ECONOMICS AND MANAGEMENT DECISIONS

MBCE-701 EMBA (Power Management)

Contents
International eco environ . Domestic eco environ. The Legal Environ. Pricing methods. Investment decisions. Decision making. Profit analysis. Demand and supply. Determinants of demand. Elasticity of demand. Demand forecasting. Cost analysis. Production function. Market structure. Pricing and output decisions under I. perfect competition; II. monopoly; and III. imperfect competition.

Economics
Economics is a subject matter that studies different economic activities as directed towards the maximization of satisfaction or maximization of profits at the level of an individual, and maximization of social welfare at the level of the country as a whole. It is the problem of choice arising out of the fact that: I. Resources are scarce, and II. Resources have alternative uses.

Management Decisions
Decision making is the selection of a course of action amongst all possible alternatives; it is the core of planning. Mangers must make decisions in light of everything that can be learnt about a situation, which may not be everything they should know. Alternatives are evaluated in terms of quantitative and qualitative factors. Other techniques include marginal analysis, and cost-effectiveness analysis. Experience, experimentation, research and analysis come into play in selection of an alternative.

Concept of Environment
The environment of any organisation is the aggregate of all conditions, events, and influences that surround and affect it. Since the environment influences an organisation in multitudinous ways, it is crucial to understand it. Internal and external environment: The internal environment refers to all factors within the organisation that impact strengths or cause weaknesses of a strategic nature.

The External Environment

The external environment includes all the factors outside the organisation which provide opportunities or pose threats to the organisation. Generally the external environment is divided into eight categories for analysis: Economic; international; market; political; regulatory/legal; socio-cultural; supplier; and technological sectors.

The International Economic Environment

UNIT 1

Open and Closed Economy

A country may theoretically choose to have two options vis-a vis the rest of the world. It may be open or a closed economy. An open economy is one which allows for import and export of goods from and to, the rest of the world. A Closed economy is one where no such interaction with the rest of the world takes place.

Effect of International Economy No country today is absolutely insulated from international events in the economic sphere. An open economy is affected by International economy in a number of ways: The general trade regime in the world; The health of the international economy; Foreign Exchange Rates.

General Trade Regime

So long as a country is a member of WTO, it is bound to all multilateral agreements. The general trade regime of the world clearly defines the dos and donts of international trade thereby enabling traders to play in an even field Hence business would rely crucially on the information about all relevant international actors in the field.

The World Trade Organisation

The WTO secretariat is at Geneva, Switzerland. And any country can become its member by signing on the dotted line. Presently WTO has around 130 members. China is not a party to WTO. WTO seeks to expand opportunities for trade in such a manner that there is sustainable development in relation to the optimal utilisation of world's resources.

The World Trade Organisation

The WTO comprises a set of multilateral plurilateral agreements these include agreements on: Trade in Goods GATT (1994) and its associate agreements, including those on trade in textiles and agriculture and agreement on trade related investment measures (TRIMs). Trade in Services- General Agreement on Trade in Services(GATS). TRADE Related Intellectual Property Rights (TRIP).

Four Basic Principles of GATT

Domestic industry be allowed to be protected through tariffs. Countries are requested to reduce tariffs and remove other barriers. Tariffs and other regulations are to be applied to all goods without discrimination amongst countries. (most favored nation concept) National treatment rule that prohibits discrimination between imported products and equivalent domestically produced products.

Plurilateral Trade Agreements (PTAs)

The plurilateral trade agreements (PTAs) are: Agreement on Trade and Civil Aviation Agreement on Govt. procurement. International Dairy Agreement. International Bovine Meet Agreement. Dispute Settlement Body (DSB) provides a platform where trade disputes among members can be amicably settled in conformity with WTO rules.

Health of the International Economy

Rate of growth of other countries also affect our economy. Other economies serve as demand centers for out products. For an Indian exporter, the rate of growth of the economies to which he exports is really crucial. Imports too get affected by global scenario. A depressed global scenario marks sluggish industrial activity domestically.

Foreign Exchange Rate

Foreign exchange rate is the rate which determines the actual valuation of our products and thus affect our imports and exports. Majorities of the economies of the world now have a managed free floating exchange rate mechanism. Sometimes adjustments are made beyond which there is a broad limit to its upper and lower value.

