Information Network and Credit Information Center of Nepal Rastra Bank

Establishment of Information Network: 

In order to promote banking and financial system of Nepal, the central bank of Nepal commonly known as Nepal Rastra Bank, has established information network. The central bank operates the information network. The main objective of establishing the information network is to establish the communication among different licensed banks and financial institutions.

Establishment of Credit Information Center (CIC) : 

Nepal Rastra bank establishes, regulates as well as manages one credit information Center. This center secures the licensed bank and financial institutions from the upcoming problem and challenges aroused in respect of loan. The main purposes to establish this center are as follows:-

• To obtain information on the flow of credit from commercial banks and financial institutions. This helps to ensure fairness and appropriateness in credit flow.

• To require the exchange of the information among the commercial banks and financial institutions. 

• To require to send the name-list of the debtors that do not repay the loan in time or misuses the loan to the Center.

• To require to obtain on compulsory basis the information from the Center prior to making investment or advancing loan of an amount more than the limit prescribed by the central Bank.

• To have the name-list received blacklisted by the Center upon confirmation and to take necessary action in this regard as the central bank deems to be fit. 

• To submit report to the Bank, on the exchange of information among the commercial bank and financial institution and

• To use the information of above report while making loan investment on the basis of inspection, supervision and monitoring.

Note : 

Click this link given as follows :

• For more details regarding Nepal Rastra Bank 

• For more details regarding Objectives, duties, function and powers of Nepal Rastra Bank 

• For more details regarding Currency of Nepal and its related rules 

• For more details regarding Financial Provisions of Nepal Rastra Bank 

• For more details regarding Foreign exchange policy, regulation and reserves and govermental relationships of Nepal Rastra Bank  

• For more details regarding Effect of control made by Nepal Rastra Bank to its Licensed Institutions

Picture Credit: ornatesol.com

Mental Accounting or Psychological Accounting

Mental accounting is simply a psychological process of accounting of impact upon any transaction or events incurred. It is also called 'Psychological Accounting', because whole processing is done within mind.

It refers to the way in which the consumers encodes the product, categorizes it and finally evaluates its financial outcomes from available alternatives. 

It is to be noted that, different people derive different kind of utilities (mental accounts) under same circumstances. Therefore the values may differ as per person and circumstances.

There are no logical patterns for categorization, however there is certain trend to categorize funds and quantify a certain value for it.

Let us see an example for this,

when you get any income from any source than what do you do?

you allocate your budget in different parts (accounts), like you fix some portion of your budget in consumption, rent, household expenses, health, education, investment, savings and so on. However, you can easily shift your allocation into other heads as per the necessity. This implies that, although there is a certain trend to categorize and quantify a certain value, but there is no set of any logical patterns for such categorization.

Now, let us see next example to understand the flow of mental accounting:

Situation i :

You have decided to drink a cappuccino costing Rs 300 in the reputed restaurant. you purchased it but found it to be tasteless. what would you do?

Well !, I don't know about you, but i would definitely throw my drink. If you have the same state of mind, then the actual loss for your cappuccino is Rs. 300. you may not consume the same product again.

Situation ii:

Assume that you have realized that, you lost Rs 300. ...What happens?

In this case, you are more likely to purchase cappuccino because the money that was lost, didn't belong to any account, so you had not exceeded your mental concert budget.

However, in the first case you had allocated the money for the drink. So, the purchase of another drink will exceed your mental concert budget.

Richard Thaler (an american economist) of Chicago has said that - the mental accounting is based upon the following core principles :

• consumer tend to segregate gains. 

• consumer tend to integrate losses. 

• consumer tend to integrate smaller losses with larger gains.

• consumer tend to segregate small gains from large losses. 

The principle of mental accounting is derived from 'Prospect theory'.

Prospect theory is the theory which says that, people choose between probabilistic alternatives that possesses risk, where the probabilities of outcomes are known. This means that, the people makes decisions based upon potential values of losses and gains rather than final output. In simple words, consumers frame their decision alternatives in terms of gains and losses as per the value function.

So, the propensity to consume depends upon the level of mental account. Similarly, mental accounting depends upon the utility one derives. It also depends upon how one stimulate and respond towards such stimulation. Higher the mental value, higher will be the urge to consume. Therefore, the whole process is subjective. So, the researchers have found out that, the consumers use mental accounting to handle their resources. 

Some important links:

• Stress Management

• Psychological Capital

Picture Credit : www.ryansaplan.com

Practical approach towards Profit Maximization and Boumol's Sales Revenue maximization Model

# Tamakoshi Electronics Ltd. has following demand and cost functions:

    P = 2000 – 10 Q

    TC = 1000 + 200 Q

It is obvious that the general public is willing to purchase tickets.

So, compute:

a) Profit Maximization Output, Price, TR and Maximum Profit.

b) Sales Maximizing Output, Price, Profit and Maximum TR.

c) Output, Price and TR under profit constraints of Rs. 79,500.

