Theory of production, in economics, an effort to explain the principles

by which a business firm decides how much of each commodity that it

sells (its “outputs” or “products”) it will produce, and how much of each
kind of labour, raw material, fixed capital good, etc., that it employs (its
“inputs” or “factors of production”) it will use. The theory involves
some of the most fundamental principles of economics. These include
the relationship between the prices of commodities and the prices (or
wages or rents) of the productive factors used to produce them and also
the relationships between the prices of commodities and productive
factors, on the one hand, and the quantities of these commodities and
productive factors that are produced or used, on the other.
The various decisions a business enterprise makes about its productive
activities can be classified into three layers of increasing complexity.
The first layer includes decisions about methods of producing a given
quantity of the output in a plant of given size and equipment. It involves
the problem of what is called short-run cost minimization. The second
layer, including the determination of the most profitable quantities of
products to produce in any given plant, deals with what is called short-
run profit maximization. The third layer, concerning the determination
of the most profitable size and equipment of plant, relates to what is
called long-run profit maximization.

Factors of production This term refers to inputs or resources; these terms

are used interchangeably in this text. They refer to anything used in the
production and distribution of goods and services. When economists use
the term factors of production they usually classify them into three, or
sometimes four, categories: land, Production theory 177 labour and
capital. Entrepreneurship is sometimes added as a fourth factor. These
terms are not self-explanatory so each is now discussed in turn.
a. Land Land is really a combination of two different factors. First,
there is the area of land that is needed to produce the good. This
may be agricultural l6h776h66666hhhthntgbnuh7and, factory area,
shop space, warehouse space or office space. Second, land relates
to all natural resources, that is anything that comes from the
surface of the land, underneath it or on top of it. Thus we include
minerals, crops, wood, and even water and air, though it may seem
strange to refer to these as land
b. . b. Labour Labour is the easiest of the factors to understand, the
input of labour being measured in number of workers, or more
precisely, in number of hours worked. Of course, labour is not
homogeneous and manual labour is often divided into unskilled,
semi-skilled and skilled categories. Labour also includes
administrative and managerial workers, though some empirical
studies have omitted this important input.1 In practice we may
wish to distinguish between these different categories of labour,
especially if we want to evaluate their different contributions to
output, as will be seen.
c. c. Capital This term can again be confusing to students. It does not
refer to money, or to capital market instruments; rather it refers to
capital goods, that is plant and machinery. Like labour, this is a
highly heterogeneous category, and in practice we might want to
distinguish between different types of capital, again especially if
we want to evaluate their different contributions to output. For
example, we may want to classify personal computers,
photocopying machines, printers, fax machines and coffee
machines separately.
d. d. Entrepreneurship Entrepreneurship refers to the ability to
identify and exploit market opportunities. It therefore includes two
separate functions. This input is often not considered in economic
analysis; it is really more relevant in long-run situations, and it is
notoriously difficult to measure. For one thing it is difficult to
separate entrepreneurship from management; top management
should be concerned with both the functions of entrepreneurship, if
they are truly representing the interests of shareholders.

Fixed factors These are the factors of production that cannot be

changed in the short run. This does not mean that they cannot be
changed at all; they can be changed in the long run. In practice
these factors tend to involve that aspect of land that relates to area
of land, and capital equipment. The nature of these factors will
vary from firm to firm and industry to industry. It also may be
physically possible to change these factors in the short run, for
example close down a factory, but it is not economically feasible
because of the high costs involved (redundancy payments and so
on).
Variable factors These are the converse of the fixed factors,
meaning that they are inputs that can be varied in both short and
long run. In practice this applies mainly to that part of land that
relates to raw materials and to labour. Not all labour may be easily
varied however, since salaried staff may have long-term contracts,
making it difficult to reduce this input. It may be easier to increase
it, but even here job searches can take time, especially for top
positions.
Short run In economics this is not such a useful definition because
it does not permit so many generalizations, bearing in mind the
large differences between firms in terms of their business
environments. It is therefore more useful to define the short run as
being the period during which at least one factor input is fixed
while other inputs are variable. In practice this will vary from firm
to firm and industry to industry according to the
cibbbbfbassq3rcumstances. It also means that a firm might have
several short-run time frames as more and more factors become
variable. This tends to be ignored in analysis since the same
general principles apply to any short-run situation, as long as at
least one factor is fixed. Sometimes economists refer to the ‘very
short run’, defined as being the period during which all factors are
fixed. Although output cannot be varied under such circumstances,
different amounts can be supplied onto the market depending on
inventory levels.
The long run This is the converse of the short run, meaning that it
is the period during which all factors are variable. One can now see
that all the last four definitions are interdependent. It may seem
initially that this circularity is a problem and is not getting us
anywhere, but we will see that these definitions permit some very
useful analysis. Some economists also refer to the ‘very long run’,
which they define as being the period during which technology can
also change. However, this is not a frequently used term, perhaps
because technology is changing more quickly now; most
economists assume that technology is changeable in the long run
but not in the short run.
 refers to the point in which total cost and total revenue are equal. A
break even point analysis is used to determine the number of units or
revenue needed to cover total costs (fixed and variable costs). Break-
even point analysis is a measurement system that calculates the margin
of safety by comparing the amount of revenues or units that must be sold
to cover fixed and variable costs associated with making the sales. In
other words, it’s a way to calculate when a project will be profitable by
equating its total revenues with its total expenses. There are several
different uses for the equation, but all of them deal with managerial
accounting and cost management.
The main thing to understand in managerial accounting is the difference
between revenues and profits. Not all revenues result in profits for the
company. Many products cost more to make than the revenues they
generate. Since the expenses are greater than the revenues, these
products great a loss—not a profit.

The purpose of the break-even analysis formula is to calculate the

amount of sales that equates revenues to expenses and the amount of
excess revenues, also known as profits, after the fixed and variable
costs are met. There are many different ways to use this concept. Let’s
take a look at a few of them as well as an example of how to calculate
break-even point.
Formula for Break Even Analysis

The formula for break even analysis is as follows:

Break even quantity = Fixed costs / (Sales price per unit – Variable
cost per unit)

Where:

 Fixed costs are costs that do not change with varying output (i.e.
salary, rent, building machinery).
 Sales price per unit is the selling price (unit selling price) per
unit.
 Variable cost per unit is the variable costs incurred to create a
unit.

