Case 1 Q1 What are the factors responsible for this excess demand for electricity?

(i) Due to satellite towns like Noida, Ghaziabad, Greater Noida, etc. that are emerging as new industrialhubs; therefore there is growing demand for infrastructure facilities like power, transport, health,education, road, shopping malls, multiplexes, etc. in these cities. These are all factors responsible forexcess of demand for electricity.Secondly, reorganization of UP which could only retain 516 MW of low cost hydel power while thebalance was allocated to Uttaranchal. Hence, due to unavailability of low cost hydel power the demandfor electricity was on rise. Q2 The demand supply gap is reformed by the government intervention. Explain this phenomenon by a demand supply model. (ii) There is a change in demand due to low or constant supply in favour of the good. This is illustratedgraphically in the figure below. The initial demand curve D1D1 and initial supply curve S1S1determine the equilibrium quantity at Q* & price at P*. Now an increase in demand is manifestedthrough shift of demand curve to the right (from D1D1 to D2D2). This shifts the equilibrium to E1E1,where the new demand curve D2D2 intersects the supply curve S1S1.The equilibrium price rises fromQ* to Q1 and the equilibrium prices increases from P* to P1. Therefore an increase in demand with no change in supply results in a rise in equilibrium price & quantity.

Q3 What do you think will happen to the price of electricity? The cost of electricity will increase due to increase in demand & slow rate of capacity generation

Case 2
Q1 Identify the most important factors of production in case of automobile industry. Also attempt toexplain the relative significance of each of these factors The most important factors of production in case of Automobile industry are :1. Labour : Workers employed directly in the car industry; engineers, designers, paint sprayers, testers,management staff, transport & distribution workers etc2. Land : Natural resources used in manufacturer, land for plant and equipment3. Capital : Fixed capital: machinery, technology, buildings + Working capital: i.e. stocks of raw materialsand components4. Entrepreneurship (sometimes seen as a separate factor): management, risk-takerEach one of these factors is extremely important to every business operation. A company must balance theseresources and consider their cost in order for them to stay profitable.1.

Natural resources include all items that occur naturally. A few examples of this are land, water, and otherthings that are not man-made. Even the most basic level, all companies must buy land in order to have aplace to do business. Though some companies might not rely directly on natural resources to produce theirproduct, but the products that they buy from other companies are likely to at some point have been derivedfrom natural resources.2. Capital another factor in play a huge role in the formation and expansion of the company. Capital includes things like tools, machines, and other things that a business uses in order to produce their goods or services.At some level, all companies rely on their capital in order to successfully run. Without these things, thecompany would not be able to produce anything. These things can be very expensive, so this can be a hardpart for the owner to finance.3. Yet another factor of production is human resources. Human resources deals with everybody that workswithin the company. All companies need labor in order to function. Everyone from the manual workers, tothe owner of the company falls under the classification of human resources. Without this factor, therewould be no company at all because nobody would be working there.4. The final factor production is entrepreneurship. Entrepreneurs are the people that start their own business, taking all the necessary risks in order to, hopefully, make a profit. Without these people and their ideas, nocompanies would ever start. Starting a business extremely risky, because there is no way to tell if it will beprofitable until after you've tried. However, if you manage the company well and people want your goodsor services, there's a good chance he will be successful in the end. In order to take this risk, entrepreneurmust collect the necessary resources needed to start the company. If he or she does not have naturalresources, capital, and human resources, then there is no way to get the company off the ground. Withoutthese factors, company will never amount to anything more than an idea.

Q2 What more information would you like to obtain in order to draw a production function for MarutiUdyog? Explain with logic

The task of a production unit is to organize a production process a process of combining the different factors insome proportion so that those inputs can be efficiently transformed into products or outputs.Various terms are used for inputs and outputs.INPUTS OUTPUTSFactors Quantity ( Q )Factors of production Total Product ( P )Resources ProductA production function defines the relationship between inputs and the maximum amount that can be producedwithin a given period of time with a given level of technology.Decisions on input and output are taken after considering various technological specifications. The technologicalinformation is summarized in the equation Q = Q( L, N, K.................)

