ADAM SMITH’S WEALTH DEFINITION

Wealth Definition by Adam Smith: “economics is an enquiry into the nature and causes of wealth nations". According to Adam Smith “the purpose of study economics is to increase the wealth of the Nation, its study includes the consumption, production , exchange and distribution of wealth."

A definition proposed by Adam smith is “the science related to law of production, distribution and exchange"Adam Smith defined Economics as science of wealth. Economists define wealth as oneThat has “Value in use” and “Value in exchange”

AUTHOR: T .R .Jain and O.P.Khanna,

Rians Tennenuhaw Eisler

NAME OF THE BOOK: Business economics , An Enquiry into the nature and causes of wealth of Nation in 1776, The Real wealth of Nation.

SPECIFIED PAGE: page 3, page 242.

PUBLICATION: FK publication, Berrett -koehler,2007.

WELFARE

ALFRED MARSHALL was one of the greatest economist and

mathematicians of the 20th century. His famous book,”Principles of Economics” was published in 1890.

Marshall in his book defined economics as a “Study of mankind in the ordinary business of life, it examines that part of individual and social action which is most closely connect with the attainment and the use of material requisites of well being”.

Adapted from:-

NAME OF THE BOOK AUTHOR’S NAME PUBLICATIONS YEAR PAGE NO.

PRINCIPLES OF ECONOMICS T.R JAIN

Vimla Kumari Jain (V.K Publications,

New Delhi)2006 5

PRINCIPLES OF BUSINESS DECISION

K.G.C NAIR, HARIHARAN,

GEORGE, YOHANAN

CHAND BOOKS, TRIVENDRUM 1.2

ROBBIN’S SCARCITY DEFINITIONProf Lionel Robbins in his book ‘’ THE NATURE AND SIGNIFICANTS OF ECONOMIC SCIENCE” (1932) gave a new definition to Economics. This is known as the scarcity definition. Robbins defines economics in

the following lines. ” Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses “.Following this definition, human beings have unlimited wants. But the means to satisfy these wants are limited. These limited means have alternate uses. Thus a fundamental problem arises-the problem of choice or the problem of choosing between less urgent and more urgent wants. The main shortcoming of the definition is that it makes economics only a theoretical science, ignoring the realistic side of the science relating to human welfare .

BOOK PRINCIPLES OF BUSINESS DECISIONS

AUTHORS Dr KGC NAIR

Dr GEORGE

Dr HARIKUMAR

Dr YOHANNAN

PUBLISHERS CHAND BOOKS

PAGE NO 1.3

NO OF PAGES 10.10

VALUE Value = Price * Quantity. Value is the sense is a bit like price, but somehow more important, more permanent and better. This usage is enshrined in the definition of cynic as one who knows the price of everything and the value of nothing. Advertisers claim that their goods represent value of money; politicians claim the same for their policies.

BOOK OXFORD DICTIONARY FOR ECONOMICS, LONDON

AUTHOR JOHN BLACK

PAGE NO 492

PAGES 512

PRICEThe amount of money paid per unit for a good or service .This is easy to observe for many goods and services. In any ordinary shop customers will find displayed a price at which as many or few units as they wish can be purchased. For some goods and services, however price is less easy to observe. Special terms may be available for large orders for repeat order or for particular types of customer. In some markets buyers and sellers haggle over the price of each item. The price of similar goods varies over time and place and goods with the same name vary in quality. A price mechanism refers to the role of price in organizing the production and distribution of goods and services in an economy

BOOK OXFORD DICTIONARY FOR ECONOMICS, LONDON

AUTHOR JOHN BLACK

PAGE NO 362

PAGES 512

UTILITY The capacity of goods and services to satisfy human needs. Utility cannot be measured in any definite quantitative form. It is sufficient to be able to say, however that the utility of the commodity A >B >C and so on

BOOKS DICTIONARY OF ECONOMICS

AUTHOR M C MADIAN

PUBLISHERS HIMALAYAN PUBLISHING HOUSE

PAGE NO 318

TOTAL PAGES 332

Classification of goodsEconomic assets taking a tangible physical form are called to be goods.

Or

Goods are the commodities which are scarce, useful, transferable, material, visible, and capable of being stored.

There are thousands of varieties of manufactured goods and all goods cannot carry the same rate or amount of duty. It is also not possible to identify all products individually. It is, therefore, necessary to identify the numerous products through groups and then to decide a rate of duty on each group. This is called ‘Classification’ of a good, which means determination of heading or sub-heading under which the particular product will be covered.

Some classified goods are as follows-

1] CAPITAL GOODS

Goods intended for use in production, rather than by consumer. Some goods, such as power station and oil drilling equipment , can clearly only be capital goods. Many goods are infact capable of being used either for production or consumption. Cars for example, may be used in private homes or for business purposes in hotels and restaurants.

OR

Capital goods are generally man-made, and do not include natural resources such as land or minerals, or human capital — the intellectual and physical skills and labor provided by human workers. In most cases, these goods require a substantial investment on behalf of the company making a product ; the purchase of these goods are usually considered a capital expense. Capital goods are important to businesses, because they use these items to make functional goods for the buying public or to provide consumers with a valuable service. As a result, capital goods are sometimes referred to as "producers' goods" or "means of production."

