JK Institute of Technology and Management

Managerial Economics Assignment

By: Vineet. M. Ganvi

For: Prof. Preeti Duggal

1) Note on Market Structure.

In economics, market structure (also known as market form)

describes the state of a market with respect to competition.

Basic market structures:

 Perfect competition, in which the market consists of a very large

number of firms producing a homogeneous product.
 Monopolistic competition, also called competitive market, where
there are a large number of independent firms which have a very small
proportion of the market share.
 Oligopoly, in which a market is dominated by a small number of firms
which own more than 40% of the market share.
 Oligopsony, a market dominated by many sellers and a few buyers.
 Monopoly, where there is only one provider of a product or service.
 Natural monopoly, a monopoly in which economies of scale cause
efficiency to increase continuously with the size of the firm. A firm is
a natural monopoly if it is able to serve the entire market demand at a
lower cost than any combination of two or more smaller, more
specialized firms.
 Monopsony, when there is only one buyer in a market.

The imperfectly competitive structure is quite identical to the

realistic market conditions where some monopolistic competitors,
monopolists, oligopolists, and duopolists exist and dominate the market
conditions. The elements of Market Structure include the number and size
distribution of firms, entry conditions, and the extent of differentiation.

These somewhat abstract concerns tend to determine some but not

all details of a specific concrete market system where buyers and sellers
actually meet and commit to trade. Competition is useful because it reveals
actual customer demand and induces the seller (operator) to provide service
quality levels and price levels that buyers (customers) want, typically subject
to the seller’s financial need to cover its costs. In other words, competition
can align the seller’s interests with the buyer’s interests and can cause the
seller to reveal his true costs and other private information. In the absence of
perfect competition, three basic approaches can be adopted to deal with
problems related to the control of market power and an asymmetry between
the government and the operator with respect to objectives and information:

(a) Subjecting the operator to competitive pressures,

(b) Gathering information on the operator and the market, and

(c) Applying incentive regulation.

Quick Reference to Basic Market Structures

Seller Entry Seller Buyer Entry Buyer
Market Structure
Barriers Number Barriers Number
Perfect Competition No Many No Many
Monopolistic
No Many No Many
competition
Oligopoly Yes Few No Many
Oligopsony No Many Yes Few
Monopoly Yes One No Many
Monopsony No Many Yes One

The correct sequence of the market structure from most to

least competitive is perfect competition, imperfect competition, oligopoly,
and pure monopoly.

The main criteria by which one can distinguish between

different market structures are: the number and size of producers and
consumers in the market, the type of goods and services being traded, and
the degree to which information can flow freely.
2) Note on Macro Economics and its policies.
Macroeconomics

Macroeconomics is a branch of economics that deals with

the performance, structure, and behavior of the economy of the entire
community, a nation, a region, or the entire world. Along with
microeconomics, macroeconomics is one of the two most general fields in
economics. It is the study of all the aspects, namely the behavior and
decision-making, of entire economies. Macroeconomists study aggregated
indicators such as GDP, unemployment rates, and price indices to
understand how the whole economy functions. Macroeconomists develop
models that explain the relationship between such factors as national
income, output, consumption, unemployment, inflation, savings, investment,
international trade and international finance. In contrast, microeconomics is
primarily focused on the actions of individual agents, such as firms and
consumers, and how their behavior determines prices and quantities in
specific markets.

While macroeconomics is a broad field of study, there are two

areas of research that are emblematic of the discipline: the attempt to
understand the causes and consequences of short-run fluctuations in national
income (the business cycle), and the attempt to understand the determinants
of long-run economic growth (increases in national income).

Macroeconomic models and their forecasts are used by both

governments and large corporations to assist in the development and
evaluation of economic policy and business strategy.

The diagram on the right shows

the circulation system of

Macro economics:
Macroeconomic policies

To try to avoid major economic shocks, such as The Great

Depression, governments make adjustments through policy changes they
hope will stabilize the economy. Governments believe the success of these
adjustments is necessary to maintain stability and continue growth. This
economic management is achieved through two types of strategies:

 Fiscal policy
 Monetary policy

Fiscal policy:

In economics, fiscal policy is the use of government spending

and revenue collection to influence the economy.

Fiscal policy can be contrasted with the other main type of

economic policy, monetary policy, which attempts to stabilize the economy
by controlling interest rates and the supply of money. The two main
instruments of fiscal policy are government spending and taxation. Changes
in the level and composition of taxation and government spending can
impact on the following variables in the economy:

 Aggregate demand and the level of economic activity;

 The pattern of resource allocation;
 The distribution of income.

