SHADAN INSTITUTE OF MANAGEMENT STUDIES FOR

GIRLS/BOYS

COURSE : MBA

SUBJECT : ECONOMICS FOR MANAGERS

SEM / YEAR : I SEM / I YEAR

FACULTY : MR.ATA-UR-RAHMAN
: Ms. ASMA BANU
: Ms. GOUSIA
 SHADAN INSTITUTE OF MANAGEMENT STUDIES FOR
GIRLS/BOYS.

KHAIRATABAD ,HYDERABAD

SUBJECT : ECONOMICS FOR MANAGERS

SEM/YEAR : 1SEM/1YEAR

COURSE : M.B.A

FACULTY INCHARGE: MR.ATA-UR-RAHMAN (GIRLS)

MRS.S.GOUSIA ( BOYS)

IMORTANT QUESTIONS

UNIT-1

1) Define managerial economics? Explain its nature and scope, also explain its
relation with the others subjects and how it differs from traditional
economics?
2) Discuss the importance of managerial economics in managerial decision
making, decision making process, certainty .uncertainty and risk?
3) Explain fundamental concept of opportunity cost, discounting principles.
And time perspective?
4) What is econometric? Explain the use of econometric model and decisions
making?

UNIT-2

1) What do you understand the concept of demand? What are the various
determinants of demand, critical examine the theory of law of demand, with its
limitation, define demand analysis and describe its objects?
2) What is utility? Explain law of marginal utility? what are the exception to it
3) Define demand forecasting .explain different methods of demand forecasting?
4) What is price elasticity of demand determine the factors for different groups?
Explain how do you measure elasticity of demand and different types?

UNIT-3

1) Critically examine the law of variable proportions ?

2) What is production function ?explain cobb-douglas production function.
3) Explain the concept of law of diminishing marginal returns to scale and
return to scale
4) What is production function? Explain in detail different types of production
function?
UNIT-4

1) what is monopolistic competition ? explain its features and explain how price is
determined in monopolistic competition?
2) What do you mean by the imperfect competition markets? differentiate between
perfect and imperfect market ?
3) What is oligopoly? Explain price determination under monopoly and oligopoly ?
4) What is agriculture market? Explain the classification of agricultural markets.
5) Define cost concepts ? Explain the various types of cost concepts ?

UNIT-5

1) What is national income? Explain its nature and concepts? Explain the methods to
measure national income?
2) What is inflation? Explain its types, causes and consequences? Outlines the
reasons for inflation in India suggesting preventive measures and also explain
how do you measure inflation?
3) Define Fiscal policy? Its objectives merits and demerits?
4) Define a Budget? Classify, discuss the highlights of budget 2021-2022 of India?
INDIRECT QUESTIONS
1) Basic economic tools ?
2) Role and functions of managerial economist ?
SHORT
1) Virtual market?
2) Arc elasticity ?
3) Stagflation ?
4) Learning curve ?
5) National income - GDP ?
6) War inflation?
7) Dis-economics of scale?
8) Limitations of C-V-P ?
9) Types of investment ?
10) Keynes savings?
11) Kinked demand curve ?
12) Transfer pricing ?
13) Trade cycle?
14) Hurwicz criterion ?
15) Pear load pricing ?

III Case study

 IMPORTANT DEFINITIONS AND MEANINGS

1) According to MC.Nair and Meriam , managerial economics is the use of

economic model of thought to analyse business situations.

2) Decision making is a process of identifying and selecting an action from a

number of alternative courses of action for resolving a problem in the
organisation.

3) Aris spanos,econometrics is concerned with the systematic study of

economic phenomena using observed data.

4) Total utility refers to complete satisfaction acquired by a consumers after

consuming the various units of the commodity.

5) Marginal utility of a commodity refers to the change in total utility due to

change in consumption of a commodity .

6) According to Alfred marshall, law of diminishing marginal utility is defined

as “the additional benefit which a person derives from a given increase of his
stock of a thing diminishes with every increase in the stock that he already
has”

7) Utility means some economists explained utility is considered as satisfaction

attained by consumer while consuming goods or services.

8) Demand can be defined as the amount of the commodity which an

individual consumer will purchase or is willing to purchase at a given price and
at a given period.
9) Law of demand explains a consumer‟s behaviour in demanding a
commodity in relation to the variations in its prices.

10) Elasticity of demand can be defined as proportionate change in the

quantity demanded by proportionate change in the determinant of demand
under consideration.

11) Demand forecasting refers to predicting consumer‟s future demand for

product.it is mainly used for planning purpose.

12) Production is an organized activity of transforming physical input (

resources ) into output ( finished goods ) which will satisfy the product‟s needs
of the society.
INPUT-----> TRANSFORM ------- > OUTPUT

13) According to JR.Hicks, production is “ any activity whether physical or

mental which is directed to the satisfaction of other people‟s wants through
exchange .

14) Break-even analysis refers to the study of cost-volume-profit analysis.

15) The BEP may be defined as “the point of sales volume at which total
revenue is equal to total cost .
16) A learning curve is a correlation between a learner‟s performance on a task
and the number of attempts or time required to complete the task; this can be
represented as a direct proportion on a graph

17) total cost, in economics, the sum of all costs incurred by a firm in
producing a certain level of output

18) Average cost is the cost per unit manufactured in a production run. It
represents the average amount of money spent to produce a product. This
amount can vary, depending on the number of units produced.

19) Total fixed cost is the total amount of money a business must pay to keep
their operations running regardless of how many products they make or sell.

20) The total variable cost is simply the quantity of output multiplied by the
variable cost per unit of output

21) the marginal cost is the change in total production cost that comes from
making or producing one additional unit.

22) A market is a place where commodities are purchased and sold at retail or
wholesale prices.it is considered as a place where large number of big and
small shops, stalls and hawkers sell different types of goods.

23) according to prof.J.C.Edwards,”A market is the mechanism by which

buyers and sellers are brought together.it is not necessarily a fixed place”.

24) Virtual marketing is essentially just another name for digital marketing or
viral marketing. All three of these terms simply mean marketing that is done in
a virtual or digital space. It is marketing, without physical presence.
25) the term monopolistic competition was coined by Edwerd chamberlin to
signify imperfections in the real world market structure.

26) “Monopoly”, you get “Mono” which means single or solo, and “Poly”
which means “seller”. Thus a monopoly market is the one where a firm is the
sole seller of a product without any close substitutes.

27) A monopoly market is a form of market where the whole supply of a

product is controlled by a single seller.

28) monopoly power is the power which is possessed by

monopolist,oligopolistic or a competitive monopolist who is a price maker.

29) An oligopoly is a market structure with a small number of firms, none of

which can keep the others from having significant influence.

30) Agricultural marketing covers the services involved in moving

an agricultural product from the farm to the consumer.

31) macro economics is the study of aggregate or averages of complete

economy like total employment national output, total consumption, total
savings, national income, aggregate demand etc. the study of macro economics
is necessary for understanding the work of the economy.

32) National income is referred to as the total monetary value of all services
and goods that are produced by a nation during a period of time. In other
words, it is the sum of all the factor income that is generated during a
production year

33) Fiscal policy refers to the use of government spending and tax policies to
influence economic conditions, especially macroeconomic conditions. These
include aggregate demand for goods and services, employment, inflation, and
economic growth.

34) the view of “classical employment theory‟ was rejected by a british

economist‟” John maynard keynes.he argued that there is always less than full
employment in the economy and full employment is only a special case.
35) Inflation is a rise in prices, which can be translated as the decline
of purchasing power over time.

36) A budget is an approximation of revenue and expenses over a defined

future time frame; it is organised and re-conceptualised on a periodic basis.
Budgets can be outlined for a person, a family, a group of people, an entity, a
country, a multinational organisation, a government, or just anything else that
makes and spends money.
UNIT-1

Q1) Define managerial economics? Explain its nature and scope, also
explain its relation with the others subjects and how it differs from
traditional economics?

Ans:- Definition: Managerial economics is a stream of management

studies which emphasises solving business problems and decision-
making by applying the theories and principles of microeconomics and
macroeconomics. It is a specialised stream dealing with the
organisation‟s internal issues by using various economic theories.

Nature of Managerial Economics:

 Art and Science: Managerial economics requires a lot of logical

thinking and creative skills for decision making or problem-

solving.
 Micro Economics: In managerial economics, managers generally

deal with the problems related to a particular organisation instead

of the whole economy.
Uses Macro Economics: A business functions in an external environment,
i.e. it serves the market, which is a part of the economy as a whole. such as
market conditions, economic reforms, government policies, etc. and their
impact on the organisation.
 Multi-disciplinary: It uses many tools and principles
belonging to various disciplines such as accounting, finance,
statistics, mathematics, production, operation research, human
resource, marketing, etc.

 Prescriptive / Normative Discipline: It aims at goal

achievement and deals with practical situations or problems by
implementing corrective measures.
 Management Oriented: It acts as a tool in the hands of managers

to deal with business-related problems and uncertainties

appropriately.
 Pragmatic: It is a practical and logical approach towards the
day today business problems.

Scope of Managerial Economics:

 Micro-Economics Applied to Operational Issues

 Theory of Demand: The demand theory emphasises on the

consumer‟s behaviour towards a product or service. It takes into
consideration the needs, wants, preferences and requirement of the
consumers to enhance the production process.
 Theory of Production and Production Decisions: This theory is
majorly concerned with the volume of production, process, capital
and labour required, cost involved, etc. It aims at maximising the
output tomeet the customer‟s demand
 Pricing Theory and Analysis of Market Structure: It focuses on
the price determination of a product keeping in mind the competitors,
market conditions, cost of production, maximising sales volume,
etc.
 Profit Analysis and Management: The organisations work for a
profit. Therefore they always aim at profit maximisation. It depends
upon the market demand, cost of input, competition level, etc.
 Theory of Capital and Investment Decisions: Capital is the most
critical factor of business. This theory prevails the proper allocation of
the organisation‟s capital and making investments in profitable projects
or venture to improve organisational efficiency.

Macro-Economics Applied to Business Environment

 Economic Environment: The economic conditions of a country,

GDP, economic policies, etc. indirectly impacts the business and its
operations.
 Social Environment: The society in which the organisation
functions also affects it like employment conditions, trade unions,
consumer cooperatives, etc.
 Political Environment: The political structure of a country,
whether authoritarian or democratic; political stability; and attitude
towards the private sector, influence organizational growth and
development.

