Inflation has to be controlled, otherwise the extent of damage done to the economy will be something substantial and the economy would take a long time to recover from the effects of inflation. In this direction of control of inflation, the following are the theoretical measures available. These measures could be classified into three groups viz. Monetary measures, Fiscal measures and Other measures. 1. Monetary Measures Monetary measures are steps taken by the Central bank of a country as the head of the monetary system. These measures are usually refereed to as the, quantitative credit controls and qualitative credit controls. The former include bank rate, open market operations and the variable reserve ratio. The, latter include margin requirements, moral suasion, direct action, control through directives, consumer credit regulation or rationing, publicity, etc. Quantitative Credit Controls: Bank rate is the first, measure to curb credit creation activity of the commercial banks, Continue reading
Economics Principles
The Edgeworth Box
In 1881, Francis Y. Edgeworth came up with a way of representing, using the same axis, indifference curves and the corresponding contract curve in his book “Mathematical Psychics: an Essay on the Application of Mathematics to the Moral Sciences”. It was Vilfredo Pareto, in his book “Manual of Political Economy”, 1906, who developed Edgeworth’s ideas into a more understandable and simpler diagram, which today we call the Edgeworth box. Edgeworth box a conceptual device for analyzing possible trading relationships between two individuals or countries, using indifference curves. It is constructed by taking the indifference map of one individual (B) for two goods (X and Y) and inverting it to face the indifference map of second individual (A) for the same two goods. Thus, Edgeworth box is a traditional visualization of the benefits potentially available from international trade. Individual A’s preferences are depicted the three indifference curves A1, A2 and corresponding Continue reading
Equi-Marginal Principle in Managerial Economics
Equi-marginal principle in managerial economics deals with the allocation of the available resource among the alternative activities. According to equi-marginal principle, an input should be allocated in such a way that the value added by the last unit is the same in all cases. Suppose a firm has 100 units of labor at its disposal. The firm is engaged in four activities, which need labor services, viz., A, B, C and D. It can enhance any one of these activities by adding more labor but sacrificing in return the cost of other activities. If the value of the marginal product is higher in one activity than another, then it should be assumed that an optimum allocation has not been attained. Hence it would, be profitable to shift labor from low marginal value activity to high marginal value activity, thus increasing the total value of all products taken together. For example, Continue reading
Dumping Concept in Managerial Economics
The term Dumping means selling a firms product in foreign market at a price lower than in the home market. Dumping is a form of price discrimination. Let us elaborate ‘dumping’ by considering the following illustrations : Suppose the producer is selling in two markets; viz, the home market and the world market. In the home market he is saddled as a monopolist but in the world market there is perfect competition. Let us therefore analyse the price-output policy of the producer under this peculiar situation. Since there is perfect competition in the world market, the producer has to take the price which prevails in the world market. This is represented by the horizontal average revenue curve ARw and the marginal revenue curve coincides with the average revenue curve. Thus ARw = MRw. However, in the home market he is a monopolist and therefore average Continue reading
Incremental Principle in Economics
The incremental concept is closely related to the marginal costs and marginal revenues of economic theory. Incremental concept in managerial economics involves two important activities which are as follows: Estimating the impact of decision alternatives on costs and revenues. Emphasizing the changes in total cost and total cost and total revenue resulting from changes in prices, products, procedures, investments or whatever may be at stake in the decision. The two basic components of incremental reasoning are as follows: Incremental cost: Incremental cost may be defined as the change in total cost resulting from a particular decision. Incremental revenue: Incremental revenue means the change in total revenue resulting from a particular decision. The incremental principle in economics may be stated as under: A decision is obviously a profitable one if; It increases revenue more than costs It reduces costs more that revenues. It decreases some costs to a greater extent than Continue reading
Variants of Perfect Competition Market Structure
In the previous article, we learned about perfect competition and its features. There are some derivatives of perfect competition. The most important variants of perfect competition market structure are: 1. Effective or Workable Competition Competition among the sellers, even though it may not be perfect, can be regarded as effective if it offers real alternatives to consumers that are sufficient to compel sellers to vary quality, service and price substantially with a view to attract buyers. The prerequisites of effective competition are as follows: Ready substitution of one product for another. General availability of essential information about alternatives (its significance lies in that buyers cannot influence the behavior of the sellers unless alternatives are known.) Presence of several sellers, each of them possessing the capacity to survive and grow. Preservation of conditions which keep alive the basis or potential competition from others. Substantial independence of action that is each seller Continue reading