Microeconomics assignment (usama shehzad sr ii s)

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  • 1. Qs.1 What is economic problem? Ans. The economic problem it asserts that there is scarcity, or that the finite resources available are insufficient to satisfy all human wants and needs. The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labor) are to be allocated. Qs.2 Define for factors of production? Ans. Land: In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to the production of all goods, including capital goods Labor: Labor economics seeks to understand the functioning and dynamics of the markets for wage labor. Labor markets function through the interaction of workers and employers. Labor economics looks at the suppliers of labor services (workers), the demands of labor services (employers), and attempts to understand the resulting pattern of wages, employment, and income. Capital : In economics, capital goods, real capital, or capital assets are already- produced durable goods or any non-financial asset that is used in production of goods or services. Entrepreneur: He is the risk taker, the decision maker and the one who combines all the factors of production. Qs.3 what are the advantages and disadvantages of free market, planned and mixed economy. Ans. A free market economy is driven by individual innovation and the notion that hard work and ingenuity will be rewarded by success. All businesses exist to make a profit. Therefore, in the free market system, a successful business makes a consistent profit in a field of competitors. The concept of competition is an important component of a free market system. Competition in the marketplace provides the best possible product to the customer at the best price. When a new product is
  • 2. invented, it usually starts out at a high price, once it is in the market for a period of time, and other companies begin to copy it, the price goes down as new, similar products emerge. In a competitive market, the poor versions of the product or the overpriced will be pushed out of the market because consumers will reject them. The free market system determines the winners and losers in each industry based on the demands of the customer, whether industrial, business customers, or consumers, people who buy for personal use. In a free market system, the entrepreneur takes a great risk to launch a business, putting up capital, with the hope that the product or service will succeed. If the risk is considered a disadvantage, when the business succeeds, the profit and control of the businesses future is determined by the owner, not the government. A mixed economy is an economic system that incorporates aspects of more than one economic system. This usually means an economy that contains both privately- owned and state-owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and planned economy characteristics. This system overcomes the disadvantages of both the market and planned economic systems. Resources are owned both by the government as well as private individuals. I.e. co-existence of both public sector and private sector. Market forces prevail but are closely monitored by the government. Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government. Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government. As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government. Monopolies may be existing but under close supervision of the government. In a planned economy, the factors of production are owned and managed by the government. Thus the Government decides what to produce, how much to produce and for whom to produce. All resources are owned and managed by the government. There is no Consumer or producer sovereignty. The market forces are not allowed to set the price of the goods and services. Profit in not the main objective, instead the government aims to provide goods and services to everybody. Government decides what to produce, how much to produce and for whom to produce. Prices are kept under control and thus everybody can afford to consume goods and services. There is less inequality of wealth. There is no duplication as the allocation of resources is centrally planned. Low level of unemployment as the government aims to provide employment to everybody. Elimination of waste resulting from competition between firms. Qs.4 Define fixed cost, variable cost, total cost and total revenue ? Ans. Fixed 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, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume- related (and are paid per quantity produced).
