LEARNOVATE ECOMMERCE

TASK – 13

SUBMITTED BY

MEENAKSHI R
 1A) FIRMS AND INDIVIDUALS PARTICIPATION AND
INTERACTION IN PRODUCT MARKET AND FACTOR MARKET

In the product market, households buy goods and services from businesses in

exchange for money. In the factor market, the businesses buy labor from
households in exchange for money. ... Households interact with businesses in
the factor market every time a person does paid work for a company

PRODUCT MARKET

A product market refers to a place where goods and services are bought and
sold.

 The main sellers of goods are different kinds of firms.

 Demand for goods is a direct demand. The good is bought for its intrinsic
use.
 The market facilitates the exchange of goods and services in the
economy. It is based on a voluntary transaction across a wide range of
places.

FACTOR MARKET

The factor market is a place where factors of production (land, labour,

capital) are bought and sold.

 Demand for labour and capital is a derived demand. Firms need to

employ more workers when there is greater demand for the product
that they make.
 If demand for takeaway coffee rises, then Starbucks will need to
employ more coffee workers (baristas)
 If there is an increase in demand for private dental treatment, there
will be an increase in demand for dentists and this will push up the
price of dental treatment and also the wage of dentists.
 1B) ROLE OF PROFIT IN MARKET SYSTEM

Profit plays two primary roles in the free-market system. First, it acts as a signal
to producers to increase or decrease the rate of output, or to enter or leave an
industry. Second, profit is a reward for entrepreneurial activity, including risk
taking and innovation. In a competitive industry, economic profits tend to be
transitory .The achievement of high profits by a firm usually results in other
firms increasing their output of that product, thus reducing price and profit.
Firms that have monopoly power may be able to earn above-normal profits over
a longer period, such profit does not play a socially useful role in the economy.
Although, profit maximization is a dominant objective of the firm, other
important objectives of the firm, other than profit maximization the following
are the reasons behind this objective:

1. Maximization of sales revenue.

2. Maximization of firm’s growth rate

3 .Maximization of manager’s own utility or satisfaction

4. Making a satisfactory rate of profit.

5. Long-run survival of the firm

6. Entry-prevention and risk avoidance.

2 A) THE VARIOUS DETERMINANTS OF MARKET DEMAND

Demand refers to the various quantities of a good or service that people

will be and able to purchase at various prices during a period of time. Income,
prices of related goods, taste and preferences of the consumer, expectations,
number of buyers in the market, distribution of income etc are likely to affect
the demand for the product. These factors are called “non-price determinants”
and are assumed to be constant while deriving the demand schedule and demand
curve. But any change in these non-price determinants will change the demand
schedule and demand curve. Let us analyse how these factors can affect the
demand for the product.

Income:

The demand depends up on income of the people. The greater the income
of the people, the greater will be their demand for goods and services. If their
income increases, people will tend to buy more goods and services than they did
before the increase in income. This is the case of most goods and services.
Hence economists refer to goods whose demand varies directly with income as
“normal goods”. Although most commodities are normal goods, there are cases
when consumers may not buy some goods more as their income increases.
Instead they buy less. Such goods are called “inferior goods” because as
people’s income increases they actually reduce the purchase of such goods.

Prices of related goods:

Goods and services may be related to each other in two ways; they may
be substitutes or they may be complements. One good is said to be substitute for
a second good if it can be used in the place of second good. Example: tea and
coffee, beef and chicken. Two goods are said to be complementary if they are
used together. Complementary goods are demanded jointly. Example: scooter
and petrol, computer and computer software. In general, if the price of a
substitute commodity increases, consumers tend to increase their purchases of
the substitute in question. Goods are substitutes when an increase in the price of
one leads to an increase in the quantity demanded of the other. For instance, if
the price of coffee increases, people will substitute tea for coffee and as a result
demand for tea increases. On the other hand, if the price of complement falls,
people will tend to increase their purchases of the commodity in question. Two
goods are complements if a fall in the price of one leads to increase in the
quantity demanded of the other. For instance, if the price of scooter falls, the
demand for them will increase which in turn will increase the demand for petrol.
Taste and Preferences:

The quantity of a commodity that people will buy will be affected by the
taste and preferences. Companies spend millions of Rupees in advertisement in
an attempt to influence consumer’s tastes in favour of their products.
Consumer’s taste and preferences often change and as a result, there is a change
in the demand for products. A good for which consumer’s tastes are greater, its
demand would be larger. On the contrary, any good goes out of fashion or
people’s taste and preferences no longer remain favourable to them, the demand
for them decreases.