Fiscal policy refers to the overall effect of the budget outcome

on economic activity. The three possible stances of fiscal policy are neutral,
expansionary, and contractionary:

 A neutral stance of fiscal policy implies a balanced budget where G =

T (Government spending = Tax revenue). Government spending is
fully funded by tax revenue and overall the budget outcome has a
neutral effect on the level of economic activity.

 An expansionary stance of fiscal policy involves a net increase in

government spending (G > T) through rises in government spending, a
 fall in taxation revenue, or a combination of the two. This will lead to
a larger budget deficit or a smaller budget surplus than the
government previously had, or a deficit if the government previously
had a balanced budget. Expansionary fiscal policy is usually
associated with a budget deficit.

 A contractionary fiscal policy (G < T) occurs when net government

spending is reduced either through higher taxation revenue, reduced
government spending, or a combination of the two. This would lead to
a lower budget deficit or a larger surplus than the government
previously had, or a surplus if the government previously had a
balanced budget. Contractionary fiscal policy is usually associated
with a surplus.

Governments spend money on a wide variety of things, from

the military and police to services like education and healthcare, as well as
transfer payments such as welfare benefits.

This expenditure can be funded in a number of different ways:

 Taxation
 Seignorage, the benefit from printing money
 Borrowing money from the population, resulting in a fiscal deficit
 Consumption of fiscal reserves.
 Sale of assets (e.g., land).

 Funding the deficit

A fiscal deficit is often funded by issuing bonds, like treasury bills or

consoles. These pay interest, either for a fixed period or indefinitely. If the
interest and capital repayments are too large, a nation may default on its
debts, usually to foreign creditors.

 Consuming the surplus

A fiscal surplus is often saved for future use, and may be invested in local
(same currency) financial instruments, until needed. When income from
taxation or other sources fall, as during an economic slump, reserves allow
spending to continue at the same rate, without incurring additional debt.
Monetary policy

Monetary policy is the process a government, central bank, or

monetary authority of a country uses to control (i) the supply of money, (ii)
availability of money, and (iii) cost of money or rate of interest to attain a set
of objectives oriented towards the growth and stability of the economy.[1]
Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is 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 involves raising interest rates to combat inflation.
Monetary policy is contrasted with fiscal policy, which refers to government
borrowing, spending and taxation.[2]

 Monetary policy tools:

1. Monetary base

Monetary policy can be implemented by changing the size of the

monetary base. This directly changes the total amount of money circulating
in the economy. A central bank can use open market operations to change
the monetary base. The central bank would buy/sell bonds in exchange for
hard currency. When the central bank disburses/collects this hard currency
payment, it alters the amount of currency in the economy, thus altering the
monetary base.

2. Reserve requirements

The monetary authority exerts regulatory control over banks.

Monetary policy can be implemented by changing the proportion of total
assets that banks must hold in reserve with the central bank. Banks only
maintain a small portion of their assets as cash available for immediate
withdrawal; the rest is invested in illiquid assets like mortgages and loans.
By changing the proportion of total assets to be held as liquid cash, the
Federal Reserve changes the availability of loanable funds. This acts as a
change in the money supply. Central banks typically do not change the
reserve requirements often because it creates very volatile changes in the
money supply due to the lending multiplier.
 3. Discount window lending

Many central banks or finance ministries have the authority to

lend funds to financial institutions within their country. By calling in
existing loans or extending new loans, the monetary authority can directly
change the size of the money supply.

4. Interest rates

The contraction of the monetary supply can be achieved

indirectly by increasing the nominal interest rates. Monetary authorities in
different nations have differing levels of control of economy-wide interest
rates. In the United States, the Federal Reserve can set the discount rate, as
well as achieve the desired Federal funds rate by open market operations.
This rate has significant effect on other market interest rates, but there is no
perfect relationship. In the United States open market operations are a
relatively small part of the total volume in the bond market. One cannot set
independent targets for both the monetary base and the interest rate because
they are both modified by a single tool — open market operations; one must
choose which one to control.

In other nations, the monetary authority may be able to

mandate specific interest rates on loans, savings accounts or other financial
assets. By raising the interest rate(s) under its control, a monetary authority
can contract the money supply, because higher interest rates encourage
savings and discourage borrowing. Both of these effects reduce the size of
the money supply.