Production Function states that Q is the maximum amount of an output which the firm can produce if it combines the inputs (Land L , Labor N,and Capital K). The ratio of the factor-combination depends on the form of theestimated production function. The existence of such a function implies that the firm has undertaken on set of optimally calculations whereby they have examined the many alternative ways in which the inputs L N and K canbe combined to produce an output in the different technological process available for use in the productive process,and that it is on the basis of these calculations, that it has been found that Q is the maximum amount of a givenoutput possible with the given set of inputs ( L, N, K ) Mathematically, the production function can also be shown as: Q= f ( X1, X2 ............... Xk) where Q= Output Production Function X 1.............. X k = Inputs used. For purposes of analysis, the equation can be reduced to two inputs X and Y Restating, Q= f ( X,Y) Where Q= Output; X = Labor ;Y= Capital. Two special features of a production function are given below: (a) Labour and capital are both inevitable inputs to produce any quantity of goods, and (b) Labour and capital are substitutes to each other in production.Further, The Cobb-Douglas equation is derived as Q = A, K L where K = Capital, Q = Output, L= Labour, A, = positive constants Properties of Cobb-Douglas Production function 1. This function assumes the returns to scale to be constant. 2. If one of the input is zero, output also will be zero. Hence, In the case of Maruti Udyog,Land : No details has been made available such as location, cost of land etc Capital: 100 million+ 50 million from suppliers = 150 million Labour : No information on Labour required is available, hence due to absence of these factors, production equation for Maruti Udyog cannot be derived. Q3 Automobile industry is a good example of capital augmenting technical progress. Discuss. As per Davos Report 2006, 1. India is largest three wheeler market in the world; 2. 2nd largest two wheeler market; 3. 4th largest tractor market; 4. 5th largest commercial vehicle market and 5. 11th largest passenger car market in the world and6. expected to be the seventh largest by 2016.India is among few countries that are showing a growth rate of 30 per cent in demand for passenger cars. Theindustry currently accounts for nearly 4% of the GNP and 17% of the indirect tax revenue. As per another report 1.every commercial vehicle manufactured, creates 13.31 jobs, while 2.every passenger car creates 5.31 jobs and 3.every two-wheeler creates 0.49 jobs in the country.Besides, the automobile industry has an output multiplier of 2.24, i.e., for every additional rupee of output in theauto industry, the overall output of the Indian economy increases by Rs. 2.24

sustain profitability, it is imperative that players evaluate additional ways of capturing value, including expandingservice networks, developing branded generic parts, forward integrating and building scale. Looking ahead, revenuepools remain large across the value chain, hence if players are able to pursue appropriate strategies, significantprofits can be made in this sector

Case 3
Q1 Do you think cement industry in India presents a good explanation of oligopoly? Which characteristics of oligopoly do you find in the above case? Yes. This is because competition even if temporarily ensured, as it seems to have been in the cement industry, which has for some time now been freed of restrictions on entry as well as controls on prices. Liberalization did initially spur competition, which led to increased capacity, an improved demand-supply balance and better prices for the consumer. Behind these protective barriers the demand-constrained industry has been witnessing a substantial change in structure. The industry has seen a process of growing consolidation of capacity in a few hands as a result of a spate of mega-mergers and acquisitions. Features of an Oligopoly market and its application to the Cement Industry 1.Only a few firms supply the entire market with a product that may be standardized or differentiated. Cement IndustryThe large cement plants accounts for over 94 percent of the total installed capacity. However two large groups, viz. the Aditya Birla Group and the Holcim Group; together control more than 40 per cent of total capacity. This apart, more than 25 per cent of total capacity is controlled by global majors. 2.At least some firms have large market shares and thus can influence the price of the product. Cement Industry The industry has seen a process of growing consolidation of capacity in a few hands as a result of a spate of mega-mergers and acquisitions. All this is occurring in an industry where already capacity with the top six players accounts for more than 60 per cent of total production. Such a high concentration index is a factor that strongly indicates an oligopolistic market structure 3.There is an indeterminateness of the demand curve facing oligopolist firms

