requiring the price be set at a level that optimizes profits. This is often the case when the mar-keter has little incentive to introduce improvements to the product (e.g., demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy.

Factors Affecting Pricing Decision:

For the remainder of this tutorial we look at factors that af-fect how marketers set price. The final price for a product may be influenced by many factors which can be categorized into two main groups:

Internal Factors –

Objectives of the firm.

Production costs.

Quality of the product and its characteristics.

Scale of the production.

Efficient management of the re-sources.

Policy towards percentage of profits and dividend distribution.

Advertising and sales promotion policies.

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Wage policy and sales turn over policy etc.

The stages of the product life cy-cle.

Use pattern of the product.

Extent of the distinctiveness of the product and extent of product differentiation practiced by the firm.

Composition of the product and life of the firm.

External Factors –

Demand, supply and their determinants.

Elasticity of demand and supply.

Degree of competition in the market.

Size of the market.

Good will, name, fame, reputation of the firm in the market.

Trends in the market.

Purchasing power of the buyers.

Bargaining power of the customers.

Availability of the substitutes and comple-ments.

Government’s policy relating to various kinds of incentives, disincentives, controls, restric-tions and regulations, licensing, taxation, ex-port and import, foreign aid, foreign capital foreign technology, MNC’s etc.

Competitors pricing policy.

Social consideration.

ASSIGNMENT ON MANAGERIAL ECONOMICS

Question 2: Mention three crucial objectives of

price policies?

Profit generally is the making of gain in business ac-tivity for the benefit of the owners of the business. The word comes from Latin meaning "to make progress", and is defined in two different ways, one for economics and one for accounting.

A sales oriented business will focus much more of its energy on selling. This is usually done by door to door selling or what is called telesales over the phone. Other sales oriented businesses may rely entirely on social functions by selling exclusively from booths or kiosks. Some local stores and grocers also function

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entirely as a sales oriented business without the use of conventional advertising.

Status quo, a commonly used form of the original Latin "statu quo" - literally "the state in which" - is a Latin term meaning the current or existing state of af-fairs.[1] To maintain the status quo is to keep the things the way they presently are. The related phrase status quo ante, literally "the state in which before", means "the state of affairs that existed previously"

Question 3: Mention the bases of price discrimi-nation?

INTRODUCTION:Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets[1], where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines and even in fully competitive retail or industrial markets allow for a limited de-gree of differential pricing to different consumers. Price dis-crimination also occurs when it costs more to supply one cus-tomer than it does another, and yet the supplier charges both the same price.

The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but out-put can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers.

ASSIGNMENT ON MANAGERIAL ECONOMICS

Price discrimination requires market segmentation and some means to discourage discount customers from becoming re-sellers and, by extension, competitors. This usually entails us-ing one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundaries set up by the marketer to keep segments separate are referred to as a rate fence. Price discrimination is thus very common in services, where resale is not possible; an example is stu-dent discounts at museums.

Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price dis-crimination exercised by providing a means for consumers to reveal their willingness to pay.

Types of price discrimina-tion:

First degree price discrimination:

In first degree price discrimination, price varies by cus-tomer's willingness or ability to pay. This arises from the fact that the value of goods is subjective. A customer with low price elasticity is less deterred by a higher price than a cus-tomer with high price elasticity of demand. As long as the price elasticity (in absolute value) for a customer is less than one, it is very advantageous to increase the price: the seller gets more money for fewer goods. With an increase of the price elasticity tends to rise above one. One can show that in the optimum the price, as it varies by customer, is inversely proportional to one minus the reciprocal of the price elasticity of that customer at that price. This assumes that the consumer passively reacts to the price set by the seller, and that the seller knows the demand curve of the customer. In practice however there is a bargaining situation, which is more com-plex: the customer may try to influence the price, such as by pretending to like the product less than he or she really does or by threatening not to buy it.

