MANAGERIAL ECONOMICS

Long Questions Answer:

1. Managerial Economics is economic s that is applied in

decision making” Explain?

Ans : Managerial economics, also known as business economics, is the application

of economic theory and methods to solve practical problems faced by businesses
and managers. It combines microeconomic analysis with management science to
help managers make informed and effective decisions. The main goal of managerial
economics is to provide a framework for thinking about decision problems faced by
firms and to help managers make better decisions through the use of economic
concepts and methods.

Managerial economics provides tools and concepts for analyzing market structures,
consumer behavior, production and cost analysis, pricing strategies, and market
forecasting. It also helps managers understand the impact of government policies,
taxes, regulations, and other external factors on their business operations. By using
the principles of economics, managerial economists assist managers in evaluating
various courses of action and in determining the best decisions to achieve the
company's goals.

In summary, managerial economics applies economic theory and methods to

practical business problems to provide a structured approach to decision-making
and help managers make informed choices.
 2. Explain the relation ship of managerial economics with statistics,
mathematics, accounts & economics?

Ans : Managerial economics has a close relationship with various other fields,
including statistics, mathematics, accounting, and economics.

Statistics provides a way to collect, analyze, and interpret data that is essential to
making informed decisions in managerial economics. It helps managers to
understand trends, patterns, and relationships in data, and to make forecasts based
on historical data. Statistical methods are used to perform market research, to
measure consumer demand, and to evaluate marketing campaigns.

Mathematics provides a systematic way to solve problems and make decisions, and it
is an essential tool for managerial economists. Mathematical methods are used to
model complex business situations, to analyze market structures, to evaluate
production and cost functions, and to make optimal decisions.

Accounting provides the financial information that is required for making decisions in
managerial economics. Managerial economists use financial statements, cost data,
and other accounting information to evaluate the financial performance of a firm and
to make investment decisions.

Economics, as a discipline, provides the theoretical framework and concepts for

managerial economics. Managerial economists use microeconomic and
macroeconomic theories and models to analyze market structures, consumer
behavior, and market forces that affect a firm's operations.

In summary, managerial economics draws on a range of disciplines, including

statistics, mathematics, accounting, and economics, to provide a structured approach
to decision-making and help managers make informed choices.

3. What is Opportunity Cost?

Ans : Opportunity cost is a concept in Economics that is defined as those values

or benefits that are lost by a business, business owners or organisations when
they choose one option or an alternative option over another option, in the course
of making business decisions.
 4. Differentiate b/w, a/c profit & economic profit?
Ans :

Difference between Accounting Profit and Economic Profit:

ACCOUNTING PROFIT ECONOMIC PROFIT

Meaning

Accounting profits allude to the monetary Economic profits are the benefits procured by the
benefits acquired by the organisation towards organisation in the wake of diminishing both the implicit as
the end of the monetary year. well as explicit expenses from the income acquired by the
association.

Formula

Accounting profits = Revenue – Explicit Economic profits = Revenue – (Explicit + Implicit expenses).
expenses.

Applicability

Bookkeeping benefit is pertinent for Monetary benefits may not give the right image of the
understanding the monetary execution and monetary presentation of the firm as it additionally
performance of the firm. incorporates a few different perspectives like opportunity
costs.

Significance

Bookkeeping benefits of the organisation Financial benefit connotes how productively the organisation
connotes the productivity of the organisation. is apportioning or allocating its assets for acquiring income.

5. What is Macroeconomics?
Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinises
itself with the economy at a massive scale, and several issues of an economy are
considered. The issues confronted by an economy and the headway that it makes are
measured and apprehended as a part and parcel of macroeconomics.

