The Labor Market

Product Markets Markets in which firms sell goods and services to households or other firms Products made from the economys resources Factor Markets Markets in which resources are sold to firms Resources include Capital, land, labor, and natural resources Resources are sometimes called factors of production

Product and Factor Markets

Derived demand It is demand for resources (inputs) that is dependent on the demand for the outputs those resources can be used to produce. Inputs are demanded by a firm if, and only if, households demand the good or service produced by that firm.

Inputs: Complementary and Substitutable

The productivity of an input is the amount of output produced per unit of that input.

Inputs can be complementary or substitutable. This means that a firms input demands are tightly linked together.

Labor Supply Labor supply is the willingness and ability to work specific amounts of time at alternative wage rates in a given time period.

Marginal product of labor (MPL) It is the additional output produced by one additional unit of labor The marginal revenue product (MRP) MRP of a variable input is the additional revenue a firm earns by employing one additional unit of input, ceteris paribus. MRPL equals the price of output, PX, times the marginal product of labor, MPL.

Wage Rate (dollars per hour)

The Classical View of the Labor Market The labor supply curve illustrates the amount of labor that households want to supply at the particular wage rate. The labor demand curve illustrates the amount of labor that firms want to employ at the particular wage rate.
Labor supply w2 w1

B A

q1 q2 Quantity of Labor (hours per week)

 Higher wages represent more goods and services and thus

induce people to substitute labour for leisure. Substitution Effect of Wages An increased wage rate encourages people to work more hours (to substitute labour for leisure).

A worker might also respond to higher wage rates by

working less, not more

Income Effect of Wages An increased wage rate allows

a person to reduce hours worked without losing income.

Classical economists believe that the labor market always clears If labor demand decreases, the equilibrium wage will fall. Everyone who wants a job at W* will have one. There is always full employment in this sense.

The elasticity of labor supply is the percentage change in the quantity of labor supplied divided by the percentage change in wage rate.
Elasticity of % change in quantity of labor supplied = labor supply % change in wage rate

Labor Demand The demand for labor is the quantity of labour employers are willing and able to hire at alternative wage rates in a given time period Derived demand is the demand for labor and other factors of production resulting from (depending on) the demand for final goods and services produced by these factors

The Labor-Demand Curve The number of workers hired is not completely dependent upon the demand for the product. The quantity of labor demanded also depends on its price (the wage rate).
Wage Rate (dollars per hour)
Demand for labor W1 W2 A B

L1 L2 Quantity of Labor (hours per month)

Marginal physical product (MPP) is the change in total output associated with one additional unit of input
Marginal change in total output = physical product change in quantity of labor

LARGE SCALE INDUSTRIES Large scale industries refers to those industries which require huge infrastructure, man power and a have influx of capital assets The term 'large scale industries' is a generic one including various types of industries in its purview All the heavy industries of India like the Iron and steel industry, textile industry, automobile manufacturing industry fall under the large scale industrial arena. However in recent years due to the IT boom and the huge amount of revenue generated by it the IT industry can also be included within the jurisdiction of the large scale industrial sector

Define : Large scale industries use heavy machinery and equipment, employ many workers, and invest more capital. It includes the production of different kinds of products like cars, cement

The Importance of Large Scale Industries

Every country needs exploring of coal, iron and steel, exploring of oil and its purification, heavy machineries, heavy electrical equipments, heavy chemicals, ships and aero planes, industries of heavy and basic industries for its development. All these industries help to develop agriculture, transport, communication facilities and other industries. It means development of large scale industries is almost essential for the development of heavy and basic industries

FACTORS 1. Improvement in Productivity 2. Import Substitution 3. Export Promotion

Improvement in Productivity: In large scale industries work is distributed among the labour according to their efficiency which improves the productivity. These industries also use huge modern capital which raises productivity and reduces cost per head. It enables the consumer to get commodities at a cheaper rate.

Import Substitution:
Capital goods and consumer goods which are imported from the foreign countries can be produced inside the country through large scale industries. Our country will depend upon foreign countries on heavy chemicals, heavy electricity, chemical fertilizers and other consumer goods, unless we develop large scale industries. Due to the development of large scale industries, all these commodities are produced inside the country and there is no need of import which is known as import substitution

Export Promotion:
Large scale industries change the pattern of export. In the old days, we exported skin, tea, jute, jute products, spices of different types, and cotton clothes to foreign countries. Due to the development of large scale industries, we are now able to export engineering products, heavy electric products and other industrial products. It means large scale industries have changed the pattern of export and increased the quantity of export.

