Q1. What is Managerial economics?

Discuss the fundamental nature and scope of managerial

economics?
Ans- Managerial economics is a branch of economics involving the application of economic
methods in the managerial decision-making process. Economics is the study of the production,
distribution and consumption of goods and services. Managerial economics involves the use of
economic theories and principles to make decisions regarding the allocation of scarce resources.
Managers use economic frameworks in order to optimize profits, resource allocation and the
overall output of the firm, whilst improving efficiency and minimizing unproductive activities.
These frameworks assist organisations to make rational, progressive decisions, by analysing
practical problems at both micro and macroeconomic levels. Managerial decisions involve
forecasting (making decisions about the future), which involve levels of risk and uncertainty,
however, the assistance of managerial economic techniques aid in informing managers in these
decisions.
Scope of Managerial Economics

The concept is implemented in the following ways:

Microeconomics for Solving Operational Problems

Managers apply microeconomic principles and theories to handle internal issues—production,

sales, distribution, capital, pricing, profit, workforce, etc.

Given below are the various microeconomic theories:

1. Production Theory: In order to ensure high productivity with limited resources,

microeconomics studies the impact of production-related decisions: capital requirement,
labor requirement, production capacity, process, methods, techniques, cost, and quality, 
2. Investment Theory: Companies diligently plan their capital investment to ensure
resource utilization—generating higher returns.
3. Demand Theory: To ensure consumer satisfaction, managers analyze consumer needs
and requirements—they understand consumer attitudes and responses toward company
products or services.
4. Market Structure Pricing Theory: It involves price determination and management—
the business prices its products and services very competitively. To determine the price,
the firms consider production cost, market demand, and marketing cost.
5. Profit Management: Profit maximization is the ultimate aim—this approach focuses on
cost and revenue.
Macroeconomics for Handling External Environment Issues

Businesses operate in external environments—face unforeseen

challenges. Macroeconomics deals with external challenges with the help of tools like PESTEL
analysis.
Let us go through the components in detail:
 1. Political (P): The government plays a critical role in a firm’s progress. Thus, managerial
economics studies how governance style, political unrest, and foreign collaboration
affect private sector companies.
2. Economic (E): Business profitability greatly depends on government policies, tax
reforms, GDP, and the nation’s economic stability.
3. Social (S): The social environment molds businesses. This includes factors like societal
values, beliefs, attitudes, consumer awareness, employment conditions, literacy rate, and
trade unions.
4. Technological (T): Technology enhances the production and distribution of goods or
services.
5. Environmental (E): When awareness of environmental concerns increases—firms face
pressure to adopt sustainable and eco-friendly practices. This includes the curtailing of
pollution, waste management, preservation of water, and preservation of natural
resources.
6. Legal (L): Businesses must operate within legal boundaries—national laws pertaining to
consumer rights, labor laws, health and safety laws, product labeling regulations, and
advertising guidelines.
Nature of Managerial Economics

Managerial economics has often been confused with traditional economics but it has a whole
new meaning and purpose. Let us understand the distinction by venturing deeper into its
characteristics:

 Microeconomics: It solves microeconomic problems faced by a particular firm—does

not focus on the entire economy.
 Pragmatic: Managerial economics is a practical approach—it applies economic
principles in decision-making and problem-solving.
 Multidisciplinary: This approach aggregates multiple streams—business,
management, accounting, statistics, finance, and mathematics.
 Application of Macro Economics: Every firm operates in an external environment—
influenced by legal, political, global, social, economic, technological, competitive, and
demographic factors. Macroeconomics deals with all these threats.
 Management Oriented: It educates leaders and managers on how to make crucial
decisions in critical situations.
Q3. What are various types of Inflation? What are the causes of Inflation? Define what
measures are needed to control Inflation?
Ans- The three types of Inflations are:
1. Demand-Pull Inflation
Demand-pull inflation occurs when an increase in the supply of money and credit
stimulates the overall demand for goods and services to increase more rapidly than the
economy's production capacity. This increases demand and leads to price rises. When
people have more money, it leads to positive consumer sentiment. This, in turn, leads to
higher spending, which pulls prices higher. It creates a demand-supply gap with higher
demand and less flexible supply, which results in higher prices.
 2. Cost-Push Inflation
Cost-push inflation is a result of the increase in prices working through the production
process inputs. When additions to the supply of money and credit are channeled into a
commodity or other asset markets, costs for all kinds of intermediate goods rise. This is
especially evident when there's a negative economic shock to the supply of key
commodities
These developments lead to higher costs for the finished product or service and work
their way into rising consumer prices. For instance, when the money supply is expanded,
it creates a speculative boom in oil prices. This means that the cost of energy can rise
and contribute to rising consumer prices, which is reflected in various measures of
inflation.
3. Built-In Inflation
Built-in inflation is related to adaptive expectations or the idea that people expect
current inflation rates to continue in the future. As the price of goods and services rises,
people may expect a continuous rise in the future at a similar rate. As such, workers may
demand more costs or wages to maintain their standard of living. Their increased wages
result in a higher cost of goods and services, and this wage-price spiral continues as one
factor induces the other and vice-versa.
The different causes of inflation are as follows:
Primary Causes
In an economy, when the demand for a commodity exceeds its supply, then the excess demand
pushes the price up. On the other hand, when the factor prices increase, the cost of production rises
too. This leads to an increase in the price level as well.
Increase in Public Spending
In any modern economy, Government spending is an important element of the total spending. It is
also an important determinant of aggregate demand.