It is also helpful to note that sales price per unit minus variable cost per
unit is the contribution margin per unit. For example, ifxzxzc a book’s
selling price is $100 and its variable costs are $5 to make the book, $95
is the contribution margin per unit and contributes to oxc vvzv v vcx x
xffsetting the fixed cost
 Economies of scale: Economies of scale are defined as the cost
advantages that an organization can achieve by expanding its
production in the long run. It is a term that refers to the reduction
of per-unit costs through an increase in production volume. This
idea is also referred to as diminishing marginal cost. Economies of
scale refer to reduced costs per unit that arise from
increased total output of a product. For example, a larger factory
will produce power hand tools at a lower unit price, and a larger
medical system will reduce cost per medical procedure. Economies
of scale give rise to lower per-unit costs for several reasons. First,
specialization of labor and more integrated technology boost
production volumes. Second, lower per-unit costs can come from
bulk orders from suppliers, larger advertising buys or lower cost of
capital. Third, spreading internal function costs across more units
produced and sold helps to reduce costs. "Internal
functions" include accounting, information technology, and
marketing. The first two reasons are also considered operational
efficiencies and synergies. The second two reasons are cited as
benefits of mergers and acquisitions.

Economies of scale can be of 2 types:(i)

Internal EOS (Occurs when the firm [individual business] grows in

size)(ii)
External EOS (Occurs when the industry [collection of firms] grows in
size)
TYPES OF INTERNAL ECONOMIES OF SCALE
Marketing EOS
Average costs may be lowered when businesses increase sales because
of large scale production. Advertising and any other costs associated
with marketing may be lower per unit because thesecosts are spread over
a larger amount of output. It will be the same case for transportation
wherelarge businesses can transport more goods at a time causing the
transportation cost per unit to belower as compared to small businesses.
Bulk buying EOS / Commercial EOS / Purchasing EOS
As a firm grows in size, more raw materials will be needed for mass
production. Hence, bulk buying will take place. As such, discounts are
negotiated and this helps the business to decrease the costs of its inputs
(raw materials). This will help businesses to benefit from lower average
costs per unit.
Technical EOS
Large scale production allows a more efficient use of machinery and
equipment. The latter will not be idle and mass production will allow the
average cost of production to fall. Modern and up to date machinery
might also be purchased for large scale production and this will allow
rapid and more effective production.
Financial EOS
Larger firms have more power to influence financial institutions. They
can negotiate for lowerrate of interest and borrow massive sums
of money. This is because financial institutions seethem as being less
risky than smaller firms. Large firms are trusted to be able to pay back
themoney without major difficulties. Smaller firms have problems to get
loans from the banksbecause of the risk factor. They are also not allowed
for lower rate of interest.

Managerial EOS
By becoming ‘bigger’, firms can employ specialists. One pers
on will not be responsible formanaging the business as a whole. Instead,
the management functions will be distributedaccording to the area of
specialization that the human resources possess. Large firms
can affordto pay such specialists and they may help the business to boost
up productivity by a better andmore effective management. This will
help costs of the business to fall.
Specialisation EOS
This EOS may be classified as Managerial EOS but there is a slight
difference in the sense thathere, the focus in on the workforce rather than
the management. It occurs when specialistworkers are employed, for
example engineers. Division of labour can easily be practiced in
largeorganizations and the specialists help the business to do it in a more
cost effective manner.
TYPES OF EXTERNAL ECONOMIES OF SCALE Improved
transportation
Growth of an industry will benefit an individual firm as far
as transportation is concerned. Thiswill be helpful for deliveries of the
firm be it from the supplier or to the market. It will alsoallow employees
to be punctual to work and as such decrease cost of the business.
Improved financial services
Financial institutions can set up different schemes for firms because of a
growth of the industry.Loans will be more readily available as well as
other services. Businesses will not strugglefinding sources of finance
and regulations regarding financial transactions will also
improvecausing less wastage of time.
Setting up of education & training institutions
When the industry expands, training facilities become more
reachable. Universities or traininginstitutions may tailor
specific programmes to help individual businesses. The community
alsohas access to those institutions and therefore the firm can benefit
from a pool of trainedworkforce which will help the business to operate
successfully in the most cost effective manner.This will also help
businesses to reduce the cost of recruitment and training.
DISECONOMIES OF SCALE (DEOS) Diseconomies of scale
happen when a company or business grows so large that the
costs per unit increase. It takes place when economies of
scale no longer function for a firm. With this principle, rather than
experiencing continued decreasing costs and increasing output, a
firm sees an increase in marginal costs when output is increased.
Diseconomies of scale can occur for variety of reasons, but the
cause usually comes from the difficulty of managing an
increasingly large workforce.
There is a point up to which economies of scale might be reaped. If the
business becomes too
‘big’, economies of scale might start to disappear. This is because of
various disadvantages of
being too large in size. Diseconomies of scale can be defined as those
factors which lead tohigher cost per unit because of an outsized
business.Diseconomies of scale can be of 2 types:(i)

Internal DEOS (Occurs because of managerial problems)(ii)

External DEOS (Occurs because of factors not within the control of an

organisation)
TYPES OF INTERNAL DISECONOMIES OF
SCALECommunication problems
By growing too large, the level of hierarchy in the business
increases. This might lead tocommunication problems where messages
might be wrongly interpreted or not sent to the rightperson
concerned. Management and staff will not be able to interact on a
regular basis and thissort of barrier may cause work to be carried out in a
disorganized way leading to an increase inthe average cost of
production.
Lack of control
Management will have less time to interfere directly with the work that
employees are carryingout. This results in lack of control and
coordination. Productivity of the business may as such beaffected
negatively and this leads to increased cost of operations.
Poor working relationship
Morale of the staff may be affected because of the barrier between
management and them inlarge organizations. This will impact on their
performance and motivation. This further impactson productivity and
again cause costs of the business to increase.
Bureaucracy
Costs of the business may rise because of increased paperwork,
administration matters andpolicies. Decision making will be slowed
down as such causing the costs to increase.

Normal Profit

What is 'Normal Profit'

Normal profit is an economic condition that occurs when the
difference between a firm’s total revenue and total cost is equal to
zero. Simply put, normal profit is the minimum level of profit
needed for a company to remain competitive in the market.

'Normal Profit'
A business will be in a state of normal profit when its economic
profit is equal to zero, which is why normal profit is also called
“zero economic profit.” Normal profit occurs at the point where the
resources available to the firm are being efficiently used and
could not be put to better use elsewhere. It is often considered the
minimum amount of earnings needed in order to justify an
enterprise. It is important to note that zero economic profit does
not mean that the company is not earning any money (accounting
profit). It is simply a measure of how well resources are being
used relative to all possible options.

When total revenues are equal to total costs, normal profit and
economic profit are the same. Unlike accounting profit, economic
profit (and, thus, normal profit as well) takes into account
the opportunity cost of a particular enterprise. As such, normal
profit calculations divide total cost into two categories, explicit
costs and implicit costs.

When attempting to determine whether or not a business is in a

state of normal profit, it is important to understand the
components of total cost. Total cost is divided into explicit costs
and implicit costs. Explicit costs are easily quantifiable and
generally involve a transaction that is tied to an exchange of cost.
Examples of explicit costs include raw materials, labor and
wages, rent and owner compensation. Implicit costs, on the other
hand, are costs associated with not taking an action, called the
opportunity cost, and are therefore much more difficult to quantify.
Usually, analysts or economists calculate implicit costs. Examples
of implicit costs include entrepreneurship or cost of capital.

