What you must know to pass an Economics Exam/Interview 4- The Importance of the 45° line in Income Determination Theory-

Aggregate Demand is the total amount of goods demanded in the economy. Distinguishing among goods demanded for consumption(C), for investment (I), by the government (G), and as net exports(NX), aggregate demand (AD) is determined by

AD=E=C+I+G+NX                                                                                                 (1)

Output is at its equilibrium level when the quantity of output produced is equal to the quantity demanded. Thus, an economy is at its equilibrium output when

Y=E=AD=C+I+G+NX                                                                                                 (2)

The simple form of (2) and of the identities discussed later results from neglecting some complexities in the definitions of GDP and national income.

Depreciation is neglected, so we do not need to distinguish between GDP and Net-National Product. We also assume that GDP and national income are equivalent. This means we do not include items in the model that cause a discrepancy between the two totals (primarily indirect business taxes). A final assumption relates to the units in which each of the variables is measured. We assume that the aggregate price level is fixed.All variables are real variables and all changes are in real terms.

With national product also measuring national income, we can write

YC+S+T                                                                                                              (3)

Equation 3 is an accounting definition or identity, stating that national income, all of which is assumed to be paid to households in return for factor services(wages, interest, rents, dividends) is either consumed (C), paid out in taxes (T), or saved(S).

In addition , from the fact that Y is national product, we can write

YC+I_r+G                                                                                               (4)

Equation (4) defines national product as equal to consumption plus realized investment plus government spending.

Realised investment is the total that appears in the national income accounts whether or not that investment was desired by the firms.

Using the definitions given in Equations 3 and 4, we rewrite the condition given for equilibrium income given in equation (2) in two lternative ways, which will help us understand the nature of equilibrium in the model.By 2, Y must equal C+I+G in equilibrium, and from 3 Y is defined as C+S+T; in requilibrium therefore,

C+S+TYC+I+G

Or equivalently

S+T=I+G                              (5)

From equations 2 and 4, we can see that in equilibrium,

C+I_r+GYC+I+G

Or,

By canceling terms

I_r =I                           (6)

There are then three equivalent ways to state the condition for equilibrium in the model:

Y=E=C+I+G    (2)

S+T=I+G           (5)

I_r =I                    (6)

To see how realized and inventory investment can differ, consider what happens when a level of output() is produced that exceeds AD(E=C+I+G).

In this case

YE

C+I_r+GC+I+G                         

 

Where I_r-I is the unintended inventory accumulation. The amount by which output exceeds Aggregate Demand(I_r-I) will be unsold output over and above the amount of inventory investment the firm desired. The excess is unintended inventory accumulation.

In the reverse situation, in which AD exceeds Output, we have

 

C+I+GC+I_r+G         (8)

II_r

Where I-I_r, is the unintended inventory shortfall. Demand is greater than output and firms sell more than was planned.Inventories end up at less than the desired level.The equilibrium point(I= I_r) is a level of production that, after all sales are made, leaves inventory investment at just the level desired by the firms. As can be seen from equation (7) or (8), this is the level at which output is equal to Aggregate Demand and hence is equivalent to the other two ways of expressing the condition for equilibrium.

The third way of expressing the condition for equilibrium in this model, shows clearly why there cannot be equilibrium at any other point.If at a given level of output, firms are accumulating undesired inventories or are seeing their inventories depleted, there is a tendency for output to change. I

If production exceeds demand, YE, firms are acumulatinghh unwanted inventories I_rI, and hence there is a tendency for output to fall as firms cut production to reduce the level of inventories.If alternately, demand is outstripping production, EY, there is an inventory shortfall I_r<I and a tendency for output to rise as firms try to prevent further fall in inventories.

Only when AD equals Output will firms be satisfied with their current level of output.There is neither an unintended inventory build up nor a shortfall and therefore no tendency for output to change. The situation is what is meant by equilibrium.

Graphical Determination of Equilibrium Income.

Income is measured along the horizontal axis, and the components of AD along the ve3rtical axis. The 45 line is drawn to split the positive quadrant of the graph. All points along this line indicate that aggregate expenditure equals aggregate output. The value of the variables measured on the vertical axis(C+I+G), is equal to the value of the variable on the horizontal axis, Y.C=a+bYD and Y=C+I+G, because the autonomous expenditure components I,G do not depend directly on income, the C+I+G schedule lies above the consumption function by a constant amount.

The equilibrium level of income is shown at the point where the C+I+G scheduler crosses the 45 line, and AD is therefore equal to income.

This intersection illustrates the equilibrium condition expressed in Equation 2

Y=E=C+I+G    (2)

The understanding of the 45 line and of the properties of an equilibrium level of income is aided by considering why other points on the graph are not points of equilibrium.Consider a level of income below Y, for example Y_L.

A level of income equal to Y_L generates consumption as shown along the consumption function.When this level of consumption I is added to the auitonomous expernditures I+G, aggregate demand exceeds income, the C+I+G schedule is above the 45 line. It follows that with demand outstripping production, desired investment will exceed actual investment at points such as Y_L,C+I+G>Y C+I_r+G, therefore I> I_r.There will be an unintended inventory shortfall at such points below and therefore a tendency for output to rise. Conversely, at levels of income above , output will exceed demand the 45 line is above the C+I+G schedule, and unintended inventory investment wil bev taking place(Y C+I_r+G>C+I+G; therefore I_r>I), and there will be a tendency for output to fall.It is only at that output is equal to AD; there is no unintrended inventory shortfall or accumulation, and consequently no tendency for output to change.

What you must know to pass an Economics Exam/Interview 3: Income and Spending

 (Reference:  Dornbusch, Fischer and Startz, Chapter 9)

1. Output is at its equilibrium level when the aggregate demand for goods is equal to the level of output.
2. Aggregate demand consists of planned spending by households on consumption, by firms on investment goods, and by government on its purchases of goods and services and also includes net exports.
3. When output is at its equilibrium level, there are no unintended changes in inventories and all economic units are making precisely the purchases they had planned to. An adjustment process for the level of output based on the accumulation or rundown of inventories leads the economy to the equilibrium level of output. Know, that AD is equal to planned aggregate spending, on the 45 degree line Aggregate Spending=Output. When the AD curve intersects the 45 degree line planned aggregate spending equals output and Saving equals planned investment.
4. The level of aggregate demand is itself affected by the level of output (equal to the level of income) because consumption demand depends on the level of income.
5. The consumption function relates consumption spending to income. Consumption rises with income. Income that is not consumed is saved, so the savings function can be derived from the consumption function.
6. The multiplier iss the amount by which a $1 change in autonomous spending changes the equilibrium level of output. The greater the propensity to consume, the higher the multiplier.
7. Government purchases and government transfer payments act like increases in autonomous spending in their effects on the equilibrium level of income. A proportional income tax has the same effect on the equilibrium level of income as a reduction in the propensity to consume. A proportional income tax thus reduces the multiplier.
8. The budget surplus is the excess of government receipts over expenditures. When the government is spending more than it receives, the budget is in deficit.The size of the budget surplus or (deficit) is affected by the government’s fiscl policy variables-government purchases, transfer payments, tax rates.
9. The actual budget surplus is also affected by changes in tax collection and transfers resulting from movements in level of income that occur because of changes in private autonomous spending. The full employment budget surplus is used as a measure of the active use of fiscal policy. The full employment surplus measures the budget surplus that would exist if output were at its potential(full-employment) level.