Characteristics of a large scale industry Large-scale industries are located in urban centers and are in the public sector or run by big industrialists, e.g. cotton textiles. They also require huge capital investments.

Advantages Of Large-Scale Production

1. Increased output, and the distribution of this increase among the various factors of production (labor, including the enterpriser, land, and capital) creates problems both social and economic. 2. Large-scale production causes the concentration of workers, and this concentration raises problems of housing, of government, and of social development. 3. large-scale production permits of a decreased unit-cost production, with the result that small industries are driven out of business

The efficiency of large-scale production are five in number. (1) Division of labor, which always accompanies large-scale production, permits the use of varied talents and aptitudes, whereby each worker can confine his attention and efforts to the particular operation in which he is the most proficient. (2) The latest and most improved machinery can be utilized, something which is usually impossible in small-scale production. (3) Large-scale production also permits of economies in buying raw materials and in selling finished products. It is a well-known fact that large purchasers can buy at a cheaper price than small ones; and equally as well known that large producers are able to economize in the matter of advertising, and of getting their products in the hands of retailers through traveling salesmen. (4) Large-scale industries are better able to utilize their by-products. In the slaughtering industry, for example, a large plant can make use of hair, blood, and other by-products which the local butcher allows to go to waste. (5) The large-scale producer can better afford to carry on expensive experiments with the idea of improving his product and of lessening unit cost

Difference: Large Scale, Small and Cottage Industry

The difference among the industries is defined on the basic of use of capital equipment according to instruction of the Government. INVESTMENT According to instruction of the Government of 1985, industries whose investment on fixed capital like machineries and equipments is less than Rs. 35 lakhs is known as Small Scale Industries. For large scale industries, promoter or entrepreneur as one person or two persons are not able to provide capital for construction of large scale industries.

So the entrepreneurs or promoters of large scale industries collect the required capital through the shares of small values. They also get loan from the market through different ways. But small scale industries are not able to get the required capital through all these sources.

MARKET As large scale industries produce more than small scale industries, the extent of market is more for large scale industries. Small scale industries can manage themselves with their local market but large scale industries cannot. Large scale industries cannot function if they do not get adequate market.

LABOUR large scale industries :-large scales industries that employ thousands of labourers Example:-iron and steel, cement, petrochemicals etc small scale industries:-small scale industries that employ less number of labourers and less amount of capital as in units that make sewing machines, fans, cycles etc.

MACHINERIES Large scale industries: large scales industries used for heavy machineries Small scale industries: small scale industries that less amount of capital as in units that make sewing machines, fans, cycles etc.

FINANCIAL INSTITUTIONS

In financial economics, a financial institution acts as an agent that provides financial services for its clients. Financial institutions generally fall under financial regulation from a government authority. Provides for efficient flow of funds from saving to investment by bringing savers and borrowers together via financial markets and financial institutions

Financial institutions Also called financial intermediaries Facilitate flows of funds from savers to borrowers

 Surplus spending units ( SSUs) have income for the period that exceeds spending, resulting in savings. Other words for SSU are saver, lender, or investor. Most SSUs are households. Deficit spending units (DSUs) have spending for the period that exceeds income. Another word for DSU is borrower. Most DSUs are businesses or governments.

Why there is need of finance 1) Long term 2) Medium term 3) Short term

 Long term capital is also known as block capital or fixed capital. it is needed to acquire -fixed and permanent assets Medium term capital is required for repairs, replacements, maintenance of machines and building etc. Short term capital is needed for purchase of raw material , and to meet day to day expenses

Types of financial institutions in India

Term lending Refinance institutions Investment institutions State level institutions

Term lending
IFCI IDBI ICICI IIBI EXIM TFCI

Refinance Institutions
NABARD SIDBI NHB

Investment Institutions
LIC GIC UTI

State Level Institutions

SFC

IFCI (Industrial Finance Corporation of India)

It was established in 1948 First development bank of India Objective was to make medium and long term credits more readily available Management - BOD total 12 members(4 by idbi,2 by center govt, 6 by shareholders) - -full time chairperson

