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Economics
It’s a Social Science.
Social science studies social activities which create
social relation.
Economics-
Economics studies particular type of social
activities = Economical activities.
Production
Exchange
Consumption.
2
Economics answers three basic
questions
What to Produce?
How to Produce ?
Whom to Produce?
3
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.
4
Economic Resources
Land:-
Labor:-
Capital:-
Organizer:-
5
Economic Problem
Why this problem arises-
6
Economics can be studied under
two heads
Micro Economics.
Study of individual unit.
Macro Economics.
It studies economics as a whole.
7
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.
8
Decision Making
9
Uncertainty
Change in demand and supply.
Changing business environment.
Government polices.
External influence on the domestic market.
Social and political change.
10
Process of Decision Making.
11
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.
12
Relationship Between ME &
other subject
Mathematics & Managerial Economics
Liner Programming
Game theory
Inventory Model.
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.
15
Game theory
16
Regression Analysis
17
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.
18
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,) 19
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.
20
Law of Demand
It state that when other thing remain same,
higher the price, lower the demand and vise
versa.
Assumption-
Income of the consumer is constant.
Availability of complementary & substitutes.
No future price expectation.
Taste & preference remain same.
No change in population & its structure.
21
Characteristics
Inverse relationship between Price & quantity
demanded.
22
Exceptions
Conspicuous Consumption.
Speculative Market.
Gffens goods
Ignorance.
23
Utility Approach.
Cardinal Utility Approach-
it believed that utility can cardinality or
quantitatively measurable , like weight length
temperature etc .
24
Utility Concept.
Total Utility-
sum 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
25
Law of Diminishing Marginal Utility
27
Law of Diminishing Marginal Utility
Limitation of the law
28
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.
29
Indifference Curve analysis.
30
Indifference Schedule of Commodity X
& Y.
Combination Units of Units of Total
Commodity Y Commodity X Utility
A 25 3 U
B 15 6 U
C 8 9 U
D 4 17 U
E 2 30 U
32
Properties of Indifference Curve
Indifference curves are convex to the origin.
Why- 1). The two commodities are imperfect substitutes for one another.
2)The marginal rate of substitutes (MRS) between to commodity goes
decreases.
(MU of a commodity increases as its quantity decreases and vise versa)
Upper indifference
A curves
25 + indicate
3 -a higher level
- of satisfaction.
B 15 + 6 10 3 3.3
C 8 + 9 7 3 2.3
D 4 + 17 4 9 0.4
E 2 + 30 2 13 0.2
33
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 Equilibrium-
Consumer is equilibrium where the
indifference curve is tangent to the budget line.
34
Consumer Equilibrium
1). Price Effect-
It is the change in consumption of goods because of the change in the
price of the goods.
2).Income Effect-
The 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.
35
Consumer Equilibrium
3). Substitute Effect-
It is defined as the change in quantity demanded
resulting from a change in relative price after real
income effect of price is eliminated.
36
Consumer Equilibrium
1).Income Effect-
The increase or decrease in the income can be shown by
the parallel shift of the budget line.
37
Income Effect-
Y
A1
ICC
A
Q
P
O
X1 X3 B B1
X
38
Consumer Equilibrium
Income Consumption Curve-
39
Consumer Equilibrium
3). Price Effect-
It is the change in consumption of goods because of the change in the price
of the goods.
Income effect.
Substitute effect.
40
Price effect
Q PCC
O
X1 X3 B B1
X
Price Effect
41
Consumer Equilibrium
3). Substitute Effect-
Arises due to the consumer inherent tendency to
substitute cheaper goods for relatively expensive.
42
Consumer Equilibrium
Price Effect = Income Effect + Substitute Effect
PE = IE + SE
Price Effect-
It is the change in consumption of goods because of the change in the price
of the goods.
Income effect.
Substitute effect.
43
Price Effect = Income Effect. + Substitute Effect
PE = IE + SE
Y
A1
P
Q
R
IC1
SE
IE
O
X1 X2 X3 B B3 B1
X
Price Effect
44
Demand Elasticity
The degree of responsiveness of the demand to the change
in its determinants is called elasticity of demand.
Type of demand elasticity's-
1.Price elasticity.
2.Income elasticity.
3.Substitute elasticity
4.Advertise elasticity.
45
Characteristics
Inverse relationship between Price & quantity
demanded.
46
Page no 1-16, 103-109, 113-132.
47
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,) 48
Demand Elasticit
y
The degree of responsiveness of the demand to the change
in its determinants is called elasticity of demand.
Type of demand elasticity's-
1.Price elasticity.
2.Income elasticity.
3.Substitute elasticity
4.Advertise elasticity.
49
Demand Elasticity
Type of demand elasticity-
1.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
50
Demand Elasticity
Y
D
R
4
Price
Q
3
O
16 25
X
Quantity
Demanded
51
Calculating Elasticity
ARC Elasticity
The measure of elasticity of demand between
any two finite points on a demand curve is
known as ARC elasticity.
