Inputs for Economics

Definitions of exogenous: -

Ø Generated by external factors, as opposed to internal factors (endogenous). Exogenous effects include for example natural disasters or regional economic crises.

Ø Externally caused rather than resulting from conditions within the individual.

Ø Exogenous (or exogeneous) (from the Greek words "exo" and "gen", meaning "outside" and "production") refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system.

Ø A component of the price cap formula incorporating a change, specific to the telecommunications industry, having a material impact on the company, resulting from legislative, judicial or administrative actions which are beyond the control of the company. ...

Definitions of endogenous:

· derived or originating internally

· The word endogenous means "proceeding from within", the opposite of exogenous.

· In an economic model, a parameter or variable is said to be endogenous when there is a correlation between the parameter or variable and the error term. ...

· Generated by internal factors, as opposed to outside (exogenous) factors. Endogenous effects include for example technological change or economies of scale.

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In an economic model, a parameter or variable is said to be endogenous when there is a correlation between the parameter or variable and the error term. Endogeneity can arise as a result of measurement error, autoregression with autocorrelated errors, simultaneity, omitted variables, and sample selection errors. Broadly, a loop of causality between the independent and dependent variables of a model leads to endogeneity.

For example, in a simple supply and demand model, when predicting the quantity demanded in equilibrium, the price is endogenous because producers change their price in response to demand and consumers change their demand in response to price. In this case, the price variable is said to have total endogeneity once the demand and supply curves are known. In contrast, a change in consumer tastes or preferences would be an exogenous change on the demand curve.

Economics Basics: Monopolies, Oligopolies and Perfect Competition

Economists assume that there are a number of different buyers and sellers in the marketplace. This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods.

A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra.

In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.

There are two extreme forms of market structure: monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.

Oligopoly

An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high (i.e. a large % of the market is taken up by the leading firms). Firms within an oligopoly produce branded products (advertising and marketing is an important feature of competition within such markets) and there are also barriers to entry.

Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets - which economists seek to model through the use of game theory.

Economics is much like a game in which the players anticipate one another's moves.

Game theory may be applied in situations in which decision makers must take into account the reasoning of other decision makers. It has been used, for example, to determine the formation of political coalitions or business conglomerates, the optimum price at which to sell products or services, the best site for a manufacturing plant, and even the behaviour of certain species in the struggle for survival.
Adapted from Brittanica

The ongoing interdependence between businesses can lead to implicit and explicit collusion between the major firms in the market. Collusion occurs when businesses agree to act as if they were in a monopoly position.

KEY FEATURES OF OLIGOPOLY

* A few firms selling similar product

* Each firm produces branded products

* Likely to be significant entry barriers into the market in the long run which allows firms to make supernormal profits.

* Interdependence between competing firms. Businesses have to take into account likely reactions of rivals to any change in price and output

THEORIES ABOUT OLIGOPOLY PRICING

There are four major theories about oligopoly pricing:

(1) Oligopoly firms collaborate to charge the monopoly price and get monopoly profits

(2) Oligopoly firms compete on price so that price and profits will be the same as a competitive industry

(3) Oligopoly price and profits will be between the monopoly and competitive ends of the scale

(4) Oligopoly prices and profits are "indeterminate" because of the difficulties in modeling interdependent price and output decisions

THE IMPORTANCE OF PRICE AND NON-PRICE COMPETITION

Firms compete for market share and the demand from consumers in lots of ways. We make an important distinction between price competition and non-price competition. Price competition can involve discounting the price of a product (or a range of products) to increase demand.

Non-price competition focuses on other strategies for increasing market share. Consider the example of the highly competitive UK supermarket industry where non-price competition has become very important in the battle for sales

• Mass media advertising and marketing
• Store Loyalty cards
• Banking and other Financial Services (including travel insurance)
• In-store chemists / post offices / crèches
• Home delivery systems
• Discounted petrol at hyper-markets
• Extension of opening hours (24 hour shopping in many stores)
• Innovative use of technology for shoppers including self-scanning machines
• Financial incentives to shop at off-peak times
• Internet shopping for customers

PRICE LEADERSHIP IN OLIGOPOLISTIC MARKETS

When one firm has a dominant position in the market the oligopoly may experience price leadership. The firms with lower market shares may simply follow the pricing changes prompted by the dominant firms. We see examples of this with the major mortgage lenders and petrol retailers.

In economic theory, market situation in which there is only one buyer. An example of pure monopsony is a firm that is the only buyer of labour in an isolated town. Such a firm is able to pay lower wages than it would under competition. Although cases of pure monopsony are rare, monopsonistic elements are found wherever there are many sellers and few purchasers.

Definition:Monopsony is a state in which demand comes from one source. If there is only one customer for a certain good, that customer has a monopsony in the market for that good.
Analogous to monopoly, but on the demand side not the supply side.

A common theoretical implication is that the price of the good is pushed down near the cost of production. The price is not predicted to go to zero because if it went below where the suppliers are willing to produce, they won't produce.

Definition of inductive: -

· of reasoning; proceeding from particular facts to a general conclusion; "inductive reasoning"

Reasoning process in which data are gathered and examined, hypotheses are formulated, and eventually theories are developed in response to what the data reveal; generally used with qualitative research methods.

Unlike deductive arguments, inductive ones promise only probability, not certainty. Thus, if one argues that having watched several different newscasts in several different cities on many different nights one may infer that newscasts emphasize, in Bob Inman's phrase, "mayhem and misery", then ...

Definitions of deductive on the Web: -

· relating to logical deduction; "deductive reasoning"

· involving inferences from general principles

A deductive argument is one that derives the truth of the conclusion from the truth of the premises. If the argument form, or structure of the argument, is valid, then the conclusion will always follow from the premises. ...

Reasoning process in which researcher begins with a theory and then gathers evidence, or data, to assess whether the theory is correct; generally used with quantitative research methods.

A form of reasoning in which conclusions are formulated about particulars from general or universal premises

Liquidity Trap Explained

A liquidity trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, even an increase in the money supply could fail to increase spending because interest rates can't fall further.

A liquidity trap means consumers' preference for liquid assets (cash) is greater than the rate at which the quantity of money is growing. So any attempt by policymakers to get individuals to hold non-liquid assets in the form of consumption by increasing the money supply won't work.

Liquidity Trap 2009

Base interest rates were cut to 0.5% in March 2009. For a considerable time, the economy remained in recession. Technically, the economy is now creeping back to positive growth, but, the economy remains sluggish. So 2009, has been a good example of a liquidity trap.

Why do Liquidity Traps Occur?

• Expectations of deflation. If there is deflation or people expect deflation (fall in prices) then real interest rates can be quite high even if nominal interest rates are zero. - If prices are falling 2% a year, then keeping cash under your mattress means your money will increase in value. The difficulty is in having negative nominal interest rates (banks would be paying you to borrow money). There have been attempts to create a negative interest rates (e.g. destroy money in circulation but in practice it is rarely implemented.
• Preference for Saving. Liquidity traps occur during periods of recessions and a gloomy economic outlook. Consumers, firms and banks are pessimistic about the future, so they look to increase their precautionary savings and it is difficult to get them to spend. This rise in the savings ratio means spending falls. Also, in recessions banks are much more reluctant to lend. Also, cutting the base rate to 0% may not translate into lower commercial bank lending rates as banks just don't want to lend.
• Credit Crunch. Banks lost significant sums of money in buying sub prime debt which defaulted. Therefore, they are seeking to improve their balance sheets. They are reluctant to lend so even if firms and consumers want to take advantage of low interest rates, banks won't lend them the money.
• Unwillingness to hold bonds. If interest rates are zero, investors will expect interest rates to rise sometime. If interest rates rise, the price of bonds falls. Therefore, investors would rather keep cash savings than hold bonds.

What is compounding?

· A process by which investment earnings build up not only on the money originally invested but also on the earnings and gains made in previous years.

· Earning money on a principal investment and its interest, usually calculated on a monthly or yearly basis. Compounding is said to be one of the best ways to create wealth.

Determining the future value of a current amount, in which the interest remains with the principal and becomes part of the principal for computing interest in the next period.

· Interest that is paid on interest, resulting in a geometric rate of increase on the initial principal. For mutual funds, reinvesting dividends and capital gains takes advantage of the power of compounding. Correlation A statistical measure of how two securities move in relation to each other. ...

· The process of adding interest earned to principal.

Definition of compounding interest:-

· Interest paid on interest, resulting in a geometric rate of increase on the initial investment. For example, a $100 investment that earns 5% generates $5 per year. ...

· Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding (i.e. the interest is compounded). ...

