File
File
PACE 20, Park Road, Vallabh Nagar, Near Rajkumar Bridge, Indore (M.P.)
Mobile:- 9977404446, 9977604446
Compiled by – Roopa Trivedi (BE, MBA Gold Medalist Founder Director PACE)
PACE 20, Park Road, Vallabh Nagar, Near Rajkumar Bridge, Indore (M.P.)
Mobile:- 9977404446, 9977604446
NATURE AND SCOPE OF BUSINESS ECONOMICS,
ECONOMIC SYSTEM:
Central What provisions
How to Refers to the sum total of arrangements for the
produce? Economic are to made for
economic growth? production and distribution of goods and services
Problems
in a society
CAPITALIST ECONOMY
SOCIALIST ECONOMY MIXED ECONOMY
✓ Right to Private property
✓ Collective ownership of means of production ✓ Coexistence of both private and public
✓ Freedom of Enterprise
✓ Centrally planned economy sectors-
✓ Freedom of choice by consumers
✓ Economic equalities ✓ Planned Economy
✓ Profit Motive
✓ Social welfare ✓ Balanced regional development
✓ Consumer Sovereignty
✓ Lack of competition ✓ Dual system of pricing
✓ Competition
✓ Elimination of exploitation ✓ Depends on both markets and
✓ Price mechanism
✓ Propounded by Karl Marx and Frederic Engels in their work ‘The government for allocation of resource
✓ Inequalities of Income
Communist Manifesto’ published in 1848 ✓ Mixed economy is called
✓ Absence of Government Interference
✓ Also called “Command Economy” or a “Centrally Planned Economy” "CAPITALISM INSIDE AN
✓ Also called a free market economy or
✓ Resources are allocated according to the commands of a central planning OXYGEN TENT" - SCHUMPETER
laissez-faire economy
authority
Ep=∞
Quantity
THEORY OF CONSUMER BEHAVIOUR
UTILITY Assumptions
CARDINAL (MARSHAL)
•Utility is measurable
•Utility is additive
Want satisfying •Marginal utility of money is constant
power of commodity Law of diminishing •Consumer is rational
marginal utility
(LDMU) Consumer surplus
FEATURES = (What a consumer is willing to pay) - (What he actually pays)
= TU - P x Q
•Subjective Limitations of LDMU = Area above the price line and below the marginal utility curve
•Relative and variable
➢ Units consumed should be identical in all respects.
•Not measurable
➢ Habit, taste, treatment & income of the consumer remain unchanged.
•Utility, Usefulness, Pleasure ➢The different units consumed should consist of standard units.
are not always same ➢There should be no time gap or interval between the consumption of one unit and another unit i.e., there
•Abstract should be continuous consumption
➢The law may not apply to articles like gold, cash etc. where a greater quantity may increase the lust for it.
➢The shape of the utility curve may be affected by the presence or absence of articles which are substitutes
TYPES or complements.