Solution:

Let us see the information given:

We can find that the demand function is represented by P = 2000 – 10 Q. Similarly, cost function is represented by TC = 1000 + 200 Q

Representation of the abbreviations:

P = Price

Q = quantity

TR = Total Revenue

TC = Total Cost
𝝅 = Total Profit

a) For computation of Profit Maximization Output, Price, TR and Maximum Profit.

Applying the first order condition:

We have,

On solving this, we get 1800 – 20 Q = 0

Or, Q = 90 units

Where,

𝝅 = TR – TC

= (P X Q) – TC                    [since TR = P X Q]

= (2000 – 10 Q) x Q – (1000 + 200 Q)         [putting the respective values of P and TC from the above functions]

= 2000 Q – 10 Q ² – 1000 – 200 Q

= 1800 Q – 10 Q² – 1000……………………………………………equation (i)

Again, under second order condition, we have:

The second order condition is negative, so as per maxima approach, the profit function is maximized when 90 units of output is produced.

So, the required information are as follows: 

• Profit Maximization output is 90 units

• Price is Rs 1100 [since, P = 2000 – 10 Q = 2000 – 10 x 90] 

• TR is Rs. 99000 [since, P x Q = 1100 x 90]

• Maximum Profit (𝝅) is Rs. 80000 [ since, 1800 Q – 10 Q² – 1000 = (1800 x 90) – (10 x 90 x 90) – 1000 ]

b.) For computation of Sales Maximizing Output, Price, Profit and Maximum TR.

Maximum TR = P x Q = (2000 – 10 Q) x Q       [since, P = 2000 – 10 Q]

                       

                      = 2000 Q – 10 Q²

Now computing the first order condition, we get

Or, 2000 – 20 Q = 0

Or, Q = 100 units

This is the level of output where sales maximizing could be done.

Testing the second order condition:

The second order condition is negative, so as per maxima approach, the total revenue is maximized when 100 units of output is produced.

So, the required information are as follows:

• Sales Maximizing Output is 100 units of output.

• Price is Rs 1000                 [since, P = 2000 – 10 Q = 2000 – (10 x 100)    ]

• Maximum Profit (𝝅) is Rs. 79000 [since, 1800 Q – 10 Q² – 1000 = 1800 x 100 – 10 x 100 x 100 – 1000]

• Maximum TR is Rs. 100,000          [since, P x Q = 1000 x 100        ]

 c.) For computation of Output, Price and TR under profit constraints of Rs. 79,500.

Here, the profit constraints is given as Rs 79,500. This implies that, the total profit of Tamakoshi Electronics Ltd must be Rs.79, 500 or more.

This means:

 𝝅 = Rs. 79,500

As we have the value of  𝝅 in equation (i)

We get,

𝝅 = 1800 Q – 10 Q² – 1000  

Or, 79,500 = 1800 Q – 10 Q² – 1000    [putting the value of 𝝅 as 79,500]

Or, 10 Q² – 1800 Q +79,500 + 1000 = 0

Or, 10 Q² – 1800 Q + 80,500 = 0

On solving the above equation we get,

Q = 97 units or 83 units

Now, if Q = 97 units, Then 

• P is Rs. 1030 [since, P = 2000 – 10 Q = 2000 – 10 x 97 = 1030]

• TR is Rs. 99910 [since, P x Q = 1030 x 97]

• TC is Rs. 20,400 [since, TC = 1000 + 200 Q = 1000 + (200 x 97)   ]

• 𝝅 = Rs. 79,510 [since, TR – TC = 99910 – 20400]

However, if Q = 83 units, Then

• P is Rs. 1170 [since, P = 2000 – 10 Q = 2000 – 10 x 83 = 1030]

• TR is Rs. 97110 [since, P x Q = 1030 x 83]

• TC is Rs. 17600 [since, TC = 1000 + 200 Q = 1000 + (200 x 83)   ]

• 𝝅 is Rs. 79,510 [since, TR – TC = 99910 – 20400]

Since, the objective of the firm is to maximize sales revenue with constraints of 𝝅 so, the revenue could be maximum at greater or equal to 90 units (profit maximization output). So, under the two probable output units (97 units or 83 units), the sales could be maximized at 97 units.

Therefore, the required information are as follows:

• Output is 97 units

• Price is Rs. 1030

• TR under profit constraints of Rs. 79,500 is Rs. 99910.

Note : 

Click on these links for :

• Managerial Economics or Business Economics
• Characteristics of Managerial economics and Role of Managerial Economics in Business Decision Making 
• Difference between Managerial Economics and Traditional Economics
• Is Sales Revenue Maximization Model is better than Profit Maximization Model

• Practical Approach to Accounting Cost and Economic Cost

• Profit and Functions of Profit
• Practical Approach to Moving Average in Managerial Economics 
• Case Study for Demand Forecasting

Sales Revenue Maximization Model is better than Profit Maximization Model

# Is Sales Revenue Maximization Model is better than Profit Maximization Model? Justify.

In order to compare both the models i.e sales maximization model and profit maximization model first we must understand both the models :

Profit Maximization Model:

This is a traditional model of economics which has its prime focus upon profits. 