.
Managerial Economics and Theory of Decision-Making:-Decision
theory has been developed to deal with problems of choice or decision-
making under uncertainty.

Economics and Political Science: Economics has various things

common with political science. For example, both subjects deal with
public finance, financial relations between the centre of the study as also
the economics of planning.

Economics and Sociology: related to the production and consumption of

goods and services. As a general rule economists assume that
individuals pursue their self-interest and respond to various signals or
incentives in thelight of that self-interest.

Economics and Psychology: Economics is particularly concerned with

consumption, production and resource use by individuals and groups.
Economics is also concerned with the procures by which households
andfirms make decisions about the use of scarce resources.
 Managerial Economics and Operations Research: The significant
relationship between managerial economics and operations research
can be highlighted with reference to certain important problems of
managerial economics which are solved with the help of OR
techniques. They are allocation problems, competitive problems,
waiting line problems and inventory problems.

Q2) Discuss the importance of managerial economics in managerial decision making,

decision making process, certainty .uncertainty and risk?

Definition:-Decision making is a process of selecting the best course of

action among all available alternatives. The main objective of decision
making is to maximize profit, minimize cost, and achieve higher
customer satisfaction.

The steps involved in the decision-making

processare explained as follows:
1. Setting Objectives:-The decision-making process of an organization
can be successful if the objectives are clear, realistic, and aligned with
the present market conditions. The objectives should be in quantitative
form, so that results can be measured more accurately.
2. Defining the problem:-An organization can be successful if it clearly
identifies the problem for which a decision is to be taken.
3. Identifying the causal factors:-These factors can be availability of
substitutes, climatic conditions, income level of consumers, demand and
supply of the product, and costs incurred in manufacturing the product.
4. Finding out alternatives:-Refers to the step in which all the possible
alternatives are generated for solving a problem. In this step, an
organization precisely identifies the multiple solutions to solve a
problem.
Collecting information:-An organization collects information from
internal and external sources. Internal sources include records
maintained by different departments of the organization, such as
marketing, human resource, production, finance and personnel
department. On the other hand,external sources include information
collected through surveys, interviews, and research conducted.

5. Evaluating information: In this step, the collected data is analyzed so

that best alternative can be selected. All the alternatives are analyzed on
the basis of their advantages and disadvantages. After conducting a
thorough analysis of the alternatives with the help of quantitative and
qualitative tools, the best alternative is selected.
6. Implementing the alternative and monitoring results:-Moreover, the
organization keeps a tab on the results generated after implementing
theselected alternative.

Concept of Certainty:-Certainty means a decision can be taken with

full knowledge about the situation. It means to have complete
information about future conditions. Example of certainty:-Considering
a simple example, every farmer has knowledge of the time periods for
growing crops. Therefore, they make definite decisions within the
relevant time frame. That is, they have prior knowledge of the decision
they make.

Concept of Risk:-In a simple manner, the risk is an action or choice

that can result in a losing situation and It could be emotional, monetary
or otherwise. Example of risk:-Considering a simple example, a man
lost his job and is unable to pay his rent. Because of this, he makes the
choice to steal money from the local convenience store. In this
situation, the man getsa risk and he knows the outcome is bad.

Concept of Uncertainty:- Uncertainty means that implies a situation

where future events are not known and can not be measured. It means
outcome of the decision is unknown and uncontrollable. Example of
uncertainty:- A simple example when a consumer buys goods, they
know what they are getting and how much utility they get from their
consumption but for some goods, it means games or lotteries outcome is
uncertain. Horse racing, buying insurance, playing gambles, outcome
cannot be measured certainly

Decision making under certainty:-In this situation decision maker has

complete knowledge of the outcome. In such a case he would select a
decision alternative that will yield the maximum payoff under the
known state of nature. Considering a simple example for decision
makingunder certainty can be identified as follows.

Examples of decision making under certainty:-For example; a farmer

wants to decide which crop should plant among three crops, on his 100-
acre farm.The farmer has categorized the amount of rainfall. It was high
rainfall, medium rainfall and low rainfall.
  When the rainfall is high, the farmer decided to plant crop A
because Crop A profit is higher than others under the amount of
rainfall as high.
 When the rainfall is medium, the farmer decided to plant crop C
because crop C is higher than others under the amount of
rainfall asthe medium.
 When the rainfall is low, the farmer decided to plant crop B
becausecrop B profit is 5000. It is higher than others.
According to this situation decision maker has
complete knowledge about outcome therefore he could be able to
take an effective decision with maximum payoff.

Decision making under risk:-In economics, to make the best decision we

have to measure the risk first. we need to know the probability of each
possible outcome of a decision to measure the degree of risk. There are two
main concepts of probability. They are,

 In subjective probability, decision-makers have knowledge about

past information or data is available regarding the occurrence of
outcomes.

 In objective probability, there is no similar past experience that

helps us in measuring probability. It is based on decision makers‟
personal judgment, experience or knowledge about the subject.

Decision making under uncertainty:- When a decision involves

condition about which the manager has no information , either about
the outcome or the relative chances or any single outcome, he is said to
be operating under conditions of uncertainty.
 There are five criteria that come under decision making under
uncertainty.They are,

1. Maximin criteria:- The maximin criteria is called the criterion of

pessimism. This implies that the worst possible outcomes for each
action.The decision-maker should choose the best of the worst
alternativesavailable.
2. Maximax criteria:- The Maximax criteria is known as the criteria
of optimism. These criteria are well-suited to those who are
extreme risk- takers. This also implies that the „best of the best‟
decision.
3. Hurwicz alpha criteria:- In these criteria, we have to find out the
expectedmonetary value for each of the strategies.
4. Minimax regret criteria:- These criteria suggest that the decision-
maker should attempt to minimize his maximum regret. Regret
represents an opportunity lost so for each of the demands.If we did
not choose the best strategy then how much would be the regret or
opportunity lost for all the other strategies. for that particular event or
demand that is the regret.
5. Laplace criteria and maximization of expected value:- Laplace criteria
suggest that if we do not know of any reason for one event to occur
more than the other, we should assume that all events have an equal
chance of occurrence. In this criterion, we assign the same
probability to each of the events. That is we assume that each event
is equal- probable.

Q3) Explain fundamental concept of opportunity cost,

discountingprinciples. And time perspective?

Ans:- Fundamental concept of opportunity cost :

 Definition:-Opportunity cost of a decision is the sacrifice of alternatives
required by that decision. Opportunity cost, therefore, represents the
benefits or revenue forgone by pursuing one course of action rather than
another.

The concept of opportunity cost implies three things:

1. The calculation of opportunity cost involves the measurement of

sacrifices.

2. Sacrifices may be monetary or real.

3. The opportunity cost is termed as the cost of sacrificed alternatives.

The economic significance of opportunity cost is as follows:

1. It helps in determining relative prices of different goods.

2. It helps in determining normal remuneration to a factor of production.

3. It helps in proper allocation of factor resources.

Fundamental concept of discounting principle:- The mathematical

technique for adjusting for the time value of money and computing
present value is called „discounting‟.
The following example would make this point clear. Suppose, you are
offered a choice of Rs. 1,000 today or Rs. 1,000 next year. Naturally,
you will select Rs. 1,000 today. That is true because future is uncertain.

The concept of discounting is found most useful in managerial

economics in decision problems pertaining to investment planning or
capital budgeting.

The formula of computing the present value is given below:

V = A/1+i

where:

V = Present value

A = Amount invested Rs.

100 i = Rate of interest 5
per cent

V = 100/1+.05 = 100/1.05 =Rs. 95.24

Similarly, the present value of Rs. 100 which will be discounted at the
end of2 years: A 2 years V = A/ (1+i) 2

For n years V = A/ (1+i) n

Fundamental concept of time perspective:-

The time perspective concept states that the decision maker must give
due consideration both to the short run and long run effects of his
decisions. In the short period, the firm can change its output without
changing its size. In the long period, the firm can change its output by
changing its size. In the short period, the average cost of a firm may be
either more or less than its average revenue. In the long period, the
average cost of the firm will be equal to its average revenue.

Suppose, a firm having a temporary idle capacity, received an order for

10,000 units of its product. The customer is willing to pay only Rs. 4.00
per unit or Rs. 40,000 for the whole lot but no more.

The short run incremental cost (ignoring the fixed cost) is only Rs. 3.00.
Therefore, the contribution to overhead and profit is Rs. 1.00 per unit (or
Rs. 10, 000 for the lot). If the firm executes this order, it will have to face
the following repercussion in the long run:

(a) It may not be able to take up business with higher contributions in

thelong run.

(b) The other customers may also demand a similar low price.

(c) The image of the firm may be spoilt in the business community.

(d) The long run effects of pricing below full cost may be more than

offsetany short run gain.

Q4) What is econometric? Explain the use of econometric model and
decisions making?

Ans:- Definition:- Econometrics is the quantitative application of

statistical inferences, economic theory and mathematical models using
data to develop theories or test existing hypotheses in economics and to
forecast future trendsfrom the huge amount of data acquired over time.

Its function is to convert real-world data to statistical trials and

then compares the findings against the theory or theories being
tested for similar patterns.

Econometrics prime function is to convert the qualitative

statements into quantitative statements.

Use of econometric model and decisions making:-

It helps economists test theories or hypotheses, whether

existing ornew.
Econometric analysis is concerned with the quantitative
relationships between economic variables and it can provide an
important input into the decision making process of manager.
Role of econometrics in decision making in business and
economics is very important. Econometrics is extensively used to
forecast sales, estimate demand and supply functions or price
elasticity of products which are essential for businesses to form
marketing campaigns and production strategies.
Econometrics has enhanced the understanding of the way the
managerial decision works. Econometrics is used in doing
quantitative analysis of actual economic phenomena based on
 theory and observations. An economic model is based on a set of
assumptions to simplify the complex economic phenomena.

Applications:-

 Forecasting macroeconomic indicators: Some macroeconomists are

concerned with the expected effects of monetary and fiscal policy on
the aggregate performance of the economy. Time-series models can
be used tomake predictions about these economic indicators.

 Estimating the impact of immigration on native workers:

Immigration increases the supply of workers, so standard economic
theory predicts thatequilibrium wages will decrease for all workers.

 Identifying the factors that affect a firm's entry and exit into a
market: Theory suggests that many factors, including existing profit
levels, fixed costs associated with entry/exit, and government
regulations can influence market structure. Econometric estimation
helps determine which factors are the most important for firm entry
and exit.

