Marginal Efficiency of Capital and Business Expectation

MEC (Marginal Efficiency of Capital) depends on the businessmen’s expectations, which increases due to invention and goes down due to any threat to the returns on investment. It is also affected by the annual spirit of the entrepreneur. That is why investments are not always calculations but also irrational optimism. Business expectations are based on existing events and partly future facts. The investment decision is not done on actual investment but on the future yields.

Therefore, huge expenditure is required but actual returns start later. These two types of expectations – short term and long term are based on existing facts, whereas long term expectation is based on the future events.

Acceleration Principle:

The multiplier and Acceleration Principle are parallel concepts. This principle is also called Principle of Acceleration.

Multiplier shows the effect of consumption on investment.

Acceleration shows the effect of investment on consumption.

This is so because to produce the final goods, capital goods are also required. Therefore, if you want to increase the final product, the capital goods which are inputs for these final goods should also be increased. When consumption increases, the demand for factors of production will also increase.

There are certain practical limitations to this principle.

No excess capacity: If consumer goods sectors have excess capacity, induced investment will not increase. Only after the utilization of idle capacity, the principle will start operating.

Surplus capacity: Acceleration principle works on a very tough condition that there will be excess capacity in investment industry but not in the industry producing consumer goods. It is assumed that there is surplus capacity in investment goods industry, but if there is no excess capacity in machine making industries there will be postponed delivery and the acceleration will be low.

Availability of resources: When demand increase for capital goods that means increase in production, which again means more employment. So, there should be enough unemployed resources available. But only when the full employment level reached there is difficulty in expanding the production.

Nature of Demand: The demand for consumption goods should be more or less permanent for acceleration principle to work, because if the demand increase is temporary, then that will increase demand for capital goods as these goods are expensive.

The relationship between consumption, profit maximization and investment is shown by acceleration principle.

Macro Economics Ratios from Managerial Economics for Management of Business

There are only those ratios, which shall come across in the following chapters:

Consumption Income Ratio:

It is general income consumption relationship. It expresses the relationship between income (Y) and consumption (C). The relation is functional. We represent it as:

C = f (Y)
C – Consumption
Y – Income
f – Function

Saving Income Ratio:

Income is either spent or consumed. The saving function can be easily derived by subtracting consumption or spending from income.

S = Y-C

S – Saving

Y – Income

C – Consumption

Capital Output Ratio:

The number of units of capital required for each unit of output produced. More capital is required to produce more output for business and market. This ratio varies from firm to firm and industry to industry.

K = wY

K- Capital Stock

Y – Level of Output

W – Capital-Output Ratio

Capital Labour Ratio:

This ratio indicates factor proportion, the combination of labour and capital in the production process. It can be defined as:

K/L

K – Capital

L – Labour

Output-Labour Ratio:

It means the labour productivity. It can be written as

Y/L

Y – National Income

L – Employment.

Index Number:

Value in economy means value in exchange. The value of money is the buying capacity of money, which is expressed in terms of commodity and services you get in exchange.

If the price is high, then value of money decreases and vice-versa. They are reversely related to each other. Movement of price has two aspects: one is change in relative price and the other is change in overall price, which affects the purchasing power of money. Change in price is not uniform for all goods: for some goods it may decrease and for some goods it may increase. To bring the element of uniformity to the concept of general, price is used. This is done by index number.

Index number is statistical device which indicates relative changes of a variable over a period of time. It shows the general trend of prices. The value of money can be measured by means of price index numbers. We will discuss some types of prices indices. More specific price indices can be constructed which focuses on specific goods and services.

An Evaluation of Loss and Benefit Due to Tax in Property Market

We can evaluate loss and benefit from the economic policies by the government. Now we will discuss the gain and loss in consumer surplus due to tax and subsidies. We can understand the loss in consumer surplus by imposing the indirect tax with an example. Indirect tax is the tax that we pay when we are paying the price for a commodity. Suppose the supply is perfectly elastic for scooters, the demand curve for scooter is downward sloping.

Evaluating the loss and benefit due to tax

In the above figure, the number of scooters sold shown on X-axis and the price of scooters is shown on Y-axis. OP is the price and OQ is the number of scooters sold. The consumer surplus price OP is DCP. Now, if indirect tax is imposed on scooter, the price will increase to OP1 and the number of scooter sold decreases to OQ1. Thus the consumer surplus will decrease to DP1A. There is a decrease in consumer surplus by P1ACP. There are two parts in this is a decrease in Consumer Surplus P1ACP.

P1ABP – This decrease in consumer surplus is because of increase in price.

ABC – This decrease in consumer surplus is because of decrease in the number of scooters sold.

ABC is the extra burden due to the sales tax. P1ABP is the loss in consumer surplus which goes to the government as revenue. But ABC is excess burden or net loss in welfare, which is called Dead weight loss. This part of loss in welfare goes nowhere. Indirect tax distorts the price of scooter and decrease the demand for scooter. So the burden of indirect tax is more than direct tax.

