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SMU

ASSIGNMENT
SEMESTER – 1
MBO026

MANAGERIAL ECONOMICS

SUBMITTED BY:
MUSHTAQ AHMAD PARA
MBA
ROLL NO.- 520950361
Subject code – MB0026
Set 2

SUBJECT NAME- MANAGERIAL ECONOMICS

1. What is pricing policy? What are the internal and external


factors of the policy?
Ans. Pricing policy refers the policy of setting the price of the product or products and
services by the management after taking into account of various internal and external
factors, forces and its own business objectives. Pricing policy basically depends on price
theory that is the corner stone of economic theory. Pricing is considered as one of the basic
and central problems of economic theory in modern economy. Fixing prices are the most
important aspect of managerial decision making because market price charged by the
company affects the present and future production plans, pattern of distribution, nature of
marketing etc. Above all, the sales revenue and profit ratio of the producer directly depend
upon the prices.
Hence, a firm has to charge the most appropriate price to the
customers. Charging an ideal price, which is neither too high nor too low, would depend on a
number of factors and forces. There are no standard formulas or equations in economics to
fix the best possible price for a product. The dynamic nature of the economy forces to raise
and reduce the prices continuously. Hence, price fluctuates over a period of time.
In economic theory, generally, we take into account of only two parties, i.e.,
buyers and sellers while fixing the prices. However, in practice many parties are associated
with pricing of a product. They are rival competitors, potential rivals, middlemen,
wholesalers, retailers, commission agents and above all the Government. Hence, we should
give due consideration to the influence exerted by these parties in the process of price
determination.

The various factors and forces that affect the price are divided into two categories.

They are as follows:-

External Factors (Outside factors):-

Demand, supply and their determinants.


Elasticity of demand and supply.
Degree of competition in the market.
Size of the market.
Goodwill, name, fame and reputation of a firm in the market.
Trends in the market.
Purchasing power of the buyers.
Bargaining power of customers.
Buyer’s behavior in respect of particular product.
Availability of substitutes and complements.
Government’s policy relating to various kinds of incentives, disincentives, controls,
restrictions and regulations, licensing, taxation, export & import, foreign capital, foreign
technology, MNC’s etc.
Competitors pricing policy.
Social consideration.
Bargaining power of customers.

Internal Factors (Inside factors):-

Objectives of the firm.


Production costs.
Quality of the product and its characteristics.
Scale of production.
Efficient management of the resources.
Policy towards percentage of profits and dividend distribution.
Advertising and sales promotion policies.
Wage policy and sales turn over policy etc.
The stages of the product on the product life cycle.
Use pattern of the product.
Extent of the distinctiveness of the product and extent of product differentiation practiced
by the firm.
Composition of the product and life of the firm.

Thus, multiple factors and forces affect the pricing policy of a firm.

Q2. Mention three crucial objectives of price policies


Ans. The ultimate objective of every firm is to maximize profits. This is possible when the
returns exceed costs. Setting an ideal price for a product assumes greater importance.

The following objectives are considered while fixing the prices of the product.

Profit Maximization in the short term:-

The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to
achieve this objective should be formulated in such a way as to maximize the sales revenue
and profit. Maximum profit refers to the highest possible profit. In short run, a firm not only
should be able to recover its total costs, but also should get excess revenue over costs. This
will build the morale of the firm and instill the spirit of confidence in its operations. It may
follow skimming price policy, i.e., charging a very high price when the product is launched to
cater to the needs of only a few sections of people. It may exploit wide opportunities in the
beginning. But it may prove fatal in the long run. It may lose its customers and business in
the market. Alternatively, it may adopt penetration pricing policy i.e., charging a relatively
lower price in the latter stages in the long run so as to attract more customers and capture
the market.

Profit optimization in the long run:-

The traditional profit maximization hypothesis may not prove beneficial in the long run. With
the sole motive of profit making a firm may resort to several kinds of unethical practices like
charging exorbitant prices, follow Monopoly Trade Practices (MTP), Restrictive Trade
Practices (RTP) and Unfair Trade Practices (UTP) etc. This may lead to opposition from the
people. In order to over come these evils, a firm instead of profit maximization, aims at
profit optimization. Optimum profit refers to the most ideal or desirable level of profit.
Hence, earning the most reasonable or optimum profit has become a part and parcel of a
sound pricing policy of a firm in recent years.

Price Stabilization:-

Price stabilization over a period of time is another objective. The prices as far as possible
should not fluctuate too often. Price instability creates uncertain atmosphere in business
circles. Sales plan becomes difficult under such circumstances. Hence, price stability is one
of the pre requisite conditions for steady and persistent growth of a firm. A stable price
policy only can win the confidence of customers and may add to the goodwill of the concern.
It builds up the reputation and image of the firm.
Q3. Mention the bases of price discrimination.
Ans. The policy of price discrimination refers to the practice of a seller to charge different
prices for different customers for the same commodity, produced under a single control
without corresponding differences in cost.

