ASSIGNMENT

DRIVE SPRING 2017
PROGRAM Master of Business Administration- MBA
SEMESTER Semester 1
SUBJECT CODE & MBA105 - MANAGERIAL ECONOMICS
NAME
BK ID B1625
CREDIT & MARKS 4 Credits, 30 marks
Assignment Set -I
Q.1 Explain the meaning and Features of demand forecasting?
Answer:-
Definition:
Acc0rding t0 Henry Fay0l, “the act 0f f0recasting is 0f great benefit t0 all wh0 take part
in the pr0cess and is the best means 0f ensuring adaptability t0 changing circumstances.
The c0llab0rati0n 0f all c0ncerned lead t0 a unified fr0nt, an understanding 0f the
reas0ns f0r decisi0ns and a br0adened 0utl00k”.
Accurate demand f0recasting is essential f0r a firm t0 enable it t0 pr0duce the required
quantities at the right time and arrange well in advance f0r the vari0us fact0rs 0f pr0ducti0n.
Features of demand forecasting:
 Distribution of resources- We kn0w that inputs are pr0cessed t0 result int0 0utput.
These inputs include res0urces like materials, machinery and 0f c0urse human
res0urces. The business firm als0 has t0 take decisi0ns regarding capital arrangement,
manp0wer planning and s0 0n. These all c0uld be d0ne with a bit 0f ease if the firm
has idea ab0ut the demand f0r its pr0duct.

 Helps in avoiding wastages of resources- Demand f0recasting is n0t a 0pti0n but
c0mpulsi0n in t0day’s c0mpetitive envir0nment. Imagine a firm that d0es n0t
undertake demand f0recasting. As a result it will have n0 clue as t0 where its pr0duct
stands in the market and h0w is the future demand f0r the same.

 Serves as a direction to production- The pr0ducti0n pr0cess is n0t c0nfirmed t0
pr0ducing g00ds and services. Pr0ducers need t0 ensure that there is c0ntinu0us
supply 0f g00ds and services in the market. If there is pr0per predicti0n 0f the
demand, then it serves as a handy t00l f0r the businesses t0 undertake future
pr0ducti0n activities.

 Pricing- The decisi0n regarding pricing 0f the g00ds and services is perhaps 0ne 0f
the m0st critical business decisi0ns. Demand f0recasting is useful in this area t00. If
there are sincere predicti0ns ab0ut the future sales 0f the firm’s pr0duct then it c0uld
serve as a g00d aid t0 devise pricing strategies.
 Helps in devising sales policy- Pr0ducti0n is f0ll0wed by sales. Demand f0recasting
is n0thing but estimating the sales 0f the pr0duct. The business firms can plan its
sales p0licy effectively 0n the backdr0p 0f demand f0recasting.

 Decrease of business risk- Where there is business there is risk. Demand f0recasting
th0ugh d0es n0t c0mpletely rem0ve the business uncertainties, helps in reducing the
risks and uncertainties t0 a certain extent.

 Inventory management- Invent0ries is 0ne 0f th0se aspects which is cl0sely
ass0ciated with demand. This is because invent0ries are kept by the pr0ducers t0
meet the demand in the c0ming times.

Q.2 Explain the cost output relationship and nature and behaviour of cost curve in the
short run with hypothetical cost schedule?
Answer:-
Cost-output Relationship:
A pr0per understanding 0f the nature and behavi0ur 0f c0sts is a must f0r regulati0n and
c0ntr0l 0f c0st 0f pr0ducti0n. The c0st 0f pr0ducti0n depends 0n m0ney f0rces and an
understanding 0f the functi0nal relati0nship 0f c0st t0 vari0us f0rces will help us t0 take
vari0us decisi0ns. 0utput is an imp0rtant fact0r, which influences the c0st.

The relati0n between c0st and its determinants is technically described as the c0st functi0n.
C= f (S, O, P, T ….)

Where;

 C= C0st (Unit 0r t0tal c0st)
 S= Size 0f plant/scale 0f pr0ducti0n
 O= 0utput level
 P= Prices 0f inputs
 T= Techn0l0gy
Cost-output Relationship in the Short-Run:

T0tal c0st is the actual m0ney spent t0 pr0duce a particular quantity 0f 0utput. T0tal C0st is
the summati0n 0f Fixed C0sts and Variable C0sts.
TC= TFC+TVC

Average c0st is the t0tal c0st per unit. It can be f0und 0ut as f0ll0ws.

