economics & mgmt decisions

7/29/2019 ECONOMICS & Mgmt Decisions

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ECONOMICS AND

MANAGEMENT DECISIONS

MBCE-701

EMBA (Power Management)


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Contents

International eco environ .

Domestic eco environ.

The Legal Environ.

Pricing methods.Investment decisions.

Decision making.

Profit analysis.

Demand and supply.Determinants of demand.

Elasticity of demand.

Demand forecasting.

Cost analysis.

Production function.

Market structure.

Pricing and output decisionsunder

I. perfect competition;

II. monopoly; and

III. imperfect competition.


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Economics Economics is a subject matter that studies

different economic activities as directedtowards the maximization of satisfaction ormaximization of profits at the level of an

individual, and maximization of social welfareat the level of the country as a whole.

It is the problem of choice arising out of thefact that:

I. Resources are scarce, and

II. Resources have alternative uses.


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Management Decisions

Decision making is the selection of a course of actionamongst all possible alternatives; it is the core of

planning.

Mangers must make decisions in light of everything

that can be learnt about a situation, which may not

be everything they should know.

Alternatives are evaluated in terms of quantitative

and qualitative factors. Other techniques includemarginal analysis, and cost-effectiveness analysis.

Experience, experimentation, research and analysis

come into play in selection of an alternative.


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Concept of Environment

The environment of any organisation is the

aggregate of all conditions, events, andinfluences that surround and affect it. Sincethe environment influences an organisation in

multitudinous ways, it is crucial to understandit.

Internal and external environment:

The internal environment refers to all factorswithin the organisation that impact strengthsor cause weaknesses of a strategic nature.


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The External Environment

The external environment includes all thefactors outside the organisation which provide

opportunities or pose threats to the

organisation. Generally the external environment is divided

into eight categories for analysis:

Economic; international; market; political;regulatory/legal; socio-cultural; supplier; and

technological sectors.


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The International Economic

Environment

UNIT 1


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Open and Closed Economy

A country may theoretically choose to havetwo options vis-avis the rest of the world. It

may be open or a closed economy.

An open economy is one which allows forimport and export of goods from and to, the

rest of the world.

A Closed economy is one where no suchinteraction with the rest of the world takes

place.


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Effect of International Economy

No country today is absolutely insulatedfrom international events in the

economic sphere. An open economy is

affected by International economy in anumber of ways:

The general trade regime in the world;

The health of the international economy;

Foreign Exchange Rates.


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General Trade Regime

So long as a country is a member of WTO, it isbound to all multilateral agreements. Thegeneral trade regime of the world clearly

defines the dos and donts of internationaltrade thereby enabling traders to play in aneven field

Hence business would rely crucially on theinformation about all relevant internationalactors in the field.


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The World Trade Organisation

The WTO secretariat is at Geneva, Switzerland.And any country can become its member bysigning on the dotted line. Presently WTO has

around 130 members. China is not a party toWTO.

WTO seeks to expand opportunities for tradein such a manner that there is sustainabledevelopment in relation to the optimalutilisation of world's resources.


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The World Trade Organisation

The WTO comprises a set of multilateral plurilateralagreements these include agreements on:-

Trade in Goods GATT (1994) and its associate

agreements, including those on trade in textiles

and agriculture and agreement on trade related

investment measures (TRIMs).

Trade in Services- General Agreement on Trade in

Services(GATS).

TRADE Related Intellectual Property Rights (TRIP).


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Four Basic Principles of GATT

Domestic industry be allowed to be protectedthrough tariffs.

Countries are requested to reduce tariffs and

remove other barriers.

Tariffs and other regulations are to be applied to

all goods without discrimination amongst

countries. (most favored nation concept)

National treatment rule that prohibits

discrimination between imported products and

equivalent domestically produced products.


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Plurilateral Trade Agreements (PTAs)

The plurilateral trade agreements (PTAs) are:- Agreement on Trade and Civil Aviation

Agreement on Govt. procurement.

International Dairy Agreement.

International Bovine Meet Agreement.

Dispute Settlement Body (DSB) provides a

platform where trade disputes amongmembers can be amicably settled inconformity with WTO rules.


