Economics assignment on

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Economics (104) Assignment

On:

MADE BY:

KRITIKA RAWAT 4562

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LEKHNI GARG 4593

(BBA I-B)

Acknowledgement

We hereby declare that this project report

titled impact of business fluctuation on decisionmaking is a record of our work carried out under

the guidance of MRS KUSUMLATA MISHRA

(ECONOMICS PROF. ,BIT, NOIDA).

We gratefully acknowledge the guidance

provided to us by Kusumlata maam and also thankour batch mates for providing constant

encouragement, support and directions

throughout the development of the project.

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Contents

1. Business Fluctuation pg 4

2. Keynesian Economics pg 7

3. Exogenous and Endogenous causes pg 7

4. HUL (Introduction) pg 9

5. Case Study pg 10

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BUSINESS FLUCTUATIONS

The term business fluctuation refers to economy-wide changes in

production or economic activity over several months or years.

These changes occur around a long-term growth trend, and

typically involve shifts over time between periods of relativelyrapid economic growth (expansion or boom), and periods of

relative stagnation or decline (contraction or recession).

These changes are often measured using the growth rate of real

gross domestic product. Despite being termed cycles in most

cases, many of these changes in economic activity do not follow a

mechanical or predictable periodic pattern.

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When it comes to business cycles, they are not merely

fluctuations in aggregate economic activity. They are a type of

fluctuation found in the aggregate economic activity of nations

that organize their work mainly in business enterprises: a cycle

consists of expansions occurring at about the same time in many

economic activities, followed by similarly general recessions,

contractions, and revivals which merge into the expansion phase

of the next cycle; in duration, business cycles vary from more

than one year to ten or twelve years; they are not divisible into

shorter cycles of similar characteristics with amplitudes

approximating their own. The critical feature that distinguishesthese cycles from the commercial convulsions of earlier centuries

or from the seasonal and other short term variations of our own

age is that the fluctuations are widely diffused over the

economy--its industry, its commercial dealings, and its tangles of

finance. The economy of the western world is a system of closely

interrelated parts. The one who would understand business cycles

must master the workings of an economic system organized

largely in a network of free enterprises searching for profit. Theproblem of how business cycles come about is therefore

inseparable from the problem of how a capitalist economy

functions.

Most social indicators (mental health, crimes and suicides) worsen

during economic recessions. As periods of economic stagnation

are painful for the many who lose their jobs, there is often

political pressure for governments to mitigate recessions. Sincethe 1940s, following the Keynesian revolution, most governments

of developed nations have seen the mitigation of the business

cycle as part of the responsibility of government, under the

rubric of stabilization policy.

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http://en.wikipedia.org/wiki/Keynesian_revolutionhttp://en.wikipedia.org/wiki/Stabilization_policyhttp://en.wikipedia.org/wiki/Keynesian_revolutionhttp://en.wikipedia.org/wiki/Stabilization_policy


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Another set of models tries to derive the business cycle

from political decisions. The cycles result from the

successive elections of administrations with different

policy regimes. Regime A adopts expansionary policies,

resulting in growth and inflation, but is voted out of

office when inflation becomes unacceptably high.

The replacement, Regime B, adopts contractionary policies

reducing inflation and growth, and the downwards swing of the

cycle. It is voted out of office when unemployment is too high,

being replaced by Party A. The political business cycle is analternative theory stating that when an administration of any hue

is elected, it initially adopts a contractionary policy to reduce

inflation and gain a reputation for economic competence. It then

adopts an expansionary policy in the lead up to the next election,

hoping to achieve simultaneously low inflation and unemployment

on election day.

It is observed that one of the factors that is absolutely

necessary for all production land has an inherent tendency

to rise in price on an exponential basis as the economy grows. The

reason for this is that the quantity of land (the stock of locations

and natural resources) is fixed. Its supply cannot increase.

Therefore, when demand for land increases, its price must go up.

Investors see this tendency as the economy grows and they buy

land ahead of the boom areas, withholding it from use in order to

take advantage of its increased value in the future. In every

booming economy prices of land, housing and rents increase far

more rapidly than the overall rate of inflation. Speculation in land

concentrates profits in landholders and diverts economic

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resources to speculation in land, squeezing profits away from

production that has to occur on this land. In effect, land

speculation creates a built-in supply shock, which squeezes the

economy just as economic output increases. This is a systemic

retardation of the economy, placing a sharp brake on further

economic expansion. This shock to the economy occurs as long as

there is land speculation, creating an underlying tendency toward

inflation and recession late in the growth phase of the business

cycle. Land speculation, is always the cause of economic

downturns. There are any number of contributing causes; things

like oil price shocks, consumer confidence crises, international

trade fluctuations, natural disasters but none of these thingscreates the underlying weakness.

Keynesian Economics

According to Keynesian economics, fluctuations in aggregate

demand cause the economy to come to short run equilibrium at

levels that are different from the full employment rate ofoutput. These fluctuations express themselves as the observed

business cycles. Keynesian models do not necessarily imply

periodic business cycles. However, simple Keynesian models

involving the interaction of the Keynesian multiplier and

accelerator give rise to cyclical responses to initial shocks.

When it comes to wages, the fluctuations are almost the same as

in the level of employment (wage cycle lags one period behind theemployment cycle), for when the economy is at high employment,

workers are able to demand rises in wages, whereas in periods of

high unemployment, wages tend to fall. According to Goodwin,

when unemployment and business profits rise, the output rises.

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Within mainstream economics, the debate over external

(exogenous) versus internal (endogenous) causes of the economic

cycle is centuries long ,with the classical school (now neo-classical)arguing for exogenous causes and the

underconsumptionist (now Keynesian) school arguing for

endogenous causes. These may also broadly be classed as supply-

side and demand side explanations: supply-side explanation

argues that supply creates its own demand , while demand side

explanations argue that effective demand may fall short of

supply, yielding a recession or depression.

