Google
 

Friday, January 18, 2008

KLM Captain to assume that the word ‘Okay’ was the complete message

It seems likely that this caused

the KLM Captain to assume that the word ‘Okay’ was the complete message. In any

event the KLM Captain then took off and collided with the Pan-Am Jumbo killing a total

of 573 people. The investigators commissioned by the American Airline Pilots

Association concluded that this was the most likely explanation of events. They also

commented on the ambiguous use of the term ‘take-off’. Their comments on the use of

the telm ‘Okay’ were as follows:

The word (or letters) ‘O.K.’ can be ambiguous also: to the controller it was either a word

of acknowledgement or a delaying term to allow a moment to think. It can also mean a

host of other things, such as a state of well being, a check off of a task accomplished, or

a statement of approval. It could have had the latter meaning for the KLM crew.

Cultural differences can obviously present barriers to effective communication as well.

Some of the cultural barriers-such as language-are obvious but there may be more

hidden obstacles. A recent example given to me which illustrates this point concerned

the communication between the male Asian workers and the female canteen workers in

a London factory.

be reluctant to admit that he cannot understand the language

The person receiving the explanation may also,

understandably, be reluctant to admit that he cannot understand the language that is

used. The skill is in recognising that, even when ordinary English is used, there may. be

problems of comprehension. The initiator of any cQmmunication needs to get positive

confirmation that the ‘language’ he is using is one that can be understood.

In identifying the appropriate’ language’ for communication, attention needs to be given

to the possibility of ambiguity. The more important the consequences of error, the more

attention needs to be devoted to avoiding ambiguity. If stress is needed on this point, it

can be provided by the ambiguous use of words which contributed to the world’s worst

air disaster at Tenerife in the Canary Islands in 1977. The pilot of a KLM Jumbo Jet, who

was ironically. also the head of their Flight Training Department, was preparing to take

off at Tenerife. He explained that he was ready to the air traffic controllers and in

response was told “Okay. Stand by for take-off I will call you”. In the pause after the world

“Okay” there was radio interference because of a radio query by the Captain .of a

Pan-Am Jumbo about the intentions of the KLM Captain

Choice of language

Language difficulties can obviously hamper communication between people who have

different national languages. Regional dialects can also, and predictably, complicate

matters. However, there can be many other and more subtle language problems even

between people who are from the same country’, region and class. Technical language

may be used. in discussion which is beyond the comprehension of some of the

participants. In any organisation there are likely to be abbreviations, words with special

connotations, and ‘in-terms’ whose meaning is

taken for granted by those inside the organisation. A

colleague of mine recently gave an example of two nurses trying to communicate about

sterilisation policies in their respective parts of the Health Service. One was a midwife

and the other a community nurse. It took a quarter of an hour before they realised that

one was talking about sterilisation as a means of. birth control and the other about

sterilisation as a means of protecting babies from infection! Problems of language

invariably get exposed in the rectangles drawing exercise previously explained. The

diagram may be explained by the use of geometric language, points of the compass, the

hands of a clock or the use of symbols such as ‘L shaped’ and ‘an inverted V’. The

language chosen by the instructor is likely to be more convenient to some people than

others and a person’s ability to understand the instructor will in part depend on whether

the instructor chooses a language convenient to him or not

The recurring problem with language in communication is that the person who is trying to

explain something may understandably use the language that is most convenient to

himself without perhaps realising that

there. is a choice of language.

The choice of time and place

The choice of time and place to invite people to talk can be critical, Just as one knows

oneself that there are times when one is prepared to open up, and times when one is

not, so this can obviously be the case with other people. One of the skills of

communication is picking up the cues as to whether a person \s or is not prepaI’ed to

talk about a sensitive matter. Even if the place cannot always be chosen, sometimes the

geography of a room can be arranged to encourage, or for that matter to discourage, a

person from talking. The more status symbols surrounding the authority figure, the less

likely a subordinate is to feel free to talk. One remember one personnel officer who was

over six feet tall always made a point of seeing that he had an able but peppery works

superintendent who was short were both seated if anything of consequence was to be

discussed. The personnel officer had learned from experience that the superintendent

was self-conscious about his lack of height and so he did his best not to emphasise it.