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Health of the International Economy

Rate of growth of other countries also affectour economy. Other economies serve asdemand centers for out products.

For an Indian exporter, the rate of growth ofthe economies to which he exports is reallycrucial. Imports too get affected by globalscenario.

A depressed global scenario marks sluggishindustrial activity domestically.


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Foreign Exchange Rate

Foreign exchange rate is the rate whichdetermines the actual valuation of ourproducts and thus affect our imports and

exports. Majorities of the economies of the world now

have a managed free floating exchange ratemechanism. Sometimes adjustments aremade beyond which there is a broad limit toits upper and lower value.


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Adjustment in Exchange Rate

It is not just the exchange rate, but the changes/adjustments in it that are equally important.

A downward adjustment in the exchange rate

raises the relative price of traded goods (byincreasing the domestic price of foreign

currency) to non-traded (or home) goods.

The real effective exchange rate (REER) is the

nominal exchange rate adjusted for the

relative change in prices in the respective

countries.


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Regional Trading Blocs/Agreements

The world economy has not only seen mergers,there is an acceleration in the process of

regional trade agreements. Such regional

trade agreements are based on one of the

four concepts:

1. Free Trade Area.

2. Customs Union.

3. Common Market.

4. Economic Union.


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Free Trade Area & Customs Union

Free trade area, where a group of countries gettogether and decide to remove all barriers totrade amongst themselves. Each member is freeto decide on the tariff it would like to for any non-

member country.

Customs Union: here the members have a freetrade with each other, plus, they have a commonwall of tariffs. All non-members trading with 2 ofthe members of the customs union will meetexactly similar commercial policy regulations inboth countries.


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Common Market & Economic Union

In a common market, all barriers to movement ofcapital and labour amongst member countries arealso removed in addition to the free flow of goodsamongst them as in free trade area and customs

union.Economic Union is the most comprehensive of all

concepts. In this case there is completeharmonization of the macro economic policies ofthe member countries, involving coordination ofexchange rates, inflation rates, the taxation systemand monetary policies. European Union is anexample of this.


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Trade Enhancement Effect Of A Trade Bloc.

A trade block with no boundaries amongst itsmembers is almost like a huge single country.There is relocation and development of

production in areas which are most viable andallow for greater economies of scale withinthe bloc.

Increased efficiencies lead to an increase inincomes within the region, termed as tradeenhancement effect of a trade bloc.


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India's Position vis-a vis RTAs

India does not belong to any bid trade bloc. It

has been granted a dialogue partner status in

ASEAN and still an aspirant to join APEC.

However most of the members of these trade

blocs are not convinced that India has

reformed its economy enough, and feel

apprehensive about Indias regulatory andtariff structures.


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The Domestic Economic

Environment

UNIT 2


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Economic Growth

Economic growth means sustained andsubstantial rise in product per capita. It

implies that:

Economic growth as an upward trend, The upward trend is the per capita real

income, and

The upward trend has to be significantly largeand sustained over a long period.


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Asian Economic Crisis: Reasons

Before 1997, for almost three decades some ofthe Asian countries like Japan, Thailand, HongKong, Malaysia, South Korea etc. had recorded animpressive growth.

Since May 1997, these countries witnessed stockmarket and currency crisis. The principal reasonwas that most of the East Asian economies were

witnessing economic slow down due tocontraction of world demand. As exports have amajor share in GDP of these countries, slowdownin global demand made their economies weak.


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Possible reasons for the crisis (contd)

These economies assumed over ambitiousgrowth and created excess capacity. Items ofmanufacture were highly labour intensive, andthe countries witnessed near full employment

and wage rise. This resulted in loss of pricecompetitiveness.

These countries were pursuing over-ambitiouseconomic goals with huge borrowings form

abroad, and thus piled up huge external debtburden and debt servicing ratio.


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Impact on India

Unlike other Asian countries ,India is not so open for

foreign investments in the speculative stock market

and properties. Besides, the fundamentals of the

economy are strong with low current account

deficits, low ratio of short term debt to total debt,adequate forex reserves, low debt servicing ratio.

