Question 1) Inflation is a global Phenomenon which is associated with high price causes decline

in the value for money. It exists when the amount of money in the country is in excess of the
physical volume of goods and services. Explain the reasons for this monetary phenomenon.

a) Define Inflation.

Ans :- inflation is commonly understood as a situation of substantial and rapid increase in the level of
prices and consequent deterioration in the value of money over a period of time. It refers to the
average rise in the general leve l of prices and fall in th evalue of money. Inflation is stastically
measured in terms of percentage increase in the price index, as a rate(percent) per unit of time usually
a year or a month. Usually the whole sale price index and consumer price index can be adopted to
measure the rate of inflation.


b) Causes for Inflation.

Ans :-
Demand side :- increase in aggregative effective demand is responsible for inflation in
this case ,aggregate demand exceeds aggregate supply of goods and services .demand rises
much faster than supply. There are some reasons for increase in effective demand:-
Increase in money supply:-
Supply of money in circulation increases following reasons. deficit financing by the government ,
expanses in public expenditure, expansion in bank credit, and repayment of past debt by the
government to the people.
Increase in disposable income:-
Reduction in the taxes, increase in national income , while tax level remains constant and decline in the
level of savings.
Increase in exports:-
An increase in the foreign demand for a countries exports reduces the the stock of goods available foer
home consumption. This creates shortage in the country leading to a rise in price level.
Existence of black money:-
It is due to corruption, tax evasion, black marketing etc. increases the aggregate demand. We spent such
unaccounted money, extravagantly and create unnecessary demands for goods and services, thus
causing inflation.
Supply side :-
generally ,the supply of goods and services do not keep pace with the ever increasing demand
for goods and services .thus ,supply does not match the demand. Supply falls short of
demand. Increase in supply of goods and services may be limited because of the following
reasons:-
Shortage in the supply of factors of production:-
When there is shortage in the supply in the factors of production like raw materials, labour capital
equipments, etc. there will be automatically rise in there prices.
Hoardings by traders and speculators:-
Hoardings of essential commodities by traders and speculators with the objective of earning extra
profits creats a situation of excess demand paving the way for further inflation.
Role of natural calamities:-
Natural calamities such as- earthquake , floods and drought, conditions also affect the suppliis of
agricultural products adversely.
War:-
During the period of war , shortage of essential goods creates a rise in prices.
Role of expectations :-
exceptions also play a significant role in accentuating inflation .the following points are
worth mentioning.
If people expect further rise in price ,the current aggregate demand increase ,which in
turn causes a rise in the prices.
Expectations about higher wages and salaries affect the price of related goods.
Expectations of wage increase often induces some business house to increase prices even
before upward wage revisions are actually made.


Question 2) Monopoly is the situation there exists a single control over the market producing a
commodity having no substitutes with no possibilities for anyone to enter the industry to
compete. In that situation, they will not charge a uniform price for all the customers in the
market and also the pricing policy followed in that situation.

a) Define Monopoly.

Ans :- Monopoly is that market form in which a single producer controls the whole supply of a
single commodity which has no close substitutes. Monopoly may be defined as a condition of
production in which a single firm has the power to fix the price of the commodity or the output of
the commodity. It is a situation there exists a single control over the market producing a
commodity having no substitutes with no possibilities for any one to enter the industry to
complete.

b) Features of Monopoly.

Ans :-
Anti-thesis of competition:-
Absence of competition in the market creates a situation of monopoly and hence, the seller faces no
threat of competition.
Existence of a single seller:-
There will be only one seller in the market who exercises single control over the market.
Absence of substitutes:-
There are no substitutes for the sellers product with a strong cross elasticity of demand. Hence buyers
have no alternatives.
Control over supply:-
Seller will have complete control over output and supply of the commodity.

Entry barriers:-
Entry of new firms is difficult , hence monopolist will not have direct competitors in the market.
Nature of firm:-
The monopoly firm may be proprietary concern , partnership concern , joint stock company or a public
utility which pursues an independent price output policy.
Existence of super normal profits:-
There will be opportunities for supernormal profits under monopoly, because market price is
greater than the cost of production


c) Kinds of Price Discrimination.

