Final Assignment of ME

8/8/2019 Final Assignment of ME

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ASSIGNMENT ON MANAGERIAL ECONOMICS

Question 1: What is pricing policy? What are the internal andexternal factors of the policy ?

Introduction:Standard procedure used by a firm to set wholesale and retail prices for its

products or services . See also pricing strategy . Price planning that takes into viewfactors such as a firm's overall marketing objectives , consumer demand , product attributes , competitors' pricing , and market and economic trends .

Pricing Factors to Consider: Determine primary and secondary market segments. This helps you

better understand the offering's value to consumers. Segments are important

for positioning and merchandising the offering to ensure maximized sales atthe established price point.

Assess the product's availability and near substitutes. Under pricing hurtsyour product as much as overpricing does. If the price is too low, potentialcustomers will think it can't be that good. This is particularly true for high-end, prestige brands. One client underpriced its subscription product,yielding depressed response and lower sales. The firm underestimated theuniqueness of its offering, the number of close substitutes, and the strengthof the consumer's bond with the product. As a result, the client couldincrease the price with only limited risk to its customer base. In fact, the

initial increase resulted in more subscribers as the new price was more inline with its consumer-perceived value.

Survey the market for competitive and similar products. Consider whether new products, new uses for existing products or new technologiescan compete with or, worse, leapfrog your offering. Examine all possibleways consumers can acquire your product. I've worked with companies thatonly take into account direct competitors selling through identical channels.Don't limit your analysis to online distribution channels.

Competitors may define your price range. In this case, you can price higher if consumers perceive your product and/or brand is significantly better; priceon parity if your product has better features; or price lower if your producthas relatively similar features to existing products. An information clientfaced this situation with a premium product. Its direct competitorsestablished the price for a similar offering. As the third player in this

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segment, its choices were price parity with an enhanced offering or a lower price with similar features.

Examine market pricing and economics. A paid, ad-free site shouldgenerate more revenue than a free ad-supported one, for example. Inconsidering this option, remember to incorporate the cost of forgonerevenue, especially as advertisers find paying customers more attractive.

Calculate the internal cost structure and understand how pricinginteracts with the offering. I recommended a content client promote itsadvertising-supported free e-zines to incent readers to register. The client

believed the e-zines had no value as the content was repurposed fromanother product, so it didn't advertise them. Yet the repurposed content wasexactly what readers viewed as a benefit. By undervaluing its offering, the

client missed an opportunity to increase registrations and, hence, advertisingrevenues with a product that effectively had no development costs.

Test different price points if possible. This is important if you enter a newor untapped market, or enhance an offering with consumer-oriented benefits.To determine price, MarketingExperiments.com tested three different price

points for a book. It found the highest price yielded the greatest productrevenue. Interestingly, the middle price yielded greater revenue over time, asit generated more customers to whom other related products could bemarketed.

Monitor the market and your competition continually to reassesspricing. Market dynamics and new products can influence and changeconsumer needs.

Internal Factors: MarketingObjectives:

Marketing decisions are guided by the overall objectives of the company. While wewill discuss this in more detail when we cover marketing strategy in a later tutorial,for now it is important to understand that all marketing decisions, including price,

work to help achieve company objectives. Corporate objectives can be wide-rangingand include different objectives for different functional areas (e.g., objectives for production, human resources, etc). While pricing decisions are influenced by manytypes of objectives set up for the marketing functional area, there are four keyobjectives in which price plays a central role. In most situations only one of these

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objectives will be followed, though the marketer may have different objectives for different products. The four main marketing objectives affecting price include:

Return on Investment (ROI) A firm may set as a marketing objective therequirement that all products attain a certain percentage return on theorganizations spending on marketing the product. This level of return alongwith an estimate of sales will help determine appropriate pricing levelsneeded to meet the ROI objective.

Cash Flow Firms may seek to set prices at a level that will insure that salesrevenue will at least cover product production and marketing costs. This ismost likely to occur with new products where the organizational objectivesallow a new product to simply meet its expenses while efforts are made toestablish the product in the market. This objective allows the marketer toworry less about product profitability and instead directs energies to buildinga market for the product.

Market Share The pricing decision may be important when the firm has anobjective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is setartificially low in order to capture a sizeable portion of the market and will

be increased as the product becomes more accepted by the target market (wewill discuss this marketing strategy in further detail in our next tutorial). For existing products, firms may use price decisions to insure they retain marketshare in instances where there is a high level of market competition andcompetitors who are willing to compete on price.

Maximize Profits Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a levelthat optimizes profits. This is often the case when the marketer has littleincentive to introduce improvements to the product (e.g., demand for productis declining) and will continue to sell the same product at a price premiumfor as long as some in the market is willing to buy.

