Name: SANDHYA S

Roll Number: 2214503765

Programme: MBA
Semester: 1st
Course Name: Managerial Economics
Course Code: DMBA105
1) Define the term ‘Demand’. Explain the determinants of demand with suitable example.
The term demand refers to total or given quantity of a commodity or a service that is purchased by the
consumer in the market at a particular price and at a particular time.
The following are some of the important features of demand:
 It is backed up by adequate purchasing power.
 It is always at a price.
 It should always be expressed in terms of specific quantity.
 It is related to time.
Demand basically depends on utility of a product.
Determinants of demand (factors that affect or influence the demand):
Demand for a commodity or service is determined by a number of factors. All such factors are called
“demand determinants”. The demand determinants are as follows:
1. Price of the Product/ Price of Substitute/Complementary Goods & Services: Price of the given
commodity, prices of other substitutes and/or complements, future expected trend in prices etc When
the price of goods and services rises, the quantity demanded falls. When the price of goods and services falls,
the quantity demanded will increase. It is also called the Law of Demand. Substitute goods are goods that
satisfy the same needs.
 Example: If the price of oil increases the services related to the product also increase. Were
as substitute to oil can be replaced either by buying dalda or reducing the quantity consumed
initially.
2. General Price level existing in the country-inflation or deflation: Price level refers to the buying
power of money or inflation. In other words, economists describe the state of the economy by
looking at how much people can buy with the same dollar of currency.
 Example: If we buy 1000 rupees worth cart of groceries this year. The same cart of groceries
might be either 980 rupees or 1020 rupees depending on the country’s economy growth.
3. Level of income and living standards of the people: Buyers’ purchasing power is dependent on
their incomes and wealth. Suppose we see it in the non-developed areas where jobs are not easily
available, and people do not have much income. Hence, the demand for goods and services is much
lower than the developed cities like Bangalore, where many jobs are available. Therefore, people
have good income and purchasing power, and demand for goods and services is high.
 Example: The availability of Malls/Beauty-Product are comparatively more in cities.
4. Size, rate of growth and composition of population: The size or composition of the population
can affect demand.
 Example: The more children a family has, the greater their demand for clothing.
5. Tastes, preferences, customs, habits, fashion and styles: The demand for any product can change
based on buyers tastes and preferences, brand advertising, plays a vital role in changing buyers’
tastes and preferences.
 Example: Earlier there was a customary that chocolates are for kids, but the advertising
industry has changed this concept by showing that its for kids to very old adults.
6. Publicity, propaganda and advertisements: Advertising is a matter of raising awareness, creating
a deeper interest in a product, and encouraging consumers to desire to make a purchase and
ultimately to act.
 Example: Products like newly launched iPhone etc
7. Weather and climatic conditions: There are many products for which demand is seasonal or
dependent on the climate.
 Example: Demand for winter clothes is high in the winter season, and demand for ice creams
is higher in the summer season.
Thus, several factors are responsible for bringing changes in the demand for a product in the market. A
business executive should have the knowledge and information about all these factors and forces in order to
finalise his own production, marketing and other business strategies.
2) Discuss the different economies of scale in detail.
There are two types of economies of scale:
 Internal economies or real economies: Internal economies are those economies which arise
because of the actions of an individual firm to economise its cost.
Kinds of internal economies:
→ Technical economies: These economies arise on account of technological improvements and
their practical application in the field of business.
 Economies of superior techniques: These economies are the result of the application of
the most modern techniques of production.
 Economies of increased dimension: It is found that a firm enjoys the reduction in cost
when it increases its dimension.
 Economies of linked processes: It is quite possible that a firm may not have various
processes of production within its own premises.
 Economies arising out of research and by-products: A firm can invest adequate funds for
research and, the benefits of research and its costs can be shared by that firm as well as all
other firms in the industry.
 Inventory economies: Inventory management is a part of better materials management.
→ Managerial Economies: They arise because of better, efficient, and scientific management
of a firm.
 Delegation of details: The general manager of a firm cannot look after the working of all
