INDUSTRIAL ECONOMICS

Defination :
Industrial economics is a distinctive branch of economics which deals with
the economic problems of firms and industries, and their relationship with society.
Industrial Economics is the study of firms, industries and markets. It looks at firms
of all sizes - from local corner shops to multinational giants such as WalMart or
Tesco. And it considers a whole range of industries, such as electricity generation,
car production and restaurants.
When analysing decision making at the levels of the individual firm and industry,
Industrial Economics helps us understand such issues as:

the levels at which capacity, output and prices are set;

the extent that products are differentiated from each other;

how much firms invest in research and development (R&D)

how and why firms advertise

Industrial Economics also gives insights into how firms organise their activities, as
well as considering their motivation. In many micro courses profit maximisation is
taken as given, but many industrial economics courses examine alternative
objectives, such as trying to grow market share.
There is also an international dimension - firms have the option to source inputs (or
outsource production) overseas. As such, while industrial economics more
frequently uses skills and knowledge from micro courses, macroeconomic
concepts are sometimes employed.
One of the key issues in industrial economics is assessing whether a market is
competitive. Competitive markets are normally good for consumers (although they
might not always be feasible) so most industrial economics courses include
analysis of how to measure the extent of competition in markets. It then considers
whether regulation is needed, and if so the form it should take. There is again an
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international dimension to this, as firms that operate in more than one country will
face different regulatory regimes.
Industrial Economics uses theoretical models to understand firm and regulatory
decision making, and so students should expect to use diagrams and maybe some
basic mathematical models, including game theory. In addition, researchers often
develop empirical statistical models to identify relationships between variables of
interest: for example to understand the relationship between product price,
advertising and profits. While most courses will not require students to conduct
their own empirical analysis (that is left to the econometrics courses)
understanding and interpreting empirical results is an important skill.
Industrial Economists are also highly employable. There is an entire industry of
consultancies and government agencies (such as the Office of Fair Trading (OFT)
and the Competition Commission (CC)) concerned with competition policy. There
is an equally large set of consultancies and regulators (such as Ofcom (the
communication sector regulator)) which are concerned with the economics of
regulation.
What is Micro- Economics :
DEFINITION OF 'MICROECONOMICS'
The branch of economics that analyzes the market behavior of individual
consumers and firms in an attempt to understand the decision-making process of
firms and households. It is concerned with the interaction between individual
buyers and sellers and the factors that influence the choices made by buyers and
sellers. In particular, microeconomics focuses on patterns of supply and demand
and the determination of price and output in individual markets (e.g. coffee
industry).
BREAKING DOWN 'MICROECONOMICS'
The field of economics is broken down into two distinct areas of study:
microeconomics and macroeconomics. Microeconomics looks at the smaller
picture and focuses more on basic theories of supply and demand and how
individual businesses decide how much of something to produce and how much to
charge for it. People who have any desire to start their own business or who want
to learn the rationale behind the pricing of particular products and services would
be more interested in this area.
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Macroeconomics, on the other hand, looks at the big picture (hence

