Market structures

The determination of prices and output of various products

depends upon the type of marketstructure in which they are
produced,sold and purchased.
Economists have classified the various markets prevailing in a
capitalist economy into
 Perfect Competition or pure competition
 Monopolistic competition
 Oligopoly
 Monopoly

Three market forms

Monopolistic competition, Oligopoly, and Monopoly are
generally grouped under the general heading of imperfect
competition. They differ with respect to the level of
imperfection.
Meaning of Market

Market is generally understood to mean a particular place or

locality where goods are bought and sold.

The idea of a particular locality or geographical place is not

necessary to the concept of the market. What is required for
the market to exist is a contact between the buyers and the
sellers so that transaction at an agreed price can take place
between them.

Classification of market structures

The popular basis of classifying the market rests on three

elements
 The number of firms producing a product
 Nature of the product produced by the firms; homogenous
of differentiated
 The ease with which the new firms can enter the industry.
Price elasticity of demand
Depends on the
 number of firms producing the same or similar product
 Degree of substitution.
Degree of control over the price

Perfect Competition
The following are the important features of
perfect competition
 There is a large number of firms(producers and
sellers) and buyers of the product
 Products of all firms are homogeneous.
 There is freedom of new firms to enter the industry
and the old ones to leave it.
 All firms and buyers have perfect information about
the prevailing market price of the product

Inferences
  No individual firm is under a position to influence the
Price.
 Therefore the demand curve will be a horizontal straight
line at the prevailing price of the product in the market.
 The number of sellers is very large
 The output of one seller is negligibly small compared to
the total output of the commodity
 The product of various sellers are homogenous from the
view point of the customers.

A large number of firms

 Existence of large number of firms ensures that an
individual firm exercises no influence over the price
of the product.
 The output of the individual firm constitutes a small
fraction of the total output of the industry

Homogeneous Products
Products produced by various firms are
 Indistinguishable from each other
  Perfect substitutes of each other
 Cross elasticity is infinite
 The bundle of utilities offered by all sellers is
identical
 Selection of a seller is entirely a matter of chance.
Perfect information about the prevailing price
 Buyers and sellers are fully aware of the
prevailing price
 If a seller tries to charge a higher price the
buyers will shift to some other seller.

Free Entry and Free Exit

 No barriers to the entry of firms or exit of existing
firms from the industry in the long run

Supernormal profits—more firms enter the

industry
Losses—existingfirms leave the market.
Pricing underPerfect competition

 Price depends on demand or supply

  One school of thought – Supply -- > cost of
production

 One school of thought – Demand -- > Marginal

Utility

Answer given by Marshall explained it with the help of a

scissors example

The price at which quantity demanded equals the

quantity supplied is called equilibrium price. At this price
the two forces balance each other.

The intersection of demand supply determines the price

quantity equilibrium. This price quantity equilibrium is
static equilibrium, because factors influencing demand
and supply are held constant
Market demand depends on
 Income of people,
 Their preferences for the commodity
 Total population
 Availability and prices of substitute goods
Supply depends on
 availability and price of labour ,Raw material,
machines, chemicals
 Technique of production

Importance of price element in the determination

of the price
Time is long or short according to the extent to which the
supply can adjust to the change in demand
Reason why time is needed to adjust to the demand is
production is technical in nature.
Marshall divided into
 Market period
 Short run
 Long run
Market period is very short period—supply is fixed—no
adjustment can take place in supply.
Short run – supply can be adjusted to a limited extent.

Long run is period long enough to permit the firms to build new
plants

Imperfect competition

Individual firms exercise control over the price to a smaller or

larger degree depending upon the degree of imperfection.
Degree of Imperfection is determined by
 Fewness of firms
 Product differentiation

1.Monopolistic Competition

 Large number of firms

 Some what different products which are close substitutes
of each other.
 Freedom of entry and exit.
2. Pure Oligopoly
 Competition among few firms producing homogeneous or
identical product.
 Fewness of firms ensures that eac of them have some
control over the price of the product
3. Differentiated Oligopoly
 Few firms producing differentiated products which are
close substitutes of each other
 Firms have fairly large control over the price of their
individual products
4.Monopoly
 Existence of a single producer or seller producing or selling
a product which has no close substitute
 Large control on the price of the product

Monopoly

Monopoly form of market structure prevails in the capitalist

economies of the world including India.
Monopoly is an extreme form of imperfect competition

Capitalism is an economic system and an ideology based on

private ownership of the means of production and their
operation for profit.

Features of Monopoly
 There is a single producer or seller
o If there are many producers  either Perfect
competition or Monopolistic competition depending on
whether the product is differentiated or Homogeneous
 o If there are few producers or sellers Oligopoly
 No close substitutes for the product of that firm are
available. Monopoly implies absence of all competition
Cross elasticity of demand between the product of the
monopolist and the product of any other producer is very
small.
 Strong barriers to the entry of new firms exist economic,
technological, institutional, or artificial.

Sources or causes of Monopoly

1. Patents or Copyright E.g.: Xerox
2. Control over essential raw material E.g. OPEC
Organization of petrol exporting countries)
3. Grant of franchise by the government
4. Economies of scale: Natural monopoly
5. Advertising and brand loyalties of the established firm

Demand curve: Downward sloping

Relation between marginal revenue and price
MR= Change in total revenue/Change in quantity
= Change in (Price *Quantity)/Change in Quantity
AR= Total revenue/ Total number of units sold

Revenue is the income generated from the sale of goods and

services in a market.
Average Revenue (AR) = price per unit = total revenue / output.
The AR curve is the same as the demand curve.
Marginal Revenue (MR) = the change in revenue from selling
one extra unit of output.
Total Revenue (TR) = Price per unit x total number of units sold

Price determination under Monopoly

Relation between Marginal revenue and Price

Marginal Revenue < Price(Average Revenue)
Marginal revenue depends on the price of the product and the
price elasticity of demand .

 The monopolist will go on producing the product as long

as the MR is greater than the MC.
  Equilibrium is reached at a point where the MR= MC
 He would incur losses when MC>MR

Perfect competition
 Demand curve of the firm straight line AR=MR

Monopoly
 Demand curve is downward sloping
 MR is below the AR curve

25/10/2017

Important features of Monopolistic competition

 1. A large number of firms:
 Each of them has their own share of the market
demand.
 Stiff competition
 Differentiated products
 Size of each firm is relatively small
2. Product differentiation:
 Though the products are slightly different they
are close substitutes of each other
 Prices cannot be much different from each
other
 Hence the firms compete with each other
3.Firm has some influence over the price
 If a firm lowers the price of its product, some
customers will switch over to it
 If the firm raises the price some of its customers
will leave it.
 The demand curve slopes downwards
 Marginal curve lies below it
 Individual firm is not a price taker has some
influence on the price of the product
  Firm has to choose price output combination
which will maximize profits
4. Non Price competition: Expenditure on advertisement
and other selling costs
 Firms incur a considerable expenditure on
advertisement and other selling costs.
 Advertising and other selling outlays impact the
demand and the cost
5. Product variation refers to
 Change in the quality of the product
 Technical changes
 A new design
 Better material
 It may just mean a new package or a container
6. Freedom of entry and exit
 Easy for firms to enter and existing firms to
leave.
 Entry of new firms causes expansion of
output Price tends to fall in the long run
Nature of demand and the Marginal revenue curve
 Monopolistic competition enjoys some control on the
price of the product as the product is differentiated
 If a firm raises its price it will find some customers will
move away
 If it lowers the price demand for its product will rise.
The problem is to find the price quantity combination which is
optimum for it which yields max amount of profit.

Demand curve is the average revenue curve sloping downwards

MR curve lies below it .MR= AR(1-1/e)
Where e = price elasticity of demand

Price and output equilibrium under monopolistic

competition

Individual firm’s equilibrium under monopolistic

competition
The following are regarded as constant
 Availability of substitutes.
  Prices charged for the substitutes are held as constant.
 Equilibrium of an individual firm is considered in isolation.
 Since there are close substitutes the demand curve is fairly
elastic. The price set by the individual firm is not very high.

Assuming the above conditions

 The demand curve for the individual curve is given.

 Long run firm’s equilibrium and group equilibrium
under monopolistic competition

The following are the difficulties faced while describing the

group equilibrium
 Vast diversity of conditions
 Qualitative differences lead to large variations in the
demand ( in respect to elasticity and position)and the cost
curves( in respect to the shape and position)
As a result of the above differences there would be differences
in the price and output and profits of various firms of the group

In order to simplify Chamberlin goes for the

“Uniformity Assumption”—Customers preferences are evenly
distributed among the varieties
“Symmetry Assumption” Prof. Stigler – Number of firms being
large, Individual firm’s action regarding price and output will
have negligible impact on the competitors

 There is freedom of entry only as long as the new firms

can provide identical products as the existing firms.
 As the new firms enter the market the demand curve shifts
to the left.
 The demand curve becomes tangent to the Average cost
curve
 Excess capacity common feature of the firm in the long run

Sales in a monopolistic competition are

dependent on
 Price
 Nature of the product Advertising outlay it
makes
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Price and Output determination Under Oligopoly
Oligopoly is often referred to as the “Competition among
the few”.Oligopoly is said to prevail when there are fe
firms or sellers in the market producing or selling the
product.Whenthere are two or more than two , but not
many, producers or sellers of a product Oligopoly is said
to exist.
When number of sellers of a product is two to ten,
oligopoly is said to exist.
Oligopoly without product differentiation or Pure
Oligopoly products are homogeneous
Differentiated OligopolyOligopoly with product
differentiation

Characteristics of Oligopoly
1. Interdependence:
 Any change in the Price , output, product design will
have an impact on the rivals
  Must consider not only the market demand but also
the reactions of other firms in the industry to the
decisions/action taken by it.
2. Importance of Advertising and selling cost
 Firms have to incur a good deal of costs on
advertising and on other methods of sales
promotions
 Firms need to employ aggressive and defensive
marketing weapons to gain greater share in the
marketor to prevent a fall in the market share.
Perfect competition: Unnecessary
Monopoly: Only to inform public about the introduction
of a new model
Monopolistic: plays an important role as product
differentiation exists but not as important as Oligopoly.

Indeterminateness of demand curve facing an

Oligopolist
Because of the interdependence of the firms on each
other, the demand curve facing an oligopolistic firm
looses its definiteness and determinateness because it
goes on shifting as the rivals change their prices in
reaction to price changes made by the firm.

