AMITY 1 M.B.A.

SEM - I







Mean|ng
- Many wanLs ( unllmlLed wanLs) relaLlvely scarce resources
- SaLlsfacLlon mosL lmporLanL
WanLs
1ransformed ln goods servlces
ulsLn of goods

MICkC MACkC LCCNCMICS

MICkC SLudy of lndlvldual's eco behavlour flrm's or lndlvldual lndusLry's
eg producL prlclng
facLor prlclng
consumer behavlour
sLudy of flrms
locaLlon of lndusLry

MACkC SLudy of aggregaLes
eg LoLal producLlon LoLal savlngs
LoLal consumpLlon LoLal lnvesLmenL
n l and ouLpuL
Ceneral prlce level
8alance of Lrade
LxLernal value of money
LmploymenL eco CrowLh

Nature of Lco (Sc|ence or Art or both)

Lco ls a sc SysLemaLlsed body of knowledge own meLhods ablllLy Lo forecasL
SLudles cause effecL relaLlonshlp (law of uu)

8u1 noL a perfecL sclence because
- ack of unlform oplnlon
- 1he sub[ecL maLLer eco behavlour of a man ls hlghly unpredlcLable
- Lco varlables are unpredlcLable

Lco as an arL arL pracLlce of knowledge
Lco as poslLlve sc and as normaLlve sc




INTRODUCTION TO MICRO ECONOMICS
AMITY 2 M.B.A. SEM - I

Methods of Study



educt|ve Method Induct|ve Method
absLracL analyLlcal prlorl collecLlon analysls of facLs of an
laws are deduced loglcally enqulry
on Lhe basls of generallzaLlons
absLracL reasonlng noL acLual facLs
SLep 1 ercepLlon SLep 1 ercepLlon
SLep 2 1echnlcal Lerms SLep 2 CollecLlon classlflcaLlon of daLa
SLep 3 ueduclng hypoLhesls SLep 3 llnd reasons for relaLlonshlp
SLep 4 1esLlng hypoLhesls SLep 4 SeL rules for verlflcaLlon
(eg law of uu law of SS) (eg ConsumpLlon funcLlon acceleraLor)
loglcal proceeds from general Lo parLlcular loglc proceeds from parLlcular Lo general

noL muLually excluslve

CLN1kAL LCCNCMIC kC8LLMS

- ScarclLy ls felL noL only by lndlvlduals buL by socleLy also
- ow Lo use llmlLed resources Lo derlve maxlmum saLlsfacLlon? Lconomlc roblem
- WhaL how for whom Lo produce? whaL provlslons of growLh?

Jhat to roduce More guns or more buLLer
CaplLal goods or consumer goods
now to roduce 1echnlques of producLlon
CaplLal lnLenslve or labour lnLenslve
uepends on avallablllLy of lC's
Ior Jhom to roduce Share of dlfferenL people of socleLy
Jhat prov|s|ons for Savlngs lnvesLmenL
Lconom|c growth Sacrlflce of currenL consumpLlon
lor fuLure progress

kCDC1ICN CSSI8ILI1 CDkVLS (C)

- graphlcal represenLaLlon of alLernaLlve producLlon posslblllLles faclng an economy
AssumpLlons a) only Lwo Lypes of goods wheaL cloLh
b) flxed resources fully employed
c) no change ln Lechnology
1ab|e
roduct|on
poss|b|||t|es
C|oth Jheat Cpportun|ty cost
A
8
C
u
L
l
0 (LxLreme)
1
2
3
4
3 (LxLreme)
13
14
12
9
3
0

1
2
3
4
3
AMITY 3 M.B.A. SEM - I

15
14
12
9

6
5
3

0




CCk1DNI1 CCS1 C

- CosL of Lhe nexL besL opporLunlLy losL
- CC goes on lncreaslng concave Lo Lhe orlgln
- ConsLanL CC C sLralghL llne
Say and ls more sulLable for wheaL Lhan cloLh
lf we produce more of cloLh whlch ls less producLlve more resources wlll be requlred
- greaLer sacrlflce ln wheaL for exLra producLlon of cloLh (le more opp CosL)
lf Lechnology progresses C wlll shlfL ouLward Lo Lhe rlghL



















P
1

P

Wheat



0
CloLh
1

C
D
E
F
A
B
Cloth -3 4 5
As a resulL of
Lech
lnvesLmenL / caplLal
populaLlon
AMITY 4 M.B.A. SEM - I






LMAN

Mean|ng efers Lo quanLlLy of goods LhaL consumers are wllllng able Lo purchase aL a prlce durlng a
glven perlod of Llme
- LffecLlve uu depends on deslre ablllLy wllllngness
- Lxpressed aL a prlce durlng a perlod of Llme / per unlL of Llme

L1LkMINAN1S CI

(l) rlce of Lhe commodlLy uu r lnversely relaLed
due Lo lncome subsLlLuLlon effecLs
(ll) rlce of relaLed commodlLles CompllmenLarles SubsLlLuLes
consumed LogeLher ln place of each oLher

eg Car / eLrol eg 1ea / Coffee
en / lnk

x uy(ve) x uy (+ve)

(lll) lncome level Cenerally dlrecLly relaLed
excepLlonally Clffen goods (lnLerlor goods) lndlrecLly relaLed
baslc necesslLles (food cloLhlng shelLer)
uu less Lhan proporLlonaLe Lo y (lncome)
as consumpLlon paLLern shlfLs from consumer goods Lo durable goods

(lv) 1asLe references more fashlon more uu
'uemonsLraLlon effecL' lmporLanL role

(v) CLher lacLors
a) Slze of populaLlon (dlrecL relaLlon)
b) ComposlLlon of populaLlon
c) ulsLrlbuLlon of y
equal hlgher propenslLy Lo (MC) consume hlgher uu
unequal lower MC lower uu

LAJ CI LMAN

- lf Lhe prlce of a commodlLy falls quanLlLy demanded of lL wlll rlse vlce versa
CLher Lhlngs remalnlng consLanL (CeLerls arlbus)

r of relaLed lncome 1asLe references
goods
OF DEMND & ESTICITY OF DEMND

AMITY S M.B.A. SEM - I

emand Schedu|e (Ind|v|dua|)
r
3
4
3
2
1
10
13
20
33
60



Market emand Schedu|e
r A 8 C 1ota| (A + 8 + C)
3
4
3
2
1
10
13
20
33
60
8
12
17
23
33
12
18
23
40
30
30
43
60
100
140

kat|ona|e for the |aw of Why uu curve slopes ?
(l) SubsLlLuLlon effecL x x becomes cheaper Lhan y
Se y becomes relaLlvely cosLller

Consumer buys more of x

(ll) lncome effecL x urchaslng power
le or real y

lnduces hlm Lo buy more of x

(lll) When x falls lL becomes affordable for Lhose who could noL buy lL

uux

LkCL1ICN CI 1nL LAJ CI

(l) Consplcuous goods or snob effecL
- some consumers measure uLlllLy of a commodlLy by lLs prlce
- 1hey dd more aL hlgher prlce vlce versa
(ll) Clffen goods oberL Clffen
- rlce of bread purchaslng power drasLlcally decreased as bread formed slgnlflcanL porLlon of
expense
- 1hls forced Lhe consumers Lo curLall meaL oLher expenslve foods Lurn back Lo bread whlch
ls sLlll relaLlvely cheaper
- ulrecL relaLlonshlp excepLlon paradoxlcal
- Lg coarse gralns ba[ra low quanLlLy of rlce
(lll) uemonsLraLlon effecL 1o follow Lhe paLLern of consumpLlon of Lhose belonglng Lo hlghly group
(lv) SpeculaLlon LxpecLaLlon of consumer
(v) lmperfecL knowledge

LLAS1ICI1 CI

esponse of quanLlLy demanded Lo a change ln rlce
Lp rop change ln CuanLlLy 7 q / q
rop change ln rlce 7 p / p

- Slnce prlce quanLlLy are lnversely relaLed 7 q / 7 p ls ve
- Inverse relationship

5 D - downwards Irom L to R
4
3
2
1
Pr D
0 10 20 30 40 50 60
Quantity
AMITY 6 M.B.A. SEM - I

Methods of measur|ng r|ce L| of

o|nt Method Ll aL a glven polnL on uu curve


Are LlasLlclLy lf r el ls Lo be found beL Lwo prlces
L
p
q
1
q
2

1

2

q
1
+ q
2

1
+
2

1ota| Cut|ay Method
CuLlay Lxp r CnLy
q Cut|ay Ld
Case l

4 03 20

ConsL
1
1 0 20
Case ll

4 4 16
1
1 24 24
Case lll

4 6 24
1
1 16 16

L1LkMINAN1S CI k LL CI (ef of L
d
)

AvallablllLy of SubsLlLuLes
lf subsLlLuLes are avallable More elasLlc
lf subsLlLuLes are noL avallable less elasLlc
uu for eLrol ls lnelasLlc buL dd for lndlan Cll's eLrol ls elasLlc (roducL's dd ls lnelasLlc buL brand's
dd ls elasLlc)

INCCML LL CI

Ll rop change ln q
rop change ln y

(a) lf proporLlon of lncome spenL as Lhe y same
Lhen L
l
1

e ,
E ~1
e 0
t
e 1
R (e 1)
t
R
T
P
RT lower seg
Rt upper seg
E
d - dq P
Dp q
T
AMITY ? M.B.A. SEM - I

(b) lf proporLlon of lncome spenL as Lhe y lncreases
Lhen L
l
1

(c) lf proporLlon of lncome spenL as Lhe y decreases
Lhen L
l
1

CkCSS Ld Change ln ddx due Lo change ln y

Lc 7q
x

y
7 q
x
7
y

q
x
7
y
q
x

y


SubsLlLuLes
x
u
y
L
c
+ ve

CompllmenLory
x
u
y
L
c
ve



































AMITY S M.B.A. SEM - I





D1ILI1 WanL saLlsfylng power of a com
Ieatures Sub[ecLlvlLy
elaLlvlLy
lnLenslLy
CrdlnallLy
ulff from leasure
ulff from SaLlsfacLlon
ulff from usefulness
no eLhlcal Slgnlflcance

