Category: Economics Content

Economics Content, and Business, Finance, Microeconomics, and Macroeconomics, It’s the study of scarcity, the study of how people use resources and respond to incentives or the study of decision-making. It often involves topics like wealth and finance, but it’s not all about money. Economics is a broad discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming years.

Also learn, Economics ranges from the very small to the very large. The study of individual decisions is calls microeconomics. The study of the economy as a whole is calling macroeconomics. A microeconomist might focus on families’ medical debt, whereas a macroeconomist might focus on sovereign debt.

Economics focuses on the behavior and interactions of economic agents and how economies work. Microeconomics analyzes basic elements of the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labor, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies). See glossary of economic.

  • What do you think of Monopoly? Understand the Monopoly on the Characteristics, Purpose, and Strength.

    What is a Monopoly? The word Monopoly is made of two words; MONO + POLY. Here “Mono” means one and “Poly” implies the seller, thereby the literal meaning of the word Monopoly is one seller or one producer. Thus, pure monopoly refers to that form of market organization wherein there is a single firm (or producer) producing a commodity for which there are no good or close substitutes. The monopolist is not bothered by the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve. So, what is the topic of the question we are going to discuss; What do you think of Monopoly? Understand the Monopoly on the Characteristics, Purpose, and Strength. Read in Hindi.

    Here are explained about Monopoly: Understand the Monopoly on the Characteristics, Purpose, and Strength.

    The market, form of monopoly is the opposite extreme from that perfect competition. It exists whenever an industry is in the hands of the single producer. In the case of perfect competition, there are so many individual producers that no one of them has any power over the market and an; one firm can increase or diminish its production without affecting the market price. A monopoly, on the other hand, has the power to influence the market price. By reducing its output, it can force the price up, and by increasing its output it can force the price down.

    According to Watson, “A monopolist is the only producer of a product that has no close substitutes.” Changes in prices and outputs of other goods sold in the economy must leave the monopolist unaffected. Conversely, changes in the monopolist’s price and output must leave the other producers of the economy unaffected.

    In the words of Salvatore, “Monopoly is the form of market organization in which there is a single firm selling a commodity for which there are no close substitutes.” The cross elasticity of demand with every other product is very low. This means that no other firms produce a similar product. Thus, the monopoly firm is itself an industry and the monopolist faces the industry demand curve. The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes and incomes of his customers.

    The Characteristics of Monopoly:

    We may state the features or characteristics of monopoly as:

    One Seller and a Large Number of Buyers:

    The monopolist’s firm is the only firm; it is an industry. But the number of buyers is assumed to be large.

    The difficulty of Entry of New Firms and Industry:

    Firms – There are either natural or artificial restrictions on the entry of firms into the industry, even when the firm is making abnormal profits. Industry – Under monopoly, there is only one firm which constitutes the industry. Difference between firm and industry comes to an end. Since in monopoly there is a single firm producing the commodity, hence the difference between firm and industry vanishes automatically.

    Barriers to the Entry:

    The entry into the industry is completely barred or made impossible. If new firms are admitted into the industry, monopoly itself breaks down. This ban on entry may be legal, natural or institutional but it must essentially be there.

    Price Maker:

    Under monopoly, the monopolist has full control over the supply of the commodity. But due to a large number of buyers, the demand of any one buyer constitutes an infinitely small part of the total demand. Therefore, buyers have to pay the price fixed by the monopolist.

    Price-Discrimination is Possible:

    Under the conditions of monopoly, price-discrimination is possible. It implies that a monopolist can sell its product at different prices to different customers.

    In short, monopoly depends basically on two factors:

    • Absences of close substitutes, and.
    • Restriction on the competition.
    No Close Substitutes:

    For the monopoly to exist single producer is the necessary condition but not a sufficient one. It is also essential that there should be no close substitute of the commodity in the market. This second condition would be even more difficult to fulfill than the first since there are few things for which there is no substitute. For instance, Usha is produced by a single firm alone but there are close substitutes of Usha fans that are available in the market in the form of Railfans, Khaitan Ashoka, Crompton, etc. Hence, though the firm producing Usha fans is single yet it cannot be termed a monopoly firm.

    It is, therefore, essential for a monopoly to exist that there should be no close substitutes available in the market. This condition can be stated in other words as that the cross elasticity of demand for the output of the firm with respect to the price of every firm’s product is zero. There shall not be any close substitutes for the product sold by the monopolist. The cross elasticity of demand between the product of the monopolist and others must be negligible or zero.

    Positive And Negative Purpose Of Monopoly:

    Currently, in many countries around the world, the monopoly in the business still has debatement and it is applied in some fields. Therefore, there will be two exclusive aspects: positive and negative when applied in the business methods of a certain field. The main points lead to monopoly are Government concessions resources for a certain firm, the ownership of inventions, patents and intellectual property, ownership is a great resource.

    Positive Purpose:

    As a result, we can analyze the positive outlook base on Viet Nam Oil And Gas Group (Petrovietnam) – one of the most popular corporations in Viet Nam since 1985 till now. Petrovietnam has supposed as a powerful economic group in Vietnam, known in the region and the world. In this situation, the profits that Petrovietnam earns to provide funds that can be invested in equipment and development.

    Whereas perfect competition must be accepted with a normal return on invested capital, the monopolist has more funds to undertake the development further. Importantly, the ability to achieve a monopoly position or to maintain it and step ahead of potential competitors, Petrovietnam has to do innovation in products, techniques and cost savings. They also may not need to spend more money on advertising, marketing, promotions, etc.

    Negative Purpose:

    Due to maximize revenue, the monopolist would produce goods which marginal sales equal marginal revenue instead of producing output level which prices higher than marginal cost as in the market (supply equals demand). Besides, different from perfect competition which price depends on the quantity of producing of a firm. Price of Petrovietnam would increase while decreasing the quantity of produce. For this reason, profit margins will be higher than selling price.

    Besides, producing more oil products will make the enterprise gets more revenue and it also will be the higher selling price. Accordingly, sometimes Petrovietnam suddenly increases the price higher while the international market price was decreasing and the market did not change. Thus, people have to buy oil and gas at an expensive price because oil and gas are important in life. Although people complained, Petrovietnam still keeps the price high.

    In this case, we can see easily that they misused the power of monopolist sometimes. In short, the monopolist will produce lower and price of selling goods is higher than the competitive market. In addition, society has to bear loss by increased output minus the marginal total cost to produce the output which should be produced more. It is the toll by the monopolist. In addition, lack of incentive to innovate also impact the demand and supply.

    Measuring Monopoly Power (Strength):

    Different measures that have been suggested are as follows:

    By Concentration Ratio:

    Concentration ratio refers to the fraction of total market sales controlled by the largest group of sellers. The inclusion of the market shares of several firms in the concentration ratio rests upon the possibility that large firms will adopt a common price- output policy which may not be very different from the one they would adopt if they were under unified management. But here the difficulty arises that they may not do so. Therefore, a high concentration ratio may be necessary for the exercise of monopoly power but it is not sufficient.

    In an industry, usually there exist some smaller firms and some larger firms in the sense that smaller firms have relatively smaller shares in total industry sales (or profits or assets), and the larger firms have relatively larger shares. That is, sales (or profits or assets) may be more concentrated in a few firms of the industry, or such concentration may be less. Now, the size of the largest firms’ share in total industry sales, etc. is known as the concentration ratio.

    For example, if we consider sales as the criterion, then the n largest firms’ share in total industry sales is called an n-firm concentration ratio which is denoted by CRn. Usually, the four-firm and eight-firm concentration ratios denoted by CR4 and CR8, are used as a measure of monopoly power.

    The concentration ratio may act as a measure of monopoly power because, in a competi­tive industry, sales are more evenly distributed among firms—concentration of sales is more or less absent. On the other hand, in a monopolistic industry, sales tend to concentrate in a few large firms—in the limiting case, sales are concentrated in only one firm when we have the case of a pure monopoly.

    By Profit-Rate:

    J.S. Bain used profit-rate as a measure of monopoly power. By high profits, economists mean returns sufficiently in excess of all opportunity costs which potential new entrants desire for entering the industry. The size of super-normal profits which a firm is able to earn is an indication of its monopoly power. In perfect competition, a firm earns only normal profits. In a monopoly, new entrants will not normally compete away monopoly profits.

    But there will be some level of profits at which new firms will find it worth taking the risk of trying to break the monopoly. The stronger the monopolist’s position, the greater the profits he will be able to earn without attracting new rivals. In short, it is said that neither concentration ratio nor profit-rate is ideal measures of the degree of monopoly power, both are of some value nor both are widely used.

    By Lerner’s:

    It is the oldest measure and is based on the difference between the price charged by the monopolist and his marginal cost. Bober gives the formula 1/E. Thus, the degree of monopoly power varies inversely with the elasticity of demand for the commodity.

    However, the more commonly used formula is:

    Degree of monopoly power = (P-MC) / P

    Where P is the price charged by the monopolist and MC his marginal cost.

    In perfect competition,

    P = MC and the formula (P-MC)/P gives zero answers indicating no monopoly power. If the monopolized product is a free good, MC = 0 and the formula registers unity. The index of monopoly power thus varies from zero to unity. Since monopolized goods are seldom free, monopoly power is seldom as high as unity.

    This method is not free from defects as:

    • Firstly it does not measure non-price competition. Secondly, monopoly power is shown itself not only in high price but also in output restriction. The output may be restricted by under-utilization of capacity already in existence or by restricting new entry.
    • Lerner’s method throws no light on these aspects of monopoly power.

  • What does Monopoly mean? Understand Monopoly control Methods.

    What is the Monopoly? The word Monopoly has been derived from the combination of two words i.e., “Mono” and “Poly”. Mono refers to a single and poly to control. “Mono” means one and “Poly” means seller. A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. Thus monopoly refers to a market situation in which there is only one seller of a particular product. This means that the firm itself is the industry and the firm’s product has no close substitute. So, what is the question we are going to discuss; What does Monopoly mean? Understand Monopoly control Methods. Read in Hindi.

    Here are explained What does Monopoly mean? after Understand Control and Regulation of Monopoly Methods.

    The monopolist is not bothered by the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve. In this way, monopoly refers to a market situation in which there is only one seller of a commodity.

    There are no close substitutes for the commodity it produces and there are barriers to entry. The single producer may be in the form of an individual owner or a single partnership or a joint-stock company. In other words, under monopoly, there is no difference between firm and industry. The monopolist has full control over the supply of the commodity.

    Having control over the supply of the commodity he possesses the market power to set the price. Thus, as a single seller, the monopolist may be a king without a crown. If there is to be the monopoly, the cross elasticity of demand between the product of the monopolist and the product of any other seller must be very small.

    Can there be the complete monopoly in the real commercial world? Some economists feel that by maintaining some barriers to entry a firm can act as the single seller of a product in a particular industry. Others feel that all products compete for the limited budget of the consumer. Therefore, no firm, even if it is the only seller of a particular product, is free from competition from the sellers of other products.

    Thus complete monopoly does not exist in reality. The monopolist is the sole seller of a particular product. Therefore, if the monopolist is to enjoy excess profit in the long run that must exist certain barriers to the entry of new firms into the industry. Such barriers may refer to any force which prevents rival firms (competing producers) from enter­ing the industry.