6. What is Microeconomics?
Microeconomics is the study of decisions made by people and businesses regarding the
allocation of resources and prices of goods and services. The government decides the
regulation for taxes. Microeconomics focuses on the supply that determines the price level of
the economy. It uses the bottom-up strategy to analyse the economy
7. Differentiate b/w, Micro economics vs. macro economics?
 Ans :
Microeconomics Macroeconomics

                                                                             Meaning

Microeconomics is the branch of Economics that is
related to the study of individual, household and
firm’s behaviour in decision making and allocation
of the resources. It comprises markets of goods and
services and deals with economic issues.
Macroeconomics is the branch of Economics that deals
with the study of the behaviour and performance of the
economy in total. The most important factors studied
in macroeconomics involve gross domestic product
(GDP), unemployment, inflation and growth rate etc.

                                                                         Area of study

Microeconomics studies the particular market Macroeconomics studies the whole economy, that
segment of the economy covers several market segments

                                                                             Deals with

Microeconomics deals with various issues like

Macroeconomics deals with various issues like
demand, supply, factor pricing, product pricing,
national income, distribution, employment, general
economic welfare, production, consumption, and
price level, money, and more.
more.

                                                          Business Application

It is applied to internal issues. It is applied to environmental and external issues.

   

                                                                                 Scope

It covers several issues like demand, supply, factor It covers several issues like distribution, national
pricing, product pricing, economic welfare, income, employment, money, general price level, and
production, consumption, and more. more.

                                                                              Significance

It is useful in regulating the prices of a product It perpetuates firmness in the broad price level,
alongside the prices of factors of production and solves the major issues of the economy like
(labour, land, entrepreneur, capital, and more) deflation, inflation, rising prices (reflation),
within the economy. unemployment, and poverty as a whole.

                                                                             Limitations

It has been scrutinised that the misconception of

It is based on impractical presuppositions, i.e.,
composition’ incorporates, which sometimes fails
in microeconomics, it is presumed that there is
to prove accurate because it is feasible that what is
full employment in the community, which is
true for aggregate (comprehensive) may not be
not at all feasible.
true for individuals as well.
 8.  Illustrate the scope of managerial economics.
Ans :
The scope of managerial economics is broad and encompasses various aspects of
business decision-making. Some of the key areas of managerial economics include:

1. Market structures and pricing: Managerial economists study different market

structures, such as perfect competition, monopolistic competition, oligopoly, and
monopoly, and analyze the impact of market structure on pricing and output
decisions.
2. Consumer behavior: Managerial economists use the principles of microeconomics to
understand consumer behavior and make decisions on product design, marketing,
and pricing.
3. Production and cost analysis: Managerial economists analyze the costs of production
and use this information to make decisions on production levels, product design, and
pricing.
4. Market forecasting: Managerial economists use statistical methods and economic
models to make forecasts about future market conditions and to plan for changes in
demand and supply.
5. Investment and capital budgeting: Managerial economists use financial analysis and
decision-making tools to evaluate potential investments and make decisions on
capital expenditures.

9. factors on which price elasticity depends.

Ans : Price elasticity of demand is a measure of how responsive the quantity

demanded of a good or service is to a change in its price. The factors that determine
the price elasticity of demand are:
1. Nature of the good or service: The price elasticity of demand varies depending on
whether the good or service is a necessity or a luxury. Necessities, such as food and
shelter, tend to have inelastic demand, meaning that changes in price have a small
impact on the quantity demanded. Luxuries, such as jewelry and expensive cars, tend
to have more elastic demand, meaning that changes in price have a larger impact on
the quantity demanded.
2. Time period: The price elasticity of demand can vary depending on the time period
considered. In the short run, demand for most goods and services is more inelastic
than in the long run, because consumers have limited time to adjust their
consumption patterns.
3. Availability of substitutes: The price elasticity of demand is higher for goods and
services that have close substitutes. For example, if there are many substitute brands
of a product, consumers are more likely to switch to a cheaper brand if the price of
their preferred brand increases.
4. Habits and customs: The price elasticity of demand can vary depending on the
habits and customs of consumers. For example, if consumers have a strong
habit of drinking coffee every morning, the demand for coffee may be
relatively inelastic, even if the price increases.

