Question 1. :-Define economics?

Answer:-It is the study of allocation of resources available to organization or business. It is

fundamentally concerned with the art of economizing i.e. making rational choice to yield
maximum return of output in minimum resources & efforts by selecting best alternative course of
action among various.

Question 2. : - Contraction and extension of demand?
Answer:-A variation in demand implies extension or
contraction of demand. When with a fall in price more of a
commodity is bought there is an extension of demand.
Similarly, when a lesser quantity is demanded with a rise in
price there is a contraction of demand. In short demand
extends when the price falls and it contracts when the price
rises. Both of the terms are technically used in stating the law
of demand.

Question 3. :-Opportunity cost / alternative cost?
Answer:-It is measure in terms of the forgone benefits from the next best alternatives use of a
given resources in simple words scarifies or loss of alternative use of a given resource is turn as
an opportunity cost. The alternative or opportunity cost of one unit of product A is the amount of
product B that has been sacrificed by allocating the resources to produce A rather than B.

Question 4. :-Low of Demand?
Answer:-According to Ceteris Paribus,
The higher the price of the commodity the smaller is the quantity demanded and lover
the price larger the quantity demanded other things remain constant.
In other words the demand for a commodity extends (i.e., the demand rises) as the price falls and
contracts (i.e., demands falls) as the price rises. Or briefly stated, the low of demand stresses
that, other thing remaining unchanged, demand varies inversely with the price.



Question 5. :-Social Accounting?
Answer:-The concept of social accounting is introduced by J.R. Hicks in 1942. He explained it has
nothing else but the accounting of the whole community or nation, just as private accounting is
the accounting of the individual firm social accounting explains and makes us to understands the


working and show statistically the economics activities of the different sector of the economy. It
also indicates their mutual relationship and provides a basis for analysis.

Question 6. :-Relationship between Average cost and marginal cost?
Answer:-Average cost: - The cost per unit of output assuming that production of each unit of
output insures the same cost. Average cost is the relationship between total cost and total
quantity produced i.e., Average cost = total cost / total quantity.
Marginal cost: - The extra cost of producing one additional unit is marginal cost.
When AC is minimum the MC is equal to
AC. Thus MC curve must intersect at the
minimum point of ATC curve.
When AC is falling then MC is also falling
initially after a point MC may starts rising
but AC continuous to fall. However AC is
Grater then MC. Thus when MC and AC
are falling, MC curves lies below the AC
curve.
Once MC is equal to AC then as the
output increases AC will start rising and MC continuous to rise further but now MC will be
greater than AC. Therefore when both the cost is raising MC curve will always lies about
the AC curve.


Question 7. :- Define Selling cost and Equilibrium

Answer. Selling cost
Expenditure incurred by a firm on advertisement and sales promotion of its product is known as
selling costs, Thus selling cost include the following items of expenditure
.Advertisement and publicity expenditure
Expenses of sales department
Expenses for sales window display, demonstration of goods, free distribution of samples
etc
Equilibrium:-It is a point at which firms total revenue = total expenditure. At this point firm is
having no profit no loss situation, after this point whatever the firm produce and sale is profit for
firm.


Question 8:- Define Oligopoly
Answer. It is a market situation comprising of only a few firms in a given line of production. Their
products may be standardized or differentiated. The price and output policy are interdependent
Feller define oligopoly as competition among the few




Question 9:- Gross Domestic Product?
Answer. For some purposes we need to find the total income generated by production within a
territorial boundaries of an economy, irrespective of whether it belong to the inhabitant of that
nation or not. Such income is known as a gross domestic product (GDP)
GDP =GNP Net factor income from abroad

Question 10:- What is breakeven quantity?
Answer. Breakeven quantity is formula that is determine the break-even point
B.E.P=Fixed cost / price change per unit-variable cost of production

Question 11:- What do you mean by consumption function?
Answer. Consumption function is a simple mathematical function use to explain consumer
spending. It was developed by J.M.Keynes. The function is use to calculate the amount of total
consumption in an economy. It is made up of autonomous consumption that is not influence by
current income and induced consumption that is influence by the economy income level.

Question 12:- Distinguish between static and dynamic multiplier?
Answer. Static multiplier is also known as comparative static multiplier

The concept of static multiplier assumes that the change in investment and the resulting
changes in income are simultaneous. There is no time lag between change investment
and the change in income
Static multiplier ignores the process through which the change in income and
consumption expenditure lead to new equilibrium

Dynamic multiplier also known as Sequence Multiplier

The dynamic multiplier traces the process through which equilibrium of national income
shift from one position to the other
In real life, income level does not rise instantly when an autonomous investment is made
because of the time lag between increase in income and consumption expenditure

Question 13:- Define macro economy?
Answer. Macro means large or aggregate behavior of the country as a whole. It consider
the overall dimension of a country economic affairs Macro economies concern itself with
phenomena like total national output and income, total employment, total consumption, total
investment, supply, price, economic growth etc.


Question 14:- Define Demand Function?
Answer. Demand Function is a comprehensive formulation which specifies the factors that
influence the demand for the product.
Using the symbolic notations we may express the demand function as follow.

Dx = f(Px, Ps, Pc, Yd, T, A, N, u)
Dx =Demand for the item x
Px =Price of the product
Ps =Price of the substitute
Pc =Price of the complementary
Yd =Level of disposable income
T =Change in taste of buyers
A =Level of advertisement expenditure
N =No, of buyers
U =All other factors

Question 15:- Product differentiation?


Answer. In economics successful product differentiation leads to monopolistic competition
and is inconsistent with the condition for perfect competition which includes the requirement
that product of competing firms should be perfect substitutes


Question 16:- What is total variable cost?
Answer. Corresponding to variable inputs in the short-run production is the total variable cost.
It is obtained by summing up the product of quantities of input multiplied by their prices.
TVC= f(q) means total variable cost is an increasing functions of output.

Question 17:- WHAT is transitory income?
Answer. According to Milton Friedman in his theory of consumption function stated that
Transitory income is an anticipated income. It may be either positive or negative
For eg a farmer may receive in a year more income than anticipated because of unusually good
monsoon or they may receive less income than anticipate because of exceptionally bad
monsoon.

Question 18:- What is duopoly?
Answer. A type of imperfect market in which only two seller exist. It may be of two types

Competition with product different ion
Competition without product different ion
Question 19:- What do you understand by cost function?
Answer. A relationship between the value of production input and the corresponding rates of
output attained by the firm in each period.

Question 20:- What do you understand by sunk cost?
Answer. Costs that are not affected or altered by change in the level or nature of the business
activity.

Question 21:- What is managerial cost?
Answer. Managerial cost is the extra cost of producing one additional unit. At a given level of
output, one examines the additional costs being incurred in producing one extra unit and this yield
the managerial cost.

Question 22:- Explain the concept of profit planning.
Answer. Profit planning is an integral part of business policy and planning. Profit policy is
programmed through profit planning. Profit planning gives a concrete shape to the profit policy of
the firm. Profit planning is a time bound action to fulfill this ideal. Profit planning is a time bound
action to fulfill this ideal. In profit planning to regulate the profit, sales volume and input quantity
are to be manipulated.

Question 23:- What is peak load pricing?
Answer. Peak load pricing can be used to reduce and increase profit if the same facilities are
used to provide a product or services at different period of times, the product or services is not
storable or the demand characteristics vary from period to period. The theory of its suggests that
peak period users may be required to pay only variable costs. For example: pricing of telephone
services.

Question 24:- What is demand forecasting?
Answer. In modern business, production is often made in anticipation of demand. Anticipation of
demand implies demand forecasting. So, Demand forecasting means expectation about the


future course of the market demand for the product. It is based on statistical data about past
behavior and empirical relationship of the demand determinants.

Question 25:- What is advertisement elasticity of demand?
Answer. Advertisement occupies a very prominent place in the competitive market economy;
consumer generally needs a minimum level of advertisement before they take notice of a
particular product. How far is demand of a product influenced by advertisement? It can be
measured by advertisement elasticity of demand, therefore advertisement elasticity of demand is
define as,

The Proportionate change in the sale or quantity demanded of a particular product in response to
a change in expenditure on advertisement or sale promotion activities. The demand function in
this case may be stated as
Qx =f(A)
Where,
Qx =Demand for the product.
A =Advertisement expenditure of the firm







Question 26:- Define micro economics?
Ans- Microeconomics is the branch of economics which is concern with the analysis of the
behavior of individual economic unit.
In the words of Dolding it is the study of particulars firms, particulars householders,
individual prices, and wages and particulars commodities. It consists of observing the economy
through a microscope.

Question 27:- What is composite demand?
Ans- A commodity is said to be in composite demand when it is wanted for several different uses.
E.g.-steel is needed for manufacturing cars, building etc.

Question 28:- Differentiate between Extension and increase in Demand?
Ans- 1. Extension in Demand:-when with a fall in price more of a commodity is bought, there is an
extension of demand.
2. Increase in Demand: - When more of commodity is bought than before at any given price there
is in an increase demand.
Extension of Demand indicates variation in demand whereas increase in demand
denotes change demand.
Extension shown by movement along the demand curve. Increase in Demand shown by
shifting the demand curve.

Question 29:- What is market demand curve?
Ans- A demand curve is a graphical representation of a demand schedule. The market demand
curve is derived by the horizontal summation of individual demand curve for a given product. The
slope of the market demand curve is an average of the slopes of individual demand curve.
Market demand curve has a downward slope from left to right indicate inverse
relationship between price quantity demands.

Question 30:- What is market?


Ans- An arrangement whereby buyers & sellers come in close contact with each other directly or
indirectly to sell and buy goods is described as market. It refers to the whole area of the demand
and supply. It is also refers to the condition and commercial relationship between buyers and
sellers.

Question 31:- Difference between perfect & pure competition market.
Ans- For a market to be purely competitive three fundamental conditions must prevail
1. A large no. of buyers & sellers.
2. Product homogeneity.
3. Free entry or exit of firms.
For a market to be perfectly competitive following condition must be fulfilled
1. Perfect knowledge of market
2. perfect mobility factor of a production
3. government non intervention
4. no transport cost difference
Perfect competition is just a concept a suggestive norms for the market structure.
Pure competition substantial the norms of perfect competition without fully attaining it.


Question 32:- What is transfer pricing?
Ans-Transfer pricing refers to intra-firm pricing, the pricing of the products transferred from the
production or sales unit of a multinational firm in one country to another unit of the firm in another
nation. The main motives behind transfer pricing are.
Low transfer price is quoted in the case of high taxation.
High transfer price is quoted in the case of low taxation.


