All Paper Niraj

8/9/2019 All Paper Niraj

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PAPER-1 (M.E)

Q: 1) What are the basic or fundamental concept of managerial economics? Discuss any five

of these with illustrations.

Answer: Managerial economics is that branch of science in which economic theories are used

in taking business decisions and formulates future plans. Managerial economics is an applied

branch of economic science. According to McGuigan and Moyer, Managerial economics

deals with the application of economic theory and methodology to decision making problems

faced by public, private and not-for-profit institutions. Managerial economics extracts from

economic theory those concepts and techniques that enable the decision maker to allocate

efficiently the resources of the organization. Thus, Managerial economics is a discipline which

deals with the application of economic theory to business operation.

The basic or fundamental concepts of managerial economics are

1) Scarcity

2) Marginalism

3) Equi-Marginalism

4) Time Perspective

5) Discounting Principle

6) Opportunity Cost

7) Risk and uncerainity

8) Profit etc.

Five of these fundamental concepts given above are discussed below with illustrations: -

1) SCARCITY : - Scarcity is one of the fundamental concepts of economics relevant to

managerial decision making. In both micro and macro economics, the main economic problem is

scarcity of resources. All level of management suffers from scarcity of resources in varied scale.

For example, a production manager faces scarcity of good quality of materials or skilled

workers.

In economics scarcity may be define as excess demand. Demand in relation to

supply determines the element of scarcity. Scarcity is the root cause of economics problems and

as such it requires management attention. Unemployment is the scarcity of job in the job market.

Inflation is essentially the scarcity goods. Unutilized capacity at the plant level may be primarily

due to scarcity of power or material and other support facilities. Had here been no scarcity therewould have been no managerial economic problem. On the basis of the scarcity of resources

business firm must be careful in optimum allocations of resources like men, materials, machine,

money time, energy etc.


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2) MARGINALISM : - When the supplies of resources are limited, a manager has to

utilize each and every additional unit in an optimum manner. It is necessary to know the

additional unit of input. Similarly, a decision about the additional investment has to be taken in

view of the additional return from the investment. Economists use the term marginal for all such

additional magnitudes of output or return. In marginalism, following points are considered-

a) The nature of relationship between the variables is to be clearly stated.

b) The independent variable is to be changed by one unit at a time to workout the

impact on the dependent variables.

c) The marginalism is not to be confused with the concept of average.

Thus, a manager at the time of taking decision should consider the use of

additional unit and try to find out the additional benefit deriving from the employment of

additional unit.

3) EQUI-MARGINALISM : - This economics principle states that an input must be so

allocated between various uses that the value added by the last unit of the input is same in all thecases. The use of the given factor of production for alternative uses should consider what will

be the marginal increase in output of that factor of production.

We can analyze this concept with an example. Suppose a firm is a multimarket seller like Titan

watch which sells watches in both home market and foreign market. If marginal revenue from a

watch sold in home market exceeds the marginal revenue from a watch sold in the foreign

market, the firm is likely to reduce the sale of watch in the foreign market and increase the sales

in home market for higher revenue. This process will continue till the marginal revenue from

both market are equalized. In the same way when the wage rate of the workers is high in a

particular factory the mobility of labour will be higher in that factory and ultimately the wagerate of all the factories will be equal. This is what we call equi-marginalism. This concept is very

important while the management is employing various factors of production.

4) TIME PERSPECTIVE : - Past, present and future time dimension are very important

for decision making purpose. The economists consider this concept like temporary run, short run

and long run period. In temporary period the supply of output is totally fixed, but in the short run

period the supply of goods can be changed slightly by altering factor proportion. In the long run

period all factors are variable and therefore output level can be adjusted according to the needs

of the society. In short run period managers face a lot of problems but in the long run period

there are no constraints for increasing or decreasing production by the management. The short

run is the present period whereas long run is the future period. A manager has to calculate theopportunity cost of his decision if he has to choose present and future course of action.

Therefore, it is important for the manager to take a decision for short or long run period.

