---Swami Vivekananda

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Economics
It’s a Social Science.

Social science studies social activities which create social relation. EconomicsEconomics studies particular type of social activities = Economical activities. Production Exchange Consumption.

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Economics answers three basic questions
What to Produce? How to Produce ? Whom to Produce?

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Definition of Economics
Adam Smith

( Father of Modern Economics)"Enquiry into nature & Causes of wealth of nation". (1776).
Robbins -

Economic is a science which studies human behavior as a relationship between ends and scares means which have alternative uses.

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Economic Resources
   

Land:Labor:Capital:Organizer:.

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Economic Problem

Why this problem arises-

i. Human wants are unlimited ii. The means are limited iii. Alternative uses of the limited resources.

.

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Economics can be studied under two heads

Micro Economics. Study of individual unit.

Macro Economics. It studies economics as a whole.

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Managerial Economics
 

Management + Economics = Managerial Economics Management =

Coordinating work activities so that

they are completed efficiently and effectively with and through people.

It is defined as the integration of economic theory with business practice for the purpose of facilitating decision making.

.

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Decision Making
"Decision making as the process of selecting the suitable Action from among several alternative course of action". Characteristic of Decision Making. Risk Uncertainty

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Uncertainty
Change in demand and supply. Changing business environment. Government polices. External influence on the domestic market. Social and political change.

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Process of Decision Making.
Defining the objective to be achieved.
 Collections and analysis of information.  Selecting the best course of action.  Implement the course of action.  Continuous monitoring. 

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Scope of Managerial Economics
Scope study how far a particular subject will go.
Demand Analysis Consumption Analysis Production Theory. Cost Analysis Market Structure. Pricing System.

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Relationship Between ME & other subject
Mathematics & Managerial Economics

Liner Programming Game theory Inventory Model.
Statistic & Managerial Economics

Regression analysis Probability theory Hypothesis testing

Relationship Between ME & other subject
Operations Research

Economics + Mathematics + statistic.
Management, Accountancy theory & ME. Computer & ME

Linear Programming
Linear programming (LP) is a technique for optimization of a linear objective function. Linear programming determines the way to achieve the best outcome (such as maximum profit or lowest cost) in a given mathematical model and given some list of requirements represented as linear equations.

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Game theory
An individual's success in making choices

depends on the choices of others.

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Regression Analysis

Regression analysis helps us understand how

the typical value of the dependent variable changes when any one of the independent variables is changed.

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Demand and its Determinants
Demand-

“Necessity is the mother of invention”
Meaning of Demand• Desire for commodity. • Ability to pay. • Willingness to pay. Specific reference to

Time , Price & Place.

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Demand Function
It specify the factors that influence the

demand for the product. Px = its own price Py = the price of its substitute B, = the income of the purchaser W, = wealth of the purchaser. A, = Advertisement E, = the price expectation. T, = taste or preference of user. U, = all other factors. So Dx = D(Px, Py, B, W, A, E, T, U,)

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Types of Demand
1. Direct Demand & Derived Demands. 2. Domestic & Industrial Demand. 3. Autonomous & Induced Demand. 4. Perishable & Durable goods Demand. 5. New & Replacement. 6. Final & Intermediate Demand. 7. Individual & Market Demands 8. Total market & Segmented market

Demands. 9. Company & Industry Demands.
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Law of Demand
It state that when other thing remain same,

higher the price, lower the demand and vise versa. AssumptionIncome of the consumer is constant. Availability of complementary & substitutes. No future price expectation. Taste & preference remain same. No change in population & its structure.
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Characteristics
Inverse relationship between Price & quantity

demanded.
Price is independent variable & quantity

demanded is dependent variable.
Reasons underline the law of demandIncome effect. Substitute effect.

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Exceptions
Conspicuous Consumption. Speculative Market. Gffens goods Ignorance.

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Utility Approach.
Cardinal Utility Approachit believed that utility can cardinality or quantitatively measurable , like weight length temperature etc .
Ordinal Utility Approach

Utility is immeasurable in cardinal term.

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Utility Concept.
Total Utilitysum of the utilities derived by a consumer from the various units of goods & services he consume. Tux = u1 + u2 + u3+…….un
Marginal Utility

change in the total utility( TU) obtained from the consumption of an additional unit of a commodity. MU = TU Q

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Law of Diminishing Marginal Utility
As the quantity consumed of a commodity increases, the utility derived from each successive unit decreases, assuming consumption of all other commodities remaining the same. No. of Unit MC Utility schedules Marginal TC & Total Utility
Consume 1 2 3 4 5 6 Utility 30 50 60 65 60 45 30 20 10 5 -5 -15
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Law of Diminishing Marginal Utility
Assumption for the law The unit of the consumer good must be a

standard one. The consumer taste and preference remain same. There must be continuity in the consumption. Consumer is a rational.

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Law of Diminishing Marginal Utility
Limitation of the law Utility is a psychological phenomenon. It is feeling of

satisfaction, measurability of utility is not possible.
It does not explain the impact of the complementary and

substitute goods of demand.
It is applicable only for one commodity.

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Ordinal Utility approach
It is based on the fact that it may not be possible for the

consumer to express the utility of the commodity in absolute term, but introspectively whether a commodity or less or equally useful as compared to other.
The higher order of preference is given to the

commodity which will give a higher utility. (Pioneered by J.R. Hicks & R.G.D Allen also known as Indifference Curve Analysis)

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Indifference Curve analysis.
Defined as locus of point, each representing a different

combination of two substitute goods, which yield the same utility or level of satisfaction to the consumer.
He is indifference between any two combinations of

goods when it comes to making a choice between them.
It is also called Isoutility curve or Equal utility curve.

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Indifference Schedule of Commodity X & Y.
Combination Units of Commodity 25 15 8 4 2 Units of Y Commodity 3 6 9 17 30 X Total Utility U U U U U

A B C D E

Five combination A, B, C, D, E of two substitute commodities X & Y as presented in table yield the same level of satisfaction.
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Properties of Indifference Curve
Indifference curves have a Negative slope. Indifference curves do not intersect nor are they

tangent to one another.
Upper indifference curves indicate a higher level

of satisfaction.

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Properties of Indifference Curve
Indifference curves are convex to the origin.
Why- 1). The two commodities are imperfect substitutes for one 2)The marginal rate of substitutes (MRS) between to commodity decreases. (MU of a commodity increases as its quantity decreases and vise another. goes versa)

Indifference Units of Point Commodity Y + X

Change in Y

Change in X

MRS

Upper indifference curves indicate -a higher level of satisfaction. A 25 + 3 -

B C D E

15 + 6 8 + 9 4 + 17 2 + 30

10 7 4 2

3 3 9 13

3.3 2.3 0.4 0.2

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Consumer Equilibrium
Budget Line-

The budget line shows the market opportunities available to the consumer given his income and the price of X & Y.
Consumer EquilibriumConsumer is equilibrium where the indifference curve is tangent to the budget line.

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Consumer Equilibrium
1). Price EffectIt is the change in consumption of goods because of the change in the price of the goods.

2).Income EffectThe increase or decrease in the income can be shown by the parallel shift of the budget line. Income effect result from the increase in real income caused by the change in price of the goods consumed by the consumer.

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Consumer Equilibrium
3). Substitute EffectIt is defined as the change in quantity demanded resulting from a change in relative price after real income effect of price is eliminated.

Price Effect = Substitute Effect + Income Effect. PE = SE + IE

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Consumer Equilibrium
1).Income EffectThe increase or decrease in the income can be shown by the parallel shift of the budget line. Income effect result from the increase or decrease in real income caused by the change in price of the goods consumed by the consumer.

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Income EffectY A1 A Q P ICC

O X1 X3

B

B1

X

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Consumer Equilibrium
Income Consumption CurveDefine as the locus of points representing various equilibrium quantizes of to commodities consumed by a consumer at different level of income, all things remaining constant.

