€ Managerial

economics refers to the application of economic principles and methodologies to the decision making process within a business firm organization. € The focus of managerial economics evolves round identifying and solving the decision making problems which a manager faces in a given business environment. It lies on the borderline of management and economics. It is primarily an applied branch of knowledge.

and Haynes point out that managerial economics is economics applied in decision making. It is a special branch of economics. That bridges the gap between abstract theory and managerial practice. € Joel dean views that the purpose of managerial economics is to show how economic analysis can be used in formulating business policies.
€ Henry

€A

close interrelationship between management and economics has led to the development of managerial economics. Management is the guidance, leadership and control of the efforts of a group of people towards some common objective. On the other hand, economics, in broadest sense, is what economists do. Economists are primarily engaged in analyzing and providing answers to manifestations of the most fundamental problem, scarcity.

of resources results because of two fundamental facts of life: 1. Human wants are virtually unlimited and insatiable. 2. Economic resources to satisfy these human demands are limited. Thus, we cannot have everything we want, we must make choices. Thus, managerial economics is the study of allocation of resources available to a firm among the various alternative activities of that unit.
€ Scarcity

€ ME

is micro economic in character. The unit of study is a firm and its problems are studied in it. € ME is normative in character. It is prescriptive rather than descriptive. It tells the businessmen how best to achieve the objectives of the firms under the given circumstances. € ME mostly uses the theory of the firm and profit theories.

micro economics concept, macro economic concepts like, business cycles, national income accounting, tax policy of the government, price control measures, etc. are highly used in ME to understand the external forces effecting the business. € ME bridges the gap between the purely abstract analytical problems and the pragmatic policies that management must face. It offers powerful tools and approaches for managerial policy making.
€ Besides

€ Economics

is the systematic study of the society as a whole. It studies as to how the resources are allocated. It analyses the interaction in markets of many individual choices. € ME is the systematic study of a particular enterprise. It studies as to how resources are allocated in a firm. It studies the purposive decisions by the managers of the enterprise.

€ The

following areas generally are found under the ambit of ME: 1. Demand analysis and forecasting. 2. Production and cost analysis. 3. Pricing decisions, policies and practices. 4. Profit analysis. 5. Capital management.

€ Economic

theory has contributed the following basic principles to ME, which are of immense use. They are: 1. The incremental concept. 2. The time perspective concept. 3. The discounting concept. 4. The opportunity cost concept. 5. The equi marginal principle.

€ Incremental

reasoning amounts to estimating the impact of decision alternatives on costs and revenue by comparing the resultant change in the total revenue with the change in the total cost. € A business decision is considered as profitable only if: 1. It increases the revenue more than the costs. 2. It adds to revenue more than costs. 3. It reduces costs more than revenue. 4. It lowers some cost more than revenues.

€ Managerial

economists are concerned with the short run and long run effects of decision on revenues as well as costs. The important practical problem in decision making analysis is to maintain the right balance between the long run, short run and intermediate run perspectives. The management usually begins with a short run approach to the costs and revenues and then carries out a series of analysis extending the time perspective.

€ The

decision problems make it imperative that the concept of discounting is applied to future costs and returns. Because of the time value of money costs and revenue that occur at different times must be adjusted to their equivalent values at some common time before a comparison to determine the profitability is made. The method of compounding and discounting are used to find the time value of money.

€ Opportunity

costs are the costs of displaced alternatives. The opportunity cost of a decision is meant the sacrifice of alternatives required by the decision. If a scarce resource is put to particular use, other uses of the resources must be given up. The net revenue that could be produced in the next best use of the resource is called the opportunity cost of the resource for the use actually made.

The equi marginal concept tells us that an input should be allocated in such a way that the value added by the last unit is the same in all the cases. The available input should be used in all the activities, in such a way that the value added by the marginal input should be the same. € If the value of the marginal product is greater in one activity he will shift labour from low marginal uses. This will increase the total value of the product taken together. The optimum is reached when the value of the marginal product is equal in all activities.
€

€ Risk

refers to the amount of variability among the outcomes associated with a particular strategy. When there are many possible outcomes with different money returns, there is said to be substantial risk. For ex. When an unproven oilfield is drilled possibly there may be two results. One is that if oil is found, the well will be financially worth millions. If no oil is found, the well will be worth nothing.