Ans :- Three kinds of price discrimination are :-
Discrimination of the first degree :-
under price discrimination of the first degree ,the producer exploits the consumers to the maximum
possible extent, asking to pay the maximum he or she prepared to pay rather than go without the
commodity. In this case the monopolist will not allow any consumers surplus to the cusumer.
Discrimination of the second degree :-
in case of discrimination of the second degree . the monopolist charges different prices for
markets of of the same commodity ,but not a maximum possible rate but at a lower rate. This is
done to keep the consumers satisfied and prevent the entry of potential rivals.
Discrimination of the third stage :-
in case of discrimination of the third degree ,the markets are devided into many sub-markets or
sub-groups.the price charge in each case roughly depends on the ability to pay of different
subgroups in the market .this is most common type if discrimination followed by a monopolist..


Question 3) Define Fiscal Policy and the instruments of Fiscal policy.

a) Definition of Fiscal policy.

Ans :-The term fisc in English language means treasury ,and the policy related to treasury or
government exchequer is known as fiscal policy. Fiscal policy is a package of economic measures of
the government regarding public expenditure, public revenue , public debt, or public borrowings. In
short it refers to the budgetary policy of the government.

Fiscal policy is an important part of the overall economic policy of a nation.

b) Explanation of Instruments of Fiscal Policy.

Ans :-
Public revenue :-
it refers to the income or receipts of public authorizes .it is classified into two parts - tax-
revenue and non-tax revenue. Taxes are the main source of revenue to a government
Public expenditure policy :-
it refers to the expenditure incurred by the public authorities like central ,states and local
government .it is of two kinds :development or plan expenditure and non-development or
non-plan expenditure.
Public debt or public borrowing policy :-
all loans taken by the government constitutes public debt.
Deficit financing :-
it is an extraordinary technique of financing the deficits in the budgets. it implies printing of
fresh and new currency notes by the government by running down the cash balances with the
central bank .the amount of new money printed by the government depends on the absorption
capacity of the economy.
Built in stabilizers or automatic stabilizers :-
the automatic or built in stabilizers imply automatic changes in tax collection and transfer
payments or public expenditure programmes so that it may reduce the destabilizing effect on
aggregate effective demand.


Question 4) Describe Cost-Output Relationship in brief.


a) Definition of cost-output relationship.

Ans :-cost and output are correlated. cost-output relations play an important role in almost all business
decisions. It throws light on cost minimisation or profit maximization and optimization of output.the
relation between the cost and output is technically described as the cost function. The significance of
cost output relationship is so great that in economic analysis, the cost function usually refers to the
relationship between cost and rate of output alone and we assume that all other independent variables
are kept constant. Mathematically speaking TC =F(Q) where TC = total cost and Q stands for output
produced.

b) Explanation of Cost-output relationship in short run and long run in brief.

Ans :-Short-run is a period of time in which only the variable factors can be varied while fixed factors
like plant ,machinery ,etc .remain constant .hence ,the plant capacity is fixed in the short run .the total
number of firms in an industry will remain old same .time is insufficient either for the entry of new
firms or exit of the old firms .if a firm wants to produce greater quantities of o0utput.it can do so only
by employing more units of variable factors or by having additional shifts, or by having overtime work
for the existing labour force or by intensive utilization of existing stock of capital assets etc.
The short run cost function relates to the short run production function .it implies two sets of input
components : (a) fixed inputs and (b) variable inputs. Fixed inputs are unalterable. They remain
unchanged over a period of time on the other hand , variables factors are changed to vary the output in
the short run.

Long run is defined as a period of time where adjustments to changed condition are complete. it is
actually a period during which the quantities of all factors. variable as well as fixed factors, can be
adjusted. Hence ,there are no fix costs in the long run. in the short run ,a firm has to carry on its
production within the existing plant capacity ,but in the long run ,it is not tied up to a particular plant
capacity,. If demand for the product in increases , it can expand output by enlarging its plants capacity,
it can make use of the existing as well as new staff in the most efficient way and, there is a lot of scope
for transforming indivisiable factors in to divisible factors. on the other hand if demand for the product
declines, a firm can cut down to a greater extent in the long run.
In the long run only the average total cost is important and considered in taking long term output
decisions.


