NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION

BUSINESS ECONOMICS

Question Bank.

Multiple choice questions.

1. ________________ can be defined as how individual, households and nations

make optimum use of scarce resources to satisfy their needs.
a) Literature
b) Economics
c) Communication
d) Utilization

2. The study of cost-output relationship comes under _________.

a. Production and Cost Analysis
b. Pricing Decisions
c. Capital Management
d. Strategic Planning

3. In which method of demand forecasting, consumer-buyers are asked to

reveal their future purchase plans with respect to specific items.
a. Collective opinion method
b. Delphi Method
c. Survey of buyer‟s intentions or preferences
d. Trend Projection Method

4. Experts views generally avoid or reduce the “Halo – Effects” and “Ego –
Involvement” of the views of the others under ___.
a. End Use Method
b. Economic Indicators
c. Trend Projection Method
d. Delphi Method
5. At which level, estimating industry demand for the economy as a whole will
be based on macro-economic variables.
a. Macro level
b. Micro level
c. Industry level
d. Micro and Industry level both.

6. Production cost is concerned with _____ to produce a given quantity of

output.
a. Demand Forecast
b. Estimation of Costs
c. Profit Management
d. Pricing Policies

7. The demand curve will have a downward slope indicating ________ .

a. the expansion of demand with a fall in price

b. contraction of demand with a rise in price
c. the expansion of demand with a fall in price and contraction of demand
with a rise in price
d. rise in price causes a rise in supply

8. Cyert and March‟s Behavior Theory explains the usual and normal behavior of
different groups of people who work in an organization having ____________ .
a. Sales goal
b. Market-share goal
c. Profit goal
d. Mutually opposite goals

9. Trace the variable on which cost function does not depend.

a. Technology
b. Production function
c. The market prices of inputs
d. Period of time
 10. Modern perspective of economics is given by ________________.
a. Fayol
b. Paul Samuelson
c. J.M. Keynes
d. Robins

11. When supply is relatively inelastic, elasticity of supply ES = ______.

a. greater than one
b. zero
c. less than one
d. one

12. Charging high prices for new products is known as _________.

a. Penetration price policy
b. Charm prices
c. Marginal Cost Pricing
d. Price skimming

13. Which out of the following is not an assumption for price – output
determination under monopoly?
a. The monopoly firm aims at maximizing its total profit.
b. The monopolist can fix the price and control the supply simultaneously.
c. It is completely free from Govt. controls.
d. It charges a single & uniform high price to all customers.

14. Surplus generation is possible when the firm produces __________.

a. Minimum output with minimum costs
b. Maximum output with minimum costs
c. Maximum output with maximum costs
d. Minimum output with maximum costs
15. Dumping policy refers to selling of goods at ___ prices in the competitive
International market and at ___ prices in the protected domestic market.
a. Lower, Higher
b. Lower, Lower
c. Higher, Lower
d. Higher, Higher

16. Select the wrong statement in case of imperfect market.

a. The MR curve is similar to that of the AR curve
b. MR is less than AR
c. AR and MR curves are different.
d. Generally AR curve lies below the MR curve.

17. A business cycle has _____ phases

a. Five
b. Two
c. Four
d. Six

18. The price we pay for a commodity basically depends on its .

a. retailer selling it
b. manufacturer
c. Worthiness and Utility
d. consumer willingness

19. Which of the following is the market structure in which the firms produce
homogeneous products?
a. Monopolistic competition
b. Oligopoly
c. Perfect competition
d. Monopoly
20. ________ is the difference between the actual price at which producer is
selling and the price at which producer is willing to sell.
a. Consumers' surplus
b. Optimum price
c. Producers' surplus
d. Total receipts

21. In the words of ______ “Deflation is that state of falling prices which occurs at
the time when output of goods and services increases more rapidly than the value
of money income in the economy”.
a. Prof. Pigou
b. Prof. Crowther
c. Prof. Samuelson
d. Prof. Paul Einzig

22. _____ refers to the amount of capital required to produce a unit of output.
a. Saving income ratio
b. Consumption Income Ratio
c. Capital output ratio
d. Input-output ratio

