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MBA105MB0042 - Managerial Economics
MBA105MB0042 - Managerial Economics
2. “Demand is strengthened with a rise in price or weakened with a fall in price”. This is
stated by which exception to the law of demand?
a. Giffen's paradox
b. Veblen's effect
c. Fear of shortage
d. Fear of future rise in price
3. Which of the following method is used for demand forecasting for new products?
a. Economic indicators
b. Opinion survey method
c. Trend projection method
d. Substitute approach
6. do not take the form of cash outlays and as such do not appear in
the books of accounts.
a. Explicit cost
b. Implicit cost
c. Money cost
d. Actual cost
13. Monetary policy along with fiscal policy and lumped together form
the financial policy of the country.
a. Debt management
b. Credit management
c. Administrative policies
d. Budgeting
19. When supply of a commodity remains constant and does not change, whatever may be
the change in price, it is said to be absolutely or supply.
a. Relatively inelastic
b. Relatively elastic
c. Perfectly elastic
d. Perfectly inelastic
22. In which model of the firm, do we compare the revenue earned from one additional
unit and cost incurred to produce one additional unit of output?
a. TR and TC approach
b. MR and MC approach
c. Profit-maximisation approach
d. Economist theory
24. In microeconomics, a firm's optimal output is where its marginal revenue its
marginal cost.
a. Exceeds
b. Is less than
c. Equals
d. Unrelated to
26. What makes the demand curve of the firm much more elastic?
a. Competition
b. Product differentiation
c. Product discrimination
d. Market structure
28. Which law states that ‘’Supply creates its own demand”?
a. Say‟s law of markets
b. Psychological law of consumption.
c. Fundamental law of consumption.
d. Fundamental law of Demand
29. Which frequent changes would affect the imports, exports and inflow of foreign capital?
a. Neutral money
b. Exchange rate
c. Price
d. Trade cycles
31. When the satisfaction obtained by the is much more than the price he
is paying for the commodity, he will be enjoying a surplus.
a. Consumer
b. Producer
c. Seller
d. Manufacturer
34. In the profit-maximisation model, as per the assumption, the firm is managed by
.
a. Proprietor
b. Shareholders
c. Board of directors
d. Owner-entrepreneur
35. is a market with two sellers exercising control over the supply
of commodities.
a. Duopoly
b. Bilateral Monopoly
c. Oligopoly
d. Monopoly
38. By raising the reserve requirements, trend can be kept under control. a.
Deflationary
b. Inflationary
c. Debt management
d. Liquidity ratio
40. The concept of was first developed by J.M. Keynes, which means „an
excess of anticipated expenditure over available output at a base price‟.
a. Inflationary gap
b. Deflation
c. Stagflation
d. Inflation
41. Popularly, inflation is associated with , which causes a decline in the value of
money.
a. Low prices
b. Low demand
c. High supply
d. High prices
45. Which stage is the law of diminishing returns, with respect to the law of
variable proportions?
a. Stage 1
b. Stage 2
c. Stage 3
d. Stage 4
46. The percentage of total deposits which the bank is required to hold in the form of
cash reserves for meeting the depositors‟ demand for cash is called .
a. Current deposit
b. Cash reserve ratio
c. Cash income ratio
d. Capital's share of income
47. The GNP Deflator acts as factor which is used to convert nominal GNP
into Real GNP.
a. An adjustment
b. A catalytic
c. An estimate
d. An economic index
ANSWER -
b. 1- False, 2- False
c. 1- True, 2- True
d. 1- True, 2- False
54. The partial equilibrium approach means the of a single commodity will
be determined keeping the prices of other commodities .
a. Price, constant
b. Quantity, variable
c. Quantity, constant
d. Price, variable
55. "1. When a company grows beyond a limit, it is necessary to split it into smaller units.
This is known as .
2. Granting tax-concessions, tax-holidays, tax-exemptions, subsidies are all various
forms of
."
a. 1- Economies of government action, 2- Economies of physical factors.
b. 1- Economies of Disintegration, 2- Economies of information.
c. 1- Economies of concentration, 2- Economies of information.
d. 1- Economies of disintegration, 2- Economies of government action.
56. Identify the features of long run Average Cost (LAC) curves from the following:
1. LAC curve is L shaped.
2. LAC curve is described as the planning curve of the firm.
3. LAC curve is also known as envelope curve.
4. LAC curve should always lies above the minimum point of short run Average Cost (SAC)
curve.
a. 1 & 2
b. 1 & 3
c. 3 & 4
d. 2 & 3
59. "Consider the following statements with respect to features of perfect competition:
1. The market price is flexible over a period of time.
2. The number and size distribution of buyers."
State True or False: a. 1- True, 2- False
b. 1- False, 2- False
c. 1- True, 2- True
d. 1- False, 2- True
62. Consider the below mentioned statements with respect to the types of investments:
1. Autonomous investments are income-elastic.
2. Private investments are profit –
elastic. State True or False:
a. 1-True, 2-False
b. 1-True, 2-True
c. 1-False, 2-True
d. 1-False, 2-False
66. "1. Which ratio shows the relationship between value of debts and total assets?
2. Stock variable has a reference."
a. 1- Leverage, 2- time
b. 1- Liquidity, 2- quantity
c. 1- Leverage, 2- quantity
d. 1- Liquidity, 2- time
DEPRESSION is the first phase of a trade cycle. It is a protracted period in which business
activity is far below the normal level and is extremely low.
69. "1. When the output is carried beyond the plant capacity resulting in a higher per
unit cost, it leads to .
2. A mismatched demand and supply leading in falling of prices leads to
."
a. 1- Labour diseconomy, 2- Financial diseconomy
b. 1- Technical diseconomy, 2- Marketing diseconomy
c. 1- Managerial diseconomy, 2- Financial diseconomy
d. 1- Marketing diseconomy, 2- Technical diseconomy
71. "Consider the following statements with respect to features of managerial economics:
1. It uses various macroeconomic concepts like national income, inflation, deflation,
trade cycles, etc. to understand and adjust its policies to the environment in which the
firm operates.
2. It all depends on the manager’s ability, experience, expertise and intelligence to use
different tools of economic analysis to find out the correct answers to business
problems." State True or False:
a. 1- True, 2- False
b. 1- True, 2- True
c. 1- False, 2- True
d. 1- False, 2- False
73. Part A
1. Technical economy
2. Managerial economy
3. Commercial economy
4. Labour economy
Part B
A. Buying and selling of goods on large scale.
B. Impart training to raise skill, efficiency and productivity.
C. Inventory economy D. Delegation of details
a. 1A, 2B, 3C, 4D
b. 1B, 2C, 3D, 4A
c. 1C, 2D, 3A, 4B
d. 1D, 2C, 3B, 4A
Section B
Answer:-
Managerial economics:-
Managerial economics is a science that deals with the application of various economic theories, principles,
concepts and techniques to business management in order to solve business and management problems. It
deals with the practical application of economic theory and methodology in decision-making problems
faced by private, public and non-profit making organisations.
i. It is more realistic, pragmatic and highlights the practical application of various economic theories to
solve business and management problems.
ii. It is a science of decision-making. It focuses on decision-making process, decision models and decision
variables and their relationships.
iii. It is both conceptual and metric in nature, and it assists the decision maker through precise and evident
measurement of various economic variables and their interrelationships.
iv. It uses various macroeconomic concepts like national income, inflation, deflation, trade cycles, etc. to
understand and adjust its policies to the environment in which the firm operates.
v. It also gives importance to the study of non-economic variables having implications on economic
performance of the firm. For example, impact of technology, environmental forces, socio-political and
cultural factors, etc.
vi. It uses the services of many other related sciences like mathematics, statistics, engineering, accounting,
operation research and psychology to find solutions to business and management problems.
Answer:-
Generally speaking, customers would buy more when price falls in accordance with the law of demand.
Exceptions to law of demand states that with a fall in price, demand also falls and with a rise in price
demand also rises. This can be represented by rising demand curve. In other words, the demand curve
slopes upwards from left to right. It is known as an exceptional demand curve or unusual demand curve.
Figure depicts the exceptional demand curve. It is clear from figure that as price rises from Rs. 4.00 to Rs.
5.00, quantity demanded also expands from 10 units to 20 units.
Figure: Exceptional Demand Curve
Answer:-
SURVEY METHODS:-
1. Consumers interview Method: - Under this method, efforts are made to collect the relevant information
directly from the consumers with regard to their future purchase plans.
a) Survey of buyers’ intentions through questionnaire: - Under this method, consumer-buyers are
requested to indicate their preferences and willingness about particular products.
b) Direct Interview Method: - Under this method, customers are directly contacted and interviewed. Direct
and simple questions are asked to them.
i) Complete Enumeration Method: - Under this method, all potential customers are interviewed in a
particular city or a region.
ii) Sample Survey Method: - Under this method, different cross sections of customers that make up the
bulk of the market are carefully chosen.
2. Collective Opinion Method: - Under this method, sales representatives, professional experts, the
market consultants and others are asked to express their considered opinions about the volume of sales
expected in the future.
3. Expert Opinion method: - Under this method, outside experts are appointed. They are supplied with all
kinds of information and statistical data.
