Monday, 18 September 2017

Theory of Consumption - Indifference Curve Analysis

The advocates of Indifference Curve Analysis make the following assumptions for the analysis of the behaviour of the consumer.

1. Utility cannot be measured

2. When the consumer is given more of a commodity, he will always prefer to have more to less of that commodity.

3. It is based on the Principle of Transitivity. If there are many combinations of two commodities, and if the consumer is indifferent between the combinations of A and B, and also indifferent between B and C, so he will be indifferent between the combinations of A and C.

4. The Indifference Curve Analysis is based on the Law of Diminishing Marginal Rate of Substitution.

Properties of Indifference Curve

There are definite properties of the Indifference Curve(IC). On these properties is built the shape of the IC.

1. An IC slopes downwards from left to right, because as the consumer increases the consumption of one commodity, he has to decrease the consumption of another commodity in order to remain at the same satisfaction level.

2. The IC cannot touch either the X-axis or the Y-axis, because if the IC touches either of the axes, then the consumer will purchase only one commodity. But this is against the concept of the IC. IC is the representation of the same satisfaction obtained from different combinations of two commodities.

3. The higher IC gives more satisfaction than the lower IC, because in the higher indifference curve the consumer will have more of the commodities. Also, the consumer will always prefer to have more to less of that commodity. In the diagram IC4(highest) gives the maximum satisfaction to the consumer because on this curve the consumer will have more of the commodities.

4. The different indifference curves cannot cut each other at any point. If two ICs cut each other at a point, satisfaction obtained from both the curves will be the same. This is against the property of IC. All the points on a higher indifference curve give more satisfaction than all the points on a lower indifference curve.

5. An indifference curve is convex to the origin because it is based on the law of Diminishing Marginal Rate of Substitution.

Diminishing Marginal Rate of Substitution

Statement of the Law: If there are two commodities, the consumer will substitute one commodity for the other commodity in order to get the same satisfaction, but the marginal rate of substitution will be diminishing.

This can be explained with the following example. Figures are units consumed of commodities X and Y.
Combination A (X=1, Y=15, Substitution=0),
Combination B (X=2, Y=11, Substitution X = 2-1= 1, substitution Y = 15-11 = 4 )
Combination C (X=3, Y= 8, Substitution X = 3-2= 1, substitution Y = 11-8 = 3)
Combination D (X=4, Y= 6, Substitution X = 4-3= 1, substitution Y = 8-6 = 2 )
Combination E (X=5, Y= 5, Substitution X = 5-4= 1, substitution Y = 6-5 = 1 )

Substitution of commodity Y gradually diminishes from 5 to 4 to 3 to 2 to 1.

Diagram of Marginal Rate of Substitution

When the Indifference curve is convex to the origin, the Law of Diminishing Marginal Rate of Substitution will be applicable.

The Indifference curve can never be a straight line or concave to the origin.

Consumer's Equilibrium

Meaning: the consumer will be at an equilibrium position when he gets the maximum satisfaction out of his consumption. At this position he is not willing to make any alterations in his pattern of consumption.
Assumptions: In order to find out the consumer's equilibrium position with the help of IC Analysis, we make the following assumptions.

1. The consumer has an indifference map.
2. The consumer has a fixed amount of income, and he will spend the whole of the income on the goods or commodities, which are available in the market.
3. There are only two commodities available in the market. This is done to keep the discussion simple and easy to comprehend.
4. The prices of these two commodities are fixed.
5. These two commodities are finely divisible.
6. The consumer acts rationally.

Now if we combine the indifference map and the price line, we can find out the consumer's equilibrium position, because the indifference map shows the scale of preferences of the consumer and the price line shows the purchasing power of the consumer.

In the diagram below we combine the indifference map and the price line.

Conclusion: thus according to the Indifference Curve analysis the consumer will be at equilibrium when the price line is tangent to the highest Indifference curve.

New equilibrium position under Indifference curve analysis
The equilibrium position of the consumer will be found out on the assumption that income of the consumer will remain constant. Now if there is any change either in the income of the consumer or prices of commodities, there will be a change in the equilibrium position.