Question 33:- What is gross national product?
Ans-Gross National Product is the value of all final goods & services produced by domestically
owned factor of production within a given period. GNP is the aggregate of consumption
expenditure i.e.,
GNP=C+Ig+G+(X-M) where
G=personal consumption expenditure
I
g
=gross private investment
G=government expenditure
X-M=net export

Question 34:- Write down the limitation of fiscal policy.
Ans-1.Tax evasion leading to generation of black money.
2. Existence of barber economy.
3. Poor performance of public sector.
4. Limited scope due to wide spread poverty & unemployment.
5. Lack of confidence & sense of co-operation among the people towards fiscal measure.
6. Low elasticity of taxes.
7. Dominance of non-monetized factor.
8. Narrow & unorganized money &capital market.

Question 35:- Whet is national income?
Ans-National income is the aggregate of money value of the annual flow of final goods & services
in the national economy during a given period.
According to Paul Studenski national income is the both a flow of goods & services and a flow of
money income.
National income represents the aggregate value of the final product rather than the total value of
all kinds of product produced in economy.

4 Write the scope of managerial economics?


Demand Analysis and Forecasting
Production Function
Cost Analysis
Inventory Management
Advertising
Pricing system
Resource allocation
Profit
Product policy, sales promotion and market strategy

Question 36:- What is the prime function of management?
Ans :-The prime function of management is Decision making and forward planning.
Decision making
Managerial economics is concerned with decision making at the firm level.
Decision making problems faced by business firms:
1. To identify the alternative courses of action of achieving objectives.
2. To select the course of action that achieves the objectives in the economically most efficient
way.
3. To implement the selected course of action in a right way to achieve the business objectives.
Decision making is the most important function of business managers and the central objective of
Managerial Economics.
Decision making may be defined as the process of selecting the suitable action from among
several alternative courses of action.
Forward planning
Forward planning goes hand in hand with decision making.
Forward planning means establishing plans for the future.
It involves capital budgeting obtaining land, assessing the technology, existing and to be
procured.
Mobilizing raw materials, labor, pricing etc. Essential to an organization for diversification and
expansion.

Question 37:- What is normative and positive economics?
Ans:-Normative economics
It is concerned with prescription or what ought to be done. In normative economics, it is
inevitable that value judgment are made as to what should and what should not be done.
Managerial economics is a part of normative economics as its focus is more on prescribing
choice and action and less on explaining what has happened. It expresses a judgment about


whether a situation is desirable or undesirable. The primary task of Managerial economics is to fit
relevant data to this framework of logical analysis so as to reach valid conclusions.
Positive economics
It is concerned with prescription or what ought to be done. In normative economics, it is
inevitable that value judgment are made as to what should and what should not be done.
Managerial economics is a part of normative economics as its focus is more on prescribing
choice and action and less on explaining what has happened. It expresses a judgment about
whether a situation is desirable or undesirable. The primary task of Managerial economics is
to fit relevant data to this framework of logical analysis so as to reach valid conclusions.

Question 38:- What are the methods of managerial economics analysis?
Defining a problem
Formulation of a hypothesis
Model building
Data collection
Testing the hypothesis
Deduction
Evaluating the test result
Conclusion for decisions

Question 39:- What is micro economic?
Ans:-A branch of economics concerned with the analysis of the behavior of specific economic
units or variables.
Boulding it is the study of particular firms, particular households, individual wages, prices,
incomes, industries and commodities.
It is called as Worms eye view. Also called price theory or value theory. Basically deals with
individual decision making and resource allocation.

Question 40:- What is macro economic?
Ans:-Macro means large or aggregate. A branch of economics which deals with the aggregate
behavior of the economy as a whole. Study of the economic system in general refers to
aggregate variables like national income, total savings, total consumption, total investment,
money supply, price levels, growth, unemployment, economic growth rate, etc.



Question 41:- Perishable and durable goods demand?


Ans:;-Both consumers goods and producers goods are further classified into perishable/non-
durable/single-use goods and durable/non-perishable/repeated-use goods. The former refers to
final output like bread or raw material like cement which can be used only once. The latter refers
to items like shirt, car or a machine which can be used repeatedly. In other words, we can classify
goods into several categories: single-use consumer goods, single-use producer goods, durable-
use consumer goods and durable-use producers goods.
This distinction is useful because durable products present more complicated problems of
demand analysis than perishable products. Non-durable items are meant for meeting immediate
(current) demand, but durable items are designed to meet current as well as future demand as
they are used over a period of time. So, when durable items are purchased, they are considered
to be an addition to stock of assets or wealth. Because of continuous use, such assets like
furniture or washing machine, suffer depreciation and thus call for replacement.
Thus durable goods demand has two varieties replacement of old products and expansion of
total stock. Such demands fluctuate with business conditions, speculation and price expectations.
Real wealth effect influences demand for consumer durables.


Question 41:- Joint and composite demand?
Ans:-When two goods are demanded in conjunction with one another at the same time to satisfy
a single want, they are said to be joint or complementary demand .ex: pen and ink, bread and
butter, car and petrol, etc. in such cases, a change in demand for one commodity leads to a
change in the demand for the other in the same direction or same proportion .Commodities so
related are termed as complementary goods.

Composite demand is said to exist when there are different uses for the same commodity .ex:
steel is needed in the manufacture of cars, buildings, railways etc. similarly, electricity is used in
cooking, heating, lighting etc.



Question 42:- Individual and market demand?
Ans:-This distinction is often employed by the economist to study the size of the buyers demand,
individual as well as collective.
Individual demand refers to the demand for a good from the individuals point of view .the quantity
of a good a consumer would buy at a given price over a given period of time is his individual
demand for that particular product. In short, it is a single consuming entity's demand.


Market demand for a product, on the other hand refers to the total demand of all the buyers,
taken together. Market demand is the aggregate of the quantities of a product demanded by all
the individual buyers at a given price over a given period of time.
From the business point of view, market demand has much more relevance as business policy
and planning are based on it. It serves s as a guidepost to producers in adjusting their supplies to
the market economy.

Both individual and market demand schedules (and hence curves, when plotted) obey the law of
demand. But the purchasing capacity varies between individuals.
For example, A is a high income consumer, B is a middle income consumer and C is in the low-
income group. This information is useful for personalized service or target-group planning as a
part of sales strategy formulation.

Question 43:- Price, income and cross demand?
Ans:-Price demand refers to the various quantities of a product purchased by a consumer at
alternative prices .in price demand, demand function is based on a single price
D=f (P)
Income demand refers to the various quantities of a product purchased by a consumer at
alternative levels of his changing money income .in income demand; demand function is based
on the income variable
D=f (M)
Cross demand refers to the various quantities of a product (X) purchased by a consumer in
relation to the price of a related commodity (Y, which may be a complementary or a substitute).in
cross demand, the function is stated thus;
Dx=f (Py), where Dx is demand for the commodity X and
Py=price of the commodity

Question 44:- Consumer goods and producer goods?
Ans:-Goods and services demanded by the consumer for the direct satisfaction of wants for
consumption purposes are referred to as consumer goods eg: food, clothes, house, and services.
This demand tends to be autonomous.
Demand for consumer goods depends on its marginal utility and the individual demand curves
are negatively sloping curves.
Goods which are demanded by the producers in the process of production are referred to as
producers goods or capital goods e.g.: tools and equipments, machinery, raw materials, factory
buildings, etc.


It is derived demand as it depends on the demand for the output. Demand for producers goods
depends on marginal productivity or the, marginal revenue products.
Producers goods are distinct because
1. The buyers are experts and not influenced by marketing tactics
2. Price fluctuations are violent
3. Goods are purchased on account of profit prospects.
4. The demand is highly sensitive to the price of substitute goods.

Question 45:- Total Market and Segmented Market Demands?
Ans:-The total market demand implies the entire or total demand for a product by all the buyers in
the market at a given period of time. While estimating market demand we add the purchases
made in all segments.
Market segment demand, on the other hand, refers to the large identifiable group in a market,
differentiated in their wants, purchasing power, geographical location, buying habits, etc. Knowing
the clientele as much as possible and then matching them with appropriate product and service
offerings form the essence of marketing strategy.
Segmentation is usually geographical, demographic, psychological, buyer behavior, volume.

Question 46:- What are the Assumptions of law of demand?
Income of the consumer is constant.
There is no change in the availability and the price of the related commodities (i.e.
complimentary and substitutes)
There are no expectations of the consumers about changes in the future price and
income.
Consumers taste and preferences remain the same.

Question 47:- Why does the Demand Curve Slope Downward?
Law of Demand
Inverse relationship between price and quantity.
Law of Diminishing Marginal Utility.
Utility is the extra satisfaction that one receives from consuming a product.
Marginal means extra.
Diminishing means decreasing
Substitution effect
Income effect
New consumers
Several uses


Psychological effects



Question 48:- What is Delphi method?
Ans:-Delphi method: - Under this method a panel of experts is identified where an expert could be
a decision maker, an ordinary employee, or an industry expert. Each of them will be asked
individually for their estimate of the demand. The administrator then provides the experts with
anonymous summary statistics on the forecasts, and experts reasons for their forecasts. The
process is continued till the experts have reached a consensus.



Question 49:- What is simulated market approach?
Ans:-Simulated market approach: - Under this method, an artificial market is created and
participants are chosen. These participants are then given money and asked to spend the same
in an artificial department store. Different prices are set up for different groups. Observations are
then recorded and accordingly necessary decisions about price and promotional efforts are taken.

Question 50:- What is end use method?
Ans:-End use method: - Under this method, future demand for the product is measured by
calculating the demand for the final products that use the given product as an intermediate good
.e.g.: in the case of electricity, household demand for electricity can be estimated by estimating
the number of electrical appliances used in a given period of time. Similarly in the case of steel
which is used in the manufacture of industrial and agricultural implements, demand can be
forecast by studying the demand for these goods in a given period of time.

Question 51:-What is break-even analysis?
Ans:-The BEA is an important technique to trace the relationship between costs, revenue, profits
at the varying levels of output or sales.

As Joel Dean puts it, the BEA presents flexible projections of the impact of the volume of output
upon cost, revenue and profits. As such it provides an important bridge between business
behavior and economic theory of the firm.



