SENGUNTHAR ENGINEERING COLLEGE,TIRUCHENGODE

DEPARTMENT OF BUSINESS ADMINISTRATION [MBA]

MBA 0903 – MANAGERIAL ECONOMICS

Unit 1& Unit 2

TWO MARK QUESTIONS WITH ANSWERS & ESSAY TYPE QUESTIONS

Prepared by Mr.V.Saravana Kumar, M.A,MBA, M.Phil Lecturer

Department of Business Administration [MBA] Sengunthar Engineering College, Tiruchengode.

HOD/MBA Principal Director

MBA – 0903 – MANAGERIAL ECONOMICS

Two mark questions with answers

1. What is Managerial Economics?

Spencer and Siegel man defines , “Managerial Economics is the

integration of economic theory with business practices for the purpose of

facilitating decision making and forward planning by management

Brigham and pappas believes that managerial economics is thE , “

application of economic theory and methodology to business

administration practices

2. Define Economics.

Adam smith’s Wealth definition - Economics as the science of

wealth .Economics lays down the principles to make the people and the

sovereign rich . The science provide ways and means of getting plentiful

revenue to the state and more property the people .

Marshall’s Welfare definition – A study of mankind in the ordinary

business life . It examines that part of individual and social action which is

most closely connected with the attainment and with the use of material

requisites of well being

Lionel Robbin’s Scarcity definition - Economics as a science which

studies human behavior as a relationship between ends and scarce meas

which have alternative use

3. What is Business Decision Making?

Business Decision Making involves choices between various courses

of actions and these choices must be made in the environment over which

the decision maker has limited or even no control. Such conditions of the

environment are called states of nature. Normally business decisions have

to be taken very clearly otherwise the decision maker has to face some

consequences.

4.What is marginal analysis ?

Marginal analysis is the analysis of the benefits of costs of the

marginal units of the input and output. This is a technique widely used in

business decision making and ties together much of economic thought . To

do a marginal analysis we have to change variable such as quantity of

good that the firm buys, the quantity of the output they produce , the

quantity of an input they used and ( these variable are usually refereed

they as control variables )

5. State the Law of Diminishing Marginal utility.

Law of diminishing marginal utility states that with successive

increases in the units of consumption of a commodity, every additional unit

of that commodity gives lesser satisfaction to the consumer. Consumption

beyond point of satiety i.e.., maximum satisfaction only yields negative

marginal utility.

6.What is Equi-marginal utility?

A consumer maximizes his total utility by allocating his income

among goods and services(including savings) available to him in such a

way that the marginal utility per rupees worth of one good equals the

marginal utility per rupee’s worth of any other good.

7. What is meaning of Demand?

Demand for a commodity refers to the quantity of the commodity

which an individual consumer or household is willing to purchase per unit

of time at a particular price. Demand for a commodity implies –

Desire of the consumer to buy the product

Consumer’s willingness to buy the product

Sufficient purchasing power in consumer’s possession to buy the

product.

8. What are the types of Demand?

Demand for any commodity is determined by its nature. Demand for

such commodities which are essential for the consumer is unaffected

significantly by changes in their market conditions. We can classify the

Demand into following types.

Demand for consumer’s and producer’s goods.

Demand for perishable and durable goods

Derived and autonomous demands.

Firm and Industry demands

Demands by total market and market segments

Short term and long term demand.

9. Define Demand for Consumer’s and producer’s goods.

The consumer’s goods are goods used for final consumption.

Demand for consumer’s goods are also termed as direct demand, and

these goods are used directly for final consumptions.

Example – Food items, readymade dresses, houses, etc..,

The producer’s goods are used for production of other goods.

Demand for producer’s goods is termed as derived demand, for these

goods are demanded not for final consumption but for the production of

other goods.

Example - Machines, Tools, Raw Materials, etc..,

10. State the Law of Demand.

The Law of Demand states that “The amount demanded of a

commodity increases when there is a fall in price, and the amount

demanded of a commodity diminishes at the time of rise in prices”.