MAkGINAL D1ILI1

1u Sum of Lhe uLlllLles u
1
+ u
2
+ u
3
+ + u
n

Mu AddlLlonal uLlllLy from addlLlonal unlL 1u
n
1u
n1

AssumpLlons CardlnallLy homogenelLy conLlnulLy reasonablllLy
Mu of money consL
ypoLhesls of lndependenL
(lgnores compllmenLarlLy beLween goods)


1he Law of MD

#1he addlLlonal beneflL a consumer derlves from a glven lncrease ln sLock of a Lhlng dlmlnlshes wlLh
every lncrease ln Lhe sLock he already has"

Dn|ts 1D MD
1
2
3
4
3
10
18
23
23
20
10
8
3
0
3


ke|at|onsh|p between 1D MD

(l) 1u Mu sLarL aL Lhe same polnL
(ll) Mu decreases from beglnnlng 1u lncreases Lhen consLanL Lhen decreases
(lll) When Mu 0 1u ls Max
(lv) Mu becomes ve when 1u sLarLs lncreaslng





TU




MU
UTIITY NYSIS

AMITY 9 M.B.A. SEM - I





Mean|ng

CuanLlLy of goods servlces LhaL sellers are wllllng able Lo sell
aL varlous prlces durlng a perlod of Llme
ls a flow concepL

eterm|nants

l r|ce ulrecL relaLlon maxlmlzaLlon of proflL ls raLlonal behavlour of a flrm
ll rlce of relaLed goods lf x Cy
lll rlce of oLher lCs CosL proflL
lv 1echnology lnvenLlons lnnovaLlons
v CovernmenL pollcy 1axes cosL r
vl CLher facLors forelgn pollcy ob[ of flrm lnfrasLrucLure naLural facLors eLc

LAJ CI SDL

CLher Lhlngs remalnlng consLanL SS as pr
SS cannoL be ad[ ln shorL run buL can be ln long run

Schedu|e


SnII1S IN 1nL SS CDkVL (INCkLASL Ck LCkLASL)



r nty
1
2
3
4
3
3
33
43
33
63

S
1

S
1

S
1

S
1

S
2

S
2

S
2

S
2

0
Q
P
Q
0
P
Increase
(due to change in other Iactors)
Decrease
5

4

3
Pr.
2
1


, , , , , , ,
10 20 30 40 50 60 70
Q
S
S Diagram
THEORY OF SUPPY

AMITY 10 M.B.A. SEM - I

MCVLMLN1 CN 1nL SS CDkVL


LLAS1ICI1 CI SS
L Change ln CnLy Supplled
Change ln r
C 7q
q 7

Are LlasLlclLy e
s
beLween Lwo prlces
Ls q
1
q
2

1

2

q
1
+ q
2

1
+
2


Ls q
1
q
2

1
+
2

q
1
+ q
2

1

2


CCNSDMLk SDkLDS

- Lvolved by Marshall
- Consumers are generally ready Lo pay more Lhan Lhey acLually pay 1hls exLra saLlsfacLlon ls called
as consumers surplus
- Cs eady Lo pay acLually pays
- ConcepL F derlved from Lhe law of uMu

Dn|ts MD kICL CS
1
2
3
4
3
26
24
22
20
18
20
20
20
20

6
4
2
0






e
s M

e
s ~ 1

e
s 1
e
s 1

e
1

e
1

e
M

P
1

P
Q
1
Q
0
As a result oI change in price
e
s 0
e
0

AMITY 11 M.B.A. SEM - I





- 8ased on consumer preferences
- Mu ls noL measurable preference order ls easler
- le ordlnal

Assumpt|ons
aLlonallLy of consumer
Consumer capable of ranklng
Consumer conslsLenL le A 8 8 C Lhen A C
lf A has more commodlLles Lhan 8 Lhen A musL be preferred Lo 8

IC n|cks|an Ana|ys|s
All Lhose comblnaLlon of goods whlch yleld equal saLlsfacLlon
e does noL mlnd whlch comblnaLlon does he geL

Schedu|e

Comb|nat|on Iood C|oth|ng MkS
A
8
C
u
1
2
3
4
12
6
4
3

6
2
1

MA Set of ICs

MkS

aLe aL whlch consumer ls prepared Lo exchange goods x ?
MS AmounL of y forgone Lo geL addlLlonal x remaln on same lC
MS ls falllng as he has more and more of food he ls prepared Lo glve up less less of cloLhes
IC
1

IC
2

IC
3

X
Y
0
12

10

8

6

4

2

, , , , , , ,
1 2 3 4 5 6 7
Food
IC
Diagram
Clothing
INDIFFERENCE CURVE NYSIS

AMITY 12 M.B.A. SEM - I

kCLk1ILS
l) lCs slope downward from Lo
lf amounL of x amounL of ? G ( F more rapldly)
ll) Convex Lo Lhe orlgln
As MS ls dlmlnlshlng
e consumes more more of x buL prepared Lo parL wlLh less less of ?
lll) lCs never lnLersecL each oLher Lhough noL necessarlly parallel

lv) lgher lC represenLs hlgher saLlsfacLlon

8DGL1 LINL
Consumer wanLs Lo have more more and go hlgher hlgher lC
8uL has llmlLed lncome rlce
G
ConsLralnLs
Means all Lhose comblnaLlons one can buy wlLh hls glven lncome All Lhese comblnaLlon wlll lle
on 8


CCNSDMLk'S LDILI8kIDM

When he derlves maxlmum saLlsfacLlon
Assume
a) lnd Map Showlng scales of pref for varlous comblnaLlons
b) llxed lncome spenL wholly on x ?
c) r of x ? are glven flxed


IC
1

IC
2

IC
3

M
X
N
0
E
P
S
T
N
IC
4

IC
5

L
K
H Y
X
0
IC
1

B
IC
2









A C

A B (IC
1
)
A C (IC
1
) B C

absurd
K Under spending
H Beyond the reach
R
- PL tangent to IC
3

- Slope oI PL & IC
3
are equal
Slope oI IC MRS
xy

MUx Px
MUy Py
( MUx Px
MUy Py
Slope oI PL Px MUx
Py MUy
& Slope oI IC MRS
xy
MUx
MUy

AMITY 13 M.B.A. SEM - I





Mean|ng of Market

- All Lhose buyers sellers who lnfluence prlce
- A sysLem or arrangemenL whereln buyers sellers come ln close conLacL dlrecLly or lndlrecLly

L|ements of Market
(l) 8uyer Seller
(ll) A producL or servlce
(lll) 8argalnlng for a prlce
(lv) knowledge abouL markeL condlLlons
(v) Cne prlce aL a glven Llme

1ypes



erf Comp MonopollsLlc Monopoly Cllgopoly
Many sellers b Many sellers Slngle seller lew sellers
ldenLlcal producLs ulfferenLlaLed producL LxLremely dlfferenL roducLs
Many buyers b Many buyers
ulLlmaLe r Ll large pr Ll (el Ll) Small (el lnl) Small
no conLrol over pr Some conLrol G some G very conslderable
llaLLer uu Curve SLeeper uu Curve


kLVLNDL CCNCL1S

l) 1 L C
ll) A 1/C L C/C
lll) M 71/7C M 1
n
1
n1

M A 1 el of uu are unlquely relaLed

e1
Mk Ak L

e
e el
le lf e 1 M 0
e 1 M +ve
e 1 M ve

kINCILLS

lf a flrm 1 1vC F lL should noL produce
When M MC expand ouLpuL Llll M MC MC should cuL M from below

PRICE DETERMINTION IN DIFFERENT MRKETS

AMITY 14 M.B.A. SEM - I

eterm|nat|on of pr|ces Genera| v|ew
Interact|on between SS det Lq pr

SN r SS
1
2
3
4
3
1
2
3
4
3
60
33
20
13
10
3
33
43
33
63


Case I


Case II G


Case III SS



S
E P
Q Q
1

0
S
S
1

D
E
1

P
1

S
1

D
S
E P
Q
1
Q
0
S
D
D
D
1

E
1

D
1

P
1

S
E
1
P
1

Q Q
1

0
S
D
1

D
1

D
E
D
P
S
E P
Q
0
D
D
Pr
Q
G Pr
G Q
G Pr
Q
S
AMITY 1S M.B.A. SEM - I

Case V
DDSS
Case IV G SS

S|mu|taneous changes |n SS

kICL L1LkMINA1ICN DNLk IIILkLN1 CCNI1ICNS

LkILC1 CCML1I1ICN
Ieatures
a) arge number of buyers / sellers
b) omogenelLy of producL
c) lree enLry exlL
d) erf knowledge
e) erf MoblllLy of lCs
f) Absence of frelghL
g) AbsenL CovernmenL's lnL

LDILI8kIDM (MAk CI kCII1)

S
S
D
D
O
N
Q
P
M
T R
MC (SS-Curve)
(FIRM)
O
Q
P

OP Eq price Price takers
~ OP - loose customers P - DD Curve
OP - no incentive AR MR (as all the units are priced same)
T is no eq as MC is G : # Eq.
S
1

