INDUSTRIAL ECONOMICS IInd S C P MODAL

The Structure-Conduct-Performance Model

In 1930s, a group of economists developed an approach to understand relationship among a firm’s environment, behaviour and performance. This theoretical framework, since then, is known as the Structure-Conduct-Performance (S-C-P) Model.

Structure, in this model refers to the structure of the industry in which the firm is operating. According to their findings, following factors could be used by a firm to measure the industry structure it’s operating in.

• Number of Competing Firms
• Homogeneity of Products
• Cost of Entry and Exit

Conduct refers to the set of strategies that the firm implement to gain competitive advantage over its rivals.

Performance in the s-c-p model has two meanings:

1. Performance of the individual firm
2. Performance of the economy as a whole

The Link Among Structure, Conduct and Performance

Attributes of the industry structure define the range of options and constraints a firm has to face. In highly competitive industries, firms have a very limited motion space as they are only let with a very few options too many constraints when compared to options. In such setting, both firm’s conduct and long term performance are determined by the industry structure making (in general) firms only able to gain competitive (not competitive advantage).

On the other hand, in less competitive industries, firms have the liberty of large ranges of conduct options and fewer constraints, enabling capable firms to gain competitive advantages. However, even at this type of setting, the industry structure can impact on firms critically such as deciding how long a firm can maintain its competitive advantage.

BBE IIIrd GROWTH MODALS (HARROD DOMAR GROWTH MODAL)

The Harrod-Domar Growth Model
The Harrod-Domar growth model gives some insights into the dynamics of growth. We want a method of determining an equilibrium growth rate g for the economy. Let Y be GDP and S be savings. The level of savings is a function of the level of GDP, say S = sY. The level of capital K needed to produce an output Y is given by the equation K = σY where σ is called the capital-output ratio. Investment is a very important variable for the economy because Investment has a dual role.
Investment I represents an important component of the demand for the output of an economy as well as the increase in capital stock. Thus ΔK = σΔY. For equilibrium there must be a balance between supply and demand for a nation's output. In simple case this equilibrium condition reduces to I = S. Thus,

I = ΔK = σΔY
and I = S
so
σΔY = sY.


Therefore the equilibrium rate of growth g is given by

g = ΔY/Y = s/σ

In words, the equilibrium growth rate of output is equal to the ratio of the the marginal propensity to save and the capital-output ratio. This is a very significant result. It tells us how the economy can grow such that the growth in the capacity of the economy to produce is matched by the demand for the economy's output.
Consider this numerical illustration. Suppose the economy is currently operating at a capacity production level of 1000 per year and has a capital-output ratio of 3. This means the capital stock is 3000. Assume the marginal propensity to consume out of GDP is 0.7 so the marginal propensity to save is 0.3. This includes business and public saving as well as household saving. The Harrod-Domar growth model tells that the equilibrium growth rate is g = 0.3/3 = 0.1; i.e., the economy can grow at 10 percent per year. We can now check this result. At the current GDP of 1000 the level of saving is 0.3*1000=300. The growth in GDP is 0.1*1000 = 100 and with a capital-output ratio of 3 the additional capital required to produce the additional output is 3*100=300. This is the investment required in order to increase capacity by the right amount and, sure enough, this happens to be equal to the amount of saving available in the economy.
But we must made sure there is adequate aggregate demand next year to absorb the production of 1100. At that level of income the consumer demand is 0.7*1100 = 770. The level of investment the next year under the assumed equilibrium growth conditions is derived as above. The ten percent growth on production of 1100 is 110 which with a capital-output ratio of 3 requires an increase in capital stock of 330. Thus next year's investment will be 330. This, added to the consumer demand of 770 gives an aggregate demand of 1100. Thus everything balances.
For contrast, let us consider what would happen if the level of current level of investment were to be higher, say 350. This, combined with consumption demand of 700 generates more demand than the capacity of the economy to produce. That excess of investment of 50 induces a demand for an additional 3*50 = 150 units of capital which the economy cannot achieve. There is an irresolvable excess of demand in the economy.
On the other hand, suppose the investment demand fell short of 300, say 250. Now the aggregate demand is only 950, less than the capacity of the economy. If production falls to 950 there is an excess of capital and no need for any investment. Thus aggregate demand fall as investment dropped to zero and consumer demand would drop along with. There would be an irresolvable deficiency of demand.
The equilibrium of the Harrod-Domar model is a razor-edge equilibrium. If the economy deviates from it in either direction there will be an economy calamity.

INDUSTRIAL ECONOMICS (Question Paper 2009)

BUSINESS ECONOMICS III Semester 2009 PAPER XI INDUSTRIAL ECONOMICS

Time: 3Hours Maximum Marks: 60

Attempt any six questions. All questions carry equal marks.

