Managerial Economics (MB0026) Assignment: Set -2

MBA – I SEM

MB0026

MANAGERIAL ECONOMICS

SET -2

ASSIGNMENT
7. What is pricing policy? What are the internal and external
factors of the policy?

Ans: Pricing Policies:

Pricing Policies refer to the policy of setting the price of the product or
product & services by the management after taking into account of
various internal and external factors, forces and its own business
objectives. The decision of pricing is very important in any business. Price
once fixed is never permanent. It needs to be reviewed and revised
according to the market conditions.

Internal factors which can affect the pricing decisions of the company
include suppliers, employee’s efficiency, profit margin, production cost
and other expenses, brand image and expectations of the company.
Suppliers provide the raw materials to the company and good relations
with suppliers can make the company to buy quality products at
reasonable prices. Employees' efficiency can also reduce the costs of the
company and company can charge lower prices. Product cost also
determines the prices of the products because all of the companies have
to cover up the product costs. Moreover, image of the company also plays
an important role in the price decisions of the company because a global
brand will usually charge premium prices. On the other hand, the external
factors include government policies, competitors' prices, costs of raw
materials, consumer’s expectations and demand and supply of the
product. Government sets the price floors to save the interest of the
borrowers and the sellers, therefore, government policies should be also
take into consideration. Expectations of the consumers or consumer
reservation prices are also considered in the price decisions. Costs of raw
materials in the market also determine the pricing strategies. Moreover,
the prices offered by the competitors can also impact the pricing decisions
of the company.

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 Managerial Economics (MB0026) Assignment: Set -2

8. Mention three crucial objectives of price policies.

Ans: Price policy has certain objectives:-

1. To maximize profits:

Every firm tries to maximize their profits. So they should have a price
policy, which fetches them maximum revenue. Every firm should have a
price policy keeping the long run prospects in mind.

2. Price Stability:

Always fluctuating price is not for the goodwill of the company. A stable
price always wins the confidence of customers.

3. Ability to pay:

The price should be fixed according to the ability of consumer to pay; high
price for rich customers and low for poor customers. This can be applied in
case of services given by doctors, lawyers etc.

9. Mention the bases of price discrimination.

Ans: PRICE DISCRIMINATION:

The monopoly seller has the advantage of price discrimination, as he is

the only producer in the market. Price discrimination is charging different
price to different buyer for the same product.

DEGREES OF PRICE DISCRIMINATION:

1. First degree price discrimination:

It is also called perfect price discrimination, as it involves maximum

exploitation of the consumer in the interest of the seller. It happens when
the seller is able to sell each unit separately and at a different price. Each
buyer is made to pay the amount he is willing to pay rather going without
it. The seller will make different bargain with each buyer. Such type of
price discrimination enjoyed by the seller is called first degree price
discrimination.

2. Second degree price discrimination:

It happens when the monopoly seller will charge separate price in such a
way that the buyer is divided into different groups according to the price
elasticity of demand for his product.
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 Managerial Economics (MB0026) Assignment: Set -2

3. Third degree price discrimination:

When the seller will be divided into sub-market and charge different price
depending on the output sold in the market and the demand condition of
that sub-market. The seller practicing price discrimination between the
domestic market and international market, the seller will charge higher
price in the domestic market, where he enjoys monopoly and charge low
price in the international market, where he has to face more competition.

10. What do you mean by the fiscal policy? What are the
instruments of fiscal policy? Briefly comment on India’s fiscal
policy.

Ans: Fiscal policy is a policy, which affects aggregate output,

employment, saving, investment etc. A responsible government would
contain its expenditure within its revenue and thus making the budget
balanced. The instruments of Fiscal Policy are Automatic Stabilizer and
Discretionary Fiscal Policy:

i) Automatic Stabilizer:

The tax structure and expenditure are programmed in such a way that
there is increase in expenditure and decrease in tax in recession and
decrease in expenditure and increase in tax revenue in the period of
inflation. It refers to built-in response to the economic condition without
any deliberate action on the part of government. It is called built- in-
stabilizer to correct and thus restore economic stability. It works in the
following manner,

Tax revenue:

Tax revenue increases when the income increases; as those who were not
paying tax go into the higher income tax bracket. When there is
depression, the income decreases and many people fall in the no-income-
tax bracket and the tax revenue decreases.

ii) Discretionary Fiscal Policy:

Under this, to stabilize the economy, deliberate attempts are made by the
government in taxation and expenditure. It entails definite and conscious
actions.

