Manegerial Economics.doc

8/11/2019 Manegerial Economics.doc

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Learn as much as you can while you are young, since life becomes too busy later.~Dana Stewart Scott

Assignment By: Merwin ALVA ---------------------Just as Reference------ Dont copy

Managerial Economics MB0042 (Assignment winter 2013)

Q.1 =

As per Boulding, Elasticity of Demand checks the responsiveness of demand to changes in

price.The Elasticity of the demand can be of price elasticity; income elasticity; promotional elasticity;

cross elasticity; substitution elasticity.

Advertising Elasticity of Demand is the responsiveness of demand or sales to change in

advertising or other promotional expenses. In short it is an elasticity measuring the effect of an


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increase or decrease in advertising on the market. The advertising elasticity is percentage

change in demand or sales divided by percentage change in advertisement expenditure.

The formula can be expressed in Following way:

Ea = Percentage (%) change in demand or sales

Percentage (%) change in Advertisement expenditure

Symbolic formula:

Ea= D or Sales x A .

A Demand (D) or Sales (S)

Advertising elasticity of demand can be used for advertising expenses are in line though

an increase in demand may not be the only desired outcome of advertising. The following are

three practical application of the Advertising Elasticity of Demand:

1.

Helps in determining the level of prices: Level of prices fixed by a firm for its productwould depend on the amount of advertisement expenditure incurred by it in the market.

For eg; most of the branded products are expensive because of the high expenditure of

advertisement and thus it effects the level of market.

2. Helps in formulating appropriate sales promotional strategy: Volume of advertisement

expenditure also throw light on the sales promotional strategies adopted by a firm to

increase its total sales in the market.

3. Helps in manipulating the sales: Advertising elasticity of demand is useful in

determining the optimum level of sales in the market because the sales made by firmwould also depend on the total amount of money spent on the sales promotion of the

other firms in the market.

Q.2= Production in Economics is a process of combining various material inputs and immaterial

inputs (plans etc.) in order to make something for output. It can be generally defined as act of

creating output. It can be both in terms of goods as well as services. In general the term

Production means transformation of physical inputs into physical outputs.The four factors of production are Land, Labour, and Capital & Organisation.

Production Function can be defined as technological or engineering relationship between

physical quantity of input employed and physical quantity of outputs obtained by an


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organisation. There are 2(two) types of Production Function:

1. Short Run Production Function: The producer will keep all fixed factors as constant and

change only a few variable factor inputs.

There are two types further:a. Quantities of all inputs both fixed and variable will be kept constant and only one

variable input will be varied.

b. Quantities of all factor inputs are kept constant and only two variable factor inputs are

varied.

2. Long Run Production function: The producer will vary the quantities of all factor

inputs are fixed and variable in the same proportion.

Further it is classified into 3:

a. The quantity of inputs can decrease while the quantity of output may remain same.

b. The quantity of inputs can decrease while the quantity of output may increase.

c. The quantity can remain constant while the quantity of output may increase.

Uses of Production Function:

Production function can appear as highly abstract and unrealistic in Reality but it is both logical

and useful. Production function is immense utility to the managers and executives in the

decision making process at the organization level.

The following are some uses of production functions:

1) to calculate the least cost input combination for a given output or the maximum output inputcombination for a given cost.

2) To working out on an optimal and economic combination of inputs for getting a certain level

of output. The utility of employing (Employee Productivity) a unit of variable factor input in the

production function can be judged.

3) To help in long run decision making. Managers can identify increase or decrease the

production, if the subject is production to constant returns.


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Q.4=Existence of a single seller & many buyers in the market means Monopoly. It is a market

form in which a single producer controls the whole supply of a commodity which has no such

substitute. Monopoly has a power to fix a price of the commodity of its own.

Monopoly Enterprises can be small as well big in size; Size is not a characteristic of monopoly

business. Patents, copyright or trademarks can be considered as an example of government

granted monopoly organisations.

Monopolist has an effective control over the output & supply. In case of monopoly market the

market forces of demand & supply do no work smoothly in determination of equilibrium price

and output (supply).

The monopoly firm considers the following aspects while fixing the price & output:

1.The monopolist can either fix the price of its own product and supply but the price and

control of the supply cannot be fixed simultaneous. The price of the product may be fixed and

supply can be determined by the demand conditions.

2. It is difficult to estimate the accurate demand and elasticity of demand for the monopolist on

his product rather it would be beneficial to fix the price of the product.

3. The points to be considered while determining the price is demand conditions, product cost,

substitutesemergency, competitions, government policies.

4. In market if there is inelastic market demand than a higher price can be charged & if there is

an elastic market demand than a relatively lower price has to be charged.

5. Smaller quantities at higher market price & larger quantities can be sold at lower price.

6. The price should be reasonable it should not be low or high

7. The total profit of the monopolist is always high with the perfect price.

Assumptions:

1.In market situation, a monopoly organisation aims at maximise its total profit.

2. No as such rules & regulations or policies of government are implemented on monopoly firm.

The government has no control on monopoly firm.

