Since almost every firm has several items in its product line, product line pricing becomes an important phase of pricing policy. The problem of product line pricing is to find the proper relationship among the prices of numbers of a product group. Product line pricing may refer to product group. Product line pricing may refer to products physically the same but sold under different conditions. This gives the seller an opportunity to charge different prices. Thus use differentials (e.g. hot coffee versus cold/iced coffee), seasonal differentials (e.g. night fights or night telephone calls), and style cycles differentials are all phases of product line pricing. The rationale for this heterodox approach to pricing is that the essential economic features of the product line is the cross-elasticity of demand that exist among parts of the seller’s output. General Approach to Product Line Pricing The underlying principle in product-line pricing is that demand Continue reading
Economics Basics
Sectoral Demand-Shift Theory of Inflation
Under demand-pull inflation, we have shown how expansion in aggregate demand without a proportionate increase in the supply of goods and services leads to an inflationary situation. However, it is not necessary to have a general increase in demand to bring about inflationary pressure. Sometimes, the increase in demand may be confined to some sector of the economy and this increase in demand and the consequent rise in the price in a particular sector may spread to other sectors. Suppose the demand for agricultural goods rises because of inadequate supplies of these goods, there would be a consequent rise in the price of agricultural goods. Thus, the rise in prices spreads to all other sectors in the economy, through rise in the prices of raw materials and wages. The rise in prices in the agricultural sector may push up prices in the industrial sector. Therefore, the inflationary rise in the Continue reading
Important Functions of Money
Money is a critical component of any modern economy, serving as a medium of exchange, a store of value, and a unit of account. It is used by individuals, businesses, and governments to facilitate transactions and to manage financial resources. In this essay, we will explore the functions of money, and how it helps to facilitate economic activity. Medium of Exchange: One of the most important functions of money is its role as a medium of exchange. In a barter system, goods and services are exchanged directly for other goods and services, with no universal medium of exchange. However, money provides a convenient and efficient way to facilitate transactions by allowing buyers and sellers to exchange goods and services for a universally accepted form of payment. This reduces the need for a double coincidence of wants, where a buyer must have something the seller wants in order to complete a Continue reading
Incremental Principle in Economics
The incremental concept is closely related to the marginal costs and marginal revenues of economic theory. Incremental concept in managerial economics involves two important activities which are as follows: Estimating the impact of decision alternatives on costs and revenues. Emphasizing the changes in total cost and total cost and total revenue resulting from changes in prices, products, procedures, investments or whatever may be at stake in the decision. The two basic components of incremental reasoning are as follows: Incremental cost: Incremental cost may be defined as the change in total cost resulting from a particular decision. Incremental revenue: Incremental revenue means the change in total revenue resulting from a particular decision. The incremental principle in economics may be stated as under: A decision is obviously a profitable one if; It increases revenue more than costs It reduces costs more that revenues. It decreases some costs to a greater extent than Continue reading
Variants of Perfect Competition Market Structure
In the previous article, we learned about perfect competition and its features. There are some derivatives of perfect competition. The most important variants of perfect competition market structure are: 1. Effective or Workable Competition Competition among the sellers, even though it may not be perfect, can be regarded as effective if it offers real alternatives to consumers that are sufficient to compel sellers to vary quality, service and price substantially with a view to attract buyers. The prerequisites of effective competition are as follows: Ready substitution of one product for another. General availability of essential information about alternatives (its significance lies in that buyers cannot influence the behavior of the sellers unless alternatives are known.) Presence of several sellers, each of them possessing the capacity to survive and grow. Preservation of conditions which keep alive the basis or potential competition from others. Substantial independence of action that is each seller Continue reading
Interest Rate Concepts
In market economy, there are many economic-financial categories, including credit and credit interest rate which are two of the most important ones. Credit activities are borrowing and lending activities. The capital-using relationship between borrowers and lenders bases on the principles of reimbursement. Lenders who are in excess of capital have opportunities not only to preserve but also capital get profit. Borrowers who are short of capital have chances to get additional capital to meet production, business or living needs. Therefore, owing to the credit activities that a large proportion of capital in the economy are mobilized, concentrated and distributed from temporary capital surplus sections to shortage ones to meet different needs of all entities in the economy. Indispensable leverage and tool in credit activities is interest rate. Interest rate of bank credit is the ratio in percentage between income and amount of loan for a certain period. Thus, interest rate Continue reading