What you must know to pass an Economics Exam/Interview 2-Introduction to Macro-Economics and AS-AD:

In Macro-Economics we deal with the market for goods as a whole, treating all the markets for different goods-such as the markets for agricultural products and for medical services as a single market. Similarly, we deal with the labour-market as a whole, abstracting from differences between the markets, for, say unskilled labor and doctors. We deal with the assets market as a whole, abstracting from differences between the markets for IBM shares and for Rembrandt paintings.

The study of macroeconomics is organized around three models that describe the world, each model having its greatest applicability in a different time frame.Growth theory describes the behavior of the economy in the long run, when capital, labour and technology can all vary, and the AS-AD model describes the behavior of vthe economy at all shorter horizons, with different assumptions about the slope of the aggregate supply curve determining the time horizon over which the model is applicable.

The AS-AD model shows how the demand for products(described by the AD curve)interacts with the supply of products(described by the AS curve)to determine the equilibrium price level and output of the economy.

In the long run, because all inputs are fully employed, the AS curve is vertical at the level of potential output, and output is determined by AS alone. In the short run, a period of time so brief that prices do not have time to adjust at all, the AS curve is flat and output is determined by AD alone.

AS-AD

1. The AS-AD model is used to show the determination of the equilibrium levels of both output and prices.
2. The AS schedule, shows at each level of prices the quantity of real output firms are willing to supply.
3. The Keynesian supply schedule is horizontal, implying that firms supply as many goods as are demanded at the existing price level. The classical supply schedule is vertical. It would apply in an economy that has full price and wage flexibility. In such a frictionless economy, employment and output are always at the full-employment level.
4. The AD, shows at each price level the level of output at which goods and asset markets are in equilibrium. This is the quantity of output demanded at each price level.Along the AD schedule fiscal policy is given, as is the nominal quantity of money.
5. A fiscal expansion shifts the Ad curve up and to the right, as does an increase in money stock , by the same proportion as an increase in the money stock.
6. Supply side economics makes the claim that reducing tax rates generates very large increases in AS. In truth, tax cuts produce very small increases in AS and relatively large increases in AD.
7. Over long periods, output is essentially determined by AS and prices by movement of AD relative to the movement of AS.

What you must know to pass an economics exam/interview1-Consumer Choice

                            

                       Rational Consumer Choice

1.The model of Rational Consumer Choice takes consumer preferences as given and assumes they will try and satisfy them in the most efficient way possible.

2.The first step in solving the budgeting problem is to identify the set of bundles of goods that the consumer is able to buy. The consumer is assumed to have an income level given in advance and to face fixed prices. Prices and income together define the consumer’s budget constraint, which in the simple two-good case, is a downward-sloping line whose slope, in absolute value, is the ratio of the two prices. It is the set of all possible bundles that the consumer might purchase if he spends his entire income.

3.The second step in solving the consumer budgeting problem is to summarise the consumers preferences. Here, we begin with a preference ordering by which the consumer is able to rank all possible bundles of goods. This ranking scheme is assumed to be complete and transitive and to exhibit the more is better property. Preference orderings that satisfy these restrictions give rise to indifference maps, or collections of indifference curves, each of which represents combinations of bundles among which the consumer is indifferent. Preference orderings are also assumed to have diminishing marginal rate of substitution in the sense that if you have pepsi on the y-axis and pizza on the x axis then for a lot of pepsi and less of pizza the consumer will be willing to give up a lot of pepsi for a unit extra of pizza, and when there is a lot of pizza and a little bit of pepsi the consumer will require a lot more of pizza for giving up an unit of pepsi.

4. The budget constraint tells us what combinations of goods the consumer can afford to buy. To summarise the consumer’s preferences over various bundles, we use an indifference map. The best affordable bundle occurs at a point of tangency between an indifference curve and the budget constraint. At that point, the marginal rate of substitution is exactly equal to the rate at which the goods can be exchanged for one another at market prices.

                                                 Individual and Market Demand

1. How do individual and market demands respond to variation in prices and incomes. To generate a demand curve for an individual consumer for a specific good X, we first trace out the price-consumption curve in the standard indifference curve diagram. The PCC is the line of optimal bundles observed when the price of X varies, with both income and preferences held constant. We then take the relevant price-quantity pairs from the PCC and plot them in a separate diagram to get the individual demand curve.

2. The Income analog to the PCC is the income consumption curve, or ICC.It too is constructed using the standard indifference curve diagram.The ICC is the line of optimal bundles traced out when we vary the consumer’s income, holding preferences and relative prices constant. The Engel curve is the income analog to the individual demand curve.We generate it by retrieving the relevant income-quantity pairs from the ICC and plotting them in a separate diagram.

3. Normal goods are those which a consumer buys more of when income increases and inferior goods are those the consumer buys less of as income rises.

4. The total effect of a price change can be decomposed into two separate effects:1) the substitution effect, which denotes the change in quantity demanded that results because the price change makes substitute goods seem either more or less attractive, and 2) the income effect, which denotes the change in quantity demanded that results from the change in real purchasing power caused by the price change. The substitution effect always moves in the opposite direction from the movement in price: price increases (reductions)always reduce(increase)the quantity demanded. For normal goods, the income effect also moves in the opposite direction from the price change, and thus tends to reinforce the substitution effect. For inferior goods, the income effect moves in the same direction as the price change, and thus tends to undercut the substitution effect.

5. The fact that the income and substitution effects move in opposite directions for inferior goods suggests the theoretical possibility of a Giffen good, one for which the total effect of a price increase is to increase the quantity demanded.

6. Goods for which purchase decisions respond most strongly to price tend to be ones that have large income and substitution effects that work in the same direction. For example, a normal good that occupies a large share of total expenditures and for which there are many direct or indirect substitutes will tend to respond sharply to changes in price. For many consumers, housing is a prime example of such a good. The goods least responsive to price changes will be those that account for very small budget shares and for which substitution possibilities are limited. For most people, salt has both those properties.