4. End-Use Method: - Under this method, the sale of the product under consideration is projected on the
basis of demand surveys of the industries using the given product as an intermediate product.
STATISTICAL METHODS:-
i. Trend projection method:- This method is not based on any particular theory, which explains the causes
for the variables to change; it merely assumes that whatever forces contributed to the change in the
recent past will continue to have the same effect. On the basis of time series, it is possible to project the
future sales of a company.
ii. Economic indicators: - Under this method, a few economic indicators become the basis for forecasting
the sales of a company.
Answer:-
Determinants of supply:-
i. Natural factors – Favourable natural factors like good climatic conditions and timely, adequate, well
distributed rainfall results in higher production and expansion in supply.
ii. Change in techniques of production – An improvement in techniques of production and use of modern,
highly sophisticated machines and equipments will go a long way in raising the output and expansion in
supply.
iii. Cost of production – Given the market price of a product, if the cost of production rises due to higher
wages, interest and price of inputs, supply decreases.
iv. Prices of related goods – If prices of related goods fall, the seller of a given commodity offers more units
in the market even though, the price of his product has not gone up.
v. Government policy – When the government follows a positive policy, it encourages production in the
private sector. Consequently, supply expands.
vi. Monopoly power – Supply tends to be low, when the market is controlled by monopolists, or a few
sellers as in the case of oligopoly. Generally, supply would be more under competitive conditions.
vii. Number of sellers or firms – Supply would be more when there are a large number of sellers. Similarly,
production and supply tends to be more when production is organised on large scale basis.
viii. Complementary goods – In case of joint demand, the production and sale of one product may lead to
production and sale of other product also.
ix. Discovery of new source of inputs – Discovery of new sources of inputs helps the producers to supply
more at the same price and viceversa.
x. Improvements in transport and communication – This will facilitate free and quick movements of goods
and services from production centres to marketing centres.
xi. Future rise in prices – When sellers anticipate a further rise in price, current supply tends to fall. Opposite
will be the case when the seller expects a fall in price.
Q.6. Discuss profit maximising model.
Answer:-
Profit-maximisation implies earning highest possible amount of profit during a given period of time.
A firm should always give optimum productivity in order to get a huge amount of profit both in the short
run and long run depending upon various factors like internal and external. The short run and long run
objectives should always be balanced. In the short run, a firm is able to make only slight or minor
adjustments in the production process as well as in business conditions. The plant capacity in the short run
is fixed and as such, it can increase its production and sales by intensive utilisation of existing plants and
machineries, having overtime work for the existing staff, etc.
Thus, in the short run, a firm has its own technical and managerial constraints. But in the long run, as there
is plenty of time at the disposal of a firm, it can expand and add to the existing capacities; build new plants;
employ additional workers; etc. to meet the rising demand in the market. Thus, in the long run, a firm will
have adequate time and ample opportunity to make all kinds of adjustments and readjustments in
production process and in its marketing strategies.
Answer:-
i. Neutral money policy: This objective was in vogue during the days of gold standard. According to this
policy, money is only a technical device having no other role to play.
ii. Price stability: price stability is considered as one of the main objectives of monetary policy in recent
years. It is to be remembered that price stability does not mean that prices of all commodities are kept
constant or fixed over a period of time.
iii. Exchange rate stability: Maintenance of a stable or fixed exchange rate was one of the major objects of
monetary policy for a long time under the gold standard. The stability of national output and internal
price level was considered secondary and subservient to the former.
iv. Control of trade cycles: Operation of trade cycles has become very common in modern economies. one
of the major objectives of monetary authorities to control the operation of trade cycles and ensure
economic stability by effectively regulating total money supply.
v. Full employment: In recent years, full employment has become another major goal of monetary policy all
over the world, especially with the publication of the general theory by Lord Keynes.
vi. Equilibrium in the balance of payments: This objective has assumed greater importance in the context of
expanding international trade and globalisation. Today, most of the countries are experiencing adverse
balance of payments on account of various reasons.
vii. Rapid economic growth: This is comparatively a recent objective of the monetary policy. Achieving a
higher rate of per capita output and income over a long period of time has become one of the supreme
goals of monetary policies in recent years.
Section C
Answer:-
Demand forecasting for new products means the demand forecasting for a different kind of product, which
is totally different established products. There is no past data or past experience available for any of the
firms.
Professor Joel Dean, however, has suggested a few guidelines for forecasting the demand of new products,
as follows:
a) Evolutionary approach – The demand for the new product may be considered as an outgrowth of an
existing product. For e.g., demand for new Tata Indica, which is a modified version of old Indica can most
effectively be projected based on the sales of the old Indica, the demand for new Pulsar can be forecasted
based on the sales of the old Pulsar.
b) Substitute approach – If the new product developed serves as a substitute for the existing product, the
demand for the new product may be worked out on the basis of ‘market share’. The growths of demand for
all the products have to be worked out on the basis of intelligent forecasts for independent variables that
influence the demand for the substitutes.
c) Opinion poll approach – Under this approach, the potential buyers are directly contacted, or through the
use of samples of the new product, their responses are found out. Finally, these are extrapolated to
forecast the demand for the new product.
d) Sales experience approach – Offer the new product for sale in a sample market; say supermarkets or big
bazaars in big cities, which are also big marketing centres. The product may be offered for sale through one
super market and the estimate of sales obtained may be extrapolated to arrive at estimated demand for
the product.
e) Growth curve approach – According to this, the rate of growth and the ultimate level of demand for the
new product are estimated on the basis of the pattern of growth of established products. For e.g., an
Automobile Co., while introducing a new version of a car will study the level of demand for the existing car.
f) Vicarious approach – A firm will survey consumers’ reactions to a new product indirectly by getting in
touch with some specialised and informed dealers who have good knowledge about the market, about the
different varieties of the product already available in the market, the consumers’ preferences, etc. This
helps in making a more efficient estimation of future demand.
Q.9. Define Revenue. Explain in brief the relationship between TR, AR and MR under perfect market
conditions.
Answer:-
In order to understand the relationship between TR, AR and MR, we can prepare a hypothetical revenue
schedule. Table P. represents a hypothetical revenue schedule that shows the relationship between TR, AR
and MR.
Under perfect competition, an individual firm by its own action cannot influence the market price. The
market price is determined by the interaction between demand and supply forces. A firm can sell any
amount of goods at the existing market prices. Hence, the TR of the firm would increase proportionately
with the output offered for sale. When the total revenue increases in direct proportion to the sale of
output, the AR would remain constant. As the good’s market price is constant without any variation due to
changes in the units sold by the individual firm, the extra output would fetch proportionate increase in the
revenue. Hence, MR and AR will be equal to each other and remain constant. This will be equal to price.
Table Q. shows revenue comparison chart under perfect market conditions. Figure P. shows a graphical
representation of the data in table P.
Under perfect market conditions, the AR curve will be a horizontal straight line and parallel to OX axis. This
is because a firm has to sell its product at the constant existing market price. The MR curve also coincides
with the AR curve. This is because additional units are sold at the same constant price in the market.
Q.10. Discuss the practical application of Price elasticity and Income elasticity of demand.
Answer:-
i. Production planning – It helps a producer to decide about the volume of production. If the demand for his
products is inelastic, specific quantities can be produced while he has to produce different quantities, if
the demand is elastic.
ii. Helps in fixing the prices of different goods – It helps a producer to fix the price of his product. If the
demand for his product is inelastic, he can fix a higher price and if the demand is elastic, he has to charge a
lower price.
iii. Helps in fixing the rewards for factor inputs – Factor rewards refer to the price paid for their services in
the production process. It helps the producer to determine the rewards for factors of production.
iv. Helps in determining the foreign exchange rates – Exchange rate refers to the rate at which currency of
one country is converted in to the currency of another country. It helps in the determination of the rate of
exchange between the currencies of two different nations.
v. Helps in determining the terms of trade – it is the basis for deciding the ‘terms of trade’ between two
nations. The terms of trade implies the rate at which the domestic goods are exchanged for foreign goods.
vi. Helps in fixing the rate of taxes – Taxes refer to the compulsory payment made by a citizen to the
government periodically without expecting any direct return benefit from it. It helps the Finance Minister
to formulate sound taxation policy of the country.
vii. Helps in declaration of public utilities – Public utilities are those institutions which provide certain
essential goods to the general public at economical prices. The government may declare a particular
industry as ‘public utility’ or nationalise it, if the demand for its products is inelastic.
viii. Poverty in the midst of plenty – The concept explains the paradox of poverty in the midst of plenty. A
bumper crop of rice or wheat, instead of bringing prosperity to farmers, may actually bring poverty to
them because the demand for rice and wheat is inelastic.
i. Helps in determining the rate of growth of the firm – If the growth rate of the economy and income
growth of the people is reasonably forecasted, in that case, it is possible to predict expected increase in
the sales of a firm and vice-versa.
ii. Helps in the demand forecasting of a firm – It can be used in estimating future demand provided that the
rate of increase in income and the Ey for the products are known. Thus, it helps in demand forecasting
activities of a firm.
iii. Helps in production planning and marketing – The knowledge of Ey is essential for production planning,
formulating marketing strategy, deciding advertising expenditure and nature of distribution channel, etc.
in the long run.
iv. Helps in ensuring stability in production – Proper estimation of different degrees of income elasticity of
demand for different types of products helps in avoiding over-production or under production of a firm.
