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: Managerial Economics

Date Of Submission : 13th June, 2009 Assignment No. : MB0026

SET – 1
Q1. Define Managerial Economics and discuss its importance and functions. Answer – Managerial economics is a science that deals with the application of various economic theories, principles, concepts and techniques to business management in order to solve business and management problems. It deals with the practical application of economic Important Features of managerial Economics:1. It is a new discipline and of recent origin 2. It is a highly specialized and separate branch by itself. 3. It is basically a branch of microeconomics and as such it studies the problems of only one firm in detail. 4. It is mainly a normative science and as such it is a goal oriented and prescriptive science. 5. It is more realistic, pragmatic and highlights on practical application of various economic theories to solve business and management problems. 6. It is a science of decision-making. It concentrates on decisionmaking process, decision models and decision variables and their relationships. 7. It is both conceptual and metrical and it helps the decision maker by providing measurement of various economic variables and their interrelationships. 8. It uses various macro economic concepts like national income, inflation, deflation, trade cycles etc to understand and adjust its policies to the environment in which the firm operates.

It uses the services of many other sister sciences like mathematics. Decision-making:The word ‘decision’ suggests a deliberate choice made out of several possible alternative courses of action after carefully considering them. The act of choice signifying solution to an economic problem is economic decision making. Hence. 10. he has to take innumerable decisions. statistics. Among them. accounting. decision-making and forward planning are described as the two major functions and all other functions are derived from these two basic functions. impact of technology. Some decisions are taken in the background of . operation research and psychology etc to find solutions to business and management problems. sociopolitical and cultural factors etc. environmental forces. Two major functions of a Managerial Economist. It also gives importance to the study of no economic variables having implications of economic performance of the firm. He has in-depth knowledge of the subject. Decision-making is a management function. He is an authority and has total command over his subject. Some decisions are taken on the spot and some others are taken after careful thinking. Sometimes the manager takes the decision himself. sometimes in collaboration and consultations with others. it is a part of business activity. For example. Some decisions are taken in the absence of any information. It is a basic function of a managerial economist. Some decisions are major and complex while others are minor and simple. Decisionmaking is essentially a process of selecting the best out of many alternative Opportunities or courses of action that are open to a management. engineering. A Managerial Economist is a specialist and an expert in analyzing and finding answers to business and managerial problems. Decision making is a routine affair in any business unit. In the day today business. A Managerial Economist has to perform several functions in an organization. It involves choices among a set of alternative courses of action. 1.9. A detailed description of the two functions is as follows.

computers or improvements in R&D. Forward planning:The term ‘planning’ implies a consciously directed activity with certain predetermined goals and means to carry them out. Q. Hence. Some other decisions are taken in the midst of uncertainties. It is associated with deciding the future course of action of a firm. crucial and have far-reaching consequences. management experts are of the opinion that right decision – making at the right time is the secret of a successful manager.2 What is elasticity of demand? Explain the different degree of price elasticity with suitable examples. It is a programmed action. . Forward planning implies planning in advance for the future. It is prepared in the background of uncertain and unpredictable environment and guess work. Much of economic activity is forward looking. It is prepared on the basis of past and current experience of a firm. Future events and happenings cannot be predicted accurately. each decision involves cost benefit analysis. A business executive must be sufficiently intelligent enough to think in advance. add to the stocks of inputs. known factors and information. Every time we build a new factory. It is a deliberate activity.certainty. prepare a sound plan and take all possible precautionary measures to meet all types of challenges of the future business. The basic aim of taking a decision is to select the best course of action which maximizes the economic benefits and minimizes the use of scarce resources of a firm. The choice made by the business executives are difficult. Basically Planning is concerned with tackling future situations in a systematic manner. trucks. Growing firms devote a significant share of their current output to net capital formation to bolster future economic output. It is for this reason. our intension is to enhance the future productivity of the firm. The success or failure of the future plan depends on a number of factors and forces which are unknown in nature. 2. forward planning has acquired greater significance in business circles. Hence. Any slight error or delay in decision making may cause considerable economic and financial damage to a firm.

