LEARNOVATE E-COMMERCE

Task – 13

Submitted By
Shyama E M

(a) Explain how firms and individuals participate and interact in the product
market and in the factor market.

Product Market

The product market represents the purchases of finished goods and services
in an economy. Households are the main buyers of goods and services in the
product market, and businesses are the sellers of goods and services. The product
market represents the millions of buy-sell transactions that are made every day in
supermarkets, gas stations, convenience stores, department stores, bakeries,
laundries, dentist and doctor offices, delis, and coffee shops. The transactions that
take place in the product market are based on the principle of voluntary exchange.
That is, both the buyer (household) and the seller (business firm) believe they will
benefit from an exchange; otherwise, it will not take place. The spending by a
household becomes revenue earned by a business. In an expanded version of the
circular flow model, the government also appears as an important buyer of goods
and services in the product market.
 Goods are tangible items. The two main categories of goods are durable
goods and nondurable goods. Durable goods are items designed for long-term use,
such as motor vehicles, household furnishings, and household appliances.
Nondurable goods, on the other hand, are items produced for immediate
consumption. Commonly consumed nondurable goods include clothing and
footwear, food and beverages, and gasoline. The larger part of household spending
was on services. Services are activities performed for a fee.

Factor Market

The factor market, sometimes called the resource market, represents the
purchase of resources in an economy. In the factor market, households are the
sellers of resources, and business firms are the buyers of resources. Resources are
owned by households and sold to businesses. These resources are called the factors
of production—things that are used to make goods and services. The three main
factors of production are natural resources, the gifts of nature; human resources,
the human element in production; and capital goods, human-made items that are
used to produce other items. Some economists also include entrepreneurship as a
fourth factor of production. Entrepreneurship represents the innovative commercial
ideas of entrepreneurs working on their own or within existing businesses.
Resources have value because they are the main ingredients of production. That is,
resources are transformed by businesses into items that households, government,
and other businesses are willing to buy.

The costs of production are the payments businesses make in exchange for
the factors of production. the costs of production eventually make their way into
the pockets of households, who own the factors of production. Some resources are
owned directly by people in households. For instance, workers directly own their
labor, and entrepreneurs own their special talents or skills. At other times,
households own resources indirectly, mainly through their ownership of business
enterprises—including the natural resources and capital goods that comprise the
holdings of these business firms.

The main costs of production incurred by businesses are wages or salaries,

which is the payment for human resources; rents, the payment for natural
resources; interest, the payment for capital goods; and profits, the payment for
entrepreneurship. The largest category of payments—and thus the largest source of
household income—is wages and salaries. 

(b) What role does profit plays in Market System?

Profit is the surplus revenue after a firm has paid all its costs. Profit can be
seen as the monetary reward to shareholders and owners of a business. In a
capitalist economy, profit plays an important role in creating incentives for
business and entrepreneurs. For an incumbent firm, the reward of higher profit will
encourage them to try and cut costs and develop new products. If an industry is
profitable, it will encourage new firms to enter. If a firm becomes unprofitable, it
will either have to adapt and change or close down. This profit motive can help
increase efficiency, provide greater choice for consumers and allocate resources
according to consumer preferences.

1. Investment in Research & Development. Higher profit enables a firm

to spend more on research and development. This can lead to better
technology, lower costs and dynamic efficiency. This profit is
particularly important for some industries such as oil exploration, drug
research and car manufacturing – which require significant risky
 investment to develop. Without this profit and investment, the economy
will stagnate and lose international competitiveness, leading to job losses
in some sectors.
2. Reward for Shareholders
Shareholders are given dividends. Higher profit leads to higher dividends
and encourages people to buy shares. Shareholders are an important
source of finance for firms. Profit is important to be able to remunerate
shareholders. It is the hope of future profit that enables firms to raise
finance from shareholders to finance expansion.

3. High Profit should attract new firms into the industry

If the price of oil is high then it will become more profitable. These
profits should encourage firms to develop new oil fields. With mobile
Apps becoming more profitable, it will encourage more firms to enter.

1. (a) Explain the concepts and various determinants of market demand.