5) DISCOUNTING PRINCIPLE : - This principle is an extension of time perspective

and opportunity cost concept. The concept of discounting is based on a fundamental fact that


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todays one rupee is worth more than a rupee earned a year after. The time value of money is

taken into consideration in this discounting principle.

For example- a person is offered a gift of Rs. 1000 today or Rs. 1000 after a year.

What will be his option for taking the gift today or after a year. Naturally the person will choose

Rs. 1000 today. This is due to the risk and uncertainty in the future period. Moreover the personwho is receiving Rs. 1000 today can invest Rs. 1000 at the rate of 10 percent interest, so that

after a year he will be getting Rs. 1100. In this case we can say that the present value of Rs. 1100

is just Rs. 1000.

The formula for calculation of present value is

P/V = Rs.1100\1+i

P/V = Present Value, i = Rate of interest

Applying the formula

P/V = 1100/1+10% = 1100/ 1.1 = Rs.1000

To verify, we have to multiply Rs. 1000 by 1.1. We will get the money which will accumulate at

10% interest after a year i.e., 1000x1.1=Rs. 1100. Or we may say

P =

Here P = Principal Amount

A = Accumulated amount or annuity

i = Rate of Interest

In the second year, P =

3rd year, P =

For n year, P = + + + . +

This discounting principle has application in areas rather than investment decisions. If a

decision affects cost and revenue at future dates it is essential to discount those costs and


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revenues to present value before a valid comparison of alternatives is possible. With the help of

this concept investment appraisal can be done by the investor.

Q2) Discuss briefly different cost concept relevant to managerial decision of passing andcontrol.

Answer: There are several cost concepts and a clear understanding of them is necessary for

managerial decision making. Some of the important costs concepts are discussed below: -

1. ECONOMIC COST AND REAL COST: - The economic cost refers to the payment a firm

must make to resources employed by it to manufacture or produce some goods. The

resources may be either hired or owned by the firm itself. In the former case, payments are to

be made to outsiders and this is known as explicit cost. When the resources are owned by the

producer himself there is no need of such payment to any one, but in economics it is treated

as a part of cost and known as implicit cost or opportunity cost. The opportunity cost ofdoing one thing is the next best alternative foregone. For example, the opportunity cost of

using ones own capital in the business is the interest it could have earned by depositing in a

bank.

2. SHORT RUN AND LONG-RUN COSTS: - In economic analysis a distinction is made

between short-run and long-run. The short-run refers to period in which output can be

changed by varying some factors, while in long-run all factors can be changed. In other

words, all the factors can not be changed during short-run period and in contrast to this

during long-run period all the factors can be changed to bring change in output. The fixed

factor is normally the production capacity. Both short-run and long-run costs are useful in

decision making. In short-run, a firm is concerned with optimum output while long-run it is

concerned with optimum plant size.

3. FIXED AND VARIABLE COSTS: - There are some costs which do not vary with the level

of output in short-run period, while some other cost varies with the level of output. The

former are called fixed costs and the latter variable costs. Interests on capital, rent etc are

example of fixed costs while wages and salaries, costs of raw materials, power, etc are

example of variable costs. Fixed costs are irrelevant for decision making in short-run while

variable cost are relevant.

4. TOTAL COST, AVERAGE COST AND MARGINAL; COST: - Total cost refers to theoverall cost needed to produce a given level of output. Total cost rises as output rises. Total

cost is the sum total of total fixed costs and total variable costs. The per unit costs i.e., total

cost divided by total output is the average cost. Marginal cost is the additional cost incurred

to produce one additional unit of output. Thus, it is the increase in total cost as output

increases by one unit.


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The total cost concept is useful for break even and profit analysis, average cost concept

for estimating profit margin per unit of sales and the marginal cost for deciding the optimum

level of output.

5. INCREMENTAL AND SUNK COST:- Incremental cost are the cost incurred on

acceptance of a decision while sunk costs are the costs already incurred and have nothing to

do with the decision. The costs relevant for decision making are incremental costs only while

sunk costs are irrelevant for decision making. Suppose firm has a plant having a production

capacity of 500 units per week which it had bought for Rs.5, 00,000. If the firm wants to

increase its output to 300 units per week from 100 units per week at present, the additional

cost it would requires is estimate at Rs.20,000/-. Therefore, the incremental cost would be

Rs.20, 000/- and sunk cost would be Rs.5, 00,000.

