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
Economics Concepts
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
Setting a Reasonable Profit Target in Business
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
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