Determinants of Demand

Five of the most common determinants of demand are the price of the goods or
service, the income of the buyers, the price of related goods, the preference of the
buyer, and the population of the buyers.
Price

The law of demand states that when prices rise, the quantity of demand falls. That
also means that when prices drop, demand will grow. People base their purchasing
decisions on price if all other things are equal.

Income

When income rises, so will the quantity demanded. When income falls, so will
demand. But if your income doubles, you won't always buy twice as much of a
particular good or service. There's only so many pints of ice cream you'd want to
eat, no matter how wealthy you are, and this is an example of "marginal utility." 

Prices of related goods or services

The price of complementary goods or services raises the cost of using the product
you demand, so you'll want less. For example, when gas prices rose to $4 a gallon
in 2008, the demand for gas-guzzling trucks and SUVs fell. 2 Gas is a
complementary good to these vehicles. The cost of driving a truck rose along
with gas prices.

The opposite reaction occurs when the price of a substitute rises. When that
happens, people will want more of the good or service and less of its substitute.
That's why Apple continually innovates with its iPhones and iPods. As soon as a
substitute, such as a new Android phone, appears at a lower price, Apple comes out
with a better product. Then the Android is no longer a substitute.
Tastes

When the public’s desires, emotions, or preferences change in favor of a product,

so does the quantity demanded. Likewise, when tastes go against it that depresses
the amount demanded. Brand advertising tries to increase the desire for consumer
goods. 

Number of buyers in the market

The number of consumers affects overall, or “aggregate,” demand. As more buyers

enter the market, demand rises.

(b) Write a detailed note on price output decisions in multi plant firms.

A monopoly organisation with a number of plants may increase (or decrease) the
number of its plants with a view to obtain the profit - maximising solution. Now,
each plant of the monopolist may be of a different size, and in the long run the size
of each plant is a variable.
 However, in the long run since all sorts of input adjustments are possible, the LAC
curve and the associated SAC curves of each plant of the monopolist would be
identical, for what is good for a particular plant is good for every other plant. The
size of each plant should be such as would enable the firm to produce the same
quantity of output at the same minimum possible (average) cost.

That is, in the long run the monopolist will select the minimum point on the
identical LAC curve of each plant, which is also the minimum point of the
associated SAC curve. This point would be like the point R 0. At this point, the
quantity of output to be produced at each plant is q0 and the minimum long-run
average cost of production at q = q0 would be R0q0—this is also the minimum
possible average cost in the long run of his total output of all the plants taken
together. In the long run, as the number of plants of the multi-plant monopolist
increases so that a larger quantity of output may be produced, the SAC curves
along with their envelope LAC curve in each plant will shift upwards, as it has
done from the lower LAC to the higher LAC curveIt may be remembered that the
LAC = F0q* is equal to the SMC and LMC of each plant. Since the price, or
average revenue of the total output, and, therefore, of the output of each plant is
p*0 and the long-run average cost of the output of each plant and of the total output
is E0q’0 = F0q0* = OH0, the average amount of profit per unit of output is p* 0 –
OH0 = p*0H0 and the total amount of profit of the monopolist here would be equal
to p*0H0 x q*0 = □ p*0H0F0G0.

2. (a) Elaborate meaning and various types of cost in detail.