3. Monopoly firm charges a high uniform price to its all customers.


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Q.5=The word Investment has different meaning in Economics & Finance.In Finance Term,we can say investment is putting money into assets with the expectation of appreciation likeinterest, profits or dividend. It is purchase of shares, bonds & dividends.In Economics Terms, Investment is putting money into fixed physical assets like factories,shops, machinery, properties etc. Investments are risk or risk free depends upon its nature.

Investment function has a connection between aggregate income and aggregate investment.It is a second important component of demand.

Five (5) Types of Investment.

1. Private Investment: By the name itself Private it describe the investment is done by privateentrepreneurs on the purchase of capital assets. It is influenced by Marginal Efficiency ofCapital& its interest rate. Private investments aim at profit basis. Entrepreneurs invest only onthose projects which provide quick result & higher gain.

2. Public Investment: Public defines control by central, state & local government authorities.These investments are basically on infrastructures, public utilities, defense industries,construction of dams & other projects.

3. Foreign Investment: It is an investment outside the national borders most probably thesetypes of investments are done by the country where exports are over imports of country. Itdepends on rules and regulations of both the countries.

4. Induced Investment: Induced investment which changes as per the changes in the level ofnational income. When income increases, the level of demand of consumption also increases. Itis income elastic in nature. It is sensitive in changes of income and thus regularly governed bygovernment concern. It can be called as Private investment due to some of its similar factors.

5. Autonomous investment: Investment which is independent of level of income refersAutonomous. This investment doesnt vary with the level of income; it can be also calledincome elastic in nature. It depends upon populations, technological, some new inventing ofresources. It can be called with the other name Public Investment.

Determinants:

Investment factors depend upon number of factors like interest rate, political environment,uncertainty level, existing stock of capital, level of income of investor, invention and innovation,consumes demand level, availability of capital and liquid assets of the inventors, governmentpolicies etc.

It is necessary that the investment should be more volatile and unpredictable. It is unstable inthe short run because the factors are complex and uncertain in nature. However the mostimportant inducement to invest is in consideration profit.


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There are two factors mainly the profitability of investment depends: Marginal Efficiency ofCapital (MEC) & Interest Rate (IR). It is cost benefits analysis. The cost of borrowing and profitexpectations has to be calculated by entrepreneur (businessmen).Q.6=Monetary policy is controlled by Government Monetary authorities, mostly by centralbank. Monetary policy is an effective tool to promote economic stability and achieve to

objectives. It deals with total monetary supply and its management in the nations economy. Itis a macroeconomic factor & thus the goals are macroeconomic. In Simple words monetarypolicy can be explained as it is administrating and controlling the money supply of a country. Itincludes Currency notes & coins, level of money &Parameters:

1. Complete money supply in the country: One of the important parameters is to supply thecurrency throughout the country for the people for the basic requirement and other primary &secondary requirements.2. Interest rates & borrowing Cost: The government has to decide the bank interest rates & loaninterest rates as per the parameters & economic situation of the country.3. Measures of credit control: Credit control is one of the important issues in every country ascredit can bring deficit to the country. Excess increase in credit can harm the growth of thecountry and can bring recession to the economy.

Objectives:As we have already study that monetary policy is a part of overall country economic matters,therefore it must be regarded with the economic objectives as discussed by government experts.Objectives should be set as per some priorities to current economic problems, current economicpolicies and its magnitude.

There are some objectives mentioned below:1. Neutral money policy: As the name itself describes Neutral, it doesnt affect the price,

employment & income of an individual so as a country.

2. Price Stability: It refers to control on the variation and fluctuations on the price level in theeconomical market.

3. Exchange rate stability: In order to run smooth business in international trade from the tradebarriers like currency rate fluctuations & variation, therefore it is one of the essential objectives.

4. Control of trade cycle: To control the operations of trade cycle to handle economic instabilitiesissues like inflations, deflation etc. By regulating proper money supply in the country canachieve his objective.

5. Full employment: Higher Employment rate is a factor in nations development this can beonly possible when there is proper supply of finance in the country & his has to be regulated inthese policies.

6. Equilibrium in the balance of payments: There are two types of balance payments its surplus& deficit. Presently in India BOP 2013 were measure 17 billon USD deficits. A country aims to


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be surplus in BOP for the development; hence these factors are also important whileconsidering monetary policies.7. Rapid economic growth: An economic rate growth at its best can ensure more employment,income & will increase the standard of living & higher output in a country.

Physical policy (Direct Controls):

Government interference with the forces of demand and supply in the country market and stategovt. regulation of price of commodities are essential features this period. Therefore whenmonetary and fiscal policies fail in controlling price than this Physical Policy or Direct controlpolicy is applied. The inflationary forces are strong during war period at that time the priceinvolves imposing ceilings in prices & has to be stopped from rise it more.

Instruments & Disadvantages

Generally Physical policies are in 3 forms: Control on consumption through price control anddistribution through rationing. Control on investment and production through licensing andfixing of quotas. Control on foreign trade through import control or export control.

Demerits of direct controls:

1. It can be introduced quickly and easily, hence the effects of these can be quick.2. It can be more discriminatory than the fiscal policies & monetary control.3. The operation of controls can have a variation from time to time in many sectors.

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