.Answer – The term elasticity is borrowed from physics. Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price of a commodity Price Elasticity of Demand:Price elasticity of demand is one of the important concepts of elasticity which is used to describe the effect of change in price on quantity demanded. a very small change in price leads to an infinite change in demand. Elasticity is an index of Reaction. The numerical coefficient of perfectly elastic demand is infinity (ED=00). The demand cure is a horizontal line and parallel to OX axis. It shows the reaction of one variable with respect to a change in other variables on which it is dependent.Perfectly Elastic Demand: In this case. Different Degree of Price Elasticity of Demand 1.

a slight change in price leads to more than proportionate change in demand. The demand curve is a vertical straight line and parallel to OY axis. the numerical coefficient of perfectly inelastic demand is zero.00 to Rs. the elasticity is greater than one.. ED = 0 3. One can notice here that a change in demand is more than that of change in price. irrespective of price changes from Rs.2. price falls by 3 % and demand rises by 9 %. Perfectly Inelastic Demand: In this case. For e. Relative Elastic Demand: In this case.g. 10. Hence. Hence. what ever may be the change in price. the numerical coefficient of demand is greater than one. 2. Quantity demanded would be 10 units. . Hence. quantity demanded will remain perfectly constant.00.

4.. elasticity is less than one 5. Unitary elastic demand: In this case. we make reference only to two terms relatively elastic demand and relatively inelastic demand. . For e. elasticity is equal to unity. the first two are theoretical and the last one is a rare possibility. Hence. say 8 % fall price. say 4 % rise in demand. 5 % fall in price leads to exactly 5 % increase in demand. Hence. One can notice here that Change in demand is less than that of change in price. This can be represented by a steeper demand curve. in all our general discussion. It is possible to come across unitary elastic demand but it is a rare phenomenon. leads to less than proportionate change in demand.g. Out of five different degrees. proportionate change in price leads to equal proportionate change in demand. Relatively Inelastic Demand In this case. a large change in price. Hence.

Survey Methods:Survey methods help us in obtaining information about the future purchase plans of potential buyers through collecting the opinions of experts or by interviewing the consumers. There are different approaches under survey methods. It requires the assistance and opinion of experts in the field of sales management. Broadly speaking. Survey methods and 2. These methods are extensively used in short run and estimating the demand for new products. a. Consumers’ interview method: under this method. a number of alternative . intelligence and judgment of the experts. Explain the various methods forecasting for a new product Answer – Methods Or Techniques Of Forecasting:Demand forecasting is a highly complicated process as it deals with the estimation of future demand. They are A. past data or experience. They are: 1. While estimating future demand. to become more realistic should consider the two aspects in a balanced manner. Demand forecasting. Application of commonsense is needed to follow a pragmatic approach in demand forecasting. there are two methods of demand forecasting.Q. Statistical methods.3 Suppose your manufacturing company planning to release a new product into market. In order to gather information from consumers. one should not give too much of importance to either statistical information. efforts are made to collect the relevant information directly from the consumers with regard to their future purchase plans.

The next step is to collect the questionnaire from the consumers for the purpose of evaluation. The success of the survey method depends on many factors. the following are some of the important ones. 2) The ability of the surveyed 3) The representative of the samples 4) Nature of the product 5) Characteristics of the market 6) Consumer buyer’s behavior. It is also called as “Opinion surveys”. when. Survey of buyer’s intentions or preferences: It is one of the oldest methods of demand forecasting. are found at the time of answering they would be eliminated. exaggerations. The information so collected will now be consolidated and reviewed by the top executives with lot of experience. Among them. If any bias prejudices. Consumers are requested to furnish all relevant and correct information. Finally a report is prepared and submitted to management for taking final decisions. consumer buyers are requested to indicate their preferences and willingness about particular products. what quality they expect. thoughts. edited analyzed. Under this method. artificial or excess demand creation etc. The materials collected will be classified. how much money they are planning to spend etc. the field survey is conducted by the marketing research department of the company or hiring the services of outside research organizations consisting of learned and highly qualified professionals. Generally. where.. Inferences are drawn and conclusions are arrived at. . The heart of the survey is questionnaire. It is a comprehensive one covering almost all questions either directly or indirectly in a most intelligent manner. motives. why. honesty etc. They are expected to give answers to questions like what items they intend to buy. their intentions. It is prepared by an expert body who are specialists in the field or marketing. attitudes. They are asked to reveal their ‘future purchase plans with respect to specific items. in what quantity.techniques are developed from time to time. 1) The nature of the questions asked. The questionnaire is distributed among the consumer buyers either through mail or in person by the company. It will be examined thoroughly.