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Consumer Equilibrium
3). Price EffectIt is the change in consumption of goods because of the change in the price of the goods.

Income effect. Substitute effect. Price consumption curve(PCC) shows the change in consumption basket due to change in the price of the commodity.

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Price effect Y

A P Q PCC

O X1

X3 B

B1

X

Price Effect
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Consumer Equilibrium
3). Substitute EffectArises due to the consumer inherent tendency to substitute cheaper goods for relatively expensive. It is defined as the change in quantity demanded resulting from a change in relative price after real income effect of price is eliminated.

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Consumer Equilibrium
Price Effect = Income Effect + Substitute Effect PE = IE + SE

Price EffectIt is the change in consumption of goods because of the change in the price of the goods.

Income effect. Substitute effect.

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Price Effect = Income Effect. + Substitute Effect PE = IE + SE Y

A A1 P R SE IE O X1 X2 X3 B B3 B1 X Q IC1

Price Effect
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Demand Elasticity
The degree of responsiveness of the demand to the change in its determinants is called elasticity of demand.

Type of demand elasticity's1.Price elasticity.
2.Income elasticity. 3.Substitute elasticity 4.Advertise elasticity.

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Characteristics
Inverse relationship between Price & quantity

demanded.
Price is independent variable & quantity

demanded is dependent variable.
Reasons underline the law of demandIncome effect. Substitute effect.

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Page no 1-16, 103-109, 113-132.

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Demand Function
It specify the factors that influence the

demand for the product. Px = its own price Py = the price of its substitute B, = the income of the purchaser W, = wealth of the purchaser. A, = Advertisement E, = the price expectation. T, = taste or preference of user. U, = all other factors. So Dx = D(Px, Py, B, W, A, E, T, U,)

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Elasticit Demand y The degree of responsiveness of the demand to the change
in its determinants is called elasticity of demand.

Type of demand elasticity's1.Price elasticity.
2.Income elasticity. 3.Substitute elasticity 4.Advertise elasticity.

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Demand Elasticity
Type of demand elasticity1.Price elasticity
Price elasticity is generally define as the responsiveness or sensitivity of demand for commodity to the changes in its price. it is percentage change in demand as a result of percentage change in the price of the commodity.
% Change in Quantity demanded

Price Elasticity = commodity

% Change in the price of the

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Demand Elasticity
Y D R Price 4 3 Q

D O 16 25 Quantity Demanded
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X

Calculating Elasticity
ARC Elasticity

The measure of elasticity of demand between any two finite points on a demand curve is known as ARC elasticity. ARC Elasticity =
Q2 - Q1 ( Q1 + Q2 ) / 2 P2 - P1 ( P1 + P2 ) / 2

where         Q1  =  Initial quantity         Q2  =  Final quantity         P1  =  Initial price         P2  =  Final price

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Calculating Elasticity
Point Elasticity

For an infinitesimal (very, very small )change in price we use point elasticity.
Y M Ep P = PN PM

R

O

N

X
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Demand Elasticity
Determinant of Price elasticity.1.Availability of the substitute. 2.Nature of the commodity. 3.Weightage of the total consumption. 4.Time factor in adjustment of consumption pattern. 5.Range of commodity use. 6.Price expectation of buyers–

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Supply Analysis
Supply The supply of a commodity means the amount

of that commodity which producers are
Ability to supply Willing to supply At a given price.

 Quantity supplied refers to a specific

amount of the commodity that will be supplied at a specific price.
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Supply Function
It specify the factors that influence the supply

for the product. Px = its own price Py = the price of its substitute F, = Price of the factors of production. T, = State of technology E, = Means of transportation & Communication. T, = Taxation policy. U, = Future expectation of prices. So Sn = F(Px, Py, F, T, , E,T,U)

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Supply Analysis
The Law of Supply “Other thing remaining the same, as the price

of a commodity rises, its supply increases; and the price falls, its supply decrease”.
There is a direct positive relationship between

price and quantity supplied.

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Supply Analysis
The law of supply is accounted by two factors:

Assuming firm’ cost is constant.
When prices rise, firm substitute production of

one commodity for another.
Higher price means higher profits.

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Supply Schedule

Price

Supply (A Supply (B Supply (C Aggregat Firm) Firm) Firm) e Supply 25 100 200 300 400 50 100 150 200 250 75 150 225 300 375 150 350 575 800 1052
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2 4 6 8 10

Supply Curve
Y 4 Price 2 Q R S

S O 25 Quantity Supplied
60

100

X

Supply Analysis
Supply Curve:The supply curve shows the minimum price which the firm would be

prepared to receive for different quantities the of the commodity .

It has a positive slope. Supply curve rise upward from left to right.

When prices rise, firm substitute production of one commodity for another. Higher price means higher profits.
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Supply Analysis
Shift in Supply Curve:The shift in supply curve occurs when the

producers are willing to offer more or less of a commodity because of reasons other than the price of the commodity.
This change in supply which occurs because of a

change in any of the determinants of supply, other than price is known as increase or decrease in supply.
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Supply Analysis
Elasticity of Supply :Elasticity of supply of a commodity measure s

changes in the quantity supplied as a result of a change in the price of commodity. It is percentage change in quantity

supplied as a result of percentage change in the price of the Change in Quantity supplied % consumer. Supplied Elasticity = % Change in Price of the
commodity
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Supply Elasticity
Determinant of Supplied elasticity.1.Nature of the commodity. 2.Time lag. 3.Techniques of production. 4.Estimates of future prices.

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Production
“Creating an utility is known as production”. The term production means a process by which resources are transformed into a different and useful commodity or service. In general production means transform input into output. Production also involved intangible input to produce intangible output. Wholesaling, retailing, packaging, assembling are all production activity.
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Production
Fixed input & Variable input.:-

Fixed input is one whose supply is inelastic in the short run or which remain constant up to certain level of output. Variable input is defined as one whose supply in the short run is elastic or variable input which changes with the change in output. In long run all inputs are variable.
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Production
Short Run & Long Run:-

Short run refers to a period of time in which the supply of certain inputs ( plant, building, machinery etc) is fixed. The long run refers to a period of time in which the supply of all the inputs can be changed.

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Production Function.
Production Function:-

Production function is tool of analysis used to explain the input output relationship. It describes the technological relationship between inputs and output in physical term. More specifically it represent the quantitative relationship between inputs and outputs.

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Production Function.
Production Function:Economically it stated as belowQ= f(L,L,K,O). More specifically it can be stated asQ= f(Ld, L, k, M, T, t) Q= quantity produced, Ld = land & building, K= capital T= technology, & t= time. for the sake of convenience the number of variable used in a production function to only twoQ=f(L,K)
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Production Function.
 Production FunctionEconomically it stated as belowQ= f(L,L,K,O). More specifically it can be stated asQ= f(Ld, L, k, M, T, t) Q= quantity produced, Ld = land & building, L= labor K= capital, M= Material T= technology, & t= time. for the sake of convenience the number of variable used in a production function to only twoQ=f(L,K)
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Production Function.
 Production Law-

Law of production state the relationship between input and out put.
It can be studied under two conditions Short Run law of production. Law of return to variable inputs. Law of Diminishing return to scale. Long Run. Law of return to scale.
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Production Function.
 Short run law of production-

a)Can employee unlimited variable factors of production. b) Fixed production factors can not be changed. c) Law state the relationship between varying factors of production and out put therefore known as law of return to variable input or law of diminishing return.

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Production Function.
 Short run law of production- (Diminishing returns)

“The law of diminishing returns state the relationship between varying factors of production and out put therefore known as law of return to variable input or law of diminishing return”. Assumption of the law1. The state of technology is given 2. Labor is homogeneous. 3. Input prices are given.

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Production Function.
 Short run law of production- (Diminishing returns)

“The law of diminishing returns state that when more & more units of a variable inputs are applied to a given quantity of fixed inputs, the total output initially increase at a increasing rate & then at constant rate but it will eventually increase at diminishing rates”. Stages of production1.Stage one increase at increasing rate. 2.Stage two increase but at constant rate. 3.Stage three total production decrease.