WWW.WISEGEEK.COM

2] CONSUMER GOODS

Goods designed for use by final consumers. These are mostly bought by consumers, but some, such as business cars are bought by enterprises, and many are exported.

OR

Consumer goods are alternately called final goods, and the second term makes more sense in understanding the concept. Essentially, consumer goods are things purchased by average customers, and will be consumed or used right away. This is in contrast to other types of goods called intermediate goods. The clothing made from the fabric would be consumer goods, since it has reached its final destination: the consumer.

WWW.WISEGEEK.COM

3] FINAL GOODS

Goods for use by final uses, including consumers investors, the government, and exporters, as distinct from intermediate products .it is not at all easy to distinguish

final goods in practice; fuel for example, may be bought by consumers or businesses.

4] FREE GOODS

A good which is not scarce, so that its availability is not an effective constraint or economic activity .a good is not a free good merely because its market price is zero, it may be infact scarce, but be underpriced by the market because of lack of enforceable property rights over it.

5] FUTURE GOODS

A good to be delivered at a future date .A future contract is an agreement to buy or sell on future date at a price fixed when the agreement is made.

6] GIFFEN GOODS

A good for which quantity demanded falls when its price falls ,this can be in theory occur .a giffen good must be inferior and also have poor substitutes .a fall in the price of a good increases real purchasing power ;if the good is inferior the income effect of this rise in real income is negative .giffen goods in practice unlikely to be found ,since narrowly defined classes of goods may be inferior but are unlikely to have poor substitutes ,while widely defined classes of goods ,may have poor substitutes but are unlikely to be inferior.

0R

A Giffen Good is a good that experiences increased demand for when the price rises and decreased demand for when the price falls.

[www.askabout.com]

7] HOMOGENEOUS GOODS

A good which has uniform properties ,any unit being interchangeable with any other goods.

OR

Two goods are called homogeneous for a consumer if the consumer would always be willing to give up one unit of one good for one more unit of the other good, and keep his utility fixed.

www.econlinks.com

8] INFERIOR GOODS

A commodity for which demand declines as income rises and increases when real income falls ,that is a commodity whose demand curve rises.

[ dictionary of economics ,author-m.c. maidan ,year of publication-1997,pages of book-330,publisher-himalaya publishing house]

OR

Goods for which demand tends to fall when income rises are called inferior goods .For example ,when people have higher incomes ,people can afford to fly .people who can afford to fly are less likely to take the bus long distances .thus higher income may reduce the number of times someone takes a bus.

[Principle of economics, author- karl e. case,ray c. fair, pages of book-784,page no.-54,publisher-pearson]

9] INTERMEDIATE GOODS

A good which is not itself a final good ,but is used as an input for production .intermediate good include fuel and lubricants ,natural and man-made materials and components .a large proportion of gross output in a modern industrial economy consists of intermediate goods. For instance, fabric produced from cotton might be an intermediate good.

10] MERIT GOODS

Goods or services whose consumption is believed to confer benefits on society as whole greater than those reflected in consumers own preferences for them .merit goods are sometimes subsidized by the government ,and sometimes provided by charities.

11] NORMAL GOODS

A good whose consumption increases with income .thus any good is normal which is not inferior , this applies to most goods.

OR

Goods for which demand goes up when income is higher and for which demand goes down when income is lower are called normal goods .movie-tickets ,restaurant-meals ,telephone calls ,and shirts are called normal goods.

[Principle of economics,author-karl e. case,ray c. fair,pages of book-784,page no.-54,publisher-pearson]

12] PRODUCER GOODS

Goods made for the purpose of producing consumer goods and other capital goods ,e.g. machinery of all kinds .it is synonomous with capital goods.

13] PUBLIC GOODS

A good or services provided for the community by the government or local authority ,e.g .education, public health services ,libraries ,theatres ,museums etc.

These are some variety of goods that are covered under its classification.

[source:-oxford dictionary of economics,author-john blade,sixth impression-2006,pages-512]

FIRMS

Firms: A firm is a unit that produces a good or service for sale. The firm’s business can be conducted at more than one location. The objectives of a firm include profit maximization, avoidance of risk and long run growth. Firms can be broadly classified under three categories based on ownership: Proprietorship (Owned by a single person.); Partnership (Owned by two or more people.) and Corporations (Fictitious legal person.)

Proprietorship: A business owned by one person. This type of firm may be a one person operation or a large enterprise with many employees. In either case, the owner receives all the profits and is responsible for all the debts incurred by the business.

Partnership: A business owned by two or more partners who share both profits of the business and responsibility for the firm’s losses according to agreement made between them. The partners can be individuals, estates, or other business.

Corporations: A business whose identity in the eyes of law is distinct from the identity of its owners. State law allows the formation of corporations. A corporation is an economic entity that like a person, can own property and borrow money in its own name. The owners of a corporation are its shareholders. If a corporation cannot pay its debts, creditors cannot seek payment from shareholder’s personal wealth. The corporation itself is responsible for its actions. The shareholder’s liability is limited to the value of the stock they own.

However, many firms are global in their operations (owns and operates producing units) even though they may have been founded and may be owned by residents of a single country. These kinds of firms are called multinational firms. Examples: Ford, IBM, Pepsi Co. etc.