Theory of Consumption - Revealed Preference Analysis

Introduction: In 1960 Mr. Samuelson introduced the Revealed Preference Analysis to explain the behaviour of the consumer. The fundamental difference between the Utility Analysis, Indifference Curve Analysis and Revealed Preference Analysis is that when the first two are based on the psychology of the consumer, the revealed Preference is based on the actual behaviour of the consumer.

Assumptions: In order to explain the behaviour of the consumer with the help of Revealed preference Analysis, Mr. Samuelson made the following assumptions.

1. Utility cannot be measured.

2. The consumer always prefers more of a good to less, until his income is exhausted.

3. It is based on the Principle of Strong Ordering. This means that if the consumer is given many commodities, he can place them in order of his preference.

4. It is based on the Principle of Consistency, and the consumer acts consistently. 'Consistency in choice' means that if the consumer chooses the commodity combination P in preference to all other combinations, then he will never subsequently choose any combination from the rejected ones in a situation in which P is also available. This is the key to this approach.

5. The choice made by the consumer will reveal the preference of the consumer for the commodity. If he chooses P over Q, then this choice reveals his preference for P.

6. The consumer's preference pattern maintains transitivity. If the consumer prefers P over Q, and Q over R, Then he definitely prefers P over R.

The substitution effect is always non-positive. It can never result into a reduction in the purchase of the commodity whose price has fallen.

In order to find out the consumer's equilibrium position with the Revealed Preference Analysis, we make the following assumptions.

1. The consumer has a fixed amount of income.
2. There are only two commodities available in the market, namely A and B.

On the basis of these assumptions we can now draw the following diagram and find out the consumer's equilibrium position.

Let us assume that the price line or budget line is XY. It represents all combinations of commodities A and B available to the consumer. The consumer can choose any of the combinations of commodities A and B, lying within, or on border of the shaded triangle OXY.
We now assume that out of all the combinations available to him, the consumer chooses to consume Oa of commodity A and Ob of commodity B. This combination is represented by the point P. Thus the consumer has chosen the combination P in preference to all other combinations lying within the triangle OXY. So in future he will never choose any combination from triangle OXY in a situation where P is also available.

Now there is a fall in the price of commodity B. The price of commodity A and the income of the consumer remains constant. Given the same income, the consumer can still consume OX of commodity A by spending all his income on commodity A. Also as the price of commodity B has fallen, he can consume OZ of commodity B instead of Ob, by spending all his income on commodity B. Therefore, XZ is the new budget line.

A fall in the price of a commodity is equivalent to an increase in real income. This income effect needs to be eliminated. This is done by moving the new budget line XZ towards the origin O, keeping it parallel to its original position, until it passes through point P. So the new budget line is X'Z', where the consumer is able to purchase his original combinations of commodities A and B at P, but at the new set of prices. (new price for commodity B only; price of commodity A has not changed). The consumer can now choose any point on X'Z'.

Considering the segment X'P: All points on segment X'P were available to the consumer before the fall in the price of commodity B. All these points were within the triangle OXY and rejected by him originally in favour of the combination at point P. So, in the new situation, where P is still available, he will definitely choose P rather than a combination previously rejected. This is because the consumer moves according to the Principle of Consistency.

Considering the segment PZ': The segment PZ' represents combinations of commodities which were not previously available to the consumer. It would therefore be quite consistent for the consumer to choose some combination along the PZ' part of the new budget line. This could mean consuming more of commodity B, whose price has fallen.

This implies that the consumer either consumes same quantity of commodity B as before by remaining at point P, or more of the commodity B by choosing a point on the segment PZ'. The consumer selects the point Q. If we now restore the income effect and return to the changed budget line XZ, the consumer will move to R on the changed budget line XZ, as a result of both income effect and substitution effect, where bc (the price effect) = bs (the substitution effect) + sc (the income effect).

Conclusion: The substitution effect can never lead the consumer to buy less of a commodity whose price has fallen.

Unless the income effect is negative and of sufficient magnitude to neutralize the substitution effect, under the assumption of consistency in choice, the demand curve of a consumer for any product will slope downward to the right.

Criticism: Some economists have said that this analysis is based on the assumption of Strong Ordering. But according to the critics if the consumer is given many commodities it will not be possible for him to follow the Principle of Strong Ordering. In the case of many commodities there may be a stage where the consumer will be indifferent.

