Session 1B. CONCEPTS

1. Session 1B. CONCEPTS

2. CONCEPTS Consumption: Direct and final use of goods- destruction of utility. Savings are that part of the income which is not used for current consumption- i.e., Postponement of current consumption S = Y-C

3. Investment: Savings when mobilised and converted into real physical assets Production: Creation or addition of utility Productive activity: Any activity undertaken with the objective of earning an economic reward

4. CONCEPTSFactors of production Land • All natural resources lying on, above or below the earth’s surface • Heterogeneous • Geographically immobile but occupationally mobile • Passive factor of production

5. CONCEPTSFactors of production Labour • Physical or mental exertion by a human being in the process of production • Heterogeneous • Inseparable from the labourer • Active factor of production

6. CONCEPTSFactors of production Capital • Produced means of production • Factories, machines, tools, buildings etc • Derived demand • Subject to depreciation Money Capital:Money funds at the disposal of a firm or individual Real capital: Physical assets. E.g., machines, buildings, etc Human capital: Skills, knowledge and health of labour as a factor of production

7. CONCEPTSFactors of production • Enterprise & Organization: Newer concepts • Identifying potential sources of production, collecting them in required quantities, assigning them specific tasks as per skills is the role of Organisation. • Using these factors for economic activities, without any certainty of returns is the function of the entrepreneur.

8. CONCEPTS Concept of scarcity- Scarcity of resources and multiplicity of wants- Choice Opportunity Cost: Benefits foregone from the alternatives that are not selected- arises from scarcity and versatility of resources

9. PPC/PPF or Transformation Curve Production Possibility Curve/ Frontier • A graph that shows the different combinations of the quantities of two goods that can be produced (or consumed) in an economy, subject to availability of resources

10. PPC/PPF or Transformation Curve • PPC represents opportunity cost concept and measures it (through the slope) • Highlights significance of scarcity of resources • Shows trade-off “Substitution is the law of life in a full employment economy. The PPC depicts the society’s menu of choices”- Samuelson

12. PPC/PPF or Transformation Curve Imagine an economy that can produce only wine and cotton. According to the PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by the economy. Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources.

13. PPC/PPF or Transformation Curve Assumptions: • Economy is operating at full employment • Factors of production fixed in supply; but can be reallocated between uses • Technology unchanged • For simplification, considers only 2 commodities Based on these assumptions, society is faced with a fundamental problem of choice

14. PPC/PPF or Transformation Curve • PPC measures the best combination of outputs that can be achieved from a given number of inputs. • Downward sloping . Why? • Concave to the origin (bowed outside)- As we produce more units of a commodity, we have to give up more and more units of the other commodity

15. Shifts in PPC

16. PPF • When the PPF shifts to the right (outwards) , it shows there is growth in an economy.. Reasons: • Technology • Factor Endowments (shale Gas)

17. PPC • When the PPF shifts inwards, it indicates that the economy is shrinking. • A shrinking economy could be a result of huge ecological disaster , social unrest or deficiency in technology

18. PPC • An economy can be producing on the PPF curve only in theory. In reality, economies constantly struggle to reach an optimal production capacity.

19. Firm • An entity or organization that combines and organizes resources for the purpose of producing goods and /or services for sale. • Identify- collect -and assign resources • Types: proprietorships, partnerships, and corporations

20. Sole Proprietorship Firm Sole Proprietorship Firm/ Proprietary Single owner -Invests own/borrowed capital uses his own skills in management, solely responsible for results of operations -Profits / losses not shared by anybody

21. Advantages: • Simple form • Easy to start and exit • Undivided profits • Secrets of Trade • Prompt decision making • Personal touch to business

22. Disadvantages: • No separate entity of the firm • Unlimited liability • Limited availability of funds • Uncertain life of business after the owner

23. 2. PARTNERSHIP • Association of two or more persons • Agreement/ contract to start the firm and to share profits (& losses) • Individually partners , collectively firm • Heir does not automatically become partner • All partners are bound by a decision or act by any one of them. • A partnership firm can not become a member of another firm, though partners can join another firm

24. PARTNERSHIP • Partnership Deed- as partnership is created by agreement • Easy to form • Strong credit position • Shared Risk • Shared resources

25. PARTNERSHIP • Uncertain life -Can be broken any time and reconstituted • Unlimited liability- if a partner can not repay loan, creditors can claim it from the his personal assets. • No legal framework for defining partners’ roles- Distrust can destroy • Fund availability related to partners’ creditworthiness

26. JS/ LTD COMPANY Most common type of business organisation Legal entity Perpetual Existence- independent of its members MOA and Articles of Association to registrar

27. Private and Public Ltd Co Private LTD Co: -Max 50 share holders -Shares transferable only among members • Cant issue a prospectus Public Ltd Co: Minimum 7 members, no max

