NAME : B V SOWMYA

ROLL NO. : 2214501814

PROGRAM : MBA

SEMESTER : 1

COURSE NAME : MANAGERIAL ECONOMICS

CODE : DMBA105
ASSIGNMENT SET – 1

Define the term ‘Demand’. Explain the determinants of demand with suitable example.

The term demand is not a term like desire, want, will or wish. Demand has different
meanings in the language of economics. Any want or desire will not be constituted by
demand.

Demand = Desire to buy + Ability to pay + Willingness to pay

Demand refers to total or given quantity of a product or a service that is purchased by the
consumer in the market at a particular price and at a particular time.

Some of the important features of demand:

• It is backed up by sufficient purchasing power.

• It is related to time.

Consumers create demand. Demand basically depends on utility of a product. There is a

direct relation between the two i.e., higher the utility, higher would be demand and lower the
utility, lower would be the demand.

Demand function:

The demand for a product or service is affected by its price, the income of the individual, the
price of other substitutes, population, habit, etc. Thus, we can say that demand is a function
of the price of the product and other factors, as mentioned above.

Demand function is a comprehensive formulation which specifies the factors that influence
the demand for a product. Mathematically, a demand function can be represented in the
following manner.

Dx = f (Px, Ps, Pc, Ep, Y, Ey, T, W, A, U… etc) Where, Dx = Demand for commodity X Ps
= Price of the substitutes Px = Price of the commodity X Pc = Price of the complements Ep =
Expected future price Y = Income of the consumer Ey = Expected income in future T =
Tastes and preferences W = Wealth of the consumer A = Advertisement and its impact U =
All other determinants.

Determinants of demand (factors that affect or influence the demand)

Demand for a commodity or service is determined by a number of factors. All such factors
are called ‘demand determinants’. The demand determinants are as follows:

1. Price of product

2. Availability of substitutes

3. Number of consumers in the market

4. Tastes, preferences, customs, habits, fashion and styles.

5. Consumer’s income.

Thus, several factors are responsible for bringing changes in the demand for a product in the
market. A business executive should have the knowledge and information about all these
factors and forces in order to finalise his own production, marketing and other business
strategies. Demand curve A demand curve is a locus of points showing various alternative
price quantity combinations. In short, the graphical presentation of the demand schedule is
called as a demand curve.

It represents the functional relationship between quantity demanded and prices of a given
commodity. The demand curve has a negative slope or it slopes downwards to the right. The
negative slope of the demand curve clearly indicates that quantity demanded goes on
increasing as price falls and vice versa.

Discuss the different economies of scale in detail.

Large scale production is beneficial and economical in nature.

I . Internal economies or real economies

Economies of scale refer to the cost advantage experienced by a firm when it increases its
level of output. The advantage arises due to the inverse relationship between the per-unit
fixed cost and the quantity produced. The greater the quantity of output produced, the lower
the per-unit fixed cost.

Economies of scale also result in a fall in average variable costs (average non-fixed costs)
with an increase in output. This is brought about by operational efficiencies and synergies as
a result of an increase in the scale of production.
Types of Internal Economies:

• Technical Economies
• Managerial Economies
• Marketing Economies
• Financial Economies
• Commercial Economies
• Network Economies

II. External economies or pecuniary economies

External economies of scale refer to factors that are beyond the control of an individual firm,
but occur within the industry, and lead to a cost benefit.
The prospect of external economies of scale often induces firms in the same industry to
cluster together

Types of external economies:

Economies of concentration

Economies of information .

Economies of innovation.

Economies of disintegration

Economies of government action

Economies of physical factors

Tax Breaks

Economies of welfare

Summarize the different types of cost with examples.

The types of costs are as follows:

1. Money cost and real cost –

Production cost expressed in money terms is called as money cost. Real cost refers to the
payment made to compensate the efforts and sacrifices of all factor owners for their services
in production.

2. Implicit costs and explicit costs –

It's the costs that include cash outflows because of the production factors, whereas explicit
costs is the cost that doesn't require a cash outlay.

3. Actual costs and opportunity costs –

Actual costs are also called as outlay costs, absolute costs and acquisition costs. They are
those costs that involve financial expenditures at some time and hence, are recorded in the
books of accounts. While taking a decision among several alternatives, a manager selects the
best one which is more profitable or beneficial by sacrificing other alternatives.