In BEA the break up point is located at the level of output or sales at which the net income or
profit is zero. At the point, total cost is equal to total revenue. Hence the break up point is the no-
profit-no-loss zone.

Question 52:-Write notes on break-even chart?
Ans:-A break up chart is a group of the short run relation of total cost and the total revenue to the
rate of output and sales.

The BEC graphically shows the cost and revenue relation to the value of output. It thus depicts
profit output relationship. Hence, the BEC is also called profit group.

In the chart the break-even point is the point at which the total revenue equals total cost, so net
profit is zero at OQ level of out put.

The area between the TR curve and TC curve depicts the profit function. It follows that the firm
incurs loss, when it produces output below OQ level. OQ level of output is at break-even point of
no loss, no profit. When it expands further output, it makes profit.

Question 52:-Discuss the limitations Of BEA?
Ans:-The break-even analysis has certain major limitations as follows:
It is Static.
It is Unrealistic.
It has many shortcomings.
Its scope is limited to the short run only.
It assumes Horizontal Demand Curve with the given price of the product.
It is Difficult to Handle Selling Costs in the BEA.
The Traditional BEA is very simple.

Question 53:-Break even point
Ans:-Break even point is that point of activity of sales volume where total revenue equals total
expense. It is a point of zero profit. In other words it is a point where losses stop occurring but
profit yet not started. It refers to the minimum level of production which a company should have in
order to be economically viable.

Question 54:-Contribution margin?
Ans:-Contribution margin is a difference between total revenue and variable expenses. For
example, if a product sales at Rs.10 unit and it variable cost of Rs.4. This implies that each unit of


the product recovers Rs.6 over and about variable expenses is Rs.4. Thus, Rs.6 which is the
contribution of the recovery of fixed cost and profit is called the contribution margin.

Question 55:-Margin of safety: -
Ans:-The concept of safety margin is a great important in break even analysis. The margin of
safety is access of actual sales over the break even sales volume. It represents the difference
between actual sales volume and the sales volume suggested by break even point. In other
words, greater the safety of margin greater will be the profit.

Question 56:-Profit volume analysis (P/V)?
Ans:-The profit volume analysis or cost volume profit analysis is the application of the break even
analysis to situation of multi product firm. In multi product firm break even chart are constructed
separately for different division or the products of the firm. The individual division department or
product is called as sector.

Question 57:-Law of Supply ?
Ans:-Other things remaining the same, supply varies directly with the changes in price. So, a
larger amount is supplied at a higher price than a lower price in the marketwise, supply expands
with a rise in price and contracts with a fall in price.

Question 58:-Actual cost and Opportunity cost?
Ans:-Actual costs: refer to the costs incurred by the entrepreneur to acquire or purchase the
Factors of production like raw materials, labor, land, etc. It is also called outlay cost, acquisition
costs or absolute costs
Opportunity cost: are alternative costs or the returns from the next best alternative use of the
firms resources which the firm foregoes in order to avail of the returns of the next best use of the
same resources e.g.: suppose a businessman can buy a lathe machine or a paper pressing
machine with the help of limited capital which can earn him Rs. 50,000 and Rs. 70,000. If he
chooses the latter he would have foregone the opportunity of earning Rs. 50,000, thus, his
opportunity cost is Rs. 50,000. It is technically the cost of foregone opportunities.



Question 59:-Explicit cost and Implicit cost (imputed costs)
Ans:-Explicit cost: - Explicit costs are direct contractual monetary payments incurred through
market transactions, cost of raw materials, wages & salaries, power charges, rent of business /
factory premises, interest payments on capital, insurance premium, taxes paid, marketing /


advertising expenses, it is also known as accounting cost since it appears in the accounting
records of the company.
Implicit costs: - Implicit costs are the opportunity costs of the use of factors which a firm does not
buy or hire but already owns. It refers to the wages ,rent ,interest ,etc that is due to the
entrepreneur for employing his own resources., it is necessary to take into account both explicit
and implicit costs for economic decision making .

Question 60:- Book costs and Out of pocket costs
Ans:-Book costs and: - business costs that do not involve any cash payments but a provision are
made for them in the book of accounts like the provision for depreciation and other imputed costs.
Out of pocket costs: - Out of pocket costs refer to those expenses which are current cash
payments to outsiders.

Question 61:- Accounting costs and Economic costs?
Ans:-Accounting costs: - Accounting costs point out the expenditure that has already been
incurred on a particular process or on production .it is useful for managing taxation needs and to
calculate profit and loss of the firm.
Economic costs: - Economic costs refer to the future. It includes explicit cost, implicit cost as well
as opportunity cost.

Question 62:-Replacement costs and Historical costs?
Ans;-Historical cost of an asset states the cost of plant, equipment and material at the price paid
originally for them, while the replacement cost states the cost that the firm would have to incur if
wants to replace or acquire the same assets now. For example, if the price of bronze at the time
of purchase, say, in 1974 was Rs.15 a kg. And if the present price is Rs.18 a kg., the original cost
of Rs. 15 is the historical cost whole Rs. 18 is the replacement cost. Replacement cost means the
price that would have to be paid currently for acquiring the same plant.

Question 63:-Shutdown cost and Abandonment cost?
Ans:-Shutdown costs are required to be incurred when the production operations are suspended
and will not be necessary, if the production operations continue. For example, if the production is
suspended, the, machinery or equipment will have to be protected by putting up sheds, using
tarpaulin, plastic sheets etc. Such costs are called shutdown costs.
When any plant is to be permanently closed down, some costs are to be incurred for disposing of
the fixed assets. These costs are called abandonment costs.

Question 64:-Marginal cost, Average cost and Total cost?


Ans:-Marginal cost
Definition: - Marginal cost is the cost of producing an extra unit of output.
The marginal cost is also a per unit cost of production. It is the additional made to the total
cost by producing one more unit of output.
In other words, marginal cost may be defined as the change in total cost associated with a
one unit change in output. It is also an extra-unit cost or incremental cost, as it measures the
amount by which total cost increase when output is expanded by one unit. It can also be
calculating by dividing the change in total cost by the one unit change in output.
Average cost
Average total cost or average cost is total cost divided by total units of output.
Thus,
AC= TC / Q or TFC/Q + TVC/Q or AC= AFC + AVC
Hence, average total cost can be computed simply by adding average fixed cost and
average variable cost at each level of output.
Total cost
Total cost is the aggregate of expenditures incurred by the firm in producing a given level
of output.
TC = f (Q) or TC = TFC + TVC
Thus, total cost may be viewed as the sum of total fixed cost and total variable cost at each
level of output.

Question 65:-Short run and Long run cost?
Ans:-The short-run is a period of time in which the output can be increase or decrease by
changing only the amount of variable factors such as labour, raw material, chemicals etc. In the
short-run the firm cannot build anew plant or abandon an old one. If the firm wants to increase
output in the short-run, it can only do so by using more labour and more raw materials. It cannot
increase output in the short-run by expanding the capacity. Long-run, on other hand, is defined as
the period of time in which the quantities of all factors may be varied. All factors being variable in
the long-run, the fixed and variable factors dichotomy holds good only in the short-run. In other
words, it is that time-span in which all adjustments and changes are possible to realize.













LONG ANSWERS

Question 1:- What is inflation? Define its causes.
Ans- Inflation is commonly understood as a situation of substantial & rapid general increase in the
level of the price & consequent deterioration in the value of money over a period of time.
The behavior of general prices is measure through price indices. The trend of price indices
reveals the course of inflation & or deflation in the economy. As Lerner says, a price rise which is
unforeseen and uncorrected is inflationary. Also according to proof Rowan, inflation is the
process of the price increase. He suggested the following formula to measure the percentage rate
of inflation.

P (t) =p (t)/p (t-1)*100
Where p=the price level
(P (t), (t-1))=are the periods of calendar time to which the observations calendars
time to which the observation are made)

CAUES OF INFLATION:-
Inflation is a complex phenomenon which cannot be attributed to a single factor. The
following are some of the major causes.
OVER-EXPANTION OF THE MONEY SUPPLY:-
Money times, a remarkable degree of correlation between the increase in money
supply and the rise in the price level may be observed.
EXPANSION OF BANK CREDIT:-
Rapid expansion of bank credit is also responsible for the inflationary trend in a country.
DEFICIT FINANCE:-
The high doses of deficit financing which may cause reckless spending, may also spiral in
a country.
ORDINARY MONETARY FACTOR:-
a>High non-development expenditure
b>High plan investment
c>Black money
d>High indirect Taxes
NON-MONETARY FACTOR:-
a>A high population growth
b>Natural calamities & bad weather
c>Speculation & Hoarding
d>High price of imports
e>Underutilization of the resources

Question 2. WRITE EFFECTS OF INFLATION?
Ans-- Inflation is commonly understood as a situation of substantial & rapid general increase in
the level of the price & consequent deterioration in the value of money over a period of time.
Inflation dire socio-economic consequence
Economic Effects of Inflation:-
It is classified into three kinds
a> Effects on Production:-
1. Maladjustments
2. Hindrance to capital Accumulation.
3. Speculation
4. Holding & Block marketing


5. Distortion of the production puffer
6. Creation of the sellers market.
7. Disincentive effects Due to Income-Tax Bracket creep.
b>Effect on Income Distribution:-
1. Debtors and creditors
2. Business Community
3. Fixed Income Group
4. Investors
5. Farmers
c>Effects on consumption & welfare:-
Rising cost of living during inflation implies falling standard of living & lowering of general
economic welfare of the community at large. A galloping inflation is therefore described as the
cruelest tax of all.
d>Other Economic Effect:-
1. Deterioration in savings
2. Deterioration of the Budget & Vicious circle.
3. Disturbance in the planning
4. Lowering of International competitiveness.

Question 3. What do you mean by Multiplier? Explain its Assumption?
Ans-In simple words Multiplier is nothing but the ratio of change in income to change in
investment. The Multiplier, according to Keynes
Establishes a precise relationship given the propensity to consume between
aggregate employment and income and the rate of investment. It tells us that there is an
increment of investment, income will increase by an amount which is k times the increment of
investment
Assumption of Multiplies:-
There is change in autonomous investment & induce investment is absent.
The marginal propensity to consume is constant.
Consumption is a function to current income only.
There are no times gaps in the multiplier process.
There is net increase in investment.
Consumption goods are available in response to effective demand for them.
Other resource of production is also easily available within the economy.
There are no changes in price.
There is less than full employment level in the economy
The new level of investment is maintained steadily for the completion of the multiplier
process.
There is surplus capacity in consumer goods industries to meet the increased
demand for the consumer goods in response to a rise in income following increased
investment.\
There is an industrialized economy which the multiplier process operates.
The accelerator effect of consumption on investment is ignored.\
.








