System of Planned Economy Under the conditions of the planned economy, all decisions concerning what to manufacture, how to manufacture and to whom to manufacture are approved by the sole center or group. This economy is based on collective ownership. Fixed production assets are owned by the government, and resources, production and the quantities of future products are distributed according to a plan. The type of the system of the command economy was prevailing in the USSR, Cuba, and North Korea. The plans of the system of the centralized economy are drawn up and implemented by the authorities and governmental political leaders after consulting with highly ranked professionals: engineers, economists, industrialists, and other experts. These planners decide which products to manufacture and which services to render. Their vote is decisive in approving decisions whether new undertakings are to be constructed, how many employees are to be employed at undertakings, whether Continue reading
Economics Principles
Laws of Returns in Economics
The relationship between the inputs and the output in the process of production is clearly explained by the Laws of Returns or the Law of Variable Proportions. This law examines the production function with only one factor variable, keeping the quantities of other factors constant. The laws of returns comprise of three phases: The Law of Increasing Returns. The Law of Constant Returns. The Law of Diminishing Returns. The Laws of Returns in Economics may be stated as follows: “If in any process of production, the factors of production are so combined that if the varying quantity of one factor is combined with the fixed quantity of other factor (or factors), then there will be three tendencies about the additional output or marginal returns: Firstly, in the beginning, as more and more units of a variable factor are added to the units of a fixed factor, the additional Continue reading
Role of Supply Side Policies in Balanced Economic Growth
The government has a responsibility for delivering public goods optimally for the collective development of all individuals. In the quest to achieve this noble course, supply side policies, which form part of macroeconomic strategies, are developed to ensure that markets and industries function in an efficient way to increase the rate of economic growth as reflected in the real national yield. Many governments support the assertion that they can achieve a sustained economic growth by improving supply side operations without causing an increase in inflation. However, reforms on the supply side policies do not facilitate the achievement of adequate growth. Definition and Explanation of Balanced Economic Growth Although the growth rate does not reflect people’s living standards entirely, economic growth has been one of the critical areas of consideration for every nation that is in the process of developing its economic policies. Indeed, economic growth is the most common approach Continue reading
Economic Tools for Management Decision Making
Managerial decision-making draws on economic concepts as well as tools and techniques of analysis provided by decision sciences. The major categories of these tools and techniques are optimization, statistical estimation and forecasting. Most of these methodologies are technical. These methods are briefly explained below to illustrate how tools of decision sciences are used in managerial decision making. 1. Optimization Optimization techniques are probably the most crucial to managerial decision making. Given that alternative courses of action are available, the manager attempts to produce the most optimal decision, consistent with stated managerial objectives. Thus, an optimization problem can be stated as maximizing an objective (called the objective function by mathematicians) subject to specified constraints. In determining the output level consistent with the maximum profit, the firm maximizes profits, constrained by cost and capacity considerations. While a manager does not resolve the optimization problem, he or she may make use of the Continue reading
Dornbusch Exchange Rate Overshooting Model
The Dornbusch overshooting model, developed by Rudiger Dornbusch in 1976, is a theoretical framework used to explain the dynamics of exchange rates. It suggests that when there is a change in monetary policy or other economic factors, exchange rates overshoot their long-run capital flows before settling back to their equilibrium levels. The model helps explain the short-term volatility of exchange rates, which can have significant implications for international trade, investment, and capital flows. Assumptions of the Model: The Dornbusch overshooting model is based on several key assumptions. First, it assumes that prices and wages are sticky in the short run, meaning that they do not adjust immediately to changes in economic conditions. This is because many contracts, such as labor contracts and long-term supply contracts, are negotiated in advance and do not reflect current market conditions. As a result, changes in the money supply or other economic factors can lead Continue reading
Marginal Cost Pricing
In case of Marginal Cost Pricing we have to consider the incremental cost of production. Fixed cost is not taken into consideration. Marginal cost is the additional cost for producing additional unit of output. In this method the price is related to marginal cost. The main difference between Full Cost Pricing and Marginal Cost Pricing is that in Marginal Cost Pricing the fixed cost component is not included. The Marginal Cost Pricing is useful in the short period whereas Full Cost Pricing is mainly for the long period. As long as the marginal cost is covered there is a sort of guarantee that the firm will not shut down. Advantages of Marginal Cost Pricing Variable cost remains constant per unit of output and fixed costs remain constant in total during short period. Thus control over costs becomes more effective and easier. Standards can be set for variable costs, while Budgets Continue reading