Listening effectively

Listening effectively

Adopting a listening role can be far harder than taking the lead by talking. The problem

with this can be that, the more the authority figure talks, the less the other person may be

inclined to talk. There can be a critical moment when people in the subordinate role

might just start saying what they really feel, if only the authority figure stays quiet long

enough. Once the ‘subordinate’ has started talking, things may come out with a rush and

to the amazement of the authority figure. One have often found that such a critical

moment can occur when one leading classroom discussions.. One useful technique in

any such situation can be to count silently to five before breaking the silence after a

particularly important question has been asked. Time after time one have found that

such a delay has resulted in someone making a contribution that one had not thought

possible. Once a person has started to talk it can be relatively easy to get him to

continue and for any others to join in. The problem is likely to be how to get them started.

The authority figure needs to be aware of letting his ignorance, impatience or even his

own

nelVousness prevent such a process staI1ing. Care has to be taken with the timing of

invitations for people to open up-it is not only the time and the place that can be

important but also the stage in a discussion.

The skills of effective communication

Much of the skill in effective communication lies in recognising the problem areas one

have just identified. Effective communication is achieved as much as anything by

avoiding these traps. Positive approaches are, however, also necessary. One positive

approach is that of coaxing information out of people.

Coaxing information

It may be necessary for managers to work hard at this, particularly if people feel inhibited

about discussing a particular issue. The lament ‘why didn’t someone tell me’ can be as

much a condemnation of a manager’s lack of skill in developing effective channels of

communication as a condemnation of others for keeping him in the dark. It can be very

hard for those in authority roles to realise the difficulty that others may have in

communicating with

them. The authority figure may feel totally relaxed and uninhibited and not appreciate that

perhaps the very factors which create his security create difficulties for others. The

proprietor of a business may feel totally self¬confident and secure and be amazed to

find out, if he ever does, that people who are very dependent on him are reluctant to tell

him anything unpleasant. The same problem can be encountered by parents with their

children. They may forget what it was like to be a child and be blissfully unaware of many

of the thoughts and anxieties that their own children have and see any suggestion to the

contrary as quite preposterous.

As well as having to cope with one’s own subjectivity,

As well as having to cope with one’s own subjectivity, it must also be recognised that

much of the data which is available within organisations is subjective or actually

misleading. Most people working in organisations are likely to be concerned with the

pursuit of truth, but people in organisations, as in life generally, are under a valiety of

pressures to highlight some things and not others. There are also pressures to view

events in a particular way. This means that a manager, as well as being aware of the

pressures on him to see things in a

‘particular way, and to report selectively, needs to evaluate carefully the information that

is being fed to him. One of the themes of the TV comedy series Yes Minister is that

information is fed to the Cabinet Minister by his Permanent Secretary in such a way that

the Minister thinks that he is taking the decisions himself. One strategem is that the

options are put so that the Minister is bound to choose the one preferred by his

Permanent Secretary. It is also necessary to be careful to evaluate the information that

this fed down the line. For example, one

have found. that if one examines carefully the policy decisions that are actually taken by

their own Local Education Authority, they bear little relationship to many of the

interpretations that work their way down the structure to individual College departments..

Selective reporting and misunderstanding are not phenomena confined to upward

reporting. COlToboration of the existence and nature of these problems is given by a

former civil servant, John Carswell, in a Sunday Times article.

In one experiment conducted with Amelican students

The extent to which people can .be misled or even coerced into believing things which

are untrue can be alarming. In one experiment conducted with Amelican students it was found that a

quarter could be coerced into stating that straight lines were of identical length when one

was 25 per cent shorter than the other. This effect was achieved by priming the seven

students in the expelimental group to say that the lines were identical in length. One must

be careful not to overgeneralise about the amount of social coercion possible from the

results of a series of experiments in America with a particular group and at a particular

time. However, if social pressure can have this effect on such obvious matters of fact,

what is the scope for social pressure on matters that are more subjective or where

people’s self-interest is involved?

