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variation
in
demand
implies
extension
or
working and show statistically the economics activities of the different sector of the economy. It
also indicates their mutual relationship and provides a basis for analysis.
The concept of static multiplier assumes that the change in investment and the resulting
changes in income are simultaneous. There is no time lag between change investment
and the change in income
Static multiplier ignores the process through which the change in income and
consumption expenditure lead to new equilibrium
The dynamic multiplier traces the process through which equilibrium of national income
shift from one position to the other
In real life, income level does not rise instantly when an autonomous investment is made
because of the time lag between increase in income and consumption expenditure
future course of the market demand for the product. It is based on statistical data about past
behavior and empirical relationship of the demand determinants.
Question 25:- What is advertisement elasticity of demand?
Answer. Advertisement occupies a very prominent place in the competitive market economy;
consumer generally needs a minimum level of advertisement before they take notice of a
particular product. How far is demand of a product influenced by advertisement? It can be
measured by advertisement elasticity of demand, therefore advertisement elasticity of demand is
define as,
The Proportionate change in the sale or quantity demanded of a particular product in response to
a change in expenditure on advertisement or sale promotion activities. The demand function in
this case may be stated as
Qx =f(A)
Where,
Qx =Demand for the product.
A =Advertisement expenditure of the firm
Ans- An arrangement whereby buyers & sellers come in close contact with each other directly or
indirectly to sell and buy goods is described as market. It refers to the whole area of the demand
and supply. It is also refers to the condition and commercial relationship between buyers and
sellers.
Question 31:- Difference between perfect & pure competition market.
Ans- For a market to be purely competitive three fundamental conditions must prevail
1. A large no. of buyers & sellers.
2. Product homogeneity.
3. Free entry or exit of firms.
For a market to be perfectly competitive following condition must be fulfilled
1. Perfect knowledge of market
2. perfect mobility factor of a production
3. government non intervention
4. no transport cost difference
Perfect competition is just a concept a suggestive norms for the market structure.
Pure competition substantial the norms of perfect competition without fully attaining it.
Production Function
Cost Analysis
Inventory Management
Advertising
Pricing system
Resource allocation
Profit
whether a situation is desirable or undesirable. The primary task of Managerial economics is to fit
relevant data to this framework of logical analysis so as to reach valid conclusions.
Positive economics
It is concerned with prescription or what ought to be done. In normative economics, it is
inevitable that value judgment are made as to what should and what should not be done.
Managerial economics is a part of normative economics as its focus is more on prescribing
choice and action and less on explaining what has happened. It expresses a judgment about
whether a situation is desirable or undesirable. The primary task of Managerial economics is
to fit relevant data to this framework of logical analysis so as to reach valid conclusions.
Defining a problem
Formulation of a hypothesis
Model building
Data collection
Deduction
Ans:;-Both consumers goods and producers goods are further classified into perishable/nondurable/single-use goods and durable/non-perishable/repeated-use goods. The former refers to
final output like bread or raw material like cement which can be used only once. The latter refers
to items like shirt, car or a machine which can be used repeatedly. In other words, we can classify
goods into several categories: single-use consumer goods, single-use producer goods, durableuse consumer goods and durable-use producers goods.
This distinction is useful because durable products present more complicated problems of
demand analysis than perishable products. Non-durable items are meant for meeting immediate
(current) demand, but durable items are designed to meet current as well as future demand as
they are used over a period of time. So, when durable items are purchased, they are considered
to be an addition to stock of assets or wealth. Because of continuous use, such assets like
furniture or washing machine, suffer depreciation and thus call for replacement.
Thus durable goods demand has two varieties replacement of old products and expansion of
total stock. Such demands fluctuate with business conditions, speculation and price expectations.
Real wealth effect influences demand for consumer durables.
Composite demand is said to exist when there are different uses for the same commodity .ex:
steel is needed in the manufacture of cars, buildings, railways etc. similarly, electricity is used in
cooking, heating, lighting etc.
Market demand for a product, on the other hand refers to the total demand of all the buyers,
taken together. Market demand is the aggregate of the quantities of a product demanded by all
the individual buyers at a given price over a given period of time.
From the business point of view, market demand has much more relevance as business policy
and planning are based on it. It serves s as a guidepost to producers in adjusting their supplies to
the market economy.
Both individual and market demand schedules (and hence curves, when plotted) obey the law of
demand. But the purchasing capacity varies between individuals.
For example, A is a high income consumer, B is a middle income consumer and C is in the lowincome group. This information is useful for personalized service or target-group planning as a
part of sales strategy formulation.
It is derived demand as it depends on the demand for the output. Demand for producers goods
depends on marginal productivity or the, marginal revenue products.
Producers goods are distinct because
1. The buyers are experts and not influenced by marketing tactics
2. Price fluctuations are violent
3. Goods are purchased on account of profit prospects.
4. The demand is highly sensitive to the price of substitute goods.
There is no change in the availability and the price of the related commodities (i.e.
complimentary and substitutes)
There are no expectations of the consumers about changes in the future price and
income.
Law of Demand
Inverse relationship between price and quantity.