23. ________ helps in formulating appropriate sales promotional strategy

a. Substitution Elasticity of Demand
b. Advertising or Promotional Elasticity of Demand
c. Income elasticity of demand
d. Cross elasticity of demand

24. If Marginal Social Cost > Marginal Private Cost of an activity, the government
has to_______ .
a. Tax on producers
b. Subsidize producers
c. Tax on consumers
d. Subsidize consumers
25. The ____ indicates the percentage of income earned by capital in the form of
interest out of total national income .
a. Land‟s share of income
b. Capital‟s share of income
c. Labor‟s share of income
d. Cash - income ratio

26. _____ refers to the amount of capital required to produce a unit of output.
a. Saving income ratio
b. Consumption Income Ratio
c. Capital output ratio
d. Input-output ratio

27. Physical policy is also known as _________ .

a. Monetary Policy
b. Direct Controls
c. Fiscal Policy
d. Stabilization policy

28. __________ measures price elasticity of demand at different points on a

demand curve.
a. The point method
b. Total Expenditure Method
c. Arc Method
d. Production planning

29. Burns and Mitchell observe that peaks and ____ are the two main mark-off
points of a business cycle.
a. Expansion
b. Prosperity
c. Revival
d. Troughs
30. _________ explains the functional relationship that exists between income
and the level of consumption.
a. Investment function
b. Multiplier
c. Consumption function
d. Accelerator

31. Physical policy is also known as _________ .

a. Monetary Policy
b. Direct Controls
c. Fiscal Policy
d. Stabilization policy

32. Identify the false statement from the features of demand forecasting stated
below .
Statement 1 It is an informed and well thought out guesswork.
Statement 2 It is in terms of specific quantities
Statement 3 It is not made for a specific period of time
Statement 4 It is based on historical information and the past data.
a. Only statement 3
b. Statement 1, 2, 3, and 4
c. Statement 2, 3, and 4
Condition 1. MR=MC
Condition 2. MR curve cut MC curve from below
Condition 3. MC curve cut MR curve from below
Condition 4. MC curve cut MR curve from above
a. Condition 1 and 3 are the conditions when a firm will be maximizing its profits
b. Condition 1 and 2 are the conditions when a firm will be maximizing its profits
c. Condition 1 and 4 are the conditions when a firm will be maximizing its profits
d. Condition 2 is the condition when a firm will be maximizing its profits

33. Which of the following is not a feature of long run AC curves?

a. Tangent curve
 b. Flatter U-shaped or dish-shaped curve
c. Planning curve
d. Minimum point of LAC curve should not always be lower than the
minimum point of SAC curve

34. _____ deals with the total money supply and its management in an economy.
a. Fiscal Policy
b. Direct Controls
c. Monetary Policy
d. Stabilization Policy

35. Integration of business economics and strategic planning has given rise to a
new area of study called __________.
a. Micro Economics
b. Corporate Economics.
c. Macro Economics
d. Managerial Economics

36. ____________ implies the behavior of output when all the factor inputs are
changed in the same proportion given the same technology.
a. Returns to scale
b. Input
c. Output
d. Economics

37. _____ refers to the amount of capital required to produce a unit of output.
a. Saving income ratio
b. Consumption Income Ratio
c. Capital output ratio
d. Input-output ratio

38. A _____ expresses quantitative relationship between two different variables

at a certain time.
 a. Functional variables
b. Flow variable
c. Stock variable
d. Ratio variable

39. The numerical co-efficient of perfectly inelastic demand ED= ___

a. ED>1
b. ED=0
c. ED<1
d. ED=1

40. CES means ___________________.

a. Constant Elasticity Substitution
b. Constant Economic Substitution
c. Constant Elasticity Substraction
d. Constant Elastic Substitution

41. What are the two major functions of a managerial economist?

a. Decision making & Profit management
b. Decision making & Capital management
c. Decision making & Forward planning
d. Pricing decisions & Policies and practices

42. Increasing the volume of investment in an economy can only fill up the gap
between income and ______ .
a. Saving
b. Rate of Interest
c. Marginal efficiency of capital
d. Consumption.