Reference: Author: John Black; Year Of Publication: 2006; Name Of The Book: Oxford Dictionary Of Economics (Indian Edition); Publisher: Oxford, Delhi; Total Pages: 507; Page No: 176.

Author: Edwin Mansfield; Year Of Publication: 1988; Name Of The Book: Micro-Economics Theory And Applications Shorter Sixth Edition; Publisher: W.W.Norton And Company; New York And London; Total Pages: 453; Page No: 141.

Author: William Boyes And Michael Melvin; Year Of Publication: 2008; Name Of The Book: Textbook Of Economics Sixth Edition Indian Adaptation; Publisher: Biztantra, New Delhi; Total Pages: 885; Page No: 80, 81.

OPPORTUNITY COST PRINCIPLE

Opportunity cost is the cost related to next best choice available to someone who has picked between several mutually exclusive choices.it is a key concept in economics.

The opportunity cost of a good or performing an action,also known as the greatest cost is the lost value of alternate option that could have been choosen,rather than the one that was chosen.If A gives twice as much as pleasure as B,and there is no C that gives more pleasure than B and is comparable(such as uses,time,effort or some other resource),than A’s opportunity cost is the benefit of B because that is the difference in resulting happiness.in this particular scenario,the opportunity cost of A is not a good indicator of its value because it says that A is worth only as much as B,which is not the case.

Normally,there would be many uses for the resources of A/B so that there would not be such a notable difference and so A and B would be similar in benefits,B and C would be similar in benefits etc.In such a case where difference is minor,the opportunity cost of A is similar to B,and that would reflect their similar benefits.

Often times,the opportunity cost is seen as what one would have to give up for something else.

Opportunity cost of A (in terms of B) = ,

Where,

ΔA is the gain of marginal utility because of a gain of A = 1 ΔB is the loss of marginal utility because of a loss of B

Opportunity costs can also be thought of as the resources lost, or alternate products forgone, through taking a particular action or producing a certain product. The lost resources could be time, effort, money, goods, etc.

Opportunity Cost Principle: Heaberler and Taussing have developed this important cost principle. This principle studies about the various alternatives and their benefits. According to this principle the managerial decision must be such that from the selected alternative benefits.

2.Opprtunity cost can also b defined as highest valued alternative that must be forgone when a choice is made.Economists refer to the forgone opportunities or forgone benefits of the next best alternative.

Introduction from:wikipedia

2nd definition from:Textbook of economics,by William Boyes and Michael Melvin

Published by “biztantra”

19-A,ansari road,

Darya ganj,

New delhi.

No.of pages:885

Page no. of opportunity cost content: 25

INCREMENTAL POLICY Economic principles assist in rational reasoning and defined thinking. They develop logical ability and strength of the character.

One of the important principles in managerial economics is:

MARGINAL AND INCREMENTAL PRINCIPLE:

This principle states that the decision is said to be rational and sound if given the firms objective of profit maximization, it leads to increase in profit, which is in either two scenarios:

1. If total revenue increases more than total cost.2. If total revenue declines less than total cost.

Marginal analysis implies judging the impact of unit change in one variable on the other. Marginal generally refers to small changes.

Marginal revenue is the change in total revenue per unit change in the output sold.

Marginal cost refers to the change in the total cost per unit change in output produced. (Where as incremental costs refer to change in total costs due to change in total output.)

Incremental analysis differs from marginal analysis only that it analysis changes in the firms performance for a given managerial decision, whereas marginal analysis often is generated by change in outputs or inputs.

Incremental analysis is the generalization of marginal concept. It refers to changes in cost and revenue due to a policy change.For example: (additional cost of installing computer facilities will be incremental costs and the additional revenue due to access to internet will be incremental revenue, adding a new business, buying new inputs, processing products, etc)

Change in output due to change in process, product or investment is considered as incremental change.

Incremental reasoning highlights the fact that incremental cost, rather than full cost, should be taken in consideration to assess the profitability of a decision. Incremental principle states that the decision is profitable:

If revenue increases more than costs. If costs reduce more than revenues. If increase in some revenues is more than decrease in others. If decrease in some costs is greater than increase in others.

Time value of money

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The method also allows the valuation of a likely stream of income in the future, in such a way that the annual incomes are discounted and then added together, thus providing a lump-sum "present value" of the entire income stream.

All of the standard calculations for time value of money derive from the most basic algebraic expression for the present value of a future sum, "discounted" to the present by an amount equal to the time value of money. For example, a sum of FV to be received in one year is discounted (at the rate of interest r) to give a sum of PV at present: PV = FV − r·PV = FV/(1+r).Some standard calculations based on the time value of money are:

Present value The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.Present value of an annuity An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.Present value of a perpetuity is an infinite and constant stream of identical cash flows.Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.Future value of an annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest.

For example, 100 dollars of today's money invested for one year and earning 5 percent interest will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars. This notion dates at least to Martín de Azpilcueta (1491-1586) of the School of Salamanca.

Taken from Wikipedia encyclopydia.

Demand

1. A schedule of quantities of a give product which consumers are willing to buy at various prices in a particular market at given period of time.

2. The entire relationship between quantity of a commodity that buyers wish to purchase per period of time & the price of commodity.