E
1

Q Q
1

0
S
D
E
P
S
D
D
1

D
1

P
Q Q
1

D
D
E
S
S
1

S
1

S
D
1

D
1

P
1

E
1

Q Q
1

S
S
S
1

S
1

P
P
1

D
D
D
1

D
1

E
E
1

0 0
G G G
DD SS DD ~ SS DD SS
P
1
P P
1
~ P P
1
P

S
1

E
1
P
1

Q
1
Q
0
S
1

S
D
E
P
S
D
Pr
G Q
S
1

AMITY 16 M.B.A. SEM - I

Cond|t|ons for equ|||br|um
l) M MC (lf M MC lncenLlve for flrm Lo expand lLs producLlon lf M MC addlLlonal unlL
adds more Lo cosL Lhan revenue)
ll) MC should cuL M from below MC should have poslLlve slope (MC ls sLlll falllng)

SDL CDkVL
MC Curve


Can the compet|t|ve f|rm earn prof|ts?
ln shorL run lL wlll earn super normal normal proflLs or losses dependlng on cosL condlLlons
Supernorma| rof|ts (Ak A1C) Norma| rof|ts (Ak A1C)

Losses lf a flrm ls able Lo meeL lLs vC parL of lC
lL wlll conLlnue ln shorL run because of exp are already lncurred
8uL lf a flrm ls noL able Lo recover lLs AvC lL ls beLLer Lo shuL down


P P
O O
B
E
SMC
1

SAC
1
TC
P AR MR E
SMC
1

SMC
2TC
SAC
2
TC P
1

P AR MC
P
1

SAC
1

AR MR
SMC
2
SAC2
E
2

AR MR
LAC


P P
O Q O Q
B
E
SN
ProIit
MC
A
T
AR MR E
MC
ATC
AR MR
D
4

D
3

D
2

D
1

AVC
MC
MC SS Curve
Q
1
Q
2
Q
3
Q
4

MC gives quantity supplied
( MC SS Curve
No SS below AVC
P
1
is BEP
P
1

P
2

P
3

P
4

AMITY 1? M.B.A. SEM - I

Losses


LCNG kDN LDILI8kIDM

Introduct|on
- Mlnlmum polnL of AC Curve (llrms ad[usL Lhelr planLs Lo produce aL )
- Cnly normal proflLs because lf Lhey earn abnormal proflLs new flrms wlll enLer uu for lCs wlll
cosL proflL wlll come down
- 1hese changes wlll conLlnue Llll AC ls LangenL Lo Lhe uu Curve as loss maklng flrms wlll leave cosL G
unLll remalnlng flrms cover Lhelr 1C
I|rm

SMC
1
SAC
1
(less Lhan A) F roflL (abnormal)
new flrms enLer capaclLy expanslon
- SS SS Curve shlfLs rlghLwards
Cond|t|on MC AC
SMC MC SAC AC M
Industry



P
D
E
1

S
1

S
1

S
S
E
D
P
O
E
SMC
1

P
1

SAC
1

SMC
2
SAC2
P AR MR
LAC

AR MR
O Q
E
ATC
MC
B
Losses
P
AMITY 1S M.B.A. SEM - I

Long run equ|||br|um


ln Lhe long run A M AC MC
As
(l) 1he ouLpuL ls produced aL marglnal cosL
(ll) Consumer pays mlnlmum prlce whlch [usL covers Lhe MC ( MC AC
(lll)lull capaclLy uLlllsaLlon ( MC AC
(lv)Cnly normal proflLs AC A
(v) Maxlmum proflL MC M

MCNCCL

Ieatures
Slngle seller (flrm lndusLry)
no close subsLlLuLe (zero cross elasLlclLy) or very small cross elasLlclLy
never found ln pracLlce (excepL publlc uLlllLles llke 1ransporL WaLer LlecLrlclLy eLc)
esLrlcLlon Lo enLry (Lconomlc lnsLlLuLlonal legar or arLlflclal)
rlce elasLlclLy (ed) ls less Lhan one hence downward sloplng ddcurve

kevenue Curves of Monopo||st
llrms dd curve ls ldenLlcal wlLh Lhe markeL dd curve
lf prlce () of a monopollsL ls flxed and SS Lo all buyers aL LhaL prlce (C)
( We can easlly flnd A 1 / C C L M 1n 1n
1

C

ln perfecL comp A M 8u1 noL ln monopoly Slnce lf monopollsL prlce uu G uu lf prlce G
1hus
A M are negaLlvely sloped
M lles halfway beLween A yaxls
A cannoL be zero buL M can be zero or ve

Lqu|||br|um Ck rof|t Max|m|sat|on
erf Comp F rlce Laker F only eq ouLpuL deLermlned
Monopoly F rlce and ouLpuL (eq) deLermlned
O Q
MR
A uemand
(downward sloplng)
P
O
SMC
LMC
LAC
E
AR MR P
(M A a flrm has Lo G prlce
Lo sell addlLlonal unlL or
Marglnal unlL)
AMITY 19 M.B.A. SEM - I

SnCk1 kDN
We know Lhe condlLlons of equlllbrlum le
MC M
MC cuLs M from below
Craphlcally

know wheLher a monopollsL lncurs proflL or loss we need Lo know A1C curve (Avg 1oLal CosL curve)
kCII1 LCSS

lf he covers AvC parL of flxed cosL F no shuL down
As he covers someLhlng of lC whlch ls already lncurred
8u1 lf he ls noL even coverlng AvC F ShuL down

LCNG kDN
A monopollsL need noL reach mlnlmum of (mlnlmlse cosL) AC Curve
e can sLop anywhere where hls proflLs are maxlmum


kICL ISCkIMINA1ICN

Same producL dlfferenL buyers dlfferenL prlce lrrespecLlve of cosL
MC
ATC
AR
MR
M O
P
A
B
E
MC MC
ATC ATC
AR
AR
MR
MR
M M O O
Q Q
P
P
A
B
E
B
E
A
MR AR
MC
E
A
M Q
O
P
E F Equilibrium
OM F Eq output
OP F Eq Price (corresponding
(P AR) to AR)
P
AMITY 20 M.B.A. SEM - I

Cond|t|ons
a) Some monopoly power (noL absoluLe) ls necessary
b) AblllLy Lo dlvlde markeL ln Lwo segmenLs
c) rlce elasLlclLy should be dlfferenL ln dlfferenL markeLs
d) no posslblllLy of cross selllng (le from cheaper markeL Lo hlgh prlced markeL)

MCNCCLIS1IC CCML1I1ICN

Monopoly and perfecL compeLlLlon
More common Lhan pure compeLlLlon pure monopoly

Ieatures
(l) arge number of sellers each havlng small share of markeL
(ll) roducL dlfferenLlaLlon brand loyalLy glves degree of monopoly buL close subsLlLuLes glve
deg of compeLlLlon
(lll) lree enLry exlL
(lv) non prlce compeLlLlon aggresslve advanLage
roducL devL
8eLLer dlsLrlbuLlon / afLer sales servlce
uellberaLe producL dlfferenLlaLlon

LDILI8kIDM Short kun

uownward sloplng dd curve buL flaLLer
CondlLlons remaln Lhe same le MC M and MC cuLs M from below
A8C rof|t (Super norma|) A8C |oss

LDILI8kIDM Long kun


MC
ATC
D AR
Q
1
Q
2
O
P
X
E
P
1
Q
1
Normal ProIit
Equilibrium Price & Quantity
MC SMC
ATC
SAC
D AR
AR
MR
Q Q O O
P
P
A
B
E
A
E
B
MR
C
C
MR
AMITY 21 M.B.A. SEM - I

- ln Lhe long run equlllbrlum ls achleved lf Lhe flrm has excess capaclLy
- 1he flrm can expand lLs producLlon Lo C
2
and reduce average cosL 8u1 lL does noL do so because ln
dolng so A wlll reduce more Lhan AC

CLIGCCL

Ieatures
(l) CompeLlLlon among few (AuLomoblle lndusLry or Cold drlnks lndusLry)
(ll) lnLerdependence on oLher flrms / eacLlons of oLher flrms musL be consldered
(lll) lmporLance of advg selllng cosLs
(flrms avold prlce cuLLlng) Lo avold prlce war
(lv) Croup behavlour (any leader flghL or come LogeLher)
(v) rlce cuL by one wlll be relaLed by oLher flrms Lhls wlll affecL dd of one Lhus
uu Curve of ollgopoly ls noL sure deflnlLe
1herefore only economlc analysls can deLermlne prlce and ouLpuL

|nked emand Curve

- CllgopollsLlc lndusLrles follow prlce rlgldlLy
- klnked uu Curve hypoLhesls by Amerlcan LconomlsL #Sweezy"
- klnked aL Lhe level of prevalllng prlce
- Above Lhe klnk hlghly elasLlc dd curve
- 8elow Lhe klnk lnelasLlc dd curve


- lf an ollgopollsL lowers Lhe prlce compeLlLor wlll follow Lhe same
- 8uL lf he ralses Lhe prlce above prevalllng level comp wlll noL follow Lhe same
1hus Lhe lower porLlon of dd curve u ls prlce lnelasLlc very llLLle ln prlce
Cne Lhe oLher hand subsLanLlal G ln uu by an ln prlce

CusLomers wlll run away Lo comp
G
Wlll be happy
G
no moLlvaLlon Lo prlce

1herefore ollgopollsL wlll lose greaLly by rlce 1hus elasLlc upper porLlon le large G ln uu by small ln
prlce
1hls rlgldlLy forms Lhe klnk


P
M
P
O
D
d
e 1
e ~ 1
dP rel elastic
PD rel inelastic
AMITY 22 M.B.A. SEM - I





Mean|ng
(l) CreaLlon of uLlllLy goods or servlces
(ll) CreaLlon of addlLlon of value
(lll) CreaLlon of ouLpuL of goods servlces uslng lnpuLs Lhrough a process of creaLlon
(lv) CreaLlon of form uLlllLy Llme uLlllLy place uLlllLy and personal uLlllLy