Substitution effect
Income effect
New consumers
Several uses
Psychological effects
As Joel Dean puts it, the BEA presents flexible projections of the impact of the volume of output
upon cost, revenue and profits. As such it provides an important bridge between business
behavior and economic theory of the firm.
In BEA the break up point is located at the level of output or sales at which the net income or
profit is zero. At the point, total cost is equal to total revenue. Hence the break up point is the noprofit-no-loss zone.
The BEC graphically shows the cost and revenue relation to the value of output. It thus depicts
profit output relationship. Hence, the BEC is also called profit group.
In the chart the break-even point is the point at which the total revenue equals total cost, so net
profit is zero at OQ level of out put.
The area between the TR curve and TC curve depicts the profit function. It follows that the firm
incurs loss, when it produces output below OQ level. OQ level of output is at break-even point of
no loss, no profit. When it expands further output, it makes profit.
It is Static.
It is Unrealistic.
It assumes Horizontal Demand Curve with the given price of the product.
the product recovers Rs.6 over and about variable expenses is Rs.4. Thus, Rs.6 which is the
contribution of the recovery of fixed cost and profit is called the contribution margin.
Question 55:-Margin of safety: Ans:-The concept of safety margin is a great important in break even analysis. The margin of
safety is access of actual sales over the break even sales volume. It represents the difference
between actual sales volume and the sales volume suggested by break even point. In other
words, greater the safety of margin greater will be the profit.
advertising expenses, it is also known as accounting cost since it appears in the accounting
records of the company.
Implicit costs: - Implicit costs are the opportunity costs of the use of factors which a firm does not
buy or hire but already owns. It refers to the wages ,rent ,interest ,etc that is due to the
entrepreneur for employing his own resources., it is necessary to take into account both explicit
and implicit costs for economic decision making .
Ans:-Marginal cost
Definition: - Marginal cost is the cost of producing an extra unit of output.
The marginal cost is also a per unit cost of production. It is the additional made to the total
cost by producing one more unit of output.
In other words, marginal cost may be defined as the change in total cost associated with a
one unit change in output. It is also an extra-unit cost or incremental cost, as it measures the
amount by which total cost increase when output is expanded by one unit. It can also be
calculating by dividing the change in total cost by the one unit change in output.
Average cost
Average total cost or average cost is total cost divided by total units of output.
Thus,
AC= TC / Q or TFC/Q + TVC/Q or AC= AFC + AVC
Hence, average total cost can be computed simply by adding average fixed cost and
average variable cost at each level of output.
Total cost
Total cost is the aggregate of expenditures incurred by the firm in producing a given level
of output.
TC = f (Q) or TC = TFC + TVC
Thus, total cost may be viewed as the sum of total fixed cost and total variable cost at each
level of output.
LONG ANSWERS
Question 1:- What is inflation? Define its causes.
Ans- Inflation is commonly understood as a situation of substantial & rapid general increase in the
level of the price & consequent deterioration in the value of money over a period of time.
The behavior of general prices is measure through price indices. The trend of price indices
reveals the course of inflation & or deflation in the economy. As Lerner says, a price rise which is
unforeseen and uncorrected is inflationary. Also according to proof Rowan, inflation is the
process of the price increase. He suggested the following formula to measure the percentage rate
of inflation.
P (t) =p (t)/p (t-1)*100
Where p=the price level
(P (t), (t-1))=are the periods of calendar time to which the observations calendars
time to which the observation are made)
CAUES OF INFLATION:Inflation is a complex phenomenon which cannot be attributed to a single factor. The
following are some of the major causes.
OVER-EXPANTION OF THE MONEY SUPPLY:Money times, a remarkable degree of correlation between the increase in money
supply and the rise in the price level may be observed.
EXPANSION OF BANK CREDIT:Rapid expansion of bank credit is also responsible for the inflationary trend in a country.
DEFICIT FINANCE:The high doses of deficit financing which may cause reckless spending, may also spiral in
a country.
ORDINARY MONETARY FACTOR:a>High non-development expenditure
b>High plan investment
c>Black money
d>High indirect Taxes
NON-MONETARY FACTOR:a>A high population growth
b>Natural calamities & bad weather
c>Speculation & Hoarding
d>High price of imports
e>Underutilization of the resources
Question 2. WRITE EFFECTS OF INFLATION?
Ans-- Inflation is commonly understood as a situation of substantial & rapid general increase in
the level of the price & consequent deterioration in the value of money over a period of time.
Inflation dire socio-economic consequence
Economic Effects of Inflation:It is classified into three kinds
a> Effects on Production:1. Maladjustments
2. Hindrance to capital Accumulation.
3. Speculation
4. Holding & Block marketing
Answer:- The relative hypothesis is in response to conflicting results of Kuznets historical data
and post-1929 data and budget studies. Duesenberry, in the late 1940s, presented his
reconciliation of Kuznets estimated consumption function passing through the origin with the
flatter consumption functions suggested by the 1929-44 American data and the budget studies. In
this reconciliation he rejected as invalid two basic assumptions which had been earlier at the
base of consumption theory. These assumptions were:
1. Every familys consumption behavior reflects its own wants, independent of the
consumption habits and patterns of the other families (this is akin to the assumption of
independent utility functions of consumers we come across in microeconomic theory).