4. Direct costs and indirect costs –

Direct costs are those costs which can be specifically attributed to a particular product, a
department, or a process of production. For example, expenses on raw materials, fuel, wages
to workers, salary to a divisional manager, etc are direct costs. For example, expenses
incurred on electricity bill, water bill, telephone bill, administrative expenses, etc

5. Past and future costs –

Past costs are those costs which are spent in the previous periods. On the other hand, future
costs are those which are to be spent in the future.

6. Fixed costs and variable costs –

Fixed costs are costs that are independent of volume. Ex: rents, salaries, utility bills,
insurance and loan repayments etc.

Variable costs are costs that changes as the volume changes. Ex: raw materials, piece-rate
labour, production supplies, delivery costs, credit card fees etc.

7. Marginal or incremental cost –

It reflects changes that occur to the balance sheet of a company as a result of an addition to
the unit of production. When a company produces one more unit of a product, the costs
associated with this production are Incremental cost

8. Accounting costs and economic costs –

Accounting cost can be defined as the cost of activity as recorded. Accounting costs are
tangible costs comprising business fundamentals like payroll, production costs, and
marketing budgets.

Economic cost can be defined simply as the accounting cost or explicit cost in addition to the
opportunity cost or implicit cost. It means that economic cost comprises actual direct costs
and opportunity costs.
ASSIGNMENT SET – 2

Outline the characteristics and causes of business cycle.

Characteristics of business cycles:

1.Industrialised capitalistic economies witness cyclical movements in economic activities. A

socialist economy is free from such disturbances.

2.It exhibits a wave-like movement having a regularity and recognised patterns. That is to
say, it is repetitive in character.

3.Almost all sectors of the economy are affected by the cyclical movements. Most of the
sectors move together in the same direction. During prosperity, most of the sectors or
industries experience an increase in output and during recession they experience a fall in
output.

4.Not all the industries are affected uniformly. Some are hit badly during depression while
others are not affected seriously.

Investment goods industries fluctuate more than the consumer goods industries. Further,
industries producing consumer durable goods generally experience greater fluctuations than
sectors producing non-durable goods. Further, fluctuations in the service sector are
insignificant in comparison with both capital goods and consumer goods industries.

5.One also observes the tendency for consumer goods output to lead investment goods output
in the cycle. During recovery, increase in output of consumer goods usually precedes that of
investment goods. Thus, the recovery of consumer goods industries from recessionary
tendencies is quicker than that of investment goods industries.

6.Just as outputs move together in the same direction, so do the prices of various goods and
services, though prices lag behind output. Fluctuations in the prices of agricultural products
are more marked than those of prices of manufactured articles.

7.Profits tend to be highly variable and pro-cyclical. Usually, profits decline in recession and
rise in boom. On the other hand, wages are more or less sticky though they tend to rise during
boom.

8.Trade cycles are ‘international’ in character in the sense that fluctuations in one country get
transmitted to other countries. This is because, in this age of globalisation, dependence of one
country on other countries is great.

9.Periodicity of a trade cycle is not uniform, though fluctuations are something in the range
of five to ten years from peak to peak. Every cycle exhibits similarities in its nature and
direction though no two cycles are exactly the same. In the words of Samuelson: “No two
business cycles are quite the same. Yet they have much in common. Though not identical
twins, they are recognisable as belonging to the same family.”
Causes of business cycles:

The following are some of the important causes, which deserve our attention.

Internal Causes

The factors that are built within the economic system and influence the business cycle are
called the internal causes of the business cycle. The major causes that affect the business
cycle are as follows:

Change in Demand: A change in the demand of a good or service will lead to changes in
production and supply of the concerned goods and services, thus, affecting output in an
economy.

Investment Fluctuations: Changes in investments made will lead to differences in output in an

economy much like what happens in changes in demand.

Macroeconomic Policies: The monetary and other related policies set up by a government are
the macroeconomic policies that immensely affect the business cycle.

Supply of Money: It is obvious that more supply of money will make people spend more
which will, in turn, lead to growth or expansion in the economy and vice-versa.

External Causes

The factors or changes that arise outside of an economy but still affect it are called external
causes of the business cycle

Wars: During wars, economic resources and available capital are used for manufacturing
weapons and providing for the army which increases the need for basic amenities among the
general citizens as the focus shifts to the battlefield and other places of the economy are
ignored.