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An alternative way to understand First Degree Price Dis-crimination is as follows: This type of price discrimination is primarily theoretical because it requires the seller of a good or service to know the absolute maximum price that every consumer is willing to pay. As above, it is true that con-sumers have different price elasticities, but the seller is not concerned with such. The seller is concerned with the maxi-mum willingness to pay (or reservation price) of each cus-tomer. By knowing the reservation price, the seller is able to absorb the entire market surplus, thus taking all consumer surpluses from the consumer and transforming it into rev-enues. From a social welfare perspective, first degree price discrimination is not undesirable. That is, the market is still entirely efficient and there is no deadweight loss to society. However, it is the complete opposite of a perfectly competi-tive market. In a perfectly competitive market, the consumers receive the bulk of surplus. In a market with first degree price discrimination, the seller(s) capture all surpluses. Efficiency is unchanged but the wealth is transferred. This type of mar-ket does not much exist in reality, hence it is primarily theo-retical. Examples of where this might be observed are in mar-kets where consumers bid for tenders, though still, in this case, the practice of collusive tendering undermines effi-ciency.

Second degree price discrimination:

In second degree price discrimination, price varies accord-ing to quantity sold. Larger quantities are available at a lower unit price. This is particularly widespread in sales to indus-trial customers, where bulk buyers enjoy higher discounts.

Additionally to second degree price discrimination, sellers are not able to differentiate between different types of con-sumers. Thus, the suppliers will provide incentives for the consumers to differentiate themselves according to prefer-ence. As above, quantity "discounts", or non-linear pricing, is a means by which suppliers use consumer preference to dis-

ASSIGNMENT ON MANAGERIAL ECONOMICS

tinguish classes of consumers. This allows the supplier to set different prices to the different groups and capture a larger portion of the total market surplus.

Third degree price discrimination:

In third degree price discrimination, price varies by at-tributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity; where the attribute in question is used as a proxy for ability/willingness to pay.

Additionally to third degree price discrimination, the sup-plier(s) of a market where this type of discrimination is ex-hibited are capable of differentiating between consumer classes. Examples of this differentiation are student or senior discounts. For example, a student or a senior consumer will have a different willingness to pay than an average consumer, where the reservation price is presumably lower because of budget constraints. Thus, the supplier sets a lower price for that consumer because the student or senior has a more elastic price elasticity of demand (see the discussion of price elastic-ity of demand as it applies to revenues from the first degree price discrimination, above). The supplier is once again capa-ble of capturing more market surplus than would be possible without price discrimination.

Note that it is not always advantageous to the company to price discriminate even if it is possible, especially for second and third degree discrimination. In some circumstances, the demands of different classes of consumers will encourage suppliers to simply ignore one/some class (es) and target en-tirely to the other(s). Whether it is profitable to price discrim-inate is determined by the specifics of a particular market.

Question 4: What do you mean by the fiscal pol-

icy? What are the instruments of fiscal policy?

Briefly comment on India’s fiscal policy?

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Introduction:In economics, fiscal policy is the use of government spend-ing and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of eco-nomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are gov-ernment spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

Aggregate demand and the level of economic activity;

The pattern of resource allocation;

The distribution of income.

Fiscal policy refers to the overall effect of the budget out-come on economic activity. The three possible stances of fis-cal policy are neutral, expansionary and contractionary:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending or a fall in taxation rev-enue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the gov-ernment previously had a balanced budget. Expan-sionary fiscal policy is usually associated with a bud-get deficit.

A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Con-tractionary fiscal policy is usually associated with a surplus.

ASSIGNMENT ON MANAGERIAL ECONOMICS

1. To achieve desirable price level:

The stability of general prices is necessary for economic sta-bility. The maintenance of a desirable price level has good ef-fects on production, employment and national income. Fiscal policy should be used to remove; fluctuations in price level so that ideal level is maintained.

2. To Achieve desirable consumption level:

A desirable consumption level is important for political, so-cial and economic consideration. Consumption can be af-fected by expenditure and tax policies of the government. Fiscal policy should be used to increase welfare of the econ-omy through consumption level.

3. To Achieve desirable employment level:

The efficient employment level is most important in deter-mining the living standard of the people. It is necessary for political stability and for maximization of production. Fiscal policy should achieve this level.

4. To achieve desirable income distribution:

The distribution of income determines the type of economic activities the amount of savings. In this way, it is related to prices, consumption and employment. Income distribution should be equal to the most possible degree. Fiscal policy can achieve equality in distribution of income.

5. Increase in capital formation:

In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry and economic development. Fiscal policy can di-vert resources and increase capital.