Expectations:

The expectations of the consumers regarding the price in the future will
affect present purchases of goods and services. If consumers expect the price of
the product to increase in the future, they are likely to increase their present
purchases to stock up on the good and thus postpone paying the ensuing higher
price for as long as possible. Conversely, if the price is expected to fall in
future, consumers will attempt to delay their present purchases in order to take
advantage of the lower future prices. The expectations of the consumer about
the future change in income will also affect the purchases of goods and services.
If people expect substantial increase in their income sometime in the near
future, they are likely to buy more goods and services even before the increase
in income materialises. If the people expect decrease in their income, they are
likely to buy fewer goods and services.

Number of buyers in the market:

The quantity of the commodity that people will buy depends on the
number buyers in the market for that particular commodity. The greater the
number of buyers of a good, the greater the market demand for it. If population
increases we can expect the demand for most goods and services to increase as a
consequence

Distribution of income:

Distribution of income in the society also affects demand for goods. If

the distribution of income is more equal, then the propensity to consume of the
society as a whole will be higher which results in greater demand for goods. On
the other hand, if the distribution of income is more unequal, then the
propensity to consume of the society will be relatively less because propensity
to consume of rich people is less than that of poor people.

2B) PRICE OUTPUT DECISION IN MULTI PLANT FIRMS

In the long run, a monopoly organisation with a number of plants may

increase (or decrease) the number of its plants with a view to obtain the profit-
maximising solution. Now, each plant of the monopolist may be of a different
size, and in the long run the size of each plant is a variable.

However, in the long run since all sorts of input adjustments are possible,
the LAC curve and the associated SAC curves of each plant of the monopolist
would be identical, for what is good for a particular plant is good for every other
plant. The size of each plant should be such as would enable the firm to produce
the same quantity of output at the same minimum possible (average) cost.

3A) VARIOUS TYPES OF COST

Cost is the sacrifice made, usually measured by the resources given up, to
achieve a particular purpose. A sacrifice made in order to obtain some goods or
services

Fixed Costs (FC):

The costs which don’t vary with changing output. Fixed costs might

include the cost of building a factory, insurance and legal bills. Even if your
output changes or you don’t produce anything, your fixed costs stay the same.
In the above example, fixed costs are always £1,000.

Variable Costs (VC): 

Costs which depend on the output produced. For example, if you produce
more cars, you have to use more raw materials such as metal. This is a variable
cost.

Semi-Variable Cost:

 Labour might be a semi-variable cost. If you produce more cars, you need to
employ more workers; this is a variable cost. However, even if you didn’t
produce any cars, you may still need some workers to look after an empty
factory.

Total Costs (TC) = Fixed Costs + Variable Costs

Marginal Costs:

Marginal cost is the cost of producing an extra unit. If the total cost of 3
units is 1550, and the total cost of 4 units is 1900. The marginal cost of the 4th
unit is 350.

Opportunity Cost:

Opportunity cost is the next best alternative foregone. If you invest £1million in
developing a cure for pancreatic cancer, the opportunity cost is that you can’t
use that money to invest in developing a cure for skin cancer.

Economic Cost:

Economic cost includes both the actual direct costs (accounting costs)
plus the opportunity cost. For example, if you take time off work to a training
scheme. You may lose a weeks pay of £350, plus also have to pay the direct
cost of £200. Thus the total economic cost = £550.
Accounting Costs: this is the monetary outlay for producing a certain good.
Accounting costs will include your variable and fixed costs you have to pay.

Sunk Costs:

These are costs that have been incurred and cannot be recouped. If you
left the industry, you could not reclaim sunk costs. For example, if you spend
money on advertising to enter an industry, you can never claim these costs back.
If you buy a machine, you might be able to sell if you leave the industry.

Avoidable Costs:

 Costs that can be avoided. If you stop producing cars, you don’t have to
pay for extra raw materials and electricity. Sometimes known as an escapable
cost.

Explicit costs:

These are costs that a firm directly pays for and can be seen on the
accounting sheet. Explicit costs can be variable or fixed, just a clear amount.

Implicit costs:

These are opportunity costs, which do not necessarily appear on its

balance sheet but affect the firm. For example, if a firm used its assets, like a
printing press to print leaflets for a charity, it means that it loses out on revenue
from producing commercial leaflets.

3B) MEANING OF RISK AND DECISION MAKING UNDER

RISK IN DETAIL

The international standard definition of risk for common understanding in

different applications is “effect of uncertainty on objectives
 In case of decision-making under uncertainty the probabilities of
occurrence of various states of nature are not known. When these probabilities
are known or can be estimated, the choice of an optimal action, based on these
probabilities, is termed as decision making under risk.