Selective perception and bias

In considering barriers to communication, it is also necessary to deal specifically with

the problems caused by selective perception and bias. The sheer volume of data thai is

available means that one has to have some basis for deciding what to look for and what

to react to. However, careful judgment is needed in making these decisions.

A totally open mind can simply mean that a person is swamped with data but a closed

mind can mean that a person doesn’t respond to what is uner his nose. Particular

dangers are seeing only what you want to see, ng the ‘facts’ fit what has already been

· decided, and suppressing unpleasant facts. Norman Dixon,. a formr Army psychiatrist,

·

explains a number of Western military disasters in terms of such selective perception on

the- part of the military leaders concerned, in his book On the Psychology of Military

Incompetence. Three of the many examples the documents concern the Japanese

attack on Pearl Harbor, the fall of Singapore and the failure of the Amhem offensive in

Holland. The pattern according to Dixon is clear and recurrent-the warning signs were

there but, because they did not fit into the established thinking, they were ignored until

too late.

Wednesday, January 16, 2008

Write a note on Externalities

Externalities:

Externalities (Spillover effects)- are common virtually every area of economic activity. Externalities occur when firm of people impose costs or benefits outside the market place. External cost are said to be the negative externals cost and benefits together are called Externalities. External cost are said to be the negative externalities and external benefits are said to be positive externalities. External cost is uncompensated cost an individual or the firm imposes on the other, the best example for external cost or negative externalities is the environment cos of the pollution. The external benefits are the benefits the individual of firm gives to others without receiving and compensation in returns, the best example for positive externality or external benefits is the national defense provided to protect the freedom of everyone., even if one wants or not irrespective of whether one is paying for it or not and commodity available from public distribution system. The government should be more concerned about the negative externalities. They are defined as third party effects arising from production and / or consumption of goods and services for which no appropriate compensation is paid. The study of externalities by economists has been more in the recent years after the link between the economy and environment became strong.

Externalities create divergence between private and social cost. Eg. costs of pollution is not included in the cost of production of the factory, which is creating the pollution; but it is included in the social cost as the community has to bear the cost in some way or the other. Thus the social cost in this case is greater than the private cost.

Social cost= private cost +private cost

A chemical factory throwing out a lots of chemical waste in the nearby river killing the fish and making the water unhealthy for use, refineries pullulating the air and paint industry creating bed odour, creating respiratory track infections and other diseases to all the people living in the area around the factories. These negative externalities will increase the social cost as the cost on the clean up and health will increase. External cost due to traffic jams, an individual deciding to go for a drive in the peak hours and increasing the travel time of the other drivers are all negative externalities.

Define Business Cycle. Elucidate characteristics and phases of Business Cycle .

Business cycle:

Business cycle is also called Trade Cycle. The business is never steady. There are always ups and downs in economic activity. This cyclical movement both upwards and downwards iswcommonly called Trade Cycle. This is a wave like movement in regular manner in business cycle. In business, there are flourishing activities, which take economy to prosperity and growth whereas there are periods when there is recession, which leads to decline in the employment, income and output. When the economy goes into downswing then there is a stage of recovery to reach a new boom.

Definition and Characteristics of Business Cycle:

Keynes : Trade Cycle is composed of periods of good trade characterized by rising price and low unemployment percentage altering with periods of bad trade characterized by falling price and high unemployment percentage. To put in simple words:-

Business cycle is a fluctuation of the economy characterized by periods of prosperity followed by periods of depression.

Definition and Characteristics of Business Cycle:

· The fluctuation are wave like movement and are recurrent in nature.

· Business cycle is characterized by waves of expansion and contraction. But these are not only two phased of business cycle. There are four phases of business cycle.

o Expansion

o Recession

o Contraction and

o Revival or Recovery

· The movement from peak to trough and again trough to peak is not symmetrical. According to Keyness, prosperity phases of business cycle comes to end fast but dip is gradual and slow.