Direct tax is superior to indirect tax because if the government takes away P1ACP by direct tax then the loss equal to ABC would not be born by the public. This evolution is followed in property market also.

A Discussion on Perfect and Pure Competition of Market

Perfect Competition can be categorized as:

Large number of buyers and sellers:

A market runs on large number of buyers and sellers. Single firm is not able to affect the market supply or the market price. Similarly, there are large numbers of buyers also in market. Even the buyers can’t influence the price by changing their demand because each buyer and seller is like a drop in the ocean.

Homogeneous product:

Homogeneous product is known as the most important feature. According to it, product, which these large number of buyers buy from large number of sellers are identical or we can say perfect substitute. That means if one buyer increase the price, the buyer will buy it from other sellers as the products are identical e.g. rice.

Free entry and exit of firms:

We can take an example to clarify the term. An entrepreneur, who has enough capital and still can start the business and enter the industry and any one who is incurring loss can stop the production and exit the industry.

Firms are price takers:

If there are many buyers and sellers, nobody can influence the price or the supply in the industry. They are just like the drop in the ocean.

No cost of transportation:

In the perfect competition it is assumed that cost of transportation does not exist.

Now we should talk about perfect and pure competition. Perfect competition has all the features of pure competition and some more features. The first three features given under perfect competition constitutes pure competition whereas perfect competition has the features of pure competition and two more features they are perfect knowledge about the market and perfect mobility of inputs and output. Market of competition comes through profit maximization concept.

Property market also runs on the same concept of perfect and pure competition in the modern market. Now, market is not a place where we sell or buy a thing. Now, market is services also where third party takes an entry such as – finance market, property market etc.

Profit Maximization Model and Theory for Market

Profit maximization is the rational behaviour of equilibrium assumption. Any firm which aiming at profit maximization model; will go increasing its output till it reaches maximum profit output. Profit is known nothing but differences between total revenue and total cost. The more the differences between total revenue and total cost will create maximum profit. So, the equilibrium for a firm will be when there is maximum difference between the total cost and total revenue.

Economist Theory of Firm:

According to the Economist Theory of Firm, a firm is a transformation unit, which converts input into output and while doing so, tries to create surplus value. This surplus value is nothing but the difference between the value of the product and the value of the factors of production. The firm aiming for profit maximization reaches its equilibrium only when it produces profit maximizing output. The firm maximizes profit by equating marginal revenue with marginal cost.

Behavioral Theory of Cyert & March:

According to the theory, in a large multi-product firm the management is not the owner. There are forms of business firm which compromises the group of individuals and not controlled by single entity.

Marris Growth Maximization Model:

Robin Marris is the developer of the model. According to this theory, modern firms are managed by both the manager and the shareholders. A manager aims to maximize the rate of growth of the firm and the shareholders will try to maximize the dividend and the increase the share price.

Sales Maximization Model:

This is alternative model for profit maximization model. The model has been propounded by W.J. Baumol who was an American Economist. The assumption in this theory is relation about business behaviour. Baumol thinks managers are more interested in maximizing sales rather than profit.

Williamson’s Managerial Discretionary Theory:

According to the theory, in a firm, shareholders and managers are two separate groups. The firm tries to get maximum returns on investment and get maximum profit, whereas managers try to maximize profit in their satisfying function.

At last, Williamson’s managerial discretion theory shows the utility function of a manager. In this theory, the firm will try to get maximum returns or maximum profit where as manager try to maximum utility satisfying function. They are in equilibrium when the utility has maximum amount.

Concept of Market Equilibrium Theory in Market Demand

Market equilibrium is able to show interaction between the demand and supply. “Equilibrium” is Latin word, which means equal balance. It means there is no tendency to move.

Equilibrium of demand and supply:

Take here interaction between demand and supply. Demand and supply are always depended on price for commodities. Equilibrium price is the match of price of quantity demand and quantity supply. Equilibrium quantity is buying and selling products on equilibrium price. Here is a diagram to represent market equilibrium:

Equilibrium of Demand and Supply

Equilibrium Price:

There is a graph to show equilibrium price of market. Here, supply is P2 S2. There is excess demand of S2 D2. Due to competition in buyers, the price increases and reaches OP.

Equilibrium Price

Market equilibrium:

If there are no changes in demand or supply then equilibrium will go on so long. At first, we should take the change in the demand curve and assume that the supply curve remains shame. For example – if the shift in demand curve is due to change in income.

Market Equilibrium (Shift in demand curve)

Let’s take a view of shift in the supply curve also and assume that the demand curve remains constant.

Market Equilibrium (Shift in supply curve)

At last, in the market equilibrium, everyone who wants to sell, finds a buyer and everyone who wants to buy, gets a seller. This happen when, the market reaches equilibrium when the buyer finds a willing seller and seller finds a willing buyer. This tendency of market to reach equilibrium is not just theoretical, but we can see things happening in our day to day life.

A Way of Growth in Property Business

I am not calming that in this recession there are no ways to growth. However, still there are many companies which have great plan to success in this recession. Real Estate sector is also very growing sector but in this recession it has affected.

