DHRUVKUMAR SONAGARA

Roll No: P16052

Introduction to and Scope of Economic Analysis

What is economics? It is the branch of science that deals with income-expenditure and wealth
creation. Many people want to learn this because of several reasons like they hope to make money,
they want to know laws of supply and demand many are interested in how computers and IT sector
can be useful and many more. Economics helps to understand behaviour of financial markets, interest
rate and stock exchange.it examines the reason of differences in income of people, studies business
cycles of unemployment and inflation and international market and finance.
The main two aspects of economics is scarcity and efficiency. World is full of scarcity, it is the
situation of scarcity in which goods are limited compared to desires. Developed Countries are not able
to cater the desire of every individual as resources those countries have are not enough. When we see
the other extreme of underdeveloped countries situation is even worse. As resources are limited
relative to wants brings to the concept of efficiency. It denotes the most effective use of the resources
available in order to meet everyones need. It is a way to identify and understand the reality and then
figure out the efficient method to use available resources. For any economy, developed or developing,
advanced or isolated they must need to identify and answer three main questions. Every economy
must have a ways to what is to be produced, how to produced, and for whom to produce the goods.
Economies are mainly divided into two division: Microeconomics and Macroeconomics.
Microeconomics looks at the behaviour of individual entities like firms and markets. It considers how
price of land, labour and capital are set. Other one is Macroeconomics which looks at overall
economy. It considers wide aspects like total investment, how central bank manages money, why
some nations
grows at faster pace and some stagnant.
Economic relationship are complex involves many variables, so there is possibilities of fallacies to
occur. Some of them are like: post hoc fallacy, failure hold other thing constant, and fallacy of
composition. The first one involves fallacy of causality. It occurs when one event occur before other
and we consider it as cause of next event. Second fallacy is failure to hold other thing constant. If we
want to identify the whether particular event have given this result, other factor must remain constant
in order to identify it. If it is not constant we can make error. And the last fallacy is the fallacy of
composition. This occurs when we extrapolate the findings of small group to the bigger one which
might not be applicable and sometime cause error.
Economics can also be looked as positive and normative economics. Former one defines when basic
facts of economies are only considered. Like the profit of the firm, growth of company, why someone
earns more and some earns less, how technology affects productivity and many such. While normative
approach is the one in which involved ethical norm and rules. It is thinking about the people of the
economy rather than just focusing on facts of economics. Like US should take action against
Microsoft to break antitrust laws.
Economy can also be classified as market, command and mixed economies. A market economy is one
in which individual and private firms make the decision about the usage and consumption of
resources. System of private firms take every decision. The opposite of this is command economy in
which everything is in control of government and every decision is taken by government. No other
can interfere it. The third type is mixed economy in which elements of both of the above type can be
seen.
To answer the three main question that are what, why, for whom we make choice of inputs and
output. Inputs are those commodities that are used to produce goods and services. And output is useful

DHRUVKUMAR SONAGARA
Roll No: P16052
goods or services that are produced after production process. Factors of the production are land,
labour and capital.
Any country cannot satisfy all the desire of everyone as they dont have unlimited resources. So we
need to invest in wisely so as to obtain maximum efficiency. Consider we have some fix amount of
resources and needs to be allocated wisely among the different tasks. Consider the simple example of
total budget available out of which we can either buy ammunition or can do public welfare works. So
for every unit of money spent on one head we can also have spending on other. So we can build a plot
between these two head called production possibility frontier. If any country is inside this curve
suggests that economy is underperforming. If these plot done on year-wise we can observe that
developed countries move ahead with large chunk of income is saved as savings or investment.
We always have choices in production, consumption and every activity we do. When we select one
option over the other. To do that we must consider how much the decision will cost in terms of
forgone opportunities. The cost of next option given up is called opportunity cost. For example when
TATA acquired Corus they forgone the opportunity to invest the same in other place. Other concept is
productive efficiency. It occurs when economy cannot produce more of one good without losing
production of other. Many a time in economy workers are sitting idle may be in factories or in land is
called unemployed resources.
Goodbye 2020, Hello 1991!
This article mainly concentrates on decreasing growth rate of GDP of India in 2011-12. Time before
that India has experienced unprecedented growth consistently in UPA-1 government and all the
figures were very colourful. But during the time article published, picture looks gloomy. All figure are
comparable to 1980s and govt. shedding their hands over responsibility and saying this is due to
troubles in European markets. Industrialist asking for some action from government to handle the
situation.
Reviving Indias Economy
Article was published when Modi became prime minister in 2014. Starting from outgoing PM, despite
of being capable of handling any stringent situation, wasnt able to do much due political
conundrums. Experience of Modi so far is running business-friendly state and it will not be easy to
run much complex system of India. Inflation is high, growth rate is low, and deficit is high so it will
be tough job for Modi.
Indias Mediocre Growth
This article published after the two years of completion of Modi as a PM. GDP growth rate is 7.9%
become fastest growing major economy. Still Modi has many more things to do. There are some
obstacles to private enterprise which needs to take care in order to allow them grow at faster pace.
Still employment grows slowly as compared to 2000. Many MNCs CEO and officer are looking
towards India for the investment so at this crucial time India should take of its regulatory and
infrastructure issues to allow India to around 10%.