Compounding

The process of earning interest on a loan or other fixed-income instrument where the interest can itself earn interest. That is, interest previously calculated is included in the calculation of future interest. For example, suppose someone had the same certificate of deposit for $1000 that pays 3%, compounding each month. The interest paid is $30 in the first month (3% of $1,000), $30.90 in the second month (3% of $1,030), and so forth. In this situation, the more frequently interest is compounded, the higher the yield will be on the instrument.

Definitions of discounting of bills:

Where the payee of a term bill requires payment immediately, a bank may discount the bill, ie make immediate payment, deducting an amount for interest over the term of the bill. Discrete time The division of time into indivisible units. ...

Discounting

The act of determining the present value of future cash flows. Because money is subject to inflation and has the ability to earn interest, one dollar today is worth more than one dollar tomorrow. Discounting, then, is the act of determining how much less tomorrow's dollar is worth. For example, a bank may loan a sum of money and schedule repayments at $100 per month for 10 years. The bank may then discount the value of payments and determine exactly how much? In today's dollars ? It will have received once the loan is paid off.

Restoration Economics

Discounting and Time Preference

Introduction

When weighing the benefits and costs of coastal restoration projects and other environmental management programs, the selection of a discount rate is a key consideration and often a source of controversy. What is a discount rate? The discount rate is the rate at which society as a whole is willing to trade off present for future benefits. When weighing the decision to undertake a project with long-term benefits (e.g., wetland protection programs) versus one with short-term benefits and long-term costs (e.g., logging forests near aquatic ecosystems), the discount rate plays an extremely important role in determining the outcome of the analysis. Indeed, a number of reasonable decision measures (e.g., net present value, benefit-cost ratio, internal rate of return, return on investment) depend critically on the chosen discount rate.

Why are discount rates needed? Because a dollar received today is considered more valuable than one received in the future. There are four primary reasons for applying a positive discount rate. First, positive rates of inflation diminish the purchasing power of dollars over time. Second, dollars can be invested today, earning a positive rate of return. Third, there is uncertainty surrounding the ability to obtain promised future income. That is, there is the risk that a future benefit (e.g., enhanced fish catches) will never be realized. Finally, humans are generally impatient and prefer instant gratification to waiting for long-term benefits.

Discount rates are used to compress a stream of future benefits and costs into a single present value amount. Thus, present value is the value today of a stream of payments, receipts, or costs occurring over time, as discounted through the use of an interest rate. Present value calculations of benefits and costs are then compared to determine benefit-cost ratios. For example, if the present value of all discounted future benefits of a restoration project is equal to $30 million and the discounted present value of project costs totals $20 million, the benefit-cost ratio would be 1.5 ($30 million / $20 million), and the net benefit would be $10 million ($30 million — $20million). Any benefit-cost ratio in excess of 1.0 or net benefit above 0.0 demonstrates positive economic returns to society. Note that values used for benefit-cost analysis are often amortized over the project time horizon, yielding annualized benefits and costs. This practice allows for comparison of projects with different timeframes.

Mathematically, the present value of a future benefit or cost is computed based on Equation 1.

PV = FV / ( 1+i) n		Equation 1.

Where PV = the present value of a benefit or cost, FV = its future value, i = the discount rate and n = the number of periods between the present and the time when the benefit or cost is expected to occur. The following example illustrates how the equation is used. Assume that a future benefit of a salmon habitat restoration project is an expanded catch valued at $10,000,000 in Year 10. Here is how we would calculate the present value of that benefit, assuming a 3 percent discount rate.

PV	=	$10,000,000 / (1+.03) 10
	=	$10,000,000 / 1.34
	=	$7,440,940

The present value will vary widely based on the discount rate used in the analysis. For example, use of a 10 percent discount rate would reduce the present value of the aforementioned benefit associated with salmon habitat restoration to $3,855,433, a 48 percent reduction in present-value benefits. High discount rates, therefore, tend to discourage projects that generate long-term benefits (e.g., wetland restoration) and favor those that create short-term benefits and significant long-term costs (e.g., damming rivers).

Another way of thinking about discount rates is as the inverse of compound interest. That is, whereas compounding measures how much present-day investments will be worth in the future, discounting measures how much future benefits are worth today.

Definitions of disposable income:

· income (after taxes) that is available to you for saving or spending

· Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income. ...

· That part of an individual's compensation from an employer and other income from any source, including spousal income, that remains after the deduction of any amounts required by law to be withheld, or any child support or alimony payments that are made under a court order or legally enforceable ...

· total household income after the deduction of the income tax, property taxes, compulsory social insurance contributions of employees, the self-employed and the unemployed (if applicable), and regular remittances to other households.

· The amount of a person's or group's monetary income which is available to be saved or spent (on either essential or non-essential items), after deducting all taxes and other governmental fees

· Income minus taxes. More accurately, income minus direct taxes plus transfer payments; that is, the income available to be spent (including on imports) and saved.

Disposable Income

Disposable income is money that can be spent, saved, invested or otherwise disposed of after taxes and certain other obligations (such as union dues, employer-mandated health care costs or other similar fees) have been paid. Another term for disposable income is take home pay. Since most fees and taxes are beyond the control of workers, the only ways to increase disposable income is by a pay raise, working additional hours, developing an additional source of income or finding different employment at a higher rate of pay with more disposable income. An increase in disposable income is considered a sign of prosperity while a drop in disposable income is often a trailing indicator of an economic slowdown. Disposable income is also known as discretionary income or spendable income.

Definitions of supermarket:

· a large self-service grocery store selling groceries and dairy products and household goods

· A supermarket, also called a grocery store, is a self-service store offering a wide variety of food and household merchandise, organized into departments. It is larger in size and has a wider selection than a traditional grocery store and it is smaller than a hypermarket or superstore.

· In lean manufacturing terms, a supermarket is a tightly managed amount of inventory within the value stream to allow for a pull system. Supermarkets, often called inventory buffers, can contain either finished items or work-in-process. ...

· Large retail store operated on a self-service basis, selling groceries, produce, meat, bakery and dairy products, and sometimes nonfood goods. Supermarkets were first established in the U.S. during the 1930s as no-frills retail stores offering low prices. In the 1940s and '50s they became the major food marketing channel in the U.S.; the 1950s also saw them spread through much of Europe. Their growth is part of a trend in developed countries toward reducing cost and simplifying marketing. In the 1960s supermarkets began appearing in developing countries in the Middle East, Asia, and Latin America, where they appealed to individuals who had the necessary buying power and food storage facilities.

Definitions of hypermarket:

· a huge supermarket (usually built on the outskirts of a town)

· In commerce, a hypermarket is a superstore which combines a supermarket and a department store. The result is a very large retail facility which carries an enormous range of products under one roof, including full lines of groceries and general merchandise. ...

· The largest supermarket format, typically 150,000 square feet or more of floor space. General merchandise accounts for 40 percent of sales, while food and nonfood grocery products represent 60 percent of sales.

· A giant shopping centre containing a very large supermarket and other smaller shops found in an out-of-city location, close to a motorway junction. It benefits from cheap land and the new trend to shopping by car, with large carparks to cater for this. ...

· A very large commercial establishment that is a combination of a department store and a supermarket.

Definitions of Superstore:

· A big-box store (also supercenter, superstore, or megastore) is a physically large retail establishment, usually part of a chain. The term sometimes also refers, by extension, to the company that operates the store. Examples include large department stores such as Wal-Mart and Target.

· An extremely large store, hypermarket

· A larger version of the conventional supermarket, with at least 40,000 square feet in total selling area and 25,000 items. Superstores offer an expanded selection of nonfood items, including health and beauty products and general merchandise.

What is a Superstore?

A Superstore is supposed to be a place where the public can go to find the things that they need for living in a quick precise manner. With all the hustle and bustle of life, Superstores enable us to find things quickly. The word "Superstore" Has been used for a long time. When people think of a Superstore, they think of a place to go for just about anything. Whether you need groceries, lawn supplies, clothes, car care products, electronics or personal hygiene products, the Superstore has it all. Think about all of those things in one store. You think it would be very hard to find something that you are looking for if all these...

Substitute good

Substitute goods exhibit a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises

A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand.This means a good's demand is increased when the price of another good is increased. Conversely, the demand for a good is decreased when the price of another good is decreased. If goods A and B are substitutes, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve for B to shift in.

Examples

Classic examples of substitute goods include margarine and butter, or petroleum and natural gas (used for heating or electricity). The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so.

Increase in price

An increase in price (ceteris paribus) will result in an increase in demand for its substitutes goods. Thus, economists can predict that a spike in the cost of wood will likely mean increased business for bricklayers, or that falling cellular phone rates will mean a fall-off in business for public pay phones.