One should also know whether rise or fall in income is permanent or temporary.
v. Helps in estimating construction of houses – The rate of growth in incomes of the people also helps in
housing programmes in a country. Thus, it helps a lot in managerial decisions of a firm.
Answer:-
Constant returns to scale is operating when all factor inputs [scale] are increased in a given proportion
leading to an equi-proportional increase in output. When the quantity of all inputs is increased by 10%,
and output also increases exactly by 10%, then we say that constant returns to scale are operating. Figure
a. depicts a graph for constant returns to scale. In the figure, it is clear that the successive isoquant curves
are equidistant from each other along the scale line OP. It indicates that as the producer increases the
quantity of both factors X and Y in a given proportion, output also increases in the same proportion.
Economists also describe constant returns to scale as the linear homogeneous production function. It
shows that with constant returns to scale, there will be one input proportion which does not change,
whatever be the level of output.
Causes for constant returns to scale: - In case of constant returns to scale, the various internal and external
economies of scale are neutralized by internal and external diseconomies. Thus, when both internal and
external economies and diseconomies are exactly balanced with each other, constant returns to scale will
operate.
Diminishing returns to scale is operating when output increases less than proportionately when compared
to the quantity of inputs used in the production process. For example, when the quantity of all inputs are
increased by 10%, and output increases by 5%, then we say that diminishing returns to scale is operating.
Figure b. depicts the diminishing return to scales. In the figure, it is clear that the distance between each
successive isoquant curve is progressively increasing along the scale line OP. It indicates that as the
producer is increasing the quantity of both factors X and Y, in a given proportion, output increases less than
proportionately. Thus, the law of diminishing returns to scale is operating.
Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change
in the price or non-price determinant of a commodity. It refers to the capacity of demand either to stretch or
shrink to a given change in price or non-price determinant. Advertising or promotional elasticity of
demand
Most of the firms, in the present marketing conditions, spend considerable amounts of money on
advertisement and other such sales promotional activities with the object of promoting its sales. Advertising
elasticity refers to the responsiveness of demand or sales to change in advertising or other promotional
expenses. The formula to calculate the advertising elasticity is as follows:
Original sales = 10,000 units Original advertisement expenditure = 800-00
New sales = 50,000 units New advertisement expenditure = 2000-00
In the above example, advertising elasticity of demand is 1.67. It implies that for every one time increase in
advertising expenditure, the sales would go up 1.67 times. Thus, Ea is more than one.
The term “production” means transformation of physical “inputs” into physical “outputs”.
Production function
The entire theory of production centres revolves around the concept of production function. A “production
function” expresses the technological or engineering relationship between physical quantity of inputs
employed and physical quantity of outputs obtained by a firm. It specifies a flow of output resulting from a
flow of inputs during a specified period of time. It may be in the form of a table, a graph or an equation
specifying maximum output rate from a given amount of inputs used. As it relates inputs to outputs, it is also
called “input-output relation.” The production is purely physical in nature and is determined by the quantum
of technology, availability of equipments, labour, raw materials, etc. employed by a firm.
A production function can be represented in the form of a mathematical model or equation as Q = f (L, N,
K….etc) where Q stands for quantity of output per unit of time and L, N, K etc are the various factor inputs
like land, capital, labour, etc which are used in the production of output. The rate of output Q is thus, a
function of the factor inputs L, N, K etc, employed by the firm per unit of time.
It is necessary to note that production function is assumed to be a continuous function, i.e. it is assumed that
a change in any of the variable factors produces corresponding changes in the output. Generally speaking,
there are two types of production functions. They are as follows:
1. Short run production function – In this case, the producer will keep all fixed factors as constant and
change only a few variable factor inputs. In the short run, we come across two kinds of production functions:
Quantities of all inputs both fixed and variable will be kept constant and only one variable input will
be varied, for example, law of variable proportions.
Quantities of all factor inputs are kept constant and only two variable factor inputs are varied, for
example, iso-quants and iso-cost curves.
2. Long run production function – In this case, the producer will vary the quantities of all factor inputs,
both fixed as well as variable in the same proportion, for example, the laws of returns to scale. Each firm has
its own production function which is determined by the state of technology, managerial ability,
organisational skills, etc of a firm. It may be in the following manner:
1. The quantity of inputs may be reduced while the quantity of output may remain same.
2. The quantity of inputs may be reduced while the quantity of output may increase.
3. The quantity of inputs may be kept constant while the quantity of output may increase.
If there are any improvements in the firm, the old production function is disturbed and a new one takes its
place.
Uses of production function
Though production function may appear as highly abstract and unrealistic, in reality, it is both logical and
useful. It is of immense utility to the managers and executives in the decision making process at the firm
level. There are several possible combinations of inputs and, decision makers have to choose the most
appropriate among them. The following are some of the important uses of production function:
1. It can be used to calculate or work out the least cost input combination for a given output or the maximum
output-input combination for a given cost.
2. It is useful in working out an optimal and economic combination of inputs for getting a certain level of
output. The utility of employing a unit of variable factor input in the production process can be better judged
with the help of production function. Additional employment of a variable factor input is desirable only
when the marginal revenue productivity of that variable factor input is greater than or equal to cost of
employing it in an organisation.
3. Production function also helps in making long run decisions. If returns to scale are increasing, it is wise to
employ more factor units and increase production. If returns to scale are diminishing, it is unwise to employ
more factor inputs & increase production. Managers will be indifferent whether to increase or decrease
production, if production is subject to constant returns to scale. Thus, production function helps both in the
short run and long run decision - making process.
Demerits
There are some demerits of Marris’ growth maximisation model. They are as follows:
1. It is doubtful whether both managers and owners would maximise their utility functions simultaneously,
always.
2. The assumption of constant price and production costs are not correct.
3. It is difficult to achieve both growth maximisation and profit maximization together.
Thus, Marris’ growth maximisation model also has some drawbacks.
Types of investment
Keynes speaks of 5 types of investment. They are as follows:
1. Private investment
It is made by private entrepreneurs on the purchase of different capital assets like machinery, plants,
construction of houses and factories, offices, shops, etc. It is influenced by MEC and interest rate. It is
profit – elastic. Profit motive is the basis for private investment. Private entrepreneurs would take up only
those projects which yield quick results and generally those that have a small gestation period.
2. Public investment
It is undertaken by the public authorities like central, state and local authorities. It is made on building
infrastructure of the economy, public utilities and on social goods, for example, expenditure on basic
industries, defense industries, construction of multipurpose river valley projects, etc. In this case, the basic
criterion and motto is social net gain, social welfare and not profits. The principle of maximum social
advantage would govern public expenditure. It is also influenced by social and political considerations.
3. Foreign investment
It consists of excess of exports over the imports of a country. It depends on many factors such as
propensity to export of a given country, foreigners’ capacity to import, prices of exports and imports, state
trading and other factors.
Induced investment
Induced investment is another name for private investment. Investment, which varies with the changes in the
level of national income, is called induced investment. When national income increases, the aggregate
demand and level of consumption of the community also increases. In order to meet this increased demand,
investment has to be stepped up in capital goods sector which finally leads to increase in the production of
consumption goods Therefore, we can say that induced investment is income – elastic i.e., it increases as
income increases and vice-versa.
5. Autonomous investment
Autonomous investment is another name for public investment. The investment, which is independent of
the level of income, is called as autonomous investment. Such investments do not vary with the level of
income. Therefore it is called income-inelastic. It does not depend on changes in the level of income,
consumption, rate of interest or expected profit.
Determinants of investment
Investment decisions taken by entrepreneurs depend upon a number of factors like; interest rate, level of
uncertainty, political environment, rate of growth of population, level of existing stock of capital, and the
necessity of new products. It also depends on investors’ level of income, level of inventions and innovations,
level of consumer demand, availability of capital and liquid assets of the investors, government policy, etc. It
is necessary to note that investment is more volatile and unpredictable. It is highly unstable in the short run
because the factors determining it are highly complex and uncertain in their nature. The above-mentioned
factors no doubt generally affect the volume of investment. However, the most important inducement to
invest is the consideration of the profit. The profitability of investment depends mainly on two factors:
Marginal efficiency of capital (MEC)
Interest rate (IR).
It relates to the cost-benefit analysis. The businessman while investing capital has to calculate the cost of
borrowing and the expected rate of profits from it.
a) Monetary Policy
Monetary policy is a part of the overall economic policy of a country. It is employed by the government as
an effective tool to promote economic stability and achieve certain predetermined objectives. Monetary
policy deals with the total money supply and its management in an economy. It is essentially a programme of
action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply
of money with the public, and the flow of credit with a view to achieving economic stability and certain
predetermined macroeconomic goals.
Monetary policy can be explained in two different ways. In a narrow sense, t is concerned with administering
and controlling a country’s money supply including currency notes and coins, credit money, level of interest
rates and managing the exchange rates. In a broader sense, monetary policy deals with all those monetary
and non-monetary measures and decisions that affect the total money supply and its circulation in an
economy.