DETERMINANTS Supply = Ability + Willingness to sell at a particular price in a given period of time
C Es< I
Price B
Es> I A
Es= I
Quantity
➢ Free gift from nature ➢ Human Element Steps in capital formation FUNCTIONS
➢ Indestructible ➢ Perishable ➢Planning
➢ Limited in supply ➢ Inseparable from labourer ➢Organizing
➢ Immobile ➢ Labour power differs ➢Savings ➢Risk bearing
➢ Heterogeneous ➢ Weak bargaining power ➢Mobilization of savings ➢Innovation
➢ Passive factor of production ➢ Productivity varies ➢Investment
➢ Land has multiple uses ➢ Has to choose between
hours of labour and leisure
➢ Mobile TYPES OF CAPITAL
➢ There is no rapid adjustment ➢Fixed capital Formulae
of supply of labour to the ➢AP = TP
PRODUCTION FUNCTION demand for it
➢Circulating capital
➢Real capital Q
➢Human capital ➢MPn = TPn – TPn–1
Short Run Long Run ➢Tangible capital ➢MP= TP
➢Individual capital Q
At least one All factors ➢Social capital
factor fixed variable
Y STAGE STAGE TP
Marginal product
II III
Scale of input
AP
ECONOMIES & DISECONOMIES OF SCALE
O MP X
Amt. of Variable Factor
Implicit cost (Opportunity costs) Explicit cost (Accounting cost) Outlay cost Opportunity costs
= Cost of factors owned by = Payments and charges made by = Actual expenditure of = Cost of forgone
entrepreneur and employed in the entrepreneur to the suppliers funds incurred in production alternatives
his own business of various productive factors
Direct Cost = Costs Indirect Cost = Costs Average Cost = Marginal Cost = Addition Variable Cost = Fixed Cost = Costs
which are traceable which are not Cost per unit of in the total cost on the Costs which vary which are not
to a particular traceable to specific output production of an with production dependent on
product, operation goods, services or additional unit of production
or plant operation commodity
FORMULAE
AC / ATC = TC POINTS TO REMEMBER TOTAL COST = FIXED COST
+
Q ➢AFC curve does not touch any axis.
VARIABLE COST
TC = ATC X Q ➢AFC is a rectangular hyperbola, is convex towards origin.
MCn =TCn – TCn-I ➢AFC is not U shaped.
= ▲TC (to be used when quantity ➢Till MC is below ATC, ATC falls.
▲Q changes by more than one unit)
➢When MC comes above ATC, ATC rises.
TC = TFC + TVC
➢Till MC is below AVC, AVC falls.
AFC = TFC AVC = TVC ➢When MC comes above AVC, AVC rises.
Q Q ➢MC cuts AVC and ATC at their respective minimas.
TFC = AFC x Q TVC = AVC x Q ➢SAC is called plant curve.
ATC = AFC+AVC ➢ LAC is called planning curve or envelop curve.
Short Run Cost Curves
Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311
MARKETS TYPES OF MARKET
On the On the basis On the basis of On the basis of On the basis of On the basis of
basis of of time nature regulation volume of business competition
area of transactions ➢Perfect
➢Imperfect
Relation Between Demand & Equilibrium Quantity – DIRECT ➢If demand is more, prevailing price MR,AR and Elasticity of Demand
Relation Between Demand & Equilibrium Price – DIRECT is less than equilibrium price MR = AR e-1
Relation Between Supply & Equilibrium Quantity – DIRECT ➢If supply is more, prevailing price is e
Relation Between Supply & Equilibrium Price – INVERSE more than equilibrium price If e> I, MR = Positive
If e< I, MR = Negative
SHUTDOWN POINTS DECISION REGARDING PRODUCTION
If e=I, MR = Zero
1) TR = TVC ➢MR>MC – Increase Production
2) AR = AVC ➢MR<MC – Decrease Production
3) MC = AVC(only for PCM) ➢MR=MC – Profit maximization or loss minimization point
MARKETS ON THE BASIS OF COMPETITION
MONOPOLISTIC
S. No. FEATURE PCM MONOPOLY OLIGOPOLY
COMPETITIVE
5 Entry Free Entry & Exit Restriction on Entry Free Entry & Exit Restriction on Entry
10 Works at what point of LAC Minima Falling portion of LAC Falling portion of LAC
Rhythmic fluctuations in aggregate economic activity that an economy experiences over a period of time are called business cycles or trade cycles.
EXPANSION RECESSION
• Full employment of resources
• Input prices reduce
• Production is at its maximum possible level
• Aggregate demand of goods and services falls
• Involuntary unemployment is almost zero and • Incomes of wage earners decline
whatever unemployment is there is either • Stock prices fall and unemployment increases.
frictional or structural.
• Prices and costs tend to rise faster.