I am going to share a real estate company of India which has great plan to success in this recession. The company has generated a revenue model which is for common people. According to the company by the revenue model even a common people can also earn by giving some extra time in property business.

According to the company,

Across India sales convert with the backup of our local presence either office either POW Only. Company giving you chance…Referral sales done by Adviser, which is not done always by Call Center, is always bigger in volume.

Also we are paying them & considering the referral sale as a Call Centre Sale. For Every Adviser Account there is a maximum limit fixed by Company as 1 Lakh in a week and 4 lakh in a month. It means “Low cost high Revenue Model”, to achieve faster break even.

I have already stated some model of the company in my previous posts. But here the company is going to introduce fully unique model – call center revenue model along with adviser model.

I am very amazed to hear that the company will give a person as 1 Lakh in a week and 4 lakh in a month. It is very high amount for a common people if he is interested in doing property business. However, the company introduces itself,

6 years old company, only ltd company into Real Estate brokerage 66 outlets 105 online portals, The one and only Company of India with Best Technology with Property Award winner of the Best Technology Company in Year 2009 by Real Estate Federate or India.

It shows the reliability of the company in real estate sector. But here is nothing which has been achieved earlier on the model which is currently, the company has introduced. The model is not only to attract a customer but also the company is trying to attract a common people also to participate in property business.

An Introduction of Property on Wheels (POW) in Real Estate Sectors

Property on Wheels (POW) is a single vendor program across the India in Commercial area of the Real estate. The program has been launched by PropertySensex as a new Model in property business. The Main goal behind the property on wheels (POW) is to improve customer services in buying & selling sectors.

Property on Wheels (POW) 0% brokerage for buyers only

Property on Wheels is a type of car that is GPS (Global Positioning System) Activated. Any individual client can call at the company across the India to buy a property. As client calls, backend call center note down all the client requirements and see the property on wheel nearby client on the site and dispatches the requirement to the local POW manager. There is not a driver in POW car while there is a manager that will drive a car with quotation of property. POW manager shortly contact to the client and describe the all information to the client -

1. Rate Card of Concerned Area.
2. Location Map.
3. Profile of Company.

Across the India the company has promoted single calling number for the customer’s convenience. The backend call center will receive all calls centralized to take up customer requirements. The charge will be paid by the Company itself.

This is a national level service in real estate sector. You will get this property on wheels in all cities where the company has operation with same number only for buyers not for sellers.

If you want to purchase a flat or flat on rent and you want to the flat at nearby your children school or you want to flat nearby the airport or metro station, the company manager will take you for site visit as per your requirement and also conduct a meeting with the owner of the property at free of the cost.

These all cars are company owned cars with a manager who will take client for property visit as per their requirements. The site visits are free of costs.

A Real Investment in Property Business

In India or across the world there are many concepts to earn money by investing in property business but a successful step has not been taken by anyone for common people. This is the age of global crisis where all industries are going down. Investments in all industries are down. In the mid of crisis people are looking for a successful business and concept to invest their resources and power.

Recently, our team analyzed a property business which was for common people. It was the concept of real investment in property business. It is not a new model but yes, the model has been launched with new theory. Already, Amway, world’s largest company, is running on the model which is known as binary system but the company has added some new concept in the binary system.

It is PropertySensex, India based real estates Company which announced that it offers an adviser model to earn money from real estates sector. It will be part time or full time work for any person.

To develop the model company has some new theories which are:

Property on Wheel (POW) with 0% brokerage

Adviser Model

According to the company these two models will be more effective than others real estate investments concept.

POW will work on 0% brokerage for only buyers across India. It will be a model of off-line advertisement also. Property on Wheel cab will run across India with GPS technologies. It will be advertised with company logo and phone number. To make the process easier company has offered single number for whole country.

POW offers only one logo across India to advertise property business. The company has offered commercial spaces for big companies also – TATA AIG Life Insurance, Max Life Insurance, Bharti AXA Life Insurance, Religare, Aviva, Subhiksha, Spencer Retail, Vishal Mega Mart, Bharti, Walmart etc. across India.

Company gives simple logic that when a cab run on road then surly, a buyer will call. When a buyer call to the company, the call will directly reach to the call center where call center agent look up nearest cab and will send that to the buyer as soon as possible.

It will be a reliable and faster service to deal a property. If a customer gets satisfaction by this service then he surly will recommend others also.

Adviser model is basic concept of the company. In the real estates sector it will be first retail chain. Future of the company will grow with the adviser model.

Adviser Model:

Adviser model will work on simply binary system like – Amway Company. An adviser has to send an SMS to the company if a buyer contact with him. He will be an authorized person of PropertySensex to recommend buyer. On each recommendation, if the deal gets success, he will get 20% commission by check in his bank account.

To be an adviser, a person can send an SMS to join. On each 1000 Adviser Company will offer a cab. Recently, company has targeted to achieve 9000 adviser across India.

Any person who is able to pay Rs 7720 will get software on his mobile for an adviser. This is the simple method to invest money and resources with the company.