  • 3. Variable cost: Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct Costs, however, are costs that can easily be associated with a particular object. However, not all variable costs are direct costs. Total cost : Total cost describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that Cannot be varied in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs. Total revenue: Total revenue is the total receipts of a firm from the sale of any given quantity of a product. It can be calculated as the selling price of the firm's product times the quantity sold, i.e. total revenue = price × quantity. Qs.5 Draw fixed cost, total cost and total revenue. Ans. Total Revenue Total, Fixed and Variable cost. Qs.6 Advantages, Disadvantages and Characteristics of: Sole trader, Co operatives, Multinational, Public corporation, Partner, Public sector. Ans. Sole trader: The sole trader is the oldest and most popular type of business. It is a form of business where there is only one owner who manages and controls the business. A sole proprietorship is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the
  • 4. Person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to. A sole proprietor may do business with a trade name other than his or her legal name. In some jurisdictions, for example the United States, the sole proprietor is required to register the trade name or "Doing Business As" with a government agency. This also allows the proprietor to open a business account with banking institutions. An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business.A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual's non- protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member corporation or limited company still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability.Furthermore, in most jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. Typically a sole proprietorship reports its income and deductions on the individual's personal tax return. In comparison, an identical small business operating as a corporation or partnership would be required to prepare and submit a separate tax return.A sole proprietorship often has the advantage of the least government regulation.A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company.It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is required for bank financing.Hiring employees may also be difficult.This form of business will have unlimited liability, so that if the business is sued, the proprietor is personally liable.The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.In countries without universal health care, such as the United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue.Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation. In the United States, a sole proprietor could also form a limited liability company, or LLC, which would give the protection of limited liability but would still be treated as a sole proprietorship for income tax purposes Co operatives : A cooperative may also be defined as a business owned and controlled equally by the people who use its services or who work at it There are different types of co-operatives: Housing cooperative A housing cooperative is a legal mechanism for ownership of housing where residents either own shares reflecting their equity in the co-operative's real estate, or have membership and occupancy rights in a not-for-profit co-operative and they
  • 5. underwrite their housing through paying subscriptions or rent. Building cooperative Members of a building cooperative (in Britain known as a self-build housing co- operative) pool resources to build housing, normally using a high proportion of their own labour. When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved. Retailers' cooperative A retailers' cooperative (known as a secondary or marketing co-operative in some countries) is an organization which employs economies of scale on behalf of its members to get discounts from manufacturers and to pool marketing. It is common for locally-owned grocery stores, hardware stores and pharmacies. In this case the members of the cooperative are businesses rather than individuals. Utility cooperative A utility cooperative is a public utility that is owned by its customers. It is a type of consumers' cooperative. In the US, many such cooperatives were formed to provide rural electrical and telephone service. Worker cooperative A worker cooperative or producer cooperative is a cooperative that is owned and democratically controlled by its "worker-owners". There are no outside owners in a "pure" workers' cooperative, only the workers own shares of the business, though hybrid forms in which consumers, community members or capitalist investors also own some shares are not uncommon. Membership is not compulsory for employees, but generally only employees can become members. However, in India there is a form of workers' cooperative which insists on compulsory membership for all employees and compulsory employment for all members. That is the form of the Indian Coffee Houses. Consumers' cooperative A consumers' cooperative is a business owned by its customers. Employees can also generally become members. Members vote on major decisions, and elect the board of directors from amongst their own number. A well known example in the United States is the REI (Recreational Equipment Incorporated) co-op, and in Canada: Mountain Equipment Co-op.The world's largest consumers' cooperative is the Co-operative Group in the United Kingdom, which offers a variety of retail and financial services. The UK also has a number of autonomous consumers' cooperative societies, such as the East of England Co-operative Society and Midcounties Co-operative.Migros is the largest supermarket chain in Switzerland and keeps the cooperative society as its form of organization. Agricultural cooperative Agricultural cooperatives are widespread in rural areas. In the United States, there are both marketing and supply cooperatives. Agricultural marketing cooperatives, some of which are government-sponsored, promote and may actually distribute specific commodities. There are also agricultural supply cooperatives, which provide inputs into the agricultural process. In Europe, there are strong agricultural / agribusiness cooperatives, and agricultural cooperative banks. Most emerging countries are developing agricultural cooperatives.
