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Four Stages of the business enterprise Cycle


Q 1 Define the term Business Routine and also clarify the phases of business or trade routine in brief?

Ans: The business routine is the regular but abnormal up-and-down movements in financial activity, measured by fluctuations in real GDP and other macroeconomic variables. Diagram of Business Pattern (or Trade Pattern) :-

The business cycle starts off from a trough (lower point) and goes by through a restoration phase accompanied by a period of expansion (higher turning point) and prosperity. After the top point is reached there is a declining stage of recession accompanied by a despair. Again the business enterprise cycle continues in the same way with fluctuations.

Explanation of Four Stages of Business Cycle

1. Prosperity Stage : Expansion or Boom or Upswing of economy. When there can be an expansion of result, income, job, prices and income, there is also a rise in the standard of living. This era is termed as Prosperity period. The features of wealth are :- Advanced of output and trade, High level of effective demand, High level of income and occupation, Rising interest levels, Inflation, Large development of loan company credit, Overall business optimism.

2. Recession Phase: from wealth to recession (upper turning point).

The turning point from prosperity to depressive disorder is referred to as Recession Period.

During a downturn period, the monetary activities slow down. When demand begins dropping, the overproduction and future investment programs are also abandoned. There's a steady decline in the end result, income, career, prices and income. The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The lenders and the individuals try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market comes. Orders are terminated and people start losing their jobs. The upsurge in unemployment causes a sharp drop in income and aggregate demand. Generally, recession lasts for a short period.

3. Depression Period : Contraction or Downswing of current economic climate. When there is a continuous decrease of output, income, employment, prices and earnings, there's a fall in the standard of living and depressive disorder pieces in.

The top features of major depression are :- Fall season in volume of outcome and trade, Fall in income and go up in unemployment, Decline in ingestion and demand, Show up in interest, Deflation, Contraction of standard bank credit, Overall business pessimism. In despair, there exists under-utilization of resources and fall season in GNP (Gross Country wide Product). The aggregate financial activity reaches the lowest, creating a decrease in prices and gains until the current economic climate gets to its Trough (low point).

4. Recovery Phase : from major depression to wealth (lower turning Point).

The turning point from major depression to expansion is termed as Restoration or Revival Phase. Over revival or recovery, there are expansions and climb in economic activities. When demand starts off rising, production increases and this triggers a rise in investment. There is a steady go up in outcome, income, work, prices and revenue. The businessmen gain assurance and become positive (Positive). This raises investments. The stimulation of investment results in the revival or recovery of the economy. Thus we see that, during the expansionary or success phase, there is certainly inflation and through the contraction or depression phase, there is a deflation.

Q2. Monopoly is the problem there is a solitary control over the market producing a commodity having no substitutes with no possibilities for anybody to enter in the industry to contend. For the reason that situation, they'll not charge a standard price for all your customers on the market and also the pricing policy followed in that situation?

Ans: A market structure seen as a a single seller, selling a distinctive product on the market. Inside a monopoly market, the seller encounters no competition, as he's the sole retailer of goods without close substitute. In the monopoly market, factors like federal license, ownership of resources, copyright and patent and high starting cost make an entity an individual vendor of goods. Each one of these factors restrict the entrance of other retailers on the market. Monopolies also have some information that is not recognized to other vendors.

Characteristics of monopoly: Only 1 single seller on the market, There is absolutely no competition, There are various buyers in the market, The firm loves abnormal profits, Owner controls the prices for the reason that particular product or service and is the price maker, Consumers don't possess perfect information, You will find barriers to admittance. These barriers many be natural or manufactured, The product doesn't have close substitutes.

Advantages of monopoly

Monopoly avoids duplication and hence wastage of resources.

Due to the fact that monopolies make whole lot of profits, it can be used for research and development and maintain their position as a monopoly.

Monopolies could use price discrimination which benefits the financially weaker parts of the society. Monopolies are able to purchase most advanced technology and machinery to become efficient and avoid competition.

Disadvantages of monopoly

Poor degree of service, No consumer sovereignty, Consumers may be priced high prices for poor of goods and services, Lack of competition may lead to poor and outdated goods and services.

Price Discrimination : It is the ability to ask for different prices to different specific.

Need for price discrimination: increase output and earnings. Buying pattern of people will be different. Increase the economical welfare.

