SESSION AUG/SEP 2023

PROGRAM MASTER OF BUSINESS ADMINISTRATION

(MBA)
SEMESTER I
COURSE CODE & NAME DMBA105 – MANAGERIAL ECONOMICS
STUDENT NAME SABARI NATHAN C
ROLL NO 2314519359

Set – 1

Answer 1.

Law of Demand

The Law of Demand is a fundamental concept in economics that describes the inverse
relationship between the price of a good or service and the quantity demanded by consumers,
assuming other factors remain constant (ceteris paribus). Simply put, as the price of a good or
service increases, the quantity demanded for it tends to decrease, and conversely, as the price
of a good or service decreases, the quantity demanded for it tends to increase.

This behavior can be attributed to two primary effects:

1. Substitution Effect: When the price of a product rises, other similar products become
relatively more affordable. Consumers will then substitute the now more expensive
product with a cheaper alternative. On the other hand, if the price of the product falls, it
becomes more attractive than its substitutes, leading to an increase in its demand.

2. Income Effect: When the price of a product rises, it erodes the purchasing power of
consumers' income, making them feel relatively poorer. Consequently, they buy less of
that product. Conversely, a price drop effectively increases the consumers' purchasing
power, leading them to buy more of the product.

Exceptions to the Law of Demand

While the Law of Demand generally holds true, there are specific situations and goods for
which the demand does not necessarily decrease with a rise in price or increase with a fall in
price:
1. Giffen Goods: Named after the Scottish economist Sir Robert Giffen, these are inferior
goods for which an increase in price leads to an increase in quantity demanded. The
reason is that the income effect (reduction in real income) outweighs the substitution
effect.

2. Veblen Goods: Named after the American economist Thorstein Veblen, these goods are
considered to be status symbols, like luxury cars or designer brands. An increase in their
price might make them even more desirable as a status symbol, leading to an increase in
demand.

3. Necessities: Essential goods like medicines or basic food items might not see a
significant decrease in quantity demanded even if their prices rise, as they are crucial for
survival.

4. Speculative Bubbles: In situations where people believe that the price of an asset, like
property or stocks, will continue to rise, they might buy more of it even as its price
increases, expecting to sell it at a profit later on.

5. Non-Monetary Considerations: Sometimes, people buy goods not just because of their
price but due to non-monetary considerations like sentimental value, loyalty, or ethical
reasons.

6. Perfectly Inelastic Demand: This is a theoretical situation where the quantity demanded
remains unchanged irrespective of any change in the price of the product.

7. Goods with Habitual Consumption: Goods like cigarettes or alcohol may not see a
significant decrease in demand even if prices rise, as people who are addicted to them
may continue to buy regardless of price.

8. Emergencies: In emergency situations, people might be willing to pay whatever price is

asked, especially for essential or life-saving items.

In conclusion, while the Law of Demand provides a general framework for understanding the
relationship between price and demand, it's essential to recognize its exceptions.
Understanding these exceptions allows businesses and policymakers to make better-informed
decisions in various market scenarios.
Answer 2.

Features of Various Market Structures

Market structures provide a framework within which businesses operate, determine product
prices, and compete. They essentially describe the nature and level of competition between
firms in the same industry. There are several types of market structures, each with its own
distinct features and implications for the way businesses behave. Let’s delve into the primary
market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.

1. Perfect Competition:

Many Sellers and Buyers: There are numerous sellers, each selling an identical product, and
many buyers. No single buyer or seller can influence the market price.

Price Takers: Firms in a perfectly competitive market are price takers, meaning they accept
the market price as given.

Freedom of Entry and Exit: New firms can freely enter or exit the market.

Perfect Information: All buyers and sellers have complete information about prices,
products, and market conditions.

Zero Economic Profit in the Long Run: Due to the lack of barriers and the identical nature
of products, firms earn just enough to cover their costs in the long run.

2. Monopolistic Competition:

Many Sellers: There are many firms, but products are differentiated. This meAnswer each
firm has its own variant of the product.

Product Differentiation: Each firm offers a slightly different product, often due to branding,
quality, or other features.

Some Price-making Power: Due to product differentiation, each firm has some control over
the price of its product, but competition still limits this power.