Different types

It is important to note that when speaking about substitute goods we are speaking about two different kinds of goods; so the "substitutability" of one good for another is always a matter of degree. One good is a perfect substitute for another only if it can be used in exactly the same way. In that case the utility of a combination is an increasing function of the sum of the two amounts, and theoretically, in the case of a price difference, there would be no demand for the more expensive good.

In microeconomics, two types of substitutes are being distinguished. Good X is said to be gross substitute of good Y ifGoods X and Y are said to be net substitutes if where U = U(X,Y) is a utility function.

Perfect and Imperfect substitutes

Indifference curve for perfect substitutes

Perfect substitutes may alternatively be characterized as goods having a constant marginal rate of substitution. Alternative types of soft drinks are commonly used as an example of perfect substitutes. As the price of Coca Cola rises, consumers would be expected to substitute Pepsi in equal quantities, i.e., total cola consumption would hold constant. Also, blank media such as a writable Compact Discs from alternate manufacturers would be perfect substitutes. If one manufacturer raises the price of its CDs, consumers would be expected to switch to a lower cost manufacturer.

Imperfect substitutes exhibit variable marginal rates of substitution along the consumer indifference curve.

Substitute goods

Different goods that, at least partly, satisfy the same needs of the consumers and, therefore, can be used to replace one another. Price of such goods shows positive cross-elasticity of demand. Thus, if the price of one good goes up the sales of the other rise, and vice versa. Also called substitutes.

Substitute goods can be used in place of each other, so that as the cost of one rises, everything else the same, people will buy more of the other. For example, Coke and Pepsi.

Complementary Goods and Substitute Goods

There are, as we all know it, certain things that just go well together and belong together; hot dogs and hot dog buns for example, tennis shoes and shoestrings, cake and ice cream, a bed and sheets, etc, etc. In each one of these couples, the goods in point are more useful or more enjoyable when they are used with the other member of the match.

Given that these goods complement each other, economists call these complementary goods. An interesting aspect of complementary goods is that a change in the price of a complement affects the other complement. For example if a price reduction is made on hot dogs, people will not only start to buy more hot dogs, but hog dog buns as well and more mayonnaise, ketchup and mustard is sold as well.

On the other hand, consider substitute goods – which are goods that have similar functions, so that if the price of one of these increases, people pass on over to another. For example, if the price of a bus ride increases, more people will start using their automobiles. If the cost of sending mail increases, then people would simply turn to sending more emails rather then direct mail.

Both complementary goods as well as substitute goods are the result of cross pricing. An increase in the price of a complement causes the demanded amount of the “couple” to decrease, whereas an increase in the price of a substitute makes the demanded amount of the other good increase.

Whenever you look at the economy, think of it as a great organic everything, where things do not occur separately. When the price of a good changes, it does not only affect that good, but it affects many others that are substitute or complementary. If the prices of the substitutes or the complements change, as a result of the change of the initial price, then all the substitutes and complements also become affected by it.

Substitute goods

Two (or more) products for which the demand schedules are related to each other in such a way that an increase in the price of one good (other things being equal) will result in a rightward shift of the entire demand schedule for the other good, so that more of the second good will then be demanded at any given available price of the second good. (By the same token, a decrease in the price of the first good will result in a leftward shift of the entire demand schedule for its substitute, so that less of the substitute good will then be demanded at any given available price for the substitute than before.) This kind of relationship occurs when the two kinds of goods can be consumed or used in place of each other in at least some of their common uses. (Of course, substitutability of one for the other is a matter of degree, ranging from almost perfect interchangeability to only partial interchangeability.) The relative costs of using one good versus its substitute is apt to play a major role in determining which one each user chooses to purchase.

An example of substitutable consumer goods might be compact disks and cassette tapes, both of which can be used as media for selling recorded musical performances to the public, even though there are significant differences between the two in terms of sound quality, durability, and the cost of the equipment needed to play them. Essentially these represent alternative choices for the consumers, and the relative prices of the two alternatives are going to have a lot to do with which way many consumers will go in spending their music budgets. If the price of cassettes suddenly increases a good bit, other things being equal, we can expect cd sales to be larger at any given price than they would have been with cassettes still at the old price.

Examples of substitutable producers' goods might include coal versus natural gas (versus fuel oil versus nuclear fuels versus windmills etc) as alternative means to power generators for producing electricity. If the price of coal increases sharply, one may expect demand for the various substitutes to be greater at any of their given prices than would have been the case if the coal price had remained unchanged. This is because at least some electricity producers will now find it financially worth their while to shift part or all of their electricity production over to these suddenly relatively cheaper technologies. (Another common pattern is for various sorts of skilled or unskilled labor to be fairly substitutable in particular industries for each other and/or for various forms of labor-saving machinery because of the existence of alternative production technologies available for producing the same goods or services. If the price of purchasing electronic teller machines goes down, for example, other things being equal, banks' demand for human bank tellers is likely to be reduced.)

What is 'substitute goods'?

Substitute goods can be used in place of each other, so that as the cost of one rises, everything else the same, people will buy more of the other. For example, Coke and Pepsi.

Definitions of Complementary goods:

· A complementary good or complement good in economics is a good which is consumed with another good; its cross elasticity of demand is negative. – It is two goods that are bought and used together. ...

Complementary good

Complementary goods exhibit a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.

A complementary good, in contrast to a substitute good, is a good with a negative cross elasticity of demand.^[1] This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.^[2] If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in; less of each good will be demanded. A decrease in price of A will result in a rightward movement along the demand curve of A and cause the demand curve B to shift outward; more of each good will be demanded.

Examples

Supply and demand of hotdogs

An example of this would be the demand for hotdogs and hotdog buns. The supply and demand of hotdogs is represented by the figure at the right with the initial demand D1. Suppose that the initial price of hotdogs is represented by P1 with a quantity demanded of Q1. If the price of hotdog buns were to decrease by some amount, this would result in a higher quantity of hotdogs demanded. This higher quantity demanded would cause the demand curve to shift outward to a new position D2. Assuming a constant supply S of hotdogs, the new quantity demanded will be at D2 with a new price P2.

Other examples include:

• Peanut butter and jelly
• Printers and ink cartridges
• DVD players and DVDs
• Computer hardware and computer software

Perfect complement

Indifference curve for perfect complements

A perfect complement is a good that has to be consumed with another good. The indifference curve of a perfect complement will exhibit a right angle, as illustrated by the figure at the right.^[3] Few goods in the real world will behave as perfect complements.^[4] One example is a left shoe and a right; shoes are naturally sold in pairs, and the ratio between sales of left and right shoes will never shift noticeably from 1:1 - even if, for example, someone is missing a leg and buys just one shoe.

The degree of complementarily, however, does not have to be mutual; it can be measured by cross price elasticity of demand. In the case of video games, a specific video game (the complement good) has to be consumed with a video game console (the base good). It does not work the other way: a video game console does not have to be consumed with that game.

Example; A classic example of mutually perfect complements is the case of pencils and erasers. Imagine an accountant who will need to prepare financial statements, but in doing so he or she must use pencils to make all calculations and an eraser to correct errors. The accountant knows that for every 3 pencils, 1 eraser will be needed. Any more pencils will serve no purpose, because he or she will not be able to erase the calculations. Any more erasers will not be useful either, because there will not be enough pencils for him or her to make a large enough mess with in order to require more erasers.

Complementary goods; Goods are complementary if a reduction in the price of one leads to an increase in demand for the other. They are usually goods that are consumed (used) together, such as gin and tonic or computers and software.

If two goods are complementary, they will then have a negative cross price elasticity of demand.

The sales of some products are sufficiently strongly tied to sales of related complementary goods that it is necessary to model sales of the two goods together.

Some business models exploit the strongly complementary nature of certain pairs of goods, a good example this are razor-blade models.

What Does Initial Public Offering - IPO Mean?
The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.
Also referred to as a "public offering".

Investopedia explains Initial Public Offering - IPO
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.

An initial public offering, or IPO, is the first sale of a corporation's common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, being listed on a stock exchange comes with heavy regulatory compliance and reporting requirements.

The term IPO only refers to the first public issuance of a company's shares. It assumes a company is big enough, successful enough, and has the required track record to raise capital in the public equity market. If a company later sells newly issued shares again to the market, it is called a seasoned equity offering. When a shareholder sells shares, it is called a secondary offering and the shareholder, not the company that originally issued the shares, retains the proceeds of the offering. These terms are often confused and only a company which issues shares can make a primary offering or IPO. Secondary offerings occur on the secondary market, where shareholders (not the issuing company) buy and sell shares from and to each other.

The IPO process starts when the corporation files a registration statement, according to the Securities Act of 1933, with the SEC. The SEC then investigates the registration statement and approves the full disclosure. The underwriter first issues a preliminary prospectus and then an official prospectus before or along with the stock offering. After SEC approval, the price and date of the IPO are decided.