Reference- V.G. Mankar, Richard g. Lipsey, Douglas D.Purvis, Peter O.Steiner), 1999, 1988, Business Economics, Economics (sixth edition). Macmillan India limited, Harper & Row, India (New Delhi), Newyork, 34, G-4.

LAW OF DEMANDIn economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases.

Market demand is represented by a downward sloping curve with price on the vertical axis and quantity on the horizontal axis.

Law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumer’s demand for the good will move opposite to the movement in the price of the good.

"If the price of the good increases, the quantity demanded decreases, while if price of the good decreases, its quantity demanded increases."

Reference: en.wikipedia.org/wiki/Law_of_demand

Demand curve

A graph illustrating how much of a given product would be willing to buy at different prices.Demand curves have a negative slope indicating that lower prices cause quantity demanded to increase.

Source-principles of economice.

Author-CASE N FARE

PAGE NO-51,52

EDITION -8

PAGE-800

The demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule.

(GOOGLE IMAGE)

P – price(at p1 price the quantity demanded is q1)

(at p2 price the quantity demanded is q2)

Q - quantity of good

S - supply

D – demand

authors: Paweł Zdziarski (faxe), Astarot

created with en:Inkscape

Source -wikipedia

SOURCE –NET MBA

The quantity demanded of a good usually is a strong function of price. A tabular representation is made in respect to the quantity demanded and price.

s

PRICE ELASTICITY OF DEMANDPrice Elasticity of Demand= % change in quantity demanded/% change in prize

It measures sensitivity of quantity demanded to price changes.It tells us what the percentage change in the quantity demanded for a good will be following a 1

percent increase in the price of that good.

It can also be written Ep=%(∆Q)/%(∆P)

%∆Q simply means percentage change in Q and %∆P means percentage change in P.It can also be written as Ep=P/Q*(∆Q/∆P).

1.AUTHOR-Robert.S.Pindyck,Daniel L.Rubinfield

Year-1989,Title-MICROECONOMICS,Publisher-Collier Macmillan Publishers,London,Total no. of pages-657,Page No-27

2.AUTHOR-William Boyes,Michael Melvin,Year-2008,

Title-TEXTBOOK OF ECONOMICS,Publisher-biztantra,New Delhi

Total No. of Pages-885,Page No.-475.

3.AUTHOR-Karl E.Case,Ray C.Fair,Year-2009,

Title-PRINCIPLES OF ECONOMICS,Publisher-Pearson Education,Inc and Dorling Kindersley Publishing,Inc.New Delhi ,Total No. of Pages-784,Page No.-96

CROSS ELASTICITY OF DEMAND

Cross Elasticity of Demand=% change in quantity Y demanded/%change in price of X.It measures the response of quantity of one good demanded to a change in the price of another good.

1.AUTHOR-Robert.S.Pindyck,Daniel L.Rubinfield

Year-1989,Title-MICROECONOMICS,Publisher-Collier Macmillan Publishers,London,Total no. of pages-657,Page No-27

2.AUTHOR-William Boyes,Michael Melvin,Year-2008,

Title-TEXTBOOK OF ECONOMICS,Publisher-biztantra,New Delhi

Total No. of Pages-885,Page No.-475.

3.AUTHOR-Karl E.Case,Ray C.Fair,Year-2009,

Title-PRINCIPLES OF ECONOMICS,Publisher-Pearson Education,Inc and Dorling Kindersley Publishing,Inc,New Delhi ,Total No. of Pages-784,Page No.-96

INCOME DEMANDDemand is also affected by the amount of income that consumers avail

and they are ready to spend. For more increase in the consumer income would case the demand curve for the demand curve to shift to the right.

For example the income of the upper middle classes in India increased rapidly in 1990’s. As a result of which 1991 reforms leading to the entry of many foreign companies in the country.Increase in the income of the young engineering and management graduates resulted in increased demand for a variety of branded consumer goods.

REFERENCE:

BOOK:Managerial Economics (4 th edition) 2006 AUTHOR:Craig H.Petersen,W.Cris Lewis,

Sudhir.K.Jain

PUBLISHER: Petersen Lewis Jain

PAGE NO. : 70

LAW OF SUPPLY

The positive relationship between price and quantity of a good supplied: an increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

THE LAW OF SUPPLY

A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by supplier increases and vice versa.

Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis.

In economics, the law of supply is the tendency of suppliers to offer more of a good at a higher price. The relationship between price and quantity supplied is usually a positive relationship. A rise in price is associated with a rise in quantity supplied.

What are the determinants of supply?

Price of the product

A producer is always aimed on maximizing his profit and minimizing his cost. A higher price increases his willingness to supply and vice-versa.

Technology changesTechnology aids a producer in minimizing his cost of production; mass production is possible with technology

Resource suppliesThe producer also has to pay for other resources such as raw materials and labor. if his money is short on supplying a certain number of products because of an increase in resource supplies, then he has to reduce his supply.

Tax/ subsidyA producer aims to minimize his profit, but an increase in tax will only increase his expenses, decreasing his capacity to buy resource supplies and forcing him to reduce his supply.

Expectations about future priceAgain, the producer is aimed at maximizing his profit. A future decline in price would tell the producer to lessen his supply so that he will not endure a loss when the prices go down and vice-versa.