Adjustment in Exchange Rate

It is not just the exchange rate, but the changes/ adjustments in it that are equally important. A downward adjustment in the exchange rate raises the relative price of traded goods (by increasing the domestic price of foreign currency) to non-traded (or home) goods. The real effective exchange rate (REER) is the nominal exchange rate adjusted for the relative change in prices in the respective countries.

Regional Trading Blocs/Agreements

The world economy has not only seen mergers, there is an acceleration in the process of regional trade agreements. Such regional trade agreements are based on one of the four concepts: 1. Free Trade Area. 2. Customs Union. 3. Common Market. 4. Economic Union.

Free Trade Area & Customs Union

Free trade area, where a group of countries get together and decide to remove all barriers to trade amongst themselves. Each member is free to decide on the tariff it would like to for any nonmember country. Customs Union: here the members have a free trade with each other, plus, they have a common wall of tariffs. All non-members trading with 2 of the members of the customs union will meet exactly similar commercial policy regulations in both countries.

Common Market & Economic Union

In a common market, all barriers to movement of capital and labour amongst member countries are also removed in addition to the free flow of goods amongst them as in free trade area and customs union. Economic Union is the most comprehensive of all concepts. In this case there is complete harmonization of the macro economic policies of the member countries, involving coordination of exchange rates, inflation rates, the taxation system and monetary policies. European Union is an example of this.

Trade Enhancement Effect Of A Trade Bloc.

A trade block with no boundaries amongst its members is almost like a huge single country. There is relocation and development of production in areas which are most viable and allow for greater economies of scale within the bloc. Increased efficiencies lead to an increase in incomes within the region, termed as trade enhancement effect of a trade bloc.

India's Position vis-a vis RTAs

India does not belong to any bid trade bloc. It has been granted a dialogue partner status in ASEAN and still an aspirant to join APEC. However most of the members of these trade blocs are not convinced that India has reformed its economy enough, and feel apprehensive about Indias regulatory and tariff structures.

The Domestic Economic Environment

UNIT 2

Economic Growth
Economic growth means sustained and substantial rise in product per capita. It implies that: Economic growth as an upward trend, The upward trend is the per capita real income, and The upward trend has to be significantly large and sustained over a long period.

Asian Economic Crisis: Reasons

Before 1997, for almost three decades some of the Asian countries like Japan, Thailand, Hong Kong, Malaysia, South Korea etc. had recorded an impressive growth. Since May 1997, these countries witnessed stock market and currency crisis. The principal reason was that most of the East Asian economies were witnessing economic slow down due to contraction of world demand. As exports have a major share in GDP of these countries, slowdown in global demand made their economies weak.

Possible reasons for the crisis (contd) These economies assumed over ambitious growth and created excess capacity. Items of manufacture were highly labour intensive, and the countries witnessed near full employment and wage rise. This resulted in loss of price competitiveness. These countries were pursuing over-ambitious economic goals with huge borrowings form abroad, and thus piled up huge external debt burden and debt servicing ratio.

Impact on India
Unlike other Asian countries ,India is not so open for foreign investments in the speculative stock market and properties. Besides, the fundamentals of the economy are strong with low current account deficits, low ratio of short term debt to total debt, adequate forex reserves, low debt servicing ratio. With highly depreciated other Asian currencies, Indias export competitiveness got eroded. India could increase its share of FII investments to 10% in the shrinking Asian FII investment inflows.

Recession
Recession is a period in which an economy slips below its trend growth path. There is a consensus among Indian economists that a sustainable economic growth, GDP, given the resource balance in the economy, is about 7 per sent. Any sustained deviation from this rate could be construed as a recessionary phase.

Broad GDP Might Be Misleading

Looking at a broad GDP might be misleading. The slow down in India is concentrated in the Industrial segment. Sectors like agriculture which have helped shove up aggregate growth rates have a momentum and a dynamic place of their own and have largely been untouched by liberalization. Two of the critical components of demand for the economys output of goods, investment demand and exports are slack.

Macro Economic Overview

At the time of Independence THE Indian Economy was in shambles. At that time, both economic leaders and industrialists advocated economic planning. The strategies for growth and development were charted out accordingly. The national income of India registered a 5.5% growth rate per annum during 1980s. This was significantly higher than the trend rate of the past, but this pushed India into the economic crisis which began to take shape during 1990-91.