the quality and quantity of products. customers are directly contacted and interviewed. At best it can be used for short term forecasting. Consumer buyers may not express their honest and real views and as such they may give only the broad trends in the market. This method is simple and useful to the producers who produce goods in bulk. relative price preferences etc. Hence. B. The result mainly depends on the nature of questions asked and answers received from the customers. There are two different methods of direct personal interviews. Complete enumeration method : Under this method. field surveys should be regularly checked and supervised. Direct and simple questions are asked to them. The answers elicited are consolidated and carefully studied to obtain the most probable demand for a product. expenditure plans. Preparation of a questionnaire is not an easy task. Under this method. particular items to be selected. all potential customers are interviewed in a particular city or a region. The management can safely project the future demand for its products. However this method is not much useful in estimating the future demand of the households as they run in large numbers and also do not freely express their future demand requirements. The management should not entirely depend on the results of survey reports to project future demand. It is expensive and also difficult. for a particular period of time. this method cannot be used successfully by all sellers in all cases. Here the burden of forecasting is put on customers. They are requested to answer specifically about their budget. Direct Interview Method Experience has shown that many customers do not respond to questionnaire addressed to them even if it is simple due to varied reasons.7) Techniques of analysis 8) Conclusions drawn etc. an alternative method is developed. They are as follows: i. This method can be employed to only those products whose customers are . However. In order to arrive at right conclusions. This method is free from all types of prejudices.

concentrated in a small region or locality. less expensive. the sample survey method is less tedious. which is popularly known as sample survey method. this method may not be physically adopted or prove costly both in terms of time and money. much simpler and less time consuming. inconsistency in buying intentions of consumers. number of sensible questions asked and dropouts from the panel for various . different cross sections of customers that make up the bulk of the market are carefully chosen. In other words. ii. On the basis of the views expressed by these selected consumers. Sample survey method or the consumer panel method : Experience of the experts’ show that it is impossible to approach all customers; as such careful sampling of representative customers is essential. Only such consumers selected from the relevant market through some sampling method are interviewed or surveyed. A sudden change in price. a group of consumers are chosen and queried about their preferences in concrete situations. The selection of a few customers is known as sampling. Hence. another variant of complete enumeration method has been developed. Success of this method depends upon the sincere cooperation of the selected customers. this method is highly cumbersome in nature. Even with careful selection of customers and the truthful information about their buying intention. The advantage of a panel lies in the fact that the same panel is continued and new expensive panel does not have to be formulated every time a new product is investigated. most likely demand may be estimated. Under this method. This method is generally used to estimate short run demand by government departments and business firms. Hence. In case consumers are widely dispersed. The method of survey may be direct interview or mailed questionnaire to the selected consumers. This method uses either random sampling or the stratified sampling technique. As compared to the complete enumeration method. the results of the survey can only be of limited use. The selected consumers form a panel. selection of suitable consumers for the specific purpose is of great importance. Hence.

They can study the pulse of the people and identify the specific views of the customers. Thus. if not accurate estimates. It is simple. It cannot be relied upon for long term business planning. these opinions or estimates collected from the various experts are considered. they provide approximate. Collective opinion method or opinion survey method This is a variant of the survey method. Delphi Method or Experts Opinion Method . departmental heads and the top executives.reasons put a serious limitation on the practical usefulness of the panel method. Further. income distribution. will be in a position to know and feel the customer’s reactions towards the product. These revised estimates are further examined in the light of factors like proposed change in selling prices. The logic and reasoning behind the method is that these salesmen and other people connected with the sales department are directly involved in the marketing and selling of the products in different regions. This method is also known as “Sales – force polling” or “Opinion poll method”. professional experts and the market consultants and others are asked to express their considered opinions about the volume of sales expected in the future. C. sales representatives. This method heavily depends on the collective wisdom of salesmen. consolidated and reviewed by the top executives to eliminate the bias or optimism and pessimism of different salesmen. D. Then. Salesmen. Under this method. being very close to the customers. the views of all salesmen are aggregated to get the overall probable demand for a product. The main drawback is that it is subjective and depends on the intelligence and awareness of the salesmen. expected changes in the degree of competition. product designs and advertisement programs. less expensive and useful for short run forecasting particularly in case of new products. These people are quite capable of estimating the likely demand for the products with the help of their intimate and friendly contact with the customers and their personal judgments based on the past experience. population etc. The final sales forecast would emerge after these factors have been taken into account.