7. A central analytical concept in demand theory is the price elasticity of demand, a measure of the responsiveness of purchase decisions to small changes in price. Formally, it is defined as the percentage change in quantity demanded that is caused by a one percentage change in price. Goods for which the absolute value of elasticity exceeds 1 are said to be elastic; those for which it is less than 1, inelastic; and those for which it is equal to 1, unit elastic.

8. Another important relationship is the one between price elasticity and the effect of a price change on total expenditure. When demand is elastic, a price reduction will increase total expenditure; when inelastic, total expenditure falls when the price goes down. When demand is unit elastic; total expenditure is at a maximum.

9. The value of the price elasticity of demand for a good depends largely on four factors: substitutability, budget share, direction of income effect, and time.1) Substibutabiility. The more easily consumers may switch to other goods, the more elastic demand will be.2)Budget share. Goods that account for a large share of total expenditures will tend to have higher price elasticity.3)Direction of income effect .Other factors the same, inferior goods will tend to be less elastic with respect to price than normal goods.4) Time. Habits and existing commitments limit the extent to which consumers can respond to price changes in the short run. Price elasticity of demand will tend to be larger, the more time consumers have to adapt.

    

10. Changes in the average income level in the market will generally shift the market demand curve. The income elasticity of demand for a good X is defined analogously to its price elasticity.It is the percentage change in quantity that results from a one percentage change in income. Goods whose income elasticity of demand exceed zero are called normal goods, those for which it is less than zero are called inferior goods;those for which it exceeds one are called luxuries; and those for which it is less than one are called necessities. For normal goods an increase in income will shift market demand to the vright; and for inferior goods, an increase in demand will shift it to the left. For some goods, the distribution of income, not just its average value, is an important determinant of market demand.

11. The cross price elasticity of demand is a measure of the responsiveness of the quantity demanded of one good to a small change in the price of another.If cross price elasticity is positive the goods are substitutes and if negative, complements.

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Explaining tastes: the importance of altruism

Micro-Economics and Behavior II

Explaining tastes: the importance of altruism and other non-egoistic behavior:

The central assumption of microeconomic analysis is that people are rational. Two important definitions of rationality are the so-called present-aim and self-interest standards. (Derek Parfit, Reasons and Persons, Oxford:Clarendon,1984.).A person is rational under the present-aim standard if she is efficient in the pursuit of whatever aims she happens to hold at the moment of action. No attempt is made, under this standard, to assess whether her aims themselves make any sense.Under the self-interest standard, by contrast, it is assumed at the outset that people’s motives are congruent with their narrow material interests.

In textbook accounts of rational choice, economists often embrace the present-aim standard. The difficulty with the present-aim standard is what we might call the ‘crankcase oil’ problem. If we see a person drink the used crankcase oil from his car, and he then writhes in agony and dies, we can assert that he must have really liked crankcase oil.

With this difficulty in mind, most economists assume some version of the self-interest standard of rationality in their actual research. It helps explain, for example, why car pools form in the wake of increases in gasoline prices. Without question, self-interest is an important human motive.

Yet narrow self interest is surely not the only human motive. Travelers on interstate highways leave tips for waitresses they will never see again. Participants in bloody family feuds seek revenge even at ruinous cost to themselves. People walk away from profitable transactions whose terms they believe to be “unfair.” In these and countless other ways, people do not seem to be pursuing interests of the usual egoistical sort.

An application of the present-aim standard: altruistic preferences

Because we know from experience that not everyone has the narrowly selfish preferences assumed by the self-interest model, it is tempting to broaden the analysis by simply adding additional tastes-by assuming, for example, that people derive satisfaction from a variety of behaviors that conflict with narrowly defined self interest, such as donating money to charity, voting, disposing of litter properly, and so on.Let us explore how the notion that some people have altruistic preferences can be incorporated formally into our model of rational choice.

Consider, for example, the case of Tashu, who cares not only about her own income level but also about Mun’s. Such preferences can be represented in the form of an indifference map defined over their respective income. Tashu’s indifference curves are negatively sloped, which means that she is willing to tolerate a reduction in her income in return for a sufficiently large increase in Mun’s.Her indifference curves exhibit diminishing MRS, which means that the more income Tashu has, the more she is willing to give up in order to see Muns have more.

The question that Tashu confronts is whether she would be better off if she gave some of her income to Muns. Suppose her initial income level is $50,000/yr and that Mun’s is $10,000.What are Tashu’s options? She can retain all her income. Or she can give some of it to Muns, in which case she will have $1 less than $50,000 for every $1 she gives him.

If Tashu keeps all her income, her MRS exceeds the slope of her budget constraint,it is clear that she can do better. The fact that MRS greater than one at the original point tells us that she is willing to give up more than a dollar of her own income to see Muns have an extra dollar. But the slope of her budget constraint tells us that it costs her only a dollar to give Muns an extra dollar. She is therefore better off if she gives some of her income to  Muns.

The Strategic Role in Preferences

The attractive feature of the present-aim standard of rationality is that it lets us broaden our analysis to embrace nonegoistic motives whose existence is well documented. Yet as noted, the lingering methodological difficulty is that unless we impose some constraints on ourselves, the present-aim standard allows us to explain virtually any bizarre behavior by simply positing a taste for it. Our dilemma is how to expand our view of human motives without at the same time becoming vulnerable to the crankcase oil objection.

Biologists have discovered a way out of this dilemma, one that rests on an analysis that is quintessentially microeconomic in character. In biology, an organism’s tastes are not arbitrarily given as they are in economic models. Rather, biologists assume that tastes are forged by the pressures of natural selection to help organisms solve important problems in their environments. For example in the biologist’s account, our taste for sweets is a characteristic we inherited from our ancestors, in whom it evolved for functional reasons.

There is evidence that this particular taste is no longer functional in our current environment. In earlier times, the sugar found in ripened fruits were sufficiently scarce that there was no practical danger of over consuming them. Now, with sweets so plentiful, our taste for them sometimes leads us to overindulge,with various adverse consequences.

The taste for sweets is a simple preference, in the sense that it would have been useful to an individual irrespective of whether others in the population shared that taste. Other tastes, however, are more complex, in the sense that the usefulness of having them depends on the fraction of other individuals in the population who share them. This second type we call a strategic preference, one that helps the individual solve important problems of social interaction.

A Parable of Hawks and Doves

Consider a population which differs in its taste for aggressive behavior. Thus it is divided into hawks, the aggressors and doves, the pacifists. If these two types engage in a fight for scarce resources which one will win out? Well, at first glance one would assume that the hawks who are more aggressive would win out, but this precludes a confrontation between two hawks. Since both individuals are predisposed to be aggressive a bitter confrontation might ensue. Depending on the consequences of such a fight, it may indeed be costly to be a hawk.