 Determining the influence of minimum-wage laws on employment

levels: The minimum wage is an example of a price floor, so higher
minimum wages are supposed to create a surplus of labor (higher
levels of unemployment). Therefore, labor economists use econometric
techniques toestimate the actual effect of such policies.

 Finding the relationship between management techniques and worker

productivity: The use of high-performance work practices (such as
worker autonomy, flexible work schedules, and other policies designed
 to keep workers happy) has become more popular among managers.
Econometric models can be used to determine which policies lead to
the highest returnsand improve managerial efficiency.

 Measuring the association between insurance coverage and individual

health outcomes: Health economists may use econometric models with
aggregate data (from countries) on medical coverage rates and health
outcomes or use individual-level data with qualitative measures of
insurancecoverage and health status.
 Deriving the effect of dividend announcements on stock market
prices and investor behavior: Dividends represent the distribution of
company profits to its shareholders. The net effect of dividend
announcements can be estimated using econometric models and data of
investor behavior.

 Predicting revenue increases in response to a marketing campaign:

The field of marketing has become increasingly dependent on empirical
methods. A marketing or sales manager may want to determine the
relationship between marketing efforts and sales. These can be
addressed with econometric techniques.

 Calculating the impact of a firm's tax credits on R&D

expenditure: Econometric estimates can be used to determine
how changes in the tax credits influence R&D expenditure and
how
distributional effects may produce tax-credit effects that vary by firm
size.
 Estimating the impact of cap-and-trade policies on pollution levels:
. Econometric models can be used to determine the most efficient
combination of state regulations, pollution permits, and taxes to
improve environmental conditions and minimize the impact on firms.
UNIT-II

Q5) What do you understand the concept of demand? What are the
various determinants of demand, critical examine the theory of law
of demand, with its limitation, define demand analysis and describe its
objects?

Ans:- Demand is the quantity of consumers who are willing and able to buy
products at various prices during a given period of time. Demand for any
commodity implies the consumers' desire to acquire the good, the willingness and
ability to pay for it.

Determinants of Demand

There are many determinants of demand, but the top five determinants of
demand are as follows:

Product cost: Demand of the product changes as per the change in the
price of the commodity. People deciding to buy a product remain
constant only if all the factors related to it remain unchanged. For
example:- If theprice of the given commodity (say tea) increases its
quantity falls as satisfaction derived from tea will fall due to rise in its
price.

The income of the consumers: When the income increases, the number
of goods demanded also increases. Likewise, if the income decreases,
the demand also decreases. Example :- Suppose income of a consumer
increases. As a result, the consumer reduces consumption of toned
milk and increases consumption of full cream milk. In this case „Toned
milk‟ is an inferior good for the consumer and „Full cream milk‟ is a
normal good.
Costs of related goods and services: For a complimentary product, an
increase in the cost of one commodity will decrease the demand for a
complimentary product. Example: An increase in the rate of bread will
decrease the demand for butter. Similarly, an increase in the rate of
one commodity will generate the demand for a substitute product to
increase. Example: Increase in the cost of tea will raise the demand for
coffee and therefore, decrease the demand for tea.

Consumer expectation: High expectation of income or expectation in the

increase in price of a good also leads to an increase in demand.
Similarly, low expectation of income or low pricing of goods will
decrease the demand. For example:- If the price of petrol is expected to
rise in future, its presentdemand will increase.

Buyers in the market: If the number of buyers for a commodity are

more orless, then there will be a shift in demand.

(i) Substitute goods:- Substitute goods are those goods which can be

used in place of one another for satisfaction of a particular want, like tea
and coffee. An increase in the price of substitute leads to an increase in
the demand for given commodity and vice – versa.

For example : – If price of a substitute good (say, coffee) increases then

demand for given commodity (say, tea) will rise as tea will become
relatively cheaper in comparison to coffee. So, demand for a given
commodity is directly affected by change in price of substitute goods.

(ii) Complementary goods:- Complementary goods are those goods

which are used together to satisfy a particular want, like tea and sugar,
An increase in the price of complementary good leads to a decrease in
the demand for given commodity and vice – versa.
For example : – if the price of a complementary good (say, sugar)
increases, then demand for given commodity (say, tea) will fall as it will
be relatively costlier to use both the goods together. So, demand for a
given commodity is inversely affected by change in price of
complementary goods.

Law of demand:-

The law of demand describes an inverse relationship between price and

quantity demanded of a good. If the price of the good increases, then the
demand falls, because the consumer is usually reluctant to spend more
and more money on her purchase. If the price of the good decreases, the
demand for the good increases because with price being less, the
consumer prefers tobuy the good.

Each point on the curve (A, B, C) reflects the quantity demanded (Q)
at a given price (P). At point A, for example, the quantity demanded is
low (Q1) and the price is high (P1). At higher prices, consumers
demand less of thegood, and at lower prices, they demand more.
Limitations of Law of Demand

When the prices of normal goods rises, the demand for them decrease,
there are few cases where the law cannot operated. Following are the
limitations of law of demand.

1. Prestige Goods

There are certain commodities like sports car or diamond, which are
the sign of distinction and honor in any society. If the price of these
goods increases the demand for them may be increase instead of
falling.

2. Price Expectations

Expect a further increase in the price of a specific commodity they will

go to buy more and more in spite of rising in price. In this case the
violation of law is temporary.
 3. Ignorance of the Consumer

If the consumer is ignorant about the rise in price of goods, he may buy
more of the commodity at higher price.

4. Giffen Goods

If the prices of basic goods like (sugar, wheat etc) on which the poor
spend a large part of their income declining the poor increase the
demand for superior goods. When the price of giffen goods fall it
demand will also falls. There is a positive price effect in the case of
giffen goods.

Q6) What is utility? Explain law of marginal utility? what are the
exception to it?

Ans:- Utility:-Utility is the capacity of a commodity through which

humanwants are satisfied.

Law of Diminishing Marginal Utility:-The law of diminishing marginal

utility is comprehensively explained by Alfred Marshall. According to
his definition of the law of diminishing marginal utility, the following
happens:

“During the course of consumption, as more and more units of a

commodity are used, every successive unit gives utility with a
diminishing rate, provided other things remaining the same; although,
the total utility increases.”

Utils:-'Utils' is considered as the measurable 'unit' of utility.

Explanation for the Law of Diminishing Marginal Utility:

We can briefly explain Marshall‟s theory with the help of an example.

Assume that a consumer consumes 6 apples one after another. The first
apple gives him 20 utils (units for measuring utility). When he consumes
the second and third apple, the marginal utility of each additional apple
will be lesser. This is because with an increase in the consumption of
apples, his desire to consumemore apples falls.

Therefore, this example proves the point that every successive unit of a
commodity used gives the utility with the diminishing rate.

We can explain this more clearly with the help of a schedule and
diagram.

Schedule for Law of Diminishing Marginal Utility:

In the above table, the total utility obtained from the first apple is 20
utils, which keep on increasing until we reach our saturation point at
5th apple. On the other hand, marginal utility keeps on diminishing with
every additional apple consumed. When we consumed the 6th apple, we
have gone over the limit. Hence, the marginal utility is negative and the
total utility falls.

With the help of the schedule, study the following diagram:

Saturation Point: The point where the desire to consume the same
product anymore becomes zero.

Following are the Exceptions to the law of diminishing marginal utility:

1) Hobbies: In certain hobbies like the collection of various stamps and coins,

rare paintings, music, reading, etc., the law does not hold true because every
additional increase in the stock gives more pleasure. This increases marginal
utility. However, this violates the assumption of homogeneity and
continuity.
2) Miser: In the case of a miser, every additional rupee gives him more and

more satisfaction. The marginal utility of money tends to increase with an

increase in his stock of money. However, this situation ignores the
assumption of rationality.
3) Addictions: It is observed in the case of a drunkard that the level of

intoxication increases with every additional unit of liquor consumed. So

MU received by drunkard may increase. Actually, it is only an illusion.
This condition is similar to almost all addictions. However, this violates the
assumption of rationality.
4) Power: This is an exception to the law because when a person acquires

power, his lust for power increases. He desires to have more and more of it.
However, thisagain violates the rationality assumption.
Q7) Define demand forecasting .explain different methods of demand

forecasting?

Ans:- Demand forecasting helps the company to produce the required

quantities of products at the right time and to arrange the various factors
of production in advance. Forecasting demand accurately also helps a
company to estimate the future demand for its products and plan its
production. There are different methods of demand forecasting in
business which are commonlyknown as demand forecasting techniques.

There are mainly two methods of demand forecasting in business,

namely – Survey method and statistical method.
Survey of Buyer‟s Choice

When the demand needs to be forecasted in the short run, say a year, then
the most feasible method is to ask the customers directly that what are
they intending to buy in the forthcoming time period. This survey can be
done in anyof the following ways:

a. Complete Enumeration Method: Under this method, nearly all

thepotential buyers are asked about their future purchase plans.
b. Sample Survey Method: Under this method, a sample of potential
buyers are chosen scientifically and only those chosen are
interviewed.
c. End-use Method: It is especially used for forecasting the demand of
the inputs. Under this method, the final users i.e. the consuming
industries and other sectors are identified.

Collective Opinion Method: Under this method, the salesperson of a firm

predicts the estimated future sales in their region. The individual
estimates are aggregated to calculate the total estimated future sales.
These estimates are reviewed in the light of factors like future changes in
the selling price, product designs, changes in competition, advertisement
campaigns, the purchasing power of the consumers, employment
opportunities, population, etc.

Barometric Method:-This method is based on the past demands of the

product and tries to project the past into the future. The economic
indicators are used to predict the future trends of the business. Based on
future trends, the demand for the product is forecasted. An index of
economic indicators is formed.

Trend projections: Generally a firm prepares its own data of sales at

different periods. When the firm arranges its data in a chronological
order, it gets time series. Time series represent the past pattern of its
effective demand. A trend line could be filled through the series in visual
or statistical way by the method of least squares and then projected into
the future for purpose of extrapolation. So, this can be used for further
analysis.

Economic indicators: Under this method, demand may be estimated on

the basis of some economic indicators like construction contracts,
personal income, agricultural income, and automobile registration. This
method of demand forecasting is well suited where relationship of
demand with a particular indicator is characterized by a Time Lag.

Controlled experiments: Demand Forecasting will be undertaken by

changing the determinants of demand like price. advertisement,
packaging etc. This may be done either by changing them over different
markets or timeperiods in the same market.