10. Explain the uses of managerial economics.

Ans: Managerial economics is the application of economic theory and methodology

to decision-making problems faced by firms and other organizations. The primary
goal of managerial economics is to help managers make informed, effective
decisions that will improve the performance and profitability of the organization.
Some of the key uses of managerial economics are as follows:

1. Market analysis: Managerial economists use economic concepts and tools to analyze
market conditions and make informed decisions about pricing, production, and
marketing strategies.
2. Demand forecasting: Managerial economists use demand forecasting techniques to
estimate future demand for a company's products and services, which is a critical
factor in determining production levels, pricing strategies, and marketing campaigns.
3. Cost analysis: Managerial economists use cost analysis techniques to determine the
most cost-effective production methods, to evaluate the impact of changes in
production costs on prices and profits, and to make decisions about cost-cutting
measures.
4. Capital budgeting: Managerial economists use capital budgeting techniques to
evaluate investment opportunities and make decisions about whether to invest in
new projects or expand existing operations.
5. Market structure analysis: Managerial economists use economic concepts to analyze
the structure of industries and markets, including the number of firms, the degree of
competition, and the bargaining power of buyers and sellers.
6. Strategic decision-making: Managerial economists provide support and advice to
managers in making strategic decisions related to pricing, product development,
marketing, and production.

11. distinguish between individual demand curve and market demand

curve

Comparison Chart
BASIS FOR
INDIVIDUAL DEMAND MARKET DEMAND
COMPARISON

Meaning Individual Demand implies the Market demand for a commodity

quantity demanded of a commodity
by a single potential consumer, firm,
or household, at different price
levels, and during a given period.
refers to the aggregate quantity of
the commodity demanded by all the
potential consumers in the market at
different price levels, over a certain
period.

Curve Depicts the relationship between Depicts the relationship between the
quantity demanded by a single total quantity demanded and the
consumer, as we change the price. market price of the goods.

Inter- Component of Market Demand. Summation of Individual demand of

Relationship all buyers.

Demand curve Steeper Relatively flatter

appears

Law of Demand It does not always follow the law of It always follows the law of demand.
demand

12. Distinguish between own price elasticity and cross price elasticity and income
elasticity of demand .
Ans : Own-price elasticity of demand refers to the degree to which the quantity
demanded of a good or service changes in response to a change in its own price. If a
small change in the price of a good results in a relatively large change in the quantity
demanded, then the demand is considered to be price elastic. On the other hand, if a
small change in price results in a relatively small change in the quantity demanded,
then the demand is considered to be price inelastic.

Cross-price elasticity of demand refers to the degree to which the quantity

demanded of a good or service changes in response to a change in the price of a
related good or service. For example, if the price of a substitute product decreases,
the demand for the original product may decrease, indicating a positive cross-price
elasticity of demand. On the other hand, if the price of a complement product
decreases, the demand for the original product may increase, indicating a negative
cross-price elasticity of demand.

Income elasticity of demand refers to the degree to which the quantity demanded of
a good or service changes in response to a change in the income of consumers. If a
small increase in income results in a relatively large increase in the quantity
demanded of a good, then the demand is considered to be income elastic. On the
other hand, if a small increase in income results in a relatively small change in the
quantity demanded, then the demand is considered to be income inelastic.

13. Explain the properties of indifference curve.

Ans: The principle characteristics of indifference curves (IC) are as follows:

(i) Indifference curves are negatively-sloped or downward-sloping: An indifference
curve slopes downwards from left to right. It shows that more of one commodity implies
less of the other, so that the total satisfaction (at any point on the IC) remains constant.
(ii) Indifference curves are convex to the point of origin: An indifference curve will
ordinarily be convex to the point of origin. This is because of diminishing marginal rate
of substitution.
(iii) Higher indifference curve represents higher level of satisfaction: On an indifference
map, a higher indifference curve represents those combinations which yield higher level
of satisfaction than combinations on the lower indifference curves. The assumption of
monotonic preferences of the consumer permits us to conclude that greater the
consumption, higher must be the level of satisfaction.
(iv) Indifference curves never intersect one another: As each IC represents one level of
satisfaction which remains constant, two different indifference curves can never cross or
intersect each other.
 14. Distinguish between increasing returns to scale and decreasing
returns to scale.

the size of a firm and the amount of output produced.