Causes for the existence of oligopolies

1.Economies of scale
When economies of scale exist, average cost falls rapidly
over a large range of increase in the level of output. As a
result of large economies of scale , a few firms can fulfill
the demand for the product by producing ona large scale
and thus lowering the average cost of production.
2.A large amount of fixed cost
Due to greater divisionof labour the average variable cost
falls and economies of scale set in.
Economies of scale also set in also because..
If the sales of a product that is developed after incurring
large fixed costs increases, its average fixed cost
decreases.
3. Economies of scope : In case of a multiproduct firm
some of the recourses can be used for the production of
a number of products . Economies of scope arise when
production of different products within one firm leads to
the lower average cost of production than if they were
produced in independent firms.
4. Barriers to entry
There are two types of barriers
 Technological
 Legal
5. Product differentiation: when products produced by
various firms are differentiated, it provides some market
power to the producers of different varieties of the
product. The firm could lower the price of its product so
that it is unviable for the new entrant to operate in the
industry.
Product differentiation and Economies of scale are
significant reasons for the existence of Oligopolies.
6. Firm created causes of Oligopoly
Some existing firms may take strategic moves over other
firms in the industry firms may grow and become big by
merging with other firms. Firms may drive out rivals from
the market by making them bankrupt through predatory
practices.
Unless existing firms can create and sustain strong
barriers to the entry of new firms oligopolies may not last
long

Price and output under Oligopoly indeterminate

1. Interdependence of firms in oligopoly
Consequence of interdependence
 Rivals may get together and cooperate with each
other
 Become competitive with each other
 Indeterminateness of the demand curve facing
individual firms

Reasons for the Indeterminateness of the demand curve

 As an oligopolistic firm changes the price of the
product the rival firms would retaliate by changing
 the price (/ quantity) of their product, which would
affect the demand curve of the oligopolistic firm.
 The demand curve would keep shifting as the rivals
retaliate. More over there would be uncertainty
about the rival’sreactions.
 Uncertainty
 Would the prices of the rival product remain
unchanged
 If they cut their prices would it be
o The same amount
o By smaller or greater amount
If the prices are unchanged a definite demand curve
could be drawn.

The principle of MC=MR cannot be used here, without

making some assumptions because of the shifting
demand curve

2. Profit maximizing assumption challenged in case

of oligopoly
A determinate solution to the price output problem in
the other market forms is arrived at by assuming profit
maximization motive.

Some economists have challenged the validity of profit

maximizing maxim in the oligopolistic situations

The following are the other maximization objectives of

the firm as per various economists 
 Maximizing stable profits over a long period of time
rather than profit maximization(Prof. Rothschild)
 Sales maximization objective(Prof. Baumol)
 Maximize growth rate(Prof. Morris)
 Oligopolists do not maximize anything, they merely
satisfise

In view of the above there is no single determinate

solution of the oligopoly problem but a variety of
possible solutions, each depending upon different
assumptions
Various approaches to determination of price and
output under Oligopoly
There is no single determinate solution, but a number of
determinate solutions depending on different
assumptions

1. Ignoringinterdependence: For providing a

determinate solution to the price output determination,
some economists have assumed that oligopolistic firms
ignore interdependence.
 The demand curve can be ascertained.
 Standard analysis of – Theory of the firm can be
applied to provide a determinate solution to the
price output problem of oligopoly.
Classical models of Duopoly were put forward by
o Cournot – Each Oligopolistic firm would set its
output in the belief that its rival firm‘s output
would remain constant.
 o Bertrand—each firm would set its price in the
belief that the rival firm would keep its price
unchanged.
As per few other economists providing a solution for the
price and output problem by ignoring interdependence is
a fundamentally mistaken approach.

2. Predicting reaction pattern and counter moves of

rivals
Various models based on different assumptions
regarding reaction patterns have been propounded
a.Price and output are determined so that profits are
jointly maximized- Chamberlin
b.Price increase will not be followed by the rival
firms , but price reduction will be matched by them –
P.M Sweezy and Oxford economists Hall and Hitch
In light of the above assumptions regarding the reaction
patterns the demand curve facing an
individualOligopolistic firm is of a kinked type with a kin
at the current price.
a. Cooperative behavior: Forming a collusion to
maximize Joint profits
Oligopolistic firms realizing their interdependence, will
pursue their common interests and will form a collusion ,
formal or tacit – they will enter into agreement and work
in the purist of common interest .

They would
 Maximize joint profits
 Share profits , markets or output
 They would accept one firm as a leader ( dominant
or low cost firm )—follow the leader in the fixation
of price
b. Game theory approach to Oligopoly
The Oligopolistic firm does not guess the rival’s reaction
pattern , but calculates the optimal moves by rival firms ,
i.e. their best possible strategies and in view of that
adopts its own policies and counter moves .
Cooperative Vs. Non cooperative behavior – Dilemma of
Oligopoly

30/10/2017
Dilemma of Oligopoly
 Co- operative
 Non cooperative behavior
Behavior of Oligopolistic firms can be strategic in
deciding their price and output policies.

Strategic behavior—the strategic behavior means that

the oligopolistic firms must take into account the effect
of their price output decisions on their rival firms and on
the reactions they expect from them.
Non strategic behavior—firms working in perfect
competition & monopolistic competition & a monopolist
have a non strategic behavior while deciding their price
and output. They are guided by their own demand and
cost curves.

Cooperative Solution
 Cartel Overtly / Tacitly
 They could decide not to compete with each other,
decide to charge a monopoly price and reach an
agreement on the output produced by each.

Results in

o Results in maximization of joint profits if they

worked as one firm
o Collusive oligopoly model explains joint behavior

 Price leadership Model

Few firms in an oligopolistic industry accept one firm
as the leader and accept the price set by it.

The non – cooperativeequilibrium-- Nash equilibrium-

Nash Equilibrium named after John Nash, the well known
us Mathematician who received a noble prize in
economics in 1994
Equilibrium is reached when each firm thinks that its
present strategy is the optimum strategy given the
present strategy of other firms

Cournot:- Each firm decides the output it will produce,

assuming that the rival firm will keep its output constant
at the present level.

Collusive Oligopoly: Cartel as a cooperative model

 Cartel – firms jointly fix a price and output policy
through agreements
o Central administrative agency—firms
completely surrender their rights of price and
output determination(perfect cartel)
o Total profits are distributed among the member
firms in a pre agreed format
o Central authority determines the separate
output produced by various members and the
price they have to charge.
 o Total cost would be minimized when various
firms in the cartel produce out put such that the
marginal cost is equal.

Market sharing cartels

Profits are pooled together and distributed late

 Market sharing by non price competition- only a

uniform price is set and the member firms are free
to produce and not to sell below the fixed price, they
are free to vary the style of their product and the
advertising expenditure and promote sales in other
ways
 Market sharing by output quota- agreement is
reached by the firms regarding quota of output to be
produced and sold by each firm at an agreed price

Price Leadership
 Tacit
  Formal Agreement
Types of price leadership
 Price leadership by a low cost firm
 Price leadership by a dominant firm
 Biometric price leadership
 Exploitative or aggressive price leadership

Kinked demand curve theory of Oligopoly

Oligopolistic industries exhibit an appreciable degree of
price rigidity or stability. The prices remain sticky or in
flexible.

There is no tendency on part of the oligopolist to change

the price even if the economic conditions undergo a
change

Many explanations have been given about the stickiness

of the price . The most popular one being the kinked
demand curve hypothesis.
  Paul M. Sweezy an American economist
 Hall and Hitch Oxford economists
Kinked demand curve – Price and output under oligopoly
with product differentiation.

Why is the demand curve kinked?

When under oligopoly products are differentiated, it is
unlikely that when a firm raises its price all customers
would leave because some customers are attached to the
product due to its differentiation.
Without product differentiation when the firm raises its
price all its customers would leave so that the demand
curve would be perfectly elastic—tendency of the firms
to form a cartel
The demand curve facing an oligopolist has a Kink at the
level of the prevailing price.The kink is formed because
the segment of the curve above the price is highly elastic
and the segment of the curve below the kink is highly
inelastic
i)Price reduction
ii)Price increase

31/10/2017
Tuesday
Nature of profits

Business profits:Is an accounting concept.

 It is the residual sales revenue to the owners of the
firm after making payments to all the other factors
the firm uses.
Business profits/Accounting profits = Total sales
revenue- Explicit costs
Economic Profits: Economists deduct not only the
explicit costs but also the implicit costs from the sales
revenue of the firm.
Implicit costs refers to the
Opportunity costs of the resources provided by the
firm’s owners
 Capital – Economists consider a normal rate of
return on the capital
 Entrepreneurial ability- transfer earnings of the
owner- entrepreneur.
Economic profits/ Pure profits= Sales revenue- Explicit
costs- Implicit costs

Economic profits or pure profits also a makes a provision

for
a. Insurable risks
b. depreciation
c.necessary minimum payment to the share holders to
prevent them firm withdrawing their capital.

A pure profit is considered to be a short term

phenomenon—it does not exist in the long run.

The various theories of profits provide an explanation for

the existence of economic profits
 Walker’s theory of profit
 J B Clarks Dynamic theory of profits
  Hawley’s Risk theory of profit
 Knight’s theory of profit
 Schumpeter’s Innovation theory of profit.

Walker’s theory of profit: Profit as rent ability

Profit is the rent of “exceptional abilities that an
entrepreneur may possess“over the others.
 Land rent is the difference between the yields of the
least and the most fertile lands.
 Profit is the difference between the earnings of the
least and the most efficient entrepreneurs.
 Assumed a state of perfect competition in which all
firms processed equal managerial ability.
 He regarded wages of the management as ordinary
wages, which is popularly be known as ‘normal profits‘.

J B Clark’s Dynamic theory of profits:

Profits arise in a dynamic economy not in a static one.
 In a static economy the following do not change

 Population and capital are stationary

 Production remains unchanged over time
 Goods remain homogeneous
 Factors enjoy the freedom of mobility but do not move because their
marginal product in every industry is the same.

There is no risk .Therefore the firms make normal profits

Dynamic economy is characterized by the following changes

 Increase in population
 Increase in capital
 Improvement in production technique
 Changes in the form of business organization
 Increase in the consumer wants

The major function of the managers in a dynamic world is to take

advantage of the generic changes, promote their business, expand sales
and reduce costs. Only the entrepreneurs who take advantage of the
changes make pure profit in addition to the normal profits. Pure profits
exist only in the short run.

In the long run Competitionrise in the demand for factors of

production> rise in factor pricesrise in cost of production

On the other hand rise in output decline in prices given the

demand pure profits decline..
 Hawley’s Risk theory of profit
Risk may arise due to the following reasons:
 Obsolescence of the product
 sudden fall in prices
 Non availability of certain material
 Introduction of a substitute
 Risk due to fire or war etc
Hawley regarded risk taking as an inevitable
accompaniment of dynamic production.
Those who take risks have a claim to additional reward
known as profit.

According to Hawley profit is the price paid by the society for assuming
business risk. Business men would not assume risk without expecting
adequate compensation in excess of actuarial value.

Profit consists of two parts

 Compensation for actuarial or average loss incidental to the

assumption of risk
 An inducement to suffer the consequence of being exposed to risk
Knight’s theory of profit

Frank H. Knight treated profit as a residual return to uncertainty

bearing, not to risk bearing. He made a distinction between risk and
uncertainty.

Risk

 Calculable risk and

 Non – calculable risk

Calculable risks are those risks whose probability of occurrence can be

statistically estimated on the basis of available data. .

Non calculable risks: probability of risk occurrence cannot be

calculated.

The area of incalculable risk is the area of uncertainty. In the area of

uncertainty the decision making becomes a crucial function of an
entrepreneur and a manager. If his decisions are proved right by the
subsequent events, the entrepreneur makes a profit.

Profit arises under from the decisions taken and implemented under
conditions of uncertainty.

Schumpeter’s Innovation theory of profit.

 Was developed by Joseph Shumpeter. He was of the opinion that
factors like

 Emergence of interest and profit

 Recurrence of trade cycles and other such changes are only
incidental to a distinct process of economic development

Principles which would explain the process of economic development

would explain these economic variables.

He starts with a state of Stationary equilibrium in all spheres.