2. Consumption depends on current income and is not influenced by past consumption
levels. This assumption amounts to temporal reversibility of consumption relationships
(James S Boysenberry, Income, Saving and the Theory of Consumer Behavior,
Cambridge: Harvard university Press, 1949).
Kuznets historical data indicated that while the average fraction of income consumed did not vary
much over long periods of time, there was considerable variation within a business cycle.
Consumption as a fraction of income tended to be low during boom periods and high during
periods of economic slump. Duesenberry tried to explain this phenomenon on the ground that
consumers tend to follow a habitual behavior pattern. As income rises quickly, they consume
more, but not as much as one might expect from long-run historical consumption relationships.
The reason is that they are held back by their higher incomes. On the other hand, when income
decreases they find it difficult to adjust downward their consumption pattern, as they are
accustomed to higher consumption. Thus during periods of declining income, consumption rises
as a fraction of income. Which he rejected, Duesenberrys fundamental psychological hypothesis
was that it is harder for a family to reduce its expenditures from a high level than for a family to
refrain making high expenditures in the first place.
Fall employment acc. To them merely meant the absence of involuntary unemployment. The
classical economist. Word of the opinion that depression was very short phenomena because in
case of any deflation the automatics market mechanism would operate and restore a full
employment in the economy. The classical economist is concern with only 3 market labor market
where equilibrium will attain through demand and supply of labor.
Product: - market labor equilibrium was attaining through a equality of between saving &
investment.
Money market where equilibrium is attain through quality between demand & supply between of
money.
R.G Hawtrey describe the trade is purely Monetary phenomena. According to him the main
reason for assurance of trade cycle is the money supply or the credit creation by the banking
system. Who appoints then the inherent
Instability in bank credit system causes changes in the money supply which in term lead to
cyclical fluctuation. In economy expansion is caused by expansion of bank credit and vise versa.
This theory can be summarized as follows.
1.Which is consumer expenditure = the money expand in the aggregate consumption and
investment.
2.Which is aggregate money income=national income
3.Effective demand =production which is equal to investment
4.The Wholesalers traders could depend on bank credit and highly sensitive to the rate of
interest.
5.When rate of interest is lower than the expansion phase starts.
Expansion phase is the result of the trader desire to increase stock. Which lead to increase in
production, inc. in demand, inc. in employment.
6.As a cumulative process carries on leading higher profit trader seek more credit.
7.As bank go on lending credit cash reserves deplete and central bank limit creation by
commercial bank.
8.In order to discourage borrowing bank in inc. rate of interest.
9.The recessionary phase is thus set in the motion by traders lowering investment activities and
diverting fund to repayment of bank loans.
10.Lower investment lower income and ultimately aggregate demand.
11.Now Bank face with higher cash reserve starts lowering their interest rate in order to utilized
there vast ideal resources.
12.Now this expansion of credit set on the path of recovery leading to inflation.
The theory has been criticized on the following point.
1.To much importance is given to traders, while ignoring capital industries and government.
2.Bank are not only the leaders of economic activity.
3.There are other factors like social and political which lead to accurance of Trade cycle.
Question 10:-Define demand pull and cost push inflation?
Ans:-Broadly speaking to the demand, there are two schools of thought regarding the possible
causes of inflation. One school views the demand-pull element as an important cause of
inflation, while the other group of economists holds that inflation is mainly caused by the costpush element.
Demand-pull or just demand inflation may be defined as a situation where the total monetary
demand persistently exceeds total supply of real goods and services at current prices, so that
prices are pulled upwards by the continuous upwards shifts of the aggregate demand function.
According to the demand-pull theory, price rise in response to an excess of aggregate demand
over existing supply of goods and services. The demand pull theorists point out that inflation
(demand-pull) might be caused, in the first place, by an increase quantity of money, when the
economy is operating at full-employment level. As the quantity of money increases, the rate of
interest will fall and, consequently, investment will increase. This increased investment
expenditure will soon increase the income of the various factors of production,As a result,
aggregate consumption expenditure will increase leading to an effective demand, with the
economy already operating at the level of full employment, this will immediately raise prices, and
inflationary forces may emerge. Thus ,when the general monetary demand rises faster than the
general supply, it pulls up prices(commodity prices as well as factor prices, in
general).Demand- pull inflation, therefore, manifests itself when there is active cooperation, or
passive collusion, or a failure to take counteracting measures by monetary authorities.
Cost-push inflation:A group of economists holds the opposite view that the process of inflation is initiated not by
an excess of general demand but by an increase in costs, as factors of production try to
increase their share of the total product by raising their prices, thus it has been viewed that a
rise in prices in initiated by growing Factor costs. Therefore, such a price rise is termed as
cost-push inflation as prices are being pused up by the rising factor costs.
