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Block No. 13, Sector H-8, Allama Iqbal Open University, Islamabad.
Submitted by:
Muhammad Hammad Manzoor (Courtesy: Ms. Madiha Ahmed Khan) MBA (HRM) 1st Semester
Roll No. 508195394 508, 5 Floor, Continental Trade Centre (CTC) Block 08, Clifton, KARACHI
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Q.1 People have unlimited wants but resources are limited Comment on this statement. Also discuss Production Possibility Frontier (PPF) in detail.
Answer:
The conspicuous consumption of limited resources has yet to be accepted widely as a spiritual error or even bad manners Barbara Kingsolver
Limited Resources and Unlimited Wants:
Faces with the undeniable fact that goods are scarce relative to wants, an economy must decide how to cope with limited resources. It must:
Choose among different potential bundles of goods (the what) Select from different techniques of production (the how) Decide in the end who will consume the goods (the for whom) To answer these three questions, every society must make choices about the economys inputs and outputs.
INPUTS
Inputs are commodities or services that are used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs.
OUTPUTS
Outputs are the various useful goods or services that result from the production process and are either consumed or employed in further production.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
As we can see, in order for this economy to produce more wine, it must give up some of the resources it uses to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would have to divert resources from making wine and, consequently, it will produce less wine than it is producing at
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Economic Analysis (522) Q.2 a) Explain in detail the Islamic economic system in relation to Pakistan. Islamic Economic System
Everything in Islam is for the benefit and welfare of mankind. The economic principle of Islam aim at establishing a just society wherein everyone will behave responsibly and honestly, and not as cunning foxes fighting for as big a share of something as possible without regard for honesty, truth, decency, trust and responsibility. The Islamic Economic System is based on the following fundamental principles:
"O you, who believe, do not take interest, doubling and quadrupling, and keep your duty to Allah, so that you may prosper." (3:130)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
"O you, who believe, observe your duty to Allah and give up what remains (due) from interest, if you are believers. But if you do not do it, then be warned of war from Allah and His messenger; and if you repent, then you shall have your capital. Do not exploit and be not exploited." (2:278-279). 5. Law of Inheritance (Mirath)
The Islamic law of inheritance is a wonderful system of stopping the concentration of wealth. It provides very detailed laws regarding the rights of dependents over the property of the deceased person.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Q2 b) Briefly explain different forms of business organizations and their advantages and disadvantages. BUSINESS
A business (also known as enterprise or firm) is an organization engaged in the trade of goods, services, or both to consumers.
Sole Proprietorships
The vast majority of small business start out as sole proprietorships is very dangerous. These firms are owned by one person, usually the individual who has dayto-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume "complete personal" responsibility for all of its liabilities or debts. In the eyes of the law, you are one in the same with the business.
are not an
Corporation
Corporations are incorporated businesses. Every form of business besides the sole proprietor is considered a separate entity, and this often provides a measure of legal and financial protection for the shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain. Corporations are presumed to be for-profit entities, and as such they can have an unlimited number of years with losses. Corporations must have at least one shareholder.
Advantages of a corporation
1. Owners have limited Liability 2. It can exist with continuity. 3. Shares of ownership are transferable. 4. It attracts more investors. 5. You can be an employee of your own corporation. 6. The corporation pays its own tax.
Disadvantages of a corporation
1. Incorporation is costly. 2. Corporations are highly regulated. 3. Limited liability may discourage creditors.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Advantages of a Partnership
1. Partnerships are relatively easy to establish. 2. With more than one owner, the ability to raise funds may be increased,
because two or more partners may be able to contribute more funds and because their borrowing capacity may be greater. 3. Prospective employees may be attracted to the business if given the incentive to become a partner. 4. A partnership may benefit from the combination of complimentary skills of two or more people. 5. There is a wider pool of knowledge, skills and contacts. 6. Partnerships can be cost-effective as each partner specializes in certain aspects of their business. 7. Partnerships provide moral support and will allow for more creative brainstorming.