Under the conditions of stationary equilibrium

 The total receipts from business are exactly equal to the total
outlay
 There is no economic profit
 Profit in excess of management wages can be made only by
introducing innovations in manufacturing techniques and
methods of supplying the goods

Innovations may include

 Introduction of the new commodity or a new quality of goods

 The introduction of a new method of production
 The emergence or opening of a new market
 Finding new sources of raw material
 Organizing the industry in an innovative manner with new
techniques.
Over time the supply of the factors remain the same, factors prices
tend to rise

Cost of production increases

With the firms adopting innovations the supply of goods and services
increases

Results in fall of prices

Cost per unit goes up

Revenue per unit goes down

Difference in the cost and receipts disappears

Profits in excess of normal profits disappear

Economy reaches a state of stationary equilibrium

However process of innovation continues profits appear and disappear.

Profits exist in spite of the process of profits being wiped out

Profits arise due to factors such as,

 Patents
 Trusts
  Cartels
 It would be in the nature of monopoly revenue than economic
profits.

Monopoly arises due to

 Economies of scale
 Sole ownership of certain raw material
 Legal sanction and protection
 Merger and takeover

A monopolist can earn pure profits and control it in the long run using
monopoly powers.

Power to control supply and price

\Power to prevent the entry of comp. by cutting price

Unit V Government and Business

Need for government intervention in the market

Government intervenes considerably in to the business environment and
functioning of the markets, reasons 
  Improving the economic performance in the general interest of the nation

Therefore manager needs to recognize the role of the government in the market
economy.

The following needs to be kept in mind by the managers. The business is moulded
from time to time,

 Demand management induced macro economic policies such as

o Moneary policy
o Fiscal policy
o Exchange rates
 Supply Management – macro policies related to
o Privatization
o Deregulation
o Mergers and acquisitions
o Monopoly and restrictive trade practices
o Development of small scale industries , ruralindustrialization etc

Other specific trade policies such as

o Export promotion
o Protection
o Import quotas

All the above have a significant impact on the growth and pattern of business

Reasons / need for government intervention in the market

Adam smith, Ricardo and Js Mill advocated the Laissez faire policy for the
government’s role in the Indian economy. It was suggested that the government
should not intervene into the play of market system. The ‘invisible hand of the
market mechanism brings an automatic efficient allocation of the resources and
full employment equilibrium conditions in the long run.

Adam smith opposed any government intervention that may obstruct the free
paly of the market mechanism..

However it has been realized that there are several mechanisms and chances of
market failure that necessitate government intervention for corrective measures
in a market oriented or mixed economy.

Thinking of Adam Smith

Recognized the limitations and the evils of private enterprise economy

Opposed the growth rate of monopoly

For the sake of national interest and augmentation of welfare in general

competition among traders and manufacturers should be followed.

Competition alone maximizes welfare and perfect competition “The wealth of

nations”

Complete freedom of trade is a Utopian dream.

He thus allowed government intervention to some extent

Market mechanism
Is characterized by the free play between the demand and supply forces of the
market. However it does not mean that there is a absence of government
intervention. The extent to which the state should intervene is a a matter of micro
economic policy

Imperfections and failures in market mechanisms

If market is allowed to operate without any kind of external control over its
working, would have important short comings

1. Economicinstability: A change in the demand – fall or rise – brings a change in

the connected variables and effect the economy

Demandpricelabour( retrenchment of labor)

Because of fluctuations in demand major variables are constantly changing

resulting in economic uncertainty and insecurity.

2. Economic inequalities: The right to inheritance enables san individual to enjoy

the income from the property inherited without in any way personally
contributing to the productive assets of the economy.

3. Wastage of valuable resources: Market economy in its attempt to allow free

play between demand and supply allows the producers the freedom to produce,-
 un restricted competition result in glut of outputand waste of resources.

4. Fall in the demand due to depression --> results in glut

Rise of monopolies:

Healthy Competition  improvement in the quality of product, productive

efficiency.

Unhealthy Competition rivalrywhich can drive away the new commers  rise
of monopoly and concentration of market power in the hands of a few

5. Divergence between social and private costs

Firm’s calculation of costs does not include the cost that the society needs to pay
or social costs e.g.;- factory discharging waste

6. Immobility of the factors of production: Unemployed workers may not

have adequate information regarding the job opportunities. They might be
reluctant to move to other places of work.
7. Inability to provide collective consumption of goods

8. Inability to provide collective consumption of goods eg:-National defense

services, Police force.

9. Inability to bear high costs of collecting revenue in case of certaingoods: The

good may not be a collective consumption good , still it might not be suitable for
private production . Toll booths for a stretch of road.

9. Inability to protect individuals from wrong decisions Alcohol cigarettes and all
the self harm substances

10. Disregards for humanitarian considerations If allowed to operate in a free

market system small units compete with well established houses. Inefficient
units would close down

11. Sluggish function of the price mechanism. Due to market imperfections,

market knowledge, imperfect mobility of labor the price mechanism may not
function well.

Case for state intervention

1. Counteracting the cyclical fluctuations: in situations of depression It is only the

state economy that can get the economy out of depression. In case of inflation
the government could employ anti inflationary monetary policy that could
effectively bring the inflation under control.

2. Preventing economic inequalities and concentration of economicpower:

  Taxation policy
 Ceiling on the procession of property
 Introduce legislation to curb monopoly
 Reserve the production of certain items exclusively fro small sectory.

3. Reducing divergence between the social and private costs: can be adjusted
using taxes and subsidies.

Social cost is more than the private cost – taxes

If private cost is more than the social cost subsidies are given eg producer is
offered subsidy if he agrees to set up his plant in remote areas.

4. Stimulating factor mobility: because of uneven distribution of factors of

production lead to uneven distribution in the national income.

Shortage in the doctors  provide more scholarships

Employment exchanges are unable to find workers –( if factors are not ready to
move because of higher transportation) subside housing and transportation.

5. Producing and providing collective consumption goods – services like Police

protection, city beautification, warning systems for national disasters, --
floods,hurricanes, financed by the state.

6. Protecting the individuals against wrong decisions. Drivinglicense, primary

education compulsory

7. Humanitarianconditions—Public goods cannot be denied for people who do

not pay for it,defense, street lights, road et.c

3/11/2017

Support price
In economics support price may be a price control tool, used with the intended
effect of keeping the market price of a good higher than the competitive
equilibrium level.

The price guaranteed by a government price support program. Typically it

requires that the government buy the product at that price. If the market clearing
price is lower, this raises the price to that level and causes the government to
acquire the resulting excess supply.

What is Minimum Support Price?

Minimum Support Price is the price at which government purchases crops from
the farmers, whatever may be the price for the crops. Minimum Support Price is
an important part of India’s agricultural price policy.

The MSP helps to incentivize the framers and thus ensures adequate food grains
production in the country. I gives sufficient remuneration to the farmers, provides
food grains supply to buffer stocks and supports the food security programme
through PDS and other programmes.

When the MSP is announced?

The minimum support prices are announced by the Government of India at the
beginning of the sowing season for certain crops on the basis of the
recommendations of the Commission for Agricultural Costs and Prices (CACP).
Support prices generally affect farmers’ decisions indirectly, regarding land
allocation to crops, quantity of the crops to be produced etc. It is in this angle that
the MSP becomes a big incentive for the farmers to produce more quantity.

Why is it important?
Price volatility makes life difficult for farmers. Though prices of agri commodities
may soar while in short supply, during years of bumper production, prices of the
very same commodities plummet. MSPs ensure that farmers get a minimum price
for their produce in adverse markets. MSPs have also been used as a tool by the
Government to incentivize farmers to grow crops that are in short supply.

Why should I care?

Trends in MSP impact the availability of key food crops and food inflation. MSP is
also good tool to ensure that farmers produce what is most lucrative for them,
given consumer demand. Therefore, you should be pleased that the Centre is
pegging up MSPs for crops such as pulses and oilseeds which are in short supply
and holding back on MSPs for foodgrains.

In recent years, there have been large-scale imports of pulses and oil seeds into
India with high costs adding to Consumer Price inflation. Unless the Centre
increases State procurement of these crops, the bias towards rice, wheat and
sugarcane (where minimum prices are fixed by States) may continue. Pulses are a
cheap source of protein for the masses.

Administered Price

The price of a good or service as dictated by a governmental or other governing

agency. Administered prices are not determined by regular market forces of
supply and demand.

Examples of administered prices included price controls and rent controls.

Administered prices are often imposed to maintain the affordability of certain
goods and to prevent price gouging during periods of shortages (such as gas
prices). Rent controls are intended to stabilize rent in certain cities, where rents
are reviewed by a standard of reasonableness.

Price controls can specify a price ceiling (the upper limit of price) and a price floor
(the minimum amount that can be charged for a good or service). Administered
prices stabilize the costs of commodities such as

 sugar,
 staple foods,
 goods,
 interest rates and fees,

according to acceptable standards.

When supply and demand for the good change, the administered price may
change to subsidize the supplier or protect the consumer.

Draw backs of monopolies

 Restriction of output to charge higher prices

 Managerial Slack
 Monopolies do not make adequate expenditure on research and
development
 Rent seeking activities of monopoly.

Why the Government regulates monopolies

Prevent excess prices. Without government regulation, monopolies could put
prices above the competitive equilibrium. This would lead to allocative
inefficiency and a decline in consumer welfare.

Quality of service. If a firm has a monopoly over the provision of a particular

service, it may have little incentive to offer a good quality service. Government
regulation can ensure the firm meets minimum standards of service.

Monopsony power. A firm with monopoly selling power may also be in a position
to exploit monopsony buying power. For example, supermarkets may use their
dominant market position to squeeze profit margins of farmers.(A monopsony,
sometimes referred to as a buyer's monopoly, is a market condition similar to a
monopoly except that a large buyer, not a seller, controls a large proportion of
the market and drives prices down. A monopsony occurs when a single firm has
market power in employing its factors of production.)

Promote competition. In some industries, it is possible to encourage competition,

and therefore there will be less need for government regulation.

Natural Monopolies. Some industries are natural monopolies – due to high

economies of scale, the most efficient number of firms is one. Therefore, we
cannot encourage competition, and it is essential to regulate the firm to prevent
the abuse of monopoly power.

Protection of consumers' interest

Prevention and control of monopoly,

The government may wish to regulate monopolies to protect the interests of

consumers. For example, monopolies have the market power to set prices higher
than in competitive markets. The government can regulate monopolies through

1.price capping,
the government could create regulatory bodies, which could have the authority to
regulate prices.If the regulator thinks a firm can make efficiency savings and is
charging too much to consumers, It could set a price cap at which the product is
sold .

1. Regulation of quality of service :egulators can examine the quality of the

service provided by the monopoly.
2. Merger policy :The government has a policy to investigate mergers which
could create monopoly power. If a new merger creates a firm with more
than 25% of market share, it is automatically referred to the Competition
Commission. The Competition commission can decide to allow or block the
merger.
3. Breaking up a monopoly :In certain cases, the government may decide a
monopoly needs to be broken up because the firm has become too
powerful. This rarely occurs. For example, the US looked into breaking up
Microsoft, but in the end, the action was dropped. This tends to be seen as
an extreme step, and there is no guarantee the new firms won’t collude.

5.‘Rate of Return’ Regulation:Rate of return regulation looks at the size of the firm
and evaluates what would make a reasonable level of profit from the capital base.
If the firm is making too much profit compared to their relative size, the regulator
may enforce price cuts or take one off tax.

A disadvantage of rate of return regulation is that it can encourage ‘cost padding’.

