Professional Documents
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Dr. G Bharathi Kamath, Associate Professor, College of Insurance, Insurance Institute of India
Economics
Introduction
What is economics?
scarce resources among competing uses. Scarcity is the lack of enough resources to satisfy all desired uses of those resources.
At all levels
Micro- Households/Firm
Meso- Industry
Macro- Economy
select. FOR WHOM goods and services are produced; that is, who should get them.
Mobilization of savings
Investment Economic growth and development Increase in productivity
in advance whereas uncertainty is accidental and therefore cannot be calculated on the grounds of historical facts or empirical conclusions
Types of risks
Dynamic Demand and supply Changes in consumer preferences Technological changes Innovation Regulations Market speculation Competitors suppliers Pure/static Loss arising of static risk- quantifiable and measurable
structure(insured has to concentrate on speculative risks only) The need for liquid assets and contingency reserve decreases Capital resources can be mobilized to more productive use Reduction in the cost of handling risk benefits the society as a whole Channelizing the investment in the economy by the insurers Social security and welfare
Definitions
Wealth- Adam smith
Welfare- Marshall
Scarcity- Robbins Growth - Samuelson
Significance
Consumption
Production
Exchange Distribution
Ceteris paribus
Optimization Consumer Producer
Branches of Economics
Micro economics
Macro Economics
Concept of Equilibrium
Static and dynamic
prices and sales to signal desired outputs (or resource allocations). The market decides the mix of output in an economy.
to intervene but had to own all the means of production. Markets permit capitalists to enrich themselves while the proletariat toil long hours for subsistence wages
solution In Keynes view, government should play an active but not an all-inclusive role in managing the economy
Mixed economy
A mixed economy is one that uses both market
signals and government directives to allocate goods and resources. Most economies use a combination of market signals and government directives to select economic outcomes
Economic Systems
Planned
Market
Mixed
(produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus.
specific quantities of a good at alternative prices in a given time period, ceteris paribus.
Determinants of Supply
Price
Cost of Production
Techniques of production Taxation Natural factors Price of related products Price of Factors of Production Expectations about future price
P PI Pr T Pe F
Law of Supply
Law of Supply
Determinants of Demand
Price
P M PR
Pe N
Types of demand
Price
Income
Cross
Law of demand
Elasticity of Demand
Meaning
Price Elasticity
The response of consumers to a change in price is
Price Elasticity
The price elasticity of demand (E) is always
The absolute value of the price elasticity of demand will always be greater than zero.
Extremes of Elasticity
A horizontal demand curve means that demand is
perfectly elastic.
Any price increase would cause demand to fall to zero.
completely inelastic.
Quantity demanded will not change regardless of the
price change.
Determinants of elasticity
Nature of the product
Variety of uses
Number of close substitutes Durability of the commodity
Period of time
Possibility of postponement Relation with other products
Elasticity of Supply
Meaning
Types of costs
Money and real costs
Laws of Production
Law of diminishing Marginal returns
Concept of Revenue
Meaning
Total revenue
Average revenue Marginal revenue
Market Structure
Equilibrium of firm Equating MC and MR
(D =
MR)
Can sell all they want at the market price Each additional unit of sales adds to total revenue an amount equal to price, i.e. MR=AR=P
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Market Power
Ability of a firm to raise price without losing all its
sales
Any firm that faces downward sloping demand has
market power
Gives firm ability to raise price above average cost
& earn economic profit (if demand & cost conditions permit)
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Monopoly
Single firm
which there are no good substitutes New firms are prevented from entering market
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degree of market power The fewer close substitutes for a firms product, the smaller the elasticity of demand (in absolute value) & the greater the firms market power When demand is perfectly elastic (demand is horizontal), the firm has no market power
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market power of existing firms by increasing the number of substitutes A firm can possess a high degree of market power only when strong barriers to entry exist
Conditions that make it difficult for new firms to enter a
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wide range of output relative to demand for the product, there may not be room for another large producer to enter market
Barriers created by government
Licenses, exclusive franchises
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process
Brand loyalties
Strong customer allegiance to existing firms may
keep new firms from finding enough buyers to make entry worthwhile
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Network externalities Occur when value of a product increases as more consumers buy & use it Make it difficult for new firms to enter markets where firms have established a large network of buyers
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Monopolistic Competition
Large number of firms sell a differentiated
product
Products are close (not perfect) substitutes
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Oligopoly Markets
Interdependence of firms profits Distinguishing feature of oligopoly Arises when number of firms in market is small enough that every firms price & output decisions affect demand & marginal revenue conditions of every other firm in market
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Strategic Decisions
Strategic behavior Actions taken by firms to plan for & react to competition from rival firms Game theory Useful guidelines on behavior for strategic situations involving interdependence
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Government regulations
Market structure Nature of product (type of insurance)
individual demand Availability of substitutes Price of the product(premium) Mandatory (inelastic demand) Income levels Product differentiation and brand loyalty Individuals demand inelastic when compared to business and industrial establishments
Brand loyalty
Supply of Insurance
Labour intensive industry
Pricing
Product differentiation Barriers to entry Economies of scale/market size Capital requirements Compulsory investments FDI cap Regulatory environment
BOUGHT
Thank You