Physical Policy or Direct Controls
Government interference with the forces of demand and supply in the market, and state regulation of prices
of commodities are common features in these days. Thus, when monetary and fiscal measures are inadequate
to control prices, government resorts to direct control. During wars, when inflationary forces are strong,
price control involves imposing ceilings in respect of certain prices and prices are to be stopped from rising
too high. In a planned economy, the objective of price control is to bring about allocation of resources in
accordance with the objects of plan. Price control normally involves some control of supply or demand or
both. These are done by control of distribution of commodities through rationing. Rationing is, therefore, an
essential part of the price control policy. In the U.S., price control takes the form of price support programme
in which prices are prevented from falling below certain levels considered fair. Under certain circumstances,
government may resort to dual pricing which is yet another form of price control by the government.
Qno 7. Inflation is a global Phenomenon which is associated with high price causes decline in the value for
money. It exists when the amount of money in the country is in excess of the physical volume of goods and
services. Explain the reasons for this monetary phenomenon.
Define Inflation 2
Answer - Definition - The term inflation is used in many senses and hence it is very difficult to give a
generally accepted, universally agreeable, and precise definition to the term inflation. Inflation is commonly
understood as a situation of substantial and rapid increase in the level of prices and consequent
deterioration in the value of money over a period of time. It refers to the average rise in the general level of
prices and fall in the value of money. Most of the economists considered inflation as a purely monetary
phenomenon. According to this approach, it is the increase in the quantity of money which causes an
inflationary rise in the price level.
The Cambridge economists such as Lord Keynes and A.C Pigou viewed inflation as a
phenomenon of full employment. According to Keynes “an inflationary rise in price cannot take place before
the point of full employment”. An expansion of money supply in a situation of under employment
equilibrium, leads to increased production of goods and services and expansion in employment by using
unemployed resources.
Causes of inflation -
1. Demand side - Demand rises much faster than supply. We can enumerate the following reasons for
increase in effective demand.
Increase in money supply - Supply of money in circulation increases on account of deficit financing
by the government, expansion in public expenditure, expansion in bank credit and repayment of
past debt by the government to the people, increase in legal tender money and public borrowing.
Increase in disposable income –Aggregate effective demand rises when disposable income of the
people increases.
Increase in private consumption expenditure and investment expenditure – An increase in private
expenditure both on consumption and on investment leads to emergence of excess demand in an
economy.
Increase in exports – An increase in the foreign demand for a country’s exports reduces the stock of
goods available for home consumption.
Existence of black money – The existence of black money in a country due to corruption, tax
evasion, black-marketing, etc.
Increase in foreign exchange reserves – This may increase on the account of inflow of foreign
money into the country.
Increase in population growth – This creates an increase in demand for many types of goods and
services in a country.
High rates – Higher rates of indirect taxes would lead to a rise in prices.
Reduction in the rates of direct taxes – This would leave more cash in the hands of people inducing
them to buy more goods and services leading to an increase in prices.
Reduction in the level of savings – This creates more demand for goods and services.
Supply side
Generally, the supply of goods and services do not keep pace with the ever- increasing demand for goods
and services. Thus, supply does not match the demand. Supply falls short of demand. Increase in supply of
goods and services may be limited because of the following reasons.
Shortage in the supply of factors of production – When there is shortage in the supply of factors of
production like raw materials, labour, capital equipment’s, etc. there will be a rise in their prices.
Operation of law of diminishing returns – When the law of diminishing returns operates, increase
in production is possible only at a higher cost which demotivates the producers to invest in large
amounts.
Hoardings by traders and speculators – During the period of shortage and rise in prices, hoardings
of essential commodities by traders and speculators with the objective of earning extra profits in
the future creates an artificial scarcity of commodities.
Hoardings by consumers – Consumers may also hoard essential goods to avoid payment of higher
prices in the future. This leads to an increase in the current demand, which in turn stimulates prices.
Role of trade unions – Trade union activities leading to industrial unrest in the form of strikes and
lockouts also reduce production. This will lead to creation of excess demand that eventually brings a
rise in the price level.
Role of natural calamities – Natural calamities such as earthquake, floods, and drought conditions
also affect the supplies of agricultural products adversely. They also create shortage of food grains
and raw materials, which in turn creates inflationary conditions.
War – During the period of war, shortage of essential goods creates a rise in prices.
International factors – These factors would cause either shortage of goods and services or rise in
the prices of factor inputs leading to inflation. E.g., higher prices of imports.
Increase in prices of inputs within the country
Role of expectations
Expectations also play a significant role in accentuating inflation. The following points are worth
mentioning:
If people expect further rise in price, the current aggregate demand increases, which in turn causes
a rise in the prices.
Expectations about higher wages and salaries affect the prices of related goods.
Expectations of wage increase often induce some business houses to increase prices even before
upward wage revisions are actually made.
QNo8.2Monopoly is the situation there exists a single control over the market producing a commodity
having no substitutes with no possibilities for anyone to enter the industry to compete. In that situation,
they will not charge a uniform price for all the customers in the market and also the pricing policy
followed in that situation.
Define Monopoly 2
Features of Monopoly 4
Answer – In a simple term we can say it that monopoly is complete domination of single person or single
market. Monopoly may be defined, as a condition of production in which a single firm has the power to fix
the price of the commodity or the output of the commodity. Monopoly is that kind of market form in which
a single producer controls the whole supply of a single commodity which has no close substitutes.
Features of Monopoly –
Kinds of Price Discrimination – 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. Three kinds of price discrimination are commonly seen as follows –
Discrimination of the first degree – Under price discrimination of the first degree, the producer exploits the
consumers to the maximum possible extent, by asking to pay the maximum he/she is prepared to pay
rather than go without the commodity. In this case, the monopolist will not allow any consumer’s surplus to
the consumer. This type of price discrimination is called perfect discrimination.
Discrimination of the second degree – In case of discrimination of the second degree, the monopolist
charges different prices for markets of the same commodity, but not at a maximum possible rate but at a
lower rate. The monopolist will leave a certain amount of consumer’s surplus with the consumers. This is
done to keep the consumers satisfied and prevent the entry of potential rivals.
Discrimination of the third degree – In case of discrimination of the third degree, the markets are divided
into many sub-markets or sub- groups. The price charged in each case roughly depends on the ability to pay
of different subgroups in the market.
Answer - Fiscal policy is an important part of the overall economic policy of a nation. Lord Keynes, for the
first time, emphasised the significance of fiscal policy as an instrument of economic control. The term “fisc”
in English language means “treasury”, and the policy related to treasury or government exchequer is known
as fiscal policy.
Fiscal policy is concerned with the manner in which all the different elements of public
finance, while still primarily concerned with carrying out their own duties (as the first duty of a tax is to raise
revenue), may collectively be geared to forward the aims of economic policy.” It involves alterations in
government expenditures for goods and services or the level of tax rates.
1. Public revenue: It refers to the income or receipts of public authorities. It is classified into two parts - tax-
revenue and non-tax revenue. Taxes are the main source of revenue to a government. There are two types
of taxes. They are direct taxes such as personal and corporate income tax, property tax, expenditure tax,
and indirect taxes such as customs duties, excise duties, sales tax (now called VAT).
2. Public expenditure policy: It refers to the expenditure incurred by the public authorities like central, state
and local governments. It is of two kinds: development or plan expenditure and non-development or non-
plan expenditure.
3. Public debt or public borrowing policy: All loans taken by the government constitutes public debt.
4. Deficit financing: It is an extraordinary technique of financing the deficits in the budgets. It implies
printing of fresh and new currency notes by the government by running down the cash balances with the
central bank.
5. Built in stabilisers or automatic stabilisers (BIS): The automatic or built-in stabilisers imply automatic
changes in tax collections and transfer payments or public expenditure programmes so that it may reduce
the destabilising effect on aggregate effective demand.
Qno10.Describe Cost-Output Relationship in brief. It is of two types, internal borrowings and external
borrowings.
Answer - Cost-output relations play an important role in almost all business decisions. It throws light on cost
minimisation or profit maximisation and optimisation of output. The relation between the cost and output is
technically described as the “cost function”. are kept constant. Mathematically speaking TC = f (Q) where TC
= Total cost and Q stands for output produced.
Cost-Output Relationships in the Short Run – It is interesting to note that the relationship between the cost
and output is different at two different periods of time i.e. short-run and long run. Generally speaking, cost
of production will be relatively higher in the short- run when compared to the long run. This is because a
producer will get enough time to make all kinds of adjustments in the productive process in the long run
than in the short run.
Short-run is a period of time in which only the variable factors can be varied while fixed factors like plant,
machinery, etc. remain constant. Hence, the plant capacity is fixed in the short run.
The short run cost function relates to the short run production function. It implies two sets of input
components:
(a) Fixed inputs and - Fixed inputs are unalterable. They remain unchanged over a period of time.
(b) Variable inputs.- On the other hand, variable factors are changed to vary the output in the short
run.
Fixed costs
These costs are incurred on fixed factors like land, buildings, equipments, plants, superior type of labour,
top management, etc. Fixed costs in the short run remain constant because the firm does not change the
size of plant and the amount of fixed factors employed. Fixed costs do not vary with either expansion or
contraction in output. These costs are to be incurred by a firm even if output is zero.