 Fixed Costs (FC) The costs which don’t vary with changing output. Fixed
costs might include the cost of building a factory, insurance and legal bills.
Even if your output changes or you don’t produce anything, your fixed
costs stay the same. In the above example, fixed costs are always £1,000.
 Variable Costs (VC) Costs which depend on the output produced. For
example, if you produce more cars, you have to use more raw materials
such as metal. This is a variable cost.
 Semi-Variable Cost. Labour might be a semi-variable cost. If you produce
more cars, you need to employ more workers; this is a variable cost.
However, even if you didn’t produce any cars, you may still need some
workers to look after an empty factory.
 Total Costs (TC)  = Fixed + Variable Costs
 Marginal Costs – Marginal cost is the cost of producing an extra unit. If
the total cost of 3 units is 1550, and the total cost of 4 units is 1900. The
marginal cost of the 4th unit is 350.
 Opportunity Cost – Opportunity cost is the next best alternative foregone.
If you invest £1million in developing a cure for pancreatic cancer, the
opportunity cost is that you can’t use that money to invest in developing a
cure for skin cancer.
 Economic Cost. Economic cost includes both the actual direct costs
(accounting costs) plus the opportunity cost.
 Accounting Costs – this is the monetary outlay for producing a certain
good. Accounting costs will include your variable and fixed costs you have
to pay.
 Sunk Costs. These are costs that have been incurred and cannot be
recouped. If you left the industry, you could not reclaim sunk costs. For
 example, if you spend money on advertising to enter an industry, you can
never claim these costs back. If you buy a machine, you might be able to
sell if you leave the industry. See: Sunk cost fallacy
 Avoidable Costs. Costs that can be avoided. If you stop producing cars,
you don’t have to pay for extra raw materials and electricity. Sometimes
known as an escapable cost.
 Explicit costs – these are costs that a firm directly pays for and can be seen
on the accounting sheet. Explicit costs can be variable or fixed, just a clear
amount.
 Implicit costs – these are opportunity costs, which do not necessarily
appear on its balance sheet but affect the firm. For example, if a firm used
its assets, like a printing press to print leaflets for a charity, it means that it
loses out on revenue from producing commercial leaflets.

(b) Discuss meaning of risk. Explain the decision making under risk.

Risk implies a degree of uncertainty and an inability to fully control the

outcomes or consequences of such an action. Risk or the elimination of risk is an
effort that managers employ. However, in some instances the elimination of one
risk may increase some other risks. Effective handling of a risk requires its
assessment and its subsequent impact on the decision process. The decision
process allows the decision-maker to evaluate alternative strategies prior to making
any decision. The process is as follows:

1) The problem is defined and all feasible alternatives are considered. The
possible outcomes for each alternative are evaluated.
 2) Outcomes are discussed based on their monetary payoffs or net gain in
reference to assets or time.

3) Various uncertainties are quantified in terms of probabilities.

4) The quality of the optimal strategy depends upon the quality of the
judgments. The decision maker should identify and examine the sensitivity of
the optimal strategy with respect to the crucial factors. Whenever the decision
maker has some knowledge regarding the states of nature, he/she may be able
to assign subjective probability estimates for the occurrence of each state. In
such cases, the problem is classified as decision making under risk.

4. (a) Explain the composition and functions of money market in India.

Indian money market is divided into organized and unorganized segments.

Unorganized market is old Indigenous market mainly made of indigenous bankers,
money lenders etc.  Organized market is that part which comes under the
regulatory purview of RBI and SEBI. The nature of the money market transactions
is such that they are large in amount and high in volume. Thus, the entire market is
dominated by small number of large players.  At the same time, the money market
in India is yet underdeveloped. The key players in the organized money market
include Governments (Central and State), Discount and Finance House of India
(DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector
Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-
Banking Financial Companies (NBFCs).
Functions of Money Markets
Due to short maturity term, the instruments of money market are liquid and can be
converted to cash easily and thus are able to address the need of the short term
surplus fund of the lenders and short term borrowing requirements of the
borrowers.  Thus, the major function of the money markets is to cater to the short
term financial needs of the economy. The other functions are as follows:

1. Money Markets help in effective implementation of the RBI’s monetary

policy

2. Money markets help to maintain demand and supply equilibrium with

regard to short term funds

3. They cater to the short term fund requirement of the governments

4. They help in maintaining liquidity in the economy

(b) Discuss the role of SEBI in monitoring and regulating capital market in
india.

SEBI plays a very important role in regulating capita market. SEBI is regulator to
control Indian capital market. Since its establishment in 1992, it is doing hard work for
protecting the interests of Investor.

Role of SEBI is as follows:

1. Power to make rules for controlling stock exchange:

 SEBI has power to make new rules for controlling stock exchange in India. For
example, SEBI fixed the time of trading 9 AM and 5 PM in stock market. 

2. To provide license to dealers and brokers:

SEBI has power to provide license to dealers and brokers of capital market. If SEBI
sees that any financial product is of capital nature, then SEBI can also control to
that product and its dealers. One of main example is ULIPs case. SEBI said, " It is
just like mutual funds and all banks and financial and insurance companies who
want to issue it, must take permission from SEBI."