    Learn Control and Regulation of Monopoly:

    There are three methods of controlling and regulating monopoly:

    First, the government may adopt anti-monopoly laws and restrictive trade practices legislation. Second, the government may either run natural monopolies directly or regulate monopolies by imposing price ceilings. Third, the government may regulate monopolies through taxation.

    Besides, there are certain fears that prevent the monopolist from charging a very high price in order to earn large super-normal profits.

    They are discussed as under.

    Fear of Potential Rivals:

    The fear of potential competitors may prevent a monopolist to charge a very high price to his customers. If he sets a very high price, he will earn large super-normal profits. Attracted by these monopoly profits, new entrants may force themselves into the monopolized industry. The monopolist, being averse to the entry of new firms, would prefer to charge a reasonable price and thus earn only a modest profit.

    Fear of Government Regulation:

    The same consideration applies to potential government regula­tion. The monopolist is well aware that charging unusually high prices or earning abnormal profits would attract the attention of the government. Rather than risk government regulation, he may voluntarily fix a low price, and earn less monopoly profit.

    Fear of Nationalisation:

    The fear of nationalization also prevents the monopolist to wield absolute monopoly power. If the product or service which the monopolist provides is a public utility service, there is every likelihood of the state taking over the monopoly organization in public interest. This consideration may prevent the monopolist from charging too high a price.

    Fear of Public Reaction:

    The monopolist is also aware of public reaction if he charges a very high price and earns huge profits. Voices may be raised against the monopoly firm in parliament to press for anti-monopoly legislation.

    Fear of Boycott:

    People may even boycott the use of monopolized service and start their own service instead. For instance, if in a big city taxi operators combine to charge high rates, people may boycott taxi service and even start operating their own services by forming a cooperative society. Naturally, such a fear compels monopoly firms to charge reasonable prices and earn only nominal profits.

    Fear of Substitutes:

    Then there is the fear of substitutes. In fact, the fear of substitutes is the most potent factor which prevents monopoly firms from charging very high prices and thereby earn super-normal profits. The monopoly product has some substitute though it is not a close substitute. Therefore, the fear of the emergence of very close substitutes is always uppermost in the mind of the monopolist which acts as a restraint on his absolute power.

    Differences in Elasticities of Demand:

    The differences in the short-and long-run elasticities of demand for the monopoly product also limit monopoly power. In the short-run, the monopolist can charge a very high price because customers take time to adjust their habits, tastes, and incomes to some other substitutes.

    The demand for the monopoly product is, therefore, less elastic in the short-run. But in the long-run, the fear of public opinion, the emergence of substitutes, government regulations, etc. will force the monopolist to set a low price. He will view his demand curve as elastic, and sell more at a low price.

    1. Control of Monopoly through Legislation:

    Government tries to control monopoly by anti-monopoly laws and restrictive trade practices legislation.

    These measures tend to:

    • Remove restrictive trade practices and fixation of high prices.
    • Reduce the incidence of market-sharing agreements.
    • Remove unfair competition.
    • Restrict the control of a very large share of the market.
    • Prevent unfair price discrimination.
    • Restrict mergers in order to avoid market domination, and.
    • Prohibit exclusive agreements between the producer and retailer to the detriment of other traders.

    2. Control of Monopoly through Price Regulation:

    We now take the case where the government feels that monopoly price is very high and tries to bring it down by price regulation. To regulate monopoly, the government imposes price ceiling so that monopoly price should be near or equal to competitive price.

    This is done when the government appoints a regulating authority or commission which fixes a price for the monopoly product below the monopoly price, thereby increasing output and lowering the price for the consumer.

    Before the regulation of monopoly price, the monopolist is making PF * OM profits by selling OM output at MP (=OA) price. Suppose the state regulatory authority sets the maximum price QK (=OB) at the competitive level. The new demand curve facing the monopolist becomes BKD. Its corresponding MR curve becomes BKHMR. Now the monopolist behaves like a perfectly competitive producer. He produces and sells OQ output at point К where the MC curve cuts the BKHMR curve from below.

    As a result of price regulation, the monopolist increases his output to OQ from OM. He still makes supernormal profits equal to KG * OQ that are smaller than the monopoly profits (PF * OM) at the unregulated price MP. If the price regulatory authority fixes the monopoly price WS equal to the average cost where the AC curve cuts the D/AR curve at point S, the monopolist would be able to place a greater quan­tity of output OW in the market.

    At this level, the monopolist would earn only normal profits. In such a situation, the monopolist would continue to produce so long as he is getting a fair return on his capital investment. But the regulatory authority cannot force him to increase output beyond OW because the monopolist would not be operating at a loss.

    3. Control of Monopoly through Taxation:

    Taxation is another way of controlling monopoly power. The tax may be levied lump-sum without any regard to the output of the monopolist. Or, it may be proportional to the output, the amount of tax rising with the increase in output.

    Lump-sum Tax:

    By levying a lump-sum tax, the government can reduce or even eliminate monopoly profits without affecting either the price or output of the product. A lump-sum tax imposed on the monopoly firm is shown in suppose where AC and MC are the average cost and marginal cost curves before the tax is levied. The monopolist earns APRT super-normal profits by selling OM product at MP Price.

    The imposition of the lump-sum tax is, in fact, a fixed cost to the monopoly firm because it is independent of output. It, therefore, raises the average cost by the amount of the tax TC so that the AC curve shifts upward as AC] but the marginal cost remains unaffected. So the imposition of a lump-sum tax has the effect of reducing monopoly profit from APRT to APBC.

    The entire burden of the tax will be borne by the monopolist himself. He cannot shift any part of it to his customers at any stage by raising the price and reducing output. Since the monopolist’s marginal cost curve and the marginal revenue curve remain unaffected by the tax imposition, any change in the existing price-output combination would only lead to losses.

    Specific Tax:

    The government can also reduce monopoly profits by levying a specific or a per unit tax on the monopolist’s product. A per unit tax on monopoly output has the effect of shifting both the average and marginal cost curves upward by the amount of the tax.

    Illustrates this case. AC and MC are the monopoly firm’s average cost and marginal cost curves before the tax imposition. It earns BPGK monopoly profits by selling OM quantity of the product at the UP price. Suppose a government levies a specific tax which is a variable cost to the monopoly firm tends to shift the cost curves upward to AC1 and MC1.

    The monopolist’s new equilibrium point is E1 where the MC1 curve cuts the MR curve. The new price is M1P1 >MP (the old price) and the output is OM1

    Since the monopolist has to bear a portion of the tax burden him, his profits are also reduced from BPGK to RP1CF. Such a tax does not help in regulating monopoly price and output. For the higher, the demand elasticity of tax, the higher the price for the product and the lower the output. The ultimate loss will be borne by the public rather than by the monopolist.

  • Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits

    Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits

    What does mean Capitalist Economy? Meaning; It is one of the oldest economic systems and its origin is at the time of mid-eighteenth century in England in the wake of the Industrial Revolution. It is that system, where means of production are owned by private individuals, profit is the main motive and there is no interference by the government in the economic activities of the economy. They are free to use them with a view of making the profit. Everybody is free to take up one line of production he likes and is free to enter into any contract with others for his profit. Hence, it is known as the free market economy. So, what is the topic we are going to discuss; Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits.

    Here are explained; What is the Capitalist Economy? with Meaning, Definition, Features, Merits, and finally Demerits.

    What is the Capitalist Economic System of India? Capitalism is the most prominent in our current global economic system. Its main characteristic is that it most means of production and property are privately owned by individuals and companies. The government has a limited role in such an economy limited to management and control measures. So a capitalist economy is a liberal economy. This means only the free market will determine the supply, demand, and prices of the products.

    Definition of Capitalist Economy:

    According to Wright,

    “Capitalism is a system in which, on average, much of the greater portion of economic life and particularly of net new investment is carried on by private (i.e. non-government) units under conditions of active and substantially free competition and avowedly at the least, under the incentive of hope for profit.”

    In the words of Loucks,

    “Capitalism is a system of economic organization featured by private ownership and use for private profit of man-made and nature-made capital.”

    According to Ferguson,

    “Capitalism is a free-market form or capitalistic economy may be characterized as an automatic self-regulating system motivated by self-interest of individuals and regulated by competitions.”

    Features of Capitalist Economy:

    Capitalist economy has the following main features:

    • Private Property: In this economy, private property is allowed. All means of production like machines, implements, mines, and factories etc. come under private property.
    • Price Mechanism: The Capitalist economy is gained by the price mechanism. Here prices are determined by the interaction of demand and supply without the interference of any kind by the government or any other external forces.
    • Freedom of Enterprise: In this system, every individual is independent to his means of production in any occupation that one likes.
    • The sovereignty of that consumer: Under this system, the consumer plays the most vital role. The entire production pattern is based on the desires, wishes and the demand of the consumer.
    • Profit Motive: The maximization of profit is the main motive of the producer. Profit guides the production in this type of economy.
    • No Government Interference: Under a capitalistic system, the government does not interfere in day-to-day economic activities. This means producers and consumers are free to make decisions.
    • Democratic: The capitalistic system is more democratic in comparison to other economic systems as there are more changes to chancel according to new environments of the economy.
    • Self-Interest: The inspiring force in this system is self-interest. It leads to hard work and to earn maximum income by satisfying their consumers.
    Capitalist Economy Meaning Definition Features Merits and Demerits
    Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits. Image credit from #Pixabay.

    Merits of the Capitalist System:

    The following advantages or merits below are:

    • Individual Motivation: The capitalist economic system motivates the businessmen to develop new items, produce in good quality and undertakes innovative activities because of the initiative of larger profits.
    • Flexible and Dynamic Economy: Motivated by profits, individual initiatives and competition among the traders and businessmen, there is dynamism in the capitalist economy continuously goes ahead with changes and innovative activities.
    • The benefit of Perfect Competition: There exist perfect competition between different traders and creditors who benefit from the capitalist economy. There is no change of monopolistic profits because of perfect competition. The existence of competition initiates more economic welfare. According to George Steiner, from the point of view of public welfare, competition serves as a regulator and reducer of prices as an incentive to improved production efficiency. Without competition, the capitalist economy would become stagnant, unproductive and exploitative.
    • Capital Formation: The capitalist economy encourages for the formation of capital, wealth and assets in the society. New industrial and commercial institutions are set up with the objectives of profits and also encourages the creation of additional employment, income, and savings. 
    • The economic growth of an economy is also faster and higher in a capitalist economy. This is because the investors will also invest in projects that are profitable for them. There is no pressure to produce any goods or services if they do not wish to do so for the sake of the public.
    • Consumers also benefit in a capitalist economy. Firstly they have the freedom to choose whichever products or services they wish to buy. Also, the competition is high and the producers are motivated to make their best products in large quantities at reasonable prices.
    • Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers.

    Demerits of Capitalist System:

    The countries which have become independent after the 1950s adopted mostly the socialistic economic system because of the demerits of the capitalist economic system. Human welfare aspect has completely disappeared in the capitalist system and it has created disparity in income and wealth. H.D. Dickinson writes, “Capitalism. …is fundamentally blind, purposeless, and irrational and is incapable of satisfying many of the urgent human needs.

