Lernovate Ecommerce WEEK 4 Task (Monday-Tuesday)

Submitted By - Sanket Dhole Date: 20/07/2021

Learnovate e-commerce

Q1. a) Explain how firms and individuals participate

and interact in the product market and in the factor
market.

The circular flow diagram offers a simple way of organizing the economic transactions that occur
between households and firms in the economy.
Households are buyers and firms are sellers in the product market. In particular, households buy
the output of goods and services that firms produce.
Households are sellers, and firms are buyers in the factor market. In this market households
provide the inputs that firms use to produce goods and services.

b) What role does profit plays in Market System?

1.Source of income: It is the most important source of income and provides livelihood for the
businessman. Everyone has to satisfy his needs and hence no one is expected to undertake
business activities without any earnings for the same.
2. Source of finance: Profit is a source of finance for expansion and diversification of business
activities, A part of the profits can be retained for increasing the volume of the business.
Retention of profit is always considered the best way for carrying out business activities.
3. Efficient working: Profit is required for efficient and
smooth functioning of the business. It is considered as a barometer for judging the performance
of the business.
4. Goodwill : Profit helps in building the reputation
or goodwill of the business firms. With profit increasing over time, a business enterprise gains
reputation. Such goodwill creates market standing which ultimately helps to raise loans and
thereby obtain credit more easily.
5. Reward for risk bearing : Risk is always associated with any business. A person who invests
money in the business has to bear the risk also. In the eventuality of loss due to any risk, the
businessman doesn’t stop the business. It is the profit element that motivates him to carry on with
business even in the case of losses.
6. Social responsibility : Higher profits make better remuneration and amenities possible. It
increases the standard of living of workers. A firm with a higher profit is in a position to carry out
its social responsibility towards various groups.

Q2) a) Explain the concept and various determinants

of market demand.

The Five Determinants of Demand

The five determinants of demand are:

1)The price of the good or service.
2)The income of buyers.
3)The prices of related goods or services—either complementary and purchased along with a
particular item, or substitutes and bought instead of a product.
4)The tastes or preferences of consumers will drive demand.
5)Consumer expectations. Most often, this refers to whether a consumer believes prices for the
product will rise or fall in the future.

b) Write a detailed note on-Price output decisions in

multi plant firms.
Price and output decision of Multi plant monopoly

– When the firm produces the homogeneous product in two

different plants each with different costs, the multi plant
monopolist has to decide also how to allocate the profit
maximizing output between two plants.
Firm must determine how to distribute production between
both plants
1. Production should be split so that the MC in the plants is
the same
2. Output is chosen where MR=MC. Profit is therefore
maximized when MR=MC at each plant.
– Q1 and C1 is output and cost of production for Plant 1
– Q2 and C2 is output and cost of production for Plant 2
QT = Q1 + Q2 is total output
– Profit is then:
= PQT – C1(Q1) – C2(Q2)
Firm should increase output from each plant
until the additional profit from last unit
produced at Plant 1 equals 0
Same for Plant 2
• The firm should choose to produce where
MR = MC1 = MC2
• We can show this graphically
– MR = MCT
gives total output
– This point shows the MR for each firm
– Where MR crosses MC1 and MC2 shows the output for each firm

Q3) a) Elaborate the meaning and various types of

cost in detail.

Direct Costs

Direct costs are related to producing a good or service. A direct cost includes raw materials, labor,
and expense or distribution costs associated with producing a product. The cost can easily be
traced to a product, department, or project. For example, Ford Motor Company (F) manufactures
cars and trucks. A plant worker spends eight hours building a car. The direct costs associated with
the car are the wages paid to the worker and the cost of the parts used to build the car.

Indirect Costs

Indirect costs, on the other hand, are expenses unrelated to producing a good or service. An
indirect cost cannot be easily traced to a product, department, activity, or project. For example,
with Ford, the direct costs associated with each vehicle include tires and steel. However, the
electricity used to power the plant is considered an indirect cost because the electricity is used
for all the products made in the plant. No one product can be traced back to the electric bill.

Fixed Costs

Fixed costs do not vary with the number of goods or services a company produces over the short
term. For example, suppose a company leases a machine for production for two years. The
company has to pay $2,000 per month to cover the cost of the lease, no matter how many
products that machine is used to make. The lease payment is considered a fixed cost as it remains
unchanged.

Variable Costs

Variable costs fluctuate as the level of production output changes, contrary to a fixed cost. This
type of cost varies depending on the number of products a company produces. A variable cost
increases as the production volume increases, and it falls as the production volume decreases. For
example, a toy manufacturer must package its toys before shipping products out to stores. This is
considered a type of variable cost because, as the manufacturer produces more toys, its
packaging costs increase, however, if the toy manufacturer's production level is decreasing, the
variable cost associated with the packaging decreases.
Operating Costs

Operating costs are expenses associated with day-to-day business activities but are not traced
back to one product. Operating costs can be variable or fixed. Examples of operating costs, which
are more commonly called operating expenses, include rent and utilities for a manufacturing
plant. Operating costs are day-to-day expenses, but are classified separately from indirect costs –
i.e., costs tied to actual production. Investors can calculate a company's operating expense ratio,
which shows how efficient a company is in using its costs to generate sales.