Price of other goods producedA producer may not only produce on product but other products as well. A producer's money is limited and if he increases his supply in one product, he would have to decrease his supply in the other product, not unless his sales increase.

REFERENCE WEBSITE URL:

http://en.wikipedia.org/wiki/Law_of_demand

http://wiki.answers.com/Q/What_are_the_determinants_of_supply\

REFERENCE BOOK:

AUTHOR: KARL E. CASE, RAY C. FAIR

YEAR: 2009

TITLE: PRINCIPLES OF ECONOMICS

PUBLISHER: DORLING KINDERSLEY (INDIA) PVT. LTD., LICENSEES OF PEARSON EDUCATION

PLACE OF PUBLISH: INDIA

PAGE NO: 60

TOTAL NO OF PAGES: 784

Author Name of the Book

Total Specified Page

Factors of Production : Any resources used in the production of goods or services, the top factors of production can be broadly classified into three main groups-labour or human services , caapital or Man made means of production can be sub -divided in vaarious ways for example labour with vaarious aamount of human capital or laand with various minerals content and also thier is Fixed factors and Immobile factors

M.C.Madian Dictionary of Economics

330 170

Short Run : A period in which something cannot be changed which could be changed given more time . In the Short run for example a firm can buy more materials or fuel and continue more unskilled workers , but doesnot have time to bulid new plant or recruit and train more skilled workers and managers .The Short run is contrasted with the medium run,in which more things but not everything can be changed with the long run ,in which everything can be changed that can be ever be changed at all . Short Run supply and demand curves are typically are less elastic than the corresponding long run curves .

M.C.Madian Dictionary of Economics

330 428

SHORT RUNIn economics, the concept of the short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed. Costs which are fixed in the short-run have no impact on a firm decisions. For example a firm can raise output by increasing the amount of labor through overtime.

ECONOMICS:Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime,[3] education,[4] the family, health, law, politics, religion,[5] social institutions, war,[6] and science.

A generic firm can make three changes in the short-run:

Increase production Decrease production Shut down

In the short-run, a profit maximizing firm will:

Increase production if marginal cost is less than price; Decrease production if marginal cost is greater than price; Continue producing if average variable cost is less than price, even if

average total cost is greater than price; Shut down if average variable cost is greater than price. Thus, the average

variable cost is the largest loss a firm can incur in the short-run.

SIMPLE EXPLANATION WITH EXAMPLE:

"The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied.

I find examples helpful, so we'll consider a hockey stick manufacturer. A company in that industry will need the following to manufacture sticks:

Raw materials such as lumber Labor Machinery A factory

Suppose the demand for hockey sticks has greatly increased, prompting our company to produce more sticks. We should be able to order more raw materials with little delay, so we consider raw materials to be a variable input. We'll need extra labor, but we can likely increase our labor supply by running an extra shift and getting existing workers to work overtime, so this is also a variable input. The equipment on the other hand, may not be a variable input. It may be time consuming to implement the use of additional equipment. It depends how long it would take us to buy and install the equipment and how long it would take us to train the workers to use it. Adding an extra factory is certainly not something we could do in a short period of time, so this would be the fixed input

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Short-run

http://economics.about.com/cs/studentresources/a/short_long_run.html

PRODUCTION FUNCTION

A production function is an equation, table, or graph showing the maximum output of a commodity that a firm can produce per period of time with each set of inputs. Both inputs and outputs are measured in physical rather than in monetary units. Technology is assumed to remain constant during the period of the analysis.

AUTHOR: DOMINICK SALVATOREYEAR: 2007TITLE: MANAGERIAL ECONOMICS IN A GLOBAL ECONOMY

PUBLISHER: THOMSON

PLACE OF PUBLISH: BABA BARKHA NATH PRINTERS, HARYANA

PAGE NO: 239

TOTAL PAGES: 754

MARGINALPRODUCT:

The amount added to the total product by the addition of

One more unit of capital and labor.

Mp=tpn-tpn-1

George .j .Stigler in his theory of price makes five preposition regarding

The marginal product

1. The sum of the n marginal units is equal to the total product of n units of capital and labor.

2. When the average product is increasing the marginal product is greater than the

Average product, but it doesn’t follow that the marginal product increases when the average product increases.

3. When the average product is decreasing, the marginal product is less than the average product.

4. When the average product is at maximum, the marginal product is equal to the

Average product.

5. The addition or subtraction of a fixed sum from all of the total products will have no effect on marginal product.

REFERENCE: DICTIONARY OF ECONOMICS, oxford dictionary of economics

EDITEDBY: ML .MADIAN

PUBLISHER: HIMALAYA PUBLISHING HOUSE

PLACE: MUMBAI

YEAR:2005

AVERAGE PRODUCT: Average product is the output produced perunit of variable

Factor input employed.a.p is obtained by dividing the total product by the

Number of fctors employed.

A.P=totalproduct/no.of variable factor units(n)

REFERENCE:PRINCIPLES OF BUSINESS DECISIONS

AUTHOR:KGC.NAIR,HARIKUMAR,GEORGEE,YOHANAN

PUBLISHER:CHAND BOOKS

PLACE TRIVENDRUM

PAGE NO:5.4

ISOCOST LINE The Isocost Line

It shows the various combination of two inputs that the firm can hire with a given total cost outlay.