Disadvantages of a Partnership
1. Business partners are jointly and individually liable for the actions of the 2. 3. 4. 5. 6. 7.
other partners. Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations and situations can change, which can lead to dramatic and traumatic split ups. The partnership may have a limited life; it may end upon the withdrawal or death of a partner. A partnership usually has limitations that keep it from becoming a large business. You have to consult your partner and negotiate more as you cannot make decisions by yourself. You therefore need to be more flexible. A major disadvantage of a partnership is unlimited liability.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Advantages of a Trust
1. Reduced liability - especially if corporate trustee. 2. Asset protection. 3. Flexibility of asset and income distribution.
Disadvantages of a Trust
1. Can be expensive and complex to establish and administer. 2. Difficult to dissolve, dismantle, or make changes once established particularly
3. Any profits retained to reinvest into the business, will incur penalty tax rates. 4. Can not distribute losses, only profits.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Q.3 Discuss the concept of price elasticity of supply in short and long run. Aslo explain the applications of elasticity of supply. Price Elasticity of Supply
Price elasticity of supply measures the relationship between change in quantity supplied and a change in price. If supply is elastic, producers can increase output without a rise in cost or a time delay If supply is inelastic, firms find it hard to change production in a given time period. The formula for price elasticity of supply is: Percentage change in quantity supplied divided by the percentage change in price When Pes > 1, then supply is price elastic When Pes < 1, then supply is price inelastic When Pes = 0, supply is perfectly inelastic When Pes = infinity, supply is perfectly elastic following a change in demand
Factors that Affect Price Elasticity of Supply (1) Spare production capacity
If there is plenty of spare capacity then a business should be able to increase its output without a rise in costs and therefore supply will be elastic in response to a change in demand. The supply of goods and services is often most elastic in a recession, when there is plenty of spare labour and capital resources available to step up output as the economy recovers.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Economic Analysis (522) (3) The ease and cost of factor substitution
If both capital and labour resources are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily and quickly be switched
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Economic Analysis (522) Useful applications of price elasticity of demand and supply
Elasticity of demand and supply is tested in virtually every area of the AS economics syllabus. The key is to understand the various factors that determine the responsiveness of consumers and producers to changes in price. The elasticity will affect the ways in which price and output will change in a market. And elasticity is also significant in determining some of the effects of changes in government policy when the state chooses to intervene in the price mechanism. Some relevant issues that directly use elasticity of demand and supply include:
Taxation: The effects of indirect taxes and subsidies on the level of demand and output in a market e.g. the effectiveness of the congestion charge in reducing road congestion; or the impact of higher duties on cigarettes on the demand for tobacco and associated externality effects Changes in the exchange rate: The impact of changes in the exchange rate on the demand for exports and imports Exploiting monopoly power in a market: The extent to which a firm or firms with monopoly power can raise prices in markets to extract consumer surplus and turn it into extra profit (producer surplus) Government intervention in the market: The effects of the government introducing a minimum price (price floor) or maximum price (price ceiling) into a market Elasticity of demand and supply also affects the operation of the price mechanism as a means of rationing scarce goods and services among competing uses and in determining how producers respond to the incentive of a higher market price.
Total product is simply the total output that is generated from the factors of production employed by a business. In most manufacturing industries such as motor vehicles, freezers and DVD players, it is straightforward to measure the volume of production from labour and capital inputs that are used. But in many service or knowledge-based industries, where much of the output is intangible or perhaps weightless we find it harder to measure productivity
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Average product is the total output divided by the number of units of the variable factor of production employed (e.g. output per worker employed or output per unit of capital employed) Marginal product is the change in total product when an additional unit of the variable factor of production is employed. For example marginal product would measure the change in output that comes from increasing the employment of labour by one person, or by adding one more machine to the production process in the short run.
Increasing returns to scale occur when the % change in output > % change in inputs Decreasing returns to scale occur when the % change in output < % change in inputs Constant returns to scale occur when the % change in output = % change in inputs
In the example above, we increase the inputs of capital and labour by the same proportion each time. We then compare the % change in output that comes from a given % change in inputs.
In our example when we double the factor inputs from (150L + 20K) to (300L + 40K) then the percentage change in output is 150% - there are increasing returns to scale. In contrast, when the scale of production is changed from (600L + 80K0 to (750L + 100K) then the percentage change in output (13%) is less than the change in inputs (25%) implying a situation of decreasing returns to scale.
