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# Assignment - MB0026 Managerial Economics

MB0026

Managerial
Economics

Submitted by:
Sreeja .T

Submitted By: Sreeja. T Page 1 of 8

a) Here given Q1=100-6P1-4P2+2P3+0.5-15 = 1.003(8000)) = 30 – 24 = 6 %change in quantity of price good 2 Q = 16.5 Cross elasticity = (Δ) Quantity of good1&2 * Price of Q2 (Δ) Price of good1& 2 Q of good1 Submitted By: Sreeja. Ans: A cross elasticity is the effect on the change in demand or supply of one good as a result of a change in something related to another product The cross price elasticity of product A with product B is: (ΔQA/QA)/(ΔPB/PB) Where QA is the quantity sold of A. P2 =16.003Y P1 =7. ΔQA is the change in the quantity of A sold . T Page 2 of 8 . P3 =4 Y=8000.5 (ΔQ/Q) = 6/1.5)+2*4+0.003Y WHERE P1 and Q1 are the price and quantity values of good 1 P2 and P3 are the prices of good 2 and good 3 and Y is the income of the consumer. Q1 =30 % change in quantity of good 1 & 2 = ΔQ ΔQ = Q1 –Q2 = 30 – (100-6(7)-4(16.5(Since there is 10%increase for good2). The initial values are given: P1 =7 P2 =15 P3 =4 Y=8000 Q1 =30 You are required to: a) Using the concept of cross elasticity determine the relationship between good 1 and others b) Determine the effect on Q1 due to a 10 % increase in the price of good 2 and good 3. Assignment .PB is the price of B and ΔPB is the change in the price of B.MB0026 Managerial Economics Assignment 1 The demand function of a good is as follows: Q1=100-6P1-4P2+2P3+0.

Assignment .003y P2 and p3 are prices of good 2 and good 3. Demand curve can be defined as the graph depicting the relationship between the price of a certain commodity. p3=4.5 * 30 = 2 b) Determine the effect on Q1 due to a 10 % increase in the price of good 2 and good 3.8 1.MB0026 Managerial Economics = 6 * 15 1. What are the factors that determine the Demand curve? Explain.8 Change in price of goods =4.4=0.5) +2(4.003(8000) =30.e. Q3 = 30. It is a graphic representation of a demand schedule.4 Then Q1=100-6(7)-4(16. Demand curves are used to estimate behaviors in competitive markets.4) +. Submitted By: Sreeja.4 * 4/30= 0.4 Cross elasticity = 0. when 10% increase in price P2 and P3 will be p2=16.8=0.5. and are often combined with supply curves to estimate the equilibrium price (the price at which sellers together are willing to sell the same amount as buyers together are willing to buy.0.003(8000) = 24. T Page 3 of 8 .8/0. also known as market clearing price) and the equilibrium quantity (the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market.[1] The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together.4) +0.4 .2 Here the effect on Q1 due to 10% increase in the price of good2 and good 3 Q1=100-6p1-4p2+2p3+0.8 I. Cross elasticity = (Δ)Quantity of good1 and good3 * Price of good3 (Δ) Price of goods Quantity of good1 % change of good1 and good3:=100-6(7)-4(15) +2(4.8 So Change in quantity of good1 and good3 = Q1-Q3=30-30. and the amount of it that consumers are willing and able to purchase at that given price.

