Notes on Fundamentals Of Business And Managerial Economics:

            At the begining of our studies in economics, we come across two very important subjects – microeconomics and macroeconomics. It's highly likely that we study both of these topics as we learn more about economics, as they are fundamentals of economics.

            Microeconomics is the study of economic systems on a small scale on the other hand macroeconomics looks at the entire economy of the nation or the world as a whole.

Functions Of Lead Bank Scheme:
  1. The entire nation is served with the efficient commercial and co-operative banking sectors.
  2. Bank branches were opened every areas- backward and advanced to encourage and collect thrift savings and meet the credit requirements.
  3. The banks arranged for the developmental schemes and solve unemployment problems by extending all possible credit funds on the basis of priority plans.
  4. To educate people and bring and make them aware about the facilities provided under the Lead Bank Schemes
  5. Encouraging people to take advantage of the scheme.
Importance or Necessity Of Five Year Planning:

For a developing country, planning plays an important role for its economic development and progress the objectives of planning can be summarized as follows:

1. Achievement of High Economic Growth:

            Achievement of high rate of economic growth is the top most objectives of the economic planning process or the Five Year Plans.

2. Achievement of Self Reliance:

            Achievement of self reliance or reduction in the dependence on foreign countries can be achieved by emphasizing on production of food grains and oil seeds and also increasing the production of all those commodities on which the country is rich. The five year plans emphasizes on those aspects.

3. Removal of Poverty:

            Inorder to ensure that the benefits are percolates to the poorest of the poor and to raise their standard of living above the poverty line, several poverty alleviation programs have been devised since the fourth five year plans.

4. Removal of Unemployment:

            The five year plans have a crucial responsibility and objectives of generating employment for removal of unemployment, under employment and disguised unemployment.

5. Achievement of Modernization:

            It is an important objective of economic planning which involves taking the economy out from its dependence on the primary sector to its reliance on secondary and tertiary sector.

6. Reduction of Imbalance in the Economy:

            Another objective of five year plans is the reduction of regional disparities and imbalances in the economy.

7. Raising of Investment-Income Ratio:

            To bring the actual level of investment as a proportion of national income to a higher level requires an increase in the production capacity by increasing savings and an increase in the capital stock of the economy to ensure a sustain level of growth. For that steps are taken to raise the volume of GDP to near investment in successive five year plans.

Note On Internal Resource Mobilization For Planned Economic Development:

            The following are some of the steps taken for the mobilization of internal financial resources:

1. Taxation:

            The policies of taxation play an important role in the mobilization of internal resources.

2. Surplus from Budget:

            The surplus earned from the budget can be utilized for financing the five years plans and programs.

3. Surplus from Public Enterprises:

            A good amount of resources for financing our financing five year plans and programs comes from the surpluses of the public enterprises.

4.Private Savings:

            The internal private savings of the people contribute a good amount of financial resources for the five year plan. The two components for mobilizing private savings of the individuals are market borrowing and thrift savings of the individuals.

5.Deficit Financing:

             As taxation and borrowings from government have their limits, deficit financing have been considered as one important source of financing the plans in our country.

Definition Of Consumers's Equilibrium And Its Assumptions:

            "The term consumer's equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market".

            In short, when a consumer getting maximum satisfaction with available resources then he will be in a state of equilibrium.

Assumptions:

The following assumptions are made to determine the consumer's equilibrium position

1.Rationality:

             The consumer is rational. He wants to obtain maximum satisfaction given his income and prices.

2. Utility is Ordinal:

            It is assumed that the consumer can rank his preference according to the satisfaction of each combination of goods.

3. Consistency of Choice:

            It is also assumed that the consumer is consistent in choosing of goods.

4. Perfect Competition:

             There is perfect competition in the market from where the consumer is purchasing the goods.

5. Total Utility:

            The total utility of the consumer depends on the quantities of the good consumed.

Limitations Or Exceptions Of The Law Of Diminishing Marginal Utility:

There prevail some exceptions or limitations to the Law of Diminishing Marginal Utility:

  1. If the size of the units is not suitable, the law will not hold good.
  2. The law is based upon time factor. The law does not hold good if there is a gap between two meals
  3. The law is applicable to normal persons only and not to misers.
  4. The law assumes constant income which may not stand valid at times. Any change in income will falsify the law.
  5. The law does not stand good for hobbies. As because pursuing of hobbies increase the degree of satisfaction.

            To conclude, it can be stated that the law of diminishing utility, like any other laws of Economics, is simply a statement of tendency. It holds good provided other factors remain constant.