DHRUVKUMAR SONAGARA
Roll No: P16052

Theory of firm, present value and wealth creation

Managerial economics is achieving goals and objectives of any firms or organization using various
economic theory and decision making tools. Theories it uses includes microeconomic and
macroeconomics and tools used are econometrics and mathematical economics. This theories tries to
explain the behaviour of firms and also predicts their future actions. Mathematical economics tries to
express the situation in equation form and formalize it. Then econometrics applies the statistical tools
to relate it to the real life scenario.
When we try to make any decision, steps involved are: 1) Define the problem. This is the most
important step. Unless we dont know what is the problem we cant put any action to solve it. For
example Xerox invented copying machine in 1959 but have no competition until 1969 when Japanese
copiers machine came with better quality at lower cost. 2) Determine the objective. For any firm it is
necessary to have objective to solve the problem Xerox needs to be in market so it took some measure
to have its position intact. 3) Identify the possible solution. It is important because from this step we
can know what are the options available with us to solve the problem.4) Selection of best solution.
From those options available it is required to select the best one which fix our problem 5) Implement
the solution. Unless we apply it whole procedure is futile.
In any firm generally two type of risks are involved: systematic and unsystematic. Unsystematic are
those risks which are taken due to the internal situation of firms. It may be management capability,
human resources related issue, technological aspects or any other. Like chevron took huge risk of $50
billion due to its internal risk appetite. Whatever the implication came were due to systemic risk.
Systemic risk is due to the market conditions prevailing when decisions were taken. For example,
when TATA acquired Corus market condition for steel industries for very favourable. With that
performance of TATA was also at higher note. But result after sometime was not expected by anyone.
So such risks are systematic risks.
A firm is an organization that manages the resources, human and/or material, in a peculiar manner to
produce goods and/or services which can be sold in market to gain profit. In general firms are mainly
segregated into: proprietorship, partnerships and corporations. Firms exists because of some
specification reasons. Whenever someone starts business it would very difficult for single person to
take every operation on hand. And as firms grows number of operations increase so single person
cannot do it alone. So he/she enters into contracts with some other people to perform the tasks for
which owner may pay them or people agree on some different conditions. All in all, such contracts are
much more economical than asking someone for each single operation. So there will be much savings
on transaction costs and by doing almost all operation under one roof, costs of transfer, taxes, and
volatility can be reduced.
Any firms starts at small scale and then it grows and it volume increases. Until it is 100% proprietor
or partnership firm problem does not arises but when its size increases it tries to become corporation
and include shareholders. Now when major chunk of ownership is with shareholder which are
principals wants more and more profit situation tightens. On other hand CEOs or managers tries to
relax. And this conflict is termed as agency problem. Now in may firms CEO have huge control over
the board as he/she may be holding large number of shares or in many case board of members have
greater control over company. For the benefit of firm both need to align in same manner. But many
cases can be seen of destruction of firm due to malfunction of one of them of problem in coordination

DHRUVKUMAR SONAGARA
Roll No: P16052
between the two. Satyam computers was such a case in which owner had huge control over the board,
shareholder and on firm resulted in very bed condition.
Whenever we look at any firm we analyse it on the basis of how much it makes the profit. And to
maximize the profit is always the primary objective of any firm. When we look at any firm, it
involves two risks in general that are: business risk that is because of uncertainty of return from the
market and financial risk that is related to the leverage. It is the finance related to debt. Todays major
organization concentrates on Sales, Profit and Market share but there is also another concept of value
maximization. In which firms concentrates on building up of its value. Here the time value of money
comes into the picture. Considering the example of highly capital intensive industries like aviation
and petrochemicals this becomes very important. For example, Boeing starts to invest in aircraft
which takes 4-5 years or more than that to start rewarding. Consider Reliance refinery complex,
Jamnagar coming up with J3 and J4 plants which will start even functioning after 5-6 years. So here
present value of such projects needs to be consider. When any start new project, cash which we
investing currently should be less than the revenue that will be generated in future. If this is not
satisfied than it is said that particular project is financially unviable and should not be started. As exchairmen of Infosys says as soon as we realise the unviability of project we should return the money
of shareholders.
The rate by which value of any firm increase is termed as discount factor. This is rate by which
current money will increase in one year. So when we want to do provision for future event this factor
is very useful. So when we try to evaluate any project we first find out the current investment. And
then we find equated future cash inflow with discount factor. The difference between this both is net
present value (NPV) which should be positive.
This concept applies to every firm and companies. Situation changes when we shift from domestic
firm to global companies. Domestic are those firms of whose all the transactions are in their own
countries currency. No foreign currency involved in their transection. While the opposite will be the
case for global company. Simple is the calculation of finding out the present value of domestic firm as
other currency is not involved. So only consideration is the discount factor. While for the global
companies exchange rate are also important factor as net income they will be showing in the currency
of country in which parent company present. Here the role of managers of global company becomes
crucial because exchange rate can make or ruin their profits. Brexit is current example because of
which Infosyss result is affected as major business they get from Britain. Many other software
companies like TCS and WIPRO are affected as their large portion of business coming for overseas.