tomato sauce) shifts in (i. that is. Assignment . weather could be factor in the demand for beer at a baseball game. Some of the more important factors are the prices of related goods (both substitute and complementary). However. A firm supplied 3000 pens at the rate of Rs 10. when the price of a good (e. Elasticity = 2000 * 10 12 3000 Submitted By: Sreeja. chicken) shifts out. there is more demand for substitute goods as they become more attractive in terms of value for money. Here Elasticity = change in supply * original price Change in price original supply Change in supply = 5000 – 3000 = 2000 Change in price = 22 – 10 = 12 I. while demand for complementary goods contracts in response to the contraction of demand with the underlying good) 2.MB0026 Managerial Economics The demand curve usually slopes downwards from left to right. as demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances.g. the demand curve for normal goods shifts out as more will be demanded at all price levels. which means people will buy more of a service. while the demand curve for inferior goods shifts in due to the increased attainability of superior substitutes. The negative slope is often referred to as the "law of demand".e. it has a negative association. a hamburger) rises. Find the elasticity of supply of the pens Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in a good’s price. while the demand curve for complementary goods (e. When income rises. product. the demand curve for substitute goods (e. As an example. or resource as its price falls. Next month. income. due to a rise of in the price to 22 Rs per pen the supply of the firm increases to 5000 pens.e. so any relevant circumstance can be a non price determinant of demand. resulting in a new demand curve. With respect to related goods. population and expectations.g. The shift of a demand curve takes place when there is a change in any non-price determinant of demand. T Page 4 of 8 .g.

But in the long run.5555 ~= 0. as there is plenty of time at the disposal of a firm. A firm has to generate largest amount of profits by building optimum productive capacity both in the short run and long run depending upon various internal and external factors and forces. Thus. Avoiding any sort of clash between short run and long run profits in the business policy and maintaining proper balance between them. 5. name. The plant capacity in the short run is fixed and as such. it can expand and add to the existing capacities build up new plants. Thus. in the long run. 6. Taking various kinds of risks and uncertainties in the changing business environment. It is to be noted with great care that a firm has to maximize its profits after taking in to consideration of various factors in to account. having over time work for the existing staff etc. Aggressive sales promotion policies adopted by rival firms in the market. employ additional workers etc to meet the rising demand in the market. Briefly explain the profit-maximization model.56 3. fame and image in the market. They are as follows- 1. 3. T Page 5 of 8 . 8. 9. a firm has its own technical and managerial constraints. Profit maximization model explicitly evaluates decisions such as where to incur tax liabilities and how to set intra-company prices may be required to develop an integrated global manufacturing and distribution plan. In the short run a firm is able to make only slight or minor adjustments in the production process as well as in business conditions. 4. Without resorting to monopolistic and exploitative practices inviting government controls and takeovers. Pricing and business strategies of rival firms and its impact on the working of the given firm. a firm will have adequate time and ample opportunity to make all kinds of adjustments and readjustments in production process and in its marketing strategies. The total revenue—total cost method relies on the fact that profit equals revenue minus cost. Profit-maximization implies earning highest possible amount of profits during a given period of time. Without inducing the workers to demand higher wages and salaries leading to rise in operation costs. and the marginal revenue—marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost. Maintaining its reputation. Submitted By: Sreeja. Adopting a stable business policy. Profit Maximization is the process by which a firm determines the price and output level that returns the greatest profit. in the short run. 7. it can increase its production and sales by intensive utilization of existing plants and machineries. There are several approaches to this problem. 2. There should be proper balance between short run and long run objectives. Assignment . Maintaining the quality of the product and services to the customers.MB0026 Managerial Economics = 2 *5 6 3 = 0.