"macro"). It focuses on the national economy as a whole and provides a basic
knowledge of how things work in the business world. For example, people who
study this branch of economics would be able to interpret the latest Gross
Domestic Product figures or explain why a 6% rate of unemployment is not
necessarily a bad thing. Thus, for an overall perspective of how the entire economy
works, you need to have an understanding of economics at both the micro and
macro levels.
MACROECONOMICS:DEFINITION OF 'MACROECONOMICS'
The field of economics that studies the behavior of the aggregate economy.
Macroeconomics examines economy-wide phenomena such as changes in
unemployment, national income, rate of growth, gross domestic product, inflation
and price levels.
BREAKING DOWN 'MACROECONOMICS'
Macroeconomics is focused on the movement and trends in the economy as a
whole, while in microeconomics the focus is placed on factors that affect the
decisions made by firms and individuals. The factors that are studied by macro and
micro will often influence each other, such as the current level of unemployment in
the economy as a whole will affect the supply of workers which an oil company
can hire from, for example.
SIGNIFICANCE OF ECONOMICS :
My. Durbin says "Economics is the intellectual religion of the days."
About the importance of economics Malthus says, "Political economy is perhaps
the only science of which it may be said that the ignorance of it is not merely a
derivation of good but produce great positive evil."
Following are the main advantages of the study of economics.
1. USEFUL FOR THE PRODUCER :Economics is very useful for the producer. It guides him that how he should
combine the four factors of production and minimize the cost of production.
2. USEFUL FOR THE CONSUMER :The consumer can adjust his expenditure of various goods in better way if he
knows the principles of economics. He will spend his income according the law of
Equi-Marginal utility in order to get maximum satisfaction.
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3. POVERTY AND DEVELOPMENT :It helps in removing the poverty from the country. Under developed countries are
facing many problems like unemployment , over population low per capita income
and low production. Economics is very useful in solving these problems.
4. USEFUL FOR THE LEADER :Its study is helpful for the leaders to understand the economic problems if they
have a knowledge of Economics.
5. USEFUL FOR THE FINANCE MINISTER :Finance minister prepares the yearly budget of the country. Economics guides him
that how he should frame the tax policy and monetary policy.
6. USEFUL FOR THE DISTRIBUTION OF NATIONAL INCOME :From the study of economics one can easily judge that how the income should be
distributed among the four factors of production. For this purpose Marginal
productivity theory is suggested by economics.
7. CULTURAL VALUE :A person's education can not be considered complete unless he has some
knowledge of economics. The thing which happen daily around us have an
important economic bearing. So there is also the cultural value of the study of
economics.
8. IMPORTANCE FOR A COMMON MAN :The study of economics is very useful for every citizen. It enables him to
understand and criticize the economic policies of the government. He can also
guide the government.
9. ECONOMIC PLANNING :In the modern age the importance of economic planning can not be ignored.
Through planning we can utilize our natural resources in better way and can
improve our economic condition.
10. IMPORTANCE FOR LABOUR :It guides the workers that how they can get maximum wages from the employer. It
enables them to get the right of trade union , collective bargaining and fixation of
working hours.
11. SOLUTION FOR ECONOMIC CRISES :Industrial Economics

It guides the nations that how they can save themselves from the economic crises.
The advanced countries desire is that there should be economic stability and full
employment without inflation to achieve these objectives, economics is very useful
for them.
12. INSPIRES FOR DEVELOPMENT :The study of advanced countries economy inspires the less development countries
that they can also improve their economics conditions.
13. INTELLECTUAL VALUE :Economics has great intellectual value, because it broadens our out-look, sharpens
our intellect and inculcate in us the habit of balanced thinking.
14. OPTIMUM USE OF RESOURCES :In the third world countries there is a lot of wastage of resources which is the main
cause of their poverty. The study of economic development will enable them to
make the optimum use of their resources.
15. CREATES THE SENSE OF RESPONSIBILITY :Economics develop the sense of responsibility among the citizens by explaining
the various problems and their solutions.
16. USEFUL FOR INTERNATIONAL TRADE :Its study is very useful for international trade. It helps the importers and exporters
to earn maximum profit. A businessman can easily understand the trade policies of
various countries.
ROLE OF ECONOMIC SYSTEM :
An economic system is a system of production and exchange of goods and services
as well as allocation of resources in a society. It includes the combination of the
various institutions, agencies, entities (or even sectors as described by some
authors) and consumers that comprise the economic structure of a given
community. A related concept is the mode of production.
The study of economic systems includes how these various agencies and
institutions are linked to one another, how information flows between them, and
the social relations within the system (including property rights and the structure of
management).

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Among existing economic systems, distinctive methods of analysis have

developed, such as socialist economics and Islamic economic jurisprudence. Today
the dominant form of economic organization at the global level is based on marketoriented mixed economies.
Economic systems is the category in the Journal of Economic Literature
classification codes that includes the study of such systems. One field that cuts
across them is comparative economic systems. Subcategories of different systems
there include:

planning, coordination, and refor

productive enterprises; factor and product markets; prices; population
public economics; financial economics
national income, product, and expenditure; money; inflation
international trade, finance, investment, and aid consumer economics;
welfare and poverty
performance and prospects
natural resources; energy; environment; regional studies
political economy; legal institutions; property rights.
Indifference Curve :
An indifference curve is a graph showing combination of two goods that give the
consumer equal satisfaction and utility.
Definition: An indifference curve is a graph showing combination of two goods
that give the consumer equal satisfaction and utility. Each point on an indifference
curve indicates that a consumer is indifferent between the two and all points give
him the same utility.
Description: Graphically, the indifference curve is drawn as a downward sloping
convex to the origin. The graph shows a combination of two goods that the
consumer consumes.

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Significance of Indifference Curve Analysis:

In indifference curve approach only ordination of preferences is needed.It
overcomes the weakness of Cardinal measurement as the satisfaction cannot be
measured objectively.
The cardinal approach provides the assumption of constant utility of money, which
is unrealistic.In indifference curve approach, this assumption has been dropped.
Indifference curve approach is base for the measurement of 'consumer's surplus'.In
a way it contributes to the Welfare economics.
Indifference curve is a better tool to classify substitutes and complementary goods.

