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
Economics Concepts
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
Settlement of Transactions in Foreign Exchange Markets
Foreign exchange markets make extensive use of the latest developments in telecommunications for transmitting as well settling foreign exchange transaction, Banks use the exclusive network SWIFT to communicate messages and settle the transactions at electronic clearing houses such as CHIPS at New York. SWIFT SWIFT is a acronym for Society for Worldwide Interbank Financial Telecommunications, a co operative society owned by about 250 banks in Europe and North America and registered as a co operative society in Brussels, Belgium. It is a communications network for international financial market transactions linking effectively more than 25,000 financial institutions throughout the world who have been allotted bank identified codes. The messages are transmitted from country to country via central interconnected operating centers located in Brussels, Amsterdam and Culpeper, Virginia. The member countries are connected to the centre through regional processors in each country. The local banks in each country reach the regional processors Continue reading
The Principle of Opportunity Cost
Opportunity or economic cost is an initial part of the business process and plays a crucial role for stakeholders and investors. The opportunity cost calculation represents the distinction between the returns of investments of the declined and accepted option. When the management decides which direction will be the most successful for the company and bring a lot of profit, they have to consider all the possible outcomes. Choosing one opportunity over another always comes with some benefits and losses. The central task is to see all the possible opportunities and choose those that will bring more profit. The opportunity cost of a decision means the sacrifice of alternatives required by that decision. The concept of opportunity cost can be best understood with the help of a few illustrations, which are as follows: The opportunity cost of the funds employed in one’s own business is equal to the interest that could Continue reading
National Income Accounting in India
According to the First report of the National Income Committee, “National income estimate measures the volume of commodities and services turned out during a given period, counted without duplication.” This means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the National income of the country concerned. Regarding the measurement of National income, it could be done in three different ways depending upon the interpretation of concept of national income. If National income is considered as a flow of goods and services, then the method used is called Product method. If National income is treated as a flow of income then the relevant method of measuring it is called Income method. Alternatively, if National income is treated as a flow of expenditure, the method used is called the Expenditure method. Apart from these traditional methods of measuring National Continue reading