Factors Affecting Pricing Decision:



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For the remainder of this tutorial we look at factors that affect how marketers set price. The final price for a product may be influenced by many factors which can becategorized into two main groups:

Internal Factors Objectives of the firm. Production costs. Quality of the product and its characteristics. Scale of the production. Efficient management of the resources. Policy towards percentage of profits and dividend

distribution. Advertising and sales promotion policies.

Wage policy and sales turn over policy etc. The stages of the product life cycle. Use pattern of the product. Extent of the distinctiveness of the product and extent of

product differentiation practiced by the firm. Composition of the product and life of the firm.

External Factors

Demand, supply and their determinants. Elasticity of demand and supply. Degree of competition in the market. Size of the market. Good will, name, fame, reputation of the firm in the market.



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Trends in the market. Purchasing power of the buyers. Bargaining power of the customers. Availability of the substitutes and complements. Governments policy relating to various kinds of incentives,

disincentives, controls, restrictions and regulations, licensing,taxation, export and import, foreign aid, foreign capital foreigntechnology, MNCs etc.

Competitors pricing policy. Social consideration.

Question 2: Mention three crucial objectives of price policies?



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Profit generally is the making of gain in business activity for the benefit of the owners of the business. The word comes from Latin meaning "to make

progress", and is defined in two different ways, one for economics and onefor accounting.

A sales oriented business will focus much more of its energy on selling. Thisis usually done by door to door selling or what is called telesales over the

phone. Other sales oriented businesses may rely entirely on social functions by selling exclusively from booths or kiosks. Some local stores and grocersalso function entirely as a sales oriented business without the use of conventional advertising.

Status quo , a commonly used form of the original Latin "statu quo" -literally "the state in which" - is a Latin term meaning the current or existingstate of affairs. [1] To maintain the status quo is to keep the things the waythey presently are. The related phrase status quo ante , literally "the state inwhich before", means "the state of affairs that existed previously"

Question 3: Mention the bases of price discrimination ?

INTRODUCTION:Price discrimination exists when sales of identical goods or services are transactedat different prices from the same provider. In a theoretical market with perfect information , no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage , price discrimination can only be a feature of monopoly and oligopoly markets [1], where market power can be exercised. Otherwise, the

moment the seller tries to sell the same good at different prices, the buyer at thelower price can arbitrage by selling to the consumer buying at the higher price butwith a tiny discount. However, market frictions in oligopolies such as the airlinesand even in fully competitive retail or industrial markets allow for a limited degreeof differential pricing to different consumers. Price discrimination also occurs when

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it costs more to supply one customer than it does another, and yet the supplier charges both the same price.

The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others.

Output can be expanded when price discrimination is very efficient, but output canalso decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remainsconstant, price discrimination can reduce efficiency by misallocating output amongconsumers.

Price discrimination requires market segmentation and some means to discouragediscount customers from becoming resellers and, by extension, competitors. Thisusually entails using one or more means of preventing any resale, keeping thedifferent price groups separate, making price comparisons difficult, or restricting

pricing information. The boundaries set up by the marketer to keep segments

separate are referred to as a rate fence . Price discrimination is thus very common inservices, where resale is not possible; an example is student discounts at museums.

Price discrimination can also be seen where the requirement that goods be identicalis relaxed. For example, so-called "premium products" (including relatively simple

products, such as cappuccino compared to regular coffee) have a price differentialthat is not explained by the cost of production. Some economists have argued thatthis is a form of price discrimination exercised by providing a means for consumersto reveal their willingness to pay.

Types of price discrimination:

First degree price discrimination:

In first degree price discrimination , price varies by customer's willingness or ability to pay. This arises from the fact that the value of goods is subjective. Acustomer with low price elasticity is less deterred by a higher price than a customer

with high price elasticity of demand. As long as the price elasticity (in absolute value ) for a customer is less than one, it is very advantageous to increase the price:the seller gets more money for fewer goods. With an increase of the price elasticitytends to rise above one. One can show that in the optimum the price, as it varies bycustomer, is inversely proportional to one minus the reciprocal of the price elasticityof that customer at that price. This assumes that the consumer passively reacts to the

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price set by the seller, and that the seller knows the demand curve of the customer.In practice however there is a bargaining situation, which is more complex: thecustomer may try to influence the price, such as by pretending to like the productless than he or she really does or by threatening not to buy it.