€ From

the alternative courses of action and choosing the best or optimal courses of action from among the several alternatives is decision making. Decision making implies the need for optimizing behavior of the firm.

to Herbert Simon the principle of economics identifies with following areas of decision making in the following areas: 1. Finding occasions for making decisions. 2. Identifying possible courses of action. 3. Evaluating the revenues and costs associated with each course of action. 4. Choosing the particular course that best meets the goal or objective of the firm.
€ According

€ Demand

in economics means effective demand, which can be defined as a desire backed by willingness and ability to pay for a particular product. Thus for a demand to be effective, three factors are important: 1. Desire to buy. 2. Willingness to buy. 3. Ability to buy.

€ Want

can be defined as a desire to buy a particular product. But for the want to become a demand, it must be backed by the ability to pay for the product. For ex. A person may have a desire to buy a car. This desire can be termed as a want. This becomes a demand, only when he has the ability to pay for the car.

€ Population. € Income

and wealth. € Consumers tastes, preferences, customs and habit. € Price of the related goods. € Future expectation about the price of the product. € Advertisement expenditure. € Price of the product. € Demonstration effect. € Consumer credit facility.

€ There

is an inverse correlation between price and demand. Whenever a price changes for a commodity, the demand for the commodity also changes. When the price of a commodity declines, the demand for the same increases. On the contrary, if the price of the commodity increases, the quantity demanded decreases. Thus there is a cause and effect relationship between price and demand of the commodity. € This cause and effect relationship between the price and the quantity demanded is called the Law of Demand.

€ There 1. 2.

are two types of demand schedule: Individual demand schedule Market demand schedule

€ Individual

demand schedule indicates how an individual consumer will buy commodities at various prices. € The graphical presentation of Individual demand schedule will depict Individual demand curve.

€ Market

demand schedule is formulated to indicate the various prices at which the consumers in the whole market will buy different quantities of goods. € The graphical presentation of Market demand schedule will depict market demand curve.

1. 2. 3. 4.

Substitution effect. Income effect. Arrival of new consumers. Operation of law of diminishing marginal utility.

1. 2. 3. 4. 5.

Prestige value. Giffens paradox. Speculative demand. Expectation of further changes in price. Money market speculations.

€ Income

demand. € Cross demand. € Direct demand. € Derived demand. € Joint demand. € Composite demand.

€ At

various levels of income, the consumers demand different quantities of goods. For better types of goods like butter, ghee etc. The larger the income larger will be the demand. Costly goods are demanded only when the consumers get more income. These are known as superior goods. On the other hand,basic necessaries like salt, kerosene etc. every one has to buy them. with the rise in income, there is no increase in the demand of these products. Such goods are known as inferior goods.

€ Cross

demand refers to various amount of a commodity, which are demanded at different prices of another related commodity. In cross demand, we relate the quantity demanded of one commodity, with the price of another commodity. For ex. The demand for petrol may increase not because the price of petrol has fallen but because the prices of cars has fallen.

€ Demand

for all such goods which are directly consumed by the consumers, is known as direct demand. For ex. Demand for car, eatables etc.

€ Demand

for all such goods which are not directly consumed by the consumers but are used in the preparation of such goods which are used directly by the consumers, is known as derived demand. For ex. Demand for petrol, demand for sugar.

€ Many

commodities like tea have a joint demand. Tea comprises of tea leaves, milk, sugar, etc., the demand for all of them taken together is a joint demand.

€ Many

industries demand coal, for ex., railways, factories, etc. here the demand for coal is called composite demand.

€ Every

demand has elasticity. A small change in price of a commodity may lead to a big change in demand. Similarly a big change in price may not lead to proportionately big changes in demand. Therefore, it is seen that goods are either more sensitive or less sensitive to price changes. The concept of elasticity of demand measures the proportionate change in quantity demanded as a result of proportionate change in price.

€ The

concept of elasticity of demand refers to the responsiveness of quantity demanded of a good to a change in price. It tries to quantify the relationship between the demand of the commodity and the price of the commodity.

€ Elasticity

of demand is different from the Law of demand. The law of demand states that when the price increases, demand of a good decreases. But the law does not tell us to what extent the price changes and to what extent the demand changes as a result of change in the prices.