3. To Control the Merge, Acquisition and Takeover the companies:

Many big companies in India want to create monopoly in capital market. So, these
companies buy all other companies or deal of merging. SEBI sees whether this
merge or acquisition is for development of business or to harm capital market. 

4. To audit the performance of stock market:

SEBI uses his powers to audit the performance of different Indian stock exchange
for bringing transparency in the working of stock exchanges. 

5. (a) Write short note on

(i)Difference between WTO and GATT
Comparison Chart

BASIS FOR
GATT WTO
COMPARISON

Meaning GATT can be described as a set WTO is an international

of rules, multilateral trade organization, that came
agreement, that came into force, into existence to oversee
to encourage international trade and liberalize trade
and remove cross-country trade between countries.
barriers.

Institution It does not have any institutional It has permanent

existence, but have a small institution along with a
secretariat. secretariat.

Participant Contracting parties Members

nations

Commitments Provisional Full and Permanent

Application The rules of GATT are only for The rules of WTO
trade in goods. includes services and
aspects of intellectual
property along with the
goods.
 BASIS FOR
GATT WTO
COMPARISON

Agreement Its agreement are originally Its agreements are purely

multilateral, but plurilateral multilateral.
agreement are added to it later.

Domestic Allowed to continue Not allowed to continue

Legislation

Dispute Slow and ineffective Fast and effective

Settlement
System

(ii) GDP and PPP

GDP for different countries is usually measured in a common currency – normally

we use the US dollar. But there are two problems in using market exchange rates to
measure GDP

1. Exchange rates can be volatile from month to month and from year to year.
For example a large depreciation in the value of the Argentinean peso against
the US dollar might imply that Argentinean living standards have fallen even
though their economy might actually be growing quite quickly
 2. Exchange rates are more relevant to products that are traded between
countries rather than non-traded products. Manufactured goods tend to sell for
similar prices in most parts of the world – this is because international
competition tends to reduce the differentials in prices for similar products.
Non-traded service such as domestic cleaners, haircuts and academic tutors
tend to have bigger differences in prices.

Calculations of GDP based on market exchange rates tend to over-estimate the cost
of living in poorer developing countries.

This is called the Balassa - Samuelson effect.

To make a PPP adjustment for comparing GDP we build a basket of comparable

goods and services and look at the prices of that basket in different countries.

Purchasing Power Parity is the exchange rate needed for say $100 to buy the same
quantity of products in each country.

(b) Define the terms in relation with Union Budget

(i) Revenue account

A revenue account is an account with a credit balance. It includes all the revenue
receipts also known as current receipts of the government. These receipts include tax
revenues and other revenues of the government.

Tax revenues include the revenue earned by the government authorities by levying
direct and indirect taxes and duties. Direct taxes include income tax, corporate tax
and so on. Indirect taxes include Excise duties, customs duties, and service tax.Other
revenues include revenues from other sources of investments like interest, dividends,
profits from public sector units, fees, fines and so on.

(ii) Capital Account

A capital account is an account that includes the capital receipts and the payments. It
basically includes assets as well as liabilities of the government. Capital receipts
comprise of the loans or capital that are raised by governments by different means.

They can also raise money from the public, such loans are market loans. They could
also borrow from banks or other sources by means of Treasury Bills, also called T-
Bills. Loans are also raised from external sources like foreign governments or
international institutions. Another way of raising capital is by disinvestment in public
sector units or other assets.

(iii) Revenue Deficit

A revenue deficit indicates that the government doesn't have sufficient revenue for
the normal functioning of the government departments. In other words when the
government starts spending more than it earns it results in Revenue Deficit.
Revenue Deficit forces the government to disinvest or cover the shortage by
borrowing.

(iv)Capital Deficit
 Capital account deficit shows that more money is flowing out of the economy
along with increase in its ownership of foreign assets and vice-versa in case of a
surplus. The balance of payments contains the current account (which provides a
summary of the trade of goods and services) in addition to the capital account
which records all capital transactions.

(v) Plan and non-plan expenditure

Non-plan expenditure is what the government spends on the so-called non-

productive areas, such as salaries, subsidies, loans and interest, while plan
expenditure pertains to the money to be set aside for productive purposes, like
various projects of ministries.