Usually, in lesser developed economies, the Govt. spending increases which invariably creates
inflationary pressure on the economy.

Deficit Financing of Government Spending
There are times when the spending of Government increases beyond what taxation can finance.
Therefore, in order to incur the extra expenditure, the Government resorts to deficit financing.

For example, it prints more money and spends it. This, in turn, adds to inflationary pressure.

Increased Velocity of Circulation

In an economy, the total use of money = the money supply by the Government x the velocity of
circulation of money.
When an economy is going through a booming phase, people tend to spend money at a faster rate
increasing the velocity of circulation of money.

Population Growth
As the population grows, it increases the total demand in the market. Further, excessive demand
creates inflation.

Hoarding
Hoarders are people or entities who stockpile commodities and do not release them to the market.
Therefore, there is an artificially created demand excess in the economy. This also leads to inflation.

Genuine Shortage
It is possible that at certain times, the factors of production are short in supply. This affects
production. Therefore, supply is less than the demand, leading to an increase in prices and inflation.

Exports
In an economy, the total production must fulfill the domestic as well as foreign demand. If it fails to
meet these demands, then exports create inflation in the domestic economy.

Trade Unions
Trade union work in favor of the employees. As the prices increase, these unions demand an
increase in wages for workers. This invariably increases the cost of production and leads to a further
increase in prices.

Tax Reduction
While taxes are known to increase with time, sometimes, Governments reduce taxes to gain
popularity among people. The people are happy because they have more money in their hands.

However, if the rate of production does not increase with a corresponding rate, then the excess cash
in hand leads to inflation.

The imposition of Indirect Taxes

Taxes are the primary source of revenue for a Government. Sometimes, Governments impose
indirect taxes like excise duty, VAT, etc. on businesses.
As these indirect taxes increase the total cost for the manufacturers and/or sellers, they increase the
price of the product to have a minimal impact on their profits.

Price-rise in the International Markets
Some products require to import commodities or factors of production from the international
markets like the United States. If these markets raise prices of these commodities or factors of
production, then the overall production cost in India increases too. This leads to inflation in the
domestic market.

Non-economic Reasons
There are several non-economic factors which can cause inflation in an economy. For example, if
there is a flood, then crops are destroyed. This reduces the supply of agricultural products leading to
an increase in the prices of the commodities.

Investment in Gold, Real estate, stocks, mutual funds, and other assets are some of the ways to deal
with Inflation.

The various methods are usually grouped under three heads: monetary measures, fiscal measures

and other measures.

1. Monetary Measures:

Monetary measures aim at reducing money incomes.

(a) Credit Control:

One of the important monetary measures is monetary policy. The central bank of the country

adopts a number of methods to control the quantity and quality of credit. For this purpose, it

raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a

number of selective credit control measures, such as raising margin requirements and regulating

consumer credit. Monetary policy may not be effective in controlling inflation, if inflation is due

to cost-push factors. Monetary policy can only be helpful in controlling inflation due to demand-

pull factors.
(b) Demonetisation of Currency:

However, one of the monetary measures is to demonetise currency of higher denominations.

Such a measures is usually adopted when there is abundance of black money in the country.

(c) Issue of New Currency:

The most extreme monetary measure is the issue of new currency in place of the old currency.

Under this system, one new note is exchanged for a number of notes of the old currency. The

value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an

excessive issue of notes and there is hyperinflation in the country. It is a very effective measure.

But is inequitable for its hurts the small depositors the most.

2. Fiscal Measures:

Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented

by fiscal measures. Fiscal measures are highly effective for controlling government expenditure,

personal consumption expenditure, and private and public investment.

The principal fiscal measures are the following:

(a)  Reduction in Unnecessary Expenditure:

The government should reduce unnecessary expenditure on non-development activities in order

to curb inflation. This will also put a check on private expenditure which is dependent upon

government demand for goods and services. But it is not easy to cut government expenditure.

