Average tax rate: Average Tax Rate is equal to the total amount of taxes paid by an individual or business divided by taxable income. This rate will vary based on the amount of income received during the taxable period.
For example, if Sujith paid INR. 3,000 in taxes on income of INR. 25,000, his average tax rate would be 12%.
Formula: Paid taxes/taxable income = average tax rate.
Marginal tax rate: Marginal tax rate is the percentage of tax applied to the income for each tax slab in which you qualify. In other words, marginal tax rate is the extra taxes paid on an additional rupee of income.
For example,
Income tax slab rates for this financial year are
Up to INR. 2,50,000 income it is “NILL”.
INR. 2,50,000 to INR. 5,00,000 it is 5% + 4% education cess.
INR. 5,00,000 to INR. 10,00,000 it is 20% + 4% education cess.
Above INR. 1,00,00,000 it is 30% + 4% education cess.
So, from the above it is clear that as the income increases the rate of tax will also increase, that which is called as marginal tax rate.
Total cost: The total cost is all the costs incurred in producing something or engaging in an activity. In economics, total cost is made up of variable costs + fixed costs.
Variable cost: The variable cost is a cost that varies as the amount of goods and services a company produces varies. A variable cost is dependent on a company’s production volume. For example, XYZ company pays INR. 10 per unit of goods produced; its cost would vary as the amount of goods produced varies.
Fixed costs: Costs that don’t change from month to month and don’t vary based on activities or number of goods produced are fixed costs. These are easy to calculate and could be things like rent to pay every month, machinery rent, and salaries, etc. Regardless of whether you produce any goods or not in the 30 days during the month or 10 days during the month, you have to pay the rent.
Explicit costs: Explicit cost, also called as Actual Cost is the cost actually incurred by the firm to make all the physical payments. The physical payments include raw material, labour, plant, equipment, building, technology, advertisement, etc.
Implicit costs: Implicit costs are subtler, but just as important. They represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store.
Profit: Profit is the positive gain remaining for a business after all costs and expenses have been deducted from total sales. In other words, profit is the financial return or reward that entrepreneurs aim to achieve to reflect the risk that they take.
Formula: PROFIT = Total Sales – Total Costs.
For example, ABC company’s total sales are INR. 20,000 whereas the costs incurred in production and other expenses like advertisements, rent and salaries stood INR. 18,000. Now let us apply the formula Total Sales INR. 20,000 – Total Costs INR. 18,000 = INR. 2,000 Profit.
Economies of scale: Economies of Scale refer to the cost advantage experienced by a firm when it increases its level of production. Costs per unit can decrease as the volume of production increases for different reasons. First, the fixed costs of production can be spread over a larger number of units as the volume of units produced increases. For example, if the fixed cost is INR. 1,000 and you produced 10 units, the fixed cost per unit is 100 (1,000/10 = 100), but if you produce 50 units, the cost per unit is only INR. 20 (1,000/50 = 20). Second, you can often save money by obtaining discounts for bulk purchases of raw resources used in production.
Diseconomies of scale: Instead of production costs declining as more units are products (which is the case with normal economies of scale), the opposite happens, and costs become higher with the production of each additional unit. Diseconomies of scale are when production output increases with rising marginal costs, which results in reduced
profitability.
Constant return to scale: Constant returns to scale is when a firm changes their inputs (resources) with the results being exactly the same change in outputs (production). In other words, if a firm increases their inputs (or resources), they will see a proportional increase in production (or outputs). The same can be true if a firm decreases their inputs and that results in a proportional decrease in outputs.
For example, if a company decreases all of their inputs by 15%, their outputs will also decrease by 15. So, if a firm increases the amount of labour by 20%, a constant return to scales exists if the firm has also experienced a 20% increase in output.