1. 2. 3. 4. 5.

Elastic demand. Inelastic demand. Unitary elastic demand. Perfectly elastic demand. Perfectly inelastic demand.

€ When

there is a small change in price and if there is a big change in demand, this situation is called elastic demand. For ex. When there is a 10% change in the price and because of this there is 40% change in demand, this phenomenon is known as elastic demand.

€ When

there is a big change in price, and as a result of this there is a little change in demand, this situation is known as inelastic demand. For ex. When there is a 50% change in the price and as a result of this there is only 10% change in the demand of a product, this phenomenon is known as inelastic demand.

€ When

the change in price of a product is exactly equal to the resultant change in the demand of the commodity, this situation is known as unitary elastic demand. For ex. When price increases by 10% and as a result the demand decreases by exactly 10%, this phenomenon is known as unitary elastic demand.

€ When

a small change in price creates a huge change in demand of a commodity, this situation is known as a perfectly elastic demand. For ex. When price increases by 5% and as a result the demand decreases by 50%, it is a case of perfectly elastic demand.

€ When

there is a change in the price of a commodity but as a result there is no change in the demand of the commodity, this situation is known as perfectly inelastic demand. For ex. When price increases by 10% but there is no change in the demand of the product because of this, it indicates perfectly inelastic demand.

€ Demand

forecasting means an estimation of the level of demand that might be realized in future under given circumstances. By forecasting demand we intend to making an objective assessment of the future course of demand. However in a world of uncertainty future conditions can never be predicted accurately. Yet the businessmen needs to plan and take decisions making the best possible judgment about future development. For this purpose demand forecasting comes handy to us.

€ The

techniques of forecasting methods for the demand of a product are of two categories: 1. Survey methods. 2. Statistical methods.

1. 2. 3. 4. 5. 6.

Opinion survey method. Consumer interview method. Complete enumeration method. Sample survey. End use method. Experts opinion survey.

1. 2. 3. 4. 5.

Measures of central tendency. Correlation. Regression. Index number. Graphical methods.

1. 2. 3. 4. 5. 6.

Accuracy. Plausibility. Durability. Flexibility. Availability. Economy.

€ The

factors of production, land, labour, capital and entrepreneurship are called factor inputs. When these factors are used in certain proportions depending upon the method of production chosen by the firm a certain quantity of product comes into existence. This quantity of product known as output comes out of the process of production. The technical relationship between the factor inputs and outputs is known as production function.

€ Production

implies transformation of inputs the factors bought by a firm into output. Production is a transformation of physical inputs into physical output. The functional relationship between physical inputs and physical outputs of a firm is called production function.

€ The

production function is determined by the state of technology. When technology improves, a new production function comes into being. The new technology has greater flow of outputs from the same quantity of inputs or still smaller quantity of inputs. Algebraically the production function can be written as: € Q = F(L,K,D) € Where L = Labour, K = capital, D = Land

1.

2.

3.

Total product: Total product of a factor is the amount of total output produced by a given amount of the factor, other factors held constant. Average product: Average product of a factor of production is the total output produced per unit of factor employed. Marginal product: Marginal product of a factor is the addition to the total production by the employment of extra unit of a factor.

€ The

law of variable proportions or non proportional returns occupies an important place in the theory of production. It states how the output behaves in a production function when one factor input is constant and the employment of other factor input is varied.

€ According

to samuelson, ´an increase in some inputs relative to other fixed inputs will in a given state of technology, cause output to increase; but after a point the extra output resulting from the same additions of extra inputs will become less and less.

€ This

law examines the production function with one factor variable, keeping the quantities of other factors constant, when the total output or production of a commodity is increased by adding units of a variable input. While the quantities of other inputs are held constant, the increase in total production becomes after some point smaller and smaller. This is known as the law of diminishing returns.

1. 2. 3.

1 stage ² increasing returns. 2 stage ² constant returns. 3 stage ² negative returns.

€ At

this stage average product per man increases. Marginal product and total product also increases. At this stage total product to a point increases at an increasing rate.

€ At

stage 2, the total product continues to increase at a diminishing rate until it reaches the maximum point, where the second stage ends. At this stage both the marginal product and the average product are diminishing but remain positive. At the end of the second stage, marginal product of the variable becomes zero. This stage is known as the stage of diminishing returns as both the average and marginal products of the variable factor continuously fall during this stage.

