ASSIGNMENT
SEMESTER – 1
MBO026
MANAGERIAL ECONOMICS
SUBMITTED BY:
SIDHARTH RAMTEKE
MBA
ROLL NO.- 520918813
Q2. What are the factors that determine the Demand curve? Explain.
ASSIGNMENTS- MBA Sem-I
MB0026 – MANAGERIAL ECONOMICS
Answer:- Price elasticity of demand is a ratio of two pure numbers, the numerator
is the percentage change in the quantity demanded and the denominator is the
percentage change in price of the commodity. It is measured by the following
formula:
Answer: - Profit- making is one of the traditional, basic and major objectives of a
firm. Profit- motive is the driving force behind all business activities of a company. It
is the primary measure of success or failure of a firm in the market.
Pricing and business strategies of rival firms and its impact on the working of the
given firm.
Aggressive sales promotion policies adopted by rival firms in the market.
Without inducing the workers to demand higher wages and salaries leading to rise
in operation costs.
Without resorting to monopolistic and exploitative practices inviting government
controls and takeovers.
Maintaining the quality of the product and services to the customers.
Taking various kinds of risks and uncertainties in the changing business
environment.
Adopting a stable business policy.
Avoiding any sort of clash between short run and long run profits in the business
policy and maintaining proper balance between them.
Maintaining its reputation, name, fame and image in the market.
Profit maximization is necessary in both perfect and imperfect markets. In a perfect
market, a firm is a price-taker and under imperfect market it becomes a price-
searcher.
The profit maximization model is based on three important assumptions. They are
as follows:-
Q5. What is Cyert and March’s behavior theory? What are the demerits?
Answer: - Cyert and March’s behavior makes an attempt to explain the behavior of
inter group conflicts and their multiple objectives in an organization. Basically, this
theory explains the usual and normal behavior of different groups of people who
work in an organization having mutually opposite goals.
Cyert and March explain how complicated decisions are taken in big industrial
houses under various kinds of risks and uncertainties in an imperfect market in the
background of limited data and information. The organizational structure, goals of
different departments, behavioral pattern and internal working of a big and multi-
product firm differs from that of small organizations. The various kinds of internal
conflicts and problems faced by these organizations. They also explain how there
are certain common problems faced by similar organizations in an industry and
their effects on internal working of each individual organization and their decision
making process.
Cyert and March consider that a modern firm is a multi-product, multi-goal and
multi-
decision making coalition business unit. Like a coalition government, it is managed
by a number of groups. The group consists of share holders, managers, workers,
customers, suppliers, distributors, financiers, legal experts and so on. Each group is
independent by itself and has its own set of objectives and they try to maximize
their individual benefits.
Cyert and March points out the goals of a business organization would depend upon
the multiple objectives of each group and their collective demands. Demands of
each group would depend on their aspirations levels, expectations, actual
performance of the organization, bargaining power of each group, past success in
their demands, etc.
As all of them change over a period of time, the demands of each group would all
of them change over a period of time, the demands of each group would also
undergo changes. If actual performance and achievements of the organization is
much better than expected aspirations and target level, in that case, there will
upward revision in their demands and vice-versa.
Thus, there is a strong linkage between the expected and actual demand of each
group in the organization, past success and future environment. Each group makes
an attempt to achieve its demand in its own way.
Cyert and March are of the opinion that out of several objectives a firm
has five important goals. They are:-
The above mentioned objectives also would undergo changes over a period of time
in the background of modern business environment. Hence, decision making would
become complex and complicated.
The theory fails to analyze the behavior of the firm but it simply predicts the future
expected behavior of different groups.
It does not explain equilibrium of the industry as a whole.
It fails to analyze the impact of the potential entry of the new firms into the industry
and the behavior of the well established firms in the market.
It highlights only on short run goals rather than long run objectives of an
organization. Thus, there are certain limitations to this theory.
Answer: - The model highlights that the primary objective of a firm is to maximize
its sales rather than profit maximization. It states that the goal of the firm is
maximization of sales revenue subject to a minimum profit constraint. The minimum
profit constraint is determined by the expectations of the share holders. This is
because no company can displease the share holders. Maximization of sales does
not mean maximization of physical sales but maximization of total sales revenue.