The potential disadvantages of being a hawk become even clearer, when we consider what happens when two doves confront each other over sharing of a resource, in this case the costs of a bloody battle are avoided and the two decide to share the resource.

In our hypothetical population pairs of individuals interact with one another at random and there are three possible pairings 1) two hawks, 2) a hawk and a dove, 3) two doves. To see how this population will evolve we need to know the payoffs for each of these three types of interaction.

Suppose the conflict involves food that contains 12 calories. When two doves interact, they share the food so that each receives a payoff of 6 calories. When a hawk and a dove interact, the dove defers to the hawk so that the hawk gets 12 calories the dove gets none. Finally, when two hawks interact, the winner gets twelve calories the loser gets none. The confrontation however, consumes ten calories for both the hawks, which means the winner gets 12-10=2 calories, and the loser gets -10 calories. Of course over the course of many interactions, any given hawk can be expected to win half the time, and lose half the time. Thinking of hawks as a whole then, the average payoff for the hawk-hawk encounters is expected to be (2-10)/2=-4 calories per individual.

Thus summarizing: when two hawks meet, a fight ensues that consumes 10 calories each, leaving an average net payoff of -4 calories per hawk. When doves and hawks meet, doves defer, so hawks get 12 calories, doves 0.When two doves meet, they share the food, so each gets 6 calories.

With the working of the hawks and doves model in mind, we will focus on how certain unselfish motives often help people solve an important class of problems that arise in economic and social interaction.

The Commitment Problem

One of the most frequently discussed examples in which the pursuit of self-interest is self defeating is the so called prisoners dilemma. Two prisoners are held in separate cells for a serious crime that they did, in fact commit. The prosecutor, however has only enough hard evidence to convict them of a minor offense, for which the penalty is, say, 1 year in jail. Each prisoner is told that if one confesses while the other remains silent, the confessor will go scot free while the other will spend 20 years in prison.If both confess, they will get an intermediate sentence, say, 5 years. The two prisoners are not allowed to communicate with one another.

The dominant strategy in the prisoners dilemma is to confess.No matter what Y does, X gets a lighter sentence by speaking out-if Y too confesses, X gets 5 years instead of 20; and if Y remains silent, X goes free instead of spending a year in jail.The payoffs are perfectly symmetric, so Y also does better to confess no matter what X does. The difficulty is that when each behaves in a self-interested way, both do worse than if each had shown restraint. Thus, when both confess, they get 5 years, instead of the 1 year they could have gotten by remaining silent.

Although the prisoners are not allowed to communicate with one another, it would be a mistake to assume that this is the real source of difficulty. Their problem is rather a lack of trust. A simple promise not to confess does not change the material payoffs of the game.(If each could promise not to confess, each would still do better if he broke his promise.)

The prisoners dilemma is an example of a broader class of problems called commitment problems. The common feature of these problems is that people can do better if they can commit themselves to behave in a way that will later be inconsistent with their own material interests. In the prisoners dilemma, for example, if the prisoners could commit themselves to remain silent, they would do better than if left free to pursue their narrow material interests.

Illustration:The Cheating Problem

The functional role of unselfish motives can be seen more clearly with the help of the example of a simple ecology in which egoists are pitted against nonegoists in a struggle to survive. The commitment problem they face arises in joint business ventures, each of which consist of a pair of individuals. In these ventures each person can behave in each of two ways. He can “cooperate” which means to deal honestly with his partner, or he can”defect:” which means to cheat his partner. The payoffs to each of the partners, depend on the combination of the behavior of both. Thus if they both defect, each gets a payoff of 2, each gets 4 by cooperating. The defector gets 6 if the other person cooperates and the cooperator in turn gets zero

These payoffs thus confront the partners with a monetary version of the prisoners dilemma.. They get a higher payoff by defecting no matter what the other does. If one believes the other will behave in a self interested way, he will predict that the other will defect. And, if only to protect himself he may feel compelled to defect as well. When both defect, each gets only a 2-unit payoff. The frustration as in all dilemmas of this sort, is that both could have done better. Had they cooperated, each would have gotten a 4 unit payoff.

Thinking LIke an Economist

MICRO-ECONOMICS AND BEHAVIOR

Thinking Like an Economist

Many Economics books like Mankiw start with a chapter on: “Thinking like an Economist.”But the book that does this best from a behavioral viewpoint is Robert Frank’s “MicroEconomics and Behavior”.

This book initiates its chapter on “Thinking Like an Economist” with a negation of the typical ‘material’ view of scarcity. Giving the example of Aristotle Onassis who suffered from ‘myasthenia gravis’, a debilitating and progressive neurological disease, the author states that despite being worth several billion dollars at his death Onassis ‘confronted the problem of scarcity much more than most of us will ever have to.’

‘For him, the scarcity that mattered was not money but time, energy and the physical skill needed to carry out ordinary activities.’

As a teacher I like to give the following example of scarcity: It is possible you have thousands of rupees in your pocket but because you are a very busy executive you do not have the time to see the latest movie ‘Ready’. Or, maybe you do have one evening (say, Saturday) free, but your wife or girlfriend wants to spend the evening in a Chinese Restaurant having dinner instead.

Costs and benefits of decisions.-When we are sitting in an armchair in our sitting room, we may want to lower the volume of the stereo, increase the speed of the fan, turn off the light, but we may be too lazy to do any of these activities, it is as if we compare the costs and benefits of alternate actions, getting up or remaining seated. (the author in the chapter explains how to translate this decision into a monetary framework.)

The Role of Economic Theory-It might sound not just strange but absurd that someone might actually calculate the costs and benefits of turning down a stereo. Making unrealistic assumptions is a charge often levied against economists. Two responses are made to this criticism. Economists don’t assume that people make explicit calculations of this sort at all-is the first response. Rather, we can make useful predictions if we assume that people act as if they made such calculations, is what many economists argue. Milton Friedman expresses this view forcefully by arguing that the shots expert pool players choose, and the specific ways they attempt to make them, can be predicted extremely well by someone who assumes that the players take careful account of all the relevant laws of Newtonian Physics. Not that they would have had training in Physics but, Friedman argues, they would never have become expert players in the first place unless they played as dictated by the laws of physics. Unrealistically, our theory of pool player behavior assumes, that pool players know the laws of physics. We are urged to judge this theory by Friedman  not by how accurate its central assumption is but by how well it predicts behavior. And it performs very well indeed, on this score.

 Friedman like many other economists, believes that useful insights into our behavior can be gained by assuming that we act if governed by the rules of rational decision making. By trial and error, he feels, we eventually absorb these rules, just as pool players absorb the laws of physics.

Conceding that actual behavior does often differ from the predictions of economic models, is a second response to the charge that economists make unrealistic assumptions. Thus, as economist Richard Thaler puts it, we often behave more like novice than expert pool players.