That is if the price of the good increases its quantity demanded

decreases, while if the price of the good decreases its quantity demanded

increases.

11. Explain the assumptions in Law of Demand.

The law of demand is based on certain assumptions:

There is no change in consumer’s tastes and preferences.

Income should remain constant.

Prices of other goods should not change.

There should be no substitutes for the commodity.

The commodity should not confer any distinction.

The demand for the commodity should be continuous.

People should not except any change in the price of a commodity.

12. Define Elasticity of Demand.

The Elasticity of demand is defined as the percentage change in

quantity demanded caused by one percent change in the demand

determinant under consideration, while other determinants are held

constant.

The formula for finding the EOD is

Percentage change in the quantity demanded of good X

Ed = Percentage change in determinant Z

13. Give short note on Derived and Autonomous Demand.

When the demand for a product is tied to the purchase of

some parent product, its demand is called as Derived.

For Example

Demand for cement is a derived demand since it is needed for its

own sake but for satisfying the demand for buildings.

An autonomous demand for a commodity is one that arises on its

own out of a natural desire to consume or possesses a commodity.

Autonomous demand is independent of the demand for any other

commodity.

For Example

The demand for commodities which arises directly from the

biological or physical needs of human beings like food, dresses, shelter,

etc..,

14. Define Demand Schedule.

Demand Schedule is a list of quantities of a commodity purchased

by the consumer at different prices. The Law of Demand may be explained

with the help of Demand Schedule.

The following table shows the demand schedule of commodity X

When the price falls from Rs 10 to Rs 8, quantity demanded increases

from 1 to 2 in the same way as price falls, quantity demanded increases.

15. What is Demand Forecasting? What are its types?

A forecast is a prediction or estimation of future situation.

Since the future is uncertain no forecasts can be 100% accurate and

current data. Here the forecast has been made about the demand

conditions for the particular commodity.

Types of Forecast

Passive Forecast

Active Forecast

Long term Forecast

Short term forecast

Price of X (Rs) Quantity Demanded

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1. Passive Forecast- It predict the future situation in the absence of any

action by the firm.

2. Active Forecast- It estimate the future situation taking into account the

likely future actions of the firm.

3.Short term forecast – Usually made for a period upto one year . It made

in order to know the effect of current policies of the firm .Made for the

established products of the firm

4. Long term Forecast- Relates to the production for a year or more . It is

usually made when a new product has to be launched

16. What are the steps involved in scientific approach to Forecasting?

The following steps constitute a scientific approach to Demand

forecasting.

Identify and state the objectives of forecasting clearly.

Select appropriate method of forecasting in the right of objectives.

Identify the variables affecting demand for the given product or

service.

Express these variables in appropriate form

Collect the relevant data to represent the variables

Determine the most probable relationship between the dependent

and independent variables.

Make appropriate assumptions to forecasts and interpret

17. Explain the criteria for the choice of good forecasting method.

The following criteria have to be followed while choosing the

forecasting method. They are

The result achievable by a forecasting method must be weighted

against the cost of the method

The use to which the forecast can be made should be well

understood. Infact, it is not a question of results achievable but

results achieved by forecasting method.

It is quite easy to judge the existing trend. But for a good forecast it

is necessary that it should also predict deviations and turning points

so that the forecasts are more effective.

There is a time gap between the occurrence of an event and it

forecast- known as the lead time.

18. Explain the traditional steps involved in Forecasting method.

The following are the steps involved in forecasting method.

They are

Identification of objective

Determining the nature of goods under consideration

Selecting a proper method of forecasting

Interpretation of results

19. What is Price Determination?

A firm cannot arbitrarily fix the price of its products to achieve its

objective of maximizing profit. There can be only one optimal price

for a product that can maximize the profit, under a given set of

conditions.

The price is generally different in different kinds of markets,

depending on the level of competitions between the sellers.

The sellers should not charge the price for their products as they

like.

20. What is Supply?

The term supply denotes the quantity of goods or services offered for

sale at various prices at any moment of time or during a specified time

period, say, a week, month, year and so on, but the conditions of supply

remains same.

