Managerial economics

WELCOME TOTHETOPPERSWAY.COMManagerial economicsUnit-52National incomeThe total income of the nation is called National Income. In real terms, national income is the flow of goods and services produced in the economy in a particular period- a year.Concept of national incomeGross National Product (GNP)- GNP has been defined as the total market value of all final goods and services produced within or outside the territorial limits of a country in a year.

Factors to be taken into consideration while studying GNP

As GNP is a measure of money, so all kinds of goods and services produced in a country during one year are measured in terms of money at current prices and then added together.

In estimating GNP of the economy, the market price of only final products should be taken into account.(iii) Goods and Services rendered free of charge are not included in the GNP, because it is not possible to have a correct estimate of their market prices.

(iv) The transactions which do not arise from the produce of current year or which do not contribute in any way to production are not included in the GNP.

(v) The income earned through illegal activities is not included in the GNP. GNP = GDP + NFIA

Net National Product (NNP)-NNP refers to the totalmarket valueof all finalgoodsandservicesproduced by residents in a country during a given time period minusdepreciation. NNP = GNP Depreciation or NDP + NFIAGross Domestic Product (GDP)- Gross domestic product(GDP) is themarket valueof all officially recognized final goods and services produced in the domestic territory of a country in a given period of time.

Domestic territory includes- Terittory lying within the political frontiers, including territorial waters of the country, Ships and aircrafts operated by the residents of the country between two or more countries, Fishing vessels, oil and natural gas rigs, operated by the residents of the country, Embassies, consulates and military establishments of the country located abroad.

NDP-While calculating GDP no provision is made for depreciation allowance.when depriciation is substracted from GDP ,we get NDP. NDP = GDP- DepriciationPer Capita Income- It denotes the income received by an individual during a certain year in a country.

Per Capita Income = National income of India in 2011 Population of India in 2011

Personal Income- It refers to an individual's total earnings from wages, investment enterprises, and other ventures. It is the sum of all the incomes actually received by all the individuals or household during a given period.

Disposable Income- It is the actual income which can be spend on consumption.

Disposable Income = Personal Income Direct Taxes

But it should be remembered while calculating this income that the whole of the disposable income is not spend on consumption and a part of it is saved.

Disposable Income = Consumption Expenditure + SavingsMethods of measurement of national incomeThe Census of Products Method or Output Method- This method measures the output of the country. It is also called Inventory Method and involves the assessment through census, of the gross value of production of goods and services produced in different economic sectors by all the productive enterprises in the economy.

Y= (P-D) + (S-T) + (X-M) + (R-P)

Where,

Y = Total income of the nation P = Domestic output of all production sectors D = Depreciation allowance S = Subsidies T = Indirect Taxes X = Exports M = Imports R = Receipts from Abroad P = Payments made abroad.Precautions-Final Product should be used in order to avoid double counting.Goods for self-consumption by the producer should be excluded, they have not marketed, so it is difficult to ascertain their true market value.When, we are calculating the output, changes in the price level between the years must be taken into account.Indirect taxes, included in prices, are to be deducted for getting the exact market value of the products. Similarly, subsidies given by the govt. to certain products should be added in evaluating the product.Add the value of exports, and deduct the value of imports.

This method is widely used in under-developed countries, but it is less reliable because the margin of error in this method is large. Census of Incomes Method- This method is also called the factor cost Method. According to this method, the net income payments received by all the citizens of a country in a particular year are added up. The data pertaining to income are obtained from various sources.

Census of Expenditure Outlay Method- According to this method the total expenditure incurred by the society in a particular year are added up. This includes- (i) Personal Consumption Expenditure of Households, (ii) Gross private domestic investment i.e. buss. Spending on capital goods, (iii) Net foreign investments, (iv) Govt. purchases of goods and services. This concept is based on the assumption that national income equals national expenditure.Value added method and Final goods approach- Here, it has been assumed that the difference between the value of material outputs and inputs is the value added. If all such differences are added up for all industries in the economy, we arrive at the GDP.