Executive Judgment Method: In this method, expert judgments are

sought from top executives in the related field. Collected judgments are
combined, averaged out and analyzed to figure out the demand
forecasts.
 Expert‟s Opinions: Here in methods of demand forecasting, expert
opinions are taken from specialists in the related field, collected opinions
from various sources like print or electronic media. Then, these opinions
are analyzed to figure out the demand forecasts.

Q8) What is price elasticity of demand determine the factors for

different groups? Explain how do you measure elasticity of demand
anddifferent types?

Ans:- Price elasticity of demand is a measurement of the change in the

consumption of a product in relation to a change in its price. Expressed
mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷

Percentage Change in Price.

Types of Price Elasticity of Demand:

1. Perfectly elastic demand: Perfectly elastic demand is when the

price is constant but there is a change in the demand i.e. increase or
decrease of a commodity. Thus, the demand curve is parallel to the X-
axis.Here, EP = ∞

2. Perfectly inelastic demand: Perfectly inelastic demand is when the

demand is constant or there is no change in the demand of a commodity
even if the price changes i.e. increases or decreases.Thus, the demand
curve is parallel to the Y-axis. Demand for salt is an example of
perfectly inelastic demand.Here, EP = 0.
3. Relatively elastic demand: Relatively elastic demand is when the
proportionate change in demand is more than the proportionate change in
the price.In other words, this means that a little change in the price shall
cause more change in demand. Thus, the demand curve slopes
downward from left to right. An example of this is luxury goods.Here,
EP ˃ 1

4. Relatively inelastic demand: Relatively inelastic demand is when

the proportionate change in demand is less than the proportionate
change in theprice.Here, EP ˂ 1

5. Unitary elastic demand: Unitary elastic demand is when the

proportionate change in demand is equal to the proportionate change in
price. Thus, the demand curve slopes downward from left to right but it
is a rectangular hyperbola. An example of this is comfort goods. Here, EP
=1

Factors affecting Price Elasticity of Demand:

Price Elasticity of Demand depends on various factors. Some of the

determinants of Price Elasticity of Demand are:

1. Nature of Commodity: There are different types of commodities

prevailing in the market which affect the elasticity of demand.
Ordinarily, necessaries like salt, oil, textbooks, etc., tend to have
inelastic demand, whereas luxuries like air conditioners, fashionable
garments, etc., have elastic demands.
2. Availability of Close Substitutes: Goods with close substitutes tend
to have more elastic demand because it is easier for consumers to switch
from that particular good to another. Whereas, goods with no close
substitute
tend to have inelastic demand because even if the price of that
commodity rises, the consumers do not have a close substitute, and they
have to buy that good only.

3. Diversity of Uses: Commodities that can be put to a variety of uses

have elastic demand. On the other hand, if a commodity such as paper
has onlya few uses, its demand is likely to be less elastic.
4. Income Level of the Buyer: The Elasticity of Demand for goods also
depends on the income level of its buyers. If the buyers of the goods are
high- end consumers (with a high level of income), they will not be
bothered by the rise in its price. So the elasticity of demand is expected
to be low. On contrary, if the income level of the buyer is low, elasticity
is expected to be high.
5. Time Horizon: Demand for any product is inelastic in a short period
but elastic in long run. It is because in the long run, a consumer can
change his consumption habits more conveniently than in the short
period. It means that if the price of any product rises, then at that
moment, the demand for that product is expected to be inelastic, but in
some time the consumer will find a different approach to tackle this,
and hence the demand is expectedto become elastic.

Measurement of Elasticity of Demand: There are three methods of measuring

price elasticity of demand.

1. The Percentage Method

It is also known as ratio method, when we measure the ratio as:

2. Total Outlay Method

Marshall suggested that the simplest way to decide whether demand is elastic or
inelastic is to examine the change in total outlay of the consumer or total revenue
of the firm.

Total Revenue = ( Price x Quantity Sold)

TR = (P x Q)

Where there is inverse relation between Price and Total Outlay, demand is elastic.
Direct relation means inelastic. Elasticity is unity when Total Outlay is constant.
3. Point or Geometrical Elasticity

When the demand curve is a straight line, it is said to be linear. Graphically, the
point elasticity of a linear demand curve is shown by the ratio of the segments of
the line to the right and to the left of the particular point.

Where „ep‟ stands for point elasticity, „L‟ stands for the lower segment and „U‟
for the upper segment.
 UNIT-3

9) Critically examine the law of variable proportions ?

ANS) Law of Variable Proportions occupies an important place in economic theory.

This law is also known as Law of Proportionality.

Keeping other factors fixed, the law explains the production function with one factor
variable. In the short run when output of a commodity is sought to be increased, the
law of variable proportions comes into operation.

Therefore, when the number of one factor is increased or decreased, while other
factors are constant, the proportion between the factors is altered. For instance, there
are two factors of production viz., land and labour.Land is a fixed factor whereas
labour is a variable factor.

Definitions:

“As the proportion of the factor in a combination of factors is increased after a point,
first the marginal and then the average product of that factor will diminish.” Benham

“An increase in some inputs relative to other fixed inputs will in a given state of
technology cause output to increase, but after a point the extra output resulting from
the same additions of extra inputs will become less and less.” Samuelson

Assumptions:
Law of variable proportions is based on following assumptions:

(i) Constant Technology:

The state of technology is assumed to be given and constant. If there is an

improvement in technology the production function will move upward.

(ii) Factor Proportions are Variable:

The law assumes that factor proportions are variable. If factors of production are to
be combined in a fixed proportion, the law has no validity.

(iii) Homogeneous Factor Units:

The units of variable factor are homogeneous. Each unit is identical in quality and
amount with every other unit.

(iv) Short-Run:

The law operates in the short-run when it is not possible to vary all factor inputs.

Explanation of the Law:

In order to understand the law of variable proportions we take the example of

agriculture. Suppose land and labour are the only two factors of production.

By keeping land as a fixed factor, the production of variable factor i.e., labour can be
shown with the help of the following table:

From the table 1 it is clear that there are three stages of the law of variable proportion.
In the first stage average production increases as there are more and more doses of
labour and capital employed with fixed factors (land). We see that total product,
average product, and marginal product increases but average product and marginal
product increases up to 40 units. Later on, both start decreasing because proportion of
workers to land was sufficient and land is not properly used. This is the end of the
first stage.

The second stage starts from where the first stage ends or where AP=MP. In this
stage, average product and marginal product start falling. We should note that
marginal product falls at a faster rate than the average product. Here, total product
increases at a diminishing rate. It is also maximum at 70 units of labour where
marginal product becomes zero while average product is never zero or negative.

The third stage begins where second stage ends. This starts from 8th unit. Here,
marginal product is negative and total product falls but average product is still
positive. At this stage, any additional dose leads to positive nuisance because
additional dose leads to negative marginal product.

Graphic Presentation:

In fig. 1, on OX axis, we have measured number of labourers while quantity of

product is shown on OY axis. TP is total product curve. Up to point „E‟, total product
is increasing at increasing rate. Between points E and G it is increasing at the
decreasing rate. Here marginal product has started falling. At point „G‟ i.e., when 7
units of labourers are employed, total product is maximum while, marginal product is
zero. Thereafter, it begins to diminish corresponding to negative marginal product. In
the lower part of the figure MP is marginal product curve.
Up to point „H‟ marginal product increases. At point „H‟, i.e., when 3 units of
labourers are employed, it is maximum. After that, marginal product begins to
decrease. Before point „I‟ marginal product becomes zero at point C and it turns
negative. AP curve represents average product. Before point „I‟, average product is
less than marginal product. At point „I‟ average product is maximum. Up to point T,
average product increases but after that it starts to diminish.

Three Stages of the Law:

1. First Stage:

First stage starts from point „O‟ and ends up to point F. At point F average product is
maximum and is equal to marginal product. In this stage, total product increases
initially at increasing rate

up to point E. between „E‟ and „F‟ it increases at diminishing rate. Similarly marginal
product also increases initially and reaches its maximum at point „H‟. Later on, it
begins to diminish and becomes equal to average product at point T. In this stage,
marginal product exceeds average product (MP > AP).

2. Second Stage:

It begins from the point F. In this stage, total product increases at diminishing rate
and is at its maximum at point „G‟ correspondingly marginal product diminishes
rapidly and becomes „zero‟ at point „C‟. Average product is maximum at point „I‟
and thereafter it begins to decrease. In this stage, marginal product is less than
average product (MP < AP).

3. Third Stage:

This stage begins beyond point „G‟. Here total product starts diminishing. Average
product also declines. Marginal product turns negative. Law of diminishing returns
firmly manifests itself. In this stage, no firm will produce anything. This happens
because marginal product of the labour becomes negative. The employer will suffer
losses by employing more units of labourers. However, of the three stages, a firm will
like to produce up to any given point in the second stage only.

10) What is production function ?explain cobb-douglas production function.?

ANS) The production function is a mathematical equation determining the

relationship between the factors and quantity of input for production and the number
of goods it produces most efficiently. It answers the queries related to marginal
productivity, level of production, and cheapest mode of production of goods.
Four major factors of production are – entrepreneurship, labor, land, and capital.
They form an integral part of inputs in this function. The production function helps
the producers determine the maximum output that firms and businesses can achieve
using the above four factors. In addition, it aids in selecting the minimum input
combination for maximum output production at a certain price point.

The Cobb-Douglas production function is based on the empirical study of the

American manufacturing industry made by Paul H. Douglas and C.W. Cobb. It is a
linear homogeneous production function of degree one which takes into account two
inputs, labour and capital, for the entire output of the .manufacturing industry.

The Cobb-Douglas production function is expressed as:

Q = ALa Cβ

where Q is output and L and С are inputs of labour and capital respectively. A, a and
β are positive parameters where = a > O, β > O.

The equation tells that output depends directly on L and C, and that part of output
which cannot be explained by L and С is explained by A which is the „residual‟,
often called technical change.
The production function solved by Cobb-Douglas.

11) Explain the concept of returns to scale or law of diminishing marginal

returns to scale?
ANS) Law of Returns to Scale

In the long run all factors of production are variable. No factor is fixed. Accordingly,
the scale of production can be changed by changing the quantity of all factors of
production.

Definition:

“The term returns to scale refers to the changes in output as all factors change by the
same proportion.”

“Returns to scale relates to the behavior of total output as all inputs are varied and is
a long run concept”.