Cement Industry Demand or consumption of cement has been analyzed across the five respective regions. From the graph, it is e v i d e n t t h a t M a r c h 0 6 a n d S e p 0 6 w i t n e s s e d s u d d e n s u r g e i n d e m a n d a f t e r t h e p r e v i o u s m o n t h s h a v e faced demand shocks. Another apparent feature is that demand for cement is highly vola tile across all zones.S h o c k s i n d e m a n d a r e f o l l o w e d b y s u d d e n s u r g e s . S u c h h i g h d e m a n d v a r i a b i l i t y i s a c h a r a c t e r i s t i c o f oligopoly markets 4.Firms in an Oligopoly market exhibit increasing sales but decreasing expense to sales ratio in Cement industry The expense (or cost to sales) ratio per annum of the cement companies h a s d e c r e a s e d o v e r t h e y e a r s . Though the total sales have picked up, the cost of producing cement has not increased at the same pace. The sharpi n c r e a s e i n s a l e s w i t h o u t a corresponding increase in cost does indicate possibility of cartel b e h a v i o u r which is a characteristic of oligopoly markets. 5.The oligopoly market is concerned with group in Cement industry The cement industry has seen a process of growing consolidation of capacity in a few hands as ar e s u l t o f m e g a - m e r g e r s a n d a c q u i s i t i o n s . B u t w h a t i s d i s t u r b i n g i s t h a t t h e p r o c e s s o f consolidation has been accompanied by growing evidence of monopolistic practices. 6.The firms in an oligopolistic industry are aware of their interdependence and always consider their rivalsr e a c t i o n s

whenselectingpricesandotherbusinesspoliciesincementindustry.
During last four years (2003-2007) cement prices have gradually increased from around Rs 150 per bag to Rs 230per bag in 2007. Average industry ROCE has reached more than 26% due to the recent burst in cement prices.Encouraged by such lucrative returns cement manufacturers have decided to increase capacity by more than 97million tonnes over next three years of which 43.7 million tonnes is likely to complete in FY 2009 Q2 How has decontrolling of cement prices helped the growth of this industry? Cement industry has been decontrolled from price and distribution on 1st March 1989 and de-licensed on 25th July1991. While the decontrol of cement ensured better profitability, the economic liberalization ensured steady rising demand for this core infrastructure product.Cement manufacturers control over market can be gauged by the fact that even 20-25% freight hike was straight passed on to consumers. Average industry ROCE has reached more than 26% due to the recent burst in cement prices. Encouraged by such lucrative returns cement manufacturers have decided to increase capacity by more than97 million tonnes over next three years of which 43.7 million tonnes is likely to complete in FY 2009. Thus, the cement supply will increase by more than 11% in next three years.The continuous capacity addition, though resulting in sporadic surplus situation, is a reflection of the expectation of the industry that notwithstanding the cyclical fall in demand the general tenor would that be of a high trajectory growth in cement demand arising out of the huge infrastructure gap that Indian economy has and which needs to bead dressed in the coming years. The four years prior to that the industry achieved an average growth of about 9 to 10per cent while prior to that the demand growth has been in the range of 8 to 8.5 per cent

Q3 Do you see possibilities of cartel or implicit collusion in the above case? How? Yes. Cartelisation is & will be relevant in every sector where oligopoly exists. Cartelisation reduces efficiency of the manufacturing sector if it operates on the supply of the raw material side, thereby increasing prices of the end products. Cartelisation artificially increases costs for the consumer goods manufactures and gives them a no leeway for boosting their bottom line.In India, cartelisation exists in various sectors and subsectors of the economy and is partly responsible for the rapid rise in inflation. The sector has been accused of cartelisation many times in the past. Indian cement sector includes three major players which control one third of the cement volumes in India.Since the market structure in India is rather fragmented, the dominant players in cement market control theproduction, distribution and selling prices and have been acting in concert through price & quality control, thus making it prone to cartelisation. They have been indulging in restrictive and unfair trade practices, which are prejudicial to public interest and consumers generally. The consolidation of the cement industry in few hands is not advisable. They come together and collude leading to a decline in competition