5 TRACEABLE AND COMMON CO STS: - Costs can be classified on basis of

traceability. There are some costs which can be attributed to a product while somecosts can not be attributed to a product. The former is called traceable cost or

separable cost while the latter is called common cost. They are also referred as

direct cost and indirect cost respectively. This distinction of cost helps in pricing

of the products, particularly in a multi- product firm.

6 PRIVATE AND SOCIAL COST: - Private costs are incurred directly by the

individuals or firms engaged actively while social costs are the cost incurred by the

society. There are costs like taxes, which are the costs to the firm but not society.

Similarly, there are costs which are costs to the society but not firm like noise

pollution or water pollution caused by individuals or firms. This distinction isimportant in making cost- benefit analysis of a project. However, individual firms

may not consider social cost in evaluating their projects.


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5) Accounting Period.

b) Principles: - Basic accounting principles are the general decision rules which govern the

development of accounting techniques. Following are the basic accounting principles: -

1) Dual aspects,

2) Revenue recognition,

3) Cost,

4) Matching,

5) Full Disclosure; and

6) Objectivity

c) Modifying Principles: - Generally, the financial statements are prepared keeping in viewthe basic principles and assumptions of accounting. Following are the basic constraints of

modifying principles: -

1) Materiality,

2) Conservatism (prudence),

3) Cost-benefit,

4) Timeliness,

5) Consistency,

6) Substance over Legal form ; and

7) Industry practice

d) Accounting Standards: - These are the established and accepted models which aim at

providing excellent, adequate and unbiased treatment of accounting

transaction/information and reporting the same in the financial statements to facilitate

their users in forming rational and judicious decision. There are 29 Accounting

Standards. They are as AS-1, AS-2AS-29 with different topics of accounting.

Accounting assumptions and accounting principles are traditionally termed as AccountingConcepts and the modifying principles are considered as accounting conventions.


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Q2) Define profitability. What are its indicators? Discuss the managerial uses of profitability.

Answer:Profitability is defined as the profitearning capacity of an organization with reference

to either sales or investment or assets used. It is considered for various purposes. The primary

objective of any business house is to earn profit. It is a test of business efficiency. In this context

profit is interpreted in two senses-------profit in absolute sense and profitability relative sense.

Profit is expressed as net earning before tax and profitability is expressed in relation to anothervariable, e.g., return on investment is 20 p.c., or net profit to sale ratio is 25 p.c., etc. Both

concepts are important for financial decision investment decision and for measurement of

managerial performance.

Profitability is defined as the profit earning capacity of an organization with

reference to either sales or investment or assets used. It is considered for various purposes.

The indicators of profitability are:-

1) By calculating ratios, such as Gross Profit Ratio, Net Profit Ratio; Return on Investment

etc.

2) By calculating net present value, discount cash flow or pay back period.3) By applying techniques of marginal costing, e.g., BEP, P/V Ratio, margin of safety etc.

4) By comparison of interdepartmental profits.

5) By calculating earning per share, Dividend Yield Ratio, Dividend pay out ratio etc.

6) By calculating efficiency ratio, activity ratio, resource utilization ratio productivity ratio

etc.

The managerial uses of profitability are as follow: -


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1) To measure the overall organizational efficiency.

2) To measure the departmental efficiency.

3) To plan the optimum level of activity.

4) To determine pricing policies.

5) For project evaluation.

6) For strategic planning.7) To decide on product mix.

8) To decide on sale mix.

9) For capital expenditure planning.

10) For make or buy decision.

11) To take decision on continuance or discontinuance of any product.

12) To take decision on closer of operation.

13) For cost control measure.

14) To decide on special offer.

15) For replacement of machinery.

PAPER III (OB)

Q1) What is organizational culture? What are the factors that have bearing on organizational

culture?