€ In

stage 3, the total product declines and therefore, the total product curve slopes downwards. The marginal product of the variable factor is negative and it goes below X axis. Hence this stage is called the stage of negative returns.

€ Cost

analysis is very important for the business manager because he has to balance cost against revenue in an optimal manner with a view to earning a satisfactory level of profits. The term cost of production may be used in three different senses; production of goods and services is possible only at a cost, the producer will like to minimize his cost and all costs are not added for accounting purposes.

1. 2. 3. 4.

Output level. Prices of factors of production. Productivities of factors of production. Technology.

€ Total

cost varies directly with output. The more output a firm produces, the higher will be its production cost and vice versa. This is because increased production requires increased use of raw materials, labour, etc; and if the increase is substantial, even fixed inputs like plant and equipment and managerial staff have to be increased.

€ Productivity

of a factor of production means the contribution of a unit of that factor is output. The higher the productivity of an input factor, the smaller the quantum of that factor, other factors remaining the same, that one needs, to produce a given output and vice versa. Thus, production cost varies inversely with the productivities of factors of production.

€ Technology

is a significant force underlying production. Technological progress is conducive to increased production while technological stagnation may impede production. By definition, technological improvement leads to an increase in the efficiency or productivity of factors of production, which in turn, causes a reduction in production cost. Thus, cost varies inversely with technological progress.

€A

cost output function is a relationship between the value of production input that are used by the firm in each period and the corresponding ratio of the output attained. The costs are divided into long run costs and short run costs.

1.

2.

3.

Variable cost: costs incurred by a firm in connection with the use of variable factors are called the variable costs in economics. Fixed cost: costs incurred by a firm in connection with the use of fixed factors are called fixed cost. Marginal cost: Marginal cost is the addition made to total cost when one more unit of the commodity is produced.

€ Opportunity

cost or alternative cost: such costs are cash outflows prevented by taking one course of action instead of another. They include returns which the entrepreneur could have earned in an alternative use of his services and capital. € Explicit costs: such costs are those expenses which are actually paid by the firm. In other words, these are paid out costs. These appear in the accounting records of the firm.

€ Implicit

costs: such costs are imputed costs. They are theoretical costs and they are not recognized by the accounting system. Imputed costs are defined as costs which are not actually incurred, but would have been incurred in the absence of self employment of owned factors. € Incremental costs: Incremental cost is the addition resulting from a change in the level or nature of business activity like addition of a new product line, changing the channel of distribution, etc.

cost: Sunk cost is one which is not affected or altered by varying the nature or level of business activity. It will remain the same whatever the level of activity. € Past cost: past costs are actual costs incurred in the past and are generally contained in the financial accounts. If they are regarded as excessive, management can indulge in postmortem, just to find out the factors responsible for the excessive costs, if any, without being able to do anything for reducing them.
€ Sunk

€ Future

cost: future cost are costs that are reasonably expected to incur in some future period or periods. Their actual incurrence is a forecast and their management is an estimate. € Short run cost: short run cost is that vary with output when fixed plant and capital equipment remain the same. € Long run cost: long run cost are which vary with output when all input factors including plant and equipment vary.

€ Direct

cost: A direct or traceable cost is one, which can be identified easily and indisputably with units of operation. € Indirect cost: indirect costs are those that are not traceable to any plant, department or operation or to any individual final product. € Controllable cost: The executive may define a controllable cost as one, which is reasonably subject to regulation.

€ In

economics the term market does not refer to the sale of several commodities. It does not refer to a place also. In economics market, refers to the sale or purchase of single commodity. For ex. Tea market. € A market in economic terms means: 1. Sale of single commodity. 2. Buyers and sellers for that commodity. 3. Close touch between the buyers and sellers.

1. 2. 3. 4.

Number of firms in a industry. Goods homogeneous or differentiated. Knowledge about market and technology. Freedom of entry into industry and exit from industry.

€ Profit

maximization. € Sales maximization. € Utility maximization.

€ Under

market conditions, two markets are said to prevail in the economy: 1. Perfect competition. 2. Imperfect competition. Imperfect competition market has three types of markets: Monopoly market. Monopolistic market. Oligopoly market.

1. 2. 3.