But even where economic models fail on descriptive grounds, they often provide very useful guidance for making better decisions, they may often give insights into how we may achieve our goals more efficiently, even if they don’t always predict how we do behave.

Common Pitfalls in Decision Making-

Ignoring Implicit Costs: some costs are not explicit, we should include the opportunity cost ie the value of the most highly valued alternative to the chosen alternative. If doing activity x means not being able to do activity y, then the value to you of doing y (had you done it) is an opportunity cost of doing x. Many people make mistakes while making decisions because they fail to see that while making a decision, the foregone alternative should be considered. Thus it would always be instructive to translate questions such as “Should I do x?” into ones such as “Should I do x or its most highly valued alternative y?

Should I go skiing today or work as a research assistant?

there is a skiing area near your campus in which the cost of skiing is $40, the benefit of skiing to you is $60, but there is a choice to that, you can work as a research assistant to your professor, and be paid $45 for that, you like the job enough such that you are willing to do it for free.

Here the cost of skiing is not just the explicit cost of $40 for skiing, but the opportunity cost of the lost earnings ($45). Therefore the total costs are $85, which exceed the benefits of $60. So, you should stay on the campus and work for your professor. Someone who ignored the opportunity cost of the foregone earnings would decide incorrectly to go skiing.

It is an important point that you are willing to do the job for free, meaning there are no psychic costs attached to the job. This is important because it means that by not doing the job you would not have escaped something unpleasant.

Not all jobs fall into this category. Suppose your job involves scraping plates at the dining hall for which you will get the same $45 per day. The job is so unpleasant that you would not be willing to do it for less than $30 per day. Let us now reconsider the decision of whether to go skiing assuming that your boss allows you to have one day free in your job.

Should I scrape plates or go skiing today?

There are two alternative ways of looking at this decision. One is that, one of the benefits of going skiing is not having to scrape plates. Since you would never scrape plates for less than $30 per day, one could say that going skiing is worth that much to you. So the indirect benefit of going skiing is $30.The direct benefit of going skiing is still the same $60.So the total benefit of going skiing is $90. Whereas the costs of going skiing is the same the opportunity cost of the lost earning which is $45 plus the explicit cost of skiing which is $40, so the total cost of going skiing is $85.So, in this alternative the costs of skiing are less than the benefits of skiing, $85 is less than $90, indeed it makes sense to go skiing.

There is an alternate way of looking at this problem. Looking at the unpleasantness of the job as an offset against the salary. In that case we would subtract the $30 unpleasantness cost from the $45 salary, so the opportunity cost of not doing the job would be only $15, and the cost of going skiing would be $40+ $15=$55.The benefits of skiing are $60.And, again the benefits are greater than the costs.

The valuation of the unpleasantness of scraping the plates can thus be handled either way, however it is important that you handle the valuation in one of the alternative ways do not count it twice.

Clearly there is a reciprocal relationship between costs and benefits. Not incurring a cost is the same as getting a benefit. Similarly not getting a benefit is the same as incurring a cost.

Consider the case of a graduate student who was returning home after getting his degree from US. Now he could get a car from US without paying duty according to the rules for a returning student. This story is of way back in the 60’s.The car the student planned to get was an Impala. He planned to sell it in India at the rate of its cost plus the amount of duty he would have had to pay otherwise. However his uncle asked him to bring back the Impala for him and told him he would pay him the cost of the car. Obviously the student could not charge his uncle the duty. Not getting this benefit was the cost paid by the student.

Should I work first or go to college first?

The cost of going to college is not only the cost of fees, books, hostel room and board but also the cost of time and money foregone by not working, this cost is the least when yoyu are straight out of school, so most people go to college right after school.

Is it fair to charge interest-Yes it is, interest is merely the lender’s opportunity cost of not having deposited money in a bank, but this begs the next question.

Why do banks pay interest in the first place?

Because interest is the reimbursement for the opportunity cost of money, yet there is hostility towards money lenders because they are the richer part of the transaction.

Pit  fall 2-Failure to ignore sunk costs-there are two examples given in the book, one is if we compare the cost of say going to Bombay from ahmedabad by bus and car, if we would take the cost of going by car as the petrol, maintenance, insurance and interest cost that would be a mistake because, they would be the same whether or not you drive to Bombay, they would not vary with the amount of km traveled, thus these costs are unrecoverable at the time at which the decision is made.Another eg is an all u can eat dinner of pizzas, the relevant choice is which restaurant to go based on the per head charge and other factors , once this decision is made, getting your moneys worth should just depend, on how hungry you are, and how much you like pizza not on how much you paid for the dinner, yet this is often the case.

Landmark Events of last 40 years in my country

Technological Advances
TV in India-Mid Seventies
80's-Color TV, VCR
90's-2000's-Cyber Space,Mobile, DVD, Androids
Departmental Stores, Malls, TV Channels, Luxury Cars, Speciality Restaurants but also elite dabhas, cafes, bars....
Sports-World Cup 83, 2011, Olympic Medals in 21'st century, Sachin Tendulkar
Cinema-Amitabh-Action in 70's and 80's folowed by 90's, 21'st century:Khans-Romance, Akshay , Sunny, Hrithik-Action
Politics-Confusion, Madams of various hues and not to speak of bhenjis, now Baba Rahul?, 80-2010:Epoch of Confusion.
Tender Mercies-Independent, Strong, Non Interfering, Impartial Constitutional Bodies,Military, to some extent judiciary, Freedom of Speech, Social Spirit, Activist Media, Liberal(by and large) society
.....More of the same..next forty years? ....or better......

Favourite Movies

My earliest recollection of seeing movies were yaadon ki baaraat and don, i must have been about four then, after that i remenmber seeing Hum kisise kum nahin, kaala patthar, mr.natwarlal, suhaag, Sholay i saw much later. On a trip to Italy i saw Grease and loved it, i also saw my first animation super robot film and loved it too. I was very fond of Amitabh Bachchan and those were his days..the seventies. Other movies watched in the early eighties were Force Ten from Navarone(guns of Navarone watched much later), the hindi "Love Story", the first movie of Kumar Gaurav, (Sunjay Dutts Rocky not untill much later).Then Satte Pe Satta, Hero, Jaanbaaz, folowed by Maaine Pyar Kiyaa, QSQT, and then during colege days Dil, Jo Jeeta Wohi Sikander, Henna, Hum, folowed by Coolie No.1 , Raja Babu(Sarkailo Khatiya).Then as i reached the twenties, Hum Aapke hain kaun, DDLJ, Saajan Chale Sauraal, Hero No 1,Dil To Paagal Hai and then towards the thirties with kuch Kuch Hotaaa Hai, Biwi No.1, and then shifting to Ahmedabad in early to mid thirties(2000-20005) with Mohabatein, Kabhi Khushi Kabhi Gham, Munnabhai MBS, Main Hoon Na, Lage Raho Muna Bhai, and finally late thirties with Goilmaal Series and of course Dabbang,
Now i am ready for READY.....