Answer: Organizational culture represents a common perception shared by the members of an

organization. It conveys some important assumptions and norms governing values, attitudes, andgoals of the members of an organization .It also tells employee how to do things, and in what

fashion. In this, connection, Mr. Stephen P.Robbins has rightly described organizational culture

as follows:

Organizational culture is relatively uniform perception held of the organization, it has common

characteristics, it is descriptive, it can distinguish one organization from another and it integrates

individual, group and organization system variables.

The importance of Organizational culture may be summed up as given below-

1. Objectives setting: - Culture mould people and people are the basic building blocks of anorganization. The objectives of a business organization may be maximization of profit

but the same objective may be unworthy for other individuals depending upon cultural

differences.

2. Motivational pattern: - Motivational pattern develops from a persons family and

educational background and national cultures. The knowledge of cultural pattern and its

motivational impact leads a manager to adopt his motivational strategy appropriately.


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3. Work Ethic: - Ethics refers to conformity to principles of human conduct. Work Ethic

has its origin in religious and secular values. People work hard for the maintenance of

their life; they attach meaning and importance to work.

4. Control: - Controlling is a dynamic process involving action which is either restraining,

stimulating or adaption.

FACTORS OF ORGANIZATIONAL CULTURE ARE

1. ECONOMIC CONDITIONS: Several dimensions of organizational culture are

influenced by an organizations position on the economic cycle. The economic condition

of any organization influences whether its budget should be tight or loose. So,

dimensions of organizational culture like risk-taking, control, progressiveness and

development, etc are directly influenced by economic condition.

2. LEADERSHIP STYLE : The leadership style prevailing in an organization has a direct

impact in determining several dimensions of organizational culture. The influence is so

pervasive that whether organizational culture is a product of philosophy and practices of

prominent persons in an organization.

3. ORGANIZATIONAL POLICIES : Specific organizational policies can influence a

specific dimension of organizational culture to a large extent. For example, if the

company policy states that layoffs will be used only as a last resort to cope with business

downturn, then it would, in general, foster an internal environment that is supportive and

humanistic. So, organizational culture is also influenced by organizational policies.

4. MANAGERIAL VALUES : The values held by executives have a strong influence on

organizational culture because values lead to actions and shape decisions.

5. ORGANIZATIONAL STRUCTURE : The structure of an organizational affects the

perception of its internal environment. For example, benevolent authoritative

organizations structure is different from the participative structure.

6. CHARACTERISTICS OF MEMBERS : Organizational culture is also influenced by

the characteristics of members in an organization. An organizational having well

educated, ambitious and younger employees are likely to have a different organizational

culture than an organization with less educated or older employees.

7. ORGANIZATIONAL SIZE : In small sized organization, it is much easier to foster a

climate for creativity and to establish a participative kind of management . On the other

hand, in large organization, it is easier to have a more authoritative kind of management.


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Q2) Define motivation. Discuss the theories of motivation propagated by Maslow and

Herzberg with critical analysis.

Answer: Motivation is a basic psychological process. It is a process that account for an

individuals intensity, direction and persistence of effort towards attaining a goal. Here intensity

refers to how hard a person tries. The effort should be channeled in a direction that benefits theorganization. Therefore both quality of effort and intensity is considered important. Effort

should be directed and should be consistent with organizational goals. Again, persistence refers

to how long a person can maintain their effort. Motivated in individuals stay with a task long

enough to achieve their goal.

Motivation is the need of reason that makes people to work or to take action. It includes

the processes and forces in an individual that encourage him to act or not to act in particular

ways. According to William G. Scott, Motivation means a process of stimulating people to

action to accomplish goals.

MASLOWS theory of motivation:-

Abraham H. Maslow (1908-1970) propagated the need theory, which is one of the most

important theories of motivation in management.

The behavior of an individual at any point of time is affected by his strongest need.

Human being tends to satisfy their basic needs and move on to higher needs. A.H.Maslow, a

famous social scientist, has propagated hierarchy into which human needs are arranged as shown

in the diagram below-.