processes of production.
 Functional specialisation: – It is possible to secure economies of large-scale production
by dividing the work of management into several separate departments.
→ Marketing or commercial economies: These economies arise on account of buying and
selling goods on large scale basis at favourable terms.
→ Financial economies: They arise from advantages secured by a firm in mobilizing huge
financial resources.
→ Labour economies: These economies arise as a result of employing skilled, trained, qualified
and highly experienced persons by offering higher wages and salaries.
→ Transport and storage economies: They arise on account of the provision of better, highly
organised and cheap transport and storage facilities and their complete utilisation.
→ Overhead economies: These economies arise on account of large-scale operations. The
expenses on establishment, administration, book-keeping, etc, are more or less the same
whether production is carried out on a small or large scale.
→ Economies of vertical integration: A firm can also reap this benefit when it succeeds in
integrating a number of stages of production.
→ Risk-bearing or survival economies: These economies arise as a result of avoiding or
minimising several kinds of risks and uncertainties in a business.
 External economies or pecuniary economies: External economies are those economies which
accrue to the firms as a result of the expansion in the output of the whole industry and they are not
dependent on the output level of individual firms.
Kinds of external economies
→ Economies of concentration or agglomeration: They arise due to a very large number of firms
which produce the same commodity being established in a particular area.
→ Economies of information: These economies arise as a result of getting quick, latest and up-to-
date information from various sources. Another form of benefit that arises due to localisation of
industry is economies of information.
 → Economies of disintegration: These economies arise as a result of dividing one big unit into
different small units for the sake of convenience of management and administration.
→ Economies of government action: These economies arise as a result of active support and
assistance given by the government to stimulate production in the private sector units.
→ Economies of physical factors: These economies arise due to the availability of favourable
physical factors and environment.
→ Economies of welfare: These economies arise on account of various welfare programmes
undertaken by an industry to help its own staff.
→ Diseconomies of scale: When a firm expands beyond the optimum limit, economies of scale will
be converted into diseconomies of scale.
3) Summarize the different types of cost with examples.
The types of costs are as follows:
1. Money cost and real cost: When cost is expressed in terms of money, it is called as money cost. It
relates to money outlays by a firm on various factor inputs to produce a commodity. In a monetary
economy, all kinds of cost estimations and calculations are made in terms of money only.
When cost is expressed in terms of physical or mental efforts put in by a person in the making of a
product, it is called as real cost. It refers to the physical, mental or psychological efforts, the exertions,
sacrifices, the pains, the discomforts, displeasures and inconveniences which various members of the
society have to undergo to produce a commodity.
2. Implicit or imputed costs and explicit costs: Explicit costs are those costs which are in the nature of
contractual payments and are paid by an entrepreneur to the factors of production [excluding himself] in
the form of rent, wages, interest and profits, utility expenses, and payments for raw materials, etc. They
can be estimated and calculated exactly and recorded in the books of accounts.
Implicit or imputed costs are implied costs. They do not take the form of cash outlays and as such do not
appear in the books of accounts. They are the earnings of owner-employed resources.
3. Actual costs and opportunity costs: Actual costs are also called as outlay costs, absolute costs and
acquisition costs. They are those costs that involve financial expenditures at some time and hence, are
recorded in the books of accounts. They are the actual expenses incurred for producing or acquiring a
commodity or service by a firm.
Opportunity cost of a good or service is measured in terms of revenue which could have been earned by
employing that good or service in some other alternative uses. In other words, opportunity cost of
anything is the cost of displaced alternatives or costs of sacrificed alternatives.
The knowledge of opportunity cost is of great importance to managerial decision-making. The concept
of opportunity cost helps in taking decisions to select the best alternative. While taking a decision among
several alternatives, a manager selects the best one which is more profitable or beneficial by sacrificing
other alternatives.
4. Direct costs and indirect costs: Direct costs are those costs which can be specifically attributed to a
particular product, a department, or a process of production.