Man cannoL creaLe or desLroy maLLer hence only Lhe lasL deflnlLlon ls accepLable
1o geL economlc producLlon followlng processes are needed
(a) CollecLlon of resources and lnpuLs for producLlon
(b) uslng personal ablllLles and skllls F servlces
(c) Changlng Lhe lnherenL form of resources
(d) Changlng Lhe place of resources or reallocaLlon
(e) 8rlnglng generally unavallable maLerlal ln avallablllLy

1he resources of producLlon are collecLlvely called as 'lacLors of roducLlon'

Iactors of roduct|on kemunerat|on
Anu
A8Cu
CAl1A
Ln1LlSL
enL
Wages
lnLeresL
roflL
LxlsLlng
LxlsLlng
Manmade
LxlsLlng
naLural
noL naLural
noL naLural
noL naLural

eL us dlscuss Lhem lndlvldually

LAN
- noL merely soll or surface of Lhe earLh
- lL ls locaLlon wlLh vegeLaLlon mlnerals ferLlllLy waLer cllmaLe eLc

Ieatures
(l) lmmoblle cannoL be produced by man
(ll) has alLernaLlve uses
(lll) no supply prlce as free glfL of naLure
(lv) supply ls flxed buL flexlble ln relaLlve sense
(v) lnflnlLe varlaLlons of ferLlllLy
(vl) lL earns renL
uavld lcardo enL ls earned due Lo orlglnal lndesLrucLlble power of soll ulfferLlal surplus
!oan oblnson enL ls earned due Lo scarclLy
(vll) passlve facLor
(vlll) sub[ecL Lo aw of uM Marshall

LA8CDk
- Any menLal or physlcal acLlvlLy or exerLlon dlrecLed Lowards producLlon of goods and servles
- uemand F from enLrepreneur
Supply F from socleLy
- abour can enhance lLs producLlvlLy u as a sub[ecL deals wlLh lL
PRODUCTION & PRODUCTION NYSIS

AMITY 23 M.B.A. SEM - I

Ieatures
(l) heLerogeneous
(ll) acLually human efforL
(lll) perlshable
(lv) varlous Lypes skllled / unskllled llLeraLe / llllLeraLe
(v) all labour ls noL producLlve
(vl) earns wages
(vll) can unlLe form unlons wage raLe condlLlons Lerms of employmenL 1rade unlons dlscuss Lhls
wlLh managemenL known as collecLlve 8argalnlng
(vlll) SS llke any oLher facLor
8uL excepLlonal labour SS ls counLer producLlve lndlcaLed by 8ackward 8endlng
SS Curve


ere we are Lalklng abouL work lelsure raLlo
SS of labour wlll be more more aL hlgher wages Llll a cerLaln polnL
aLer work wlll be replaced by lelsure
(lx) abour earns lncome Lo Lhe Lune of lLs producLlvlLy (accordlng Lo general Lheory of dlsLrlbuLlon)

CAI1AL
- CfLen confused for wealLh
- All caplLal ls wealLh buL all wealLh ls noL caplLal
- roduced means of producLlon

Ieatures
(l) ArLlflclal or man made
(ll) Classlfled as 1anglble (vlslble)
lnLanglble (lnvlslble)
llxed (unchanged for a long Llme)
ClrculaLlng (Changes frequenLly)
uman (Sklll / ablllLy)
lndlvldual / Soclal
uomesLlc / lorelgn
(lll) Larns lnLeresL
(lv) CaplLal formaLlon Lakes place ln Lhree sLages
4 lormaLlon of savlngs
4 MoblllzaLlon of savlngs
4 lormaLlon of lnvesLmenL
4 And lL lnvolves sacrlflce of presenL consumpLlon
O
S S
1

Quantity
Wages
AMITY 24 M.B.A. SEM - I

(v) Classlcal 1heory F lnL ls deLermlned by uu for lnvesLmenLs SS of savlngs
oanable lunds 1heory F lnL ls
rlce pd for use of loanable funds
le uu SS of loanable funds
lquldlLy ref 1heory F lnL ls
eward for parLlng wlLh llquldlLy for a speclfled perlod
F uu for money
SS of money F ConsLanL
lnLeracLlon deL lnLeresL
(vl) vlLal for growLh and developmenL of economy

LN1LkkISL
- eal coordlnaLlng facLor
- Manages conLrols coordlnaLes resL of Lhree lCs

Ieatures
(l) lnvolves human efforL
(ll) rlmary funcLlons F managlng and coordlnaLlng
(lll) ueclslon maklng formaLlon of pollcles
(lv) roflL as a reward
(v) 1heorles
(a) roflL F reward for rlsk bearlng and uncerLalnLy
(b) uynamlc Changes brlng proflL

A br|ef study of roduct|on
- Lconomlc unlL for sLudy ls a flrm
- Consumer F maxlmum saLlsfacLlon
llrm F maxlmum proflL
- 8aslcally deplcLs lnpuL / CuLpuL relaLlonshlp
G G
lndependenL / dependenL varlable
- 1hls relaLlonshlp (ln equaLlon form) F roducLlon luncLlon

q
f (x
1
x
2
x
3
x
n
)

q
CuanLlLy produced
x
1
x
2
x
3
x
n
varlous lnpuLs

Concepts
1 (1ota| roduct) 1oLal CuLpuL
A (Avg roduct) 1oLal roducL per unlL of lnpuL
M (Marg|na| roduct) Change ln 1 per unlL due Lo
Change ln lnpuL
(hys|ca| roduct) AmounL of real ouLpuL
k (kevenue roduct) Money value of physlcal producL
Ind|v|s|b|||t|es lnablllLy of dlvlslon of facLor lnpuLs lnLo smaller unlLs
keturns to sca|e esulLanL change ln ouLpuL due Lo a cerLaln change ln lnpuL
Cost of roduct|on LxpendlLure lncurred by a flrm ln producLlon
AMITY 2S M.B.A. SEM - I

ke|at|on between A M
WlLh an lncrease ln lnpuL F A buL M A
When A ls maxlmum F M A
When A decllnes F M A

1he |aws of returns are sure|y the foremost touch bearers of theory of product|on

I 1he Law of var|ab|e roport|ons (Short run s|tuat|on)

lf we varlable lnpuL
G
ln ouLpuL (upLo a cerLaln sLage Lhen )
G
ConsLanL ouLpuL (Lhen _
G
uecllnlng ouLpuL

Assumpt|ons
(l) 1echnology ConsLanL
(ll) Cne lnpuL changes CLhers consLanL
(lll) omogenelLy of facLor unlLs
(lv) Cnly shorL run
(v) hyslcal roducL or value of ouLpuL CalculaLed aL markeL prlce
(vl) no governmenL lnLervenLlon
(vll) no change ln soclal pollLlcal geographlcal facLors
(vlll) erfecL dlvlslblllLy of lCs


Stage I
1 aL lncreaslng raLe buL slows down ln Lhe flnal area
M A buL M sLarLs Lo G buL remalns poslLlve
M A
reLurns due Lo abundance of lCs

Stage II
1 aL a dlmlnlshlng raLe Lhen becomes consLanL
A M G buL remaln poslLlve
M becomes zero aL Lhe end of Lhe sLage buL remalns below A
M A G due Lo lnadequaLe flxed facLor
MP
AP
TP
St I St II St III
AMITY 26 M.B.A. SEM - I

Stage III
1 keeps falllng (G)
M goes negaLlve
A also G buL remalns poslLlve
llxed facLors varlable facLors
ence efflclency decllnes
A raLlonal producer wlll prefer llnd sLage

1he loglc of Lhls law ls appllcable Lo boLh lndusLrlal and agrlculLural producLlon owever ln pracLlce
more pracLlcal and appllcable Lo agrlculLural secLor where Lechnlque remalns unchanged for years and
land shows dlmlnlshlng reLurns afLer some Llme

LAJ CI kL1DkNS 1C SCALL

aw of varlable proporLlons F ShorL un / Change ln one lC
aw of eLurns Lo scale F ong un / Change ln all lC
ence noL only producLlon buL scale of producLlon ls also lncreaslng
1he law F All oLher Lhlngs remalnlng consLanL
When lnpuL F (lncreaslng) reLurns F lnlLlally Lhen consLanL reLurns laLer
decreaslng reLurns
reLurns lndlvlslble lnpuLs can be used more effecLlvely + SpeclallsaLlon
and dlvlslon of labour
ConsLanL eLurns ln ouLpuL ls proporLlonal Lo ln lnpuL no furLher dlvlslon of
labour posslble opLlmum level
ulmlnlshlng eLurns ln ouLpuL ls smaller Lhen ln lnpuL enLerprlse ls flxed facLor
Lhough scale of producLlon becomes unmanageable



LCCNCMILS CI SCALL A ISCDSSICN

- SLlmulaLed by hlgher proflLs hlgher reLurns producers scale of producLlon
- May resulL ln economles or dlseconomles of scale

|nds of econom|es (L) and d|seconom|es ()

(|) 1echn|ca| (L) arge and advanced machlnes F lower cosL of producLlon
speclallsaLlon
(u) lgh long run cosLs afLer full uLlllzaLlon and dlfflculLles ln managemenL
Scale oI Production
P
R
O
D
U
C
T
I
O
N

Returns to Scale
Constant
AMITY 2? M.B.A. SEM - I

(||) Manager|a| (L) educLlon ln managemenL cosL speclallzaLlon dlvlslon of labour
uecenLrallsaLlon of declslon maklng
(u) ack of conLrol and coordlnaLlon complex and bureaucraLlc
(|||) Commerc|a| (L) 8ulk orders F dlscounLed prlce
AddlLlonal ouLpuL F no addlLlonal selllng cosL
AdvanLage cosL F spread over larger producLlon
(u) AdvanLage cosL and markeLlng overheads wlll lncrease afLer opLlmum scale
(|v) I|nanc|a| (L) ralse caplLal aL lower cosL
lnvesLor's confldence
(u) CosL afLer opLlmum level due Lo more dependence on exLernal flnances

