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
Economics Concepts
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
Applications of the Price Elasticity of Demand
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
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