New Development Strategy

Govt. introduced various structural reforms since 1991 to improve the supply side of the economy. Some important ones being: trade and capital flow reforms; Industrial deregulation; disinvestment and Public Enterprise Reforms; Financial Sector Reforms.

Present Economic Scene

Unsustainable fiscal and revenue deficits; Low rate of investment; Performance of agriculture is a major cause for concern; Worsening external trade situation; fragile balance of payments.

Macroeconomic Indicators: GDP

GDP is a measure of market prices of the total flow of goods and services produced in an economy during a year. GDP growth slowed down to 5% in 1997-98, after averaging 7 % in the previous years. The fall in agricultural growth was the major reason for this.

Production Trends
Investment in agriculture remain dismally low and this could account for the decreasing growth in production. Free trade in agricultural products market has inflated domestic prices radically. Industrial growth rate which declined to 0.6 in 1991-92, attained the height of double digit growth five years later. Post reforms period is characterized by good response from the industry.

Inflation
Price stability is an essential condition for stability and economic growth. Fluctuations in prices work to the disadvantage of the poor. High rate of inflation accompanied by high rate of interest, makes industrial investment and production cost very high, and the country would not be able to sustain its exports. Inflation has an adverse effect on balance of payment .

Concept of Government Budget

Article 112 of the Constitution requires the central government to prepare annual financial statement for the country as a whole this is called budget of the Central Govt. The govt. is required to present this budget every year before Lok sabha and Rajya Sabha, the two houses of Parliament. Likewise state governments are mandated vide Article 202 of the Costitution.

Government Budget
Government budget is a statement of the estimates of the government receipts and Government expenditure during the period of the financial year. It has two broad components; Revenue Budget and Capital Budget. Looked at from a different angle, the two broad components are; Budget receipts and Budget Expenditure.

Budget Receipts and Expenditure

Budget receipts refer to estimated money receipts of the government from all sources during the fiscal year. Budget receipts are classified as Revenue Receipts and Capital Receipts. Revenue Receipts are those money receipts which do not either create a liability or lead to reduction of assets. Examples- Tax receipts, income from pubic enterprises and fines. Capital Receipts include very of loans, borrowings and disinvestment.

Revenue and Capital Expenditure

Important items of revenue expenditure are: interest payments; expenditure on subsidies; and expenditure on defence. As a matter of convention, all grants given by center to the state govt. are treated as revenue expenditure. Important items of capital expenditure are: expenditure on land and building; expenditure on machinery and equipment; purchase of shares; loans by the Central govt. to State Govts.

Budget Deficit
Budget deficit refers to a situation when budget expenditure of the govt. is greater than the budget receipts. Three types of budget deficits are: Revenue Deficit; Fiscal Deficit; and Primary Deficit. Revenue Deficit is the excess of revenue expenditure over revenue receipts. Fiscal Deficit is the excess of total expenditure (revenue + capital) over total receipts (revenue + capital other than borrowings). Primary Deficit is the difference between fiscal deficit and interest payment.

Concept of Balance of Payments

Balance of Payments (BoP) refers to the statement of accounts recording economic transaction of a country with the rest of the world. Each country enters into economic transactions with other countries and receives payments from and makes payments to others. Balance of Payments is a statement of account of these receipts and payments. BoP accounts broadly comprises current account, and capital account.

Current Account & Capital Account

Components of current account: I. Export and import of goods; II. Export and import of services; III. Unilateral transfers from one country to the other. Components of capital account are: I. Foreign Investments; II. Loans.

Current Account
India has witnessed severe BoP problems since 1980. The problem was further accentuated during the year 1990-91 with the Gulf crises, the remittances form abroad declined sharply. The govt. imposed an import squeeze, which in turn had a decelerating effect on the economy. Govt. had to open up imports of capital goods, also as apart of structural adjustments with the IMF.

Current Account (contd.)

Due to pick up in industrial activity in 1994-95 and 1995-96 imports pulled up the trade deficit sharply and the current account deficit rose to 1.7 of GDP. External debt and debt service indicators have moved in favorable direction indicating substitution, on a relatively large scale of nondebt creating foreign investment for other forms of debt creating capital inflows.