Risk implies a degree of uncertainty and an inability to fully control the

outcomes or consequences of such an action. Risk or the elimination of risk is
an effort that managers employ. However, in some instances the elimination of
one risk may increase some other risks. Effective handling of a risk requires its
assessment and its subsequent impact on the decision process. The decision
process allows the decision-maker to evaluate alternative strategies prior to
making any decision. The process is as follows:

1. The problem is defined and all feasible alternatives are considered. The
possible outcomes for each alternative are evaluated.

2. Outcomes are discussed based on their monetary payoffs or net gain in

reference to assets or time.

3. Various uncertainties are quantified in terms of probabilities.

4. The quality of the optimal strategy depends upon the quality of the
judgments. The decision-maker should identify and examine the
sensitivity of the optimal strategy with respect to the crucial factors.

4A) COMPOSITION AND FUNCTIONS OF MONEY MARKET

Money market is a segment of financial market. It is a market for short

term funds. It deals with all transactions in short term securities. These
transactions have a maturity period of one year or less. Examples are bills of
exchange, treasury bills etc. These short term instruments can be converted into
money at low transaction cost and without much loss. Thus, money market is a
market for short term financial securities that are equal to money.
Money Market performs the following functions:

1. Facilitating adjustment of liquidity position of commercial banks,

business undertakings and other non-banking financial institutions.
2. Enabling the central bank to influence and regulate liquidity in the
economy through its intervention in the market.
3. Providing a reasonable access to users of short term funds to meet their
requirements quickly at reasonable costs.
4. Providing short term funds to govt. institutions.
5. Enabling businessmen to invest their temporary surplus funds for short
period.
6. Facilitating flow of funds to the most important uses.

Composition of Money Market

Money market consists of a number of sub markets. All submarkets

collectively constitute the money market. Each sub market deals in a particular
financial instrument. The main components or constituents or sub markets of a
money markets are as follows:

1. Call money market

Call/Notice money is the money borrowed or lent on demand for a very

short period. When money is borrowed or lent for a day, it is known as Call
(Overnight) Money. Intervening holidays and/or Sunday are excluded for this
purpose. Thus money, borrowed on a day and repaid on the next working day,
(irrespective of the number of intervening holidays) is "Call Money". When
money is borrowed or lent for more than a day and up to 14 days, it is "Notice
Money". No collateral security is required to cover these transactions.
 2. Commercial bill market

These are negotiable instruments. These are generally issued for 30 days
to 120 days. Thus these are short term credit instruments. These are self
liquidating instruments with low risk. These can be discounted with a bank.
When a bill is discounted with a bank, the holder gets immediate cash. This
means bank provides credit to the customers. The credit is repayable on
maturity of the bill. In case of need for funds, the bank can rediscount the bill in
the money market and get ready money. These are used for settling payments
in the domestic as well as foreign trade. The creditor who draws the bill is
called drawer and the debtor who accepts the bill is called drawee

3. Treasury bill markets

Treasury Bills are short term (up to one year) borrowing instruments of
the union government. It is an IOU of the Government. It is a promise by the
Government to pay a stated sum after expiry of the stated period from the date
of issue (14/91/182/364 days i.e. less than one year). They are issued at a
discount to the face value, and on maturity the face value is paid to the holder.
The rate of discount and the corresponding issue price are determined at each
auction.

4. Certificates of deposits market

These are unsecured promissory notes issued by banks or financial

institutions. These are short term deposits of specific maturity similar to fixed
deposits.These are negotiable (freely transferable by endorsement and
delivery) .These are generally risk free. The rate of interest is higher than that
on T-bill or time deposits. These are issued at discount. These are repayable on
fixed date. These require stamp duty.

5. Commercial paper market

 CP is an unsecured promissory note privately placed with investors at a
discount rate to face value determined by market forces. CP is freely negotiable
by endorsement and delivery. A company shall be eligible to issue CP provided
–
(a) The tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs. 4 crore;
(b) The working capital (fund-based) limit of the company from the
banking system is not less than Rs.4 crore and
(c) The borrower account of the company is classified as a Standard
Asset by the financing bank/s.
(d) The minimum maturity period of CP is 7 days. The minimum
credit rating shall be P-2 of CRISIL or such equivalent rating by other
agencies.
(e) CPs can be issued in multiples of Rs. 5 lakhs subject to the
minimum issue size of Rs. 50 lakhs
6. Acceptance market

Acceptance Market is another component of money market. It is a market

for banker’s acceptance. The acceptance arises on account of both home and
foreign trade. Bankers’ acceptance is a draft drawn by a business firm upon a
bank and accepted by that bank. It is required to pay to the order of a particular
party or to the bearer, a certain specific amount at a specific date in future. It is
commonly used to settle payments in international trade. Thus acceptance
market is a market where the bankers’ acceptances are easily sold and
discounted.