1. (a) What is the main difference between Microeconomics and Industrial Economics? How did Chicago School of thought differ from mainstream Industrial Economics? (4)

(b) Clearly distinguish between the linear and interactive Structure Conduct Performance framework to study Industrial behaviour. (6)

2. In contrast to determinate emphasis on equilibrium concentration level, the stochastic approach focuses on the problem of actual concentration change. Explain. (10)

3. How do Absolute Cost Advantage and Economies of Scale act as a source of barriers to entry? (10)

4. (a) Demstez argued that an inventor supplying a monopolist will have a greater incentive to invent if he is not constrained to charge the same per unit royalty to both the monopoly and competitive industry. Comment. (5)

(b) According to Demstez, what happens if we compare industries of equal size in case of drastic cost reduction. (5)

5. How Coase and later Williamson did developed the market failure consideration for vertical integration. (10)

6. Output X is produced by a competitive industry using two inputs A and B. A is supplied by a monopolist while B is supplied competitively. Does the monopolist A has an incentive to take over production to X if inputs are used in variable proportions. (10)

7. (a) Briefly discuss various measures of diversification. (4)

(b) How does Reduction in financial risk acts as a motive for diversification? (6)

8. Write short notes on any two:

(a) Research as a special economic process

(b) Group interdependence and consequence of diversification

(c) Libenstein’s critique of Williamson argument for mergers (5*2=10)

BUSINESS ECONOMICS 2nd SYLLABUS

PAPER – 302

INDUSTRIAL ECONOMICS

UNIT 1: STRUCTURE - CONDUCT - PERFORMANCE PARADIGM

The Simple SCP model / framework without feedbacks, its critique and modified framework with feedback.

Ref: Stephen Martin- Advanced Industrial Economics, pp. 1-11

Stephen Martin- Industrial Economics, pp. 1-12

Fergusen and Fergusen- Industrial Economics, pp. 13-18

Giles Burgess, Industrial Organisation. pp. 32-33

UNIT 2: MARKET CONCENTRATION

Definition of the market, nature and measurement of market concentration, indices of concentration, inequality measures, Theories of measurement: deterministic and stochastic approach.

Ref: Stephen Martin- Industrial Economics, pp. 9-19, (Entropy Index omitted) 28-37

Giles Burgess, Industrial Organisation. pp. 77-80, 94-96.

UNIT 3: BARRIERS TO ENTRY

Concepts of Barriers to Entry by Bain, Demstez and Stigler, Sources of Barriers to Entry, Limit Pricing Theory, Strategic Entry deterrence and Contestable markets.

Ref: Stephen Martin- Advanced Industrial Economics, pp. 71-142

Giles Burgess, Industrial Organisation. pp. 31-32

UNIT 4: TECHNICAL PROGRESS & PERFORMENCE

Economics of Research, Market structure and incentive to invent, Market structure and innovation.

Ref: Stephen Martin- Advanced Industrial Economics, pp. 143-157

UNIT 5: VERTICAL INTEGRATION

Nature and extent of vertical integration, theories of vertical integration, monopolistic motives for vertical integration

Ref: Stephen Martin- Advanced Industrial Economics, pp. 172-192

UNIT 6: CONGLOMERATE DIVERSIFICATION

Concepts, measures, determinants and consequences of diversification

Ref: Stephen Martin- Advanced Industrial Economics, pp. 196-199, 206-212, 215-219.

UNIT 7: MERGERS

Concept of merger, different types of mergers, Public Policy relating to horizontal mergers: critique of Williamson and Libenstein’s approach.

Ref: Stephen Martin- Advanced Industrial Economics, pp. 265-269

Main Reading

1. Industrial Economics by Stephen Martin. It is supplemented by following

Supplementary Readings

1 Fergusen and Fergusen. Industrial Economics.

2 Giles Burgess, Industrial Organisation.

3 Stephen Martin, Advanced Industrial Economics.

BUSINESS ECO SYLLABUS 3rd (Growth and Development

Semester VI
B. A. (Hons.) Business Economics
Optinal Group E: Paper xviii

ECONOMIC GROWTH AND POLICY

UNIT 1: ECONOMIC DEVELOPMENT- DEFINITIONS AND CONCEPTS
•A Very Short Introduction (AVSI), Characteristics of Development pp 1-29
•Development Economics, Chapter-2
•Economic Development, Michael. P. Todaro, Chapter 1 and 2

UNIT 2: GROWTH MODELS
•DE, Chapter-3 Economic Growth, Section-3.3.1(pp 51-56) and
Section 3.5 (pp 74-84).
•DE, Chapter 10, pp 353-371 (LEWIS MODEL)
•Introduction to Economic Growth pp20-53 (THE BASIC SOLOW MODEL)
Note- Solow Model shall be covered before Convergence (Section 3.5)

UNIT 3: HUMAN CAPITAL- EDUCATION, INTELLECTUAL CAPITAL & POVERTY.
•Meier pp 450-459 (Education investment in Human Capital)
•Michael P Todaro , Economic Development, Chapter 9 (Human Capital : Education
& Health n Economic Development)

UNIT 4: TECHNOLOGICAL PROGRESS
•Introduction to Economic Growth Chapter 4 & Chapter 5 (up till Page 110)
•Development Economics, Chapter 4 , Section 4.4.4 & 4.4.5
•Growth and Development, A.P Thirwall Chapter 14 (up till page 499) also included are pp 525 -536
•Meier, Section VIII, pp 381-405 (International Trade and International Inequality)

UNIT 5: STATE AND THE MARKET
•F Hayami , Chapter-8 (up till page 212) and also included are pp 233-239

References:
•Debraj Ray, Development Economics, DE, Princeton University Press 1998
•Charles Jones, Introduction to Economic Growth, Second Edition
•Partha Dasgupta, Economics: A Very Short Introduction, Oxford University Press,
2007
•Meier, Leading Issues in Economic Development, 5th edition
•Michael.P.Todaro, Economic Development,8th edition.
•F Hayami, Economics (as per the previous syllabus)
61
•A.P Thirwall, Growth and Development ,7th edition