As we know, every nation is governed by economic and non-economic activities. Economic activities are concerned with profits and wealth whereas non-economic activities is concerned with mankind and welfare of the nation. 

There are a lot of objectives of the business.  Under this model, the main target of the firm is to maximize profits. The firm may have different objectives or combination of these objectives like: Survival, Growth, Stability, Efficiency, Market Share and so on.

As firms were operated mostly under proprietorship business in 18th century, the classical economists believed that the sole objective of any business is profit. They had following assumption :

1. Time period is fixed.
2. Single commodity is produced by the firm where the owner himself is the manager of the firm.
3. There is existence of imperfectly competitive market (like monopoly, monopolistic, oligopoly ).
4. The firm always wants to maximize profits.

So, the classical economists tried to explain profit maximization model in two simple ways. 

They are :

TR-TC Approach:

Under this approach, Profit is defined simply as the difference between total revenue and total cost. 

Mathematically, 

Profit = TR-TC ,

Note: 

• TR=TC then it is the break-even level.
• TR>TC then the firm derives profit.
• TR<TC then the firm suffers loss.

So, the firm will be at equilibrium position where the difference between total revenue and total cost is maximum. 

If we represent the facts through graphical representation , it can be found that:

The TR curve slopes upward to the right and bends towards X-axis. This is due to its assumption number 3. That makes TR increase but at decreasing rate.

Similarly, TC curve slopes upward to the right as inverse -S-shaped. This is due to traditional cost concept which explains that  TC increases at decreasing rate initially and latter at increasing rate.

If we plot the above information , then we can find that a place where the vertical difference between TR point and TC curve point is maximum, at that level firm is in equilibrium position.

MR-MC Approach:

Under this approach, the firm reaches at equilibrium position if it satisfies the following two condition:

1. MC=MR
2. MC cuts MR from below (i.e the slope of MC > the slope of MR)

As per the assumption number 3 , TR increases at diminishing rate as output increases. So, MR decreases continuously as output increases that implies, MR curve slopes downward to the right..

Similarly, as per the traditional cost concept, MC falls initially and then rises later. This is the reason MC curve gets U-shaped.

Sale Revenue Maximization Model

This is the model developed by W.J.Boumol. This model of economics has its prime focus upon sales. 

Under this model,  the ultimate objective of the firm is to maximize sales (revenue of the firm). Although, the firm needs profit in short run to survive, expand and attract customers, however the ultimate objective of the firm must be maximizing sales in order to survive in long run. 

This model is based upon following assumptions:

1. There is single period time horizon of a firm .
2. During this period, the firm tries to maximize its total revenue.
3. The firm realizes a minimum level of profits in order to keep the shareholders happy
4. Cost curves are U-shaped
5. Demand curves are downward sloping.
6. Market is imperfect.

According to Baumol, in the real world, The firms gains more and more profits by maximizing its volume of sales. So, its price and output policies comes nearer towards welfare maximization of the consumers. However, the firms changes its price and output when there is increase in the cost of overhead. 

Comparison of the two Models:

Although both the models has been criticized in its own manner it can be analysed that, Baumol model of sales maximization is more acceptable model in compared to profit maximization model, due to following reasons:

• A firm with profit maximization as a sole objective considers only that stimulation factors which increases its profit. Therefore, the economic welfare of the society gets hampered. However, a firm operating under sales maximization objective considers upon the volume of sales that is closely connected with welfare of the society.

•  Most of the financial institution interlinks the performance of the firms on the basis of sales. This means that a firm with greater sales will get greater financial support.

• A firm with higher sales means it has huge market coverage. This helps to gain more competitive advantage ( in terms of strength or  bargaining power). 

• A firm with growing sales can meet higher level of expectation of employees.

• In short run the firm with profit maximization model can fetch high profits and survive. However, In long run, a firm with sales revenue maximization firms will be able to survive and not the profit maximization firms. 

• A sales maximizing firms can spend more on advertising and promotional field. However, profit maximizing firms would not like to spend upon these factors ,

• It could be easy to meet corporate social responsibility for the firms operating in sales maximization model rather than profit maximization model.

• Sales maximization model focuses upon larger sales. This means more prestige to the managers whereas profit maximization model focus upon lager profits . This means large amount of profits will go into the pocket of shareholders.

Conclusion:

Therefore, on the basis of above facts, it is proper to say that, Sales Revenue Maximization  Model is better than Profit maximization Model.






Note :

Click on these links for -

• Managerial Economics or Business Economics
• Difference between Managerial Economics and Traditional Economics
• Characteristics of Managerial economics and Role of Managerial Economics in Business Decision Making 
• Practical approach towards Profit Maximization and Boumol's Sales Revenue maximization Model
• Profit and Functions of Profit
• Practical Approach to Moving Average in Managerial Economics