43. _______ introduces the concept of “expense preference”.

a. Williamson
 b. Boumal
c. Marris
d. Cyert and March

44. Cost function usually refers to the relationship between cost and ___________.
a. fixed cost
b. rate of output
c. variable cost
d. direct cost

45. The numerical co-efficient of perfectly inelastic demand ED= ___

a. ED>1
b. ED=0
c. ED<1
d. ED=1

46. Which out of the following is not an assumption for price – output
determination under monopoly?
a. The monopoly firm aims at maximizing its total profit.
b. The monopolist can fix the price and control the supply simultaneously.
c. It is completely free from Govt. controls.
d. It charges a single & uniform high price to all customers.

47. Which of the following is not the factor in determining Elasticity of Supply
a. Availability and mobility of factors of production
b. Time period
c. Technological improvements
d. Natural factors

48. According to Marris Growth Maximization Model, which of the following is not
a variable of utility function of the managers.
 a. Salaries
b. Power
c. market share
d. status

49. An industry under perfect competition in the short run, reaches the position
of equilibrium when all firms in the industry are producing an equilibrium level of
output at which _________.
a. AR = AC
b. MR = MC
c. MR = AR
d. MC = AC

50. The next best alternative cost is ____________________.

a. Opportunity cost
b. Implicit cost
c. Explicit cost
d. Marginal cost

51. According to Marris Growth Maximization Model, which of the following is not
a variable of utility function of the managers.
a. Salaries
b. Power
c. market share
d. status

52. If price rises, quantity demanded falls in accordance with law of demand. This
leads to ________________ .
a. Transfer of producers‟ surplus to consumer‟s surplus.
b. Increase in consumers' surplus.
c. Reduction in producers' surplus.
d. Transfer of consumer‟s surplus to producers‟ surplus.

53. The numerical co-efficient of perfectly inelastic demand ED= ___

a. ED>1
 b. ED=0
c. ED<1
d. ED=1

54. Under _______ method, a producer decides a predetermined target rate of

return on capital invested.
a. Full – Cost pricing
b. Going Rate Pricing
c. Rate of Return Pricing
d. Administered prices

55. Calculate the price elasticity of demand for the good, if demand for the good reduces by 4%
price by 20%.

a. +0.40
b. -0.40
c. +0.20
d. -0.20

56. _____ is a statistical device by which changes in prices of the same articles at
different periods are calculated and computed.
a. GNP deflator
b. Real GNP
c. Index number
d. Nominal GNP

57. Which of the following is not a disadvantage of Direct controls?

a. Direct controls suppress individual initiative and enterprise.
b. Direct controls can be more discriminatory than monetary and fiscal controls.
c. Direct controls may induce speculation which may have destabilizing effect.
d. Direct control tends to inhibit innovations.

58. In which phase of the trade cycle do the level of investment in stocks decline?
a. Recovery
 b. Depression
c. Over full Employment
d. Prosperity

59. Identify true and false statements.

Statement1. Exogenous variables are influenced by outside or external factors or
forces.
Statement2. Microeconomic variables deal with the study of individual units.
Statement3. Macroeconomics splits up the economy into big lumps for the purpose
of the convenience of the study.
Statement4. Income theory gives a detailed description about the performance and
achievements of different sectors of the economy
a. Statement 1, 2, 4 are true and 3 is false.
b. Statement 1, 2, 3, and 4 are true
c. Statement 2, 3, 4 are true and 1 is false.
d. Statement 4 is false and 1, 2, 3 are true

60. Which of the following is not one of the positive effects of inflation?
a. Encourage entrepreneurship
b. Full utilization of resources
c. Increase in Exports
d. Leads to rise in investment

61. Match the following

Part A
1. Expansion in supply
2. Contraction in supply
3. Increase in supply
4. Decrease in supply

Part B
A. more quantity is supplied at a
higher price
B. less quantity is supplied at a lower
price.
C. more supply at the same price
D. same quantity is supplied at a
higher price.

a. 1A, 2C, 3B, 4D

b. 1D, 2B, 3C, 4A
c. 1A, 2B, 3D, 4C
d. 1A, 2B, 3C, 4D

62. In which phase of the trade cycle do the level of investment in stocks decline?
a. Recovery
b. Depression
c. Over full Employment
d. Prosperity

