DRIVE SPRING 2014
PROGRAM- MBADS/ MBAFLEX/ MBAHCSN3/ MBAN2/ PGDBAN2
SEMESTER- 1
SUBJECT CODE & NAME- MB0042- MANAGERIAL ECONOMICS
BK ID- B1625
Q1. Inflation is a global Phenomenon which is associated with high price causes decline in the value for money. It exists when the amount of money in the country is in excess of the physical volume of goods and services. Explain the reasons for this monetary phenomenon.
(Define Inflation, Causes for Inflation) 2, 8
Answer:
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.
There are several variations on inflation:
- Deflationis when the general level of prices is falling. This is the opposite of inflation.
- Hyperinflationis unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!
- Stagflationis the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined withOPECraising oil prices.
In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.
Causes of Inflation
Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that's universally agreed upon, but at least two theories are generally accepted:
Demand-Pull Inflation- This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.
Cost-Push Inflation- When companies' costs go up, they need to increase prices to maintain theirprofit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.
Costs of Inflation
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary theirinterest ratesand workers can negotiate contracts that include automatic wage hikes as the price level goes up.
Q2. Monopoly is the situation there exists a single control over the market producing a commodity having no substitutes with no possibilities for anyone to enter the industry to compete. In that situation, they will not charge a uniform price for all the customers in the market and also the pricing policy followed in that situation.
(Define Monopoly, Features of Monopoly, Kinds of Price Discrimination) 2, 4, 4
Answer:
Monopoly
Monopoly means existence of a single seller in the market. Monopoly isthat market form in which a single producer controls the whole supplyof a single commodity which has no close substitutes. Monopoly maybe defined, as a condition of production in which a single firm has the powerto fix the price of the commodity or the output of the commodity.
Features of monopoly
Anti-thesis of competition – Absence of competition in the marketcreates a situation of monopoly and hence, the seller faces no threat ofcompetition.
Existence of a single seller – There will be only one seller in themarket who exercises single control over the market.
Absence of substitutes – There are no close substitutes for the seller’sproduct with a strong cross elasticity of demand. Hence, buyers have noalternatives.
Control over supply – Seller will have complete control over output andsupply of the commodity.
Price maker – The monopolist is the price maker and in takingdecisions on price fixation, he or she is independent. He or she can setthe price to the best of his or her advantage.
Entry barriers – Entry of new firms is difficult. Hence, monopolist willnot have direct competitors in the market.
Firm and industry is same – There will be no difference between thefirm and an industry.
Nature of firm – The monopoly firm may be a proprietary concern,partnership concern, Joint Stock Company or a public utility whichpursues an independent price-output policy.
Existence of super normal profits – There will be opportunities forsupernormal profits under monopoly, because market price is greaterthan the cost of production.
Kinds of price discrimination:
Three kinds of price discrimination are commonly seen. It is as follows:
Discrimination of the first degree – Under price discrimination of thefirst degree, the producer exploits the consumers to the maximumpossible extent, by asking to pay the maximum he/she is prepared topay rather than go without the commodity.
Discrimination of the second degree – In case of discrimination of thesecond degree, the monopolist charges different prices for markets ofthe same commodity, but not at a maximum possible rate but at a lowerrate
Discrimination of the third degree – In case of discrimination of thethird degree, the markets are divided into many sub-markets or subgroups.The price charged in each case roughly depends on the abilityto pay of different subgroups in the market.
Q3. Define Fiscal Policy and the instruments of Fiscal policy. (Definition of Fiscal policy, Explanation of Instruments of Fiscal Policy) 2, 8
Answer:
Fiscal Policy
The term “fisc” in English language means “treasury”, and the policy relatedto treasury or government exchequer is known as fiscal policy. Fiscal policyis a package of economic measures of the Government regarding publicexpenditure, public revenue, public debt or public borrowings.
In short, it refers to the budgetarypolicy of the government.Fiscal policy is concerned with the manner in which all the differentelements of public finance, while still primarily concerned with carrying outtheir own duties (as the first duty of a tax is to raise revenue), maycollectively be geared to forward the aims of economic policy.”