Practical Importance Of The Law Of Diminishing Marginal Utility:

            The importance of law of diminishing marginal utility is given below:

  1. Use in Consumption
  2. Use in Production
  3. Use in Exchange
  4. Use in Distribution
  5. Use in Public Finance.

            The law of diminishing utility has significant practical importance in economics. The law of demand, the theory of consumer's surplus, and the equilibrium in the distribution of expenditure are derived from the law of diminishing marginal utility.

1. Basis of the Law of Demand:

             The law of diminishing marginal utility and the law of demand are very closely related to each other. It can be said that as a person gets more and more of a particular commodity, the marginal utility of the successive units begins to diminish. So every consumer while buying a particular commodity compares the marginal utility of the commodity and the price of the commodity which he has to pay.

             From this, it can be concluded that the law of demand and the law of diminishing marginal utility are very closely inter-related.

2. Consumer's Surplus Concept:

            The theory of consumer's surplus is also based on the law of diminishing marginal utility. A consumer while buying a commodity compares the utility of the commodity with that of the price which he has to pay. In most of the cases, he is willing to pay more than what he actually should pay. The excess of the price that which he actually does pay is the economic measure of this surplus satisfaction. It is in fact difference between the total utility and the actually money spent.

3. Importance To The Consumer:

             A consumer in order to get the maximum satisfaction from his relatively scare resources distributes his income on commodities and services in such a way that the marginal utility from all the uses are same.

            Here again the concept of marginal utility helps the consumer in arranging his scale of preference for the commodities and services.

Definition Of Market:

            A market refers to a set of conditions in which buyers and sellers meet each other for the purpose of exchange of goods and services expressed in terms of money.

Elements Of Market:

            The essentials of a market are:

  1. Existence of one or more buyers and sellers.
  2. Presence of goods and services to be exchanged.
  3. A place or a region where buyers and sellers of goods get in close touch with each other.
Types Of Market/Market Model:

            Based on the number of firms in the market and also by the commodity to be exchanged, the economists on the basis of variation in the features of market described four market models:

  1. Perfect Competition.
  2. Pure Monopoly.
  3. Monopolistic Competition.
  4. Oligopoly.
Price And Output Determination Under Oligopoly:

            There is not a single theory which satisfactorily explains the pricing and output decisions under oligopoly. The reasons are:

  1. Sometimes there are only three of four firms dominating the market signifying tight oligopoly and at other times, the number of firms increases may be to 7-8 capturing 80% of the market (loose oligopoly).
  2. The goods produced under oligopoly may or may not be standardized.
  3. The firms under oligopoly sometime cooperate with each other in the fixing of price and output of goods. At another time, they prefer to act independently.
  4. In some situations the entry of new firms under oligopoly becomes very hard and at another time, they are quite loose.
  5. Finally, a firm under oligopoly cannot predict with certainty the reaction of the rival firms, thus making it difficult the determination of price and output.
Causes Of Oligopoly:

            The main reasons which give rise to oligopoly are as follows:

1. Economies of Scale:

Larger firms with heavy investment capacity capture major percentage of market leaving a very small portion for the smaller players. Thus, the heavy firms reap the economies of scale in production, sales, promotion, etc., and can compete to sustain and dominate the market. The smaller firms being unable to compete with the larger firms get eventually wiped out.

            Oligopoly is, thus, promoted due to the economies of scale.

2. Barriers to Entry:

            Many times, new firms cannot enter the industry as the big firms have the ownership of patents or control over the essential raw material used in the production of an output.

3. Merger:

            Sometimes, if the few firms in the industry smell the danger of entry of new firms, they immediately merge and formulate a joint policy with regard to the pricing and production of the goods.The joint action of a few big firms discourages the entry of new firms into the industry.

4. Mutual Interdependence:

             As the number of firms under oligopoly is very few, they therefore keep a strict vigil of the price charged by the rival firms in the industry. They generally avoid price war and try to create conditions of mutual interdependence.

Characteristics Of Oligopoly:

            The main characteristics of oligopoly are as follows:

  1. Oligopoly is a market structure characterized by a few firms. These handfuls of firms dominate the industry to set prices.
  2. All firms in an industry are mostly interdependent. Any action of one firm with regard to price, output, quality, product differentiation can cause a reaction on the part of other firms.
  3. Under Oligopoly, the existing firms try to obstruct entry of new firms into the industry.
  4. Under Oligopoly, the competing tries to predict the reactions of rival firms. It is a strategy game which they play.
Meaning And Definition Of Perfect Competetion:

Definition:

            The concept of perfect competition was first introduced by Adam Smith in his book "Wealth of Nations". Later on, it was improved by Edgeworth. However, it received its complete formation in Frank Kight's book "Risk, Uncertainty and Profit" (1921).