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Properties of Indifference Curves

The main attributes or properties or characteristics of indifference curves are as
follows:
1) Indifference Curves are Negatively Sloped:
The indifference curves must slope downward from left to right. As the consumer
increases the consumption of X commodity, he has to give up certain units of Y
commodity in order to maintain the same level of satisfaction.
DIAGRAM:

In the above diagram, two combinations of commodity cooking oil and commodity
wheat is shown by the points a and b on the same indifference curve. The
consumer is indifferent towards points a and b as they represent equal level of
satisfaction.
(2) Higher Indifference Curve Represents Higher Level of Satisfaction:
Indifference curve that lies above and to the right of another indifference curve
represents a higher level of satisfaction. The combination of goods which lies on a
higher indifference curve will be preferred by a consumer to the combination
which lies on a lower indifference curve.
Diagram:

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In this diagram, there are three indifference curves, IC1, IC2 and IC3 which
represents different levels of satisfaction. The indifference curve IC3 shows greater
amount of satisfaction and it contains more of both goods than IC2 and IC1. IC3 >
IC2> IC1.
(3) Indifference Curves are Convex to the Origin:
This is an important property of indifference curves. They are convex to the origin.
As the consumer substitutes commodity X for commodity Y, the marginal rate of
substitution diminishes as X for Y along an indifference curve. The Slope of the
curve is referred as the Marginal Rate of Substitution. The Marginal Rate of
Substitution is the rate at which the consumer must sacrifice units of one
commodity to obtain one more unit of another commodity.
Diagram:

In the above diagram, as the consumer moves from A to B to C to D, the

willingness to substitute good X for good Y diminishes. The slope of IC is
negative.In the above diagram, diminishing MRSxy is depicted as the consumer is
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giving AF>BQ>CR units of Y for PB=QC=RD units of X. Thus indifference curve

is steeper towards the Y axis and gradual towards the X axis. It is convex to the
origin.
If the indifference curve is concave, MRSxy increases. It violets the fundamental
feature of consumer behaviour.
If commodities are almost perfect substitutes then MRSxy remains constant. In
such cases the indifference curve is a straight line at an angle of 45 degree with
either axis.
If two commodities are perfect complements, the indifference curve will have a
right angle.
In reality, commodities are not perfect substitutes or perfect complements to each
other.Therefore MRSxy usually diminishes.
(4) Indifference Curves cannot Intersect Each Other:
The indifference curves cannot intersect each other. It is because at the point of
tangency, the higher curve will give as much as of the two commodities as is given
by the lower indifference curve. This is absurd and impossible.
Diagram:

In the above diagram, two indifference curves are showing cutting each other at
point B. The combinations represented by points B and F given equal satisfaction
to the consumer because both lie on the same indifference curve IC2. Similarly the
combinations shows by points B and E on indifference curve IC1 give equal
satisfaction top the consumer.
If combination F is equal to combination B in terms of satisfaction and
combination E is equal to combination B in satisfaction. It follows that the
combination F will be equivalent to E in terms of satisfaction. This conclusion
looks quite funny because combination F on IC2 contains more of good Y (wheat)
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than combination which gives more satisfaction to the consumer. We, therefore,
conclude that indifference curves cannot cut each other.
(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:
One of the basic assumptions of indifference curves is that the consumer purchases
combinations of different commodities. He is not supposed to purchase only one
commodity. In that case indifference curve will touch one axis. This violates the
basic assumption of indifference curves.
Diagram:

In the above diagram, it is shown that the in difference IC touches Y axis at point P
and X axis at point S. At point C, the consumer purchase only OP commodity of Y
good and no commodity of X good, similarly at point S, he buys OS quantity of X
good and no amount of Y good. Such indifference curves are against our basic
assumption. Our basic assumption is that the consumer buys two goods in
combination.

Consumer Equilibrium :The state of balance achieved by an end user of products that refers to the
amount of goods and services they can purchase given their present level of
income and the current level of prices. Consumer equilibrium allows a consumer to
obtain the most satisfaction possible from their income.
All consumers strive to maximize their utility. We try to get as much
satisfaction as we can. The consumers scale of preference is derived by means of
indifference mapping that is a set of indifference curves which ranks the
preferences of the consumer. Getting to the indifference curve which is farthest
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from the origin gives the highest total utility. Although the goal of the consumer is
maximization of satisfaction, the means of achieving the goal is not clear. Higher
indifference curve not only gives higher satisfaction but also are more expensive.
Here we are confronted with the basic conflict between preferences and the prices
of the commodities consumer wants to consume. With a given amount of money
income to spent, we cannot attain the highest satisfaction but have to settle for less.