Hence, the managers are more interested in increasing the sales rather than profit.
The basic philosophy is that when sales are maximized automatically profits of the
company would also go up.
Prof. Boumal has developed two models. The first is static model and the second
one is the dynamic model.
The model is applicable to a particular time period and the model does not operate
at different periods of time.
The firm aims at maximizing its sales revenue subject to a minimum profit
constraint.
The demand curve of the firm slope downwards from left to right.
The average cost curve of the firm is U-shaped one.
ASSIGNMENTS- MBA Sem-I
MB0026 – MANAGERIAL ECONOMICS
Many changes take place which affects business decisions of a firm. In order to
include such changes, Boumal developed dynamic model. This model explains how
changes in advertisement expenditure, a major determinant of demand, would
affect the sales revenue of a firm under severe competitions.
Under competitive conditions, a firm in order to increase its volume of sales and
sales revenue would go for aggressive advertisements. This leads to a shift in the
demand curve to the right. Forward shift in demand curve implies increased
advertisement expenditure resulting in higher sales and sales revenue. A price cut
may increase sales in general. But increase in sales mainly depends on whether the
demand for a product is elastic or inelastic. A price reduction policy may increase its
sales only when the demand is elastic and if the demand is inelastic; such a policy
would have adverse effects on sales.
Hence, to promote sales, advertisements become an effective instrument today. It
is the experience of most of the firms that with an increase in advertisement
expenditure, sales of the company would also go up. A sales maximizer would
generally incur higher amounts of advertisement expenditure than a profit
maximizer. However, it is to be remembered that amount allotted for sales
promotion should bring more than proportionate increase in sales and total profits
of a firm. Otherwise, it will have a negative effect on business decisions.
Q.7 What is pricing policy? What are the internal and external factors of
the policy?
Ans: Pricing Policies
Pricing Policies refer to the policy of setting the price of the product or product &
services by the management after taking into account of various internal and
external factors, forces and its own business objectives. The decision of pricing is
very important in any business. Price once fixed is never permanent. It needs to be
reviewed and revised according to the market conditions.
Internal factors which can affect the pricing decisions of the company include
suppliers, employees efficiency, profit margin, production cost and other expenses,
brand image and expectations of the company. Suppliers provide the raw materials
to the company and good relations with suppliers can make the company to buy
quality products at reasonable prices. Employees' efficiency can also reduce the
ASSIGNMENTS- MBA Sem-I
MB0026 – MANAGERIAL ECONOMICS
costs of the company and company can charge lower prices. Product cost also
determines the prices of the products because all of the companies have to cover
up the product costs. Moreover, image of the company also plays an important role
in the price decisions of the company because a global brand will usually charge
premium prices. On the other hand, the external factors include government
policies, competitors' prices, costs of raw materials, consumers expectations and
demand and supply of the product. Government sets the price floors to save the
interest of the borrowers and the sellers, therefore, government policies should be
also take into consideration. Expectations of the consumers or consumer
reservation prices are also considered in the price decisions. Costs of raw materials
in the market also determine the pricing strategies. Moreover, the prices offered by
the competitors can also impact the pricing decisions of the company.
Q.10 What do you mean by the fiscal policy? What are the instruments of
fiscal policy? Briefly comment on India’s fiscal policy.
Ans: Fiscal policy is a policy, which affects aggregate output, employment, saving,
investment etc. A responsible government would contain its expenditure within its
revenue and thus making the budget balanced. The instruments of Fiscal Policy are
Automatic Stabilizer and Discretionary Fiscal Policy:
i) Automatic Stabilizer: The tax structure and expenditure are programmed in
such a way that there is increase in expenditure and decrease in tax in recession
and decrease in expenditure and increase in tax revenue in the period of inflation. It
refers to built-in response to the economic condition without any deliberate action
on the part of government. It is called built- in- stabilizer to correct and thus restore
economic stability. It works in the following manner,
Tax revenue: Tax revenue increases when the income increases; as those who
were not paying tax go into the higher income tax bracket. When there is
depression, the income decreases and many people fall in the no-income-tax
bracket and the tax revenue decreases.
ii) Discretionary Fiscal Policy: Under this, to stabilize the economy, deliberate
attempts are made by the government in taxation and expenditure. It entails
definite and conscious actions.