Instruments of fiscal policy
The instruments of fiscal policy include:
1. Public revenue: It refers to the income or receipts of public authorities.It is classified into two parts - tax-revenue and non-tax revenue. Taxesare the main source of revenue to a government. There are two types oftaxes. They are direct taxes such as personal and corporate income tax,property tax, expenditure tax, and indirect taxes such as customs duties,excise duties, sales tax (now called VAT). Administrative revenues are the bi-products of administrate functions of the government. Theyinclude fees, licence fees, price of public goods and services, fines,escheats and special assessment.
2. Public expenditure policy: It refers to the expenditure incurred by thepublic authorities like central, state and local governments. It is of twokinds: development or plan expenditure and non-development or nonplanexpenditure.
3. Public debt or public borrowing policy: All loans taken by thegovernment constitutes public debt. It refers to the borrowings made bythe government to meet the ever-rising expenditure. It is of two types,internal borrowings and external borrowings.
4. Deficit financing: It is an extraordinary technique of financing thedeficits in the budgets. It implies printing of fresh and new currencynotes by the government by running down the cash balances with thecentral bank. The amount of new money printed by the governmentdepends on the absorption capacity of the economy.
5. Built in stabilisers or automatic stabilisers (BIS): The automatic orbuilt-in stabilisers imply automatic changes in tax collections and transferpayments or public expenditure programmes so that it may reduce thedestabilising effect on aggregate effective demand. When income expands, automatic increase in taxes or reduction in transfer paymentsor government expenditures will tend to moderate the rise in income.
Q4. Describe Cost-Output Relationship in brief.
(Definition of cost-output relationship, Explanation of Cost-output relationship in short run and long run in brief) 3, 7
Answer:
Cost-Output Relationship: Cost Function
Cost-output relations play animportant role in almost all business decisions. It throws light on costminimisation or profit maximisation and optimisation of output. The relationbetween the cost and output is technically described as the “cost function”.The significance of cost-output relationship is so great that in economicanalysis, the cost function usually refers to the relationship between costand rate of output alone and we assume that all other independent variables are kept constant. Mathematically speaking TC = f (Q) where TC = Totalcost and Q stands for output produced.However, cost function depends on three important variables. Thesevariables are as follows:
1. Production function – If a firm is able to produce higher output with alittle quantity of inputs, in that case, the cost function becomes cheaper andvice-versa.
2. The market prices of inputs – If market prices of different factor inputsare high in that case, cost function becomes higher and vice-versa.
3. Period of time – Cost function becomes cheaper in the long run and itwould be relatively costlier in the short run.
Cost-Output Relationships in the Short Run
Itis interesting to note that the relationship between the cost and output isdifferent at two different periods of time i.e. short-run and long run.Generally speaking, cost of production will be relatively higher in the short runwhen compared to the long run. This is because a producer will getenough time to make all kinds of adjustments in the productive process inthe long run than in the short run. When cost and output relationship is represented with the help of diagrams, we get short run and long run costcurves of the firm.
Cost-Output Relationship in the Long Run
Long run is defined as a period of time where adjustments to changedconditions are complete. It is actually a period during which the quantities ofall factors, variable as well as fixed factors, can be adjusted. Hence, thereare no fixed costs in the long run. In the short run, a firm has to carry on itsproduction within the existing plant capacity, but in the long run, it is not tiedup to a particular plant capacity. If demand for the product increases, it canexpand output by enlarging its plant capacity. It can construct new buildings or hire them, install new machines, employ administrative and otherpermanent staff.
Q5. Discuss the practical application of Price elasticity and Income elasticity of demand.
(Practical application of price elasticity, Practical application of Income elasticity) 5, 5
Answer:
Practical application of price elasticity of demand
Few examples on the practical application of price elasticity of demand areas follows:
1. Production planning – It helps a producer to decide about the volumeof production. If the demand for his products is inelastic, specificquantities can be produced while he has to produce different quantities,if the demand is elastic.
