To the management, the utility of break-even analysis lies in the fact that it presents a picture of the profit structure of a business firm. Break-even analysis not only highlights the areas of economic strength and weaknesses in the firm but also sharpens the focus on certain leverages which can be operated upon to enhance its profitability. Through break-even analysis, it is possible for the management to examine the profit structure of a business firm to the possible changes in business conditions. There are some important limitations of break-even analysis, which are to be kept in mind while using break-even analysis. These limitations are as follows: When break-even analysis is based on accounting data, it may suffer from various limitations, such as negligence towards imputed costs, arbitrary depreciation estimates and inappropriate allocation of overhead costs. Break-even analysis, therefore, can be sound and useful only if the firm in question maintains Continue reading
Economics Principles
Inflation: Meaning, Causes, and Effects
Inflation can be characterized as a rise in the general value level and therefore there is a fall in the estimation of cash. Inflation happens when the measure of purchasing power is higher than the yield of merchandise and ventures. Inflation additionally happens when the measure of cash surpasses the measure of enterprises accessible. Regarding whether the falling the estimation of cash will influence the elements of cash relies upon the level of the fall. Fundamentally, alludes to an expansion in the supply of money or credit with respect to the accessibility of stock and venture, bringing about higher costs. In this manner, expansion can be estimated as far as rates. The rate increment in the value list, as a rate for every penny per unit of time, or, in other words, years. The two fundamental cost lists are utilized when estimating inflation, the Producer Price Index(PPI) and the Consumer Continue reading
Revenue Structure of a Firm under Perfect Competition
One of the distinguishing characteristics of perfect competition is the presence of an infinite number of firms producing homogeneous product. The number of firms is so large that a single firm’s contribution to the total output of the product in the market is insignificant or microscopic. The firm under perfect competition can neither influence the price nor the output in the market. In fact, it has to take the going-market price, i.e. the price prevailing in the market as is determined by the forces of demand and supply. It is in this context that the firm under perfect competition is referred to as price-taker and not a price maker. The revenue structure of the firm under perfect competition is influenced by this characteristic of perfect competition. Let us assume that the price of the product X as determined in the market by the forces of Continue reading
Product Line Pricing
Since almost every firm has several items in its product line, product line pricing becomes an important phase of pricing policy. The problem of product line pricing is to find the proper relationship among the prices of numbers of a product group. Product line pricing may refer to product group. Product line pricing may refer to products physically the same but sold under different conditions. This gives the seller an opportunity to charge different prices. Thus use differentials (e.g. hot coffee versus cold/iced coffee), seasonal differentials (e.g. night fights or night telephone calls), and style cycles differentials are all phases of product line pricing. The rationale for this heterodox approach to pricing is that the essential economic features of the product line is the cross-elasticity of demand that exist among parts of the seller’s output. General Approach to Product Line Pricing The underlying principle in product-line pricing is that demand Continue reading
Volume-Profit Analysis
Volume-Profit Analysis is very similar to the break-even analysis and is based on the relationship of profits to sales volume. The profit-volume graph shows the relationship of firm’s profit to its volume. Total profit or loss is measured on the vertical axis above the X-axis and the loss below it. The volume is measured on the X-axis, which is drawn at the point of ‘Zero-Profit’. Volume is usually expressed in tons of percentage of full capacity. The maximum loss, which occurs at zero sales volume, is equal to the fixed cost and is shown on the vertical axis below the X-axis. The maximum profit is earned when the firm works at full capacity. The point of maximum profit is shown on the vertical axis above the X-axis. The two points of maximum loss and the maximum profit are joined by a line, which is known as the profit line. The Continue reading
Sectoral Demand-Shift Theory of Inflation
Under demand-pull inflation, we have shown how expansion in aggregate demand without a proportionate increase in the supply of goods and services leads to an inflationary situation. However, it is not necessary to have a general increase in demand to bring about inflationary pressure. Sometimes, the increase in demand may be confined to some sector of the economy and this increase in demand and the consequent rise in the price in a particular sector may spread to other sectors. Suppose the demand for agricultural goods rises because of inadequate supplies of these goods, there would be a consequent rise in the price of agricultural goods. Thus, the rise in prices spreads to all other sectors in the economy, through rise in the prices of raw materials and wages. The rise in prices in the agricultural sector may push up prices in the industrial sector. Therefore, the inflationary rise in the Continue reading