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Chennai - 020
FIRST SEMESTER EMBA/ MBA
Subject : Principles of Economics
Attend any 4 questions. Each question carries 25 marks
(Each answer should be of minimum 2 pages / of 300 words)
1.
Write an essay on the main purposes of how economics work, and the
relations between the main economic players and institutions.
2.
3.
4.
Define price elasticity of demand and explain the formula for calculating
price elasticity?
5.
6.
25 x 4=100 marks
scarce relative to human wants, an economy must choose among different alternative
collections of goods and services that it should produce.
If the Society decides to produce particular goods in a larger quantity, it will have to
withdraw resources from the production of some other goods. Further, an economy has to
decide how much resources should be allocated for the production of consumer goods and
how much for capital goods. In other words, an economy has to decide the respective
quantities of consumer goods and capital goods to be produced.
The choice between consumer goods and capital goods involves the choice between the
present and the future. If the society decides to produce more capital goods, some resources
will have to be taken away from the production of consumer goods and. therefore, the
production of consumer goods would have to be cut down. But greater amount of capital
goods would make possible the production of larger quantities of consumer goods in the
future. Thus, we see that some current consumption has to be sacrificed for the sake of more
consumption in the future.
utilise less labour and more capital. Production with power looms is, therefore, called
capital-intensive technique of producing cloth. Thus, the economy has to choose whether it
wants to use for production labour-intensive methods or capital-intensive methods of
production.
Obviously, the choice between different methods would depend on the factor-supply
situation and the prices of the factors of production. The criterion, it is obvious, must be the
cost of production- It is well known that the resources are scarce. But some resources are
more scarce than others. It is in societys interest that those methods of production are
employed that make the greatest use of the relatively plentiful resources or, conversely,
economies are much as possible on the relatively scarce resources.
the distribution is efficient if it is not possible to make any one person/persons better off
without making any other person/persons worse off through any redistribution.
Growth of Productive Capacity:
It is also important to know whether the productive capacity, of an economy is increasing,
static or declining. The increase in productive capacity of an economy over time is called
economic growth. Obviously, for under-developed economies, their basic problem is how to
accelerate the pace of their economic growth.
Even developed countries would not like to rest on their oars. In fact, it has been observed
that they are able to achieve higher annual rate of growth than the under-developed ones.
The problem of growth is thus not peculiar to the under-developed countries, but is of
importance to all countries, whether developed or undeveloped, whether free-market or
centrally planned.
that for a 14% increase in price ,demand has declined only by 4% . The negative sign indicates
the inverse relationship between demand and price.
Capitalism is an economic system in which capital goods are owned by private individuals or
businesses. The production of goods and services is based on supply and demand in the general
market (market economy), rather than through central planning (planned economy or command
economy). The purest form of capitalism is free market or laissez-faire capitalism, in which
private individuals are completely free to determine where to invest, what to produce or sell, and
at which prices to exchange goods and services, without check or controls. Most modern
countries practice a mixed capitalist system of some sort that includes government regulation of
business and industry.
Turbo Capitalism
Refers to an unregulated form of capitalism with financial deregulation, privatisation and lower
tax on high earners. Turbo capitalism involves:
Absence of regulation for banking /finance system. This encourages banks to take risks and
pursue profit through complex financial derivatives rather than basic principles of attracting
deposits and lending.
Less regulation on abuse of monopoly power.
Lower income tax and lower capital gains tax giving greater rewards to high income earners.
An unregulated labour market, where it is easy to hire and fire workers, and very limited
regulation about working conditions.
The term turbo capitalism was coined in 1989 by Edward Lattwak, a senior fellow at the Center
for Strategic and International Studies, in his book Turbo-Capitalism: Winners and Losers in the
Global Economy, (New York, 1999). It reflected on the changes to capitalist societies such as
US and UK since 1980. The 1980s were a period of financial deregulation, privatisation and tax
cuts for the wealthy. Arguably, this led to rising income inequality and also the financial
deregulation played a key role in the unsustainable credit bubble of 2001-2007. Turbo capitalism
could also be referred to as:
Unrestrained capitalism or free market capitalism
Responsible Capitalism
Responsible capitalism is essentially a free market economy, but with a degree of government
regulation to avoid the excesses and inequalities of capitalism. Responsible capitalism would
involve:
An extensive welfare state to protect those who are unemployed or on low incomes.
A progressive tax system with high earners paying a higher % of their income to fund
government spending.
Most industries would be in the private sector, but, the government might take
responsibility for areas with substantial positive externalities and social benefits like
health care, education, public transport.
A willingness to regulate monopolies and protect rights of workers.
Responsible capitalism is similar to concepts of social market economy
Popular Capitalism
Recently, the Conservative leader David Cameron, spoke about his wish for popular capitalism.
Presumably this is to take benefits of capitalism, but to make sure everyone benefits from
economic growth. This would involve a degree of redistribution and guarantees of a certain
social welfare safety net. Presumably popular capitalism would be willing to impose greater
regulation on the finance sector to prevent excess risk taking and growing inequality.
But, when politicians use such terms, there is always a degree of vagueness. As much as
anything it is an attempt to appeal to a wider political audience. Popular capitalism could really
mean whatever you want it to.
Crony Capitalism
A term used to refer to the situation where business success is related to strategic influences with
civil servants, politicians and those in authority. It could be used to refer to situations in early
twentieth century US where business leaders had to buy off politicians in return for favours (e.g.
in popular media: Citizen Kane). Arguably a degree of crony capitalism occurs in countries like
China, South Korea and Latin America. The power of the Mafia in Italy is also an example of
crony capitalism
Advanced Capitalism
A term used to refer to societies where capitalism is firmly established. There is widespread
acceptance of status quo, and little political activism over fundamental political issues. In
advanced capitalism, consumerism is important. There is likely an established welfare state to
overcome the worst of the excesses of capitalism.
State Capitalism
State capitalism occurs when state owned industries play a key role within the market economy.
Under state capitalism, the government also plays a key role in planning, for example deciding to
invest in transport and communication. To some extent, China has become a model of state
capitalism. Private firms play a key role, but the government also plays a key role in planning
energy, transport and the Chinese government influences monetary policy and exchange rate
policy. The difference between state capitalism and state socialism is that under state socialism
there is no room for private enterprise and competition.