An alternative way to understand First Degree Price Discrimination is as follows:This type of price discrimination is primarily theoretical because it requires theseller of a good or service to know the absolute maximum price that every consumer is willing to pay. As above, it is true that consumers have different price elasticities,

but the seller is not concerned with such. The seller is concerned with the maximumwillingness to pay (or reservation price ) of each customer. By knowing thereservation price, the seller is able to absorb the entire market surplus, thus taking allconsumer surpluses from the consumer and transforming it into revenues. From asocial welfare perspective, first degree price discrimination is not undesirable. Thatis, the market is still entirely efficient and there is no deadweight loss to society.However, it is the complete opposite of a perfectly competitive market. In a

perfectly competitive market, the consumers receive the bulk of surplus. In a marketwith first degree price discrimination, the seller(s) capture all surpluses. Efficiencyis unchanged but the wealth is transferred. This type of market does not much existin reality, hence it is primarily theoretical. Examples of where this might beobserved are in markets where consumers bid for tenders, though still, in this case,the practice of collusive tendering undermines efficiency.

Second degree price discrimination:

In second degree price discrimination , price varies according to quantity sold.

Larger quantities are available at a lower unit price. This is particularly widespreadin sales to industrial customers, where bulk buyers enjoy higher discounts.

Additionally to second degree price discrimination , sellers are not able todifferentiate between different types of consumers. Thus, the suppliers will provide

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incentives for the consumers to differentiate themselves according to preference. Asabove, quantity "discounts", or non-linear pricing, is a means by which suppliers useconsumer preference to distinguish classes of consumers. This allows the supplier toset different prices to the different groups and capture a larger portion of the totalmarket surplus.

Third degree price discrimination:

In third degree price discrimination , price varies by attributes such as location or by customer segment , or in the most extreme case, by the individual customer'sidentity; where the attribute in question is used as a proxy for ability/willingness to

pay.

Additionally to third degree price discrimination , the supplier(s) of a marketwhere this type of discrimination is exhibited are capable of differentiating betweenconsumer classes. Examples of this differentiation are student or senior discounts.

For example, a student or a senior consumer will have a different willingness to paythan an average consumer, where the reservation price is presumably lower becauseof budget constraints. Thus, the supplier sets a lower price for that consumer

because the student or senior has a more elastic price elasticity of demand (see thediscussion of price elasticity of demand as it applies to revenues from the firstdegree price discrimination, above). The supplier is once again capable of capturingmore market surplus than would be possible without price discrimination.

Note that it is not always advantageous to the company to price discriminate even if it is possible, especially for second and third degree discrimination. In somecircumstances, the demands of different classes of consumers will encourage

suppliers to simply ignore one/some class (es) and target entirely to the other(s).Whether it is profitable to price discriminate is determined by the specifics of a

particular market.

Question 4: What do you mean by the fiscal policy? What are the

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instruments of fiscal policy? Briefly comment on Indias fiscal

policy?

Introduction:In economics, fiscal policy is the use of government spending and revenuecollection to influence the economy. Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize theeconomy by controlling interest rates and the supply of money . The two maininstruments of fiscal policy are government spending and taxation. Changes in thelevel and composition of taxation and government spending can impact on thefollowing variables in the economy:

Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income.

Fiscal policy refers to the overall effect of the budget outcome on economic activity.The three possible stances of fiscal policy are neutral, expansionary andcontractionary:

A neutral stance of fiscal policy implies a balanced budget where G = T(Government spending = Tax revenue). Government spending is fullyfunded by tax revenue and overall the budget outcome has a neutral effect onthe level of economic activity.

An expansionary stance of fiscal policy involves a net increase ingovernment spending (G > T) through rises in government spending or a fallin taxation revenue or a combination of the two. This will lead to a larger

budget deficit or a smaller budget surplus than the government previouslyhad, or a deficit if the government previously had a balanced budget.Expansionary fiscal policy is usually associated with a budget deficit.

A contractionary fiscal policy (G < T) occurs when net government spendingis reduced either through higher taxation revenue or reduced governmentspending or a combination of the two. This would lead to a lower budgetdeficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal

policy is usually associated with a surplus.

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1. To achieve desirable price level:

The stability of general prices is necessary for economic stability. The maintenanceof a desirable price level has good effects on production, employment and nationalincome. Fiscal policy should be used to remove; fluctuations in price level so thatideal level is maintained.

2. To Achieve desirable consumption level:

A desirable consumption level is important for political, social and economicconsideration. Consumption can be affected by expenditure and tax policies of thegovernment. Fiscal policy should be used to increase welfare of the economy

through consumption level.

3. To Achieve desirable employment level:

The efficient employment level is most important in determining the living standardof the people. It is necessary for political stability and for maximization of

production. Fiscal policy should achieve this level.

4. To achieve desirable income distribution:

The distribution of income determines the type of economic activities the amount of

savings. In this way, it is related to prices, consumption and employment. Incomedistribution should be equal to the most possible degree. Fiscal policy can achieveequality in distribution of income.

5. Increase in capital formation:

In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry and economic development.Fiscal policy can divert resources and increase capital.

6. Degree of inflation:

In under-developed countries, a degree of inflation is required for economicdevelopment. After a limit, inflationary be used to get rid of this situation.