Instruments of Fiscal Policy: Some important instruments of fiscal policy are:-
1. TAXATION: Taxation is always a very important source of revenue for both
developed and developing countries. Tax comes under two heading –Tax on
individual (direct tax) and tax on commodity (indirect tax or commodity tax).Direct
tax includes income tax, corporate tax, taxes on property and wealth. Indirect tax is
tax on the consumptions. It includes sales tax, excise duty and custom duties.
Direct tax structure can be divided into three bases-
1. Progressive tax
2. Regressive tax
3. Proportional tax
Progressive tax: Progressive tax says that higher the level of income, greater the
volume of tax burden you have to bear. This means as income increases, the tax
contribution should also increase. Low income group people pay low tax, whereas
the high income group people pay higher tax.
Regressive tax: It is theoretically possible, though no government implements
such tax structure, because that leads to unequal distribution of income. As your
income increases the contribution through tax decreases. Low income people will
pay more and high income people will pay less.
Proportional tax: When the tax imposed is irrespective of the income you earn,
every income group, high or low pay the same amount of tax.
2. INDIRECT TAX OR CONSUMPTION TAX: Indirect tax differs from direct tax.
Tax which is imposed on every unit of product is known as lump sum tax. E.g.
excise tax and sales tax. Taxes depending on the value of particular product are
called ‘ad valorem tax’ e.g. tax on airline tickets.
A good tax structure has to control and bring stability in economic system. There
are few requirement of a good tax structure. They are –
The revenue earned through tax structure should be adequate.
The distribution of tax burden should be equal.
Administration cost should not be more than revenue earned.
Tax burden should be borne by the person who is taxed.
ASSIGNMENTS- MBA Sem-I
MB0026 – MANAGERIAL ECONOMICS
Air pollution- Air pollution can be contributed to the three man made sources,
industrial production, vehicles and the energy. Human suffering increases due to
the air pollution. Respiratory disorders and cancers are due to inhalation of polluted
air. The vehicle increases the sulpur dioxide concentration in the air creating
breathing problems for the children and affects their neurological developments.
Deforestation- Forest is the most important source to protect environment. They
protect soil erosion and regulate the ecological balance of the nature. They i affect
the nature and the climatic condition of the region. The blind increase in the
industrial growth is leading to cutting down of many forest leading to many serious
problems for the human being.
• For example, after the economy has just been in recession, the
unemployment level will be fairly high. This will mean that there is a labor
surplus.
• As the economy has just started growing, the aggregate demand (AD) will
increase and therefore leading to an increase in employment. In the
beginning, there will be little pressure for a raise in wages. However, as the
economy grows faster and more people are employed, wages will start rising
slowly.
B) Stagflation
Ans: Stagnation + Inflation = Stagflation
Stagnation = Slow or no growth. Inflation = Rises in price.
Stagflation is an economic trend in which inflation and unemployment rise while
general growth of the economy is slow. It can be difficult to correct stagflation,
because focusing on one aspect of the problem can exacerbate other aspects. Many
governments try to avoid stagflation through fiscal policy, by promoting even and
healthy growth and attempting to prevent inflation. If stagflation continues long
enough, it will trigger an economic recession and an ultimate self-correction.
Stagflation is when the economy experiences slow GDP growth (stagnation) with
high inflation and high level of unemployment. This occurred in the 1970's in many
countries. When the economy is working normally, slow economic growth reduces
demand, which keeps prices low, preventing inflation. Stagflation can only occur
when fiscal or monetary policy sustains high prices, and inflation, despite slow
growth. Stabilization policies to control stagflation.
1. The money supply should be tightened to check inflation.
2. We can control inflationary wage and price increases with direct controls.
Government can limit increases by law or constrain them through tax policies.
3. Protect people against the effects of inflation. All wages, including the minimum
wage, could be increased automatically when the Consumer Price Index increases.
Government bonds could pay a fixed real interest rate by adjusting the actual
interest rate for inflation.
Stagflation is difficult to control without government controls. Therefore, political
will is necessary for formulating the measures to stop stagflation.