Cost-push inflation, or cost inflation, as it is sometimes called, is induced by the wage-inflation
process. It is believed that wages constitute nearly seventy percenct of the total costs of
production. Thus a rise in wages leads to a rise in the total cost of production and a consequent
rise in the price level, because fundamentally, prices are based on costs.Indeed, any
autonomous increase in costs, such as a rise in the prices of imported components or an
increase in indirect taxes(excise duties, etc)may initiate a cost-push inflation. Basically, however,
it is wage-push pressures which tend to accelerate the rising price spiral.
4. Change in liquidity: According to this method, every bank is required to keep a certain
proportion of its deposits as cash with it. When the central bank wants to contract the
credit, it raises its liquidity ratio and vise versa.
Qualitative or selective methods
1. Direct action,
2. Rationing of the credit,
to bring about an equality of income between different groups by imposing tax on rich and
spending more on poor.
c) To maintain price stability- It means a fall in a prices leads to a sharp decline in business
activity. On the other hand, inflation may hit hard the fix income classes and may benefit
the speculators and traders. Fiscal policy has maintain a reasonable and stable general
price level to benefit all section of the society.
d) Full employment- the most important objectives of a fiscal policy is the promotion and
maintenance of full employment, because through it all other objectives are automatically
achieved. For this fiscal authority should start programs of removing unemployment.
These objectives are not always compatible, particularly price stability and full
employment. fiscal policy may transfer wealth from the rich to the poor through the use
of taxation with a view to bringing about a redistribution of income, but it may be criticized
on the ground that the transfer of income from rich to poor will affect savings and capital
formation, which in turn, would affect investment and employment.
National goals
ORGANIZATIONAL GOALS
Organizational goals refer to those that are essential for the firm to strengthen itself in the
market or in the economy and to expand its business empire.
Growth maximization
Market leadership
Sales maximization
Facing challenges
Joy of creation
Production goal
Inventory goal
Sales goal
Profit goal
ECONOMIC GOALS
Economic goals are those goals which are related to money aspect of a business firm
Balanced growth-Marris
Risk avoidance
Financial soundness
Customer satisfaction
Innovation-Prof Schumpeter
R&D facilities
STRATEGIC GOALS
Strategic goals are competitor focused. it includes all those objectives which aim at unseating a
competitor who may pose as a potential rival, it also aims at ensuring the long run survival of the
firm in the market
SOCIAL GOALS
Social goals of a business firm refers to its duties towards the society (customers, employees,
financiers, government and general public.
Honoring commitments
Participation in HRD
Human goals
Job satisfaction
Workers participation
National goals
Social justice
National priorities
Export promotion
In short, the business economist who would help in the decision making process measures a
number of micro and macro variables. Forecasting is a fundamental activity of a business
economist. Indeed, a business economist is greatly helpful to the management by virtue of his
studies of economist analysis. He is an effective model builder. He deals with the business
problems in a sharp manner with a deep probing.
A managerial economist in a business firm may carry on a wide range of duties, such as:
o
The business economist has to acquire a full knowledge about the behavior of the economy as a
whole and the impact of macro-economic policies such as monetary, fiscal and industrial,
adopted by the Government from time to time, in the growth of the business. The business
economist has also to keep an eye on the fast changing technological developments. An
economic decision is taken within the framework of technological developments.
Above all the business economist has to help the management in business planning by
providing guidance for the correct and economical organization and running of the enterprise.
Question 15:- Discuss the different between Micro and Macro economics?
Ans:-Microeconomics analysis is individualistic, whereas macroeconomic analysis is aggregative.
In essence, thus, microeconomics deals with the part (individual) units while macroeconomics
deals with the whole (all units taken together) of the economy. Since both approaches tend to
provide an insight or understanding into the working of an economic system, both are interrelated.
Hence, the difference between microeconomics and macroeconomics are bound to be more or
less of a degree rather than of kind.
Difference in outlook and scope: - In macroeconomics, usually, behavioural elements of units with
homogeneous characteristics are aggregated. For example, the concept of industry in
microeconomics is an aggregate concept. Industry refers to a set of all firms producing
homogeneous goods taken together. Similarly, market is the aggregate concept. Likewise, market
demand is measured as the summation of all individual consumers demand for a given product
in the market. Also, market supply is the aggregate of the production supplied by individual firms.
As much, Microeconomics, however, never uses aggregate relating to the economy wide total. Its
scope is limited.
Macroeconomics, on the other hand, uses aggregate which relate to the entire economy
or to a large sector of the economy and when it considers industrial output, it refers to the whole
of output produced by the industries sector and similarly, agriculture output for the entire
agriculture sector. Likewise, when macroeconomists talk of aggregate demand, they refer to the
demand for all products by all households taken together for the economy as a whole. Thus,
aggregate demand covers all market demands.
Demarcation in areas of study: - Theory of value and theory of economic welfare are the major
areas covered in microeconomics. The theory of value includes pricing and distribution, i.e.
product pricing and factor pricing.
On the other hand, income and employment theory and monetary theory are the core
topics of macroeconomics. In a broad sense, public finance, growth and international trade are
also included in the field of microeconomics.