6. Degree of inflation:

In under-developed countries, a degree of inflation is re-quired for economic development. After a limit, inflationary be used to get rid of this situation.

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Instruments of Fiscal Pol-icy:

1. Public expenditure:Significance

Public expenditure is the value of goods and services bought by the State and its articulations.

Public expenditure plays four main roles: 1. it contributes to current effective demand; 2. it expresses a coordinated impulse on the economy, which can be used for stabilization, business cycle inversion, and growth purposes; 3. it increases the public endowment of goods for every-body; 4. it gives rise to positive externalities to economy and soci-ety, the more so through its capital component.

With its prioritized structure and its peculiar decision-making processes, it substantiates the prevailing kind of State. In democracy, public expenditure is an expression of people's will, managed through political parties and institutions. At the same time, public expenditure is characterized by a high degree of inertia and law-dependency, which tempers the will of the current majority. Public expenditure can be financed through taxes, public debt, money emission, international aid.

2. Taxes:To tax (from the Latin taxo; "I estimate", which in turn is from tangō; "I touch") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many sub national entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labor equivalent (of-ten but not always unpaid). A tax may be defined as a "pecu-niary burden laid upon individuals or property to support the

ASSIGNMENT ON MANAGERIAL ECONOMICS

government […] a payment exacted by legislative author-ity."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative author-ity" and is "any contribution imposed by government […] whether under the name of toll, tribute, tillage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation is characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised are often highly debated in politics and economics. Tax col-lection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual.

3. Public debts:

Public debt is, in effect, an extension of personal debt, since individuals make up the revenue stream of the government. Public debt accrues over time when the government spends more money than it collects in taxation. As a government en-gages in more deficit spending, the amount of public debt in-creases.

Public debt can be made up of all sorts of different types of debt. A great deal of public debt is external debt, which is money that is owed by the government to foreign lenders, ei-ther in the form of international organizations, other govern-ments, or groups like sovereign wealth funds which invest in government bonds. Public debt is also made up of internal debt, where citizens and groups within the country lend the government money to continue operating. In some ways, this is a lot like lending to oneself, since ultimately the responsi-bility for public debt falls back on the very people lending money.

Governments with strong economies, who are well trusted in the world, are able to raise funds by issuing their own securi-ties, usually called government bonds. Individuals, other na-tions, and groups buy these bonds, and the government prom-ises to pay them back at a certain, usually fairly good, interest

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rate. Less robust governments, who do not have the trust from the world to be able to issue bonds and expect people to buy them, may turn to international institutions, or even nor-mal banks, to give them loans, usually at less favorable rates.

The above mentioned instruments are used by the public au-thorities to achieve desirable level of production, consump-tion and National Income. During inflationary trend more and more taxes are levied on the community. In this way, pur-chasing power of the people can be decreased and desirable price level is achieved. During inflation public expenditure is decreased so that all in production may decrease high prices and increase the value of money. During deflationary period taxes are reduced and public expenditure is increased. In this way incentives to invest are increased and national income begins to rise. For economic development public debts are necessary. In under developed countries, due to insufficient resources economic development is not possible. Public loans are drawn internally and externally. The above mentioned methods are called budgetary policy of the government. This policy can increase national income, production level and maintain full employment level.

India’s Fiscal Policy:

External Affairs and Finance Minister Pranab Mukherjee [Images ] on Monday said the government cannot indulge in 'reckless borrowing' and did not have Parliamentary mandate to tweak taxes.

The following is the government's fiscal policy strategy state-ment that the finance minister announced in Parliament.

Fiscal Policy Overview

The Union Budget 2008-09 was presented in the backdrop of impressive growth in the Indian economy which clocked about 9 per cent of average growth in the last four years.

Riding on the path of fiscal consolidation, the Union Budget 2008-09 was presented with fiscal deficit esti-

ASSIGNMENT ON MANAGERIAL ECONOMICS

mated at 2.5 per cent of GDP and revenue deficit at 1 per cent of GDP.

The global financial crisis in the second half of the fi-nancial year which heralded recessionary trends the world over also impacted the Indian economy causing the focus of fiscal policy to be shifted to providing growth stimulus.

The Country is facing difficult economic situation, the cause of which is not emanating from within its boundaries. However, left unattended, the impact of this crisis is going to affect us in medium to long term.