--DOMINICK SALVATORE

The Isocost Line shows the combinations of capital and labor that will end up costing the same amount. Thus, given a budget of $C,

C = wL + rK (Is cost eqn.)

Or K = C/r - (w/r)L

Where C/r = Intercept

- (w/r) = Slope of the isocost

Key Concepts for Isocosts

The isocost function is the set of all combinations of capital and labor that can be purchased for a specified total cost

Changes in the budget amount, $C, cause the isocost line to shift in a parallel manner

Changes in either the price of labor or capital cause both the slope and one intercept of the isocost function to change

Reference: www.wikipedia.com

Author: Dominick Salvatore

Year: 2008

Title: managerial economics principles and world wide applications

Publisher: oxford university press

Place: New York

Page no: 647

Total no of pages: 666

MARGINAL REVENUE

Marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is

the additional income from selling one more unit of a good; sometimes equal to price. It can also

be described as the change in total revenue per the change in the number of units sold. Marginal

revenue is equal to the change in total revenue over the change in quantity when the change in

quantity is equal to one unit. This can also be represented as a derivative when the units of output

are arbitrarily small. (Total revenue) = (Price that can be charged consistent with selling a given

quantity) times (Quantity) .

For a firm facing perfectly competitive markets, price does not change with quantity sold

, so marginal revenue is equal to price. For a monopoly(no competitors), the price

received will be the profit maximizing quantity, for which marginal revenue is equal to marginal

cost(MC) will be lower for a monopoly than for a competitive firm, while the profit-maximizing

price will be higher. When demand is elastic, marginal revenue is positive, and when demand is

inelastic, marginal revenue is negative. When the price elasticity of demand is equal to1,

marginal revenue is equal to zero.

Example: A promoter has properly estimated the demand curve for seats at an event to be

Q = 40,000 − 2000P ,

Where P is the price of a seat. The inverse demand curve, which determines price as a function

of quantity, is therefore represented by P(Q) = 20 − Q / 2000.

We therefore have

TR(Q) = 20Q − Q2 / 2000.

Marginal revenue is the slope of total revenue:

MR(Q) = 20 − Q / 1000.

Definition from : oxford dictionary of economics edited by john black.

2006 Indian edition,

No. of pages:507, located in 287th page

Dictionary of economics edited by m.c. madian

By Himalaya publishers

1997 edition No. of pages: 330, located in 186&187th pages.

Example from : Wikipedia the encyclopedia

FIXED COST

The part of total cost which does not depend on the level of current production. This includes items such as management costs and the costs of plan security. Fixed cost do not affect the profit maximizing level of output in the short run though in longer run a firm which can not cover its fixed costs will become insolvent and exit. It is also called overhead cost or unavoidable cost.

In economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business .They tend to be time-related, such as salaries or rents being paid per month.

From a pure economics perspective, fixed costs are not permanently fixed; they will change over time, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production; and warehouse costs and the like are fixed only over the time period of the lease.

Fig:1 Fig:2

As per fig 1 total fixed cost is constant throughout the change in volume.

As per fig 2 fixed cost per unit changes with the change in volume. We can derive that fixed cost per unit is inversely proportional to the volume.

Reference-

John Black, 2006, Oxford Dictionary of Economics, Oxford University Press, New Delhi, Page no.178

Richard G. Lipsey ; Douglas D.Purvis ; Peter O.Steiner(1988),Economics(6th ed.) ,Harper & Row Publishers, New York, Total pages-989.specified page-196.

http://en.wikipedia.org/wiki/Fixed_cost http://www.allbusiness.com/glossaries/fixed-cost/4951608-1.html

VARIABLE COST A cost that varies directly with output, rising as more is produced and

falling as less is produced is called VARIABLE COST. It’s also known as direct or avoidable cost. Varaiable cost is the sum of all marginal cost of all units produced.

Eg.- labor is the variable factor of production, then wage bill is a variable cost.

Figure I Figure II

Total variable cost Variable cost per unit

As per figure I total variable cost increases with increase in volume. Total variable cost is directly proportional to the volume.

As per figure II variable cost per unit is constant.

References:-

-Richard G. Lipsay ; Douglas D.Purvis ; Peter O.Steiner(1988),Economics(6th ed.) ,Harper & Raw Publishers. Total pages-989.specified page-196.

- John Black, 2006, Oxford Dictionary of Economics, Oxford University Press, New Delhi, Page no.179

-Garrison, Ray H; Eric W. Noreen, Peter C. Brewer (2009). Managerial Accounting (13e ed.). McGraw-Hill Irwin. ISBN 978-0-07-337961-6

-webpage- www.investorwords.com/variable cost

BREAK EVEN ANALYSIS

Break Even Analysis refers to the calculation to determine how much product a company must sell in order to break even on that product. It is an effective analysis to measure the impact of different

marketing decisions. It can focus on the product, or incremental changes to the product to determine the potential outcomes of marketing tactics.

Break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR = TC) A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative.

The formula for a break even analysis is:

Break even point ($) = (Total Fixed Costs + Total Variable Costs). Total Variable Costs = Variable cost per unit x units soldUnit contribution (contribution margin) = Price per unit - Variable cost per unit.

