Q1.

Inflation is a global Phenomenon which is associated with high price causes decline in the
value for money. It exists when the amount of money in the country is in excess of the
physical volume of goods and services. Explain the reasons for this monetary phenomenon.
Ans. Inflation is commonly understood as a situation of substantial and rapid increase in the
level of prices and consequent deterioration in the value of money over a period of time. It
refers to the average rise in the general level of prices and fall in the value of money.
CAUSES OF INFLATION
Demand-Pull
In the case of demand-pull, inflation is caused by aggregate demand being more than the
available supply. Factors that commonly lead to demand-pull inflation include a sudden
increase in the amount of money in an economy and decreases in taxes on goods, which leaves
consumers with more disposable income.
Cost-Push
Cost-push inflation occurs when manufacturers and businesses raise prices as a result of
shortages, or as a measure to balance other increases in production costs. An example of this is
raising labor costs. When workers demand wage increases, companies usually pass on these
costs to their customers.
Built-In
Built-in inflation happens as a result of previous increases in prices caused by demand-push or
cost-pull. In this type of situation, people expect prices to continue to rise, so they push for
higher wages. This raises costs for manufacturers, which then raise the cost of goods to
compensate, causing a cycle of inflation.
Quantity
Quantity theory states that inflation is caused just by having too much money in an economy.
This includes cash as well as financial instruments like investments and mortgages. It is part of
monetarist economics, in which some inflation is to be expected and is seen as a normal thing,
but any excess has to be controlled by manipulating the money supply.
DRIVE SPRING 2014
PROGRAM MBADS/ MBAFLEX/ MBAHCSN3/ MBAN2/ PGDBAN2
SEMESTER 1
SUBJECT CODE & NAME MB0042- MANAGERIAL ECONOMICS
BK ID B1625
CREDIT & MARKS 4 Credits, 60 marks
Short-Term Causes
Other causes of inflation include wars, natural disasters, and decreases in natural commodities.
Wars often result in this situation as governments must recoup the money spent on them, and
repay the funds borrowed from central banks. Natural disasters may have a similar effect by
disrupting the usual cycle of the production process.
Means of Control
Governments take different approaches to controlling inflation, depending on what they
believe is causing it and their stance on government involvement in the economy. In the case of
a demand-pull or cost-push situation, a government taking a classical economics approach
would do nothing, since this approach is based on the idea that the market will naturally work
itself out and get back to normal without government influence.

Q2.Monopoly is the situation there exists a single control over the market producing a
commodity having no substitutes with no possibilities for anyone to enter the industry to
compete. In that situation, they will not charge a uniform price for all the customers in the
market and also the pricing policy followed in that situation.
Ans. A market structure characterized by a single seller, selling a unique product in the market.
In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no
close substitute.

FEATURES OF MONOPOLY
1. One seller and large number of buyers: Monopoly is a form of imperfect market structure
where there is only one seller of a product .The characteristic feature of single seller eliminates
the distinction between the firm and the industry
2. No close substitute : Under monopoly a single producer produces single commodities which
have no close substitute. As the commodity in question has no close substitute, the monopolist
is at liberty to change a price according to his own whimsy. Monopoly cannot exist when there
is competition.
3. Strong barriers to the entry into the industry exist:In a monopoly market there is strong
barrier on the entry of new firms. Monopolist faces no competition.. Since the monopolist has
absolute control over the production and sale of the commodity certain economic barriers are
imposed on the entry of potential rivals.
4. Nature of demand curve:In case of monopoly one firm constitutes the whole industry. The
entire demand of the consumers for a product goes to the monopolist. Since the demand curve
of the individual consumers lopes downward, the monopolist faces a downward sloping
demand curve.
5. Price maker: The monopolist is the price maker and in taking decisions on price fixation, he
or she is independent.
6 .Firm and industry is same: There will be no difference between the firm and an industry.
Kinds of Price Discrimination
Three kinds of price discrimination are commonly seen. It is as follows:
Discrimination of the first degree Under price discrimination of the first degree, the
producer exploits the consumers to the maximum possible extent, by asking to pay the
maximum he/she is prepared to pay rather than go without the commodity. This type
of price discrimination is called perfect discrimination.
Discrimination of the second degree In case of discrimination of the second degree,
the monopolist charges different prices for markets of the same commodity, but not at
a maximum possible rate but at a lower rate. This method is adopted by railway
companies.
Discrimination of the third degree In case of discrimination of the third degree, the
markets are divided into many sub-markets or sub- groups. The price charged in each
case roughly depends on the ability to pay of different subgroups in the market.