Question 4. Explain the relative income hypothesis of consumption?


Answer:- The relative hypothesis is in response to conflicting results of Kuznets historical data
and post-1929 data and budget studies. Duesenberry, in the late 1940s, presented his
reconciliation of Kuznets estimated consumption function passing through the origin with the
flatter consumption functions suggested by the 1929-44 American data and the budget studies. In
this reconciliation he rejected as invalid two basic assumptions which had been earlier at the
base of consumption theory. These assumptions were:
1. Every familys consumption behavior reflects its own wants, independent of the
consumption habits and patterns of the other families (this is akin to the assumption of
independent utility functions of consumers we come across in microeconomic theory).
2. Consumption depends on current income and is not influenced by past consumption
levels. This assumption amounts to temporal reversibility of consumption relationships
(James S Boysenberry, Income, Saving and the Theory of Consumer Behavior,
Cambridge: Harvard university Press, 1949).
Kuznets historical data indicated that while the average fraction of income consumed did not vary
much over long periods of time, there was considerable variation within a business cycle.
Consumption as a fraction of income tended to be low during boom periods and high during
periods of economic slump. Duesenberry tried to explain this phenomenon on the ground that
consumers tend to follow a habitual behavior pattern. As income rises quickly, they consume
more, but not as much as one might expect from long-run historical consumption relationships.
The reason is that they are held back by their higher incomes. On the other hand, when income
decreases they find it difficult to adjust downward their consumption pattern, as they are
accustomed to higher consumption. Thus during periods of declining income, consumption rises
as a fraction of income. Which he rejected, Duesenberrys fundamental psychological hypothesis
was that it is harder for a family to reduce its expenditures from a high level than for a family to
refrain making high expenditures in the first place.




Question 5. Elaborate on the classical approach to the study of employment.
Answer:- the classical theory was found after Adam Smith publication of the wealth of nation
published in 1776 the classical economist like David Recardo, J.V. say and Albert Marshall
assumed that fall employment exist in the economy at any given time acc. To them
unemployment was of only two type. Frictional & voluntary.
Frictional unemployment :- was due to lack of technical Skills in between job changes and
unavailability of right opportunity. It would disappears once worker got employment acc. To them
was voluntary unemployment which was due reluctant of workers or refused to work at gain rate.


Fall employment acc. To them merely meant the absence of involuntary unemployment. The
classical economist. Word of the opinion that depression was very short phenomena because in
case of any deflation the automatics market mechanism would operate and restore a full
employment in the economy. The classical economist is concern with only 3 market labor market
where equilibrium will attain through demand and supply of labor.
Product: - market labor equilibrium was attaining through a equality of between saving &
investment.
Money market where equilibrium is attain through quality between demand & supply between of
money.

Question 6. Write a note on balance budget multiplier.
Answer:- Balance budget multiplier is first developed getting in 1941, and the by Norwegian
economist trygve haavelma (1911-1999) in 1945.
Balance budget multiplier holds that of govt. revenues and expenditures inc. or dec.
simultaneously and equally, then national income will also change in the same amount which
means that the balance budget-multiplier = 1.
The reason behind the equal amount of change in national income is the opposite effect of the
equal changes in the govt. revenues and expenditures.
The balance budget multiplier is multiplier is important in understanding the way govt. manage
the economy.
The govt. inc. its expenditures (G), balancing by an inc. taxes (T).
In general, a change in the balance budget will change aggregate demand by an
amount = change in spending.



Question 7:- Trade Cycle and explain its phases?
Answer. According to Keynes: -
A trade cycle is composed of periods of good trade characterized by rising prices and low
employment percentages alternating with periods of bad trade characterized by falling trade and
high unemployment percentages.

Therefore a trade cycle is an alternate expansion and contraction in the overall business activity
as evidenced by fluctuations in the measures of aggregate economic activity such as gross
product, the index of industrial production and employment and income.



PHASES OF A TRADE CYCLE

PROSPERITY PHASE: -
Def. A state of affairs in which the real income consumed, real income produced and level of
employment are high or rising and there are no idle resources or unemployment workers or very
few of either-harbeler
It is a state where the economy attains maximum growth with full employment and the movement
of the economy is beyond full employment

RECESSION
Recession refers to a situation where there is a decline in overall business activity.
According to Prof. Lee,A recession once started tends to build upon itself such as a forest fire,
once underway tends to create its draft and gives an impetus to its destructive ways

RECESSIONARY PHASE:-
1. When prosperity ends the recession begins
2. Recession relates to a turning point rather than a phase
3. It lasts for a shorter period of time
4. The stock market registers the first downfall
5. Production of capital, goods industries falls
6. The banking system and the people in general
Try to attain greater liquidity
7. Credit sharply contracts, business expansion stops, order are cancelled and workers are laid
off
8. Unemployment levels start rising.


9 there is a fall in income, expenditure, prices and profit

DEPRESSIONARY PHASE:-
During a depression the most deplorable conditions prevail in the economy. Real income
consumed, real income produced and the rate of employment fall.
According to Harberler,Depression is a state of affairs in which real income consumed or volume
of production per head and the rate of employment are falling or reaching subnormal levels due to
idle resources and unused capacity (mainly labor).

RECOVERY OR REVIVAL PHASE:-
It refers to the lower turning point at which the economy undergoes a change from depression to
prosperity.
This period signals a ray of hope to the businessmen who feel the major crisis is over.

Question 8:- Discuss the various leakages of multiplier?
Answer. Leakages are the potential pitfalls from the income stream, which tend to weaken the
multiplier effect of new investment. Given the marginal propensity to consume, the increase in
income in each round happens to decrease due to leakages in the income stream and ultimately
the process of income propagation.
Leakages of Multiplier
Saving: - Saving is the most important leakage of the multiplier mechanism. Since the marginal
propensity to consume is less than one or more than zero, the whole increment of income is not
spent on consumption. A part of it is saved which peters out of the income stream and the
increase in the next round declines.

Strong Liquidity Preference:-Due to the increase in income individual save a part of the increased
income in the form of cash balances for the transaction ,precautionary and speculative motives to
satisfy a strong liquidity preference, then it will act as a leakage out of the income stream.

Purchase of old stock and securities:-If apart of increased income is used for the investment in
old stocks and securities instead of buying consumer goods, then consumption expenditure will
fall and its cumulative effect on income will be less.

Debt Cancellation:-If a part of increased income is used for repayment of old debts to banks,
instead of spending for new consumption, then that part of income peters out of the income
stream.
Price Inflation:-When new or replacement investment causes to increase general price level, the
multiplier effect of increased income may again be dissipated on higher prices. A sustained rise in
price of consumption goods implies increased expenditure on them.

Net Imports:-if increased income is spent on the purchase of the imported goods it will act as a
leakage out of the domestic income stream. Then such expenditure fails to affect the
consumption of domestically produced consumption and capital goods

Undistributed Profit: - if a part of a profit of joint stock companies are not distributed to the share
holders in the form of dividend but are kept in the reserve fund to meet out any unforeseen
happenings or for modernization/ expansion, it acts as a leakage from the income stream.

Taxation: - Taxation policy of a land cans also a important factor, which leads to weaken the
multiplier process. Progressive taxes have the effect and potential of lowering the disposable
income of the taxpayers and reducing their consumption expenditures.

Question 9:- Elaborate on the Purely Monetary Theory?

ANS:-According to R.G Hawtrey The main stay of this theory is the bank credit i.e Bank is
lending in market at lower rate.


R.G Hawtrey describe the trade is purely Monetary phenomena. According to him the main
reason for assurance of trade cycle is the money supply or the credit creation by the banking
system. Who appoints then the inherent
Instability in bank credit system causes changes in the money supply which in term lead to
cyclical fluctuation. In economy expansion is caused by expansion of bank credit and vise versa.
This theory can be summarized as follows.
1.Which is consumer expenditure = the money expand in the aggregate consumption and
investment.
2.Which is aggregate money income=national income
3.Effective demand =production which is equal to investment
4.The Wholesalers traders could depend on bank credit and highly sensitive to the rate of
interest.
5.When rate of interest is lower than the expansion phase starts.
Expansion phase is the result of the trader desire to increase stock. Which lead to increase in
production, inc. in demand, inc. in employment.
6.As a cumulative process carries on leading higher profit trader seek more credit.
7.As bank go on lending credit cash reserves deplete and central bank limit creation by
commercial bank.
8.In order to discourage borrowing bank in inc. rate of interest.
9.The recessionary phase is thus set in the motion by traders lowering investment activities and
diverting fund to repayment of bank loans.
10.Lower investment lower income and ultimately aggregate demand.
11.Now Bank face with higher cash reserve starts lowering their interest rate in order to utilized
there vast ideal resources.
12.Now this expansion of credit set on the path of recovery leading to inflation.

The theory has been criticized on the following point.

1.To much importance is given to traders, while ignoring capital industries and government.
2.Bank are not only the leaders of economic activity.
3.There are other factors like social and political which lead to accurance of Trade cycle.

Question 10:-Define demand pull and cost push inflation?
Ans:-Broadly speaking to the demand, there are two schools of thought regarding the possible
causes of inflation. One school views the demand-pull element as an important cause of
inflation, while the other group of economists holds that inflation is mainly caused by the cost-
push element.
Demand-pull or just demand inflation may be defined as a situation where the total monetary
demand persistently exceeds total supply of real goods and services at current prices, so that
prices are pulled upwards by the continuous upwards shifts of the aggregate demand function.
According to the demand-pull theory, price rise in response to an excess of aggregate demand
over existing supply of goods and services. The demand pull theorists point out that inflation
(demand-pull) might be caused, in the first place, by an increase quantity of money, when the
economy is operating at full-employment level. As the quantity of money increases, the rate of
interest will fall and, consequently, investment will increase. This increased investment
expenditure will soon increase the income of the various factors of production,As a result,
aggregate consumption expenditure will increase leading to an effective demand, with the
economy already operating at the level of full employment, this will immediately raise prices, and
inflationary forces may emerge. Thus ,when the general monetary demand rises faster than the
general supply, it pulls up prices(commodity prices as well as factor prices, in
general).Demand- pull inflation, therefore, manifests itself when there is active cooperation, or
passive collusion, or a failure to take counteracting measures by monetary authorities.

