A business firm has various objectives to achieve. The survival of a firm depends on the profit it can make. So, whatever the goal of the firm may be, it has to be a profitable firm. The other goals of a business firm can be sales revenue maximization, maximization of firm’s growth, maximization of managers’ utility function, long-run survival, market share or entry-prevention. In technical sense maximization of profit, as a business objective, may not sound practical , but profit has to be there in the objective function of the firms for its survival. The firms may differ on the level of profit and the extent to which it is to be achieved by various firms. Some firms set standard profit as their objective, while some of them may set target profit and some reasonable profit as their objective to be achieved. A reasonable profit, as a business objective, Continue reading
Economics Concepts
Pricing to Market Concept
One important aspect of Purchasing Power Parity (PPP) doctrine is its espousal of law of one price, i.e. assuming one-way transport costs and tariffs. A HMT watch will be priced the same whether it is sold either in Mumbai or New York. But in the literature of international finance two stylized facts are prominently mentioned. First, real exchange rate movements are seen to be very persistent at the aggregate level of the economy. Second, individual prices of traded commodities tend to be sticky in terms of local currency at the micro level. Engel (1993) has compared the relative prices of different commodities within the same country versus relative price of the same commodity across different countries and he has reached the conclusion that the former measure is less variable in all but a few cases such as primary commodities and energy. Also Engel finds Continue reading
The Circular Flow Model of the Economy
The circular flow model is used to represent the monetary transactions in an economy. It helps to show connections between different sectors of an economy. It shows flows of goods and services and factors of production between firms and households. The circular flow of income is a model that helps show the movement of income and spending throughout the economy. In the economy, households help provide firms with factors of production, e.g. labour. Organisations use these factors to provide goods and services to the household. The households will then spend their money on the goods and services provided by the firms. This money is use by the firms to pay the households for the work they provide, through wages. This process will repeat itself and then form the circular flow of income. There are two main flows within the model shown above, the flow of physical things, e.g. Good and Continue reading
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
Understanding Akerlof’s “Lemon Market Theory”
The Lemon Market Theory (LMT) explained by Nobel Prize winner George A. Akerlof in 1970 in his seminal paper, “The Market for Lemons: Quality Uncertainty and the Market Mechanism” describes how markets that sell good products is never identified because of poor quality supplying markets, as sellers of the poor quality products are provided incentives to sell their products. Incentives such as guarantees, warranties and brand names oppose the quality uncertainty issue. The Lemon Market Theory also focuses on the information asymmetry or unbalanced information between the buyer and seller, where the entire set of sellers take the credit for the quality of the product or service rather than granting the individual quality reward to the appropriate seller who provides the good quality ones. This result in extinguishing the existence of good quality sellers from the market because their product’s quality or service is never recognized or identified and they Continue reading
Factors Affecting the Exchange Rate of Indian Rupee
As we know that Forex market for Indian currency is highly volatile where one cannot forecast exchange rate easily, there is a mechanism which works behind the determination of exchange rate. One of the most important factors, which affect exchange rate, is demand and supply of domestic and foreign currency. There are some other factors also, which are having major impact on the exchange rate determination. After studying research reports on relationship between Rupee and Dollar of last four years we identified some factors, which have been segregated under four heads. These are: Market Situations. Economic Factors. Political Factors. Special Factors. 1. Market Situations: India follows the “floating rate system” for determining exchange rate. In this system “market situation” also is pivot for determining exchange rate. As we know that 90% of the Forex market is between the inter-bank transactions. So how the banks are taking the decision for settling Continue reading