Increasing returns to scale occurs when a firm's average cost per unit of output
decreases as the firm's size increases. This happens because the fixed costs of
production are spread over a larger number of units, resulting in lower average costs.
For example, a factory that doubles its production capacity may be able to reduce its
average cost per unit because it can spread its overhead costs, such as rent and
utilities, over a larger number of units.

On the other hand, decreasing returns to scale occurs when a firm's average cost per
unit of output increases as the firm's size increases. This occurs because the costs of
production become increasingly inefficient as the firm grows larger. For example, a
factory that doubles its production capacity may find that it becomes more difficult
to coordinate and manage its workers, leading to higher costs.

15. explain the relationship between average cost and marginal cost curve

The relationship between average variable cost (AVC) and marginal cost (MC) is as follows:
(i) When MC is less than AVC, AVC falls with increase in the output.
(ii) When MC is equal to AVC i.e. when MC and AVC curves intersect each other at point A,
AVC is constant and at its maximum point.
 (iii) When MC is more than AVC, AVC rises with increase in output.
(iv) Thereafter, AVC and MC rise but MC increases at a faster rate as compared to AVC. As
a result, MC curve is steeper as compared to AVC curve.

What Is the Breakeven Point (BEP)?

The breakeven point (breakeven price) for a trade or investment is
determined by comparing the market price of an asset to the original cost;
the breakeven point is reached when the two prices are equal.

In corporate accounting, the breakeven point (BEP) formula is determined

by dividing the total fixed costs associated with production by
the revenue per individual unit minus the variable costs per unit. In this
case, fixed costs refer to those that do not change depending upon the
number of units sold. Put differently, the breakeven point is the production
level at which total revenues for a product equal total expenses.

16. What are the properties keynesian consumption function?

The Keynesian consumption function, also known as the absolute income hypothesis,
is a theory proposed by economist John Maynard Keynes that describes the
relationship between consumer spending and disposable income. According to this
theory, there are several key properties of the Keynesian consumption function:

1. Positive slope: The consumption function has a positive slope, meaning that as
disposable income increases, consumer spending also increases.
2. Marginal Propensity to Consume (MPC): The MPC is the ratio of the change in
consumption to the change in income. It measures the amount of additional
consumption that results from an increase in income. According to the Keynesian
consumption function, the MPC is always less than 1.
3. Autonomous consumption: Autonomous consumption refers to consumption that
occurs independently of changes in income. This consumption is the intercept of the
consumption function, and it represents the minimum level of consumption that
occurs even when income is zero.
4. Propensity to save: The propensity to save refers to the portion of disposable income
that is not consumed but instead saved. This is equal to 1 minus the MPC.
5. Income effects: The consumption function takes into account the income effect,
which refers to the impact that changes in income have on consumer spending.
According to the Keynesian consumption function, as income increases, consumer
spending also increases.

17. What do you mean speculative motive of demand for money

The speculative motive of demand for money refers to the desire of individuals or organizations
to hold money for the purpose of speculation or investment. In other words, the speculative
motive refers to the desire to hold money as a store of value with the expectation that its value
will increase in the future, rather than using it to purchase goods and services.

For example, an individual who believes that the value of a currency is likely to appreciate in the
future may choose to hold onto that currency rather than spending it, in order to take advantage
of the expected increase in value. Similarly, an organization may hold onto cash reserves in
anticipation of a future investment opportunity, rather than using the funds to pay for current
expenses.

The speculative motive of demand for money is an important factor in the determination of the
demand for money in an economy, as it affects the overall supply and demand for money, and
therefore, the value of money. It is one of the several motives for holding money, including
transactions motive and precautionary motive.