A method of determining whether a firm is in a state of normal

profit can be represented in the following way:

Total Revenue - (Explicit Expense + Implicit Expenses) = 0

If the difference between total revenue and total expenses is not

equal to zero, the business in question is not in a state of normal
profit. If total revenue exceeds total expenses, it is called
economic profit or, alternatively, super-normal profit or abnormal
profit. If total expenses exceed revenue, it is an economic loss.

Super-normal (economic) profit

If a firm makes more than normal profit it is called super-

normal profit. Supernormal profit is also called economic
profit, and abnormal profit, and is earned when total
revenue is greater than the total costs. Total costs
include a reward to all the factors, including normal
profit. This means that, when total revenue equals total
cost, the entrepreneur is earning normal profit, which is
the minimum reward that keeps the entrepreneur
providing their skill, and taking risks.

The level of super-normal profits available to a firm is

largely determined by the level of competition in a
market – the more competition the less chance there is
to earn super-normal profits.

Super-normal profit can be derived in three general

cases:

1. By firms in perfectly competitive markets in the short

run, before new entrants have eroded their profits
down to a normal level.
2. By firms in less than competitive markets, like firms
operating undermonopolistic
competition and competitive oligopolies, by
innovating or reducing costs, and earning head start
profits. These will eventually be eroded away,
providing further incentive to innovate and become
more cost efficient.
3. By firms in highly uncompetitive markets,
like collusive oligopolies andmonopolies, who can
erect barriers to entry protect themselves from
competition in the long run and earn persistent
above normal profits.

Market Structure
Definition: The Market Structure refers to the characteristics of the
market either organizational or competitive, that describes the nature of
competition and the pricing policy followed in the market.
Thus, the market structure can be defined as, the number of firms
producing the identical goods and services in the market and whose
structure is determined on the basis of the competition prevailing in that
market.

The term “ market” refers to a place where sellers and buyers meet and
facilitate the selling and buying of goods and services. But in economics,
it is much wider than just a place, It is a gamut of all the buyers and
sellers, who are spread out to perform the marketing activities.

Types of Market Structure

Perfect Competition
Definition: The Perfect Competition is a market structure where a
large number of buyers and sellers are present, and all are engaged in the
buying and selling of the homogeneous products at a single price
prevailing in the market.
 In other words, perfect competition also referred to as a pure
competition, exists when there is no direct competition between the
rivals and all sell identically the same products at a single price.

Features of Perfect Competition

1. Large number of buyers and sellers: In perfect competition, the buyers

and sellers are large enough, that no individual can influence the price
and the output of the industry. An individual customer cannot influence
the price of the product, as he is too small in relation to the whole
market. Similarly, a single seller cannot influence the levels of output,
who is too small in relation to the gamut of sellers operating in the
market.
2. Homogeneous Product: Each competing firm offers the homogeneous
product, such that no individual has a preference for a particular seller
over the others. Salt, wheat, coal, etc. are some of the homogeneous
products for which customers are indifferent and buy these from the
 one who charges a less price. Thus, an increase in the price would let
the customer go to some other supplier.
3. Free Entry and Exit: Under the perfect competition, the firms are free
to enter or exit the industry. This implies, If a firm suffers from a huge
loss due to the intense competition in the industry, then it is free to
leave that industry and begin its business operations in any of the
industry, it wants. Thus, there is no restriction on the mobility of sellers.
4. Perfect knowledge of prices and technology: This implies, that both
the buyers and sellers have complete knowledge of the market
conditions such as the prices of products and the latest technology
being used to produce it. Hence, they can buy or sell the products
anywhere and anytime they want.
5. No transportation cost: There is an absence of transportation cost, i.e.
incurred in carrying the goods from one market to another. This is an
essential condition of the perfect competition since the homogeneous
product should have the same price across the market and if the
transportation cost is added to it, then the prices may differ.
6. Absence of Government and Artificial Restrictions: Under the perfect
competition, both the buyers and sellers are free to buy and sell the
goods and services. This means any customer can buy from any seller,
and any seller can sell to any buyer.Thus, no restriction is imposed on
either party. Also, the prices are liable to change freely as per the
demand-supply conditions. In such a situation, no big producer and the
government can intervene and control the demand, supply or price of
the goods and services.

Thus, under the perfect competition, a seller is the price taker and
cannot influence the market price.

Monopolistic Competition
Definition: Under, the Monopolistic Competition, there are a large
number of firms that produce differentiated products which are close
substitutes for each other. In other words, large sellers selling the
 products that are similar, but not identical and compete with each other
on other factors besides price.

Features of Monopolistic Competition

1. Product Differentiation: This is one of the major features of the firms

operating under the monopolistic competition, that produces the
product which is not identical but is slightly different from each other.
The products being slightly different from each other remain close
substitutes of each other and hence cannot be priced very differently
from each other.
2. Large number of firms: A large number of firms operate under the
monopolistic competition, and there is a stiff competition between the
existing firms. Unlike the perfect competition, the firms produce the
differentiated products which are substitutes for each other, thus make
the competition among the firms a real and a tough one.
3. Free Entry and Exit: With an intense competition among the firms, the
entity incurring the loss can move out of the industry at any time it
wants. Similarly, the new firms can enter into the industry freely,
provided it comes up with the unique feature and different variety of
products to outstand in the market and meet with the competition
already existing in the industry.
4. Some control over price: Since, the products are close substitutes for
each other, if a firm lowers the price of its product, then the customers
of other products will switch over to it. Conversely, with the increase in
the price of the product, it will lose its customers to others. Thus, under
the monopolistic competition, an individual firm is not a price taker but
has some influence over the price of its product.
5. Heavy expenditure on Advertisement and other Selling Costs:Under
the monopolistic competition, the firms incur a huge cost on
advertisements and other selling costs to promote the sale of their
products. Since the products are different and are close substitutes for
each other; the firms need to undertake the promotional activities to
capture a larger market share.
6. Product Variation: Under the monopolistic competition, there is a
variation in the products offered by several firms. To meet the needs of
the customers, each firm tries to adjust its product accordingly. The
changes could be in the form of new design, better quality, new
packages or container, better materials, etc. Thus, the amount of
product a firm is selling in the market depends on the uniqueness of its
product and the extent to which it differs from the other products.

The monopolistic competition is also called as imperfect

competitionbecause this market structure lies between the pure
monopoly and the pure competition.

Oligopoly Market
Definition: The Oligopoly Market characterized by few sellers, selling
the homogeneous or differentiated products. In other words, the
Oligopoly market structure lies between the pure monopoly and
monopolistic competition, where few sellers dominate the market and
have control over the price of the product.

