Lecture Notes For Industrial Economics 3f5d1p

INDUSTRIAL ECONOMICS Defination : Industrial economics is a distinctive branch of economics which deals with the economic problems of firms and industries, and their relationship with society. Industrial Economics is the study of firms, industries and markets. It looks at firms of all sizes - from local corner shops to multinational giants such as WalMart or Tesco. And it considers a whole range of industries, such as electricity generation, car production and restaurants. When analysing decision making at the levels of the individual firm and industry, Industrial Economics helps us understand such issues as: 

the levels at which capacity, output and prices are set;

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the extent that products are differentiated from each other;

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how much firms invest in research and development (R&D)

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how and why firms Industrial Economics also gives insights into how firms organise their activities, as well as considering their motivation. In many micro courses profit maximisation is taken as given, but many industrial economics courses examine alternative objectives, such as trying to grow market share. There is also an international dimension - firms have the option to source inputs (or outsource production) overseas. As such, while industrial economics more frequently uses skills and knowledge from micro courses, macroeconomic concepts are sometimes employed. One of the key issues in industrial economics is assessing whether a market is competitive. Competitive markets are normally good for consumers (although they might not always be feasible) so most industrial economics courses include analysis of how to measure the extent of competition in markets. It then considers whether regulation is needed, and if so the form it should take. There is again an Industrial Economics

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international dimension to this, as firms that operate in more than one country will face different regulatory regimes. Industrial Economics uses theoretical models to understand firm and regulatory decision making, and so students should expect to use diagrams and maybe some basic mathematical models, including game theory. In addition, researchers often develop empirical statistical models to identify relationships between variables of interest: for example to understand the relationship between product price, advertising and profits. While most courses will not require students to conduct their own empirical analysis (that is left to the econometrics courses) understanding and interpreting empirical results is an important skill. Industrial Economists are also highly employable. There is an entire industry of consultancies and government agencies (such as the Office of Fair Trading (OFT) and the Competition Commission (CC)) concerned with competition policy. There is an equally large set of consultancies and regulators (such as Ofcom (the communication sector regulator)) which are concerned with the economics of regulation. What is Micro- Economics : DEFINITION OF 'MICROECONOMICS' The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (e.g. coffee industry). BREAKING DOWN 'MICROECONOMICS' The field of economics is broken down into two distinct areas of study: microeconomics and macroeconomics. Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. People who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area. Industrial Economics

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Macroeconomics, on the other hand, looks at the big picture (hence "macro"). It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world. For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not necessarily a bad thing. Thus, for an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels. MACROECONOMICS:DEFINITION OF 'MACROECONOMICS' The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. BREAKING DOWN 'MACROECONOMICS' Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from, for example. SIGNIFICANCE OF ECONOMICS : My. Durbin says "Economics is the intellectual religion of the days." About the importance of economics Malthus says, "Political economy is perhaps the only science of which it may be said that the ignorance of it is not merely a derivation of good but produce great positive evil." Following are the main advantages of the study of economics. 1. USEFUL FOR THE PRODUCER :Economics is very useful for the producer. It guides him that how he should combine the four factors of production and minimize the cost of production. 2. USEFUL FOR THE CONSUMER :The consumer can adjust his expenditure of various goods in better way if he knows the principles of economics. He will spend his income according the law of Equi-Marginal utility in order to get maximum satisfaction. Industrial Economics

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3. POVERTY AND DEVELOPMENT :It helps in removing the poverty from the country. Under developed countries are facing many problems like unemployment , over population low per capita income and low production. Economics is very useful in solving these problems. 4. USEFUL FOR THE LEADER :Its study is helpful for the leaders to understand the economic problems if they have a knowledge of Economics. 5. USEFUL FOR THE FINANCE MINISTER :Finance minister prepares the yearly budget of the country. Economics guides him that how he should frame the tax policy and monetary policy. 6. USEFUL FOR THE DISTRIBUTION OF NATIONAL INCOME :From the study of economics one can easily judge that how the income should be distributed among the four factors of production. For this purpose Marginal productivity theory is suggested by economics. 7. CULTURAL VALUE :A person's education can not be considered complete unless he has some knowledge of economics. The thing which happen daily around us have an important economic bearing. So there is also the cultural value of the study of economics. 8. IMPORTANCE FOR A COMMON MAN :The study of economics is very useful for every citizen. It enables him to understand and criticize the economic policies of the government. He can also guide the government. 9. ECONOMIC PLANNING :In the modern age the importance of economic planning can not be ignored. Through planning we can utilize our natural resources in better way and can improve our economic condition. 10. IMPORTANCE FOR LABOUR :It guides the workers that how they can get maximum wages from the employer. It enables them to get the right of trade union , collective bargaining and fixation of working hours. 11. SOLUTION FOR ECONOMIC CRISES :Industrial Economics