What is Cost-Push Inflation?

Cost-push inflation is a condition in which the cost of labor or raw materials goes up
and causes an increase in prices for goods and services. Rapid changes in supply,
called supply-side shocks lead to cost-push inflation. This type of inflation can be
contrasted with demand-pull inflation, where there is an increase in the demand of
goods and services that drives prices up.

Any inflation in an economy can be quite damaging by eroding consumers'

purchasing power unless wages keep up with the increase in prices. Cost-push
inflation isn't any different and often is the result of businesses passing on the
increase in production to consumers.

Cost-push inflation is unlikely to occur unless demand for the affected products
remains steady or is growing.

Explain price discrimination by dumping.

Ans : Price discrimination by dumping refers to the practice of selling a product in a

foreign market at a price that is lower than the price of the same product in the
domestic market. Dumping is considered a form of price discrimination because it
allows a company to charge different prices for the same product in different
markets.

The practice of price discrimination by dumping can occur for a variety of reasons.
For example, a company may choose to sell a product at a lower price in a foreign
market in order to gain a larger market share and increase its profits in the long run.
Alternatively, a company may choose to sell a product at a lower price in a foreign
market in order to dispose of surplus inventory or to offset losses in other parts of its
business.

However, price discrimination by dumping can have negative consequences for

domestic producers and consumers in the affected foreign market. For example, it
can lead to decreased demand for domestically produced goods and services, lower
prices for those goods and services, and potentially, job losses in the affected
industries.

In response to the practice of price discrimination by dumping, many countries have

implemented anti-dumping policies, such as tariffs and import quotas, in order to
protect domestic producers and consumers. These policies aim to prevent companies
from selling products at artificially low prices in foreign markets and to level the
playing field for domestic producers.
What is Asymmetric Information?
Asymmetric Information refers to the information mismatch. It is believed that
asymmetric information occurs in almost all economic transactions. In
Economics, asymmetric information occurs between the sellers and buyers of
goods and services.

One side possesses greater knowledge than the other and therefore tries to
take advantage of the information gap.
The best example of asymmetric information is when a seller wants to sell his
house but does not disclose the information, which can make the buyer
question the purchase. As the owner, the seller possesses more and more
complete information about the house, including what the drawbacks of the
house are. But the seller won’t disclose that information since he wants to sell
the house. This information gap between the seller and buyer is defined as
Asymmetric information.

Asymmetric information, in a way, is also a specialisation of knowledge; for

example, Architects spent years getting specialised education in their field. So
they naturally possess more information than their clients, thus having an
advantage. Similarly, this principle applies to other professions and services
such as Doctors, Teachers, Police Officers, Engineers etc.

Explain the laws of demand and supply.

what are the determinants of demand
and supply?

Law of Supply and Demand Explained

The law of supply and demand describes how the relationship between supply and demand
affects prices. If a supplier wants more money than the customer is willing to pay, items will
most likely stay on the shelf. If the price is set too low, customers will be eager to buy the
items, but each item will be less profitable. The law of supply and demand is based on the
interaction between two separate economic laws: the law of supply and the law of demand.
Here's how they work.

The Law of Supply.

The law of supply predicts a positive relationship between pricing and supply. As prices of
goods or services rise, suppliers increase the amount they produce — as long as the
revenue generated by each additional unit they produce is greater than the cost of producing
it. Seeing a greater potential for profits, new suppliers may also enter the market. For
example, prices of lithium and other metals used in batteries have soared as sales of electric
vehicles have increased. That has encouraged mining companies to explore new sources of
lithium and expand production at existing mines in order to increase the supply and generate
higher profits.

The law of supply can also operate on a local scale. Let's say a well-known musician is
coming to town. Anticipating a huge demand for tickets, promoters aim to maximize the
supply by booking the biggest venue possible and offering as many tickets as they can, at
high prices. As the supply of tickets runs out, the price of secondhand tickets rises — and so
does the supply — as casual fans who bought tickets at the list price see the opportunity to
resell them at a higher price. As a result, they enter the market as new suppliers.