Prof. Marshall called fixed costs as supplementary costs. They include items such as contractual
rent payment, interest on capital borrowed, insurance premiums, depreciation and maintenance
allowances, administrative expenses like manager’s salary or salary of the permanent staff, property and
business taxes, license fees, etc.
Variable costs - The costs corresponding to variable factors are discussed as variable costs. These costs are
incurred on raw materials, ordinary labour, transport, power, fuel, water, etc, which directly vary in the
short run. Variable costs are incurred only when some amount of output is produced.
It is clear from the above description that production costs consist of both fixed as well as variable costs.
The difference between the two is meaningful and relevant only in the short run. However, the distinction
between fixed and variable costs is very significant in the short run because it influences the average cost
behaviour of the firm.
Cost-Output Relationship in the Long Run -
Long run is defined as a period of time where adjustments to changed conditions are complete. It is actually
a period during which the quantities of all factors, variable as well as fixed factors, can be adjusted. Hence,
there are no fixed costs in the long run. In the short run, a firm has to carry on its production within the
existing plant capacity, but in the long run, it is not tied up to a particular plant capacity. If demand for the
product increases, it can expand output by enlarging its plant capacity. It can construct new buildings or
hire them, install new machines, employ administrative and other permanent staff.
As all costs are variable in the long run, the total of these costs is the total cost of production.
Hence, the distinction between fixed and variables costs in the total cost of production will disappear in the
long run. Long run average cost is the long run total cost divided by the level of output. In brief, it is the per-
unit cost of production of different levels of output by changing the size of the plant or scale of production.
The long run cost–output relationship is explained by drawing a long run cost curve through short–
run curves as the long period is made up of many short–periods just as the day is made up of 24 hours and a
week is made out of 7 days. This curve explains how costs will change when the scale of production is
varied.
The long run-cost curves are influenced by the law of returns to scale as against the short run cost
curves which are subject to the working of law of variable proportions.
Conclusion - Short run cost function gives information about the nature and behaviour of various
cost curves. Long run cost function tells us how it is possible to obtain more output at lower costs in the long
run
Qno11. Discuss the practical application of Price elasticity and Income elasticity of demand.
According Prof. Stonier and Hague, price elasticity of demand is a technical term used by economists to
explain the degree of responsiveness of the demand for a product to a change in its price.
We can give some examples practical application of price elasticity of demand are as follows:
1.Production planning – It helps a producer to decide about the volume of production. If the demand for his
products is inelastic, specific quantities can be produced while he has to produce different quantities, if the
demand is elastic.
2.Helps in fixing the prices of different goods – It helps a producer to fix the price of his product. If the
demand for his product is inelastic, he can fix a higher price and if the demand is elastic, he has to charge a
lower price. Thus, price-increase policy is to be followed if the demand is inelastic in the market and price-
decrease policy is to be followed if the demand is elastic.
3.Helps in fixing the rewards for factor inputs – Factor rewards refer to the price paid for their services in
the production process. It helps the producer to determine the rewards for factors of production. If the
demand for any factor unit is inelastic, the producer has to pay higher reward for it and vice-versa.
4.Helps in determining the foreign exchange rates – Exchange rate refers to the rate at which currency of
one country is converted in to the currency of another country. It helps in the determination of the rate of
exchange between the currencies of two different nations. For e.g. if the demand for US dollar to an Indian
rupee is inelastic, in that case, an Indian has to pay more Indian currency to get one unit of US dollar and
vice-versa.
5.Helps in determining the terms of trade – it is the basis for deciding the ‘terms of trade’ between two
nations. The terms of trade implies the rate at which the domestic goods are exchanged for foreign goods.
6.Helps in declaration of public utilities – Public utilities are those institutions which provide certain
essential goods to the general public at economical prices.
7.Helps in fixing the rate of taxes – Taxes refer to the compulsory payment made by a citizen to the
government periodically without expecting any direct return benefit from it.
8.Poverty in the midst of plenty – The concept explains the paradox of poverty in the midst of plenty.
Thus, the concept of price elasticity of demand has great practical application in
economic theory.
Practical application of income elasticity of demand - Income elasticity of demand may be defined as the
ratio or percentage change in the quantity demanded of a commodity to a given percentage change in the
income. Few examples on the practical application of income elasticity of demand are as follows:
1. Helps in determining the rate of growth of the firm – If the growth rate of the economy and income
growth of the people is reasonably forecasted, in that case, it is possible to predict expected increase in the
sales of a firm and vice-versa.
2. Helps in the demand forecasting of a firm – It can be used in estimating future demand provided that the
rate of increase in income and the Ey for the products are known. Thus, it helps in demand forecasting
activities of a firm.
3. Helps in production planning and marketing – The knowledge of Ey is essential for production planning,
formulating marketing strategy, deciding advertising expenditure and nature of distribution channel, etc. in
the long run.
4. Helps in ensuring stability in production – Proper estimation of different degrees of income elasticity of
demand for different types of products helps in avoiding over-production or under production of a firm.
5. Helps in estimating construction of houses – The rate of growth in incomes of the people also helps in
housing programmes in a country. Thus, it helps a lot in managerial decisions of a firm.
Answer - Managerial economics is a science that deals with the application of various economic theories,
principles, concepts and techniques to business management in order to solve business and management
problems.
In Spencer and Siegelman, in the following words: “Managerial economics is the integration of
economic theory with business practice for the purpose of facilitating decision making and forward
planning by the management”1.
Mc Nair and Meriam say, “Managerial economics is the use of economic modes of thought to
analyse business situation”.
Scope of Managerial Economics - There is no unanimity among different economists with respect to the
exact scope of business economics.Yet we can discuss the following scope in this context -
Objectives of a firm –
Historically, profit maximisation has been considered as the main objective of a business unit. All business
organisations have multiple objectives which are multidimensional out of which some are supplementary
and some are competitive. Few others are inter-connected and few others are opposing.
Demand analysis and forecasting - Mostly, a firm use to produces different kinds of goods and services. It
has to meet the requirements of consumers in the market. The basic problems like: what to produce; where
to produce; for whom to produce; how to produce; how much to produce and how to distribute them in the
market, are to be answered by a firm. Hence, the firm has to study in detail about the various determinants
of demand, nature, composition and characteristics of demand, elasticity of demand, demand distinctions,
demand forecasting, etc.
Production means conversion of inputs into the final output. It may be either in physical or in monetary
terms. Physical production deals with the production of outputs by a firm, by employing different factor
inputs in proper proportions. Always, the most basic goal of any firm is to increase the output.
Pricing decisions means to fix the prices for all the goods and services of any firm. This is based on the
pricing policy and practices of that particular firm. Amongst all the policies the most important policy of any
firm would be the price setting policy.
Profit management
Basically, a firm can be a commercial or a business unit. Consequently, its success or failure is measured in
terms of the amount of profit it is able to earn in a competitive market. The management gives top most
priority to this aspect.
Capital management
This is one of the essential areas of business unit. The success of any business is based on proper
management and adequate capital investment. Under capital management, managers should assess
capital requirement, methods of capital mobilisation, capital budgeting, optimal allocation of capital,
selection of highly profitable projects, cost of capital, return on capital, planning and control of capital
expenditure, etc.
The term linear means that the relationships handled can be represented by straight lines and the term
programming implies systematic planning or decision-making. It implies maximisation or minimisation of a
linear function of variables subject to a constraint of linear inequalities.
The information on market structure and conditions of various markets is the most important part of the
business.
Strategic planning
It provides long term decisions, which will have a huge impact on the behaviour of the firm. The firm fixes
up some long-term goals and objectives and selects a different strategy to achieve them. This framework is
a recent addition to the scope of business economics with the emergence of MNCs.
External environment
The external environment has a significant role in managerial economics. Few examples of external
environment impacting managerial economics are as follows:
Macroeconomic management of the country relating to economic system, national income, trade
cycles, savings and investments and its impact on the working of a firm.
Conclusion -
It is clear that the scope of managerial economics is expanding with the growth of modern business and
business environment.
Q13. Economic stability implies avoiding fluctuations in economic activities. It is
important to avoid the economic and financial crisis. The challenge is to minimize
the instability without affecting productivity, efficiency, employment. Find out the
instruments to face the challenges and to maintain an economic stability.
(Explanation of economic stability, Instruments) 2, 8
Answer:-
Economic Stability-------
Economic stability - promotion is partly a matter of avoiding economic and financial crisis. A dynamic
market economy necessarily involves some degree of instability, as well as gradual structural change. The
challenge for policy makers is to minimize this instability without reducing the ability of the economic
system to raise living standards through increasing productivity, efficiency and employment. Economic
stability is fostered by robust economic and financial institutions and regulatory frameworks.
Economic stability implies avoiding fluctuations in the level of economic activities as 100% stability is
neither possible nor desirable. It implies only relative stability in the overall level of economic activities. A
stabilization policy is a set of measures introduced to stabilize a financial system or economy. It can refer to
correcting the normal behavior of business cycles. In this case, the term generally refers to demand
management by monetary and fiscal policy to reduce normal fluctuations in output, sometimes referred to as
“keeping the economy on an even keel.” The policy changes in these circumstances are usually
countercyclical, compensating for the predicted changes in employment and output to increase short run and
medium run welfare. It can also refer to measures taken to resolve a specific economic crisis, for instance, an
exchange rate crisis or stock market crash, in order to prevent the economy developing recession or inflation.