5. Past and future costs: Past costs are those costs which are spent in the previous periods. On the other
hand, future costs are those which are to be spent in the future.

6. Fixed costs and variable costs: Fixed costs are those costs which do not vary with either expansion or
contraction in output. They remain constant irrespective of the level of output. They are positive even if
there is no production. They are also called as supplementary or overhead costs.
On the other hand, variable costs are those costs which directly and proportionately increase or decrease
with the level of output produced; they are also called as prime costs or direct costs.
7. Marginal and incremental costs: Marginal cost refers to the cost incurred on the production of another
or one more unit. It implies the additional cost incurred to produce an additional unit of output.
Incremental cost on the other hand refers to the costs involved in the production of a batch or group of
output. They are the added costs due to a change in the level or nature of business activity.
8. Accounting costs and economic costs: Accounting costs are those costs which are already incurred on
the production of a particular commodity. It includes only the acquisition costs. They are the actual costs
involved in the making of a commodity. On the other hand, economic costs are those costs that are to be
incurred by an entrepreneur on various alternative programmes. It involves the application of
opportunity costs in decision making.
4) Outline the characteristics and causes of business cycle.
The term business cycle refers to a wave-like fluctuation in the overall level of economic activity;
particularly in national output, income, employment, and prices that occur in a more or less regular time
sequence. It is the rhythmic fluctuations in the aggregate level of economic activity of a nation.
Characteristics of business cycles:
i. It is a wave-like movement, and it is not a random fluctuation.
ii. It is synchronic in nature. It is all embracing; it covers the entire economy. Any change in one
part of the economy affects the entire economy.
iii. It occurs periodically and hence is recurrent in nature. It is repetitive in the sense that it has some
recognised pattern.
iv. It is to be noted that different trade cycles are similar but not identical in their nature.
v. The effects of different trade cycles are different on different activities.
vi. It is self-generating. The process is cumulative and self-reinforcing. The self-generating forces
terminate one phase and start another phase. No phase is permanent.
vii. It is international in character.
viii. The prosperity phase takes double the time taken by the depression phase.
ix. The downward movement is more sudden and violent than the change from downward to
upward.
x. Profits fluctuate more than the other incomes.
xi. Employment and output in durable goods and capital goods industries fluctuate more than in the
consumption goods industries.
xii. It is characterised by the presence of a crisis. No two phases are symmetrical. Each phase
distinctly represents a crisis of different nature.
Causes of business cycles
The following are some of the important causes, which deserve our attention.
i. Climatic conditions – good or bad create boom and depression.
ii. Variations in business confidence, over-optimism and over-pessimism and other
psychological factors cause fluctuations in business.
iii. Innovations carried out in industrial and commercial organisations.
iv. Under-consumption or over-consumption.
v. Non-monetary factors such as wars, earthquakes, strikes, crop failures, etc may only cause
partial or temporary fluctuations. But substantial changes in the total money supply in an
economy is one of the major causes for cyclical oscillations or alternate phase of prosperity and
depression of good and bad trade conditions.
vi. Excess of investment over voluntary savings.
vii. Variations in the rate of investment, which are caused by fluctuations in marginal efficiency of
capital and interest rate.
viii. Autonomous investment and induced investment cause cyclical fluctuations in economic
activity via multiplier and accelerator respectively.
ix. Inter-related and inter-connected components and sectors of an economy.
 x. Changes in the stock of capital bring about changes in the level of savings and investment
which, in turn, causes variations in the level of output, income, and employment in an economy.
xi. Multiplier or accelerator can explain the process of cyclical fluctuations in any economy. On the
other hand, these two forces working together [super multiplier] can satisfactorily explain the
whole income generation and income fluctuations.
xii. A change in the total stock of money supply will have its rapid transmission effect on the level
of income and prices in an economy. Thus, it is very clear that several factors and forces are
collectively responsible for the emergence of trade cycles in an economy.
5) “The sole cause of inflation is the existence of a persistent excess demand in the economy” Justify the
statement with reference to different types and causes of inflation.
The sole cause of inflation is the existence of a persistent excess demand in the economy. Inflation is the
excess demand over the supply of everything after the limits of the supply have been reached.
Types of inflation: Depending upon the rate of rise in prices and the prevailing situation, inflation has been
classified into the following six types:
 Creeping inflation: When the rise in prices is very slow (less than 3%) like that of a snail or
creeper it is called creeping inflation.
 Walking inflation: When the rise in prices is moderate (in the range of 3 to 7%) and the annual
inflation rate is of single digit it is called walking inflation. It is a warning signal for the
government to control it before it turns into running inflation.
 Running inflation: When the prices rise rapidly at a rate of 10 to 20% per annum it is called
running inflation. Such inflation affects the poor and middle classes adversely. Its control
requires strong monetary and fiscal measures; otherwise, it can lead to hyperinflation.
 Hyperinflation: Hyperinflation is also called by various names like jumping, runaway, or
galloping inflation. During this period, prices rise very fast (double- or triple-digit rates) at a rate
of more than 20 to 100% per annum and become absolutely uncontrollable. Such a situation
brings a total collapse of the monetary system because of the continuous fall in the purchasing
power of money.
 Demand-pull Inflation – The total monetary demand persistently exceeds the total supply of
goods and services at current prices so that prices are pulled upwards by the continuous upward
shift of the aggregate demand function. It arises as a result of an excessive aggregate effective
demand over aggregate supply of goods and services in a slowly growing economy.
It is essential to note that the demand-pull inflation is the result of increase in money supply. This
leads to the following:

→ Decrease in the interest rate.