Though there are some defects in this analysis, the advocates of this analysis regard this as superior to the other two because it is based on the actual behaviour of the consumer. So according to them this is more scientific because it is based on the actual behaviour of the consumer

Creativity in Advertising

Creativity is at the heart and soul of advertising.It helps to transform strategic thinking into ideas that enable the advertiser and the ad agency to make ads that standout esp in the mind of the prospect.
Creativity is the ability to generate novel and innovative ideas that can be used as a solution to communication problems.

3 aspects are most accepted:

The creative process
The creative person and
The creative situation

The Creative process

1. Preparation

During the preparation step of the creative process model, an individual becomes curious after encountering a problem. Examples of problems can include an artistic challenge or an assignment to write a paper. During this stage, she may perform research, creates goals, organize thoughts and brainstorm as different ideas formulate. For example, a marketing professional may prepare for a marketing campaign by conducting market research and formulating different advertisement ideas.

2. Incubation

While the individual begins to process her ideas, she begins to synthesize them using her imagination and begins to construct a creation. During this step, the individual does not actively try a find a solution, but continues to mull over the idea in the back of the head.

3. Illumination

As ideas begin to mature, the individual has an epiphany regarding how to piece her thoughts together in a manner that makes sense. The moment of illumination can happen unexpectedly. For example, an individual with the task of putting together an office party may have an idea for a theme while driving home from work.

4. Evaluation

After a solution reveals itself in an epiphany, the individual then evaluates whether the insight is worth the pursuit. He may make changes to his solution so it is clearer. He may consult with peers or supervisors regarding his insights during this step before pursuing it further. If he works with clients, he may seek a client's input and approval before moving on to the next step.

5. Implementation

The implementation of an idea or solution in the creative process model is when an individual begins the process of transforming her thoughts into a final product. For example, during this step, a painter may begin outlining shapes on a canvas with charcoal before applying oil paints to the medium. An individual may begin this step more than once in order to reach the desired outcome. For example, a graphic designer may open a new digital canvas if he did not have the scale calculated correctly on a previous work, and he will continue to implement his ideas and make adjustments until he reaches a pleasing final product.
The Creative person
Some of the essential characteristics of a Creative Person are 1. The Ability to Visualise 2. Openness to New Experiences 3. Willingness to gather information!

1. The Ability to Visualise:

Most copywriters have a good visual imagination as well as excellent writing skills.

Writers as well as designers must be able to visualize. Good writers paint pictures with words. They describe what something looks like, sounds like, smells like, and tastes like. They use words to transmit these sensory impressions.
Most of the information we accumulate comes through sight, so the ability to manipulate visual images is crucial for good writers. In addition to seeing products, people, and scenes in his or her mind’s eye, a good writer is able to visualize a mental picture of the finished ad while it is still in the talking, or idea, state.

2. Openness to New Experiences:

One characteristic that identifies creative people is that they are open to new experiences. Sheri Broyles, professor at the University of North Texas, looked at people in advertising to test that idea. Agency creative directors must not only be creative themselves, but they must also be able to recognize and inspire creative work in their copywriters and art directors.
When given the Openness to Experience questionnaire. Broyles found that these creative directors were more open than most over people. A second study showed a similar pattern with students in a creative advertising class. A comparison between the two studies showed that the advertising students scored higher than established norms and the advertising professionals scored even higher than the students did.
According to Broyles, it is easy to see how someone who agrees with this last statement might develop innovative advertisements and commercials. Such fantasies lead to Michael Jordan and Larry Bird playing an outlandish game of horse and the award winning “Nothing but Net” spot for McDonald’s. Over the course of a lifetime, openness to experience may give you many more adventures from which to draw. Those experiences would, in turn, give a novelist more characters to write about, a painter more scenes to paint, and the creative team more angles from which to tackle an advertising problem.

3. Willingness to gather information:

The creative personnel must review the creative brief, including the marketing and advertising plan. They should be aware of the market, the product, and the competition. They may also seek additional information from the account executives and from the client company’s marketing, product, sales, or research departments to learn about the nature of the company, its products, its marketing history, its competitors and the competitor’s advertising styles. 
Four Rules of Creativity:
There are generally four basic rules to be kept in mind during the creativity process these are
mentioned below:
1. Make the product relevant to customer.
2. It should be promise to the customer.
3. Don't let it stand alone.