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SelfActualization

Esteem

Social

Safety

Physiological

Maslows hierarchy of needs

He formulated that within every human being, there exits hierarchy of five needs. They are

1) PHYSIOLOGICAL: - They are the unlearned primary needs. Hunger thirst, shelter, sex,

and other bodily needs area classified in this category. Once these needs are satisfied,

they no longer motivate. The individual then seeks for next higher level of needs.

2) SAFETY: - Safety needs includes security and protection from physical and emotional

harm. This is the second level in needs hierarchy. This can be associated with security

needs also. Like physiological needs, once safety needs are satisfied they fail to motivate

further.

3) SOCIAL: - Affection, belongingness, acceptance and friendship are the social needs.

4) ESTEEM NEEDS: - Esteem needs are internal esteem factors such as self-respect

autonomy, and achievement and external esteem factors such as status, recognition and

attention. These are the higher level needs of human being. Maslow pointed out that itincludes self esteem & esteem for others.

5) SELF ACTUALIZATION: - The drive to become what one is capable of becoming

includes growth, achieving ones potential and self- fulfillment. People who are self-

actualized are self-fulfilled and have realized all their potential.


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According to Maslow, if an individual needs to be motivated, one needs to

understand the level of hierarchy the person is currently on and focus on satisfying the needs at

or above that level. These five categories of needs are further separated by Maslow into lower-

order and higher order needs. The lower level needs are the physiological and safety needs

and the higher level needs includes the needs of social, esteem and self actualization. The

concept was that higher- level needs are satisfied internally and lower level needs are satisfiedexternally.

Critical Analysis of Maslows Theory: -

Maslows theory is based on assumptions that human needs are hierarchical and people often

desire to satisfy their basic needs first and then move on to higher needs. But this raises a basic

question. Is need hierarchy rigid? Does every person try to satisfy his needs according to this

model? But in realty it is not so.

Maslows Theory has been critised on various grounds. Some of them are focused below: -

1) With the limited resources in hand every person is to satisfy his needs in some order.

However, this order may not follow Maslows need hierarchy.

i) Some people may be deprived of their lower order needs but may like to fulfill

their self-actualization needs.

ii) A person who sets importance to self-esteem needs may try to fulfill those before

the basic needs.

2) This is a subjective matter that a person tries for his higher level need when his lower

order need is reasonably satisfied. Thus, the level of satisfaction for a particular need maydiffer from person to person.

HERZBERGS Motivation Theory: -

Frederick Herzbergs Theory is also called the dual factor theory and the Motivation-hygiene

theory of motivation. The theory was originally derived by analyzing critical indents written

by 200 engineers and accountants in nine different companies in Pittesburg area USA, Herzburg

and his associates conducted interview with the professional and asked them what they liked or

disliked about their work. The research approach was simplistic and built around many

questions. From this Herzberg concluded that people have two different categories of needs that

are essentially independent of each other and affect behavior in different ways Herzberg calledthe first category of needs.

1. Hygiene or Maintenance Factors: -Hygiene factors describe peoples environment and

serve the primary function of preventing job dissatisfaction, maintenance because they

are never completely satisfied, they have to continue Herzberg emerged that there are ten

maintenance or hygiene factors. These are company policy and administration, technical

supervision, inter-personal relationship with supervisors, salary, job, and status. These


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maintenance factor are also called dissatisfiers, since any increase in them will not affect

employees level of satisfaction, these are of no use for motivating them.

2. Motivational Factors: - Herzberg called it is the second category of needs motivators

since they seemed to be effective in motivating people to superior performance. Herzberg

includes six factors that motivate employees, these are achievements, recognition,advancement, work itself, possibility of growth and responsibility. An increase in these

factors will motivate employees.

Herzberg consolded that individual may be classified into two parts: -

a) Motivation seeker, which are generally individuals who are primarily motivated by

the satisfiers such as advancement achievement and other factors associated with

work itself.

b) Maintenance seeker, which are tend to be more concerned with factors such as

supervision, pay, etc...

Hygiene Factors

Motivators

Herzbergs dual factor

This theory is being critised on the following grounds they are: -

1. Job satisfaction and dissatisfaction are two opposite points on a single continuum.

Individual on the job are affected by any change in job environment or job content.

