Perfect competition is a market situation where large number of buyers and sellers operate freely and commodity sells at a uniform price. In such a situation no seller or buyer has any influence on the market price. In a perfectly competitive market, a firm is the price taker and industry is the price maker. Main Features of Perfect Competition The main features of perfect competition are as follows: There are a large number of buyers and sellers. Each seller must be small and the quantity supplied by any seller must be so insignificant that no increase or decrease in his output can appreciably affect the total supply and the market price. So also, each buyer must be small and the quantity bought by any of the buyers should be so insignificant that no increase or decrease in his purchases can · appreciably affect the total demand and the price. As Continue reading
Economics Concepts
Arguments in Favor of Firms Profit Maximization Objective
Profit maximization is the most important assumption, which helps the economists to introduce the price and production theories. The traditional economic theory assumes that the profit maximization is the only objective of business firms. According to this theory, profits must be earned by business to provide for its own survival, coverage of risks, growth and expansion. It is a necessary motivating force and it is in terms of profits that the efficiency of a business is measured. It forms the basis of conventional price theory. Profit maximization is regarded as the most reasonable and analytically the most productive business objective. The profit maximization assumption in this theory helps in predicting the behavior of business firms and also the behavior of price and out pet under different market conditions. No alternative hypothesis or assumption explains and predicts the behavior of firms better than the profit maximization assumption. The traditional theory supports Continue reading
Inflation in a Developing Economy
Basically, inflation is supposed to occur after reaching the stage of full employment, for till that stage is reached an increase in effective demand and price level will,be followed by an increase in output, income and employment. It is after the stage of full employment when all men are employed that a rise in the price level will not be accompanied by an increase in production and employment. Theoretically, therefore, it is not possible to imagine an inflationary situation existing side by side with full employment. It is in this context that the question of inflation in a developing country, which has both widespread unemployment and underemployment is raised. Bottlenecks of Inflation It is interesting to observe that Keynes himself visualized the possibility of an inflationary situation even before full employment was reached. Such a situation can arise even in advanced countries, if there are difficulties in perfect elasticity of Continue reading
Different Types of Costs
Profit is the ultimate aim of any business and the long-run prosperity of a firm depends upon its ability to earn sustained profits. Profits are the difference between selling price and cost of production. In general the selling price is not within the control of a firm but many costs are under its control. The firm should therefore aim at controlling and minimizing cost. Since every business decision involves cost consideration, it is necessary to understand the meaning of various concepts for clear business thinking and application of right kind of costs. A managerial economist must have a clear understanding of the different cost concepts for clear business thinking and proper application. The several alternative bases of classifying cost and the relevance of each for different kinds of problems are to be studied. The various relevant concepts of cost are: Opportunity costs and Outlay costs: Out lay cost also known Continue reading
Pigovian Tax – Meaning and Definition
Neo-classicals uphold perfect competition as the ideal state of the market. But in truth, the economy is fraught with market failures. Therefore, we need government interference to correct many of these market failures. Pigovian Tax (also spelled Pigouvian tax) imposed by the government is one such course of intervention. It helps to curb negative externalities (e.g. pollution) and reduce the burden on the society caused by the externalities (social costs of production and consumption). Moreover, it attacks over-consumption, bringing it closer to the socially optimal level of production and/or consumption. What is Pigovian Tax? Pigovian tax is a kind of tax, which is levied to correct a negative cost that is created by the actions of any business firm, but that is not considered in a firm’s private costs or profits. Also known as ‘sin tax’, it is a tax placed on an action with a negative externality, to correct Continue reading
Principal-Agent Problem – Overview, Examples and Solutions
The significant discussion in business economics is principal-agent problems in organizations. A principal is a top authority who hires agents to act on his/her behalf, while an agent usually aims to achieve the objectives of the principal. A principal-agent problem arises when the activities of an agent impact on the principal’s interests. Although agents may seek to attain the goals set by principals but may sometimes fail to carry out those targets. The conflict between shareholders (as principals) and managers (as agents) is a good example of principal-agent problem. When ownership and control is divided between the principals and agents in an organisations this gives the agents opportunity to pursue the goals that may not agree with the desires of the principals. A lot of principal-agent relationships may be found in human society such as patients and doctors, shareholders and managers, managers and workers. But shareholder-manager and manager-workers are the Continue reading