Defined by Leftwitch:

            In the opinion of Leftwitch, "Prefect competition is a market in which there are many firms selling identical products with no firm large enough, relative to the entire market, to be able to influence market price".

Defined by Bllas:

            In the opinion of Bllas, "The perfect competition is characterized by the presence of many firms. They sell identically the same product. The seller is a price taker".

Features/Characteristics Or Condition Of Perfect Competetion:

            The main features and characteristics of perfect competition are as follows:

(1) Existence of Large Number of Firms.

            The fundamental condition of perfect competition is that there has to be one or more than one firms in an industry. A single firm cannot influence the price of the product either by reducing or increasing its output. An individual firm takes the market price as given and adjusts its output accordingly. In a competitive market, supply and demand determine market price. The firm is price taker and output adjuster.

(2) Large Number of Buyers:

            Perfect Competitive Market is featured by the existence of very large numbers of buyers of the product. Purchasing of goods by a consumer should not affect the market price of the commodity. The purchasing of goods by a single consumer should not define the price of the product in the market.

(3) Homogeneous Product:

            Another provision of perfect competition is that same goods are produced by all the firms in the industry and the products are more or less identical. In the eyes of the consumer, the products of all firms are same.

(4) Free Entry:

            In a perfect competitive market, the firms have complete freedom of entering or leaving the industry as and when desired. There exists no barrier as such to enter or leave the industry.

(5) Complete Product Price Information:

            Another condition for perfect competition is that the consumers and producers have perfect information regarding the prevailing price of a product in the market. The consumers know the ruling price, the producers know production costs, and the workers know about their wage rates and so on.

(6) Profit Maximization:

            For perfect competition to exist, the sole objective of the firm must be to geximum profit.

Importance Of Perfect Competetion:

            Perfect competition model is a debatable topic in economic literature. It is rare in practice and it is argued that the model is based on unrealistic assumptions. The defenders of the model argue that:

  1. The theory of perfect competition has positive aspect and leads us to correct conclusions.
  2. The concept is useful in the analysis of international trade.
  3. In the allocation of resources.
  4. It also makes us understand as to how a firm adjusts its output in a competitive world.
Marginal Cost (MC):

Definition:

             Marginal Cost is an increase in total cost that results from a one unit increase in output. It is defined as, "The cost that results from a one unit change in the production rate".

     For example, if the total cost of producing one pen is $18 and the total cost of producing two pens is $14, then the marginal cost of expanding output by one unit is $4 only (18 - 14 = 4).

             The marginal cost of the second unit is the difference between the total cost of the second unit and total cost of the first unit. Marginal Cost is governed only by variable "cost" which changes with changes in output.

Definition Of Revenue. Different Types Or Kinds Of Revenue:

Definition of Revenue:

            'Revenue' of a firm is the total sale proceeds or the total receipts of a firm from the sale of the output.

Kinds Of Revenue

            The various kinds of revenue will be discussed here under three heads:

  1. Total Revenue,
  2. Marginal Revenue,
  3. Average Revenue.

1. Total Revenue (TR):

'Total Revenue of a firm is the total amount of sale proceeds or the total receipts of the firm.

2. Marginal Revenue (MR):

Marginal revenue is the addition made to the total revenue by a one unit increase in the volume of sales by the firm in the market.

It is also called the net revenue earned by selling an additional unit of output.

3. Average Revenue (AR):

            Average revenue is revenue earned per unit of output. Average revenue is obtained by dividing the total revenue by the number of units sold in the market.

Average Cost:

            Average Cost is the cost per unit of the product. Average Cost is derived from the total fixed cost, total variable cost and the total cost by dividing each of them with corresponding output.

Types Or Classification Of Average Cost:

1. Average Fixed Cost (AFC):

            Average Fixed Cost refers to the fixed cost per unit of output. It is found out by dividing the total fixed cost by the corresponding output.

2. Average Variable Cost (AVC):

            Average variable Cost refers to the variable expenses per unit of output. Average variable cost is obtained by dividing the total variable cost by the total output.

3. Average Total Cost (ATC):

            Average Total Cost refers to the fixed and variable cost per unit of output. Average Total Cost is obtained by dividing the total cost by the total number of commodities produced by the firm or when the total sum of Average Variable Cost and Average Fixed Cost is added together, it becomes equal to Average Total Cost.