Returns to scale are of the following three types:

1. Increasing Returns to scale.

2. Constant Returns to Scale
3. Diminishing Returns to Scale

1. Increasing Returns to Scale:

Increasing returns to scale or diminishing cost refers to a situation when all factors of
production are increased, output increases at a higher rate. It means if all inputs are
doubled, output will also increase at the faster rate than double. Hence, it is said to be
increasing returns to scale. This increase is due to many reasons like division external
economies of scale.
In figure 8, OX axis represents increase in labour and capital while OY axis shows
increase in output. When labour and capital increases from Q to Q 1, output also
increases from P to P1 which is higher than the factors of production i.e. labour and
capital.

Some of the factors are as follows:

i. Technical and managerial indivisibility:

Implies that there are certain inputs, such as machines and human resource, used for
the production process are available in a fixed amount. These inputs cannot be
divided to suit different level of production. For example, an organization cannot use
the half of the turbine for small scale of production. Similarly, the organization
cannot use half of a manager to achieve small scale of production. Due to this
technical and managerial indivisibility, an organization needs to employ the
minimum quantity of machines and managers even in case the level of production is
much less than their capacity of producing output. Therefore, when there is increase
in inputs, there is exponential increase in the level of output.

ii. Specialization:

Implies that high degree of specialization of man and machinery helps in increasing
the scale of production. The use of specialized labor and machinery helps in
increasing the productivity of labor and capital per unit. This results in increasing
returns to scale.

iii. Concept of Dimensions:

Refers to the relation of increasing returns to scale to the concept of dimensions.

According to the concept of dimensions, if the length and breadth of a room increases,
then its area gets more than doubled.

2. Diminishing Returns to Scale:

Diminishing returns or increasing costs refer to that production situation, where if all
the factors of production are increased in a given proportion, output increases in a
smaller proportion. It means, if inputs are doubled, output will be less than doubled.
If 20 percent increase in labour and capital is followed by 10 percent increase in
output, then it is an instance of diminishing returns to scale.

In this diagram 9, diminishing returns to scale has been shown. On OX axis, labour
and capital are given while on OY axis, output. When factors of production increase
from Q to Q1 (more quantity) but as a result increase in output, i.e. P to P1 is less. We
see that increase in factors of production is more and increase in production is
comparatively less, thus diminishing returns to scale apply.

3. Constant Returns to Scale:

Constant returns to scale or constant cost refers to the production situation in which
output increases exactly in the same proportion in which factors of production are
increased. In simple terms, if factors of production are doubled output will also be
doubled.

In this case internal and external economies are exactly equal to internal and external
diseconomies. This situation arises when after reaching a certain level of production,
economies of scale are balanced by diseconomies of scale. This is known as
homogeneous production function. Cobb-Douglas linear homogenous production
function is a good example of this kind. This is shown in diagram 10. In figure 10, we
see that increase in factors of production i.e. labour and capital are equal to the
proportion of output increase. Therefore, the result is constant returns to scale.

12)What is production function and explain its types?

ANS) Production function means a mathematical equation/representation of the
relationship between tangible inputs and the tangible output of a firm during the
production of goods. A single factor in the absence of the other three cannot help
production. In simple words, it describes the method that will enable the maximum
production of goods by technically combining the four major factors of production-
land, enterprise, labor and capital at a certain timeframe using a specific technology
most efficiently. It changes with development in technology. J H Von was the first
person to develop the proportions of the first variable of this function in the 1840s.

This function depends on the price factor and output levels that producers can easily
observe. Moreover, every manufacturing plant converts inputs into outputs. Hence
the factors necessarily determine the production level of goods to maximize
profits and minimize cost. Therefore, the production function is essential to know the
quantity of output the firms require to produce at the said price of goods. It
determines the output and the combination inputs at a certain capital and labor cost.

It is a common phenomenon that a firm‟s marginal cost starts to increase at higher

production levels, which is known as diminishing returns to scale. The diminishing
returns to scale lead to a lesser proportional increase in output quantity by increasing
the input quantities. Moreover, the increase in marginal cost is identifiable by using
this function.

The Leontief production function is a type of function that determines the ratio of
input required for producing in a unit of the output quantity. Also, producers and
analysts use the Cobb-Douglas function to calculate the aggregate production
function.
A production function may be expressed in three forms:

(a) It can be expressed in the form of an arithmetic table where first few columns
show the input of the factors and the last column shows total output of the product as
has been depicted below. Here, for the sake of simplicity, we take only on input

In the above table, fertilizer is the variable input (applied to a fixed price of land with
other fixed inputs). Total corn yield is increasing (column 2) as more units of
fertilizers are applied.

(b) The production function can also be illustrated geometrically by means of a

simple graph as shown in Fig. 1. Input level is measured along the horizontal axis and
the total output upon he vertical axis.
The points on the curve OT indicate different quantities of output associated with
particular levels of the input used.

(c) The production function may be shown through an algebraic expression in which
output is a dependent variable and input, the independent variable.

Formula

The general production function formula is:

Q= f (K, L),

Here Q is the output quantity,

L is the labor used, and

K is the capital invested for the production of the goods.

Types Of Production Function

There are two main types of productivity functions based on the input variables, as
discussed below.

1) Long Run

In the long-run production function, all the inputs are variable such as labor or raw
materials during a certain period. Therefore, the operation is flexible as all the input
variables can be changed per the firm‟s requirements. Furthermore, in the production
function in economics, the producers can use the law of equi-marginal returns to
scale. It leads to a smaller rise in output if the producer increases the input even after
the optimal production capacity. It means the manufacturer can secure the best
combination of factors and change the production scale at any time. Therefore, the
factor ratio remains the same here.
Moreover, the firms are free to enter and exit in the long run due to low barriers.

2) Short Run

The firm cannot vary its input quantities in the short-run production function. The
law of variable proportion gets applicable here. There is no change in the level of
activity in the short-run function. The ratio of factors keeps changing because only
one input changes concerning all the other variables, which remain fixed. The
manufacturing firms face exit barriers. As a result, they can be shut down
permanently but cannot exit from production.

For any production company, only the nature of the input variable determines the
type of productivity function one uses. If one uses variable input, it is a short-run
productivity function; otherwise, it is a long-run function.

UNIT-4

13) what is monopolistic competition ? explain its features and explain how
price is determined in monopolistic competition?

Ans) Monopolistic Competition is that condition of market in which there are many
sellers of any commodity but commodity of every seller is different from
commodities of other sellers in any way. Therefore, product differentiation is main
quality of monopolistic competition.

Characteristics of Monopolistic Competition

Following are the main characteristics of Monopolistic Competition

1. Large Number of Firms and Buyers:

Firm producing differentiated product and sellers are large in numbers in

monopolistic competition.
2. Product Differentiation:

Product differentiation is the main feature of monopolistic competition. Product

differentiation means that product of different types, brands, and qualities will be
available to customers in a fixed time period. Product differentiation occurs when
buyer of product can differentiate between two products. In this, firms are in large
number but their products are different from each other in anyway, but these products
are close substitutes of each other. Product differentiation is obtained due to
characteristic of product like shape, measurement, colour, durability, quality etc.
There are many examples of product differentiation like bath soaps Lux, Godrej,
Camay, Rexona, etc.

3. Freedom of Entry and Exit of Firms:

In the situation of monopolistic competition there is freedom of entry and exit of

firms in the industry like perfect competition. It should be noticed that Chamberlin
has used group at the place of industry for group of firms which produce
differentiated products under the monopolistic competition.

4. Selling Cost:

An important characteristic of monopolistic competition is that every firm spends

more money in promoting its product under it. Firm gives advertisements in
newspapers, cinemas, magazines, radio, T.V. etc. for selling its product in the
maximum amount. The investment done on all these is called as Selling Costs.

5. Price Control:

Every firm has limited control on the cost of product. Average income and limit end
income curve of a firm fall down like monopoly in monopolistic competition. It
means that in this situation, firm can slow down the price for selling more products
and raise price for fewer products. In monopolistic competition, a firm has control on
cost of its production due to the product differentiation. But due to the availability of
close substitute of opposite product firms do not have full control on cost in
monopolistic competition. The cost of every firm is affected by cost policy of its
competitors in market up to the certain limit.

6. Limited Mobility:

In monopolistic competition, sources of production and products and do not have

mobility in services.

7. Imperfect Knowledge:

In the situation of monopolistic competition, buyers, sellers of products, and owners

of sources do not have knowledge of different prices of product. The reason is that
comparison between productions of different firms is not possible due to product
differentiation. Customers are fond of the production of any one specific firm. They
only buy the production of that firm even if it costs higher than others. In this way
even sources of production are not able to know fully that how much the different
firms are costing to the sources of services.

8. Non-Price Competition:

The main characteristic of monopolistic competition is that under it different firms

without changing the costs of products compete with each other like the example of
companies producing „Surf‟ and „Ariel‟. If you take a box of „Surf‟, you will get a
glass utensil similarly, with the box of „Ariel‟ you will get the steel spoon. In this
way, firms, by providing different types of facilities and products etc. to customers to
attracts them toward their products. This type of competition is called as Non-Price
Competition.

Price-output determination under Monopolistic Competition: Equilibrium of a firm

In monopolistic competition, since the product is differentiated between firms, each

firm does not have a perfectly elastic demand for its products. In such a market, all
firms determine the price of their own products. Therefore, it faces a downward sloping
demand curve. Overall, we can say that the elasticity of demand increases as the
differentiation between products decreases.
Fig. 1 above depicts a firm facing a downward sloping, but flat demand curve. It also
has a U-shaped short-run cost curve.

Conditions for the Equilibrium of an individual firm

The conditions for price-output determination and equilibrium of an individual firm are
as follows:

1. MC = MR

2. The MC curve cuts the MR curve from below.

In Fig. 1, we can see that the MC curve cuts the MR curve at point E. At this point,

 Equilibrium price = OP and

 Equilibrium output = OQ

Now, since the per unit cost is BQ, we have

 Per unit super-normal profit (price-cost) = AB or PC.

 Total super-normal profit = APCB

The following figure depicts a firm earning losses in the short-run.

From Fig. 2, we can see that the per unit cost is higher than the price of the firm.
Therefore,

 AQ > OP (or BQ)

 Loss per unit = AQ – BQ = AB

 Total losses = ACPB

Long-run equilibrium

If firms in a monopolistic competition earn super-normal profits in the short-run, then

new firms will have an incentive to enter the industry. As these firms enter, the profits
per firm decrease as the total demand gets shared between a larger number of firms.
This continues until all firms earn only normal profits. Therefore, in the long-run, firms,
in such a market, earn only normal profits.
As we can see in Fig. 3 above, the average revenue (AR) curve touches the average cost
(ATC) curve at point X. This corresponds to quantity Q1 and price P1. Now, at
equilibrium (MC = MR), all super-normal profits are zero since the average revenue =
average costs. Therefore, all firms earn zero super-normal profits or earn only normal
profits.

