At shut-down point one very important question arises i.e. will a firm take an exit as soon as it incurs a loss? The answer will be in the negative. No doubt the aim of the firm is to maximize profit and when it incurs a loss it must try to minimize its loss. This implies that a firm should remain in production at least as long as its loss is minimized. To understand the shut-down point of the firm we shall have to reconsider the cost structure. When the average revenue is below the average cost then the firm is not enjoying profit but is incurring a loss. But the average cost itself is made up of average fixed cost and average variable cost. Now, as long as the average revenue of the firm can cover its variable cost then the firm will continue Continue reading
Economics Principles
Time Series Analysis for Business Forecasting
Forecasting is a method or a technique for estimating future aspects of a business or the operation. It is a method for translating past data or experience into estimates of the future. It is a tool, which helps management in its attempts to cope with the uncertainty of the future. Forecasts are important for short-term and long-term decisions. Businesses may use forecast in several areas: technological forecast, economic forecast, demand forecast. There two broad categories of forecasting techniques: quantitative methods (objective approach) and qualitative methods (subjective approach). Quantitative forecasting methods are based on analysis of historical data and assume that past patterns in data can be used to forecast future data points. Qualitative forecasting techniques employ the judgment of experts in specified field to generate forecasts. They are based on educated guesses or opinions of experts in that area. There are two types of quantitative methods: Times-series method and explanatory Continue reading
Economic Dualism
Economic dualism refers to the existence of a developed sector side by side with an under developed or undeveloped sector. We will come across the co-existence of sophistication and primitive characteristics in every walk of life. For example, in the urban areas, one will find the use of modem technology in the production field as well as households, while in the rural areas, the age old, antiquated techniques will be used in the production as well as in households. This dualism retards economic growth. That is, the subsistence sector in the rural areas will pull down whatever little economic progress is achieved with the developed and modem sector. Further in the urban areas, one can come across the existence of dualism, in every activity. For instance there will be modern, technologically sophisticated industries existing side by side with industries with labor intensive and poor technology. There will be high wage Continue reading
Balance of Payments (BoP)
The balance of payment is defined as a systematic record of all economic transactions between the residents of a country and residents of foreign countries during a certain period of time. Although the above definition of balance of payments is quite revealing certain terms used in the definition may require some clarification. The term’s systematic record does not refer to any particular system. However, the system generally adopted is double entry book-keeping system. Economic transactions include all such transactions that involve the transfer of title or ownership. While some transactions involve physical transfer of goods, services, assets and money along with the transfer of title while other transactions do not involve transfer of title. For example, suppose that a subsidiary company of a foreign undertaking is operating in India and making profit. This company may pay all its profits as dividend to the shareholders abroad, or it may, alternatively reinvest Continue reading
Steps in Demand Forecasting
Demand or sales forecasting is a scientific exercise. It has to go through a number of steps. At each step, you have to make critical considerations. Such considerations are categorically listed below: 1) Nature of forecast: To begin with, you should be clear about the uses of forecast data- how it is related to forward planning and corporate planning by the firm. Depending upon its use, you have to choose the type of forecasts: short-run or long-run, active or passive, conditional or non-conditional etc. 2) Nature of product: The next important consideration is the nature of product for which you are attempting a demand forecast. You have to examine carefully whether the product is consumer goods or producer goods, perishable or durable, final or intermediate demand, new demand or replacement demand type etc. A couple of examples may illustrate the importance of this factor. The demand for intermediate goods like Continue reading
Trade-Off Between Equity And Efficiency
In any society at any point of time all the resources would be relatively scarce. We cannot have whatever we want. We need to decide our priorities and then distribute the resources. In such a situation we need to take into consideration goals of efficiency and equity (sense of fairness). If the distribution of resources or goods in an economy is fair between different members of the society, it indicates equity. Efficiency is making the best out of scarce resources at the best possible price. Efficiency refers to the size of economic resource and equity refers to how this economic resource is distributed. When the resources are distributed we will be faced with a trade-off between efficiency and equity. This trade off is a central principle in economics. The best example of trade-off between equity and efficiency can be explained with environmental policy of the government. Who gets the most Continue reading