Eg: Air tickets, movie tickets, discounts etc.

multiple types of price discrimination:

  • First-degree price discrimination is an attempt by owner to leave the price unannounced in advance and demand each customer the best price they would be willing to pay for the purchase.
  • A business may profit by offering different prices to the people who purchase in much larger amounts because either they can increase their revenue with the increased level sales or their costs per product decrease when items are purchased in quantity. Businesses can create alternate rates methods that identify high-volume buyers from low-volume customers. This is second-degree price discrimination.
  • Third-degree price discrimination is differential pricing to different groups of customers. One justification for this practice is the fact that producing goods and services on the market to 1 identifiable group of customers is less than the expense of sales to some other band of customers. For example, a publisher of music or books may be able to sell a music recording or a e book in electronic digital form for less cost when compared to a physical form just like a compact disk or printed words.

Q3 Fiscal coverage is a deal of economic options of the federal government regarding public expenditure, public revenue, open public arrears or borrowings. It is very important since it identifies the budgetary coverage of the federal government. Explain the fiscal plan and its devices in detail?

Ans: Fiscal plan is the means by which a government adjusts its spending levels and duty rates to screen and influence a nation's market. It's the sister strategy to monetary policy by which a central loan provider influences a nation's money source.

instruments of Fiscal Coverage are Automatic Stabilizer and Discretionary Fiscal Coverage:

  1. Automatic Stabilizer: The tax structure and expenses are programmed so that there surely is increase in expenditure and decrease in tax in tough economy and reduction in expenditure and increase in tax revenue in the time of inflation. It refers to built-in respond to the economical condition without any deliberate action on the part of government. It is called built- in- stabilizer to improve and thus rebuild economic stability. It works in the next manner, Tax revenue: Tax earnings boosts when the income rises; as those who were not paying tax go into the higher income tax bracket. When there may be major depression, the income decreases and many people show up in the no-income-tax bracket and the taxes revenue decreases.

ii) Discretionary Fiscal Coverage: Under this, to stabilize the economy, deliberate

attempts are created by the government in taxation and expenses. It entails distinct and

conscious actions.

Instruments of Fiscal Plan: Some important tools of fiscal insurance plan are:

- 1. TAXATION: Taxation is obviously a very important source of earnings for both developed and producing countries. Duty comes under two going\u2013Tax on specific(direct tax) and tax on product (indirect tax or commodity tax).

a) Direct duty includes tax, corporate tax, fees on property and wealth. Indirect tax is tax on the consumptions. It includes sales taxes, excise responsibility and custom responsibilities. Direct tax composition can be divided into three bases-

  1. Progressive tax: Progressive duty says that higher the level of income, greater the volume of tax burden you have to keep. This means as income raises, the taxes contribution also needs to increase. Low income group people pay low taxes, whereas the high income group people pay higher taxes.
  2. 2 Regressive taxes: It is theoretically possible, though no federal government implements such taxes framework, because that leads to unequal syndication of income. As your earnings escalates the contribution through duty decreases. Low income people will pay more and high income people can pay less.
  3. Proportional duty: Once the tax enforced is irrespective of the income you earn, every income group, high or low pay the same amount of tax.

b) Indirect Taxes Or consumpyion tax: tax which is iimposed on every product of product.

Q4 Explain the many ways of forecasting demand?

Ans : Economic forecasting is the procedure of earning predictions about the current economic climate. Forecasts can be carried out at a higher degree of aggregation-for example for GDP, inflation, unemployment or the fiscal deficit-or at a far more disaggregated level, for specific sectors of the market or even specific organizations.

Methods of forecasting demand:


For many goods, the space of the product circuit is shrinking. Not merely does this make it more challenging to create a historical data source, it accentuates the need to forecast effectively. Computer technology can help you adjust costs instantly and to modify sales special offers away from home. Without correct historical information to measure the impact of price changes, the business enterprise owner may be required to experiment. Sales performance of other goods with similar product attributes may serve as proxies for an up-to-date product with no track record.

Trend Analysis

If you have historical data -- or when you can create it from related products -- trend research is the first rung on the ladder popular forecasting. Plotting sales as time passes will show you the presence of an sales trend if one is available. If there are aberrations -- "hiccups" in the trend -- you can look for explanations, which could include price, weather or demographic changes. If you're skillful with spreadsheet programs, you can chart data items and put a trend series over the data. A more complex approach is using least squares regression examination which may also be finished with standard spreadsheet software.

Qualitative Forecasting

A more subjective procedure uses expert thoughts to anticipate demand. Especially useful when there's a lack of historical data, relying on the collective opinion of experts makes sense. Begin with an analysis of the marketplace, reviewing the economic conditions. Obtain as much information about challengers' performance as you can. Then gather views from a variety of sources within your business. Are the owner, sales manager, accountant, lawyer and any others whose opinion you value. If you want, you can get outside views as well. Qualitative forecasting is dependant on the consensus view of your panel as you process and aggregate their viewpoints.