14) What do you mean by the imperfect competition markets?differentiate

between perfect and imperfect market ?

Ans) Definition of Imperfect Competition

The competition, which does not satisfy one or the other condition, attached to the
perfect competition is imperfect competition. Under this type of competition, the
firms can easily influence the price of a product in the market and reap surplus
profits.

In the real world, it is hard to find perfect competition in any industry, but there are
so many industries like telecommunications, automobiles, soaps, cosmetics,
detergents, cold drinks and technology, where you can find imperfect competition.
By the virtue of this, imperfect competition is also considered as real world
competition. There are various forms of imperfect competition, described below:
  Monopoly: Single seller dominates the entire market.
 Duopoly: Two sellers share the whole market.
 Oligopoly: Few sellers are there who either act in collusion or competition.
 Monopsony: Many sellers and a single buyer.
 Oligopsony: Many sellers and few buyers.
 Monopolistic Competition: Numerous sellers offering unique products.

Differences Between Features of Perfect and Imperfect Competition

Depending on the features mentioned in the definitions of perfect and imperfect

competition above, the following differences between the features may be noted.

Perfect Competition Imperfect Competition

In a competitive market where there are When the condition is not met, it is
many buyers and sellers, the sellers sell considered imperfect competition.
identical products to the buyers, then it is
known as perfect competition.

Perfect competition is theoretical; it is The markets we have in real life are

impossible to find a perfectly competitive all imperfect.
market. Perfect competition is usually used
as a standard; it has no real-life example.
However, there are inferences the market
players may get from the conditions of
perfectly competitive markets.

In the case of perfect competition, there are While in the case of imperfect
always many players in the market. competition, there can be few to
many players.

In a perfectly competitive market, the While the sellers in the case of an

sellers sell identical products. imperfectly competitive market sell
 non-identical products. This means
that sellers in the imperfectly
competitive market choose their own
specialties according to their
knowledge and choice.

There are no barriers to entry and exit in In imperfectly competitive markets,

the perfectly competitive market which is the barriers to entry not only exist
not true in the case of non-competitive but may also be very high so that no
markets. new participant may easily enter the
market.

In the case of a perfectly competitive In the case of imperfectly

market, the sellers cannot decide the price competitive markets, the sellers can
of the products. The prices are set by decide the prices so they are price
market forces. So, the sellers are price makers.
takers in competitive markets.

Conclusion

Perfect competition is an imaginary situation which does not exist in reality, but
imperfect competition is factual i.e. which genuinely exist.

Whichever market, you consider for this like for example if you consider the
detergent market. There are many players like Tide, Rin, Surf Excel, Ariel, Ghadi,
etc. producing similar product i.e. detergent.

At first instance, you may think that this is an example of perfect competition, but
this is not so. If you dig a little deeper, you may find that all the products are different
as well as they vary in their prices. Some are low budget detergents for capturing
the market of price sensitive people while others are high budget detergents for
quality sensitive people.
 15) What is oligopoly? Explain price determination under monopoly and
oligopoly ?

Ans) An oligopoly is a market characterized by a small number of firms who realize

they are interdependent in their pricing and output policies. The number of firms is
small enough to give each firm some market power.

The word Oligopoly is derived from two Greek words – ‘Oligi’ meaning „few‟ and
„Polein‟ meaning „to sell‟.

An Oligopoly market situation is also called „competition among the few‟. In this article,
we will look at Oligopoly definition and some important characteristics of this market
structure.

PRICE DETERMINATION MODELS OF OLIGOPOLY:

1. Kinky Demand Curve: The kinky demand curve model tries to explain that in non-
collusive oligopolistic industries there are not frequent changes in the market prices
of the products. The demand curve is drawn on the assumption that the kink in the
curve is always at the ruling price. The reason is that a firm in the market supplies a
significant share of the product and has a powerful influence in the prevailing price of
the commodity. Under oligopoly, a firm has two choices:

(a) The first choice is that the firm increases the price of the product. Each
firm in the industry is fully aware of the fact that if it increases the price of the
product, it will lose most of its customers to its rival. In such a case, the upper
part of demand curve is more elastic than the part of the curve lying below the
kink.
(b) The second option for the firm is to decrease the price. In case the firm
lowers the price, its total sales will increase, but it cannot push up its sales very
much because the rival firms also follow suit with a price cut. If the rival firms
make larger price cut than the one which initiated it, the firm which first started
the price cut will suffer a lot and may finish up with decreased sales. The
 oligopolists, therefore avoid cutting price, and try to sell their products at the
prevailing market price. These firms, however, compete with one another on
the basis of quality, product design, after-sales services, advertising, discounts,
gifts, warrantees, special offers, etc.

n the above diagram, we shall notice that there is a discontinuity in the marginal
revenue curve just below the point corresponding to the kink.During this
discontinuity the marginal cost curve is drawn. This is because of the fact that the
firm is in equilibrium at output ON where the MC curve is intersecting the MR curve
from below.
The kinky demand curve is further explained in the following diagram
In the above diagram, the demand curve is made up of two segments DB and
BD‟. The demand curve is kinked at point B. When the price is Rs. 10 per unit, a firm
sells 120 units of output. If a firm decides to charge Rs. 12 per unit, it loses a large
part of the market and its sales come down to 40 units with a loss of 80 units. In case,
the producer lowers the price to Rs. 4 per unit, its competitors in the industry will
match the price cut. Its sales with a big price cut of Rs. 6 increases the sale by only
40 units. The firm does not gain as its total revenue decreases with the price cut.

Price Determination under Monopoly

Monopoly is that market form in which a single producer controls the whole supply
of a single commodity which has no close substitute.

From this definition there are two points that must be noted:

(i) Single Producer: There must be only one producer who may be
an individual, a partnership firm or a joint stock company. Thus single firm
constitutes the industry. The distinction between firm and industry
disappears under conditions of monopoly.
(ii) No Close Substitute: The commodity produced by the producer
must have no closely competing substitutes, if he is to be called a
monopolist. This ensures that there is no rival of the monopolist. Therefore,
the cross elasticity of demand between the product of the monopolist and
the product of any other producer must be very low.

PRICE-OUTPUT DETERMINATION UNDER MONOPOLY:

A firm under monopoly faces a downward sloping demand curve or average revenue
curve. Further, in monopoly, since average revenue falls as more units of output are
sold, the marginal revenue is less than the average revenue. In other words, under
monopoly the MR curve lies below the AR curve.
The Equilibrium level in monopoly is that level of output in which marginal revenue
equals marginal cost. The producer will continue producer as long as marginal
revenue exceeds the marginal cost. At the point where MR is equal to MC the profit
will be maximum and beyond this point the producer will stop producing.

PRICE DISCRIMINATION IN MONOPOLY:

Price discrimination may be (a) personal, (b) local, or (c) according to trade or use:

(a) Personal: It is personal when different prices are charged for different
persons.
(b) Local: It is local when the price varies according to locality.
(c) According to Trade or Use: It is according to trade or use when different
prices are charged for different uses to which the commodity is put, for
example, electricity is supplied at cheaper rates for domestic than for
commercial purposes.

Some monopolists used product differentiation for price discrimination by means of

special labels, wrappers, packing, etc. For example, the perfume manufacturers
discriminate prices of the same fragrance by packing it with different labels or brands.

Conditions of Price-Discrimination: There are three main types of situation:

 (a) When consumers have certain preferences or prejudices. Certain
consumers usually have the irrational feeling that they are paying higher prices
for a good because it is of a better quality, although actually it may be of the
same quality. Sometimes, the price differences may be so small that consumers
do not consider it worthwhile to bother about such differences.
(b) When the nature of the good is such as makes it possible for the
monopolist to charge different prices. This happens particularly when the good
in question is a direct service.
(c) When consumers are separated by distance or tariff barriers. A good may
be sold in one town for Re. 1 and in another town for Rs. 2. Similarly, the
monopolist can charge higher prices in a city with greater distance or a country
levying heavy import duty.

16) What is agriculture market? Explain the classification of agricultural

markets

Definitions of Agricultural Marketing

The term agricultural marketing is composed of two words- agriculture and

marketing. Agriculture, generally means growing and/or raising of crops and
livestock while, marketing encompasses a series of activities involved in moving the
goods from the point of production to point of consumption. Many scholars have
defined agricultural marketing and incorporated essential elements of time, place,
form and passion utility. Some of the definitions of agricultural marketing are given
below;

Performance of business activities that directs the flow of goods and services
 The study of agricultural marketing comprises all the operations, and the
agencies conducting them, involved in the movement of farm produced foods; raw
materials and their derivatives, such as textiles, from the farms to the final consumers,
and the effect of such operations on the farmers, middlemen and consumers

Agricultural marketing is a process which starts with a decision to produce a

saleable farm commodity, involves all the aspects of market structure or system, both
financial and institutional, based on technical and economic considerations, and
includes pre- and post-harvest operations, assembling, grading, storage,
transportation and distribution (National Commission on Agriculture, 1976

MARKET CLASSIFICATION

1. On the basis of Location:

On the basis of the place of location or operation, markets are of the following types:

Village Markets: A market which is located in a small village, where

major transactions take place among the buyers and sellers of a village is
called a village market.

Primary wholesale Markets: These markets are located in big towns near
the centers of production of agricultural commodities. In these markets,
a major part of the produce is brought for sale by the producer-farmers
themselves. Transactions in these markets usually take place between
the farmers and traders.

Secondary wholesale Markets: These markets are located generally in

district headquarters or important trade centers or near railway junctions.
The major transactions in commodities take place between the village
traders and wholesalers. The bulk of the arrivals in these markets are
from other markets
The produce in these markets is handled in large quantities. There are,
therefore, specialized marketing agencies performing different
marketing functions, such as those of commission agents, brokers, weigh
men, etc.

Terminal Markets: A terminal market is one where the produce is either

finally disposed of to the consumers or processors, or assembled for
export. Merchants are well organized and use modern methods of
marketing. Commodity exchanges exist in these markets, which provide
facilities, for forward trading in specific commodities. Such markets are
located either in metropolitan cities or in sea-ports – in Bombay, Madras,
Calcutta and Delhi.

Seaboard Markets: Markets which are located near the seashore and are
meant mainly for the import and/or export of goods are known as
seaboard markets. Examples of these markets in India are Bombay,
Madras, and Calcutta.