With highly depreciated other Asian currencies,

Indias export competitiveness got eroded.

India could increase its share of FII investments to

10% in the shrinking Asian FII investment inflows.


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Recession

Recession is a period in which an economy

slips below its trend growth path.

There is a consensus among Indian

economists that a sustainable economic

growth, GDP, given the resource balance in

the economy, is about 7 per sent. Any

sustained deviation from this rate could beconstrued as a recessionary phase.


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Broad GDP Might Be Misleading

Looking at a broad GDP might be misleading. Theslow down in India is concentrated in theIndustrial segment.

Sectors like agriculture which have helped shoveup aggregate growth rates have a momentumand a dynamic place of their own and havelargely been untouched by liberalization.

Two of the critical components of demand for theeconomys output of goods, investment demandand exports are slack.


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Macro Economic Overview

At the time of Independence THE Indian Economywas in shambles. At that time, both economic

leaders and industrialists advocated economic

planning. The strategies for growth and

development were charted out accordingly.

The national income of India registered a 5.5%

growth rate per annum during 1980s. This was

significantly higher than the trend rate of thepast, but this pushed India into the economic

crisis which began to take shape during 1990-91.


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New Development Strategy

Govt. introduced various structural reforms

since 1991 to improve the supply side of the

economy. Some important ones being:-

trade and capital flow reforms;

Industrial deregulation;

disinvestment and Public Enterprise Reforms;

Financial Sector Reforms.


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Present Economic Scene

Unsustainable fiscal and revenue deficits;

Low rate of investment;

Performance of agriculture is a major cause

for concern;

Worsening external trade situation;

fragile balance of payments.


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Macroeconomic Indicators: GDP

GDP is a measure of market prices of the total

flow of goods and services produced in an

economy during a year.

GDP growth slowed down to 5% in 1997-98,

after averaging 7 % in the previous years. The

fall in agricultural growth was the major

reason for this.


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Production Trends

Investment in agriculture remain dismally low

and this could account for the decreasinggrowth in production.

Free trade in agricultural products market has

inflated domestic prices radically. Industrial growth rate which declined to 0.6 in

1991-92, attained the height of double digitgrowth five years later.

Post reforms period is characterized by goodresponse from the industry.


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Inflation

Price stability is an essential condition for stability

and economic growth. Fluctuations in prices work

to the disadvantage of the poor.

High rate of inflation accompanied by high rate ofinterest, makes industrial investment and

production cost very high, and the country would

not be able to sustain its exports. Inflation has an adverse effect on balance of

payment .


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Concept of Government Budget

Article 112 of the Constitution requires the

central government to prepare annual

financial statement for the country as a whole

this is called budget of the Central Govt.

The govt. is required to present this budget

every year before Lok sabha and Rajya Sabha,

the two houses of Parliament.

Likewise state governments are mandated

vide Article 202 of the Costitution.


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Government Budget

Government budget is a statement of the

estimates of the government receipts and

Government expenditure during the period of

the financial year.

It has two broad components; Revenue

Budget and Capital Budget.

Looked at from a different angle, the two

broad components are; Budget receipts andBudget Expenditure.


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Budget Receipts and Expenditure

Budget receipts refer to estimated money receipts ofthe government from all sources during the fiscalyear.

Budget receipts are classified as Revenue Receipts

and Capital Receipts. Revenue Receipts are those money receipts which

do not either create a liability or lead to reduction ofassets. Examples- Tax receipts, income from pubic

enterprises and fines. Capital Receipts include very of loans, borrowings

and disinvestment.


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Revenue and Capital Expenditure

Important items of revenue expenditure are:interest payments; expenditure on subsidies;and expenditure on defence.

As a matter of convention, all grants given by

center to the state govt. are treated asrevenue expenditure.

Important items of capital expenditure are:expenditure on land and building; expenditureon machinery and equipment; purchase ofshares; loans by the Central govt. to StateGovts.


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Budget Deficit

Budget deficit refers to a situation when budget

expenditure of the govt. is greater than the budgetreceipts. Three types of budget deficits are: Revenue

Deficit; Fiscal Deficit; and Primary Deficit.