Lk1LkNAL LCCNCMILS ISLCCNCMILS

Interna| Lconom|es F wlLhln an lndlvldual f|rm
Lxterna| Lconom|es F accrue due Lo expanslon ln Lhe whole |ndustry
1hey may accrue ln varlous forms
(l) Cheaper raw maLerlal caplLal equlpmenLs
(ll) 8eLLer Lechnology Lechnlcal coefflclenL producLlvlLy
(lll) uevelopmenL of skllled labour
(lv) uevelopmenL of ancllllary lndusLrles
(v) 8eLLer LransporLaLlon and markeLlng

owever dlseconomles may resulL due Lo uu of lCs hence prlce of lC and lasLly envlronmenLal
hazards may Lake place (polluLlon)















AMITY 2S M.B.A. SEM - I





Mean|ng
- MaLhemaLlcal relaLlonshlp beLween cosL of a producL varlous deLermlnanLs of cosL

SnCk1 kDN 1C1AL CCS1S


Factors Time Element
Fixed Variable Short Run Long Run
Cannot be varied Can be varied Fixed Factors Fixed Variable
With output with output remain Iixed Iactors vary
Only variable All Iactors
Factors change are variable
COSTS
Fixed Variable


Indepent oI output Depend on output


Rent, Insurance, Maintenance Wages, Raw material, Fuel
Interest, etc Power, Transportation etc


Exist even when shutdown Do not exist when shutdown
TC
TVC
TFC
OUTPUT
COST
O
COST FUNCTION

AMITY 29 M.B.A. SEM - I

SnCk1 kDN AVLkAGL CCS1S

(1) AIC 1IC] F downward curve LhroughouL buL noL zero
(2) AVC 1VC] F Curve wlll flrsL fall reach mlnlmum Lhen rlse agaln
(3) A1C AIC + AVC F Curve falls ln Lhe beglnnlng reaches mlnlmum Lhen rlses 'u' shaped curve

MAkGINAL CCS1

Addn made Lo Lhe LoLal cosL

MC 1Cn 1Cn1
- lndependenL of lC
- dependenL only on vC
- curve fall ln Lhe beglnnlng buL sLarLs rlslng afLer a cerLaln level of ouLpuL
- because of aw of varlable proporLlons
M flrsL reaches maxlmum Lhen decllnes
MC G flrsL reaches mlnlmum Lhen rlses



ke|at|onsh|p between AC MC

(l) When Average cosL falls MC AC
(ll) When Average cosL rlses MC AC
(lll) When Average cosL mlnlmum MC AC
le MC cuLs AC aL lLs mlnlmum

Long kun Average Cost

ln Lhe long run all cosLs are varlable
AC ls LangenLlal Lo all Lhe SACs
lL envelops SAC F Lnvelop Curve



AFC
AVC ATC
MC
AMITY 30 M.B.A. SEM - I




ldeal equlllbrlum F lowesL polnL of AC F CM
1he law of v affecLs Lhe SAC curve
1he law of reLurns Lo scale affecLs AC curve

L1LkMINAN1S CI CCS1S

(l) 1he sLage of Lhe law of reLurns
(ll) 1lme perlod
(lll) Slze of naLure of planL
(lv) uLlllsaLlon of capaclLy
(v) ConslsLency of producLlon
(vl) rlces avallablllLy of lC
(vll) 1echnology
(vlll) aw maLerlal (rlces CuallLy)
(lx) Managerlal ConslderaLlons
















LAC SAC
6

SAC
5

SAC
4
SAC
3
SAC
2

SAC
1

O R Q M
II output OQ is to be
produced, it is better
to produce at SAC
3

AMITY 31 M.B.A. SEM - I





8ackground

After |ndependence

ConservaLlve pollcles for planned growLh
ubllc secLor redomlnanL
llscal ollcy moblllsed resources from rlvaLe secLor Lo flnance developmenL programmes and
lnfrasLrucLure
MoneLary ollcy ln accordance wlLh needs of lndusLrlal secLor and conLrol lnflaLlon
lorelgn Lrade pollcy proLecLs domesLlc lndusLry Lrade balance

It was then not|ced |n 80s that |t resu|ted |nto

ConsumpLlon and expendlLure was more Lhan revenue esulL heavy governmenL borrowlngs
lnefflclenL resource uLlllsaLlon
MlsmanagemenL
lncreaslng losses of publlc secLor
oor Lechnology developmenL shorLage of forex

1hus cr|s|s began to show |tse|f |n 1991 as

a) ow forex reserves sufflclng only 3 weeks of lmporLs
b) naLlonal uebLs 60 of Cn
c) lnflaLlon Wholesale prlces 12 lncrease

1herefore CovernmenL lnLroduced ma[or reforms



lndusLrlal SecLor llnanclal SecLor LxLernal SecLor llscal ollcy
(nl 1991) (Money and 8anklng (lorelgn ollcy)
and flnance)

INDS1kIAL SLC1Ck kLICkMS NI 1991

Abollshed llcenses (dellcenslng) all pro[ecLs excepL 18 lndusLrles relaLed Lo sLraLeglc and securlLy
concerns soclal reasons hazards or envlronmenLal reasons and ellLe consumpLlon

(AL presenL only 6 lndusLrles under llcenslng)
le alcohol clgareLLes hazardous chemlcals elecLronlc aerospace and defence equlpmenLs lndusLrlal
exploslves and pharmaceuLlcals (excepL bulk drugs)

Cnly 8 lndusLrles reserved for publlc secLor
(AL presenL only 3 lndusLrles le aLomlc energy subsLances as per C01 schedule and rallways)
(noLe ln 2001 defence producLlon was dereserved buL mlnlmum caplLal of 100 cr requlred by prlvaLe
companles Lo enLer)

ECONOMIC REFORMS IN INDI

AMITY 32 M.B.A. SEM - I

ro[ects w|th |mported cap|ta| goods

automat|c c|earance |f
a) lorelgn exchange avallablllLy ensured Lhrough forelgn equlLy
b) lf Lhe Cll value of lmporL ls less Lhan 23 of LoLal value of planL machlnery (upLo maxlmum of s
2cr)

c) ocaLlon no approval for 1 mllllon populaLlon
CLherwlse 23 kms away from perlphery (excepL non polluLlng lndusLrles)

Mandatory Convert|b|||ty C|ause

no longer appllcable for Lerm loans
8road bandlng
uellcenslng for all subsequenL expanslon
LnLrepreneurs Lo flle an lnformaLlon memorandum on new pro[ecLs and expanslon

As regards Iore|gn Investment

lul upLo 31 equlLy ln hlgh prlorlLy lndusLry
lorelgn equlLy upLo 31 for Lradlng companles ln exporLs
Speclally empowered board Lo negoLlaLe wlLh lnLernaLlonal flrms

(Note
ln 0203 100 lul allowed ln urugs and pharmaceuLlcals hoLels and Lourlsm courler oll reflnlng
mass rapld LransporL sysLem alrporLs Lcommerce lnLerneL Lea eLc
49 lul allowed ln 8anklng
26 lul allowed ln defence and prlnL medla
ln 200403 lul ln banklng secLor ralsed by 74 and 'Alr 1ransporL Servlces' upLo 49 Lhrough
auLomaLlc rouLe
2003 lul ln Lelecom secLor lncreased from 49 Lo 74)

Mk1
CrowLh and resLrucLurlng (expanslon mergers amalgamaLlon and Lake over freed from M1
consLralnLs

IINANCIAL SLC1Ck kLICkMS


8anklng CaplLal MarkeL lnsurance

(noLe Cnly 8anklng secLor eforms ls ln syllabus)

rekeforms Status

AdmlnlsLered lnLeresL raLes
CuanLlLaLlve resLrlcLlon on credlL
lgh C / S

esulLed lnLo negaLlve roflL of 8anks

1hus eforms Measures were Laken

AMITY 33 M.B.A. SEM - I

l) Ckk uecreased from 13 Lo 43 ln !une 2003
3 ln 2004
73 ln 2008
ll) SLk uecreased from 383 (9092) Lo 23 recenLly
lll) rlme endlng aLes () under banks and noL 8l
Savlng A/c raLes and exporL credlL sLlll regulaLed)
from Aprll 2001 ls only a benchmark and noL Lhe mlnlmum raLe)
lv) 8ank kate uecreased from 8 Lo 6 from Aprll 2003
v) aLe of lnLeresL on savlng deposlLs decreased from 43 ln 80's Lo 33 recenLly
vl) 1993 8l lssued guldellnes for llcenslng new banks ln Lhe prlvaLe secLor
2000 maxlmum 40 nl equlLy parLlclpaLlon
vll) Su 8anks encouraged Lo approach publlc Lo ralse resources
vlll) ecovery of debLs AcL 1993 was passed and speclal recovery Lrlbunals were seL up
lx) 8anks Lo lmprove credlL rlsk managemenL Lo reduce nAs
x) CredlL lnformaLlon bureau Lo be seL up Lo ldenLlfy bad rlsks
xl) uerlvaLlves such as lA (lorward aLe AgreemenL) and lnLeresL raLes swaps) have been seL up
xll) 8l has emphaslsed Lransparency and corporaLe governance
xlll) A roadmap for enLry of forelgn banks conslsLenL wlLh W1C also released by 8l
xlv) 8ase ll framework Lo be operaLlonal by March 2007
xv) 8l has lssued guldellnes for merger / amalgamaLlon of rlvaLe secLor banks ln 2003
xvl) Cther areas
elaxlng credlL resLrlcLlons for consumer durable
lncrease ln coverage of prlorlLy secLor Lo lnclude sofLware agroprocesslng lndusLry and venLure
caplLal

Lk1LkNAL SLC1Ck kLICkMS

8ackground

upLo slxLles only caplLal goods were lmporLed
lmporL of foodgralns was only as per domesLlc demand