Question 16:- Discuss the relation between managerial economics and other subject?
Ans:-Managerial economics is not something which is related to economics only, but there are
other areas also to which managerial economics is related. Other related subjects of managerial
economics are:
Economics
Mathematics
Statistics
Accounting
Operations Research
Computers
Management
Economics and managerial economics
Economic tools used in managerial economics
4. Discounting principle
5. Equimarginal principle
revenue information and their classification are influenced considerably by the accounting
profession.
The focus of accounting within the enterprise is fast changing from the concept of
bookkeeping to that of managerial decision making.
an
inter-disciplinary solution
finding
techniques.
It
combines
economics,
mathematics, and statistics to build models for solving specific business problems.
Linear programming and goal programming are two widely used OR in business decision
making.
It has influenced ME through its new concepts and model for dealing with risks. Though
economic theory has always recognized these factors to decision making in the real world, the
frame work for taking them into account in the context of actual problem has been
operationalised.
Characteristics of a plant:
A plant is a technical unit: - A plant is body or group of person who are actually
engaged in the production of goods. The term plant, therefore, has to be used in a
broad sense to includes, Farms, Office, Shops, Stores and Warehouse in addition to,
of course, workshops and factories manufacturing goods.
Within Technical Sphere, a Plant Enjoys Considerable Autonomy: - The broad policy
framework is laid down by the firm but within that broad framework, a plant can take
independently of the firm important decisions in the technical fields.
A Plant is a Body of persons who Work at a given Time and Place: - A plant consists
of persons who assemble together at certain time and place.
A Plant is controlled by a Single Firm: - One plant cannot be controlled by more than
one firm. But a single firm may control more than one plant.
Firm
We may note the following points in exploring the concept of firm in managerial economic
analysis:
A Firm may Own One or More than One Plant: - As already seen, if a firm has only one
plant, it is identical with the plant.
A firm Exercises a Unified Control over its Plants: - The broad policy decision is taken by
the firm. It has to decide and implements policies that have an important bearing for the
enterprises as a whole.
A firm Organizes the Resource and Plans their Use: - Since a firm is an administrative
planning unit which has a unified control over plant the firm organizes and combines the
resources the factors of production and plans the use of these resources.
A firm is Separate Legal Entity: - A plant is not a legal entity in the sense it can sue or be
sued. A firm, on the other hand, is a body of persons working under a particular name. It
has legal personality, can hold property, sue and be sued.
Industry
An industry is a group of firms producing similar or homogenous goods, adopting the same
technology or using the same raw materials. There has to be some common factor among all the
firms that make up an industry. Three such factors can be distinguished: The material used and
the production techniques employed are the two factors working on the supply side and the
similarity among the products produced is a factor on the demand side. E.g.: a ship building firm
can be included in the steel industry because it uses steel as raw material. If production process
is the criteria then a ship building firm would be included in the building industry and if similarity of
goods is the criteria all such firms would be categorized as a separate ship building industry.
Question 18:- What are the assumption underlings the law of demand?
Ans:-The above stated law of demand is conditional. It is based on certain conditions as given. It
is, therefore, always stated with the other things being equal. It relates to the change in price
variable only, assuming other determinants of demand to be constant. The law of demand is,
thus, based on the following ceteris paribus assumptions:
No Change in Consumers Income: - Throughout the operation of the law, the consumers
income should remain the same. If the level of a buyers income changes, he may be buy
mare even at a higher price, invalidating the law of demand.
No Change in the Fashion: - If the commodity concerned goes out the fashion, a buyer
may not buy more of it even at a substantial price of reduction.
No Change in the Price of Related Goods: - Price of other goods like substitutes and
supportive, i.e., Complementary or jointly demanded products remain unchanged. If the
prices of other related goods change, the consumers preferences would change which
may invalidate the law of demand.
No Expectation of Future Price Change or Shortage: - The law requires that the given
price change for the commodity is normal one and no speculative consideration. That is
to say, the buyer does not expect any shortages in the commodity in the market and
consequent future changes in the prices. The given price change is assumed to be final
at a time.
No Change in Size, Age Composition an Sex Ratio of the Population: - For the operation
of the law in respect of total market demand, it is essential that the number of buyers and
their preferences should remain constant. This necessitates that the size of population as
well as the age structure and sex ratio of the population should remain the same
throughout the operation of the law. Otherwise, if population changes, there will be
additional buyers in the market, so the total market demand may not contract with a rise
in price.
No Change in the Range of Goods Available to the Consumers: - This implies that there
is no innovation and arrival of new varieties of product in the market which may distort
consumers preferences.
No Change in Government Policy: - the level of taxation and fiscal policy of the
government remain the same throughout the operation of the law. Otherwise, change in
income-tax, for instance, may cause changes in consumers income or commodity taxes
(sales tax or excise duties) and may lead to distortion in consumers preferences.
In short, the law of demand presumes that except for the product, all other determinants
of its demand are unchanged. Apparently, the validity of the law of demand or the inference about
inverse relationship between price and demand depends on the existence of these conditions or
assumption.
