In any society at any point of time all the resources would be relatively scarce. We cannot have whatever we want. We need to decide our priorities and then distribute the resources. In such a situation we need to take into consideration goals of efficiency and equity (sense of fairness). If the distribution of resources or goods in an economy is fair between different members of the society, it indicates equity. Efficiency is making the best out of scarce resources at the best possible price. Efficiency refers to the size of economic resource and equity refers to how this economic resource is distributed. When the resources are distributed we will be faced with a trade-off between efficiency and equity. This trade off is a central principle in economics. The best example of trade-off between equity and efficiency can be explained with environmental policy of the government. Who gets the most Continue reading
Economics Concepts
Interest Rate as an Effective Tool for Regulating the Economy
Reserve Bank of India (RBI), the Central Bank in India, operates its monetary policies primarily by the set of interest rate. Therefore, interest rate policy plays an important role than ever before in economy. It is used as an effective tool for regulating the economy, dominating inflation and controlling investment and savings. In general, the Central Bank often changes the level or construction of the interest rate to achieve these goals. The increase or decrease of interest rate causes the capital of enterprises go up or down respectively, which determines the expansion or narrowing of production. Therefore, it changes the number of jobs available. As a common payment method in the borrowing of enterprises from banks, credit rate has direct influences on unemployment situation in society and plays an important role to solve it. The change in deposit rates, especially rediscount rate has direct effect on the amount of foreign Continue reading
Monopolistic Competition
In the real world, market is neither perfectly competitive nor a monopoly. The great majority of imperfectly competitive producers in the real world produce goods, which are neither completely different nor completely same. They produce goods, which are analogous to those produced by their rivals. This means that the goods produced in the market are close substitutes. It follows that such producers must be concerned about the way in which the action of these rivals affects their own profits. This kind of market is known as ‘Monopolistic Competition’ or group equilibrium. Here there is competition, which is keen, though not perfect, between firms manufacturing very similar products. According to Chamberlin, “Monopolistic competition is a challenge to the traditional viewpoint of economics that competition and monopoly are alternatives…By contrast it is held that most economic situations are composites of both competition and monopoly.” Monopolistic Competition is that market category in which Continue reading
Role of SMEs in Economic Development
All over the world, there is growing evidence that Small and medium-sized enterprises (SMEs) play an important role in the national economic development of any country. SMEs are becoming more and more a subject of high attention in the developing countries, countries in transition but also in the countries with developed economies. In market economies, SMEs are the engine of economic development. Thanks to their private ownership, entrepreneurial spirit, their flexibility and adaptability as well as their potential to react to challenges and changing environments, SMEs contribute to sustainable growth and employment generation in a significant manner. Until latest, the private sectors of many emerging economies were missing the middle level of development. Investors, policymakers, and professionals dedicated most of their efforts to big companies of over 500 employees, larger enterprises or multinationals. Large Enterprises and MNCs were target of TAX incentives and subsidies whereas organizations like World Bank and Continue reading
Income Elasticity of Demand – Concept and Types
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as the ratio of the percentage change in the demand for a commodity to the percentage change in income. Income elasticity of demand can be expressed as follows: Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income For example, consumer’s income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is: ey = 5/25 x 100/2 = 10. It means that 1 percent increase in income results 10 percent increase in demand and vice versa. The income elasticity may be positive or negative or zero depending upon the nature of a commodity. As a Continue reading
Consumer’s Surplus – Definition, Significance and Criticisms
The concept of consumer’s surplus is one of the most important idea in economic theory especially in demand and welfare economics. This law was first developed by French engineer A.J Dupuit in 1844 to measure the social benefits of public commodities like canals, bridges, national highways, etc. This concept was further refined and popularized by Dr. Alfred Marshall in 1890. The essence of the concept of consumer’s surplus is that people generally get more satisfaction or utility from the consumption of commodities than the actual price they pay for them. It has been found that people are willing to pay more price for the commodity than they actually pay for them. This extra satisfaction which the consumers obtain from buying a commodity has been called consumer’s surplus by Marshall. The amount of money which a person is prepared to pay for a commodity indicates the amount of utility he derives Continue reading