ppt chapter sixteen

8/12/2019 PPT Chapter Sixteen

1/23

Chapter Sixteen Managerial Economics

Glimpses of Macro-Economic Environment & Input

Output Analysis

Business Cycle Its meaning

The upswings ( boom )and downswings( depression )in the levels ofbusiness activity mark the different

phases of the Trade Cycle.A business cycle is a wave likemovement.

It is - pervasive.- cumulative process of

expansion and contraction.

- self enforcing.


2/23



Output Analysis

I starting trough, II to IV expansion phase,

V peak, VI to VIII contraction phase,

IX end Trough


3/23



Output Analysis

The Phases of A Trade Cycle

Phase 1 Prosperity, Phase 2, Recession,

Phase 3 Depression and Phase 4 Recovery

Line EE is a position of economic equilibrium.


4/23



Output Analysis

Characteristic Features of Each Phaseof Trade Cycle

Depression :

means a state of affairs in whichreal consumption or volume of

consumption per head, real productionor volume of production per head andof employment are falling or aresubnormal.

It is characterized by lowproduction, trade, employment,prices, profits. There is decline incredit, share prices, constructionactivity.


5/23



Output Analysis


Depression :

when it reaches trough, pent updemand bursts open, producers take uppostponed replacement of machinery,consumers want capital goods , banks

are forced to provide credit forthese activities and stage is set forRecovery.


6/23



Output Analysis


Recovery :

is characterized by rise in levels of

employment, income and output,expectations of producers improve,banks expand credit.

when the wave of recovery isinitiated, it begins to feed uponitself leading to Prosperity.


7/23



Output Analysis


Prosperity :

is characterized by large volume of

production, trade, employment,incomes, etc.

Profits start to swell, interest

rates go up, bank credit expands,investments increase and there is afeel of optimism everywhere.


8/23



Output Analysis

Characteristic Features of Each Phaseof Trade Cycle - Prosperity :

Why does boom brought about byprosperity, break?

The period of over- optimism andover-investment signals oncoming ofdepression.

Though income increases marginalpropensity to consume decreases.


9/23



Output Analysis



Most of income generated goes intopockets of businessmen who do notspend.

Progressive taxation reducesmarginal profit.


10/23



Output Analysis


Why does boom brought about byprosperity break?

As higher levels of employment arereached less & less efficientresources are employed.

Bottlenecks are developed.


11/23



Output Analysis



Higher labour cost has to beincurred as wages rise to keep upwith rising prices.

Higher funding costs have to beincurred as interest rates increase.


12/23



Output Analysis


Why does boom brought about byprosperity break?

Funds become scarce.

All types of investments fall

suddenly, entrepreneurs become lessoptimistic.

Thus boom contains seeds of its own destruction.


13/23



Output Analysis


Recession and the Downswing

Optimism of boom gives way toskepticism.

Recovery dreams disappear. Projects on hand are also dropped.

Credit is curtailed.

Workers are laid off. Unemployment

spreads. Construction activity slows down.

Share prices decline.


14/23



Output Analysis

Business Policies.

Managerial decisions in Inflation have toconsider :

1. Prices are rising.

2. Value of money falls.

3. Demand for goods dampens.4. Cost of replacement of assets is high.

5. Although profits are high, cost offurther production has to be checked withrevenue from it over a long period.

6. Corporate taxes are high.

7. Shareholders expect high dividends.


15/23



Output Analysis

Business Policies.

Managerial decisions in Recession have toconsider :

1. Prices are falling.

2. Cost saving measures required.

3. Profits are low.

4. No scope for further investment.

The Government has to take measures tocontrol these fluctuations in prices.

The tools available are Fiscal Policy

Monetary Policy


16/23



Output Analysis

Business Policies.

Fiscal Policy

- is the policy under which theGovernment uses its expenditure andrevenue programmes to produce

desirable effects and avoidundesirable effects on the NationalIncome, Production and Employment.

Three constituents of Fiscal policyare Taxation

Public Expenditure

Public Debt


17/23



Output Analysis

Business Policies.

Fiscal PolicyObjectives

1. resource mobilization

2. acceleration of economic growth

3. reduction in inequalities

4. increase employment

5. price stability , curbing inflation.


18/23



Output Analysis

Business Policies.

Monetary Policy

- refers to management of expansion orcontraction of money and credit supply in

the economy by either changing the costof credit, or the availability of creditwith a view to achieving certain macroeconomic objectives of full employment,

price stability, economic growth andexchange rate stability.


19/23



Output Analysis

Business Policies.

Monetary Policy

There exists a conflict betweenobjectives of stable prices and full

employment.

If the rate of unemployment is to bereduced certain level of inflation has to

be tolerated.


20/23



Output Analysis

Indicators of Business Activity

Indicators of Business Activity are broadly

classified into Internal & External Economic

Indicators.

Internal indicators include National Income and

output, Gross Domestic Product (GDP), Level of

Employment, Index of Agricultural / Industrial

production, Price Index, Cost of Living Index,

Rate of saving, investment, economic growth;

Modernization, Nationalization, Liberalization,

Population Growth etc.


21/23



Output Analysis

Indicators of Business Activity

Indicators of Business Activity are broadly

classified into Internal & External Economic

Indicators.

External indicators include Exports &Imports, balance of Payments, Capital flows,Foreign Exchange Reserves, Rate of Exchange,depreciation, appreciation or devaluation

etc.


22/23



Output Analysis

Input Output Analysis

Input output analysis is used tostudy the supply and demandinterrelationships that exist betweenthe various sectors of economy.

The matrix prepared under theanalysis shows for each industry forone rupee output produced, how manypaise are spent on itself, how manyon buying materials from other

industries and the balance spent onlabour.

The analysis is based on severalassumptions.


23/23



Output Analysis

Input Output Analysis

The analysis is very useful inascertaining effects of change infinal demand on production in varioussectors of industry. It provides animportant mathematical tool for analyzinginter-industry, inter sectoral Input-Outputrelations.

Compilation of input-output matrix iscomplex, time consuming andexpensive. It fails to recognizedynamic conditions of the economy ingeneral and firms in particular.

ppt chapter sixteen

Documents