Under the Oligopoly market, a firm either produces:

 Homogeneous product: The firms producing the homogeneous

products are called as Pure or Perfect Oligopoly. It is found in the
producers of industrial products such as aluminum, copper, steel,
zinc, iron, etc.
 Heterogeneous Product: The firms producing the heterogeneous
products are called as Imperfect or Differentiated Oligopoly. Such
type of Oligopoly is found in the producers of consumer goods such
as automobiles, soaps, detergents, television, refrigerators, etc.
There are five types of oligopoly market, for detailed description, click
on the link below:

Types of Oligopoly Market

Features of Oligopoly Market

1. Few Sellers: Under the Oligopoly market, the sellers are few, and the
customers are many. Few firms dominating the market enjoys a
considerable control over the price of the product.
2. Interdependence: it is one of the most important features of an
Oligopoly market, wherein, the seller has to be cautious with respect to
any action taken by the competing firms. Since there are few sellers in
the market, if any firm makes the change in the price or promotional
scheme, all other firms in the industry have to comply with it, to remain
in the competition.

Thus, every firm remains alert to the actions of others and plan their
counterattack beforehand, to escape the turmoil. Hence, there is a
complete interdependence among the sellers with respect to their price-
output policies.

3. Advertising: Under Oligopoly market, every firm advertises their

products on a frequent basis, with the intention to reach more and
more customers and increase their customer base.This is due to the
advertising that makes the competition intense.

If any firm does a lot of advertisement while the other remained silent,
then he will observe that his customers are going to that firm who is
continuously promoting its product. Thus, in order to be in the race, each
firm spends lots of money on advertisement activities.

4. Competition: It is genuine that with a few players in the market, there

will be an intense competition among the sellers. Any move taken by
the firm will have a considerable impact on its rivals. Thus, every seller
keeps an eye over its rival and be ready with the counterattack.
5. Entry and Exit Barriers: The firms can easily exit the industry whenever
it wants, but has to face certain barriers to entering into it. These
barriers could be Government license, Patent, large firm’s economies of
scale, high capital requirement, complex technology, etc. Also,
 sometimes the government regulations favor the existing large firms,
thereby acting as a barrier for the new entrants.
6. Lack of Uniformity: There is a lack of uniformity among the firms in
terms of their size, some are big, and some are small.

Since there are less number of firms, any action taken by one firm has a
considerable effect on the other. Thus, every firm must keep a close eye
on its counterpart and plan the promotional activities accordingly

Monopoly Market
Definition: The Monopoly is a market structure characterized by a
single seller, selling the unique product with the restriction for a new
firm to enter the market. Simply, monopoly is a form of market where
there is a single seller selling a particular commodity for which there are
no close substitutes.

Features of Monopoly Market

1. Under monopoly, the firm has full control over the supply of a product.
The elasticity of demand is zero for the products.
2. There is a single seller or a producer of a particular product, and there
is no difference between the firm and the industry. The firm is itself an
industry.
3. The firms can influence the price of a product and hence, these are
price makers, not the price takers.
4. There are barriers for the new entrants.
5. The demand curve under monopoly market is downward sloping, which
means the firm can earn more profits only by increasing the sales which
are possible by decreasing the price of a product.
6. There are no close substitutes for a monopolist’s product.

Under a monopoly market, new firms cannot enter the market freely due
to any of the reasons such as Government license and regulations, huge
capital requirement, complex technology and economies of scale. These
economic barriers restrict the entry of new firms.

Pricing is the process whereby a business sets the price at which

it will sell its products and services, and may be part of the
business's marketing plan. In setting prices, the business will take
into account the price at which it could acquire the goods,
the manufacturing cost, the market place, competition, market
condition, brand, and quality of product.
Pricing is a fundamental aspect of financial modeling and is one
of the four Ps of the marketing mix, the other three aspects being
product, promotion, and place. Price is the only revenue
generating element amongst the four Ps, the rest being cost
centers. However, the other Ps of marketing will contribute to
decreasing price elasticity and so enable price increases to drive
greater revenue and profits
Definition of 'Pricing Strategies'

Definition: Price is the value that is put to a product or service

and is the result of a complex set of calculations, research and
understanding and risk taking ability. A pricing strategy takes into
account segments, ability to pay, market conditions, competitor
actions, trade margins and input costs, amongst others. It is
targeted at the defined customers and against competitors.

Description: There are several pricing strategies:

Premium pricing: high price is used as a defining criterion. Such

pricing strategies work in segments and industries where a strong
competitive advantage exists for the company. Example: Porche
in cars and Gillette in blades.

Penetration pricing: price is set artificially low to gain market share

quickly. This is done when a new product is being launched. It is
understood that prices will be raised once the promotion period is
over and market share objectives are achieved. Example: Mobile
phone rates in India; housing loans etc.

Economy pricing: no-frills price. Margins are wafer thin;

overheads like marketing and advertising costs are very low.
Targets the mass market and high market share. Example:
Friendly wash detergents; Nirma; local tea producers.

Skimming strategy: high price is charged for a product till such

time as competitors allow after which prices can be dropped. The
idea is to recover maximum money before the product or segment
attracts more competitors who will lower profits for all concerned.
Example: the earliest prices for mobile phones, VCRs and other
electronic items where a few players ruled attracted lower cost
Asian players.
What is 'Price Discrimination'
Price discrimination is a pricing strategy that charges customers
different prices for the same product or service. In pure price
discrimination, the seller charges each customer the maximum
price he or she will pay. In more common forms of price
discrimination, the seller places customers in groups based on
certain attributes and charges each group a different price.

Price discrimination is most valuable when the profit from

separating the markets is greater than profit from keeping the
markets combined. This depends on the relative elasticities of
demand in the sub-markets. Consumers in the relatively inelastic
sub-market pay a higher price, while those in the relatively elastic
sub-market pay a lower price.

Conditions for Price Discrimination

The company identifies different market segments, such as
domestic and industrial users, with different price elasticities.
Markets must be kept separate by time, physical distance and
nature of use. For example, Microsoft Office Schools edition is
available for a lower price to educational institutions than to other
users. The markets cannot overlap so that consumers who
purchase at a lower price in the elastic sub-market could resell at
a higher price in the inelastic sub-market. The company must also
have monopoly power to make price discrimination more
effective.

Types of Price Discrimination

First-degree discrimination, or perfect price discrimination, occurs
when a company charges the maximum possible price for each
unit consumed. Because prices vary among units, the firm
captures all available consumer surplus for itself. Companies
rarely practice this type of discrimination.

Second-degree price discrimination occurs when a company

charges a different price for different quantities consumed, such
as quantity discounts on bulk purchases.

Third-degree price discrimination occurs when a company

charges a different price to different consumer groups. For
example, a theater may divide moviegoers into seniors, adults
and children, each paying a different price when seeing the same
movie. This discrimination is the most common.