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Instruments of Fiscal Policy:

1. Public expenditure:

Significance

Public expenditure is the value of goods and services bought by the State and itsarticulations.

Public expenditure plays four main roles:1. it contributes to current effective demand ;2. it expresses a coordinated impulse on the economy, which can be used for stabilization, business cycle inversion, and growth purposes;3. it increases the public endowment of goods for everybody;4. it gives rise to positive externalities to economy and society, the more so throughits capital component.

With its prioritized structure and its peculiar decision-making processes, itsubstantiates the prevailing kind of State. In democracy, public expenditure is anexpression of people's will, managed through political parties and institutions. At the

same time, public expenditure is characterized by a high degree of inertia and law-dependency, which tempers the will of the current majority. Public expenditure can be financed through taxes , public debt, money emission, international aid.

2. Taxes:

To tax (from the Latin taxo ; "I estimate", which in turn is from tang ; "I touch") isto impose a financial charge or other levy upon a taxpayer (an individual or legal entity ) by a state or the functional equivalent of a state such that failure to pay is

punishable by law. Taxes are also imposed by many sub national entities . Taxesconsist of direct tax or indirect tax , and may be paid in money or as its labor equivalent (often but not always unpaid). A tax may be defined as a "pecuniary

burden laid upon individuals or property to support the government [] a paymentexacted by legislative authority." [1] A tax "is not a voluntary payment or donation,

but an enforced contribution, exacted pursuant to legislative authority" and is "anycontribution imposed by government [] whether under the name of toll, tribute,

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tillage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. Inmodern taxation systems, taxes are levied in money, but in-kind and corve taxationis characteristic of traditional or pre- capitalist states and their functional equivalents.The method of taxation and the government expenditure of taxes raised are oftenhighly debated in politics and economics . Tax collection is performed by a

government agency such as Canada Revenue Agency , the Internal Revenue Service (IRS) in the United States , or Her Majesty's Revenue and Customs (HMRC) in theUK . When taxes are not fully paid, civil penalties (such as fines or forfeiture ) or criminal penalties (such as incarceration ) may be imposed on the non-paying entityor individual.

3. Public debts:

Public debt is, in effect, an extension of personal debt, since individuals make up therevenue stream of the government. Public debt accrues over time when thegovernment spends more money than it collects in taxation. As a governmentengages in more deficit spending, the amount of public debt increases.

Public debt can be made up of all sorts of different types of debt. A great deal of public debt is external debt, which is money that is owed by the government toforeign lenders , either in the form of international organizations, other governments,or groups like sovereign wealth funds which invest in government bonds. Publicdebt is also made up of internal debt, where citizens and groups within the countrylend the government money to continue operating. In some ways, this is a lot likelending to oneself, since ultimately the responsibility for public debt falls back onthe very people lending money.

Governments with strong economies, who are well trusted in the world, are able toraise funds by issuing their own securities, usually called government bonds.Individuals, other nations, and groups buy these bonds, and the government

promises to pay them back at a certain, usually fairly good, interest rate . Less robustgovernments, who do not have the trust from the world to be able to issue bonds andexpect people to buy them, may turn to international institutions, or even normal

banks, to give them loans, usually at less favorable rates.

The above mentioned instruments are used by the public authorities to achievedesirable level of production, consumption and National Income. Duringinflationary trend more and more taxes are levied on the community. In this way,

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The Interim Budget 2009-2010 is being presented in the backdrop of uncertainties prevailing in the world economy. The impact of this is seen inthe moderation of the recent trend in growth of the Indian economy in 2008-09 which at 7.1 per cent still however makes India the second fastestgrowing economy in the World.

Question 5: Comment on the consequences of environmental

degradation on the economy of a community?

The theory of land degradation:In economic theory, land clearance or land reclamation involves a market failure.The market does not value naturally occurring resources in the production process.

Nature's "capital" is not assigned a value by the market. The externalities that lead to private individuals cutting trees and the real economic costs and benefits to thenation of doing so arise because some of the biosphere's products, especiallyenvironmental protection functions, are neither produced goods nor do they haveclearly defined ownership. As a consequence, they are regarded as free goods.

Destruction of forested areas, wetlands, grasslands and bodies of water arises because of the difference between the discount rate of the individual and the societyas a whole. Poor people, who are responsible for a significant share of the losses

because of their pressing current need for fuel, fodder, water and land for cultivation--assign a higher discount rate to these resources than does society as awhole.



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The private interests of poor people and the social interests of the broader societydiverge. The interest of poor, local people in using these lands and water resourcesis intense, immediate and focused--food, fuel, fodder, crop land, and irrigationwater. They will (often unknowingly) incur almost any social cost to permit theimmediate exploitation of these environmental resources to sustain their livelihood.