63. Match the following:

Part A
1. Strategic planning
2. Production
3. Capital management
4. Profit maximization

Part B
A. transformation of inputs into outputs.
 B. objective of a firm in olden days
C. provides framework for long term decisions
D. is a cost-benefit analysis

a. 1B, 2A, 3D, 4C

b. 1C, 2A, 3B, 4D
c. 1C, 2A, 3D, 4B
d. 1D, 2A, 3C, 4B

64. Select the wrong statement in case of imperfect market.

a. The MR curve is similar to that of the AR curve
b. MR is less than AR
c. AR and MR curves are different.
d. Generally AR curve lies below the MR curve.

65. ________ is the difference between the actual price at which producer is
selling and the price at which producer is willing to sell.
a. Consumers' surplus
b. Optimum price
c. Producers' surplus
d. Total receipts

66. If a product can be manufactured using two combinations say A and B.

Combination A takes 8 units of labor and 2 units of capital, where in combination B
takes 5 units of labor and 3 units of capital, what will be the marginal rate of
technical substitution of labor for capital ?
a. 4:1
b. 3:1
c. 2:1
d. 1:1

67. A firm sells 2000 units of a product at the rate of Rs. 4 per unit. What will be the
total revenue and the average revenue of the firm?
 a. TR = 500, AR = 125
b. TR = 8000, AR = 500
c. TR = 8000, AR = 4
d. TR = 500, AR = 4

68. Suppose there is only one factory in a small town providing employment for
labor in the area. And there is a trade union which controls the supply of labor in
the factory. What kind of market situation it is?
a. Oligospony
b. Monospony
c. Bilateral monopoly
d. Monopoly

69. Cyert and March‟s Behavior Theory explains the usual and normal behavior of
different groups of people who work in an organization having ____________ .
a. Sales goal
b. Market-share goal
c. Profit goal
d. Mutually opposite goals

70. Demand for new Tata Indica, which is a modified version of Old Indica can
most effectively be projected based on the sales of the old Indica, can be the
example of ______.
a. Substitute Approach
b. Evolutionary Approach
c. Opinion Poll Approach
d. Sales Experience Approach

DESCRIPTIVE QUESTIONS
1. What is managerial economics? State any four features of it.

2. What is linear programming and the theory of games?

3. What is the importance of managerial economics?

4. What are the important features of demand forecasting?

5. What are the levels of demand forecasting?

6. What are the criteria for good demand forecasting?

7. Explain Delphi method.

8. What are the determinants of supply?

9. What the law of supply states?

10. What are the main propositions of the profit-maximization model?

11. Cyert and March are of the opinion that out of several objectives a firm has five
important goals. What are those?

12. What is the significance of revenue curves?

13. What are the external factors that affect price?

14. Explain cost plus pricing method.

15. What do you understand by consumers’ surplus?

16. What does cost benefit analysis state?

17. What does Psychological Law of Consumption states?

18. What do you mean by marginal propensity to consume? State the

characteristics of MPC.
19. Discuss any two types of investment.

20. What is monetary policy?

21. What do you mean by exchange rate stability?

22. What are the characteristics of business cycle?

23. How a recovery can be initiated?

24. Identity the reasons for market failures.

NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION

 BUSINESS ECONOMICS

Question Bank.

Multiple choice questions.

ANSWERS KEY

1. b 21. a 41. c 61. d

2. a 22. c 42. d 62. b
3. c 23. b 43. a 63. c
4. d 24. a 44. b 64. d
5. a 25. d 45. b 65. d
6. b 26. c 46. a 66. b
7. c 27. b 47. d 67. c
8. d 28. a 48. c 68. c
9. a 29. d 49. b 69. d
10. b 30. c 50. a 70. b
11. c 31. b 51. c
12. d 32. a 52. d
13. a 33. d 53. b
14. b 34. c 54. c
15. c 35. b 55. d
16. d 36. a 56. c
17. a 37. c 57. b
18. c 38. d 58. b
19. b 39. b 59. d
20. d 40. a 60. c

DESCRIPTIVE QUESTIONS.
1. 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 theory and methodology to decision-making problems
faced by private, public and non-profit making organizations.