Investing in an IPO is a risky and speculative investment. Only active traders, depending on their investment objectives and risk tolerance, should consider this type of investment.

FACE VALUE: The stated, or face, value of a legal claim or financial asset. For debt securities, such as corporate bonds or U. S. Treasury securities, this is amount to be repaid at the time of maturity. For equity securities, that is, corporate stocks, this is the initial value set up at the time it is issued. Face value, also called par value, is not necessarily, and often is not, equal to the current market price of the asset. A $10,000 U.S. Treasury note, for example, has a face value of $10,000, but might have a current market price of $9,950. The difference between face value and current price contributes to the yield or return on such assets. An asset is selling at a discount if the current price is less than the face value and is selling at a premium if the current price is more than the par value.

Face value

The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question (as with circulation coins) it can sometimes be largely symbolic, as is often the case with bullion coins. For example, a one troy ounce (31 g) American Gold Eagle bullion coin was worth and sold for about $1200 USD during 2009 market prices (as of November 14, 2009^[update]) and yet has a face value of only $50 USD

Definitions of face value:

Ø par value: the value of a security that is set by the company issuing it; unrelated to market value

Ø the apparent worth as opposed to the real worth

Ø The amount or value listed on a bill, note, stamp, etc.; the stated value or amount; No more or less than what is stated; a literal or direct meaning or interpretation

Ø "Face value" means the original purchase price or original issued value of a gift obligation, pre-funded bank card or stored-value card if unused or, if partially used, the remaining balance prior to the deduction of any service charges, fees or dormancy charges. [2003, c. 339, §1 (new).]

Ø The amount of money which the issuer of a bond promises to repay to the bondholder on or before the maturity date.

What is a Face value of a Share?

Face Value (par Value) of Share

All companies issue shares with a fixed denomination called the face value (or par value) of the share. This face value be indicated on the share certificate. Generally Indian shares has a face value of Rs. 10/-

Difference between Face Value and Market value

A face value has no relation with the market value of the share. Market value of the share will always change depending upon the market conditions. But the face value is a fixed value of the share as per the books of the company.

Split the face value of the share

A Face value or par value of the company share always remains the same, irrespective of the market price of that share. Companies have to right to split the face value of the share to Rs. 5, 2 or 1 to bring more volatility to the share.

Definitions of market value:

· the price at which buyers and sellers trade the item in an open marketplace

· The price which a seller might reasonably expect to fetch for goods, services or securities on the open market

· The price at which a commodity can be bought or sold, determined through the interaction of buyers and sellers in a market.

· The value of an asset based on a current market value

What Does Market Value Mean?
1. The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. Also known as "market price".

2. The market capitalization plus the market value of debt. Sometimes referred to as "total market value".

Investopedia explains Market Value
1. In the context of securities, market value is often different from book value because the market takes into account future growth potential. Most investors who use fundamental analysis to pick stocks look at a company's market value and then determine whether or not the market value is adequate or if it's undervalued in comparison to it's book value, net assets or some other measure.

In finance, the term market price, or market value, refers to the most recent price at which a security transaction took place, if it was completed on an exchange. If the transaction took place over-the-counter, with brokers and dealers negotiating directly with each other, market price refers to the most current bid, the price requested by the broker, and the most current ask, the price demanded by the dealer. As an economic concept, market price is the price at which a good or service is offered at in the marketplace. This price is reached when market supply and market demand meet.

Market value refers to the price that a seller of real property can expect to receive from a buyer in a fair and open negotiation. Typically, the market value of a home or other real property, such as land, is determined by professional appraisers or real estate agents and is based on a variety of key factors. Especially in tumultuous markets, market value can flucutate dramatically, and while your real estate professional may determine one "market value" for your house, the reality in the end is that the true market value is determined by what a buyer is willing to pay for it.

Definition of share:

Ø any of the equal portions into which the capital stock of a corporation is divided and ownership of which is evidenced by a stock certificate; "he bought 100 shares of IBM at the market price"

Re: What is Share?

Answer: Share is a finit number of equal portions in the capital of

the company. In Financial Markets, Share is a "unit of

account" for various finacial instruments. The person who

owns shares is called shareholder.

Re: What is Share?
Answer: A share is share of a company

Introduction
Shares are the best investment available over a long period of time. The growth of share prices comfortably out-paces inflation most years because the best share prices represent the growth in earnings of the best companies. Although the stock market is seen as "high risk" this depends very much on timing and the sort of shares you invest in. It is possible to invest in shares with very little risk if you are willing to put in a great deal of effort in learning the art of investment and doing ample research.

Shares have acquired a high-risk reputation because the majority of people only participate in the stock market during bull markets, buying at or near historic high prices in the belief that past returns may by a good indicator of future results. Those that buy just before a crash do not appreciate share valuations and upside potential vs downside risk. In fact such considerations actually bore them and many newcomers choose to trade shares in a highly speculative fashion, making the stock market into little more than a casino.

The rewards are great, but the penalty for laziness is also great. Those that buy on "hot tips" and rely on the opinions of others, without any knowledge of what they are doing are often those who suffer the greatest loss.

A "share" is nothing more, and nothing less than a partial ownership of a business. If you look at shares investment as the partial purchase of businesses, you are already half way to becoming a successful investor (the other half is to get some idea of what a business is worth, economically, and hence to be able to value a share). If you think of shares as part ownership of businesses you have a substantial advantage over those who think of them only as abstract pieces of paper with a randomly fluctuating price tag.

Direct share investment is not suitable for everyone, many simply do not have the time or the inclination to research a portfolio adequately, and will be exposed to the greatest dangers when they do take the plunge and buy something. Managed funds are available that give returns roughly in line with market averages (if you take into account tax and trading expenses) and these are by far a superior investment for those that do not wish to make investment their profession.

Shares, as a whole, are not highly speculative investments with a low probability of success. The chances of making money in shares over all but the shortest time frames are excellent, however you need more than just money and a desire to succeed in order to invest successfully.

No one should be afraid of the stock market, it does not crash without reason at any random time. If you choose to ignore stocks out of fear of a market downturn, you ignore the best investment that there is.

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.^[1]

Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time.

Bonds and stocks are both securities, but the major difference between the two is that stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).

What is a Bond?

Answer: A Bond is simply an 'IOU' in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate.

If a business wants to expand, one of its options is to borrow money from individual investors, pension funds, or mutual funds. The company issues bonds at various interest rates and sells them to the public. Investors purchase them with the understanding that the company will pay back their original principal (the amount the investor loaned to the company) plus any interest that is due by a set date (this is called the "maturity" date).

A bondholder is mailed a check from the company at set intervals; in the United States, it is common for bonds to pay interest twice a year. In some other countries, bonds pay interest once a year. Still other bonds can pay monthly interest. It is entirely up to the "contract" that governs the bond offering. Unfortunately, these documents can be very difficult to come by, unlike the 10K or annual report of a share of stock.

The rate of interest a bondholder earns depends on the strength of the corporation that issued the bond. For example, a blue chip is more stable and has a lower risk of defaulting on its debt. When companies such as Exxon Mobile, General Electric, et cetera, issue bonds, they may only pay 7% interest, while a much less stable start-up pays 10%. A general rule of thumb when investing in bonds is "the higher the interest rate, the riskier the bond."

Who can issue bonds? Governments, municipalities, a variety of institutions, and corporations.

There are many types of bonds, each having different features and characteristics. A few of the most notable are zero coupon and convertible.

For new investors, one of the biggest risks of investing in bonds is something known as bond spreads. This huge hidden cost can result in thousands of dollars in losses if you trade your bonds frequently.

Definitions of joint venture:

· A joint venture (JV here after) is a legal entity formed between two or more parties to undertake an economic activity together and sharing the risk in formation. The parties agree to create, for a finite time, a new entity and new assets by contributing equity. ...

· A cooperative partnership between two individuals or businesses in which profits and risks are shared

· An undertaking by two parties for a specific purpose and duration, taking any of several legal forms. Two corporations, for example, perhaps from two different countries, may undertake to provide a product or service that is distinct, in kind or location, from what the companies do on their own.

What is a joint venture and how do they work?

If you are a business owner who wants to significantly increase market reach, break down barriers to entry in your market, or simply generate skyrocketing revenues in a shorter amount of time, these old adages are becoming more and more relevant.

According to the Commonwealth Alliance Program (CAP), businesses anticipate strategic alliances accounted for 25% of all revenues in 2005, a total of 40 trillion dollars. This figure has been steadily growing over the past few years as more solopreneurs and Work At Home Parents (WAHPs) decide to unite to augment their odds of survival in a highly competitive global environment.