Reference:en.wikipedia.org/wiki/break_even _analysis

Basic Price

Definition:The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, on that unit as a consequence of its production or sale; it excludes any transport charges invoiced separately by the producer.

Context:The amount received by the producer from the purchaser for a unit of good or service produced as output. It includes subsidies on products and other taxes on production. It excludes taxes on products, other subsidies on production, suppliers’ retail and wholesale margins, and separately invoiced transport and insurance charges. Basic prices are the prices most relevant for decision making by suppliers.

http://www.imf.org/external/np/sta/tegppi/index.htm.

PRODUCT LINE PRICING:

PART OF YOUR PRODUCT PRICING STRATEGY

DEFINITION

Pricing is one of the most important elements of the marketing mix and has the most effect on whether or not the strategy is successful. Product line pricing (PLP) is a pricing strategy used to sell different products in the same product range at different price points based on features or benefits.

P R O D U C T - L I N E P R I C I N G – The setting of prices for all items in a product line involving the lowest-priced product price, the highest price product, and price differentials for all other products in the line.

P R O D U C T L I N E P R I C I N G is a pricing strategy that uses one product with various class distinctions. An example would be a car model that has various model types that change with performance and quality. This pricing process is evaluated through consumer value perception, production costs of upgrades, and other cost and demand factors.

Product line pricing requires a different look at setting price. With a line of products to price, you need to consider the whole product mix, the product life cycle within the mix, and your product positioning strategy.

Within the product mix or line, there are typically price points that reflect the price level: high, medium or low.

Common Examples of Product Line Pricinga) Car wash options are common examples of product line pricing.

Product line pricing is seen from gas pumps to car dealerships and from ice cream shops to fast food restaurants. A basic car wash may be shown as one price, a super wash with wash and wax will cost a little more, and a full-service premium wash will be the most expensive.

b) For example, most computer manufacturers have basic models, business models and premium high graphic and/or gaming models. Each of those model levels has its own price point. Automotive manufacturers have economy models, environmental models, luxury models, work models, and more.

c) For example, you may charge a base price for a basic model, the next product up might have more features or be a better quality - it would be a higher price, and so on throughout the line (think of beds and the number of coils, or the type of cover, etc. or think of televisions with size and the number of pixels as a differentiation in the product line).

d) For example, most computer manufacturers have basic models, business models and premium high graphic and/or gaming models. Each of those model levels has its own price point. Automotive manufacturers have economy models, environmental models, luxury models, work models, and more.

When to use Product Line Pricing Product line pricing is used when a primary product is offered with different features or benefits,

essentially creating multiple "different" products or services. For example, a car could be the primary product. It could come standard, with a sunroof and navigation system or fully stocked with all the features and add-ons. Each product would then be priced accordingly.

Use this strategy only if you have more than two products in the line and if you have clear enough differentiation of features and benefits - if the customer cannot distinguish between the products, this strategy will fail.

Additionally, understand your product positioning strategy: is your product line targeted for commodity or luxury markets (the line needs to bytargeted to the same, or linked, markets).

Use this strategy through the growth, maturity and declining stages of the product's life-cycle; if used in the introduction phase, there might not be enough early recognized value between the products in the product line.

With this particular pricing strategy, it is important to build strong product differentiation within the line so that buyers can understand what they're paying for and why.

source

Goal of Product Line Pricing The goal of product line pricing is to maximize profits. The more features offered, the more

consumers will pay. The goal is to draw enough interest in the primary product that the upgraded product will be sold (at a greater price) based off the interest in the "basic" primary product. By using PLP, some individual products may not make profits, but the goal is for the product line as a whole to turn a profit.

Factors Involved in PLP The biggest factor in the success of product line pricing is the success of the primary product. A

customer won't get his ice cream cone upgraded to have sprinkles and whipped cream unless he

enjoyed the ice cream itself. Products must also be priced correctly. One product in the line cannot be too much more money than the others, or it will not adhere to the pricing plan.

Specific Types of Product Line Pricing Plans Specific types of product line pricing strategies include optional-feature pricing (as with cars), and

two-part pricing, which could be an amusement park that charges for general admission but then also charges for particular rides. Product bundling is pricing a product so that if a product is bought with all available features it would be cheaper then buying accessories or feature upgrades individually.

Refrences-

Definitions:http://www.ehow.com/facts_6003881_product-line-pricing-strategy_.htmlwww.coolavenues.comhttp://wiki.answers.com/Q/What_is_Product_Line_Pricing

Other information andExamples :http://www.ehow.com/facts_6003881_product-line-pricing-strategy_.htmlhttp://www.more-for-small-business.com/product-line-pricing.html

CYCLICAL PRICING

ADAM SMITH FATHER OF ECONOMICS

Defined Economics as ‘science of wealth’.

BASIC CONCEPTS REGARDING PRICE:

1) Price: It is the quantity of money that has to be exchanged for one unit of a good or service.

2) Price Control: It is the measure taken by the government to prevent price rise. Direct fixing of prices is a measure applicable to special conditions. It does not itself eradicate inflation. However, other methods of control on margins between costs and prices are commonly used by government to keep the prices under check.