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Stages of Production N0 0f Workers Total Marginal Average Stages of Production Production Production Production TP MP AP . 0 24 72 138 216 300 384 462 528 576 600 594 552 0 24 48 66 78 84 84 78 66 48 24 -6 -42 0 24 36 46 54 60 64 66 66 64 60 54 46 III Negative return II Diminishing Return I Increasing Return

0 1 2 3 4 5 6 7 8 9 10 11 12

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Production Function.
 Short run law of production- (Diminishing returns)

More specifically the law of diminishing returns can be state as follows“Given the employment of fixed factor (capital) when more and workers are employed the return from the additional worker may initially increase but eventually decrease”. Reason for the law1.Indivisibility of fixed factor 2.Division of labour. 3.Per worker marginal productivity decrease after optimum utilization of capital.

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Production Function.
Application of Short run law of production-

(Diminishing returns)
It provides answer to what number of workers

to be employed at a given fixed input. How much to produce. More application in agriculture sector. May not apply universally to all kinds of production activities.

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Production Function.
Long Term laws of production.(Law of return to scale)

Production with Two variable inputs. In this section, we will discuss the relationship between inputs & outputs under the condition that both the inputs capital and labour are Variable factors. The technological relationship between changing scale of inputs and outputs is explained under the laws of returns to scales. the law of return to scale can be explained through the 1) Laws of returns to scales through Production function. 2) Isoquant Curve technique.

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Production Function.
Law of return to scale, Production function.

Laws of returns to scale explain the behavior of output in response to a proportional and simultaneous change in inputs. When a firm expands its scale there are three technical possibilities.i) Increasing Returns to scale ii) Constant returns to scale, iii) Diminishing returns to scale.
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Production Function.
Law of return to scale, Production function.

i) Increasing Returns to scale Output more than doubles when all inputs are doubled. Causes of increasing returns to scaleTechnical and marginal indivisibility Higher degree of specialization. It is known as economics of scale.

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Production Function.
Law of return to scale, Production function.

ii) Constant returns to scale, When the change in output is proportional to the change in inputs, it exhibits constant returns to scale. for ex if quantities of both the inputs, K and L are double and output is also double the return to scale is said to be constant.

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Production Function.
Law of return to scale, Production function.

iii) Diminishing returns to scale. The firm are faced with decreasing returns to scale when a certain proportionate change in inputs K, and L leads to a less than proportional change in output. Causes of Diminishing return to scale The diminishing return to management. Exhaustibility of natural resources.
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Production Function.
Law of return to scale, Production function.

iii) Diminishing returns to scale. The firm are faced with decreasing returns to scale when a certain proportionate change in inputs K, and L leads to a less than proportional change in output. Causes of Diminishing return to scale The diminishing return to management. Exhaustibility of natural resources.
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Production Function.
Law of return to scale, Isoquant curve.

Isoquant. Iso (Greek word)= equal And quant ( Latin word) = quantity. Equal production curve, or Production indifference curve. “ it is locus points representing various combinations of two inputs capital and labour yielding the same output”. Assumption1.There are only two inputs (L, K) 2.Two inputs (L,K) can substitute.
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Insoquant Schedule of input L & K.
Combination Input Units k OK4 OK3 OK2 OK1 Input Units L OL1 OL2 OL3 OL4 Total Output 100 100 100 100

A B C D

Five combination A, B, C, D of two substitute inputs L & K as presented in table yield the same level output.
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Properties of Insoquant Curve
Isoquant curves have a Negative slope.
 The negative slope in the of the insoquant implies substitution between the inputs. If one

input is increase reduced other input has to be increased.

Isoquant curves do not intersect nor are they tangent to one

another. Upper isoquant represent upper level of output. Indifference curves are convex to the origin
It is because diminishing Marginal Rate of Technical Substitution.  A rate at which a marginal units of labour can substitute a marginal units of capital.  Reason for MRTS- 1. No two factors are perfect substitute.

marginal

2. Inputs are subject to diminishing return.

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Optimal Input Combination.
Isocline, Budget Line Budget Constraint Line-

Which represents the alternative combinations of K & L that can be purchased out of the total cost.
Optimal input out put combination. Or least

cost combination.Least cost combination exists at a point where isoquent is tangent to the isocost line.

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Cobb Douglas Production
The

Cobb–Douglas functional form of production functions is widely used to represent the relationship of an output to inputs. It was proposed by Knut Wicksell (1851–1926), and tested against statistical evidence by Charles Cobb and Paul Douglas so it is called Cobb Douglas production function.

The theory is depended on the real practical experience

they get in U.S automobile industry.

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 The cobb Douglas function indicates constant returns to scale.  That is if factor of production are each raised by 1% then out

put will also increase by 1%.  Mathematically, the function can be stated as Y = ALαKβ, where: Y = total production (the monetary value of all goods produced in a year) L = labor input K = capital input A = total factor productivity α and β are the output elasticity's of labor and capital, respectively. They are the exponent equal to 1. These values are constants determined by available technology.

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Out Put elasticity or Elasticity of production  Output elasticity measures the responsiveness of output to a change in levels of either labor or capital used in production, when other thing remaining same.

For example if α = 0.50, 1% increase in labor would lead to approximately a 0.50% increase in output. Or β = 0.50, 1% increase in capital would lead to approximately a 0.50% increase in output. So as per the cobb Douglas Production function.

Y = ALαKβ, Α+β,=1 Means  1% increase in input would lead to approximately a 1% increase in output.

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Consider a cobb Douglas production function

with parameters A= 100, α = 0.50, β=.50 Production table for the production

function Y = RateαKβ, Y = 100L.50K.50, AL of
capital input 1 2 3 4 5 1 2 3 100 200

Total Out Put

400 4 5
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Rate of labour Input(L)

Relationship between Production & Cost function.
Cost function is the relationship between a firms costs and the firms output. The cost function is closely related to production function. Production function specifies maximum quantity of out put that can be produced from various combinations of inputs. Where as the cost function combines this information with input price on various outputs and their prices. Thus cost function is combination of production function and input prices.
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Cost Function
Some basic costs & Cost concept. Fixed cost:-

Fixed costs those which are fixed in volume for a certain given output. Fixed cost does not vary with variation in the output between zero & certain level of output. Variable Cost Variable costs are those which vary with the variation in the total output.
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Cost Function
Average variable cost. Counted

Average Variable cost(AVG)= Total Variable cost (TCV) Total out put. (Q) Total cost, Average Fixed cost, Average variable cost. Total cost= Total fixed cost+ Total variable cost. Average Total Cost Average Total Cost(TCV)= Total out put.

Total cost (TC)

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Cost Out Put Relations

Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

FC TVC TC AVC AC MC
10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 0 5.15 8.8 11.3 12.8 13.8 14.4 15.1 16 17.6 20 23.7 28.8 35.8 44.8 56.3 70.4 10 15.2 18.8 21.3 22.8 23.8 24.4 25.1 26 27.6 30 33.7 38.8 45.8 54.8 66.3 80.4   5.15 4.4 3.75 3.2 2.75 2.4 2.15 2 1.95 2 2.15 2.4 2.75 3.2 3.75 4.4   15.2 9.4 7.08 5.7 4.75 4.07 3.58 3.25 3.06 3 3.06 3.23 3.52 3.91 4.42 5.03   5.15 3.65 2.45 1.55 0.95 0.65 0.65 0.95 1.55 2.45 3.65 5.15 6.95 9.05 11.5 14.2

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Cost Function
Some Important cost relationshipWhen MC falls Ac follows. But the rate of fall in MC is greater than AC. Reason MC decreasing cost is attributed to single marginal unit while in case of AC, decreasing marginal cost is distributed over entire out put.
When MC increases AC also increases but at a

lower rate for the same reason.
MC intersects AC at its minimum point. That is

output optimization point.
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Cost Function
Cost Curves and the law of diminishing

returns Given the employment of fixed factor (capital)

when more and more variable inputs are employed the output from the additional input may initially increase but eventually decrease”.
Given the employment of fixed factor (capital)

when more and more variable units are employed the cost from the additional input may initially decrease but eventually increase”.