Meaning And Definition Of Monopolistic Or Imperfect Competition:

Monopolistic/Imperfect competition as the name signifies is a blend of monopoly and competition. It is a systematic and realistic theory of price analysis in this imperfectly competitive world. Monopolistic competition is a market situation in which there are relatively large numbers of small firms which produce or sell similar but not identical commodities to the customers.

Defined by Leftwitch:

According to Leftwitch, "Monopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other seller".

Defined by J. S. Bain:

In the words of J. S. Bain, "Monopolistic competition is found in the industry where there is a large number of small sellers selling differentiated but close substitute products".

Characteristics Of Monopolistic Or Imperfect Competition:

The main characteristic or features of monopolistic competition are as under:

  1. There exist a fairly large number of sellers each selling a close substitute for the product of other firms in the same group or industry. Product differentiation is thus the hallmark of monopolistic competition.
  2. Under monopolistic competition, the firms sell differentiated products. Product differentiation may be real or imaginary. Real differentiation is done through differences in the materials used, design, colour etc. And the imaginary differences may be created through advertisement, brand name, trade marks etc.
  3. Another very important characteristic of the monopolistic competition is that each firm tries to create difference in its product from the other by advertising, propaganda, attractive packing, etc. All these are done to boost up the sales and when it succeeds in its object, the firm occupies almost the position of a monopolist. It is, thus, in a position to raise the price of the product without losing its customers.
  4. The demand curve faced by a monopolistic competitive firm is fairly elastic because the existence of close substitutes limits the monopoly power of the firm. The degree of elasticity however, depends upon the number of firms in the group, product or industry. If the number of firms is fairly large and the product of each firm is not very similar, the demand curve of a firm will be quite elastic. In case, there is close competition among the rival firms for the sale of similar products, the demand curve of a firm will be less elastic.
  5. The entry of new firms under the monopolistic competition is relatively easy. There are no barriers of the new firm to enter the product group or leave the industry in the long run.
  6. In monopolistic competition, the firms make every effort to win over the customers. Other than price cutting, the firms may offer after sale service, a gift scheme, discount not declared in the price list etc
Meaning And Definition Of Demand:

The word "Demand" in economics means a desire to possess a good supported by willingness and ability to pay for it.

Demand is always at a price. "The demand for anything at a given price is the amount of it which will be bought per unit of time at that price."

The demand is always per unit of time-per day, per week, per month, or per year.

Defined by Prof Hibdon:

In the words of Prof. Hibdon, "Demand means the various quantities of goods that would be purchased per time period at different prices in a given market".

Why Demand Curve Is Drawn As AR Curve:

From the point of view of the seller, the demand price is the average revenue (revenue per unit) or income that he expects to earn from the sale of a unit of commodity. Thus, demand price is identical with average revenue (AR) and that is why, the demand curve is also drawn as Average Revenue (AR) Curve.

Types Of Demand:
  1. Price Demand
  2. Income Demand
  3. Cross Demand

1. Price Demand:

            Price demand refers to the various quantities of a commodity or service that a consumer would purchase at a given time in a market at various hypothetical prices. It is assumed that other things, such as consumer's income, his tastes and prices of inter-related goods remain unchanged.

2. Income Demand:

            The income demand refers to the various quantities of goods and services which would be purchased by the consumer at various levels of incomes with the assumption that the price of the commodity or service as well as the prices of inter-related goods and the taste and desires of the consumers do not change.

Income demand shows the relationship between income and quantities demanded.

3. Cross Demand:

            The cross Demand means the quantities of a good or service which will be purchased with reference to change in price not of this good but of other inter-related goods. These goods are either substitute or complementary goods. A change in the prices of tea for instance will affect the demand for coffee.

Meaning of Individual Demand:

            The demand of the consumer is called individual demand.

Meaning of Industry Demand:

            The total demand of the consumers combined for the commodity or service is called Industry Demand.

Meaning of Firm's Demand/Individual Seller's Demand:

The total demand for the product of an individual firm at various prices is known as firm's demand or individual seller's demand.

Characteristics of Demand:

            There are thus three main characteristics of demand in economics.

(I) Willingness And Ability To Pay:

            Demand is the amount of a commodity for which a consumer has the willingness and also the ability to buy.

(II) Demand Is Always Expressed At A Price:

            If we talk of demand without reference to price, it will be meaningless. The consumer must know both the price and the commodity. He will then be able to tell the quantity demanded by him.

(II) Demand Is Always Per Unit Of Time:

            The time may be a day, a week, a month, or a year.