Though this measure is always welcome but it becomes difficult to distinguish between essential

and non-essential expenditure. Therefore, this measure should be supplemented by taxation.

(b)  Increase in Taxes:

To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes

should be raised and even new taxes should be levied, but the rates of taxes should not be so high

as to discourage saving, investment and production. Rather, the tax system should provide larger

incentives to those who save, invest and produce more.

Further, to bring more revenue into the tax-net, the government should penalise the tax evaders

by imposing heavy fines. Such measures are bound to be effective in controlling inflation. To

increase the supply of goods within the country, the government should reduce import duties and

increase export duties.

(c) Increase in Savings:

Another measure is to increase savings on the part of the people. This will tend to reduce

disposable income with the people, and hence personal consumption expenditure. But due to the

rising cost of living, people are not in a position to save much voluntarily.

Keynes, therefore, advocated compulsory savings or what he called ‘deferred payment’ where

the saver gets his money back after some years. For this purpose, the government should float

public loans carrying high rates of interest, start saving schemes with prize money, or lottery for

long periods, etc. It should also introduce compulsory provident fund, provident fund-cum-

pension schemes, etc. All such measures increase savings and are likely to be effective in

controlling inflation.

(d)  Surplus Budgets:

An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the

government should give up deficit financing and instead have surplus budgets. It means

collecting more in revenues and spending less.

(e) Public Debt:

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At the same time, it should stop repayment of public debt and postpone it to some future date till

inflationary pressures are controlled within the economy. Instead, the government should borrow

more to reduce money supply with the public.

Like monetary measures, fiscal measures alone cannot help in controlling inflation. They should

be supplemented by monetary, non-monetary and non-fiscal measures.

3. Other Measures:

The other types of measures are those which aim at increasing aggregate supply and reducing

aggregate demand directly.

(a) To Increase Production:

The following measures should be adopted to increase production:

(i) One of the foremost measures to control inflation is to increase the production of essential
consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

(ii) If there is need, raw materials for such products may be imported on preferential basis to

increase the production of essential commodities,

(iii) Efforts should also be made to increase productivity. For this purpose, industrial peace

should be maintained through agreements with trade unions, binding them not to resort to strikes

for some time,

(iv) The policy of rationalization of industries should be adopted as a long-term measure.

Rationalization increases productivity and production of industries through the use of brain,

brawn and bullion.

SECTION-B

Q1. Why does the demand curve slope downward from left to right?
Ans- The demand curve slopes downward from left to right because of the law of demand. The
law of demand states that there is an inverse proportional relationship between price and demand of
a commodity. When the price of commodity increases, its demand decreases and vice versa.

For the demand curve for a single product, the income and substitution effects come into play. The
consumer’s real income rises when the price of an individual product falls, because the consumer’s
nominal income can be used to buy more product. This is the income effect. The substitution effect
occurs when the consumer substitutes more of the now lower-priced product because it is relatively
less expensive.

Q2. Distinguish between market demand curve and household demand curve?

Ans- Key differences are as follows:

1. Individual demand connotes the quantity demanded by a single consumer, for any given
product, at any given price, at any point in time. On the other hand, market demand is the
aggregate quantity that all the consumers of a commodity are willing and able to buy at a
point of time, in a market at different possible prices.
2. Both Individual Demand Curve and Market Demand Curve have a negative slope, i.e.
from left to right showing an indirect functional relationship between the price of the
commodity and the quantity demanded. Other things being constant, an individual demand
curve showcases the relationship between quantity demanded by a single consumer, as we
change the price. Conversely, the market demand curve indicates the relationship between
the total quantity demanded and the market price of the goods.
3. While individual demand is a component of market demand. On the other hand, market
demand is the summation of all individual demand of all consumers.
4. The market demand curve is flatter in comparison to the individual demand curve.
5. Individual demand does not always follow the law of demand whereas market demand
always follows the law of demand. As per the law of demand, when there is an increase in
the price of the commodity, the quantity demanded will decrease.
Q3. Explain in brief methods of demand forecasting?

Ans- There are many different ways to create forecasts. Here are five of the top demand
forecasting methods.

1. Trend projection

Trend projection uses your past sales data to project your future sales. It is the simplest and most
straightforward demand forecasting method.
It’s important to adjust future projections to account for historical anomalies. For example,
perhaps you had a sudden spike in demand last year. However, it happened after your product
was featured on a popular television show, so it is unlikely to repeat. Or your eCommerce site
got hacked, causing your sales to plunge. Be sure to note unusual factors in your historical data
when you use the trend projection method. 