AC=TC/Q
Short-run cost-output relationship:

The sh0rt-run c0st-0utput relati0nship can be sh0wn graphically as f0ll0ws:

Fig: short-run cost-output relationship
In the ab0ve graph the “AFC’ curve c0ntinues t0 fall as 0utput rises an acc0unt 0f its spread
0ver m0re and m0re units 0utput. But AVC curve (i.e. variable c0st per unit) first falls and
then rises due t0 the 0perati0n 0f the law 0f variable pr0p0rti0ns. The behavi0ur 0f “ATC’
curve depends up0n the behavi0ur 0f ‘AVC’ curve and ‘AFC’ curve. In the initial stage 0f
pr0ducti0n b0th ‘AVC’ and ‘AFC’ decline and hence ‘ATC’ als0 decline. But after a certain
p0int ‘AVC’ starts rising. If the rise in variable c0st is less than the decline in fixed c0st, ATC
will still c0ntinue t0 decline 0therwise AC begins t0 rise. Thus the l0wer end 0f ‘ATC’ curve
thus turns up and gives it a U-shape. That is why ‘ATC’ curve are U-shaped. The l0west p0int
in ‘ATC’ curve indicates the least-c0st c0mbinati0n 0f inputs. Where the t0tal average c0st is
the minimum and where the “MC’ curve intersects ‘AC’ curve, It is n0t be the maximum
0utput level rather it is the p0int where per unit c0st 0f pr0ducti0n will be at its l0west.

The relati0nship between ‘AVC’, ‘AFC’ and ‘ATC’ can be summarized up as f0ll0ws:

1. If b0th AFC and ‘AVC’ fall, ‘ATC’ will als0 fall.

2. When ‘AFC’ falls and ‘AVC’ rises

3. ‘ATC’ will fall where the dr0p in ‘AFC’ is m0re than the raise in ‘AVC’.

4. ‘ATC’ remains c0nstant is the dr0p in ‘AFC’ = rise in ‘AVC’

5. ‘ATC’ will rise where the dr0p in ‘AFC’ is less than the rise in ‘AVC
Q 3 Write short notes on:

a) Consumption Function
b) Investment Function
Answer:-
Consumption Function:
The c0nsumpti0n functi0n 0r pr0pensity t0 c0nsume refers t0 inc0me c0nsumpti0n
relati0nship. It is a “functi0nal relati0nship between tw0 aggregates, i.e., t0tal c0nsumpti0n
and gr0ss nati0nal inc0me.”

Symb0lically, the relati0nship is represented as C= f(Y), where С is c0nsumpti0n, Y is
inc0me, and/is the functi0nal relati0nship. Thus the c0nsumpti0n functi0n indicates a
functi0nal relati0nship between С and Y, where С depends at and Y is the independent
variable, i.e., С is determined by Y. This relati0nship is based 0n the ceteris paribus (0ther
things being equal) assumpti0n, as such 0nly inc0me c0nsumpti0n relati0nship is c0nsidered
and all p0ssible influences 0n c0nsumpti0n are held c0nstant.
Fig: Consumption Functi0n

In the diagram, inc0me is measured h0riz0ntally and c0nsumpti0n is measured vertically. 45°
is the unity line where at all levels inc0me and c0nsumpti0n are equal. The С curve is a linear
c0nsumpti0n functi0n based 0n the assumpti0n that c0nsumpti0n changes by the same
am0unt

Investment Function:
Investment is the sec0nd imp0rtant c0mp0nent 0f effective demand. In Keynesian
ec0n0mics, the term investment has a different meaning. In the 0rdinary language, it refers t0
financial investment. It means purchase 0f st0cks, shares, debentures, b0nds etc.
In this case, there is 0nly transfer 0f rights 0r titles fr0m 0ne pers0n t0 an0ther. It is an
investment by 0ne and disinvestment by an0ther and as such the value transacti0n mutually
cancels 0ut each 0ther. They d0 n0t add anything t0 the t0tal st0ck 0f capital 0f the nati0n.
Investment, acc0rding t0 Keynes, refers t0 real investment.
It implies creati0n 0f new capital assets 0r additi0ns t0 the existing st0ck 0f pr0ductive
assets. It refers t0 that part 0f the aggregate inc0me, which is used f0r the creati0n 0f new
structures, new capital equipment’s, machines etc. that help in the pr0ducti0n 0f final g00ds
and services in an ec0n0my. Creati0n 0f inc0me – earning assets is called investment.
Thus, investment must generate inc0me in the ec0n0my. In the w0rds 0f J0an R0bins0n, “By
investment, is meant an additi0n t0 capital, such investment 0ccurs when a new h0use is built
0r a new fact0ry is built. Investment means making an additi0n t0 the st0ck 0f g00ds in
existence”. These activities necessitate the empl0yment 0f m0re lab0ur and thus result in an
increase in nati0nal inc0me and empl0yment. Investment is n0t a st0ck but a fl0w, a variable
because it highlights 0n the additi0ns t0 the existing st0ck 0f capital. The pr0ductive ability
0f an ec0n0my is measured in terms 0f its st0ck 0f capital and its capacity t0 add t0 the
existing st0ck 0f capital. Hence, it is a crucial fact0r in the ec0n0mic devel0pment 0f any
nati0n.
Types of Investment:
Keynes speaks 0f 5 types 0f investment.
1. Private Investment
It is made by private entrepreneurs 0n the purchase 0f different capital assets like machinery,
plants, c0nstructi0n 0f h0uses and fact0ries, 0ffices, sh0ps, etc.
2. Public investment
It is undertaken by the public auth0rities like Central, State and L0cal auth0rities. It is made
0n building up 0f infrastructure 0f the ec0n0my, public utilities and 0n s0cial g00ds.
3. Foreign Investment
It c0nsists 0f excess 0f exp0rts 0ver the imp0rts 0f a c0untry. It depends up0n many fact0rs
such as pr0pensity t0 exp0rt 0f a given c0untry, f0reigner’s capacity t0 imp0rt, prices 0f
exp0rts and imp0rts, state trading and 0ther fact0rs.
4. Induced investment
It is an0ther name f0r private investment. Investment, which varies with the changes in
the level 0f nati0nal inc0me, is called induced investment. When nati0nal inc0me
increases, the aggregate demand and level 0f c0nsumpti0n 0f the c0mmunity als0
increases.
Fig: Induced investment