Change in Income: - A change in the consumer significantly influences his demand for
most commodities. The demand for superior commodities in general and for comfort and
luxury articles increase with a rise in the consumers income. Similarly, overall demand
generally decreases with a fall in income. In estimating demand function for commodities
such as cars, for instance, changes in gross national product (GNP) or per capita real
income is considered as crucial factors by the researchers in general.
Changes in Taste, Habits, and Preference: - When there is a change in taste, habits or
preference of the consumer, his demand will change. For instant, when a person gives up
his smoking habit, this demand for cigarettes decreases.
Change in Fashions and Customs: - Fashions and customs of our society determine
many of our demands. When these change, demands also change.
Change in the Distribution of Wealth: - Through fiscal measures, government can reduce
inequality of income and wealth and bring about a just distribution of wealth;
consequently the demand pattern may change in a dynamic welfare society. Welfare
programs like free medical aid, free education, pension schemes, etc.
Change in Substitutes: - Change in the supply of substitutes, change in their prices, and
the development of new and better quality substitutes certainly affect the demand for the
given product. For instance, introduction of ball-point pens has caused a fall in the
demand for fountain pens.
Change in Population: - The market demand for a commodity substantially changes when
there is change in the total population or change in its age or sex composition. For
instance, if the birth rate is high in a country, more toys and chocolates will be demanded.
But when the birth rate is substantially reduced through overall family planning efforts,
their demand will decrease. Similarly, if the sex ratio of the country changes and if
females outnumber males, demand for skirts will increase and that for shirts will
decrease.
Change in the Value of Money: - When there are inflationary or deflationary tendencies
developing in the general price level, consequently the value of money falls or rise, and
there may be change in the relative prices of different goods, causing widespread
changes in the demand pattern of various items.
Change in the Level of Taxation: - When the government changes its tax structure,
especially if direct taxes such as income tax, wealth tax etc. are reduced the disposable
income of the people increase, which may lead to change in the overall demand. On this
count usually, the government in order to decrease the demand for foreign goods
imposes high tariff duties on imports.
Expectation of Future Change in Prices: - When the consumer experts that there will be a
rise in price in future, he may buy more at the present price and so his demand increase.
In the reverse case, his demand decrease.
Consumer market survey: - In this method, the customers are asked about their
purchasing plans and their projected buying behavior, through personal interviews,
mail, post or telephone. It may even be conducted house to house. A large number of
respondents is needed here to be able to generalize certain results. The success of
the results is largely dependent on the nature and effectiveness of the questions
asked.
Sample
survey:
covering
few
consumers
selected
from
the
total
potential
Depending on the quality and quantity of sales data required for the final
decision, test marketing may last from few weeks to several months.
Jury of executive opinion: The opinions of a small group of high-level managers are
pooled and together they estimate demand. The group uses their managerial
experience, and in some cases, combines the results of statistical models.
Simulated market approach: under this method, an artificial market is created and
participants are chosen .these participants are then given money and asked to spend
the same in an artificial department store. Different prices are set up for different
groups. Observations are then recorded and accordingly necessary decisions about
price and promotional efforts are taken.
Collective opinion method/opinion poll method: Each salesperson (for example for a
territorial coverage) is asked to project their sales. Since the salesperson is the one
closest to the marketplace, he has the capacity to know what the customer wants.
These projections are then combined at the municipal, provincial and regional levels.
Delphi method: - Under this method a panel of experts is identified where an expert
could be a decision maker, an ordinary employee, or an industry expert. Each of
them will be asked individually for their estimate of the demand. The administrator
then provides the experts with anonymous summary statistics on the forecasts, and
experts reasons for their forecasts. The process is continued till the experts have
reached a consensus.
End use method: Under this method, future demand for the product is measured by
calculating the demand for the final products that use the given product as an
intermediate good .e.g.: in the case of electricity, household demand for electricity
can be estimated by estimating the number of electrical appliances used in a given
period of time. Similarly in the case of steel which is used in the manufacture of
industrial and agricultural implements, demand can be forecast by studying the
demand for these goods in a given period of time.
Statistical method
Trend projection method: - A time series analysis on sales data over a period of time
is considered to serve as a good guide for sales or demand forecasting.
For long-term demand forecasting, trend is computed from the time based demand
function data.
Trend refers to the long-term persistent movement of data in one direction upward or
downward.
Barometric method
Economic indicators
Question 21:- Explain with suitable diagram Extension and Construction of Demand?
Ans:-A variation in demand implies extension or construction of demand. When with a fall in
price more of a commodity is bought, there is an extension of demand. Similarly, when lesser
quantity is demanded with a rise in price, there is a construction of demand. The terms extension
and construction are technically used in stating the law of demand.
The terms extension and construction of demand should, however, be distinguished from
increase or decrease in demand. The former is used for indicating variation in demand, while
the latter for denoting change in demand. Variation in demand is the connotation of the law
demand. It expresses a functional relationship between demand and price. A change in demand
due to change in price is called extension or construction. Extension and construction, relates to
the same demand curve. A change in demand due to causes other than price is called increase
and decrease in demand.