    Some of the important disadvantages or demerits of capitalism are:

    • Increase Inequalities: It increases inequalities in wealth, income and opportunities. Increase in economic inequalities creates economic and social problems.
    • Economic Instability: It is difficult to establish a balance between the demand and supply. There will be a trade boom or recession or the frequent fluctuations in prices. All the decisions relating to production are taken by the capitalist and due to wrong estimates of future requirements; imbalance in production is generally found. Due to fluctuations in prices industrial and other economic activities become unstable and this will have an adverse impact on economic development and expansion.
    • Inefficient Production: The capitalist always produces with the motive of profit only. He always produces goods for use by the higher income class of the community so that maximum profits can be obtained. There is no place in the mind of the capitalist to produce for consumption by common people. Goods and service are not produced by keeping in view the interest and wants of the common man, but with the motive of capitalist’s profits.
    • Class Conflicts: The capitalist economy divides the community into two parts; on the first side the top capitalists and on the other side labor class which depends on the capitalists to fill their stomach. Since the production resources are controlled by the capitalists they exploit the labor from their reasonable reward.
    • Unemployment: In a capitalist economy, full employment situation cannot be brought due to lack of central economic planning. With the result, optimum use of resources cannot be possible. This brings the situation of unemployment.
    • Monopoly and Exploitation: The establishment of large-scale business, improvement in technology, the motive of maximization of profits, formation of combinations and acute competition are the reasons for the creation of monopoly and exploitation of customers.
    • Neglect of National Interest: They are mainly oriented towards self-interest of maximization of profits for which they compete with each other. They neglect the social interests. They do not undertake their activities keeping in view the national interest.
  • 5 Advantages and disadvantages of Capitalism

    5 Advantages and disadvantages of Capitalism

    Understand the Advantages and disadvantages of Capitalism; Capitalism is an economic system in which each individual in his capacity as a consumer, producer, and resource owner is engaged in economic activity with a large measure of economic freedom. Individual economic actions conform to the existing legal and institutional framework of the society which is governed by the institution of private property, the profit motive, freedom of enterprise, and consumer sovereignty. Now discuss the pros and cons of capitalism;

    5 Advantages and disadvantages of Capitalism.

    Definition: Prof. R. T. Bye has defined capitalism as, “That system of economic organization in which free enterprise, competition and private ownership of property generally prevail.” Thus, the definition hints at the major features of capitalism. Also, understand Capitalism in India, Economic Growth and Development.

    Advantages of Capitalism:

    The protagonists of capitalism advance the following arguments in favor of capitalism – pros and advantages of capitalism.

    • Quality Products at Low Costs.
    • Increase in Production.
    • Flexible System.
    • Progress and Prosperity.
    • Maximizes Welfare, and.
    • Optimum use of Resources.

    Now, explain;

    Quality Products at Low Costs:

    The twin freedoms of consumers and producers lead to the production of quality products and lowering of costs and prices. Thus the society as a whole stands to gain under capitalism.

    Increase in Production:

    Arthur Young wrote, “The magic of property turns sand into gold.” This observation of Young holds good in a free enterprise economy where every farmer, trader, or industrialist can hold property and use it in any way he likes. He brings improvement in production and increases productivity because the property belongs to him. This leads to an increase in income, savings, and investment, and to progress.

    Flexible System:

    A capitalist economy operates automatically through the price mechanism. If there are shortages or surpluses in the economy, they correcte automatically by the forces of demand and supply. As such, capitalism is a highly flexible system that can adapt itself to changing economic conditions. That is why it has survived many depressions, recessions, and booms.

    Progress and Prosperity:

    The presence of competition under capitalism leads to an increase in efficiency, encourages producers to innovate, and thereby brings progress and prosperity to the country. As pointed out by Seligman. “If competition in biology leads only indirectly to progress, competition in economics is the very secret of progress”.

    Maximizes Welfare:

    The automatic working of the price mechanism under capitalism brings efficiency in the production and distribution of goods and services without any central plan and promotes the maximum welfare of the community.

    Optimum Use of Resources:

    Under capitalism, producers undertake the production of only those goods that appear to yield maximum profits in anticipation of demand. This leads to the optimum use of resources.

    Disadvantages of Capitalism:

    The following arguments are advanced against capitalism – the cons and disadvantages of capitalism.

    • Inequalities.
    • Consumer’s Sovereignty a Myth.
    • Inefficient Production.
    • Leads to Monopoly.
    • Depression Unemployment, and.
    • Non-utilisation of Resources.

    Now, explain;

    Inequalities:

    The institution of private property creates inequalities of income and wealth under capitalism. The price mechanism through competition brings huge profits to big producers, the landlords, the entrepreneurs, and the traders who accumulate the vast amount of wealth. While the rich roll in wealth and luxury, the people with low-income live in poverty and squalor.

    Consumer’s Sovereignty a Myth:

    Consumer’s sovereignty is a myth under capitalism. Consumers have to buy only those commodities which manufactured and supplied by the producers in the market. The majorities of consumers are not rational buyers and are often ignorant about the utility and quality of the products available at the stores or shops. They are also misled by advertisement and propaganda about the usefulness of the products. Products which produced by monopoly concerns are often of inferior quality and are priced high. Thus there is no consumers’ sovereignty in a seller’s market.

    Inefficient Production:

    Capitalism fails to produce goods in keeping with the society’s requirements. Frivolous luxury goods and obnoxious articles produced to satisfy the wants of the few rich at the expense of the necessities needed by the people with low-income. Thus there is social wastage of the economy’s resources.

    Leads to Monopoly:

    The competition which regarded as the very basis of capitalism contains within itself the tendency to destroy competition and leads to monopoly. It is the profit motive under capitalism which leads to cut-throat competition, and ultimately to the formation of trusts, cartels, and combinations. This brings about a reduction in the number of firms actually engaged in production. As a result, small firms are eliminated in this process.

    Depression and Unemployment:

    Capitalism is characterized by business fluctuations and unemployment. Excessive competition and unplanned production lead to overproduction and glut of commodities in the market and ultimately depression and unemployment.

    Non-utilisation of Resources:

    The price mechanism under capitalism fails to employ the country’s resources fully. Free and unfettered competition, inequalities of income distribution, overproduction, and consequent depression lead to wastage of productive resources. Besides, there is mass unemployment and freedom of occupation has little meaning under capitalism.

  • How to Analysis of Capitalism in India?

    How to Analysis of Capitalism in India?

    What is Capitalism? In the capitalist economic system, all farms, factories and other means of production are the property of private individuals and firms. In the words of Loucks, “Capitalism is a system of economic organization featured by private ownership and use for private profit of man-made and nature-made capital”. So, what is the question we are going to discuss; How to Analysis of Capitalism in India?

    Here are explained; Capitalism in India: first Features, Growth, Process, and finally Social.

    Definition; According to Wright, “Capitalism is a system in which, on average, much of the greater portion of economic life and particularly of net new investment is carried on by private (i.e. non-government) units under conditions of active and substantially free competition and avowedly at the least, under the incentive of hope for profit”.

    The Features of Capitalism:

    In the broadest sense, capitalism may be defined as the economic system making the widest use of capital in the process of production. In the technical sense, capitalism may be defined as the economic system of production in which capital goods are owned privately by individuals or corporations.

    The principal features of capitalism are discussed below; key points.

    • Private Property.
    • Profit Motive.
    • Price Mechanism.
    • Role of the State.
    • Market Economy.
    • Consumer Sovereignty.
    • Freedom of Enterprise.
    • Large Scale Production, and.
    • Competition.

    The following are the economic bases of capitalism, now explain each below:

    Private Property:

    Capitalism thrives on the institution of private property. It means that the owner of a firm or factory or mine may use it in any manner he likes. He may hire it to anybody, sell it, or lease it at will in accordance with the prevalent laws of the country. The state’s role is confined to the protection of the institution of private property through laws.” The institution of private property induces its owner to work hard, to organize his business efficiently and to produce more, thereby benefiting not only himself but also the community at large. All this is actuated by the profit motive.

    Profit Motive:

    The main motive behind the working of the capitalist system is the profit motive. The decisions of businessmen, farmers, producers, including that of wage-earners are based on the profit motive. The profit motive is synonymous with the desire for personal gain. It is this attitude of acquisitiveness which lies behind individual initiative and enterprise in a capitalist economy.

    Price Mechanism:

    Under capitalism, the price mechanism operates automatically without any direction and control by the central authorities. It is the profit motive which determines production. Profit being the difference between outlay and receipt, the size of profit depends upon prices. The larger the difference between prices and costs, the higher is the profit. Again, the higher the prices, the greater are the efforts of the producers to produce the varied quantities and types of products. It is the consumers’ choices which determine what to produce, how much to produce, and how to produce. Thus capitalism is a system of mutual exchanges where the price-profit mechanism plays a crucial role.

    Role of the State:

    During the 19th century, the role of the state was confined to the maintenance of law and order, protection from external aggression, and provision for educational and public health facilities. This policy of laissez-faire—of non-intervention in economic affairs by the state—has been abandoned in capitalist economies of the West after the Second World War. Now the state has important tasks to fulfill. They are monetary and fiscal measures to maintain aggregate demand; anti-monopoly measures and nationalized monopoly corporations; and measures for the satisfaction of communal wants such as public health, public parks, roads, bridges, museums, zoos, education, flood control, etc.

    Market Economy:

    Under capitalism, there is no governmental control over the forces of production, distribution, and exchange. It is controlled by the forces operating in the market. There is no price control or regulated distribution by the government. The economy operates freely under the law of demand and supply. The capitalist economy is a liberalized or market economy.

    Consumer’s Sovereignty:

    Under capitalism, ‘the consumer is the king.’ It means freedom of choice by consumers. The consumers are free to buy any number of goods they want. Producers try to produce a variety of goods to meet the tastes and preferences of consumers. This also implies freedom of production whereby producers are at liberty to produce a vast variety of commodities in order to satisfy the consumer who acts like a ‘king’ in making a choice out of them with his given money income. These twin freedoms of consumption and production are essential for the smooth functioning of the capitalist system.

    Freedom of Enterprise:

    Freedom of enterprise means that there is the free choice of occupation for an entrepreneur, a capitalist, and a laborer. But this freedom is subject to their ability and training, legal restrictions, and existing market conditions. Subject to these limitations, an entrepreneur is free to set up any industry, a capitalist can invest his capital in any industry or trade he likes, and a person is free to choose any occupation he prefers. It is on account of the presence of this important feature of freedom of enterprise that a capitalist economy is also called a free enterprise economy.

    Large Scale Production:

    It is another important feature of capitalism. Capitalism arose as a result of the industrial revolution which made large-scale production possible. The installation of gigantic plants and division of labor increased production. More production means wider use of capital and led to more profits.

    Competition:

    Competition is one of the most important features of a capitalist economy. It implies the existence of a large number of buyers and sellers in the market who are motivated by self-interest but cannot influence market decisions by their individual actions. It is competition among buyers and sellers that determine the production, consumption, and distribution of goods and services. There being sufficient price flexibility under capitalism, prices adjust themselves to changes in demand, in production techniques, and in the supply of factors of production. Changes in prices, in turn, bring adjustments in production, factor demand, and individual incomes.

    How to the Growth of Capitalism in India?

    In primitive societies the usual system of exchanging goods vas barter system. At that time the idea of profit did not exist, ‘people accumulated goods not for making a profit during the days of scarcity but to gain prestige. The system of trading often consisted if giving and mutual rendering of services. Economic factors such as wages, investment; interest and profit were practically unknown preliterate societies. During the early Middle Ages, trade and commerce were little more advanced than they had been among the primitive peoples.