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MarketIs a system by which buyers and sellers bargain for the price of product, settle the price and transact their business. Buyer Seller. Commodity. Price. How is the price of a commodity can be determined? The market structure influence firms pricing decisions. The nature and degree of competition make the market structure. Depending on the market structure the degree of competition varies between 0 to 1. Higher the degree of competition the lower the firms degree of freedom & control over the price of its own product & vice versa.

Market Structure and Pricing Decision

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Market Structure and Pricing Decision
Types of the market Structure-

1. Perfect Competition2. Imperfect Competitiona). Monopolistic competition. b). Oligopoly c). Monopoly. The theory of pricing explains pricing decisions and profit behavior of the firms in different kinds of market structure.
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Market Structure and Pricing Decision
Perfect Competition1.Large number of sellers & buyers. 2.Homogeneous product. 3.Perfect mobility of factors of production. 4.Free entry & free exit. 5.Absent of collusion or artificial collusion. 6.No government intervention. Competition-

As characteristic perfect competition is uncommon phenomenon. Up to some extant we can find perfect competition in Financial market & agriculture market. But it provides starting point and analytical framework for pricing theory.
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Price Determination Under Perfect Competition.
Price in perfectly competitive market is determined by the market forcesMarket demand & Market supply. Market Demand- refers to the demand for the industry as a hole. It is sum of quantity demanded by each individual consumer. Market Supply – refers to the sum of quantity supplied by the individual firms in industry. So market price is determined for the industry and given to the firm. So sellers are not price makers but they are price takers.

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Price $10 8 6 4 2 0

Market Market supply Price $10 8 6 4 Market demand 2 1,000 Quantity 3,000 0

Firm

Individual firm demand

10 20 30 Quantity

Profit-Maximizing Level of Output
What happens to profit in response to a

change in output is determined by marginal revenue (MR) and marginal cost (MC).
A firm maximizes profit when MC = MR.

Profit-Maximizing Level of Output
Marginal revenue (MR) – the change in total

revenue associated with a change in quantity sold.
Marginal cost (MC) – the change in total

cost associated with a change in quantity produced.
A perfect competitor accepts the market price

as given. As a result, marginal revenue equals price

Quantity Price = MR Produce 35.00 0 d

35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00

1 2 3 4 5 6 7 8 9 10

28.00 20.00 16.00 14.00 12.00 17.00 22.00 30.00 35.00 54.00 68.00

Margi nal Cost

Costs

MC

60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 910Quantity A A C B P=D= MR

The Marginal Cost Curve Is the Supply Curve
The MC curve tells the competitive firm how

much it should produce at a given price.

The firm can produce the quantity at which

marginal cost equals marginal revenue which in turn equals price.

Determining Profit and Loss From a Graph
Find output where MC = MR. The intersection of MC = MR (P) determines the quantity the firm will produce if it wishes to maximize profits. The firm makes a profit when the ATC curve is

below the MR curve. The firm incurs a loss when the ATC curve is above the MR curve.

MC MC MC Price Price Price 65 65 65 60 60 60 55 55 55 ATC 50 50 50 ATC 45 45 45 40 40 D A P = MR 40 Loss P = MR 35 35 35 P = MR 30 30 30 Profit B ATC AVC 25 25 C 25 AVC AVC E 20 20 20 15 15 15 10 10 10 5 5 5 0 0 0 1 23 4 567 89 1 12 1 23 4 5 67 891012 1 23 4 5 67 891012 Quantity Quantity Quantity 0 (a) Profit case (b) Zero profit case (c) Loss case

The Shutdown Point
The firm will shut down if it cannot cover

average variable costs.
A firm should continue to produce as long as

price is greater than average variable cost. If price falls below that point it makes sense to shut down temporarily and save the variable costs.

Long-Run Competitive Equilibrium
Profits and losses are inconsistent with long-

run equilibrium.
Profits create incentives for new firms to enter,

output will increase, and the price will fall until zero profits are made. The existence of losses will cause firms to leave the industry.

Output, Price, and Profit in Perfect Competition
Long-Run Adjustments In short-run equilibrium, a firm may earn an economic profit, earn normal profit, or incur an economic loss and which of these states exists determines the further decisions the firm makes in the long run. In the long run, the firm may:  Enter or exit an industry  Change its plant size

Pricing under pure Monopoly
 Monopoly-

The term pure monopoly signifies an absolute power to produce and sell a product which has no close substitute. In other words a monopoly market is one in which there is only one seller of product having no close substitute. Causes & Kinds of Monopolies-

1. Legal Restrictions 2. Control over key raw materials 3. Efficiency.

Pricing under pure Monopoly
 Monopoly Pricing and output decision-

As under perfect competition pricing and output decision under monopoly are based on revenue and cost conditions. AC & MC curves in a competitive and monopoly market are generally identical but revenue conditions differ.

(a) MC E 40 Total Loss ATC 50 40 32 Total Profit D 10,000 Number of MR Subscribers E

(b) ATC MC AVC

D 10,000 Number of MR Subscribers

Profit And Loss
Monopoly firm faces a downward sloping demand curve,

marginal revenue is less than price of output

Monopoly will always produce at an output level where

marginal revenue is positive

A monopoly earns a profit whenever P > ATC A monopoly suffers a loss whenever P < ATC

Long run pricing decision in monopoly
In the long run a Monopolist gets an

opportunity to expand the size of is firm sale more units at lower price with a view to enhance its long run profits.

So in long run monopolist will earn an

economical profit.

Pricing under pure Monopoly
 Monopoly Pricing and output decision-

As under perfect competition pricing and output decision under monopoly are based on revenue and cost conditions. AC & MC curves in a competitive and monopoly market are generally identical but revenue conditions differ.

Price discrimination. Under certain conditions, a firm with market power is able to charge different customers different prices. This is called price discrimination. Price discrimination is the ability to charge different prices to different individuals or groups of individuals.

Monopoly &Price Discrimination
Necessary conditions for price discrimination.

Market can be separable. Limit the customers ability to resell its product from one market to another. Different market must have different elasticity of demand; Profit maximizing output is much larger then the quantity demanded.

Monopoly &Price Discrimination
A

price-discriminating monopolist can increase both output and profit.

 It

can charge customers with more inelastic demands a higher price. can charge customers with more elastic demands a lower price.

 It

Perfect Price Discrimination
First degreeA firm with market power could collect the entire consumer surplus if it could charge each customer exactly the price that customer was willing and able to pay. This is called perfect price discrimination or first degree.

Second degreeUnder this monopolist divide the potential buyers into the blocks e.g rich, middle class, poor class & sell the product at different price.

Third degreeSet the different price in different market having deferent price elasticity.

Monopolistic Competition
Monopolistic competition

is a market structure in which there are many firms selling differentiated products. The model of price & output determination under monopolistic competition was developed by Edward H Chamberlin.

Monopolistic Competition
Characteristics:
Many number of firms in the industry The products produced by the different firms are

differentiated

Entry and exit from the industry is relatively easy Consumer and producer knowledge imperfect

Monopolistic Competition
Major Automobile player in India Ashok Leyland HMT Tractors Royal Enfield Audi AG Honda Motors Co. Ltd. San Motors Bajaj Auto Hyundai Motors Scooters India Ltd BEML Indofarm Tractors Skoda Auto India BMW Kinetic Motor Co. Ltd. Sonalika Tractors Bentley Motors Limited Lamborghini Suzuki Motors Chevrolet LML India Swaraj Mazda Ltd. Daewoo Motors Mahindra & Mahindra Tafe Tractors Ltd. Eicher Motors Maruti Suzuki India Ltd. Tata Motors Escorts Ltd. Mercedes Benz Telcon Fiat India Pvt Ltd Mitsubishi Motors Terex Vectra Force Motor Monto Motors Toyota Kirloskar Motors

Monopolistic Competition

Ford Motors General Motors Hero Honda Hindustan Motors

Nissan Motors Porsche Reva Electric Co. Rolls-Royce Motor

TVS Motor Co. Volkswagen Volvo Yamaha Motor

Product Differentiation
Product differentiation Implies that the products are different enough that the producing firms exercise a “mini-monopoly” over their product.
The firms compete more on product differentiation

than on price.