In graphical exposition, extension or construction of demand is shown by the movement along
the demand curve. A downward movement from one point to another on the same demand curve
implies extension of demand, for instance, movement from a to b in figure. It suggest that when
the price reduced from OP to OP1, demand extends from OQ
movement from on point to another on the same demand curve implies construction of demand,
e.g. movement from a to c in the figure. It suggest that when price rises from OP to OP2, demand
contracts from OQ to OQ2.
In short, a change in the quantity demanded in response to a change in price is explained by the
term extension or construction of demand. Further, extension or construction implies a
movement on the same demand curve. It, thus, signifies that the demand scheduled remains the
same.
Question 22:-. Explain with suitable diagram Increase and Decrease of Demand?
Ans:-These two terms are used to express changes in demand. Changes in demand are a result
of the change in the conditions or factors determining demand, other than the price. A change in
demand, thus, implies an increase or decrease in demand. When more of a commodity is bought
than before at any given price, there is an increase in demand. Similarly, with price remaining
unchanged less of a commodity is bought than before than before, there is a decrease in
demand.
An increase in demand signifies either that more will be demand aat a given price or same will
be demanded at a higher prices. An increase in demand really means that more is now
demanded than before at each and every price. Likewise, a decrease in demand signifies either
that less will be demanded at a given price or the same quantity will be demanded at the lower
price. Decrease in demand really means that less is now demanded than before at each and
every rise in price. Shifting the demand curves shows the increase and decease in demand.
The term increase or decrease in demand are graphically expressed by the movement from
one demand curve to another. In the other words the change in demand is denoted by the shifting
of the demand curve. In the case of an increase in demand, the demand curve is shifted to the
right. In figure (A) thus, the shift of demand curve from DD to D1D1 shows an increase in
demand. In this case, the movement from point a to b indicates that the price remain the same at
OP, but more quantity (OQ1) is now demanded, instead of OQ. Here, increase in demand OQ1.
Similarly, as in figure (B) a decrease in demand curve from DD to D2D2 shows a decrease in
demand. In this case, the movement from point a to c indicates that the price remains the same at
OP, but less quantity QQ2 is now demanded than before. Here decrease in demand is OQ2.
In short, a change in the quantity demanded due to change in the all overall pattern of demand
results in an increase or decrease in demand. For a change in demand, the change in factor
other than price is responsible.
Ans:-There are many causes which bring about a change in the conditions of supply. The
important factors are:
Cost of production: - Given the price, the supply changes with the change in the cost of
production. If the cost of production increases because of higher wages to worker or
higher prices of raw material, there will be a decrease in supply. If the cost of production
falls due to any of the reasons, the supply will increase.
Natural factors: - There might be a decrease in the supply due to floods, paucity of
rainfall, pests, earthquakes, etc. Absence of the above calamities or an exceptionally
good as well as timely monsoon might increase supply.
Policy of Government: - Taxes on production, sales, import duties and import restrictions
may reduce supply. It may also be deliberately reduced by government policies.
Business Combines: - The producers also might reduce the supply by entering into an
agreement among themselves through their business combine like trust, cartel or a
syndicate with a view to rising prices in the market.
Cost of production is unchanged: - It is assumed that the price of the product changes,
but there is no change in the cost of production. If the cost production increases along
with the rise in the price of product, the sellers will not find it worthwhile to produce more
and supply more. Therefore, the law of supply is valid only if the cost production remains
constant. It implies that the factor prices, such as wages, interest, rent, etc., are also
unchanged.
Fixed scale of production: - During a given period of time, it is assumed that the scale of
production is head constant. If there is a changed in scale of production, the level of
supply will change, irrespective of the changes in the price of the product.
Government policies are unchanged: - Government policies like taxation policy, trade
policy, etc., are assumed to be constant. For instance, an increase in or totally fresh levy
of excise duties would imply an increase in the cost or in case there is fixation of quotas
for the raw materials or imported components for a product, then such a situation will not
permit the expansion of supply with a rise in prices.
No change in transport costs: - It is assumed that the transport facilities and transport
costs are unchanged. Otherwise, a reduction in transport cost implies lowering of cost of
production so that more would be supplied even at a lower price.
No speculation: - The law also assumes that the sellers do not speculate about the future
changes in the price of the product. If, however, sellers expect prices to rise further in
future, they may not expand supply with the present price rise.
The prices of other goods are held constant: - The law assumes that there are no
changes in the prices of other products. If the price of some other product rises faster
than that of the given product in consideration, producers might transfer their resource to
the other product which is more profit yielding due to rising prices. Under this situation,
more of the product in consideration may not be supplied, despite the rising prices.
Tangent curve: - By joining the loci of various plant curves relating to different operational
short run phases, the LAC curve is drawn as a tangent curve.
The LAC approximates a smooth curve, if the plant sizes can varied by infinitely small
capacities and there are numerous short run average cost curves to each of which the MC is
a tangent. In the other words, the long run average cost curve is the locus of all these points
of tangency.