You are about to learn one of the most powerful tools I know of for being successful in today's competitive business atmosphere. I'm of course talking about Joint Ventures, or specifically, teaming up with another person, group of persons, or business entity for the purpose of expanding your business influence and creating a more powerful market presence.

Joint Ventures are in, and if you're not utilizing this strategic weapon, chances are your competition is, or will soon be, using this to their advantage.... possibly against you!

Our primary goal is to make you a successful joint venturer. This will happen if you are an informed entrepreneur. Thus, it is necessary for us to dive into the technical aspects of joint ventures. Specifically:

Definitions of consumer goods:

· goods (as food or clothing) intended for direct use or consumption

· In economics final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.

· Items which are used or bought for primarily personal, family or household purposes.

· New goods acquired by households for their own consumption. Comprise three categories: a) Durable goods, which can be used repeatedly or continuously for more than one year, such as motor vehicles and major appliances; b) Semi-durable goods, which can be used on multiple occasions and have an ...

Consumer goods: are alternately called final goods, and the second term makes more sense in understanding the concept. Essentially, consumer goods are things purchased by average customers, and will be consumed or used right away. This is in contrast to other types of goods called intermediate goods. Intermediate goods are products produced or things sold that will be used in the making of something else by another manufacturer or an assembler. For instance, fabric produced from cotton might be an intermediate good. The clothing made from the fabric would be consumer goods, since it has reached its final destination: the consumer.

Definitions of Consumption goods:

· In economics final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.

· Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by opposition to production. But the precise definition can vary because different schools of economists define production quite differently. According to mainstream economists, only the final purchase of goods and services by individuals constitutes consumption, while other types of expenditure — in particular, fixed investment and government spending — are placed in separate categories. Likewise, consumption can be measured by a variety of different metrics such as energy in energy economics . The total consumer spending in an economy is generally calculated using the consumption function, a metric devised by John Maynard Keynes, which simply expresses consumption as a function of the aggregate disposable income. This metric essentially defines consumption as the part of disposable income that does not go into saving. But disposable income in turn can be defined in a number of ways - e.g. to include borrowed funds or expenditures from savings.

· Consumer's goods \Con*sum"er's goods\ (Polit. Econ.)

· Economic goods that directly satisfy human wants or desires,

· such as food, clothes, pictures, etc.; -- called also

· consumption goods, or goods of the first order, and

· opposed to producer's goods.

–goods that are ready for consumption in satisfaction of human wants, as clothing or food, and are not utilized in any further production (contrasted with capital goods).

Definitions of Capital goods:

· In Marxian economics, capital goods originally referred to the means of production. Individuals, organizations and governments use capital goods in the production of other goods or commodities. ...

· A factor-of-production category consisting of manufactured products used in the process of production.

· Stocks of physical or financial assets those are capable of generating income.

· Human-made resources needed to produce goods or services such as machinery or tools.

In the economic realm, "capital goods" is a specialized term which refers to real objects owned by individuals, organizations, or governments to be used in the production of other goods or commodities. Capital goods include factories, machinery, tools, equipment, and various buildings which are used to produce other products for consumption. This term also refers to any material used or consumed to manufacture other goods and services

What Does Capital Goods Mean?
Any goods used by an organization to produce other goods.

Investopedia explains Capital Goods
Examples of capital goods include office buildings, equipment and machinery.

In a basic sense, capital goods are goods used for the purpose of producing other goods. Capital goods would include items such as industrial buildings, equipment, and heavy machinery. Capital goods also categorize office buildings, highways, and various government installations. The nominal value of capital goods is commonly known as "book value". Capital goods may undergo capital improvement, which typically extends their life and increases their productivity. Depending on market forces and technological trends, companies may deplete their capital goods through the process of disinvestment. The number of new orders for capital goods is an important leading economic indicator. The aggregate of capital goods is a key determining factor of a country's productive capacity. Thus, a significant loss or international transfer of capital goods may signal a substantial economic decline.

Definitions of Investment goods:

• In economics, investment goods are the plant, machinery, and equipment that enable production, and are the main input into new installed capital.
• In economics, investment goods are the plant, machinery, and equipment that enable production, and are the main input into new installed capital.

What Is Fixed Capital?

Fixed capital is the fund which is required for the purchase of those assets that are to be used and over a long period. Such assets are land, building machinery, payments rights, copy rights and other overheads expenses. These expenses are born regardless of the number of unit's produced. Fixed capitals are thus, thus funds which are required not only for the purchase of fixed assets but also non current assets at the start of business like copy right, registration etc.

The main factors which determine the requirements of fixed capital in a business are:
Nature of business:Nature of business the amount of fixed capital in a business. Huge fixed investment is required in public enterprise such as railways, electricity, sewerage system etc.

Manufacturing concerns also need sizeable amount of fixed capital. Trading and financial firm's needs less fixed capital. They require more working to invest in current assets.
Sizeable of business:Capital required by a business depends upon its size. Generally, the larger the size of business, the greater is the need of capital and vice versa.
Type of business:

If an industry is capital intensive, like iron and steel industry, a large amount of fixed capital is required in them. In labor intensive industries, lesser amount of fixed capital is needed.

What Does Fixed Capital Mean?
Assets or capital investments that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not used up in the actual production of a good or service, but have a reusable value. Fixed-capital investments are typically depreciated on the company’s accounting statements over a long period of time, up to 20 years or more.

Examples include factories, office buildings, computer servers, insurance policies, legal contracts and manufacturing equipment – anything that is not continually purchased in the course of production of a good or service.

Investopedia explains Fixed Capital
The amount of fixed capital needed to set up a business is quite variable, especially from industry to industry. Some lines of business, by their nature, require high fixed-capital investment. Common examples would include industrial manufacturers, telecommunications providers and oil exploration firms.

Fixed-capital investments typically don’t depreciate in the even way that is shown on income statements. Some devalue quite quickly, while others have nearly infinite “usable” lives. But the depreciation method allows investors to see a rough estimate of how much value fixed-capital investments are contributing to the current performance of the company.

Fixed Capital And Working Capital

The distinction between fixed capital and working capital is often not clearly understood. There would be much less confusion if it were possible to drop the adjective "working," which in this connection is meaningless, and substitute the word "revolving." "Fixed" capital and "revolving" capital are almost self-explanatory. The "fixed" capital is invested in the plant, equipment, and other forms which cannot be disposed of without breaking up the business. The "revolving" capital is invested in raw materials, in stocks of partly finished and finished products, in accounts receivable, in salable securities, and in cash. Capital in all these forms is constantly being converted - after whatever alterations in form are necessary - into cash, and this cash flows out again in exchange for other forms of working capital. Thus, it is constantly revolving; or, to use a more common expression, it is being "turned over".

Note that it is said in the preceding paragraph that the working capital is invested in cash or in various forms of assets that are readily convertible into cash. This is not equivalent, however, to saying that the total value of the cash or cashable assets measures the amount of the working capital. On the other side of the balance sheet, there is a group of liabilities, consisting chiefly of short-time bank loans and accounts payable, which must be deducted from the total of the working assets in order to determine the net working capital. If this were not done, a firm which had managed to pile up a great quantity of merchandise debts, might be considered, looking only at its assets, to be well provided with working capital; yet the truth might be that it had little or no surplus of working capital above its current liabilities.

Mention is frequently made of "quick assets" and "quick liabilities," and the question is sometimes raised as to the distinction between them and "working" or "current" assets and liabilities. As a matter of fact, there is no clear-cut or authoritative distinction. In a general sense, however, the adjective "quick," used in this connection, is reserved for assets or liabilities that have only a short period - say 30 days or less - to run. A stock of finished products which are regarded as immediately salable might be listed as a quick asset, whereas a stock of half-finished products or of raw materials could not be described as more than a "working" or "current" asset.

Definitions of working capital:

· capital: assets available for use in the production of further assets

· Working capital, also known as net working capital or NWC, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. ...

· The cash available to an enterprise for day-to-day operations. It allows bills to be paid while awaiting payment of cash for sales. In accounting, it is current assets less current liabilities.

What Does Working Capital Mean?
A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".

Investopedia explains Working Capital
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Working capital: is a measurement of an entity’s current assets, after subtracting its liabilities. Sometimes referred to as operating capital, it is a valuation of the amount of liquidity a business or organization has for the running and building of the business. Generally speaking, companies with higher amounts of working capital are better positioned for success. They have the liquid assets needed to expand their business operations as desired.

Definitions of Inventories:

· Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. It is also used for a list of the contents of a household and for a list for testamentary purposes of the possessions of someone who has died. ...

