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 decision
making’ 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 thank
our 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 relatively
rapid 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 distinguishes
these 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. The
problem 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. Since
the 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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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 an
alternative 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 things
creates 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 of
output. 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 the
employment 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 can’t 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 factory
orders, 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 supply which
causes a recession (via interest rates, purchases and
sales 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 organization’s

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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's
corporate 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 to
HUL, 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 world’s
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. India’s
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 Hul’s 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 times

Teacher’s Report

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