Q2 - Q1
ARC Elasticity = ( Q1 + Q2 ) / 2
P2 - P1
( P1 + P2 ) / 2
where
Q1 = Initial quantity
Q2 = Final quantity
P1 = Initial price
P2 = Final price
52
Calculating Elasticity
Point Elasticity
For an infinitesimal (very, very small )change
in price we use point elasticity.
Y
M
Ep = PN
PM
P
R
O
N X
53
Demand Elasticity
Determinant of Price elasticity.-
54
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.
57
Supply Analysis
The law of supply is accounted by two factors:
58
Supply Schedule
2 25 50 75 150
4 100 100 150 350
6 200 150 225 575
8 300 200 300 800
10 400 250 375 1052
59
Supply Curve
Y S
4 R
Price
2
Q
S
O
25 100
X
Quantity
Supplied
60
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 .
When prices rise, firm substitute production of one commodity for another.
61
Supply Analysis
Shift in Supply Curve:-
62
Supply Analysis
Elasticity of Supply :-
63
Supply Elasticity
Determinant of Supplied elasticity.-
64
Production
“Creating an utility is known as production”.
65
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.
66
Production
Short Run & Long Run:-
67
Production Function.
Production Function:-
68
Production Function.
Production Function:-
Economically it stated as below-
Q= f(L,L,K,O).
69
Production Function.
Production Function-
Economically it stated as below-
Q= f(L,L,K,O).
70
Production Function.
Production Law-
Law of production state the relationship
between input and out put.
Long Run.
Law of return to scale.
71
Production Function.
Short run law of production-
72
Production Function.
Short run law of production- (Diminishing returns)
73
Production Function.
Short run law of production- (Diminishing returns)
74
Stages of Production
N0 0f Total Marginal Average Stages of
Workers Production Production Production Production
TP MP AP .
0 0 0 0
1 24 24 24
2 72 48 36
I
3 138 66 46 Increasing
4 216 78 54 Return
5 300 84 60
6 384 84 64
7 462 78 66 II
8 528 66 66 Diminishing
Return
9 576 48 64
10 600 24 60
11 594 -6 54 III
12 552 -42 46 Negative
return 75
Production Function.
Short run law of production- (Diminishing returns)
76
Production Function.
Application of Short run law of production-
(Diminishing returns)
77
Production Function.
Long Term laws of production.(Law of return to scale)
Production with Two variable inputs.
78
Production Function.
Law of return to scale, Production function.
79
Production Function.
Law of return to scale, Production function.
80
Production Function.
Law of return to scale, Production function.
81
Production Function.
Law of return to scale, Production function.
82
Production Function.
Law of return to scale, Production function.
83
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”.
Assumption-
1.There are only two inputs (L, K)
2.Two inputs (L,K) can substitute.
84
Insoquant Schedule of input L & K.
Combination Input Units Input Units Total
k L Output
86
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.
87
Cobb Douglas Production
88
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.
89
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.
90
Consider a cobb Douglas production function
with parameters A= 100, α = 0.50, β=.50
Production table for the production
function
Y = Rate
ALαKofβ, Y = 100L.50K.50,
capital Total Out Put
input
1 100
2 200
3
4 400
5
1 2 3 4 5
Rate of labour Input(L)
91
Relationship between Production & Cost
function.
92
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.
93
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.
94
Cost Out Put Relations
Q FC TVC TC AVC AC MC
0 10 0 10
1 10 5.15 15.2 5.15 15.2 5.15
2 10 8.8 18.8 4.4 9.4 3.65
3 10 11.3 21.3 3.75 7.08 2.45
4 10 12.8 22.8 3.2 5.7 1.55
5 10 13.8 23.8 2.75 4.75 0.95
6 10 14.4 24.4 2.4 4.07 0.65
7 10 15.1 25.1 2.15 3.58 0.65
8 10 16 26 2 3.25 0.95
9 10 17.6 27.6 1.95 3.06 1.55
10 10 20 30 2 3 2.45
11 10 23.7 33.7 2.15 3.06 3.65
12 10 28.8 38.8 2.4 3.23 5.15
13 10 35.8 45.8 2.75 3.52 6.95
14 10 44.8 54.8 3.2 3.91 9.05
15 10 56.3 66.3 3.75 4.42 11.5
16 10 70.4 80.4 4.4 5.03 14.2 95
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.
96
Cost Function
Cost Curves and the law of diminishing
returns -
97
Market Structure and Pricing Decision
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.
98
Market Structure and Pricing Decision
Types of the market Structure-
1. Perfect Competition-
2. Imperfect Competition-
a). Monopolistic competition.
b). Oligopoly
c). Monopoly.
99
Market Structure and Pricing Decision
Perfect Competition-
1.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-
101
Market Firm
Price Market supply Price
$10 $10
8 8
Individual firm
6 6 demand
4 4
Market
2 demand 2
0 0
1,000 Quantity
3,000 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).