    While at first conducted largely on a barter basis, trading came gradually more and more to involve money as a medium of exchange. This gave a fillip to the development of trade and commerce which gave importance to money, gold, silver, and tokens thereof. Money is not property, it is a symbol of property; it has a profound influence on the uses to which productive properties are put. According to Simmel, the establishment of the institution of money in the economic system of modern western society has had far-reaching effects upon almost every phase of life.

    It resulted in greater freedom for both the employer and employee and for both the seller and buyer of goods and services since it makes for the depersonalized relationship between the two parties in a transaction. Simmel maintains that the institution of money has radically changed our whole philosophy of life. It has made us pecuniary in our attitudes so that everything is evaluated in terms of money, and as social contacts have become depersonalized, human relations have become superficial and cold.

    In the early part of the modern period, the economic activities were generally regulated by the governing powers. It was an economic reflection of the growing unification of European peoples under strong monarchical Governments. The interest of the secular rulers lay in internal unification and this necessarily meant economic as well as political integration. The mercantilist ideology dominated the period. The economic activities of the people were politically regulated to increase the profits of the king and to fill his treasury with wealth.

    The nation was looked upon by the mercantilist as an economic organization engaged in the making of profit. The ownership and use of productive properties were minutely regulated by mercantilist’s law. Then came the Industrial Revolution which changed the techniques of production. The policy of mercantilism also had failed to bring about the welfare of the people. To secure maximum production of usual goods the new do “trine of ‘Laissez-faire’ was propounded.

    The doctrine preached non- interference in economic matters. According to this doctrine, if individuals pursue their own interest, unhampered by restriction; they will achieve the greatest happiness of the greatest number. Its advocates, Adam Smith, J.S. Mill, Spencer, and Sumner contended that Government should remove all legal restrictions on trade, on production, on the exchange of wealth and on the accumulation of property.

    Adam Smith enunciated four principles:
    • The doctrine of self-interest.
    • Laissez-faire policy.
    • The theory of competition, and.
    • Profit motive.

    Upon these principles and in response to the changing techniques of production brought about by the Industrial Revolution, a new system of property ownership and ‘production’, capitalism developed. The Industrial Revolution replaced factories in place of households. In factories, the work was divided up into little pieces, each worker doing a little piece. Production increased. Large plants in -course of time were set.

    Corporations owning large plants came into being. All these developments of mass production, the division of labor, specialization, and exchange were accompanied by capitalism. In this new system of production and exchange, the ownership of productive properties was both individualized and divested of all social responsibility.

    The Property became private and was freed from all obligations to the state, church, family and other institutions. The owners of the factory were free to do as they pleased. Profit was the main motive for them. They were under no obligation to produce goods if they believed that they could not make the profit. The mode of production was profit-oriented and the Governments in adherence to the doctrine of Laissez-faire supported the owners in this right.

    How to understand Capitalism as a Process?

    With the growth of the capitalist system there was:

    • Extreme polarization of classes.
    • Pauperization.
    • Alienation.
    • Dehumanization of Labor.
    • The dictatorship of the proletariat, and.
    • Shift from Capitalism to Socialism.

    Marx’s sociology of capital in capitalist societies is not applicable to so many capitalist societies. This is the” case particularly with the Asiatic societies which do not show any class conflict in-spite of social stratification.

    In the words of Raymond Aron,

    “For one thing the Marxist conception of capitalist society and of society, in general, is sociological but this sociology is related to philosophy, and a number of interpretative difficulties arise from the relation of philosophy to sociology.”

    Hence Marx’s predictions about the downfall of capitalism have not come true everywhere. His idea of constant pauperization of Labour is wrong so far as Western societies are concerned. Neither is there any proof of Proletaization. The claim of the destruction of capitalism is inevitable is far from being scientific.

    How to Analysis of Capitalism in India
    How to Analysis of Capitalism in India? Old Two Rupees Coin, Image credit from #Pixabay.

    What do the Social Consequences of Capitalism?

    Capitalism or economic development has brought in some good consequences which are as follows:

    • Economic Progress: Capitalism has led men to exploit the natural resources more and more. The people exert themselves utmost for earning money. This had led to many inventions in the field of industry, agriculture, and business which have contributed to economic progress.
    • Exchange of Culture: Capitalism has led to international trade and exchange of know-how. People in different countries have come nearer to each other. The development of the means of transport and communication has facilitated contacts among the peoples of the world thereby leading to exchange of ideas and culture.
    • High Standard of Living: Capitalism is the product of industrialization. Industrialization has increased production. Now men do not have to toil for bread as they used to do in the primitive days. The necessities of life are easily available.
    • The progress of Civilization: Capitalism was instrumental in inventing new machines and increasing the production of material goods. Man is to-day more civilized than his ancestors.
    • Lessening of Racial Differences: Capitalism has also led to the lessening of differences based on race, creed, caste, and nationality. In the factory, the workers and officials belonging to different castes co-operate with one another and work shoulder to shoulder. Inter-mixing of castes is the off-shoot of capitalism.

    But in spite of the above good consequences capitalism has proved a curse instead of a blessing.

    Its bad effects are the following:
    • Imbalance in Social System: Capitalism has led to an imbalance in the social system. It has failed to adjust itself to the welfare of society. It has widened the gap between the haves and have-not’s and created insatiable greed for wealth among the people. It has changed the very outlook of human beings. Wealth has become an important criterion of status.
    • Artificiality: Capitalism has transformed modern culture into mere artificiality. Today there is a false courtesy. One does not find gentility and human touch. One can see false prestige, mere artificiality, and sheer advertisement even in art and literature, nothing to speak of diet, dress, and speech etc. Life today has become artificial.
    • Greed for Wealth: Capitalism is based on greed for wealth It has raised wealth to the pedestal of deity. Wealth has become the be-all and end-all of human life. The modern man is mad after wealth. He wants to earn more and more wealth by any means. The idea for morality does not enter into the means of earning. It has thus led to moral degeneration.
    • Destruction of Human Values: In a capitalist order, everything has come to be measured in terms of wealth. All values of human life such as love, sympathy, benevolence, love, and affection are evaluated in terms of silver coins. Every person wants to get the maximum. The sole criterion is wealth, not value.
    • Materialism: Capitalism manifests materialism in its extreme form. Religion and spirituality lose their force. Religion becomes the opium of people. Religion becomes hypocrisy. The big capitalists save lacs of rupees by way of tax through contribution to fictitious charitable institutions. While people are short of goods, the capitalists hoard them to soar the prices.
    • Emphasis on Sex: Capitalist culture lays emphasis on sex. Marriage has become a mere agreement for the satisfaction of sex hunger. The capitalists advertise their goods through the display of sex instincts. Literature and movies are based on sexual passion. Pre-marital and extra-marital sexual relations are on the increase. Man is lacking in self-control.

    It has led to the moral degeneration of man. Obviously, capitalism has failed to bring about the moral development of man. It is injurious both to society and the individual. In short, it has proved a curse to humanity instead of a blessing. Karl Marx was its bitter critic.

  • Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits

    Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits

    What does mean Capitalism? Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Capitalism is an economic system where private entities own the factors of production. The four factors are entrepreneurship, capital goods, natural resources, and labor. So, what is the topic we are going to discuss; Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits…Read in Hindi.

    Here are explained What is Capitalism? First Meaning, Definition, Characteristics, Features, Merits, and finally their Demerits.

    The owners of capital goods, natural resources, and entrepreneurship exercise control through companies. Capitalism is ‘A system of economic enterprise based on market exchange’. The Concise Oxford Dictionary of Sociology (1994) defines it as ‘a system of wage-labor and commodity production for sale, exchange, and profit, rather than for the immediate need of the producers’.

    ‘Capital refers to wealth or money used to invest in a market with the hope of achieving a profit’. It is an economic system in which the means of production are largely in private hands and the main incentive for economic activity is the accumu­lation of profits. From the perspective developed by Karl Marx, capitalism organizes around the concept of CAPITOL implying the ownership and control of the means of production by those who employ workers to produce goods and services in exchange for wages.

    Max Weber, on the other hand, considered market exchange as the defining characteristic of capitalism. In practice, capitalist systems vary in the degree to which private ownership and economic activity are regulated by the government. It has assumed various forms in indus­trial societies. In common parlance, these days, capitalism knows as a market economy. The goods sold and the prices they are sold at determines by the people who buy them and the people who sell them.

    In such a system, all people are free to buy, sell and make a profit if they can. This is why capitalism often calls a free market system. It gives freedom to entrepreneurs (of the opening industry), to the worker (of selling labor), to the trader (of buying and selling goods), and to the individual (of buying and consuming).

    Meaning of Capitalism:

    Under capitalism, all farms, factories and other means of production are the property of private individuals and firms. They are free to use them to make a profit. The desire to earn a profit is the sole consideration with the property owners in the use of their property. Under capitalism, everybody is free to take up any line of production he wishes and is free to enter into any contract to earn the profit.

    Definition of Capitalism:

    In the words of Prof. LOUCKS,

    “Capitalism is a system of economic organization featured by the private ownership and the use for private profit of man-made and nature-made capital.”

    Ferguson and Kreps have written that,

    “In its own pure form, free enterprise capitalism is a system in which privately owned and economic decision are privately made”.

    Prof. R. T. Bye has defined capitalism as,

    “That system of economic organization in which free enterprise, competition and private ownership of property generally prevail.”

    Capitalism from Mc Connell view is,

    “A free market or capitalist economy may be characterized as an automatic self-regulating system motivated by the self-interest of individuals and regulated by competition.”

    A capitalist economy works through the Price System.

    Prices perform two functions:

    • A rationing function,
    • An incentive function.

    Prices ration out the available goods and services among buyers according to the amounts each buyer wants and can pay for others whose desire is less urgent or whose income is smaller will receive smaller qualities. Prices also provide an incentive for firms to produce more. Where demand is high prices will rise encouraging firms already in the industry to produce more and drawing new firms into the industry. Where demand is falling, prices will normally fall too. Firms will reduce their production, releasing resources for use in other industries where there is a demand for them. Firms are buyers as well as sellers.

    They buy materials and supplies from other firms behaving exactly as private individuals do in deciding what to buy and how much to buy. If a new machine promises to reduce production costs or if a certain material can substitute for another at saving, the firm will buy low-cost resources to compete with other firms. The economy is tied together by millions of those interactions linking producers with one another and with consumers, linking one product with other products and linking every market with other markets. The point is that all the economic units in an economy inter-relates.

    The Characteristics of Capitalism:

    Capitalism involves new attitudes and institutions—entrepreneurs engaged in the sustained, systematic pursuit of profit, the market acted as the key mechanism of productive life, and goods, services, and labor become commodities whose use was determined by rational calculation.

    The main characteristics of the capitalistic organization in its ‘pure’ form may briefly describe as under:

    • Private ownership and control of the economic instruments of production, i.e., CAPITOL.
    • The gearing of economic activity to making profits—maximization of profits.
    • Free market economy—a market framework that regulates this activity.
    • The appropriation of profits by the owners of capital. It is the income derived by the capitalist from selling in the market.
    • The provision of wage labor, which creates by converting labor-power into a commodity. It is this process that produces the working class and inherently hostile relationships in capitalist society workers (proletariat) versus capitalist, employee versus the employer.
    • Business firms privately own and compete with each other to sell their goods to consumers.
    • Commercialization of agricultural and industrial production.
    • Development of new economic groups and expanding across the globe.
    • Capital accumulation by the capitalists as an obligatory activity, for unless there is capital to invest, the system will fail. Profits produce capital when they are re-invested.
    • Investment and growth are accomplished by using accumulated capital to expand an enterprise or create a new one. Capitalism, thus, is an economic system that requires constant investment and constant economic growth.