Resources of IFCI - Ownership capital - Issue of shares and bonds - Borrowing from RBI, IDBI and CENTER GOVT - Accepting deposits from public, state govt and local authorities

Objectives The primary role of IFCI is to provide direct financial assistance on medium and long term basis to industrial projects in the corporate and co-operative sectors. The objectives of the corporation are stated below. (a) To provide long and medium-term credit to industrial concerns engaged in manufacturing, mining, shipping and electricity generation and distribution. (b) The period of credit can be as long as 25 years and should not exceed that period; (c) To grant credit to a single concern up to a maximum amount of rupees one crore. This limit can be exceeded with the permission of the government under certain circumstances; (d) guarantee loans and deferred payments;

 (e) underwrite and directly subscribe to shares and debentures issued by companies; (f) assist in setting up new projects as well as in modernization of existing industrial concerns in medium and large scale sector; (g) assist projects under co-operatives and in backward areas.

Functions The main functions of I.F.C.I. are as under: i) Granting loans and advances for the establishment, expansion, diversification and modernization of industries in corporate and co-operative sectors. ii) Guaranteeing loans raised by industrial concerns in the capital market, both in rupees and foreign currencies. iii) Subscribing or underwriting the issue of shares and debentures by industries. Such investment can be held up to 7 years.

 iv) Guaranteeing credit purchase of capital goods, imported as well as purchased within the country. v) Providing assistance, under the soft loans scheme, to selected industries such as cement, cotton textiles, jute, engineering goods,etc. vi) Providing technical, legal, marketing and administrative assistance to any industrial concern for the promotion, management and expansion of the industrial concern. vii) Providing equipment (imported or indigenous) to the existing industrial concerns on lease under its equipment leasing scheme. viii) Procuring and reselling equipment to eligible existing industrial concerns in corporate or co-operative sectors. ix) Rendering merchant banking services to industrial concerns

IDBI (industrial Development. Bank of India) Set up in 1964 It was fully owned subsidiary of RBI but in 1976 delinked from RBI and made as autonomous body of GOI H.O in Mumbai 11 branch offices It is managed by a chairman and MD appointed by central govt, a deputy governor nominated of RBI, 20 other directors.

 With effect from 1 oct,2004 it has renamed as IDBIL. It has been accepted as a deemed banking co under banking regulation act. The govt holds the majority (58.47%) shares of IDBI LTD. During last 40 years IDBI has given a qualitative dimension to the process of industrial development of the country.

Thus the role of IDBI may be stated as under: 1. As an apex financial institution, it coordinates the working of other financial institutions. (2) It assists in the development of other financial institutions. (3) It provides credit to large industrial concerns directly. (4) It undertakes other activities for the development of industry.

Objectives The main objectives of IDBI is to serve as the apex institution for term finance for industry in India. Its objectives include (1) Co-ordination, regulation and supervision of the working of other financial institutions such as IFCI , ICICI, UTI, LIC, Commercial Banks and SFCs. (2) Supplementing the resources of other financial institutions and thereby widening the scope of their assistance. (3) Planning, promotion and development of key industries and diversifications of industrial growth.

Function The IDBI has been established to perform the following functions (1) To grant loans and advances to IFCI, SFCs or any other financial institution by way of refinancing of loans granted by such institutions which are repayable within 25 year. (2) To grant loans and advances to scheduled banks or state co-operative banks by way of refinancing of loans granted by such institutions which are repayable in 15 years.

(3) To grant loans and advances to IFCI, SFCs, other institutions, scheduled banks, state co-operative banks by way of refinancing of loans granted by such institution to industrial concerns for exports (4) To discount or rediscount bills of industrial concerns. (5) To underwrite or to subscribe to shares or debentures of industrial concerns. (6) To subscribe to or purchase stock, shares, bonds and debentures of other financial institutions. (7) To grant line of credit or loans and advances to other financial institutions such as IFCI, SFCs, etc. (8) To grant loans to any industrial concern. (10) To guarantee loans raised by industrial concerns in the market or from institutions

 (11) To provide consultancy and merchant banking services in or outside India. (12) To provide technical, legal, marketing and administrative assistance to any industrial concern or person for promotion, management or expansion of any industry. (13) Planning, promoting and developing industries to fill up gaps in the industrial structure in India. (14) To act as trustee for the holders of debentures or other securities

The following are the subsidiaries of IDBI.