The Law of Demand.

The law of demand says that rising prices reduce demand. So as prices rise, customers buy
less. That's particularly true if they can substitute cheaper goods. When the famous
musician comes to town, not everyone may be able to afford a ticket even if they'd like to go.
So, if the theater sets prices too high, fewer people will decide it's a worthwhile purchase,
and the show organizers will be left with empty seats. Fans who want to resell their tickets
may need to lower their asking price. Some people may decide to see another artist instead,
if those tickets are cheaper.

The Law of Supply and Demand.

The price where supply and demand meet is known as the equilibrium price. At that price
point, suppliers produce just enough of a good or service to satisfy demand, and everyone
who wants to purchase the product can do so. In practice, of course, balancing supply and
demand is more complex. As supply and demand fluctuate, the equilibrium price can vary
over time. Furthermore, the law of supply and demand assumes that all other factors that
can affect pricing remain constant. In reality, that's often not the case. For example,
fluctuating production costs or supply chain problems can have a big impact on pricing.
 Determinants of Demand and Supply

Factors affecting demand are:- 
 
1. Buyer's Income
 
The buyer's purchasing power and the demand for a product are
determined by their income. An increase in income leads to increased
purchasing power and demand, whereas a fall in income leads to
decreased purchasing power and demand. There is also a link
between income and commodity quality.
 
Quality items will see an increase in demand as income rises, whereas
poorer goods would see a reduction in demand. However, if income
declines, there will be less demand for high-quality items and more
desire for low-cost ones.
 

2. Price of related services

 
In the case of complementary products , an increase in the price of
one commodity reduces demand for the complementary product. For
example, as the price of bread rises, so will the demand for butter. 
 
Similarly, an increase in the price of one item increases demand for a
substitute product. For example, an increase in the price of tea will
 increase the demand for coffee and, as a result, lower the demand for
tea.
 
3. Consumer Expectations
 
When customers expect a product's price to decline, they will wait to
buy it when it is less expensive. In other words, demand decreases.
However, if they predict the price to rise, they will buy more of the
goods while it is still inexpensive.
 
4. Taste
 
Demand is influenced by changes in customer preferences. Demand
for a certain item of apparel, for example, is particularly susceptible to
shifting consumer fashion choices. The elasticity of demand relates to
how sensitive a good's demand is to changes in other economic
factors such as pricing and consumer income.

Explain how a firm can find the least combination of inputs.

A firm can find the least combination of inputs, also known as the
production frontier or the efficient frontier, by using the concept of cost
minimization. The goal of cost minimization is to find the combination of
inputs that produces a given level of output at the lowest possible cost.

To find the least combination of inputs, a firm needs to consider the

following steps:
1. Determine the production function: The production function describes the
relationship between inputs and outputs, and it is a key element in finding
the least combination of inputs. The production function should be
specified in a mathematical form that allows for the calculation of the
optimal input combination.
2. Identify the production constraint: The production constraint is a limit on
the inputs that the firm can use. It may be related to budget constraints,
availability of inputs, or technology.
3. Derive the cost function: The cost function is the relationship between
inputs and costs, and it is used to find the combination of inputs that
minimizes costs.
4. Find the first order conditions: The first order conditions are the
mathematical relationships that must hold for the input combination that
minimizes costs. They are used to find the optimal combination of inputs by
equating the marginal cost of an additional unit of an input with the
marginal benefit of that input.
5. Solve for the optimal input combination: Once the first order conditions
have been derived, they can be used to solve for the optimal input
combination. This involves finding the values of the inputs that minimize
costs while satisfying the production constraint.

By using these steps, a firm can find the least combination of inputs that
allows it to produce a given level of output at the lowest possible cost. This
can help the firm to maximize its profits and competitiveness in the market.