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It guides the nations that how they can save themselves from the economic crises. The advanced countries desire is that there should be economic stability and full employment without inflation to achieve these objectives, economics is very useful for them. 12. INSPIRES FOR DEVELOPMENT :The study of advanced countries economy inspires the less development countries that they can also improve their economics conditions. 13. INTELLECTUAL VALUE :Economics has great intellectual value, because it broadens our out-look, sharpens our intellect and inculcate in us the habit of balanced thinking. 14. OPTIMUM USE OF RESOURCES :In the third world countries there is a lot of wastage of resources which is the main cause of their poverty. The study of economic development will enable them to make the optimum use of their resources. 15. CREATES THE SENSE OF RESPONSIBILITY :Economics develop the sense of responsibility among the citizens by explaining the various problems and their solutions. 16. USEFUL FOR INTERNATIONAL TRADE :Its study is very useful for international trade. It helps the importers and exporters to earn maximum profit. A businessman can easily understand the trade policies of various countries. ROLE OF ECONOMIC SYSTEM : An economic system is a system of production and exchange of goods and services as well as allocation of resources in a society. It includes the combination of the various institutions, agencies, entities (or even sectors as described by some authors) and consumers that comprise the economic structure of a given community. A related concept is the mode of production. The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system (including property rights and the structure of management).

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Among existing economic systems, distinctive methods of analysis have developed, such as socialist economics and Islamic economic jurisprudence. Today the dominant form of economic organization at the global level is based on marketoriented mixed economies. Economic systems is the category in the Journal of Economic Literature classification codes that includes the study of such systems. One field that cuts across them is comparative economic systems. Subcategories of different systems there include:     

planning, coordination, and refor productive enterprises; factor and product markets; prices; population public economics; financial economics national income, product, and expenditure; money; inflation international trade, finance, investment, and aid consumer economics; welfare and poverty  performance and prospects  natural resources; energy; environment; regional studies  political economy; legal institutions; property rights. Indifference Curve : An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.

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Significance of Indifference Curve Analysis: In indifference curve approach only ordination of preferences is needed.It overcomes the weakness of Cardinal measurement as the satisfaction cannot be measured objectively. The cardinal approach provides the assumption of constant utility of money, which is unrealistic.In indifference curve approach, this assumption has been dropped. Indifference curve approach is base for the measurement of 'consumer's surplus'.In a way it contributes to the Welfare economics. Indifference curve is a better tool to classify substitutes and complementary goods.

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Properties of Indifference Curves The main attributes or properties or characteristics of indifference curves are as follows: 1) Indifference Curves are Negatively Sloped: The indifference curves must slope downward from left to right. As the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction. DIAGRAM:

In the above diagram, two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level of satisfaction. (2) Higher Indifference Curve Represents Higher Level of Satisfaction: Indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction. The combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve. Diagram:

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In this diagram, there are three indifference curves, IC1, IC2 and IC3 which represents different levels of satisfaction. The indifference curve IC3 shows greater amount of satisfaction and it contains more of both goods than IC2 and IC1. IC3 > IC2> IC1. (3) Indifference Curves are Convex to the Origin: This is an important property of indifference curves. They are convex to the origin. As the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve. The Slope of the curve is referred as the Marginal Rate of Substitution. The Marginal Rate of Substitution is the rate at which the consumer must sacrifice units of one commodity to obtain one more unit of another commodity. Diagram:

In the above diagram, as the consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes. The slope of IC is negative.In the above diagram, diminishing MRSxy is depicted as the consumer is Industrial Economics

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giving AF>BQ>CR units of Y for PB=QC=RD units of X. Thus indifference curve is steeper towards the Y axis and gradual towards the X axis. It is convex to the origin. If the indifference curve is concave, MRSxy increases. It violets the fundamental feature of consumer behaviour. If commodities are almost perfect substitutes then MRSxy remains constant. In such cases the indifference curve is a straight line at an angle of 45 degree with either axis. If two commodities are perfect complements, the indifference curve will have a right angle. In reality, commodities are not perfect substitutes or perfect complements to each other.Therefore MRSxy usually diminishes. (4) Indifference Curves cannot Intersect Each Other: The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible. Diagram:

In the above diagram, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC2. Similarly the combinations shows by points B and E on indifference curve IC1 give equal satisfaction top the consumer. If combination F is equal to combination B in of satisfaction and combination E is equal to combination B in satisfaction. It follows that the combination F will be equivalent to E in of satisfaction. This conclusion looks quite funny because combination F on IC2 contains more of good Y (wheat) Industrial Economics

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than combination which gives more satisfaction to the consumer. We, therefore, conclude that indifference curves cannot cut each other. (5) Indifference Curves do not Touch the Horizontal or Vertical Axis: One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves. Diagram:

In the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.