An Example of Price Discrimination in Airlines

Consumers buying airline tickets several months in advance
typically pay less than consumers purchasing at the last minute.
When demand for a particular flight is high, airlines raise ticket
prices. In contrast, when tickets for a flight are not selling well, the
airline reduces the cost of available tickets. Because many
passengers prefer flying home late on Sunday, those flights tend
to be more expensive than flights leaving early Sunday morning.
Airline passengers typically pay more for additional legroom too.

Perfect competition is a microeconomics concept that describes

a market structure controlled entirely by market forces. In a
perfectly competitive market, all firms sell identical products and
services, firms cannot control prevailing market prices, market
share per firm is small, firms and customers have perfect
knowledge about the industry, and no barriers to entry or exit
exist. If any of these conditions are not met, a market is not
perfectly competitive.

Perfect competition is an abstract concept that occurs in

economics textbooks, but not in the real world. Imperfect
competition, in which a competitive market does not meet the
above conditions, is very common. Examples of imperfect
competition include oligopoly, monopolistic
competition, monopsony and oligopsony.

Definition of 'Imperfect Competition'

Definition: Imperfect competition is a competitive market situation where there are
many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to
the perfect competitive market scenario. As the name suggests, competitive markets
that are imperfect in nature.

Description: Imperfect competition is the real world competition. Today some of the
industries and sellers follow it to earn surplus profits. In this market scenario, the
seller enjoys the luxury of influencing the price in order to earn more profits.

If a seller is selling a non identical good in the market, then he can raise the prices
and earn profits. High profits attract other sellers to enter the market and sellers,
who are incurring losses, can very easily exit the market.

There are four types of imperfect markets:

- Monopoly (only one seller) - Oligopoly (few sellers of goods) - Monopolistic
competition (many sellers with highly differentiated product) - Monopsony (only one
buyer of a product)

Key Differences Between Perfect Competition and Imperfect

Competition

The main points of difference between perfect competition and

imperfect competition in economics are depicted below:

1. The competitive market, in which there are a large number

of buyers and sellers, and the sellers supply identical
products to the buyers; it is known as perfect competition.
Imperfect competition occurs when one or more conditions
of the perfect competition are not met.
2. Perfect competition is a hypothetical situation, which does
not apply in the real world. Conversely, Imperfect
Competition is a situation that is found in the present day
world.
3. In perfect competition, there are many players in the market,
but in imperfect competition, there can be few to many
players, depending upon the type of market structure.
 4. In perfect competition, the sellers produce or supply
identical products while in imperfect competition the
products offered by the sellers can either be homogeneous or
differentiated.
5. In perfect competition, there are no barriers to the entry and
exit of the firms which is just opposite in the case of
imperfect competition.
6. In perfect competition, it is assumed that the firms do not
influence the price of a product. Hence they are price takers
but in imperfect competition, the firms are price makers.

What is 'Adverse Selection'

Adverse selection refers generally to a situation where sellers
have information that buyers do not have, or vice versa, about
some aspect of product quality. In the case of insurance, adverse
selection is the tendency of those in dangerous jobs or high-risk
lifestyles to get life insurance. To fight adverse selection,
insurance companies reduce exposure to large claims by limiting
coverage or raising premiums.

Adverse selection occurs when one party in a negotiation has

relevant information the other party lacks. The asymmetry of
information often leads to making bad decisions, such as doing
more business with less-profitable or riskier market segments.

Adverse Selection in the Marketplace

A seller may have better information than a buyer about products
and services being offered, putting the buyer at a disadvantage in
the transaction. For example, a company’s managers may more
willingly issue shares when they know the share price is
overvalued compared to the real value; buyers can end up buying
overvalued shares and lose money. In the secondhand car
market, a seller may know about a vehicle’s defect and charge
the buyer more without disclosing the issue.

Moral Hazard

What is 'Moral Hazard'

Moral hazard is the risk that a party to a transaction has not
entered into the contract in good faith, has provided misleading
information about its assets, liabilities or credit capacity. In
addition, moral hazard may also mean a party has an incentive to
take unusual risks in a desperate attempt to earn a profit before
the contract settles. Moral hazards can be present any time two
parties come into agreement with one another. Each party in a
contract may have the opportunity to gain from acting contrary to
the principles laid out by the agreement.

A moral hazard occurs when one party in a transaction has the

opportunity to assume additional risks that negatively affect the
other party. The decision is based not on what is considered right,
but what provides the highest level of benefit, hence the reference
to morality. This can apply to activities within the financial
industry, such as with the contract between a borrower or lender,
as well as the insurance industry. For example, when a property
owner obtains insurance on a property, the contract is based on
the idea that the property owner will avoid situations that may
damage the property. The moral hazard exists that the property
owner, because of the availability of the insurance, may be less
inclined to protect the property, since the payment from an
insurance company lessens the burden on the property owner in
the case of a disaster.

Market failure is the economic situation defined by an

inefficient distribution of goods and services in the free
 market. Furthermore, the individual incentives for rational
behavior do not lead to rational outcomes for the group. Put
another way, each individual makes the correct decision for
him/herself, but those prove to be the wrong decisions for
the group. In traditional microeconomics, this is shown as a
steady state disequilibrium in which the quantity supplied
does not equal the quantity demanded….

What are Externalities?

Home » Accounting Dictionary » What are Externalities?
Definition: Externalities are the positive or negative economic
impact of consuming or producing a good on a third party who
isn’t connected to the good, service, or transaction. In other
words, they are unforeseen consequences to economic activities.
What Does Externalities Mean?
What is the definition of externalities? Generally, the social
benefit should be greater than the private benefit so that society
protects its members and is productive. When the production or
the consumption of a good or a service proves beneficial to a third
party, then it is a positive externality.
Conversely, when the production or the consumption of a good or
a service is detrimental to a third party, then it is a negative
externality. For example, a farmer that cultivates oranges is a
positive externality because he provides society with healthy
products. Conversely, someone who is smoking in a closed area
is a negative externality because he may cause cancer to other
people.

Let’s look at an example.

Example
Contemporary society suffers from crime, drug use, and
vandalism. These are examples of negative externalities as they
harm the public good. However, by building new homes to foster
the homeless people, these social problems may be anticipated to
a certain extent. Therefore, if the social benefit is greater than the
private benefit, the outcome for the society is positive.

Furthermore, modern buildings have improved insulation, thereby

lowering the cost of heating. Also, new buildings are following the
contemporary environmental standards that require the building to
be clean, without damp, and with a high level of sanitation.
Therefore, as the social benefit is greater than the private benefit,
the outcome for the society is positive.

So, if building new houses can create positive externalities, the

social benefit contributes to social efficiency. In the cases that
social efficiency is at stake, the government may intervene to
encourage the creation of positive externalities through the
production or consumption of certain goods or services. A typical
example is the government intervention in the UK for the clearing
of slums and their replacement with affordable homes in 2010.

Summary Definition
Define Externalities: Externality means the actions of a group of
people having a positive or a negative impact on a third party.