The interests of loggers, commercial farmers, builders and others who exploit theforests, range and grasslands and water resources are equally intense, but drivenmore by immediate profit considerations, not by the need to survive.

Society, as a whole, traditionally, has not placed a monetary value on the benefitsderived from these resources; as such benefits are not marketable. When society hasrecognized these resources as having value, it has assigned a diffused, nonspecificvalue to them and has not translated that assigned value into market signals, i.e.,financial incentives for preservation or disincentives for destruction of these landand water resources embodied in the nation's legal and administrative system. Thus,the intense, focused private interests are permitted to discount the value of

environmental resources to the detriment of the longer term benefits to society of investment in these areas because these resources have neither been given marketvalues, nor a legal, enforceable means of translating value into market signals. TheCosts of Land Clearance arising from the exploitation of natural resources for financial gain highlight the problems involved all too clearly, since these resources

provide a myriad of functional processes which go beyond the clearly tangible areasof providing food and products for commerce. These functional processes are notmerely essential to a sound ecological balance and, therefore, ideologies advocatedand imposed on society by conservationists; they are naturally occurring systems, onwhich the economic wellbeing of societies at local, national and international leveldepends.

Land degradation:Forested areas are especially sensitive to population pressure and commercialexploitation. At a local level, once the trees are felled, the highly productive

potential of that region is immediately threatened, since the quality of the soils isgenerally poor. It is in the mass of vegetation that the nutrients essential to fastgrowth are stored so that, if the vegetation cover is removed, organic breakdown isalmost immediate and nutrients are quickly washed away. When large gaps in theforest canopy occur, the microclimate of the area is also likely to be changed and theforest floor becomes exposed to direct sunlight. Consequently, both air and soil

become dry, to the direct detriment of the land's productivity. Because of thesefactors, not only has the forest's capacity to provide fuel, food, fodder and shelter

been removed, but so has the land's capacity to regenerate them. Degradation isfurther increased through soil erosion.



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Erosion:Around a quarter of a million tons of topsoil are washed from the deforestedmountain slopes of Nepal alone each year. On a global scale, about eleven million

hectares of arable lands are annually lost through erosion, desertification andtoxification; processes which are greatly encouraged by poor resource management.10 It is human activity that causes natural erosion rates to increase many times over.Steep slopes are cultivated without terracing, irrigation projects are poorlydeveloped and livestock overgraze grassland.

Flooding:The socio-economic impact resulting from a decline in productive capacity due toecological interactions does not remain localized, especially when forest cover is

lost in a watershed. The soil's water retention capacity is lost and the release of rainfall becomes erratic; periods of floods followed by droughts become the norm.Farmers in the valley lands of Southern Asia are particularly vulnerable as riverssuch as the Ganges, Brahmaputra and the Mekong no longer supply regular amountsof irrigation. Flooding in the Ganges Plain provides a graphic example of theassociated costs of deforestation. As the foothill forests are cleared for agriculture,the 500 million people in the valleys become more vulnerable to flooding. Duringthe 1978 monsoon, India suffered losses of $2 billion and hundreds of peopledrowned. The impact of watershed degradation even extends into urban areas. In thehinterland of Panama City and Manila, deforestation has caused so much injury tothe effective functioning of watersheds that domestic water supplies are being

threatened, bringing risk of contamination and pandemics. Once the forests have been clear felled, the reduction or elimination of resultant flooding may require veryheavy investment in compensatory measures such as channeling, damming, anddiking. These measures to reduce the natural patterns of flooding have the potentialto damage replenishment of alluvial soils and recharges of soil moisture. They mayalso damage the vegetation and wildlife on the floodplain, as well as riverinefisheries.

Reduced economic viability:The erratic flow of rivers coupled with the problems of erosion is effectivelyundermining the potential of irrigation projects, as is so evident in the Sri LankanMahaweli program. Several large dams were constructed for the generation of energy, as well as for irrigation and flood control downstream. However, the treecover reduction in the relevant watershed areas has jeopardized the steady supply of water to the reservoirs, on which the success of the project is dependant. Projects are



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further undermined by siltation, a process that not only causes river basins to silt up(thereby reducing storage capacity), but also chokes hydropower dams andadversely affects coastal fisheries and sensitive coral formations.

Intensification of farming practice:Intensification of agriculture takes two forms. Clearly, the most destructive is

putting former grass and marsh lands to the plow. These activities have dramatic andfar reaching effects, both on biodiversity and on human communities. Animal and

plant species may become extinct if deprived of the environment in which theysurvive. Human communities are affected by the removal of flood control areas andthe land itself is subject to erosion and soil depletion, if not carefully managed.