Features of managerial Economics

1. It is more realistic, pragmatic and highlights on practical application of various
economic theories to solve business and management problems.
2. It is a science of decision-making. It concentrates on decision-making process,
decision-models and decision variables and their relationships.
3. It is both conceptual and metrical and it helps the decision-maker by providing
measurement of various economic variables and their interrelationships.
4. 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.

2. The term linear means that the relationships handled are the same as those
represented by straight lines and programming implies systematic planning or
decision-making. It implies maximization or minimization of a linear function of
variables subject to a constraint of linear inequalities. It offers actual numerical
solution to the problems of making optimum choices. It involves either
maximization of profits or minimization of costs.
The theory of games basically attempts to explain what is the rational course of
action for an individual firm or an entrepreneur who is confronted with the a
situation where in the outcome depends not only on his own actions, but also on
the actions of others who are also confronted with the same problem of selecting
a rational course of action. In short, under the conditions of conflicts and
uncertainty, a firm or an individual faces problem similar to that of the player of
any game.

3. Managerial Economics does not give importance to the study of theoretical

economic concepts. Its main concern is to apply theories to find solutions to day-
to-day practical problems faced by a firm. The following points indicate the
significance of the study of this subject in its right perspective.
1. It gives guidance for identification of key variables in decision-making process.
2. It helps the business executives to understand the various intricacies of business
and managerial problems and to take right decision at the right time.

3. It provides the necessary conceptual, technical skills, toolbox of analysis and

techniques of thinking and other such most modern tools and instruments like
elasticity of demand and supply, cost and revenue, income and expenditure, profit
and volume of production etc to solve various business problems.
4. It is both a science and an art. In the context of globalization, privatization,
liberalization and mercerization and a highly competitive dynamic economy, it
helps in identifying various business and managerial problems, their causes and
consequence, and suggests various policies and programs to overcome them.
5. It helps the business executives to become much more responsive, realistic and
competent to face the ever changing challenges in the modern business world.
6. It helps in the optimum use of scarce resources of a firm to maximize its profits.

4. Important features of demand forecasting

It is an informed and well thought out guesswork.
It is in terms of specific quantities
A forecast is made for a specific period of time which would be sufficient to
take a decision and put it into action.
It is based on historical information and the past data.

Demand forecasting is needed to know whether the demand is subject to cyclical

fluctuations or not, so that the production and inventory policies, etc, can be
suitably formulated.
Demand forecasting is generally associated with forecasting sales A firm can make
use of the sales forecasts made by the industry as a powerful tool for formulating
sales policy and sales strategy. They can become action guides to select the course
of action which will maximize the firm‟s earnings.

5. Demand forecasting may be undertaken at three different levels, viz., micro

level or firm level, industry level and macro level.
Micro level or firm level
This refers to the demand forecasting by the firm for its product. The management
of a firm is really interested in such forecasting. Generally speaking, demand
forecasting refers to the forecasting of demand of a firm.

Industry level
Demand forecasting for the product of an industry as a whole is generally
undertaken by the trade associations and the results are made available to the
members. A member firm by using such data and information may determine its
market share.

Macro-level
Estimating industry demand for the economy as a whole will be based on macro-
economic variables like national income, national expenditure, consumption
function, index of industrial production, aggregate demand, aggregate supply etc,
Generally, it is undertaken by national institutes, govt. agencies etc. Such forecasts
are helpful to the Government in determining the volume of exports and imports,
control of prices etc.

