Economics

Economics — No Comments
30
Aug 10

Types of Floating Exchange Rate System

Exchange rate can be defined as the value of one currency in terms of another. India follows floating exchange rate system for the determination of the exchange rate. Floating exchange rate system can be defined as a system where the exchange rate between currencies are not fixed but they keep fluctuating, as they are determined by the demand and supply for the domestic currency in the international market. Floating exchange rate system is of two types –

Floating Exchange Rate System Credit: Flickr

1. Free Float – Under this the exchange rate of a country is determined by the market and there is no intervention either by the government or the central bank of the country. It is determined by the interaction of the demand and supply for the currency. Under this system there is a risk of the currency either appreciating or deprecating suddenly resulting in currency coming in to pressure and becoming more volatile. It is also called clean float.

2. Managed Float – In order to reduce the volatility in currency countries follow managed float, under this system central banks of the country tend to intervene from time to time in order to smoothen the fluctuations in the exchange rate in the currency market.

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7
Aug 10

Price Elasticity of Demand and Supply

Price Elasticity of Demand

Price elasticity of demand can be defined a measure of the sensitivity of quantity demanded to changes in price. It is a measure of how consumers react to a change in price. Demand can be relatively elastic or inelastic. A price fall usually results in an increase in the quantity demanded by consumers and price rise has the opposite effect. But degree of it is different for different goods, for some goods demand will fall more with price rise and for some it will fall less.

When the price elasticity of demand for a good is elastic, the percentage change in quantity demanded is greater than that in price. While when the price elasticity of demand for a good is inelastic, the percentage change in quantity demanded is smaller than that in price. For example people who smoke, for them demand for cigarettes is inelastic because they are quite habitual to smoking and they will be willing to pay more price for cigarettes because of their habit.

Knowledge of price elasticity is important for a company because for a company whose products demand is inelastic can easily raise the price without much drop in demand and hence can increase the total revenue of the company.

Price Elasticity of Demand and SupplyCredit : Flickr

Price elasticity of supply

Price elasticity of supply can be defined as measure of the sensitivity of the quantity supplied of product to a change in price of product. In other words Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. Higher elasticity indicates that supply of good is sensitive to the change in prices and lower elasticity means supply of goods is relatively inelastic to the change in prices.

For example the objects of art are relatively inelastic because any rise in prices does not affect their supply due to obvious reasons; while products which are of daily use like soaps, food items etc are elastic because producers can easily increase their supply if price rises.

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31
Jul 10

What is Micro and Macro Economics

Well there’s no one universally accepted answer to the question “What is economics. But in simple basic language Economics is the study of how people choose to use resources or it can be defined as the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires”.

Micro and Macro EconomicsCredit: Flickr

Economics can be further be divided into two categories

1. Micro Economics – In simple words it is the study of economic behavior of individuals, families, company etc. So for example what will be the effect of rise in salary of an individual will have on his purchasing power or How does the change of a price of good influence a family’s purchasing decisions.

2. Macro Economics – It is a branch of economics that deals with the economic behavior of the society or nation as a whole for example how change in interest rates by central bank will affect the economy as a whole, so in that sense it is much broader in nature than micro economics

Economics — 1 Comment
11
Jul 10

Demand and Supply and how is price determined

Demand can be defined as the amount of a particular good or service that a consumer or group of consumers will want to purchase at a given price. Hence the demand curve is usually downward sloping, since consumers will want to buy more as price decreases and less when price increases. In contrast supply can be defined as the total amount of goods or services which are available at a given price. Hence the supply curve is usually downward sloping, since producers of goods and services will want to sell more as price increases and less as price decreases.

Demand and Supply Credit: Flickr

So how the price is decided for which goods and services can be exchanged, well it can be understood with following example

Price Demand for crude (gallons) Supply of crude (gallons)
10 $ 1000 600
20 $ 800 800
30 $ 600 1000

In the above example if price is 10$ then demand will be 1000 gallons and supply will be only 600 gallons while if price increases to 30$ then demand will fall to 600 gallons while supply will be 1000 gallons. It is at 20$ that both demand and supply will be same and it is at this price exchange will take place between buyer and seller.

Well to the above example one can include certain external factors which can affect both demand and supply and come with different price for exchange of crude.

Economics — No Comments
23
May 10

Deflation – A Vicious Circle

What would be a common man reaction to a fall in price of goods and services, well the answer is that of happiness and relief because everybody likes low prices for goods and services. However too much decrease in the price of goods and services is not good and it leads to deflation. Deflation can be defined as a decrease in the general price of goods and services. Deflation happens when inflation rate fell below zero percent, in other words a country has negative inflation rate. Deflation can be a vicious circle, let’s see how -

Deflation thumb Deflation A Vicious CircleCredit : Flickr

1. As the deflation sets in or during the initial phase of deflation, when prices fall rapidly, the cost of production does not fall correspondingly which leads to losses to producers or companies resulting in lowering of their profits.

2. Since the profits of companies decline they try to reduce their cost by reducing the number of workers which in turn curtail employment and results in fall in aggregate income of the people.

3. As the income of the people began to decline demand for goods and services began to decline which further reduces the prices of goods and services.

4. Since there is low demand for products companies reduce the production which leads to further increase in unemployment and income, business activity comes to standstill and it is a situation in which there are plenty of resources but nobody want to use them due to lack of demand and the pessimism which sets in during deflationary periods.

As one can see from above deflation is a vicious circle and that is why if governments are given a choice between deflation and inflation, they will always go for inflation.

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