China : The alternative to Democracy

Hey all,

Do watch this video, which we watched and later discussed on. Its about China and how its political system has been working well for the last thirty years.

Think of how this relates to the Indian experience!

Pranjal Rawat,
Presidency University

A peep into the Black Money of India

It is important for us to note that inflation, while a function of growth, is actually caused by money supply growing faster than the rate of economic growth. In essence, Inflation is directly correlated to more cash flowing in the system than required to maintain market equilibrium.

 1.4 Trillion USD estimated to be sitting in Swiss Banks….While the numbers are wild estimates at best and may vary greatly in reality, the fact remains that there is an obscenely large amount of undocumented cash in circulation. 

A lot of black money was being funneled out of India and it actually kept money supply in control but nowadays, this money is re-entering the Indian market via the assistance of financial managers who aim to provide annual returns of between 10 percent - 20 percent. We need to note that it is only common sense to reinvest this money in a market like India, via assets like stocks, bonds, and even real estate rather than let it accrue interest at a paltry one to two percent a year in Switzerland.

(Here are the slides for the Presentation) 

-Sohoum and Shreyans,

Presidency University

Types of Market

                                          DIFFERENT TYPES OF MARKET

                                

Ok so before I began this topic let me just tell you one thing…don’t take it as a boring course topic…trust me on this one. This topic is very very interesting and it actually is one of the most realistic topic of economics. What makes this one so awesome is that it explains the true nature of producers..I know that in economics we usually we don’t deal with psychological behavior of the producers but here we do look at it in an indirect way. Now not wasting any more of your time let us begin this topic.

WHAT IS A MARKET?

so before I start jabbering about what are different forms of market are…let me first make sure that you people at least know what “market” is…a market does not specifically refers to a geographical place or area.. It actually is just any place where transaction b/w consumer and producer take place. The great part here is that the consumer and producer are not even required to be present there…like for example- ebay, flipkart etc. Ok, so now let’s move on to our main topic i.e. different types:

Perfect competition

Imperfect competition:

Monopoly market

Monopolistic market

Oligopoly market

Ok now just for the sake of simplicity I will not focus much on the equilibrium condition of each topic. I will just explain it you what exactly do we mean by the market and how does it exist.

PERFECT COMPETITION MARKET 

Now all you people must have had enough of perfect competition by now (thanks to our great M.D. mam) but let me just try and make it simple for you. I will give you some of the simple points here:

There are large numbers of sellers in this form of market as there is no restriction on entry and exit of the firm

The market price which remains fixed at all level of output is determined by the demand and supply forces…i.e. that very famous cross shaped graph(hopefully you know at least about that graph)

The producers are known as the price takers as individual seller has no effect on the market price and the simply has to accept the price prevailing in the market. Look at it like this, if the individual seller will reduce the price he will incur loss and if he increase the price on rational customer will buy from him so PRICE TAKER it is.

Availability of substitutes: this is one of the best and obvious part of perfect competition that there are substitutes available in the market so there is more elasticity of demand.

Since there is no restrictions on entry and exit of the firm the firms in perfect competition earns only normal profit.

Ok so those were the features of a perfectly competitive market in a nutshell. Now let’s just sneak a peek into the equilibrium condition.

EQUILLIBRIUM IN SHORT RUN

Here I won’t expand it too much. I will just give you the basic equilibrium condition in short run:

Marginal cost= marginal revenue

The rising part of MC cuts MR from below.

AR > AC

Ok now if anyone any explanation regarding it you people are very much welcome to ask me. :-)

EQUILLIBRIUM IN LONG RUN

Here also I will explain in nutshell. The requirements are:

Marginal cost=marginal revenue

The rising part of MC cuts MR from below

AR=AC

Ok so now that was all about the features and equilibrium of perfectly competitive market. Let’s talk about imperfect competition now.

IMPERFECT COMPETITION

So now you people know about perfect competition just think for a second what was so “perfect” about it and what could be imperfect in imperfect competition???

Ok so now if you have thought about it (do it for real..!! because then only you will appreciate this topic), you might have seen how there is a feature in perfectly competitive market that price is fixed at all level and is same for all consumers. You don’t find it a little too perfect. Well I do. Also in imperfect competition the price is not fixed and is also not same at all level of output. It increase with increase in output.

Some famous types of imperfectly competitive market:

Monopoly market

Monopolistic market

Oligopoly market

MONOPOLY MARKET

So what we mean basically about monopoly market is that there is only one seller in the market so he is the one responsible for taking all decision regarding price and supply. Now before I go on explaining about the various features of the market let me explain how such a situation is established. Let us take some examples:

Patent rights: this happens when a new technology of producing a particular product is discovered by someone and that individual or firm gets it patented with the government for a certain time period. Once the producer gets the patent right no other firm or individual is allowed to use that same method for producing that particular goods for the patented period.

Cartel: sometimes producers form a group and this group is called a “cartel”. Cartel is responsible for taking all the decision regarding the price and supply of product. Here also the cartel act as a single seller and therefore situation of monopoly is achieved.