  • 6. Multi national : The advantages of a multinational business to host countries are: Transfer of technology,capital and entrepreneurship. They increase the investment level and thus the income and employment in the host country. Greater availabilty of products for local consumers. Greater access to high quality managerial talentwhich tens to be scarce in host countries. Increase in exports and decrease in imports, thereby improving the balance of payment of host countries. Help in equalizing of cost of factors of production around the world. They provide an efficient means of integrating economics. Disadvantages include: Trade restrictions imposed at the government-level Taxes or tariffs imposed on imports from other countries Limited quantities (quotas) of imports Effective management of a globally dispersed organization Slow down in the growth of employment in home countries. Destroy competition and acquire monopoly. Technology designed for mink‟s is for worldwide profit maximization not for the social welfare or development of economy. They could cause fast depletion of some of the non renewable natural resources in the host country. Public Corporation: Limited companies which can sell share on the stock exchange are Public Limited companies. These companies usually write PLC after their names. Minimum value of shares to be issued (in UK) is £50,000.The advantages are that there is limited liability for the shareholders.The business has separate legal entity. There is continuity even if any of the shareholders die.These businesses can raise large capital sum as there is no limit to the number of shareholders.The shares of the business are freely transferable providing more liquidity to its shareholders.the disadvantages are that There are lot of legal formalities required for forming a public limited company. It is costly and time consuming.In order to protect the interest of the ordinary investor there are strict controls and regulations to comply. These companies have to publish their accounts.The original owners may lose control. Public Limited companies are huge in size and may face management problems such as slow decision making and industrial relations problems. Partner : A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as
  • 7. the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.Easy to set up.More capital can be brought into the business.Partners bring new skills and ideas to a business.Decision making can be much easier with more brains to think about a problem.Partners share responsibilities and duties of the business.Division of labour is possible as partners may have different skills.There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings.Disagreement among the partners can lead to problems for the business.There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt. Private sector : These are closely held businesses usually by family, friends and relatives.Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering.Shareholders may not be able to sell their shares without the agreement of the other shareholders.Limited Liability: It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors.Continuity of existence: business not affected by the status of the owner.Minimum number of shareholders need to start the business are only 2.More capital can be raised as the maximum number of shareholders allowed is 50.Scope of expansion is higher because easy to raise capital from financial institutions and the advantage of limited liability.Growth may be limited because maximum shareholders allowed are only 50.The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders. Qs.7 Factors affecting demand and supply and draw and explain wage determination point. Ans. Factors affecting demand: 1. Price: when P goes up, demand goes down and vice versa. 2. Prices of other products: when the price of beef goes up for example, the demand for pork will rise. 3. Nr. of population: if a lot of babies of born, demand rises as well (in this case for products used by babies). 4. Advertising: if there are loads advertisements for a certain product (which is okay), many people certainly will buy that product; so demand rises.
  • 8. 5. Fashion: as tastes change, demand for products change as well (if the fashion of 2010 is Nike, most of the people will buy Nike clothing - but if in 2011 it changes to Puma for example, those people following the fashion will get Puma clothing). 6. Income: we distinguish two type of goods if we are talking about income. Normal goods and inferior goods. With normal goods the demand rises when your income rises (more meat e.g.). With inferior goods the demand falls, when the income rises. For example: you will use your car more often (so more petrol as a good) when you have a higher income than using the public transport (in this example this is the inferior good). Factors affecting supply: 1. Price: as with the demand factors, price also affects supply. But when P changes, other factors will remain the same!!! (the ceteris paribus clause). 2. Environmental conditions: sometimes wheather plays an important role in the cultivation of products or if we want to say it in general: enviromental conditions are of great importance when talking about supply. 3. Developments in costs: producing a products has its costs and so does supplying. When the costs are low, there will be more supplied at all different price levels. The supply curve shifts to the right as a result (more supplied for the same P). 4. The position of technology: while technology improves, productivity rises due to the fact that there may be robotic production involved. So for the same amount of costs it is possible to supply more > supply curve shifts to the right. 5. The total amount of suppliers: if foreign producers enter a new (e.g. American) markets, supply increases as well. Determination of Wage rate In a perfectly competitive market, the wage rate of a particular type of labour is determined by the interaction of the labour demand curve and labour supply curve. In figure 20.3(a) the DD‟ is the demand curve of labour say carpenters for the industry. It is found by summation of the demand curves of alr the firms in the industry SS‟ represents the supply curve of carpenters for the industry, The labour demand curve DD‟ intersects the labour supply curve SS‟ at point N. The wage rate is NL or Rs. 20/- per day and the number of workers hired at the equilibrium wage rate (Rs. 20/-) is 200 thousand.