The Interim Budget 2009-2010 is being presented in the backdrop of uncertainties prevailing in the world economy. The impact of this is seen in the moderation of the recent trend in growth of the Indian economy in 2008-09 which at 7.1 per cent still however makes In-dia the second fastest growing economy in the World.

Question 5: Comment on the consequences of en-

vironmental degradation on the economy of a

community?

The theory of land degra-dation:

In economic theory, land clearance or land reclamation in-volves a market failure. The market does not value naturally occurring resources in the production process. Nature's "capi-

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tal" is not assigned a value by the market. The externalities that lead to private individuals cutting trees and the real eco-nomic costs and benefits to the nation of doing so arise be-cause some of the biosphere's products, especially environ-mental protection functions, are neither produced goods nor do they have clearly defined ownership. As a consequence, they are regarded as free goods.

Destruction of forested areas, wetlands, grasslands and bodies of water arises because of the difference between the discount rate of the individual and the society as a whole. Poor people, who are responsible for a significant share of the losses be-cause of their pressing current need for fuel, fodder, water and land for cultivation--assign a higher discount rate to these resources than does society as a whole.

The private interests of poor people and the social interests of the broader society diverge. The interest of poor, local people in using these lands and water resources is intense, immediate and focused--food, fuel, fodder, crop land, and irrigation wa-ter. They will (often unknowingly) incur almost any social cost to permit the immediate exploitation of these environ-mental resources to sustain their livelihood. The interests of loggers, commercial farmers, builders and others who exploit the forests, range and grasslands and water resources are equally intense, but driven more by immediate profit consid-erations, not by the need to survive.

Society, as a whole, traditionally, has not placed a monetary value on the benefits derived from these resources; as such benefits are not marketable. When society has recognized these resources as having value, it has assigned a diffused, nonspecific value to them and has not translated that assigned value into market signals, i.e., financial incentives for preser-vation or disincentives for destruction of these land and water resources embodied in the nation's legal and administrative system. Thus, the intense, focused private interests are per-mitted to discount the value of environmental resources to the detriment of the longer term benefits to society of investment in these areas because these resources have neither been given market values, nor a legal, enforceable means of trans-lating value into market signals. The Costs of Land Clearance arising from the exploitation of natural resources for financial gain highlight the problems involved all too clearly, since these resources provide a myriad of functional processes which go beyond the clearly tangible areas of providing food and products for commerce. These functional processes are not merely essential to a sound ecological balance and, there-

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fore, ideologies advocated and imposed on society by conser-vationists; they are naturally occurring systems, on which the economic wellbeing of societies at local, national and interna-tional level depends.

Land degradation:Forested areas are especially sensitive to population pressure and commercial exploitation. At a local level, once the trees are felled, the highly productive potential of that region is immediately threatened, since the quality of the soils is gen-erally poor. It is in the mass of vegetation that the nutrients essential to fast growth are stored so that, if the vegetation cover is removed, organic breakdown is almost immediate and nutrients are quickly washed away. When large gaps in the forest canopy occur, the microclimate of the area is also likely to be changed and the forest floor becomes exposed to direct sunlight. Consequently, both air and soil become dry, to the direct detriment of the land's productivity. Because of these factors, not only has the forest's capacity to provide fuel, food, fodder and shelter been removed, but so has the land's capacity to regenerate them. Degradation is further in-creased through soil erosion.

Erosion:Around a quarter of a million tons of topsoil are washed from the deforested mountain slopes of Nepal alone each year. On a global scale, about eleven million hectares of arable lands are annually lost through erosion, desertification and toxifica-tion; processes which are greatly encouraged by poor re-source management. 10 It is human activity that causes natural erosion rates to increase many times over. Steep slopes are cultivated without terracing, irrigation projects are poorly de-veloped and livestock overgraze grassland.