Public good: a commodity or service that is provided

without profit to all members of a society, either by the
government or by a private individual or organization. A
public good is a product that one individual can consume
without reducing its availability to another individual, and
 from which no one is excluded. Economists refer to public
goods as "non rivalrous"(goods or resources) capable of
being enjoyed or consumed by many consumers
simultaneously) and "non excludable." National defense,
sewer systems, public parks and other basic societal goods
can all be considered public goods.

Merit good

A merit good is a good which when consumed provides

external benefits, although these may not be fully
recognised - hence the good is under-consumed, e.g.
education and healthcare.

OR

Definition
Goods and services that are judged to be worth more than
their value according to the market. Merit goods such as
education and healthcare may be under-supplied in proportion to
their perceived value if left to private enterprise, and are
sometimes provided by governments or nonprofit organizations.

Demerit Goods
Demerit goods are goods which are deemed to be socially
undesirable, and which are likely to be over-produced and over-
consumed through the market mechanism. Examples of demerit
goods are cigarettes, alcohol and all other addictive drugs such
as heroine and cocaine.
The consumption of demerit goods imposes considerable
negative externalities on society as a whole, such that the private
costs incurred by the individual consumer are less than the social
costs experienced by society in general; for example, cigarette
smokers not only damage their own health, but also impose a
cost on society in terms of those who involuntarily passively
smoke and the additional cost to the National Health Service in
dealing with smoking-related diseases. Thus, the price that
consumers pay for a packet of cigarettes is not related to the
social costs to which they give rise i.e. the marginal social cost
will exceed the market price and overproduction and over-
consumption will occur, causing a misallocation of society’s
scarce resources. This is illustrated in figure below.

Game Theory
Complete information: in the firm or players have complete
information about their competitors.
In complete Information: In this firm or players do not have complete
information about their competitors.
Share3
WHAT IT IS:

Game theory is a tool used to analyze strategic behavior by

taking into account how participants expect others to behave.
Game theory is used to find the optimal outcome from a set of
choices by analyzing the costs and benefits to each independent
party as they compete with each other.

HOW IT WORKS (EXAMPLE):

Game theory explores the possible outcomes of a situation in

which two or more competing parties look for the course of action
that best benefits them. No variables are left to chance, so each
possible outcome is derived from the combinations of
simultaneous actions by each party.

Game theory is best exemplified by a classic hypothetical

situation called the Prisoners' Dilemma. In this scenario, two
people are arrested for stealing a car. They will each serve 2
years in prison for their crime.

The case is air-tight, but the police have reason to suspect that
the two prisoners are also responsible for a recent string of high-
profile bank robberies. Each prisoner is placed in a separate cell.
Each is told he is suspected of being a bank robber and
questioned separately regarding the robberies. The prisoners
cannot communicate with each other.

The prisoners are told that a) if they both confess to the robberies,
they'll each serve 3 years for the robberies and the car theft, and
b) if only one confesses to the robbery and the other does not, the
one who confesses will be rewarded with a 1 year sentence while
the other will be punished with a 10 year sentence.

In the game, the prisoners have only two possible actions:

confess to the bank robbery, or deny having participated in the
bank robbery.

Since there are two players, each with two different strategies,
there are four outcomes that are possible:
The best option for both prisoners is to deny committing the
robberies and face 2 years in prison for the car theft. But because
neither can be guaranteed that the other won't confess, the most
likely outcome is that both prisoners will hedge their bets and
confess to the robberies -- effectively taking the 10 year sentence
off the table and replacing it with the 3 year sentence.

Pure and Mixed Strategies:

In a pure strategy, players adopt a strategy that provides the best
payoffs. In other words, a pure strategy is the one that provides
maximum profit or the best outcome to players. Therefore, it is
regarded as the best strategy for every player of the game.

This is because if both of them increase the prices of their

products, they would earn maximum profits. However, if only one
of the organization increases the prices of its products, then it
would incur losses. In such a case, an increase in prices is
regarded as a pure strategy for organizations ABC and XYZ.

On the other hand, in a mixed strategy, players adopt different

strategies to get the possible outcome. For example, in cricket a
bowler cannot throw the same type of ball every time because it
makes the batsman aware about the type of ball. In such a case,
the batsman may make more runs

BREAKING DOWN 'Nash Equilibrium'

Nash Equilibrium is named after its inventor, John Nash, an
American mathematician. It is considered one of the most
important concepts of game theory, which attempts to determine
mathematically and logically the actions that participants of a
game should take to secure the best outcomes for themselves.
The reason why Nash Equilibrium is considered such an
important concept of game theory relates to its applicability. The
Nash Equilibrium can be incorporated into a wide range of
disciplines, from economics to the social sciences.

Nash Equilibrium
The Nash Equilibrium is the solution to a game in which two or
more players have a strategy, and with each participant
considering an opponent’s choice, he has no incentive, nothing to
gain, by switching his strategy. In the Nash Equilibrium, each
player's strategy is optimal when considering the decisions of
other players. Every player wins because everyone gets the
outcome they desire. To quickly test if the Nash equilibrium exists,
reveal each player's strategy to the other players. If no one
changes his strategy, then the Nash Equilibrium is proven.

Signaling in job markets:

Macro Environment

What is a 'Macro Environment'

A macro environment is the condition that exists in the
economy as a whole, rather than in a particular sector or
region. In general, the macro environment includes trends
in gross domestic product (GDP), inflation, employment,
spending, and monetary and fiscal policy. The macro
environment is closely linked to the general business
cycle as opposed to the performance of an individual
business sector.
The macro environment in which a company or sector operates
influences its performance, and the amount of the influence
depends on how much of the company's business is dependent
on the health of the overall economy. Cyclical industries, for
example, are heavily influenced by the macro environment, while
consumer staples are less influenced. The macro environment
can also greatly affect consumers directly, affecting their ability
and willingness to spend. Consumers’ reactions to the broad
macro environment are closely monitored by businesses and
economists as a gauge for an economy’s health. Effects from
some of the market’s key factors influencing the macro
environment include the following:

Gross Domestic Product

GDP is a measure of a country’s output and production of goods
and services. The Bureau of Economic Analysis releases a
quarterly report on GDP growth that provides a broad overview of
the output of goods and services across all sectors. GDP is often
the lead influencing factor of corporate profits for the economy,
which is another measure of an economy’s comprehensive
productivity.

Inflation Inflation occurs when the AVERAGE price level (that

is, prices in general) increases over time. This does NOT
mean that ALL prices increase the same, nor that ALL prices
necessarily increase. Some prices might increase a lot,
others a little, and still other prices decrease or remain
unchanged. Inflation results when the AVERAGE of these
assorted prices follows an upward trend
Inflation is a key factor watched by economists, investors and
consumers. It affects the spending strength of the U.S. dollar and
is a factor closely regulated through monetary policy by the
Federal Reserve. The target rate for annual inflation from the
Federal Reserve is 2%. Inflation higher than 2% significantly
affects the purchasing power of the dollar, making each unit less
valuable as inflation rises.