Capital Account
The structure of capital account has changed considerably since the reform process began. The average maturity of loans also declined while the average rate of interest increased. Thus there was deterioration in the quality of external financing. India had to borrow high interest rate and relatively shorter duration loans as against earlier. GOI resorted to substantial drawls from the IMF from 1990-91 onwards less that one facility or other . Other sources were NRI deposits and External Commercial Borrowings.

Capital Account (contd.)

The things started looking up since then. The share of concessional debt in the total external debt has risen which is significant from the point of view of future liability. This has been brought about by a structural change in the capital account. This relates to a sharp reduction in debt creating flows and an increased recourse to non debt foreign investment flows. The increasing inflows in capital account inflows has helped to mitigate the pressure on BoP and is likely to reduce future debt service imbalance.

Trade Policy
From the policy of import substitution, the government now has its emphasis on export promotion. Coverage of OGL (open general license) has enhanced while the restricted license list has been reduced. Introduction of full convertibility, rupee depreciation and devaluation has further helped to boost exports, by making Indian exports competitive.

Trends in Foreign Trade

Exports have risen at a much faster pace since 1993-94. Gains in the terms of trade for India reflect her diversified export base. Over the years there has been a decline in the importance of agriculture and allied products and a substantial increase in manufactured products. US continues to be the largest destination as well as source of our goods.

Savings
Savings are the primary source of funds required for investments, the other being foreign capital. There are two basic issues facing us: a. to mobilize more funds in the form of savings. b. To make more remunerative use of these funds through prudent investment. The rate of savings of the corporate sector has been rising, while the public savings have been low.

The Legal Environment

UNIT: 3

Commencing a Business
Constitution provides a Fundamental Right to carry out any business, at any place within the country, unless otherwise mentioned in law. Business can be organised in various formssole proprietor, partnership firm, limited liability firm, private company, public company and the like. Businesses of a certain dimensions need compliance with laws laid down specifically for the purpose.

Specific Statutes for Business

The Contract Act 1872; The Partnership Act,1932; The Sale Of Goods Act,1930; The Negotiable Instrument Act, 1881; The Companies Act, 1956; Foreign Exchange Management Act,1999; The Competition Act, 2000;

Laws Related to labour

The Industrial Disputes Act,1947; Trade Union Act, 1926; Payment of Wages Act, 1935; Minimum Wages Act, 1948; Workmens Compensation Act, 1923; Factories Act, 1948; Payment of Bonus Act, 1965;

Land and Power for Business

The Collector is the chief authority to whom application for land acquisition is to be made to. The application must specify the particulars of the land and purpose for which it is to be acquired. The land cannot be put to any other use. Electricity too is regulated by legislation and it can be provided only by those who have licenses for the purpose.

Protection of Environment
immense importance of Environment and Ecology has been recognized and a number of laws passed to protect the environment. It is imperative that business operate with full consciousness of their role in maintaining environment. Air (prevention and control of pollution)Act, 1981, Water(prevention and control of pollution) Act. 1974, and Environment Protection Act, 1986 are the main legislation which have to be complied with.

Exploration and Licensing policy (oil and gas) New Exploration Licensing Policy (NELP) WAS PROMULGATED BY THE Govt. in 1997-98 to eliminate the countrys demand-supply gap and build up pressure on import of crude and petroleum products. The NELP terms are considered as the best in the world for attracting greater investment in the upstream oil and gas sector. The terms are far superior to earlier terms offered by the government.

NELP Terms
National Oil Companies (NOCs) are exempted from payment of less under NELP. Maximum royalty rate under NELP is 12.5%f international price as against 20% of the administered price in non- NELP areas. Exemption from customs duty. Liberal depreciation provisions. Private companies are free to have 100% participating interest. A true level playing fled established as a block reserved for NOCs

Demand and Supply

UNIT: 4

Concept of Demand
Demand for a commodity refers to the quantity of the commodity which an individual household is willing to purchase per unit of time at a particular price. Demand for a commodity implies: a. Desire to acquire it; b. willingness to pay for it ; and c. Ability to pay for it.

Concept of Demand (contd.)