    What has impressed students of modernity is the huge and largely unreg­ulated dominance of capitalist enterprise across political and religious control with it’s related monetary and market networks.

    The Features of Capitalism:

    What a capitalistic economy is a can knows through its main features. These derive from the way certain functions perform and the main decisions of the economy execute.

    These may be stated as under:

    Private Property and Freedom of ownership:

    A capitalist economy is always having the institution of private property. An individual can accumulate property and use it according to his will. The government protects the right to property. After the death of every person, his property goes to his successors.

    The right of Private Property:

    The most important feature of capitalism is the existence of private property and the system of inheritance. Everybody has a right to acquire private property to keep it and after his death, to pass it on to his heirs.

    Price Mechanism:

    This type of economy has a freely working price mechanism to guide consumers. Price mechanism means the free working of the supply and demand forces without any intervention. Producers are also helped by the price mechanism in deciding what to produce, how much to produce, when to produce and where to produce.

    This mechanism brings about the adjustment of supply to demand. All economic processes of consumption, production, exchange, distribution, saving and investment work according to its directions. Therefore, Adam Smith has called the price mechanism as the “Invisible Hand” which operates the capitalist.

    Profit Motive:

    In this economy, the desire to earn a profit is the most important inducement for economic activity. All entrepreneurs try to start those industries or occupations in which they hope to earn the highest profit. Such industries expect to go under a loss abandoned. Profit is such an inducement that the entrepreneur prepares to undertake high risk. Therefore, it can say that the Profit Motive is the SOUL of the capitalist economy.

    Competition and Co-operation Goes Side by Side:

    A capitalist economy characterizes by free competition because entrepreneurs compete for getting the highest profit. On the other side buyers also compete for purchasing goods and services. Workers compete among themselves as well as with machines for taking up a particular work. To produce goods of the required type and quality workers and machines are made to co-operate so that the production line runs according to schedule. In this way, competition and co-operation go side by side.

    Role of the Entrepreneur:

    The entrepreneurial class is the foundation of the capitalist economy. The whole of the economic structure of the capitalist economy base on this class. Entrepreneurs play the role of leaders in different fields of production. The presence of good entrepreneurs is a must for healthy competition. Entrepreneurs are the main sources of the dynamism of the capitalist economy.

    Main Role of Joint Stock Companies:

    In a joint-stock company, business carries on by a board of directors which democratically elects by the shareholders of the company at its general body meeting. Because of this, it has said that Joint-stock Companies “Democratic Capitalism”. However, the real functioning of the corporate sector is not democratic because there is a one-share-one vote election. Since big business houses own a majority of the shares of a company, they manage to get re-elected and the company is run as if it were their family business.

    Freedom of Enterprise, Occupation, and Control:

    Every person is free to start any enterprise of his choice. People can follow the occupations of their ability and taste. Moreover, there is the freedom of entering into the contract. Employers may contract with trade unions, suppliers with a firm and one firm with another.

    Consumer’s Sovereignty:

    In a capitalist economy, a consumer compares to a sovereign king. The whole production frameworks according to his directions. Consumer’s tastes govern the whole production line because entrepreneurs have to sell their products. If a particular type of production is to the liking of consumers, the producer gets high profits.

    It arises Class Conflict:

    From this class-conflict arises. The society is normally divided into two classes the “haves” and the “have-not’s”, which are constantly at war with each other. The conflict between labor and capital is found in almost all capitalistic countries and there seems to be no neat solution to this problem. It seems that this class-conflict is inherent in capitalism.

    Historical Development of Capitalism:

    Historically, modem capitalism has mainly developed and expanded in Great Britain and the United States. Early industrial capitalism in Great Britain and the United States in the 19th century is regarded as the classical model that approximates the pure form most closely. Modern (industrial) capitalism differs fundamentally from pre-existing production systems because it involves the constant expansion of production and ever-increasing accumu­lation of wealth.

    In traditional production systems, levels of production were fairly static since they were geared to habitual, customary needs. Capitalism promotes the constant revision of the technology of production. The impact of science and technology stretches beyond the economic sphere. Scientific and technological development, such as radio, television, computers and other electronic media, have also come to shape how we live, how we think and feel about the world. In the face of these developments, traditional debates between the advocates of free-market capitalism, and state socialism have become more or less outdated or are becoming outdated.

    As we have moved into a ‘postmodern’ world (information society) from the 18th and 19th-century modern society, some philosophers like Francis Fukuyama predicated about the ‘end of history’—meaning that there are no future alternatives to capitalism and liberal democracy. Capitalism has won in its long struggle with socialism, contrary to Marx’s prediction and liberal democracy now stands unchallenged.

    Capitalism Meaning Definition Characteristics Features Merits and Demerits
    Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits.

    The advantages or Merits of Capitalism:

    The main merits and advantages of capitalism are as follows:

    Production According to the Needs and Wishes of Consumers: 

    In a free-market economy, consumer needs and wishes are the uppermost in the minds of the producers. They try to produce goods according to the tastes and liking of the consumers. This leads to the maximum satisfaction of the consumers as obtained from his expenditure on the needed goods.

    Higher Rate of Capital Formation and More Economic Growth: 

    People under capitalism have the right to hold property and pass it on an inheritance to their heirs and successors. Owing to this right, people save a part of their income so that it can invest to earn more income and leave the larger property for their heirs. The rate of Capital formation increases when savings invest. This accelerates economic growth.

    Efficient Production of Goods and Services: 

    Due to the competition, every entrepreneur tries to produce goods at the lowest cost and of a durable nature. Entrepreneurs also try to find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost because the producers are always busy in making their production methods more and more efficient.

    Varieties of Consumer Goods: 

    Competition is not only in price but also in the shape design, colors, and packing of products. Consumers, therefore, get a good deal of variety of the same product. They need not give limited choices. It says that variety is the spice of life. The free market economy offers a variety of consumer goods.

    In Capitalism there is no Need for Inducement or Punishment for Good and Bad Production:

    A capitalist economy encourages efficient producers. The able an entrepreneur is, the higher is the profit he obtains. There is no need to provide any kind of inducement. The price mechanism punishes the inefficient and rewards the efficient on its own.

    It Encourages Entrepreneurs to Take Risks and Adopt Bold Policies: 

    Because taking the risk they can make higher profits. Higher the risk, the greater the profit. They also make innovations to cut their costs and maximize their profits. Hence capitalism brings about great technological progress in the country.

    The disadvantages or Demerits of Capitalism:

    The capitalist economy has been showing signs of stress and strain at different times. Some have called for a radical reform of the free-market economy. Others like Marx have considered the capitalist economy to be contradictory in itself. They have predicted the ultimate doom of the capitalist economy after a series of deepening crisis.

    The main demerits or disadvantages of the capitalist economy are as follows:

    Inequality of Distribution of Wealth and Income: 

    The system of private property acts as a means of increasing inequalities of income among different classes. Money begets money. Those who have wealth can obtain resources and start big enterprises. The propertyless classes have only their labor to offer. Profits and rents fewer classes have only their labor to offer. Profits and rents are high.

    Wages are much lower. Thus the property holders obtain a major share of national income. The common masses have their wages to depend upon. Although their number is overwhelming their share of income is relatively much lower.

    Class Struggle as Inevitable in Capitalist Economy: 

    Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point out that there are two main classes into which the capitalist society divide. The ‘haves’ in which the rich property class owns the means of production. The “have not’s” which constitute the wage-earning people have no property.

    The ‘haves’ are few. The ‘have not’s are in the majority. There is a tendency on the part of the capitalist class to exploit the wage-earners. As a result, there is a conflict between the employers and the employees which leads to labor unrest. Strikes, lockouts and other points of tension. All these have a very bad effect on production and employment.

    Social Costs are Very High:

    A capitalist economy industrializes and develops but the social costs of the same are very heavy. Factory owners running after private profit do not care for the people affected by their production. The environment pollutes because factory wastes not properly dispose of. Housing for factory labor very rarely provides the result that slums grow around big cities.

    Instability of the Capital Economy: 

    A capitalist economy is inherently unstable. There is a recurring business cycle. Sometimes there is a slump in economic activity. Prices fall, factories close down, workers render un-employe. At other times the business is brisk, prices rise, fast, there is a good deal of speculative activity. These alternating periods of recession and boom lead to a good deal of wastage of resources.

    Unemployment and Under-employment: 

    A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions. Business fluctuations also result in a large part of the labor force going unemployed during depressions. Not only this, workers are not able to get full-time employment except under boom conditions.

    Working Class does not have Adequate Social Security: 

    In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for any pension, accident benefits or relief to the families of those who die in employment. As a result, widows, and children have to undergo a good deal of suffering. Governments are not in a position to provide for adequate social security in overpopulated less developed countries.

  • Economic Laws: Meaning Definition Features Nature

    Economic Laws: Meaning Definition Features Nature

    What does mean Economic Laws? The Generalization or Law is the establishment of a general truth based on particular observations or experiments. Which trace a causal relationship between two or more phenomena. But economic laws are statements of general tendencies or uniformities in the relationships between two or more economic phenomena. So, what is the question we going to study?

    The Concept of Economic Laws: first study their Meaning, Definition, Features, Nature, and finally Limitations.

    Meaning and definition of Economic Laws: Economic laws are nothing more than careful conclusions and inferences drawn with the help of reasoning or by the aid of observation of human and physical nature. In everyday life, we see that man is always busy satisfying his unlimited wants with limited means. In doing so, it acts upon certain principles.

    Marshall defined economic laws in these words,

    “Economic laws, or statements of economic tendencies, are those social laws, which relate to those branches of conduct in which the strength of the motives chiefly concerned can be measured by money price.”

    On the other hand, according to Robbins,

    “Economic laws are statements of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.”

    These two definitions are common in that they consider economic laws as statements of tendencies or uniformities relating to human behavior.

    Features of Economic Law:

    The following six points highlight the features of economic laws.

    Are not Commands:

    Economic laws are not orders of the state (government) and do not command. They formulate based on people’s behavior in the real world.

    Are not Exact:

    Since economic laws deal with the actions of human beings having free will. They are not as exact as the laws of the natural sciences. They are statements that are true only in general. For example, the statement that men will buy goods at the cheapest available market is true generally but not universally. A man inten­tionally pays a higher price to help a relative or a friend. But such cases form a small fraction of the total transactions of human beings.

    Economists tacitly ignore these excep­tional cases and frame them. Their laws on the expectation that men’s actions will, in the great majority of cases, follow a uniform pattern. This makes economic laws generally true, but less exact than physical laws. “Economic laws are probability laws, not exact relationships.” “Abnormal as well as normal patterns of probabilities occur in economics”, as Samuelson has commented.

    Statements of Cause and Effect: 

    Economic laws, like scientific laws, are statements of cause and effect. They attempt to state the effects that will follow from particular causes. Unfortunately, in economic affairs, many factors operate simul­taneously. And it is impossible to isolate each factor to find out its effects separately. The qualifying clause “other things remaining the same” (ceteris paribus), uses to get over this difficulty. But in economic life, other things generally do not remain the same. Hence, economic laws are never exact enough to enable accurate predictions or prophecies existing made.