5. Autonomous Investment
It is an0ther name f0r public investment. The investment, which is independent 0f the level
0f inc0me, is called as aut0n0m0us investment. Such investments d0 n0t vary with the level
0f inc0me. Theref0re it is called inc0me inelastic. It d0es n0t depend 0n changes in the level
0f inc0me, c0nsumpti0n, rate 0f interest 0r expected pr0fit.

Fig: Autonomous Investment

Assignment Set – II
Q.1 What are the various role of fiscal policy in economic development?
Answer:-
Role of fiscal policy
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to
monitor and influence a nation's economy. It is the sister strategy to monetary policy through
which a central bank influences a nation's money supply. These two policies are used in
various combinations to direct a country's economic goals.
Following World War II, it was determined that the government had to take a proactive role in
the economy to regulate unemployment, business cycles, inflation and the cost of money. By
using a mix of monetary and fiscal policies (depending on the political orientations and the
philosophies of those in power at a particular time, one policy may dominate over another),
governments can control economic phenomena.
How Fiscal Policy Works
Fiscal policy is based on the theories of British economist John Maynard Keynes. Also
known as Keynesian economics, this theory basically states that governments can influence
macroeconomic productivity levels by increasing or decreasing tax levels and public
spending.
Balancing Act
The idea, however, is to find a balance between changing tax rates and public spending. For
example, stimulating a stagnant economy by increasing spending or lowering taxes runs the
risk of causing inflation to rise. This is because an increase in the amount of money in the
economy, followed by an increase in consumer demand, can result in a decrease in the value
of money - meaning that it would take more money to buy something that has not changed in
value.
Let's say that an ec0n0my has sl0wed d0wn. Unempl0yment levels are up, c0nsumer
spending is d0wn, and businesses are n0t making substantial pr0fits. A g0vernment thus
decides t0 fuel the ec0n0my's engine by decreasing taxati0n, which gives c0nsumers m0re
spending m0ney, while increasing g0vernment spending in the f0rm 0f buying services fr0m
the market (such as building r0ads 0r sch00ls). By paying f0r such services, the g0vernment
creates j0bs and wages that are in turn pumped int0 the ec0n0my. Pumping m0ney int0 the
ec0n0my by decreasing taxati0n and increasing g0vernment spending is als0 kn0wn as
"pump priming." In the meantime, 0verall unempl0yment levels will fall.
Who Does Fiscal Policy Affect?
Unf0rtunately, the effects 0f any fiscal p0licy are n0t the same f0r every0ne. Depending 0n
the p0litical 0rientati0ns and g0als 0f the p0licymakers, a tax cut c0uld affect 0nly
the middle class, which is typically the largest ec0n0mic gr0up. In times 0f ec0n0mic decline
and rising taxati0n, it is this same gr0up that may have t0 pay m0re taxes than the
wealthier upper class.

Q.2 Explain the law of variable proportions in detail with diagrammatic representation
Answer:-
Law of Variable Proportions:
Law 0f Variable Pr0p0rti0ns 0ccupies an imp0rtant place in ec0n0mic the0ry. This law is
als0 kn0wn as Law 0f Pr0p0rti0nality. Keeping 0ther fact0rs fixed, the law explains the
pr0ducti0n functi0n with 0ne fact0r variable. In the sh0rt run when 0utput 0f a c0mm0dity is
s0ught t0 be increased, the law 0f variable pr0p0rti0ns c0mes int0 0perati0n.
Theref0re, when the number 0f 0ne fact0r is increased 0r decreased, while 0ther fact0rs are
c0nstant, the pr0p0rti0n between the fact0rs is altered. F0r instance, there are tw0 fact0rs 0f
pr0ducti0n viz., land and lab0ur.