Cost-push inflation:-
A group of economists holds the opposite view that the process of inflation is initiated not by
an excess of general demand but by an increase in costs, as factors of production try to


increase their share of the total product by raising their prices, thus it has been viewed that a
rise in prices in initiated by growing Factor costs. Therefore, such a price rise is termed as
cost-push inflation as prices are being pused up by the rising factor costs.
Cost-push inflation, or cost inflation, as it is sometimes called, is induced by the wage-inflation
process. It is believed that wages constitute nearly seventy percenct of the total costs of
production. Thus a rise in wages leads to a rise in the total cost of production and a consequent
rise in the price level, because fundamentally, prices are based on costs.Indeed, any
autonomous increase in costs, such as a rise in the prices of imported components or an
increase in indirect taxes(excise duties, etc)may initiate a cost-push inflation. Basically, however,
it is wage-push pressures which tend to accelerate the rising price spiral.







Question 11:- Define monetary policy and its instruments?
Ans.
Monetary Policy
Monetary policy is an important economic tool of macroeconomic policy of a country. It is
formulated and implemented by the central bank of a country through the wide network of
financial institutions. It is designed with an objective to take care of economic conditions and to
avoid any policy conflicts for achieving overall efficiency of economy monetary policy includes all
measures, which affect money supply, liquidity, cost and availability of credit Changes in money
supply affects rate of interest, which in turn influence investment decisions of firms.
In advance countries, central authority or the central bank only performs the function to control
money market in order to bring reasonable degree of stability. On the contrary, in developing
countries it plays a pioneer and dynamic role in accelerating economic growth with stability and
social justice. It not only controls the money market but also provides adequate resources for
development.
Instrument of Monetary Policy
Broadly instruments or techniques of monetary policy can be divided into two categories: -
Quantitative or general methods,
Qualitative or selective methods.
Quantitative or general methods
1. Bank rate or discount rate: Bank rate refers to that rate at which a central bank is ready
to lend money to commercial bank or to discount bills of specified types. Thus by
changing the bank rate, the credit and the further money supply can be affected.
2. Open market operations: By open market operation, we mean the sale or purchase of
securities. As is known that the credit creating capacity of the commercial banks depends
on the cash reserves of the bank. The monetary authority (Central Bank) controls the
credit by affecting the base of the credit creation by commercial bank. If the credit to be
decreased in the country, the central begins to sale securities in the open market. This
happens in the period of inflation.
3. Variable reserve ratio: The commercial bank have to keep given percentage as a cash
reserve with the central bank. If there is depression in the economy, the reserve ratio is
reduce to raise the credit creating the capacity of commercial banks. Therefore variable
reserve ratio can be used to affect commercial banks to raise or reduce their credit
creation capacity.


4. Change in liquidity: According to this method, every bank is required to keep a certain
proportion of its deposits as cash with it. When the central bank wants to contract the
credit, it raises its liquidity ratio and vise versa.
Qualitative or selective methods
1. Direct action,
2. Rationing of the credit,
3. Moral persuasion or advice,
4. Publicity,
5. Change in margin requirement.
Direct Action: This method is adopted when some commercial bank do not co-operate the
central bank in controlling the credit. Thus, the central bank takes direct action against the
defaulter. The central bank may take direct action in a number of ways as under:
1. It may refuse rediscount facilities to those banks that are not following its directions.
2. It may follow similar policy with the bank seeking accommodation in excess of its capital
and reserves.
3. It may change penal rates over and above the bank rate.
4. Any other strict restrictions on the defaulter institutions.
Rationing of the credit: Under this method the central bank fixes the limit for the credit facilities
to commercial bank. Central bank rations the available credit among the applicants. Generally,
rationing of credit is done by following four ways:
1. Central bank can refuse loan to any bank.
2. Central bank can reduce the amount of loans given to the bank.
3. Central bank can fix quota of the credit.
4. Central bank can determine the limit of the credit granted to a particular industry or
trade.

Question 12:- Define fiscal policy and its objectives?
Ans. Fiscal policy plays very important role to affect aggregate demand, price level, cost
conditions, rate of interest, money supply, international trade, financial markets and the overall
growth of the economy through the changes in public expenditure, public debt and taxation.
Fiscal policy has the ability to influence key variables of the economy. A business manager uses
it for making various strategic decisions.
In simple words, fiscal policy concerns itself with the aggregate effects of government expenditure
and taxation on income, production and employment. In other words, it refers to the instruments
by which a government tries to regulate or modify the economic affairs of an economy keeping in
view its objectives.

Objectives of fiscal policy

Fiscal policy aims at a number of objectives depending upon the circumstances in a country.
Important objectives of fiscal policy are:
a) Optimum allocation of economic resources- It means that the fiscal policy should be
framed to increase the efficiency of productive resources like man, money, material, etc.
It also means that the government should spend on those public works, which give the
maximum employment and are beneficial to society.
b) Equitable distribution of wealth and income- It mean that difference in payment to the
factor of production should be reduce to the minimum and fiscal policy should be design


to bring about an equality of income between different groups by imposing tax on rich and
spending more on poor.
c) To maintain price stability- It means a fall in a prices leads to a sharp decline in business
activity. On the other hand, inflation may hit hard the fix income classes and may benefit
the speculators and traders. Fiscal policy has maintain a reasonable and stable general
price level to benefit all section of the society.
d) Full employment- the most important objectives of a fiscal policy is the promotion and
maintenance of full employment, because through it all other objectives are automatically
achieved. For this fiscal authority should start programs of removing unemployment.
These objectives are not always compatible, particularly price stability and full
employment. fiscal policy may transfer wealth from the rich to the poor through the use
of taxation with a view to bringing about a redistribution of income, but it may be criticized
on the ground that the transfer of income from rich to poor will affect savings and capital
formation, which in turn, would affect investment and employment.

Question 13:- Discuss the various goals of a business organization?
Ans:-Goals are defined as those objectives which are set forth by any business firm to be
achieved during the course of the business. It functions as a yardstick to measure performance.
Goals are determined by various factors like external environment, socio-economic
conditions, internal factors prevailing in the firm and the circumstances under which the firm
operates.

They may be of various types
a) Organizational goals
b) Economic goals
c) Strategic goals
d) Social goals
e) Human goals
f) National goals

ORGANIZATIONAL GOALS
Organizational goals refer to those that are essential for the firm to strengthen itself in the
market or in the economy and to expand its business empire.

Long run survival-Prof Rothschild
Growth maximization
Establishing a business empire
Satisfactory level goal-satisfactory profit/growth
Market leadership
market share expansion


Sales maximization
Attaining economic social and political power
Facing challenges
Joy of creation
Production goal
Inventory goal
Sales goal
Market share goal
Profit goal


ECONOMIC GOALS
Economic goals are those goals which are related to money aspect of a business firm
Profit maximization- Adam smith
Sales maximization-Prof Baumol
Balanced growth-Marris
Reduction in cost of production
Prevention of entry by new firms
Risk avoidance
Financial soundness
Economic self sufficiency
Customer satisfaction
Innovation-Prof Schumpeter
R&D facilities

STRATEGIC GOALS
Strategic goals are competitor focused. it includes all those objectives which aim at unseating a
competitor who may pose as a potential rival, it also aims at ensuring the long run survival of the
firm in the market

A bigger market share
To supply better quality goods
Wider and attractive product line
Stronger and wider distribution channels
Obtaining a higher level of customer satisfaction
Providing superior customer service



SOCIAL GOALS
Social goals of a business firm refers to its duties towards the society (customers, employees,
financiers, government and general public.

Improve the welfare of the society
Participate in community development programmes.
Provide good quality products
Avoiding anti social practices and profiteering
Providing employment opportunities
Honoring commitments
Good corporate citizenship
Participation in HRD

Human goals

Fair deal to employees
Job satisfaction
Workers participation

National goals

Social justice
National priorities
Export promotion


Question 14:- Explain the role of a business economist?
Ans:-A business/managerial economist is an economic adviser to a firm or businessman. A firm
or an entrepreneur, in the course of its/his business operations, has to take a number of decisions
which are vital to the survival and growth of the business. Such decisions may pertain to the
nature of the product to be produced, the quantity in which it is to be produced, its quality, cost,
price and its distribution in the market, planning, diversification of business, renewal of worn-out
equipment and machinery, modernizations, etc. The business economist, by virtue of his
expertise in all these areas, helps the businessman or the manager in arriving at correct decision.
His main task is to apply intelligences certain quantitative and qualitative techniques to the
practical aspects and problems encountered by a business firm in its productive activity.


In short, the business economist who would help in the decision making process measures a
number of micro and macro variables. Forecasting is a fundamental activity of a business
economist. Indeed, a business economist is greatly helpful to the management by virtue of his
studies of economist analysis. He is an effective model builder. He deals with the business
problems in a sharp manner with a deep probing.
A managerial economist in a business firm may carry on a wide range of duties, such as:
o Demand estimation and forecasting.
o Preparation of business/sales forecasts. To provide forecasts of changes in
costs and business conditions based on market research and policy analysis.
o Analysis of the market survey to determine the nature and extent of
competition.
o Analysis the issues and problems of the concerned industry.
o Assisting the business planning process of the firm.
o Advising on pricing, investment and capital budgeting policies.
o Directing economic research activity.

The business economist has to acquire a full knowledge about the behavior of the economy as a
whole and the impact of macro-economic policies such as monetary, fiscal and industrial,
adopted by the Government from time to time, in the growth of the business. The business
economist has also to keep an eye on the fast changing technological developments. An
economic decision is taken within the framework of technological developments.
Above all the business economist has to help the management in business planning by
providing guidance for the correct and economical organization and running of the enterprise.

Question 15:- Discuss the different between Micro and Macro economics?
Ans:-Microeconomics analysis is individualistic, whereas macroeconomic analysis is aggregative.
In essence, thus, microeconomics deals with the part (individual) units while macroeconomics
deals with the whole (all units taken together) of the economy. Since both approaches tend to
provide an insight or understanding into the working of an economic system, both are interrelated.
Hence, the difference between microeconomics and macroeconomics are bound to be more or
less of a degree rather than of kind.

For analytical reasons, however, microeconomics and macroeconomics may be
distinguished on the following counts: -
Difference in nature: - Microeconomics is the study of the behaviour of the individual units, in
particular, consumers firms and resource-owners (factory of production), rather than aggregates.
Macroeconomics, on the other hand, is the study of the behaviour of the economy as a whole.