· Business Cycle is self generating. Every phase has germs of the next phase, that is, expansion has the germs of the recession in it.

The Business cycle or Economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.

Elaborate on Monetary Policy

Monetary policy is the process by which the government, central bank, or monetary authority manages the supply of money, or trading in foreign exchange markets.[1] Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy has the goal of raising interest rates to combat inflation (or cool an otherwise overheated economy). Monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation.

Types of monetary policy

In practice all types of monetary policy involve modifying the amount of base currency (M0) in circulation. This process of changing the liquidity of base currency through the open sales and purchases of (government-issued) debt and credit instruments is called open market operations.

Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals.

Monetary Policy:

Target Market Variable:

Long Term Objective:

Inflation Targeting

Interest rate on overnight debt

A given rate of change in the CPI

Price Level Targeting

Interest rate on overnight debt

A specific CPI number

Monetary Aggregates

The growth in money supply

A given rate of change in the CPI

Fixed Exchange Rate

The spot price of the currency

The spot price of the currency

Gold Standard

The spot price of gold

Low inflation as measured by the gold price

Mixed Policy

Usually interest rates

Usually unemployment + CPI change

The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively fixed regime towards the currency of other countries on the gold standard and a floating regime towards those that are not. Targeting inflation, the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is tracking the exact same variables (such as a harmonised consumer price index).

Inflation targeting:

Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range.

The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar.

The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee.

Changes to the interest rate target are done in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target.

This monetary policy approach was pioneered in New Zealand. It is currently used in the Eurozone, Australia, Canada, New Zealand, Norway, Poland, Sweden, South Africa, Turkey, and the United Kingdom.

Price level targeting:

Price level targeting is similar to inflation targeting except that CPI growth in one year is offset in subsequent years such that over time the price level on aggregate does not move.

Something akin to price level targeting was tried in the 1930s by Sweden, and seems to have contributed to the relatively good performance of the Swedish economy during the Great Depression. As of 2004, no country operates monetary policy based on a price level target.

Monetary aggregates:

In the 1980s several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman.

This approach is also sometimes called monetarism.

Whilst most monetary policy focuses on a price signal of one form or another this approach is focused on monetary quantities.

This policy is based on maintaining a fixed exchange rate with a foreign currency. There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation.

Under a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-convertibility measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black market exchange rate where the currency trades at its market/unofficial rate.

Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands are set to zero.)

Under a system of fixed exchange rates maintained by a currency board every unit of local currency must be backed by a unit of foreign currency (correcting for the exchange rate). This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency.

Under dollarisation, foreign currency (usually the US dollar, hence the term "dollarisation") is used freely as the medium of exchange either exclusively or in parallel with local currency. This outcome can come about because the local population has lost all faith in the local currency, or it may also be a policy of the government (usually to reign in inflation and import credible monetary policy).

These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align withe monetary policy in the anchor nation to maintain the exchange rate. The degree to which local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility, openness, credit channels and other economic factors.

Managed Float:

Officially, the Indian Rupee (INR) exchange rate is supposed to be 'market determined'. In reality, the Reserve Bank of India (RBI) trades actively on the INR/USD with the purpose of controlling the volatility of the Rupee - US Dollar exchange rate - within a narrow bandwidth. ( i.e pegs it to the US Dollar )

Other rates - like the INR/Pound or the INR/JPY - have volatilities which reflect the volatilities of the US/Pound and the US/JPY respectively.

The pegged exchange rate is accompanied by an elaborate system of capital controls.

- On the current account, there are no currency conversion restrictions hindering buying or selling foreign exchange (though trade barriers do exist).

- On the capital account, "foreign institutional investors" have convertibility to bring money in and out of the country and buy securities (subject to an elaborate maze of quantitative restrictions).

- Local firms are able to take capital out of the country in order to expand globally.

- Local households have quantitative restrictions( which are being relaxed in recent times) in their ability to do global diversification . ( example while local firms can buy real estate - individuals may not). However they are able to purchase items ( mainly consumer items - say a laptop) and services reasonably freely ( there are quantitative restrictions ). Most of these transactions happen through credit cards through the internet.