4. Always put product in the centre of the commercial.


Non-Banking Financial Intermediaries: Non-Banking financial Intermediaries are a
heterogeneous group of financial institution, other than commercial and cooperative banks.
These institutions are an integral part of the Indian financial system. A wide variety of financial
institutions is included in it. These institutions raise funds from the public, directly and
indirectly, to lend them to ultimate spenders. The Development Banks (such as the IDBI, IFCI,
ICICI, SFCs, SIDCs, etc.) fall in this category. They specialize in making term loans to their
borrowers. LIC, GIC and its subsidiaries and the UTI are its other all India big term-lending
institutions. Out of these three, only UTI is a pure non-banking financial intermediary, the others
raise funds in the shape of premium from the sale of insurance. Besides this, there are provident
funds and post offices who mobilize public savings in a big way for onward transmission to
ultimate borrowers or spenders. A large number of small NBFs such as investment companies
loan companies, hire purchase finance companies and the equipment leasing companies, these
are private sector companies with only a few exceptions.
Functions of Non-Banking Financial Intermediaries: The main functions performed by NBFs
are as under:
1. Brokers of Loanable Funds: NBFs act as brokers of loanable funds and in this capacity
they intermediate between the ultimate saver and the ultimate investor. They sell indirect
securities to the savers and purchase primary securities from investors. Thus, they change
debt into credit. By doing so, they take risk on themselves and reduce the risk of ultimate
lenders. Not only that, by diversifying their financial assets they spread their risk widely
and thus reduce their own risk because low returns on some assets are offset by high
return on others.
2. Mobilization of Savings: These institutions mobilize savings for the benefit of the
economy. By providing expert financial services like easy liquidity, safety of the
principal amount and ready divisibility of savings into direct securities of different values
they are able to mobilize more funds and attract larger share of public savings.
3. Channelization of Funds into Investment The NBFs, by mobilizing savings, channelize
them into productive investments. Each intermediary follows its own investment policy.
For instance, savings and loan associations invest in mortgages; insurance companies
invest in bonds and securities etc. Thus this channelization of public savings into
investment helps capital formation and economic growth.
4. Stabilize the Capital Market These institutions trade in the capital market in a variety of
assets and liabilities, and thus equilibrate the demand for and supply of assets. Since they
function with a legal framework and rules and they protect the interests of the savers and
bring stability to the capital market.
5. Provide Liquidity Since the main functions of the NBF’s convert a financial asset into
cash easily, quickly and without loss in the capital value, they provide liquidity. They are
able to do so, because they advance short-term loans and finance them by issuing claims
against themselves for long periods and they diversify loans among different types of
Types of Non Banking Financial Institutions: The main types of non-banking financial
institutions/intermediaries are as under:
The Life Insurance Companies: Life Insurance Corporation of India enjoys near monopoly of
life insurance in India. It is the biggest institutional investor. The LIC was established in 1
September, 1956 by nationalizing all the life insurance companies operating in India. Prior to
nationalization of insurance companies, 245 private insurance companies operate from 97
centres. The main objectives of LIC are (i) To carry on Life Insurance business in India. Life
insurance is a very important form of long term savings. (ii) The LIC aims in promoting savings.
(iii) To invest profitability the savings collected in the form of payments received from life
insurers. The LIC has two tier of capital structure- the initial capital, and premium capital. The
initial capital of LIC is Rs. 5 crore provided by the Government of India. The premium paid by
policy holders are the principal source of funds by LIC. Besides, the LIC receives interest,
dividends, repayments and redemptions which add to its investible resources. The LIC is
required to invest atleast 50% of its funds in government and other approved securities. LIC has
to invest 10% of its funds in other investments which include loans to state governments for
housing and water supply schemes, to Municipal Corporation, and corporation, and cooperative
sugar companies, loans to policy holders, fixed deposits with banks and cooperatives societies.
The main principle involved is security of funds rather than maximization of return on
General Insurance Companies: General Insurance Corporation of India was established in
January 1973, when General Insurance Companies were nationalized. At the time of
nationalization, there were 68 Indian companies and 45 non-Indian companies in the field. Their
business was nationalized and vested in the General Insurance Company and its four subsidiaries
viz., National Insurance Company Ltd. and United India Insurance Company Ltd. The GIC is
the holding company and its direct business is restricted only to aviation insurance; general
insurance is handled by the subsidiaries of GIC and they operate various types of policies to suit
the diverse needs of various segments of the society. They derive their income from insurance
premia and invest the funds in various types of securities as well as in the form of loans. GIC has
thus emerged as an important investment institution operating in Indian capital market.
Unit Trust of India: The UTI is an investment institution which offers the small investor a share
in India’s industrial growth and productive investment with minimum risk and reasonable
returns. The UTI was established as a Statutory Corporation in February 1964 under the UTI Act
1964. It commenced its operations from 1 July, 1964. The UTI was established with the
objective of mobilizing the savings of the community and channeling them into productive
investment. Its objective is to encourage widespread and diffused ownership of industry by
affording investors particularly the small investors, a means of acquiring shares assured of a
reasonable return with minimum risk. Thus, the primary objective of the Unit Trust in two fold
(i) To stimulate and pool the savings of the middle and low income groups (ii) To enable the unit
holders to share the benefits and prosperity of the rapidly growing industrialization in the
country. The UTI is managed by a board of trustees. It consists of a chairman and 9 other
trustees. The chairman is appointed by the government of India in consultation with the IDBI, 4
trustees nominated by the IDBI, one trustee each nominated by the RBI, LIC and SBI and 2
trustees selected by other institutions which contributed to the initial capital of the UTI. The head
office of UTI is in Mumbai. It has four zonal offices at Mumbai, Kolkata, Chennai and New
Delhi. It has 51 branch offices in various parts of the country.