Intensification on existing agricultural lands can and often does produce significantenvironmental degradation. For example, the conversion of grazing land into crop

production often results in the expulsion of the grazers and their livestock intoenvironmentally sensitive areas, in habitat reduction for wildlife species that coexistwith grazing stock, in the felling of the remaining trees and the clearing of land for

processing facilities. The introduction of machinery often produces a compaction of the soil, reducing its capacity to absorb rain water, thus speeding up runoff.

A case study: AgriculturalIntensification in a Banana exportindustry:

The agro industry is to be developed in a broad valley with very deep alluvial soils.The valley itself is irrigated by a large river which drains a Hugh watershed in themountains behind the farm. It has traditionally supplied a steady flow of irrigationwater all year around. The river does flood in the rainy season, bringing new fertilityto the soils that lie in the floodplain. The land is currently used for small farmer;mixed crop agriculture. At present, the farmers rotate local tubers with pulses for subsistence on Leveled fields. The cash crops of sugar and bananas are also grownon small fields and, with the exception of banana spraying, consume almost noagrochemicals. The new industry will profoundly affect both the economy and theecology of the area. At present, the population is engaged in low input, sustainable

agriculture. The people require little other than the natural fertility for their agricultural activities.

They produce pulses and tubers for family consumption and sell a smallsurplus in local markets; these are often intercropped with bananas. The impact onthe soils is slight, as the farmers rotate their crops and fallow the fields, effectively



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keeping down pest populations. As most of the labor is manual and supplied by thefamily, there is little incentive to clear new fields. Old fields are allowed to return tofallow when the soil fertility diminishes, and are quickly colonized by the flora andfauna from the nearby hills. In addition, most of the women keep kitchen gardens, afew pigs or goats and some poultry. While these animals do forage they do little

harm to the vegetation. The feral pig population is kept in check by steady hunting pressure. The river is rich in edible fish and its banks are covered by highly variedvegetation. The mangrove swamp provides additional food and some netted shrimpto sell to the luxury hotel market for cash income. Recently, farmers have learned tosink bamboo poles to serve as a medium for growing clams. The bay with the coralreef is regenerating from the effects of a small port that existed in the late 1930s andtoday supplies fish to supplement the diet and to market. The economy is not -completely agricultural. On-farm income is supplemented by seasonal migratorylabor. The men and the women unencumbered by child rearing duties (or able torely on older women to help) migrate to the nearby cities and-earn additionalincome. The tropical forests on the lower hills have highly diverse flora and fauna.

The forests lying higher have been undisturbed since colonial times.

The few cocoa trees left from that period have been integrated into the forestvegetation and serve the community as a source of revenue when they find the cocoa

pods before the rats. The vegetation shelters a wide variety of animals, some quiterare, and some of the bird species are endangered. The river and its associatedmangrove swamp are equally rich and diverse, as well as very scenic. While theriver does flood during the rainy season, this flooding, except in the extreme caseswhich have arisen in recent years with heavy logging and forestry in the watershed,has little impact on the local population. Their houses are built on stilts.Furthermore, the flooding brings both new soil and nutrients from the mountains.

Over the centuries, these floods have built up and maintained the fertility of thevalley. In place of this low input agriculture, the valley will be mechanically leveled,ditched to depths of 10 meters for drainage of heavy rains, irrigated and planted tohigh yield bananas. The production system will require the installation not only of very deep drains but also of substantial infrastructure, such as cableways, and willrely heavily upon intensive inputs, especially fertilizers and pesticides, to produceexportable yields four or five-times greater than at present The spray application

program will be by air and that some pesticide drift; into the nearby river and themangrove swamp at the mouth of the river is inevitable.

The company will need to "train"" the river drag-lining and dicing it. The

mangrove swamp "plug" lying down river from the farm will be "opened withcanals to help control the flood waters that the new drainage system will pour intothe river. The bananas will be exported from a newly constructed terminal on the

bay just a few miles from the farm. The bay will be dredged to clear some of thecoral heads that obstruct the entry of shipping to the new fruit terminal. In addition,the valley's rolling hills that are covered with tropical vegetation and currently not



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"used" will be cleared and planted to citrus. The steeper hills will be cleared of thetropical forest interspersed with century's old cocoa trees and will be planted tohybrid coconuts resistant to lethal yellowing. The production of coconuts on acommercial scale will help alleviate the critical shortage of edible oils. Coconut oilis the staple of the rural population but because of lethal yellowing, the government

has had to import large quantities of edible oils using scarce exchange reserves. The processing of both bananas and coconuts will produce substantial volumes of effluent. The bananas that cannot be exported or sold in local markets will be fed to

pigs whose effluent waste will be dumped unprocessed into the nearby river.Coconut oil extraction will produce by-products that have no current use and will bedumped into the environment. The environment will be altered radically by theinstallation of a tropical fruit production industry. The vegetation will be clear cutnot only between the plots in the formerly cropped valley, but also on the hills andmountainsides. The flora will be destroyed and the fauna will retreat into the alreadyecologically severely affected mountainsides' many of which have been cleared ascoffee production has moved to cover the higher elevations. The river will die as a

river. It will become an irrigation canal with no vegetation permitted on the banks.In fact, it will be sprayed regularly with herbicide to keep down the vegetation thatshelters pests. Its former beautiful, winding path will be destroyed as it is widened,straightened, diced and deepened. The mangrove swamp will also be channeled andseverely impacted, if not destroyed, by the rapid flow of water through the canalsand the heavy doses of chemical run offs that the river will carry. The bay will feelthe effects of these run offs and the coral heads will again be destroyed to make wayfor the shipping.