Demand for a commodity has to be stated with reference to time, its price, and that of related commodities, consumers income and taste etc. Demand varies with fluctuations in these factors. Further it also depends on quality because if the quality changes it can be deemed to be another commodity.

Types of Demand
Consumer goods and producer goods. Perishable goods and durable goods. Autonomous and derived demand. Individuals demand and market demand. Firms demand and industry demand. Demand by market segments and by total market.

Demand Function Demand function is a comprehensive formulation which specifies the factors that influence the demand for the product. Dx = D (Px, Py, Pz, B, A, E, T, U) where Dx is the demand for item; X, Px is the price of item X; Py is the price of substitutes; Pz is the price of complements; B is the income of the consumer; E is the price expectation of the user; T is the tastes and preferences of user; and U stands for all other factors

Demand Curve
Demand curve considers the price demand relation, other factors remaining the same. (Refer to page 105 figure 4.2 Demand Curve.) The demand curve is negatively sloped, indicating that the individual purchases more of the commodity per time period at lower prices (other factors being constant).

Demand schedule

Demand Curve

Law of Demand
The inverse relationship between the price of the commodity and the quantity demanded per time period is referred to as the Law of Demand. A fall in Px leads to an increase in Dx (so that the slope is negative) because of the substitution effect and income effect.

Income and Substitution effects

Income effect refers to change in the quantity demanded when real income of the buyer changes as a result of change in the price of the commodity. When price falls, the real income increases. Accordingly, demand for the commodity expands. Substitution effect refers to substitution of one commodity for the other when it becomes relatively cheaper. When price of commodity X falls, it becomes cheaper in relation to commodity Y. Accordingly X is substituted for Y

Change in Quantity Demanded

Change in quantity demanded refers to quantity purchased of a commodity in response to rise or fall in its price, other determinants remaining the same. It is expressed through movement along the demand curve. Change in demand refers to increase or decrease in quantity demanded at the same price in response to change in other determinants of demand.

Change in quantity demanded vs. change in demand

Change in quantity demanded Change in demand

Market demand curve

Market demand is the horizontal summation of individual consumer demand curves

Concept of Supply
Supply is the willingness and ability of producers to make a specific quantity of output available to consumers at a particular price over a given period of time. Individuals control the inputs or resources necessary to produce goods. For a large number of goods, there is an intermediate step in supply; Individuals supply factors of production to firms, firms transform factors of production into consumable goods.

Law of Supply
More of a good will be supplied the higher its price, other things remaining constant or less of a good will be supplied the lower its price. Other variables, assumed constant, in the law of supply refer to: I. Changes in prices of inputs; II. Changes in technology; III. Changes in suppliers expectations; and IV. Changes in taxes and subsidies, For the supply curve See figure 4.5

Supply
the relationship that exists between the price of a good and the quantity supplied in a given time period, ceteris paribus.

Supply schedule

Law of supply
A direct relationship exists between the price of a good and the quantity supplied in a given time period, ceteris paribus.

Reason for law of supply

The law of supply is the result of the law of increasing cost. As the quantity of a good produced rises, the marginal opportunity cost rises. Sellers will only produce and sell an additional unit of a good if the price rises above the marginal opportunity cost of producing the additional unit.

Change in supply vs. change in quantity supplied

Change in supply Change in quantity supplied

Determinants of supply
the price of resources, technology and productivity, the expectations of producers, the number of producers, and the prices of related goods and services

Equilibrium of Demand and Supply

In a free market, price is determined by the interplay of supply and demand. When quantity demanded is greater than the quantity supplied, prices tend to rise; when quantity supplied is greater, prices tend to fall. Equilibrium represents a situation which can persist. It has no tendency to change. In terms of price of the commodity, it will be established where the supply decisions of the producers and demand decisions of the consumers are mutually consistent.

Market Equilibrium

Price Above Equilibrium

If the price exceeds the equilibrium price, a surplus occurs:

Price below equilibrium

If the price is below the equilibrium a shortage occurs:

Demand Rises

Demand Falls

Supply Rises

Supply Falls

Determinants of Demand

UNIT:5

Determinants of Demand
Price of the commodity is the major determinant of its demand. Price is the symptom, effect, as well as cause of demand Some other determinants of demand include: a. Consumers tastes and preferences; b. Consumers expectations; c. number of consumers and their distribution; d. Advertisement.

