1.

discuss the nature of manegerial economics

· Managerial economics to a certain degree is prescriptive in nature as it suggests a course of

action to a managerial problem. Managerial economics aims to provide the tools and techniques
to make informed decisions to maximize the profits and minimize the losses of a firm.

2. What are the basic assumptions of economic theory

· ?

3. Write a short note on discounting principle?

· One of the fundamental ideas in economics is that a dollar tomorrow is worth less than a dollar
today. This seems similar to the saying that a bird in hand is worth two in the bush. A simple
example would make this point clear. Suppose a person is offered a choice to make between a
gift of 100$ today or 100$ next year. Naturally he will choose the 100$ today.

· This is true for two reasons. First, the future is uncertain and there may be uncertainty in getting
100$ if the present opportunity is not availed of. Secondly, even if he is sure to receive the gift in
future, today’s 100$ can be invested so as to earn interest, say, at 8 percent so that. one year
after the 100$ of today will become 108$ whereas if he does not accept 100$ today, he will get
100$ only in the next year. Naturally, he would prefer the first alternative because he is likely to
gain by 8$ in future. Another way of saying the same thing is that the value of 100$ after one
year is not equal to the value of 100$ of today but less than that. To find out how much money
today is equal to 100$ would earn if one decides to invest the money. Suppose the rate of
interest is 8 percent. Then we shall have to discount 100$ at 8 per cent in order to ascertain how
much money today will become 100$ one year after.

· The formula is:

· PV = 100/(1+i)

· where,

· PV = Present Value
 · i = Rate of Interest.

· Now, applying the formula, we get PV = 92.59$

· If we multiply 92.59$ by 1.08, we shall get the amount of money, which will accumulate at 8 per
cent after one year.

· The same reasoning applies to longer periods. A sum of 100$ two years from now is worth:

· PV= 100/(1+i)2

· Similarly, we can also check by computing how much the cumulative interest will be after two
years.

· Therefore, for making a decision in regard to any investment which will yield a return over a
period of time, it is advisable to find out its ‘net present worth’. Unless these returns are
discounted and the present value of returns calculated, it is not possible to judge whether or not
the cost of undertaking the investment today is worth.

· The principle involved in the above discussion is called the discounting principle and is stated as
follows: “If a decision affects costs and revenues at future dates, it is necessary to discount those
costs and revenues to present values before a valid comparison of alternatives is possible.”

· The concept of discounting is found most useful in managerial economics in decision problems
pertaining to investment planning or capital budgeting.

4. Write a note pm qualities of managerial economics

· 1. Micro Economic Character

Managerial economics is micro economic in character because it is a unit of study i.e. firm. It only deals
the problems of firms but not deal with the entire economy as a unit of study. However, it takes the help
of macroeconomic to understand and adjust to the environment in which the firm operates.

· Normative

Managerial economics belongs to normative economics rather than positive economics. In other words,
it is prescriptive rather than descriptive. The main body of economic theory confines itself to descriptive
hypothesis, attempting to generalize about the relations among different variables without judgment
about what is desirable or undesirable. Managerial economics firstly tells what aims and objectives a
firm should pursue and secondly, it tells how best to achieve these aims in particular situations.

· Pragmatic

Managerial economics is pragmatic. It is concerned with those analytical tools, which are useful in
improving decision-making. Economic theory appropriately ignores the variety of backgrounds and
training found in individual firms but managerial economics considers the particular environment of
decision making.

· Goal Oriented

Managerial economics is goal-oriented and prescriptive. It deals with how decisions should be
formulated by managers to achieve the organizational goals.

· Conceptual and Metrical

Managerial economics is both ‘Conceptual and Metrical’. An intelligent application of quantitative

techniques to business presupposes considered judgment and hard and careful thinking about the
nature of the particular problem to be solved. Managerial economics provides necessary conceptual
tools to achieve this. Moreover, it helps the decision-maker by providing measurement of various
economic entities and their relationships. This metrical dimension of managerial economics is
complementary to its conceptual framework.

· Choice and Allocation

Managerial economics is concerned with decision-making of economic nature. This implies that
managerial economics deals with identification of economic choices and allocation of scarce resources.

5. What is demand explain the law of demand with the help of diagram what are its exception

· The Law of Demand states that other things remaining constant, the quantity demanded of a
commodity expands with fall in its price and contracts with a rise in its price.

· So, there is an inverse relationship between price and quantity demanded of a commodity. This
is explained with the help of an imaginary table and the curve which is based on imaginary data:
·

· Exceptions to the Law The law will not hold good under following circumstances:

· (i) Conspicuous consumption The Law of Demand will not apply in case of costly items such as
diamonds. These commodities will be demanded, even if the prices have gone very high.

· (ii) Conspicuous necessities Certain things become the necessity of modern life, so we have to
purchase these goods inspite of their price. The demand of television sets and automobiles has
not gone down inspite of the increase in their price.

· (iii) Ignorance If the consumer is not aware of the competitive price of the commodity, he may
purchase more of the commodity even at higher price. Such ignorance of the buyers makes the
Law of Demand ineffective.

6. What is demand forecasting? explain the criteria of good demand forecasting method

· Demand forecasting is the process of using predictive analysis of historical data to estimate and
predict customers’ future demand for a product or service. Demand forecasting helps the
business make better-informed supply decisions that estimate the total sales and revenue for a
future period of time.

· Demand forecasting allows businesses to optimize inventory by predicting future sales. By

analyzing historical sales data, demand managers can make informed business decisions about
everything from inventory planning and warehousing needs to running flash sales and meeting
 customer expectations.

· The criteria that need to be considered before forecasting the demand for a product are as
follows:

· i. Accuracy:

· ADVERTISEMENTS:

· Implies that an organization should make forecasts close to real figures, so that the real picture
of demand can be determined. For example, there would be an increase in sales in the coming
years is an inaccurate forecast. On the other hand, there would be an increase in sales by 30% in
the next year is an accurate forecast.

· ii. Durability:

· Implies that forecasts should be done in such a way that they can be used for long periods as
forecasts involves a lot of time, money, and efforts.

· iii. Flexibility:

· Implies that the forecasts should be adjustable and adaptable to changes. In today’s uncertain
business environment, there is a rapid change in the tastes and preferences of consumers, which
affect the demand for products. Therefore, the demand forecasts made by an organization
should reflect those changes. Apart from this, an organization, while making forecasts, should
consider various business risks that may take place in the future.

· iv. Acceptability:

· Refers to one of the most important criterion of demand forecasting. An organization should
forecast its demand by using simple and easy methods. In addition, the methods should be such
that organizations do not face any complexities. However, organizations generally prefer
advanced statistical methods, which may prove difficult and complex.

· v. Availability:
· ADVERTISEMENTS:

· Implies that adequate and up-to-date data should be available for forecasts. The forecasts
should be done in timely manner so that necessary arrangements should be made related to the
market demand.

· vi. Plausibility:

· Implies that the demand forecasts should be reasonable, so that they are easily understood by
individuals who are using it.

· vii. Economy:

· Implies demand forecasting should be economically effective. The forecasting should be done in
such a manner that the costs should be minimized and benefits should be maximized.