Instruments of Fiscal Policy: Some important instruments of fiscal

policy are:-
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Managerial Economics (MB0026) Assignment: Set -2

1. TAXATION:

Taxation is always a very important source of revenue for both developed

and developing countries. Tax comes under two heading –Tax on
individual (direct tax) and tax on commodity (indirect tax or commodity
tax).Direct tax includes income tax, corporate tax, taxes on property and
wealth. Indirect tax is tax on the consumptions. It includes sales tax,
excise duty and custom duties. Direct tax structure can be divided into
three bases-

a. Progressive tax
b. Regressive tax
c. Proportional tax

a. Progressive tax:

Progressive tax says that higher the level of income, greater the volume of
tax burden you have to bear. This means as income increases, the tax
contribution should also increase. Low income group people pay low tax,
whereas the high income group people pay higher tax.

b. Regressive tax:

It is theoretically possible, though no government implements such tax

structure, because that leads to unequal distribution of income. As your
income increases the contribution through tax decreases. Low income
people will pay more and high income people will pay less.

c. Proportional tax:

When the tax imposed is irrespective of the income you earn, every
income group, high or low pay the same amount of tax.

2. INDIRECT TAX OR CONSUMPTION TAX:

Indirect tax differs from direct tax. Tax which is imposed on every unit of
product is known as lump sum tax.

E.g. excise tax and sales tax. Taxes depending on the value of particular
product are called ‘ad valorem tax’ e.g. tax on airline tickets. A good tax
structure has to control and bring stability in economic system. There are
few requirement of a good tax structure. They are:

 The revenue earned through tax structure should be adequate.

 The distribution of tax burden should be equal.
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Managerial Economics (MB0026) Assignment: Set -2

 Administration cost should not be more than revenue earned.

 Tax burden should be borne by the person who is taxed.

11. Comment on the consequences of environmental degradation

on the economy of a community.

Ans: Environmental Degradation:

For sustainable economic growth, the environment should be properly

preserved and improved. The stocks may remain constant or it can even
rise but the environment resources are the base of the country and the
quality of air, water and land represents the heritage of a nation. The
environment damages in the developing countries are the main concern
nowadays. Environmental damages can be in these categories-

Water pollution:

The water quality is continuously deteriorating due to contamination from

the industrial waste, by throwing out chemical waste and heavy metal in
the river. It is difficult to remove the pollutants from the water to make it
good for drinking purpose. The capacity of the water to preserve the
aquatic life is becoming more and more difficult. The underground water is
also getting affected by the industrial waste, as they sometimes get
discharged directly into underground water.

Air pollution:

Air pollution can be contributed to the three man made sources, industrial
production, vehicles and the energy. Human suffering increases due to the
air pollution. Respiratory disorders and cancers are due to inhalation of
polluted air. The vehicle increases the sulphur dioxide concentration in the
air creating breathing problems for the children and affects their
neurological developments.

Deforestation:

Forest is the most important source to protect environment. They protect

soil erosion and regulate the ecological balance of the nature. They it
affect the nature and the climatic condition of the region. The blind
increase in the industrial growth is leading to cutting down of many forest
leading to many serious problems for the human being.

12. Write short notes on the following:

a) Philips curve
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Managerial Economics (MB0026) Assignment: Set -2

b) Stagflation

Ans: a) Philips Curve:

It describes the relationship between inflation and unemployment in an

economy. New Zealand-born economist A.W Philips first put this theory
forward in 1958 gathered the data of unemployment and changes in wage
levels in the UK from 1861 to 1957. He observed that one stable curve
represents the trade-off between inflation and unemployment and they
are inversely/negatively related. In other words, if unemployment
decreases, inflation will increase, and vice versa.

For example, after the economy has just been in recession, the
unemployment level will be fairly high. This will mean that there is a labor
surplus.

 As the economy has just started growing, the aggregate demand

(AD) will increase and therefore leading to an increase in
employment. In the beginning, there will be little pressure for a raise
in wages. However, as the economy grows faster and more people
are employed, wages will start rising slowly.

b) Stagflation

Stagnation + Inflation = Stagflation

Stagnation = Slow or no growth. Inflation = Rises in price.

Stagflation is an economic trend in which inflation and unemployment rise

while general growth of the economy is slow. It can be difficult to correct

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Managerial Economics (MB0026) Assignment: Set -2

stagflation, because focusing on one aspect of the problem can

exacerbate other aspects. Many governments try to avoid stagflation
through fiscal policy, by promoting even and healthy growth and
attempting to prevent inflation. If stagflation continues long enough, it will
trigger an economic recession and an ultimate self-correction.

Stagflation is when the economy experiences slow GDP growth

(stagnation) with high inflation and high level of unemployment. This
occurred in the 1970's in many countries. When the economy is working
normally, slow economic growth reduces demand, which keeps prices low,
preventing inflation.

Stagflation can only occur when fiscal or monetary policy sustains high
prices, and inflation, despite slow growth. Stabilization policies to control
stagflation.

1. The money supply should be tightened to check inflation.

2. We can control inflationary wage and price increases with direct

controls. Government can limit increases by law or constrain them through
tax policies.

3. Protect people against the effects of inflation. All wages, including the
minimum wage, could be increased automatically when the Consumer
Price Index increases. Government bonds could pay a fixed real interest
rate by adjusting the actual interest rate for inflation.

Stagflation is difficult to control without government controls. Therefore,

political will is necessary for formulating the measures to stop stagflation.

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