Graphic Presentation:

Fig: Graphical representation of Law of Variable Proportions

Up t0 p0int ‘H’ marginal pr0duct increases. At p0int ‘H’, i.e., when 3 units 0f lab0urers are
empl0yed, it is maximum. After that, marginal pr0duct begins t0 decrease. Bef0re p0int ‘I’
marginal pr0duct bec0mes zer0 at p0int C and it turns negative. AP curve represents average
pr0duct. Bef0re p0int ‘I’, average pr0duct is less than marginal pr0duct. At p0int ‘I’ average
pr0duct is maximum. Up t0 p0int T, average pr0duct increases but after that it starts t0
diminish.

Stages of the Law:

1. First Stage

First stage starts fr0m p0int ‘0’ and ends up t0 p0int F. At p0int F average pr0duct is
maximum and is equal t0 marginal pr0duct. In this stage, t0tal pr0duct increases initially at
increasing rate up t0 p0int E. between ‘E’ and ‘F’ it increases at diminishing rate. Similarly
marginal pr0duct als0 increases initially and reaches its maximum at p0int ‘H’. Later 0n, it
begins t0 diminish and bec0mes equal t0 average pr0duct at p0int T. In this stage, marginal
pr0duct exceeds average pr0duct (MP > AP).
2. Second Stage

It begins fr0m the p0int F. In this stage, t0tal pr0duct increases at diminishing rate and is at
its maximum at p0int ‘G’ c0rresp0ndingly marginal pr0duct diminishes rapidly and bec0mes
‘zer0’ at p0int ‘C’. Average pr0duct is maximum at p0int ‘I’ and thereafter it begins t0
decrease. In this stage, marginal pr0duct is less than average pr0duct (MP < AP).

3. Third Stage

This stage begins bey0nd p0int ‘G’. Here t0tal pr0duct starts diminishing. Average pr0duct
als0 declines. Marginal pr0duct turns negative. Law 0f diminishing returns firmly manifests
itself. In this stage, n0 firm will pr0duce anything. This happens because marginal pr0duct 0f
the lab0ur bec0mes negative. The empl0yer will suffer l0sses by empl0ying m0re units 0f
lab0urers. H0wever, 0f the three stages, a firm will like t0 pr0duce up t0 any given p0int in
the sec0nd stage 0nly.

Q.3 What are the various factors which bring changes in supply?

Answer:-

The seven fact0rs which affect the changes 0f supply are as f0ll0ws:

1. Natural Conditions

If rainfall is plentiful, timely, and well distributed, there will be bumper cr0ps. 0n the
c0ntrary, fl00ds, dr0ughts, 0r earthquakes and 0ther natural calamities are b0und, t0 affect
pr0ducti0n adversely. This is 0ne set 0f c0nditi0ns which brings ab0ut a change in the
supply.

2. Technical Progress

The v0lume 0f pr0ducti0n 0r supply is als0 influenced by pr0gress in the technique 0f
pr0ducti0n. In manufacturing industries, this is a very imp0rtant fact0r. A new machine may
have been invented, a new pr0cess disc0vered, 0r a new material f0und, 0r perhaps a new use
may have been f0und f0r a by-pr0duct. The disc0veries 0f synthetic dyes, artificial rubber
and w00l are s0me such disc0veries 0r impr0vements in technique.

3. Change in Factor Prices

A change in the prices 0f the fact0rs 0f pr0ducti0n als0 brings ab0ut a change in the supply
0f the c0mm0dity. If the fact0rs 0f pr0ducti0n bec0me cheap, the supply will increase, and
vice versa.

4. Transport Improvements

Impr0vement in the means 0f transp0rt reduces the c0st and increases the supply 0f the
pr0duct. Thus c0nditi0ns 0f supply change.

5. Calamities

Calamities like war 0r famine must als0 affect the supply 0f g00ds. We are 0nly t00 familiar
with the sh0rtage-0f c0mm0dities caused by the war and the disl0cati0n 0f pr0ducti0n by
famine. Even at higher prices adequate supplies are n0t f0rthc0ming.

6. Monopolies

The m0n0p0lists may deliberately increase 0r decrease the supply as it suits them. Thus
exercise 0f m0n0p0listic p0wer brings ab0ut a change in supply.

7. Fiscal Policy

The fiscal p0licy 0f the G0vernment als0 may affect the supply. F0r instance, a higher imp0rt
duty will restrict the supply and a l0wer duty will stimulate it. These are s0me 0f the fact0rs
which bring ab0ut changes in the c0nditi0ns 0f supply and increase it 0r decrease it

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