    Hypothetical: 

    Economic laws are hypothetical Economic laws are also hypothetical, i.e. They are conclusions drawn from certain assumptions or hypotheses. But in this, economic laws do not differ from other scientific laws. The laws of science also start from certain hypotheses and deduce certain consequences.

    Predictions are Difficult: 

    As regards making predictions the following example may note. The simple and exact laws of gravitation enable astronomers to make accurate forecasts. But in the case of tides, the level of water depends on so many factors (e.g., the strength of the attracting force, geo­graphical features of the country, etc.) that it is impossible to forecast the level accurately. Marshall, therefore, says, “The laws of econo­mics are to compare with the laws of tides rather than with the simple and exact laws of gravitation”.

    There are the Same Physical Laws: 

    Some laws dealt with in books of economics deal with inanimate nature, e.g., the Law of Dimini­shing Returns. These laws borrow from other sciences.

    Nature of Economic Laws:

    The following Nature of Economic Laws below are;

    The nature of economic laws is that they are less exact as compared to the laws of natural sciences like Physics, Chemistry, Astronomy, etc. An economist cannot predict with surety what will happen in the future in the economic domain. He can only say what is likely to happen shortly. The reasons why economic laws are not as exact as that of natural sciences are as follows:

    First

    Natural sciences deal with the lifeless matter. While economics, we are concerned with the man who endows with the freedom of or may act in whatever manner he likes. Nobody can predict with certainty his future actions. This element of uncertainty in human behavior results in making the laws of economics less exact than the laws of natural sciences.

    Secondly

    In economics, it is very difficult to collect factual data on which economic laws are to be based. Even if the data stands collected it may change at any moment due to sudden changes in the tastes of the people or their attitudes.

    Thirdly

    Many unknown factors affect the expected course of action and thus can easily falsify economic predictions. Dr. Marshall has devoted one chapter in his famous book “Principles of Economies” to discussing the nature of economic laws. He writes, that laws of economics are to compare with the laws of tides rather than with the simple and exact law of gravitation.

    The reason for comparing the laws of economics with the laws of tides by Marshall is that the laws of tides are also not exact. The rise of tides cannot be accurately predicted. It can only say that the tide expects to rise at a certain time. It may or may not rise. Strong wind may change its direction to the opposite side. Instead of rising may fall. So is the case with the laws of economics.

    Scientific or Natural or Physical Laws: 

    Economic laws are like scientific laws which trace out a causal relationship between two or more phenomena. As in natural sciences, a definite result expects to follow from a particular cause in economics. The law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal. But when there is a storm, the gravitational force will reduce and the law will not work properly.

    As pointed out by Marshall, “The law of gravitation is, therefore, a statement of tendencies”. Similarly, economic laws are statements of tendencies. For instance, the law of demand states that other things remain the same, a fall in price leads to an extension in demand and vice versa. Again, some economic laws are positive like scientific laws. Such as the Law of Diminishing Returns which deals with inanimate nature.

    Since economic laws are like scientific laws, they are universally valid. According to Robbins, “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, they are on the same footing as other scientific laws.”

    Non-Precise like the Laws of Natural Sciences:

    Despite these similarities, economic laws are not as precise and positive as the laws of natural sciences. This is because economic laws do not operate with as much certainty as scientific laws. For instance, the law of gravitation must operate whatever the conditions may be. Any object coming from above must fall to the ground. But demand will not increase with the fall in price. If there is a depression in the economy because consumers lack purchasing power.

    Therefore, according to Marshall, “There are no economic tendencies. Which act as steadily and can measure as exactly as gravitation can, and consequently. There are no laws of economics. Which can compare for precision with the law of gravitation”. Their control of experimentation in the natural sciences and the natural scientist can test scientific laws very rapidly by altering natural conditions such as temperature and pressure in their experiments in the laboratory.

    But in economics

    Controlled experiments are not possible because an economic situation is never repeated exactly at another time. Moreover, the economist has to deal with the man who acts by his tastes, habits, idiosyncrasies, etc. The entire universe or that part of it in which he carries out his research is the economist’s laboratory. As a result, predictions concerning human behavior are liable to error.

    For instance, a price rise may not lead to a contraction in demand rather it may expand it. If people fear the shortage of goods in anticipation of war. Even if demand contracts as a result of the price rise. It is not possible to predict accurately how much the demand will contract. Thus economic laws “do not necessarily apply in every individual case. They may not be reliable in the ever-changing environment of the real economy. And they are in no sense, of course, inviolable.”

    Non-predictable like the Law of Tide:

    But accurate predictions are not possible in economics alone. Even sciences like biology and meteorology cannot predict or forecast events correctly. The law of tide explains why the tide is strong at the full moon and weak at the moon’s first quarter. On this basis, it is possible to predict the exact hour when the tide will rise. But this may not happen. It may rise earlier or later than the predicted time due to some unforeseen circumstances.

    Marshall, therefore, compared the laws of economics with the laws of tides “rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain that the best statements of tendencies, which we can make in a science of human conduct, must need be inexact and faulty.”

    Behaviorist:

    Most economic laws are behaviorist, such as the law of diminishing marginal utility, the law of Equimarginal utility, the law of demand, etc., which depend upon human behavior. But the behaviorist laws of economics are not as exact as the laws of natural sciences because they are based on human tendencies which are not uniform. This is because all men are not rational beings.

    Moreover, they have to act under the existing social and legal institutions of the society in which they live. As rightly pointed out by Prof. Schumpeter: “Economic laws are much less stable than are the ‘laws’ of any physical science…and they work out differently in different institutional conditions”

    Indicative:

    Unlike scientific laws, economic laws are not assertive. Rather, they are indicative. For instance, the Law of Demand simply indicates that other things being equal, quantity demanded varies inversely with price. But it does not assert that demand must fall when price increases.

    Hypothetical:

    Prof. Seligman characterized economic laws as “essentially hypothetical” because they assume ‘other things being equal and draw conclusions from certain hypotheses. In this sense, all scientific laws are also hypothetical as they too assume the ceteris paribus clause. For instance, other things being equal, a combination of hydrogen and oxygen in the proportion of 2:1 will form water. If, however, this proportion is varied or/and the required temperature and pressure are not maintained, water will not be formed.

    Still, there is a difference between hypothetical elements present in economic laws and against scientific laws. It is more pronounced in the former because economics deals with human behavior and natural sciences with the matter. But as compared with the laws of other social sciences, the laws of economics are less hypothetical but more exact, precise, and accurate.

    This is because economies possess the measuring rod of money which is not available to other social sciences like ethics, sociology, etc. which makes economics more pragmatic and exact. Despite this, economic laws are less certain than the laws of social sciences because the value of money does not always remain constant. Rather, it changes from time to time.

    Truisms or Axioms:

    Certain generalizations in economics may state as a truism. They are like axioms and do not have any empirical content, such as ‘saving is a function of income,’ ‘human wants are numerous’, etc. Such statements are universally valid and need no proof. So they are superior to scientific laws. But all economic laws are not like axioms and hence not universally valid.

    Historico-Relative:

    On the other hand, economists of the Historical School regarded economic laws as abstractions that are historical-relative, that is economic laws have only a limited application to a given time, place, and environment.

    They have limited validity to certain historical conditions and have no relevance to the analysis of social phenomena outside that. But Robbins does not agree with this view because according to him, economic laws are not historical-relative. They are simply relative to the existence of certain conditions which assume to give. If the assumptions are consistent with one another and if the process of reasoning is logical, economic laws would be universally valid.

    But these are big “ifs”. We, therefore, agree with Prof. Peterson that economic laws “are not detailed and photographically faithful reproductions of a portrait of the real world, but are rather simplified portraits whose purpose is to make the real world intelligible.”

    Economic Laws Meaning Definition Features Nature and Limitations
    Economic Laws: Meaning, Definition, Features, Nature, and Limitations. Image credit from #Pixabay.

    Limitation of Economic Laws:

    One major drawback of economic laws is they lack generality. For example, the laws developed to explain the nature and functioning of capitalist economies do not have any relevance to socialist countries. For example, Alfred Marshall developed the laws of demand and supply which apply in a free market in the absence of government intervention. Such laws do not apply in erstwhile countries like the former Soviet Union where the price (market) system yielded place to the planning system.

    In a planned economy, the market mechanism replaces by government allocation or ra­tioning. So, the question of applying the laws of demand and supply does not arise. Thus, economic laws lack generality and are not universally applicable. Furthermore, some laws of economics which have been developed in the context of advanced industrial countries may not find application in devel­oping countries like India.

    As V. K. R. V. Rao has pointed out, the multiplier principle, as enunciated by Keynes in the context of the advanced countries of the world, does not work in developing countries like India. This is attributable to the structure of such economies. Similarly, the Quantity Theory of Money has been developed in the context of industrially advanced countries. It seeks to establish an exact, proportional relationship between money and prices.

    But, it cannot explain’ the present price situation in India.

    Here, inflation is not a purely monetary phenomenon as predicted by the Quantity Theory. These two examples make one thing clear at least — the laws and theories of economics devel­oped in the context of advanced countries cannot be applied in developing countries like India. There is a feeling among some groups of economists that, people in developing countries like India behave and respond differently from those in advanced countries.

    For example, greater self-consumption of farmers in India explains why the supply response of agricultural commodi­ties is not always favorable in the event of a rise in the price of agricultural products. It is often observed that, if the price of a particular commodity rises, farmers produce less of it to maintain the same level of income. Thus,’ they not only produce less at a higher price but generate less marketable surplus when the price rises. Thus, the marketable surplus of, say, wheat varies inversely with its price.

    But, in developed countries, it is observed that, as usual, the supply curve of agricultural output slopes upward from left to right, and the marketable surplus increases when the price rises. All these examples make it abundantly clear that most of the laws and principles of economics which have been developed in the context of advanced countries cannot be applied in developing countries like India.

  • Essay on Opportunity Cost in Managerial Economics

    Essay on Opportunity Cost in Managerial Economics

    What is Opportunity Cost? Opportunity cost analysis is an important part of a company’s decision-making processes; but, does not treat as an actual cost in any financial statement. Opportunity cost is The profit lost when one alternative selecting over another. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. So, what discusses is – Understand the Essay on Opportunity Cost in Managerial Economics.

    The Concept of Opportunity Cost is to explain the Meaning, Definition, Principles, Advantages, and Disadvantages.

    While the term opportunity cost has its roots in economics, it’s also a very important concept in the investment world. It’s a model that can apply to our everyday decisions, as we face choosing between the many options we encounter each day. For example, you have $1,000,000 and choose to invest it in a product line that will generate a return of 5%. If you could have spent the money on a different investment that would have to generate a return of 7%, then the 2% difference between the two alternatives is the foregone opportunity cost of this decision.

    Meaning of Opportunity Cost:

    Opportunity cost cannot always fully quantify at the time when a decision-maker. Instead, the person making the decision can only roughly estimate the outcomes of various alternatives; which means imperfect knowledge can lead to an opportunity cost that will only become obvious in retrospect. This is a particular concern when there is a high variability of return. The concept of opportunity cost does not always work since it can be too difficult to make a quantitative comparison of two alternatives. It works best when there is a common unit of measure, such as money spent or time used. Opportunity cost is not an accounting concept; and so does not appear in the financial records of an entity.