Consumer Equilibrium :The state of balance achieved by an end of products that refers to the amount of goods and services they can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income. All consumers strive to maximize their utility. We try to get as much satisfaction as we can. The consumer’s scale of preference is derived by means of indifference mapping that is a set of indifference curves which ranks the preferences of the consumer. Getting to the indifference curve which is farthest Industrial Economics

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from the origin gives the highest total utility. Although the goal of the consumer is maximization of satisfaction, the means of achieving the goal is not clear. Higher indifference curve not only gives higher satisfaction but also are more expensive. Here we are confronted with the basic conflict between preferences and the prices of the commodities consumer wants to consume. With a given amount of money income to spent, we cannot attain the highest satisfaction but have to settle for less.

WHAT IS PRODUCTION ? Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (the output). It is the act of creating output, a good or service which has value and contributes to the utility of individuals. Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of goods and services and increasing incomes from growing and more efficient market production. The most important forms of production are  market production  public production  household production In order to understand the origin of the economic well-being we must understand these three production processes. All of them produce commodities which have value and contribute to well-being of individuals. The satisfaction of needs originates from the use of the goods and services which are produced. The need satisfaction increases when the quality-price-ratio of the goods and services improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of goods and services is to a producer an essential way to enhance the production performance but this kind of gains distributed to customers cannot be measured with production data. Economic well-being also increases due to the growth of incomes that are gained from the growing and more efficient market production. Market production is the only production form which creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in Industrial Economics

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market production. Thus market production has a double role in creating wellbeing, i.e. the role of producing goods and services and the role of creating income. Because of this double role market production is the “primus motor” of economic well-being and therefore here under review.

LAW OF RETURN :  Total Product (TP) This is the total output produced by workers  Marginal Product (MP) This is the output produced by an extra worker Definition: Law of Diminishing Marginal Returns Diminishing Returns occurs in the short run when one factor is fixed (e.g. Capital) If the variable factor of production is increased, there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product This is because if capital is fixed extra workers will eventually get in each other’s way as they attempt to increase production. E.g. think about the effectiveness of extra workers in a small café. If more workers are employed production could increase but more and more slowly. This law only applies in the short run because in the long run all factors are variable Assume the wage rate is £10, then an extra worker Costs £10. The Marginal Cost (MC) of a sandwich will be the Cost of the worker divided by the number of extra sandwiches that are produced Therefore as MP increases MC declines and vice versa A good example of diminishing returns includes the use of chemical fertilizers- a small quantity leads to a big increase in output. However, increasing its use further may lead to declining Marginal Product (MP) as the efficacy of the chemical declines. Diagram of Diminishing Returns

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ECONOMICAL DEVELOPMENT : Defination : "Progress in an economy, or the qualitative measure of this. Economic development usually refers to the adoption of new technologies, transition from agriculture-based to industry-based economy, and general improvement in living standards." Economic development is the sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area. Economic development can also be referred to as the quantitative and qualitative changes in the economy. Such acts can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, social inclusion, health, safety, literacy, and other initiatives. Economic development differs from economic growth. Whereas economic development is a policy intervention endeavor with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP. Consequently, as economist Amartya Sen points out, "economic growth is one aspect of the process of economic development."

INDICATORS OF ECONOMICAL DEVELOPMENT : The International Economic Development Council defines economic development as an “activity that seeks to improve the economic well-being and quality of life for a community, by creating and/or retaining jobs…” The World Bank is the Industrial Economics