6. Apart from being technically efficient and economically ideal, a good method of
demand forecasting should satisfy a few broad economic criteria. They are as
follows:
1. Accuracy: Accuracy is the most important criterion of a demand forecast, even
though cent percent accuracy about the future demand cannot be assured. It is
generally measured in terms of the past forecasts on the present sales and by the
number of times it is correct.
2. Plausibility: The techniques used and the assumptions made should be
intelligible to the management. It is essential for a correct interpretation of the
results.
3. Simplicity: It should be simple, reasonable and consistent with the existing
knowledge. A simple method is always more comprehensive than the complicated
one
4. Durability: Durability of demand forecast depends on the relationships of the
variables considered and the stability underlying such relationships, as for instance,
the relation between price and demand, between advertisement and sales, between
the level of income and the volume of sales, and so on.
7. This method was originally developed at Rand Corporation in the late 1940‟s by
Olaf Helmer, Dalkey and Gordon. This method was used to predict future
technological changes. It has proved more useful and popular in forecasting non-
economic rather than economic variables.
It is a variant of opinion poll and survey method of demand forecasting. Under this
method, outside experts are appointed. They are supplied with all kinds of
information and statistical data. The management requests the experts to express
their considered opinions and views about the expected future sales of the
company. Their views are generally regarded as most objective ones. Their views
generally avoid or reduce the “Halo – Effects” and “Ego – Involvement” of the
views of the others. Since experts‟ opinions are more valuable, a firm will give lot
of importance to them and prepare their future plan on the basis of the forecasts
made by the experts.

8. Determinants of Supply
Apart from price, many factors bring about changes in supply. Among them the
important factors are:
1. Natural factors: Favorable natural factors like good climatic conditions, timely,
adequate, well distributed rainfall results in higher production and expansion in
supply. On the other hand, adverse factors like bad weather conditions,
earthquakes, droughts, untimely, ill-distributed, inadequate rainfall, pests etc., may
cause decline in production and contraction in supply.
2. Change in techniques of production: An improvement in techniques of
production and use of modern, highly sophisticated machines and equipments will
go a long way in raising the output and expansion in supply. On the contrary,
primitive techniques are responsible for lower output and hence lower supply.
3. Cost of production: Given the market price of a product, if the cost of
production rises due to higher wages, interest and price of inputs, supply decreases.
If the cost of production falls, on account of lower wages, interest and price of
inputs, supply rises.

4. Prices of related goods: If prices of related goods fall, the seller of a given
commodity offer more units in the market even though, the price of his product has
not gone up. Opposite will be the case when the price of related goods rises.
9. The Law of Supply
Normally, a seller supplies more units of a commodity at a higher price and vice-
versa. Given the cost of production, profits are likely to be high at higher prices.
Higher the price, the greater is the inducement to the producers to produce and sell
more and appropriate more profits. Hence more quantity is supplied at higher
prices and less is supplied at lower prices. This relationship between the price and
the quantity supplied is popularly known as the law of supply. It states that “Other
things remaining constant, the quantity supplied varies directly with the price i.e.
when the price falls, supply will contract and when price rises, supply will extend”.
According to S.E.Thomas, “a rise in price tends to increase supply and a fall in
price tends to reduce it.” There is a functional relationship between supply and
price. Mathematically S= F (P). The law of supply is based on a number of
assumptions.
The other things which should remain constant for the law to operate are:
1. Number of firms, the scale of production and the speed of production.
2. Availability of other inputs.
3. Techniques of production.
4. Cost of production.
5. Market prices of other related goods.
6. Climate and weather conditions.

10. Main propositions of the profit-maximization model

The model is based on the assumption that each firm seeks to maximize its profit
given certain technical and market constraints. The following are the main
propositions of the model.
1. A firm is a producing unit and as such it converts various inputs into outputs of
higher value under a given technique of production.
2. The basic objective of each firm is to earn maximum profit.
3. A firm operates under a given market condition.
4. A firm will select that alternative course of action which helps to maximize
consistent profits
5. A firm makes an attempt to change its prices, input and output quantity to
maximize its profit.

11. Cyert and March are of the opinion that out of several objectives a firm has five
important goals. They are –
1. Production goal. Production is to be organized on the basis of demand in the
market. Neither there should be over production nor under production but just that
much to meet the required demand in the market, avoid excess capacity, over
utilization of capital assets, lay-off of workers etc.
2. Inventory goal. Inventory refers to stock of various inputs. In order to ensure
continuity in production and supply, certain minimum level of inventory has to be
maintained by a firm. Neither there should be surplus stock or shortage of different
inputs. Proper balance between demand and supply is to be maintained.
3. Sales goal. There should be adequate sales in any organization to earn
reasonable amounts of profits. In order to create demand sales promotion policies
may be adopted from time to time.
4. Market-share goal. Each firm has to make consistent effort to increase its market
share to compete successfully with other firms and make sufficient profits
5. Profit goal. This is one of the basic objectives of any firm. The very survival and
success of the firm would depend upon the volume of profits earned by it.