2. On the Basis of Area/Coverage:

On the basis of the area from which buyers and sellers usually come for transactions,
markets may be classified into the following four classes:

Local or Village Markets: A market in which the buying and selling

activities are confined among the buyers and sellers drawn from the
same village or nearby villages. The village markets exist mostly for
perishable commodities in small lots, e.g., local milk market or
vegetable market.

Regional Markets: A market in which buyers and sellers for a

commodity are drawn from a larger area than the local markets.
Regional markets in India usually exist for food grains.
National Markets: A market in which buyers and sellers are at the
national level. National markets are found for durable goods like jute
and tea.

World Market: A market in which the buyers and sellers are drawn from
the whole world. These are the biggest markets from the area point of
view. These markets exist in the commodities which have a world-wide
demand and/or supply, such as coffee, machinery, gold, silver, etc. In
recent years many countries are moving towards a regime of liberal
international trade in agricultural products like raw cotton, sugar, rice
and wheat.

3. On the Basis of Time Span:

On this basis, markets are of the following types:

Short-period Markets: The markets which are held only for a few hours
are called short-period markets. The products dealt within these markets
are of highly perishable nature, such as fish, fresh vegetables, and liquid
milk. In these markets, the prices of commodities are governed mainly
by the extent of demand for, rather than by the supply of, the commodity.

Long-period Markets: These markets are held for a long period than the
short-period markets. The commodities traded in these markets are less
perishable and can be stored for some time; these are food grains and
oilseeds. The prices are governed both by the supply and demand forces.

Secular Markets: These are markets of permanent nature. The

commodities traded in these markets are durable in nature and can be
stored for many years. Examples are markets for machinery and
manufactured goods.
On the Basis of Degree of Competition:

Each market can be placed on a continuous scale, starting from a perfectly

competitive point to a pure monopoly or monopsony situation. Extreme forms are
almost non-existent. Nevertheless, it is useful to know their characteristics. In
addition to these two extremes, various midpoints of this continuum have been
identified. On the basis of competition, markets may be classified into the following
categories:

Perfect Markets: A perfect market is one in which the following conditions hold good:

There are a large number of buyers and sellers;

All the buyers and sellers in the market have perfect knowledge of
demand, supply and prices;

Prices at any one time are uniform over a geographical area, plus or
minus the cost of getting supplies from surplus to deficit areas;

The prices of different forms of a product are uniform, plus or minus the
cost of converting the product from one form to another.

The prices are uniform at any one place over periods of time, plus or
minus the cost of storage from one period to another;

Imperfect Markets: The markets in which the conditions of perfect competition are
lacking are characterized as imperfect markets. The following situations, each based
on the degree of imperfection, may be identified:

Monopoly Market: Monopoly is a market situation in which there is only

one seller of a commodity. He exercises sole control over the quantity or
price of the commodity. In this market, the price of commodity is
generally higher than in other markets. Indian farmers operate in a
monopoly market when purchasing electricity for irrigation. When there
 is only one buyer of a product the market is termed as a monopsony
market.

Duopoly Market: A duopoly market is one which has only two sellers of
a commodity. They may mutually agree to charge a common price
which is higher than the hypothetical price in a common market. The
market situation in which there are only two buyers of a commodity is
known as the duopsony market.

Oligopoly Market: A market in which there are more than two but still a
few sellers of a commodity is termed as an oligopoly market. A market
having a few (more than two) buyers is known as oligopsony market.

Monopolistic competition: When a large number of sellers deal in

heterogeneous and differentiated form of a commodity, the situation is
called monopolistic competition. The difference is made conspicuous by
different trade marks on the product. Different prices prevail for the
same basic product. Examples of monopolistic competition faced by
farmers may be drawn from the input markets. For example, they have
to choose between various makes of insecticides, pumpsets, fertilizers
and equipments.

5) Define cost concepts ? Explain the various types of cost concepts ?

a) Cost refers to foregoing or sacrifice that has occurred or has possibility to occur in
future time period with an aim to attain a particular objective which can be
measured in monetary terms .

Concept of Costs

In order to understand the general concept of costs, it is important to know the following types
of costs:

1. Accounting costs and Economic costs

2. Outlay costs and Opportunity costs
3. Direct/Traceable costs and Indirect/Untraceable costs
4. Incremental costs and Sunk costs
5. Private costs and Social costs
6. Fixed costs and Variable costs

Accounting costs

Accounting costs are those for which the entrepreneur pays direct cash for procuring resources
for production. These include costs of the price paid for raw materials and machines, wages paid
to workers, electricity charges, the cost incurred in hiring or purchasing a building or plot, etc.

Economic costs

These include money which the entrepreneur forgoes but would have earned had he invested his
time, efforts and investments in other ventures.

Outlay costs

The actual expenses incurred by the entrepreneur in employing inputs are called outlay costs.
These include costs on payment of wages, rent, electricity or fuel charges, raw materials, etc. We
have to treat them are general expenses for the business.

Opportunity costs

Opportunity costs are incomes from the next best alternative that is foregone when the
entrepreneur makes certain choices.

Direct costs

Direct costs are related to a specific process or product. They are also called traceable costs as
we can directly trace them to a particular activity, product or process.

Indirect costs

Indirect costs, or untraceable costs, are those which do not directly relate to a specific activity or
component of the business. For example, an increase in charges of electricity or taxes payable on
income.

Incremental costs

These costs are incurred when the business makes a policy decision. For example, change of
product line, acquisition of new customers, upgrade of machinery to increase output are
incremental costs.
Sunk costs

Suck costs are costs which the entrepreneur has already incurred and he cannot recover them
again now. These include money spent on advertising, conducting research, and acquiring
machinery.

Private costs

These costs are incurred by the business in furtherance of its own objectives. Entrepreneurs
spend them for their own private and business interests. For example, costs of manufacturing,
production, sale, advertising, etc.

Social costs

As the name suggests, it is the society that bears social costs for private interests and expenses of
the business. These include social resources for which the firm does not incur expenses, like
atmosphere, water resources and environmental pollution.

Fixed costs

Fixed costs are those which do not change with the volume of output. The business incurs them
regardless of their level of production. Examples of these include payment of rent, taxes, interest
on a loan, etc.

Variable costs

These costs will vary depending upon the output that the business generates. Less production
will cost fewer expenses, and vice versa, the business will pay more when its production is
greater. Expenses on the purchase of raw material and payment of wages are examples of
variable costs.

UNIT-5

17) What is national income? Explain its nature and concepts? Explain the
methods to measure national income?

ANS) What is National Income?

National Income of any country means the complete value of the goods and services
produced by any country during its financial year. It is thus the consequence of all
economic activities that are running in any country during the period of one year. It is
valued in terms of money. In short one can say that the national income of any
country is the total amount of income that is accrued by it through various economic
activities in one year. It is also helpful in determining the progress of the country.

It includes wages, interest, rent, profit, received by factors of production like labour,
capital, land and entrepreneurship of a nation.

Concept of National Income

The National Income is the total amount of income accruing to a country

from economic activities in a years time. It includes payments made to all resources
either in the form of wages, interest, rent, and profits.

The progress of a country can be determined by the growth of the national income of
the country

National Income Definition

There are two National Income Definition

 Traditional Definition

 Modern Definition

Traditional Definition

According to Marshall: “The labor and capital of a country acting on its natural
resources produce annually a certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true net annual income or revenue
of the country or national dividend.”

The definition as laid down by Marshall is being criticized on the following grounds.

Due to the varied category of goods and services, a correct estimation is very difficult.
There is a chance of double counting, hence National Income cannot be estimated
correctly.

For example, a product runs in the supply from the producer to distributor
to wholesaler to retailer and then to the ultimate consumer. If on every movement
commodity is taken into consideration then the value of National Income increases.

Also, one other reason is that there are products which are produced but not marketed.

For example, In an agriculture-oriented country like India, there are commodities which
though produced but are kept for self-consumption or exchanged with other
commodities. Thus there can be an underestimation of National Income.

Simon Kuznets defines national income as “the net output of commodities and services
flowing during the year from the country‟s productive system in the hands of the
ultimate consumers.”

Following are the Modern National Income definition

 GDP

 GNP

Gross Domestic Product

The total value of goods produced and services rendered within a country during a year
is its Gross Domestic Product.

Further, GDP is calculated at market price and is defined as GDP at market prices.
Different constituents of GDP are:
1. Wages and salaries

2. Rent

3. Interest

4. Undistributed profits

5. Mixed-income

6. Direct taxes

7. Dividend

8. Depreciation

Gross National Product

For calculation of GNP, we need to collect and assess the data from all productive
activities, such as agricultural produce, wood, minerals, commodities, the contributions
to production by transport, communications, insurance companies, professions such (as
lawyers, doctors, teachers, etc). at market prices.

It also includes net income arising in a country from abroad. Four main constituents of
GNP are:

1. Consumer goods and services

2. Gross private domestic income

3. Goods produced or services rendered

4. Income arising from abroad.

 18) What is inflation? Explain its types, causes and consequences? Outlines the
reasons for inflation in India suggesting preventive measures and also explain
how do you measure inflation?

Definition: Inflation is the percentage change in the value of the Wholesale Price
Index (WPI) on a year-on year basis. It effectively measures the change in the prices
of a basket of goods and services in a year. In India, inflation is calculated by taking
the WPI as base.

There are two primary types of inflation:

 Demand-pull inflation

 Cost-push inflation

Demand-Pull Inflation

Demand-pull inflation describes how demand for goods and services can drive up
their prices. If something is in short supply, you can generally get people to pay more
for it.Are you still paying for plane tickets for a vacation despite prices being
considerably higher than normal? That‟s a good example of demand-pull inflation.