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primary international organization that measures economic development on a national and global scale. Of the more than 2,000 indicators it uses to assess development, five measure it the most directly. Economic Policy and Debt There are three main subcategories in this class: "Balance of Payments," "External Debt" and "National s." Indicators measure capital and financial s, as well as the current and reserves. You'll find measures of foreign direct investment here, statistics for foreign trade and remittances, and development assistance the country receives. This category also includes measures of purchasing power parity. Financial Sector There are five subcategories under this heading. "Assets" and "Capital Markets" are the two most general, and they include bank capital and market capitalization. The "Exchange Rates" subcategory includes measures of inflation. "Interest Rates" covers the lending interest rate, the deposit interest rate and the interest rate spread. The fifth subcategory, "Monetary Holdings," includes measures of liability and the money supply. Poverty This subcategory covers income distribution and poverty. Poverty is measured nationally and separately as a percentage of rural population and urban populations. Income distribution is measured by quintiles and deciles. A heading called "Conflict and Fragility" measures battle-related deaths and homicides. Private Sector and Trade Under the heading "Private Sector and Trade" you’ll find many indicators of the business environment, including imports and exports measured both in dollar value and by time-study indexes. There are statistics for tariffs here, as well as measures of travel and tourism. There are also measures of private infrastructure investment in this section, such as investment in energy, transportation and telecommunications. Public Sector Industrial Economics

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Every year the World Bank assigns low income nations a set of ratings called "Country Policy and Institutional Assessment." These ratings are important because they determine the amount of money countries receive from the World Bank. You can find them under the "Public Sector" heading. They measure many variables, including transparency, budgetary management and environmental sustainability. Government finance is measured in this area--revenues, expenditures and deficits. A figure measuring the percentage of seats held by women in the national parliament is included. Other Categories The other categories of World Bank indicators include indicators that translate less directly into of financial or monetary . They include "Education," "Environment," "Health," "Infrastructure" and "Labor." FACTORS FOR ECONOMICAL GROWTH : Economic growth is important to the well-being of any national economy, and often requires deliberate actions that help to promote that growth. There are a number of factors that can go into the promotion of strong economic growth within a local, regional, national, or even global economy, and many of these factors having to do with the structure of the business cycle and the efforts to improve the standard of living for consumers. Factors such as competition, the cultivation of new markets in emerging nations, innovations in technology, and investment in foreign concerns can all come together to create economic growth. One of the more common elements that goes into stimulating strong economic growth is healthy competition within the marketplace. Here, the focus is on creating and marketing goods and services that are likely to appeal to consumers, who in turn generate a demand for those products. Manufacturers move to meet that demand with a supply of the products, making sure to balance the need to generate profits off each sale with the necessity of making sure the products are affordable for the targeted consumer groups. The end result is that the economy is stimulated by the brisk sales, more people are put to work making the products, and those employees are able to buy other goods and services thanks to the steady income. Industrial Economics

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New technology can also do a great deal to stimulate strong economic growth. Innovations with existing products that help to increase the demand, or even the creation of new products that capture the attention of the buying public can often reverse a downward trend in an economy by creating more jobs and improving the flow of cash throughout the entire economic system. Under the best of circumstances, the gains made with the new or improved products easily offsets the loss of jobs related to other economic sectors that are now considered obsolete, allowing the economy to move forward rather than regressing. Investments in new markets can also do a great deal to spur strong economic growth. Choosing to invest in emerging international markets can have a very positive effect, especially in of promoting both imports and exports that add to the financial well being of all the nations involved. By ing those emerging markets, the potential for creating allies who in turn enter into mutually beneficial trading situations with the investors can help to provide a great deal of economic stimulation that triggers a trickle-down effect for a number of related industries. Nations tend to monitor what is happening within the economy and take steps to use legislation in a manner that helps to reverse undesirable trends and promote economic growth. Often, these efforts do not yield results over night, but can make a huge difference in the state of the economy over a period of a few years. By identifying potential threats to the economy, it is possible to create strategies that impact trade and production, ultimately helping to minimize any negative factors while encouraging other factors that aid in strong economic growth.

What are some obstacles to economic growth in developing nations? There are many obstacles to economic growth in developing countries. Let us look at a few of them. Governmental problems. Governments in developing countries can often be corrupt. They can act in ways that enrich only a few of the elite of Industrial Economics 17

society without helping the population as whole. They can be very unpredictable as well. This can scare off foreign investors. Cultural issues. Some scholars argue that some countries lack the right culture for economic development. Their people might not want to take risks in order to start new businesses. Their people might feel that traditional cultural duties are more important than showing up to work every day. These sorts of cultural issues can slow a country’s growth. Foreign debt. Sometimes, countries have to take actions that they do not want to take because they need to pay off their creditors. They might have to do things that bring money in the short term even if that hurts their ability to invest for the long term. Lack of human resources. This may be a type of governmental problem. Many developing countries lack the educational infrastructure needed to develop a workforce that could a more modern economy. Foreign competition. Developing countries have to compete against companies from the developed world. This can be very difficult. It can force developing countries to stay with making low value-added products using cheap labor instead of becoming more modernized. All of these factors (and more) can hinder developing countries’ economic growth.

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