Owing to an enormous expansion of the current account and the capital account, India is increasingly moving into de facto convertibility. However - it still cannot be considered a fully convertible currency.

The INR is not a highly traded currency - beyond India. It is traded by way of Forwards through inter bank transactions. ( again the US Dollar exchange rate determines the INR / other Crosses exchange rate )

As any currency traded in the international market - the INR does trade at a market determined premium / discount for the forward months.

Gold standard:

The gold standard is a system in which the price of the national currency as measured in units of gold bars and is kept constant by the daily buying and selling of base currency to other countries and nationnals. (i.e. open market operations, cf. above). The selling of gold is very important for economic growth and stability.

The gold standard might be regarded as a special case of the "Fixed Exchange Rate" policy. And the gold price might be regarded as a special type of "Commodity Price Index".

Today this type of monetary policy is not used anywhere in the world, although a form of gold standard was used widely across the world prior to 1971. For details see the Bretton Woods system. Its major advantages were simplicity and transparency.

Mixed policy:

In practice a mixed policy approach is most like "inflation targeting". However some consideration is also given to other goals such as economic growth, unemployment and asset bubbles.

This type of policy was used by the Federal Reserve in 1998.

Write a note on Consumption Function

There are two group of factor that affect consumption function:

1. Subjective of internal factor:

These are related to psychological characteristics of human wants. These factors change more in long run rather than short run. These factors are:

a. Precaution motive:

every individual has a strong feeling to prepare for unseen emergencies like sickness, accident, unemployment etc. so they build up reserves for such emergencies

b. Foresight motive:

Every man has future needs. They need to save for old age, educational needs of children, marriage of daughters etc.

c. Motive for independence:

Most of us have a strong desire to be independent financially. So we tend to save by sacrificing present consumption.

2. Objective or External factors:

a. Distribution of income:

This is an important factor of propensity to consume. The more inequality in income distribution, the lower will be the propensity to consume. Equal distribution of income increases the propensity to consume. Poor people have higher MPC, as their basic or primary needs are not satisfied. So, increase in income tends to increase MPC, whereas rich people have lower MPC.

b. Fiscal Policies:

Fiscal policy is related to tax structure and government expenditure. When the taxes are decreased the disposable income with people will increase and so will the consumption and vice versa.

Consumption means: Consumption means using goods for services for satisfying current wants. We spend major portion of our income on consumption. Consumption expenditure means house hold spending. Which satisfies our immediate wants. Under this section, we will study the relationship between consumption and income. The pattern of consumption expenditure for all families is more or less the same. We can see that families have tendencies to increase consumption with increase in income. This relationship between consumption and income is called consumption function. Consumption is a function of income.

C = f(Y)

C – consumption

F – function

Y - income

Consumption function is expressed as a linear function of income.

Explain the basic concepts of Macro Economics

Basic Concepts of Macro Economics:

Let us introduce ourselves with the basics concepts of Macro Economics, which are important in business management:

1. Stock and Flows:

Stock is always measured at a given point of time and flow is measured over a given period of time. Macro Stock Variables are inventory, capital stock, wealth, debits etc. Macro flow variables are National income and output, consumption, investment etc. Both stock and flow are expressed in money units. Stock may be expressed as just rupee but flows are expressed as rupees per month, rupees per year or in any time unit. The distinction between the stock and flow can be cleared with an example. Total money supply is stock but change in money supply is flow.

2. Capital and Investment:

Capital is always measured at a point of time, which investment is the change in the capital stock over a period of time. Many times investment and capital formation are used synonymously.

3. Ex-Post and Ex-ante:

These are Latin phrases, which means before hand and afterwards. Ex-ante means anything planned and intended. For Eg., Ex-ante saving is an amount that the people intend to save out of their income. Ex-post is realized saving, investment etc. For Eg. Ex-Post saving is the amount that the people actually save in that period.