Flooding:The socio-economic impact resulting from a decline in pro-ductive capacity due to ecological interactions does not re-main localized, especially when forest cover is lost in a wa-tershed. The soil's water retention capacity is lost and the re-lease of rainfall becomes erratic; periods of floods followed by droughts become the norm. Farmers in the valley lands of Southern Asia are particularly vulnerable as rivers such as the Ganges, Brahmaputra and the Mekong no longer supply regu-

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lar amounts of irrigation. Flooding in the Ganges Plain pro-vides a graphic example of the associated costs of deforesta-tion. As the foothill forests are cleared for agriculture, the 500 million people in the valleys become more vulnerable to flooding. During the 1978 monsoon, India suffered losses of $2 billion and hundreds of people drowned. The impact of watershed degradation even extends into urban areas. In the hinterland of Panama City and Manila, deforestation has caused so much injury to the effective functioning of water-sheds that domestic water supplies are being threatened, bringing risk of contamination and pandemics. Once the forests have been clear felled, the reduction or elimination of resultant flooding may require very heavy investment in com-pensatory measures such as channeling, damming, and dik-ing. These measures to reduce the natural patterns of flooding have the potential to damage replenishment of alluvial soils and recharges of soil moisture. They may also damage the vegetation and wildlife on the floodplain, as well as riverine fisheries.

Reduced economic viabil-ity:

The erratic flow of rivers coupled with the problems of ero-sion is effectively undermining the potential of irrigation projects, as is so evident in the Sri Lankan Mahaweli pro-gram. Several large dams were constructed for the generation of energy, as well as for irrigation and flood control down-stream. However, the tree cover reduction in the relevant wa-tershed areas has jeopardized the steady supply of water to the reservoirs, on which the success of the project is depen-dant. Projects are further undermined by siltation, a process that not only causes river basins to silt up (thereby reducing storage capacity), but also chokes hydropower dams and ad-versely affects coastal fisheries and sensitive coral forma-tions.

Intensification of farming practice:

Intensification of agriculture takes two forms. Clearly, the most destructive is putting former grass and marsh lands to the plow. These activities have dramatic and far reaching ef-fects, both on biodiversity and on human communities. Ani-mal and plant species may become extinct if deprived of the environment in which they survive. Human communities are

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affected by the removal of flood control areas and the land it-self is subject to erosion and soil depletion, if not carefully managed.

Intensification on existing agricultural lands can and often does produce significant environmental degradation. For ex-ample, the conversion of grazing land into crop production often results in the expulsion of the grazers and their live-stock into environmentally sensitive areas, in habitat reduc-tion for wildlife species that coexist with grazing stock, in the felling of the remaining trees and the clearing of land for pro-cessing facilities. The introduction of machinery often pro-duces a compaction of the soil, reducing its capacity to ab-sorb rain water, thus speeding up runoff.

A case study: Agricultural Intensification in a Ba-nana export industry:

The agro industry is to be developed in a broad valley with very deep alluvial soils. The valley itself is irrigated by a large river which drains a Hugh watershed in the mountains behind the farm. It has traditionally supplied a steady flow of irrigation water all year around. The river does flood in the rainy season, bringing new fertility to the soils that lie in the floodplain. The land is currently used for small farmer; mixed crop agriculture. At present, the farmers rotate local tubers with pulses for subsistence on Leveled fields. The cash crops of sugar and bananas are also grown on small fields and, with the exception of banana spraying, consume almost no agrochemicals. The new industry will profoundly affect both the economy and the ecology of the area. At present, the population is engaged in low input, sustainable agriculture. The people require little other than the natural fertility for their agricultural activities.

They produce pulses and tubers for family consump-tion and sell a small surplus in local markets; these are often intercropped with bananas. The impact on the soils is slight, as the farmers rotate their crops and fallow the fields, effec-tively keeping down pest populations. As most of the labor is manual and supplied by the family, there is little incentive to clear new fields. Old fields are allowed to return to fallow when the soil fertility diminishes, and are quickly colonized by the flora and fauna from the nearby hills. In addition, most of the women keep kitchen gardens, a few pigs or goats and

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some poultry. While these animals do forage they do little harm to the vegetation. The feral pig population is kept in check by steady hunting pressure. The river is rich in edible fish and its banks are covered by highly varied vegetation. The mangrove swamp provides additional food and some net-ted shrimp to sell to the luxury hotel market for cash income. Recently, farmers have learned to sink bamboo poles to serve as a medium for growing clams. The bay with the coral reef is regenerating from the effects of a small port that existed in the late 1930s and today supplies fish to supplement the diet and to market. The economy is not - completely agricultural. On-farm income is supplemented by seasonal migratory la-bor. The men and the women unencumbered by child rearing duties (or able to rely on older women to help) migrate to the nearby cities and-earn additional income. The tropical forests on the lower hills have highly diverse flora and fauna. The forests lying higher have been undisturbed since colonial times.