The effect of the project on the human ecology will be massive. The locallargely self sustaining farm villages will become the housing for the wage 1 laborers

the banana citrus and coconut industries. The local people will have difficulty incontinuing to farm, as their time will be dedicated to the industrial regime imposed by commercial agriculture. Those that want to continue farming will have to moveaway, assuming they have adequate funds to buy new land, or wilI be pushed intoforested areas to clear land for crop production. The older farmers who know noother trade will be left unemployed, as they are not attractive to the new industrywhich needs strong, young people. Many of the women will give up the kitchengarden and child and domestic animal rearing for jobs in the packing sheds, wherethey are much preferred to men for their manual dexterity and work habits. Theformer pattern of economic activity will, to all intents and purposes, end with thedevelopment of this new industry. The largely self-sustaining village farming

community that sells some surplus, and some seasonal off-farm labor, willdisappear, to be replaced by an industrial village set on the edge of a large plantation producing tropical fruits for export and some coconut oil for local consumption.

The former diversity of income will cease and the community will depend on wages.If the industry flourishes the community will see more cash income than at any time



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before; if the banana industry should collapse due to natural disasters (as it did in the1930s after severe hurricanes) or should political changes eliminate the preferential

price in the former colonial country, the community will suffer massive economicdislocation. Its principal source of income will disappear and the community will

plunge into economic depression. To return to the former pattern of economic

livelihood will be almost impossible due to radical changes in the land use andtenure.Question 6: Write short notes on the following ?

a) Philips curve:6 a) In economics , the Phillips curve is a historical inverse relationship between therate of unemployment and the rate of inflation in an economy . Stated simply, thelower the unemployment in an economy, the higher the rate of increase in nominalwages in the short run. It has been observed that there is no relationship betweeninflation and unemployment in the long run.

William Phillips , a New Zealand born economist, wrote a paper in 1958 titled The Relationship between Unemployment and the Rate of Change of Money Wages inthe United Kingdom 18611957 , which was published in the quarterly journal

Economica . In the paper Phillips describes how he observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countries and in 1960 Paul Samuelson and Robert Solow took Phillips' work and made explicit the link betweeninflation and unemployment: when inflation was high, unemployment was low, andvice-versa.

In the 1920s an American economist Irving Fisher noted this kind of Phillips curverelationship. However, Phillips' original curve described the behavior of moneywages .[1]

http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/William_Phillips_(economist)http://en.wikipedia.org/wiki/Economicahttp://en.wikipedia.org/wiki/Paul_Samuelsonhttp://en.wikipedia.org/wiki/Paul_Samuelsonhttp://en.wikipedia.org/wiki/Robert_Solowhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Phillips_curve#cite_note-0http://en.wikipedia.org/wiki/Phillips_curve#cite_note-0http://en.wikipedia.org/wiki/File:Philipsus60.pnghttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/William_Phillips_(economist)http://en.wikipedia.org/wiki/Economicahttp://en.wikipedia.org/wiki/Paul_Samuelsonhttp://en.wikipedia.org/wiki/Paul_Samuelsonhttp://en.wikipedia.org/wiki/Robert_Solowhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Phillips_curve#cite_note-0


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Phillips Curve in the U.S in the 1960's

In the years following Phillips' 1958 paper, many economists in the advancedindustrial countries believed that his results showed that there was a permanentlystable relationship between inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflationwith a Keynesian policy. They could tolerate a reasonably high rate of inflation asthis would lead to lower unemployment there would be a trade-off betweeninflation and unemployment.

For example, monetary policy and/or fiscal policy (i.e., deficit spending ) could beused to stimulate the economy, raising gross domestic product and lowering theunemployment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.

During the 1960s, a leftward movement along the Phillips curve described the pathof the U.S. economy. This move was not a matter of deciding to achieve lowunemployment as much as an unplanned side-effect of the Vietnam war .[citation needed ]

In other countries, the economic boom was more the result of conscious policies.[citation needed ]

Most economists no longer use the Phillips curve in its original form because it wasshown to be too simplistic. This can be seen in a cursory analysis of US inflationand unemployment data 1953-92. There is no single curve that will fit the data, butthere are three rough aggregations1955-71, 1974-84, and 1985-92each of which shows a general, downwards slope, but at three very different levels with theshifts occurring abruptly. The data for 1953-54 and 1972-73 do not group easily,and a more formal analysis posits up to five groups/curves over the period.