• Good amounts of net investment
• Increasing prosperity DEPRESSION
• Depression is severe form of recession
• Growth rate becomes negative
PEAK 4 PHASES OF BUSINESS CYCLE
• Level of national income and expenditure declines
• This is the top or the highest point of the
business cycle. • Consumers are left with very less disposable income
• This is the end of expansion and it occurs when • Capital and consumer goods industry suffer from TROUGH
excess capacity
economic growth has reached a point where it
• There is mounting unemployment. • At the depth of depression when all economic
will stabilize for a short time and then move in
• Fall in interest rates activities touch the bottom, trough is reached.
the reverse direction.
• Actual demand stagnates • It is a very agonizing period causing lots of
• Consumers begin to review their consumption distress for all.
expenditure on housing, & durable goods
RECOVERY
CONTRACTION
• Increase in demand is halted • The process of reversal is initially felt in the
• It starts decreasing in certain sectors. labour market.
• There is a fall in the levels of investment and • Pervasive unemployment forces the workers to
employment. accept wages lower than the prevailing rates.
• Supply exceeds demand • The producers anticipate lower costs and better
• There is cancellation and stoppage of orders for business environment.
equipments and all types of inputs. • Employment increases,
• When contraction worsens stage of recession is • Aggregate demand picks up and prices
reached. gradually rise
Business cycles occur periodically although they do not INTERNAL CAUSES: EXTERNAL CAUSES: KEYNES:-
exhibit the same regularity. The intensity of fluctuations Fluctuations in effective demand
also varies. • Fluctuations in Effective • Wars
Business cycles have distinct phases of expansion, peak, Demand • Post War Reconstruction PIGOU:-
• Psychological factors
contraction and trough. Fluctuations in • Technology shocks
Business cycles generally originate in free market Investment • Natural Factors SCHUMPETER's:-
economies. • Innovation theory
Some sectors such as capital goods industries, durable
Variations in government • Population growth
consumer goods industry etc, are disproportionately
spending • Other Causes NICHOLAS KALDOR:-
affected by business cycles. As compared to agricultural • Macroeconomic policies Cobweb theory
sector, the industrial sector is more prone to the adverse • Money Supply HAWTREY:-
effects of trade cycles. • Psychological factors Purely monetary phenomenon
Business cycles are exceedingly complex phenomena; they
do not have uniform characteristics and causes.
Repercussions of business cycles get simultaneously felt on CYCLICAL BUSINESSES GLOBAL ECONOMIC CRISIS (2008-09)
nearly all economic variables.
Business cycles are contagious and are international in • Businesses whose fortunes are closely • To take the US Economy out of
character. recession post Technology Bubble Burst
linked to the rate of economic growth
Business cycles have serious consequences on the well 2000, the rate of interest was reduced.
being of the society. • These include fashion retailers, electrical • Credit became cheaper and the
goods, house-builders, restaurants, households, even with low
INDICATORS advertising, overseas tour operators, creditworthiness, began to buy houses in
construction and other infrastructure increasing numbers.
Leading Indicator - Those variables that change before the firms • House prices began to decline in 2006,
real output changes Housing bubble got burst in the second
Lagging Indicators - Changes in these indicators are LAGGING INDICATORS half of 2007
observable only after an economic Unemployment
trend or pattern has already occurred. Corporate profits
Coincident Indicator - Coincide or occur simultaneously with Labour cost per unit of output LEADING INDICATORS
the business-cycle movements Interest rates Changes in stock prices
Consumer price index Profit margins and profits
Commercial lending activity Indices such as housing, interest rates and
GREAT DEPRESSION, 1930 COINCIDENT INDICATORS prices
• GDP fell by around 15% between 1929 and 1932 Gross Domestic Product Value of new orders for consumer goods
• The economies of the world began recovering in 1933 Industrial production New orders for plant and equipment
Inflation Building permits for private houses
Personal income Fraction of companies reporting slower
INFORMATION TECHNOLOGY BUBBLE BURST OF 2000 deliveries
• Covered the period 1997-2000 Retail sales
Financial market trends Index of consumer confidence
• The collapse of the bubble took place during 1999–2001 Money growth rate
Gross Domestic Product at Market Prices or GDP at National and Real prices when GDP is measured
GDP at current Prices, It is known as Nominal GDP, but when
Refers to Market value of final Goods and it is converted at some base year prices, it is known as
Services produced during a year Real GDP or GDP at some constant prices.
