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MB0042-MBA-1st Sem 2011 Assignment Managerial Economics

MB0042-MBA-1st Sem 2011 Assignment Managerial Economics

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Published by Ali Asharaf Khan
MB0042-MBA-1st Sem 2011 Assignment Managerial Economics
MB0042-MBA-1st Sem 2011 Assignment Managerial Economics

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Published by: Ali Asharaf Khan on May 25, 2011
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With Lots of Lucks
Managerial Economics MBA-1st
Q.1 Income elasticity of demand has various applications. Explain each application withthe help of an example?Ans:
Income elasticity of demand may be defined as the ratio or proportionate change in thequantity demanded of a commodity to a given proportion change in the income. In short, itindicates the extent to which demand changes with a variation in consumer’s income. Thefollowing formula helps to measure the income elasticity (Ey).OrWhere
Ey is income elasticity of demand
D is change in demand
D is original demand
Y is change in income
Y is original income
Original demand=400 units Original income= 4000 unitsNew demand =700 units New income= 6000 unitsChange in demand= 700-400= 300 units change in income=6000-4000=2000Hence Ey=300/2000*4000/400=1.5Generally speaking Ey is positive. This is because there is a direct relationship between incomeand demand, i.e. higher the income; higher would be the demand and vice versa. On the basis of the numerical value of the co-efficient, Ey is classified as greater than one, less than one, equalto one, equal to zero and negative. The concept of ey helps us in classifying commodities in todifferent categories.
With Lots of Lucks
Managerial Economics MBA-1st
When Ey is positive, the commodity is normal (used in day-to-day life)2.
When Ey is negative, the commodity is inferior. ( for example jowar, beedi etc)3.
When Ey is positive and greater than one, the commodity is luxury.4.
When Ey is positive but less than one, the commodity is essential.5.
When Ey is zero, the commodity is neutral. E.g. salt, match box etc.
Practical application of income elasticity of demand1.
Helps in determining the rate of growth of the firm.
If the growth rate of the economy and income growth of the people is reasonableforecasted, in that case it is possible predict expected increase in the sales of a firm andvice versa.
Helps in the demand forecasting of a firm.
It can be in estimating future demand provided the rate of increase in income and Ey forthe products are known. Thus, it helps in demand forecasting activities of a firm.
Helps in production planning and marketing.
The knowledge of Ey is essential for production planning, formulating marketingstrategy, deciding advertising expenditures and nature of distribution channel etc in thelong run.
Helps in ensuring stability in production. 
Proper estimation of different degrees of income elasticity of demand for different typesof product helps in avoiding over-production or under-production of a firm. One shouldknow whether rise or fall in income is permanent or temporary.
Helps in estimating construction of houses.
The rate of growth in incomes of people also helps in housing programs in a country.Thus it helps a lot in managerial decisions of a firm.
Q.2 When is the opinion survey method used and what is the effectiveness of the method.Ans:
Survey of buyer’s intention or preference is one of the important methods of demandforecasting. It is also called “Opinion Survey Method”.
With Lots of Lucks
Managerial Economics MBA-1st
Under this method, consumer buyers are requested to indicate their preference andwillingness about a particular product. They are about to reveal their future purchase plans withrespect to specific items.They are expected to give answer to question like what items they intends to buy, in whatquantity, why, where, what quality they expect, how much they are planning to spend etc.Generally, the field surveys are conducted by the marketing research departments of thecompany or hiring the services of outside research organization consisting of learned and highlyqualified professionals.The heart of the survey is questionnaire. It is a comprehensive one covering almost allquestions either directly or indirectly in a most intelligent manner. It is prepared by an expertbody who are specialist in the field or marketing.The questionnaire is distributed among the consumer either through mail or in person bythe company. Consumers are requested to furnish all relevant and correct information.The next step is to collect the questionnaire from the consumers for the purpose of evaluation. The materials collected will be classified, edited and analyzed. If any biasprejudices, exaggerations, artificial or excess demand creation are found at the time of answering they would be eliminated.The information so collected will now be consolidated and reviewed by the topexecutives with lot of experiences. It will be examined thoroughly. Inferences are drawn andconclusions are arrived at. Finally a report is prepared and submitted to the management fortaking final decisions.
The success of the survey method depends on many factors: 
The nature of the question asked.2.
The ability of the surveyed.3.
The representative of the sample4.
Nature of the product5.
Characteristics of the market6.
Consumer behavior7.
Techniques of analysis

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