The initiative is taken by the government or the central bank or both. Depending on the goal to be achieved,
it involves some combination of restrictive fiscal measures and monetary tightening. Such stabilization
policies can be painful, in the short run, for the economy because of lower output and higher unemployment.
They are designed to be a platform for successful long run growth and reform.
Monetary Policy
Monetary policy is a part of the overall economic policy of a country. It is employed by the government as
an effective tool to promote economic stability and achieve certain predetermined objectives.
Monetary policy deals with the total money supply and its management in an economy. It is essentially a
programme of action undertaken by the monetary authorities, generally the central bank, to control and
regulate the supply of money with the public, and the flow of credit with a view to achieving economic
stability and certain predetermined macroeconomic goals. Monetary policy can be explained in two different
ways. In a narrow sense, it is concerned with administering and controlling a country’s money supply
including currency notes and coins, credit money, level of interest rates and managing the exchange rates. In
a broader sense, monetary policy deals with all those monetary and non-monetary measures and decisions
that affect the total money supply and its circulation in an economy. It also includes several non-monetary
measures like wages and price control, income policy, budgetary operations taken by the Government which
indirectly influence the monetary situations in an economy.
Fiscal Policy
Fiscal policy is an important part of the overall economic policy of a nation. It is being increasingly used in
modern times to achieve economic stability and growth throughout the world. Lord Keynes, for the first
time, emphasised the significance of fiscal policy as an instrument of economic control. It exerts deep impact
on the level of economic activity of a nation.
Meaning
The term “fisc” in English language means “treasury”, and the policy related to treasury or government
exchequer is known as fiscal policy. Fiscal policy is a package of economic measures of the Government
regarding public expenditure, public revenue, public debt or public borrowings. It concerns itself with the
aggregate effects of government expenditure and taxation on income, production and employment. In short,
it refers to the budgetary policy of the government. Fiscal policy is concerned with the manner in which all
the different elements of public finance, while still primarily concerned with carrying out their own duties
(as the first duty of a tax is to raise revenue), may collectively be geared to forward the aims of economic
policy.” It involves alterations in government expenditures for goods and services or the level of tax rates.
Unlike monetary policy, these measures involve direct government interference in the market for goods and
services (in case of public expenditure) and direct impact on private demand (in case of taxes).
Government interference with the forces of demand and supply in the market, and state regulation of prices
of commodities are common features in these days. Thus, when monetary and fiscal measures are inadequate
to control prices, government resorts to direct control. During wars, when inflationary forces are strong,
price control involves imposing ceilings in respect of certain prices and prices are to be stopped from rising
too high. In a planned economy, the objective of price control is to bring about allocation of resources in
accordance with the objects of plan. Price control normally involves some control of supply or demand or
both. These are done by control of distribution of commodities through rationing. Rationing is, therefore, an
essential part of the price control policy. In the U.S., price control takes the form of price support programme
in which prices are prevented from falling below certain levels considered fair. Under certain circumstances,
government may resort to dual pricing which is yet another form of price control by the government.
14. Explain any eight macroeconomic ratios. (Definition of Macroeconomics, Macroeconomics ratios) 2,
8
Answer: -
Definition of Macroeconomics
Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a
whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross
domestic product and inflation.
Macroeconomic Ratios
There are several macroeconomic ratios and an attempt is made to explain eight such macroeconomic ratios.
For a business firm, the knowledge of these macroeconomic ratios is indispensable for taking
microeconomic decisions.
1. In other words, it tells us about the percentage of consumption out of a given level of income.
This can be expressed as C = f [Y] where C = consumption, Y = income and f = function. Consumption is an
increasing function of income. Higher the income, higher would be the consumption and vice-versa. There is
a direct relationship between the two. For example, out of Rs. 100, a person can consume Rs. 80, and save
Rs 20. In this case, the consumption income ratio is 1:0.8. This ratio helps business personnel to forecast
his/her sales in the market.
This ratio indicates the proportion of two factor inputs. It tells us the ratio between the numbers of
labourers required for a given amount of capital invested in any business. This ratio is useful to work
out the least cost combination by substituting one factor input to another. This ratio can be expressed as K/L
5. Output-labour ratio
The term productivity in general is defined as a ratio of what comes out of a business to what goes in to the
business, i.e., it is the ratio of ‘outcome’ to the ‘efforts’ of the business. Hence, productivity would mean the
value of output divided by the value of inputs employed. There are different kinds of productivity ratios.
A commercial bank mobilises deposits from the general public and the entire amount of deposits is not kept
in the form of cash. An experienced banker knows that all depositors will not withdraw their entire deposits
on the same day at the same time. Hence, only a fraction of total deposits is kept in the form of liquid cash to
honour the cheques drawn on demand deposit by the customers. The remaining excess deposits are used for
lending and investment purposes by the bank.
Q15. Define Inflation and explain the types of inflation. (Definition of Inflation, types of inflation) 3, 7
Answer:-
Inflation
Inflation has become a global phenomenon in recent years. Development economics is very much associated
with inflation. An in-depth study of inflation is of paramount importance to a student of managerial
economics. The term inflation is used in many senses and hence it is very difficult to give a generally
accepted, universally agreeable, and precise definition to the term inflation. Popularly, inflation is associated
with high prices, which causes a decline in the value of money. Inflation is commonly understood as a
situation of substantial and rapid increase in the level of prices and consequent deterioration in the value of
money over a period of time. It refers to the average rise in the general level of prices and fall in the value of
money. Inflation is an upward movement in the average level of prices. The opposite of inflation is deflation,
a downward movement in the average level of prices. The common feature of inflation is rise in prices and
the degree of inflation may be measured by price indices.
Types of inflation
Depending upon the rate of rise in prices and the prevailing situation, inflation has been classified into the
following six types:
Creeping inflation – When the rise in prices is very slow (less than 3%) like that of a snail or creeper it is
called creeping inflation.
Walking inflation – When the rise in prices is moderate (in the range of 3 to 7%) and the annual inflation
rate is of single digit it is called walking inflation. It is a warning signal for the government to control it
before it turns into running inflation.
Running inflation – When the prices rise rapidly at a rate of 10 to 20% per annum it is called running
inflation. Such inflation affects the poor and middle classes adversely. Its control requires strong monetary
and fiscal measures; otherwise, it can lead to hyperinflation.
Hyperinflation – Hyperinflation is also called by various names like jumping, runaway, or galloping
inflation. During this period, prices rise very fast (double or triple digit rates) at a rate of more than 20 to
100% per annum and become absolutely uncontrollable. Such a situation brings a total collapse of the
monetary system because of the continuous fall in the purchasing power of money.
Demand-pull Inflation – The total monetary demand persistently exceeds the total supply of goods and
services at current prices so that prices are pulled upwards by the continuous upward shift of the aggregate
demand function. It arises as a result of an excessive aggregate effective demand over aggregate supply of
goods and services in a slowly growing economy. Supply of goods and services will not match the rising
demand. The productive ability of the economy is so poor that it is difficult to increase the supply at a
quicker rate to match the increase in demand for goods and services. When exports increase, the money
income of people rises. With excess money income, purchasing power, demand, and prices move in the
upward direction.
Cost-push inflation – Prices rise on account of increasing cost of production. Thus, in this case, rise in price
is initiated by growing factor costs. Hence, such a price rise is termed as ‘cost-push’ inflation as prices are
being pushed up by rising factor costs. A number of factors contribute to the increase in cost of production.
They are:
Demand for higher wages by the labour class.
Fixing of higher profit margins by the manufacturers.
Q16. Define Fiscal Policy and the instruments of Fiscal policy. (Explanation of Fiscal Policy,
Instruments) 2, 8
Answer:-
Fiscal Policy
Fiscal policy is an important part of the overall economic policy of a nation. It is being increasingly used in
modern times to achieve economic stability and growth throughout the world. Lord Keynes, for the first
time, emphasised the significance of fiscal policy as an instrument of economic control. It exerts deep impact
on the level of economic activity of a nation.
1. Public revenue: It refers to the income or receipts of public authorities. It is classified into two parts - tax-
revenue and non-tax revenue. Taxes are the main source of revenue to a government. There are two types of
taxes. They are direct taxes such as personal and corporate income tax, property tax, expenditure tax, and
indirect taxes such as customs duties, excise duties, sales tax (now called VAT). Administrative revenues are
the bi-products of administrate functions of the government. They include fees, licence fees, price of public
goods and services, fines, escheats and special assessment.
2. Public expenditure policy: It refers to the expenditure incurred by the public authorities like central, state
and local governments. It is of two kinds: development or plan expenditure and non-development or nonplan
expenditure. Plan expenditure includes income-generating projects like development of basic industries,
generation of electricity, development of transport and communications and construction of dams. Non-plan
expenditure includes defence expenditure, subsidies, interest payments and debt servicing changes.