Collusion: Collusion is an agreement between firms that usually compete against each other in efforts to set the prices for their goods in order to gain an advantage. In doing so, the equilibrium of the market is disrupted because supply and demand are no longer natural. When competitive firms work together, they’re able to increase profits via price increases, restriction of supply, and/or sharing insider information.
For example, firms may agree to limit the supply of their goods, making them harder to find and purchase. In doing so, consumers are willing to pay a higher price because of the limited amount available.
Factors of production: Land, Labour, Capital and Entrepreneurship are the four factors of production. Land implies all types of natural resources used to create goods and services. It includes commodities such as gold, timber, oil, copper and water. Labour is the workforce used to produce goods and services. The reward of labour is wages. Capital includes buildings, equipment, plant and machinery. Entrepreneurship is the driving force behind the transformation of an idea into a business. Reward for entrepreneurship is profit.
Basic Concepts of Macro Economics
Gross Domestic Product (GDP): By definition, GDP is the combined market value of all the goods and services produced in a country in a given time period.
GDP can be calculated in any of the following three ways:
1. Expenditure Method:
Y= C+I+G+(X-M)
Where,
Y: GDP
C: Consumption
Consumption is the total things we consume in a given period of time, generally one quarter or one year.
I: Investment
Investment is the amount that we invest in different things.
G: Government Expenditure
Government expenditure is the amount government spending in a year in the country.
X: Exports
M: Imports
*(X-M) = NX or Net Exports
2. Income Method:
GDP = Rent + Wage + Interest + Profit
Where,
Rent: Income from Land
Wage: Income from Labour
Interest: Income from Capital
Profit: Income for Entrepreneur or Organization.
*Land, Labour, Capital & Organization are the 4 factors of Production.
3. Production Method/Output Method:
GDP= Final Product Value= Sum of Value Added in each process of production.
E.g. Wheat crops: Stage 1 of Production
Wheat to Flour: Stage 2 of Production
Flour to Bread: State 3 of Production
Where, Wheat and Flour are raw materials and Bread is the Final Product.
Price of Wheat in Market is Rs. 2000
Price of Flour (after processing wheat) in Market is Rs. 2500
Price of Bread (using flour) in Market is Rs. 3500: Final Product Method.
Price of Bread in Market (Value Added Method) = Values added in (Stage 1 + Stage 2 + Stage 3) of production
= 2000+(2500-2000)+(3500-2500)
= 2000+500+1000= 3500
Thus, GDP= Final Product Method= Value Added Method.
#All 3 methods of calculation are designed to give exactly the same values of GDP, however, one can always count on some mathematical/statistical discrepancies to give rise to minor errors and approximations.
Gross National Product (GNP): Gross National Product (GNP) consists of Gross Domestic Production (GDP) plus factor incomes earned by NRI’s abroad, minus income earned in the domestic economy by foreign residents.
Therefore, GNP= GDP + Income generated in foreign economies by its residents – Income generated in domestic economy by foreign residents.
Generally, GNP is the totally produced by the residents of a country.
Net Domestic Product (NDP): Net Domestic Product (NDP) represents the net value of all goods and services produced within a nation’s geographic borders over a specified period of time.
The net domestic product equals the gross domestic product (GDP) minus depreciation on a country’s capital goods (Buildings, plant & machinery and vehicles, etc…).
NDP = GDP – Depreciation.
Depreciation: a reduction in the value of an asset over time, due in particular to wear and tear.
Net National Product (NNP): Net national product refers to gross national product (GNP) i.e. the total market value of all final goods and services produced by the factors of production of a country during a given time period, minus depreciation.
NNP = GNP – Depreciation.
Personal Income (PI): In economics, personal income refers to an individual’s total earnings from wages, investment enterprises, and other ventures. It is the sum of all the incomes received by all the individuals or household during a given period.
Personal Disposable Income (PDI): Personal disposable income is the total amount of money available for an individual or population to spend or save after taxes have been paid.
Personal Disposable Income = Personal Income – Direct Taxes Paid by households.