→ Increase in investment.
→ Increase in production.
→ Increase in the incomes of factors
of production.
→ Increase in the demand for goods
and services.
→ Increase in the level of price

In the figure, the point F indicates the

equilibrium position where aggregate
demand is equal to aggregate supply of
goods and services. OP is the price level
and OY indicates the supply of goods and services. As demand increases, supply being
constant, the price level rises from OP to OP1 and OP2.
  Cost-push inflation: Prices rise on account of increasing cost of production. Thus, in this case,
rise in price is initiated by growing factor costs. Hence, such a price rise is termed as ‘cost-push’
inflation as prices are being pushed up by rising factor costs. A number of factors contribute to
the increase in cost of production. They are:
 Demand for higher wages by the labour class.
 Fixing of higher profit margins by the manufacturers.
 Introduction of new taxes and raising the level of old taxes.
 Increase in the prices of different inputs in the market.
 Rise in administrative prices by the government.
These factors, in turn, cause prices to rise in the market. Out of the many causes, rise in wages is the
most important one. It is estimated and believed that wages constitute nearly 70% of the total cost of
production. A rise in wages leads to a rise in the total cost of production and a consequent rise in the
price level. Thus, cost-push inflation
occurs due to wage-push or profit-
push.
In the figure, the point F indicates the
original equilibrium position where
demand and supply are equal to each
other. OP is the original price level
and OY is the supply. A is the new
equilibrium point when the supply
curve
shifts upwards on account of cost-
push factors. OP1 will be the new
price
level, which is higher than the original
one. OY1 will be the new supply.

Causes of Inflation:

 Demand side: Increase in aggregative effective demand is responsible for inflation. In this case,
aggregate demand exceeds aggregate supply of goods and services. Demand rises much faster
than supply. We can enumerate the following reasons for increase in effective demand.
 Increase in money supply: Supply of money in circulation increases on account of the
following reasons: deficit financing by the government, expansion in public expenditure, etc.
 Increase in disposable income: Aggregate effective demand rises when disposable income
of the people increases. Disposable income rises on account of the following reasons:
reduction in the rates of taxes, increase in national income while tax level remains constant,
and decline in the level of savings
 Increase in private consumption expenditure and investment expenditure: An increase
in private expenditure both on consumption and on investment leads to emergence of excess
demand in an economy.
 Increase in exports: An increase in the foreign demand for a country’s exports reduces the
stock of goods available for home consumption.
 Existence of black money: The existence of black money in a country due to corruption, tax
evasion, black-marketing, etc. increases the aggregate demand.
 Increase in foreign exchange reserves: This may increase on the account of inflow of
foreign money into the country.
 Increase in population growth: This creates an increase in demand for many types of goods
and services in a country.
 High rates: Higher rates of indirect taxes would lead to a rise in prices.
  Reduction in the rates of direct taxes: This would leave more cash in the hands of people
inducing them to buy more goods and services leading to an increase in prices
 Reduction in the level of savings: This creates more demand for goods and services.
 Supply side: Generally, the supply of goods and services do not keep pace with the ever-
increasing demand for goods and services. Thus, supply does not match the demand.
 Shortage in the supply of factors of production: When there is shortage in the supply of
factors of production like raw materials, labour, capital equipment’s, etc. there will be a rise
in their prices.
 Operation of law of diminishing returns: When the law of diminishing returns operates,
increase in production is possible only at a higher cost which demotivates the producers to
invest in large amounts.
 Hoardings by traders and speculators: During the period of shortage and rise in prices,
hoardings of essential commodities by traders and speculators with the objective of earning
extra profits in the future creates an artificial scarcity of commodities.
 Hoardings by consumers: Consumers may also hoard essential goods to avoid payment of
higher prices in the future.
 Role of trade unions: Trade union activities leading to industrial unrest in the form of strikes
and lockouts also reduce production.
 Role of natural calamities: Natural calamities such as earthquake, floods, and drought
conditions also affect the supplies of agricultural products adversely. They also create
shortage of food grains and raw materials, which in turn creates inflationary conditions.
 War: During the period of war, shortage of essential goods creates a rise in prices.
 International factors: These factors would cause either shortage of goods and services or
rise in the prices of factor inputs leading to inflation.
 Increase in prices of inputs within the country
 Role of expectations: Expectations also play a significant role in accentuating inflation. The
following points are worth mentioning:
 If people expect further rise in price, the current aggregate demand increases, which in turn
causes a rise in the prices.
 Expectations about higher wages and salaries affect the prices of related goods.
 Expectations of wage increase often induce some business houses to increase prices even
before upward wage revisions are actually made.
Thus, many factors are responsible for escalation of prices.
6) Define and discuss the marginal efficiency of capital (MEC) in detail.
It refers to productivity of capital. It may be defined as the highest rate of return over cost accruing from an
additional unit of capital asset. It also refers to the yield expected from a new unit of capital. The MEC in its
turn depends on two important factors:
 Prospective yield from the capital asset
 Supply price of the capital asset.
The MEC is the ratio of these two factors. The prospective yield of a capital asset means the total net
returns expected from the asset over its lifetime. After deducting the variable costs like cost of raw
materials, wages, etc from the marginal revenue productivity of capital, an investor can estimate the
prospective income (expected annual returns and not the actual returns) from the capital asset. Along with it,
the investor also has to consider the supply price or replacement cost of the capital asset.
Supply price of a capital asset is the cost of producing a brand-new asset of that kind, not the supply
price of an existing asset. It is the actual amount of money spent by an investor while purchasing new
machinery or erecting a new factory.
The MEC of a particular type of asset means what an investor expects to earn from an additional unit of it
compared with what it costs him. To be more specific, MEC is the rate of discount, which will make the
present value of the capital assets equal to their future value (prospective yield) in their lifetime i.e. Supply
price = discounted prospective yield. The MEC can be calculated with the help of the following formula:

In the above formula Cr represents supply price or replacement cost of the new capital asset. Q1, Q2, Q3
indicate the prospective yields in the various years 1 2 3 … n and r represent the rate of discount which will
make the present value of the series of annual returns just equal to the supply price of capital asset. Thus, r
denotes the rate of discount or MEC.
We can illustrate the meaning of MEC as a rate of discount by means of a simple arithmetical example. Lets
assume that the supply price of a capital asset is Rs.3000/- and the asset will become useless after two years.
Furthermore, the capital asset is expected to yield Rs.1100/- at the end of one year and Rs.2420/- at the end
of 2 years. Now, it is obvious that the rate of discount of 10% will equate the future yields of the asset with
its current supply price. At 10% discount rate, the present value of Rs.1100/- discounted for one year plus
Rs.2420/- discounted for 2 years amounts to an aggregate sum of Rs.3000/- which is the supply price of the
capital asset. The above-mentioned formula can be used to explain the same point.

In this case, the discounted prospective yield is equal to the current supply price of the capital asset. If the
expected rate of yield is greater than the supply price, it becomes profitable to invest and otherwise not.
The volume of induced investment depends on MEC and IR. It is necessary to note that:
 When MEC  IR, the effect on investment is favourable.
 When MEC  IR, the effect on investment is adverse.
 When MEC = IR, the effect on investment is neutral
Generally speaking, the MEC of a capital falls as investment increases and the reasons for this are as
follows:
→ The prospective yields of the asset will fall as more and more units of it are produced. This happens
because as more assets are produced, they will compete with each other to meet the demand for the
product and consequently, their general earnings will decline.
→ The operation of the law of diminishing marginal returns.
→ Higher investments create higher demand for capital assets leading to an increase in supply price of
capital assets. Consequently, the total production cost rises. Thus, MEC declines with an increase in
investment either as a result of decreasing prospective yield or increasing supply price of capital
asset.
→ Higher investment results in higher production, reduction in per unit cost, lower price for the
products and lower earnings from the sales.
Thus, the MEC falls as investment increases because costs go up and earnings fall. The fall in MEC will be
different at different levels of investment. The MEC curve drops downwards from left to right and this
tendency can be explained with the help of the following example. Table 12.2 depicts an example of
changes in MEC in relation to IR and Investment.