Q3. Define Fiscal Policy and the instruments of Fiscal policy.
Ans. The fiscal policy is concerned with the raising of government revenue and incurring of
government expenditure. To generate revenue and to incur expenditure, the government
frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with
government expenditure and government revenue.
THE INSTRUMENTS OF FISCAL POLICY
1. Public revenue: It refers to the income or receipts of public authorities. It is classified into
two parts - tax-revenue and non-tax revenue. Taxes are the main source of revenue to a
government. There are two types of taxes. They are direct taxes such as personal and corporate
income tax, property tax, expenditure tax, and indirect taxes such as customs duties, excise
duties, sales tax (now called VAT). Administrative revenues are the bi-products of administrate
functions of the government. They include fees, licence fees, price of public goods and services,
fines, escheats and special assessment.
2. Public expenditure policy: It refers to the expenditure incurred by the public authorities like
central, state and local governments. It is of two kinds: development or plan expenditure and
non-development or non- plan expenditure. Plan expenditure includes income-generating
projects like development of basic industries, generation of electricity, development of
transport and communications and construction of dams. Non-plan expenditure includes
defence expenditure, subsidies, interest payments and debt servicing changes.
3. Public debt or public borrowing policy: All loans taken by the government constitutes public
debt. It refers to the borrowings made by the government to meet the ever-rising expenditure.
It is of two types, internal borrowings and external borrowings.
4. Deficit financing: It is an extraordinary technique of financing the deficits in the budgets. It
implies printing of fresh and new currency notes by the government by running down the cash
balances with the central bank. The amount of new money printed by the government
depends on the absorption capacity of the economy.
5. Built in stabilisers or automatic stabilisers (BIS): The automatic or built-in stabilisers imply
automatic changes in tax collections and transfer payments or public expenditure programmes
so that it may reduce the destabilising effect on aggregate effective demand.

Q4. Describe Cost-Output Relationship in brief.
Ans. Cost-output relations play an important role in almost all business decisions. The relation
between the cost and output is technically described as the cost function. The significance of
cost-output relationship is so great that in economic analysis, the cost function usually refers to
the relationship between cost and rate of output alone Mathematically speaking TC = f (Q)
where TC = Total cost and Q stands for output produced.
Cost-Output Relationship in the Short-Run
The cost concepts made use of in the cost behavior are Total cost, Average cost, and Marginal cost.
Total cost is the actual money spent to produce a particular quantity of output. Total Cost is the
summation of Fixed Costs and Variable Costs. TC=TFC+TVC
Average cost is the total cost per unit. It can be found out as follows.
AC=TC/Q
The total of Average Fixed Cost (TFC/Q) keep coming down as the production is increased and Average
Variable Cost (TVC/Q) will remain constant at any level of output.
Marginal Cost is the addition to the total cost due to the production of an additional unit of product. It
can be arrived at by dividing the change in total cost by the change in total output.
In the short-run there will not be any change in Total Fixed C0st. Hence change in total cost implies
change in Total Variable Cost only.
The short-run cost-output relationship can be shown graphically as follows.


Cost-output Relationship in the Long-Run
Long run is a period, during which all inputs are variable including the one, which are fixes in the short-
run. In the long run a firm can change its output according to its demand. Over a long period, the size of
the plant can be changed, unwanted buildings can be sold staff can be increased or reduced. The long
run enables the firms to expand and scale of their operation by bringing or purchasing larger quantities
of all the inputs. Thus in the long run all factors become variable.
The long-run cost-output relations therefore imply the relationship between the total cost and the total
output. In the long-run cost-output relationship is influenced by the law of returns to scale.
The long-run cost-output relationship is shown graphically with the help of LCA curve.




