Diversification

 The term refers to the expansion of an existing firm into another product line or market. Diversification may be related or unrelated. Related diversification occurs when the firm expands into similar product lines. For example, an automobile manufacturer may engage in production of passenger vehicles and light trucks. Unrelated diversification takes place when the products are very different from each other, for example a food processing firm manufacturing leather footwear as well.

 Diversification may arise for a variety of reasons: to take advantage of complementarities in production and existing technology; to exploit; to reduce exposure to risk; to stabilize earnings and overcome economies of scope cyclical business conditions; etc. There is mounting evidence that related diversification may be more profitable than unrelated diversification.

Dumping

 Dumping is the practices by firms of selling products abroad at below costs or significantly below prices in the home market. The former implies predatory; the latter, price discrimination. Dumping of both types is viewed by pricing many governments as a form of international predation, the effect of which may be to disrupt the domestic market of foreign competitors. Economists argue, however, that price discriminatory dumping, where goods are not sold below their incremental costs of production, benefits consumers of the importing countries and harms only less efficient producers.

 Under the General Agreement on Tariffs and Trade (GATT) rules, dumping is discouraged and firms may apply to their respective government to impose tariffs and other measures to obtain competitive relief. As in the case of or (see discussion under these headings), predatory pricing selling below costs arguments have been advanced questioning the economic feasibility of dumping at prices below costs over extended periods of time.

Franchising

 A special type of vertical relationship between two firms usually referred to as the "franchisor" and "franchisee". The two firms generally establish a contractual relationship where the franchisor sells a proven product, trademark or business method and ancillary services to the individual franchisee in return for a stream of royalties and other payments. The contractual relationship may cover such matters as product prices, advertising, location, type of distribution outlets, geographic area, etc. Franchise agreements generally fall under the purview of competition laws, particularly those provisions dealing with vertical restraints.

 Franchise agreements may facilitate entry of new firms and/or products and have efficiency enhancing benefits. However, franchising agreements in certain situations can restrict competition as well.

Intellectual Property Rights

The general term for the assignment of property rights through patents, copyrights and  trademarks. These property rights allow the holder to exercise a monopoly on the use of the item for a specified period. By restricting imitation and duplication, monopoly power is conferred, but the social costs of monopoly power may be offset by the social benefits of higher levels of creative activity encouraged by the monopoly earnings.

Joint Venture

 A joint venture is an association of firms or individuals formed to undertake a specific business project. It is similar to a partnership, but limited to a specific project (such as producing a specific product or doing research in a specific area).

 Joint ventures can become an issue for competition policy when they are established by competing firms. Joint ventures are usually justified on the grounds that the specific project is risky and requires large amounts of capital. Thus, joint ventures are common in resource extraction industries where capital costs are high and where the possibility of failure is also high. Joint ventures are now becoming more prevalent in the development of new technologies.

 In terms of competition policy, the problem is to weigh the potential reduction in competition against the potential benefits of pooling risks, sharing capital costs and diffusing knowledge. At present there is considerable debate in many countries over the degree to which research joint ventures should be subject to competition law.

Sunk Costs

Sunk costs are costs which, once committed, cannot be recovered. Sunk costs arise because some activities require specialized assets that cannot readily be diverted to other uses. Second-hand markets for such assets are therefore limited. Sunk costs are always fixed costs, but not all fixed costs are sunk.

 Examples of sunk costs are investments in equipment which can only produce a specific product, the development of products for specific customers, advertising expenditures and R&D expenditures. In general, these are firm-specific assets.

 The absence of sunk costs is critical for the existence of contestable markets. When sunk costs are present, firms face a barrier to exit. Free and costless exit is necessary for contestability. Sunk costs also lead to barriers to entry. Their existence increases an incumbents’ commitment to the market and may signal a willingness to respond aggressively to entry.

Nostro and Vostro account- Short Notes

Nostro and Vostro account normally uses in the foreign exchange transactions of the banks or during currency settlement.

 Nostro Account means the overseas account which is held by the domestic bank in the foreign bank or with the own foreign branch of the bank. For example the account held by Bangladesh Bank with bank of America in New York is a Nostro account of the Bangladesh Bank.

 Vostro Account means the account which is held by a foreign bank with a local bank, so if bank of America maintains an account with Bangladesh Bank it will be a vostro account for Bangladesh Bank.

 It is a great point that the account which is Nostro for one bank is Vostro for another so when Bangladesh Bank opens a Nostro account with Bank of America, it is a Vostro account for them and vice versa.

Define Gross domestic product

 Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living. GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a country.