Social Accounting Method- In the social accounts, the transactions among various sectors such as firms, households, govt. etc. are recorded . From the total value of these transactions recorded, the national value is known.Difficulties in the measurement of national incomePrevalence of Non-monetised transactionsIlleteracyOccupational Specialization is still incomplete and lackingLack of availability of adequate statistical dataValue of Inventory changesCalculation of depreciationDifficulty in avoiding double counting system

BUSINESS CYCLEThe term business cycle refers to the fluctuations in economic activity that occurs in a more or less regular time sequence in all capitalist societies. The volume of economic activity in a community is shown by various indicators viz., the volume of employment, price level, output and income. When these indicators are plotted on a chart, the graph looks like a wave. This shows that economic activity rises and falls in a regular manner. Each movement the rise and fall taken together, is called a Trade cycle or a Business cycle. 15charactersticsRecurring Fluctuations- Fluctuations occurs periodically in a free rhythm. This implies that the recurrence of expansion and contraction has no fixed period.

Period of Business Cycle- A typical Buss. Cycle completes itself in a period of 3 to 4 years. In some cases, it can be shorter or longer but is not shorter that 1 year.

Presence of the alternating forces of expansion and contraction- A buss. Cycle is characterized by alternating an economy to prosperity and depression. These forces are in-built in the system.Phenomenon of the crisis- According to Keynes, an important characteristic of the buss. Cycle is the phenomenon of crisis. This implies that the peak and the trough are asymmetrical. Normally the prosperity phase comes to an end abruptly, whereas recovery after depression is gradual and slow.

Phases of buss. cycleProsperity or Expansion- This stage is characterized by increase production, high capital investment in basic industries, and expansion of bank credit, high prices, high profits and full employment.

Recession- It is characterized by liquidation in stock market, strains in the banking system and some liquidation of bank loans, fall in prices, sharp reduction in demand. inflationInflation is normally associated with high prices, which causes decline in the purchasing power or the value of money. Inflation refers to the rapid increase in the general price level. It is a monetary phenomenon. Prices keeps on rising due to excess supply of money and lower production of goods.Stages of inflationPre-Full Employment stage- Inflation before full employment is beneficial to the economic development of a country. Rate of increase is not more that 3% p.a. the supply of money causes inc. in national income, consequently more employment is available.

Full employment stage- upto this stage all resources of production are fully employed. Production is optimum at this stage. Production is unable to expand because all the unused factors are fully employed. There does not exist any chance of further employment. The rate of increase in prices is not more than 10% per annum.Post-full employment stage- Prices rise without rise in production and employment. Inflation after full employment is not due to monetary phenomenon but due to full employment. The rate of increase in price level is more than 10%. It is called true inflation. Theories of inflationMarket Power Theory- When one seller or a group of sellers in the market combine to establish a price different from a competitive level, we call it market-power price. This group or groups can raise prices to any level they think profitable to themselves.

Conventional-pull demand theory- According to conventional demand pull theorists, excess in aggregate demand over aggregate supply is the only cause of inflation.

Structural Theory- According to this group, market power can be only one force, but not the exclusive force of inflation.Several explanations of inflation are put forward by these economists such as:

Mark-up Theory- Prof. Gardner Ackley says that inflation is caused both by demand-pull and cost-pull factors. The demand pull inflation is caused by excessive demand for goods, so it is natural to go their prices up. But the increase in prices stimulates production and causes excess demand for factors of production and, as a result cost rises and price also rises.

Bottle-neck inflation- Prof. Otto Eckstein, found that prices of manufacturers rose generally but one or two particular industries had a very sharp increase in price. He calls these bottle-neck industries and it was his opinion that general price rises due to such industries. Out of these steel was a chief bottle-neck industry. (iii) Demand- composition inflation- Acc. To Prof. Charles L. schultez, neither demand pull nor cost push theories can offer an adequate explanation of inflation. He points out that if demand decreases prices and wages do not go down quickly, but if demand increases the increase in prices and wages is almost simultaneous.