· inventory - a detailed list of all the items in stock

· inventory - (accounting) the value of a firm's current assets including raw materials and work in progress and finished goods

Ø Inventory is the total amount of goods and/or materials contained in a store or factory at any given time. Store owners need to know the precise number of items on their shelves and storage areas in order to place orders or control losses. Factory managers need to know how many units of their products are available for customer orders. Restaurants need to order more food based on their current supplies and menu needs. All of these business rely on an inventory count to provide answers.

Definition of autonomous investment:

A new investment created by unrelated interest rate changes or changes in the national income level.

Autonomous investment is motivated by service motive and is independent of margin of profit. It is income inelastic and as such, it is not influenced by variation in income. It is not profit oriented and accordingly, it remains unaffected by the variation in income, price, wage, rent, etc.
Autonomous investment is made by the public bodies or by the private bodies (organization or individuals). Erection of street light poles, by the municipal bodies, construction of high ways and public buildings by the government and construction of private schools, buildings, charitable houses etc. Private organizations are good examples of autonomous investment.
Induced investment refers to the investment which is motivated by the margin of profit. The higher the margin of profit is, the larger the volume of investment. In other words, it is profit originated investment and varies with the margin of profit in the like direction. Margin of profit depends upon other things remaining the same, on the size of income and as such, induced investment is income elastic. It means that it varies with the increase in the same direction. As the income rises the investment also rises and ice versa.

Induced investment is always associated with enterprise, may it be taken by the government or the private individuals or organizations.

Autonomous Investment :- Definition of Autonomous Investment: Autonomous Investment is the level of investment independent of National output. This will include Government investment, investment to replace worn out capital and any other type of investment that is not dependent on changes in GDP. The accelerator theory suggests that investment is highly volatile and this induced investment is highly volatile, but its volatility is reduced by the significant role played by autonomous investment.

Economic Definition of autonomous investment. Defined.

Term autonomous investment Definition: Business investment expenditures that are unrelated to income or production (especially national income or gross national product). These are investment expenditures that would occur even if national income was zero. Autonomous investment is graphically depicted as the vertical intercept of the investment line relating investment to national income. Changes in autonomous investment, along with changes in other autonomous expenditures, are what trigger the multiplier effect.

INDUCED INVESTMENT: Business investment expenditures that depend on income or production (especially national income and gross domestic product). That is, changes in income induce changes in investment. Induced investment reflects the observation that the business sector is inclined to reinvest profits (boosted by a growing economy) in capital goods. It is measured by the marginal propensity to invest (MPI) and is reflected by the positive slope of investment line. The alternative to induced investment is autonomous investment, which does not depend on income.

Induced investment is investment expenditures by the business sector that are based on the level of income or production. This is one of two basic classifications of investment. The other is autonomous investment, investment expenditures that are NOT based on the level income or production. In other words, business investment can be divided into: (1) expenditures which are undertaken by the business sector regardless of the level of aggregate production and (2) an adjustment of expenditures (more or less) that results because aggregate production and income changes.

Investment expenditures are commonly assumed to be totally autonomous in the introductory analysis of Keynesian economics. That is, any induced investment that realistically exists is ignored. Doing so not only simplifies the analysis, but also places the focus on how and why autonomous investment changes, and how such changes affect the macroeconomy. More sophisticated, and realistic, analysis then includes induced investment.

Investment expenditures are induced because business firms are prone to use profits generated by a growing, expending economy to finance capital investment. If business is good, production is up, and revenue is increasing, then so too are profits. This makes it easy for business firms to finance capital investment. As such, investment expenditures are induced by the increase in aggregate income and production. While induced investment is not nearly as big or important as induced consumption, it does play a key role in Keynesian economics. It affects the determination of equilibrium and the magnitude of the multiplier process.

Induced investment is reflected by the slope of the investment line and the marginal propensity to invest (MPI). The MPI is important to the slope of the aggregate expenditures line',500,400)">aggregate expenditures line which also affects the value of the expenditures multiplier.

Four Stages of Business Cycle:

I like to tell people that all of our products and business will go through three phases. There's vision, patience, and execution. ~ Steve Ballmer

No matter how much we try and seek a standardized solution for running a successful business, it is a known fact that every businessperson runs his/her business based on their individual perspectives and principles, which need not always be similar. Every business has its own set of guidelines and processes designed for its efficient functioning, however in general any business experiences four stages: start-up, maturity, growth and decline.

Four Stages of Business Cycle: Stage One – Start-up/Creation

There is a lot of planning that goes into starting any business. Stage one is the nascent phase of the business during which the business plans and strategies are finally executed and the business organization comes into existence. This is the stage where the business is not generating revenue but trying to establish itself in the market and attract a stable set of investors and customers. This is the stage where the business has to invest a lot of resources in creating the basic infrastructure and then marketing and advertising itself in the market. This is the phase during which innovative ideas are encouraged, in order to establish a USP (Unique Selling Proposition) for the company. It is a difficult task to have a smooth sailing business, without any struggle right from the beginning since the early stage of business setup involves higher risks. The income in the first stages is always lesser than the investments and hence initial stage is marked by lower profit margins for the business.

Four Stages of Business Cycle: Stage Two – Growth

Once the business passes the nascent phase, it begins to find their core customers. Stage two or the growth phase of the business is when the business establishes its niche in the market. This is the phase where the business owners start to establish their brand identity and generate brand loyalty within their customer base using sound marketing practices. Although the focus of this stage is to maintain the core customer group and build trust and goodwill amongst the customers. This stage is marked by a rise in consumer demand and a consequent requirement of increased inputs in terms of production, manufacturing, and general operations to keep up with the rising sales and continue growth. The growth phase is thus marked by increased sales, rise in profit margins and thus establishment of the brand name in the market.

Four Stages of Business Cycle: Stage Three – Maturity

Stage three is the stage where the business reaches a certain maturity level in terms of the market. The brand identity and brand image of the business are well established at this stage. The customer base, investors, and other important business networks are well laid at this point. The sales are either increasing or at least have reached a considerable regular volume and require less resources for advertising to enhance sales, however intensive marketing is a must to enhance the overall market position or at least establish the current market position. This is the phase where the company would want to branch out into other ventures and dabble with product innovation. This is the business stage where the profit margins are fairly stable.

Four Stages of Business Cycle: Stage Four – Recession/Decline

Every business at some point of time undergoes a stage where it experiences a decline in the sales and an overall unfavorable atmosphere in the market termed as recession. This is nothing but a period of reduced economic activity, which results in a sharp or considerable decline in buying, selling, production, and even employment. The company might experience reduce in profit margins or even loss depending on the market positions. This is the phase where the company struggles to maintain its existence in the market and trying its level best to equip itself for a quick recovery.

These are the four stages of business cycle experienced by every business big or small. Sometimes the business flourishes and gains maximum profits, while at times the business is on the verge of a complete breakdown. It is the attitude and the positive perspective of successful businessmen that keeps every business going through the ups and downs and yet always aiming for the pinnacle.

Definition: A business cycle is the periods of growth and decline in an economy. There are four stages in the business cycle:

1. Contraction - When the economy starts slowing down.

2. Trough - When the economy hits bottom, usually in a recession.

3. Expansion - When the economy starts growing again.

4. Peak - When the economy is in a state of "irrational exuberance."

Definition

Predictable long-term pattern changes in national income. Traditional business cycles undergo four stages: expansion, prosperity, contraction, and recession. After a recessionary phase, the expansionary phase can start again. The phases of the business cycle are characterized by changing employment, industrial productivity, and interest rates. Some economists believe that stock price trends precede business cycle stages.

Economic cycle

Recurring, fairly predictable, general pattern of periodic fluctuations (as measured by gross national product) in national economies. Left to themselves, all market economies repeatedly (typically every five years) move through four stages of (1) expansion, (2) peak, (3) recession, and (4) recovery. Despite numerous attempts to explain causes of economic cycles, no theory is universally accepted or applicable. Also called business cycle or trade cycle.

Definitions of inflation:

• a general and progressive increase in prices; "in inflation everything gets more valuable except money"

Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods.

How India calculates inflation

June 07, 2007 15:12 IST

Rising inflation was the most recent ticklish political issue that hit the Manmohan Singh [ Images ] government. But was inflation rising because of price rise in essential commodities? Or was it because of the 'erroneous method' of calculating inflation?

Some economists assert that India's [ Images ] method of calculating inflation is wrong as there are serious flaws in the methodologies used by the government.

Economists V Shunmugam and D G Prasad working with India's largest commodity bourse -- the Multi Commodity Exchange -- have come out with a research paper arguing that the government urgently needs to shift the method of calculating inflation.

Saying that there are serious flaws in the present method of calculating inflation, the paper India should adopt methodologies in developed economies.

So how does India calculate inflation? And how is it calculated in developed countries?

