Contents

Functions of central bank of India .......................................................................... 2 i. Issuing currency notes in the country ........................................................... 2

ii. Banker to government .................................................................................. 2 iii. iv. Bankers Bank ............................................................................................. 2 Custodian of exchange reserve .................................................................. 2

v. Controller of credit ....................................................................................... 2 vi. Promotional and developmental function ................................................. 2

Monetary policies .................................................................................................. 3 Objectives ........................................................................................................... 3 Why money is demanded? (Liquidity preference theory) ...................................... 4 Technique of demand forecasting.......................................................................... 6 Oligopoly................................................................................................................ 6 Characteristics .................................................................................................... 6 Price-output-price determination (price rigidity) ................................................ 7 Price Discrimination under monopoly .................................................................... 7 Degrees of price discrimination .......................................................................... 8 Condition essential for price discrimination ........................................................ 8 Significance of price elasticity in business .............................................................. 9 Money supply ........................................................................................................ 9 Component of Money supply (M=M1+M2+M3) ................................................. 9 Investment Multiplier ....................................................................................... 10 Expansion Path .................................................................................................... 11

Functions of central bank of India

a. The reserve bank of India performs traditional central banking functions along with promotional and developmental functions as follows i. Issuing currency notes in the country: RBI has the soul right to issue all denominations of currency notes except 1rupee note and coins, they are issued by the ministry of finance, govt. of India. The RBI is the only source of legal tender ii. Banker to government- The RBI acts as banker, agent, and advisor to the government of India. It maintains government deposit, it collects and makes payments on behalf of government iii. Bankers Bank: Every bank is maintaining cash reserves with RBI as statuary obligation. The RBI provides directives, assistance to other banks. Under the banking regulation act 1949, RBI is the apex bank with extensive powers of control over other banks iv. Custodian of exchange reserve: RBI maintains and stabilizes value of rupee and administers exchange control. v. Controller of credit: RBI takes the responsibility of controlling credit. In order to ensure domestic price stability and promote economic growth. RBI is using various quantitative and qualitative measured to regulate the credit in the economy vi. Promotional and developmental function: 1. Expansion of branches 2. Reduce the dependence of the masses on unorganized sector of indigenous bankers and money lenders 3. Develop the banking habits of the people 4. Efforts for expansion for agricultural credit s

5. Promote the process of industrialization in the country by the process of setting up specialized institutions for industrial finance (IDBI)

Monetary policies
It is the process by which monetary authority(RBI) controls the supply on money in the economy by controlling interest rates to maintain price stability and achieve high economic growth Objectives b. Price stability: controlling domestic price level is essential as wide fluctuations hamper economic growth c. Credit control: RBI is controlling money supply of the economy as it is the apex bank d. Promotion of exports: monetary policy is taking special measures to boost export of the country e. Food procurement operations: Monetary policy is controlling public distribution system, assuring fare prices to the farmers through food procurement operations f. Equitable distribution of credit: it control the allocation of credit so that priority sector lending is promoted g. To promote efficiency : it is promotion operational flexibility through de-regulation of interest rate, introducing new maker instruments etc

Why money is demanded? (Liquidity preference theory)

John Mayor Keynes stated that people demand money to hold it in the form of cash balances or liquid asset. The desire of people to hold liquid cash is called as liquidity preference. He has given 3 approaches to the liquidity preference theory. Transaction motive o Individuals and business firms demand money to meet their day-today transactions o There are 2 motive under transaction motive Business motive Income motive o It is not affected with the changes in the rate of interest. Therefore it is interest inelastic o It is income elastic o Lt=f(Y) Liquidity preference for transaction purpose has functional relationship with income

Precautionary motive o Money is demanded also for precautionary motive o People are showing liquidity preference for precautionary purpose o Individuals and business firms wish to hold cash in hand for enforcing contingencies

o The demand for active cash balances for precautionary purpose is a function of income o Income elastic and interest inelastic Speculative motive o It is explained by Keynes by taking into account the relationship between the price of bonds and interest rates o People are trying to get quick profits based upon their calculations about the market movements o It is Income inelastic and interest elastic o Ls=f(R)

Technique of demand forecasting

Survey methods/Direct methods Statistical /quantitative methods

Consumer survey

Expert opinion

Time series

Economatrix model

complete anumeration

Simple/ Weighted average

linear trend forecasting

Sample survey

Delphy method

Overall assesment

end use

Differnce equation

Oligopoly
A few sellers each with a major share in the market The product may be or may not be differentiated Close interdependence among the firms regarding price and output policies Characteristics Few Sellers or producers Interdependence

Advertising or selling cost Maximum competition Indeterminate demand curve (Kinky Demand Curve) Price rigidity and non-price completion

Price-output-price determination (price rigidity) There is mutual interdependency of firms with regard to price and output The chain of action and reaction of the oligopolies is the main cause for the kinked demand curve

Kinky Demand Curve

5 4.5 4 3.5

Price

3 2.5 2 1.5 1 0.5 0

Qauntity

In this situation prices remain stable over a period of time in spite of changes in cost and demand function, hence there is price rigidity They maximize their profit at prevailing price They have no incentive to lower or increase the price

Price Discrimination under monopoly

The practice of charging different prices from different customers or markets is known as price discrimination