Forecasting with Economic Indicators

Depending on the products you sell and the customers who buy them, basing your demand forecast on one or more financial signals may be a powerful method. This style of demand forecasting increases results with industrial buyers rather than retail. First, find the indicators that relate to your business. For instance, small businesses in construction-related work can turn to housing starts off, building permits, loan applications and interest levels for solid indicators of the future. Businesses in agriculture will get clues to the near future from farm income, interest levels and weather forecasts. The Departments of Commerce and Agriculture release figures on an ongoing basis. Agricultural Extension Services and other express firms provide complementary data

Q5 Define monopolistic competition and describe its characteristics?

Ans: Monopolistic Competition: Market structure in which several or many retailers each produce similar, but somewhat differentiated products. Each company can establish its price and amount without affecting the market place all together.

Monopolistically competitive market segments exhibit the next characteristics:

  1. Each firm makes impartial decisions about price and output, predicated on its product, its market, and its own costs of creation.
  2. Knowledge is greatly spread between individuals, but it is improbable to be perfect. For example, diners can review all the selections available from restaurants in a town, before they make their choice. Once inside the restaurant, they can view the menu again, before buying. However, they can not completely appreciate the restaurant or the meals until once they have dined.
  3. The entrepreneur has a far more significant role than in firms that are properly competitive due to increased dangers associated with decision making.
  4. There is independence to type in or leave the market, as there are no major obstacles to entry or exit.
  5. A central feature of monopolistic competition is the fact products are differentiated. You will find four main types of differentiation:
  • Physical product differentiation, where companies use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics may easily be in physical form differentiated.
  • Marketing differentiation, where companies try to identify their product by distinctive presentation and other promotional techniques. For instance, breakfast cereals may easily be differentiated through product packaging.
  • Human capital differentiation, where in fact the firm creates variations through the skill of its employees, the amount of training received, distinctive outfits, and so on.
  • Differentiation through circulation, including distribution via mail order or through internet shopping, such as Amazon. com, which differentiates itself from traditional bookstores by advertising online.
  1. Firms are price creators and are confronted with a downward sloping demand curve. Because each organization makes a distinctive product, it can charge a higher or cheap than its competitors. The company can set its price and doesn't have to 'take' it from the industry as a whole, although industry price may be considered a guideline, or becomes a constraint. This also means that the demand curve will slope downwards.
  2. Firms functioning under monopolistic competition usually have to engage in advertising. Companies tend to be in fierce competition with other (local) businesses supplying a similar product or service, and could need to advertise on a local basis, to let customers know their distinctions. Common ways of advertising for these businesses are through local press and radio, local movie theater, posters, leaflets and special promotions.
  3. Monopolistically competitive companies are assumed to beprofit maximisers because businesses tend to be small with entrepreneurs actively involved with managing the business.
  4. There are usually a big numbers of unbiased firms competing in the market.

Q6 When should a company in perfectly competitive market shut down its procedure?

Ans Definition of 'Perfect Competition'

A market framework in which the following five criteria are fulfilled:

1) All businesses sell an identical product;

2) All organizations are price takers - they cannot control the market price of these product;

3) All organizations have a comparatively small market talk about;

4) Buyers have complete information about the product for sale and the costs incurred by each company; and

5) The industry is characterized by freedom of accessibility and exit.

Perfect competition is sometimes referred to as "100 % pure competition".

The reason behind firm turn off in perfect competition

A perfectly competitive organization is presumed to shutdown development and produce no outcome in the short run, if price is less than average adjustable cost. That is one of three short-run creation alternatives facing a firm. The other two are revenue maximization (if price surpasses average total cost) and damage minimization (if price is higher than average adjustable cost but significantly less than average total cost).

A properly competitive firm led by the quest for profit is willing to produce no productivity if the quantity that equates marginal revenue and marginal cost in the brief run incurs an economic loss higher than total permanent cost. The main element to this reduction minimization production decision is a comparison of the loss incurred from producing with the loss incurred from not producing. If price is significantly less than average changing cost, then the firm incurs a smaller damage by not producing that by producing.

One of Three Alternatives: Shutting down is one of three short-run development alternatives facing a correctly competitive organization. All three are viewed in the stand to the right. The other two are revenue maximization and reduction minimization.

With revenue maximization, price surpasses average total cost at the number that equates marginal revenue and marginal cost. In cases like this, the firm creates an economic earnings.

With loss minimization, price is greater than average varying cost but is less than average total cost at the number that equates marginal income and marginal cost. In this case, the organization incurs a smaller reduction by producing some outcome than by not producing any outcome.

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