Short notes suggestion and answer for Banking Diploma Examination - PEB

Paper 1: Principles of Economics and Bangladesh Economy

Short Notes on Principles of Economics and Bangladesh Economy for Banking Diploma Examination - JAIBB

  

Q1.      Monopolistic competition: Definition, characteristics and graph of monopolistic competition.

In economics a monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another i.e. by branding or quality and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.

Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. This market concept was developed by Chamberlin (USA) and Robinson (Great Britain).

Figure: Monopolistic competition

Major characteristics of monopolistic competition: There are six characteristics of monopolistic competition (MC):

1. Product differentiation
2. Many firms
3. No entry and exit cost in the long run
4. Independent decision making
5. Some degree of market power
6. Buyers and Sellers do not have perfect information (Imperfect Information) 

Q2.      Production function: Definition, explain and key points of production function.

The production function relates the maximum amount of output that can be obtained from a given number of inputs.

In economics, a production function relates physical output of a production process to physical inputs or factors of production. The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency, the defining focus of economics. Or

Production function, in economics, equation that expresses the relationship between the quantities of productive factors i.e. such as labor and capital used and the amount of product obtained. It states the amount of product that can be obtained from every combination of factors, assuming that the most efficient available methods of production are used.

Key points of production function:

The production function describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.

Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor.

The production function also gives information about increasing or decreasing returns to scale and the marginal products of labor and capital.

Q3.      Fixed exchange rate: Definition, advantages and disadvantages of fixed exchange rate.

A fixed exchange rate also called pegged exchange rate or opposite of floating exchange rate is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to.

Fixed rates provide greater certainty for exporters and importers. This also helps the government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment.

It is a system in which the value of a country's currency, in relation to the value of other currencies, is maintained at a fixed conversion rate through government intervention.

Advantages of fixed exchange rate:

• A fixed exchange rate may minimize instabilities in real economic activity
• Central banks can acquire credibility by fixing their country's currency to that of a more disciplined nation
• A fixed exchange rate reduces volatility and fluctuations in relative prices
• It eliminates exchange rate risk by reducing the associated uncertainty
• It imposes discipline on the monetary authority
• International trade and investment flows between countries are facilitated

Disadvantages of fixed exchange rate:

• The main criticism of a fixed exchange rate is that flexible exchange rates serve to adjust the balance of trade.
• The need for a fixed exchange rate regime is challenged by the emergence of sophisticated derivatives and financial tools in recent years, which allow firms to hedge exchange rate fluctuations
• The announced exchange rate may not coincide with the market equilibrium exchange rate, thus leading to excess demand or excess supply
• There exists the possibility of policy delays and mistakes in achieving external balance
• The cost of government intervention is imposed upon the foreign exchange market

Q4.      Economic of scale or Economies of scale: Definition, Details and example of economies of scale.

Economies of scale are a term that refers to the reduction of per-unit costs through an increase in production volume. This idea is also referred to as diminishing marginal cost.

The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies.

Example of economies of scale: If a company makes 500 widgets, they cost the company 10 cents a piece to produce. Another company makes 100,000 widgets, and can therefore purchase the materials necessary to make them for much cheaper than its competitors, so each widget only costs this company 5 cents a piece to produce.