Behavioral Theory of organizational learning: "Organizations learn by memorizing disturbances and reaction combinations according to decision variables. the organization increases its adaptability to differing environmental states. The firm is managed by owner-entrepreneur. Cyert and March spent their careers collaborating with scholars and theorists writing and revising theories related to the topic of organizational learning. and Nonaka (2001) as two of the “founding fathers” that introduced one of the disciplines that shaped thinking about organizational learning over the past decades. layoff of workers etc. Perhaps it clears up the ambiguity that is evident in the variables in the testing processes of the theory development. avoid excess capacity. Submitted By: Sreeja." Perhaps the aforementioned summarization of Cyert and March’s behavioral theory of organizational learning is an over simplification of the theory. Assignment . a firm is a price-taker and under imperfect market it becomes a price-searcher. Neither there should be over production nor under production but just that much to meet the required demand in the market. 2. What is Cyert and March’s behavior theory? What are the demerits? Richard Cyert and James March were described by Dierkes. 3. They are as follows 1. The truly significant collaboration of their respective careers was their collaboration on their 1963 manuscript. Production is to be organized on the basis of demand in the market. Berthoin Antal. Profit maximization is necessary in both perfect and imperfect markets. over utilization of capital assets. The Cyert and March manuscript outlines a behavioral theory of organizational learning through the development and research surrounding the decision making process of the firm. T Page 6 of 8 . In a perfect market. Any decision rule that leads to a non-preferred state at one point is less likely to be used in the future. Production goal. The manuscript acknowledged the talents and works of over twenty scholars and theorists that contributed to the original manuscript. Profit maximization is the main goal of the firm. Child. Rational behavior on the part of the firm to achieve its goal of profit maximization.MB0026 Managerial Economics 10. 4. They are – 1. Cyert and March are of the opinion that out of several objectives a firm has five important goals. Standard operating procedures are referred to as the memory of the organization. Assumptions of the model The profit maximization model is based on tree important assumptions. By learning new combinations of external disturbances and internal decision-making rules.

Proper balance between demand and supply is to be maintained. In order to create demand sales promotion policies may be adopted from time to time. 4. It states that the goal of the firm is maximization of sales revenue subject to a minimum profit constraint. The firm aims at maximizing its sales revenue subject to a minimum profit constraint. 2. This is one of the basic objectives of any firm. Market share goal. Sales goal. It highlights only on short run goals rather than long run objectives of an organization. 5.MB0026 Managerial Economics 2. Boumal analyses the impact of advertisement expenditures incurred by a firm on sales promotion and its impact on total sales revenue of a firm. decision making would become complex and complicated. 1. there are certain limitations to this theory. an American economist. The theory fails to analyze the behavior of the firm but it simply predicts the future expected behavior of different groups. In order to ensure continuity in production and supply. The above mentioned objectives also would under go changes over a period of time in the background of modern business environment.Boumal. The demand curve of the firm slope downwards from left to right.J.The average cost curve of the firm is U-shaped one. 3. 3. 2. There should be adequate sales in any organization to earn reasonable amounts of profits. Assignment . It fails to analyze the impact of the potential entry of new firms in to the industry and the behavior of the well established firms in the market. W. Inventory refers to stock of various inputs. 4. The first is static model and the second one is the dynamic model Static Model This model is based on the following assumptions. Boumal has developed two models. The model is applicable to a particular time period and the model does not operate at different periods of time. The model highlights that the primary objective of a firm is to maximize its sales rather than profit maximization. Each firm has to make consistent effort to increase its market share to compete successfully with other firms and make sufficient profits 5. Submitted By: Sreeja. This model is developed by Prof. 4. 1. It does not explain equilibrium of the industry as a whole. Thus. What is Boumal’s Static and Dynamic. Neither there should be surplus stock or shortage of different inputs. The very survival and success of the firm would depend upon the volume of profits earned by it. Demerits. Inventory goal. This alternative goal has assumed greater significance in the context of the growth of Oligopolistic firms. certain minimum level of inventory has to be maintained by a firm. Hence. . Boumal’s Static and Dynamic Models. T Page 7 of 8 . Profit goal. 3.

MB0026 Managerial Economics Sales maximization [dynamic model] In the real world many changes takes place which affects business decisions of a firm. Higher advertisement expenditure would certainly increase sales revenue of a firm. 2. Market price remains constant. a major determinant of demand. 3. in the dynamic model. a trust must be established between the shareholders and management. Demand and cost curves of the firm are conventional in nature. This model is based on the following assumptions 1. This model explains how changes in advertisement expenditure. so it is a trade off between profit now or higher profits later. The main difference is that in the dynamic model the profit is reinvented allowing for more growth in the future. T Page 8 of 8 . Submitted By: Sreeja. the minimum profit is not actually a constraint as it is in the static model. In order to include such changes. Hence. would affect the sales revenue of a firm under severe competitions. the management will need to get the shareholder to agree on that. Assignment . Boumal has developed another dynamic model.