• India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
• Most developed countries use the Consumer Price Index (CPI) to calculate inflation.

Wholesale Price Index (WPI)

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

\CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

Economists Shunmugam and Prasad say it is high time that India abandoned WPI and adopted CPI to calculate inflation.

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.

"CPI is the official barometer of inflation in many countries such as the United States, the United Kingdom, Japan [ Images ], France [ Images ], Canada [ Images ], Singapore and China. The governments there review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern," says their research paper.

It pointed out that WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

The paper says the main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view.

Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.

India constituted the last WPI series of commodities in 1993-94; but has not updated it till now that economists argue the Index has lost relevance and can not be the barometer to calculate inflation.

Shunmugam says WPI is supposed to measure impact of prices on business. "But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy," he pointed out.

But why is India not switching over to the CPI method of calculating inflation?

Finance ministry officials point out that there are many intricate problems from shifting from WPI to CPI model.

First of all, they say, in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPI Rural labour.

Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers. In fact, as of May 21, the latest CPI number reported is for March 2006.

The WPI is published on a weekly basis and the CPI, on a monthly basis.

And in India, inflation is calculated on a weekly basis.

Inflation in 2009:
India has been the cynosure for the past few years in the global economic arena owing to its changing inflation patterns. Between the fiscal year 2004-05 and 2007-2008, India had experienced an average growth rate of more than 9%, but the global crunch pinched the economy so hard that the economy gave in to the adverse external shocks and few sectors experienced a slump. Inflation in India 2009 stands at 11.49% Y-o-Y. The inflation rate is referred to the general rise in prices, taking into consideration the common man's purchasing power. Inflation is mostly measured in CPI.

In 2008 industry bodies, policy makers were all worried with the steadily-mounting inflation. The middle of the year augmented the tension as the majority of the population was wary of a double-digit inflation but things changed within few months. Inflation in India actually fell below 1% during the third week of March, 2009. The moderate inflation is the desirable of all too much of it or too less of it, in every way worries the policy makers.

Understanding in the right manner inflation is such a situation when too many people chase too few goods and too few services, which automatically makes the prices of the goods and services high because of the high demand. At the same time, when inflation falls below the desired mark (in the negative territory), then too few people chase too many goods and too many services, making the prices of the goods and services under-priced.

The India inflation is actually measured by the Y-o-Y variation in the Wholesale Price Index. While the inflation as measured by WPI is at present at a very low level, the inflation measured by the Consumer Price Index is at elevated levels of 9 to 10%.

Definitions of deflation:

• a contraction of economic activity resulting in a decline of prices
• In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money – allowing one to buy more goods with the same amount .

Economic Crisis Warnings
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Currently we are still at the crossroads of beating the current economic recession, and one effect of this has been "deflation" in some sectors of our economies. What is deflation, and what are its actual effects?

Our economies are all different, despite the fact that most Countries do follow the free market economic modal to some degree. After 2008, interest rates were lowered to encourage savers to spend, as the great recession kicked in, and one effect of this has been deflation in some sectors of all our economies.

Deflation in academic terms is the effect of goods and services decreasing in price, usually in a recession, but in the business world common when some new products naturally decrease in price over time eg. computers, and electronics.

When we think of deflation in modern terms, we think of Japan. As Japan in the early 1990's faced a sharp recession, and the nations banks offered zero percent interest rates. This encouraged savers to spend, whilst the struggling economy saw the basic price of many goods and services tumble- leaving cash rich consumers with more money power, but creditors with less wealth.

One example of deflation in many economies has been the erosion of property values, which have left many banks in a paradox. Several of these banking institutions have creditors who now owe more, than what their property was 'worth," when they first took out a loan on the property- the liquidity trap.

This negative effect of deflation is seen as one reason, Governments fear deflation as much as inflation, as it does lower prices and living costs, but at the same time punishes creditors who bought on the old price- who are still repaying the debt.

Deflation also effects a nations monetary policy, which cannot be stabilized, because of the liquidity trap. It also transfers the wealth from the borrowers and holders of deflated assets to those who have capital and currency assets. One reason in 2010, whilst many people are struggling with debts, the wealthiest proportion of people in several economies have grown richer.

Another negative cause of deflation is that it punishes those stuck in the liquidity trap, and forms a trickle up, rather than a trickle down effect on the wealth inside an economy. It leads to problems in the money supply, and also social problems inside more liberal economies. Greece today is one example of how, deflation on some prices eg. Businesses, and property- has started an "us and them" attitude towards the increasingly wealthy elite.

Depending on your financial status, there are those who welcome deflation, and others who are adversely affected by the instability it causes. Whilst many things get cheaper, so does the wealth gap in many countries, which creates economic instability, and a stagnant economy. One reason most economist agree combating deflation is as important as its ugly sister, inflation.

Definition of recession:

• the state of the economy declines; a widespread decline in the GDP and employment and trade lasting from six months to a year
• In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. ...

The economy goes through different cycles. One of them is recession. It is observed when the prices start to increase, the living standard starts to fall, unemployment rises, and businesses stop expanding.

Another indicator of recession is a decreasing gross national product (GDP) of a nation. In fact, many experts consider that there is an economic recession only when a negative GDP growth has been observed over two consecutive quarters.

However, it is generally considered that a recession starts when there have been several quarters of slowing even if they have been positive.

Definition of Recession

Economic recession is defined as a significant decline in the economic activity across a country, lasting longer than a few months. Normally, the recession is visible in real GDP growth, industrial production, wholesale-retail trade, real personal income, and employment.

A recession is a decrease of less than 10% in a country’s Gross Domestic Product (GDP). The decrease must last for more than one consecutive quarter of a year. The GDP is defined as the sum of private spending and government spending on goods, services, labor and investment.

The terms recession and depression are often confused. It can be said that a recession is in general not as severe as a depression. A recession tends to resolve more quickly.

Not everyone agrees on a specific definition for determining an economic recession, but most can point to several factors, which can cause a recession. Either significant drop in prices, or significant increases in prices can occur. A drop indicates that people may spend less money, thus the GDP is decreased. An increase in price may also reduce both private and public spending and thus decrease the GDP.

In some ways, it is quite natural for countries to experience mild recessions. This is a built-in or endogenous factor of a society. Spending and consumption are going to increase and decrease, as will prices. However, another factor besides these occasional built-in drops in spending is needed to evoke a recession. Usually, something changes quickly and provokes sharp increase or decrease in prices.

A recent recession in early 2000 was caused by the sudden decrease in activity of the dot.com industry. In the 1990s, the telecom industry had made huge amounts of money and began to overreach its expectations in terms of assessing future demand. Suddenly, the previously looked for demand was much lower than expected, leading to mass layoffs, decrease in production, and thus decrease in spending.

The dot.com fall is considered a “shock” in the GDP, which can fall sharply if the product or industry falls in production and spending. Though the recession resulting from the dot.com bust was considered over by 2003, it has far-reaching consequences that are still felt.

Those who initially made excessive amounts of money may still find themselves jobless. Telecom companies significantly cut jobs, and employment rates in the industry have never fully been restored. Telecom companies also cut costs by outsourcing production to foreign countries. While this outsourcing has allowed some companies to continue operations, it left many with training for specific jobs they could no longer perform.

However, other industries have since expanded and raised the GDP. So the recession is termed over even though many still feel its effects on a personal level. Terming a recession as “over” does not necessarily account for positive economic changes for the individual.

For example, sometimes recession is evaluated in terms of the country’s jobless rate. When this is the case, and people find jobs, failure to evaluate changes in income can make the economy appear more productive than it actually is. A former telecom employee who now works at Wal-Mart may have a job, but this job is not equivalent to former work in compensation. So analysis of only one aspect of a recession should not be used to indicate economic recovery.

There is an old joke among economists that states:

A recession is when your neighbor loses his job.

A depression is when you lose your job.

The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. I will try to summarize both terms and explain the differences between them in a way that almost all economists could agree with.

Definition of depression:

· a long-term economic state characterized by unemployment and low prices and low levels of trade and investment

· a period during the 1930s when there was a worldwide economic depression and mass unemployment

Question: What is the Business Cycle?