4. Equilibrium:

Equilibrium is defined in economics as the position of rest or a state of balance or a state where there is no change required in a period of time. Equilibrium is absence of disequilibrium. Economics deals with variables, whose value changes over a period of time.

Interpret the concept of Consumer Surplus

The concept of consumer surplus is based on demand theory by Marshall According to Marshall, consumer surplus is a part of the benefit, which a person derives from his environment of conjuncture. The price, which a person pays for a product is always less than what he is willing to pay for it. The differences between the amount the consumer is willing to pay and what he actually pays leads to satisfaction which is consumer surplus. Let us illustrate this with as example. If a consumer is willing to pay Rs. 5/- for one orange and the actual price is Rs. 3/- , then the consumer surplus is Rs. 2/-.

In this diagram, the DD1 is the curve for a commodity. If OP1 is the price then the quantity demanded is OQ1. the consumer surplus is P1R1D, (Q1R1D- OP1R1Q1 = P1R1D).

Operational significance of Consumer Surplus:

Consumer surplus concept has many uses and significances. We will discuss the application of consumer surplus under the following divisions:

1. Cost benefit Analysis

2. Evaluation loss and benefit due to tax

3. Gains from Subsidies

1. Cost benefit Analysis:

Cost Benefit analysis is done for the public investment projects. This is used to judge the desirability of public investment of any public projects or investment. In this, we don’t analyze the money cost and money benefit; but real cost and real benefit. Here it is concerned with social benefit and social cost. Cost benefit analysis is done for the public projects to analyze the social benefits from the public investment

Enumerate the different Pricing Policies

Pricing Policies:
The discussion of pricing is very important in any business. Price once fixed is never permanent. It needs to be reviewed and revised according to the market conditions.

Different Pricing Policies by firm:
Every firm has its own pricing practice, depending on the nature of its product, demand , utility of its product, taxes etc. Now under this topic, we will discuss some main pricing practices –

1. Cost-Plus pricing:-
After taking into account the cost per unit and profit margin, cost-plus is fixed. In this method, the firm will consider average fixed cost and estimate the average variable cost after that a certain mark up has to be taken in terms of profit percentage. This is called profit margin; this is with regard to Total cost. Here, the fixed costs are land, capital invested in machinery and other fixed costs and variable cost include rent, wages, bills of material etc. the most difficult is deciding on the profit margin. New firm entering in the industry will imitate the existing firm and get information of profit margin from the competitor. But one with new product has to use his judgment according to market conditions and potential demand. The commodities requiring huge investment will fix high profit margins Eg. Television, Air-Conditioners, Cars etc (Sometime have 25% of total cost), whereas commodities with simpler techniques and small investment stick to low profit margins.

This pricing practice has its limitations:
• It ignores demand side of market and has no consideration for fluctuation in demand and needs to change the price.
• It fails to show the force of competition in market.

2. Going – rate pricing:-
This is opposite to the cost-plus pricing; it suggests fixing price according to the existing price of similar product in market. This firm adjusts its own price according to the general price structure. This is safest way; here price leadership fits better. But one should not confuse it with perfect competition because in Perfect Competition, the firms are price takers and they have no choice of determining price; where as, in going rate pricing, the firm can charge higher than its competitors in prosperity and lower than them in depression; which means they can change the price according to the market situations. This kind of practice is followed not only by small firms but also by big firms. It is time saving and convenient.


3. Imitative Pricing:-
It is similar to going rate pricing. The firm imitates the price of leading firm. In oligopolistic situation, the firm which joins later imitates the leader. There is a price leader. And price followers who the price fixed by price leader. This is also a simple and convenient way of pricing.

4. Marginal Cost Pricing:-
It is a common practice, it is based on a pure economic concept of equilibrium of the firm, where marginal cost is equal to marginal revenue. This pricing practice is based on the belief that if Marginal revenue. This pricing practice is based on the belief that if Marginal Revenue covers Marginal cost, the normal profit will always be there. This also has its own limitations. The accounts and calculation of Marginal cost and Marginal revenue should be done accurately. If the data in not available, the firm avoids such type of practice.