Differences in methodology: - Individualistic and aggregate. Microeconomics is individualistic,
whereas macroeconomics is aggregative in the methodological approach.
Microeconomics refers to aggregates like market demand, market supply, industry, etc. But
these were not considered in relation to the economy as a whole. On other hand,
macroeconomics concerns itself with aggregate relating to the economy as a whole. In
macroeconomic, economic phenomena are studied in their aggregate size, shapes and
behaviour.

Difference in economic variables: - Micro quantities and Macro quantities. Microeconomics is
concerned with the behaviour of micro variables or micro quantities such as individual demand,
supply, particular commodity prices, wages, and individual industries.

Difference in the field of interest: - Microeconomics theories and Macroeconomics theories.
Microeconomics primarily deals with the problems of pricing and distribution. It seeks to explain
the determination of relative prices of particular commodities in the products markets. It is also
concerned with the determination of factors pricing such as rent, wages, interest and profit and in
turn, the theory of income distribution.
Macroeconomics, on the other hand, pertains to the problems of the size of national
income, economic growth and the general price level.

Difference in outlook and scope: - In macroeconomics, usually, behavioural elements of units with
homogeneous characteristics are aggregated. For example, the concept of industry in
microeconomics is an aggregate concept. Industry refers to a set of all firms producing
homogeneous goods taken together. Similarly, market is the aggregate concept. Likewise, market
demand is measured as the summation of all individual consumers demand for a given product
in the market. Also, market supply is the aggregate of the production supplied by individual firms.
As much, Microeconomics, however, never uses aggregate relating to the economy wide total. Its
scope is limited.
Macroeconomics, on the other hand, uses aggregate which relate to the entire economy
or to a large sector of the economy and when it considers industrial output, it refers to the whole
of output produced by the industries sector and similarly, agriculture output for the entire
agriculture sector. Likewise, when macroeconomists talk of aggregate demand, they refer to the
demand for all products by all households taken together for the economy as a whole. Thus,
aggregate demand covers all market demands.



Demarcation in areas of study: - Theory of value and theory of economic welfare are the major
areas covered in microeconomics. The theory of value includes pricing and distribution, i.e.
product pricing and factor pricing.
On the other hand, income and employment theory and monetary theory are the core
topics of macroeconomics. In a broad sense, public finance, growth and international trade are
also included in the field of microeconomics.

Question 16:- Discuss the relation between managerial economics and other subject?
Ans:-Managerial economics is not something which is related to economics only, but there are
other areas also to which managerial economics is related. Other related subjects of managerial
economics are:
Economics
Mathematics
Statistics
Accounting
Operations Research
Computers
Management
Economics and managerial economics
Economic tools used in managerial economics

1. Opportunity cost principle
2. Incremental cost principle
3. Time perspective principle
4. Discounting principle
5. Equimarginal principle

Mathematics and Managerial Economics
Mathematics in ME has an important role to play. Businessmen deal primarily with concepts
that are essentially quantitative in nature e.g. demand, price, cost, wages etc. The use of
mathematical logic in the analysis of economic variable provides not only clarity of concepts but
also a logical and systematic framework.

Accounting and Managerial Economics
There exits a very close link between ME and the concepts and practices of
accounting. Accounting data and statement constitute the language of business. Cost and


revenue information and their classification are influenced considerably by the accounting
profession.
The focus of accounting within the enterprise is fast changing from the concept of
bookkeeping to that of managerial decision making.



Operation Research and Managerial Economics:
Its an inter-disciplinary solution finding techniques. It combines economics,
mathematics, and statistics to build models for solving specific business problems.
Linear programming and goal programming are two widely used OR in business decision
making.
It has influenced ME through its new concepts and model for dealing with risks. Though
economic theory has always recognized these factors to decision making in the real world, the
frame work for taking them into account in the context of actual problem has been
operationalised.

Management Theory and Managerial economics
As the definition of management says that its an art of getting things done through others.
Now a days we can define management as doing right things, at the right time, with the help of
right people so that organizational goals can be achieved. Management theory helps a lot in
making decisions.
Managerial economics has also been influenced by the developments in the
management theory. The central concept in the theory of firm in micro economic is the
maximization of profits.
Managerial economics takes note of changes in the concepts of managerial principles,
concepts, and changing view of enterprises goals.

Statistics and Managerial Economics
Statistical tools are a great aid in business decision making. Statistical techniques are used
in collecting processing and analyzing business data, testing and validity of economics laws with
the real economic phenomenon before they are applied to business analysis. The statistical tools
for e.g. theory of probability, forecasting techniques, and regression analysis help the decision
makers in predicting the future course of economic events and probable outcome of their
business decision. Statistics is important to managerial economics in for marshalling of
quantitative data and reaching useful measures of appropriate relationship involves in decision
making.





Question 17:- Distinction between Plant, firm, and industry.?
Ans: An economy is a system of production and distribution of goods. This production is carried
out by what are known as business units. In the field of production, the firmly permanent and
regular groups are plants, firms and industries.

Plant or factory of establishment
Prof. Sargent Flowrence defined a plant as a body of person engaged in production or
distribution at a given period of time and place, housed in contiguous buildings and controlled
by a single firm.

Characteristics of a plant: -
A plant is a technical unit: - A plant is body or group of person who are actually
engaged in the production of goods. The term plant, therefore, has to be used in a
broad sense to includes, Farms, Office, Shops, Stores and Warehouse in addition to,
of course, workshops and factories manufacturing goods.
Within Technical Sphere, a Plant Enjoys Considerable Autonomy: - The broad policy
framework is laid down by the firm but within that broad framework, a plant can take
independently of the firm important decisions in the technical fields.
A Plant is a Body of persons who Work at a given Time and Place: - A plant consists
of persons who assemble together at certain time and place.
A Plant is controlled by a Single Firm: - One plant cannot be controlled by more than
one firm. But a single firm may control more than one plant.
There has to be Technical Similarity in the Production Process of Goods Produced
within the Plant: - A plant may produce more than one product. But all these products
must be technically related to each other.
Firm
We may note the following points in exploring the concept of firm in managerial economic
analysis: -
A Firm may Own One or More than One Plant: - As already seen, if a firm has only one
plant, it is identical with the plant.
A firm Exercises a Unified Control over its Plants: - The broad policy decision is taken by
the firm. It has to decide and implements policies that have an important bearing for the
enterprises as a whole.


A firm Organizes the Resource and Plans their Use: - Since a firm is an administrative
planning unit which has a unified control over plant the firm organizes and combines the
resources the factors of production and plans the use of these resources.
A firm is Separate Legal Entity: - A plant is not a legal entity in the sense it can sue or be
sued. A firm, on the other hand, is a body of persons working under a particular name. It
has legal personality, can hold property, sue and be sued.

Industry
An industry is a group of firms producing similar or homogenous goods, adopting the same
technology or using the same raw materials. There has to be some common factor among all the
firms that make up an industry. Three such factors can be distinguished: The material used and
the production techniques employed are the two factors working on the supply side and the
similarity among the products produced is a factor on the demand side. E.g.: a ship building firm
can be included in the steel industry because it uses steel as raw material. If production process
is the criteria then a ship building firm would be included in the building industry and if similarity of
goods is the criteria all such firms would be categorized as a separate ship building industry.

Question 18:- What are the assumption underlings the law of demand?
Ans:-The above stated law of demand is conditional. It is based on certain conditions as given. It
is, therefore, always stated with the other things being equal. It relates to the change in price
variable only, assuming other determinants of demand to be constant. The law of demand is,
thus, based on the following ceteris paribus assumptions: -
No Change in Consumers Income: - Throughout the operation of the law, the consumers
income should remain the same. If the level of a buyers income changes, he may be buy
mare even at a higher price, invalidating the law of demand.
No Chang in Consumers Preference: - The consumers taste, habits and preferences
should remain constant.
No Change in the Fashion: - If the commodity concerned goes out the fashion, a buyer
may not buy more of it even at a substantial price of reduction.
No Change in the Price of Related Goods: - Price of other goods like substitutes and
supportive, i.e., Complementary or jointly demanded products remain unchanged. If the
prices of other related goods change, the consumers preferences would change which
may invalidate the law of demand.
No Expectation of Future Price Change or Shortage: - The law requires that the given
price change for the commodity is normal one and no speculative consideration. That is
to say, the buyer does not expect any shortages in the commodity in the market and


consequent future changes in the prices. The given price change is assumed to be final
at a time.
No Change in Size, Age Composition an Sex Ratio of the Population: - For the operation
of the law in respect of total market demand, it is essential that the number of buyers and
their preferences should remain constant. This necessitates that the size of population as
well as the age structure and sex ratio of the population should remain the same
throughout the operation of the law. Otherwise, if population changes, there will be
additional buyers in the market, so the total market demand may not contract with a rise
in price.
No Change in the Range of Goods Available to the Consumers: - This implies that there
is no innovation and arrival of new varieties of product in the market which may distort
consumers preferences.
No Change in the Distribution of Income and Wealth of the Community: - There is no
redistribution of income either, so that levels of income of the consumers remain the
same.
No Change in Government Policy: - the level of taxation and fiscal policy of the
government remain the same throughout the operation of the law. Otherwise, change in
income-tax, for instance, may cause changes in consumers income or commodity taxes
(sales tax or excise duties) and may lead to distortion in consumers preferences.
No Change in Weather Conditions: - It is assumed that the climatic and weather
conditions are unchanged in affecting the demand for certain goods like woolen clothes,
umbrella, etc.

In short, the law of demand presumes that except for the product, all other determinants
of its demand are unchanged. Apparently, the validity of the law of demand or the inference about
inverse relationship between price and demand depends on the existence of these conditions or
assumption.

