The law of returns to scale examines the relationship between output and the scale of inputs in the long-run when all the inputs are increased in the same proportion. This law of returns to scale in economics is based on the following assumptions; All factors are variable but the enterprise is fixed. There is no change in technology. Perfect competition prevails in the market. Returns are measured in physical terms. Three Phases of the Law of Returns to Scale Depending on whether the proportionate change in output exceeds, equals or decrease in proportionate to the change in both the inputs, the production is classified as increasing returns to scale, constant returns to scale and decreasing returns to scale. 1. Increasing Returns to Scale Increasing returns to scale arises due to the following reasons. Dimensional economies, Economies flowing from indivisibility, Economies of specialization, Technical economies, Managerial economies, Marketing economies. Alfred Marshall Continue reading
Economics Concepts
India and Capital Account Convertibility: Some Facts
Whatever the apparent theoretical benefits of capital account convertibility, they have not yet been vindicated by the actual empirical evidence; rather, the experience of the countries in the developing world that have experimented with capital account convertibility has been that of increased market volatility and financial crises. Moreover, at least a part of the large inflows of capital into India are a consequence of the recessionary conditions elsewhere. The country’s macroeconomic fundamentals, though better than before, are not good enough to warrant long-lasting confidence from foreign investors. The reform process is not proceeding with adequate speed, banks are saddled with large volumes of non-performing assets, the financial system is not deep or liquid enough and the country ranks high in the list of corrupt nations. Once the conditions in the rest of the world improve, and the interest rate differentials between India and the rest of the world narrow further, Continue reading
Causes and Effects of Inflation
By inflation one generally means rise in prices. To be more correct inflation is persistent rise in the general price level rather than a once-for-all rise in it, while deflation is persistent falling price. A situation is described as inflationary when either the prices or the supply of money are rising, but in practice both will rise together. These days economies of all countries whether underdeveloped, developing as well developed suffers from inflation. Inflation or persistent rising prices are major problem today in world. Because of many reasons, first, the rate of inflation these years are much high than experienced earlier periods. Second, Inflation in these years coexists with high rate of unemployment, which is a new phenomenon and made it difficult to control inflation. An inflationary situation is where there is ‘too much money chasing too few goods’. As products/services are scarce in relation to the money available in Continue reading
Opportunity Cost – Definition, Advantages and Disadvantages
Opportunity cost analysis is an important part of a company’s decision-making processes, but is not treated as an actual cost in any financial statement. While the term opportunity cost has its roots in economics, it’s also a very important concept in the investment world. It’s a model that can be applied to our everyday decisions, as we’re faced with making a choice between the many options we encounter each day. It is a very powerful concept when someone has to make a decision to select a particular product or making a choice. In simple words, opportunity cost means choosing or making a best decision from different option. When one has to make a decision in between various actions to select only one particular work at a time is called opportunity cost. When faced with a decision, the opportunity cost is the value assigned to the next best choice. The Continue reading
Time Horizon in Forecasting
Business forecasts are classified according to period, time and use. There are long term forecasts as well as short term forecasts. Operation managers need long range forecasts to make strategic-decisions about products, processes and facilities. They also need short term forecasts to assist them in making decisions about production issues that span, only few weeks. Forecasting forms an integral part of planning and decision making, production managers must be clear about the horizon of forecasts. The three divisions of forecast are short range forecast, medium range forecast and long range forecast. Short range forecast: It is typically less than 3 months but has a time span of up-to 1 year. It is used in planning, purchasing for job schedules, job assignments, work force levels, product levels. Medium range forecast: It is typically 3 months to 1 year but has a time span from one to three years. It is used Continue reading
The SCP Paradigm – Structure drives Conduct which drives Performance
The SCP paradigm assumes that the market structure determines the conduct of the organization. This conduct, in turn, is the determinant of market performance. Examples of market performance include efficiency, profitability and growth. The Structure Conduct Performance Framework seeks to establish that certain structures of the industry can lead to certain kinds of conduct or behavior which then leads to various types of economic performance. The SCP paradigm was developed through evaluation of empirical studies involving American industries. Theoretical models were not used to support the paradigm. The conclusion that was drawn from empirical studies was that market structure determined performance. This is caused by the belief that the laws of competition should not be based on behavioral models but rather on structural remedies. According to J.S. Bain who developed the paradigm in the 1950s, most industries became concentrated than necessary. In concentrated industries, there are high barriers to entry. Continue reading