Write a note on Profit Maximization Model

In Economics, Profit Maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue -- total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost.

Basic Definitions:

Any costs incurred by a firm may be classed into two groups: fixed cost and variable cost. Fixed costs are incurred by the business at any level of output, including zero output. These may include equipment maintenance, rent, wages, and general upkeep. Variable costs change with the level of output, increasing as more product is generated. Materials consumed during production often have the largest impact on this category. Fixed cost and variable cost, combined, equal total cost.

Revenue is the total amount of money that flows into the firm. This can be from any source, including product sales, government subsidies, venture capital and personal funds.

Marginal cost and revenue, depending on whether the calculus approach is taken or not, are defined as either the change in cost or revenue as each additional unit is produced, or the derivative of cost or revenue with respect to quantity output. It may also be defined as the addition to total cost as output increase by a single unit. For instance, taking the first definition, if it costs a firm 400 USD to produce 5 units and 480 USD to produce 6, the marginal cost of the sixth unit is approximately 80 dollars, although this is more accurately stated as the marginal cost of the 5.5th unit due to linear interpolation. Calculus is capable of providing more accurate answers if regression equations can be provided.
To obtain the profit maximizing output quantity, we start by recognizing that profit is equal to total revenue minus total cost. Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph. Finding the profit-maximizing output is as simple as finding the output at which profit reaches its maximum. That is represented by output Q in the diagram.
There are two graphical ways of determining that Q is optimal. Firstly, we see that the profit curve is at its maximum at this point (A). Secondly, we see that at the point (B) that the tangent on the total cost curve (TC) is parallel to the total revenue curve (TR), the surplus of revenue net of costs (B,C) is the greatest. Because total revenue minus total costs is equal to profit, the line segment C,B is equal in length to the line segment A,Q.
Computing the price at which to sell the product requires knowledge of the firm's demand curve. The price at which quantity demanded equals profit-maximizing output is the optimum price to sell the product

Elaborate on the Law of Economies of scale

Economies of scale exist when larger output is associated with low per unit cost. It has been classified into internal Economies and External Economies. (Here Economies are advantages, which a firm or industry will enjoy when they increase the scale of production)

A. Internal Economies –Economies are internal to a firm, when it expands in its size. It is open only for the firm, independent to the action of other firms.

B. External Economies –They are external to the firms, which are available when output of whole industry expands. It is shared by number of firms or industry, when the scale of production increases in any industry.

A. Internal Economies of Scale:

Under internal Economies of scale, there are two categories:

· Real

· Pecuniary

Real Internal Economies of Scale: Real Internal Economies of Scale which arises from the expansion of the firm are:

1. Technical Economies:

In order to produce a commodity in large scale, the firms will install up-to-date machinery. A large firm can utilize the waste material as a by-product by installing a plant for this purpose. Eg. Molasses left over while manufacturing sugar, can be used to produce spirit. They can have the advantage of linked processes. Eg. Sugar producing firms can have their own farms, with their own transport bringing the sugarcane to the factory and their own distribution system to send it to the market. Thus, they enjoy the economies of linked processes.

2. Marketing Economies:

A firm enjoys the advantage of buying and selling, as the requirement is in bulk because they are able to get favorable terms, in form of better quality input, transport concessions etc. these economies are due to large scale of production, as they have strong bargaining power.

3. Managerial Economies: A large firm can afford specialist to be managers and supervisors for all the departments like, sales manager for sales department, production manager dealing with the production department and so on. This brings more efficiency and leads to functional efficiency.

4 Risk Managerial Economies: Large firms are in a better position to spread risk. They can diversify their products and counter balance the loss in one product by gains from the other product. They can even diversify their market by selling their product in many markets and counter the loss in market by gains in the other market.

5 Economies of Welfare: Many firms provide welfare facilities to their workers. They provide better working conditions in and out of factory by providing canteen, crèche for the infants of women workers, recreational club, health and medical facilities to the families of the workers..