And the term supply also indicates the willingness and ability of

producers to produce for sale various amounts of goods and services at

each specific price in a set of possible price during a specified period of

time.

21. Define Elasticity of Supply.

The Elasticity of Supply is defined as the degree of

responsiveness of the quantity of a commodity supplied for a small change

in price.

It may also be defined as the ratio of percentage change in the

quantity supplied of a commodity to the percentage change in its price.

Proportionate change in quantity supplied of the product X

Es = Proportionate change in price of the product X

22. What are the determinants of Pricing?

The following are the factors that determine the price of a

commodity:

The demand

Cost of Production

Objectives of its producers

Nature of the competition

Government policy

23. What do you mean by Giffen Paradox?

Giffen goods are commodities with less quality and less cost.

These goods are available in all places and these goods are sometimes

called as Inferior Goods.

24. Explain the determinants of supply .

The main determinants of the supply are

Price of the good

Prices of other goods

Prices of factor of production

Producers objectives

State of technology

25.Explain the meaning of Production.

Production is an activity that transforms inputs into output. Production is

any activity that increases consumer usability of goods and services thus

production consists of producing , storing and distributing tangible of goods

and services

For example : A sugar mill uses such inputs as labour, raw material like

sugarcane and capital invested in machinery, factory building to produce

sugar.

26. Explain short run and long run production .

Short run production.

The short run is that period of time in which some of the firm’s inputs

are fixed – these fixed inputs act as a limiting factor on change in output. In

the short run at least one of the inputs remains constant , while the other

inputs are vary in nature. Simply, if the firm uses more then two inputs but

only two of them are variable and other is fixed is said to be short run

Long run.

The long run term is that period of time in which there are no limiting

factors on output change. In long run all the variables are variable in nature

and there is no fixed input like short run . Simply, if the firm uses only two

inputs and both of them variable in nature is said to be long run.

27. Define Production function with its assumptions.

The production function is purely a technological relationship which expresses the relation between output of a good produced and the different combinations of inputs used in its production. It means the maximum Amount of output that can be produced with the help of each possible combination of inputs. The production function can be mathematically written as Q= F(L,N,K…..)Assumptions :

1. technology is invariant2. Production function includes all the technically efficient methods of

production

28. Define law of variable propositions .

The law of variable propositions states that as more and more of one

factor input is employed , all other input quantities held constant , a point

will eventually be reached where additional quantities of the varying input

will yield diminishing marginal contributions to total product

This law is also called as law of diminishing marginal returns

29. Define Isoquant with its types .

An Isoquant is a curve representing the various combination of two

inputs that produce the same amount of output . An Isoquant is defined

as curve which shows the different combinations of the two inputs

producing a given level of output.

Types :

1. Linear Isoquant

2. Input- output Isoquant

3. Kinked Isoquant

4. Smooth convex Isoquant

30..What do you mean by Return to Scale ?

The percentage increase in output when all inputs vary in the same

proportion is known as returns to scale. Obviously return to scale relate to

greater use of inputs maintaining the same technique of production

1.Write Cobb- Douglas production function and its properties.

The production function suggested by C.W.Cobb, was of the following

form :

Q=ALb kl-h

Where Q = Total output L = Units of labour K = Units of Capital A = a constant B = a parameter

Essay type questions

1. Explain the scope of managerial economics

2. Explain the role of managerial economist

3. Explain the types of Demand and the determinants of demand.

4. What is Demand Forecasting? Explain its methods.

5. Explain the types of Price Elasticity of Demand.

6. Explain the factors governing Elasticity of Demand.

7. Explain the types of Income Elasticity demand.

8. Explain the methods available for measuring the Price elasticity of

demand.

9.Explain the nature of decision making with an example

10. Explain the business decision making process

11. Explain elasticity of supply and its types .

12. What is production function ?Discuss Short run and Long Run

production function

13.. Explain Cobb – Douglas Production Function

14.Define Iso-quants and its types

15.Explain the three stage of Return to Scale .