    It is strictly a financial analysis concept [Hindi]. Opportunity costs represent the benefits an individual, investor, or business misses out on when choosing one alternative over another. While financial reports do not show opportunity cost; business owners can use it to make educated decisions when they have multiple options before them. Because of they unsee by definition, opportunity costs can overlook if one is not careful. By understanding the potential missed opportunities one forgoes by choosing one investment over another, better decisions can make.

    Definition of Opportunity Cost:

    Opportunity Cost refers to the expecting returns from the second-best alternative use of resources that are foregone due to the scarcity of resources such as land, labor, capital, etc. In other words, the opportunity cost is the opportunity lost due to limited resources. It is a very powerful concept when someone has to decide to select a particular product or making a choice.

    In simple words, opportunity cost means choosing or making the best decision from a different option. When one has to decide between various actions to select only one particular work at a time calls opportunity cost.

    When faced with a decision, the opportunity cost the value assigned to the next best choice. The value or opportunity not chosen by the decision-maker could take many forms, including assets (as a car or home), resources (as land), or even benefits. When companies make decisions to purchase one asset over another; they’re passing up the opportunity cost offered by the asset not chosen.

    The Principles of Opportunity Cost:

    The opportunity cost of a decision means the sacrifice of alternatives required by that decision. The concept of opportunity cost can best understand with the help of a few illustrations, which are as follows:

    • The funds employed in one’s own business is equal to the interest that could earn on those funds if the employee in other ventures.
    • The time as an entrepreneur devotes to his own business is equal to the salary he could earn by seeking employment.
    • Using a machine to produce one product is equal to the earnings forgone which would have been possible from other products.
    • Using a machine that is useless for any other purpose is zero since its use requires no sacrifice of other opportunities.
    • If a machine can produce either X or Y; the opportunity cost of producing a given quantity of X is equal to the quantity of Y; which it would have to produce. If that machine can produce 10 units of X or 20 units of Y; the opportunity cost of 1 X is equal to 2 Y.
    • The opportunity cost of if no information provides about quantities produced; except about their prices then the opportunity cost can compute in terms of the ratio of their respective prices, say Px/Py.
    • Holding 100 Dollars as cash in hand for one year is equal to the 10% rate of interest; which would have been earning had the money been keeping as the fixed deposit in a bank. Thus, it is clear that opportunity costs require the ascertaining of sacrifices. If a decision involves no sacrifice; its opportunity cost is nil.

    For decision-making,

    Opportunity costs are the only relevant costs. The opportunity cost principle may state as under: “The cost involved in any decision consists of the sacrifices of alternatives required by that decision. If there are no sacrifices, there is no cost.” Thus in the macro sense, the opportunity cost of more guns in an economy is less butter. That is the expenditure on the national fund for buying armor has cost the nation of losing an opportunity of buying more butter. Similarly, a continued diversion of funds towards defense spending amounts to a heavy tax on alternative spending required for growth and development.

    Advantages of Opportunity Cost:

    The main advantages of opportunity cost are:

    Awareness of Lost Opportunity:

    The main benefit of opportunity costs is that it causes you to consider the reality that when selecting among options; you give up something in the option not selected. If you go to a grocery store looking for meat and cheese; but only have enough money for one, you have to consider the opportunity cost of the item you decide not to buy. Recognizing this helps you make more informed and economically sensible decisions that maximize your resources.

    Relative Price:

    Another important benefit of considering your opportunity cost is it allows you to compare relative prices and the benefits of each alternative. Compare the total value of each option and decide which one offers the best value for your money. For instance, a business with an equipment budget of $100,000 may buy 10 pieces of Equipment A at $10,000 or 20 pieces of Equipment B at $5,000. You could buy some of A and some of B; but relative pricing would mean comparing the value to you of 10 pieces of A versus 20 pieces of B. Assuming you choose 20 pieces of B, you effectively decide this is more valuable to you than 10 pieces of A.

    Disadvantages of Opportunity Cost:

    The disadvantages of opportunity cost are:

    Time:

    Opportunity costs take time to calculate and consider. You can make a more informed decision by considering opportunity costs; but, managers sometimes have limited time to compare options and make a business decision. In the same way, consumers going to the grocery store with a list and analyzing the potential opportunity costs of every item is exhaustive. Sometimes, you have to make an instinctive decision and evaluate its results later.

    Lack of Accounting:

    Though useful in decision making, the biggest drawback of opportunity cost is that it not account for my company accounts. Opportunity costs often relate to future events, which makes it very hard to quantify. This is especially true when the opportunity cost is of non-monetary benefit. Companies should consider evaluating projected results for forgone opportunities against actual results for selected options. This is not to generate bad feelings, but to learn how to choose a better opportunity the next time.

    The concept of Opportunity Cost:

    The concept of opportunity cost occupies a very important place in modern economic analysis. The opportunity costs or alternative costs are the return from the second-best use of the firm’s resources which the firm forgoes to avail itself of the return from the best use of the resources. To take an example, a farmer who is producing wheat can also produce potatoes with the same factors. Therefore, the opportunity cost of a quintal of wheat is the amount of the output of potatoes gives up.

    Thus we find that the opportunity cost of anything is the next best alternative that could produce instead of the same factors or by an equivalent group of factors, costing the same amount of money. Two points must note in this definition. Firstly, the opportunity cost of anything is only the next best alternative foregone. Secondly, in the above definition is the addition of the qualification or by an equivalent group of factors costing the same amount of money.

    The alternative or opportunity cost of a good can give a monetary value. To produce a good, the producer has to employ various factors of production and have to pay them sufficient prices to get their services. These factors have alternative uses. The factor must pay at least the price they can obtain in the alternative uses.

    Examples of Opportunity Cost:

    Examples are better to understand Opportunity Cost:

    Suppose a businessman can buy either a washing machine or a press machine with his limited resources; and, suppose that he can earn annually $ 40,000 and 60,000 respectively from the two alternatives. A rational businessman will certainly buy a press machine that gives him a higher return. But, in the process of earning $ 60,000 he has foregone the opportunity to earn $ 40,000 annually from the washing machine. Thus, $ 40,000 is his opportunity cost or alternative cost. The difference between actual and opportunity costs call economic rent or economic profit. For example, the economic profit from the press machine in the above case is $ 60,000 –$ 4000 = $ 20,000. So long as economic profit is above zero, it is rational to invest resources in the press machine.

    A company has $2 million to spend on a project. The company can decide to invest the money for advertising purposes of the particular product at the time of launch in the market. If they decide to invest the money in production and to buy machinery; and, all then the opportunity cost gets lost for advertisement purposes. And if they decide to spend the money on advertisement purposes; then the opportunity cost will be the organization’s ability to produce the commodity more efficiently.

    Another example of,

    A business organization is that an organization owns a building in which it operates its function; and so, it does not have to pay any rent for the office room space and all. But from the economist point of view, the business owner might have kept the office space for current use itself or the office space might have given for rent for money. So, that the owner could have earned from the rent but if the owner will not consider or provide the office space for rent then there is a loss in business expenses according to economist viewpoint. But in real life accountant of a business organization cannot provide any loss expenses due to opportunity cost in any accounts.

    Even though the opportunity cost not consider by the accountants in case of financial accounts and all. But it is very much important for a manager of the business organization to consider opportunity costs about business strategies. A business manager must consider opportunity costs in calculating the opportunity expenses in the organization for analyzing the profitable deals available in the market. It also helps in utilizing limited resources efficiently.

    Essay on Opportunity Cost in Managerial Economics
    Essay on Opportunity Cost in Managerial Economics. Image credit from #Pixabay.

  • What is the Price Mechanism or Market Mechanism?

    What is the Price Mechanism or Market Mechanism?

    Price Mechanism or Market Mechanism (Hindi); The mechanism through which the prices of commodities and factor services get determined through the free play of market forces of demand and supply. The theory that the determinations about what prices and quantities to purchase are essentially set by both sellers and buyers in the market. Define – What is the Price Mechanism or Market Mechanism?

    Price Mechanism or Market Mechanism, Explain their meaning and definition.

    The price mechanism is an economics term, which says that demand and supply of goods and services set their prices. Let me explain with the help of a diagram. The demand curve is a curve which state demand for a certain commodity at a certain price. Therefore as the prices increases, demand goes down. For example; think this from a consumer perspective, the demand for buying a car less than 10 lac (1 million) is more than the demand for luxurious cars which price in crores.

    Meaning of Price Mechanism or Market Mechanism;

    “In economics, a price mechanism is the manner in which the prices of goods or services affect. The supply and demand for goods and services, principally by the price elasticity of demand. They affect both buyers and sellers who negotiate prices. A price mechanism, part of a market mechanism, comprises various ways to match up buyers and sellers. It is a mechanism where price plays a key role in directing the activities of producers, consumers, resource suppliers. An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in trade. The purchaser will announce a price he is willing to pay (the bid price) and the seller will announce a price he is willing to accept (the asking price).” By Wikipedia.

    According to the Business Dictionary,

    “System of interdependence between the supply of a good or service and its price. It generally sends the price up when supply is below demand, and down when supply exceeds demand. The price mechanism also restricts supply when suppliers leave the market due to low prevailing prices and increase it. When more suppliers enter the market due to high obtainable prices.”

    According to capitalistic Economy,

    “Economic system based (to a varying degree) on private ownership of the factors of production (capital, land, and labor) employed in the generation of profits. It is the oldest and most common of all economic systems and, in general, is synonymous with the free market system.”

    Definition of Price Mechanism or Market Mechanism;

    The following definition below are;

    According to Cairncross.

    “It is the mechanism by which prices adjust themselves to the pressure of demand and supply and in their turn operate to keep demand and supply in balance.”

    The interaction of buyers and sellers in free markets enables goods, services, and resources to allocate prices. Relative prices and changes in price reflect the forces of demand and supply and help solve the economic problem. Resources move towards where they are in the shortest supply, relative to demand. And, away from where they are the least demand.

    What is the Price Mechanism or Market Mechanism - ilearnlot
    What is the Price Mechanism or Market Mechanism? Image Credit from ilearnlot.com.

    Features of Control Price Mechanism:

    The basic features are as below:

    • Prices fixed by the government.
    • Central Planning Authority takes all the decisions on production on behalf of the government.
    • The authority determines the level of new investment. And, allocates resources in different sectors for optimum utilization.
    • The authority distributes the different goods among the consumers through ration shops or fair price shops.
    • The government fixes the prices of the different factors of production like wage rate and interest rate etc.

    Where to be Price Mechanism in the Economy:

    A blended economy tackles the issue of what to create and in what amounts in two different ways:

    • The market mechanism (for example powers of interest and gracefully) assists the private part in choosing what items with delivering and in what amounts. In those circles of creation where the private segment contends with the open division, the nature and amounts of wares to deliver are likewise chosen by the market mechanism.
    • The focal arranging authority chooses the nature and amounts of merchandise and enterprises to deliver where the open part has a restraining infrastructure. On account of purchaser and capital merchandise, items are created fully expecting social inclinations. Prices fixed by the focal arranging expert on the guideline of the benefit price strategy.
    Extra Things:

    There are regulated prices that raise or brought down by the state. For open utility administrations like power, railroads, water, gas, interchanges, and so on., the state fixes their rates or prices on a no-benefit no-misfortune premise. The issue of how to deliver merchandise and ventures additionally understand incompletely by the price mechanism and mostly by the state. Also, the benefits rationale decides the methods of creation in the private segment.