Government: sometimes the government gives a single firm the right to produce certain product and thus the situation of monopoly is achieved. For example- reliance industry is given the right to produce electricity.

So these are some of the situation where there exists a monopoly market. Now let us take a look at the key features of monopoly market:

Price Giver: Since there is a single seller he only decides the price of the commodity and thus is called the price giver.

Unavailability of closed substitutes: since there is a single seller of the commodity the substitute of the product is no available. This leads to less elastic demand.

There is restriction on the entry and exit of the firm as when more than 1 firm will exist in the market it will be no longer a monopoly market. The implication of this characteristic is that the firm in monopoly market can incur loss as well as supernormal profit.

Price discrimination/ discriminating monopoly: sometimes the monopoly charges different price to different customer and at different places for the same product then that is called price discrimination or discriminating monopoly.

Equilibrium condition (short run) 

Here again I will only be giving a brief idea on the concept of equilibrium condition. So the firm in monopoly market is said to be in equilibrium when the following 3 conditions are satisfied:

MR=MC

Rising part of MC cuts MR from below

AR > AC

Equilibrium condition (long run)

So the firm is in equilibrium only when the following 3 conditions are satisfied:

MR=MC

Rising part of MC cuts MR from below

AR > AC

MONOPOLISTIC MARKET

Basically it is a type of imperfect competition where there are larger number of buyers and sellers and they sell differentiated products.

Features of monopoly market:

There exist a large number of buyers and sellers in this form of market. Therefore the individual sellers is not in a position to influence the price of the product but it can influence the price of a particular brand of product and in this way the individual firm enjoys power to some extent in monopolistic market.

Differentiated product: in this form of market, the producers produce differentiated product which is also called product differentiation. It means the product are not homogeneous but are closely related to each other. The producers create artificial difference in the product to make the different. Example: different company of ceiling fan as they differentiate their product by changing their shape, size, color etc.

Freedom of entry and exit of the firm: in this form of market also there is freedom of exist and entry of the firm so here also producers can make supernormal profit as well as incur loss.

The implication of the differentiated product is that the closed substitute of the product are available and hence there is less elastic demand. Also here the demand curve is less elastic as the firm in this market can sell more output at less price

High advertisement or selling cost: now since here we have got numerous sellers and also they are selling similar products if not identical there exist a tough competition. This leads to advertisement. Every firm spends a lot of amount on advertisement of their product so as to sell their product. This type of advertisement is called “persuasive advertisement”

Oligopoly market

It is that from of market in which there are few sellers of the product.

Features:

Few sellers of the product: due to the presence of few sellers in the market every sellers in this form of market depends on the individual action of the other seller. This implies that the price and output policy of 1 firm affects the price and output policy of other firms also.

Price rigidity/ sticky price: here since each seller depends on other seller for the price and output policy. If 1 of the seller increases the price of its products to get more profit then 1 of the assumptions is that the other sellers may not increase the price of their products. This way the objective of the firm will not be fulfilled. Hence the price will not change and will go back to original.

Group behavior: In an oligopoly market some of the firms form a group in order to avoid unnecessary competition among the firms. This group of firm is called “cartel”. This cartel takes all decision about the share of individual firms in the market and the price and the output policy for all the firms of that group.

Kinked demand curve: in oligopoly market there is no definite slope of the demand curve. The demand curve is indeterminate. This type of demand curve is known as kinked demand curve.

Conclusion

So that was all about different types of market. I hope that all of you were able to learn something and enjoyed it. If there is any queries about any of the topic mentioned above we can discuss about it in our next meet.  

-Anirudh Podder 

Kalecki Elementary

Capitalist vs Workers : Elementary Marxian Economics

Usually the subject of economics, as it is taught in school and college, does not tell us much about the other side of the coin. This ‘other side of the coin’ namely refers to the the economic structure of a command economy. We are not really taught how the USSR governed itself or how Cuba does so today. The history of economic thought usually does not allow the losers to have a large say; and often relegates them to footnotes or the like. This is apparently very obvious to see in the case of Marxian economics. We are hardly introduced to theories that criticize Mainstream Economic and advocate Marxist Economics. However there are economic models, that were developed to support the social theory of Marxism.

Michal Kalecki was a polish economist who developed economic theories that anticipated Keynesian idea of the economy. He published in Polish and hence was lesser known. His work also integrated Marxian analysis with mainstream economics. Since Marx did not himself offer an economic model to represent his argument, Kalecki did so in his stead. We remember Kalecki with his famous Theory of Distribution that stems the Marxian argument in a mathematical form. His theory was also one of the earliest theories on the topic. It anticipated further development and study of Macro level distribution. This theory criticises the distribution in a capitalistic scenario.

Kalecki : Macro Distribution

The theory of Marxism brings to our attention a clear division in the labor force. The theory states that society is usually divided into two groups. The entire population is divided into a smaller group of Capitalists (profit earners) and a larger group of Workers (wage earners). The Capitalists own all the capital or physical equipment needed for production and the workers only have their labor to provide. For simplification and focus we consider only a closed economy without a government.