This is when firms allow costs to increase so that profit levels are not deemed
excessive. Rate of return regulation gives little incentive to be efficient and
increase profits. Also, rate of return regulation may fail to evaluate how much
profit is reasonable. If it is set too high, the firm can abuse its monopoly power.

6. Investigation of abuse of monopoly power

Regulatory body for monopoly can investigate the abuse of monopoly power
  unfair trading practices such as:
 Collusion (firms agree to set higher prices)
 Collusive tendering. This occurs when firms enter into agreements to fix the
bid at which they will tender for projects. Firms will take it in turns to get
the contract and enable a much higher price for the contract.
 Predatory pricing (setting low prices to try and force rival firms out of
business)
 Vertical restraints – prevent retailers stock rival products
 Selective distribution :selective and exclusive distribution networks to keep
prices high.

The Monopolies and Restrictive Trade Practices Act (MRTP Act) was passed by
Parliament of India on 18 December 1969 and got president’s assent on
December 27, 1969,. But it came into force from June 1, 1970.

This act is not in force in India currently as it was repealed and was replaced by
Competition Act 2002 with effect from September 1, 2009. The MRTP
commission was replaced by Competition Commission of India.

Aims & Objectives of MRTP Act

On the basis of recommendation of Dutt Committee, MRTP Act was enacted in

1969 to ensure that concentration of economic power in hands of few rich. The
act was there to prohibit monopolistic and restrictive trade practices. It extended
to all of India except Jammu & Kashmir.

The aims and objectives of this act were:

 To ensure that the operation of the economic system does not result in the
concentration of economic power in hands of few rich.
 To provide for the control of monopolies, and
 To prohibit monopolistic and restrictive trade practices.
Definition of Monopolistic Trade Practice

The act defines the Monopolistic Trade Practice as “Such practice indicates
misuse of one’s power to abuse the market in terms of production and sales of
goods and services.

 Firms involved in monopolistic trade practice tries to eliminate competition

from the market.
 Then they take advantage of their monopoly and charge unreasonably high
prices.
 They also deteriorate the product quality, limit technical development,
prevent competition and adopt unfair trade practices”

Definition of Unfair Trade Practice

The act defines Unfair Trade Practice as

 False representation and misleading advertisement of goods and services.

 Falsely representing second-hand goods as new.
 Misleading representation regarding usefulness, need, quality, standard,
style etc of goods and services.
 False claims or representation regarding price of goods and services.
 Giving false facts regarding sponsorship, affiliation etc. of goods and
services.
 Giving false guarantee or warranty on goods and services without adequate
tests.

The act defines Restrictive Trade Practice as “The traders, in order to maximize
their profits and to gain power in the market, often indulge in activities that tend
to block the flow of capital into production. Such traders also bring in conditions
of delivery to affect the flow of supplies leading to unjustified costs.”

06/11/2017
Economic Liberalization
Economic liberalization (or economic liberalisation) is the lessening of government regulations
and restrictions in an economy in exchange for greater participation by private entities; the
doctrine is associated with classical liberalism. Thus, liberalization in short is "the removal of
controls" in order to encourage economic development.

In developing countries, economic liberalization refers more to liberalization or further

"opening up" of their respective economies to foreign capital and investments. Three of the
fastest growing developing economies today; Brazil, China, and India, have achieved rapid
economic growth in the past several years or decades, in part, from having "liberalized" their
economies to foreign capital.

Many countries nowadays, particularly those in the third world, arguably have no choice but to
also "liberalize" their economies in order to remain competitive in attracting and retaining both
their domestic and foreign investments. This is referred to as the TINA factor, standing for
"there is no alternative".

The economic liberalisation in India refers to the economic

liberalisation, initiated in 1991, of the country's economic policies, with
the goal of making the economy more

 market and service-oriented

 expanding the role of private and foreign investment.

Changes include

 a reduction in import tariffs,

 deregulation of markets,
 reduction of taxes,
 Greater foreign investment.
Liberalisation has been credited by its proponents for the high
economic growth recorded by the country in the 1990s and 2000s. Its
opponents have blamed it for

 increased poverty,
 inequality and
 Economic degradation.

The overall direction of liberalisation has since remained the same,

irrespective of the ruling party, although no party has yet solved a
variety of politically difficult issues, such as liberalising labour laws and
reducing agricultural subsidies.

Before 2015 India grew at slower pace than China which has been
liberalising its economy since 1978. But in year 2015 India outpaced
China in terms of GDP growth rate.

However,there has been significant debate around liberalisation as an

inclusive economic growth strategy. Since 1992, income inequality has
deepened in India with

 consumption among the poorest staying stable

 While the wealthiest generate consumption growth.
 As India's gross domestic product (GDP) growth rate became
lowest in 2012–13 over a decade, growing merely at 5.1%,
 employment growth suffered
 nutritional values in terms of food intake in calories,
 and also exports growth – and
  thereby leading to a worsening level of current account deficit
compared to the prior to the reform period
 But then in FY 2013–14 the growth rebounded to 6.9% and then
in 2014–15 it rose to 7.3% as a result of the reforms put by the
New Government which led to the economy becoming healthy
again and the current account deficit coming in control. Growth
reached 7.5% in the Jan–Mar quarter of 2015 before slowing to
7.0% in Apr–Jun quarter.

GDP growth: 5.7% (Q1 2017-18)

Meaning of money supply

Disinvestment is the action of an organization or government selling or

liquidating an asset or subsidiary.

Disinvestment also refers to capital expenditure reductions, which can

facilitate the re-allocation of resources to more productive areas within
an organization or government-funded project.

Whether a disinvestment action results in divestiture or the reduction

of funding, the primary objective is to maximize the return on
investment (ROI) on expenditures related to capital goods, labor and
infrastructure.

Meaning of Disinvestment:
An important aspect of present industrial policy of the Government is
that it should not operate commercial enterprises.

With that end in view the Government has decided to disinvest the
public enterprises.

The Government can sell its enterprises completely to the private

sector or disinvest a part of its equity capital held by it to the private
sector companies or in the open market.

Distinction may be drawn between disinvestment and privatisation.

Strictly speaking, disinvestment means the dilution of stake of the
Government in a public enterprise.

This can be done in two ways.

When the Government sells a part of its equity of a public enterprise

less than 50 per cent of its total stock, it is called merely disinvestment
and in this case control and management of the business enterprise
remains in the hands of Government.

On the other hand, when disinvestment or sale of its equity capital by

the Government exceeds 50 per cent so that the majority ownership
and therefore control and management of the enterprise is transferred
to private enterprise, it results in privatisation.

Therefore, in many disinvestment programmes government retains 51

per cent or more of the total equity capital of the public enterprises so
that control and management remains in its hands.
Through disinvestment or privatisation, the Government can mop up a
good amount of resources which can be used for various purposes. The
released resources can be used to

 restructure and strengthen the public sector enterprises which

are potentially viable.
 These resources can also be used to pay back a part of public
debt.
 These resources can also be used to finance budget deficits.

Disinvestment in India

Objectives

The following objectives were stated in July, 1991 while propounding

the

disinvestment policy:

 To meet the budgetary needs.

 To improve the overall efficiency of the economy.
 To reduce fiscal deficit.
 To diversify the ownership of PSUs for enhancing the
efficiency of individual enterprises.
 To raise funds for technological upgradation,
modernization and expansion of PSUs.
  To raise funds for the so-called golden handshake
scheme (VRS).

Story of Disinvestment

The new Industrial Policy Statement 1991 based on economic

reformmeasures envisaged disinvestment of a part of government
holding in the case of select public sector enterprises to provide
financial support andimprove the performance of public sector
enterprises.

The Rangarajan Committee of 1993 constituted by the

government for thispurpose made important observations.

It maintained that

 the units to be disinvested should be identified and

disinvestment could be made up to any level, except in
defence and atomic energy areas where the government
should retain the majority holding in equity.
 Further, disinvestment should be a transparent process duly
protecting the rights of the workers.
 It suggested the constitution of an autonomous body for
the smooth functioning and monitoring of the
disinvestment programme.

The Disinvestment Commission was thusconstituted in 1996 as an

advisory body having a full-time chairman and fourpart-time members.
The Commission was required to advise the governmenton the extent,
mode, timing and pricing of disinvestment.

It suggested fourmodes of disinvestment:

 Trade sale
 Strategic Sale-
According to the Department of Disinvestment, in the strategic
sale of a company, the transaction has two elements:

o Transfer of a block of shares to a Strategic Partner and

o Transfer of management control to the Strategic Partner

 Offer of shares- share market

 Closure or Sale of Assets.

Partially / Fully Divested Public Sector Units (PSUs)

The following are the PSUs which have witnessed disinvestment either
fully or

partly:

1. Shipping Credit and Investment Corporation of India

2. Container Corporation of India Ltd.

3. Videsh Sanchar Nigam Ltd. (VSNL)

4. Oil and Natural Gas Corporation (ONGC)

5. Gas Authority of India Ltd. (GAIL)

6. Steel Authority of India Ltd. (SAIL)

7. Mahanagar Telephone Nigam Ltd. (MTNL)

8. Indian Petrochemicals Corporation Ltd. (IPCL)

9. Power Grid Corporation

10. Shipping Corporation of India

11. National Aluminum Company (NALCO)

12. National Fertilisers Ltd. (NFL)

13. Indian Airlines

14. Dredging Corporation

15. LNG Petro Net

16. Madras Refineries Ltd.

17. Hindustan Zinc Ltd.

18. Maruti Udyog Ltd.

19. Modern Food Industries (India) Ltd.

20. Indian Tourism Development Corporation (10 Hotels)

21. Hotel Corporation of India etc.

Methods of disinvestment of CPSEs

 Initial Public Offering (IPO) – offer of shares by an unlisted CPSE
or the Government out of its shareholding or a combination of both to
the public for subscription for the first time.

Further Public Offering (FPO) – offer of shares by a listed CPSE or

the Government out of its shareholding or a combination of both to the
public for subscription.

Offer for sale (OFS) of shares by Promoters through Stock

Exchange mechanism – method allows auction of shares on the
platform provided by the Stock Exchange; extensively used by the
Government since 2012.

Strategic sale - sale of substantial portion of the Government

share holding of a central public sector enterprise (CPSE) of upto 50%,
or such higher percentage as the competent authority may determine,
along with transfer of management control.

Institutional Placement Program (IPP) – only Institutions can

participate in the offering.

CPSE Exchange Traded Fund (ETF) –Disinvestment through ETF

route allows simultaneous sale of GoI's stake in various CPSEs across
diverse sectors through single offering. It provides a mechanism for the
GoI to monetize its shareholding in those CPSEs which form part of the
ETF basket.

An ETF is an equity security that tracks an index and can be traded

on a stock exchange. The CPSE ETF is made up of equity investments in
10 of India’s largest public sector companies. The biggest of these are
ONGC, REC, Coal India, Container Corp, Oil India, Power Finance, GAIL,
BEL, EIL, and Indian Oil.

Salient features

The CPSE ETFs are open-ended funds with no lock-in. They can be
bought and sold on a stock market. They are pure equity investments,
and you need to make a minimum investment of `5,000.

7/11/2017

Policy planning as a guide to overall business development.

Economic stabilization and Fiscal policy

 Recession
 Inflation

1) At times economy finds itself in the grip of recession when the

following pointers are far below their potential levels

 National Income
 Output(low demand)
 Employment
During recession

Lot of idle or unutilized productive capacity, available machines and

factories not working to their full capacity, Unemployment of labor
increases, existence of excess capital stock.