banking - SHGs

Self-Help Groups: SHGs have been launched to combat the problem of growing poverty at
the grass roots level. Small, cohesive and participative groups of the poor are formed who
regularly pool their savings to make small interest bearing loans to its members. In the process,
they lean the nuances of financial discipline. Initially bank credit is not primary objective. It is
only after the group stabilizes and gains ability to undertake productive activity and bear risk that
micro-credit comes into play.
The SHG bank linkage programme has proved to be the major supplementary credit delivery
system with a wide acceptance by banks, NGOs and various government departments. It
encourages the rural poor to build their capacity to manage their own finances, and then
negotiate bank credit on commercial terms. Certain norms have to be observed in the formation
of SHGs. To become a member, a person has to be below the poverty line. Only one member of
a family can become a member and that person cannot become a member of more than one SHG.
There is no limit of maximum number of members can be between 10 and 20. Members of SHGs
are supposed to meet regularly, that is, once a week or once a fortnight. However, registration is
optional and left to the discretion of the members.

Banking- Micro Credit

Micro-Credit: In spite of the phenomenal outreach of formal credit institutions, the rural
poor still depend upon the informal sources of credit. Two major causes for this are the large
number of small borrowers with small and frequent needs. Also the ability of these borrowers to
provide collateral is very limited. Besides, the long and cumbersome bank procedures and their
risk perception have also been limiting factors. Micro-credit has emerged as the most suitable
and practical alternative to conventional banking in reaching the hitherto untapped poor
Micro-credit or micro-finance means providing very poor families with very small loans to help
them engage in productive activities or grow their tiny businesses. Over time, the concept of
micro-credit been broadened to include a whole range of financial and non-financial services like
credit, equity and institution building support, savings, insurance etc. Micro-finance institution is
an organization that provides financial services to people with limited income who have
difficulty in accessing the formal banking sector. The objective of micro finance is to provide
appropriate financial services to significant numbers of low-income, economically active people
in order to finance micro-enterprises and non-farm income generating activities including agroallied
activities and ultimately improve their condition as well as that of local economies.’
As per RBI micro-finance is the provision of thrift, credit and other financial services and
products of very small amount to the poor in rural, semi-urban and urban areas for enabling them
to raise their income levels, and improve their living standard. Micro-credit institutions are those
that provide these facilities. The micro-finance approach has emerged as an important
development in banking for channelizing credit for poverty alleviation directly and effectively.
The micro-credit extended by banks to individual borrowers directly or through any agency is
regarded as a part of banks priority sector loans.