The few cocoa trees left from that period have been integrated into the forest vegetation and serve the community as a source of revenue when they find the cocoa pods before the rats. The vegetation shelters a wide variety of animals, some quite rare, and some of the bird species are endangered. The river and its associated mangrove swamp are equally rich and diverse, as well as very scenic. While the river does flood during the rainy season, this flooding, except in the extreme cases which have arisen in recent years with heavy logging and forestry in the watershed, has little impact on the local population. Their houses are built on stilts. Furthermore, the flooding brings both new soil and nutrients from the moun-tains. Over the centuries, these floods have built up and main-tained the fertility of the valley. In place of this low input agriculture, the valley will be mechanically leveled, ditched to depths of 10 meters for drainage of heavy rains, irrigated and planted to high yield bananas. The production system will require the installation not only of very deep drains but also of substantial infrastructure, such as cableways, and will rely heavily upon intensive inputs, especially fertilizers and pesticides, to produce exportable yields four or five-times greater than at present The spray application program will be by air and that some pesticide drift; into the nearby river and the mangrove swamp at the mouth of the river is inevitable.

The company will need to "train"" the river drag-lin-ing and dicing it. The mangrove swamp "plug" lying down river from the farm will be "opened with canals to help con-trol the flood waters that the new drainage system will pour

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into the river. The bananas will be exported from a newly constructed terminal on the bay just a few miles from the farm. The bay will be dredged to clear some of the coral heads that obstruct the entry of shipping to the new fruit ter-minal. In addition, the valley's rolling hills that are covered with tropical vegetation and currently not "used" will be cleared and planted to citrus. The steeper hills will be cleared of the tropical forest interspersed with century's old cocoa trees and will be planted to hybrid coconuts resistant to lethal yellowing. The production of coconuts on a commercial scale will help alleviate the critical shortage of edible oils. Coconut oil is the staple of the rural population but because of lethal yellowing, the government has had to import large quantities of edible oils using scarce exchange reserves. The processing of both bananas and coconuts will produce substantial vol-umes of effluent. The bananas that cannot be exported or sold in local markets will be fed to pigs whose effluent waste will be dumped unprocessed into the nearby river. Coconut oil ex-traction will produce by-products that have no current use and will be dumped into the environment. The environment will be altered radically by the installation of a tropical fruit production industry. The vegetation will be clear cut not only between the plots in the formerly cropped valley, but also on the hills and mountainsides. The flora will be destroyed and the fauna will retreat into the already ecologically severely affected mountainsides' many of which have been cleared as coffee production has moved to cover the higher elevations. The river will die as a river. It will become an irrigation canal with no vegetation permitted on the banks. In fact, it will be sprayed regularly with herbicide to keep down the vegetation that shelters pests. Its former beautiful, winding path will be destroyed as it is widened, straightened, diced and deepened. The mangrove swamp will also be channeled and severely impacted, if not destroyed, by the rapid flow of water through the canals and the heavy doses of chemical run offs that the river will carry. The bay will feel the effects of these run offs and the coral heads will again be destroyed to make way for the shipping.

The effect of the project on the human ecology will be massive. The local largely self sustaining farm villages will become the housing for the wage 1 laborers the banana citrus and coconut industries. The local people will have dif-ficulty in continuing to farm, as their time will be dedicated to the industrial regime imposed by commercial agriculture. Those that want to continue farming will have to move away, assuming they have adequate funds to buy new land, or wilI

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be pushed into forested areas to clear land for crop produc-tion. The older farmers who know no other trade will be left unemployed, as they are not attractive to the new industry which needs strong, young people. Many of the women will give up the kitchen garden and child and domestic animal rearing for jobs in the packing sheds, where they are much preferred to men for their manual dexterity and work habits. The former pattern of economic activity will, to all intents and purposes, end with the development of this new industry. The largely self-sustaining village farming community that sells some surplus, and some seasonal off-farm labor, will disappear, to be replaced by an industrial village set on the edge of a large plantation producing tropical fruits for export and some coconut oil for local consumption.