Question 19:- What are the reasons for change in demand?
Ans:-A change in the demand occurs when the basic conditions of demand change. An alteration
in the demand pattern (increase or decrease in demand) is caused by many kinds of changes.
Some of the important changes are: -
Change in Income: - A change in the consumer significantly influences his demand for
most commodities. The demand for superior commodities in general and for comfort and
luxury articles increase with a rise in the consumers income. Similarly, overall demand
generally decreases with a fall in income. In estimating demand function for commodities


such as cars, for instance, changes in gross national product (GNP) or per capita real
income is considered as crucial factors by the researchers in general.
Changes in Taste, Habits, and Preference: - When there is a change in taste, habits or
preference of the consumer, his demand will change. For instant, when a person gives up
his smoking habit, this demand for cigarettes decreases.
Change in Fashions and Customs: - Fashions and customs of our society determine
many of our demands. When these change, demands also change.
Change in the Distribution of Wealth: - Through fiscal measures, government can reduce
inequality of income and wealth and bring about a just distribution of wealth;
consequently the demand pattern may change in a dynamic welfare society. Welfare
programs like free medical aid, free education, pension schemes, etc.
Change in Substitutes: - Change in the supply of substitutes, change in their prices, and
the development of new and better quality substitutes certainly affect the demand for the
given product. For instance, introduction of ball-point pens has caused a fall in the
demand for fountain pens.
Change in Demand of Position Complementary Goods: - When there is a change in the
demand conditions of a complementary good (which is jointly demanded), there will be
side effects on demand. For instance, a change in the demand for shoes will
automatically bring about a similar change in the demand for shoes laces.
Change in Population: - The market demand for a commodity substantially changes when
there is change in the total population or change in its age or sex composition. For
instance, if the birth rate is high in a country, more toys and chocolates will be demanded.
But when the birth rate is substantially reduced through overall family planning efforts,
their demand will decrease. Similarly, if the sex ratio of the country changes and if
females outnumber males, demand for skirts will increase and that for shirts will
decrease.
Advertisement and Publicity Persuasion: - A clever and persistent advertisement and
publicity programmes by the producers affects consumers preference and causes
alteration in the demand for products. Generally, demand for patent medicines and toilet
articles are very much determined by salesmanship and publicity. Often a change in
change in demand for a new brand of the articles in question, or the changed version of
the former one (e.g., when Charminar cigarettes became Gold (Charminar) it cause a
spurt in sales.)
Change in the Value of Money: - When there are inflationary or deflationary tendencies
developing in the general price level, consequently the value of money falls or rise, and
there may be change in the relative prices of different goods, causing widespread
changes in the demand pattern of various items.


Change in the Level of Taxation: - When the government changes its tax structure,
especially if direct taxes such as income tax, wealth tax etc. are reduced the disposable
income of the people increase, which may lead to change in the overall demand. On this
count usually, the government in order to decrease the demand for foreign goods
imposes high tariff duties on imports.
Expectation of Future Change in Prices: - When the consumer experts that there will be a
rise in price in future, he may buy more at the present price and so his demand increase.
In the reverse case, his demand decrease.



Question 20:- What are the Methods of Demand Forecasting?
Ans:-Methods of Demand Forecasting

Qualitative methods/survey methods

Consumer market survey: - In this method, the customers are asked about their
purchasing plans and their projected buying behavior, through personal interviews,
mail, post or telephone. It may even be conducted house to house. A large number of
respondents is needed here to be able to generalize certain results. The success of
the results is largely dependent on the nature and effectiveness of the questions
asked.

1) Complete enumeration: covering all the potential consumers in the market
2) Sample survey: covering a few consumers selected from the total potential
consumers and then taking the average
3) Test marketing: a useful method for forecasting the sales for a new product or the potential of
existing products in new geographical areas. Test marketing is an experiment conducted in a field
laboratory comprising of actual stores and real-life buying situations, without the buyers knowing
they are participating in an exercise. It simulates the eventual market-mix to observe the
consumer reaction. Depending on the quality and quantity of sales data required for the final
decision, test marketing may last from few weeks to several months.

Jury of executive opinion: The opinions of a small group of high-level managers are
pooled and together they estimate demand. The group uses their managerial
experience, and in some cases, combines the results of statistical models.



Controlled experiments: under this method, different determinants of demand like
price, packaging, advertising etc are varied one at a time, while keeping others
constant.

Simulated market approach: under this method, an artificial market is created and
participants are chosen .these participants are then given money and asked to spend
the same in an artificial department store. Different prices are set up for different
groups. Observations are then recorded and accordingly necessary decisions about
price and promotional efforts are taken.

Collective opinion method/opinion poll method: Each salesperson (for example for a
territorial coverage) is asked to project their sales. Since the salesperson is the one
closest to the marketplace, he has the capacity to know what the customer wants.
These projections are then combined at the municipal, provincial and regional levels.

Delphi method: - Under this method a panel of experts is identified where an expert
could be a decision maker, an ordinary employee, or an industry expert. Each of
them will be asked individually for their estimate of the demand. The administrator
then provides the experts with anonymous summary statistics on the forecasts, and
experts reasons for their forecasts. The process is continued till the experts have
reached a consensus.

End use method: Under this method, future demand for the product is measured by
calculating the demand for the final products that use the given product as an
intermediate good .e.g.: in the case of electricity, household demand for electricity
can be estimated by estimating the number of electrical appliances used in a given
period of time. Similarly in the case of steel which is used in the manufacture of
industrial and agricultural implements, demand can be forecast by studying the
demand for these goods in a given period of time.

Statistical method

Trend projection method: - A time series analysis on sales data over a period of time
is considered to serve as a good guide for sales or demand forecasting.
For long-term demand forecasting, trend is computed from the time based demand
function data.


Trend refers to the long-term persistent movement of data in one direction upward or
downward.
Method of moving averages: - A moving average forecast is based on the average of
certain number of most recent periods. One can select the number of months or
years or the period units in the moving average according to how far back the data is
relevant to future observation.
Regression method: - In demand regression equation relevant variables have to be
includes with practical consideration and relevant data to be obtained. To illustrate
the point we may cite a few examples: - A) Personal disposable income towards
demand for consumer products, B) Agriculture or farm incomes towards demand for
the agriculture equipments, fertilizer, etc. C) Construction contract for demand
towards building material such as cement, bricks, steel, tiles, etc., and D) Automobile
registry over a period towards demand for car spare parts petrol, etc.
Barometric method
Economic indicators



Question 21:- Explain with suitable diagram Extension and Construction of Demand?
Ans:-A variation in demand implies extension or construction of demand. When with a fall in
price more of a commodity is bought, there is an extension of demand. Similarly, when lesser
quantity is demanded with a rise in price, there is a construction of demand. The terms extension
and construction are technically used in stating the law of demand.

The terms extension and construction of demand should, however, be distinguished from
increase or decrease in demand. The former is used for indicating variation in demand, while
the latter for denoting change in demand. Variation in demand is the connotation of the law
demand. It expresses a functional relationship between demand and price. A change in demand
due to change in price is called extension or construction. Extension and construction, relates to
the same demand curve. A change in demand due to causes other than price is called increase
and decrease in demand.

In graphical exposition, extension or construction of demand is shown by the movement along
the demand curve. A downward movement from one point to another on the same demand curve
implies extension of demand, for instance, movement from a to b in figure. It suggest that when
the price reduced from OP to OP1, demand extends from OQ to OQ1, while an upward
movement from on point to another on the same demand curve implies construction of demand,


e.g. movement from a to c in the figure. It suggest that when price rises from OP to OP2, demand
contracts from OQ to OQ2.


















In short, a change in the quantity demanded in response to a change in price is explained by the
term extension or construction of demand. Further, extension or construction implies a
movement on the same demand curve. It, thus, signifies that the demand scheduled remains the
same.



Question 22:-. Explain with suitable diagram Increase and Decrease of Demand?
Ans:-These two terms are used to express changes in demand. Changes in demand are a result
of the change in the conditions or factors determining demand, other than the price. A change in
demand, thus, implies an increase or decrease in demand. When more of a commodity is bought
than before at any given price, there is an increase in demand. Similarly, with price remaining
unchanged less of a commodity is bought than before than before, there is a decrease in
demand.

An increase in demand signifies either that more will be demand aat a given price or same will
be demanded at a higher prices. An increase in demand really means that more is now


demanded than before at each and every price. Likewise, a decrease in demand signifies either
that less will be demanded at a given price or the same quantity will be demanded at the lower
price. Decrease in demand really means that less is now demanded than before at each and
every rise in price. Shifting the demand curves shows the increase and decease in demand.

The term increase or decrease in demand are graphically expressed by the movement from
one demand curve to another. In the other words the change in demand is denoted by the shifting
of the demand curve. In the case of an increase in demand, the demand curve is shifted to the
right. In figure (A) thus, the shift of demand curve from DD to D1D1 shows an increase in
demand. In this case, the movement from point a to b indicates that the price remain the same at
OP, but more quantity (OQ1) is now demanded, instead of OQ. Here, increase in demand OQ1.
Similarly, as in figure (B) a decrease in demand curve from DD to D2D2 shows a decrease in
demand. In this case, the movement from point a to c indicates that the price remains the same at
OP, but less quantity QQ2 is now demanded than before. Here decrease in demand is OQ2.



INCREASE AND DECREASE IN DDEMAND

In short, a change in the quantity demanded due to change in the all overall pattern of demand
results in an increase or decrease in demand. For a change in demand, the change in factor
other than price is responsible.



Question 23:- What are the causes for change in Supply?


Ans:-There are many causes which bring about a change in the conditions of supply. The
important factors are: -
Cost of production: - Given the price, the supply changes with the change in the cost of
production. If the cost of production increases because of higher wages to worker or
higher prices of raw material, there will be a decrease in supply. If the cost of production
falls due to any of the reasons, the supply will increase.
Natural factors: - There might be a decrease in the supply due to floods, paucity of
rainfall, pests, earthquakes, etc. Absence of the above calamities or an exceptionally
good as well as timely monsoon might increase supply.

Change in technique of production: - This has an important influence on supply. An
improvement in the technique of production might go a long way in increasing the supply.
For instance, introduction of highly sophisticated machines increases the supply of
goods.

Policy of Government: - Taxes on production, sales, import duties and import restrictions
may reduce supply. It may also be deliberately reduced by government policies.

Development of transport: - Improvement in the means of transport obviously increases
the supply of goods as they facilitate the movement of goods from one place to another.

Business Combines: - The producers also might reduce the supply by entering into an
agreement among themselves through their business combine like trust, cartel or a
syndicate with a view to rising prices in the market.



Question 24:-What are the assumptions to Law of Supply?
Ans:-The law supply is conditional, since we have stated it under the assumption: Other things
remaining unchanged.
It is based on the following ceteris paribus assumption: -
Cost of production is unchanged: - It is assumed that the price of the product changes,
but there is no change in the cost of production. If the cost production increases along
with the rise in the price of product, the sellers will not find it worthwhile to produce more
and supply more. Therefore, the law of supply is valid only if the cost production remains
constant. It implies that the factor prices, such as wages, interest, rent, etc., are also
unchanged.