As we shall see a later, the nature of the returns to scale affects the shape of a businesss long run average cost curve. The effect of an increase in labour productivity at all levels of employment Productivity may have been increased through the effects of technological change; improved incentives; better management or the effects of work-related training which boosts the skills of the employed labour force.
A numerical example of long run returns to scale Units of Capital Units of Labour Total Output % Change in Inputs % Change in Output 20 40 60 80 100 150 300 450 600 750 3000 7500 12000 16000 18000 100 50 33 25 150 60 33 13
Returns to Scale
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Economic Analysis (522) Q.4 Differentiate between perfect and imperfect markets with examples. Also explain the conditions for the determination of price and out put relationship of the firm in each market in the short and long run. Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure reallife and imperfectly competitive markets.
Imperfect competition
Imperfect competition is where there is one dominant producer who can charge whatever price he wishes to, mostly such products are innovative.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Conditions:
(1) Monopoly power. The seller of a good must be a monopolist. (2) Segregation of market. The monopolist must be able to segregate buyers into separate classes with different price elasticities. (3) No reselling. There should be no possibility of reselling the good from a tow price market to a high price market.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Economic Analysis (522) Q.5 Discuss the determination of equilibrium wage rate under perfect and imperfect market conditions. Wage Determination in Perfectly Competitive Labour Markets
How wages are determined in a perfectly competitive labour market. A perfectly competitive labour market will have the following features
Many firms Perfect information about wages and job conditions Firms are offering identical jobs Many workers with same skills
The equilibrium wage rate in the industry is set by the meeting point of the industry supply and industry demand curves. In a competitive market firms are wage takers because if they set lower wages workers would not accept the wage. Therefore they have to set the equilibrium wage We. Because firms are wages takers the supply curve of labour is perfectly elastic therefore AC = MC The firm will maximise profits by employing at Q1 where MRP of Labour = MC of Labour
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Explanations for wage differentials in the labour market There is a very wide gulf in pay and earnings rates between different occupations in the UK labour market. No one factor explains the gulf in pay that exists and persists between occupations and within each sector of the economy. Some of the relevant factors are listed below
1. Compensating wage differentials - higher pay can often be some reward for
risk-taking in certain jobs, working in poor conditions and having to work unsocial hours
2. Equalising difference and human capital - wage differentials compensate
workers for (opportunity and direct) costs of human capital acquisition. There is an opportunity cost in acquiring qualifications - measured by the current earnings foregone by staying in full or part-time education.
3. Different skill levels - the gap between poorly skilled and highly skilled
workers gets wider each year. One reason is that the demand for skilled labour grows more quickly than the demand for semi-skilled workers. This pushes up average pay levels.
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
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http://en.wikipedia.org/wiki/Production%E2%80%93possibility_frontier http://www.investopedia.com/terms/p/productionpossibilityfrontier.asp#axzz 1bgHCria http://www.friendsmania.net/forum/islamic-economics/28553.htm http://forum.pakistanidefence.com/index.php?showtopic=61367 http://en.wikipedia.org/wiki/Price_elasticity_of_demand http://www.quickmba.com/econ/micro/elas/ped.shtml http://www.investopedia.com/terms/i/imperfectmarket.asp#axzz1bgHCriaQ http://en.wikipedia.org/wiki/Perfect_market http://www.blacksacademy.net/content/3352.html http://www.economicshelp.org/labour-markets/wage-determination.html http://www.preservearticles.com/201106178068/modern-theory-of-wage determination-explained.html http://www.cliffsnotes.com/study_guide/Equilibrium-in-a-PerfectlyCompetitive Market.topicArticleId-9789,articleId-9782.html
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)
Street No. 04, Sector I # 508, 5th Floor, 8/1 CTC ISLAMABAD. (0300 989 Continental Trade Centre, 2976) Block-08 08, KARACHI. (0321Clifton 584 2326) Economic Analysis 01 522
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By: M. Hammad Manzoor (Courtesy: Madiha Ahmed Khan), MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08, KARACHI. (Roll No. 508195394)