3) Price Discrimination: It is the practice of charging different prices from different consumers for the same good where the price differences do not reflect the differences in cost of supply . To practice any form of price discrimination, it must be possible to prevent arbitrary increase in prices, since otherwise buyers at a lower price could re-sell to buyers at a higher price. In such a situation both the parties would gain, obviating the need for price discrimination. Discrimination may be of three forms:a) Personal discrimination ;b) Local or geographical discrimination; and c) Trade or purpose discrimination.

A monopolist does not always charge the same price from all the purchasers of his commodity or service. He charges different prices from different classes of people. He may divide his sale among a number of markets and charge different price in each market. This peculiar feature of monopoly is known as price discrimination. As Benham says “A monopolist can divide his sales among a number of different markets to charge a different price in each market. This is known as price discrimination.”

4) Pricing of New Products: The most dynamic pricing in business occur when new products, with uncertain market dimensions, are introduced. The price pattern tends to be determined by the maturity of the product. The price is that of a high cost low-volume product specially seeking out new uses and demands. This phase can be long or short, depending on the novelty of the product and the imagination of the seller or potential user. With the uncovering of latent demand, it becomes possible to shift from experimental to volume output, with declining costs and price reductions. In new chemical products, drastic price revisions are as a rule associated with major turning points in the industry. The cycles of business pricing to which changes in technology or product preference give rise, are frequently so compelling as to over-ride the influence of the business cycle. With little regard for general market conditions, the appearance of the maturity phase is the single stable pricing as long as sellers remain few and, by virtue of a total demand that has a known pattern, are in a position to sustain a price policy.

5) Pricing Policy: It is the policy or rules adopted by a firm enterprise which determines the prices it sets for its products. For example, it is argued that public enterprises should adopt marginal cost pricing policies. In analysing the pricing policies of private sector firms economists believe that, if a firm’s objective is to maximise profits, its pricing policy will consist of setting a price in such a manner that the marginal cost equals marginal revenue.

6) Price Mechanism: Price mechanism in a capitalist/ mixed economy system functions in such a manner that the adjustments in the economic field take place automatically without any directions or dictations from a central authority. Price becomes the coordinator both of production and consumption. In a free economy, the price mechanism tends to harmonise the interests of both the consumers and the producers.In modern welfare economies guided by the principle of welfare of the common man, the state intervenes to protect the interests of the consumers from self seeking and profit greedy enterpreneurs who may combine to extract higher prices from the consumers.

7) Price Support: It is a system of government support by which market prices are fixed at a little above the free market levels. Here the government purchases unsold surpluses to support the price and thereby raises farmers’ income. This system is in practice in India and many other countries.

8) Price System: It plays a vital role in the functioning of the free capitalistic economies. A rise in the price of a product raises the profits of the existing dealers and manufacturers and thus it is an invitation for the potential entrant to join the industry. Likewise there is an exit of labour and capital from an industry, the price of which shows a download trend. Its working may not always be conductive to the maximisation of the human welfare. The rich may get their most superfluous wants satisfied, while the basic needs of the poor may be neglected. That is why socialist states do not leave the price fixation to the competitive forces of demand and supply of the market.

9) Price Theory: It is that part of economics which analyses the ways in which prices are determined in a free market economy and role they play in solving the problems of resource allocation. The principal objective of price theory is the creation and sustenance of the market. The essential elements in a market are the behavior of sellers and the ways in which they interact.

CYCLICAL PRICING

I examine price markups in monopolisticly-competitive markets thatexperience fluctuations in demand because the economy experiences cyclicalfluctuations in productivity. Markups depend positively on the averageincome of purchasers in the market. For a nondurable good average income ofpurchasers is procyclical; so the markup is procyclical. For a durable good,however, the average income of purchasers is likely to decrease in boomsbecause low income consumers of the good concentrate their purchases in boomperiods; so the markup is likely countercyclical. This is particularly truefor growing markets. I find markups make the aggregate economy fluctuatemore in response to productivity if goods are sufficiently durable.

In simple words cyclical pricing means pricing according to the market conditions.

The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods relative stagnation or decline (contraction or recession).

These fluctuations are often measured using the growth of rate of real gross domestic product. Despite being termed cycles, most of these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.

So the pricing which is done on the basis of market fluctuations or business cycle is known as cyclical pricing.

For example prices of land, housing and rent increases during boom market conditions.

Cyclical pricing is different from seasonal pricing. Seasonal pricing is done on the basis of seasons. Like prices for air conditionor is high during summer because the demand for air conditionor is more or high during summer and vice versa.

Bibliographyhttp://www.nber.org/papers/w3050

National Bureau of Economics Research

Economics Dictionary – B.N AHUJA

Different types of Profit

Accounting profit

Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.

In the accounting sense of the term, net profit (before tax) is the sales of the firm less costs such as wages, rent, fuel, raw materials, interest on loans and depreciation. Costs such as depreciation, amortization, and overhead are ambiguous.

Economic Profit

In economics, economic profit is the difference between a company's total revenue and its opportunity costs. It is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital.

An economic profit arises when revenue exceeds the opportunity cost of inputs, noting that these costs include the cost of equity capital that is met by "normal profits." A business is said to be making an accounting profit if its revenues exceed the accounting cost of the firm.