€

Perfect competition is said to prevail where there is a large number of producers producing a homogeneous product. The maximum output, which an individual firm can produce, is relatively very small to the total demand of the industry product so that a firm cannot affect the price by varying its supply or output. With many firms and homogeneous product under perfect competition no individual firm is in such position to influence the price of the product and therefore the demand curve facing it will be a horizontal straight line at this level of the prevailing price of the product in the market, that is price elasticity of demand for a single firm will be infinite.

1.

2. 3. 4. 5. 6.

7.

Larger number of buyers and sellers and their size is small. Homogeneous product. Perfect knowledge. Perfect mobility. There is no entry ban on the firms. There is no transport and selling costs in this market. Equal cost throughout the market.

€ In

this market the price of the commodity is determined by the industry. The industry determines the price of the commodity at the point where the market demand and supply of the commodity becomes equal to each other.

€ Monopoly

refers to a market situation in which there is one producer and seller for the commodity. Monopoly is an extreme form of market structure. € Prof. chamberlin points out that monopoly refers to seller·s control over supply in such a way so as to create a monopolistic situation. There is no close substitutes for the product. Mono means single and poly means seller. It is a single seller market.

€ On 1. 2.

the basis of ownership: Private monopoly. Public monopoly.

€ On 1. 2.

the basis of price differentiation: Simple monopoly. Discriminating monopoly.

€ On 1. 2.

the basis of emergence: Natural monopoly. Legal monopoly.

1. 2. 3. 4. 5. 6.

7. 8. 9. 10.

Single seller and large number of buyers. There is no substitute in the market. Entry ban. Controlled supply. Independent price policy. There is no difference between firm and industry. Price determination. Abnormal profits. There are no selling costs. Different average and marginal revenue curve.

€A

monopolist determines that price of his product at which he will get maximum profit. He will be in equilibrium when he produces that amount of his product at which his total profit will be maximum.

€ The

monopolistic market is a market, which prevails in between the both, perfect competition and monopoly and has the elements of both the markets. € According to Prof. Chemberlin monopolistic competitive market is a blending of the elements of perfect competition and monopoly.

1. 2. 3. 4. 5.

Large number of sellers. Product differentiation. No entry ban with product differentiation. Importance of selling costs. Group behavior.

monopolistic firm faces more problems than a perfect competitive market. The equilibrium of a monopolistic firm depends upon three areas or we can say that in this market the firm has to take the following three decisions: 1. Price decision. 2. About the production quantity. 3. Advertisement costs.
€A

is the willingness and ability of producers to make a specific quantity of output available to consumers at a particular price over a given period of time. € Individuals control the inputs, or resources, necessary to produce goods. And hence, in one sense, supply is the mirror image of demand.
€ Supply

€ Supply

refers to the various quantities offered for sale at various prices. According to the Law of Supply, more of a good will be supplied the higher its price, other things constant or less or less of a good will be supplied the lower its price, other things remaining constant.

€ As

with market demand, market supply is the summation of all individual supplies at a given price. The market supply curve is the horizontal sum of the individual supply curve.

€ Monetary

policy is an important aspect of overall macro economic policy. To influence economic conditions or to achieve economic objectives, monetary authorities employ various techniques. € Monetary policy can be defined as the deliberate effort by the central bank to influence economic activity by variations in the money supply, in availability of credit or in the interest rates consistent with specific national objectives.

1. 2. 3. 4. 5.

Price stability. Exchange stability. Full employment. Maximum output. High rate of growth.

1. 2. 3. 4.

Open market operation. Bank rate policy. Reserve requirement changes. Selective credit controls.

€ Open

market operations refer to the buying or selling of securities by the central bank. Buying and selling of securities by the central bank affects directly the money supply in circulation and commercial banks cash reserves. When the central bank sells securities, it reduces the quantity of money and credit as well. when the central bank follows an expansionary monetary policy, it buys securities from the market. This increases money in circulation and banks cash reserves.

€ Bank

rate policy is one of the oldest methods of credit control. The bank rate is the rate of interest at which the central bank rediscounts approved bills of exchange. This policy is based on the assumption that market rates change in response to the bank rates. This relationship between the bank rate and market rate exists only in developed money markets.