Entering firms produce close substitutes, not an

identical or standardized product.

Product Differentiation
Firms may differentiate products by perceived quality,

reliability, color, style, safety features, packaging, purchase terms, warranties and guarantees, location, availability (hours of operation) or any other features.  Marketing is often the key to successful differentiation. The goals of advertising include shifting the demand curve to the right and making it more inelastic. Brand names may signal information regarding the product, reducing consumer risk.

Short run profit determination diagram:
Cost/Revenue

This is a short run equilibrium position for a firm in a monopolistic market structure.

MC AC

1.00

Abnormal Profit
0.60

Marginal Cost and The demand will be the Average Cost curve facing the firm will However, same shape.be downward Sincesloping and products the additional because the represents the received from revenuedifferentiated in sales. are AR earned from each unit sold falls, firm will some way, the the MR curve lies undersell only be able to the AR curve.output by lowering extra If the firm produces Q1 and price. sells each unit for 1.00 on average with the cost (on We firm for each where average) producesunit being MR the firm will 60p, = MC (profit make 40p x maximising output). At Q1 in abnormal profit. this output level, AR>AC and the firm makes abnormal profit (the grey shaded area).

MR
Q1

D (AR)
Output / Sales

Monopolistic or Imperfect Competition
Long run profit determination diagram:
Cost/Revenue

MC AC

MR1 Q 1

MR

AR1

D (AR)
Output / Sales

Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the AR and MR curves shift inwards as

Monopolistic
Long run profit determination diagram:
Cost/Revenue

MC AC

AR = AC

MR1 Q 2 Q 1

MR

AR1

D (AR)
Output / Sales

Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm will make normal profit.

Monopolistic
Long run profit determination diagram:
Cost/Revenue

MC AC

AR = AC

MR1 Q 2

AR1
Output / Sales

Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm will make normal profit.

Monopolistic Competition profit loss situation
Monopolistic competitor may make profit, loss

or no profit no loss (normal profit) in short run.
Monopolistic competitor make zero economic

profit in the long run.

Oligopoly
Oligopoly “Is a market structure in which there is few sellers selling homogenous or differentiated products”. For ex industries like cement, steel, petrol cooking gas, chemicals, aluminum, sugar etc.

Oligopoly Market
Characteristic of Oligopoly Market. 1.Small number of sellers. 2.Interdependence of decision making. 3.Barriers to entry.
• significant economies of scale • strong product name recognition

1.Indeterminate price and output.

Firms rarely engage in price decrease that is considering a price reduction may wish to estimate that competing firms would also lower their prices and it will give rise to price war. Or if the firm is considering a price increase it may want to know whether other firms will also increase prices or hold 133 existing prices constant.

Oligopoly
Oligopoly

Since firms can compete on different levels, and with respect to many choice variables, no one model can neatly capture oligopoly behavior.
– Kinked Demand curve -Price leadership – Limit pricing and entry deterrence – Quality competition – Game theoretic models that focus on strategies

Oligopoly
Kinked Demand Curve Kinked demand curve model of oligopoly was developed by Paul M Sweezy. He has tried to show through his kinked demand curve analysis that price and output once determined under oligopolistic conditions, tend to stabilizer rather than fluctuating.

Oligopoly
Kinked Demand Curve An oligopolistic faces a downward sloping demand curve but the elasticity may depend on the reaction of rivals to changes in price and output. (a) rivals will not follow a price increase by one firm therefore demand will be relatively elastic and a rise in price would lead to a fall in the total revenue of the firm. (b) rivals are more likely to match a price fall by one firm to avoid a loss of market share. If this happens demand will be more inelastic and a fall in price will also lead to a fall in total revenue.

Oligopoly
Kinked Demand Curve. The kinked-demand curve is a demand curve comprised of two segments, one that is relatively more elastic, which results if a firm increases its price, and the other that is relatively less elastic, which results if a firm decreases its price. These two segments are joined at a corner or "kink." This demand curve is used to provide insight into why oligopoly markets tend to keep prices relatively constant.

Oligopoly
Kinked Demand Marginal Revenue Curve. As always, the marginal revenue curve lies below the relevant demand curve. If the firm lowers price below P* a strong reaction from competitors occurs in the form of industry wide price drops. This causes MR to drop dramatically, causing a gap in the curve.

Pricing Strategies
Price Leadership. Marginality rules determines the profit maximization at the level of output where MR=MC. But in real business world, business follow a variety of pricing rules and methods depending on the conditions faced by them. Some important pricing strategies and methods as follows.1.Cost plus pricing 2.Multiple Product pricing. 3.Skimming pricing policy. 4.Penetration price policy .

Pricing Strategies
Cost Plus Pricing. Cost plus pricing is also known as mark up pricing, average cost pricing or full cost pricing. The general practice under this method is to add a fair percentage of profit margin to the average variable cost(AVC). P= AVC+AVC(m).

Pricing Strategies
Product line Pricing. Establishing a single price for all products in a product line, such as for dress materialprice of 2550 for the high-priced line, 1450 for the medium-priced line, and 350 for the lower-priced line.

Pricing Strategies
Multiple Product Pricing. Almost all companies have more than one product in their product . Portfolio. For example refrigerators, TV sets, radio & car models produced by the same company may be treated as different product for at least pricing purpose. The pricing under these conditions is known as multi Product pricing or product line pricing.

Pricing Strategies
Skimming Pricing policy. This pricing strategy is intended to skim the cream of the market, by setting a high initial price. This initial price would generally accompanied by heavy sales promotion expenditure. Such pricing is more effective if there is no close substitute product is available.

Pricing Strategies
Penetration Pricing policy. In contrast to skimming price policy the penetration pricing strategy involves a reverse strategy. Under this they fix a lower initial price to trap the market as quickly as possible and intend to maximize the profit. Such pricing strategy they use where there is more substitute products are available.

Almost an eighth Wonder
The Indian economy grew at 7.9% in the JulySeptember period, its fastest pace in the last six quarters. The growth figure surpassed individual projections of more than 25 economists surveyed by various agencies and is second only to China’s among major economies. Chinese economy grew 8.9% in the September quarter.

Almost an eighth Wonder

Almost an eighth Wonder
KEY DRIVERS High govt expenditure, funded largely through borrowings
Increased incomes in rural areas due to greater social

spending and high farm goods prices

Higher govt salaries & Pay Commission arrears Low interest rates & higher incomes driving demand Private consumption growth has picked up at 5.6% in the

quarter against the dismal 1.6% in the previous quarter.

Pickup in investments. Gross fixed capital formation up

7.3% compared to 4.2% in the previous quarter

Almost an eighth Wonder
IMPLICATIONS Growth forecast for 2009-10 likely to be hiked

to over 7%.

More pressure on govt to start unwinding

stimulus moves, but cloud on demand support if govt expenditure drops.

RBI could tighten rates sooner than expected.
‘GDP NOS IN    LINE WITH 8% GROWTH PROJECTION’

National Income Concept and Measurement.
“National income is the outcome of all economic activities of a nation valued in term of money during a specific period”. Economic activityall human activity which create goods & services that can be value in term of money. Non Economic activityall human activity which create goods & services that can not be value in term of money.

National Income Concept and Measurement.
Different ways of Measuring national incomeProduction Method GNP- Gross national Product. Income Method. GNI- Gross national Income. Expenditure Method GNE- Gross national Expenditure. GNP=GNI=GNE.