28. Business Cycles • Widespread contraction and expansion in most sectors of the economy. Recession Peak Expansion Trough Time

29. Phases of Business Cycles Phases of Business Cycles • Expansion • Peak of boom or prosperity • Recession or downturn • Trough, the bottom of the depression • Recovery and expansion

30. Business cycles are marked by widespread expansion and contraction in most sectors of the economy • Major phases of a business cycle are recession and expansion (or prosperity). • Peak and trough are the turning points of the phases. • If recession is severe in terms of scale and longer in duration, it is termed depression

31. Causes of Cycles • Inflationary/ deflationary pressures on price-cost relationships • Agricultural and meteorological factors • Aggregate demand and under consumption • Monetary factors • Savings-investment gap or over investment

32. Causes of Cycles • Technological innovation • General over production • Psychological factors • Risk and uncertainty factors

33. Characteristics of Recession • Fall in consumers purchase • Fall in demand for labour and other inputs. • Fall in output and increase in inventories. • Fall in investments and demand for credit • Fall in profits • General pessimism Increase in the above factors describes the phase of expansion

34. Characteristics of Recession • The Great Recession: • Fall in Durable consumer goods demand • Freeze on new recruitments • Job cuts and pay cuts • Unsold houses (Foreclosures) • Bankruptcies • Stock market slide and falling investor confidence • General mood of pessimism

35. Global Recovery?? • US sub prime lending • Each phase carries the seeds of its own destruction • Jobless recovery?? • Double Dip?? • European crisis: Sovereign Debt Crisis

36. Signs of Economic Recovery 1. Unemployment figures • Non-farm payrolls • ASA Staffing Index: Measures the temporary staffing activity. After a recession, employers add temporary workers first so as to avoid the commitments and expenses of adding full-time workers until they are sure that business has improved. A rising ASA Staffing Index can signal that a recovery is underway.

37. Signs of Economic Recovery 2. Consumer spending

38. Signs of Economic Recovery 3. Consumer SentimentSurveys ask people how they feel about the economy in near-term and their own individual or family prospects. • Consumer sentiment indicators like the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index do seem to correlate with reality more often than not.

39. Signs of Economic Recovery 4. Bank Lending

40. 5.Purchasing Managers Index (PMI) • The Institute for Supply Management (ISM) calculates the Purchasing Managers Index (PMI) • Composite index of five "sub-indicators", based on surveys of more than 400 purchasing managers from around the USA • whether businesses are seeing new orders, higher production levels, timely deliveries from suppliers and increasing inventories and employment

41. Signs of Economic Recovery • Production level • New orders (from customers) • Supplier deliveries - (are they coming faster or slower?) • Inventories • Employment level

42. Signs of Economic Recovery • Questions have only three options; "better", "same", or "worse“ (As the manager sees it) • PMI figure ranges from 0 to 100 • PMI reading of 50 would indicate an equal number of respondents reporting "better conditions" and "worse conditions".

43. Signs of Economic Recovery 6. Cass Freight Index and the American Trucking Association's Truck Tonnage Index. (because these show that goods are being delivered to satisfy consumer orders) • In India also truck sales are taken as an important indicator

44. Contra Cyclical Policy Contra-cyclical or Counter-cyclical Measures (Measures to control business cycles) A) Monetary Policy for Tackling Recession–Designed by the central bank of the country. (RBI in India) Monetary measures control liquidity and availability of credit . Need to increase liquidity through: • Repo and reverse Repo rates • CRR decrease • SLR decrease • OMO: Selling securities Moral suasion and other qualitative credit controls

45. B) Fiscal Policy for Tackling Recession Measures by the government- Emphasised by J. M. Keynes during Great Depression • Reduce tax rates • Increase subsidies • Increase public expenditure • Debt polices.

46. Fiscal measures directly affect • Prices • Consumers’ disposable income • Money supply • Supply of goods and commodities - which in turn affect the movements of business cycles

47. 3.Other measures – Buffer stock operations Declaration of minimum procurement price etc are used to stabilize prices in agriculture

48. Inflation • Demand pull/ Cost- push • WPI: 435 commodities tracked- time lag of only e weeks- revision later • CPI is a better index as it captures cost of living, but it comes with a time lag • 4 types of CPI- Industrial workers, urban Non manual workers, AL, rural labor

49. Monetary Policy • Repo rate : Rate of interest charged by central bank when banks borrow money from it • Tool through which RBI infuses funds into the system by lending to banks against pledging of securities

50. Monetary Policy • Reverse repo: Rate which RBI offers to banks when they deposit funds with it. • RBI drains out liquidity from the financial system through reverse repo by releasing bonds to the banks. This is a daily operation by the Bank to manage liquidity. Over a longer period, RBI can also manage liquidity through OMO.