Opportunity Costs

Opportunity cost is the benefits of an alternative given up when one decision is made over
another. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it's
the difference in return between a chosen investment and one that is passed up. For companies,
opportunity costs do not show up in the financial statements but are useful in planning by
management.

Controllable Costs

Controllable costs are expenses managers have control over and have the power to increase or
decrease. Controllable costs are considered so when the decision of taking on the cost is made by
one individual. Common examples of controllable costs are office supplies, advertising expenses,
employee bonuses, and charitable donations. Controllable costs are categorized as short-term
costs as they can be adjusted quickly.

b) Discuss meaning of risk. Explain the decision making under risk in

detail.

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:
The problem is defined and all feasible alternatives are considered. The possible outcomes for
each alternative are evaluated.
Outcomes are discussed based on their monetary payoffs or net gain in reference to assets or
time.
Various uncertainties are quantified in terms of probabilities.
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.
Whenever the decision maker has some knowledge regarding the states of nature, he/she may be
able to assign subjective probability estimates for the occurrence of each state. In such cases, the
problem is classified as decision making under risk. The decision-maker is able to assign
probabilities based on the occurrence of the states of nature.
The decision making under risk process is as follows:
Use the information you have to assign your beliefs (called subjective probabilities) regarding
each state of the nature, p(s),
Each action has a payoff associated with each of the states of nature X(a,s),
We compute the expected payoff, also called the return (R), for each action R(a) = Sums of [X(a,s)
p(s)],
We accept the principle that we should minimize (or maximize) the expected payoff,
Execute the action which minimizes (or maximize) R(a)
The choice of an optimal action is based on The Bayesian Decision Criterion according to which an
action with maximum Expected Monetary Value (EMV) or minimum Expected Opportunity Loss
(EOL) or Regret is regarded as optimal.

Q4) a) Explain composition and functions of money

market in India.

Composition of Money Market

The money market is not a single homogeneous market. It consists of a number of sub-markets
which collectively constitute the money market. There should be competition within each
sub-market as well as between different sub-markets. The following are the main sub-markets of
a money market:
Call Money Market.
Commercial Bills Market or Discount Market.
Acceptance Market.
Treasury bill Market.
Indian money market was highly regulated and was characterized by limited number of
participants. The limited variety and instruments were available. Interest rate on the instruments
was under the regulation of Reserve Bank of India. The sincere efforts for developing the money
market were made when the financial sector reforms were started by the government.
Money markets are the markets for short-term, highly liquid debt securities. Examples of these
include bankers’ acceptances, repos, negotiable certificates of deposit, and Treasury Bills with
maturity of one year or less and often 30 days or less. Money market securities are generally very
safe investments, which return relatively; low interest rate that is most appropriate for
temporary cash storage or short-term time needs.

Functions of the Money Market

The money market contributes to the economic stability and development of a country by
providing short-term liquidity to governments, commercial banks, and other large organizations.
Investors with excess money that they do not need can invest it in the money market and earn
interest. Here are the main functions of the money market:

1. Financing Trade
The money market provides financing to local and international traders who are in urgent need of
short-term funds. It provides a facility to discount bills of exchange, and this provides immediate
financing to pay for goods and services.

International traders benefit from the acceptance houses and discount markets. The money
market also makes funds available for other units of the economy, such as agriculture and
small-scale industries.

2. Central Bank Policies

The central bank is responsible for guiding the monetary policy of a country and taking measures
to ensure a healthy financial system. Through the money market, the central bank can perform its
policy-making function efficiently.
For example, the short-term interest rates in the money market represent the prevailing
conditions in the banking industry and can guide the central bank in developing an appropriate
interest rate policy. Also, the integrated money markets help the central bank to influence the
sub-markets and implement its monetary policy objectives.

3. Growth of Industries
The money market provides an easy avenue where businesses can obtain short-term loans to
finance their working capital needs. Due to the large volume of transactions, businesses may
experience cash shortages related to buying raw materials, paying employees, or meeting other
short-term expenses.
Through commercial paper and finance bills, they can easily borrow money on a short-term basis.
Although money markets do not provide long-term loans, it influences the capital market and can
also help businesses obtain long-term financing. The capital market benchmarks its interest rates
based on the prevailing interest rate in the money market.