National income is the outcome of all economic activities of a nation valued in term of money during a specific period”. Economic activityall human activity which create goods & services that can be value in term of money. Non Economic activityall human activity which create goods & services that can not be value in term of money.

Revenue Goods & Services sold

Market for Goods and Services

Spending Goods & Services bought

Firms

Households

Inputs for production Wages, rent, and

Market for Factors of Production

Labor, land, and capital Income
151

Resource Income

Businesses

Investment

Loanable Funds

Saving

Households

Spending

Government

Taxes

Spending for Goods and Services

National Income Concept and Measurement.
Production Method (GNP).
This method views national income from output side. This method consists of finding out the Net value of all

commodities & services of the economy for the period & adding them.

To avoid double counting only the value of final goods and

service in included.

GNP = All goods & services produced in the economy * Net Prices

National Income Concept and Measurement.
Income Method (GNI or NI).
This method is also known as factor income

method. It counts the National income from distribution side.
NI is obtained by totaling all the incomes earn

by factors of production. means GNI= R+W+P+I.

But transfer payment is not the part of

national income.

National Income Concept and Measurement.
Expenditure Method (GNP).
It is additions of all expenditure made on goods &

services in the economy during the specific period.
means it is summation of expenditures made by

households, firms and government together Y = C + I + G + (X – M) Y = GDP, C = consumption expenditure, I = investment expenditure,  G = Government expenditure, X = exports, M = imports

Concepts of National Income
 Gross

national product (GNP) GNP is defined as the value of all final goods and services produced during a specific period, usually one year plus income earned abroad by the national minus incomes earned locally by the foreigners.

Gross Domestic product (GDP)  The Gross domestic product is defined as the market value of all final goods & services produced in the domestic economy during year , plus income earn locally by the foreigners minus income earned abroad by the nationals.  GDP= GNP+ income earn locally by the foreigners income earned abroad by the nationals

156

Concepts of National Income
 Net

national product (NNP) It is derived by deducting depreciation or capital consumption from GNP.

National Income  Net national product income at factor cost is properly known as National Income. It is obtained by deducting indirect taxes and adding subsidies to Net national product. Private Income  Private income may be defined as the income obtained by private individual from any sources, it includes retained earning of corporations.
157

Concepts of National Income
Personal income
Personal income means the spendable income at current prices available to individuals before personal taxes are deducted. It excludes undistributed profit.
 Disposable

personal income is the income that household and non corporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes.

158

Concepts of National Income

Some Accounting RelationshipAt Market price. GNP= GNI (Gross National Income) GDP= GNP less Income from abroad. NNP= GNP less depreciation. At Factor price. GNP(at factor cost)=GNP at market price less indirect tax + subsidies. NNP(at factor cost)= NNP at market price less indirect tax + subsidies. NDP (at factor cost)= NDP at market price less indirect tax + subsidies.
159

Almost an eighth Wonder
The Indian economy grew at 7.9% in the JulySeptember period, its fastest pace in the last six quarters. The growth figure surpassed individual projections of more than 25 economists surveyed by various agencies and is second only to China’s among major economies. Chinese economy grew 8.9% in the September quarter.

Almost an eighth Wonder

Almost an eighth Wonder
KEY DRIVERS High govt expenditure, funded largely through borrowings
Increased incomes in rural areas due to greater social

spending and high farm goods prices

Higher govt salaries & Pay Commission arrears Low interest rates & higher incomes driving demand Private consumption growth has picked up at 5.6% in the

quarter against the dismal 1.6% in the previous quarter.

Pickup in investments. Gross fixed capital formation up

7.3% compared to 4.2% in the previous quarter

Almost an eighth Wonder
IMPLICATIONS Growth forecast for 2009-10 likely to be hiked

to over 7%.

More pressure on govt to start unwinding

stimulus moves, but cloud on demand support if govt expenditure drops.

RBI could tighten rates sooner than expected.
‘GDP NOS IN    LINE WITH 8% GROWTH PROJECTION’

National Income Concept and Measurement.
“National income is the outcome of all economic activities of a nation valued in term of money during a specific period”. Economic activityall human activity which create goods & services that can be value in term of money. Non Economic activityall human activity which create goods & services that can not be value in term of money.

National Income Concept and Measurement.
Different ways of Measuring national incomeProduction Method GNP- Gross national Product. Income Method. GNI- Gross national Income. Expenditure Method GNE- Gross national Expenditure. GNP=GNI=GNE.

National income is the outcome of all economic activities of a nation valued in term of money during a specific period”. Economic activityall human activity which create goods & services that can be value in term of money. Non Economic activityall human activity which create goods & services that can not be value in term of money.

Revenue Goods & Services sold

Market for Goods and Services

Spending Goods & Services bought

Firms

Households

Inputs for production Wages, rent, and

Market for Factors of Production

Labor, land, and capital Income
166

Resource Income

Businesses

Investment

FINANCIAL MARKET

Saving

Households

Spending

Government

Taxes

Spending for Goods and Services

The circular flow of income

Factor payments

Consumption of domestically produced goods and services (Cd)

The circular flow of income

Factor payments

Consumption of domestically produced goods and services (Cd)

BANKS, etc

Net saving (S)

The circular flow of income

Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

BANKS, etc

Net saving (S)

The circular flow of income

Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

BANKS, etc

GOV.

Net saving (S)

Net taxes (T)

The circular flow of income

Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc GOV.

Net saving (S)

Net taxes (T)

The circular flow of income

Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc GOV. ABROAD

Net saving (S)

Import Net expenditure (M) taxes (T)

The circular flow of income

Investment (I)

Export expenditure (X)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc GOV. ABROAD

Net saving (S)

Import Net expenditure (M) taxes (T)

The circular flow of income

Investment (I)

Export expenditure (X)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc GOV. ABROAD

Net saving (S)

Import Net expenditure (M) taxes (T)

WITHDRAWALS

The circular flow of income
INJECTIONS
Export expenditure (X)

Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc GOV. ABROAD

Net saving (S)

Import Net expenditure (M) taxes (T)

WITHDRAWALS

National Income Concept and Measurement.
Production Method (GNP).
This method views national income from output side. This method consists of finding out the Net value of all

commodities & services of the economy for the period & adding them.

To avoid double counting only the value of final goods and

service in included.

GNP = All goods & services produced in the economy Net Prices

National Income Concept and Measurement.
Income Method (GNI)
This method is also known as factor income

method. It counts the National income from distribution side.
GNI is obtained by totaling all the incomes earn by

factors of production. means GNI= R+W+P+I+NFIA (net factor income from abroad)

But transfer payment is not the part of national

income.

National Income Concept and Measurement.
Expenditure Method (GDP).
It is additions of all expenditure made on goods &

services in the economy during the specific period.
means it is summation of expenditures made by

households, firms and government together Y = C + I + G + (X – M) Y = GDP, C = consumption expenditure, I = investment expenditure,  G = Government expenditure, X = exports, M = imports

Concepts of National Income
 Gross

national product (GNP) GNP is defined as the value of all final goods and services produced during a specific period, usually one year plus income earned abroad by the national minus incomes earned locally by the foreigners.

Gross Domestic product (GDP)  The Gross domestic product is defined as the market value of all final goods & services produced in the domestic economy during year , plus income earn locally by the foreigners minus income earned abroad by the nationals.  GDP= GNP-NFIA (net factor income from abroad).  GDP= C + I + G + (X – M)

180

Concepts of National Income
 Net

national product (NNP) It is derived by deducting depreciation or capital consumption from GNP.

National Income  Net national product income at factor cost is properly known as National Income. It is obtained by deducting indirect taxes and adding subsidies to Net national product. Private Income  Private income may be defined as the income obtained by private individual from any sources, it includes retained earning of corporations.
181

Concepts of National Income
Personal income
Personal income means the spendable income at current prices available to individuals before personal taxes are deducted. It excludes undistributed profit.