Revenue Deficit is the excess of revenue expenditureover revenue receipts.

Fiscal Deficit is the excess of total expenditure

(revenue + capital) over total receipts (revenue +capital other than borrowings).

Primary Deficit is the difference between fiscal deficit

and interest payment.


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Concept of Balance of Payments

Balance of Payments (BoP) refers to thestatement of accounts recording economictransaction of a country with the rest of theworld.

Each country enters into economic transactionswith other countries and receives payments fromand makes payments to others.

Balance of Payments is a statement of account of

these receipts and payments. BoP accountsbroadly comprises current account, and capitalaccount.


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Current Account & Capital Account

Components of current account:

I. Export and import of goods;

II. Export and import of services;

III. Unilateral transfers from one country to theother.

Components of capital account are:

I. Foreign Investments;II. Loans.


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Current Account

India has witnessed severe BoP problemssince 1980.

The problem was further accentuated duringthe year 1990-91 with the Gulf crises, the

remittances form abroad declined sharply. The govt. imposed an import squeeze, which

in turn had a decelerating effect on the

economy. Govt. had to open up imports ofcapital goods, also as apart of structuraladjustments with the IMF.


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Current Account (contd.)

Due to pick up in industrial activity in 1994-95

and 1995-96 imports pulled up the trade

deficit sharply and the current account deficit

rose to 1.7 of GDP.

External debt and debt service indicators have

moved in favorable direction indicating

substitution, on a relatively large scale of non-

debt creating foreign investment for otherforms of debt creating capital inflows.


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Capital Account

The structure of capital account has changedconsiderably since the reform process began.

The average maturity of loans also declined whilethe average rate of interest increased. Thus there

was deterioration in the quality of externalfinancing. India had to borrow high interest rateand relatively shorter duration loans as againstearlier. GOI resorted to substantial drawls from

the IMF from 1990-91 onwards less that onefacility or other . Other sources were NRIdeposits and External Commercial Borrowings.


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Capital Account (contd.)

The things started looking up since then. The share

of concessional debt in the total external debt hasrisen which is significant from the point of view of

future liability.

This has been brought about by a structural changein the capital account. This relates to a sharp

reduction in debt creating flows and an increased

recourse to non debt foreign investment flows.

The increasing inflows in capital account inflows has

helped to mitigate the pressure on BoP and is likely

to reduce future debt service imbalance.


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Trade Policy

From the policy of import substitution, the

government now has its emphasis on exportpromotion.

Coverage of OGL (open general license) has

enhanced while the restricted license list hasbeen reduced.

Introduction of full convertibility, rupeedepreciation and devaluation has furtherhelped to boost exports, by making Indianexports competitive.


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Trends in Foreign Trade

Exports have risen at a much faster pace since

1993-94.

Gains in the terms of trade for India reflect her

diversified export base.

Over the years there has been a decline in the

importance of agriculture and allied products

and a substantial increase in manufactured

products.

US continues to be the largest destination as

well as source of our goods.


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Savings

Savings are the primary source of funds required

for investments, the other being foreign capital.

There are two basic issues facing us:

a. to mobilize more funds in the form of savings.

b. To make more remunerative use of these funds

through prudent investment.

The rate of savings of the corporate sector has

been rising, while the public savings have been

low.


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The Legal Environment

UNIT: 3


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Commencing a Business

Constitution provides a Fundamental Right tocarry out any business, at any place within thecountry, unless otherwise mentioned in law.

Business can be organised in various forms-

sole proprietor, partnership firm, limitedliability firm, private company, public companyand the like.

Businesses of a certain dimensions needcompliance with laws laid down specificallyfor the purpose.


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Specific Statutes for Business

The Contract Act 1872;

The Partnership Act,1932;

The Sale Of Goods Act,1930;

The Negotiable Instrument Act, 1881;

The Companies Act, 1956;

Foreign Exchange Management Act,1999; The Competition Act, 2000;


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Laws Related to labour

The Industrial Disputes Act,1947;

Trade Union Act, 1926;

Payment of Wages Act, 1935;

Minimum Wages Act, 1948;

Workmens Compensation Act, 1923;

Factories Act, 1948; Payment of Bonus Act, 1965;


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Land and Power for Business

The Collector is the chief authority to whomapplication for land acquisition is to be madeto.