12. Significance of Revenue curves

The relationship between price elasticity of demand and total revenue is important
because every firm has to decide whether to increase or decrease the price
depending on the price elasticity of demand of the product. If the price elasticity of
demand for his product is relatively elastic it will be advantageous to reduce price
as it increases his total revenue. On the other hand, if the price elasticity of demand
for his product is relatively inelastic he should raise the price as it increases his total
revenue.
Average revenue, which is the price per unit, considered along with average cost
will show to the firm whether it is profitable to produce and sell. If average revenue
is greater than average cost, the firm is getting excess profit; if it is less than average
cost, the firm is running at a loss.
Firm‟s profit is maximum at a point where Marginal revenue is equal to Marginal
cost. Any increase in output beyond that point will mean loss on additional units
produced; restriction of output before that point will mean lower profit. Thus the
concept of average revenue is relevant to find out whether the firm is running on
profit or loss; the concept of marginal revenue together with marginal cost will
show profit maximizing output for the firm.

13. External Factors

1. Demand, supply and their determinants.
2. Elasticity of demand and supply.
3. Size of the market.
4. Good will, name, fame and reputation of a firm in the market.
5. Purchasing power of the buyers.
6. Buyers behavior in respect of particular product
7. Availability of substitutes and complements.
8. Government‟s policy relating to various kinds of incentives, disincentives,
controls, restrictions and regulations, licensing, taxation, export & import, foreign
aid, foreign capital, foreign technology,
9. Competitors pricing policy.
10. Social consideration.

14. Full – Cost pricing or Cost Plus Pricing Method

Full cost pricing is one of the simplest and common methods of pricing adopted by
different firms. Hall and Hitch of the Oxford University in their empirical study of
actual business behavior found that business firms do not determine price and
output by comparing MR and MC. On the other hand, under Oligopoly and
monopolistic conditions they base their market price on full cost conditions.
According to this principle, businessmen charge price that cover their average cost
in which are included normal or conventional profits. Cost refers to full allocated
costs. According to Joel Dean, it has three components –
i) Actual cost which refers to the actual or total expenses incurred in production.
For e.g., wage bills, raw material cost, overhead charges etc.
ii) Expected cost refers to the forecast for the pricing period on the basis of
expected prices, output rate and productivity.
iii) Standard cost refers to cost incurred at the normal level of output.

15. Consumer’s Surplus may be defined as the excess of what a consumer is

willing to pay over what he actually does pay. According to Prof. Marshall, “The
excess of price which a person would be willing to pay rather than go without the
thing over which what he actually does pay is the economic measure of this surplus
satisfaction. It may be called consumers’ surplus. In the words of Prof. Bilas, “The
difference between what the consumer does pay for the commodity and what he
would be willing to pay rather than go without it is called consignment surplus”.
The concept may be explained with the help of a formula –
Consumers’ surplus = what we are prepared to pay – [minus] what we actually pay.

16. To day the concept is extensively used in estimating the cost-benefits of

various investment projects both in the private and public sectors. Costs and
benefits do not merely mean money costs and monetary benefits but also real costs
and real benefits in terms of satisfaction and the amount of resource utilization.
The quantum of consumers’ surplus derived from social projects like railways,
roads, bridges, dams, flyovers, parks, libraries, water and electricity supply etc by
consumers are definitely higher when compared to the amount of money spent on
them.
17. In the words of Keynes “Men are disposed, as a rule and on the average, to
increase their consumption as their income increases, but not by as much as the
increase in their incomes”. In the short period, as the level of income of the people
remains the same, the level of consumption also remains the same.
Generally it is observed that when income increases, consumption also increases
but by a less proportion than the increase in income.