6. Collateral loan market

Collateral loan market is another important sector of the money market.

The collateral loan market is a market which deals with collateral loans.
Collateral means anything pledged as security for repayment of a loan. Thus
collateral loans are loans backed by collateral securities such as stock, bonds
etc. The collateral loans are given for a few months. The collateral security is
returned to the borrower when the loan is repaid. When the borrower is not able
to repay the loan, the collateral becomes the property of the lender. The
borrowers are generally the dealers in stocks and shares.

4B) ROLE OF SEBI

SEBI plays a very important role in regulating capital market. SEBI is

regulator to control Indian capital market. Since its establishment in 1992, it is
doing hard work for protecting the interests of Investor.

Role of SEBI is as follows:

1. Power to make rules for controlling stock exchange:

SEBI has power to make new rules for controlling stock exchange in
India. For example, SEBI fixed the time of  trading 9 AM and 5 PM in stock
market. 

2. To provide license to dealers and brokers :

SEBI has power to provide license to dealers and brokers of capital

market. If SEBI sees that any financial product is of capital nature, then SEBI
can also control to that product and its dealers. One of main example is ULIPs
case. SEBI said, It is just like mutual funds and all banks and financial and
insurance companies who want to issue it, must take permission from SEBI."

3. To Control the Merge, Acquisition and Takeover the companies:

Many big companies in India want to create monopoly in capital market.

So, these companies buy all other companies or deal of merging. SEBI sees
whether this merge or acquisition is for development of business or to harm
capital market. 
4. To audit the performance of stock market :

SEBI uses his powers to audit the performance of different Indian stock
exchange for bringing transparency in the working of stock exchanges. 

5A) WRITE A NOTE ON

1. DIFFERNCE BETWEEN WTO AND GATT

The WTO is not an extension of the GATT but succession to the GATT. It
completely replace GATT and has a very different character. The major
differences between the two are:

1. The GATT had no status whereas the WTO has a legal status. It
has been created a by international treaty ratified by governments
and legislatures of member states.
2. The GATT was a set of rules and procedures relating to
multilateral agreements of selective nature. There were separate
agreements on separate issues, which were not binding on
members. Any member could stay out of the agreement The
agreements, which form part of the WTO, are permanent and
binding on all members.
3. The GATT dispute settlement system was dilatory and not binding
on the parties to the dispute. The WTO dispute settlement
mechanism is faster and binding on all parties.
4. GATT was a forum where the member countries met once in a
decade to discuss and solve world trade problems. The WTO, on
the other hand, is a properly established rule based World Trade
Organization where decisions on agreement are time bound.
 5. The GATT rules applied to trade in goods. Trade in services was
included in the Uruguay Round but no agreement was arrived at.
The WTO covers both trade in goods and trade in services.
6. The GATT had a small secretariat managed by a Director General.
But the WTO has a large secretariat and a huge organizational
setup.

2. GDP AND PPP

GDP

GDP is the final value of the goods and services produced within the
geographic boundaries of a country during a specified period of time, normally
a year. GDP growth rate is an important indicator of the economic performance
of a country.

PPP

One popular macroeconomic analysis metric to compare economic

productivity and standards of living between countries is purchasing power
parity (PPP). PPP is an economic theory that compares different countries'
currencies through a "basket of goods" approach.

5B) DEFINE THE FOLLOWING TERMS IN RELATION

WITH UNION BUDGET
1. REVENUE ACCOUNT
 A revenue account is an account with a credit balance. It includes all the
revenue receipts also known as current receipts of the government. These
receipts include tax revenues and other revenues of the government

2. CAPITAL ACCOUNT

A capital account is an account that includes the capital receipts and the
payments. It basically includes assets as well as liabilities of the government.
Capital receipts comprise of the loans or capital that are raised by governments by
different means.

3. REVENUE DEFICIT

Revenue deficit arises when the government’s revenue expenditure

exceeds the total revenue receipts. Revenue deficit includes those transactions
that have a direct impact on a government’s current income and expenditure.
This represents that the government’s own earnings are not sufficient to meet
the day-to-day operations of its departments. Revenue deficit turns into
borrowings when the government spends more than what it earns and has to
resort to the external borrowings

4. CAPITAL DEFICIT

A capital account deficit occurs when the equity in a business turns

negative. This means that the total amount of liabilities exceeds the total amount
of assets.

5. PLAN AND NON PLAN EXPENDITURE

Non-plan expenditure is what the government spends on the so-

called non-productive areas, such as salaries, subsidies, loans and interest,
while plan expenditure pertains to the money to be set aside for productive
purposes, like various projects of ministries.