€ The

central bank stipulates the statutory limits of cash reserve requirements for commercial banks. It asks banks to maintain a minimum percentage of their deposits as reserves. When reserve requirements are increased, the amount of demand deposits that banking system can support will be reduced and which in turn, reduces the money supply or vice versa.

Selective credit controls are qualitative methods to regulate credit. They are different from quantitative methods of monetary management because they are directed towards particular uses of credit rather than the total volume of credit outstanding. € Various selective credit control methods are: 1. Rationing of credit. 2. Direct action. 3. Changes in the margin requirement. 4. Regulation of consumer credit. 5. Moral suasion.
€

1. 2. 3. 4.

Lags in monetary policy. Pressure of financial intermediaries. Contradictions in objectives. Underdeveloped nature of money and capital markets.

€ Fiscal

policy involves designing the tax structure, determining tax revenue and handling public expenditure in such a way that the objective of full employment is achieved. It seeks to do this by maintaining an equilibrium between the effective demand and supply of goods and regulating public expenditure and revenue. Fiscal policy can be used to minimize the effects of business cycles and to maintain stable price levels.

1. 2. 3. 4. 5.

Mobilization of resources. Economic development and growth. Reduction of disparities of income. Expansion of employment. Price stability.

1. 2. 3.

Public expenditure. Taxation. Public borrowing.

€ The

emergence of welfare states that were set up with the aim of promoting socio economic welfare has led to an increase in government spending. Other factors that have contributed to the growth of public expenditure are: 1. Rising defense expenditure. 2. Rise in price level. 3. Economic planning. 4. Basic infrastructure. 5. Population growth.

€ Taxation

is the most important source of government revenue for both developed and developing countries. The tax structure should be designed in such a way that the government can raise the maximum revenue without affecting investment in the private sector.

€ After

taxes, public borrowing is the next important source of revenue for the government. Public borrowing is different from taxes in the sense that all borrowings from the public have to be repaid. Public borrowing is a common tool for mobilizing resources in developing countries.

1. 2. 3.

Lags in fiscal policy. Problems in tax policy. Burden of public debt.

€ Fiscal

policy is an important instrument in the hands of the government to meet its financial requirements and relates to the management of finance by the government. Monetary policy, on the other hand, refers to the policies pursued by the RBI to regulate the growth of money and credit in the economy.

€ However,

the two policies are interdependent that fiscal policies of the government determine the directions of the monetary policy and the fiscal policies have to be devised depending on the monetary control required.

€ Inflation

refers to the rate of change in the overall price level of goods and services that we typically consume. € Inflation is good for investment, because the burden of loan repayment is reduced. For ex., a company that borrows Rs.100 crore today will repay only Rs.78 crore in real terms at the end of five years, if the rate of inflation is 5%.

€ There 1. 2.

are two sources of inflation: Demand pull inflation. Cost push inflation.

€ Demand

pull inflation is caused due to excessive demand for goods and services. When aggregate demand increases, the price level also simultaneously moves up.

€ Cost

push inflation results from an increase in the cost of factors of production or a decrease in the supply of goods with demand remaining the same.

€ Depending

on the rate at which prices which, inflation is classified into three categories: 1. Creeping inflation. 2. Running inflation. 3. Galloping inflation.

€ When

the increase is small or gradual, it is called creeping inflation. Creeping inflation leads to a small increase in prices, which induces investment in the economy.

€ If

creeping inflation continues for a long period of time without any monetary or fiscal control, it may lead to running inflation. Price will then increase at 8% to 10% per annum.

€

If running inflation is not controlled, it may reduce savings in the economy and become a hindrance in the future for the economic growth. When monetary authorities completely lose control over running inflation, it will lead to galloping inflation. When inflation reaches double or triple digit figures, it is called galloping inflation. In galloping inflation, people expect the price to rise and so spend all their money quickly so that they can consume to the maximum extent possible. They believe that the purchasing power of the money they are having will fall further soon. This increases the velocity of circulation of money in the economy.

€ Inflation

usually adversely affects helpless people and disturbs the social, political and economical equilibrium. Hence it need to be controlled. € Inflation can be controlled through an integrated set of measures which may be classified as: 1. Monetary measures. 2. Fiscal measures. 3. Other measures.

1.

2.