type of banks- RRBs

Rural Banking: On the birth anniversary of Mahatma Gandhi on October 2, 1975, Rural
Banks were established with a view to stepping up rural credit. In 1975, the Government of
India appointed a working group under the Chairmanship of M. Narasimham, the Deputy
Governor of the Reserve Bank of India to review the flow of institutional credit to the people
in rural areas. The committee was to study the availability of institutional credit to the weaker
section of the rural population and to suggest alternative agencies for this purpose. The
committee concluded that the commercial banks would not be able to meet the credit
requirements of the weaker sections of the rural areas in particular and rural community in
general. The Government accepted the recommendations of the working group and passed an
ordinance in September 1977 to establish Regional Rural Banks.
Need to Establish Regional Rural Banks
The main need and objective of the RBBs was to provide credit and other facilities to the small
and marginal farmers, agricultural laborers and artisans, who had, by and large, not been
adequately served by the existing credit institutions namely, cooperative banks and commercial
1. Co-operative Banks: So far as the co-operative credit structure is concerned, it lacks the
managerial talent, post credit supervision and the loan recovery. They are also not in a
position to mobilize necessary resources.
2. Commercial Banks: These banks are mostly centralized in urban areas and are urbanoriented.
Although these can play a crucial role as far as the rural credit is concerned. For
this they have to adjust their methods, procedures, training and orientation in accordance
with the rural environment. Further, due to high salary structure, staffing pattern and high
establishment expenses their operational cost is also higher. Thus, under these
circumstances, the commercial banks cannot provide credit, to the weaker sections of the
rural areas, at a cheap rate.
3. Need of a New Institution: Thus in accordance with the rural requirements, the necessity
was felt to establish such an institution i.e. a rural oriented bank which may fulfill credit
needs of the rural people particularly the weaker section. It may also combine the merits
of the above two mentioned institutions, keeping aside their drawbacks. The RRBs, as
subsidization to nationalized banks, are expected in the long run not only to provide
credit to farmers and village industries but also to mobilize deposits from rural
households. They may form an integral part of the rural financial structure in India.
Difference Between RRBs and Commercial Banks
Although the RRBs are basically the scheduled commercial banks, yet they differ from each
other in the following respects
1. The area of the RRB is limited to a specified region comprising one or more districts of a
2. The RRBs grant direct loans and advance only to small and managerial farmers, rural
artisans and agricultural laborers and others of small having small means for productive
3. The lending rates of RRBs are not higher than the prevailing lending rates of co-operative
societies, in any particular state. The sponsoring banks and the Reserve bank of India
provide many subsidies and concessions to RRBs to enable it to function effectively.
The RRBs have been established by ‘Sponsor bank’ usually a public sector bank. The steering
committee on RRBs identifies the districts requiring these banks. Later, the Central Government
sets up RRBs with the consultation of the state government and the sponsor bank. Each RRBs
operates within local limits with such as name as may be specified by the Central Government.
The bank can establish its branches at any place within the notified areas.
The authorized capital of each RRBs is Rs. 5 crore which may be increased or reduced by the
Central Government but not below its paid up capital of Rs. 25 lakh. Of this fifty percent is
subscribed by the Central Government, 15 percent by the State Government and 35 percent by
the sponsor bank. At present the formula for subscription to RRBs has been fixed at 60:20:20
between central government, state government and the sponsor bank. The Central Government’s
contribution is made through NABARD.
Each RRB is managed by a Board of Directors. The general superintendence, direction and
management of the affairs and business of RRBs vests with the nine member Board of Directors.
The Central Government nominates 3 directors. The chairman, usually an officer of the sponsor
bank but is appointed by the central Government. The Board of Directors is required to act on
business principles and in accordance with the directives and guidelines issued by the Reserve
Bank. At the State Level, State Level Coordination Committee have also been formed to have
uniformity of approach of different RRBs.
The RRB are required to perform the following functions or operations:
1. Operations Related to Agricultural Activities: To grant loans and advances to small and
marginal framers and agricultural laborers, whether individually or in groups or to
cooperative societies including agricultural marketing societies, agricultural processing
societies, cooperative farming societies, primary agricultural societies for agricultural
purposes or for other related purposes.
2. Operations Related to Non-Agricultural Activities: Granting of loans and advances to
artisans, small entrepreneurs and persons of small means engaged in trade, commerce and
industry or other productive activities within its area of operation.