3. Public debt or public borrowing policy: All loans taken by the government constitutes public debt. It
refers to the borrowings made by the government to meet the ever-rising expenditure. It is of two types,
internal borrowings and external borrowings.
4. Deficit financing: It is an extraordinary technique of financing the deficits in the budgets. It implies
printing of fresh and new currency notes by the government by running down the cash balances with the
central bank. The amount of new money printed by the government depends on the absorption capacity of
the economy.
5. Built in stabilizers or automatic stabilizers (BIS): The automatic or built-in stabilizers imply automatic
changes in tax collections and transfer payments or public expenditure programmes so that it may reduce the
destabilizing effect on aggregate effective demand. When income expands, automatic increase in taxes or
reduction in transfer payments or government expenditures will tend to moderate the rise in income. On the
contrary, when the income declines, tax falls automatically and transfers and government expenditure will
rise and thus built-in stabilizers cushion the fall in income.
Q17. Investment is a part of income which can be used for various purposes. It is necessary to create
employment in an economy and to increase national income. To understand the benefits of income,
study the various types of investment. (Explanation of investment, types of investment) 2, 8
Answer:-
Investment Function
Investment is the second important component of effective demand. In Keynesian economics, the term
investment has a different meaning. In the ordinary language, it refers to financial investment. i.e. purchase
of stocks, shares, debentures, bonds, etc. In this case, there is only transfer of rights or titles from one person
to another. It is an investment by one and disinvestment by another and as such, the value transaction
mutually cancels out each other. They do not add anything to the total stock of capital of the nation.
Investment, according to Keynes, refers to real investment. It implies creation of new capital assets or
additions to the existing stock of productive assets. It refers to that part of the aggregate income, which is
used for the creation of new structures, new capital equipments, machines, etc that help in the production of
final goods and services in an economy. Creation of income – earning assets is called investment. Thus,
investment must generate income in the economy. Investment also refers to an addition to capital with such
investment occurring when a new house is built or a new factory is built. Investment means making an
addition to the stock of goods in existence. These activities necessitate the employment of more labour and
thus result in an increase in national income and employment.
Types of investment
Keynes speaks of 5 types of investment. They are as follows:
1. Private investment
It is made by private entrepreneurs on the purchase of different capital assets like machinery, plants,
construction of houses and factories, offices, shops, etc. It is influenced by MEC and interest rate. It is
profit – elastic. Profit motive is the basis for private investment. Private entrepreneurs would take up only
those projects which yield quick results and generally those that have a small gestation period.
2. Public investment
It is undertaken by the public authorities like central, state and local authorities. It is made on building
infrastructure of the economy, public utilities and on social goods, for example, expenditure on basic
industries, defense industries, construction of multipurpose river valley projects, etc. In this case, the basic
criterion and motto is social net gain, social welfare and not profits. The principle of maximum social
advantage would govern public expenditure. It is also influenced by social and political considerations.
3. Foreign investment
It consists of excess of exports over the imports of a country. It depends on many factors such as
propensity to export of a given country, foreigners’ capacity to import, prices of exports and imports, state
trading and other factors.
4. Induced investment
Induced investment is another name for private investment. Investment, which varies with the changes in the
level of national income, is called induced investment. When national income increases, the aggregate
demand and level of consumption of the community also increases. In order to meet this increased demand,
investment has to be stepped up in capital goods sector which finally leads to increase in the production of
consumption goods Therefore, we can say that induced investment is income – elastic i.e., it increases as
income increases and vice-versa.
5. Autonomous investment
Autonomous investment is another name for public investment. The investment, which is independent of
the level of income, is called as autonomous investment. Such investments do not vary with the level of
income. Therefore it is called income-inelastic. It does not depend on changes in the level of income,
consumption, rate of interest or expected profit.
Q18. Discuss any two law of returns to scale with example. (Law of returns to scale, examples) 8, 2
Answer:
For example, when the quantity of all inputs are increased by 10%, and output increases by 15%, then we
say that increasing returns to scale is operating. In order to explain the operation of this law, an equal product
map has been drawn with the assumption that only two factors X and Y are required. Figure 5.9 depicts the
operation of the law of increasing returns to scale. In the figure, Factor X is represented along OX axis and
factor Y is represented along OY axis. The scale line OP is a straight line passing through the origin on the
isoquant map indicating the increase in scale as we move upward. The scale line OP represent different
quantities of inputs where the proportion between factor X and factor Y is remains constant. When the scale
is increased from A to B, the return increases the output from 100 units to 200 units. The scale line OP
passing through origin is called as the “expansion path”. Any line passing through the origin will indicate the
path of expansion or increase in scale with definite proportion between the two factors. It is very clear that
the increase in the quantities of factor X and Y [scale] is small as we go up the scale and the output is larger.
The distance between each isoquant curve is progressively diminishing. It implies that in order to get an
increase in output by another 100 units, a producer is employing lesser quantities of inputs and his
production cost is declining. Thus, the law of increasing returns to scale is operating.
Q1. Managerial economics is the integration of ________ with ____ for solving business and management
problems.
ANS - Prescriptive
ANS - Micro
Q7. This method was originally developed at Rand Corporation in the late ______ by Olaf Helmer, Dalkey
and Gordon.
Ans - 1940’s
ANS - Physics
Q10. 1. In a typical demand schedule quantity demanded varies ___________ with price.
ANS - Inversely
Q11.2. In case of Giffen’s goods, price and demand go in the ______ directions.
Q13. If demand changes as a result of price changes, then it is a case of _____ and ____ in demand.
ANS - Qualitative
ANS - Qualitative
ANS - Fall
Q17. Law of demand explains the ______________change in demand and elasticity of demand explains
______ change in demand.
ANS - Flatter
Q20. When the quantity demanded increases with the increase in income, we say that income elasticity of
demand will be ____. When quantity demanded decreases with increase in income, we say that the income
elasticity of demand is ____.
Q22. Point method helps to measure _________ quantity of change in demand and arc methods helps to
measure ____ changes in demand.
Q23. Consumer surplus is excess of what a consumer is willing to pay over what he______.
Q24. Demand forecasting refers to an estimate of __________________ for the product under given
condition.
Ans - Questionnaire
Ans - Upwards
32.___________ shows the relationship between price and quantity supplied of a particular product.
33. The supply curve shifts when there is a change in quantity supplied due to the factors other than
_______________.
Ans - Price
34. When the supply increase the supply curve shifts to the ____________.
Ans - Right
Ans - Inelastic
36. Tabular representation of different quantities of commodities supplied at varying price is called
___________________.
Ans - Equilibrium
38. The quantity bought and sold at the equilibrium is called ___________.
39. There will be change in ______________ when there is a shift in either demand curve or supply curve or
both.
Ans – Decrease
41. _____ is used to judge the desirability of public investment of any public projects or investment.
42. The term “inputs” or “____________” includes all items or those things which are required by the firm
to produce a particular product.
43. A “production function” expresses the technological or engineering relationship between physical
quantity of inputs employed and__________.
1.______________,
2. Variable inputs
46. Production function explains _____________ or ________________ relationship between inputs and
outputs.
47.In the short period only ___________ factor inputs are changed.
Ans - Variable
Ans - Highest
49.An iso-quant curve shows different alternative combinations of inputs which helps to produce same
level of output where as an iso-cost curve shows ____________ combination of two inputs that can be
purchased with a given amount of investment expenditure while prices of two factor inputs remain
constant.
50.When all inputs are increased by 8% and output increases by 13% then it is a case of law of
____________________.
51. Internal economies depend on the growth of a ___________ and external economies depend on the
growth of the ____________.
52. Economies of scope refer to the benefits which arise to a firm when it produces more than
_________________ rather than producing ________ separately by two firms.
53. A short-run production function assumes that the level of output is fixed. (True/False)
Ans - False
54. When average product is increasing, then marginal product is greater than average product.
(True/False)
Ans - True
Ans - False
56. If a firm is producing a given level of output in a technically efficient manner, that level of output is the
most that can be produced with the given levels of inputs. (True/False)
Ans - True
57. Diminishing returns refer to the decrease in marginal product, which results from increases in the
variable input. (True/False)
Ans - True
58. Economies of scale is ___________that accrue to a firm as a result of increase in its scale of production.
59. Isocost line indicates the _________which the firm can purchase at given prices with a given outlay.
60. Opportunity cost of anything is the alternative that has been _____.
Ans - foregone
61. Marginal cost deals with changes in cost of ______ unit where as incremental cost deals with changes in
cost of ________.
Ans – AFC
Ans - Variable
68. Marginal cost measures how total cost changes when input prices change. (True/False)
Ans - False
69. Marginal cost measures how total cost changes when input prices change. (True/False)
Ans - True
70. A short-run cost function assumes that all inputs are fixed in supply (True/False)
Ans – False
71. In _____________ model, the important assumption is that the entrepreneur aims at maximising his
profits.
72. 2. _________ is the point where the firm has stopped incurring losses but is yet to start gaining profit.
74. Profit maximisation is the most common and basic objective of business firms. (True/False)
Ans - True
Ans - False
76. According to the economist theory of the firm, a firm is a ____ unit, which converts input into output
and while doing so, tries to create surplus value.