 The short formula of GDP calculating-

GDP = C + G + I + NX

 Where:

 "C" is equal to all private consumption, or consumer spending, in a nation's economy

"G" is the sum of government spending

"I" is the sum of all the country's businesses spending on capital

"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Public Goods

 Public goods are those which cannot be provided to one group of consumers, without being provided to any other consumers who desire them. Thus they are “non-excludable.” Examples include radio and television broadcasts, the services of a lighthouse, national security, and a clean environment. Private markets typically under invest in the provision of public goods, since it’s very difficult to collect revenue from their consumers.

More broadly, public goods can refer to any goods or services provided by government as a result of an inability of the private sector to supply those products in acceptable quantity, quality, or accessibility.

Price Discrimination

 Price discrimination occurs when customers in different market segments are charged different prices for the same good or service, for reasons unrelated to costs. Price discrimination is effective only if customers cannot profitably re-sell the goods or services to other customers. Price discrimination can take many forms, including setting different prices for different age groups, different geographical locations, and different types of users (such as residential vs. commercial users of electricity).

 Where sub-markets can be identified and segmented then it can be shown that firms will find it profitable to set higher prices in markets where demand is less elastic. This can result in higher total output, a pro-competitive effect.

 Price discrimination can also have anti-competitive consequences. For example, dominant firms may lower prices in particular markets in order to eliminate vigorous local competitors. However, there is considerable debate as to whether price discrimination is really a means of restricting competition.

 Price discrimination is also relevant in regulated industries where it is common to charge different prices at different time periods (peak load pricing) or to charge lower prices for high volume users (block pricing).

Income Elasticity of Demand

 The quantity demanded of a particular product depends not only on its own price and on the price of other related products, but also on other factors such as income. The purchases of certain commodities may be particularly sensitive to changes in nominal and real income. The concept of income elasticity of demand therefore measures the percentage change in quantity demanded of a given product due to a percentage change in income.

 The measures of income elasticity of demand may be either positive or negative numbers and these have been used to classify products into "normal" or "inferior goods" or into "necessities" or "luxuries". If as a result of an increase in income the quantity demanded of a particular product decreases, it would be classified as an "inferior" good. The opposite would be the case of a "normal" good. Margarine has in past studies been found to have a negative income elasticity of demand indicating that as family income increases, its consumption decreases possibly due to substitution of butter.

Market power / monopoly power

 The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare.

 Although a precise economic definition of market power can be put forward, the actual measurement of market power is not straightforward. One approach that has been suggested is the Lerner Index, i.e., the extent to which price exceeds marginal cost. However, since marginal cost is not easy to measure empirically, an alternative is to substitute average variable cost. Another approach is to measure the price elasticity of demand facing an individual firm since it is related to the firm’s price-cost (profit) margin and its ability to increase price. However, this measure is also difficult to compute. The actual or potential exercise of market power is used to determine whether or not substantial lessening of competition exists or is likely to occur.

Cross Price Elasticity of Demand

 Cross Price Elasticity of Demand refers to the percentage change in the quantity demanded of a given product due to the percentage change in the price of another "related" product. If all prices are allowed to vary, the quantity demanded of product X is dependent not only on its own price (see elasticity of demand) but upon the prices of other products as well. The concept of cross price elasticity of demand is used to classify whether or not products are "substitutes" or "complements". It is also used in market definition to group products that are likely to compete with one another.

If an increase in the price of product Y results in an increase in the quantity demanded of X (while the price of X is held constant), then products X and Y are viewed as being substitutes. For example, such may be the case of electricity vs. natural gas used in home heating or consumption of pork vs. beef. The cross price elasticity measure is a positive number varying from zero (no substitutes) to any positive number. Generally speaking, a number exceeding two would indicate the relevant products being "close" substitutes.

If the increase in price of Y results in a decrease in the quantity demanded of product X (while the price of X is held constant), then the products X and Y are considered complements. Such may be the case with shoes and shoe laces.

Definition of 'Scarcity'

Scarcity is the fundamental economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources efficiently.

Scarcity states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be pursued at the same time; trade-offs are made of one good against others. In an influential 1932 essay, Lionel Robbins defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses."

Define 'Opportunity cost

 Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative that is not chosen. It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.

The opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice".

Example: The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

In countries with protected and distorted economies, FDI is harmful to economic welfare

In countries with protected and distorted economies, FDI is harmful to economic welfare.