SevenLles lew relaxaLlons

LlghLles speclal arrangemenL Lo llberallse lmporLs Lo lncrease and promoLe exporLs
Such as uuLy urawback Scheme
100 LCu
LZ
AMITY 34 M.B.A. SEM - I

CrganlsaLlons such as LxporL romoLlon Councll CommodlLy 8oards lndlan lnsLlLuLe of
forelgn Lrade were geared up
owever 8C deLerloraLed Llll 90s
1o recLlfy devaluaLlon was carrled ouL and new forelgn Lrade pollcy was announced

Ma[or keforms

l) Stab|||sat|on of Lxchange kate

upee devalued Lwlce ln !uly 1991 upLo 19
8l conLrolled forex as per lLA 1973 buL ln 1993 Lrade accounL LransacLlons were freed from
forelgn exchange conLrol
ln 1994 varlous currenL accounL LransacLlons were llberallsed
CerLaln caplLal accounL LransacLlons were also llberallsed

||) Iore|gn Investment

nl 1991 led Lo llberallsaLlon of lul
(deLalls already glven ln lndusLrlal eforms)

|||) Import ||cens|ng

SLrlngenL and complex Llll 1990
lberallsaLlon lnduced LxlM ollcy ln 1992 allowlng free Lrade of all lLems excepL some lLems
1he LxlM pollcles 199702 200207 200409 pruned Lhe llsL furLher
number of lmporL llcenses decreased

|v) uant|tat|ve kestr|ct|ons

emoved on 714 lLems ln LxlM ollcy 200001 and remalnlng 713 lLems ln LxlM ollcy 200102
LxcepL defence goods hazardous goods and some oLher senslLlve goods everyLhlng Lreed
SubsequenL LxlM pollcles furLher pruned Lhe llsL

v) 1ar|ff

Cne of Lhe hlghesL Llll 1991
owered from 123 (average) ln 1991 Lo 41 ln 199396 and 13 ln 200607

v|) Lxport Subs|d|es

1houghL Lo be lmporLanL beLween 8081 Lo 9091
owever lnvolved LransacLlon cosL delays and corrupLlon
1he Cash CompensaLory Scheme (CCS) was abollshed ln !uly 1991
A new class of value based duLy exempL lmporL llcense was lnLroduced
Where Lhe exporLer could chose hls lmporLs
aLher Lhan predeflned preclse values of cerLaln caLegorles of lmporLs
Speclal scheme known as LxporL romoLlon CaplLal lnLroduced ln 1990 and llberallsed ln 1992 Lo
encourage lmporL of caplLal goods
LxporL lncome exempLed from lncome Lax
LCC furLher lmproved ln (0409)

AMITY 3S M.B.A. SEM - I

v||) Iorex keserves

ConslsLs of lorelgn Currency asseLs held by 8l gold holdlngs by 8l and Speclal urawlng lghLs (Sus)
SLeadlly bullL up from low of uS$ 11 bllllon Lo over uS$ 1413 bllllon (0403)

v|||) Irom ILkA to ILMA

lLA was nlghLmare for lndlan CorporaLe world dlscouraged forelgn Lrade
lLMA (lorelgn Lxchange ManagemenL AcL) was lnLroduced Lo faclllLaLe exLernal Lrade and paymenL
promoLlon and orderly developmenL and malnLenance of forelgn exchange markeL ln lndla

|x) Cther Measures

vlshesh krlshl upa[ ?o[ana for lncreaslng agrlculLural exporLs
lncreaslng exporLs of servlces
1he earller uuLy lree LxporL CredlL (ulLC) has been resLrucLured lnLo 'Served from lndla Scheme'

IISCAL CLIC kLICkMS

llscal ollcy ollcy relaLlng Lo ubllc evenue and ubllc LxpendlLure
unsusLalnable governmenL expendlLure lnsufflclenL revenues poor reLurns on governmenL
lnvesLmenLs led Lo flscal deflclL ln 1980s
llscal reforms Lhus came ln plcLure Lo decrease expenses lncrease revenues and earn proflLs on
lnvesLmenL

1he keforms

AugusL 1991 1C (1ax eforms CommlLLee) consLlLuLed by C01 Comprehenslve eforms ln ulrecL and lndlrecL
1ax laws

|rect 1ax keforms (I1 keforms)

Maxlmum marglnal raLe of Lax was 977 whlch proved counLer producLlve 1C reduced Lax slabs and
scaled downed Lax raLes
Cumbersome LaxaLlon of parLnershlp flrms upLo 1993 94 dlffered from reglsLered Lo unreglsLered
flrms drasLlcally modlfled Lhrough llnance AcL 1992
uomesLlc Companles decrease from 40 Lo 30
lorelgn Companles decrease from 33 Lo 40
8aslc exempLlon llmlLs for lndlvlduals and ul decrease
no flllng reLurns for lncome below baslc exempLlon llmlL
uemaL of 1uS cerLlflcaLes effecLlve from 1042008
Submlsslon of reLurns by preparers lnLroduced
Speclal Lax beneflLs Lo power secLor SLZs and shlpplng lndusLry
rocedural slmpllflcaLlon and raLlonallzaLlons
AMITY 36 M.B.A. SEM - I

Ind|rect 1ax keforms

uecrease ln eak raLe of Cu
uecrease ln Lu and move Lowards medlan CLnvA1
lnLroducLlon of sLaLe level vA1 for noncascadlng self enforclng and harmonlzed CommodlLy 1axaLlon
reglme
lncrease ln producLlvlLy of expendlLure by laylng down monlLorable performance lndlcaLors
CreaLlon of a speclal purpose vehlcle for lnfrasLrucLure pro[ecLs
l8M AcL 2003 emphaslses revenue led consolldaLlon beLLer reLurns on expendlLure raLlonallsaLlon
of Lax reglme lmprove compeLlLlveness of goods and servlces sulLable for globallsed economlc
envlronmenL

IMAC1 CI kLICkMS CN INIAN LCCNCM

Cood afLer nearly 1 Z decades

lrom 8 lndusLrlal growLh Lo nearly 10
esLrucLurlng merglng acqulrlng
World markeL
lmproved work culLure quallLy consclousness
abour lnLenslve Lo caplLal lnLenslve
AccepLanL of role of scale economles
lncreased Lechnologlcal growLh producLlvlLy
lmproved brand bulldlng

SLlll cerLaln hurdles
l) lncreased flscal deflclL
ll) lndusLrlal deregulaLlon noL full SecLors recelved for SSl are performlng less Lhan Lhose noL reserved
lll) Lconomy noL fully opened Lo Lrade
lv) unplanned dlslnvesLmenL lack of Lransparency
v) Slow flnanclal secLor reform
vl) lnadequaLe lnfrasLrucLure




AMITY 3? M.B.A. SEM - I

Mean|ng

uue Lo Lhe lnablllLy of Lhe lndlan publlc secLor

L|bera||sat|on

efers Lo relaxaLlon of prevlous governmenL resLrlcLlon usually ln areas of soclal and economlc pollcles

r|vat|sat|on

efers Lo Lhe Lransfer of asseLs or servlce funcLlons from publlc Lo prlvaLe ownershlp or conLrol end Lhe
openlng of hlLherLo rlnsed areas Lo prlvaLe secLor enLry

ln many waysfranchlslng leaslng conLracLlng and dlvesLure

ulvesLure Lhrough equlLy sale ls Lhe mosL slgnlflcanL

recond|t|ons

lberallsaLlon and deregulaLlon of Lhe economy ls an essenLlal prerequlslLe lf prlvaLlsaLlon ls Lo Lake
off and help reallse hlgher producLlvlLy and proflLs

CaplLal markeLs should be sufflclenLly developed Lo be able Lo absorb Lhe dlslnvesLed publlc secLor
shares

Arguments |n favour of pr|vat|sat|on

educlng Lhe burden on exchequer whlch resulLs from Lhe publlc subsldlslng of chronlcally loss maklng
publlc secLor unlLs

elp Lhe proflL maklng publlc secLor unlLs Lo modernlse and dlverslfy Lhelr buslness

elp ln maklng publlc secLor unlLs more compeLlLlve

elp ln lmprovlng Lhe quallLy of declslonmaklng of managers because Lhelr declslons wlll made
wlLhouL any pollLlcal lnLerference

elp ln revlvlng slck unlLs whlch have become a llablllLy on Lhe publlc secLor

WlLhouL governmenL flnanclal backlng caplLal markeL and lnLernaLlonal markeL wlll for publlc secLor Lo
be efflclenL

Arguments aga|nst r|vat|sat|on

CrowLh of monopoly power
ulsparlLles ln lncome and wealLh
rlvaLe enLerprlses may noL how any lnLeresL ln buylng shares of lossmaklng and slck enLerprlses
opslded developmenL
rlvaLe enLrepreneurs wlll noL be lnLeresLed ln longgesLaLlon pro[ecLs lnfrasLrucLure lnvesLmenL and
rlsky pro[ecLs
May reLard growLh of caplLal good lndusLrles
rlvaLe lndlvlduals prefer Lo lnvesL money where caplLal obLalns qulck reLurns 8uL for changlng Lhe
very sLrucLure of Lhe economy Lhe lnvesLmenL should go Lo sLraLeglc secLors of economy
May noL uphold Lhe prlnclples of soclal [usLlce and publlc welfare
IBERISTION, PRIVTISTION, DISINVESTMENT
ND GOBISTION

AMITY 3S M.B.A. SEM - I

uue Lo lLs commlLmenLs Lo W10 Lhe governmenL of lndla cannoL avold forelgn compeLlLlon
ubllc secLor glanLs are besL beLs for becomlng globally compeLlLlve flrms
ubllc secLor enLerprlses exlsL ln a regulaLory framework
ad Lhey been glven unbrldled freedom Lo declde prlces producLmlx eLc Lhey would have behaved
llke prlvaLe secLor and showed hlgher efflclency