77. The firm aiming for profit maximisation reaches its equilibrium only when it produces _________.
Ans - Profit maximising output
Ans - Changes
79. An entrepreneur is an individual who primarily bears the risk of the enterprise. (True/False)
Ans - True
80. The level of output where MC = MR is the point where profits are maximum. (True/False)
81. 11. _______ is related to demand of sales management and sales decision
85. Cyert and March point out that the coalition group has multiple, _____ and ________ goals.
86. According to ________ modern firms are managed by both the manager and the shareholders
(owners).
88. In Marris’ growth maximisation model, the manager tries to maximise his satisfaction and his
satisfaction lies in the ______.
2. The firm aims at maximising its sales revenue subject to a minimum profit constraint.
3. The demand curve of the firm slopes downwards from left to right.
4. _________________________.
92. Baumol thinks managers are more interested in maximising ___ rather than profit.
Ans - Sales
93. In oligopoly market structure, the firms compete more in terms of advertisement, product variations,
etc. rather than ____.
Ans - Price
94. The expenditure which is incurred by the Manager’s indulgence in a company car is termed by
Williamson as _____.
97. _________ seller is the price maker and can restrict the output to increase the price.
Ans - Monopoly
98. ___________ monopoly is a situation in which a single seller faces a single buyer.
Ans - Bilateral
99. Under __________ there are only two large buyers for a specific product or service.
Ans - Duopsony
100. ______ is the market situation where there is a monopoly element in case of the buyer.
Ans - Monopsony
Ans – Oligopsony
Ans - Selling
103. A monopolist who suffers losses in the short run; will exit in the long run if there is no plant size that
will result in economic profit, that is greater than or equal to zero. (True/False)
Ans - True
104. If a monopolist is producing a level of output at which demand is inelastic, then the firm is not
maximising profit. (True/False)
Ans - True
105. If a monopolistically competitive market is in long-run equilibrium, each firm earns economic profits.
(True/False)
Ans - False
106. Oligopolists face interdependent profits because industry sales are large. (True/False)
Ans - False
107, _________is a market structure in which a large number of small sellers sell differentiated products
which are close, but not perfect substitutes for one another.
108. ______ is a market with a single buyer who buys the entire amount produced.
Ans - Monopsony
109. _____ is a few producers specialising in the production of identical goods or differentiated goods
competing with one another.
Ans - Oligopoly
Ans - Stock
Ans – Flow
113. Investment is the _________ in the capital stock over a period of time.
Ans - Change
114. _______ means planned and desired whereas _________means actual or realised value.
115.. A variable is __________, if its value varies as a result of variations in the value of some other
independent variable.
Ans - Dependent
116. . ________ is a statistical measure, which indicates relative changes of a variable over a period of time.
117. A flow variable is a quantity which can be measured in terms of a specific period of time and not at a
__________.
119. ________ tells us the percentage of consumption out of a given level of income.
120. When a number of commodities and their prices at two different periods are arranged in a tabular
form, it is called as _____________.
Ans - True
122. Microeconomics and macroeconomics are two distinct but closely intertwined fields of economics.
(True/False)
Ans - False
123. An increase in the overall level of prices in an economy is referred to as Economic Growth.
(True/False)
Ans - False
124. Wholesale price index measures the prices paid by consumers for all goods and services they
consume. (True/False)
125. GDP Deflator measures the increase in quantity of goods produced in an economy. (True/False)
Ans - False
126. __________ is the ratio of change in total consumption to change in total income.
127. Two groups of factors that affect consumption function are ________ and ______.
128. For the economy as a whole, consumption must equal saving. (True/False)
ANS - False
129. When a country saves a large portion of its income, it will have more capital and more productivity.
(True/False)
ANS - True
130. Consumption, in economics, refers to household spending on durable and nondurable goods as well as
household spending on services. (True/False)
ANS – True
131. Investment made by government and departmental undertakings is called ______ investment.
ANS - Public
133. ________ investment does not depend on the changes in the national income.
ANS - Autonomous
134. ________ varies with the changes in the level of national income.
135. In macroeconomics, investment refers to purchase of mutual funds, stocks, or bonds. (True/False)
ANS - False
136. If the government encourages savings, it would lead to lower interest rates and higher investments.
(True/False)
ANS - True
137. When the government has a deficit, it leads to lower investment and higher interest rates.
(True/False)
ANS - True
138. The ratio of change in national income resulting from a change in autonomous investment is called
_________________.
ANS - Multiplier
139. When MPC = 1, multiplier will be ___________.
ANS - Infinite
140. __________ shows the effects of consumption on investment; whereas __________ shows the effect
of investment on consumption.
142. As the cash reserve ratio increases, the money multiplier increases. (True/False)
ANS - False
143. The amount of money in the economy partly depends on the behaviour of banks. (True/False)
ANS - True
144. If the reserve ratio is 20%, Rs. 500 can be created from Rs. 100 of reserves. (True/False)
ANS - True
145. Stable economic conditions are a prerequisite for a systematic and smooth___________..
149. _____, by regulating its credit policy, can control the credit as per the requirement of the economy.
150. The two instruments of monetary policy are ____ and _____.
153. Reserve over and above the Statutory Reserve is called _______.
155. Liquidity refers to the ease with which an asset is converted to the medium of exchange. (True/False)
Ans - True
156. When the Federal Reserve conducts open-market operations to increase the money supply, it buys
government bonds from the public. (True/False)
Ans - True
157. Under a fractional reserve banking system, banks generally lend out a majority of the funds deposited.
(True/False)
Ans - True
158. If the Federal bank wanted to increase the money supply, it would make open market purchases and
lower the discount rate. (True/False)
Ans - False
Ans - False
160. The importance of fiscal policy as an economic tool was realised only after _____ in 1930s.
161. ______ are called built-in-stabilisers to correct and, thus restore economic stability.
162. Tax on individual is called ___ and tax on commodity is called ___.
164. Taxes determined on the basis of the value of a particular product are called ____.
165. Fiscal policy affects the economy in both the short and long run. (True/False)
Ans - True
166. Fiscal policy refers to the idea that aggregate demand is changed by changes in government spending
and taxes. (True/False)
Ans - True
167. In the short run an increase in government expenditures raises real GDP and the price level.
(True/False)
Ans – True
168. An increase in government purchases is likely to crowd out investment spending by business.
(True/False)
Ans - True
169 Automatic stabilisers are changes in taxes or government spending that increase aggregate demand
without requiring policy makers to act when the economy goes into recession. (True/False)
Ans – True
170. Distribution of essential commodities through fair price shops is known as ___________.
172.Existence of two prices for the same commodity at the same time one controlled price another free
market price is called _____________________.
173. Organisations are obliged to provide employees with a ___ and ____ environment.
Ans – Policies
175. The objective of labour welfare is to make people _____ and _______.
176.The purpose of labour welfare is to bring about the development of the whole personality of the
workers to make a _______.
Ans - Productivity
178. Facilities such as housing schemes, medical benefits, and education and recreation facilities for
workers’ families help in raising their ________.
180. _______ offered by the organisations in compliance with the central and state government
regulations.
181.________ are to be provided by the employer so as to provide hygienic and nutritious food to the
employees.
Ans – Canteens
182. Proper and sufficient _____ are to be provided for employees so that they can work safely during the
night shifts.
Ans - Lights
183. ______ have the direct responsibility to provide welfare facilities to the employees.
Ans - Employers
184.The ___________ is empowered to make rules to protect the health, safety and welfare of the
employees working in factory premises.
185. ________ takes an active role in offering welfare facilities to the employees in order to improve their
well-being.
186. ________ takes an active role in offering welfare facilities to the employees in order to improve their
well-being.
Ans - People
188. Profitability of an organisation has a direct relationship with the employees’ ____________.
Ans - Productivity
191. Matching the right person to the right job is an acknowledged need in___________.
Ans - Organizations
193. Talent management refers to the process of____________, developing and retaining current workers,
and attracting highly skilled workers to work for a company.
194. __________ is a process that identifies key competencies for an organization and/or a job and
incorporating those competencies of the organization.
Ans – Outsourcing
197. Business process outsourcing is the assignment of one or more important business processes to
___________.
198. The outside firms that are providing the outsourcing services are _______.
199. _________ refers to employing and maintaining exact number of employees with required skills,
abilities and knowledge to perform the existing number of jobs in an organization.
200. ___________ results in high labour cost, high cost of production in addition in organizational policies.
Ans - Overstaffing
201. Indian organizations retrench the employees through various schemes like___________ and
______________.
202. ________ is a scheme where an organization gives its employees the opportunity of a flexible working
hour’s arrangement.
204. Flexi time benefits employees to avoid the _______of commuting at peak times if their start and finish
times are staggered.
Ans - Stress
206. Knowledge management focuses on processes such as ________, _____________ and _____________
knowledge and the cultural and technical foundations that support them.
207. _______ needs to be chosen only after all the requirements of a knowledge management initiative
have been established
Ans - Technology
209. Matching the __________ to the right job is an acknowledged need in organizations.
212. The ______ has gained a lot of importance in employee engagement and it seems to fit into the Indian
scenario very well
213. Organizations can introduce _______ for the employees who outdo themselves for the sake of the
business organization.