2. Herzbergs model is method bound and a number of other methods used for similar

study have shown different result and not supporting his contentions.

3. This theory does not attach much importance to pay, status or interpersonal relationship

which is generally held as important contents of satisfaction.


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PAPER-IV (BPA)

Q1 Discuss the relevance of privatization in the context of current economic environment

of India.

Answer: Privatization: - Privatization refers to the transfer of assets or service function from

public to private ownership or control and the opening of hitherto closed areas to private sector

entry. Privatization can be achieved in many ways-franchising, leasing, contracting and

divesture. Divesture through equity sale is the most significant, since ownership is transferred to

public / corporate entities. The new set of economic refers aimed at giving greater role to the

private sector in the nation building process and a reduced role to the public sector. This was areversal of the development strategy pursued so far by Indian planners. To achieve this, the

government redefined the role of the public sector in the New Industrial Policy of 1991, adopted

the policy of planned disinvestments of the public sector and decided to refer the loss making

and sick enterprises to the Board of Industrial and Financial Reconstruction. The term

disinvestments used here means transfer in the public sector enterprises to the private sector. It

results in dilution of stake of the government in the public enterprise. If there is dilution of


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government ownership beyond 51 percent, it would result in transfer of ownership and mgt. of

the enterprise to the private sector.

Through this policy of 1991, the govt. of India moved the country to this privatization pattern.

Certain preconditions should exist for privatization to prove successful.

Liberation and de-regulation of the economy is an essential pre-requisite if privatizationis to take off and help realize higher productivity and profits.

Capital markets should be sufficiently developed to be able to absorb the disinvestedpublic sector shares.

The relevance of privatization in the favour of current economic environment of India is as

follows: -

1. Privatization will help reducing the burden on exchequer which results from the public

subsidizing of chronically loss making public sector units.

2. It will help the profit making public sector units to modernize and diversify their

business.

3. It will help in making public sector units more competitive.

4. It will help in improving the quality of decision-making of managers because their

decisions will be made without any political interference.

5. Privatization may help in reviving sick units which have became a liability on the public

sector.

6. Without government financial backing, capital market and international market will forcepublic sector to be efficient.

Privatization is also opposed on the following grounds:

1. Privatization will encourage growth of monopoly power in the hands of big business

houses. It will result in greater disparities in income and wealth.

2. Private enterprises may not show any interest in buying shares of loss-making and sick

enterprises.

3. Privatization may result in lop-sided development of industries in the country. Private

entrepreneur will not be interested in long-gestation projects, infrastructure investments

and risky projects. It may retard growth of capital good industries and other industries

where the profit margin is less.

4. Private individuals prefer to invest money in trade, real estate and other services areas

which allows small investments and where capital obtains good returns. But for changing


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the very structure of the economy, the investment should go to strategic sectors of

economy.

5. The private sector may not uphold the principles of social justice and public welfare.

They may look for maximizing their short run profits ignoring the needs of the economy.

6. Given its commitments to W.T.O., the government of India cannot avoid foreigncompetition nor can it favour particular firms in the private sector. Under such

circumstances, some of our public sector giants are best bets for becoming globally

competitive firms.

7. It is contended that liberalization and de regulation are very important if any firm is to

deliver higher profits. Since public sector enterprises exist in a regulatory framework,

they are not able to deliver higher productivity and profit. Had they been given unbridled

freedom to decide prices, product-mix etc. they would have behaved like private sector

and showed higher efficiency and higher returns. It is not the ownership which is

important but the competitive environment. Thus, the belief that privatizationper se leads

to better results itself is questionable.

Privatization offers both opportunities and threats to the economy. We have to

privatize in such a manner that me make the maximum of opportunities while at the same time

minimizing the threats to the economy.

Q2 Discuss the role of government as a promoter, regulator and entrepreneur of industrial

development.

Answer: The government has made a significant impact on the working of enterprises inbusiness and industry. The Indian corporate sector has come face to face with several challenges

due to government policy changes. These challenges can be explained as follows:-

1) INCREASING COMPETITION:- As a result of changes in the rules of industrial licensing

and entry of foreign firms, competition for Indian firms has increased especially in service

industries like telecommunications, airlines, banking, insurance, etc which were earlier in the

public sector.