  • 9. Qs.8 Why people in the same occupation earn different amount of money ? Ans. (1) Compensating differential : A popular economic term that relates wage rate to unpleasantness, risk and other undesirable attributes of a job. Technically, it is defined as an additional income that must be offered to motivate one to take up the undesirable job. A construction worker is most likely to receive a much higher pay than, say a cleaner or a clerk for the risk undertaken. They assume risk like falling off from building, industrial accident when dealing with machineries etc. Some IT officers especially system support, may have to work nights or other unsociable hours. As such they receive higher pay to compensate for this. (2) Education and qualification. Level of education should be a good discriminator of pay scale. If an individual who studies for degree receives a pay equivalent to a cashier having O-Level, there will be very few pursuing tertiary study. The logic is, there is an opportunity cost in terms of income lost when one spends more time studying regardless of full time or part time. So now they are compensated for it also, depends on number of years one has to spend. The longer it is, the higher the pay (ceteris paribus). For instance a lecturer with PhD earns more than an ordinary teacher. Similarly, a heart specialist earns much more than an ordinary doctor given the length of time adopted for training. The supply of labour from these highly skilled professionals are low and highly inelastic while the demand for their service is great. That accounts for the vast difference in pay
  • 10. (3) Marginal revenue. Some people are able to command high salary as every economic transaction they involve in yields high marginal revenue. Consider professional footballers like C. Ronaldo and Beckham. They are central in every game. They influence the number of tickets and merchandise related to MUFC sold, fans base and probably to some extent shape the English premier league. Whenever Beckham advertises for Pepsi, directly or indirectly he influences people to drink Pepsi. As such the company generates unimaginable supernormal profit (MC = MR) and wouldn‟t mind paying him millions for one advertisement (4) Protection by trade union. There is empirical evidence that unionized workers receive better pay than those who are not represented. Although the number of trade unions has declined steadily both in UK and US due to the shift from manufacturing sector to services sector, the effect of their presence is much felt. Probably you have heard of United Auto Workers (UAW), United Steel Workers (USW) etc. The chief aim is to gather more voice and to have more negotiation power, namely collective bargaining There are many ways to push up the salary. First, they try to increase the demand for the goods produced by union workers. For instance, USW once in early 2000s pressurised the Congress under Bush administration to impose tariffs on imported steel hoping that American industries will turn to „cheaper‟ locally processed steel. Also they could decrease supply of labour to push up wage rate. Craft unions such as bricklayers and electricians have often adopted restrictive membership policies s such as high initiation fees, long apprenticeship programs and limitations on union‟s membership. Professional associations such as American Bar Association and American Medical Association also adopted similar practice (5) Fringe and benefits. To some extent, it is true that some jobs may offer lower wages than others because they got more to offer to employees such as annual holiday, company cars, free life insurance, monthly gathering etc. These jobs are thought by some people to give lots of satisfaction and hence may be prepared to
  • 11. undertake without expecting high salary (6) Immobility. Some people may be offered a hard-to-resist deal, but is in another area which could be far away from current residence. However, at the same time they value family, relatives and friends more than the pay. As such they reject they job. Also some people may want to move to a better-paid job but not able to do so since they cannot afford housing in new area. Consider receiving a pay which is just extra several hundred £ in City. Accommodation would be disastrous. Nevertheless high labour mobility does help to reduce differences in unemployment and wage rates in different parts of a country (7) Imperfect information. Some people settle down for a lower pay because they do not know about better-paid jobs elsewhere. Meanwhile, people like fresh graduates although may not be able to demand for high wages, sometimes could end up doing a job which its pay is much lower than market as they were „misinformed‟ that that is the pay they deserve being freshies. These two situations are called imperfect information. Qs.9 Define Public, Merit and Consumer good. Ans. Public goods : A commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization. Merit goods : Merit goods are those goods which are given importance by the government and are provided to the public free of cost. Consumer goods : Goods bought and used by consumers, rather than by manufacturers for producing other goods. Qs.10 What is meant by financial institution ? Ans . In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are regulated by the government. Broadly speaking, there are three major types of financial institutions:
  • 12. 1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies 2. Contractual Institutions : Insurance companies and pension funds; and 3. Investment Institutes : Investment Banks, underwriters, brokerage firms. Qs.11 Explain the role of following : Ans. Commercial Bank : A commercial bank is a type of bank that provides services, such as accepting deposits, giving business loans and basic investment products.Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to individual members of the public. Commercial banks engage in the following activities: processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means issuing bank drafts and bank cheques accepting money on term deposit lending money by overdraft, installment loan, or other means providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures safekeeping of documents & other items in safe deposit boxes sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a “financial supermarket” cash management and treasury merchant banking and private equity financing traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities. Central Bank : A central bank, reserve bank, or monetary authority is an institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the amount of money in the nation, and usually also prints the national currency, which usually serves as the nation's legal tender Functions of a central bank may include: implementing monetary policies. determining Interest rates controlling the nation's entire money supply the Government's banker and the bankers' bank ("lender of last resort")
  • 13. managing the country's foreign exchange and gold reserves and the Government's stock register regulating and supervising the banking industry setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms. Stock exchange : A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only.The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks.There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities. Qs.12 Advantages and disadvantages of division of labour ? Ans. Advantages of Division of Labour Higher productivity: Practice makes a man perfect. By concentrating on the repeating the same task again and again, a worker acquires dexterity, skill and speed, and moreover, division of labour avoids waste of time and effort caused by changes from one task to another.Specialisation requires simplification of tasks and facilitates use of labour saving devices. Due to all these the quantity and quality of work increase tremendously. Lower costs: Division of labour increases the efficiency of workers. Wasteful duplica- tion of process and tools is avoided. Large scale production offers several economies in the use of materials, machinery and skills. Therefore, costs of operations are reduced.
  • 14. Simplified training: Specialisation implies that the worker need not learn the entire job. He needs to learn only a part of the whole task. Much time and effort is saved in the training of workers. Physical toil is also reduced. Inventions: When a worker performs the same job again and again he tries to discover new and better methods of doing the work.This increases the possibilities of inventions and innovations. Division of labour thereby facilitates mechanisation and automation of jobs. Use of machinery reduces stress and strain on workers. Greater cooperation: Under division of labour the whole job cannot be completed unless workers performing different parts of the job cooperate with each other there- fore, division of work results in greater cooperation and discipline amongst workers. Besides, each worker is assigned the task best suited to him. Better goodwill: Higher efficiency and better quality of work help to satisfy customers and to earn higher profits. Simplification, standardisation and automation of work also add to the firm's goodwill. As the supply of a variety of goods in the society increases, people can enjoy a higher standard of living than before. Disadvantages of Division of Labour 1. Monotony: As a worker has to do the same work again and again he starts losing interest and pleasure in the work. The work becomes monotonous in nature and boredom arises. 2. Lack of responsibility: Under division of labour, the final product is not the output of a single person but the creation of several workers. Therefore, no individual can be held responsible if anything goes wrong. Involvement of workers in their work is reduced. 3. Lack of job pride: As a worker performs only a part of the job, he cannot take pride in the final output. There is little pleasure of creating something. Specialised workers may lose jobs due to changes in the process of work. Traditional craftsmanship declines. 4. Too much interdependence: Division of labour leads to interdependence between individuals, firms, industries and countries. Failure of any one link due to strike, war, breakdown in transport and communication, depression, etc. may cause great harm.Inferior output by one worker may spoil the quality of the entire product. Specialists know only a single process of production. In case of unemployment, they find is difficult to get jobs. 5. Limited market: The extent of division of labour is limited by size of the market demand. Division of labour is possible only when the scale of production is large. Large scale production is not always possible and it suffers from the evils of factory system. Qs.13 What are the features of perfect competitions ?