Conversion of Nominal GDP into Real GDP.
Triple identity
GNP=GNI=GNE
Positive Negative
GNP at Factor
Externalities Externalities GNP at Market NNP at Market
Cost
External benefits External Prices Prices
Total national NNP at factor cost
received from Harms in Total National Net national
product at factor Net National Product
production process Production Product including Product that
cost but including that income which
without incurring Process net indirect taxes incudes net
depreciation does not include net
any extra Expenses indirect taxes and indirect taxes
net factor income
from abroad
National Income refers to monetary value of all the final goods and services produced in an economy counted without duplication
Output of Primary Sector or Agricultural output Output of Secondary Sector Output of Tertiary Sector or Net factor income from Rest of
or farming output or Industrial Output Service Sector world
National income = Net Value added from Primary sector + Net value added from secondary sector + Net value added from Tertiary Sector + Net factor
income from abroad – Net indirect taxes
National Income (Income Method) = Wages and Salaries + Rent and Royalties + Interest + Profits + Social Security contribution made by employers + Net
factor income from abroad
Private Final Government Final Gross Domestic Net Exports Net factor
Expenditure Method
Consumption Expenditure consumption expenditure Capital Formation (Exports Import) income from
Abroad
National income (Expenditure Method) = Private Final consumption expenditure + Govt. Final
consumption expenditure + Gross Domestic Capital formation – net indirect taxes - Capital consumption
allowance + Net factor income from aboard
Professional Academy of Competitive Excellence Designed by – CS Sheetal Verma, PACE, 8120655410
NATIONAL INCOME CALCULATION
1. NDPFC = COE + OS + MI
4. Private Income = NNPFC to private sector + net current transfer from govt.
+ net current transfer from rest of the world
+ National debt interest
6. Personal Disposable Income = Personal Income (-) Direct tax by households GDP deflator = Nominal GDP × 100
(-) Misc. receipts of govt. Real GDP
Reasons for market failure Market power Externalities Public goods Incomplete
Information
• Monopoly • Production
• Price maker ✓ +ve
• Non – excludable • Asymmetric
✓ -ve
• Non - rivalrous information
• Consumption
✓ +ve • Free rider problem • Adverse selection
✓ -ve • Moral hazard
Govt. Intervention to correct market failure
Part-A Part-B
Budget Procedure Execution of Budget
Outline of prevailing macro- Progress of Govt.
economic situation (+) on various
Preparation of Budget Presentation & enactment of budget Budget estimates for next developmental
financial year measures
countries tend to export goods whose production uses In Praise of Cheap Labor, published in Slate in 1997.
intensively the factor of production that is relatively
abundant in the country. Two key concepts giving advantages to countries that import goods
➢ Economies of Scale
➢ Network effects (Bandwagon Effect)
➢ Variable Tariff
➢ Government Procurement
Policies
➢ Preferential Tariff
➢ Trade-Related Investment
➢ Bound Tariff Measures
➢ Applied Tariffs ➢ Distribution Restrictions
➢ Escalated Tariff
➢ Restriction on post-sales Services
➢ Prohibitive tariff
➢ Administrative Procedures
➢ Import subsidies
➢ Rules of origin
➢ Tariffs as Response to Trade
Distortions ➢ Safeguard Measures
✓ Anti-dumping Duties ➢ Embargos
✓ Countervailing Duties
TRADE NEGOTIATIONS
Trading Bloc
Good Council Service Council Intellectual Property (TRIPS) Council
Customs union
Free-floating exchange rate system Managed Float Systems Fixed Exchange Rates
Exchange rates are set purely by private market Currency values are allowed to change, but Exchange rate between two currencies is
forces with no government involvement governments participate in currency markets in set by government policy.