Where there is little FDI, the harm is little. Where FDI is large, however, the adverse effect on economic welfare is also large. Conversely, in countries with low barriers to trade and few restrictions on operations, foreign firms can increase the efficiency of existing economic activity and introduce new activities with strongly favorable effects on host country development. Consequently, host governments should adopt open trade and investment policies.

Developing country hosts should prohibit domestic content, joint venture, or technology sharing requirements on foreign investment.

Such requirements neither increase the efficiency of local producers nor produce host country growth. To the contrary, such provisions interrupt intrafirm trade, which is a potent source of host country growth, and lead to inefficient production processes, outdated technology, and waste of host country resources.

Host countries should avoid competing to give the best tax incentives to foreign investors.

Available resources for promoting investment are better spent on improving local infrastructure, the supply of information to investors, and education and training that benefits foreign and local firms alike.

Developed countries should back only FDI that promotes the economic welfare of developing country hosts.

Most national political risk insurance agencies do not screen projects to eliminate those that require trade protection. Such FDI hurts rather than helps hosts countries. Neither are taxpayers in developed countries served by FDI projects that lower developing country welfare and impede trade expansion. Thus these agencies should assess the degree to which an FDI project promotes host country welfare as a criterion for agreeing to insure it.

Does Foreign Direct Investment Promote Development

 Studies of the linkage between foreign direct investment and development have produced con-fusing and sometimes contradictory results. Some have shown that foreign direct investment (FDI) spurs economic growth in the host countries; others show no such effect. Some find spill-over benefits to the host economy—that is, benefits not appropriated by investors or in the form of superior wages—while others do not discern these benefits.

 For years, it has been unclear whether developing countries benefit from devoting substantial resources to attracting FDI. A government authority in a developing country might, for example, grant a subsidy to a foreign-invested project if it believed that the project would produce positive externalities or spillovers. These could include managerial and worker training, technological learning that is transferred outside the firm, an increase in supplier efficiency, and demonstration effects through which the success of one investor persuades others to invest in the host country. Yet it has proved extremely difficult to measure such effects.

 FDI that is integrated into the global supply network of parent multinationals tends to be particularly potent for host country development, while FDI oriented toward protected domestic markets and hampered by joint venture and domestic content requirements is not beneficial.

 FDI produces different results in different host countries, the economist offers guidance to policymakers in both developing and developed countries on ways to ensure that FDI aids rather than impedes development:

CONCEPTS OF NATIONAL INCOME, Gross National Product, Net National Product (NNP), Personal income

 There are various concepts of national income

Gross National Product (GNP)

Gross national product is defined as the total market value of all final goods and services produced in a year. GNP includes four types of final goods and services, (i) Consumer goods and services to satisfy the immediate wants of the people (ii) gross private domestic investment on capital goods consisting of fixed capital formation, residential constructions and inventories of finished and unfinished goods, (iii) goods and services produced by government and (ir) net export of goods and services'

GNP = government production + private output

Net National Product (NNP)

The second concept is Net National Product. The capital goods like machinery wear out as a result of continuous use. This is called depreciation. This is also called National income at market prices. Hence NNP = GNP - depreciation.

National Income at factor cost

National income at factor cost denotes the sum of all incomes earner by the factors. GNP at factor cost is the sum of the money value of the income produced by and accruing to the various factors of production in one year in a country. It includes all items of GNP less indirect tax. GNP at market price is always more than GNP at factor cost as GNP at factor cost is the income which the factors of production receive in return for their service alone.

National income at factor cost = net national product - indirect taxes + subsidies.

1. Personal Income (PI)

Personal income is the sum of all incomes received by all individuals during a given year. Some incomes such as Social security contribution are not received by individuals; similarly some incomes such as transfer payments are not currently earned, for example Old Age Pension. Therefore,

Personal income = national income - social security contribution - Corporate income taxes - undistributed corporate profit + transfer payment.

When and how Equilibrium is occurred in case of demand and supply?

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.

Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

 As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no a locative inefficiency. At this point, the price of the goods will be P*and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

What are are the Determinants of Demand/ What Causes a Shift in Demand?

 Consumer Income

Income goes up; consumers will buy more shifting demand to the right. Goes down, consumers will buy less shifting demand to the left.

Consumer Expectations

If consumers think prices, for economy, technology, etc., will change in the future this will have an effect on their consumption of today.

Population

Population increases the number of consumers and can shift demand to the right. Decreases shift to the left.

Consumer Tastes and Advertising

Consumer’s change over time the things that they want. As they change their tastes, their demand shifts to the right or the left.

Price of Related Goods

Complementary and Substitute items can have an effect on what consumers will purchase and increase the demand for products.