    Simultaneously, the focal arranging authority intercedes and impacts the working of the market mechanism. The state directs and gives different offices to the private segment for embracing such strategies of creation which may diminish costs and amplify yield.

    It is the state which chooses where to utilize capital-serious strategies and where to utilize work concentrated procedures in the open area. The issue for whom to deliver additionally chose halfway by the market mechanism and mostly by the focal arranging authority. In the private division, it is the market mechanism that figures out what products and enterprises are to deliver based on buyer inclinations and wages.

    Since a blended economy targets accomplishing development with social equity, the designation of assets isn’t left totally. The state intercedes to dispense assets and for the dissemination of salary. For this reason, it embraces standardized savings projects and exacts dynamic expenses on salary and riches. In the open area, the state chooses for whom to create fully expecting shopper inclinations.

  • Managerial Economics: Nature, Scope, and Principles

    Managerial Economics: Nature, Scope, and Principles

    Managerial Economics can define as the amalgamation of economic theory with business practices to ease decision-making and future planning by management. The Concept of Managerial Economics Study: Meaning, Definition, Nature of Managerial Economics, Scope of Managerial Economics, and Principles of Managerial Economics. Managerial Economics assists the managers of a firm in a rational solution to obstacles faced in the firm’s activities. It makes use of economic theory and concepts. It helps in formulating logical managerial decisions.

    Learn, Explain Managerial Economics: Nature, Scope, and Principles. 

    The key to Managerial Economics is the microeconomic theory of the firm. It lessens the gap between economics in theory and economics in practice. Managerial Economics is a science dealing with the effective use of scarce resources. It guides the managers in taking decisions relating to the firm’s customers, competitors, suppliers as well as relating to the internal functioning of a firm. It makes use of statistical and analytical tools to assess economic theories in solving practical business problems.

    Study of Managerial Economics:

    They help in the enhancement of analytical skills, assists in rational configuration as well as a solution to problems. While microeconomics is the study of decisions made regarding the allocation of resources and prices of goods and services, macroeconomics is the field of economics that studies the behavior of the economy as a whole. Managerial Economics applies microeconomic tools to make business decisions. It deals with a firm.

    The use of Managerial Economics not limits to profit-making firms and organizations. But it can also use to help in the decision-making process of non-profit organizations (hospitals, educational institutions, etc). It enables optimum utilization of scarce resources in such organizations as well as helps in achieving the goals in the most efficient manner. Managerial Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis, and determination of demand. Managerial economics uses both economic theories as well as Econometrics for rational managerial decision making.

    Econometrics defines:

    As the use of statistical tools for assessing economic theories by empirically measuring the relationship between economic variables. It uses factual data for the solution of economic problems. Managerial Economics associates with the economic theory which constitutes “Theory of Firm”. The theory of the firm states that the primary aim of the firm is to maximize wealth. Decision making in managerial economics generally involves the establishment of a firm’s objectives, identification of problems involving in the achievement of those objectives, development of various alternative solutions, selection of best alternative, and finally implementation of the decision.

    Nature of Managerial Economics:

    Managers study managerial economics because it gives them insight to reign the functioning of the organization. If the manager uses the principles applicable to economic behavior in a reasonably, then it will result in the smooth functioning of the organization.

    Managerial Economics is a Science:

    Managerial Economics is an essential scholastic field. It can compare to science in the sense that it fulfills the criteria of being a science in the following sense:

    • Science is a Systematic body of Knowledge. It bases on methodical observation. Managerial economics is also a science of making decisions about scarce resources with alternative applications. It is a body of knowledge that determines or observes the internal and external environment for decision making.
    • In science, any conclusion arrives at after continuous experimentation. In Managerial economics also policies are made after persistent testing and training. Though the economic environment consists of the human variable, which is unpredictable, thus the policies made are not rigid. A managerial economist takes decisions by utilizing his valuable experience and observations.
    • Science principles are universally applicable. Similarly, policies of Managerial economics are also universally applicable partially if not fully. The policies need to change from time to time depending on the situation and attitude of individuals to those particular situations. Policies are applicable universally but modifications are requiring periodically.

    Managerial Economics requires Art:

    The managerial economist requires to have an art of utilizing his capability, knowledge, and understanding to achieve the organizational objective. The managerial economist should have art to put in practice his theoretical knowledge regarding elements of the economic environment.

    Managerial Economics for the administration of the organization:

    Managerial economics helps the management in decision making. These decisions are based on the economic rationale and are valid in the existing economic environment.

    Managerial economics is helpful in optimum resource allocation:

    The resources are scarce with alternative uses. Managers need to use these limited resources optimally. Each resource has several uses. It is the manager who decides with his knowledge of economics that which one is the preeminent use of the resource.

    Managerial Economics has components of microeconomics:

    Managers study and manage the internal environment of the organization and work for the profitable and long-term functioning of the organization. This aspect refers to the microeconomics study. The managerial economics deals with the problems faced by the individual organization such as the main objective of the organization, demand for its product, price and output determination of the organization, available substitute and complementary goods, the supply of inputs and raw material, target or prospective consumers of its products, etc.

    Managerial Economics has components of macroeconomics:

    None of the organizations works in isolation. They affecting by the external environment of the economy in which it operates such as government policies, general price level, income and employment levels in the economy, stage of the business cycle in which economy is operating, exchange rate, the balance of payment, general expenditure, saving and investment patterns of the consumers, market conditions, etc. These aspects are related to macroeconomics.

    Managerial Economics is dynamic:

    Managerial Economics deals with human-beings (i.e. human resources, consumers, producers, etc.). Nature and attitude differ from person to person. Thus to cope up with dynamism and vitality managerial economics also changes itself over some time.

    The Scope of Managerial Economics:

    Managerial Economics deals with allocating scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is different from microeconomics and macroeconomics. Managerial Economics has a more narrow scope – it is solving managerial issues using micro-economics. Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. Also, understand the scope of managerial economics below is.

    The fact of scarcity of resources gives rise to three fundamental questions:

    • What to produce?
    • How to produce?
    • For whom to produce?

    To answer these questions, a firm makes use of managerial economics principles.

    The first question;

    Relates to what goods and services should produce and in what amount/quantities. The managers use demand theory for deciding this. The demand theory examines consumer behavior with respect to the kind of purchases they would like to make currently and in future; the factors influencing purchase and consumption of a specific good or service; the impact of change in these factors on the demand of that specific good or service; and the goods or services which consumers might not purchase and consume in future. To decide the number of goods and services to produce, the managers use methods of demand forecasting.

    The second question;

    Relates to how to produce goods and services. The firm has now to choose among different alternative techniques of production. It has to decide on the purchase of raw materials, capital pieces of equipment, manpower, etc. The managers can use various managerial economics tools such as production and cost analysis, project appraisal methods, etc for making these crucial decisions.

    The third question;

    It is regarding who should consume and claim the goods and services producing by the firm. The firm, for instance, must decide which is its niche market-domestic or foreign? It must segment the market. It must conduct a thorough analysis of the market structure and thus take price and output decisions depending upon the type of market.

    Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple models, managers can deal with more complex and practical situations. Also, a general approach implements. Managerial Economics take a wider picture of the firm, i.e., it deals with questions such as what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away from profit.

    In short, managerial economics emphasizes the firm, the decisions relating to individual firms, and the environment in which the firm operates. It deals with key issues such as what conditions favor entry and exit of firms in a market, why are people paid well in some jobs, and not so well in other jobs, etc. It is a great rational and analytical tool. Managerial Economics is not only applicable to profit-making business organizations but also non- profit organizations such as hospitals, schools, government agencies, etc.

    Managerial Economics Nature Scope and Principles
    Managerial Economics: Nature, Scope, and Principles, #Pixabay.

    Principles of Managerial Economics:

    Managerial Economics principles assist in rational reasoning and define thinking. They develop the logical ability and strength of a manager.

    Some important principles of managerial economics are:

    Marginal and Incremental Principles:

    These principles state that a decision says to be rational and sound if, given the firm’s objective of profit maximization, it leads to an increase in profit, which is in either of two scenarios:

    • If total revenue increases more than the total cost.
    • If total revenue declines less than total cost.

    The marginal analysis implies judging the impact of a 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 output sold. The marginal cost refers to change in total costs per unit change in output produced (While incremental cost refers to change in total costs due to change in total output). The decision of a firm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price.

    The incremental analysis differs from marginal analysis only in that its analysis the change in the firm’s performance for a given managerial decision, whereas marginal analysis often generates a change in outputs or inputs. Incremental analysis is a generalization of the marginal concept. It refers to changes in cost and revenue due to a policy change.

    For example – adding a new business, buying new inputs, processing products, etc. Change in output due to change in process, product or investment considers as an incremental change. The incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than revenues; if the increase in some revenues is more than the decrease in others; and if the decrease in some costs is greater than the increase in others.

    Equi-marginal Principles:

    Marginal Utility is the utility derives from the additional unit of a commodity consumed. The laws of Equi-marginal utility state that a consumer will reach the stage of equilibrium when the marginal utilities of various commodities he consumes are equal. According to modern economists, this law has been formulating in the form of the law of proportional marginal utility. It states that the consumer will spend his money-income on different goods in such a way that the marginal utility of each good is proportional to its price, i.e.,

    MUx / Px = MUy / Py = MUz / Pz

    Where MU represents marginal utility and P is the price of the good.

    Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of production which satisfies the following condition:

    MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3

    Where MRP is the marginal revenue product of inputs and MC represents the marginal cost.

    Thus, a manager can make the rational decision by allocating/hiring resources in a manner which equalizes the ratio of marginal returns and marginal costs of various use of resources in specific use.

    Opportunity Cost Principles:

    By opportunity cost of a decision is meant the sacrifice of alternatives require by that decision. If there are no sacrifices, there is no cost. According to Opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than it’s an opportunity cost.

    Opportunity cost is the minimum price that would be necessary to retain a factor-service in it’s given us use. It also defines the cost of sacrificed alternatives. For instance, a person chooses to forgo his present lucrative job which offers him Rs.50000 per month and organizes his own business. The opportunity lost (earning Rs. 50,000) will be the opportunity cost of running his own business.

    Time Perspective Principles:

    According to these principles, a manager/decision-maker should give due emphasis, both to the short-term and long-term impact of his decisions, giving apt significance to the different periods before reaching any decision. Short-run refers to a period in which some factors are fixed while others are variable. The production can increase by increasing the number of variable factors.

    While long-run is a period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumer’s point of view, the short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a period in which the consumers have enough time to respond to price changes by varying their tastes and preferences.

    Discounting Principles:

    According to these principles, if a decision affects costs and revenues in the long-run, all those costs and revenues must discount to present values before the valid comparison of alternatives is possible. This is essential because a rupee’s worth of money at a future date is not worth a rupee today. Money has a time value. Discounting can define as a process uses to transform future dollars into an equivalent number of present dollars. For instance, $1 invested today at 10% interest is equivalent to $1.10 next year.

    FV = PV*(1+r)t

    Where FV is the future value (time at some futures time), PV is the present value (value at to, r is the discount (interest) rate, and t is the time between the future value and present value. Maybe you’d better know about Managerial Economics and their topics Nature, Scope, and Principles.