The basis for Price discrimination is as follows:-

Personal Differences: - This is nothing but charging different prices for the same
commodity because of personal differences arising out of ignorance and irrationality of
consumers, preferences, prejudices and needs.

Place:-Markets may be divided on the basis of entry barriers, for e.g. price of goods will be
high in the place where taxes are imposed. Price will be low in the place where there are no
taxes or low taxes.

Different uses of the same commodity:- When a particular commodity or service is


meant for different rates may be charged depending upon the nature of consumption. For
e.g. different rates may be charged for the consumption of electricity for lighting, heating
and productive purposes in industry and agriculture.

Time:- Special concessions or rebates may be given during festival seasons or on important
occasions.

Distance:- Railway companies and other transporters, for e.g., charge lower rates per km if
the distance is long and higher rates if the distance is short.

Special orders:- When the goods are made to order it is easy to charge different prices to
different customers. In this case, particular consumer will not know the price charged by the
firm for other consumers.

Nature of the product:- Prices charged also depends on nature of products e.g., railway
department charge higher prices for carrying coal and luxuries and less prices for cotton,
necessaries of life etc.

Quantity of purchase:- When customers buy large quantities, discount will be allowed by
the sellers. When small quantities are purchased, discount may not be offered.

Geographical area:- Business enterprises may charge different prices at the national and
international markets. For example, dumping – charging lower price in the competitive
foreign market and higher price in protected home market.

Discrimination on the basis of income and wealth:- For e.g., a doctor may charge
higher fees for rich patients and lower fees for poor patients.

Special classification of consumers:- For e.g., Transport authorities such as Railway and
Roadways show concessions to students and daily travelers. Different charges for I class and
II class traveling, ordinary coach and air conditioned coaches, special rooms and ordinary
rooms in hotels, etc.

Age:- Cinema houses in rural areas and transport authorities charge different rates for
adults and children.
Preference or brands:- Certain goods will be sold under different brand names or trade
marks in order to attract customers. Different brands will be sold at different prices even
though there is not much difference in terms of costs.

Social or Professional status of the buyer:-A seller may charge a higher price for those
customers who occupy higher positions and have higher social status and fewer prices to
common man on the street.

Convenience of the buyer:- If a customer is in hurry, higher price would be charged.


Otherwise normal price would be charged.

Discrimination on the basis of sex:- In selling certain goods, producers may discriminate
between male and female buyers by charging low prices to females.

If price differences are minor, customers do not bother about such discrimination.

Peak season and off peak season services:- Hotel and transport authorities charge
different rates during peak season and off peak seasons.
Q4. What do you mean by the fiscal policy? What are the instruments
of fiscal policy? Briefly comment on India’s fiscal policy.
Ans. The policy of price discrimination refers to the practice of a seller to charge different
prices for different customers for the same commodity, produced under a single control
without corresponding differences in cost.

The basis for Price discrimination is as follows:-

Personal Differences: - This is nothing but charging different prices for the same
commodity because of personal differences arising out of ignorance and irrationality of
consumers, preferences, prejudices and needs.

Place:-Markets may be divided on the basis of entry barriers, for e.g. price of goods will be
high in the place where taxes are imposed. Price will be low in the place where there are no
taxes or low taxes.

Different uses of the same commodity:- When a particular commodity or service is


meant for different rates may be charged depending upon the nature of consumption. For
e.g. different rates may be charged for the consumption of electricity for lighting, heating
and productive purposes in industry and agriculture.

Time:- Special concessions or rebates may be given during festival seasons or on important
occasions.

Distance:- Railway companies and other transporters, for e.g., charge lower rates per km if
the distance is long and higher rates if the distance is short.

Special orders:- When the goods are made to order it is easy to charge different prices to
different customers. In this case, particular consumer will not know the price charged by the
firm for other consumers.

Nature of the product:- Prices charged also depends on nature of products e.g., railway
department charge higher prices for carrying coal and luxuries and less prices for cotton,
necessaries of life etc.

Quantity of purchase:- When customers buy large quantities, discount will be allowed by
the sellers. When small quantities are purchased, discount may not be offered.

Geographical area:- Business enterprises may charge different prices at the national and
international markets. For example, dumping – charging lower price in the competitive
foreign market and higher price in protected home market.

Discrimination on the basis of income and wealth:- For e.g., a doctor may charge
higher fees for rich patients and lower fees for poor patients.