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2) MORE DEMANDING CUSTOMERS: - Customers today have become more demanding

because they are well informed. Increased competition in the market gives the customers wider

choice in purchasing better quality of goods & services

3) RAPIDLY CHANGING TECHNOLOGICAL ENVIRONMENT: - Increased competitionforces the firms to develop new ways to survive and grow in the market. New technologies make

it possible to improve machines, process, products & service. The rapidly changing

technological environment creates though challenges before smaller firms.

4) NECESSITY FOR CHANGE: - In a regulated environment of pre 1991 era, the firms could

have relatively stable policies and practices. After 1991, the market forces have become

turbulent as a result of which the enterprise have to continuously modify their operations.

5) NEED FOR DEVELOPING HUMAN RESOURCES: - Indian enterprises have suffered

for long with inadequately trained personal. The new market conditions require people with

higher competence and greater commitment. Hence the need for developing human resources.

6) MARKET ORIENTATION: - Earlier firms used to produce first and go to the market for

sale later. In other words, they had production oriented marketing operations. In a fast changing

world, there is a shift to market orientation in as much as the firms have to study analyses the

market first and produce goods accordingly.

Government also adopts some regulation or imposes some controlling measures

on business in order to curb the activities which are prejudicial to the interest of the cross

sections of the different policies, laws, acts and rules which may be directly or indirectly.

Examples of direct control include Industrial Policy, Companies Act 1956, M.R.T.P. Act 1969,

F.E.M.A. Act 1999 etc. while monetary policy, fiscal policy etc. are covered under indirectcontrol. On the whole, the impact of govt. of policy changes particularly in respect of

liberalization, privatization and globalization has been positive as the Indian business and

industry has shown great resilience in dealing with the new economic order. Indian enterprises

have developed strategies and adopted business processes and producers to meet the challenges

of competition. They have become more customers- focused and adopted measures to improve

customer relationship and satisfaction.

PAPER V (MB)

Q1)What are index numbers? Why are index numbers called economic barometer? Discussthe limitation of index numbers.

Answer: Index numbers are devices which measure the change in the level of a phenomenon

with respect to time, geographical location or some other characteristic. Of all index numbers,

price index number is the most important one.

According to Spiegel, An index number is a statistical measure designed to show changes in a

variable or group of variable with respect to time, geographical location or other characteristics.


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Index numbers are considered as the barometers of an economic activity. If someone wants to

get an idea as to what is happening to an economy, he should look to important indices like the

index of industrial production, agricultural production, business activity and other related areas.

Index numbers measure the pulse of an economy and act as barometers to find the ups and

downs in the general economic conditions of the country. Index numbers of prices, output,foreign exchange reserves, bank deposit, etc. throne light on the variation in the level of business

activity of a country and these indices can be combined into a composite index which could act

as an economic barometer.

Of all indices (index numbers), price index number is the most important one. It is a pure

number which expresses by how many percentage points the average price of a group of related

commodities has changed(i.e., increased or decreased) during a period(called the current period)

with respect to the average price of the same set of commodities of another period (called the

base period) which is usually a past period. For convenience, the price of the base period is taken

as 100. If the price index in the current period is 105(say) with respect to the base period then it

reflects that the average price in the current period has gone up by 5 percent with respect to theaverage price in the base period, the set of commodities being the same in both the periods.

Limitations of Index Numbers:-Although index numbers are useful for measuring relative

changes yet it is subject to certain limitations, some of which are:

1. Definition of the purpose: -A definition awareness of the purpose for which index

numbers are to be used will have a determining influence on the selection of

commodities, selection of sources of data, selection of base year and the system of

weighting.

2. Selection of commodities: -The commodities selected should be fairly representative of

the phenomenon under investigation. It should remain uniform in quantity from year to

year.

3. Selection of sources of data: -A decision has to be taken about the arrangements to be

made for obtaining the price quotations of the commodities selected from various centers.