2. Market research

Market research demand forecasting is based on data from customer surveys. It requires time and
effort to send out surveys and tabulate data, but it’s worth it. This method can provide valuable
insights you can’t get from internal sales data.

You can do this research on an ongoing basis or during an intensive research period. Market
research can give you a better picture of your typical customer. Your surveys can collect
demographic data that will help you target future marketing efforts. Market research is
particularly helpful for young companies that are just getting to know their customers.

3. Sales force composite

The sales force composite demand forecasting method puts your sales team in the driver’s seat. It
uses feedback from the sales group to forecast customer demand.

Your salespeople have the closest contact with your customers. They hear feedback and take
requests. As a result, they are a great source of data on customer desires, product trends, and
what your competitors are doing. 

This method gathers the sales division with your managers and executives. The group meets to
develop the forecast as a team.

4. Delphi method

The Delphi method, or Delphi technique, leverages expert opinions on your market forecast. This
method requires engaging outside experts and a skilled facilitator.

You start by sending a questionnaire to a group of demand forecasting experts. You create a
summary of the responses from the first round and share it with your panel. This process is
repeated through successive rounds. The answers from each round, shared anonymously,
influence the next set of responses. The Delphi method is complete when the group comes to a
consensus.
This demand forecasting method allows you to draw on the knowledge of people with different
areas of expertise. The fact that the responses are anonymized allows each person to provide
frank answers. Because there is no in-person discussion, you can include experts from anywhere
in the world on your panel. The process is designed to allow the group to build on each other’s
knowledge and opinions. The end result is an informed consensus.

5. Econometric

The econometric method requires some number crunching. This technique combines sales data
with information on outside forces that affect demand. Then you create a mathematical formula
to predict future customer demand.

The econometric demand forecasting method accounts for relationships between economic
factors. For example, an increase in personal debt levels might coincide with an increased
demand for home repair services. 

Q4. What is the difference between law of returns and return to scale?

Ans-

Law of Returns:
If we keep adding labor (or any particular factor of production) to the production setup while
keeping all other factors constant (i.e. - ceteris paribus), then diminishing returns will set in.
For example, one farmer on a plot with X input units may produce 1 unit of output. 2 farmers on
the same parcel of land and X input units may produce 3 units of output. This is the stage of
"Increasing Returns to Scale". This may continue for a while; however, eventually, when we add
nth farmer, the production will rise at a continuously decreasing rate, finally taking a negative
turn.

Returns to Scale:
Let's say all the factors of production are taken as X input to produce output Y. Now, ask how
much will 2X produce? If the answer is 2Y, we have constant returns to scale. If the answer is
>2Y, we have increasing returns to scale. If the answer is <2Y, we have decreasing returns to
scale.

Critical Differences to note:

1. In LoR, only one factor changes. In RtS, the entire set of inputs is changed.

2. In LoR, diminishing returns is like a final truth. There may be increasing returns initially but
eventually, diminishing returns will set in.
In RtS, it depends on the industry and the process. Therefore, we may have constant RtS going
on for forever (typically in low specialisation industries, like making chairs or Pizza) or
otherwise as well.
 SECTION-C

Q1. Write a short note on profit as business objective?

Business is a set of activities undertaken with the prospect of sale for the purpose of earning a profit.
Profit is the extra income over the expenses. The main objective of any business is to earn a profit.
Just as a plant cannot survive without water, similarly a business cannot sustain without profit.

Profit is necessary for growing and expanding business activities. Profit guarantee a consistent
stream of capital for the modernization and augmentation of business activities in the future. Profits
likewise show the scale of stability, efficiency, and advancement of the business organization.

Q2. What do you mean by a firm?

A firm is a for-profit business organization—such as a corporation, limited liability company

(LLC), or partnership—that provides professional services. Most firms have just one location.
However, a business firm consists of one or more physical establishments, in which all fall under
the same ownership and use the same employer identification number (EIN).

Q3. What is demand forecasting?

Demand forecasting is a combination of two words; the first one is Demand and another forecasting.
Demand means outside requirements of a product or service. In general, forecasting means making
an estimation in the present for a future occurring event. Here we are going to discuss demand
forecasting and its usefulness.

Q4. What do you mean by Production?

Production is the process of making or manufacturing goods and products from raw materials or
components. In other words, production takes inputs and uses them to create an output which is fit
for consumption – a good or product which has value to an end-user or customer.

Q5. What is meant by the term liquidity?

liquidity describes the degree to which an asset can be quickly bought or sold in the market at a
price reflecting its intrinsic value. Cash is universally considered the most liquid asset because it
can most quickly and easily be converted into other assets. Tangible assets, such as real estate, fine
art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to
partnership units, fall at various places on the liquidity spectrum.