At shut-down point one very important question arises i.e. will a firm take an exit as soon as it incurs a loss? The answer will be in the negative. No doubt the aim of the firm is to maximize profit and when it incurs a loss it must try to minimize its loss. This implies that a firm should remain in production at least as long as its loss is minimized. To understand the shut-down point of the firm we shall have to reconsider the cost structure. When the average revenue is below the average cost then the firm is not enjoying profit but is incurring a loss. But the average cost itself is made up of average fixed cost and average variable cost. Now, as long as the average revenue of the firm can cover its variable cost then the firm will continue Continue reading
Managerial Economics
Managerial Economics generally refers to the integration of economic theory with business practice. It deals with the use of economic concepts and principles of business decision making. Managerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analyzing business problems for rational business decisions. Managerial economics can be viewed by most modern economists as a practical application of economics theory in using effectively the firms scarce resources.
Time Series Analysis for Business Forecasting
Forecasting is a method or a technique for estimating future aspects of a business or the operation. It is a method for translating past data or experience into estimates of the future. It is a tool, which helps management in its attempts to cope with the uncertainty of the future. Forecasts are important for short-term and long-term decisions. Businesses may use forecast in several areas: technological forecast, economic forecast, demand forecast. There two broad categories of forecasting techniques: quantitative methods (objective approach) and qualitative methods (subjective approach). Quantitative forecasting methods are based on analysis of historical data and assume that past patterns in data can be used to forecast future data points. Qualitative forecasting techniques employ the judgment of experts in specified field to generate forecasts. They are based on educated guesses or opinions of experts in that area. There are two types of quantitative methods: Times-series method and explanatory Continue reading
Role of Banking System in Economic Development
A safe and sound financial sector is a prerequisite for sustained growth of any economy. Globalization, deregulation and advances in information technology in recent years have brought about significant changes in the operating environment for banks and other financial institutions. These institutions are faced with increased competitive pressures and changing customer demands. These, in turn, have engendered a rapid increase in product innovations and changes in business strategies. While these developments have enabled improvement in the efficiency of financial institutions, they have also posed some serious risks. Banks play a very useful and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to developing countries may be viewed thus: Promoting Continue reading
Interest Rate Administration by Reserve Bank of India (RBI) during Global Recession/Subprime Crisis
The subprime crises triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, lead to major adverse consequences for banks and financial markets around the globe. Administered interest rates are one of the major measures for controlling the money supply in an economy. Bank rate, repo rate and reverse repo rate are administered by the Reserve Bank of India. The records show high fluctuation in the interest rates in the past in India. The Reserve Bank of India (RBI) made drastic cuts in interest rates during the recession period to make sure that the banks and individuals get the benefit of higher credit availability. The Government of India had the stimulus package for the India Inc., where as the Banking sector has been successfully managed by RBI measures. Meaning of Interest Rates/Policy rates: Interest rates can be defined from different perspectives, for an Individual an interest Continue reading
Economic Dualism
Economic dualism refers to the existence of a developed sector side by side with an under developed or undeveloped sector. We will come across the co-existence of sophistication and primitive characteristics in every walk of life. For example, in the urban areas, one will find the use of modem technology in the production field as well as households, while in the rural areas, the age old, antiquated techniques will be used in the production as well as in households. This dualism retards economic growth. That is, the subsistence sector in the rural areas will pull down whatever little economic progress is achieved with the developed and modem sector. Further in the urban areas, one can come across the existence of dualism, in every activity. For instance there will be modern, technologically sophisticated industries existing side by side with industries with labor intensive and poor technology. There will be high wage Continue reading
Deflation – Meaning, Effects and Modes of Control
When prices are abnormally high, termed as inflation, it is indeed desirable to have a fall in prices. Such a fall in the price level is good for the community, as it will not lead to a fall in the level of production or employment. The process designed to reverse the inflationary trend in prices, without creating unemployment, is generally known as disinflation. But if prices fall from the level of full employment, then income and employment will be adversely affected and this situation is termed as deflation. Effects of Deflation The following are the adverse effects of deflation: On production: Deflation has an adverse effect on the level of production, business activity and employment. During deflation, prices fall due contracting demand for goods and services. Fall in price results in losses and sometimes forcing many firms to go into liquidation. In the face of declining demand for goods, firms Continue reading