5. Currency board

A currency board is a monetary arrangement that pegs the

monetary base of one country to another, the anchor nation. As such, it
essentially operates as a hard fixed exchange rate, whereby local currency in
circulation is backed by foreign currency from the anchor nation at a fixed
rate. Thus, to grow the local monetary base an equivalent amount of foreign
currency must be held in reserves with the currency board. This limits the
possibility for the local monetary authority to inflate or pursue other
objectives. The principal rationales behind a currency board are three-fold:

1. To import monetary credibility of the anchor nation;

2. To maintain a fixed exchange rate with the anchor nation;
3. To establish credibility with the exchange rate.
 In theory, it is possible that a country may peg the local
currency to more than one foreign currency; although, in practice this has
never happened (and it would be a more complicated to run than a simple
single-currency currency board). A gold standard is a special case of a
currency board where the value of the national currency is linked to the
value of gold instead of a foreign currency.

3) Note on National Income

National Income refers to the sum total flow of all the goods and
services produced in all the sectors (Agriculture + Industry + Service) in an
economy expressed in terms of money during one year (per annum) without
double counting or duplication.

A variety of measures of national income and output are used

in economics to estimate total economic activity in a country or region,
including gross domestic product (GDP), gross national product (GNP), and
net national income (NNI). All are concerned with counting the total amount
of goods and services produced within some "boundary". The boundary may
be defined climatologically, or by citizenship; and limits on the type of
activity also form part of the conceptual boundary; for instance, these
measures are for the most part limited to counting goods and services that
are exchanged for money: production not for sale but for barter, for one's
own personal use, or for one's family, is largely left out of these measures,
although some attempts are made to include some of those kinds of
production by imputing monetary values to them.

As can be imagined, arriving at a figure for the total

production of goods and services in a large region like a country entails an
enormous amount of data-collection and calculation. Although some
attempts were made to estimate national incomes as long ago as the 17th
century, the systematic keeping of national accounts, of which these figures
are a part, only began in the 1930s, in the United States and some European
countries. The impetus for that major statistical effort was the Great
Depression and the rise of Keynsian economics, which prescribed a greater
role for the government in managing an economy, and made it necessary for
governments to obtain accurate information so that their interventions into
the economy could proceed as much as possible from a basis of fact.
 In order to count a good or service it is necessary to assign
some value to it. The value that all of the measures discussed here assign to
a good or service is its market value – the price it fetches when bought or
sold. No attempt is made to estimate the actual usefulness of a product – its
use-value – assuming that to be any different from its market value.

Three strategies have been used to obtain the market values of

all the goods and services produced: the product (or output) method, the
expenditure method, and the income method. The product method looks at
the economy on an industry-by-industry basis. The total output of the
economy is the sum of the outputs of every industry. However, since an
output of one industry may be used by another industry and become part of
the output of that second industry, to avoid counting the item twice we use,
not the value output by each industry, but the value-added; that is, the
difference between the value of what it puts out and what it takes in. The
total value produced by the economy is the sum of the values-added by
every industry.

 The output approach

The output approach focuses on finding the total output of a nation by

directly finding the total value of all goods and services a nation produces.

Because of the complication of the multiple stages in the production of a

good or service, only the final value of a good or service is included in total
output. This avoids an issue often called 'double counting', wherein the total
value of a good is included several times in national output, by counting it
repeatedly in several stages of production.

Formulae:

GDP (gross domestic product) at market price = value of output in an

economy in a particular year - intermediate consumption

NNP at factor cost = GDP at market price - depreciation + NFIA (net factor
income from abroad) - net indirect taxes.

 The income approach

The income approach focuses on finding the total output of a nation by

finding the total income received by the factors of production owned by that
nation.
The main types of income that are included in this approach are rent (the
money paid to owners of land), salaries and wages (the money paid to
workers who are involved in the production process, and those who provide
the natural resources), interest (the money paid for the use of man-made
resources, such as machines used in production), and profit (the money
gained by the entrepreneur - the businessman who combines these resources
to produce a good or service).

Formulae:

NDP at factor cost = compensation of employee + operating surplus + mixed

income of self employee

National income = NDP at factor cost + NFIA (net factor income from
abroad) - Depreciation

 The expenditure approach

The expenditure approach is basically a socialist output accounting method.

It focuses on finding the total output of a nation by finding the total amount
of money spent. This is acceptable, because like income, the total value of
all goods is equal to the total amount of money spent on goods. The basic
formula for domestic output combines all the different areas in which money
is spent within the region, and then combining them to find the total output.

GDP = C + I + G + (X - M)

Where:
C = household consumption expenditures / personal consumption
expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

Note: (X - M) is often written as XN, which stands for "net exports"

 Diagram showing Levels of National Income

Symbolically:

GDP = C + I + G + D

NDP = GDP – D
 Diagram showing Circular Flow of national Income

Here the firm sector’s Income is the expenditure of the Household sector and
vice-versa.

Report By: - Vineet. M. Ganvi.

For: - JKITM (MANAGERIAL ECONOMICS)