  • 15. Ans. A perfect market is one where there is perfect competition. This is a model market. It implies absence of rivalry.According to Boulding, “the competitive market may be defend as a large number of buyers and sellers all engaged in the purchase and sale of identically similar commodity, who are in close contact with one another and who buy and sell freely among themselves”. Features of Perfect Competition 1. Large number: In perfect competition, there must be large number of buyers and sellers. Each buyer buys a small quantity of the total amount. Each seller is so large that no single buyer or seller can influence the price and affect the market. According to Scitovsky buyers and sellers are price takers in the purely competitive market. Each seller (or firm) sells its products at the price determined by the market. Similarly, each buyer buys the commodity at the price determined by the market. 2. Homogeneous product:Under perfect competition, the product offered for sale by all the seller must be identical in every respect. The goods offered for sale are perfect substitutes of one another. Buyers have no special preference for the product of a particular seller. No seller can raise the price above the prevailing price or lower the price below the prevailing price. 3. Free entry and exit:Under perfect competition, there will be no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely. This will bring down the abnormal profits to the normal level. Similarly, when losses will occur existing sellers may leave the market. However, such free entry or free exit is possible only in the long run, but not in the short-run. 4. Perfect knowledge:Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the market conditions. As a results, no buyer will be prepared to pay a price higher than the prevailing price. Sellers will not charge a price higher or lower than the prevailing price. In this market, advertisement has no scope. 5. Perfect mobility of factors of production:The second perfection mobility of factors of production from one use to another use. This feature ensures that all sellers or firms get equal advantages so far as services of factors of production are concerned. This is essential to enable the firms and industry to achieve equilibrium. 6. Absence of transport cost:Under perfect competition transport, cost does not exist. Since commodities have, the same price it logically follows that there will be no transport cost. In the event of the presence of cost of transport, there will be no single price in the market. Transport cost occurs when there is no perfect knowledge of the market conditions on the part of buyers and sellers. 7. No attachment:There is no attachment between the buyers and sellers under perfect competition. Since products of all sellers are identical and their prices are the same a buyer is free to buy the commodity from any seller he likes. He has no special inclination for the product of any seller as in case of monopolistic competition or oligopoly. Theoretically, perfect competition is irrelevant. In reality, it does not exist. So it is a myth.
  • 16. Qs.14.What are the characteristicks, advantages and disadvantages of monopoly ? Ans. Monopoly means a market where there is only one seller of a particular good or service. Characteristics Only one single seller in the market. There is no competition. There are many buyers in the market. The firm enjoys abnormal profits. The seller controls the prices in that particular product or service and is the price maker. Consumers don‟t have perfect information. There are barriers to entry. These barriers many be natural or artificial. The product does not have close substitutes. Advantages of monopoly Monopoly avoids duplication and hence wastage of resources. A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers. Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly. Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network. Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition. Disadvantages of monopoly Poor level of service. No consumer sovereignty. Consumers may be charged high prices for low quality of goods and services. Lack of competition may lead to low quality and out dated goods and services. Qs.15 Define different pricing strategies ? Ans. Premium Pricing :Premium pricing strategy establishes a price higher than the competitors. It's a strategy that can be effectively used when there is something unique about the product or when the product is first to market and the business has
  • 17. a distinct competitive advantage. Premium pricing can be a good strategy for companies entering the market with a new market and hoping to maximize revenue during the early stages of the product life cycle. Penetration Pricing :A penetration pricing strategy is designed to capture market share by entering the market with a low price relative to the competition to attract buyers. The idea is that the business will be able to raise awareness and get people to try the product. Even though penetration pricing may initially create a loss for the company, the hope is that it will help to generate word-of-mouth and create awareness amid a crowded market category. Economy Pricing:Economy pricing is a familiar pricing strategy for organizations that include Wal-Mart, whose brand is based on this strategy. Aldi, a food store, is another example of economy pricing strategy. Companies take a very basic, low-cost approach to marketing--nothing fancy, just the bare minimum to keep prices low and attract a specific segment of the market that is very price sensitive. Price Skimming:Businesses that have a significant competitive advantage can enter the market with a price skimming strategy designed to gain maximum revenue advantage before other competitors begin offering similar products or product alternatives.