Micro and Macro Economics

Micro eco does a microscopic study of economystudy of equilibrium of several units of the economy (piece meal )and their inter-relationship to each other-study of individuals or households, individual firms etc-their role in the working of the whole economic organisation Macro eco is concerned with the behaviour of the economy as a whole-with booms and recession, economys total output of goods and services and their growth, rate of inflation and employment, balance of payment and exchange rate

Economies and Diseconomies

  

 

Economies are external and internal External Economies-advantages that arise due to expansion in the industrys size 1.economy of concentration-firms producing similar products and clustered in same area or location, enjoy the benefits of localization and specialization, easy and cheap credit facilities, better transport and mktg conditions 2.Economy of information regarding mkt conditions-availability of factors, credit, transport etc 3.Economies of disintegration-large number of firms located in an area enables better disposal of waste and by-products eg in the case of a single sugar mill, the molasses would go waste

   

 

Internal Economies-advantages arising in reduction of production costs because of expansion in the size of the firm. 1.Technical economies due to economies of superior techniques, economies of increased dimension and economies of linked processes 2.Managerial economies-creation of functional depts to deal with specific tasks 3.Marketing economies- availability of raw materials at low price reduces cost of prodn-bargaining power increases, cheaper transport facility available etc 4.Financial economies-better credit worthiness in the mkt, easy access to credit from banks etc 5.Risk bearing economies-big firms better placed to absorb risks by diversifying -production, processes of production, mkt etc

6.Economies of vertical integrationintegration of different stages of production to reduce cost eg regular supply of raw materials and steady outlets for their usage make prodn planning more certain and less subject to erratic and unpredictable changes 7.Other economies-lower advertising cost, mktg expenses, decentralization of decision making, mechanization etc

Break Even Analysis



    

BE analysis involves the determination of the BE point located at that level of output or sales at which net income or profit is zero At this pt total cost =total revenue-no profit and no loss Important tool to trace relationship between cost, revenue and profit and different output levels or sales Explains impact of volume of output on cost, revenue and profit Important bridge between business behaviour and economic theory of the firm-refer diagram BE pt (B) is where TR=TC (net profit=zero) and output=OQ

Beyond OQ output, firm makes profit ie difference between TR and TC =profit -below OQ output, firm is in loss -thus BE analysis provides a flexible set of projections of cost and revenue under given conditions and facilitates profit prediction and making -it helps in making safety margins regarding the extent to firm can permit decline in sales without incurring loss -it also determines the target profit sales volume and helps in cost control


Break Even Analysis-algebric method

       

Profit (a)=TR-TC TR=P.Q (unit price*output) TC=TVC+TFC-(now TVC=variable cost per unit of output*output) TC=AVC*Q+TFC If Qb output is BE pt, then TR=TCb P.Qb=TFC+AVC.Qb P.Qb-AVC.Qb=TFC Qb(P-AVC)=TFC ie Qb=TFC/P-AVC

Thus BE output is determined by TFC, price of output or AVC changes in any will change BE output. Denominator (P-AVC) is profit contribution per unit  BE analysis is used to determine output level to achieve target profit  If target profit=a, then Qt (new output)= TFC+a/P-AVC