Freedom of Entry and Exit: There are few barriers, so new firms can easily enter or exit the
market.
Normal Profits in the Long Run: Firms may earn short-term profits, but in the long run,
entry and exit ensure only normal profits are sustained.

3. Oligopoly:

Few Major Players: The market is dominated by a small number of large firms.

Interdependence: Firms are highly interdependent, meaning the actions of one firm can
significantly impact others.

Barriers to Entry: High entry barriers, like high startup costs or brand loyalty, prevent new
competitors from entering the market easily.

Price Rigidity: Prices tend to be sticky because if one firm changes its price, others might
follow, leading to potential price wars.

Non-price Competition: Firms often compete using advertising, product differentiation, and
other strategies rather than just on price.

4. Monopoly:

Single Seller: Only one firm controls the entire market.

Price Maker: The monopolist can set the price since there are no direct competitors.
However, they are still constrained by consumer demand.

Unique Product: There are no close substitutes for the monopolist's product.

Significant Barriers to Entry: These barriers can be natural, legal, or due to significant
economies of scale that make it unprofitable for others to compete.

Abnormal Profits: The monopolist can earn abnormal profits, especially if they can keep
costs low and barriers to entry high.

In conclusion, understanding market structures is crucial for businesses, policymakers, and

economists alike. It helps firms strategize, policymakers regulate, and economists analyze the
health and dynamics of an industry. Each structure has its own set of characteristics,
advantages, and disadvantages, and knowing how they operate can be the key to success in
the business world.
Answer 3.

Different Types of Cost with Suitable Examples

Cost is a fundamental concept in economics and business management. At its core, it

represents the amount spent to produce or purchase something. However, from a managerial
perspective, it is essential to understand the different classifications of costs, as they play a
crucial role in decision-making, budgeting, and price setting. Here, we delve into the various
types of costs and provide examples for better comprehension.

1. Fixed Costs: These are costs that do not vary with the level of production or sales. They
remain constant regardless of the volume of goods produced or sold. This meAnswer that
even if the production is zero, these costs have to be borne by the firm.

Example: Rent for a factory. Whether the firm manufactures 100 units or 1,000 units, the rent
remains the same.

2. Variable Costs: These costs vary directly with the level of production. When production is
zero, variable costs are zero. But as production increases, variable costs also rise.

Example: Raw materials. If a shoe company makes more shoes, it would need more leather,
laces, and other materials. Thus, the cost of these materials would increase with the number
of shoes produced.

3. Total Costs: This is the sum of fixed and variable costs at various levels of production.

Example: If a bakery has fixed costs of $1,000 for rent and utilities and variable costs of $5
for each cake baked, then the total cost for baking 100 cakes would be $1,500 ($1,000 + (100
x $5)).

4. Marginal Costs: This refers to the additional cost incurred by producing one more unit of
a product. It can be found by taking the difference in total costs when producing one
additional unit.

Example: If the total cost of producing 10 units is $100 and the total cost of producing 11
units is $103, the marginal cost of the 11th unit is $3.

5. Direct Costs: These are costs that can be directly attributed to a specific product,
department, or project. They are easily traceable and can be allocated directly.
Example: The cost of flour in a bread manufacturing unit. It's directly used for making bread
and can be directly attributed to the bread production process.

6. Indirect Costs: These are costs that cannot be directly attributed to a specific product or
department. They are spread over multiple products or departments.

Example: The salary of a manager overseeing multiple projects. The manager's salary cannot
be attributed to just one project but needs to be distributed across all the projects he manages.

7. Opportunity Costs: This represents the value of the next best alternative that is foregone
when a decision is made. It is not a recorded cost in accounting books but is crucial in
economic decision-making.

Example: If a farmer chooses to plant wheat instead of rice on his field, the opportunity cost
would be the profit he could have made from planting rice.

8. Sunk Costs: These are costs that have already been incurred and cannot be recovered.
They should not influence future decision-making as they are irrelevant for future actions.

Example: Money spent on a marketing campaign that didn't yield expected results. The firm
cannot recover this money, regardless of future decisions.

In conclusion, understanding the different types of costs is fundamental for managers and
decision-makers. It aids in budgeting, pricing, and strategizing, ensuring that resources are
utilized optimally and that businesses remain competitive and profitable.