Explanation for Law Of Demand

Law of demand is explained on the concept of diminishing marginal utility principle. In addition attempts have been made to explain equilibrium of a consumer through: indifference curve analysis and Revealed Preference Theory.

Marginal Utility
Marginal utility refers to the change in satisfaction which results when a little more or little less of that good is consumed. Law of diminishing marginal utility states that as more and more units of a commodity are consumed, marginal utility derived from every additional unit must decline, also called fundamental law of satisfaction.

Marginal Utility Analysis

Purchase of a commodity by a consumer depends on three factors: 1. Price of the commodity; 2. Marginal (and total) utility of the commodity; 3. Marginal utility of money. It is assumed that marginal utility of money is constant

Consumers Equilibrium
The consumer will go on purchasing more and more of a commodity until the marginal utility becomes equal to the market price of that commodity. Consumer will strike equilibrium when: Mu x/ Px = Mum Likewise, for commodity Y consumer will strike equilibrium when MUy/ Py = Mum

Indifference Curve Analysis

Indifference Curve is a diagrammatic representation of an indifference set. It shows different combinations of two commodities between which a consumer is indifferent. Each combination offers him the same level of satisfaction. ( see figure 5.4 and 5.5 on page 143) An indifference curve which is to the right and above another indifference curve shows a higher level of satisfaction to the consumer.

Budget line
The budget line or the price opportunity line represents different combinations of two goods X and Y which the consumer can buy by spending all his income. (figure 5.7 on page 144 refers) Consumers equilibrium is depicted by the point on the budget line where it touches the indifference curve tangentially, meaning that the slopes of indifference curve and the budget line are equal. (figure 5.8 )

Revealed Preference Theory

This theory is based on preference hypothesis. (figure 5.18 at page 152). A consumer chooses a combination A of goods X and Y out of various equally possible expensive combinations of X and Y, he reveals his preference for A over all other preferences. Thus choice reveals preference. The revealed preference theory is based on strong ordering hypothesis which rules out any two combinations of two goods.

Elasticity of Demand & Supply

UNIT: 6

Elasticity of Demand
Elasticity of demand measures the degree of responsiveness of/ change in demand to various factors. Elasticity of demand is important primarily as an indicator of how total revenue changes when a change in Prices induces changes in quantity demanded. The total revenues of the firm will equal to changed price into quantity sold (TR= P X Q )

Classification Of Demand Elasticity

1. 2. 3. 4. 5. Perfectly inelastic demand; Inelastic demand; Unitary elastic demand; Elastic demand; Perfectly elastic demand.

Numerically Measurement of Elasticity

Elasticity Coefficient (Ed) Ed = percentage change in quantity demanded / Percentage change in price. Ed =change in quantity demanded/original quantity demanded change in price/ original price. Ed = Q/Q P/ P

Price Elasticity
Price elasticity is percentage change in quantity demanded per 1 per cent change in price Two other measures of elasticity used are: 1. Arc price elasticity is used to assess the impact of discrete changes in price. 2. Point price elasticity is for very small price changes.

Demand Forecasting

UNIT: 7

Demand Forecasting
All business decisions are based on some forecast of the level of future economic activity in general and demand for the firms product in particular. A forecast is a prediction or estimate of a future situation. Data for use in forecasting can be obtained from experts opinion, surveys and market experiment. Various statistical methods have been developed for forecasting do demand.

Forecasting Steps
Identification of objective. Determining the mature of goods under consideration. Selecting a proper method of forecasting. Interpretation of results. There are several methods of demand forecasting basically for three reasons: no method is perfect and no method is useless; no method is best under all circumstances; and the best method may not be available in a particular situation due to constraints from data or resources (time and money).

Methods of Demand Forecasting

Broadly there are two approaches to the problem of business forecasting: To obtain information about the intentions of consumers by means of market research, survey, economic intelligence and the like. To use past experience as a guide, and by extrapolating past trends to estimate the level of future demand. The first approach is often used for short-term forecasting and the second approach for longterm forecasting.