2. Helps in fixing the prices of different goods – It helps a producer tofix the price of his product. If the demand for his product is inelastic, hecan fix a higher price and if the demand is elastic, he has to charge alower price.
3. Helps in fixing the rewards for factor inputs – Factor rewards refer tothe price paid for their services in the production process. It helps theproducer to determine the rewards for factors of production. If thedemand for any factor unit is inelastic, the producer has to pay higherreward for it and vice-versa.
4. Helps in determining the foreign exchange rates – Exchange raterefers to the rate at which currency of one country is converted in to thecurrency of another country. It helps in the determination of the rate ofexchange between the currencies of two different nations.
5. Helps in determining the terms of trade – t is the basis for decidingthe ‘terms of trade’ between two nations. The terms of trade implies therate at which the domestic goods are exchanged for foreign goods.
Practical application of income elasticity of demand
Few examples on the practical application of income elasticity of demandare as follows:
1. Helps in determining the rate of growth of the firm – If the growthrate of the economy and income growth of the people is reasonablyforecasted, in that case, it is possible to predict expected increase in thesales of a firm and vice-versa.
2. Helps in the demand forecasting of a firm – It can be used inestimating future demand provided that the rate of increase in incomeand the Ey for the products are known. Thus, it helps in demandforecasting activities of a firm.
3. Helps in production planning and marketing – The knowledge of Eyis essential for production planning, formulating marketing strategy,deciding advertising expenditure and nature of distribution channel, etc.in the long run.
4. Helps in ensuring stability in production – Proper estimation ofdifferent degrees of income elasticity of demand for different types ofproducts helps in avoiding over-production or under production of a firm.
5. Helps in estimating construction of houses – The rate of growth inincomes of the people also helps in housing programmes in a country.Thus, it helps a lot in managerial decisions of a firm.
Q6. Discuss the scope of managerial economics.
(Definition of Managerial Economics, Scope of Managerial Economics) 2, 8
Answer:
Managerial Economics
Managerial economics is ascience that deals with the application of various economic theories,principles, concepts and techniques to business management in order tosolve business and management problems. It deals with the practicalapplication of economic theory and methodology in decision-makingproblems faced by private, public and non-profit making organisations. “Managerial economics is the use of economic modes of thought to analysebusiness situation”.
Scope of Managerial Economics
Consequently, there is no unanimity among differenteconomists with respect to the exact scope of business economics.However, the following topics are explained in this subject:
Objectives of a firm
Historically, profit maximisation has been considered as the main objectiveof a business unit. All business organisations have multiple objectives whichare multidimensional out of which some are supplementary and some arecompetitive.
Demand analysis and forecasting
Mostly, a firm is a producing unit. It produces different kinds of goods andservices. It has to meet the requirements of consumers in the market.
Production and cost analysis
Production cost is concerned withestimation of costs to produce a given quantity of output. Cost controls, costreduction, cost cutting and cost minimisation receive top most priority inproduction and cost analysis. Maximisation of output with minimum cost isthe basic goal of any firm..
Pricing decisions, policies and practices
Pricing decisions means to fix the prices for all the goods and services ofany firm. This is based on the pricing policy and practices of that particularfirm. Amongst all the policies the most important policy of any firm would bethe price setting policy.
Profit management
Basically, a firm can be a commercial or a business unit. Consequently, itssuccess or failure is measured in terms of the amount of profit it is able toearn in a competitive market. The management gives top most priority tothis aspect.
Capital management
This is one of the essential areas of business unit. The success of anybusiness is based on proper management and adequate capital investment.
Linear programming and theory of games
It implies maximisation or minimisation of a linear functionof variables subject to a constraint of linear inequalities.
Market structure and conditions
The information on market structure and conditions of various markets is themost important part of the business.
Strategic planning
It provides long term decisions, which will have a huge impact on thebehaviour of the firm. The firm fixes up some long-term goals and objectivesand selects a different strategy to achieve them.