Cost-Push Inflation

Cost-push inflation often kicks in when demand-pull inflation is going strong. When
raw materials costs increase for businesses, the businesses in turn must raise their
prices, regardless of demand.“Increases to the prices that producers face put
businesses in a tough spot,” Blake says. “They can either accept higher costs and
keep their prices the same, or they can respond by trying to keep their profit margins
the same.”When the price of chicken keeps going up, for example, eventually your
favourite restaurant will need to charge more for a chicken sandwich.
Measurement of inflation :

reasons for inflation in India

. Reasons for Increasing Inflation in India

The sharp rise in commodity prices across the world is a major reason behind the
inflation spike in India. Experts have sighted many reasons for rise of Inflation in
India.
Rise in prices of petroleum and natural gas: The high rate of inflation in March
2022 is mainly due to rise in prices of crude petroleum and natural gas, mineral
oils, basic metals, etc. owing to disruption in the global supply chain caused by
the Russia-Ukraine conflict. Brent crude prices crossed $65 per barrel in May
2021, more than double of what it was a year ago.
 Rising prices of essential Food items: The retail inflation rose mainly on
account of rising prices of essential food items like 'oils and fats', vegetables and
protein-rich items such as 'meat and fish'. Ukraine is a major exporter of sunflower
oil.
Sharp rise in commodity prices: The sharp rise in commodity prices across the world
is a major reason behind the inflation spike in India. This is increasing the import cost
for some of the crucial consumables, pushing inflation higher.

19) Define Fiscal policy? Its objectives merits and demerits?

fiscal policy, measures employed by governments to stabilize the economy, specifically

by manipulating the levels and allocations of taxes and government expenditures. Fiscal
measures are frequently used in tandem with monetary policy to achieve certain goals.

A government has several fiscal policy objectives in mind when making decisions.
Some governments may favour an objective over the other one. Below are the five
main objectives of the fiscal policy.
1. Economic growth– As an economy develops, its citizens become flourishing
on the whole. Also, the economy‟s government should be careful, as a violent fiscal
policy may turn destructive in the long run.

2. Full employment– It is the primary objective of a government to get people

into work. Not only do the higher taxes benefit the governments, but also the lower
expenditures on social security. Although, an expansionary policy may invest in
infrastructure to create employment opportunities in future. Likewise, it may also
minimize taxes to supply more money to consumers to stimulate employment
indirectly from purchases.

3. Control debt– Operating a budget deficit is not a harm. It creates more and
more debt over time. If the tax receipts and economic growth do not increase its line,
a nation witnesses an unsustainable debt. Thus, a rational fiscal policy tends to
control to avoid drastic action.

4. Redistribution– The transfer of wealth from rich to poor is another

government‟s objective. High taxes may result in high tax receipts, but not always.
Although avoidance and evasion may occur, small incremental increases may not be
impactful in the short term.

5. Control Inflation– When an economy develops strongly, it may witness

inflation depending on the monetary policy. Although inflation is a monetary
phenomenon, the government still takes necessary steps to stem such a situation.
Nevertheless, governments take steps by increasing taxes to minimize disposable
incomes and consumption.

FISCAL POLICY ADVANTAGES

Unemployment Reduction – When unemployment is high, the government can employ

an expansionary fiscal policy. This involves increasing spending or purchases and
lowering taxes. Tax cuts, for example, can mean people have more disposable income,
which should lead to increased demand for goods and services. To meet the growing
demand, the private sector will increase production, creating more job opportunities in
the process.
Budget Deficit Reduction - A country has a budget deficit when its expenditures
exceeds revenue. Since the economic effects of this deficit include increased public debt,
the country can pursue contraction in its fiscal policy. It will, therefore, reduce public
spending and increase tax rates to raise more revenue and ultimately lower the budget
deficit.
Economic Growth Increase - The various fiscal measures a country employs facilitate
expansion of the national economy. For example, when the government reduces tax
rates, businesses and individuals will have a greater incentive to invest and steer the
economy forward. To boost the U.S. economy during the Great Recession in 2008, for
instance, the government enacted the Economic Stimulus Act of 2008, which provided a
range of fiscal measures, including tax incentives to encourage business investment.

FISCAL POLICY DISADVANTAGES

Conflict of Objectives -- When the government uses a mix of expansionary and

contractionary fiscal policy, a conflict of objectives can occur. If the national
government wants to raise more money to increase its spending and stimulate economic
growth, it can issue bonds to the public. Since government bonds offer a range of
benefits to buyers, individuals and businesses will buy them heavily. According to the
Michigan Institute of Technology, the private sector consequently will have little money
left to invest. With reduced investment activity, the economy can slow down.

Inflexibility - There are usually delays in the implementation of fiscal policy, because
some proposed measures may have to go through legislative processes. A good
demonstration of implementation delays is illustrated by the Great Recession. According
to the National Bureau of Economic Research, it began in December 2007, and the
country was only able to enact the Economic Stimulus Act in February 2008. Even
when the government increases its spending, it takes some time before the money
trickles down to people's pockets.
 20) Define a Budget? Classify, discuss the highlights of budget 2021-2022 of
India?

A budget is a spending plan based on income and expenses. In other words, it‟s an
estimate of how much money you‟ll make and spend over a certain period of time, such
as a month or year. (Or, if you're accounting for the incoming and outgoing money of
everyone in your household, that's a family budget.)

Budgets classified according to 4 bases;

1. Based on Time;

2. Based on Condition;

3. Based on Functions; and,

4. Based on Flexibility.
https://www.iedunote.com/budget

Budget allocation

 A 6.4% fiscal deficit has been projected for India in FY23.

 Revised fiscal deficit estimated at 6.9% of GDP.

 States to get Rs 1 lakh crore as 50-year interest-free loans to help fund PM

Gati Shakti-related investments.

 The government‟s effective capital expenditure is estimated at Rs 10.68 lakh

crore in 2022-23, about 4.1% of GDP.

 The outlay for capital expenditure to be stepped up sharply by 35.4% from Rs

4.54 lakh crore to Rs 7.50 lakh crore in 2022-23.
SHORT

1) Virtual market?

Virtual marketing is essentially just another name for digital marketing or viral
marketing. All three of these terms simply mean marketing that is done in a virtual or
digital space. It is marketing, without physical presence.Virtual marketing is one of
the most popular forms of marketing, rising in conjunction with the wide use of
social media across the world.

2) Arc elasticity ?
Arc elasticity is the elasticity of one variable with respect to another between two
given points. It is used when there is no general way to define the relationship
between the two variables. Arc elasticity is also defined as the elasticity between two
points on a curve.

3) Stagflation ?
“Stagflation” is a combination of high inflation and economic stagnation. Inflation
drives prices up but purchasing power down. Imagine spending 50 euros on the
same groceries every week. As prices go up, you‟ll start to get less bang for your
buck.
4) Learning curve ?
A learning curve is a mathematical concept that graphically depicts how a process is
improved over time due to learning and increased proficiency. The learning curve
theory is that tasks will require less time and resources the more they are performed
because of proficiencies gained as the process is learned. The learning curve was
first described by psychologist Hermann Ebbinghaus in 1885 and is used as a way to
measure production efficiency and to forecast costs.1
 5) National income - GDP ?

National income is referred to as the total monetary value of all services and goods
that are produced by a nation during a period of time. In other words, it is the sum of
all the factor income that is generated during a production year.National income
serves as an indicator of the nation‟s economic activity. It can be calculated by three
methods such as income method, value-added method, and expenditure method.

Gross national income (GNI) is defined as gross domestic product, plus net receipts
from abroad of compensation of employees, property income and net taxes less
subsidies on production.

6) inflation?

Inflation is a rise in prices, which can be translated as the decline of purchasing

power over time. The rate at which purchasing power drops can be reflected in the
average price increase of a basket of selected goods and services over some period
of time. The rise in prices, which is often expressed as a percentage, means that a
unit of currency effectively buys less than it did in prior periods. Inflation can be
contrasted with deflation, which occurs when prices decline and purchasing power
increases.

7) Dis-economics of scale?
Dis-economies of scale happen when a company or business grows so large that the
costs per unit increase. It takes place when economies of scale no longer function for
a firm. With this principle, rather than experiencing continued decreasing costs and
increasing output, a firm sees an increase in costs when output is increased.
 8) Limitations of C-V-P ?

9) Types of investment ?

Mutual fund Investment

Stocks

Bonds

Exchange Traded Funds (ETFs)

Fixed deposits

Retirement planning

Cash and cash equivalents

Real estate Investment

Provident funds

Insurance
 10) Keynes savings?
The magnitude of the Keynesian multiplier is directly related to the marginal
propensity to consume. Its concept is simple. Spending from one consumer becomes
income for a business that then spends on equipment, worker wages, energy,
materials, purchased services, taxes, and investor returns. That worker‟s income can
then be spent, and the cycle continues.

11) Kinked demand curve ?

In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces
a demand curve with a kink at the prevailing price level. The curve is more elastic above
the kink and less elastic below it. This means that the response to a price increase is less
than the response to a price decrease.

12) Transfer pricing ?

Transfer pricing refers to the prices of goods and services that are exchanged between
companies under common control. For example, if a subsidiary company sells goods
or renders services to its holding company or a sister company, the price charged is
referred to as the transfer price.

13) Trade cycle?

Trade cycles refer to regular fluctuations in the level of national income. It is a well-

observed economic phenomenon, though it often occurs on a generally upward

growth path and has a variable time span, typically of three years.In trade cycles,
there are upward swings and then downward swings in business. The periods of
business prosperity alternate with periods of adversity. Every boom is followed by a
slump, and vice versa. Thus, the trade cycle simply means the whole course of trade
or business activity which passes through all phases of prosperity and adversity.
 14) Hurwicz criterion ?

The Hurwicz criterion is arguably one of the most widely used rules in decision-
making under uncertainty. It allows the decision maker to simultaneously take into
account the best and the worst possible outcomes, by articulating a "coefficient of
optimism" that determines the emphasis on the best end.

15) Peak load pricing ?

The Peak Load Pricing is the pricing strategy wherein the high price is charged for
the goods and services during times when their demand is at peak. In other words, the
high price charged during the high demand period is called as the peak load pricing.

Law of demand
Elasticity of advertising
III. CASE STUDY FORMAT (10 Marks)

Drafting the Case: -Once the student has gathered the

necessary information, a draft of your analysis should
include these general sections, but these may differ
depending on your problem.

1. Introduction

 Identify the key problems and issues in the case study.

2. Background

 Set the scene: background information, relevant facts, and the most importantissues.
 Demonstrate that you have researched the problems in this case study.

3. Evaluation of the Case

 Outline the various pieces of the case study that you are focusing on.
 Evaluate these pieces by discussing what is working and what is not working.
 State why these parts of the case study are or are not working well.

4. Proposed Solution/Changes

 Provide specific and realistic solution(s) or changes needed.  Explain whythis

solution was chosen.

5. Recommendations

 Determine and discuss specific strategies for accomplishing the proposedsolution.

 What should be done and who should do it?
Conclusion

After you have composed the first draft of your case study analysis, read through it to check
forany gaps or inconsistencies in content or structure:

Verdict

Is your solution clear and direct?