What are are the Determinants of Supply?/ What Causes a Shift in Supply?

Effects of Rising Costs

Input costs can have a major effect on the production and supply of goods and services. Gas prices can limit the services of a landscaper or paper delivery person.

Technology

Increases in the ability to produce because of technological advances can shift the supply curve to the right. Breakdowns in technology can shift it to the left.

Subsidies

Government payments to firms can act as an incentive to produce more, which can affect supply. If government removes subsidies the curve will shift left.

Taxes

Government taxation towards firms can act as an incentive to produce, which can affect supply. If government removes taxes the curve will shift left, increases shift right.

Future Expectations

How suppliers view the future of the economy will affect their production of inventory today. If they think the economy is strong they will increase production today and Vice versa.

Number of Suppliers

Firms increase whenever their profit is to be made. They decrease whenever profit is reduced. Both will shift the curve to the right or the left.

Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition

 Monopoly

One firm

Complete barrier to entry

Total control over price

One product

 

Oligopoly

2-3 firms

High barrier to entry

Control majority of output

Similar/identical products

 Monopolistic Competition

Many Firms

Few artificial barriers to entry

Slight control over price

Differentiated products

 

Perfect (Pure) Competition

Many Buyers and Sellers

Identical Products

Informed Buyers and Sellers

Free Market Entry and Exit

Criticism of Robbins Definition

 No doubt, Robbins has made Economics a scientific study and his definition has become popular among some economists. But his definition has also been criticized on several grounds. Important ones are:

(i)Robbins has made Economics quite impersonal and colorless. By making it a complete positive science and excluding normative aspects he has narrowed down its scope.

(ii)Robbins' definition is totally silent about certain macro-economic aspects such as determination of national income and employment.

(iii)His definition does not cover the theory of economic growth and development. While Robbins takes resources as given and talks about their allocation, it is totally silent about the measures to be taken to raise these resources i.e. national income and wealth.

Economics is a Science of material well-being-Explain it.

Some economists defined Economics as a material well-being. Under this group of definitions the emphasis is on welfare as compared with wealth in the earlier group. Two important definitions are as follows:

"Economics is a study of mankind in the ordinary business of life. It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus, it is on the one side a study of wealth and on the other and more important side a part of the study of the man",

-Alfred Marshall

"The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money"

-A.C. Pigou.

In the first definition Economics has been indicated to be a study of mankind in the ordinary business of life. By ordinary business we mean those activities which occupy considerable part of human effort. The fulfillment of economic needs is a very important business which every man ordinarily does. Professor Marshall has clearly pointed that Economics is the study of wealth but more important is the study of man. Thus, man gets precedence over wealth. There is also emphasis on material requisites of well-being. Obviously, the material things like food, clothing and shelter, are very important economic objectives.

The second definition by Pigou emphasizes social welfare but only that part of it which can be related with the measuring rod of money. Money is general measure of purchasing power by the use of which the science of Economics can be rendered more precise.

Marshall's and Pigou's definitions of Economics are wider and more comprehensive as they take into account the aspect of social welfare. But their definitions have their share of criticism. Their definitions are criticized on the following grounds.

 (i)Economics is concerned with not only material things but also with immaterial things like services of singers, teachers, actors etc. Marshall and Pigou chose to ignore them.

(ii)Robbins criticized the welfare definition on the ground that it is very difficult to state which things would lead to welfare and which will not. He is of the view that we would study in Economics all those goods and services which carry a price whether they promote welfare or not.

Strengths of Robbins Definitions

 The definition deals with the following four aspects:

(i) Economics is a science: Economics studies economic human behavior scientifically. It studies how humans try to optimize (maximize or minimize) certain objective under given constraints. For example, it studies how consumers, with given income and prices of the commodities, try to maximize their satisfaction.

(ii) Unlimited ends: Ends refer to wants. Human wants are unlimited. When one want is satisfied, other wants crop up. If man's wants were limited, then there would be no economic problem.

(iii) Scarce means: Means refer to resources. Since resources (natural productive resources, man-made capital goods, consumer goods, money and time etc.) are limited economic problem arises. If the resources were unlimited, people would be able to satisfy all their wants and there would be no problem.

(iv) Alternative uses: Not only resources are scarce, they have alternative uses. For example, coal can be used as a fuel for the production of industrial goods, it can be used for running trains, it can also be used for domestic cooking purposes and for so many purposes. Similarly, financial resources can be used for many purposes. The man or society has, therefore, to choose the uses for which resources would be used. If there was only a single use of the resource then the economic problem would not arise.