Question 5) Discuss the practical application of Price elasticity and Income elasticity
of demand .

a) Practical application of price elasticity


Ans ;- there are some examples on the practical application of price elasticity of demand are as
follows:-
Production planning :-
it helps a producer to decide about the volume of production. if the demand for his products
is inelastic ,specific ,quantities can be produced while he has to produce different quantities.
Helps in fixing the price of different goods :-
it helps a producer to fix the price of his product. If the demand for his product is enelastic ,
he has to charge a lower price.
Helps in fixing the rewards for factor inputs :-
factor rewards refer to the price paid for their services in the production process.
Helps in determining the foreign exchange rates :-
exchange rate refers to the rate at which currency of the country is converted in to the
currency of another country.
Helps in determining the term of trade :-
it is the basis for deciding the term of trade between two nations. For eg:- if the demand for
japans products in india is inelastic we have to pay more in terms of our commodities to get
one unit of a commodity from japan and vice-versa.
Helps in fixing the rate of taxes :-
It helps the finance minister to formulate sound taxation policy of the country. He can
impose more taxes on those goods for which the demand is inelastic, and lower taxes if the
demand is elastic in the market.
Helps in declaration of public utilities :-
public utilities are those institutions which provide certain essential goods to the general
public at economical prices.
poverty in the midst of plenty :-
a bumper of rice or wheat instead of bringing prosperity to farmers, may actually bring
poverty to them, because the demand demand of rice and wheat is inelastic.

b) Practical application of Income elasticity.

Ans :- There are some examples on the practical application of income elasticity of demand which are
given below:-
Helps in determining the rate of growth of the firm :-
if the growth rate of the economy and income growth of the people is reasonably forecasted .in that case,
it is possible to predict expected increase in the sales of a firm and vice-versa.
Helps in the demand forecasting of a firm :-
it can be used in estimating future demand provided that the rate of increase in income and the EY
for the products are known.
Helps in production planning and marketing. :-
the knowledge of EY is essential for production planning, formulating marketing strategy , deciding
advertising expenditure and nature of distribution channel etc.
Helps in estimating construction of houses :-
the rate of growth in incomes of the people also helps in housing programmes in a country. Thus , it
helps a lot in managerial decisions of a firm.


Question 6) Discuss the scope of managerial economics.

a) Definition of Managerial Economics.

Ans :- there are many writers as like as:- SPENCER and SIEGELMAN, MC NAIR and
MERIAM, BRIGHMAN and PAPPAS, JOEL DEAN, gave different types of definitions and
theories but their main theame is:- Managerial economics is a science that deals with the
application of various economic theories, principles, concepts and technique to business
management in order to solve business and management problems. It deals with the practical
application of economic theory and methodology in decision making problems faced by private,
public and non profit making organizations.

b) Scope of Managerial Economics.

Ans :- the scope helps in understanding the subject. Consequently there is no unanimity among
different economists with respect to the exact scope of business economics .
Objectives of a firm :-
Historically, profit maximization has been considered as the main objective of a business unit.
All business organizations have many goals like- social, economical, organizational, human and
national, but the traditional profit maximization objectives has a very high place and all other
policies and programmes of a firm revolve round this objectives.
Demand analysis and forecasting :-
Mostly, a firm is a producing unit .it produces different kinds of goods and services. The basic
problems like:- what, where, for whome, how, how much, to produce and by how to distribute
them in the market. Hence the firm has to study all of these factors in detail.
Production and cost analysis :-
-production means conversion of inputs into the final output. it may be either in physical or in
monetary terms. Production analysis deals withproduction function, laws of returns, return to
scale, economics of scale, etc.
Pricing decisions, policies and practices :-
pricing decision means to fix the prices for all the goods and services of any firm. The pricing
decision depends on the revenue(amount), income(level), and profits(volume), earned by a firm.
Profit management :-
Basically a firms success or failure is measured in terms of the amount of profit it is able to earn
in a competitive market.
Capital management :-
-This is one of the essential areas of business unit. The success of any business is based on
proper management and adequate capital investment.
Linear programming and theory of games :-
the term linear means that the relationship handle can be represented by straight lines and the
term programming implies systematic planning or decision making .
Market structure and conditions :-
this information on market structure and conditions of various markets is the most important part
of the business.
Strategic planning :-
it provides long term decisions, which all have a huge impact on the behaviour of the firm. The
firm fixes up some long term goals and objectives and selects a different strategy to acheave
them.
External environment :-
the external environment has a significant role in managerial economics. There are some
examples as like as:- macroeconomic management, budgetry operations, knowledge of
information ,impact of liberalisation, globalization, privatization, impact of internal changes,
socio-political, cultural, and other external forces, are some examples of external environment
impacts on managerial economics
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