Q5.Discuss the practical application of Price elasticity and Income elasticity of demand.
Ans. THE PRACTICAL APPLICATION OF PRICE ELASTICITY
Few examples on the practical application of price elasticity of demand are as follows:
1. Production planning It helps a producer to decide about the volume of production.
If the demand for his products is inelastic, specific quantities can be produced while
he has to produce different quantities, if the demand is elastic.

2. Helps in fixing the prices of different goods It helps a producer to fix the price of
his product. If the demand for his product is inelastic, he can fix a higher price and if
the demand is elastic, he has to charge a lower price.

3. Helps in fixing the rewards for factor inputs Factor rewards refer to the price paid
for their services in the production process. It helps the producer to determine the
rewards for factors of production.

4. Helps in determining the foreign exchange rates Exchange rate refers to the rate
at which currency of one country is converted in to the currency of another country.

5. Helps in determining the terms of trade t is the basis for deciding the terms of
trade between two nations. The terms of trade implies the rate at which the
domestic goods are exchanged for foreign goods.

THE PRACTICAL APPLICATION OF INCOME ELASTICITY OF DEMAND.
Few examples on the practical application of income elasticity of demand are as follows:

1. Helps in determining the rate of growth of the firm If the growth rate of the
economy and income growth of the people is reasonably forecasted, in that case,
it is possible to predict expected increase in the sales of a firm and vice-versa.

2. Helps in the demand forecasting of a firm It can be used in estimating future
demand provided that the rate of increase in income and the Ey for the products
are known.

3. Helps in production planning and marketing The knowledge of Ey is essential
for production planning, formulating marketing strategy, deciding advertising
expenditure and nature of distribution channel,
4. Helps in ensuring stability in production Proper estimation of different degrees
of income elasticity of demand for different types of products helps in avoiding
over-production or under production of a firm.


5. Helps in estimating construction of houses The rate of growth in incomes of
the people also helps in housing programmes in a country.

Q6. Discuss the scope of managerial economics.
Ans. Managerial economics as defined "concerned with application of the economic concepts
and economic analysis to the problems of formulating rational managerial decision. It is
sometimes referred to as business economics and is a branch of economics that applies
microeconomic analysis to decision methods of businesses or other management units
Scope of Managerial Economics.
(a) Objective of the Firm To begin with the firm has to decide its objective. A Firm could have
various objectives such as profit maximization, sales maximization, maximization of market
share, etc. Economics helps us to understand what impact these different objectives will have
on key variables such as Sales, Production, Prices, Costs, Profits, etc. Organization Economics, a
branch of economics helps us in understanding relationship between firm objectives and
internal dynamics of an organization.
(b) Profit Maximization In traditional theory we examine a firm that has profit maximization
as its central objective. In order to maximize profits a firm has to minimize costs and maximize
its revenues. Thus, a deeper understanding of the Costs and Revenues is required for achieving
this objective.
(c) Revenues Revenues of a firm depend on the demand scenario and the competitive
scenario in the market. The understanding of the above two would be essential for a business
manager to predict the revenues that the business will be able to generate.
(d) Demand scenario To decide on the plant capacity and capacity utilization, an
understanding of quantity demanded in the market in different time periods is important
(e) Market Structures In addition to the quantity demanded, one has to understand the
competitive scenario. How many players are competing for the given market demand? What is
the market structure and how will it impact the firms own sales?
(f) Costs In order to maximize profits, a firm needs to minimize costs. Costs are impacted by
several factors. Primary among them are quantity of production and factor prices.
(g) Technology Technology has multi-dimensional impact on costs. On one hand technology
determines what combination of various factors is to be used eg. capital-intensive technology
or labor intensive technology.
(h) Factor Pricing Technology dictates a certain combination of factors that need to be used.
One has to check whether it would be affordable for business to employ those factors in the
given quantities. Often prohibitively high price of factors would dictate choice of technology.