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.

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.