The application must specify the particulars of

the land and purpose for which it is to beacquired. The land cannot be put to any otheruse.

Electricity too is regulated by legislation and itcan be provided only by those who havelicenses for the purpose.


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Protection of Environment

immense importance of Environment and

Ecology has been recognized and a number oflaws passed to protect the environment.

It is imperative that business operate with full

consciousness of their role in maintainingenvironment.

Air (prevention and control of pollution)Act,1981, Water(prevention and control ofpollution) Act. 1974, and EnvironmentProtection Act, 1986 are the main legislationwhich have to be complied with.


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Exploration and Licensing policy (oil and gas)

New Exploration Licensing Policy (NELP) WASPROMULGATED BY THE Govt. in 1997-98 toeliminate the countrys demand-supply gapand build up pressure on import of crude and

petroleum products. The NELP terms are considered as the best in

the world for attracting greater investment inthe upstream oil and gas sector. The terms arefar superior to earlier terms offered by thegovernment.


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NELP Terms

National Oil Companies (NOCs) are exempted

from payment of less under NELP. Maximum royalty rate under NELP is 12.5%f

international price as against 20% of the

administered price in non- NELP areas. Exemption from customs duty.

Liberal depreciation provisions.

Private companies are free to have 100%participating interest.

A true level playing fled established as a blockreserved for NOCs


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Demand and Supply

UNIT: 4


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Concept of Demand

Demand for a commodity refers to the

quantity of the commodity which an

individual household is willing to purchase per

unit of time at a particular price.

Demand for a commodity implies:

a. Desire to acquire it;

b. willingness to pay for it ; andc. Ability to pay for it.


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Concept of Demand (contd.)

Demand for a commodity has to be statedwith reference to time, its price, and that ofrelated commodities, consumers income and

taste etc. Demand varies with fluctuations in these

factors.

Further it also depends on quality because ifthe quality changes it can be deemed to beanother commodity.


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Types of Demand

Consumer goods and producer goods. Perishable goods and durable goods.

Autonomous and derived demand.

Individuals demand and market demand.

Firms demand and industry demand.

Demand by market segments and by total

market.

Demand Function


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Demand Function

Demand function is a comprehensive

formulation which specifies the factors thatinfluence the demand for the product.

Dx = D (Px, Py, Pz, B, A, E, T, U) where Dx is the

demand for item; X, Px is the price of item X;Py is the price of substitutes; Pz is the price of

complements; B is the income of the

consumer; E is the price expectation of the

user; T is the tastes and preferences of user;

and U stands for all other factors


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Demand Curve

Demand curve considers the pricedemand

relation, other factors remaining the same.

(Refer to page 105 figure 4.2 Demand Curve.)

The demand curve is negatively sloped,

indicating that the individual purchases more

of the commodity per time period at lower

prices (other factors being constant).


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Demand schedule


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Demand Curve


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Law of Demand

The inverse relationship between the price of

the commodity and the quantity demanded

per time period is referred to as the Law of

Demand. A fall in Px leads to an increase in Dx (so that

the slope is negative) because of the

substitution effect and income effect.

I d S b i i ff


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Income and Substitution effects

Income effect refers to change in the quantity

demanded when real income of the buyerchanges as a result of change in the price of thecommodity. When price falls, the real income

increases. Accordingly, demand for thecommodity expands.

Substitution effect refers to substitution of onecommodity for the other when it becomes

relatively cheaper. When price of commodity Xfalls, it becomes cheaper in relation to commodityY. Accordingly X is substituted for Y

Ch i Q tit D d d


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Change in Quantity Demanded

Change in quantity demanded refers to

quantity purchased of a commodity in

response to rise or fall in its price, other

determinants remaining the same. It is

expressed through movement along thedemand curve.