4. Commercial Banks Self-Sufficiency

The money market provides commercial banks with a ready market where they can invest their
excess reserves and earn interest while maintaining liquidity. Short-term investments, such as
bills of exchange, can easily be converted to cash to support customer withdrawals.
Also, when faced with liquidity problems, they can borrow from the money market on a
short-term basis as an alternative to borrowing from the central bank. The advantage of this is
that the money market may charge lower interest rates on short-term loans than the central bank
typically does.

b) Discuss role of Securities and Exchange Board of

India (SEBI) in monitoring regulating capital market in
India
Role of SEBI
SEBI is primarily set up to protect the interests of investors in the securities market.
It promotes the development of the securities market and regulates the business.
SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers,
share transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars,
underwriters, and other associated people to register and regulate work.
It regulates the operations of depositories, participants, custodians of securities, foreign portfolio
investors, and credit rating agencies.
It prohibits insider trading, i.e. fraudulent and unfair trade practices related to the securities
market.
It ensures that investors are educated on the intermediaries of securities markets.
It monitors substantial acquisitions of shares and take-over of companies.
SEBI takes care of research and development to ensure the securities market is efficient at all
times.

Q5) a) Write note on

i) Difference between WTO and GATT
The Differences between GATT and WTO
The points given below explain the difference between GATT and WTO in detail:
GATT was ad-hoc and provisional. The WTO and its agreement are permanent with WTO having a
sound legal basis because members have ratified the WTO agreements.
GATT refers to an international multilateral treaty to promote international trade and remove
cross-country trade barriers. On the contrary, WTO is a global body, which superseded GATT and
deals with the rules of international trade between member nations.
While GATT is a simple agreement, there is no institutional existence, but have a small
secretariat. Conversely, WTO is a permanent institution along with a secretariat.
The participating nations are called as contracting parties in GATT, whereas for WTO, they are
called as member nations.
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The grandfather clause in the Protocol of Provisional Application in GATT 1947 has not been
carried forward to WTO. WTO contains an improved version of original GATT rules-GATT Rules
1994.
GATT commitments are provisional in nature, which after 47 years the government can make a
choice to treat it as a permanent commitment or not. On the other hand, WTO commitments are
permanent, since the very beginning.
The scope of WTO is wider than that of GATT in the sense that the rules of GATT are applied only
when the trade is made in goods. As opposed to, WTO whose rules are applicable to services and
aspects of intellectual property along with the goods.
GATT agreement is primarily multilateral, but the plurilateral agreement is added to it later. In
contrast, WTO agreements are purely multilateral.
The domestic legislation is allowed to continue in GATT, while the same is not possible in the case
of WTO.
The dispute settlement system of GATT was slower, less automatic and susceptible to blockages.
Unlike WTO, whose dispute settlement system is very effective.
ii) GDP and PPP
Gross domestic product, abbreviated as GDP, is a basic measure of the overall size of a country's
economy.
As an aggregate measure of production, GDP is equal to the sum of the gross value added of all
resident institutional units engaged in production, plus any taxes on products and minus any
subsidies on products. Gross value added is the difference between output and intermediate
consumption.
GDP is also equal to:
the sum of the final uses of goods and services (all uses except intermediate consumption)
measured in purchasers' prices, minus the value of imports of goods and services;
the sum of primary incomes distributed by resident producer units.
Purchasing power parities, abbreviated as PPPs, are indicators of price level differences across
countries. PPPs tell us how many currency units a given quantity of goods and services costs in
different countries. Using PPPs to convert expenditure expressed in national currencies into an
artificial common currency, the purchasing power standard (PPS), eliminates the effect of price
level differences across countries created by fluctuations in currency exchange rates.
Purchasing power parities are obtained by comparing price levels for a basket of comparable
goods and services that are selected to be representative of consumption patterns in the various
countries.
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PPPs make it possible to produce meaningful indicators (based on either price or volume)
required for cross-country comparisons, truly reflecting the differences in the purchasing power
of, for example, households. Monetary exchange rates cannot be used to compare the volumes of
income or expenditure because they usually reflect more elements than just price differences, for
example, volumes of financial transactions between currencies and expectations in the foreign
exchange markets.

b) Define following terms in relation with Union

Budget
i) Revenue Account
Revenue Accounts are those accounts that report income of the business and therefore have
credit balances. Examples include Revenue from Sales, Revenue from Rental incomes, Revenue
from Interest income, etc.
ii) Capital Account
Capital account can be regarded as one of the primary components of the balance of payments of
a nation. It gives a summary of the capital expenditure and income for a country.
iii) Revenue deficit
The Revenue deficit refers to the financial position wherein the government’s revenue
expenditure exceeds its total revenue receipts. This means that government’s own earnings are
not sufficient to meet the day-to-day functioning of its departments and other provisions of
services.
iv) 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.
v) Plan and non-plan expenditure
Plan expenditure is that component of government expenses which helps increase the productive
capacity in the economy. It includes outlays for different sectors, such as rural development and
education.
This is largely the revenue expenditure of the government, although it also includes capital
expenditure. It covers all expenditure not included in the Plan Expenditure.