1. Legal Restrictions
2. Control over key raw materials
3. Efficiency.
Pricing under pure Monopoly
Monopoly Pricing and output decision-
Total
Profit
D D
10,000 Number of 10,000 Number of
MR Subscribers MR Subscribers
Profit And Loss
Monopoly firm faces a downward sloping demand curve,
marginal revenue is less than price of output
Monopolistic competition
is a market structure in which there are
many firms selling differentiated products.
Product differentiation
MR D (AR)
Q1
Output / Sales
Monopolistic or Imperfect
Competition
Long run profit determination
diagram:
MC
Cost/Revenue Because there is
relative freedom
AC of entry and exit
into the market,
new firms will
enter
encouraged by
the existence of
abnormal profits.
New entrants will
increase supply
AR1 causing price to
MR1 MR D (AR)
fall. As price
Q Output / Sales falls, the AR and
1 MR curves shift
inwards as
Monopolistic
Long run profit determination
diagram:
MC
Cost/Revenue Notice that the
existence of
AC more substitutes
makes the new
AR (D) curve
AR = AC more price
elastic. The firm
reduces output to
a point where MC
= MR (Q2). At
this output AR =
AR1 AC and the firm
MR1 MR D (AR)
will make normal
Q Q Output / Sales profit.
2 1
Monopolistic
Long run profit determination
diagram:
MC
Cost/Revenue Notice that the
existence of
AC more substitutes
makes the new
AR (D) curve
AR = AC more price
elastic. The firm
reduces output to
a point where MC
= MR (Q2). At
this output AR =
AR1 AC and the firm
MR1 will make normal
Q Output / Sales profit.
2
Monopolistic Competition profit
loss situation
Monopolistic competitor may make profit, loss
or no profit no loss (normal profit) in short run.
P= AVC+AVC(m).
Pricing Strategies
Product line Pricing.
Economic activity-
all human activity which create goods & services that
can be value in term of money.
Production 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 activity-
all human activity which create goods & services that can be value in term of money.
Firms Households
Loanable
Businesses Investment Funds Saving Households
Government Taxes
Spending
To avoid double counting only the value of final goods and
service in included.
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.
158
Concepts of National Income
Some Accounting Relationship-
At 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 July-
September period, its fastest pace in the last
six quarters.
Economic activity-
all human activity which create goods & services that
can be value in term of money.
Production 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 activity-
all human activity which create goods & services that can be value in term of money.
Firms Households
Government Taxes
Spending
Consumption of
Factor domestically
payments produced goods
and services (Cd)
The circular flow of income
Consumption of
Factor domestically
BANKS, etc
payments produced goods
and services (Cd)
Net
saving (S)
The circular flow of income
Investment (I)
Consumption of
Factor domestically
BANKS, etc
payments produced goods
and services (Cd)
Net
saving (S)
The circular flow of income
Investment (I)
Consumption of
Factor domestically
BANKS, etc GOV.
payments produced goods
and services (Cd)
Net
Net taxes (T)
saving (S)
The circular flow of income
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV.
payments produced goods
and services (Cd)
Net
Net taxes (T)
saving (S)
The circular flow of income
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
The circular flow of income
Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
The circular flow of income
Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
National Income Concept and
Measurement.
Production Method (GNP).
To avoid double counting only the value of final goods and
service in included.
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.
182
Concepts of National Income
Some Accounting Relationship-
At 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 Rs. Million
1 Wages & Salaries 430
2 Imports of goods & 220
services
3 Rent 50
4 Value added in 100
Agriculture
5 Govt. current 140
expenditure
6 Capital Consumption 70
7 Value added in 50
Construction
8 Consumers Expenditure 450
9 Dividends 500
10 Income from self 60
employment
11 Exports of goods & 650
services
12 Undistributed profit 110
Gross RS. Gross National Gross National
National millio Expenditure Income
Product ns
Value added 100 Consumer Exp. 450 Wages & Salaries 430
in agri.
Value added 600 Govt exp 140 Self employment 60
in
Manufacturin
g
Construction 50 Gross Fixed inv 150 Company profit 500
dividends
Distribution 150 Change in stock 10 Retained profits 110
Other sectors 270 Exports 650 Public corporations 20
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
Disguised unemployment.
Cyclical 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.
192
Inflation
Causes of Inflation
Population pressure.
Mounting govt. expenditure
Growing supply of money
Growing deficit financing
Growing black money.
194
Inflation
Cost Push factors are as follows.
195
Inflation
Other factors.
196
Costs and Consequences of Inflation
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 .
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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
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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.
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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
Recession
Peak
Do n
ur
Total Output
wn t
tu Up
rn Secular
growth
trend
Trough
0
Time
Various phases of business
Cycle
Expansion of business activities.
Recession
Inflation Increasing
Unemployment rises
Inflation falls
Investment falls
Investment occurs
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, R= Rent,
I = Interest, M = Material.
Profit
conomical Profit -
conomical Profit=
INTRODUCTION
OBJECTIVES
• By changing the CRR, the central bank can change the money.