The government and markets are interdependent and affect people's lives. The government makes rules that establish market boundaries and operations through deliberation. It also controls business activity in a planned economy. For steady economic growth, the government must make suitable policies while the market must follow laws to operate smoothly. Both the government and market play important roles in economic development.

1. Role of Market and
Govt

2.  Market and Govt are two important factors that
will affect people’s life in the world.
 Govt and Market are peopled by both individual
agents,groups. Social and economic factors.
 Govt make the rules of market boundaries and
operations through various process and
deliberations.
 Govt and market in a country are interrelated
and interdependent on each other.

3.  In today’s global economy business mens and
emerging entrepreneurs are said to be the driving
forces of economy.
 In a planned economy government holds control
of shaping the business activity of the country.
 For maintaining a steady and upward economic
growth the govt must try to make suitable for the
market.
 The market must follow the laws of government to
run the business smoothly and making sure there is
a level playing field.

4. Role of Market
Definition of Market
A regular gathering of people for the purchase and sale
of provisions, livestock, and other commodities.
 Transaction of Product ,Services and Money
 Provide Place for Market.
 Generation of Employment.
 Index of Economic Situation.
 Supply Versus Demand Adjustment.

5.  A company sets the price of its product at $10.00.
No one wants the product, so the price is lowered
to $9.00. Demand for the product increases at the
new lower price point and the company begins
to make money and a profit.

6.  The company could lower the price to $5.00 to
increase demand even more, but the increase in
the number of people buying the product would
not make up money lost when the price point was
lowered from $9.00 to $5.00.


7. Regulatory Role of Govt
 Direct Administrative Control : Industrial Licensing
,Price and distribution Controls.
 Industrial Licensing is justified as the mechanism
by which government can control industrial
investments and allocate resouces.
 Indirect Controls:
 Indirect Control are usually exercised by various
fiscal and monetary incentives or disincentives or
penalties
 For ex : High import duty may discourage imports
and tax waiving scheme and incentives may
develop Export oriented units.

8.  The financial tools available in the hands of the
Reserve Bank of India to control the monetary
and fiscal policies are:
 Bank Rate: It is the Discount Rate, rate which the
central bank charges on loans and advances to
commercial banks (Short term).

9.  Repo Rate: It is the rate at which the RBI lends
money to commercial banks, a short term for
repurchase agreement. A reduction in the repo
rate will help banks to get money at a cheaper
rate. It is equivalent to the discount rate of US.
(Long term).
 Reverse Repo Rate: It is the rate at which Reserve
Bank of India (RBI) borrows money from banks.

10.  Cash Reserve Ratio (CRR): It indicates the amount
of funds that the banks have to keep with RBI. If
RBI decides to increase the percent of this, the
available amount with the banks comes down.
RBI is using this method to drain out the excessive
money from the banks
 Statutory Liquidity Ratio (SLR): It is the amount a
commercial bank needs to maintain in the form
of cash, or gold or govt. approved securities
(Bonds) before providing credit to its customers.
SLR rate is determined and maintained by the RBI
in order to control the expansion of bank credit.

11.  Encourage Savings and Investment:
Individual saving means spending less on consumption that
available from one’s disposable income.
 Encourage Investments from Abroad:
1. Foreign Direct Investment
It refers to long term participation by one Country into the
other.
2. Foreign Portfolio investment
Entry of fund into a country where foreigners makes
purchases in the country stock and bond markets.

12.  Imagine that you are a multi-millionaire based in
the U.S. and are looking for your next investment
opportunity. You are trying to decide between (a)
acquiring a company that makes industrial
machinery, and (b) buying a large stake in a
company or companies that makes such
machinery. The former is an example of direct
investment, while the latter is an example of
portfolio investment.

13.  Now, if the machinery maker were located in a
foreign jurisdiction, say Mexico, and if you did
invest in it, your investment would be considered
as FDI. As well, if the companies whose shares you
were considering buying were also located in
Mexico, your purchase of such stock or their
American Depositary Receipts (ADRs) would be
regarded as FPI.

14.  Foreign Exchange management Act 2000 defines
foreign portfolio investment as buying and selling
of shares, convertible debentures of indian
companies and units of domestic mutual funds at
any of the indian stock exchanges.

15.  The company leaves the price set at $9.00
because that is the point at which supply and
demand are in equilibrium. Raising the price
would reduce demand and make the company
less profitable, while lowering the price would not
increase demand by enough to make up the
money lost.

16.  To Promote Education
 Economists believe that human capital is even
more important than physical capital because of
positive externalities.
 Major Problem of Poor Countries is “Brain Drain”.
 If educated workers comes up with new and
better ways of producing goods and services
everyone in the country will be benifited.

17.  To promote health and nutrition :
 Efficiency of workers depends considerably on
their health
 It reduces production losses caused by worker
illness
 It increases the enrollment of children in schools

18.  Secure Property Rights and political Stability
 Property rights refer to the ability of people to
exercise authority over the resources they own.
 Physical Capital : Consume less and save more
today to have more physical capital in future
 Human Capital : Attend School and forgo wages
today to have more human capital in the future.

19.  Promote Free Trade :
 A County which eliminates trade restrictions will
experience the same kind of economic growth .
 Research and Development:
 Government should encourage the development
of new technologies through research grants