Change in demand refers to increase or

decrease in quantity demanded at the sameprice in response to change in other

determinants of demand.

Change in quantity demanded vs


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Change in quantity demanded vs.

change in demand

Change in quantity demanded Change in demand

M k d d


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Market demand curve

Market demand is the horizontal summation of

individual consumer demand curves

Concept of Supply


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Concept of Supply

Supply is the willingness and ability of producers

to make a specific quantity of output available toconsumers at a particular price over a given

period of time.

Individuals control the inputs or resourcesnecessary to produce goods.

For a large number of goods, there is an

intermediate step in supply; Individuals supplyfactors of production to firms, firms transform

factors of production into consumable goods.

L f S l


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Law of Supply

More of a good will be supplied the higher its

price, other things remaining constant or less of agood will be supplied the lower its price.

Other variables, assumed constant, in the law ofsupply refer to:

I. Changes in prices of inputs;

II. Changes in technology;

III. Changes in suppliers expectations; and

IV. Changes in taxes and subsidies,

For the supply curve See figure 4.5

S ppl


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Supply

the relationship that exists between the price of a good

and the quantity supplied in a given time period, ceterisparibus.


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Supply schedule


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Law of supply

A direct relationship exists between the price

of a good and the quantity supplied in a given

time period, ceteris paribus.

R f l f l


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Reason for law of supply

The law of supply is the result of

the law of increasing cost. As the quantity of a good

produced rises, the marginalopportunity cost rises.

Sellers will only produce andsell an additional unit of agood if the price rises abovethe marginal opportunity cost

of producing the additionalunit.

Change in supply vs change in quantity supplied


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Change in supply vs. change in quantity supplied

Change in supply Change in quantity supplied


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Determinants of supply

the price of resources,

technology and productivity,

the expectations of producers,

the number of producers, and

the prices of related goods and services


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Equilibrium of Demand and Supply

In a free market, price is determined by the

interplay of supply and demand. When quantitydemanded is greater than the quantity supplied,prices tend to rise; when quantity supplied isgreater, prices tend to fall.

Equilibrium represents a situation which canpersist. It has no tendency to change. In terms ofprice of the commodity, it will be established

where the supply decisions of the producers anddemand decisions of the consumers are mutuallyconsistent.


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Market Equilibrium

Price Above Equilibrium


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Price Above Equilibrium

If the price exceeds the equilibrium price, a surplus

occurs:

Price below equilibrium


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Price below equilibrium

If the price is below the equilibrium a

shortage occurs:

Demand Rises


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Demand Rises

Demand Falls


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Demand Falls

Supply Rises


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Supply Rises

Supply Falls


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Supply Falls


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Determinants of Demand

UNIT:5

D t i t f D d


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Determinants of Demand

Price of the commodity is the majordeterminant of its demand. Price is the

symptom, effect, as well as cause of demand

Some other determinants of demand include:

a. Consumers tastes and preferences;

b. Consumers expectations;

c. number of consumers and their distribution;

d. Advertisement.

E l ti f L Of D d


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Explanation for Law Of Demand

Law of demand is explained on the concept ofdiminishing marginal utility principle.

In addition attempts have been made to

explain equilibrium of a consumer through:indifference curve analysis and Revealed

Preference Theory.

Marginal Utility


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Marginal Utility

Marginal utility refers to the change in

satisfaction which results when a little more

or little less of that good is consumed.

Law of diminishing marginal utility states that

as more and more units of a commodity are

consumed, marginal utility derived from every

additional unit must decline, also called

fundamental law of satisfaction.

Marginal Utility Analysis


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Marginal Utility Analysis

Purchase of a commodity by a consumer

depends on three factors:

1. Price of the commodity;

2. Marginal (and total) utility of the commodity;

3. Marginal utility of money.

It is assumed that marginal utility of money is

constant

C E ilib i


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Consumers Equilibrium

The consumer will go on purchasing moreand more of a commodity until the marginalutility becomes equal to the market price ofthat commodity.