The National Income(Y) is divided into two parts, Wages(W) that accrue to Workers and Profits(P) that accrue to Capitalists. This is the income that the people of the economy obtain for providing productive service.

Y=W+P

Next we explore the Planned Aggregate Expenditure (PAE) or the amount of expenditure the people of the economy would like to spend on goods and services. In a closed economy without a government or a external sector, there can be only two avenues for planned expenditure. One, people will demand goods for direct consumption (immediate use) and two, for investment (future use). Let us observe these two expenditures.

Consumption : Workers and Capitalists

Consumption Expenditure (C) is divided into Worker’s Consumption Expenditure (CW) and Capitalist’s Consumption Expenditure (CP ).

C=Cw +Cp

Here we take a few hints from Marxian Theory and say that the Workers spend everything they earn on Consumption. This arises from the fact that Workers earn little income and are not able to save anything out of that. Since they are unable to save anything and thus invest, everything that they earn is spent on consumption or subsistence. If Sw is the saving of the Workers, we set it to equal zero.

W=Cw + Sw

Sw=0

therefore,

W=Cw

The consumption of the capitalists is a bit more interesting and since they earn relatively higher incomes they are able to save to a certain extent. As we do in traditional Keynesian models, we consider that the consumption expenditure of the Capitalists is a fraction of the total income. We use c’ as the marginal propensity to consume out of income, for the Capitalists.

Cp =c'P

Investment : A Capitalist Concept

Investment in Marxian economics is only carried out only by Capitalists since Workers do not have any savings that they could mobilise. Since only Capitalist’s carry out Investment, it is only they who have complete control over the capital. They are the sole owners of capital. In this simple model, let us assume Investment is fixed. In more advanced models, we can relax this assumption. It is important to understand why Workers do not have capital and why Capitalists do. It is because Workers are unable to save.

I=Ip+Iw

Iw=0

therefore,

I=Ip

Aggregate Planned Expenditures (PAE)

Since we have,

PAE =C+I

or,

PAE=Cw+Cp+Ip

or,

PAE=Cw+c'P+Ip

rearranging,

PAE = Cw+Ip + c'P

A graph pitting PAE against P looks similar to the earlier graph only shifted upwards.

So as one can observe with the red line, as Capitalist Income rises so does the Planned Aggregate Expenditure of the economy.

Equilibrium : The Power of Profits

An equilibrium is a condition under which nobody wants to change their plans. An equilibrium is a state of rest, a place from which change is not possible from within. We will now build a simple argument that tells us under what conditions is the economy in equilibrium

As we observe, each buyer of goods and services is also a seller of inputs (self-labor or capital). And each buyer of inputs is also a seller of goods and services. We realise that someone’s expenditure is another person’s income. Extending this argument to a macro-level we observe that everyone’s income is everyone’s expenditure. And only if this is realised will the economy be in equilibrium.

PAE=Y (equilibrium condition)

therefore,

W+P=Cw+Ip+c'P,

W=Cw,

which leads us to the famous result,

P=Cp+Ip   

which basically says that at equilibrium, the capitalists earns what they spend. In contrast to that is the condition of the workers who spend what they earn, all of it.  This only goes on to show that capital plays a crucial part in the economy. It also displays the importance of savings which creates the difference between the worker and the capitalist.

P=Ip+c'P (at equilibrium)

Equilibrium P =Ip/(1-c')

This can be represented in the graph in the following way.

Distribution of Income

At equilibrium, we use q to denote the fraction of the income that goes to the workers and consequently (1-q) to denote the fraction of the income that accrues to the capitalist. We get the following equations. This  is dependant on two factors,

1. The ‘Mark Up Ratio’ or ‘k’ which is basically the relative share of overhead costs(salaries to managers) to variable costs(labor). There is greater Mark Up if there is a monopoly for the firm. Kalecki claims that since usually most markets are oligopolistic with information asymmetry there is scope for a Mark Up. Since the firm has a dominant position it can pay for factor services below cost and exploit them.

2. The proportion of Labor to other variable inputs (eg. raw materials ‘B’) that are involved in the process of production.

P=k(W+B),

j=BW

therefore,

q=1/(1+k(1-j))

Now going back to income distribution, we have the following equations,

W=qY,

W=q(W+P),

q=W/(W+P)

Here we also observe a relationship between W,  and P which we can write as,

W=P(1-q)

Here is Kalecki’s amazing insight of how under imperfectly competitive scenario there can be exploitation of workers. Since the capitalists control both k and j, they invariably have influence on the distributional variable q. Since the capitalists invariably determine their own income P by their expenditure. The wages and thus the consumption of the workers that is ultimately in the hands of the capitalists. Kalecki thus explains in a simple mathematical model the ideas of Marx and forms a mathematical critique of competition.

-Pranjal Rawat,
Presidency University