 Monopolist may charge different charges for the same product to different group of consumers or in different markets without corresponding difference in cost Degrees of price discrimination Prof. A.C. Pigou gave the degrees of price discrimination as o 1st degree PD This is an extreme case of price discrimination The monopolist charge different charge to each separate unit Also called as perfect PD nd o 2 degree There the buyers are divided into different groups The monopolist are charging different prices for each group rd o 3 Here buyers are divided into two/three sub-markets The elasticity of demand must be different in each sub-market Condition essential for price discrimination Distance of the market o The distance is such that is consumers cannot buy from other market from where the prices are low Tariff barriers o If the monopolist are serving to 2 countries for example a home market with tariff and a world market without tariff then he can sell the commodity at a higher rate in the home market and a lower price in the world market Market imperfections o There should be some degree of market imperfection needed for price discrimination o This enables the monopolist to divide and keep the markets separate Nature of commodity o Price discrimination is possible in case of direct personal services which cannot be resold Haircuts, medical treatments etc Price discrimination is profitable only if the elasticity of demand for the product is different in different markets in a single monopoly price

Significance of price elasticity in business

The practical utility of elasticity of demand in economic analysis is as follows Business decisions o The adjustment with the price level depends upon the nature of elasticity of demand of the particular product E.g. If demand is elastic the monopolist will reduce the price level, so that he can sell more quantity and earn profit Government policies o While taking the decision about charging taxes the elasticity concept is helpful Pricing of factors of production o If the demand for labor is inelastic, the trade union will be successful in raising wages Devaluation o It means a reduction in the external value of a currency in terms of other currency o As a result of devaluation the exports become cheaper, if the demand for export is elastic o The rise in export will be beneficial for country to earn more foreign exchange

Money supply
It refers to the total amount of money in circulation at a particular point of time It is the total stock of money held by the public o The term public refers to individual, business firms and the government Supply of money is the stock of money with the public in circulation

Component of Money supply (M=M1+M2+M3)

There are 2 approaches

 Traditional approach o It is based on the medium of exchange function of money o It is a narrow approach which include Coins & currency notes Deposits withdraw able by means of cheque Modern approach o According to this approach money supply includes both money and near money assets o It consists of coins, currency notes, demand deposits, time deposits, deposits with non-banking financial intermediaries, shares bonds, bills of exchange o RBI has symbolically expressed money supply as M=M1+M2+M3 M1= C+DD+od C = coins & currency notes with the public DD = demand deposits with banks OD = other deposits with RBI M2= M1+POSBD Post Office Savings Banks Deposits M3= M2+TD TD = time deposits with all banks
Money Supply

M1

M2

M3

C+DD+OD

M1+POSBD

M2+TD

Investment Multiplier
R.F Khan in 1931 introduced the concept of multiplier in the form of employment multiplier

 Refined it and introduced investment multiplier Multiplier coefficient is represented by K o Change in income/ change in initial investment Q. It the government undertakes autonomous investments of Rs.1000cr. and income increases by Rs5000cr. K=5000/1000 K=5

Expansion Path
Expansion Path
P1

s
Budget line/ Price line

I1

L1

Expansion path is a scale line that is connecting optimal input combinations

 When budget line are the indifference curve is tangent with each other, the tangency point gives the equilibrium level (it is the optimum level) Whenever different tangency points of indifference curve or the price line are joined together the expansion path emerges In case of production analysis the tangency points are between Iso-quant curves and Iso-cost lines Whenever the expansion path is a straight line it is a homogeneous production function In the above diagram on the X axis units of X is taken while on the Y axis units of Y are taken P1,P2,P3MP4 ARE THE PRICE LINE WHICH ARE CORRESPONDINDLY TANGENT to the indifference curve I1,I2,I3 When all equilibrium points are joined together expansion path is emerged It shows the combination of budget along with input mix or commodity mix

Objectives of firm
Objectives of frim

Profit maximization ()

Sales maximization

MR=MC

(MR is falling, MC is rising)

Baumol's maximaization model

Uncertainty

Risk

Profit maximization ()
The word profit has different meaning to businessman, tax collectors, accountants etc. o Similarly there is difference in accounting profit and economic profit o In the accounting sense Revenue-cost=profit , In economic sense R=C=normal profit o Again in economics real cost is considered which is not calculated in accounting sense As per Knights theory of profit, profit is a residuary reward for o Risk o Uncertainty Profit is indispensable for firms survival. It is a more reliable measure of firms efficiency

 There is a controversy in the profit maximization theory between the ownership and management separation o it is argued that the profit is higher in case of ownership rather the management, because the management lacks the incentive for generating profit maximization

Sales Maximization
Baumol has observed that sales maximization is an important objective of a firm He has put-up hypothesis of sales revenue maximization as o Managers perceive the goal of sales maximization which directly promotes their interests o Salary and other management gains are more closely related to sales revenue rather than to profit o Sales maximization is more readily available indicator of the firms performance

1. THE TYPE OF ECONOMYIC SYSTEM OF THE COUNTRY : 2. GENERAL TRENDS IN NATURAL INCOME, EMPLOYMENT, PRICES, SAVING AND INVESTMENTS ETC. 3. Structure of finance institutions ( banks , insurance companies , financial corporations etc. ) 4. Magnitude of and trends in foreign trade 5. Trend in labor supply and strength of capital market 6. Government economic policies 7. Socio economic environment and organization ( monetary ,fiscal policy .foreign trade policy ) 8. Political environment 9.