New Product Introductions begin slowly with market

resistance. However, as resistance breaks down and

other producers sense that economic profits are being

made, they begin to enter the market with increased

investment and production and employment increase.

Eventually the market becomes saturated and sales

decline profits decline, inventories increase, production

is curtailed, unemployment increases which in turn

results in economic downturn. But when a new innovation

takes hold, the process begins again.

If business is optimistic about future sales and profits,

they invest, produce more, increase employment and

promote an expansion of economic activity. When they

feel that things cant continue to get better (due to

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unfavorable business fluctuations), they begin to show

signs of pessimism and reduce investment, production,

cut costs (employment) and cause a reduction in economic

activity.

A recession occurs until production and prices fall to the

point that consumer demand again exceeds the available

supply. At that point, recovery begins.

During periods of economic expansion, business owners

are caught short of inventory, so they increase factoryorders, thus causing factories to increase production,

increase employment, and thus spending. Eventually

inventories become plentiful and business owners cut

back on restocking, reducing factory orders and inducing

factory owners to cut production schedules, control

costs (including employment). Spending declines and

recession sets in until inventories are reduced to

uncomfortably low levels.

When RBI is concerned about inflationary pressures, it

slows or stops the growth of the money supp ly which

causes a recession (via interest rates, purchases andsales of government securities and bank loan activity)

and when it is satisfied that inflation is no longer a

threat, it allows the money supply to expand at a faster

rate which brings about an economic recovery (again, via

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interest rates, purchases and sales of government

securities and bank loan activity).

Hindustan Unilever: Case study

Hindustan Unilever Limited (HUL) is India's largest Fast

Moving Consumer Goods Company, touching the lives of

two out of three Indians with over 20 distinct categories

in Home & Personal Care Products and Foods & Beverages.

They endow the company with a scale of combined

volumes of about 4 million tones and sales of Rs.10,000

crores. HUL is also one of the country's largest

exporters; it has been recognized as a Golden Super Star

Trading House by the Government of India. The mission

that inspires HUL's over 15,000 employees, including

over 1,300 managers, is to "add vitality to life." HUL

meets everyday needs for nutrition, hygiene, and

personal care with brands that help people feel good,

look good and get more out of life. It is a mission HUL

shares with its parent company, Unilever, which holds

51.55% of the equity. The rest of the shareholding is

distributed among 380,000 individual shareholders and

financial institutions.HUL believes that an organizations

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worth is also in the service it renders to the community.

HUL is focusing on health & hygiene education, women

empowerment, and water management. It is also involved

in education and rehabilitation of special or

underprivileged children, care for the destitute and

HIV-positive, and rural development.

Case study:

Since the very early years, HUL has vigorously responded

to the stimulus of economic growth. The growth process

has been accompanied by judicious diversification, always

in line with Indian opinions and aspirations. The

liberalization of the Indian economy, started in 1991,

clearly marked an inflexion in HUL's and the Group's

growth curve. Removal of the regulatory framework

allowed the company to explore every single product and

opportunity segment, without any constraints on

production capacity. Simultaneously, deregulation

permitted alliances, acquisitions and mergers. In one of

the most visible and talked about events of India'scorporate history, the erstwhile Tata Oil Mills Company

(TOMCO) merged with HUL, effective from April 1, 1993.

In 1995, HUL and yet another Tata company, Lakme

Limited, formed a 50:50 joint venture, Lakme Lever

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Limited, to market Lakme's market-leading cosmetics and

other appropriate products of both the companies.

Subsequently in 1998, Lakme Limited sold its brands to

HUL and divested its 50% stake in the joint venture to

the company.

In January 2000, in a historic step, the government

decided to award 74 per cent equity in Modern Foods toHUL, thereby beginning the divestment of government

equity in public sector undertakings (PSU) to private

sector partners. HUL's entry into Bread is a strategic

extension of the company's wheat business. In 2002,

HUL acquired the government's remaining stake in

Modern Foods.In 2003, HUL acquired the Cooked Shrimp and

Pasteurized Crabmeat business of the Amalgam Group of

Companies, a leader in value added Marine Products

exports. This is because of the rising prices and

unpredictable demand which exists in the market.

According to the new economy these unpredictable prices

can be predicted with help of the new technology.

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India and China cover nearly 40 percent of the worlds

population and their cumulative output accounts for

nearly 25 percent of the global GDP. India is today the

second fastest growing economy in the world. The growth

is being driven by domestic consumption and the

expansion of the information technology industry; India

has 75 percent of the IT services export market. Indias

consumer goods market is already among the top ten in

the world and is expected to be the fifth largest in the

world by 2010 with Huls maximum contribution.

The main drive for reform occurred in 1991. The Finance

Minister took on a sequence of policy initiatives when

India was facing the balance of payments crisis; he

lowered tariff levels, eliminated industrial licensing,

allowed foreign investors 51% equity in their business

enterprise and helped reform the exchange rate policy.

Since these economic changes, poverty levels declined

and the information technology sector has grown at a

rate of 30 percent annually for the last few years. The

rapid growth of the Indian economy has resulted in a

growing middle class. According to experts on global

economic trends, by 2015, there will be 628 million

middle-class Indians whose incomes have already doubled

over the last 10 years.

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When it comes to Pricing Strategies, multinational

pricing is a lot more complex than local pricing because

international currency fluctuations and price fluctuations

due to tariffs among other things that need to be

considered.

Reference

1. Google

2. Competition success review

3. Hindustan t imes

Teachers Report

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Economics assignment on