The IR in % p.a Volume of investment in crores MEC of capital in % p.a

13% 5000 13%

11% 7000 11%
9% 9000 9%
7% 11000 7%
5% 13000 5%
3% 15000 3%
On the OX axis, we represent different amounts of investment and on OY axis, we represent MEC and IR.
The ME curve indicates the MEC. It can be seen that as investment increases, the ME curve slope
downward. It is clear that if the current IR is 9 %, then the entrepreneurs will invest Rs. 9000 crores because
at this point the MEC is also 9% i.e. MEC = IR. If the IR falls to 7%, then the entrepreneurs will invest Rs
11000/-. This is because the MEC is also 7% at this point. Figure 12.4 shows Investor’s return
The MEC represents an investor’s return and the
IR is the cost. Obviously, the return on capital
must be equal to its cost. Thus, the MEC and IR
are closely related to each other and they move
together. We can conclude that given a MEC
curve, the investment will depend on the existing
IR in the market.
Determinants of MEC: Several factors that
affect MEC are as follows:
Short Run Factors
1. With expectation of increased
demand, higher MEC leads to larger investment
and vice-versa.
2. Cost and price: If the production costs
are expected to decline and market prices to go up in future, MEC will be high leading to a rise in
investment and vice-versa.
3. Higher propensity to consume, leading to a rise in MEC encourages higher investment.
4. Changes in income: An increase in income will simulate investment and MEC while a decline in the
level of incomes will discourage investment.
5. Current state of expectations: If the current rates of returns are high, the MEC is bound to be high for
new projects of investment and vice-versa. This is because the future expectations to a very great extent
depend on the current rate of earnings.
6. State of business confidence: During the period of optimism (boom), the MEC will be generally high
and during period of pessimism (depression), it will be generally less.
Long Run Factors:
1. Rate of growth of population: In a capitalist economy, a high rate of population growth leads to an
increase in MEC because it leads to an increase in the demand for both consumption and investment
goods. On the contrary, a decline in the population growth depresses MEC.
2. Development of new areas: Development activities in the new fields like transport and
communications, generation of electricity, construction of irrigation projects, ports, etc would lead to
a rise in MEC.
 3. Technological progress: Technological progress would lead to the development and use of highly
sophisticated and latest machines, equipment’s and instruments. This will add to the productive
capacity of the economy leading to an increase in MEC.
4. Productive capacity of existing capital equipment’s: Underutilised existing capital assets may be
fully utilised if the demand for goods increases in the economy. In that case, the MEC of the same
asset will definitely rise.
5. The rate of current investment: If the current rate of investment is already high, there would be little
scope for further investment and as such the MEC declines.
Thus, several factors both in the short run and in the long run affect the MEC of a capital asset. Hence,
several measures are to be taken to stimulate private investment in an economy.
Role of business expectations in determining MEC
Business expectations play a vital role in determining MEC and therefore investment. Level of income and
employment in an economy are determined by two factors: propensity to consume and inducement to invest.
Of the two, propensity to consume is more or less stable. Fluctuations in income and employment, therefore,
depend mainly on the inducement to invest. The inducement to invest in turn depends on the rate of interest
and the marginal efficiency of the capital. Since the rate of interest is relatively stable or sticky, fluctuations
in investment depend primarily upon the changes in the MEC. There are two determinants of the MEC: the
cost of the capital asset and, the rate of return from the asset.
Uncertainty in the prospective yield or business expectations causes instability in MEC. As business
expectations change, the volume of investment changes and this causes changes in business activity and
employment.
Expectations regarding the prospective yield of capital assets are of two types:
(a) Short - term expectations
(b) Long - term expectations.
Short-term expectations are based on the existing stock of capital and the intensity of consumers’ demand
for the goods, which are known and remain more or less stable.
On the other hand, long-term expectations relate to future changes in the size of the stock of capital assets
and changes in the level of aggregate demand which are uncertain. Thus, the long-term expectations are
highly unstable, but are more important in explaining fluctuations in investment and employment.
The long-term expectations are influenced by the following factors:
1. The state of confidence – How certain and confident are businessmen with regard to the future
change.
2. Stock exchange valuation – The value attached to it by the dealers in stock exchange.
3. Irrevocable decisions – Decisions made by bold and dynamic entrepreneurs.
4. Elements of instability – Frequent changes in the assessment of the prospects of various
investments have introduced lot of changes in the investment activity.
5. Link with investments – Stock exchange dealings influence new investments by, establishing links
between the new investments and the present investments.
6. Behaviour of investors – Since there is mass valuation of assets on the stock exchange, there are
alternating waves of pessimism and optimism. Apart from these, political events like war, elections,
etc. also influence the prospective yield of the capital assets. Thus, investment decisions are made in
an uncertain atmosphere, based on business expectations with regard to the marginal efficiency of
capital.