WHAT IS PRODUCTION ?
Production is a process of combining various material inputs and immaterial
inputs (plans, know-how) in order to make something for consumption (the
output). It is the act of creating output, a good or service which has value and
contributes to the utility of individuals.
Economic well-being is created in a production process, meaning all
economic activities that aim directly or indirectly to satisfy human needs. The
degree to which the needs are satisfied is often accepted as a measure of economic
well-being. In production there are two features which explain increasing
economic well-being. They are improving quality-price-ratio of goods and services
and increasing incomes from growing and more efficient market production.
The most important forms of production are
market production
public production
household production
In order to understand the origin of the economic well-being we must understand
these three production processes. All of them produce commodities which have
value and contribute to well-being of individuals.
The satisfaction of needs originates from the use of the goods and services which
are produced. The need satisfaction increases when the quality-price-ratio of the
goods and services improves and more satisfaction is achieved at less cost.
Improving the quality-price-ratio of goods and services is to a producer an
essential way to enhance the production performance but this kind of gains
distributed to customers cannot be measured with production data.
Economic well-being also increases due to the growth of incomes that are gained
from the growing and more efficient market production. Market production is the
only production form which creates and distributes incomes to stakeholders. Public
production and household production are financed by the incomes generated in
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market production. Thus market production has a double role in creating wellbeing, i.e. the role of producing goods and services and the role of creating income.
Because of this double role market production is the primus motor of economic
well-being and therefore here under review.

LAW OF RETURN :
Total Product (TP) This is the total output produced by workers
Marginal Product (MP) This is the output produced by an extra worker
Definition: Law of Diminishing Marginal Returns
Diminishing Returns occurs in the short run when one factor is fixed (e.g. Capital)
If the variable factor of production is increased, there comes a point where it
will become less productive and therefore there will eventually be a decreasing
marginal and then average product
This is because if capital is fixed extra workers will eventually get in each
others way as they attempt to increase production. E.g. think about the
effectiveness of extra workers in a small caf. If more workers are employed
production could increase but more and more slowly.
This law only applies in the short run because in the long run all factors are
variable
Assume the wage rate is 10, then an extra worker Costs 10.
The Marginal Cost (MC) of a sandwich will be the Cost of the worker divided by
the number of extra sandwiches that are produced
Therefore as MP increases MC declines and vice versa
A good example of diminishing returns includes the use of chemical fertilizers- a
small quantity leads to a big increase in output. However, increasing its use further
may lead to declining Marginal Product (MP) as the efficacy of the chemical
declines.
Diagram of Diminishing Returns

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ECONOMICAL DEVELOPMENT :
Defination :
"Progress in an economy, or the qualitative measure of this. Economic
development usually refers to the adoption of new technologies, transition from
agriculture-based to industry-based economy, and general improvement in living
standards."
Economic development is the sustained, concerted actions of policy makers
and communities that promote the standard of living and economic health of a
specific area. Economic development can also be referred to as the quantitative and
qualitative changes in the economy. Such acts can involve multiple areas including
development of human capital, critical infrastructure, regional competitiveness,
social inclusion, health, safety, literacy, and other initiatives. Economic
development differs from economic growth. Whereas economic development is a
policy intervention endeavor with aims of economic and social well-being of
people, economic growth is a phenomenon of market productivity and rise in GDP.
Consequently, as economist Amartya Sen points out, "economic growth is one
aspect of the process of economic development."

INDICATORS OF ECONOMICAL DEVELOPMENT :

The International Economic Development Council defines economic development
as an activity that seeks to improve the economic well-being and quality of life
for a community, by creating and/or retaining jobs The World Bank is the
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primary international organization that measures economic development on a