Answer: Parkin and Bade's text "Economics" gives the following definition of the business cycle: The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. If you're looking for information on how various economic indicators and their relationship to the business cycle, please see A Beginner's Guide to Economic Indicators. Parkin and Bade go on to explain: A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degress, unpredictable. A business cycle is identified as a sequence of four phases:

Depression/Business cycles

What causes depression? The answer inflation. Depression is the correction to inflation. During a depression, business go broke, people become poor, and there is high unemployment, all of this is caused by inflation. When governments stop inflating, there is concern about a depression, so they start inflating again to stop a depression. When governments stop a depression before it is full blown, the economy goes into a recession. That’s why we have inflation, recession, inflation, recession, and over and over it goes. Politicians inflate until they fear rising prices, Then they stop inflating because of high unemployment. Then they start inflating again. This cycle is called the business cycle. Each time there is an inflation, it gives business people a false sense of security, and they make mistakes. Such as expanding, hiring more people, not having enough in reserve for a recession. So each correction needs to be worse than the last. Each recession, needs a little more inflation than the last to correct the mistakes. The control of a recession depends on how mush inflation is slowed.
How to tell if we are in a depression or a recession. If inflation is slowed down or stopped for a few months, then we are in a recession. If inflation stops for years, we are in a depression. Inflation must be stopped permanently, for the economy to recover on solid ground. Depression usually involves, deflation. A deflation is………the amount of money to go down, causing money to be valuable, and prices fall. Recessions and depressions are related to the bad policy of inflation. As I said earlier, inflation gives a false sense of security, causing people to spend more, and make mistakes. Example of this is the current housing market. People had the sense that everything was going good, and bought houses the could not afford, thinking the economy was in great shape. Now there are foreclosures and people are losing their homes, because they made a bad choice.
It may appear that the government is rescuing the economy when they inflate, (the FED drops interest rates) to stop a recession or depression, in reality it only postpones more inflation cycles.
Many years ago no one understood the business cycles, no one new what caused it. We know now that business cycles are caused by the amount of money being shifted up and down.
It’s important to realize that officials would like to stop inflating, they do not like rising prices either. But officials have been inflating for years, and if they stop inflating a depression will happen. Once in awhile they stop inflating for awhile. As a result, there is a recession, examples of these are: 1970, 1975, 1982, 1990. Most officials are afraid to stop inflation all together, because they fear depression. The economy is so disorganized now, that the number of dollars officials print to stop depression is probably greater than than the number they print to finance their spending. The only way to never have a recession or a depression is to never inflate. which is a real problem, since inflation had been going on for years. it will be very hard to stop.
Remember this, inflation is just like taxes, it is one of the prices we pay to have

big government:

An economic boom occurs when real GDP grows faster than the trend rate of economic growth (in the Uk, the trend rate is around 2.5% per year).

In a boom aggregate demand is high. Typically, businesses respond to this by increasing production and employment and they may also opt to widen profit margins by raising prices. The increase in output eventually puts pressure on scarce factor resources and can lead to demand-pull inflation. This depends on how much spare capacity is available to meet demand.

Main Characteristics of an Economic Boom:

• A strong and rising level of aggregate demand – nearly always driven by household consumption but government spending, fixed investment and exports can also add to final demand. Exports might be boosted by a more rapid growth of world trade or a fall in the exchange rate which increases the competitiveness of the UK traded goods sector

• Rising employment and real wages as the labour market “tightens” leading to falling unemployment and higher real incomes for those in work. The tightness of the labour market can be measured in various ways for example the rate of unemployment; the percentage of the labour force in work; the number of unfilled jab vacancies and surveys of labour shortages in specific industries and occupations. Real incomes for those people in work tend to rise quickly during a boom because of rising labour demand and the opportunity to boost earnings from overtime and productivity-related pay

• Increased demand for imported goods & services because of our high marginal propensity to import which can lead to a increase in the trade deficit (this has been true for the UK since the late 1990s)

• Government tax revenues will be rising quickly because employment and income rise leading to an improvement in government finances (the so-called “fiscal dividend” arising from a sustained expansion). This can lead to a budget surplus which might be used to reduce government debt, or finance an increase in government spending on public goods and services

• Company profits and investment increase – possibly financing a higher level of fixed capital investment - the link between the strength of demand and planned investment is often explained using the accelerator theory of investment. The extent to which a sustained expansion of national output leads to rising profits depends in part on what is happening to the exchange rate. For example when the exchange rate is falling, the profitability of exporting goods and services increases leading to a rise in profit margins and higher export orders and output at the same time

• Rising productivity – a cyclical boom is good for labour productivity because businesses are stretching to meet extra demand by using their existing labour resources more intensively

• A danger of demand-pull and cost-push inflation if AD exceeds SRAS over a prolonged period. The consumer boom of the late 1980s led to a build up of inflationary pressure (partly masked by a trade deficit) which eventually led to inflation in excess of ten per cent and nominal interest rates of 15% from 1988-89.

Credit control of RBI

Credit Control of RBI(briefly)
Need:
1.To encourage the priority sectors for overall growth
2.Fecilitate the flow of adequate volume of bank credit to its industry, agriculture and trade
3.To keep Inflation pressure under check
4.To ensure that Credit is not diverted to undesirable purposes
5.To fecilitate the Development of Indian economic growth
Types of credit control :
1)Quantitative Method
1.Bank rate policy: by controlling the ways and means advances to the govt.
2.Open Market operation: by controling Short term liquidity in the market.
3.variation of cash reserve ratio: by increasing or reducing CRR or SLR.
4.fixation of lending rate: control by Increasing or reducing the rate of primary or secondary lending rates
5.Credit sequeenze: by controlling the amount of bank credit at a certain limit and fixing maximum limit for commercial borrowings.
2)Qualitative Method
1.Fixation of Margin Requirement
2.Regulation of consumer credit
3.Rationing of credit
4.Prior authorisation of schemes
5.Moral sausion
6.Direct Action

Child labor is basically exploiting the underage children in any form forcing them to work illegally which harms or abuses them. This abuse may be physical, mental or sexual depriving the children (child laborers) of their rights of basic education. Generally, every school of thought believes that child labor would be absent in the developed countries due to their higher economic strata. Sadly, this is far from true. Be it any country, the degree of abuse is just the same. We have landed on moon but failed to revolutionize our society and politicians to take up the cudgels on behalf of small children who do not even know that they are being exploited.

Child labor, use of the young as workers in factories, farms, and mines. Child labor was first recognized as a social problem with the introduction of the factory system in late 18th-century Great Britain. Children had formerly been apprenticed (see apprenticeship) or had worked in the family, but in the factory their employment soon constituted virtual slavery, especially among British orphans. This was mitigated by acts of Parliament in 1802 and later.

Similar legislation followed on the European Continent as countries became industrialized. Although most European nations had child labor laws by 1940, the material requirements necessary during World War II brought many children back into the labor market. Legislation concerning child labor in other than industrial pursuits, e.g., in agriculture, has lagged.

The branch of social science that deals with the production and distribution and consumption of goods and services and their management

It was criticized on Adam Smith's definition of Economics by Dr. Alfred Marshall and some other neo classical economists on the basis of following points.
• Man occupies a primary place and wealth only a secondary one. As Marshall puts it, Economics is "on the one side a study

of wealth; and on the other side and more important side, a part of the study of Man." But in the view of Adam Smith and other classical economists, Economics is the study of wealth. On that point, It was criticized that the primary importance was given to wealth and secondary to man. In this way the human being was degraded and ignored.
• Adam Smith included only material goods in economics and excluded services i.e. doctor's, teacher's and lawyer's services. We know that their services are also as important as goods.
• Adam Smith emphasis only to earn the wealth. They did not study about the means to earn the wealth.
• He ignores the human welfare as compared to wealth. According to them wealth is more important than human welfare.
• The word wealth is controversial and the majority of the people dislike it. They thought that wealth is an evil.
• Economics was supposed to teach selfishness and came to be called a "dismal science"

Economics is the study of the production and distribution of goods and services; it is the study of human efforts to satisfy unlimited wants with limited resources.

Adam Smith’s Adam SmithDefinition

Scottish economist who advocated less government intervention and more market influence in economic related matters amongst people. Adam Smith wrote a number of influential books during his life that has been credited with providing the foundation of modern economics, including "The Wealth of Nations."

Adam smith wrote a book in 1776 whose title was "Wealth of Nations". In his book he discussed the word 'wealth' through its four aspects: production of wealth, exchange of wealth, distribution of wealth and consumption of wealth. There fore it can be said according to Adam Smith: "Economics is a science of wealth". Wealth means goods and services transacted with the help of money

. Let’s discuss four aspects of wealth; first one is production of wealth it shows as to how goods and services are produced. Goods and services are produced by the combination of four factors of production i.e. land, labour, capital and organization.

Second aspect is exchange of wealth there are many procedures of goods and services in a society. Every procedure produces goods and services more than his personal requirement. The exchange of wealth enables everyone in the society to satisfy his multiple wants. Third aspect is distribution of wealth, which means the distribution of goods and services among different sections or individuals of a society. As known by explanation of exchange of wealth that procedures of goods and services exchange the surplus wealth with each other through out the year. The last and forth aspect is consumption of wealth that is using up the utility of goods and services for the satisfaction of wants is called the consumption of wealth.