1hus rlvaLlsaLlon offers boLh opporLunlLles and LhreaLs Lo Lhe economy

|s|nvestment

ulsposal of publlc secLor's unlL's equlLy ln Lhe markeL or ln oLher words selllng of a publlc lnvesLmenL Lo
a prlvaLe enLrepreneur

kIVA1ISA1ICN AN ISINVLS1MLN1 IN INIA

rlvaLlsaLlon ln lndla generally ls ln Lhe form of dlslnvesLmenL of equlLy
Cnly ln excepLlonal cases 100 per cenL prlvaLlsaLlon has Laken place (eg CenLaur oLel)

Io||ow|ng are the cases of pr|vat|sat|on |n Ind|a t||| 200S06

1 agan !uLe Machlnery Company lmlLed (!MC)
2 Modern lood lndusLrles lmlLed (Mll)
3 8haraL Alumlnlcum Company lmlLed (8ACC)
4 CMC llmlLed (CMC)
3 1 Ld (1)
6 l8 Company (l8)
7 vldesh Sanchar nlgam lmlLed (vSn)
8 lndla 1ourlsm uevelopmenL CorporaLlon (l1uC)
9 oLel CorporaLlon of lndla lmlLed (Cl)
10 aradeep hosphaLes lmlLed ()
11 !essop and Company lmlLed (!C)
12 lndusLan Zlnc lmlLed (Z)
13 MaruLl udyog lmlLed (Mu)
14 lndlan eLrochemlcal CorporaLlon (lCC)

ML1nCS CI ISINVLS1MLN1

lnlLlally equlLy was offered Lo reLall lnvesLors Lhrough domesLlc publlc lssues
lollowed by lssuance of Lhe Clobal ueposlLory ecelpLs (Cus) Lo Lap Lhe overseas markeLs
CLher meLhods lncluded crossholdlng (Lhe governmenL slmply selllng parL of lLs shares ln one Su Lo
oLher Sus
Warehouslng (governmenLs own flnanclal lnsLlLuLlons buylng governmenLs sLake ln selecL Sus and
holdlng Lhem unLll any Lhlrd buyer emerged)
eLalnlng golden share (reLalnlng governmenL's sLake up Lo 26 per cenL ln Lhe Su Lo proLecL lLs
lnLeresL)

AMITY 39 M.B.A. SEM - I

Strateg|c Sa|e Method

under Lhls meLhod Lhe governmenL sells a ma[or porLlon of lLs sLake o a sLraLeglc buyer and also glves
over Lhe managemenL conLrol
resenLly Lhe governmenL has declded Lo call off Lhe dlvesLmenL of sLake Lhrough sLraLeglc sale ln 13
proflLmaklng cenLral publlc secLor enLerprlses
Conslderlng Lhe publlc offer rouLe Lo sell mlnorlLy sLakes ln Lhese enLerprlses
ln 200306 lL has resorLed Lo ulfferenLlal rlclng MeLhod' and sold Lhe shares of Sus Lo publlc secLor
flnanclal lnsLlLuLlons and banks

kCGkLSS CI ISINVLS1MLN1

SLarLed ln 199192

alfhearLed

8y 20032006 s 49214 crore

asLy unplanned and heslLanL way

AdequaLe efforLs were noL made Lo bulld up Lhe much needed llnkage beLween Lhe publlc enLerprlses
and Lhe caplLal markeL

1he procedures suffered from ad hoclsm ln Lhe absence of a longLerm pollcy focused only on
dlslnvesLmenL of shareholdlngs and lgnored lnlLlal prlce offers lnvolvemenL of sLraLeglc parLners
seLLlng up of a LrusL employees crock ownershlp handlng over Lhe enLerprlses Lo workers unlons /
cooperaLlves and managemenL buyouLs eLc

CovernmenL underLaklng dlslnvesLmenL of navraLnas or MlnlraLnas

Cnly 3 Sus vlz lndusLan Cables Ld lndusLan Copper Ld and lndusLan hoLo lllms
ManufacLurlng Co Ld posLed losses ln 199798 buL ln all oLher 36 cases (eg 8C Ll CAl M1
8L eLc) Lhe dlvesLed Sus had been earnlng proflLs

1he process of dlslnvesLmenL has been referred prlvaLlsaLlon of Lhe proflLs of Lhe proflLmaklng
enLerprlses and Lhe naLlonallsaLlon of losses of Lhe lossmaklng enLerprlses

1he publlc equlLy has been underprlced and Lhus has been sold for a fracLlon of whaL lL could acLually
feLch

1he LoLal reallsaLlon of Lhe governmenL from varlous rounds of dlslnvesLmenL has been much below
Lhe LargeL

GLC8ALISA1ICN

Mean|ng

lnLegraLlng Lhe domesLlc economy wlLh Lhe world economy

lnvolves lncreaslng lnLeracLlon among naLlonal economlc sysLems more lnLegraLed flnanclal markeLs
economles of Lrade hlgher facLor moblllLy free flow of Lechnology and spread of knowledge
LhroughouL Lhe world

ln Lhe lndlan conLexL lL lmplles forelgn dlrecL lnvesLmenL removlng admlnlsLraLlve consLralnLs forelgn
collaboraLlons World 1rade CrganlsaLlon (W1C) brlnglng down quanLlLaLlve and nonquanLlLaLlve
resLrlcLlons Lo Lrade dlluLlng Lhe role of publlc secLor and encouraglng prlvaLlsaLlon

CoL Lhe real LhrusL from Lhe nl 1991 and World 1rade CrganlsaLlon (W1C)
AMITY 40 M.B.A. SEM - I

CASLS ICk GLC8ALISA1ICN
a)
lmprove Lhe allocaLlve efflclency of resources reduce Lhe caplLal ouLpuL raLlo and lncrease labour
producLlvlLy
uevelop Lhe exporL spheres
lncrease Lhe lnflow of caplLal and updaLed Lechnology lncrease Lhe degree of compeLlLlon boosL Lo
Lhe average groL4Lh raLe of Lhe economy

b) esLrucLure Lhe producLlon and Lrade paLLern ln favour of labourlnLenslve goods and Lechnlques

c) uue Lo forelgn compeLlLlon and Lhe removal of lmporL Larlff barrlers domesLlc lndusLry wlll be sub[ecL Lo
prlce reduclng and quallLy lmprovlng
d)
Cheaper and hlgh quallLy consumer goods wlll be manufacLured aL home
LmploymenL opporLunlLles would also go up

e) 1he efflclency of banklng and flnanclal secLors wlll lmprove

CASLS AGAINS1 GLC8ALISA1ICN

edlsLrlbuLlon of economlc power

1ranslaLe lnLo a redlsLrlbuLlon of pollLlcal power

lL ls lncreaslng Lhe pressure on economles for sLrucLural and concepLual read[usLmenLs

1o ask Lhelr publlc Lo go Lhrough Lhe palns for Lhe sake of beneflLs yeL Lo come

elplng more Lhe developed economles Lhan Lhe developlng economles

none of Lhe mulLlnaLlonals has seL up manufacLurlng planLs ln lndla or slgned any Lechnology Lransfer
agreemenL wlLh any lndlan company

MLASDkLS 1CJAkS GLC8ALISA1ICN

|) Convert|b|||ty of kupee

le allow lL Lo deLermlne lLs own exchange raLe ln Lhe lnLernaLlonal markeL
llrsL sLep ln 1991
lollowed by dual exchange raLe sysLem ln 199293 and full converLlblllLy of Lhe rupee on Lrade accounL
ln 199394
lndla achleved full converLlblllLy on currenL accounL ln AugusL 1994

CurrenL accounL converLlblllLy

a) All paymenLs due ln forelgn Lrade normal shorL Lerm banklng and credlL faclllLles

b) aymenL due as lnLeresL on loans

c) AmorLlsaLlon of loans

d) ConverLlblllLy on caplLal accounL

AuLhorlsed dealers have been allowed Lo lnvesL abroad Lhelr unlmpalred 1ler1 caplLal release
exchange for openlng of offlces abroad banks permlLLed Lo lmporL gold for resale ln lndla
AMITY 41 M.B.A. SEM - I

esldenL lndlvlduals and llsLed companles have been permlLLed Lo lnvesL ln overseas
companles
lndlan companles are allowed Lo access Au/Cu markeLs Lhrough an auLomaLlc rouLe
Aus are allowed Lo lssue lnLernaLlonal credlL cards nls are allowed Lo remlL Llp Lo uS $1 mllllon
per calendar year ouL of Lhelr sale proceeds of asseLs

||) Import ||bera||sat|on

As per Lhe World 8ank free Lrade of all lLems excepL negaLlve llsL of lmporLs and exporLs has been
allowed

lndla belng member of World 1rade CrganlsaLlon (W1C) has slnce Aprll 2001 LoLally removed Lhe
quanLlLaLlve resLrlcLlons on forelgn Lrade

1he AgreemenL on 1rade elaLed lnLellecLual roperLy lghLs (1ls) Lhe aLenLs (AmendmenLs) AcL
1999 was passed ln 1999 Lo provlde for Lxcluslve MarkeLlng lghLs (LMs)

|||) Cpen|ng the economy to fore|gn cap|ta|

lorelgn ulrecL lnvesLmenL up Lo 26 49 31 74 and even up Lo 100 has been allowed

LIILC1 CI GLC8ALISA1ICN CN INIAN LCCNCM

lndlas share ln Lhe world Lrade whlch had fallen 033 per cenL ln 1991 from 178 per cenL ln 1930
lmproved Lo 086 per cenL ln 2003

lorelgn currency reserves one bllllon dollars ln !une 1991 Lo abouL 141 bllllon dollars ln March 2003

LxporL grew ln Lhe range of 1821 per cenL per annum durlng 199396
19962002 around 8 per cenL