national and global scale. Of the more than 2,000 indicators it uses to assess
development, five measure it the most directly.
Economic Policy and Debt
There are three main subcategories in this class: "Balance of Payments," "External
Debt" and "National Accounts." Indicators measure capital and financial accounts,
as well as the current account and reserves. You'll find measures of foreign direct
investment here, statistics for foreign trade and remittances, and development
assistance the country receives. This category also includes measures of purchasing
power parity.
Financial Sector
There are five subcategories under this heading. "Assets" and "Capital Markets"
are the two most general, and they include bank capital and market capitalization.
The "Exchange Rates" subcategory includes measures of inflation. "Interest Rates"
covers the lending interest rate, the deposit interest rate and the interest rate spread.
The fifth subcategory, "Monetary Holdings," includes measures of liability and the
money supply.
Poverty
This subcategory covers income distribution and poverty. Poverty is measured
nationally and separately as a percentage of rural population and urban
populations. Income distribution is measured by quintiles and deciles. A heading
called "Conflict and Fragility" measures battle-related deaths and homicides.
Private Sector and Trade
Under the heading "Private Sector and Trade" youll find many indicators of the
business environment, including imports and exports measured both in dollar value
and by time-study indexes. There are statistics for tariffs here, as well as measures
of travel and tourism. There are also measures of private infrastructure investment
in this section, such as investment in energy, transportation and
telecommunications.
Public Sector
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Every year the World Bank assigns low income nations a set of ratings called
"Country Policy and Institutional Assessment." These ratings are important
because they determine the amount of money countries receive from the World
Bank. You can find them under the "Public Sector" heading. They measure many
variables, including transparency, budgetary management and environmental
sustainability. Government finance is measured in this area--revenues,
expenditures and deficits. A figure measuring the percentage of seats held by
women in the national parliament is included.
Other Categories
The other categories of World Bank indicators include indicators that translate less
directly into terms of financial or monetary terms. They include "Education,"
"Environment," "Health," "Infrastructure" and "Labor."
FACTORS FOR ECONOMICAL GROWTH :
Economic growth is important to the well-being of any national economy,
and often requires deliberate actions that help to promote that growth. There are a
number of factors that can go into the promotion of strong economic growth within
a local, regional, national, or even global economy, and many of these factors
having to do with the structure of the business cycle and the efforts to improve the
standard of living for consumers. Factors such as competition, the cultivation of
new markets in emerging nations, innovations in technology, and investment in
foreign concerns can all come together to create economic growth.
One of the more common elements that goes into stimulating strong
economic growth is healthy competition within the marketplace. Here, the focus is
on creating and marketing goods and services that are likely to appeal to
consumers, who in turn generate a demand for those products. Manufacturers move
to meet that demand with a supply of the products, making sure to balance the need
to generate profits off each sale with the necessity of making sure the products are
affordable for the targeted consumer groups. The end result is that the economy is
stimulated by the brisk sales, more people are put to work making the products,
and those employees are able to buy other goods and services thanks to the steady
income.
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New technology can also do a great deal to stimulate strong economic

growth. Innovations with existing products that help to increase the demand, or
even the creation of new products that capture the attention of the buying public
can often reverse a downward trend in an economy by creating more jobs and
improving the flow of cash throughout the entire economic system. Under the best
of circumstances, the gains made with the new or improved products easily offsets
the loss of jobs related to other economic sectors that are now considered obsolete,
allowing the economy to move forward rather than regressing.
Investments in new markets can also do a great deal to spur strong economic
growth. Choosing to invest in emerging international markets can have a very
positive effect, especially in terms of promoting both imports and exports that add
to the financial well being of all the nations involved. By supporting those
emerging markets, the potential for creating allies who in turn enter into mutually
beneficial trading situations with the investors can help to provide a great deal of
economic stimulation that triggers a trickle-down effect for a number of related
industries.
Nations tend to monitor what is happening within the economy and take
steps to use legislation in a manner that helps to reverse undesirable trends and
promote economic growth. Often, these efforts do not yield results over night, but
can make a huge difference in the state of the economy over a period of a few
years. By identifying potential threats to the economy, it is possible to create
strategies that impact trade and production, ultimately helping to minimize any
negative factors while encouraging other factors that aid in strong economic
growth.

What are some obstacles to economic growth in

developing nations?
There are many obstacles to economic growth in developing countries. Let us look
at a few of them.
Governmental problems. Governments in developing countries can often be
corrupt. They can act in ways that enrich only a few of the elite members of
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society without helping the population as whole. They can be very unpredictable
as well. This can scare off foreign investors.
Cultural issues. Some scholars argue that some countries lack the right culture for
economic development. Their people might not want to take risks in order to start
new businesses. Their people might feel that traditional cultural duties are more
important than showing up to work every day. These sorts of cultural issues can
slow a countrys growth.
Foreign debt. Sometimes, countries have to take actions that they do not want to
take because they need to pay off their creditors. They might have to do things that
bring money in the short term even if that hurts their ability to invest for the long
term.
Lack of human resources. This may be a type of governmental problem. Many
developing countries lack the educational infrastructure needed to develop a
workforce that could support a more modern economy.
Foreign competition. Developing countries have to compete against companies
from the developed world. This can be very difficult. It can force developing
countries to stay with making low value-added products using cheap labor instead
of becoming more modernized.
All of these factors (and more) can hinder developing countries economic growth.

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