It follows from the definition of Robbins that Economics is a science of choice. An important thing about Robbin's definition is that it does not distinguish between material and non-material, between welfare and non-welfare. Anything which satisfies the wants of the people would be studied in Economics. Even if a good is harmful to a person it would be studied in Economics if it satisfies his wants.

Economics is a Science of dynamic growth and development-Explain the statements

 Although the fundamental economic problem of scarcity in relation to needs is undisputed it would not be proper to think that economic resources - physical, human, financial are fixed and cannot be increased by human ingenuity, exploration, exploitation and development. A modern and somewhat modified definition is as follows:

"Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society".

-Paul A. Samuelson

The above definition is very comprehensive because it does not restrict to material well-being or money measure as a limiting factor. But it considers economic growth over time.

Economics is a Science of choice making-Explain the statement/ Explain the definition of L. Robbins

Robbins gave a more scientific definition of Economics. His definition is as follows:

 "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses".

Economics is a science and as an art-Explain

 Under this, we generally discuss whether Economics is science or art or both and if it is a science whether it is a positive science or a normative science or both. Often a question arises - whether Economics is a science or an art or both.

 (a) Economics is as science:

A subject is considered science if

->It is a systematized body of knowledge which studies the relationship between cause and effect.

It is capable of measurement.

It has its own methodological apparatus.

It should have the ability to forecast.

 If we analyse Economics, we find that it has all the features of science. Like science it studies cause and effect relationship between economic phenomena. To understand, let us take the law of demand. It explains the cause and effect relationship between price and demand for a commodity. It says, given other things constant, as price rises, the demand for a commodity falls and vice versa. Here the cause is price and the effect is fall in quantity demanded. Similarly like science it is capable of being measured, the measurement is in terms of money. It has its own methodology of study (induction and deduction) and it forecasts the future market condition with the help of various statistical and non-statistical tools.

But it is to be noted that Economics is not a perfect science. This is because Economists do not have uniform opinion about a particular event.

The subject matter of Economics is the economic behavior of man which is highly unpredictable. Money which is used to measure outcomes in Economics is itself a dependent variable. It is not possible to make correct predictions about the behavior of economic variables.

(b) Economics is as an art:

Art is nothing but practice of knowledge. Whereas science teaches us to know art teaches us to do. Unlike science which is theoretical, art is practical. If we analyse Economics, we find that it has the features of an art also. Its various branches, consumption, production, public finance, etc. provide practical solutions to various economic problems. It helps in solving various economic problems which we face in our day-to-day life.

 Thus, Economics is both a science and an art. It is science in its methodology and art in its application. Study of unemployment problem is science but framing suitable policies for reducing the extent of unemployment is an art.

Is Economics Positive Science or Normative Science

 i) Economics is a Positive Science:

As stated above, Economics is a science. But the question arises whether it is a positive science or a normative science. A positive or pure science analyses cause and effect relationship between variables but it does not pass value judgment. In other words, it states what is and not what ought to be. Professor Robbins emphasized the positive aspects of science but Marshall and Pigou have considered the ethical aspects of science which obviously are normative.

According to Robbins, Economics is concerned only with the study of the economic decisions of individuals and the society as positive facts but not with the ethics of these decisions. Economics should be neutral between ends. It is not for economists to pass value judgments and make pronouncements on the goodness or otherwise of human decisions. An individual with a limited amount of money may use it for buying liquor and not milk, but that is entirely his business. A community may use its limited resources for making guns rather than butter, but it is no concern of the economists to condemn or appreciate this policy. Economics only studies facts and makes generalizations from them. It is a pure and positive science, which excludes from its scope the normative aspect of human behavior.

Complete neutrality between ends is, however, neither feasible nor desirable. It is because in many matters the economist has to suggest measures for achieving certain socially desirable ends. For example, when he suggests the adoption of certain policies for increasing employment and raising the rates of wages, he is making value judgments; or that the exploitation of labour and the state of unemployment are bad and steps should be taken to remove them. Similarly, when he states that the limited resources of the economy should not be used in the way they are being used and should be used in a different way; that the choice between ends is wrong and should be altered, etc. he is making value judgments.

(ii) Economics is a Normative Science:

As normative science, Economics involves value judgments. It is prescriptive in nature and described 'what should be the things'. For example, the questions like what should be the level of national income, what should be the wage rate, how the fruits of national product be distributed among people - all fall within the scope of normative science. Thus, normative economics is concerned with welfare propositions.

 Some economists are of the view that value judgments by different individuals will be different and thus for deriving laws or theories, it should not be used.