1he average growLh of exporL 10 per cenL per annum durlng 19922004

LxporLs now flnance over 80 per cenL of lmporLs compared Lo only 60 per cenL ln Lhe elghLles
1he currenL accounL deflclL was over 3 per cenL of Cu ln 199091 lL had fallen Lo less Lhan 1 per cenL
ln 200001 uurlng 200103 we even had surplus ln currenL accounL ranglng beLween 07108 per cenL
of Cu

LxLernal debL lrom 19962003 lL grew only by less Lhan $3 bllllon per year

1he exchange raLe for Lhe rupee has remalned almosL sLeady desplLe

lull converLlblllLy of rupee

luls 133 mllllon dollars ln 1991
3200 mllllon dollars ln 200403

arger varleLy of consumer goods lmproved quallLy of goods

1he SLnSLx ln llne wlLh lndlces ln oLher parLs of Lhe globe

lnvesLmenL rlsk decrease

lndlas raLlng lncrease

8ranch offlces/subsldlarles ln oLher counLrles eg Aslan alnLs 1aLas Sundaram lasLeners anbaxy
ur eddys aboraLorles lnfosys eLc

AMITY 42 M.B.A. SEM - I

MAIN CkGANISA1ICN ICk IACILI1A1ING GLC8ALISA1ICN

1he Internat|ona| Monetary Iund (IMI)

Crganlsed ln 1946
CperaLlon ln March 1947

ob[ect|ves
l) 1he ellmlnaLlon or reducLlon of exlsLlng exchange conLrols
ll) 1he esLabllshmenL and malnLenance of currency converLlblllLy wlLh sLable exchange raLe
lll) 1he wldesL exLenslon of mulLllaLeral Lrade and paymenLs
lv) 1he solvlng of shorLLerm balance of paymenLs problems faced by lLs member naLlons

1he lund ls an auLonomous organlsaLlon afflllaLed Lo Lhe unC
1he lund now has a membershlp of 184 counLrles

Iunct|ons of the IMI
ShorLLerm credlL
Crderly ad[usLmenL of exchange raLes
eservolr of Lhe currencles of all Lhe member naLlons who can borrow Lhe currency of oLher naLlons
SorL of lendlng lnsLlLuLlon ln forelgn exchange
CurrenL LransacLlons only and noL caplLal LransacLlons
lnLernaLlonal consulLaLlons

1he Jor|d 8ank

1he lnLernaLlonal 8ank for econsLrucLlon and uevelopmenL (l8u) more popularly known as Lhe
World 8ank was formed as a parL of Lhe dellberaLlons aL 8reLLon Woods ln 1943
rovldes lLs member counLrles (184 ln numbers) long Lerm lnvesLmenL loan on reasonable Lerms
1he World 8ank Croup conslsLs of aparL from Lhe World 8ank lLself Lhe lnLernaLlonal uevelopmenL
AssoclaLlon (luA) Lhe lnLernaLlonal llnance CorporaLlon (llC) and Lhe MulLllaLeral lnvesLmenL
CuaranLee Agency (MlCA) and Lhe lnLernaLlonal CenLre for SeLLlemenL of lnvesLmenL ulspuLes (lCSlu)

Cb[ect|ves
lnvesLlng ln Lhe people parLlcularly Lhrough baslc healLh and educaLlon
Soclal developmenL
roLecLlng Lhe envlronmenL
SupporLlng and encouraglng prlvaLe buslness developmenL
romoLlng reforms Lo creaLe a sLable macroeconomlc envlronmenL conduclve Lo lnvesLmenL and
longLerm plannlng

Iunct|ons
econsLrucLlon and developmenL
8y faclllLaLlng Lhe lnvesLmenL of caplLal for producLlve purposes
1o encourage prlvaLe forelgn lnvesLmenL and credlL by provldlng guaranLee of repaymenL
1o promoLe Lhe longLerm balanced growLh of lnLernaLlonal Lrade and Lhe malnLenance of equlllbrlum
ln balance of paymenLs of lLs member counLrles



AMITY 43 M.B.A. SEM - I

1he Jor|d 1rade Crgan|sat|on (J1C)

World 1rade CrganlsaLlon (W1C) came lnLo exlsLence on 1sL !anuary 1993

Ieatures of J1C
MulLllaLeral 1rade AgreemenLs
resenL membershlp ls around 149 counLrles
lorum for negoLlaLlons among lLs members
elaLed Lo Lhe MulLllaLeral 1rade AgreemenLs (M1As)
Wlder scope Lhan lLs predecessor CA11 brlnglng lnLo Lhe mulLllaLeral Lrade sysLem Lrade ln servlce
lnLellecLual properLy proLecLlon and lnvesLmenL
1he declslon carrled ouL by consensus or else by voLlng
Lach member has one voLe
egal personallLy for Lhe exerclse of lLs funcLlons
1he represenLaLlves of Lhe members and all offlclals of Lhe W1C en[oy lnLernaLlonal prlvlleges and
lmmunlLles

Iunct|ons of J1C

lmplemenLaLlon admlnlsLraLlon and operaLlon of world Lrade agreemenLs
rovlde Lhe forum for Lrade negoLlaLlons
andle Lrade dlspuLes
MonlLor naLlonal Lrade pollcles
rovlde Lechnlcal asslsLance and Lralnlng Lo developlng counLrles
CooperaLe as approprlaLe wlLh Lhe lMl and l8u and lLs afflllaLed agencles

















AMITY 44 M.B.A. SEM - I

MLANING 1LS
erslsLenL upward movemenL ln Lhe general r evel Accordlng Lo some economlsLs
lf average pv ls 3 lnflaLlon does noL occur

(|) emand u|| Inf|at|on
MarkeL wlLnesses LA lCW (flow of goods servlces MCnL? lCW (flow of money)
More SSM less SS of goods uu SS

1hls excesslve uu pushes up Lhe prlces

due Lo exp uemand ull lnflaLlon

(||) Cost ush Inf|at|on
because of growlng facLor cosLs speclally wages
once seL ln spreads LhroughouL Lhe economy
wages ln sLeel lndusLry r of SLeel
r of vehlcles cosL of LransporL
r of LracLors pr of Agrl
roducL cosL of llvlng furLher wage raLe
More dlfflculL Lo conLrol Lhan uu ull lnflaLlon
CfLen uu ull lnflaLlon comes flrsL followed by cosL lus lnflaLlon

(|||) Stagf|at|on
low raLe of growLh + ln r level
when Agg uu due Lo hlgh ub Lxp SSM or credlL labour presses for wages
1hus cosL push lnflaLlon comblnes wlLh uu pull lnflaLlon may lead Lo hyper lnflaLlon lf noL
conLrolled by moneLary flscal measures
may be upLo 40 Lo 100 pa
ln lndla Cn growLh raLe ls slow C sLeady coupled wlLh hlgh raLe of lnflaLlon

(|v) ef|at|on
rlces are falllng purchaslng power of money opp of lnflaLlon

kICL 1kLNS IN INIA
llfLles 17 raLe of lnflaLlon very low
SlxLles 64 (Chlna ak war famlne)
Max 139 ln 196667
SevenLles 90 ( oll prlces ln 197273 1980)
LlghLles 80
nlneLles 100 ( 12 ln 9091 due Lo flscal lmbalance hlgh llquldlLy gulf crlsls shorLage of
peLroleum)
Wholesale and eLall prlce levels 3 durlng 199601 4 0104 (due Lo sLable prlces of
manufacLured goods)
200403 erraLlc monsoon crude oll prlces buL conLrolled aL 47
200708 73 (Clobal macro eco facLors)
INFTION

AMITY 4S M.B.A. SEM - I

CADSLS Agg and ] Ck Agg SS

(|) ub Lxp 186 of nn (1961)
333 of nn (1981)
360 of nn (0403)
lnevlLable buL specular rlse ln ub exp ls noL [usLlflable
As 30 exp non developmenL acLlvlLles
(defence law order)
purchaslng power of govL employees along wlLh exp creaLes uu buL no ln SS

(||) ef|c|t I|nanc|ng
8orrowlngs or prlnLlng more currency
A small dose of ul ls helpful for growLh buL a large dose lnflaLlonary
8y flnanclng Lhe deflclL more purchaslng power buL no r ln real resources
ul ls planwlse
vlll Lh l? s 20000 cr (8udgeLary deflclL) s 61134 cr (AcLual deflclL)
lx Lh x Lh l? CovL declded noL Lo ralse money Lhrough ul

(|||) Lrrat|c Agr| Growth
erraLlc monsoon crop fallure

(|v) App of the Govt
MS good for farmers buL bad for lnflaLlon

(v) |ssat|sfactory Industr|a| Growth
196383 47 pa (parLlcularly essenLlal goods)
199192 low growLh raLe 6
More SSM low producLlon (le Agg SS)

(v|) rev|s|on of adm|n|stered pr|ces
lmp commodlLles many of Lhem produced by ub SecLor revlslon of prlces Lo cover
losses cosL push lnflaLlon

(v||) Cther Iactors
lncome noL broughL under Lax neL
evaslon dependence on lndlrecL Laxes
unused capaclLy caplLal ouLpuL raLlo
low surplus of Sus lnfrasLrucLure hurdles pr of lmporLs
MLASDkLS

(|) Monetary
Lo conLrol SSm (CMC C/ S 8)
(CuanLlLaLlve CuallLaLlve) 8l
(||) I|sca|
avold LaxcuLs or Lo Lhelr raLe Lo purchaslng power
rogresslve LaxaLlon ub exp new Laxes roflLs of Sus

(|||) Contro| |nvestment
lnlLlal lnvesLmenL large ln lncome exp MulLlpller

(|v) Cther measures
shorL Lerm uS lmporLs
long Lerm eco growLh of wage goods resLrlcL presenL consumpLlon