Since, it is not necessary to collect the price of a commodity from all the markets in the

country where it is bought and sold; we should select a sample of the markets.

4. Selection of base: - the base period also known as the reference period, is the period

against which comparison are made. It is very essential in constructing index numbers

that a reference is made to some base period. It may be a year, month or a day. The indexnumber for base period is always taken as 100.

The consideration should be given to the following points for selecting a base period.

a) The base period should be a normal one i.e. it should be free from all

abnormalities like war, booms etc.

b) The base period should not be two distant in the past.


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c) The base may be fixed or changing.

5. Choice of an average: -Usually, and geometric mean are used for constructing the index.

But in practice, arithmetic mean is more popularly used as it is simpler to compute than

geometric mean. However, whenever possible, in the interest of greater accuracy,

geometric mean should be preferred.

6. Selection of appropriate weights: -The term weight refers to relative importance of

the different items in the construction of the index. The importance of different items is

done by allocating weight.

7. Selection of an appropriate formula: - The selection of an appropriate formula

depends on the purpose of the index and the data available as there are a large number of

formulae for constructing index numbers.

Q2) Write a note on the origin and development of operations research. Discuss the role andlimitations of linear programming.

Answer: Operations Research is a management science started during the Second World War.

The word operation indicates some action that we apply to some problems or hypothesis and

the word research is an organized process of seeking out some facts about the same.


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ORIGIN AND DEVELOPMENT OF OPERATION RESEARCH:- The origin of operations

research can be traced back many decades. During World War II, there was an urgent need to

allocate scare resources to various military operations and to the activities within each operation

in an effective manner. The problems associated with the allied military efforts were so complex

that it was difficult to expect a solution of these problems from any single discipline. Here

scientists from various disciplines were assembled as a unit within British armed forces. Becauseof the diverse educational backgrounds and the talent, this armed team of scientist was

remarkably successful in improving the effectiveness of complete military operations.

Consequently, American efforts produced many fundamental advances in mathematical

techniques for analyzing military operations. As the problems assigned to these groups related to

military operations. As the problems assigned to these groups related to military operations, their

work was known as Operational Research in United Kingdom and Operation Research

elsewhere.

After the World War II, scientists from these Operational Research group focused their

attention on applying these techniques to civilian problems. Some of them concentrated their

efforts on providing sound foundations for many of the techniques which were developed duringWorld War II while other devoted their efforts in developing techniques for solving problems

faced by large industries, business and government.

As a result, many improvements in the state of art took place. A prime example is the

simplex method for solving linear programming problems which was developed by George

Dantzig in 1947. Many of the standard tools of Operations Research, e.g., linear programming,

dynamic programming, queing theory, and inventory theory were relatively well developed

before the end of the 1950s. The computer revolution during the same period also helped in

rapid spread and sustained success of the Operational Research approach to problem solving.

Computer became an invaluable tool to Operations Research analyst enabling him to performotherwise intractable calculations. Indeed, many of the problem solving methods such as

transportation, simulation etc. now regarded as standard would be unthinkably impracticable

without modern computers.

ROLE AND LIMITATIONS OF LINEAR PROGRAMMING : Linear programming was

developed by George Dantzig in 1947. Linear programming is one of the most important and

most popular quantitative tools used in Operations Research. It is widely applied in several

functional areas of business such as production, finance, marketing, distribution, advertising,

administration, defence etc.

Inspite of having wide applicability of linear programming technique, it has certain limitationssome of which are as follows:

(i) In order to linear programming techniques, the objective function and the constraints

must be expressed linearly. However, in real world business problems, many objective

functions and constraints cannot be expressed linearly.


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(ii) In order to apply linear programming, the co-efficients in the objective functional and

the constraint inequations must be completely known and they must not change during

the period of study. However, in practical situation, it may not be possible to state all

co-efficient in the objective function and constraints with certainity.

(iii) To apply linear programming technique there must be only one goal which is expressedin the objective function, e.g., maximizing the value of the profit function or

minimizing the cost function. Linear programming will fail to give a solution if

management has multiple goals.

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