Forecasting Techniques
Forecasting techniques Survey methods

Statistical methods

Expert opinion

consu mers

Tend methods Regression method

Indicator method

Interview Method

Interview methods

Complete examination

Sample survey

End use method

Statistical Methods
Fitting a trend line by observation. Trend through Least Squares Method. Time series analysis Moving average. Exponential weighted moving average method.

Production Analysis
UNIT: 8

Cost Analysis
UNIT: 9

 Lecture 05

Cost analysis
Lecture 05

Production Function And Its Application

UNIT: 10

Market Structure
UNIT: 11

Pricing And Output Decisions under Perfect Competition

UNIT: 12

 LECTURE 07

Pricing and Output Decisions Under Monopoly

UNIT: 13

Monopoly
LECTURE 08

Pricing and Output Decisions under Imperfect Competition

UNIT: 14

Monopolistic Competition
LECTURE 09

Pricing Methods
UNIT: 15

Investment Decisions
UNIT: 16

 (SEE SEPARATE FILE DOWN LOADED)

Decisions making under Risk and Uncertainty

UNIT: 17

Risk and Uncertainty

Risk and Uncertainty are involved in all decision making. Certainty appears to be theoretical and impractical state. Risk may be distinguished between insurable and non-insurable risk. The modern industry provides a whole industry to deal with insurable risk. Businessmen need not lose sleep over the danger of losing plant or stock through fire. There are three types of entrepreneurs risk averters; risk seekers and risk indifferent.

Risk and Uncertainty

Risk is a situation with more than one possible outcomes to decision such that probability of each of these outcomes can be measured is a risk situation. Examples- tossing a coin, investing in stock. Uncertainty is a situation where there is more than one possible outcome of a decision but the probability of each specific outcome occurring is not known or even meaningful. This may be due to insufficient information or instability in the nature of variables.

Adjustments for Risk and Criteria for Decisions

Different approaches have been proposed for dealing with the consequences of imperfect ability to predict events and the investors risk involved therein. Some are: Finite- Horizon method. Risk discounting method. The Shackle approach. The probability Theory approach. Sensitivity analysis. Simulation. Hedging. Decision Tree.

Profit Analysis
UNIT:18

Decision Making Under Uncertainty

Decision making under uncertainty is necessarily subjective. Some methods used are: The Maximum Criteria. The Minimax Regret Criteria. The Hurwicz Alpha Index. The Maximax Criteria. The Laplace (Bayes) Criteria.

Profits
Profit is regarded as a reward for the entrepreneurial functions of final decision making and ultimate uncertainty bearing. Three important aspects about profits are: I. Profit is a residual income and not contractual or certain income as in the case of other factors of production. II. There is much greater fluctuation in profits than in rewards for any other factors. III. Profits may be negative , whereas rent, wages, and interest must always be positive.

Profit Classifications
Gross profit and Net Profit. Normal Profit and Supernormal Profit. Accounting Profit and Economic Profit. Economic Profit = total revenue (explicit cost + Imputed cost). Or Economic Profit = Accounting profit imputed cost. Imputed or implicit costs are the costs of those employed resources which belong to the owner himself.

Theories of Profit
1. Profit is the reward for risk bearing and uncertainties. 2. Dynamic Theory suggests that Profit is the consequence of frictions and imperfections in the Economy. 3. Profit is the reward for successful innovation. (innovation theory of profits) 4. Profit is a payment for organizing other factors of production. Many factors like risk, uncertainty, innovation, monopoly powers etc. affect every business.

Profit Measurement
Accounting Method based on inclusiveness of cost, depreciation, valuation of stock, treatment of deferred expenses, and capital gains and losses. Break Even Analysis examines the relationship among total revenue, total costs and total profit of the firm at various levels of output. Break Even Point is that volume of sales where the firm breaks even i.e. the total casts equal total revenue. Losses cease to occur while profits have not yet begun.

Break Even Point (BEP)

It is a point of zero profit. BEP = Fixed costs (selling price variable cost per unit). Example fixed costs Rs. 10000 (selling price Rs. 5per unit variable cost Rs. 3 per unit) Therefore BEP = Rs.. 10000 (5-3) = 5000 units. Hence 5000 units will be the point at which the manufacturing unit would not make any loss or profit.

Methods of Break-Even Analysis

The break even chart. The Algebraic method.

THANK YOU