Special classification of consumers:- For e.g., Transport authorities such as Railway and
Roadways show concessions to students and daily travelers. Different charges for I class and
II class traveling, ordinary coach and air conditioned coaches, special rooms and ordinary
rooms in hotels, etc.

Age:- Cinema houses in rural areas and transport authorities charge different rates for
adults and children.
Preference or brands:- Certain goods will be sold under different brand names or trade
marks in order to attract customers. Different brands will be sold at different prices even
though there is not much difference in terms of costs.

Social or Professional status of the buyer:-A seller may charge a higher price for those
customers who occupy higher positions and have higher social status and fewer prices to
common man on the street.

Convenience of the buyer:- If a customer is in hurry, higher price would be charged.


Otherwise normal price would be charged.

Discrimination on the basis of sex:- In selling certain goods, producers may discriminate
between male and female buyers by charging low prices to females.

If price differences are minor, customers do not bother about such discrimination.

Peak season and off peak season services:- Hotel and transport authorities charge
different rates during peak season and off peak seasons.
Q5. Comment on the consequences of environmental
degradation on the economy of a community.
Ans. There has been very fast and quick economic growth in many countries of the world.
There is a visible change in the pattern of economic growth. In the name of quick economic
development in a very short period of time, there is fast depletion of all kinds of resources
and many types of resources may be exhausted in the near future. There has been
excessive and over-utilization of many resources. Degradation and destruction of resource-
base is unpardonable. They have adverse effects on health, efficiency and quality of life of
the people. Hence, there is cry for environmental protection in recent years. Unless concrete
measures are taken in right time, the man kind may have to pay a heavy price in the near
future. In this background, today economists are talking about the concept of sustainable
economic development.
Sustainable economic development seeks to meet the needs and aspirations of
the present without compromising the ability of future generations to meet their
own needs. It is felt that sustainable development can be achieved only when the
environment is protected, conserved, saved and improved consciously by the people in a
country. The process of development will become sustainable only when the stocks of
various sources of resources, their quantities represent a common heritage for all
generations. Hence, all out efforts are to be made to augment these resources in several
ways and means.
While estimating the national income of a country, under the new system of accounting, one
has to take into account of the total physical volume of resources and their monetary value.
The total depreciation charges include the wear and tear of capital assets, depletion of
natural resources, various kinds of losses arising out of capital assets, depletion of natural
resources, various kinds of losses arising out of environmental decay and degradation etc.

Environmental damages may be in the following categories they are as follows:-

1. Water Pollution
2. Air Pollution
3. Soil Pollution
4. Deforestation
5. Loss of Biodiversity
6. Solid and Hazardous wastes
Thus, several factors have contributed for environmental degradation.
Q6. Write short notes on the following:

a) Philips curve
B) Stagflation
Ans. Philips Curve:- A. W. Philips the British economist was the first to identify the
inverse relationship between the rate of unemployment and the rate of increase in money
wages. Philips in his empirical study found that when unemployment was high, the rate of
increase in money wage rates was high. Philips calls it as the trade off between
unemployment and money wages.

In the figure the horizontal axis represents the rate of unemployment and the vertical axis
represents the rate of money wages. In the figure, the diagonal represents the Philips curve;
diagonal is sloping downwards and is convex to the origin of the two axes and cuts the
horizontal axis. The convexity of diagonal shows that money wages fall with increase in the
rate of unemployment or conversely money wages rise with decrease in the rate of
unemployment.
This inverse relationship between money wage rates and unemployment
is based on the nature of business activity. During the period of rising business activity wage
rate is high and the rate of unemployment is low and during periods of declining business
activity wage rate is low and the rate of unemployment is high.

Stagflation:- The present day inflation is the best explanation for stagflation in the whole
world. It is inflation accompanied by stagnation on the development front in an economy.

Stagflation is a portmanteau term in macro economics used to describe a period with a high
rate of inflation combined with unemployment and economic recession. Inflationary gap
occurs when aggregate demand exceeds the available supply and deflationary gap occurs
when aggregate demand is less than the aggregate supply. These are two opposite
situations. For instance, when inflation goes unchecked for some time, and prices reach very
high level, aggregate demand contracts and a slump follows. Private investment is
discouraged. Inflationary and deflationary pressures exist simultaneously. The existence of
an economic recession at the height of inflation is called “stagflation”.
The effects of rising inflation and unemployment are especially hard to counteract for
the government and the Central Bank. If monetary and fiscal measures are adopted to
redress one problem, the other gets aggravated. Say, if a cheap money policy and public
works programme are adopted to remedy unemployment inflation gets aggravated. On the
other hand, if a dear money policy and stringent fiscal measures are followed
unemployment will get aggravated. It is the most difficult type of inflation that the world is
facing today.