2) On the other hand, at times the economy is overheated due to rising

prices – Inflation

Keynes argued for the intervention by the government to cure

depression and inflation by adopting appropriate tools of
macroeconomic policy. The two important tools of macroeconomic
policy are

 Fiscal Policy
 Monetary policy

Discretionary fiscal policy for stabilization

F. P is an important instrument to stabilize the economy, to overcome

recession and to control inflation in the economy. Fiscal policy is of two
kinds

 Discretionary
 Non-discretionary fiscal policy of automatic stabilizers.

Discretionary fiscal policydeliberate change in the government

expenditure and taxes to influence the level of national output and
services
Non-discretionary fiscal policyAutomatic stabilizers is a built in tax or
expenditure mechanism that automatically increases aggregate
demand when recession occurs and reduces demand when there is
inflation, without any deliberate action by the government

Fiscal policy to cure recession

Recession Aggregate demand decreases due to fall in private

investment Business men become highly pessimistic about making
profits in the future, results in the decline in the marginal
efficiency( operational set up does not run at full capacity) of business.
Fall in private expenditure, aggregate demand, creating a
deflationary or recession gap.

Fiscal policy methods to get economy out of recession

 Increase in government expenditure

 Reduction in the taxes
A) Increase in the government expenditure Government may
increase expenditure by starting public works like, building roads,
dams, ports, telecommunication links, irrigation works,
electrification of new areas etc. --> Government buys various
types of goods and material and employs workers .  Effect of
this increase in expenditure is both direct and in direct.

DirectIncreases the income of those who supply material, labour etc.

Indirect Those who get more income spend them further on

consumer goods depending on their marginal propensity to consume.
How does the govt. finance the expenditure

 Borrowing  selling interest bearing bonds to the public

 Creation of new money—Monetization of budget deficit.(has a
better effect than borrowing)

B) Reduction in taxes to overcome recession reduction in the taxes

increase in consumption and spending

Fiscal policy to control inflation

When due to

 large increase in the consumption demand by the households

 investment expenditure by the entrepreneurs ,
 big budget deficit  caused by too large increase in govt.
expenditure

Aggregate demand increases beyond what the economy can potentially

produce by fully employing it’s given resources excess demand
inflationary pressures on the economy

The inflationary situation can also arise if too large an increase in the
money supply in the economy occurs

An alternative way of looking at inflation

After recession when during an upswing in the economy..

Inflationary gap occursrise in prices

Fiscal policy measures of control inflation

1) reducing the government expenditure

2) Increasing the taxes.

If the government has a balanced budget, then increasing taxes while

keeping the govt. Expenditure constant will yield budget
surplusdownward shift in the aggregate demand curve help in
easing then prices

If there is a balanced budget to begin with and the govt. reduces its
expenditure , on defense, subsidies, transfer payments , while keeping
taxes constant , this will create budget surplus and results in the
removing the excess demand from the economy.

Disposing the excess budget surplus

1. Retiring public debt

2. Impounding of public debt

08/11/2017

Every economy in the world aims at achieving the level of full

employment equilibrium where all its available resources are fully and
efficiently employed because it leads to maximum level of output. This
is conceptual meaning of the term ‘full employment’. In practice, the
concept of full employment generally refers to full employment of labor
force of a country.

Thus, when the entire labor force of a country is fully employed, it is

termed as situation of full employment. Keynes defines it differently.
According to him, when an increase in aggregate demand does not
result in an increase in level of output and employment, it shows state
of full employment.

Economic stability refers to

 Absence of excessive fluctuations in the macro economy.

 economy with fairly constant output growth
 Low and stable inflation would be considered economically
stable.( price stability)

Monetary policy is another instrument with which the objectives

of macroeconomic policy can be achieved. Central bank of a country
formulates and implements the monetary policy. In India the central
bank works on behalf of the government. However in some other
countries such as the USA the central bank (Federal Reserve Bank
system enjoys a independent status.
 Broad objectives of the monetary policy are to

 establish equilibrium at full employment level of output , to

ensure price stability
 to promote economic growth of the economy.
 Concerns itself with the changing the supply of money stock
and rate of interest for the purpose of stabilizing the
economy at full employment or potential output levels by
increasing the level of aggregate demand.

More importantly
 At times of recession ->adoption of monetary tools
increase the money supply and lower interest rates
to stimulate the aggregate demand.
 Inflation seeks to contract the aggregate spending
by tightening the money supply or raising the rate of
interest.

Tools of monetary policy

1. Open market operations

2. Changing the bank rate

3. Changing the cash reserve ratio

4. Undertaking selective credit controls

In times of recessionExpansionary monetary policy / easy money

policy

Inflation/Excessive expansion  contractionary monetary policy/ tight

monetary policy

Expantionary Monetary policy to cure recession or depression

Recessioncyclical unemployment fall in aggregate demand

1.Open market operations

Buying of securities by the central bank from the public , commercial

banks increase in the reserve of currency of the banks or general
public

Greater reserves with the central bank issues more credit to the
investors and businessmen for undertaking more investment.-->upward
shift in the aggregate demand curve.
 2.Central B. may lower the bank rate/ discount rate ( rate at which
the central bank offers loan to the commercial banks). At lower rates
commercial banks are indiced to borrow more from the central
bank issues more credit at lower rate of interest.-->

 Availibility of funds
 Cheaper funds
3. Reduce the cash reserve ratio
4. Reduce the SLR

Above tools lead to an increase in the reserves or liquid resources with

the banks banks expand their credit

Appropriate monetary policy in times of recession can increase

availability of credit

How the expansionary monetary policy works: Keynesian view

Expansion in the money supply can cause the rate of interest to fall. Fall
in the rate of inerestencourage the business men to borrow more for
investment.

Tight M.P seeks to reduce the money supply through contraction of

credit in the economy and raising cost of credit (lending rates of
interest)

High rates of interest reduces investment spending which results in

lowering of the aggregate demand curve.
Tight Monetary policy to control inflation

To check demand pull inflation adoption of Tight monetary policy /

Contractionary monetary policy is called for

Tight policy

 Reduces credit
 Raises the cost of credit
1. Central bank sells governamt securities to the bank , Depository
institution, General public through open market operations.
2. The bank rate may be raised ,  discourages banks from taking a
loan from the central bank
 Raises the cost of credit
 Effects the availability of credit

3. Statutary cash reserve ratio (CRR) is raised

4.Statutory liquidity ratio increased

5. Use of qualitative credit controlraising mininmum margins for

obtaining loans from banks against stocks of sensitive
commodities , Food grains, oil seeds, cotton sugar, vegetable oil,
etc.

How the tight monetary policy works the : Keynesian view

13/11/2017
Policy planning, or long-range planning, is based on the establishment
of vision and principles for future growth.

Inflation , Money and banking

14/11/2017 Inflation

Meaning

Causes of inflation

1. Demand pull inflation

2. Excessive growth in money supply
3. Cost push inflation
4. Structural inflation

Demand push inflation

Basic factor at work is the increase in aggregate demand from the

govt. , the entrepreuners or the house holds.

The pressure of demand cannot be met by the currently available

supply of output.

Keynes explained inflation is cause by inflationary gapcaused

when aggregate demand exceeds aggregate supply.

Reasons for imbalance

At times one of three sectors might try to secure a larger part of out put
than that would accrue to them. The other sectors are not ready to let
go of this increase in share of out put needed by any one sector.

All the sectors would try to get more of the output than production has
provided. This causes the inflation to rise.

Monetarist view of inflation / excessive growth in money supply.

Monetarists explain the emergence of excessive demand and the

resultant rise I prices on account of increase in the money supply in the
economy,.

Friedmann holds than when money supply is increased in the

economy , then there emerges excess supply of real money balances
with the public over the demand for money. This disturbs the
equilibrium. In order to restore the equilibrium, the public will reduce
the money balances , by increasing the expenditure on goods and
services. If there is no proportionate increase in the output, this causes
inflation or rise in the prices.

Cost push inflation

This may happen if there is an independent increase in cost

independent of increase in the aggregate demand
Wage push inflation

When unions push for higher wages which are not justifiable by rise in
productivity or cost of living they produce a cosh push effect. The
employers in a situation of high demand and employment agree to the
conditions . They hope to pass on the rise in costs to the customers.

Profit push inflation

Increase in the profit margin of the firms working under monopolistic

and oligopolistic firms , result in charging higher prices

Rise in raw material prices/ Oil prices

Rise in the raw material prices especially energy units.

Structuralist theory of inflation

One should go deeper to understand why output , especially

foodgrains, has not been increasing sufficiently.

There is a lack of balanced integrated structure wher substitution

possibilities between consumption and production , and inter sectorial
flow of resources are not smooth
They mention various sectorial bottle necks

 Agricultural bottle necks

o Not posiible to raise agricultural produce in response to
demand
o Backward agricultural technology
 Government budget constraints—budget constraints are
overcome by resorting to deficit financing. Results in more money
in the economy
 Foreign exchange bottlenecks

Industrialization demands import of capital goods , raw material and

also food grains results

. in BOP deficit

Inflation and interest rate: Fisher effect.

Nominal interest rate: Bank rateeg 8 percent

Real interest: If inflation rate is 5 percent

Then the real rate of return is 8-5=3 percent

Fisher equation and effect

R=i-pi

i=nominal rate

r=real rate

pi=rate of inflation

Fisher effect:Adjustment of nominal interest rate to changes in the

inflation is called fisher effect

8=3+5(Inflation)

9=3+6(inflation)

Effects of inflation

1. Effect on real income

2. Effect on distribution of income and wealth
3. Effect on output
4. Effect on long run economic growth
15/11/2017 Money and Banking

The concept of money supply and its measurement

The total stock of monetary media of exchange available to a society

for use in connection with the economic activity of the country.

Composed of two elements

1. Currency with the public

2. Demand deposits with the public

Two points worth noting

1. Money supply is a stock concept (National income is a flow concept

represents the value of goods and services produced per unit of time,
usually one year)

2. Represents the amount of money held by the public.

Public includes

 Households
 Firms
 Institutions(other than banks and government)
According to the standard concept of money supply, it is composed of
the following two elements

 Currency with the public

 Demand deposits with the public

Currency with the Public

In order to arrive at the total currency with the public in India add
the following items
 Currency notes issued by the Reserve bank of India
o The number of rupee notes in circulation
o Small coins in circulation

Cash reserves with the banks has to be deducted from the

value of the above three items of currency in order to arrive at
the total currency with the public.

 Demand deposits with the public

The other component of money supply is demand deposits of

the public with the bank. These demand deposits held by the
public are called bank money or deposit money

Deposits with the bank are divided into two:

 Demand deposits and

 Time deposits
Demand deposits can be withdrawn by drawing cheques on them

Four measures of money supply

The main reason why money has been classified into various measures
on the basis of its functions is that effective predictions can be made
about the likely affects on the economy changes in the different
components of money supply

Money supply M1 or narrow money

M1= C+DD+OD

Where C= currency with the public

DD= Demand deposits with the public in commercial and cooperative

banks

OD = other deposits held by the public with Reserve bank of India

Deposits held by the cent. And state govt. and few others such as RBI
employees pension and provident funds are excluded

1. Deposits of institutions such as UTI, IDBI, IFCI, NABARD

2. Demand deposits of Foreign central banks and foreign
Governments
3. Demand deposits of IMF and world bank
Money supply m2
M2 is a broader concept than M1. M2 includes savings deposits with the post office savings
bank( Saving deposits of the post office are not as liquidas demand deposits with commercial
and cooperative banks as they are not chequable accounts. However they are more liquid than
the time deposits with the banks

Money supply M3 or broad money or aggregate monetary resources

M3=M1+ Time deposits with the banks

These are not very liquid. Cannot be withdrawn through drawing a cheque on them . How ever
since loans can be obtained ont hem , they can used if necessary fro transaction purposes.
They can also be withdrawn by forgoing some interest earne don them.