Favourite Books

As far as reading is concerned i started with amar chitra katha, Archie and Richie Rich, progressed to Enid Blyton-Five Findouters, Famous Five and Secret Seven, I was enthraled by Frederick Trotevile"Fatty", progressed further to Agatha Christie and PG Wodehouse, in Agatha particularly liked Curtain-Poirot's last case, and Wodehouse was fascinated by Psmith and enjoyed Uncle Fred and Muliner tho took sometime to get to Jeeves, some Ludlum's like the Bourne Series and racy Sheldon's (Other side of midnight) later i proceeded to Non-fiction with Ideaof India(stil to read Idea of Pakistan, wonder if ever will?), Shashi Tharoor's "From Midnight to Milenium", Edward Luce's "Inspite of the Gods" , Francine Frankael, Ramachandra Guha, Bipan Chandra's India After Independence and India's Strugle for Independence(tho not in full).Other books which i read substantially tho not in full were books on behavioral eco like nudge, fooled by randomness and animal spirits.Meanwhile since school days text books like NCERT Books on History and Maths(tho i did not do justice to Maths in School) and in BA-Chiang's math eco and Gujarati's basic econometrics and Masters Dornbusch and other reference reading on topics like Welfare Eco-Nath, Mishan, Bruce and Boadway, I particularly enjoyed a monograph of Manohar Rao for Indian Economic Journal on Money Deficits and Inflation(me and a student worked on it later,while teaching i basically worked on Mankiw's Economics basic text, tho progressed to Dornbusch and Case and Fair in last two years at AES now i am progressing to reading speeches from RBI websites and completing my reading of Chiang, Gujarati and Froyen's MacroEconomics among other readings, ofcourse articles on oped of Eco Times, Financial Express, Hindu, Indian Express, Times of India and magazines like India Today, Frontline, Outlook are read quite often.........

Sports and munstheindian

Like a typical Indian guy, i have had my experience of playing and watching sports:
Playing Sports
My experience of playing started when i was two year old with my three pedal cycle which i used to ride fast in between the rooms, soon i started graduating to play with the neighbourhood boys, I remember how in Ahmedabd the society boys used to have their own lingo -HOWZATT! etc, we used to play cricket and i remember one match specially where i scored the winning runs, pure luck-the bowler missed the stumps at a distance of one foot with me and the runner at the same end!, In Drive In Area we built a team of friends playing serious gully cricket-calculating averages and all, in school in early years, i was a very good fast bowler with a tremendous yorker, but i lost my length and shifted to wicket keeping which i was good at till i picked up height, where i remember one match where my best friends were the bowlers and we conceded extras by the dozen, even the umpire did not know whether they were wides or byes, anyway my time of glory came when Ajay Jadeja organiseda cricket match between a team of "boys " in the neighbourhood(pandara park) and his team scored 76 with  him top scoring when our team got turn to bat most players got out early leaving me to score the required 70 runs i came within snifing distance and then Ajay "ordered" me to get out and through some kind of hypnotic efect i got stumped. Anyhow in schooln i did nothing of much note in sporta apart from once qualifying for a certificate in long jump. In colege i used to run 10 km but never participated in the main competition, gouing of for vacation during the Championship. In my masters i won my hostel 800 metre race, because of my practice of jogging everyday. Other sports i played were hockey, football, with some ability, Voleyball, badminton and table tenis with less ability and hand cricket and what is caled wall squash(hitting a tennis ball with your hands to the wall and scoring points) with a lot of fun, i learnt chess, carrom and cards and promptly forgot and drafts, monopoly and ludo i thankfuly did not forget
Watching Sports-The 1984 World Cup was my great moment and so has been 2011 world cup tho i started watching cricket with the 79 Kapil Kirmani series against Pakistan, I grew up with Vengsarkar Gavaskar and later Azhar Tendulkar and still later Ganguly Laxman Tendulkar Dravid, I alsos enjoyed Shahid, Zafar Iqbal, Pargat Singh, MP Singh and later Dhanraj Pilai, not to mention Mahesh and leander and Sania(Mirza).I particularly remember the Los Angeles Olympics missing out a medal in Hockey and PT Usha by a whisker this was before recent medal finishes in Shooting and Boxing!!!I remember MP Singh getting our team from 5-1 down in hockey to 5 all against germany, i also remember Ramesh Krishnan and Vijay Amritraj getting us to the finals of the Davis Cup

Walking around and discovering cities

Let me say first of all that whichever Metro City in the world I visit I like to remain stationed there for at least five days so as to soak in the atmosphere

Ahmedabad-Walk on Judges bungalow, turn into SG road, visit the ISCON mall-the Landmark Book Store there is a favourite, walk ahead to Crossword, catch a movie at Fun Republic, Cinemax or Wide Angle, have a Chocolate Sundae at Marriots Cofeeshop or a vegetarian meal at Shakahari at Marriot, walk ahead to the Hyderabadi Biryani place or turn into judges bunglow again to visit Cafe Upper Crust at Vastrapur and Himalya Mall near Drivein eat a MCSwirl at the Mc Donalds there or catch a movie at big cinemas or take your car to the Drive In Cinema.Mainland China, Mirch Masla, Hyderabadi Biryani, Country In and Suites are all good food options in the area.

Paris-The Touristy Area of Arc De Triumph is well visited but while in Paris visit the latin quarter on the left bank of the river seine, it is very historical, full of students, artists, architecture, and small cafes-Pl St Maichael and the left bank next to the river Sienne, Rue De Suger, on the other side as u walk to the Eiffel Tower, on the other side of the River is The Sorbonne University and further ahead the Louvre Museum, which is very historical opposite to that walking further on is the Eiffel Tower

Washington DC-made in same architectural style as Paris-Walk from Dupont Circle to Georgetown Univerity past Rock Creak Park, on the other side walk to the white House or Reiters Book Store where you'l get best economics books including study guides.

Manhattan-Walk from 42nd street New York Public Library, beautiful to Study and seee architecturaly, walk past Macy's Empire State Building to Central Park, New York University and the quaintness of West Vilage and East Village, number of book store and Restaurants there

Singapore-Ofcourse Orchard Street and Hill Street-Department Stores, Malls and Restaurants.

New Delhi PVR Priya, PVR Saket Malls near JNU, malls near Saket Ansal Plaza Mall near Asian Games Vilage, Metropolitan Mal near Gurgaon, India gate, Conaught Place, Greater kailash.