Consumer will strike equilibrium when:Mu x/ Px = Mum

Likewise, for commodity Y consumer willstrike equilibrium when MUy/ Py = Mum

Indifference Curve Analysis


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Indifference Curve Analysis

Indifference Curve is a diagrammatic

representation of an indifference set. It showsdifferent combinations of two commoditiesbetween which a consumer is indifferent. Eachcombination offers him the same level ofsatisfaction. ( see figure 5.4 and 5.5 on page143)

An indifference curve which is to the right and

above another indifference curve shows ahigher level of satisfaction to the consumer.

Budget line


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udget e

The budget line or the price opportunity line

represents different combinations of twogoods X and Y which the consumer can buy by

spending all his income.

(figure 5.7 on page 144 refers) Consumers equilibrium is depicted by the

point on the budget line where it touches the

indifference curve tangentially, meaning thatthe slopes of indifference curve and the

budget line are equal. (figure 5.8 )

Revealed Preference Theory


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y

This theory is based on preferencehypothesis. (figure 5.18 at page 152).

A consumer chooses a combination A of goods

X and Y out of various equally possible

expensive combinations of X and Y, he reveals

his preference for A over all other preferences.

Thus choice reveals preference.

The revealed preference theory is based on

strong ordering hypothesis which rules out

any two combinations of two goods.


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Elasticity of Demand & Supply

UNIT: 6

Elasticity of Demand


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Elasticity of Demand

Elasticity of demand measures the degree of

responsiveness of/ change in demand to

various factors.

Elasticity of demand is important primarily as

an indicator of how total revenue changes

when a change in Prices induces changes in

quantity demanded. The total revenues of the

firm will equal to changed price into quantitysold (TR= P X Q )

Classification Of Demand Elasticity


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Classification Of Demand Elasticity

1. Perfectly inelastic demand;

2. Inelastic demand;

3. Unitary elastic demand;

4. Elastic demand;

5. Perfectly elastic demand.

Numerically Measurement of Elasticity


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y y

Elasticity Coefficient (Ed)

Ed = percentage change in quantity demanded /

Percentage change in price.

Ed =change in quantity demanded/original

quantity demanded change in price/

original price.

Ed = Q/Q P/ P

Price Elasticity


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Price Elasticity

Price elasticity is percentage change inquantity demanded per 1 per cent change in

price

Two other measures of elasticity used are:

1. Arc price elasticity is used to assess the

impact of discrete changes in price.

2. Point price elasticity is for very small pricechanges.


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Demand Forecasting

UNIT: 7

Demand Forecasting


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Demand Forecasting

All business decisions are based on some

forecast of the level of future economicactivity in general and demand for the firmsproduct in particular.

A forecast is a prediction or estimate of afuture situation.

Data for use in forecasting can be obtainedfrom experts opinion, surveys and marketexperiment.

Various statistical methods have beendeveloped for forecasting do demand.

Forecasting Steps


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g p

Identification of objective.

Determining the mature of goods underconsideration.

Selecting a proper method of forecasting.

Interpretation of results.

There are several methods of demand forecastingbasically for three reasons: no method is perfectand no method is useless; no method is bestunder all circumstances; and the best method

may not be available in a particular situation dueto constraints from data or resources (time andmoney).

Methods of Demand Forecasting


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g

Broadly there are two approaches to the problem

of business forecasting:

To obtain information about the intentions ofconsumers by means of market research, survey,

economic intelligence and the like. To use past experience as a guide, and by

extrapolating past trends to estimate the level offuture demand.

The first approach is often used for short-termforecasting and the second approach for long-term forecasting.

Forecasting Techniques


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Forecasting techniques

Survey

methods

Expertopinion

consumers

Statistical

methods

Tend methods

Regression method

Indicator method

Interview Method


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Interview methods

Completeexamination

Sample survey End use method

Statistical Methods


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Statistical Methods

Fitting a trend line by observation.

Trend through Least Squares Method.

Time series analysis

Moving average.

Exponential weighted moving average

method.