Money supply M4

M4= M3 + Total deposits with post office savings Organisation

Factors determining money supply

Rserve bank of India classifies factors determing money supply in to the following categories

 Government borrowing from the banking system – Budget deficit financed through
monetization of the deficit and selling of government securities.
 Borrowing of the private or commercial sector from the banking system
 Changes in the net foreign assets held by the reserve bank of India caused by changes in
the balance of payments position
 Governments currency liabilities to the public
17/11/2017

The structure of banking varies widely from country to country. Often a country’s banking
structure is a consequence of the regulatory regime to which it is subjected.

The Indian banking system has the RBI at the apex. It is the central bank of the country. Reserve
Bank of India was established in 1935, under the Reserve Bank of India Act, 1934

The Indian banking sector is broadly classified into

 scheduled banks
 non-scheduled banks.

The scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India
Act, 1934. The scheduled banks are further classified into:

 nationalized banks;
(In 1969 the Indian government nationalised 14 major private banks, one of the big bank
was Bank of India. In 1980, 6 more private banks were nationalised. These nationalised
banks are the majority of lenders in the Indian economy. They dominate the banking
sector because of their large size and widespread networks.)
 State Bank of India and its associates;
 Regional Rural Banks (RRBs);
 foreign banks;
 other Indian private sector banks.

Non-Scheduled banks are also called Local Area Banks (LAB). There are only four Local Area
Banks in India, which exist. They are as follows:

Coastal Local Area Bank Ltd: This bank was established on 27th December 1999. Its area of
operation includes three contiguous districts viz. Krishna, Guntur and West Godavari. Its head
office is located at Vijayawada in Andhra Pradesh.

Capital Local Area Bank Ltd: This bank was established on 14th January 2000. Its area of
operation includes three districts viz. Jalandhar, Kapurthala and Hoshiarpur in Punjab. The head
office is at Phagwara (Punjab).
Krishna Bhima Samruddhi Local Area Bank Ltd: This bank was established on 28th February
2001 with an area of operation comprising three contiguous districts of Mahbubnagar in
Andhra Pradesh and Raichur and Gulbarga in the state of Karnataka with its head office at
Mahbubnagar(Andhra Pradesh).

Subhadra Local Area Bank Ltd,Kolhapur : This is smallest Local Area Bank with only 8 branches.
Its head office is in Kolhapur.

Reserve Bank of India

The central bank plays an important role in the monetary and banking structure of nation. It
supervises controls and regulates the activities of the banking sector. It has been assigned to
handle and control the currency and credit of a country.

The Reserve Bank of India, the central bank of our country, was established in 1935 under the
aegis of Reserve Bank of India Act, 1934. It was a private shareholders institution till January
1949, after which it became a state-owned institution under the Reserve Bank of India Act,
1948. It is the oldest central bank among the developing countries. As the apex bank, it has
been guiding, monitoring, regulating and promoting the destiny of the Indian financial system.

Objectives of RBI

It plays a more positive and dynamic role in the development of a country. The financial muscle
of a nation depends upon the soundness of the policies of the central banking. The objectives of
the central banking system are presented below:

1. The central bank should work for the national interest of the country.

2. The central bank must aim for the stabilization of the mixed economy.

3. It aims at the stabilization of the price level at average prices.

4. Stabilization of the exchange rate is also essential.

5. It should aim for the promotion of economic activities.

Functions of RBI

The RBI functions are based on the mixed economy. The RBI should maintain a close and
continuous relationship with the Union Government while implementing the policies. If any
differences arise, the government’s decision will be final. The main functions of the RBI are
presented below:
1. Welfare of the public

2. To maintain the financial stability of the country.

3. To execute the financial transactions safely and effectively.

4. To develop the financial infrastructure of the country.

5. To allocate the funds effectively without any partiality.

6. To regulate the overall credit volume for price stability.

Authorities

The RBI has the full authority in the following aspects:

1.Currency issuing authorityThe RBI has the sole authority to issue the currency notes and
coins.The notes issued by the RBI issues by the RBI will have legal identity everywhere in India.
The RBI issues the notes of the denomination of RS. 1000, 500, 100, 50, 20 and 10. The RBI has
the authority to circulate and withdraw the currency from circulation. It has also the authority
to exchange notes and coins from one denomination to other denominations as per the
requirement of the public.

2.Monitoring authority: The RBI is known as the Banker’s Bank. The banking system in India
works according to the guidelines issued by the RBI. The RBI is the premier banking institute
among the commercial banks. All the commercial banks, foreign banks and cooperative urban
banks in India should obey the rules and regulations which are issued by the RBI from time to
time. The RBI controls the deposits of the commercial banks through the CRR and the SLRs.

3. Banker to the Union Government:It advises the government on monetary policies. The RBI is
the bankers to the Union Government and also to the state governments in the country. It
provides a wide range of banking services to the government. It also transfers the funds,
collects the receipts and makes the payment on behalf of the Government. It also manages
the public debts.

4. Foreign exchange control authority:another major function is to control the foreign exchange
reserves position from time to time. It maintains the stability of the external value of the rupee
through its domestic policies and forex market. The RBI has the full authority to regulate the
market as discussed below:

· To monitor the foreign exchange control.

· To prescribe the exchange rate system.

· To maintain a better relation between rupee and other currencies.

· To interact with the foreign counterparts.

· To manage the foreign exchange reserves.

5. Promoting authority.It helps in mobilizing the savings and diverting them towards the
productive channel. Thus the economic development can be achieved. After the nationalization
of the commercial banks, the RBI has taken a number of series of actions in various sectors such
as agriculture sector, industrial sector, lead bank scheme and cooperative sector.

Commercial Banks
Commercial banks are the oldest institutions, some of them having their genesis in the
nineteenth century.

A commercial bank is a type of financial institution that provides services such as accepting
deposits, making business loans, and offering basic investment products. Commercial bank
can also refer to a bank, or a division of a large bank, which more specifically deals with deposit
and loan services provided to corporations or large/middle-sized business - as opposed to
individual members of the public/small business - retail banking, or merchant banks.

Commercial banks operating in India fall under different sub-categories on the basis of their
ownership and control over management.

Public Sector Banks

Public sector in Indian banking emerged to its present position in three stages. First, the
conversion of the then existing Imperial Bank of India into the State Bank of India in 1955,
followed by the taking over of the seven state associated banks as its subsidiary banks, second
the nationalization of 14 major commercial banks on July 19, 1969 and last, the nationalization
of 6 more commercial banks on April 15, 1980. Thus 27 banks constitute the Public sector in
Indian Commercial Banking.

Allahabad Bank,Andhra Bank,Bank of Baroda,Bank of India,Bank of Maharashtra,Canara Bank

,Central Bank of India,Corporation Bank,Dena Bank,Indian Bank,Indian Overseas Bank,IDBI
Bank,Oriental Bank of Commerce,Punjab & Sindh Bank,Punjab National Bank,State Bank of
India,Syndicate Bank,UCO Bank,Union Bank of India,United Bank of India,Vijaya Bank.

Private Sector Banks

After the nationalization of major banks in the private sector in 1969 and 1980, no new bank
could be set up in India for about two decades, though there was no legal bar to that effect. The
Narasimham Committee on Financial Sector Reforms recommended the establishment of new
banks in India. Reserve Bank of India, thereafter, issued guidelines for the setting up of new
private sector banks in India in January 1993.

These guidelines aim at ensuring that the new banks are financially viable and technologically
up-to-date from the start. They have to function in a professional manner, so as to improve the
image of commercial banking system and to win the confidence of the public.

In January 2001 Reserve Bank of India issued new rules for the licensing of new banks in the
private sector

Private-sector banks,Axis Bank,Bandhan Bank,Catholic Syrian Bank,City Union Bank,DCB Bank

Dhanlaxmi Bank,Federal Bank,HDFC Bank,ICICI Bank,IDFC Bank,IndusInd Bank,Jammu and

Kashmir Bank,Karnataka Bank,Karur Vysya Bank,Kotak Mahindra Bank,Lakshmi Vilas
Bank,Nainital Bank,RBL Bank,South Indian Bank,Tamilnad Mercantile Bank,YES Bank

Foreign Bank

Foreign Commercial Banks are the branches in India of the joint stock banks incorporated
abroad. Their number has increased to forty as on 31st March, 2002. These banks, besides
financing the foreign trade of the country, undertake normal banking business in the country as
well.

Licensing of Foreign Bank: In order to operate in India, the foreign banks have to obtain a
license from the Reserve Bank of India.

For granting this license, the following factors are considered:

1.Financial soundness of the bank.

2.International and home country rating.

3.Economic and political relations between home country and India.

4.The bank should be under consolidated supervision of the home country regulator.

5.The minimum capital requirement is US $ 25 million spread over three branches - $ 10 million
each for the first and second branch and $5 million for the third branch.
6.Both branches and ATMs require licenses and these are given by the RBI in conformity with
WTO’s commitments.

Co-operative Banks

Besides the commercial banks, there exist in India another set of banking institutions called co-
operative credit institutions. These have been in existence in India since long. They undertake
the business of banking both in urban and rural areas on the principle of co-operation. They
have served a useful role in spreading the banking habit throughout the country. Yet, their
financial position is not sound and a majority of co-operative banks has yet to achieve financial
viability on a sustainable basis.

Regional Rural Banks

Regional Rural Banks are relatively new banking institutions which supplement the efforts of
the cooperative and commercial banks in catering to the credit requirements of the rural
sector.

These banks have been set up in India since October 1975, under the Regional Rural Banks Act,
1976. At present there are 196 RRBs functioning in 484 districts. The distinctive feature of a
Regional Rural Bank is that though it is a separate body corporate with perpetual succession
and a common seal. It is very closely linked with the commercial bank which sponsors the
proposal to establish it and is called the sponsor bank.

The central government establishes a RRB, at the request of the sponsor bank and specifies
the local limits within which it shall establish its branches and agencies.

Business of a Regional Rural Bank

1.The granting of loans and advances, particularly to small and marginal farmers and
agricultural laborers, and to cooperative societies for agricultural operations or for other
connected purposes, and

2.The granting of loans and advances, particularly to artisans, small entrepreneurs and persons
of small means engaged in trade, commerce or industry or other productive activities within
the notified areas of a rural bank.

