Learning Curve – Definition and Meaning

In many of the manufacturing processes the average costs decline substantially as the cumulative total output increases. This is the outcome of both  labor  and management becoming more knowledgeable about production techniques with growing experience. “There is an element of learning involved through experience.” Practice makes a man perfect. Doing the work repetitively makes  labor  more efficient. Productivity is enhanced and these lessons of enhanced productivity lead to greater efficiency which in turn will result in overall reduction in the average cost of production. Learning Curve in Economics According to  James L. Pappas and Mark Hirschey “The learning curve (also known as experience curve) phenomenon has an effect on average costs similar to that for any technological advance that provides an improvement in productive efficiency.” Learning through experience in production enables the firm to produce output more efficiently and economically at each and every level of output. Above figure shows Continue reading

Conflicts with Firms Profit Maximization Objective

Profit  maximization  is the most popular hypothesis in economic analysis, but there are many other important objectives, which are not to be avoided by any firm. Modem business firms pursue multiple objectives. An important aspect of profit is its use in measuring and controlling  performances  of the individuals of the large business firms. Researches have concluded that the business  individuals  of middle and top management often deviate from profit objective and try to  maximize  their own utility functions. They give importance to job security, personal ambitions for promotion, larger perks, etc. But this often conflicts with firms profit-making objective. The reasons for conflicts are as follows: More energy is spent in expanding sales volume and product lines than in raising profitability. Subordinates spend too much time and money doing jobs perfectly regardless of its cost and usefulness. Individuals depend more to the needs of job security in the absence of Continue reading

Applications of the Price Elasticity of Demand

The concept of elasticity of demand plays a crucial role in the pricing  decisions of the business firms and the Government when it regulates prices.  The concept of price elasticity is also important in judging the effect of  devaluation of a currency on its export earnings. If has also a great use in  fiscal policy because the Finance Ministry has to keep in view the elasticity of  demand when it considers to impose taxes on various commodities. We shall  explain below the various uses, applications and importance of the elasticity  of demand. Elasticity of demand is mainly useful in Pricing Decisions by Business Firms.  The business firms take into account the price elasticity of demand when  they take decisions regarding pricing of the goods. This is because change in  the price of a product will bring about a change in the quantity demanded  depending upon the coefficient of price elasticity. Continue reading

Role of Government in Economy: An Economist’s Perspective

The question of government interference in economic activities has been debated for a very long time by the economists. While the early economists considered economics as a handmaid of politics, the modem view is that politics is the handmaid of economics. With the growing importance of the role of government in economic welfare, the modem economists firmly believe that the sphere of government in economic development has no boundary. However, there is no unanimity among the economists about the extent and mode of  government  intervention in the economic sphere. Hence, we can identify the following political ideologies regarding the government intervention in an economy. The earliest opinion was that the government has nothing to do in an economy as the society will regulate itself. This opinion also stated that the government will wither away over a period of time. These ideologists are called Anarchists. Opposing the anarchists view is the Continue reading

Administered Price Mechanism

The concept of Administered Price was first introduced by famous British Economist, John Maynard  Keynes for the prices charged by a monopolist. A monopolist can be a price maker and he consciously administered the price of his product irrespective of the cost of production. Competitive prices are determined by the interplay of forces of demand and supply in the market whereas administered prices according to Keynes were associated with monopolists’ decision regarding price fixation irrespective of the market forces of demand and supply. However, in India the meaning of Administered Price has been quite different. In India, Administered Prices refer to prices which are fixed and enforced by the Government. They acquire a statutory nature. They are the outcome of the price policy of the Government. The Government interferes in the price mechanism and fixes minimum and maximum prices of various commodities in the agricultural and non- agricultural sectors. Following Continue reading

The Baumol Model of Innovation

The main idea behind Baumols model is that Innovation is the motivating force behind the growth miracle of capitalism. In the neoclassical theory of the firm, firms compete based on price, but William Baumol argues that in a Capitalist economy innovation rather than price is the main competitive dimension and less innovative firms will find their markets shrinking as they lose business to their more innovative competitors. Thus, innovation is essential to the survival of firms in a capitalist economy. Baumol argues that innovation has replaced price as the most important factor that lies behind economic growth. He suggests that even though it has been recognized that important innovations stem from small firms, individuals or entrepreneurs, the bulk of innovative activity however is carried out by large oligopolistic firms. Baumol’s argument supports Schumpeter’s distinction between entrepreneurs led and routinized innovation. Schumpeter held that technological competition was the form of competition Continue reading