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Production Analysis

UNIT: 8


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Cost Analysis

UNIT: 9


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Lecture 05

Cost analysis


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Cost analysis

Lecture 05


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Production Function And Its

ApplicationUNIT: 10


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Market Structure

UNIT: 11


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Pricing And Output Decisions

under Perfect CompetitionUNIT: 12


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LECTURE 07


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Pricing and Output Decisions

Under MonopolyUNIT: 13

Monopoly


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Monopoly

LECTURE 08


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Pricing and Output Decisions

under Imperfect CompetitionUNIT: 14

Monopolistic Competition


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Monopolistic Competition

LECTURE 09


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Pricing Methods

UNIT: 15


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Investment Decisions

UNIT: 16


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(SEE SEPARATE FILE DOWN LOADED)


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Decisions making under Risk and

UncertaintyUNIT: 17

Risk and Uncertainty


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Risk and Uncertainty are involved in all decision

making. Certainty appears to be theoretical andimpractical state.

Risk may be distinguished between insurable and

non-insurable risk. The modern industry providesa whole industry to deal with insurable risk.

Businessmen need not lose sleep over the danger

of losing plant or stock through fire.

There are three types of entrepreneurs risk

averters; risk seekers and risk indifferent.

Risk and Uncertainty


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Risk is a situation with more than one possible

outcomes to decision such that probability ofeach of these outcomes can be measured is a risksituation. Examples- tossing a coin, investing instock.

Uncertainty is a situation where there is morethan one possible outcome of a decision but theprobability of each specific outcome occurring isnot known or even meaningful. This may be dueto insufficient information or instability in thenature of variables.

Adjustments for Risk and Criteria for Decisions


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Different approaches have been proposed for

dealing with the consequences of imperfectability to predict events and the investors riskinvolved therein. Some are:

Finite- Horizon method.

Riskdiscounting method. The Shackle approach.

The probability Theory approach.

Sensitivity analysis.

Simulation. Hedging.

Decision Tree.


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Profit Analysis

UNIT:18

Decision Making Under Uncertainty


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Decision making under uncertainty is

necessarily subjective. Some methods usedare:

The Maximum Criteria.

The Minimax Regret Criteria.

The Hurwicz Alpha Index.

The Maximax Criteria.

The Laplace (Bayes) Criteria.

Profits


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Profit is regarded as a reward for the entrepreneurial

functions of final decision making and ultimateuncertainty bearing.

Three important aspects about profits are:

I. Profit is a residual income and not contractual orcertain income as in the case of other factors ofproduction.

II. There is much greater fluctuation in profits than in

rewards for any other factors.III. Profits may be negative , whereas rent, wages, and

interest must always be positive.

Profit Classifications


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Gross profit and Net Profit.

Normal Profit and Supernormal Profit. Accounting Profit and Economic Profit.

Economic Profit = total revenue (explicit cost +

Imputed cost). OrEconomic Profit = Accounting profit imputed

cost.

Imputed or implicit costs are the costs of thoseemployed resources which belong to theowner himself.

Theories of Profit


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1. Profit is the reward for risk bearing and

uncertainties.2. Dynamic Theory suggests that Profit is the

consequence of frictions and imperfections in theEconomy.

3. Profit is the reward for successful innovation.(innovation theory of profits)

4. Profit is a payment for organizing other factors of

production. Many factors like risk, uncertainty,innovation, monopoly powers etc. affect everybusiness.

Profit Measurement


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Accounting Method based on inclusiveness of

cost, depreciation, valuation of stock, treatmentof deferred expenses, and capital gains andlosses.

Break Even Analysis examines the relationship

among total revenue, total costs and total profitof the firm at various levels of output.

Break Even Point is that volume of sales where

the firm breaks even i.e. the total casts equaltotal revenue. Losses cease to occur while profitshave not yet begun.

Break Even Point (BEP)


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It is a point of zero profit.

BEP = Fixed costs (selling price variablecost per unit).

Example fixed costs Rs. 10000 (selling price

Rs. 5per unit variable cost Rs. 3 per unit)Therefore BEP = Rs.. 10000 (5-3)

= 5000 units.

Hence 5000 units will be the point at which themanufacturing unit would not make any lossor profit.

Methods of Break-Even Analysis


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The break even chart. The Algebraic method.


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THANK YOU

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