The former diversity of income will cease and the community will depend on wages. If the industry flourishes the commu-nity will see more cash income than at any time before; if the banana industry should collapse due to natural disasters (as it did in the 1930s after severe hurricanes) or should political changes eliminate the preferential price in the former colonial country, the community will suffer massive economic dislo-cation. Its principal source of income will disappear and the community will plunge into economic depression. To return to the former pattern of economic livelihood will be almost impossible due to radical changes in the land use and tenure.Question 6: Write short notes on the following?

a) Philips curve:6 a) In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the un-employment in an economy, the higher the rate of increase in nominal wages in the short run. It has been observed that there is no relationship between inflation and unemployment in the long run.

William Phillips, a New Zealand born economist, wrote a pa-per in 1958 titled The Relationship between Unemployment and the Rate of Change of Money Wages in the United King-dom 1861–1957, which was published in the quarterly jour-nal Economica. In the paper Phillips describes how he ob-served an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countries and in 1960 Paul Samuelson and Robert Solow took Phillips'

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work and made explicit the link between inflation and unem-ployment: when inflation was high, unemployment was low, and vice-versa.

In the 1920s an American economist Irving Fisher noted this kind of Phillips curve relationship. However, Phillips' origi-nal curve described the behavior of money wages.[1]

Phillips Curve in the U.S in the 1960's

In the years following Phillips' 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship be-tween inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflation with a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off be-tween inflation and unemployment.

For example, monetary policy and/or fiscal policy (i.e., deficit spending) could be used to stimulate the economy, raising gross domestic product and lowering the unemploy-ment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unem-ployment rates.

During the 1960s, a leftward movement along the Phillips curve described the path of the U.S. economy. This move was not a matter of deciding to achieve low unemployment as much as an unplanned side-effect of the Vietnam war.[citation

needed] In other countries, the economic boom was more the re-sult of conscious policies.[citation needed]

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Most economists no longer use the Phillips curve in its origi-nal form because it was shown to be too simplistic. This can be seen in a cursory analysis of US inflation and unemploy-ment data 1953-92. There is no single curve that will fit the data, but there are three rough aggregations—1955-71, 1974-84, and 1985-92—each of which shows a general, down-wards slope, but at three very different levels with the shifts occurring abruptly. The data for 1953-54 and 1972-73 do not group easily, and a more formal analysis posits up to five groups/curves over the period.

But still today, modified forms of the Phillips Curve that take inflationary expectations into account remain influential. The theory goes under several names, with some variation in its details, but all modern versions distinguish between short-run and long-run effects on unemployment. The "short-run Phillips curve" is also called the "expectations-augmented Phillips curve", since it shifts up when inflationary expecta-tions raise, Edmund Phelps and Milton Friedman argued. In the long run, this implies that monetary policy cannot affect unemployment, which adjusts back to its "natural rate", also called the "NAIRU" or "long-run Phillips curve". However, this long-run "neutrality" of monetary policy does allow for short run fluctuations and the ability of the monetary author-ity to temporarily decrease unemployment by increasing per-manent inflation, and vice versa. Blanchard (2000, chapter 8) gives a textbook presentation of the expectations-augmented Phillips curve.

An equation like the expectations-augmented Phillips curve also appears in many recent New Keynesian dynamic sto-chastic general equilibrium models. In these macroeconomic models with sticky prices, there is a positive relation between the rate of inflation and the level of demand, and therefore a negative relation between the rate of inflation and the rate of unemployment. This relationship is often called the "New Keynesian Phillips curve." Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papers that in-corporate a New Keynesian Phillips curve are Clarida, Galí, and Gertler (1999) and Blanchard and Galí (2007).

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b) Stagflation:6b) Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965. The concept is notable partly because, in postwar macroeconomic theory, inflation and recession were regarded as mutually exclusive, and also because stagflation has gener-ally proven to be difficult and costly to eradicate once it gets started.

Economists offer two principal explanations for why stagfla-tion occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa. Second, both stagnation and inflation can result from inap-propriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets, together, these factors can cause stagflation; equally, either can, if taken to such an extreme that it must be reversed. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively simulative monetary policy to counteract the resulting reces-sion, causing a runaway wage-price spiral.

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