Regional Rural Banks are thus primarily meant to cater to the needs of the poor and small
borrower in the countryside.
List of Regional Rural Banks in India:

Andhra Pradesh, Haryana

Andhra Pragathi Grameena Bank Sarva Haryana Gramin Bank

Andhra Pradesh Grameena Vikas Bank Himachal Pradesh

Chaitanya Godavari Grameena Bank Himachal Pradesh Gramin Bank

Saptagiri Grameena Bank Jharkhand

Assam Jharkhand Gramin Bank

Assam Gramin Vikash Bank Vananchal Gramin Bank

Langpi Dehangi Rural Bank Jammu & Kashmir

Arunachal Pradesh Jammu And Kashmir Grameen Bank

Arunachal Pradesh Rural Bank Ellaquai Dehati Bank

Bihar

Karnataka

Uttar Bihar Gramin Bank Kaveri Grameena Bank

Madhya Bihar Gramin Bank Karnataka Vikas Grameena Bank

Bihar Gramin Bank Pragathi Krishna Gramin Bank

Chhattisgarh Kerala

Chhattisgarh Rajya Gramin Bank Kerala Gramin Bank

Gujarat Madhya Pradesh

Dena Gujarat Gramin Bank Narmada Jhabua Gramin Bank

Baroda Gujarat Gramin Bank Central Madhya Pradesh Gramin Bank

Saurashtra Gramin Bank Madhyanchal Gramin Bank

Maharashtra Baroda Rajasthan Kshetriya Gramin Bank

Maharashtra Gramin Bank Marudhara Rajasthan Gramin Bank

Vidarbha Kokan Gramin Bank Tamil Nadu

Manipur Pandyan Grama Bank

Manipur Rural Bank Pallavan Grama Bank

Meghalaya Telangana

Telangana Grameena Bank

Meghalaya Rural Bank Tripur

Mizoram Tripura Gramin Bank

Uttar Pradesh

Mizoram Rural Bank Sarva UP Gramin Bank

Nagaland Prathama Bank

Allahabad UP Gramin Bank

Nagaland Rural Bank Baroda UP Gramin Bank

Odisha Gramin Bank Of Aryavrat

Odisha Gramya Bank Kashi Gomti Samyukt Gramin Bank

Utkal Grameen Bank Purvanchal Bank

Punjab Uttarakhand

Punjab Gramin Bank

Malwa Gramin Bank Uttarakhand Gramin Bank

Sutlej Gramin Bank West Bengal

Puducherry Bangiya Gramin Vikash Bank

Puduvai Bharathiar Grama Bank Paschim Banga Gramin Bank

Rajasthan Uttarbanga Kshetriya Gramin Bank

Payments Bank
Payments bank is a new model of banks conceptualised by the Reserve Bank of India (RBI).
These banks can accept a restricted deposit, which is currently limited to 1 lakh per customer
and may be increased further. These banks cannot issue loans and credit cards. Both current
account and savings accounts can be operated by such banks. Payments banks can issue
services like ATM cards, debit cards, net-banking and mobile-banking. The banks will be
licensed as payments banks under Section 22 of the Banking Regulation Act, 1949, and will be
registered as public limited company under the Companies Act, 2013

India Post Payments Bank,

Airtel Payments Bank,

Paytm Payments Bank ,

Fino Payments Bank

Cooperative banks examples

State Cooperative Banks (SCBs)

Andaman and Nicobar State Chandigarh State Co- Himachal Pradesh State Co-
Co-operative Bank operative Bank operative Bank

Andhra Pradesh State Co- Chhattisgarh Rajya Sahakari Jammu and Kashmir State
operative Bank Bank Maryadit Co-operativ Bank

Arunachal Pradesh State Co- Delhi State Co-operative Jharkhand State Co-operative
operative Apex Bank Bank Bank

Assam Co-operative Apex Goa State Co-operative Bank Karnataka State Co-operative
Bank Apex Bank Bangalore
Gujarat State Co-operative
Bihar State Co-operative Bank Kerala State Co-operative
Bank Bank
Haryana State Co-operative
Apex Bank
Madhya Pradesh Rajya Odisha State Co-Operative Telangana State Co-
Sahakari Bank Maryadit Bank Operative Apex Bank Limited

Maharashtra State Co- Pondichery State Co- Tripura State Co-operative

operative Bank operative Bank Bank

Manipur State Co-operative Punjab State Co-operative Uttar Pradesh Co-operative

Bank Bank Bank

Meghalaya Co-operative Rajasthan State Co-operative Uttarakhand State Co-

Apex Bank Bank operative Bank

Mizoram Co-operative Apex Sikkim State Co-operative West Bengal State Co-
Bank Bank operative Bank

Nagaland State Co-operative The Tamil Nadu State Apex

Bank Co-operative Bank

Urban Cooperative Banks (UCBs)

List of Scheduled Urban Cooperative Banks in India:

Adhyapaka Urban Co-operative Bank

Apna Sahakari Co-Op Bank Ltd Andhra Pradesh Mahesh Co-Op Urban Bank

Ahmedabad Mercantile Co-Op Bank Indian Mercantile Co-operative Bank

Kalupur Commercial Coop. Bank Abhyudaya Co-operative Bank

Mehsana Urban Co-Op Bank Bassein Catholic Co-operative Bank

Shivalik Mercantile Co-Op Bank Bharat Co-operative Bank (Mumbai)

Nutan Nagarik Sahakari Bank Bharati Sahakari Bank

Rajkot Nagrik Sahakari Bank Bombay Mercantile Co-operative Bank

Sardar Bhiladwala Pardi Peoples Coop Bank Citizencredit Co-operative Bank

Surat Peoples Coop Bank Dombivli Nagari Sahakari Bank Ltd

Rajdhani Nagar Sahkari Bank Goa Urban Co-operative Bank

Gopinath Patil Parsik Janata Sahakari Bank Thane Bharat Sahakari Bank

Greater Bombay Co-operative Bank The Kapole Co-operative Bank

Jalgaon Janata Sahakari Bank TJSB Sahakari Bank

Janakalyan Sahakari Bank Zoroastrian Co-operative Bank

Janalaxmi Co-operative Bank Nagpur Nagrik Sahakari Bank

Janata Sahakari Bank Shikshak Sahakari Bank

Junagadh Commercial Co-operative Bank Akola Janata Commercial Co-operative Bank

Kallappanna Awade Ichalkaranji Janata Akola Urban Co-operative Bank

Sahakari Bank
Khamgaon Urban Co-operative Bank
Kalyan Janata Sahakari Bank
Muneshwra swamy BANK
Karad Urban Co-operative Bank
Eenadu Urban Co operative Bank
Mahanagar Co-operative Bank
Rohit Kataria Co-operative Bank
Mapusa Urban Co-operative Bank of Goa
Dakshin Barasat Service Co-Operative
Nagar Urban Co-operative Bank Society Private Limited; Dakshin Barasat,
Kolkata
Nasik Merchant's Co-operative Bank
Sangli District Primary Teachers Bank Ltd,
New India Co-operative Bank
Sangli
NKGSB Co-operative Bank
Chartered Mercantile M.B. Ltd, Lucknow,
Pravara Sahakari Bank U.P.

Punjab & Maharashtra Co-operative Bank Lic of India staff co operative bank. H.O
Pattom Thiruvananthapuram
Rupee Co-operative Bank
Akhand Anand Co-Op Bank
Sangli Urban Co-operative Bank
Varchha Co-op Bank
Saraswat Co-operative Bank
The Surat District Co-Op Bank Ltd
Shamrao Vithal Co-operative Bank
THE SUTEX CO-OP. BANK LTD.
Solapur Janata Sahakari Bank
The Bardoli Nagarik Sahakari Bank Ltd
21/11/2017

Demand Analysis & Supply:

Indivisual Demand

The demand for a commodity is the consumer’s desire to have it for

which he is willing and able to pay.

Demand for a commodity is the amount of it that a consumer will

purchase it at various given prices during a period of time .

In economics unless demand is backed by the purchasing power or

ability to pay it does not constitute demand .

Demand and utility :

People demand goods because they satisfy the wants of the people .

Utility means the amount of satisfaction which an indivisual derives fro

consuming a commodity.

Consumers demand for consumer goods for their own satisfaction is

called direct demand . Consumers face constrained optimization
problem.
Demand and quantity demanded Demand for a good is determined by
factors such as

 Tastes and desires of the consumer for a commodity

 Income of the consumer
 Prices of realated goods
 Substitute or complements

When there is a change in any of these factors the demand of the

consumer for a good changes .

Market demand : for a good is the sum total of the demand s of all
the indivisual consumers who purchase the commodity at various
prices in the market ina period .

Demand for commodity :- quantity of commodity which the

consumers plan to buy at various prices of a good during a time
period.

Quantity demamded :
 is the amount of good or service which consumers plan o
buy at a particular price.
 It is a flow concept .Quantity demanded is measured as an
amount that the consumers wish to buy per unit of item

Demand function
Decribes the relationship between the quality demanded of it and the
factors that influence it. Indivisual demand for a commodity depends
on

 It’s own price

 Income of the individual
 Prices of related commodities
 tastes and preferences

Individual demand function expressed in general form

Demand curve and the law of demand

Law of demand  functional realation between price and the quantity

demanded

Law of demand: Other things remaining constant, if the price of a

commodity falls , the quantity demanded of it will rise, and if the price
of the commodity rises , the quantity demanded will decline.

 There is an inverse relation between the price and the quantity

demanded, other things remaining same.

If the other things also change then the inverse relation may not hold
good.

Demand schedule of an individual consumer

Reasons for the law of demand: Why does the demand curve slope
downwards?

 Income effect
  Substitution effect

Exceptions to the law of demand

 Goods having prestige value: Veblen goods eg diamonds, Luxury

cars
 Giffen goods:Robert giffen

Market demand function depends on an additional factor , namely the

number of consumers , which in turn depends on the population of the
region , city , or country who consume the product.

Market demand curve is Obtained by making horizontal additions to

the demand curve of individual buyers

Add the various quantities demanded by the number of

consumers in the market

Shift in the demand curve

Demand function specifies the relation between the quantity

demanded of a product and many independent variables. Demand
curve  graphical representation of only a part of the demand
function( between the price of the product and the quantity demanded
of it, price is the only independent variable considered)
Effect of change in the quantity demanded, due to change in the other
variables other than price is shown in the form of a shift in the demand

Drawn the diagram

Band wagon effect and snob effect.

Factors determining demand

 Tastes and preferences of the consumers

 Income of people
 Changes in the prices of related goods
 Advertisement expenditure
 The number of customers inthe market

22/11/2017

Demand forecasting

Managers have to operate in uncertain environment. To reduce this

uncertainty on planning for future production levels, demand
forecasting is essential.
Forecasting demand means prediction of futuredemand.

Forecasting is one of the important functions. Good forecasting

 Reduces the uncertainty of the environment in which business

decisions are made.
 necessary for the proper planning of future production

The demand forecast of a product may be in respect of

 Aggregate demand: Total demand for output in the economy at a

future time.(usually measured by the level of GNP)
 Total demand for the product of an industry
 The demand for the product of an indivisual firm.