(1) Small Industries Development Bank of India (SIDBI) (2) IDBI Bank Ltd. (3) IDBI Capital Market Services Ltd. (4) IDBI Investment Management Company

ICICI Industrial Credit and Investment Corporation of India (ICICI) Established in 1955 As a public ltd co, at the initiative of world bank Authorized capital of 60 crores and issued capital 22 crores The objectives of ICICI are to encourage establishment of new industries, to help in expansion and modernization, technical and managerial aid to increase production and employment.

 In October 2001 .BOD Approved ICICI LTD AND ICICI BANK LTD. With effect from MAY 2002 IT IS SIMPLY ICICI bank . ICICI is now the largest bank with total assets of more than 3000 billions More than 700 branches and over 2200 ATM spread all over the country It mainly deals in Retail banking, wholesale banking, project finance, international business and special assets mgt

 Icici is known for its many firsts. -it was first Indian co to listed in New york stock exchange. Foreign financial investor own around 38% shares . Technology, strategy, low cost branches innovations are key reasons of icici success. They are the first to introduce mobile banking, on line financial information, portals to allow accounts and information on line. It was the first to introduce e-commerce. It has the largest no of call centers.

EXIM Export-Import Bank of India is the premier export finance institution of the country, established in 1982 under the Export-Import Bank of India Act 1981. Established on1st JAN,1982. Authorized capital 1000 crores and paid up is 650 crores. Exim bank came into existence when international finance division of idbi was transferred to exim bank in 1982. Exim started its working from march 1982 The issued capital is wholly subscribed by center govt

Assitance by exim Fund based Pre shipment credit Foreign currency Post shipment credit Deemed exports Loans to commercial banks for bills discounting Finance for consultancy and technology Non fund based Guarantees

 The main objective of exim is to provide financial assistance to exporters and importers. It has to coordinate the working of those institutions which can promote international trade. Management is MD+17 other directors representing govt,RBI,ECGC,public sector banks Resources of EXIM -GOI -RBI -any organization approved by GOI TYPES OF ASSISTANCE -fund based -non fund based

Refinancing instituitions Are those which do not give finance directly but they create such structure by which the funds are allocated up to the minimum level

Nabard-national bank for agriculture and rural development Started functioning from 1july 1982 Set up with an initial capital of 100 crores, now it is 2000 crores fully subscribed by GOI AND RBI. H.O IN Mumbai, with 28 regional and 391 district offices It is an apex orga for policies, planning and operations of agriculture ,ssi ,handicraft and village industries It mainly deals in three types of functions -credit ,developmental ,regulatory functions

Funds created by NABARD -rural infrastructural deve fund 28749 crores -R&d fund -Soft loan assistance fund -Credit and financial services fund

Banks A bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit

Commercial bank Commercial Banks are banking institutions that accept deposits and grant short-term loans and Advances to their customers. In addition to giving short-term loans, commercial banks also give Medium-term and long-term loan to business enterprises. Now-a-days some of the commercial Banks are also providing housing loan on a long-term basis to individuals. There are also many Other functions of commercial banks

 The Banking products/function of commercial banks are of two types. (A) Primary functions; and (B) Secondary functions. (A) Primary functions The primary functions of a commercial bank include a) Accepting deposits; and b) Granting loans and advances.

Secondary functions a. Issuing letters of credit, travelers cheque, etc. b. Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers. c. Providing customers with facilities of foreign exchange dealings. d. Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.

Types of commercial bank Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Nationalized banks Name Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank

Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank State Bank of India State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

Private sectors Banks: In case of private sector banks majority of share capital of the Bank is held by private individuals. These banks are registered as companies with limited Liability. 1. Bank of Punjab Ltd. (since merged with Centurian Bank) 2. Centurian Bank of Punjab (since merged with HDFC Bank) 3. Development Credit Bank Ltd. 4. HDFC Bank Ltd. 5 ICICI Bank Ltd. 6. IndusInd Bank Ltd. 7. Kotak Mahindra Bank Ltd. 8. Axis Bank (earlier UTI Bank) 9. Yes Bank Ltd.