B External Economies of scale:

In External Economies of scale, again we have two categories:

· Real

· Pecuniary

Real External Economies of Scale: It represents how a firm is benefited in an industry through technological interdependence of firms. The external economies are:

1. Technical Economies:

When any industry expands, firms in that industry start with different types of processes and the whole industry is benefited. Eg. In textile industry, some firms start specializing in manufacturing thread, some in printing, some in dying, others in shirting, etc.

2. Economies of Information:

An Industry is in a better position to set up research laboratories as they are able to gather large resources. The work of the research may be some now invention and the information about it will be given to all the firms through the journals. The industry can have their own information centre, which gives information regarding the export potentials, modern technology and information. This can be useful for the firms by publishing in the journals. This in turn helps the efficiency and productivity of the whole industry.

1. Economies of By-Product:

Many industries turn out large waste materials, which can be used as input in process of manufacturing, like iron-scarps in steel industry, molasses in the sugar industry, etc. New firms can enter the industry and use these waste materials to produce by-products. They can purchase the raw material at reasonable rates. It gives them the advantage of waste management, the expenses of disposing off waste and they can earn certain amount by selling their waster material.

Write a note on Market Equilibrium

The word “Equilibrium” is derived from a Latin word, which means equal balance. Equilibrium is the position from which there is no tendency to move. We say ‘Tendency’ to emphasize the fact that it is not necessarily a state of sudden inertia, but may instead represent the cancellation of power forces.

Equilibrium Price is the price at which the quantity demanded of a good or service is equal to the quantity supplied

In economics, Economic Equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. Market equilibrium, for example, refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the equilibrium price or market clearing price and will tend not to change unless demand or supply change.

Explain different types of Elasticity of Demand

Different types of Elasticity of Demand:-

After knowing what is demand and what is law of demand, we can now come to elasticity of demand. Law of demand will tell you the direction i.e. it tells you which way the demand goes when the price changes. But the elasticity of demand tells you how much the demand will change with the change in price to demand to the change in any factor.

Different types of Elasticity of Demand:

1. Price Elasticity of Demand

2. Income Elasticity of Demand

3. Cross Elasticity of Demand

4. Advertisement Elasticity of Demand

1. Price Elasticity of Demand:

We will discuss how sensitive the change in demand is to the change in price. The measurement of this sensitivity in terms of percentage is called price Elasticity of Demand. According to Marshall, Price Elasticity of Demand is the degree of responsiveness of demand to the change in price of that commodity.

Types of Price Elasticity of Demands:

a) Perfectly Elastic

b) Perfectly Inelastic

c) Relatively Elastic

d) Relatively Inelastic

e) Unit Elasticity

Factors influencing Price Elasticity of Demand:

a) Nature of Commodity

b) Availability of Substitutes

c) Number of Uses

d) Durability of commodity

e) Consumer’s income

Practical significance of Price Elasticity of Demand:

a) Importance to the business

b) Important to Government

2. Income elasticity of demand:

In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.

3. Cross elasticity of demand:

In economics, the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good.

It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.

The formula used to calculate the coefficient cross elasticity

4. Advertisement Elasticity of Demand:

The degree of responsiveness of quantity demanded to the change in the advertisement expense of expenditure.

Ea= Change in quantity demanded x original advertisement expenses

Chang in advertisement expenses original quantity demanded

Important factors influencing Advertisement:

1. Promotional elasticity of demand will be affected, depending on whether it is a new product or the product with a growing market.

2. The amount a competitor reacts to the firm’s advertisement.

3. The time interval between the advertisement expensed or expenditure and the unresponsiveness of the sales.

4. The influence of non-advertisement determinants of demands such as trends, price, income etc.

Uses of Advertisement Elasticity of Demands:

1. It helps the manager to decide the advertisement expense. If the advertisement is more than one, which means incremental revenue exceeds incremental expenses, then increased expenditure on advertisement can be justified.

2. The fire should observe the saturation point, where advertisement pays nothing or does not help in increasing sales revenue.