Demand fore casting plays an important role in

 Planning for the future level of production

 Launching a new produnct
 Expanding production capacity
 Enteringan industry

There a re two types of demand forecasts

 Short term demand forecasts

o Made for a period of a month, quarter, or whole year- made
fro the established products
  Longterm demand forecasts
o Made for the production of a year or more-made when a
new product is launched

Methods of demand forecasting

 Consumer survey method –eg when introducing a product,

making considerable changes to existing products
a. Complete enumeration- free from bias or value of
judgement of the investigator., but highly expensive and
time consuming
b. Sample survey methodless cumbersome, less expensive , but
sample bias may be present ,Consumers may not be able to
give the correct answer, very expensive
 Expert opinion- Obtain the views of specialisteg within the firm
executives , or sales managers or out side the firm --consultants
and investment analysts
a. Delphi technique- widely used , less expensive
b. Survey of sales force—As complete enumeration is very
expensive and when not possible to conduct complete
enumeration, insight is obtained from those who are closest
to the market.
 Market experiments- problem with consumer survey technique is
that –consumer response and behavior might not match. Results
in wasted resources.
a. Test marketing a particular test area is selected , which
represet the whole area where the product is launched.—it
is based on actual consumer behavior
 b. Controlled experiments—sample of consumers , which are
representatives of a target market is selcted . thse selected
consumers are shown advertisements of the product. And
then questioned as to how much of each product they
would buy.
 Time series analysis – uses past or historical data to predict the
future demand.—no attempt is made to understand the causal
relation ship between various variables.
a. Trends—Long term increase or decrease in the time series of
a variable.
b. Seasonal Variation- analyse the changes in the time series of
the variable due to seasonal fluctuations
c. Cyclical Variations- substantial expansion or contraction in
an economic varable , which are more than a years duration
d. Random fluctuations—remaining changes which do not
follow any pattern are due to random factors, random
fluctuations are not predictable

 Econometric method-- Long term demand forcasts are forecasts

fro more than a year—usually made when a new product is
launched. Sophesticated techniques or statistical methods are
used to make long term forecasts of demand. On the basis of a
econometric theory a mathematical model describing the relation
between economic variables is established . It gives not only the
magnitude but also the direction f change.

It can be single equation or multiple equation model

Supply and law of supply

Supply of a commodity is the entire schedule of the quantity of a

product / goods that the firm is able and willing to offer for sale at
various prices.

Quantity supplied :

Supply is the supply schedule , whereas the quantity supplied is the

quantitiy of commodity the firms produce and offer for sale in the
market per period of time.

Supply is a flow concept—it is the amount of commodity the firms

offer for sale in the market per period of time , a week , month ora
year Supply has little meaning when time is not specified.

Sometimes quantity supplied is greater than quantity demanded

Supply function

Quantity of commodity that the firms offer for sale in the market
depends on several factors
 1. The price of the commodity
2. The prices of inputs
3. The state of technology
4. The number of firms producing and selling the commodity
5. The prices of related goods produced
6. Future expectations regarding prices

Law of supply

Supply of a commodity is functionally related to its price.

According to the law of supply, when the price of a commodity rises,

the quantity supplied of it in the market increases, and when the price
falls the quantity supplied decreases, other factors of the supply
remaining the same.

Supply is directly related to the price

The law of supply explains the relation between the product price and
the quantity of product supplied

The supply schedule and the supply curve reflect the law of supply

Why does the supply curve slope upwards

As per the law of supply the price of the product and the quantity supplied are positively
related to each other,i.e.
  At higher price more amount of output is supplied firms are driven by profit
motiveThe higher price of the product, given the cost per unit of output makes it
profitable to offer more quantity of output for sale.
 Changes in the quantity supplied because of a change in the price of the product also
depends on the availability of a substitute product.
 The production of a product is expanded by using more resources diminishing returns
to variable factorsoccur results in the increase of marginal cost of production.  it is
profitable to produce more only at higher selling prices .
 Therefore in order to increase the quantity of output offered the firm raises its S.P

Shifts in supply , Increase of decrease in supply

The supply schedule depicts the relation between the price and the quantity supplied of the
commodity, other factors remaining constant.

Other factors are

State of technology

Prices of resources

Prices of related commodities

A change in the other factors , other than the price , causes a shift in the supply curve

Increase in the prices of input leads to a higher cost per unit  reduces the quantity suppled at
each price in order to maintain the profit level.

Rise in the prices of other commodities using the same factors. Eg a rise in the prices of pulses
farmers will reduce the area under cultivation of other crops to grow more of pulses.

Agricultural production depends on the rainfall due to monsoon. If in any year, the monsoon is
untimely or inadequate . This results in a drop in the output
The supply of commodities in the market is determined by the seller’s expectation of the future
prices

Taxes and subsiies also play a major role in the supply of the product

Elasticity of supply
Degree of responsiveness of supply to the chnge in the price of a good is called as the elasticity
of supply to its price

Measurement of elasticity of supply at a point on the supply curve.

Change in the quantity supplied / original quantity/Change in the price / original price.

Factors determining the elasticity of supply.

To what extent price of a product will rise following an increase in the demand for it depends
on the price elasticity of the product.

Change in the marginal cost of production: ease with which the output can be changes without
a change in the cost of production.

Response to producers: dependes on the responsiveness of the producers to change in the

prices . If the producers do not respond positively  increase in the price of the product will
not lead to an increase in the quantity manufactures.

Availability of inputs for expanding output: If the inputs required for the production are easily
available at going market prices , then out put can be expanded , without an impact on the
price of the product.

Possibility of substitution of one product for the other : change in the quantity produced of a
product following a change in its price also depends on the substitution of resources of one
product for the others .

The length of time:The longer time the producers get to make adjustments for changing the
level of output in response to a change in the price of the product , greater is the elasticity of
supply.
Length of time can be classified as

1. Market period
2. Short run – variable factors
3. Long run –fixed factors

Factors determining the elasticity of supply

Business Development Strategies is a combination of numerous
individual tasks which has a goal of implementing and developing
growth opportunities either within the organization or between two or
more organizations. It is related to all round development of a
particular business which makes it enriching and fruitful. It is a mixture
of commerce, business and organizational behaviour theories. Business
development deals with the establishment of long term value factor for
an organization from the point of view of markets, customers and their
interrelationships.

In recent times, there is a new job profile of Business Development

Executive whose function has evolved as the business world has
transformed into the global economy. This job profile represents a
pivotal role in increasing the amount of business for a particular
company.

Sales vs Business Development Strategies

Business Development Strategies should not be confused with sales.

The process of sales is based on driving revenue or the generation of
profits. The sole intention of sales is the handover of items, thereby
maintaining a profit margin. In the other hand, business development
identifies and creates new partnership avenues that help indirectly to
drive revenue. The sales function deals only with the output, whereas
the business development process deals with the entire journey.
Business Development Strategies is essentially a marketing function,
though it involves some minor sales skills like negotiation. Typical goals
of business development strategies include market expansion, brand
projection, new client acquisition, general awareness about brand, etc.

The function of sales is to sell products or services directly to the end

user or client. Whereas the function of business development strategies
is working through the channels or partners to make sales happen to
clients.

10 Awesome Business Development Strategies

The business development strategies are everywhere and lots and lots
of ideas are there which can be exploited on a commercial basis. These
fresh ideas can be harvested, launched and thereby marketed properly.
Anyone can get awesome ideas at any point of time. Ideas can be large,
small, big. Ideas are usually driven by a passion for one’s area of
interest. A new idea may be borne from an existing situation or from
the innovative mind of a thinker. The business owner can also observe
two different disciplines and blend them smoothly, which gives birth to
a new field of business innovation.
Recruit right personnel at the right time

A person can be having a great degree of knowledge as well as strong

network who is eager to close deals with clients. But it can be harmful
for a company’s well being. Sometimes marketing team emphasizes
only on lowest prices. They forget to pay attention to engineering and
quality aspects. This casts an ill effect on the company’s reputation. The
effect will depend on the company’s life cycle. There are three life
stages in a company’s life and not every employee is suited for every
stage. The three life stages are-

Scouting– This is the preliminary stage of a company. At this stage,

business development deals with identification of various entry points
to market. Various leverage points are identified and the concerned
internal team is provided with feedback of market analysis. The key
skills involved here is collaborative work with the product and
engineering teams.

Testing-At this stage, the business developer will close a few open deals
in order to test the assumptions made from the market and input
various findings. Analytical skill sets for setting up a measurement
framework is required. The framework will depend on the company’s
mission, strengths and vision.

Scaling– After the data is gathered from each and every deal, a path is
laid down for goal fulfillment. After this, business development is all set
to start closing for deals. An entire support system for future activities
is created.

Look for the right opportunity-

The contacts with whom you are dealing must be cross checked as well.
Dealing with the right person is very important. This practice leads to
unwanted wastage of time. It is very important to identify the potential
clients with whom you can do business. Scanning of the market for
fruitful associations is vital before starting dealing with prospects. If this
step is omitted, you will find that you are already drained out, yet no
positive associations have been made. Focus on those clients who
actually matters to your business rather than digging your head in
unwanted ones.

Stop talking too much

When you are speaking for more than 50 percent of the time, you are
actually talking 10 times excess. Your job is not to blurt out everything,
but understand and probe the client’s perspective, his problems, issues,
type of work done, time taken etc. Be an active listener if you really
want to develop your business. You will always be a favorite vendor in a
competitive economy if you hone your listening skills.

Focus on your client’s requirement

Don’t present what you are offering. Present what the client needs. Do
not talk about your offerings instead listen carefully the client’s
requirements, preferences. If you listen carefully to your clients, you
can modify your own pitch to match the client requirements which in
turn increase client satisfaction rates. Always pay a keen attention to
the clients’ issues so that you customize your offerings as per his needs.
If a client fails to get what he desires, then the chances of doing
business with him is minimized. He will not select you as his business
partner and instead look for other prospective partners.

Be Important
It is a well known idea that important people love to deal with other
important people. Be active within your business associations. To be
part of those organizations that fulfill your business needs and where
you can interact with prospective clients. You can offer volunteer
services to industry experts to gain visibility as well as to capture high
value targets. You can climb the corporate ladder to gather the desired
prestige in your concerned industry. If you succeed in doing so, the
successive orders are bound to flow in your company. Remember,
people like to deal with the creamy layer or the winners in their
respective areas of expertise.

Main motto: Client Satisfaction

There is nothing in the world which is worse than a furious client. Not
only it spoils the relationship of yours with the client, but it is also
harmful to your company’s reputation. Forget about everything else
and fix your client’s problems first. If you take a quick action once your
clients complaints about an issue, you will make an enthralling
impression on your client. You will get applause from your client and
your name will be circulated in your industry members. Remember to
practice empathy when dealing with clients. Place yourself in your
client’s position and feel his problem. By doing so, you will be
effectively nurtured your business.

Provide excellent service

After you successfully influenced your clients and got business from
them, it is time to make them happy with your amazing services. Stick
to the deadlines fixed with your clients. Be a perfect guide throughout
the whole process. If you succeed in making your clients satisfied, they
will be offering you repeat business as well as new business
opportunities. Who knows, you may be rewarded with something
exceptionally good.

Qualitative vs Quantitative approach

Many businesses focus purely on qualitative business value proposition

and gives less importance to the other factors. But this is not a wise
idea. This plan has a high probability of failure and is quite difficult to
achieve. There is also a minimal probability of the market to pay higher
for a premium service. The market is not ready to spend extra bucks
even if they get improved user experiences and better services. As a
result, the quantitative aspect of the business increases the chances of
success. Creating competitive lowest prices will surely attract more
clients. This in turn will maximize your revenue generation.

Stop saying: I don’t have any time

Time management is a crucial skill which every business owner needs

to know. It is all about prioritizing work. Important work needs to be
done first and less important jobs can be done later. You can also have
a great business idea in the silliest of time. Managing your time wisely is
one of the most crucial tasks, especially when you are a business start
up. Balancing time between operational activities and business
development activities is an art which you need to master. This can be
done only when you spent less time on useless stuff and allocate more
time to vital tasks.

Innovation at its best

Innovation is the best way to be at the top of the competition. When

you offer your clients something unique then there is a high probability
that your client will do business with you. Everyone prefers products or
service that are new to the market. So why don’t you go out of the box
and have some awesome ideas? Offer your clients something which no
one is offering. Innovation may involve new methods, ideas, workflows,
process flows which will be beneficial for companies.