Set – 2

Answer 4.

CHARACTERISTICS OF BUSINESS CYCLES

Wave-Like Movements: Business cycles occur in waves, characterized by alternating

periods of expAnswerion and contraction in economic activity. These are recurrent, but not
periodic, as they do not follow a fixed time pattern.

Phases: A complete business cycle comprises four phases – expAnswerion or boom, peak,
contraction or recession, and trough. The expAnswerion phase sees an upward trajectory of
economic activity until it reaches its peak. After the peak, the economic activity starts to
decline, marking the contraction phase until it reaches the trough, after which another
expAnswerion begins.

Duration and Amplitude Vary: Business cycles differ in duration (how long they last) and
amplitude (the severity of the fluctuations). Some might be short-lived with mild fluctuations,
while others might last longer with extreme variations.

Broad Impact: The effects of business cycles are pervasive, influencing a wide array of
economic indicators such as employment, output, and income.

Contagion Effect: Economic fluctuations in one country can spread to other countries,
especially in a globally interconnected economy.

CAUSES OF BUSINESS CYCLES

External Shocks: Events beyond the control of an individual economy can lead to business
cycles. Natural disasters, wars, or pandemics can disrupt the production capability of an
economy or change consumer and business sentiments.

Innovations and Technological Changes: The introduction of new technologies or

significant innovations can lead to expAnswerion phases. These spur investment and boost
consumer demand. However, once the initial surge is over, the economy might experience a
downturn.

Monetary Factors: Changes in the money supply, either through central bank policies or
external factors, play a significant role. An increase in the money supply can stimulate
economic activity, leading to a boom, while a decrease can lead to a recession.

Fluctuations in Investment: Investment levels are influenced by business sentiments,

interest rates, and expected returns. Sudden surges in investment can lead to booms, while
sharp declines can lead to recessions.

Psychological Factors: Business cycles can be driven by the collective psychology of

consumers and businesses. Pessimism can lead to reduced spending and investment, causing
a downturn. Conversely, optimism can boost spending and lead to an upswing.

Political Events: Decisions by governments, such as changes in taxation, spending, or

regulatory policies, can influence business cycles. Unexpected policy changes can introduce
uncertainty, affecting business confidence and investment.
Mismatch between Supply and Demand: At times, the goods produced might not match
consumer preferences or there might be overproduction, leading to unsold stocks. Such
mismatches can lead to downturns.

In conclusion, business cycles are inherent in market economies, characterized by recurrent

fluctuations in economic activity. Multiple factors, both internal and external to the economy,
drive these fluctuations. Understanding the characteristics and causes of business cycles is
crucial for policymakers and businesses alike to make informed decisions and to cushion the
adverse effects of downturns.

Answer 5.

Objectives of Pricing Policies

Pricing is a crucial component in the decision-making processes of firms. It not only affects a
company’s bottom line but also plays a vital role in positioning a product or service in the
market. The objectives behind pricing policies can vary based on the company's goals, market
conditions, and the specific stage of the product life cycle. Here are the key objectives of
pricing policies:

Revenue Maximization: One of the primary objectives for many businesses is to maximize
revenue. By adjusting the price, a company aims to sell a quantity of the product that will
generate the highest total revenue. This doesn't necessarily mean setting the highest price, but
finding a balance where the product price and the quantity sold produce maximum revenue.

Profit Maximization: While revenue is important, profitability remains the end goal for most
businesses. Companies aim to set a price that allows them to earn the highest possible profit,
considering production costs, competition, and demand elasticity. Sometimes, this may even
involve setting a lower price if it leads to significantly higher sales volumes and greater
overall profits.

Market Penetration: New entrants or businesses looking to quickly capture a large market
share might employ a penetration pricing strategy. Here, products are priced low to attract a
large number of customers and deter competitors. Once a significant market share is
achieved, prices can be adjusted upwards.
Skimming: Contrary to market penetration, skimming involves setting higher prices for new
products to capitalize on early-market interest and high demand. Over time, as the market
matures and competition enters, prices are reduced to attract a broader customer base.

Meeting Competition: In highly competitive markets, companies might adopt a policy to

price their products at or slightly below competitors' prices. This competitive pricing ensures
that the firm remains an attractive option for consumers and prevents loss of market share.