Employment
Employment levels in the United States are measured by the
Bureau of Labor Statistics, which releases a monthly report on
increases in business payrolls and the status of the
unemployment rate. The U.S. unemployment rate is 4.1% as of
March 15, 2018. The Federal Reserve also seeks to regulate
employment levels through monetary policy stimulus and credit
measures that can ease borrowing rates for businesses to help
improve capital spending and business growth, also resulting in
employment growth.

Monetary Policy
The Federal Reserve’s monetary policy initiatives are a key factor
influencing the macro environment in the United States. Monetary
policy measures are typically centered around access to credit
and federal interest rate limits, one of the main levers of the
Federal Reserve’s monetary policy tools. The Federal Reserve
sets a federal funds rate for which federal banks borrow from
each other, and this rate is used as a base rate for all credit rates
in the broader market. The tightening of monetary policy indicates
rates are rising, making credit borrowing less appealing.

National Income Accounting

What is 'National Income Accounting'

National income accounting is a bookkeeping system that a
government uses to measure the level of the country's economic
activity in a given time period. Accounting records of this nature
include data regarding total revenues earned by domestic
corporations, wages paid to foreign and domestic workers, and
the amount spent on sales and income taxes by corporations and
individuals residing in the country.

Although national income accounting is not an exact science, it

provides useful insight into how well an economy is functioning,
and where moniesare being generated and spent. When
combined with information regarding the associated population,
data regarding per capita income and growth can be examined
over a period of time.

Definition of 'Reverse Repo Rate'

Definition: Reverse repo rate is the rate at which the central bank
of a country (Reserve Bank of India in case of India) borrows
money from commercial banks within the country. It is a monetary
policy instrument which can be used to control the money supply
in the country.

Description: An increase in the reverse repo rate will decrease

the money supply and vice-versa, other things remaining
constant. An increase in reverse repo rate means that commercial
banks will get more incentives to park their funds with the RBI,
thereby decreasing the supply of money in the market.
Definition of 'Fiscal Deficit'

Definition: The difference between total revenue and total

expenditure of the government is termed as fiscal deficit. It is an
indication of the total borrowings needed by the government.
While calculating the total revenue, borrowings are not included.

Description: The gross fiscal deficit (GFD) is the excess of total

expenditure including loans net of recovery over revenue receipts
(including external grants) and non-debt capital receipts. The net
fiscal deficit is the gross fiscal deficit less net lending of the
Central government.

Generally fiscal deficit takes place either due to revenue deficit or

a major hike in capital expenditure. Capital expenditure is incurred
to create long-term assets such as factories, buildings and other
development.

A deficit is usually financed through borrowing from either the

central bank of the country or raising money from capital markets
by issuing different instruments like treasury bills and bonds.

Definition of 'Index For Industrial Production'

Definition: The Index of Industrial Production (IIP) is an index

which shows the growth rates in different industry groups of the
economy in a stipulated period of time. The IIP index is computed
and published by the Central Statistical Organization (CSO) on a
monthly basis.
Description: IIP is a composite indicator that measures the
growth rate of industry groups classified under,

1. Broad sectors, namely, Mining, Manufacturing and Electricity

2. Use-based sectors, namely Basic Goods, Capital Goods and

Intermediate Goods.

Currently IIP figures are calculated considering 2004-05 as base

year.
Aggregate Demand

What is 'Aggregate Demand'

Aggregate demand is an economic measurement of the sum of all
final goods and services produced in an economy, expressed as
the total amount of money exchanged for those goods and
services. Since aggregate demand is measured by market values,
it only represents total output at a given price level and does not
necessarily represent quality or standard of living.

As a macroeconomic term describing the total demand in an

economy for all goods and services at any given price level in a
given period, aggregate demand necessarily equals gross
domestic product (GDP), at least in purely quantitative terms,
because the two share the same equation. As a matter of
accounting, it must always be the case that the aggregate
demand and GDP increase or decrease together.

Technically speaking, aggregate demand only equals GDP in the

long run after adjusting for the price level. This is because short-
run aggregate demand measures total output for a single nominal
price level, not necessarily (and in fact rarely) equilibrium. In
nearly all models, however, the price level is assumed to be “one”
for simplicity. Other variations in calculations can occur depending
on methodological variations or timing issues in gathering
statistics.

Aggregate demand is by its very nature general, not specific.

All consumer goods, capital goods, exports, imports, and
government spending programs are considered equal so long as
they traded at the same market value.

Autonomous Investment (having the freedom to govern itself or control its

own affairs)

Definition: The Autonomous Investment is the capital investment

which is independent of the economy shifts. This means, any change in
the cost of raw material or any change in the salary and wages of labor
etc. has no effect on the autonomous investment.

The autonomous investment is made for the welfare of the society and
not for generating profits out of such investments. These investments are
independent of the level of income or profit, and hence, any change in
the income or profit levels will have no effect on the autonomous
investment. This can be shown in the figure below:
The graph shows that autonomous investment remains independent of
the level of income and profit and hence is parallel to the X axis. It does
not mean that induced investment does not change at all; it can be
increased or decreased at the individual’s disposal. In such a case, the
investment curve I-I either shifts upwards or downwards.

Generally, these investments are made by the government in the form of

construction of roads, buildings, flyovers, etc. The autonomous
investment is not continuous in nature which means, there could be a
rise and fall in the amount of investments depending on the
government’s desire.

Also, the firms can make these investments with the purpose of
introducing new technology, new inventions or increasing the demand
potential in case of an economic recession and unemployment, etc.
Thus, we can say that profit/income induces no effect on the
autonomous investment; it is the social welfare that brings a change in
the investment levels. This can be seen, when a government make these
investments at the time of recession, with the intention to boost the
economy.

\Multiplier

What is a 'Multiplier'
In economics, a multiplier refers to an economic factor that, when
increased or changed, causes increases or changes in many
other related economic variables. In terms of gross domestic
product, the multiplier effect causes gains in total output to be
greater than the change in spending that caused it. The term is
usually used in reference to the relationship between government
spending and total national income.

The multiplier theory and its equations were created by British

economist John Maynard Keynes. Keynes believed that any
injection of government spending created a proportional increase
in overall income for the population, since the extra spending
would carry through the economy.

Accelerator Theory
What is the 'Accelerator Theory'?
The accelerator theory is an economic postulation whereby
companies' investments increase when either demand or income
increases. The theory also suggests that when there is an excess
of demand, companies can meet the demand in two ways;
either decrease demand by raising prices or increase investment
to meet the level of demand. The accelerator theory posits that
companies typically choose to increase production, thereby
increasing profits. This growth, in turn, attracts
additional investors who also accelerate growth.
The accelerator theory was conceived before Keynesian
economics, but it came into public knowledge as the Keynesian
theory began to dominate the field of economics in the 20th
century. Developed by Thomas Nixon Carver and Albert Aftalion,
among others, some critics argue against the accelerator theory
because it removes all possibility of demand control through price
controls. Empirical research, however, supports the theory.