OUTPUT
Figure 1
Envelope curve: - The LAC curve is also referred to as the envelope curve, because it is
the envelope of a group of short run average cost curve appropriate to different levels of
output.
In figure 1, the LAC curve is enveloping or tangential to a number of plant size and the
related Short-run average cost.
Planning curve: - LAC curve is regarded as the long run planning device, as it denotes
the least unit cost of producing each possible level output and size of the plant in relation
to the LAC curve. A rational entrepreneur would select the optimum scale of plant. The
optimum scale of plant is that plant size at which a SAC is tangent to the LAC, such that
both the curve has the minimum point of tangency. In fig. level of output, SAC is tangent
to LAC at both the minimum points. Thus, OQ2 is regarded as the optimum scale of
output, as it has the minimum per unit cost. It should be noted that, there will be only one
such point on the LAC curve to which a SAAC curve is tangent as well as both have the
minimum points at the point of tangency. And as such this particular SAC phase is
regarded as the most efficient one. All other SAC curve is tangent to the LAC nor SAC
curve has the minimum point. In fact, at all these points SAC curves are either rising or
falling, showing a higher cost.
Anyway, the optimum scale of plant will inevitably be in the long run by the firm under
perfect competition. But the firm under monopoly and monopolistic competition are less
likely to select the optimum plant size.
Minimum Cost Combinations: - Since LAC is device as the tangent to various SAC
curves under consideration, the cost levels be presented by the LAC curve for different
levels of output reflect minimum cost combination of resource inputs to be the firm at
each long run level of output.
Flatter U-Shaped: - The LAC curve is less U-shaped or rather dish-shaped. This means
that in the beginning it gradually slopes downward and the, after reaching a certain point,
it gradually begins to slope upward. This implies that in the long run when the firm adopts
a larger scale of output, its long run average cost in the beginning tends to decrease. At a
certain point, it remain constant, and than rises. This behaviour of long run average costs
is attributed to the operation of laws of returns to scale. Increase returns in the beginning
cause decreasing costs, constant returns, constant costs and then decreasing returns,
increasing costs.
For e.g. - diamonds, curios. They are the prestige goods. The would like to hold it only
when they are costly and rare.
2. Speculative market
In this case the higher the price the higher will be the demand. It happens because of the
expectation to increase the price in the Future.
For e.g. shares, lotteries, gamble and ply-win type of markets.
4. Ignorance: some time consumer ignore price effect .it is due to the existence of other factor like
quality, taste, habit etc. there the law of demand doesnt hold.
5. Fear of shortage: if there is any shortage in future of a commodity then the consumer is ready
to pay any price for the commodity.
6. Emergencies: during the time of emergencies like flood, famine, world war, country at war. In
this case generally the prices of commodity are high but there is no effect on the demand.
7. Necessities: some commodity like life supporting drugs, drinking water etc in such commodity
demand will not be affect by the any change in price.
8. Consumers illusion: it is related to consumers believe about a product. If there is any change in
price of such product could not affect the demand of that product.
9. Comfort goods: some product which are now used by the consumer so often that they cannot
leave without it. They are habitual of such product like fan, refrigerator, electricity etc. so change
in price of such product cannot bring changes in demand.
Describe the significance of demand forecasting?
Question 27:-Demand forecasting is very essential in the course of business decision?
Ans:-Its significance may be trace as under: Production Planning: - Demand forecasting is a prerequisite for the production planning of a
business firm. Expansion of output of the firm should be based on the estimates of likely demand,
otherwise there may be overproduction and consequent losses may have to be faced.
Sales Forecasting: - Sales forecasting is based on the demand forecasting. Promotional efforts of
the firm should be based on sales forecasting.
Control of Business: - For controlling the business on a sound footing, it is essential to have a
well conceived budgeting of costs and profits that is based on the forecast of annual demand/
sales and prices.
Stability: - Stability in production and employment over a period of time can be made effective by
the management in the light of the suitable forecasting about market demand and other business
variables and smoothening of the business operations through counter-cyclical and seasonally
adjusted business programmes.
Economic Planning and Policy Making: - Demand forecasting at macro level for the nation as a
whole is of a great help to the planners and makers for a better planning and rational allocation of
the countrys productional resources. The government can determine its import and export
policies in view of the long-term demand forecasting for various goods in the country.
For example, the demand for gas in a fertilizer plant depends on the amount of fertilizer to be
produced and substitutability between gas and coal as the basis for fertilizer production.
However, the direct demand for a product is not contingent upon the demand for other
products.
Micro Level: - It refers to the demand forecasting by the individual business firm for
estimating the demand for its product.
Industry Level: - It refers to the demand estimate for the product of the industry as a
whole. It I undertaken by an Industrial or Trade Association. It relates to the market
demand as a whole.
Macro Level: - It refers to the aggregate demand for the industries output by the nation as
a whole. It is based on the national income or aggregate expenditure of the country. It is
based on the consumption function which the functional relationship between the
disposable income and consumption. It shows the consumption expenditure by the
community at various levels of income. With the growth of national income, consumption
expenditure increase, as such, overall demand for goods and services in general may
tend to rise.