Keynes Psychological law of consumption, which states that, when aggregate

income increases, consumption expenditure shall also increase but by a somewhat
smaller amount”. This law tells us that people fail to spend on consumption the full
amount of increment in income. As income increases, the wants of the people get
satisfied and as such when income increases they save more than what they spend.
This law may be considered as a rough indication of the actual macro-behavior of
consumers in the short-run.

18. MPC may be defined as the incremental change in consumption as a result of a

given increment in income. It refers to the ratio of the change in aggregate
consumption to the change in the level of aggregate income. It may be derived by
dividing an increment in consumption by an increment in income.

Technical characteristics of MPC

1. The value of MPC is always positive but less than one
This means that when income increases, the whole income is not spent on
consumption. Similarly, when income declines, consumption expenditure does not
decline in the same proportion. Consumption expenditure never becomes zero.
2. MPC is greater than zero
It is always positive. This means that an increase in income will lead to an increase
in consumption. MPC cannot be negative.
3. MPC goes down as income increases.
4. MPC may rise, fall or remain constant, depending on many factors, both
subjective and objective.
5. MPC of the poor is greater than that of the rich.
6. In the short-run MPC is stable.
19. Keynes speaks of 5 types of investment.
1. Private Investment.
It is made by private entrepreneurs on the purchase of different capital assets like
machinery, plants, construction of houses and factories, offices, shops, etc.
It is influenced by MEC and interest rate. It is profit – elastic. Profit motive is the
basis for private investment.
2. Public investment.
It is undertaken by the public authorities like Central, State and Local authorities. It
is made on building up of infrastructure of the economy, public utilities and on
social goods.

20. Monetary Policy deals with the total money supply and its management in an
economy. It is essentially a programme of action undertaken by the monetary
authorities generally the central bank to control and regulate the supply of money
with the public and the flow of credit with a view to achieving economic stability
and certain predetermined macro economic goals.
Monetary policy can be explained in two different ways. In a narrow sense, it is
concerned with administering and controlling a country’s money supply including
currency notes and coins, credit money, level of interest rates and managing the
exchange rates. In a broader sense, monetary policy deals with all those monetary
and non-monetary measures and decisions that affect the total money supply and
its circulation in an economy.

21. Maintenance of stable or fixed exchange rate was one of the major objects of
monetary policy for a long time under the gold standard. The stability of national
output and internal price level was considered secondary and subservient to the
former. It was through free and automatic imports and exports of gold that the
country was able to remove the disequilibrium in the balance of payments and
ensure stability of exchange rates with other countries. The government followed
the policy of expanding currency and credit with the inflow of gold and contracting
currency and credit with the outflow of gold.

22. Characteristics of Business Cycle

1. It is a wave-like movement and it is not a random fluctuation.
2. It is synchronic in nature. It is all embracing, it covers the entire economy. The
entire business of the economy acts like a living organism. Hence, any change in
one part of the economy affects the entire economy.
3. It occurs periodically and hence recurrent in nature. It is repetitive in the sense
that it has some recognized pattern.
4. It is to be noted that different trade cycles are similar but not identical in their
nature. Prof. Pigou points out that all recorded trade cycles are the members of the
same family but among them there are no twins.
5. The effects of different trade cycles are different on different activities.
6. It is self - generating. The process is cumulative and self-reinforcing. The self-
generating forces terminate one phase and start another phase. No phase is
permanent.
7. It is international in character.

23. The recovery may be initiated by the following factors:

a. Increase in government expenditure so as to increase purchasing power in the
hands of consumers.
b. Changes in production techniques and business strategies.
c. Diversification in investments or Investment in new regions.
d. Explorations and exploitation of new sources of energy etc.
e. New innovations- developing new products or services, new marketing strategy
etc.

24. Market failures arise on account of the following reasons.

1. The assumption of perfect competition in the market is wrong: The present day
markets are characterized by different degrees of imperfections. Hence, it is
difficult to expect the best allocation of resources to maximize economic gains
always.
2. The assumption that there is no difference between private and social
valuations is wrong: Private costs of an economic activity always do not equal the
social costs. They are totally different in many cases.
3. Failure to supply public goods: Markets fail to supply several types of public
goods to the general public in the overall interest of the society. A public good is
also called as social good or collective good used by all people irrespective of the
class to which one belongs.