 Disposable

personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes.

182

Concepts of National Income

Some Accounting RelationshipAt Market price. GNP= GNI (Gross National Income) GDP= GNP less Net Income from abroad. NNP= GNP less depreciation.

At Factor price. GNP(at factor cost)=GNP at market price less indirect tax + subsidies. NNP(at factor cost)= NNP at market price less indirect tax + subsidies. NDP (at factor cost)= NDP at market price less indirect tax + subsidies.
183

Particular
1 2 3 4 5 6 7 8 9 10 11 12 Wages & Salaries Imports of goods & services Rent Value added in Agriculture Govt. current expenditure Capital Consumption Value added in Construction Consumers Expenditure Dividends Income from self employment Exports of goods & services Undistributed profit

Rs. Million
430 220 50 100 140 70 50 450 500 60 650 110

Gross RS. Gross National National millio Expenditure Product ns Value added 100 Consumer Exp. 450 in agri. Value added 600 Govt exp 140 in Manufacturin g Construction 50 Gross Fixed inv 150 Distribution Other sectors GNP Less Dep NNP

Gross National Income Wages & Salaries Self employment 430 60

Company profit 500 dividends 150 Change in stock 10 Retained profits 110 270 Exports 650 Public corporations 20 less imports GNE less dep NNE -220 1170 -70 1100 Rent GNI less dep NNI 50 1170 -70 1100
185

1170 -70 1100

Unemployment
If a person has ability to work, willingness to

work but not able to get job at the given market wage rate then he is called unemployed person.
In common parlance, anybody who is not

gainfully employed in any productive activity, is called unemployed.
Unemployment can divided in Two type. Voluntary unemployment. Involuntary unemployment.
186

Unemployment
Voluntary unemployment

Means the persons within working population, who may be interested in jobs at wage rate higher than the prevailing wage rates in the labour market. And wiling to be unemployed.
Involuntary unemployment

Is situation in which person fail to get jobs even when they are prepared to accept such jobs at the prevelling wage rate.
187

Unemployment
Types of Involuntary unemployment Structural unemployment. Seasonal unemployment Cyclical unemployment. Disguised unemployment. Technological unemployment. Frictional unemployment.

the persons within working population, who may be interested in jobs at wage rate higher than the prevailing wage rates in the labour market. And wiling to be unemployed.

Involuntary unemployment

Is situation in which person fail to get jobs even when they are prepared to accept such jobs at the prevelling wage rate.

188

Unemployment
Structural unemployment.

Unemployment caused as a result of the decline of industries and the inability of former employees to move into jobs being created in new industries.
Seasonal unemployment

Unemployment caused because of the seasonal nature of employment – tourism, skiing, cricketers, beach lifeguards, etc.
189

Unemployment
Disguised unemployment.

If the total marginal contribution of the worker to the total is zero then it is called as Disguised unemployment.
Cyclical unemployment.

Cyclical unemployment is that which occurs due to cyclical nature of business. During recession phase over all demand for labour is low and during growth demand for labour is high.
190

Unemployment
Technological unemployment.

Unemployment caused when developments in technology replace human effort – e.g in manufacturing, administration etc.
Frictional unemployment.

It is the nature of temporary unemployment caused by continual movement of people between one region to another region and one job to another job.
191

Inflation
Inflation is an increase in the overall level of

prices.
According to Milton Friedman- inflation is a

sustained increase in price.
It implies a continuously rising trend in general

prices.
Deflation, is an continuously decreasing in the

overall level of prices.

192

Inflation
Causes of Inflation Demand Pull Factors

Defined as: - Excess demand condition pulls up prices of goods and services and lead to price rise.
Cost pull factors. Some factors of production are responsible for

rising the cost of production it leads to price rise.
193

Inflation
Demand pull factors are as follows. Population pressure. Mounting govt. expenditure Growing supply of money Growing deficit financing Growing black money.

194

Inflation
Cost Push factors are as follows. Slow growth rate of agriculture production. Increase in wages and bonus. Oil price hike. Rise in administered prices. Increate in tax rate.

195

Inflation
Other factors. Increase in procurement prices. Creation of artificial crisis. Devaluation of domestic currency.

196

Costs and Consequences of Inflation

Title: Overflowing Riches. Date: 1922. Description: A shopkeeper using a tea chest to store money which won't fit in the cash register during Germany's high inflation.

Description: Children using notes of money as building blocks during the 1923 German inflation crisis.

Costs and Consequences of Inflation
 Money loses its value and people lose confidence in

money as the value of savings is reduced  Inflation can get out of control - price increases lead to higher wage demands as people try to maintain their living standards.  Consumers and businesses on fixed incomes lose out because the their real incomes falls  Employees in poor bargaining positions lose out  Inflation can favor borrowers at the expense of savers – because inflation erodes the real value of existing debts  Inflation can disrupt business planning and lead to lower investment  Inflation is a possible cause of higher unemployment  Rising inflation is associated with higher interest rates - this reduces economic growth and can lead to a recession

Types of inflation
 Creeping inflation  It is a situation in which the rise in general

price level is at a very slow rate over a period of time. Under creeping inflation, the price level raises upto a rate of 2% per annum. A mild inflation is generally considered a necessary condition of economic growth.
 Walking inflation  Walking inflation is a marked increase in the

rate of inflation as compared to creeping inflation. The price rise is around 5% annually.

Types of inflation
 Running inflation  Under running inflation, the price

increases is about 8% to 10% per annum.
 Hyper inflation  Galloping inflation is a full inflation. Keynes

calls it as the final stage of inflation. It is a stage of inflation which starts after the level of full employment is reached. Here price level rise

Inflation
Way to control inflation.  (1)Monetary Policy Monetary policy is a policy that influences the

economy through changes in the money supply and available credit. (a) Quantitative controls (b) Qualitative controls .

202

Inflation
Way to control inflation. Fiscal Policy  It is the budgetary policy of the government

relating to taxes, public expenditure, public borrowing and deficit financing. Changes in taxation Changes in Govt. Expenditure Public borrowing Control of deficit financing  
203

Inflation
Way to control inflation. Others Measures: Price support programme. Provision subsidies. Imposing direct control on prices of essential

items. Rationing of essential consumer goods in case of acute emergency.

204

Business Cycle
Gross Domestic Product is a measure of the value of all outputs in an economy in a single year - the value of all goods and services produced Gross domestic Product does not increase at a constant rate over time – there are variations in growth rate. There can be times of negative growth or positive growth i.e. GDP decreases & GDP increase.  These periodic movements in output, prices, and employment are known as the Economic or Business Cycle

Various phases of business Cycle
Expansion of business activities. Peak of boom or prosperity. Recession Trough the bottom of depression Recovery & expansion.

207

Expansion Peak Do

Recession

Expansion
rn tu Up Secular growth trend

Total Output

wn

tu rn

Trough

0

Time

Various phases of business Cycle
Expansion of business activities. Peak of boom or prosperity. Recession Trough the bottom of depression Recovery & expansion.

Parts of Economic Cycle Boom Low levels of unemployment – shortages of labour occur pushing 
up wage rates
High levels of consumer borrowing and spending Firms working at full capacity Profit levels high Inflation Increasing Interest rates increasing Boom in housing market

Parts of Economic Cycle – Recession
Growth rate of GDP is falling or negative Firms decrease production and reduce stocks Unemployment rises Inflation falls Investment falls Firms suffer from falling profits, falling returns

of investment, redundancy costs.

Parts of Economic Cycle – Recovery
Consumer confidence grows – leading to increased

borrowing and spending
Firms increase output – build up stock levels Spare capacity used, then Investment occurs Unemployment falls – it make take more than a year of

recovery for large changes in unemployment levels

Government and Economic Cycle
The government will attempt to control

fluctuations in economic growth
Aims to achieve growth at around trend level Use Fiscal and Monetary policy to achieve

this objective.