Canada-Waterloo-Walk from waterloo University, past Laurier University to Waterloo Public Library, number of Shops on the main Road from Kitchener to Waterloo Borders Book Store and on either side be prepared for a long walk if you are with me tho.....

Food-the best places to eat in the world!!

The best meal i have had in India is at The Trattoria in Hotel President, particularly the T-bone steak followed by the chocolate cake, the Thai Restaurant there is also pretty good provided you order well, but you can't go wrong with the thai chicken red curry with rice, in the konkan cafe, the sea food thali gives good value for money, talking about good goan food(insert a section on goan food in Bombay and Goa).The taj Holiday Village food is quite average in Goa but the Taj Exotica gives good Goan food, other Taj properties giving good food include the Taj Kumarakoram in Kerala and the Taj Machaan  in Delhi gives a mean club sandwitch folowed by a chocolate cake again to die for(ask for lots of ice cream). Other places in India were you get really good meals include Punjabi by Nature in Delhi-lovely humungous portions of Mutton Burra and Chicken Burra Kebab,the same is also good at chicken inn and pindis in pandara park where ichiban the chinese restaurant is pretty good where you won't go wrong also is with the mutton korma at karims in jama masjid folowed by the phirni, or try the Saagar at diferent places in Delhi for south Indian food or Bengal Sweet Mart in Bengali market or South Extension for Chole Bhatiure , Chaat and Kulfi,(I used to go to Bengal sweet mart at south ex with my grandmother). For Chinese food the chinese restaurant at the Taj mansingh is pretty good, cheap chinese food can be had at Yo China  at the Metrropolitan Mall at Gurgaon, that mall is anyway good for a visit, as far as a good bar is concerned nothing can beat the Geofrey's at Ansal Plaza Mall, Pastry lovers try Wengers at Cp, for good cold milk try Keventers at CP Inner Circle, Flavours near Moolchand Flyovers gives good pizza, Nirulas used to be pretty good particularly the one at yashwant place. If you want good old diners nothing like NY Manhattan all american diners but visit cafetaria at west 18th street for deliciously huge burgers while in NY or Cafe Orlin in West village or the cafes at the East village including the lovely bakeries in a quaint atmosphere, or go to Dupont Circle in Washington for lovely deliciacies, including ethiopian food.In Paris, try the Left Bank near the river for quaint restaurants.
As far as Ahmedabad is concerned good food can be had surprisingly at the Mosaic Restaurant at Country INn where Chef Jena is the best chef in Ahmedabad, try the tandoori chicken or the Chicken Steak Valencia or the Chinese Lobster there. Or try the Chicken Steaks at Upper Crust cafe followed by the chocolate Trufle or Chocolate Brownie or Black Forest with Icce Cream and the Lemon Cooler. Sports Club near Sardar Patel Circle gives good food catered by  Rushad of Mirch Masala/Tomatos fame(Two other good restaurants in Abad).If u r talking of clubs then IIC in Delhi( for those lucky enough to get in) is prety good.

A Synoptic View of Business Classics since 1980:Munish Alagh

(Reference: Ultimate Business Library:The Greatest Books that made Management, Stuart Crainer, 2003.)

In this presentation we summarise the great management books of the last thirty years. While doing so we attempt to throw some light on the contemporary issues of management which can be further researched by our students. We divide the great management classics into subject themes and invite suggestions from the faculty regarding topics which can be further researched on those themes, besides we make some suggestions of our own for issues of study.

Book 1-

Ohmae, Kenichi, The Mind of the Strategist, McGraw Hill, New York, 1982.

Ohmae argues that Japanese strategic thinking, is ‘basically creative and intuitive’.According to Ohmae, unlike large US corporations, Japanese businesses tend not to have large strategic planning staffs like large US Corporations, Japanese companies often have a single, naturally talented strategist with ‘an idiosyncratic mode of thinking. Another area of fundamental difference explored by Ohmae is the role of the customer who is at the heart of the Japanese approach to strategy and key to corporate values. The central thrust of the book is that strategy as epitomized by the Japanese approach is irrational and non-linear. The mind of the strategist is not an unquestioning eulogy to the Japanese approach to strategy. Indeed, Ohmae notes the decline in naturally strategic thinkers in both Japan and the West. Both systems, he says, encourage orthodoxy to the extent that innovative strategic thinking is neither encouraged nor possible. The mind of the Strategist began the process of questioning the then pervasive Japanese mythology through providing interpretations of strategy which were not hidebound by habitual cultural or traditional behavior.

Book 2

Porter, Michael, Competitive Strategy, Free Press, New York, 1980.

Michael Porter’s Competitive Strategy:Techniques for analyzing industries and competitors involves a solution to a strategic dilemma. At one end are the pragmatists who contend that companies have to respond to their own specific situation. At the other end of the spectrum is the line taken that market knowledge is all-important. Porter proposes a logical compromise, arguing that there are three ‘generic strategies’, ‘viable approaches to dealing with…competitive forces’. Strategy in porter’s eyes, is distilled down to a choice on how to compete expressed in the three generic strategies; differentiation, competing on the basis of value added to customers so that customers will pay a premium to cover higher costs; cost based leadership, offering products or services at the lowest cost; and thirdly focus. Companies with a clear strategy outperform those whose strategy is unclear or those which attempt both differentiation and cost-leadership.

However less than a decade after Competitive Strategy was published in 1980, companies had to compete on all fronts. They had to be differentiated, through improved service or speedier development, and be cost leaders, cheaper than their competitors.

Porter’s other contribution in Competitive Strategy has proved more robust.

‘In any industry, whether it is domestic or international, or produces a product or a service, the rules of competition are embodied in five competitive forces, ‘he writes. These five competitive forces are:

The entry of new competitors.

The threat of substitutes.

The bargaining power of buyers.

The bargaining power of suppliers

The rivalry among existing competitors.

Book 3

Hamel, Gary and Prahalad, CK, Competing for the Future, Harvard University Press, Cambridge, MA, 1994.

C  K Prahlad and Gary Hamel’s work can be considered as a blue print for a new generation of strategic thinking.

As per them, the real barrier of strategy is at the top, not at the bottom and middle.

They believe the corporate world is following mechanistic view of the strategy. Rather, it should be analytical, concerned with meaning purpose and passion. As per them one should not rely on only core competencies, it can be a powerful weapon in some cases but should not be a sole basis.

They gave two extremes of it.

1. arch-rationalist—i.e. insisting on a constant stream of data to support any strategy

thriving on chaos—a free-wheeling organizations where strategy is a movable feast.

Book 4

Packard, David;  HP Way, 1995

Fundamental Principles

No long term borrowing to secure expansion of the business

For growth—our products should be leaders in the market

People are assets---should trusted and treated with respect and dignity

Commitment to people fosters commitment to company

Book 5

Champy, James and Hammer, Michael, Reengineering the Corporation, Harper Business, New York, 1993.