Cost Recovery: For businesses, especially in industries with large initial investments or
research and development costs, recouping costs becomes vital. They might set prices with
the primary aim of recovering the costs incurred in producing and marketing the product.

Value-Based Pricing: Recognizing that customers are willing to pay for the perceived value
of a product, some companies set prices based on the value they believe the product offers to
the consumer, rather than just the cost of production.

Psychological Pricing: This is about setting prices in a way that appeals to the emotions or
perceptions of consumers. For instance, pricing a product at $9.99 instead of $10 to make it
seem more affordable is a psychological pricing tactic.

Promotional Pricing: Occasionally, businesses might set lower prices for a limited period to
promote a product or increase its visibility in the market. This can be seen during sales,
launch offers, or clearance events.

Building Brand Image: High-end brands, particularly in the luxury segment, might price
their products higher to maintain an exclusive image. The high price, in this case, acts as an
indicator of quality, prestige, and status.

In conclusion, the objectives of pricing policies are multifaceted, and the right strategy often
depends on a combination of company goals, market conditions, and customer perceptions.
Understanding these objectives allows businesses to make informed decisions that align with
their broader goals while catering to the needs and expectations of their target market.
Answer 6

Consumption Function: Definition and Importance

Definition of Consumption Function:

The consumption function, a central concept in Keynesian economics, relates the level of
aggregate consumption to the level of disposable income in an economy. It is mathematically
expressed as:

C=C0+c(Y−T)

Where:

 C = Total consumption

 C0 = Autonomous consumption (the amount of consumption when disposable income

is zero)

 c = Marginal propensity to consume (the change in consumption resulting from an

additional unit of disposable income)

 Y = Total income

 T = Taxes

In simpler terms, the consumption function states that consumption expenditure comprises
two parts: a fixed component (autonomous consumption) that happens irrespective of income
levels and a variable component that changes with disposable income (marginal propensity to
consume).

Importance of Consumption Function:

Understanding Economic Behavior: The consumption function provides insights into how
households behave in terms of spending when they experience changes in their disposable
income. For instance, if the marginal propensity to consume is high, it indicates that
households are more likely to spend an additional unit of income rather than save it.

Economic Stability: An economy's stability can be gauged by understanding its consumption

patterns. If consumption is overly sensitive to income changes, it may indicate potential
economic instability. During recessions, if the propensity to consume drops significantly, it
may exacerbate economic downturns. On the other hand, stable consumption patterns can
cushion the effects of economic fluctuations.

Policy Formulation: Governments and policymakers use the consumption function to devise
strategies and policies aimed at regulating the economy. If the aim is to stimulate economic
growth, understanding the consumption function can guide decisions related to tax cuts,
direct trAnswerfers, or other fiscal measures. For instance, if the marginal propensity to
consume is high, tax cuts may effectively stimulate spending and boost economic activity.

Investment Decisions: Businesses, especially those in consumer goods and services, can
benefit from understanding the consumption function. Knowing how consumers are likely to
react to changes in income can help businesses forecast demand, set prices, and make
strategic decisions about production.

Multiplier Effect: The consumption function is closely related to the multiplier effect in
economics. The multiplier effect refers to the amplification of initial changes in spending. If
the marginal propensity to consume is high, an initial increase in spending can lead to a much
larger increase in output and income, amplifying the effect of the initial spending change.

Saving Behavior Insights: Apart from understanding consumption patterns, the

consumption function indirectly provides insights into saving behaviors. If the marginal
propensity to consume is known, the marginal propensity to save (the portion of additional
income that households choose to save rather than spend) can be derived, offering a
comprehensive picture of household financial behavior.

Global Comparisons: Different countries may exhibit different consumption functions based
on cultural, socio-economic, and political factors. By studying and comparing these
functions, economists can derive insights into the economic behaviors of different nations
and predict how global events might impact consumption patterns across countries.

In conclusion, the consumption function is not just a theoretical construct but a practical tool
with multifaceted importance. It offers a lens through which to view the behavioral patterns
of households, aids policymakers in decision-making, and provides businesses with strategic
insights, making it a cornerstone in the realm of managerial economics.