an effort to influence those values
Appreciation Depreciation
Exchange Rates REVALUATION DEVALUATION
An increase in a A decrease in a
currency's value due to currency's value due to A discrete official A deliberate
Nominal Real
market forces of demand market forces of demand increase of the downward
and supply and supply otherwise fixed par adjustment in the
Rate at which a Rate at which a value of a nation’s value of a country's
person can trade the person can trade the currency. currency
currency of one goods and services of
country for the one country for the
Vehicle
Forex market participants currency of another goods and services
Currency -
country of another
Dollar
FDI FPI
The acquisition of at least ten percent of the ordinary Types of Foreign direct investors – Flow of financial capital
shares or voting power in a public or private enterprise ➢ Individuals
by non-resident investors ➢ Incorporated or unincorporated private or public
Moves to investment in financial
enterprises
stocks, bonds and other financial
➢ Associated groups of individuals or enterprises,
Direct investments are real investments in factories, assets, instruments
governments or government agencies
land, inventories etc. and involve foreign ownership of
➢ Estates
production facilities. By individuals and institutions through
➢ Trusts, or other organizations or any combination
of the above-mentioned entities. the mechanism of capital market
The investor retains control over the use of the invested
capital and also seeks the power to exercise control over Types of FDI Components of FDI Immediate effects on balance of
decision making to the extent of its equity participation. ➢ Horizontal ➢ Equity capital payments or exchange rates
➢ Vertical ➢ Reinvested earnings
➢ Conglomerate. ➢ Other direct
Modes of direct investments – stake in a firm at below 10 percent
➢ Opening of a subsidiary or associate company in a ➢
foreign country Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI)
➢ Equity injection into an overseas company,
➢ Acquiring a controlling interest in an existing foreign Investment involves creation of physical assets Investment is only in financial assets
company, Has a long term interest and therefore remain Only short-term interest and generally remain invested
➢ Mergers and acquisitions(M&A) invested for long for short periods
➢ Joint venture with a foreign company. Relatively difficult to withdraw Relatively easy to withdraw
➢ Green field investment Not inclined to be speculative Speculative in nature
➢ Brownfield investments Often accompanied by technology transfer Not accompanied by technology transfer
Direct impact on employment of labour and wages No direct impact on employment of labour and wages
Enduring interest in management and control No abiding interest in management and control
Securities are held with significant degree of influence Securities are held purely as a financial investment and
by the investor on the management of the enterprise no significant degree of influence on the management of
the enterprise
INDIAN ECONOMY: PRE INDEPENDENCE THE STAGNATED NATURE OF DOWNFALL OF INDIAN INDUSTRIES
➢ Between the first and the seventeenth century AD, INDUSTRIALISATION UNDER BRITISH RULE
India was the largest economy of the ancient and ➢ Factory-based production did not exist in India ➢ The destruction of Indian handicrafts and
the medieval world. before 1850 manufactures was mainly due to –
➢ It controlled between one third and one fourth of ➢ The cotton mill industry in India had 9 million ✓ Hostile imperial policies to serve the
the world's wealth spindles in the 1930s, which placed India in the British interests
ARTHASHASTRA fifth position globally ✓ Competition from machine- made goods
➢ It was a handbook for King Chandragupta Maurya. ➢ At the end of the 19th century, the Indian jute mill ✓ Shift in patterns of demand by domestic
➢ Arthashastra is the science of ‘artha’ which is, industry was the largest in the world in terms of the consumers favouring foreign goods
primarily, ‘wealth’ and, secondarily, ‘the land’ amount of raw jute consumed in production. ➢ Adverse effects on the traditional village
➢ There are seven vital elements, namely the King, ➢ India’s iron industry was ranked eighth in the world economy
Ministers, Farmlands, Fortresses, Treasury, ➢ Just before the Great Depression, India was ranked ✓ The zamindari system
Military and the Allies. as the twelfth largest industrialized country ✓ The demand for land under tenancy
measured by the value of manufactured products ✓ Absentee landlordism