Cutting away the hype and hyperbole, the basic idea behind re-engineering is that organizations need to identify their key processes and make them as lean as possible. Peripheral processes (and, therefore, peripheral people) need to be discarded. Champy and Hammer defined re-engineering as ‘the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance such as cost, quality, service and speed’.

Book 6

Kaplan, Robert S; Norton, David,   Balanced Scorecard, 1996

Harold Geneen took management by financial measurement, and the obvious conclusion drawn from it was that sole concentration on financial measures, can achieve only short-term or medium term success, but it is unlikely to link long term prosperity. While the other parameters like customer loyalty, employee satisfactions are difficult to measure. They gave four elements need to be balanced.

-Customer perspective- Companies must ask how they are perceived by customers

-Internal Perspective- Companies must ask what it is that they must excel at

-Innovation and learning perspective- companies must ask whether they can continue and improve

-Financial perspective-how does company looks at shareholders

Book 7

Semler, Ricardo, Maverick, 1993

Ricardo Semler was elected business leader of the year by a poll of 52000 Brazilian Executives. His book Maverick became an international best seller. For his family’s company Semco, he based revolution on three values: employee participation, profit sharing and open information system. As per Ricardo the leader should play his/her role as a catalyst. The book says about dramatic shift of Semco during the 1990s crisis time.

Book 8

Peters, Tom, Liberation Management, 1992.

The central idea of Tom Peters’ research is Structure.  By structure, he does not mean traditional hierarchical and functional sense. Taking inspiration from success of CNN, ABB and Body Shop, he derived that these organizations could thrive because of their flexible structure and so was able to change to meet the business needs of the moment.  As per him, free-flowing, impossible to pin down, uncharitable, simple yet complex, these are paradoxical structures of the tomorrow. New corporate structures will be networks with suppliers, customers and with all those who can deliver the business. Again, the new model of organization should move fast and continually seek new areas so that it can be unique in its markets.

Book 9

 Ohno, Taiichi; Toyota Way, 1978

Taiichi Ohno worked as a consultant with the Toyota writes that the roots of the Toyota system lie in the immediate post war period. The Toyota production system is strikingly difference from the approaches used in a west when an average American worker produced around nine times as much as a Japanese worker. For Toyota the emphasis was on reducing costs rather than increasing the selling price.

There simple principles were put in practice by Toyota System. 1. Just-in –time production, 2. Everyone is responsible for quality and any defects of quality should be rectified as soon as they are identified. 3. Value System.

The MIT research for the Toyota concludes that while American car manufacturer focused on mass production techniques, Japanese system focused on a lean management and this resulted in to increased production, high quality, lower costs and happy customers.

Lean production is a superior way for humans to make things, but the trouble is to get it right.

Book 10

Goleman, Daniel;  Emotional Intelligence, 1995.

Emotional Intelligence is based on the notion that the ability of managers to understand and manage their own emotions and those of the people they work with is the key to better business performance. It is the ability to handle one’s emotions, deal with frustration, self-awareness, self-discipline, persistence, empathy and being able to get along with people. Goleman has gone on to explore the issue of personal and professional effectiveness. He argues in one of his book “Working with emotional Intelligence” that workplace competencies based on emotional intelligence play a far greater role in star performance than do intellect or technical skill, and that both individuals and companies will benefit from cultivating these capabilities.

Based on his survey, he identified six different types of leadership skills. These are Coercive, Authoritative, Affilitative, Democratic, Presenting and Coaching leaders.

According to him, EI can be learned by five dimensions. These are Self Awareness, Managing emotions, motivating others, Showing Empathy and staying connected.

Book 11

Collins, James; Porras, Jerry; Built to Last, 1994.

It tells about the values in the context of business and corporations. Core values are organization’s essential and enduring tenets-a small set of guiding principles; not to be confused with specific cultural or operating practices; not to be compromised for financial gain or short term expediency. As per Collins and Porras, companies that enjoy enduring success have core values and a core purpose that remain fixed while their business strategies and practices endlessly adapt to a changing world.  Key factor in the success of companies like HP, Johnson & Johnson, P&G, Merck and Sony is their vision and it has two components-core ideology and envisioned future. Core ideology provides glue that holds an organization together through a time. Central to the book is the distinction between being good and great.

Book 12

Covey, Stephen, The Seven habits of highly effective people, 1989.

The book discusses three main techniques: one minute goal setting, one minute praising and one minute reprimands. Again, the advice is to develop trust, generate positive energy and avoid negative energy.

Book 13

Porter, Michael; The competitive Advantage of nations, 1990.

Based on his study of ten countries (UK, Denmark, Italy, Japan, Korea, Singapore, Sweden, Switzerland, Germany and US), he concluded that the intensity of domestic competition often fuels a success on a global stage. He found that the principle goal of such a nation is to produce a high and rising standard of living for its citizens. The ability to do so does not depend upon the competitiveness but on the productivity with which a nation’s resources are employed. Productivity is the prime determinant in the long run of a nation’s standard of living.

To make sense of the dynamics behind national strength in a particular industry, Porter develops a national diamond and is made up of four forces like factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry.

Book 14

Kotter, John; Leading Change, 1996.

John Koter has worked on leadership, change management, culture and then careers.

While writing down a book on the Leadership Factor-he found out majority of the people doing management stuff thought that it was leadership. As the system do not support leadership—he studied on culture, then he took at environmental and economical changes.

The central theme of Kotter’s work is change.

Successful change requires the effort of a critical mass of key individuals---a group of the two-fifty people depending upon the size of the organization-in order to move the organization in significantly different directions. Leadership is the critical ingredient for driving change.

For that he suggested following steps

-Establishing sense of urgency

-organizations need to create powerful coalition

-develop vision and strategy

-communicate the change vision

-empower broad-based action

-celebrate short-term wins

-anchor the change in the corporate culture

Book 15

Peters Tom, Waterman Robert; In search of excellence, 1982.

Even though the book published in the year 1982, its legacy has become clear after approximately 20 years of its publication. It has marked a fundamental change in management emphasis from rationalist and mechanistic style to a human and humane approach. It is resolutely people centric and looks beyond rational analysis to explore social complexity. The intellectual cornerstones are eight principles identified by Peter and Waterman as characteristics of excellent companies. These are: a bias of action, being close to the customer, autonomy and entrepreneurship, productivity through people, being values driven, networking, simple form, lean staff.

Based on these principles, they identified 62 companies and divided them in to three categories. 1. 18 companies were categories as excellent but did not meet all criteria, 2. 30 companies excellence and met the criteria, 3. 14 companies were the exemplars of excellence.