Under this method. Their views generally avoid or reduce the “Halo – Effects” and “Ego – Involvement” of the views of the others. E. It has proved more useful and popular in forecasting non– economic rather than economical variables. outside experts are appointed. a firm will give lot of importance to them and prepare their future plan on the basis of the forecasts made by the experts.It is a variant of opinion poll and survey method of demand forecasting. steel etc. for transportation etc. This method was used to predict future technological changes. It is quite useful for industries which are largely producers’ goods. Their views are generally regarded as most objective ones. An intermediate product may have many end – users.This method was originally developed at Rand Corporation in the late 1940’s by Olaf Helmer. end – use demand estimation of an intermediate product may involve many final goods industries using this product. This method is used to forecast the demand for intermediate products only. Thus. It may have the demand both in the domestic market as well as international market. Once we know the demand for final consumption goods including their exports we can estimate the demand for the product which is used as intermediate good in the production of these final goods with the help of input – output coefficients. like aluminum. They are supplied with all kinds of information and statistical data. for construction. End Use or Input – Output Method Under this method. at home and abroad. steel can be used for making various types of agricultural and industrial machinery. The input – output table containing input – output coefficients for particular periods are made available in every country either by the Government or by research organizations. The management requests the experts to express their considered opinions and views about the expected future sales of the company. For e. Since experts’ opinions are more valuable. the sale of the product under consideration is projected on the basis of Demand surveys of the industries using the given product as an intermediate product..g. The main limitation of . Dalkey and Gordon. The Demand for the final product is the end – use demand of the intermediate product used in the production of the final product.

They are used for estimating long term demand.the method is that as the number of end – users of a product increase. statistical. There are several statistical methods and their application should be done by some one who is reasonably well versed in the methods of statistical analysis and in the interpretation of the results of such analysis. Some of them require considerable mathematical back – ground and competence. The analysis of the past demand serves as the basis for present trends and both of them become the basis for calculating the future demand of a commodity in question after taking into account of likely changes in the future. They are highly complex and complicated in nature. generally at equal intervals. sales as it changes from one point of time to another. They use historical data in estimating future demand. . Statistical Method : It is the second most popular method of demand forecasting. Under this method. It is an ordered sequence of events over a period of time pertaining to certain variables. Trend Projection Method An old firm operating in the market for a long period will have the accumulated previous data on either production or sales pertaining to different years. mathematical models. equations etc are extensively used in order to estimate future demand of a particular product. a time series is a set of observations taken at specified time. we get what is called as ‘time series’. It shows a series of values of a dependent variable say. On the basis of time series. it is possible to project the future sales of a company. This method is not based on any particular theory as to what causes the variables to change but merely assumes that whatever forces contributed to change in the recent past will continue to have the same effect. If we arrange them in chronological order. It depicts the historical pattern under normal conditions. In short. it becomes more inconvenient to use this method. It is the best available technique and most commonly used method in recent years.

Further. Also. we get a curve. It is for this reason that the experts give importance to identification of turning points while projecting the future demand for a product. Random movement. sales clearance season etc. The major task of a firm while estimating the future demand lies in the prediction of turning points in the business rather than in the projection of trends. Such changes take place only in the short run. Frequency in turning points indicates uncertain demand conditions and in this case. If the turning points are few and their intervals are also widely spread. Cyclical Movements: It implies change in time series or fluctuations in the demand for a product during different phases of a business cycle like depression. These movements imply sporadic changes in time series occurring due to unforeseen events such as floods. the statistics and information with regard to the sales call for further analysis. the trend projection breaks down. 3. Still they have their own impact on the sales of a company. Here the time series show a persistent tendency to move in the same direction. 2. droughts and other such natural calamities. The heart of this method lies in the use of time series. it indicates fluctuations and turning points in demand. we call them irregular or random movements. revival.. they yield acceptable results. 4. Seasonal movements: Time series also undergo changes during seasonal sales of a company. Changes in time series arise on account of the following reasons: 1. strikes. the firm has to make radical changes in its basic policy with respect to future demand. It shows the trend in sales at different periods of time. Secular or long run movements: Secular movements indicate the general conditions and direction in which graph of a time series move in relatively a long period of time. earth quakes. elections. boom etc. . When we represent the time series in the form of a graph. When turning points occur more frequently. we come across most unexpected changes. During festival season. the sales curve. When changes take place at random.