No change in technique of production: - The technique of production is assumed to be
unchanged. This is essential for the cost to remain unchanged. With the improvement in
technique, if cost of production is reduced, the seller would supply more even at falling
prices.
Fixed scale of production: - During a given period of time, it is assumed that the scale of
production is head constant. If there is a changed in scale of production, the level of
supply will change, irrespective of the changes in the price of the product.
Government policies are unchanged: - Government policies like taxation policy, trade
policy, etc., are assumed to be constant. For instance, an increase in or totally fresh levy
of excise duties would imply an increase in the cost or in case there is fixation of quotas
for the raw materials or imported components for a product, then such a situation will not
permit the expansion of supply with a rise in prices.
No change in transport costs: - It is assumed that the transport facilities and transport
costs are unchanged. Otherwise, a reduction in transport cost implies lowering of cost of
production so that more would be supplied even at a lower price.
No speculation: - The law also assumes that the sellers do not speculate about the future
changes in the price of the product. If, however, sellers expect prices to rise further in
future, they may not expand supply with the present price rise.
The prices of other goods are held constant: - The law assumes that there are no
changes in the prices of other products. If the price of some other product rises faster
than that of the given product in consideration, producers might transfer their resource to
the other product which is more profit yielding due to rising prices. Under this situation,
more of the product in consideration may not be supplied, despite the rising prices.

Question 25:- Write the features of the Long-run Curve.?
Ans:-Following are the main features of the LAC curve: -

Tangent curve: - By joining the loci of various plant curves relating to different operational
short run phases, the LAC curve is drawn as a tangent curve.

The LAC approximates a smooth curve, if the plant sizes can varied by infinitely small
capacities and there are numerous short run average cost curves to each of which the MC is
a tangent. In the other words, the long run average cost curve is the locus of all these points
of tangency.















OUTPUT
Figure 1
Envelope curve: - The LAC curve is also referred to as the envelope curve, because it is
the envelope of a group of short run average cost curve appropriate to different levels of
output.

In figure 1, the LAC curve is enveloping or tangential to a number of plant size and the
related Short-run average cost.

Planning curve: - LAC curve is regarded as the long run planning device, as it denotes
the least unit cost of producing each possible level output and size of the plant in relation
to the LAC curve. A rational entrepreneur would select the optimum scale of plant. The
optimum scale of plant is that plant size at which a SAC is tangent to the LAC, such that
both the curve has the minimum point of tangency. In fig. level of output, SAC is tangent
to LAC at both the minimum points. Thus, OQ2 is regarded as the optimum scale of
output, as it has the minimum per unit cost. It should be noted that, there will be only one
such point on the LAC curve to which a SAAC curve is tangent as well as both have the
minimum points at the point of tangency. And as such this particular SAC phase is
regarded as the most efficient one. All other SAC curve is tangent to the LAC nor SAC
curve has the minimum point. In fact, at all these points SAC curves are either rising or
falling, showing a higher cost.

Anyway, the optimum scale of plant will inevitably be in the long run by the firm under
perfect competition. But the firm under monopoly and monopolistic competition are less
likely to select the optimum plant size.

















Minimum Cost Combinations: - Since LAC is device as the tangent to various SAC
curves under consideration, the cost levels be presented by the LAC curve for different
levels of output reflect minimum cost combination of resource inputs to be the firm at
each long run level of output.
Flatter U-Shaped: - The LAC curve is less U-shaped or rather dish-shaped. This means
that in the beginning it gradually slopes downward and the, after reaching a certain point,
it gradually begins to slope upward. This implies that in the long run when the firm adopts
a larger scale of output, its long run average cost in the beginning tends to decrease. At a
certain point, it remain constant, and than rises. This behaviour of long run average costs
is attributed to the operation of laws of returns to scale. Increase returns in the beginning
cause decreasing costs, constant returns, constant costs and then decreasing returns,
increasing costs.




Question 26:- What are the Exceptions of law of demand?
Ans:- Conspicuous Consumption-VEBLENS EFFECT
The goods which are purchased for Snob appeal are called as the conspicuous
consumption. They are also called as Veblen goods because Veblen coined this term.
For e.g. - diamonds, curios. They are the prestige goods. The would like to hold it only
when they are costly and rare.



2. Speculative market
In this case the higher the price the higher will be the demand. It happens because of the
expectation to increase the price in the Future.
For e.g. shares, lotteries, gamble and ply-win type of markets.

3. Giffens goods-GIFFENS PARADOX
It is a special type of inferior goods where the increase in the price results into the
increase in the quantity demanded. This happens because these goods are consumed by the
poor people who would like to buy more if the price increases. For e.g. a poor person who
buys inferior quality vegetables. If the price of such vegetable increase then they prefer to
buy because they think that it would be of a better quality.

4. Ignorance: some time consumer ignore price effect .it is due to the existence of other factor like
quality, taste, habit etc. there the law of demand doesnt hold.

5. Fear of shortage: if there is any shortage in future of a commodity then the consumer is ready
to pay any price for the commodity.

6. Emergencies: during the time of emergencies like flood, famine, world war, country at war. In
this case generally the prices of commodity are high but there is no effect on the demand.

7. Necessities: some commodity like life supporting drugs, drinking water etc in such commodity
demand will not be affect by the any change in price.

8. Consumers illusion: it is related to consumers believe about a product. If there is any change in
price of such product could not affect the demand of that product.

9. Comfort goods: some product which are now used by the consumer so often that they cannot
leave without it. They are habitual of such product like fan, refrigerator, electricity etc. so change
in price of such product cannot bring changes in demand.
Describe the significance of demand forecasting?
Question 27:-Demand forecasting is very essential in the course of business decision?
Ans:-Its significance may be trace as under: -
Production Planning: - Demand forecasting is a prerequisite for the production planning of a
business firm. Expansion of output of the firm should be based on the estimates of likely demand,
otherwise there may be overproduction and consequent losses may have to be faced.

Sales Forecasting: - Sales forecasting is based on the demand forecasting. Promotional efforts of
the firm should be based on sales forecasting.



Control of Business: - For controlling the business on a sound footing, it is essential to have a
well conceived budgeting of costs and profits that is based on the forecast of annual demand/
sales and prices.

Inventory control: - A satisfactory control of business inventories, raw materials, intermediate
goods, semi-finished product, finished product, spare parts, etc., requires satisfactory estimates
of the future requirements which can be traced through demand forecasting.

Growth and Long-term Investment Programmes: - Demand forecasting is necessary for
determining the growth rate of the firm and its long-term investment programmes and planning.

Stability: - Stability in production and employment over a period of time can be made effective by
the management in the light of the suitable forecasting about market demand and other business
variables and smoothening of the business operations through counter-cyclical and seasonally
adjusted business programmes.

Economic Planning and Policy Making: - Demand forecasting at macro level for the nation as a
whole is of a great help to the planners and makers for a better planning and rational allocation of
the countrys productional resources. The government can determine its import and export
policies in view of the long-term demand forecasting for various goods in the country.

Question 28:-write a short notes on following:-
(a) Direct and Derived Demand
(b) Autonomous and induced demand
(c) New and Replacement Demands
Ans:- Direct and Derived Demand
Direct demand refers to demand for goods meant for final consumption; it is the demand for
consumers goods like food items, readymade garments and houses.
By contrast, derived demand refers to demand for goods which are needed for further
production; it is the demand for producers goods like industrial raw materials, machine tools and
equipments. Thus, the demand for an input or what is called a factor of production is a derived
demand; its demand depends on the demand for output where the input enters. In fact, the
quantity of demand for the final output as well as the degree of substitutability/ complementarily
between inputs would determine the derived demand for a given input.

For example, the demand for gas in a fertilizer plant depends on the amount of fertilizer to be
produced and substitutability between gas and coal as the basis for fertilizer production.


However, the direct demand for a product is not contingent upon the demand for other
products.

Autonomous and induced demand
Spontaneous demand for goods which is based on an urge to satisfy some wants directly is
called autonomous demand. When the demand for a product is tied to the purchase of some
parent product, its demand is called induced or derived.
For example, the demand for cement is induced by (derived from) the demand for
housing. As stated above, the demand for all producers goods is derived or induced. In addition,
even in the realm of consumers goods, we may think of induced demand. Consider the
complementary items like tea and sugar,bread and butter etc. The demand for butter (sugar) may
be induced by the purchase of bread (tea). Autonomous demand, on the other hand, is not
derived or induced. Unless a product is totally independent of the use of other products, it is
difficult to talk about autonomous demand. In the present world of dependence, there is hardly
any autonomous demand. No consumer today consumes just a single commodity; everybody
consumes a bundle of commodities. Even then, all direct demand may be loosely called
autonomous.
New and Replacement Demands
This distinction follows readily from the previous one. If the purchase or acquisition of an item is
meant as an addition to stock, it is a new demand. If the purchase of an item is meant for
maintaining the old stock of capital/asset, it is replacement demand. Such replacement
expenditure is to overcome depreciation in the existing stock. Producers goods like machines.
The demand for spare parts of a machine is replacement demand, but the demand for the latest
model of a particular machine (say, the latest generation Computer) is a new demand. In course
of preventive maintenance and breakdown maintenance, the engineer and his crew often express
their replacement demand, but when a new process or a new technique or a new product is to be
introduced, there is always a new demand.

Question 29:-What is demand forecasting? Discuss the Levels of demand forecasting?
Ans:-Demand Forecasting is the activity of estimating the quantity of a product or service that
consumers will purchase. Demand forecasting involves techniques including both informal
methods, such as educated guesses, and quantitative methods, such as the use of historical
sales data or current data from test markets.
It is best defined as a reasonable judgment of future probabilities of market events based
on scientific background. it gives a reasonable approximation regarding the possible
outcome, with reasonable accuracy. Demand forecasting may be undertaken at the
following levels: -


Micro Level: - It refers to the demand forecasting by the individual business firm for
estimating the demand for its product.
Industry Level: - It refers to the demand estimate for the product of the industry as a
whole. It I undertaken by an Industrial or Trade Association. It relates to the market
demand as a whole.
Macro Level: - It refers to the aggregate demand for the industries output by the nation as
a whole. It is based on the national income or aggregate expenditure of the country. It is
based on the consumption function which the functional relationship between the
disposable income and consumption. It shows the consumption expenditure by the
community at various levels of income. With the growth of national income, consumption
expenditure increase, as such, overall demand for goods and services in general may
tend to rise.