Selling costs refer to those expenses which are incurred for popularizing the differentiated product and increasing the demand for it. Selling cost is a special feature of monopolistic competition. Under perfect competition due to homogeneous product and under monopoly because of absence of substitute, the selling costs become unnecessary. The most important instrument by which a firm can convince its buyers about the differentiating nature of its product is advertising. Such expenditure which is incurred by a firm under monopolistic competition to persuade customers to prefer its product to that of its rivals is known as ‘selling costs’. According to famous American economist, Edward Chamberlin, Selling Costs are Costs incurred in order to alter the position or shape of demand curve for a product. Such selling costs may be incurred in any form such as advertising, sales promotion, samples to potential customers etc. Whatever Continue reading
Economics Principles
Disequilibrium in Balance of Payments
We have noted above that the balance of payments is always in balances from accounting point of view. Besides, in the accounting procedure, a deficit in the current account is offset by a surplus in capital account resulting from either borrowing from abroad or running down the gold and foreign exchange reserves. Similarly, a surplus in the current account is offset by a corresponding deficit in capital account resulting from loans and bills to debtor country or by decline of its gold and foreign exchange reserves. However, disequilibrium in the balance of payments does arise because total receipts during the reference period need not be necessarily equal to the total payments. When total receipts do not match with total payment of the accounting period, this is a position of disequilibrium in the balance of payments. The final balance of payments position is obtained in the manner described below. For assessing Continue reading
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
Profit Management And Control
Profit is the reward which goes to organization as a factor of production for its participation in the process of production. Profit in its pure accounting sense is the surplus of revenue over the cost. Thus, P = TR – TC We have also studied that every business enterprise desires to maximize its profit. The condition for profit maximization is the level of output where Marginal Revenue = Marginal Cost. We also differentiate between normal profit and super normal profit i.e. normal profit is included in average cost whereas any profit above the average cost is super normal profit. We have also considered the concepts of gross profit and net profit besides profit in accounting sense, which considers only explicit cost whereas in economic sense to consider profit we take note of both explicit and implicit costs. The firm has also to reveal to its shareholders the profit Continue reading