This theory is typically interpreted to establish new economic

policy. For example, the accelerator theory might be used to
determine if introducing tax cuts to generate more disposable
income for consumers – consumers who would then demand
more products – would be preferable to tax cuts for businesses,
which could use the additional capital for expansion and growth.
Each government and its economists formulate an interpretation
of the theory as well as questions that the theory can help
answer.

Fiscal Policy Impact

Fiscal policy usually involves changes in taxation and
spending policies. Lower taxes mean more disposable
income for consumers and more cash for businesses to
invest in jobs and equipment. Stimulus-spending
programs, which are short-term in nature and often
involve infrastructure projects, can also help drive
business demand by creating short-term jobs. Increasing
income or consumption taxes usually mean less
disposable income, which, over time, can decelerate
business activity. In congressional testimony in early
February 2011, Fed Chairman Ben Bernanke observed
that the twin challenges of increasing budget deficits and
the aging population must be addressed to sustain long-
term growth. He suggested such measures as
investments in research, education and new
infrastructure.

Monetary Policy Impact

Changes in short-term interest rates influence long-term
interest rates, such as mortgage rates. Low interest rates
mean lower interest expense for businesses and higher
disposable income for consumers. This combination
usually means higher business profits. Lower mortgage
rates may spur more home-buying activity, which is
usually good news for the construction industry. Lower
rates also mean more refinancing of existing mortgages,
which may also enable consumers to consider other
purchases. High interest rates can have the opposite
impact for businesses: higher interest expenses, lower
sales and lower profits. Interest-rate changes can affect
stock prices, which can impact consumer spending. Rate
changes may also impact exchange rates -- higher rates
increase the value of the dollar relative to other
currencies, which lowers import costs and increases
export costs for U.S. businesses; lower rates may have
the opposite impact, namely higher import costs and
lower export costs.

Considerations
For businesses, inflation means higher costs and
unemployment means declining sales. Inflation and
unemployment usually move in opposite directions.
However, unemployment may be high in a period of high
inflation because of a mismatch between the skills
required for vacant jobs and the skills of the unemployed
labor pool. For example, an unemployed accountant
cannot apply for a vacant nursing position. Monetary
policy tightening, meaning increasing short-term rates,
controls inflation. Fiscal policy measures, such as
retraining unemployed workers in specific job skills that
are in demand, can help bring the unemployment levels
down over the long term.
Five Areas of Government Regulation of Business

 Taxes
 Government policy
 Change in law
Advertising
Laws pertaining to marketing and advertising set in motion by the
Federal Trade Commission exist to protect consumers and keep
companies honest about their products, according to Business.gov.
Every business in the country is required to comply with the truth-in-
advertising laws and could face lawsuits for violation.
Truth-in-advertising laws are made up of dozens of tidbits under three
main requirements: advertising in the United States must be truthful and
non-misleading; businesses need to be able to back up claims made in
advertisements at any time; and advertisements must be fair to
competitors and consumers. Additionally, in compliance with the Fair
Packaging and Labeling Act of 1966, all product labels must include
information about the product, such as nutrition, size, and distribution
and manufacturing information.
Employment and Labor
Among the ever-changing regulations in business are employment laws.
These laws pertain to minimum wages, benefits, safety and health
compliance, work for non-U.S. citizens, working conditions, equal
opportunity employment, and privacy regulations--and cover the largest
area of subjects of all the business regulations. Several employment
regulations stand out as the heavy hitters among the others.
The 1938 Fair Labor Standards Act, applied by the Wage and Hour
Division, is still in effect today and was last updated in 2017. It covers
setting the national minimum wage, overtime, record keeping and child
labor laws that cover employees in the private sector as well as federal,
state and local governments.
The Employee Retirement Income Security Act ensures that employees
receive the retirement plan options and health care benefits to which
they are entitled as full-time employees. There are also several required
benefits, including unemployment insurance, Workers' Compensation
Insurance and employee Social Security assistance.
The Immigration and Nationality Act ensures that only U.S. citizens and
individuals with work visas can be hired, and every business must keep
on file I-9 eligibility forms for applicable employees.
Environmental Impact
The carbon footprint and the effect of businesses on the environment is
regulated by the Environmental Protection Agency alongside state
agencies. The EPA enforces environmental laws passed by the federal
government through educational resources, frequent inspections and
local agency accountability.
The Environmental Compliance Assistance Guide exists to help
businesses--small and large alike--achieve environmental compliance,
and serves as an educational resource more than an enforcer.
Privacy Protection
Sensitive information is usually collected from employees and
customers during hiring and business transactions, and privacy laws
prevent businesses from disclosing this information freely. Information
collected can include social security number, address, name, health
conditions, credit card and bank numbers and personal history. Not only
do various laws exist to keep businesses from spreading this
information, but people can sue companies for disclosing sensitive
information.
The Federal Trade Commission monitors business practices and charges
or fines companies that violate the privacy promises they made to
consumers. For example, when a company promises not to use their
information in ways other than what is stated, or shares their private
information without consent, or monitors customers' online, mobile
and/or television habits without informing them in advance, the FTC
charges them publicly with such offenses, levies hefty fines and forces
the business to change their unethical practices.
Safety and Health
The Safety and Health Act of 1970 ensures that employers provide safe
and sanitary work environments through frequent inspections and a
grading scale. A company must meet specific standards in order to stay
in business. This regulation has changed frequently throughout the years
alongside the changing sanitary and workplace standards.
In accordance with the 1970 act, employers must provide hazard-free
workplaces, avoiding employee physical harm and death, through a
number of procedures.
Three organizations oversee workplace health and safety:
 Occupational Safety and Health Administration (OSHA)
 Mine Safety and Health Administration (MSHA)
 Wage and Hour Division (rules for employee children under age 18)
Competition Policy in Markets and Industries

The main aims of competition policy are to promote competition; make markets
work better and contribute towards improved efficiency in individual markets and
enhanced competitiveness of UK businesses within the European Union (EU) single
market.

Competition policy aims to ensure

 Technological innovation which promotes dynamic efficiency in different

markets
 Effective price competition between suppliers
 Safeguard and promote the interests of consumers through increased choice
and lower price levels

Foreign Exchange Management Act

The Foreign Exchange Management Act (1999) or in short FEMA has been
introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA).
FEMA came into act on the 1st day of June, 2000.
The main objective behind the Foreign Exchange Management Act (1999) is to
consolidate and amend the law relating to foreign exchange with objective of
facilitating external trade and payments and for promoting the orderly development
and maintenance of foreign exchange market in India.
FEMA is applicable to the all parts of India. The act is also applicable to all
branches, offices and agencies outside India owned or controlled by a person who is
resident of India