Measures to check inflationMonetary Measures- These aims at reducing money incomes.Credit ControlDemonetization of currencyIssue of new currency

Fiscal Measures- Fiscal measures are highly effective for controlling Govt. expenditure, personal consumption expenditure and private and public investment.Reduction in unnecessary expenditureIncrease in SavingsIncrease in taxesPublic debtOther Measures- The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly.To increase production.Rational wage policy.Price controlRationingConcept of profitProfit is the difference between the total sale-proceeds obtained by a businessman and his total expenses of production.

In other words, we can say that profit is the surplus of income over expenses of production.

Profit = Gross Profit (Rent + Wages + Interest)Important definitionsProfit is earning of management- Prof. MarshallProfit is rent of ability- WalkerProfit is reward of uninsured risks- CroomeProfit is a surplus over and above the expenses of production- ElyCharacterstics of profitProfit is a residual rewardIt is not a pre-determined paymentIt is the end result of businessProfit is a dynamic conceptIt is not determined through a formal factors of marketProfit is not fixed income, it is uncertain and fluctuating

Accounting Profit- It is the revenue obtained during the period minus the cost and expenses incurred to produce the goods responsible for getting the revenue. Accounting Profit = Total revenue The cost involved in producing and selling

Economic Profit- It refers to those items that take into consideration both explicit costs and implicit costs.

Economic profit is more imp. That accounting profit as it reflects the true profitability position of the business enterprise.Theories of profitWalkers Theory of Profit.Clarks Dynamic theory of Profit.Hawleys Risk theory of Profit.Knights theory of Profit. Schumpeters theory of Profit. Monopoly power as source of Profit.Walkers Theory of Profit: Profit as a rent of ability- According to F.A. Walker, profit is the rent of exceptional abilities that an entrepreneur may possess over others. Just as land rent is the difference between the yields of the least and most fertile lands, profit is the difference between the earnings of the least and most efficient entrepreneurs.

Clarks Dynamic theory of Profit- According to J.B. Clark , profits arise in a dynamic economy, not in a static one. A static economy is one in which things do not change significantly; population and capital are stationary; production process remains unchanged over time; goods continue to remain homogeneous; there is no uncertainty and hence no risk; and if there is any risk, it is insurable.A dynamic economy is- characterized by following generic changes: (i) increase in population, (ii) increase in capital, (iii) improvement in production technique, (iv) changes in firms of business organization, and (v) increase and multiplication of consumer wants.

The major functions of entrepreneurs or managers in a dynamic world are to take advantage of the generic changes and promote their business, expand their sales and reduce their costs.

Hawleys Risk theory of Profit- According to F.B. Hawley, Risk in business may arise for such a reasons as obsolescence of a product, sudden fall in prices, non-availability of certain crucial materials, introduction of a better substitute by a competitor, and risk due to fire, war etc. Profit is the price paid by society for assuming business risks.

Knights theory of Profit- Frank H. Knight treated profit as a residual return to uncertainty bearing, not to risk bearing.Risk is divided into calculable and non-calculable risk.

Schumpeters Innovation theory of Profit- According to Joseph A. Schumpeter, the total receipts from the business are exactly equal to the total outlay and there is no profit.Profit in excess can be made only by introducing innovations in manufacturing technique and method of supplying the goods.

Innovations may include:Introduction of a new commodity or a new quality of goods.The introduction of a new method of production.

(iii) The emergence of opening of a new market.(iv) Finding new sources of raw material(v) Organizing the industry in an innovative manner with new techniques.

Monopoly power as source of Profit- Monopoly may arise due to such factors as:Sole ownership of certain crucial raw materialLegal sanction and protectionMergers and takeovers.

A monopolist can earn profit by using its monopoly powers. Monopoly power includes:Powers to control supply and price.Powers to prevent the entry of competitors by price cutting.THANK YOUFOR VISITINGTHETOPPERSWAY.COM