Technology: Changes and development of technology is an essential cause of changes in the

demands and supply of different goods and services.

Natural Causes: Natural disasters like drought, famine or flooding greatly affect several
factors of input in the economy such as transportation, employment, agriculture which results
in an increase in existing prices of related products.

Population Expansion: Excessive expansion in population puts pressure on the demands of an

economy thereby affecting the supply and prices of products.

“The sole cause of inflation is the existence of a persistent excess demand in the economy”
Justify the statement with reference to different types and causes of inflation.

Causes of inflation
I. Demand Side

• Increase in money supply – deficit financing by the government, expansion in public

expenditure, expansion in bank credit and repayment of past debt by the government to the
people, increase in legal tender money and public borrowing.

• Increase in disposable income – Aggregate effective demand rises when disposable

income of the people increases.

• Increase in private consumption expenditure and investment expenditure – An

increase in private expenditure both on consumption and on investment leads to emergence
of excess demand in an economy.

• Increase in exports – An increase in the foreign demand for a country’s exports reduces
the stock of goods available for home consumption.

• Existence of black money – The existence of black money in a country due to corruption,
tax evasion, black-marketing, etc. increases the aggregate demand.

• Increase in foreign exchange reserves – This may increase on the account of inflow of
foreign money into the country.

• Increase in population growth – This creates an increase in demand for many types of
goods and services in a country.

• High rates – Higher rates of indirect taxes would lead to a rise in prices

• Reduction in the rates of direct taxes – This would leave more cash in the hands of
people inducing them to buy more goods and services leading to an increase in prices.

• Reduction in the level of savings – This creates more demand for goods and services.

II. Supply Side

• Shortage in the supply of factors of production – When there is shortage in the supply of
factors of production like raw materials, labour, capital equipment’s.

• Operation of law of diminishing returns – When the law of diminishing returns operates,
increase in production is possible only at a higher cost which demotivates the producers to
invest in large amounts.

• Hoardings by traders and speculators – During the period of shortage and rise in prices,
hoardings of essential commodities by traders and speculators with the objective of earning
extra profits in the future creates an artificial scarcity of commodities.

• Hoardings by consumers – Consumers may also hoard essential goods to avoid payment
of higher prices in the future
• Role of trade unions – Trade union activities leading to industrial unrest in the form of
strikes and lockouts also reduce production.

• Role of natural calamities – Natural calamities such as earthquake, floods, and drought
conditions also affect the supplies of agricultural products adversely.

• War – During the period of war, shortage of essential goods creates a rise in prices.

• International factors – These factors would cause either shortage of goods and services or
rise in the prices of factor inputs leading to inflation.

III. Role of expectations

• Expectations about higher wages and salaries affect the prices of related goods.

• Expectations of wage increase often induce some business houses to increase prices even
before upward wage revisions are made.

Define and discuss the marginal efficiency of capital (MEC) in detail.

Marginal efficiency of capital

MEC refers to the expected profitability of a capital asset. It may be defined as the highest
rate of return over cost expected from the marginal or additional unit of a capital asset. First
we must go to the marginal unit of the capital asset and secondly its cost has to be deducted
from its return.

The MEC can be calculated with the help of the following formula:

Where Sp is the supply price or the cost of capital asset, R1,R2… Rn are the prospective
yields or the series of expected annual returns from the capital asset in the years 1,2…….. n,
and i is the rate of discount. This makes the capital asset exactly equal to the present value of
the expected yield from it.

Let us assume that:

1. The life time of a capital asset (n) is 2 years.

2. The supply price of the capital asset (Sp) is Rs. 3000.

3. The expected yield from the asset at the end of one year (R1) is Rs. 1100.
4. The expected yield from the asset at the end of 2 years (R2) is Rs. 2420.

The MEC or the rate of discount which will equate the future yields of the asset with its
supply price is 10% as shown below:

Determinants of MEC

Several factors that affect MEC are as follows:

I. Short run factors

1. With expectation of increased demand

2. Cost and price

3. Higher propensity to consume

4. Changes in income

5. Current state of expectations

6. State of business confidence

II Long run factors

1. Rate of growth of population

2. Development of new areas

3. Technological progress

4. Productive capacity of existing capital equipment’s

5. The rate of current investment