SS is the supply curve which remains unchanged. Define the term equilibrium. It is a position of rest characterized by absence of change. If demand raises due to a change in any one of these conditions the demand curve shifts upward to the right. suppose the demand increases. The demand curve shifts forward to D1D1. Explain the changes in market equilibrium and effects to shifts in supply and demand. DD is the demand curve. Price is shown on OY axis. It means a state of even balance in which opposing forces or tendencies neutralize each other. The new .” Changes in Market Equilibrium:The changes in equilibrium price will occur when there will be shift either in demand curve or in supply curve or both. If. tastes. In the words of professor Mehta: “Equilibrium denotes in economics absence of change in movement. the demand curve shifts downward to the left. Answer – Meaning of equilibrium The word equilibrium is derived from the Latin word “equilibrium” which means equal balance. prices of substitutes and complements.Q4. demand falls. Demand and supply curves intersect each other at point E. Such rise and fall in demand are referred to as increase and decrease in demand. on the other hand. It is a state where there is complete agreement of the economic plans of the various market participants so that no one has a tendency to revise or alter his decision. Thus OP is the equilibrium price and OQ is the equilibrium quantity demanded and supplied. size of the population etc. Now. A change in the market equilibrium caused by the shifts in demand can be explained with the help of a diagram Quantity demanded and supplied is shown on OX axis. Effects of shit in demand Demand changes when there is a change in the determinants of demand like the income.

The new supply curve intersects the demand curve at E1 reducing the equilibrium price to P1 and raising the quantity demanded to OQ1. price falls and if supply decreases price rises. If the rate of change in demand is matched with the rate of change in supply there will be no change in the market equilibrium. the new equilibrium will be at E2 and the quantity demanded will be OQ2.demand curve intersects the supply curve at point E1. In the same way. Thus changes in supply. where the quantity demanded increases to OQ1 and price to OP1. The general rule is. The effects of such changes on the market equilibrium depend on the rate of change in the two variables. Suppose. the new equilibrium shows expanded market with increased quantity . On the other hand if the supply decreases and the supply curve shifts backward to S2S2. the Effects Of Changes In Both Demand And Supply Changes can occur in both demand and supply conditions. price will be OP2. We can show the effects of shifts in supply with the help of a diagram In the diagram supply and demand curves intersect each other at point E. If the rate of change in demand is matched with the rate of change in supply there will be no change in the market equilibrium. if supply increases. Thus the market equilibrium price and quantity demanded will change when there is and increase or decrease in demand. Effects of Shifts In Supply To study of the effects of changes in supply on market equilibrium we assume the demand to remain constant. demand remaining constant will cause changes in the market equilibrium. An increase in supply is represented by a shift of the supply curve to the right and a decrease in supply is represented by a shift to the left. The effects of such changes on the market equilibrium depend on the rate of change in the two variables. the equilibrium price is pushed upwards to OP2 and the quantity demanded is reduced to OQ2. establishing equilibrium price at OP and equilibrium quantity supplied and demanded at OQ. if the demand curve shifts backwards and assumes the position D2D2. supply increases and the supply curve shifts from SS to S1S1. Effects of Changes In Both Demand And Supply: Changes can occur in both demand and supply conditions.

utility expenses. fuel . Q. For example. On the other hand if the increase in supply is greater than the increase in demand. They are the earnings of owner employed resources. showing a lower equilibrium price and a higher quantity of good supplied and demanded. expenses on raw materials. the new market equilibrium is at a higher level showing a rise in both the equilibrium price and the equilibrium quantity demanded and supplied. If the increase in demand is greater than the increase in supply. They are the actual expenses incurred for producing or acquiring a commodity or service by a firm. and payments for raw materials etc. the factor inputs owned by the entrepreneur himself like capital can be utilized by himself or can be supplied to others for a contractual sum if he himself does not utilize them in the business. Implicit or imputed costs are implied costs. interest and profits. the new market equilibrium is at lower level. They are those costs that involve financial expenditures at some time and hence are recorded in the books of accounts.5 Give a brief description of Implicit and Explicit cost Actual and opportunity cost Answer – Implicit and Explicit Costs:Explicit costs are those costs which are in the nature of contractual payments and are paid by an entrepreneur to the factors of production [excluding himself] in the form of rent. wages paid to workers. Actual costs and Opportunity Costs:Actual costs are also called as outlay costs. absolute costs and acquisition costs.of both supply and demand at the same price. They do not take the form of cash outlays and as such do not appear in the books of accounts. power. It is to be remembered that the total cost is a sum of both implicit and explicit costs. For example. wages. They can be estimated and calculated exactly and recorded in the books of accounts.