Profit
P

rofit means different thing to different people.
B

usinessman, Accountant, and Economist used the term profit with different meaning.
F

or Layman profit means all income flow to the investor.
F

or Accountant profit means excess of revenue over all the paid-out cost.
F

or economist concept of profit is of pure profit called as “economic profit”. Pure profit is return above the opportunity cost.

Profit
A

ccounting Profit Vs Economical profit.
A

ccounting Profit A

ccounting profit is surplus of revenue over and above paid cost. Including manufacturing and administration cost.
A

ccounting profit can be calculate as follows = TR- (W+R+I+M) Wh ere W = wages, I = Interest, R= Rent,

M = Material.

Profit
ccounting Profit Vs Economical profit. conomical Profit -

t takes into account the implicit and explicit costs. Implicit cost is opportunity cost. conomical Profit= TR- (Explicit Costs +Implicit costs)

Theories of profit
Wh

at are the source of profit?
Eco

nomist have given various opinion on this question which has created controversy and led to emergence of various theories of profit.
Prof

it as Rent of ability This

theory is given by F.A. Walker.
Acc

ording to him profit is the rent of “exceptional abilities that entrepreneurs may posses”.
As

like land profit is the difference between the earning of least and most efficient entrepreneur.

Dynamic Theory.

Walker. dynamic economy not in a static one.

This theory is given by J. B.Clark’s F.A. According to him profit arise in only a Static economy is one in which

absolute freedom of competition, population capital are stationary, product are homogeneous (perfect competition). Dynamic economy is one which 1) Increase in population. 2)Increase in capital formation. 3)Improvement in production technique 4) Multiplication of consumer wants. Entrepreneur how take advantage of changing condition make profit. In dynamic economy dis appearance and re emergence of profit is continuous process.

Theory of profit. given by F.B. Hawley in 1893.

Hawleys Risk This theory is According to

him profit is simply the price paid by society for assuming business risk. arise for such reason as obsolescence of product, fall in price, non availability of certain raw material etc.
In business risk

him profit consist of two part- 1) Risk which is all ready suffered or assumed by entrepreneur.

According to

2)Inducement to suffer the consequences of being exposed to risk in their entrepreneur adventure. The reason why he mentioned profit above actuarial is because risk taking is annoying, trouble some, disturbance anxiety of various kind.

Knights

theory of profit-Accordin g to him profit is residual return for bearing uncertainty not risk.
 

He divided risk into two part. Calculable & non calculable risk. Calculable risk is those whose probability of occurrence can be estimated with available data. (Fire, theft, accident etc). Next is the risk of which occurrence can not be estimated such as change in test of consumer, change in government policy etc. that is uncertainty faced by entrepreneur. Entrepre neurs are making decisions under uncertain condition. In this condition if their decision proved right they would earn profit.

Theories of profit
 

Schumpeter’s innovation theory of profit-This theory was developed by Joseph Schumpeter. His theory of profit is embedded in his theory of

Economic development.

His theory start with the stationary of static economic  equilibrium. In such profit can be made only by introducing innovations in business, it may includes1.Introducing of new product. 2.New method of production. 3.Opening of new market 4.New sources of raw material 5.Organising the industry in new innovative manner.

uncertainty not risk.

According to him profit is residual return for bearing

He divided risk into two part. Calculable & non  calculable risk. Calculable risk is those whose probability of occurrence can be estimated with available data. (Fire, theft, accident etc). Next is the risk of which occurrence can not be estimated such as change in test of consumer, change in government policy etc. that is uncertainty faced by entrepreneur. Entrepreneurs are making decisions under uncertain  condition. In this condition if their decision proved right they would earn profit.

MONETARY POLICY

MONETARY POLICY
INTRODUCTION
Monetary Policy is essentially a programme of action undertaken by the Monetary Authorities, generally the Central Bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving pre-determined macro-economics goals. At the time of inflation monetary policy seeks to contract aggregate spending by tightening the money supply or raising the rate of

MONETARY POLICY
OBJECTIVES
 To achieve price stability by controlling inflation and deflation.

 To promote and encourage economic growth in the economy.  To ensure the economic stability at full employment or potential level of output.

SCOPE OF MONETARY POLICY
The scope of Monetary policy depends on two factors 1.Level of Monetization of the Economy – In this all economic transactions are carried out with money as a medium of exchange . This is done by changing the supply of and demand for money and the general price level. It is capable of affecting all economics activities such as Production, Consumption, Savings, Investment etc. 2. Level of Development of the Capital Market Some instrument of Monetary Policy are work through capital market such as Cash Reserve Ratio (CRR) etc. When capital market is fairly developed then the Monetary Policy effects the level of economic activities by the change in capital

OPEN MARKET OPERATIONS
• The open market operations is sale and purchase of government securities and Treasury Bills by the central bank of the country. • When the central bank decides to pump money into circulation, it buys back the government securities, bills and bonds. • When it decides to reduce money in circulation it sells the government bonds and securities. • The central bank carries out its open market operations through the commercial banks.

Discount Rate or Bank Rate policy

 Discount rate or bank rate is the rate at which central bank rediscounts the bills of exchange presented by the commercial bank.  The central bank can change this rate increase or decrease depending on whether it wants to expand or reduce the flow of credit from the commercial bank.

Working of the discount rate policy
• A rise in the discount rate reduces the net worth of the government bonds against which commercial banks borrow funds from the central bank. This reduces commercial banks capacity to borrow from the central bank. • When the central bank raises its discount rate, commercial banks raise their discount rate too. Rise in the discount rate raises the cost of bank credit which discourages business firms to get their bill of exchange discounted.

Cash Reserve ratio
• The cash reserve ratio is the percentage of total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank. • The objective of cash reserve is to prevent shortage of cash for meeting the cash demand by the depositors. • By changing the CRR, the central bank can change the money. • When economic conditions demand a contractionary monetary policy, the central bank raises the CRR. And when economic conditions demand monetary expansion ,the central bank cuts down the CRR.

Statutory Liquidity Requirement

• In India ,the RBI has imposed another reserve requirement in addition to CRR. It is called statutory liquidity requirement. • The SLR is the proportion of the total deposits which commercial banks are statutorily required to maintain in the form of liquid assets in addition to cash reserve ratio.

Credit Rationing
 When there is a shortage of institutional credit available

for the business sector, the large and financially strong sectors or industries tend to capture the lion’s share in the total institutional credit.
 As a result the priority sectors and essential industries

are of necessary funds.  Below two measures are generally adopted:  Imposition of upper limits on the credit available to large industries and firms  Charging a higher or progressive interest rate on the bank loans beyond a certain limit.

Change in Lending Margins
• The banks provide loans only up to a certain

percentage of the value of the mortgaged property.

• The gap between the value of the mortgaged

property and amount advanced is called Lending Margin.

• The central bank is empowered to increase the

lending margin with a view to decrease the bank credit.

Moral Suasion

 The moral suasion is a method of persuading

and convincing the commercial banks to advance credit in accordance with the directives of the central bank in overall economic interest of the country.
 Under this method the central bank writes

letter to hold meetings with the banks on money and credit matters.

Expansionary Policy / Contractionary Policy
An Expansionary Policy increases the total supply of

money in the economy while a Contractionary Policy decreases the total money Supply into the market.
Expansionary policy is traditionally used to combat a

recession by lowering interests rates.
Lowered interest rates means lower cost of credit which

induces people to borrow and spend thereby providing steam to various industries and kick start a slowing economy.

Expansionary Policy / Contractionary Policy
A Contractionary Policy results in increasing interest

rates to combat inflation. An Economy growing in an unconstrained manner leads to inflation Hence increasing interest rates increase the cost of credit thereby making people borrow less. Due to lesser borrowing the amount of money in the system reduces which in turn brings down inflation. A Contractionary Policy is also known as TIGHT POLICY as it tightens the flow of money in order to contain Inflationary forces.

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