But still today, modified forms of the Phillips Curve that take inflationaryexpectations into account remain influential. The theory goes under several names,with some variation in its details, but all modern versions distinguish between short-run and long-run effects on unemployment. The "short-run Phillips curve" is alsocalled the "expectations-augmented Phillips curve", since it shifts up wheninflationary expectations raise, Edmund Phelps and Milton Friedman argued. In thelong run, this implies that monetary policy cannot affect unemployment, whichadjusts back to its " natural rate ", also called the "NAIRU" or "long-run Phillipscurve". However, this long-run " neutrality " of monetary policy does allow for shortrun fluctuations and the ability of the monetary authority to temporarily decreaseunemployment by increasing permanent inflation, and vice versa. Blanchard (2000,

http://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Trade-offhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Vietnam_warhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Edmund_Phelpshttp://en.wikipedia.org/wiki/Milton_Friedmanhttp://en.wikipedia.org/wiki/Natural_rate_of_unemploymenthttp://en.wikipedia.org/wiki/Neutrality_of_moneyhttp://en.wikipedia.org/wiki/File:Philipsus60.pnghttp://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Trade-offhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Deficit_spendinghttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Vietnam_warhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Edmund_Phelpshttp://en.wikipedia.org/wiki/Milton_Friedmanhttp://en.wikipedia.org/wiki/Natural_rate_of_unemploymenthttp://en.wikipedia.org/wiki/Neutrality_of_money


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chapter 8) gives a textbook presentation of the expectations-augmented Phillipscurve.

An equation like the expectations-augmented Phillips curve also appears in manyrecent New Keynesian dynamic stochastic general equilibrium models. In these

macroeconomic models with sticky prices , there is a positive relation between therate of inflation and the level of demand, and therefore a negative relation betweenthe rate of inflation and the rate of unemployment. This relationship is often calledthe "New Keynesian Phillips curve." Like the expectations-augmented Phillipscurve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papersthat incorporate a New Keynesian Phillips curve are Clarida, Gal, and Gertler (1999) and Blanchard and Gal (2007).

b) Stagflation:6b) Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The

portmanteau stagflation is generally attributed to British politician Iain Macleod ,who coined the term in a speech to Parliament in 1965. The concept is notable partly

because, in postwar macroeconomic theory, inflation and recession were regarded asmutually exclusive, and also because stagflation has generally proven to be difficultand costly to eradicate once it gets started.

Economists offer two principal explanations for why stagflation occurs. First,stagflation can result when an economy is slowed by an unfavorable supply shock,such as an increase in the price of oil in an oil importing country, which tends toraise prices at the same time that it slows the economy by making production less

profitable. This type of stagflation presents a policy dilemma because most actionsto assist with fighting inflation worsen economic stagnation and vice versa. Second,

both stagnation and inflation can result from inappropriate macroeconomic policies.For example, central banks can cause inflation by permitting excessive growth of the money supply , and the government can cause stagnation by excessive regulationof goods markets and labor markets, together, these factors can cause stagflation;equally, either can, if taken to such an extreme that it must be reversed. Both typesof explanations are offered in analyses of the global stagflation of the 1970s : it

began with a huge rise in oil prices, but then continued as central banks used

http://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibriumhttp://en.wikipedia.org/wiki/Model_(macroeconomics)http://en.wikipedia.org/wiki/Sticky_(economics)http://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Economic_stagnationhttp://en.wikipedia.org/wiki/Portmanteauhttp://en.wikipedia.org/wiki/Politicianhttp://en.wikipedia.org/wiki/Iain_Macleodhttp://en.wikipedia.org/wiki/Parliament_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Global_stagflation_of_the_1970shttp://en.wikipedia.org/wiki/New_Keynesian_economicshttp://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibriumhttp://en.wikipedia.org/wiki/Model_(macroeconomics)http://en.wikipedia.org/wiki/Sticky_(economics)http://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Economic_stagnationhttp://en.wikipedia.org/wiki/Portmanteauhttp://en.wikipedia.org/wiki/Politicianhttp://en.wikipedia.org/wiki/Iain_Macleodhttp://en.wikipedia.org/wiki/Parliament_of_the_United_Kingdomhttp://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Global_stagflation_of_the_1970s


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excessively simulative monetary policy to counteract the resulting recession,causing a runaway wage-price spiral .

http://en.wikipedia.org/wiki/Wage-price_spiralhttp://en.wikipedia.org/wiki/Wage-price_spiral

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