Quantitative credit control measures can be in the form of bank rate policy, open market operations and variable reserve ratio to influence the cost and availability of credit in an economy. Qualitative control measures includes all those methods which can be used to regulate the consumer credit. Credit facilities can be curbed by raising down payment requirements or reducing the payment periods.

€ The

various other methods that can be adopted to contain inflation are as under: 1. To check money supply. 2. To raise the interest rates. 3. Credit control. 4. Demonetization of old currency.

1. 2. 3.

Public expenditure. Taxation. Public borrowing and debt.

1. 2. 3.

Price control. Credit rationing. Wage policy.

€ When

countries of the world trade with each other, the transactions are made through foreign exchange. Foreign exchange is any currency issued by a foreign government. It is used to pay for imported goods and to meet foreign debt repayment obligations. In a foreign exchange market, individuals, banks and other institution trade in currencies.

€ The

principal purpose of the foreign exchange market is to transfer funds of a particular currency and nation to another. This is done mainly through commercial banks which act as clearing houses by buying and selling foreign currencies.

€ Exchange

rate means the price of one currency in terms of another. Exchange rates are either fixed by the government or determined by the market forces. The two basic exchange rate regimes are the fixed exchange rate and the floating exchange rate systems.

€ Further

based on the level of intervention by the central bank of the country in maintaining currency value, exchange rate regimes can be classified into: 1. Fixed rate: The government fixes the exchange rate, called the parity rate and defends it. 2. Hard peg: It is a permanently fixed rate and the government has no plan to change it. 3. Adjustable peg: Rates are periodically adjusted.

€ 4.

Soft peg: High frequency pegging such as day to day dollar pegging or week to week pegging. € 5. Low frequency pegging: Here the frequency of pegging is month to month or quarter to quarter pegging.

€ History

shows that the economics do not grow in an uniform pattern. There may be several years of economic growth followed by a recession and in some cases even a prolonged depression. In course of time, the economy recovers and if the recovery is very strong it may lead to a boom. This would be followed by another slump in the economy. And thus the cycle continues«««

A business cycle is a swing in total national output, income and employment. It usually has two phases: 1. Recession. 2. Expansion. It is difficult to predict the duration and timing of business cycles. During expansion, production increases in all sectors of the economy and so do the employment opportunities. some of the factors that come into play during expansion leads to recession. The general rise in costs relative to prices is an important factor leading to recession.
€

ultimately leads to depression and there is substantial fall in the production of goods and services and the level of employment. € During recovery, there will be more employment opportunities and income will go up which in turn will lead to more demand for goods and service. There will be an upward movement in the price, thus encouraging investment and growth in the economy.
€ Recession

to Joseph schumpeter, there are four stages in a business cycle: 1. Prosperity. 2. Recession. 3. Depression. 4. Recovery.
€ According

€ Prosperity

is also known as expansion. During this stage, production increases in all sectors of the economy. As a result of increased production, employment opportunities increases. This in turn, increases the purchasing power of the people.

€ Recession

in the economy will lead to liquidation of bank loans, fall in prices, decline in the demand for cancellation of new projects. Initially, the demand for consumer goods will remain the same, but slowly it will diminish. The most visible sign of the advent of recession is the weakening of the stock market.

€ Recovery

ultimately leads to depression. When the economy moves towards depression, there will be a substantial fall in the production of goods and services and level of employment. The effect of depression are felt most in manufacturing, mining and construction sectors. Moreover, the price level will fall despite the fall in the output of goods and services.

€ In

recovery, there is a tendency in the economy to move towards normal price. During recovery the first step is to stop the fall in the price level. During a period of depression, all inventories are exhausted, due to lack of demand; but inventories have to be replenished.

1. 2. 3.

Multiplier Accelerator Theory. Demand induced cycles. Fiscal and monetary policies.

to Samuelson, ¶Economic growth represents the expansion of a country·s potential GDP or national output € Economic growth can be measured as an increase in the economy·s output. Economic growth could be measured in terms of change in GDP/GNP.
€ According

€ Economic

growth is in general attributed to the following four factors: 1. Natural resources. 2. Human resources. 3. Capital formation. 4. Technology.

€ Economic

development is a broad term which consider various aspects relating to the structure of the economy, social attitudes, cultural set up, techniques of production and institutional frame work along with the real output or per capita income of the economy.