Stagflation and Phillips Curve

Meaning of Stagflation

The present day inflation is the best explanation for stagflation in the whole world. It is inflation accompanied by stagnation on the development front in an economy. Instead of leading to full employment, inflation has resulted in un-employment in most of the countries of the world. It is a global phenomenon today. Both developed and developing countries are not free from its clutches. Stagflation is a portmanteau term in macro economics used to describe a period with a high rate of inflation combined with unemployment and economic recession. Inflationary gap occurs when aggregate demand exceeds the available supply and deflationary gap occurs when aggregate demand is less than the aggregate supply. These are two opposite situations. For instance, when inflation goes unchecked for some time, and prices reach very high level, aggregate demand contracts and a slump follows. Private investment is discouraged. Inflationary and deflationary pressures exist simultaneously. The existence of an economic recession at the height of inflation is called ’stagflation’.

The effects of rising inflation and unemployment are especially hard to counteract for the government and the central bank. If monetary and fiscal measures are adopted to redress one problem, the other gets aggravated. Say, if a cheap money policy and public works program are adopted to remedy unemployment inflation gets aggravated. On the other hand, if a dear money policy and stringent fiscal measures are followed unemployment will get aggravated. It is the most difficult type of inflation that the world is facing today.… Read the rest

Business Competition

Meaning of Competition

To a particular business, competition usually refers to firms that market similar or substitutable products in the same geographic area. In general, the term business competition refers to the rivalry among businesses for consumer dollars. For example, the manager of a fast food outlet in an airport views all other fast food outlets near the airport as competition but probably does not think fast food outlets in other geographic areas as competition. In general, all the fast food outlets near the airport compete for passengers’ dollars.

In developing and implementing a marketing program, an organization must consider the types of business competition in its markets and assess the actions of its competition.

Types of Business Competition

The number of organizations that sell a product may affect the strength of competition. When there are many business selling a particular product, for example, price considerations and product differences are more important that when only one business is selling that product. The number of firms selling a similar product determines the structure of the market.

  1. A monopoly exists when only one firm marketing a product for which there are no close substitutes.
  2. An oligopoly exists when few firms are marketing a product and they control much of the supply of the product. Products in oligopolistic competition may be homogeneous (similar or uniform in nature), such as coal or steel, or differentiated (having real or perceived differences), such as cigarettes or airline services. In an oligopoly, each seller must consider the reactions of other sellers to changes in marketing activities.
Read the rest

Competition Based Market Structures

The competitive structure of a market is defined by the number of competing firms in some segment of an economy and the proportion of the market held by each competitor. Market structure influences pricing strategies and creates barriers to competitors wishing to enter a market.

Types of Competition Based Market Structures

There are four basic types of competition based market structures. They are pure competition, monopolistic competition, oligopoly, and monopoly.

Pure competition exists when there are no barriers to competition. The market consists of many small, competing firms and many buyers. This means that there is a steady supply of the product and a steady for demand for it. There fore, the price cannot be controlled by either the buyers or the sellers. The product itself is homogeneous – that is, one seller’s offering is identical to all others offerings. The markets for basic food commodities, such as rice and cereals, approximate pure competition.

The principal characteristic of monopolistic competition is product differentiation, a large number of sellers offering similar products differentiated by only minor differences in, for example, product design, style, or technology. Firms engaged in monopolistic competition have enough influence on the marketplace to exert some control over their own prices. The fast-food industry provides a good example of monopolistic competition.

Oligopoly, the third type of market structure, exists where a small number of sellers dominate the market.

Finally, markets with only one seller, such as a local telephone company or electric utility, are called monopolies.… Read the rest

What is Euromarket?

Euro is the currency used by the European Union (EU) countries, so, the market the Euro is used for, can be named Euromarket. It has in view all the transactions done by the banks in Euro currencies, Euro notes, Euro commercial papers, Euro bonds. It is a market that has developed itself in Europe. The market deals with US dollars as well and it can be named Euro dollar market.

Currency is borrowed and lent by institutions located in different countries, there is a capital flow which seems to be uncontrolled. Theoretically, it cannot be a national control over this market. From the practical point of view, the market forces dictate the lending rates;  the rates do not diverge from the domestic lending ones, it happens only for short interval of time. The international banks are the main operators; financial institutions are also allowed to enter the market.

The Euro dollar market is complemented by Eurobond and makes longer term funds available. The bonds are payable to bearer without deduction of tax. They are issued by bank consortia and are placed with investors (national industries, governments, multinational corporations, municipal authorities). London and Luxemburg have developed a secondary market in bonds which has become a supranational market; it is not subject to normal domestic regulations but it is affected by the international events. Important sums of dollars have been deposited in banks which are outside the USA and many USA banks have branches overseas.

Euro-notes are notes issued in bearer form and negotiable.… Read the rest

Experience Curve

Experience curve is the systematic reductions in the production costs that occur over life of a product.

There is a relationship between the scale of production and the size of the unit cost of the product, known as the effect of experience. Graphical representation of experience effect (created on the basis of cumulative production and average cost) is called experience curve.

A number of studies show that a product’s production costs decline by some characteristics about each time accumulated output doubles. E.g. in aircraft industry, where each time accumulated output f airframes was doubled, unit costs typically declined to 80 percent of their previous level. That is the production costs of the fourth airframe would be 80 percent less of the production costs for the second airframe, the eighth airframe’s production costs is 80 percent less of he fourth’s, the sixteenth’s airframe costs is 80 percent less of the eighth’s and so on.

The graph shows the experience curve that normally allows costs to be reduced with additional output. This is due to two reasons: learning effects and economies of scale.

  1. Learning effects: refers to the cost savings that come from learning by doing. Labor productivity increases as individuals learn the most efficient ways to perform particular tasks. Management also typically learns how to mange the new operation costs efficiently over time. But it has been suggested that learning effects are important only during the start up period of a new process and that they cease after two or three years.
Read the rest

Regional Economic Integration

Regional Economic Integration means agreements between groups of countries in a geographic region to reduce and ultimately remove tariff and non-tariff barriers for the free flow of goods, services and factors of production between each other. GATT and WTO are the biggest association of more than 140 member countries, which strive to reduce the barriers. However, more than regional, WTO has a global perspective. By entering into regional agreements, groups of countries aim to reduce trade barriers more rapidly than can be achieved under WTO. While there have been decreases in the global barriers to trade and investment, the greatest progress had been made on a regional basis. There are many examples in the current popular push on the European Union (EU) and the effects the EU have on a particular business or industry that illustrates this point.

Perhaps the best example of the benefits of economic integration and political union is the USA. Before the current constitution was written, the thirteen colonies had erected significant barriers to trade between each other and had separate currencies. Seeing that this was not working well, and wanting a better system for their citizens, the founding fathers agreed to combine their separate states into a United States. Whether the EU, with its significant cultural and language differences in neighboring countries, can achieve similar benefits remains to be seen. Nevertheless, major gains have already been made.

The notion of regional economic integration is becoming increasingly important as countries strive to work together better and become more productive.… Read the rest