Price-fixation is an important managerial function in all business enterprises. If the price set is quite high, the seller may not find enough number of consumers to buy his product. If the price fixed is too low, the seller may not be able to cover his cost. Thus, fixing appropriate price is a major decision-taking function of any enterprise. Price-decisions, no doubt, need to be reviewed from time to time. Market Structures and Pricing Decisions A firm operates in a market and not in isolation. Under Perfect Competition price is determined by the forces of demand and supply. The point of intersection between demand and supply curves is the point of equilibrium which determines the equilibrium price. Each firm under perfect competition is a price taker and not a price maker. The Average Revenue Curve of a firm under perfect competition is horizontal and that AR = MR. Further there 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.
Actions Taken by RBI and Ministry of Finance to Tackle Economic Problems
As most of economists feel that the most horrible economic problem which India is facing currently is inflation. To come out of these problems RBI and ministry of finance and other relevant government and regulatory entities are taking various initiatives which are as follows; RBI MONITORY POLICY With the introduction of the Five year plans, the need for appropriate adjustment in monetary and fiscal policies to suit the pace and pattern of planned development became imperative. The monitory policy since 1952 emphasized the twin aims of the economic policy of the government: Spread up economic development in the country to raise national income and standard of living, and To control and reduce inflationary pressure in the economy. This policy of RBI since the First plan period was termed broadly as one of controlled expansion, i.e.; a policy of “adequate financing of economic growth and at the same time the time Continue reading
Profit Maximization Methods in Managerial Economics
The profit maximization theory states that firms (companies or corporations) will establish factories where they see the potential to achieve the highest total profit. The company will select a location based upon comparative advantage (where the product can be produced the cheapest). The theory draws from the characteristics of the location site, land price, labor costs, transportation costs and access, environmental restrictions, worker unions, population etc. The company will then elect the best location for the factory to maximize profits. This is anathema to the idea of social responsibility because firms will place their factory to achieve profit maximization. They are nonchalant to environment conservation, fair wage policies and exploit the country. The only objective is to earn more profits. In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to profit maximization. 1. Continue reading
Government Policy Instruments for Managing Foreign Direct Investment (FDI)
By their choice of policies, home countries can both encourage and restrict FDI by local firms. We look at policies designed to encourage outward FDI first. These include foreign risk insurance, tax incentives, and political pressure. Then we will look at policies designed to restrict outward FDI. Home Country Policies to Encourage Outward FDI Many investor nations now have government backed insurance programs to cover major types of foreign investment risks. The types of risks insurable through these programs include risks of expropriation (nationalization), war losses and the inability to transfer profit back home. Such programs are particularly useful in encouraging firms to undertake investments in politically unstable countries. Home Country Policies to Restrict Outward FDI Virtually all investor countries, including the US, have tried to exercise some control over outward FDI from time to time. One common policy has been to limit capital outflows out of certain concern for Continue reading
Role of Profit in Business
Anticipation of higher profits leads to an inducement to invest as well as to innovate. As the entrepreneur begins to forecast more profits he undertakes more investment which in turn creates more employment. This will generate more incomes which in turn, will create more demand for a variety of goods in the market. The prices of these goods will rise at a rate which is related to supply. Higher prices may lead to more profits and greater inducement to invest. The Keynesian Investment Multiplier will begin to operate and the economy will march towards prosperity especially by creating bullishness in the stock markets. Whereas decline in profits signals the oncoming of depression because as profit margins dwindle, investment will fall as there would be not much of incentive to invest more. As the investment declines the Investment Multiplier will begin to operate in reverse. Employment will fall, incomes will decline, Continue reading
Elasticity of Demand – Factors, Types and Importance
Elasticity is a term that was initially developed by known economic scholar called Alfred Marshall, and has been since used in measuring the relationship that exists between product price and its quantity demanded. It typically followed the law of demand that states that the lower the price of goods and services, the higher the quantity that will be demanded of such goods and services i.e. it primarily explains only the actual directions of changes in the demand for the commodity, but not really explaining the extent of that change. A further development on these lapses led to the concept of elasticity of demands. In practical term, elasticity means the act of responsiveness. Meanwhile, elasticity of demand has been theoretically defined as the responsiveness of the actual quantity demanded of a product to the change in its actual price. Elasticity of demand could be defined as the measure of the degree Continue reading