They can be exactly calculated and accounted without any difficulty. they are also called as alternative costs. it will be a wise decision. Opportunity cost represents only sacrificed alternatives.Boumal. They help in taking a decision among alternatives. On the other hand. if the total wage bill is much lower than that of the cost of computer. a firm has to take a number of decisions almost daily. Hence. Opportunity cost of a good or service is measured in terms of revenue which could have been earned by employing that good or service in some other alternative uses. The . Thus. opportunity cost of anything is the cost of displaced alternatives or costs of sacrificed alternatives. Hence.and other types of inputs. The knowledge of opportunity cost is of great importance to management decision. This model is developed by Prof. If the cost of buying a computer is much lower than that of the total wages to be paid to the workers over a period of time. In other words. This alternative goal has assumed greater significance in the context of the growth of Oligopolistic firms. While taking a decision among several alternatives. It implies that opportunity cost of anything is the alternative that has been foregone. For example. a firm may decide to buy a computer which can do the work of 10 laborers. W. it is better to employ workers instead of buying a computer. they can never be exactly measured and recorded in the books of accounts.J. Answer – Boumal’s Static And Dynamic Models:Sales maximization model is an alternative model for profit maximization.6 Critically examine Boumal’s static and dynamic models. a manager selects the best one which is more profitable or beneficial by sacrificing other alternatives. Q. an American economist.

2. 4. 1. The minimum profit constraint is determined by the expectations of the share holders. It helps in enhancing the prestige and reputation of top management.model highlights that the primary objective of a firm is to maximize its sales rather than profit maximization. Hence. the following arguments are given. 3. It states that the goal of the firm is maximization of sales revenue subject to a minimum profit constraint. attention is diverted to increase the sales of the company in recent years in the context of highly competitive markets. It is to be noted here that maximization of sales does not mean maximization of physical sales but maximization of total sales revenue. . distribute more dividends to share holders and increase the wages of workers and keep them happy. It increases the competitive ability of the firm and enhances its influence in the market. In defense of this model. Increase in sales and expansion in its market share is a sign of healthy growth of a normal company. The amount of slack earnings and salaries of the top managers are directly linked to it. This is because no company can displease the share holders. The basic philosophy is that when sales are maximized automatically profits of the company would also go up. the managers are more interested in maximizing sales rather than profit. Hence.

1. 3. 4. Boumal has developed two models.5. . In order to include such changes. The risk averting and avoiding managers prefer to select those projects which ensure steady and satisfactory levels of profits. 2. This model explains how changes in advertisement expenditure. The first is static model and the second one is the dynamic model. The firm aims at maximizing its sales revenue subject to a minimum profit constraint. Prof. would affect the sales revenue of a firm under severe competitions.The average cost curve of the firm is Unshaped one. . 6. The demand curve of the firm slope downwards from left to right. Assumptions:1. It helps the managers to pursue a policy of steady performance with satisfactory levels of profits rather than spectacular profit maximization over a period of time. The financial and other lending institutions always keep a watch on the sales revenues of a firm as it is an indication of financial health of a firm. The model is applicable to a particular time period and the model does not operate at different periods of time. The Static Model:This model is based on the following assumptions. Higher advertisement expenditure would certainly increase sales revenue of a firm. Managers are reluctant to take up those kinds of projects which yield high level of profits having high degree of risks and uncertainties. Boumal has developed another dynamic model. Sales maximization [dynamic model] In the real world many changes takes place which affects business decisions of a firm. a major determinant of demand.

Market price remains constant. This leads to a shift in the demand curve to the right. This appears to be more practical in the present day situations. it will have a negative effect on business decisions Thus. a firm in order to increase its volume of sales and sales revenue would go for aggressive advertisements. A price cut may increase sales in general. A price reduction policy may increase its sales only when the demand is elastic and if the demand is inelastic; such a policy would have adverse effects on sales. 3. Under oligopoly conditions as there are only a few big firms competing with each other either producing similar or differentiated products.2. . it is to be remembered that amount allotted for sales promotion should bring more than proportionate increase in sales and total profits of a firm. sales of the company would also go up. by introducing. a non price variable in to his model. It is the experience of most of the firms that with an increase in advertisement expenditure. But increase in sales mainly depends on whether the demand for a product is elastic or inelastic. Otherwise. would resort to heavy advertisements as an effective means to increase their sales and sales revenue. However. Boumal makes a successful attempt to analyze the behavior of a competitive firm under oligopoly market conditions. to promote sales. A sales maximizer would generally incur higher amounts of advertisement expenditure than a profit maximizer. Forward shift in demand curve implies increased advertisement expenditure resulting in higher sales and sales revenue. Demand and cost curves of the firm are conventional in nature. advertisements become an effective instrument today. Hence. Generally under competitive conditions.

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