Section A 2 Marks Questions Q1. Define Demand. Ans.gdinfotech.com/gd_tutorial/managerial_economics.pdf · · 2018-01-06Section – A 2 Marks Questions Q1. Define Demand. Ans

SUBJECT: MANAGERIAL ECONOMICS (MBA/PGDBM-1) 1/28

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Section – A 2 Marks Questions Q1. Define Demand. Ans. Demand implies desire for a commodity ability & willingness to pay for it. Unless a

person has adequate resources or purchasing power & ready to spend his resources, his desire for a commodity would not be considered as his demand but if man has sufficient money & is willing to pay his desire become demand. Three attributes become essential for demand: (a) Desire to buy (b) Willing to pay (c) Ability to pay

Q2. Explain Managerial Economics. Ans. when the economics tools are used for purpose of solving business problems

is termed as managerial economics. Managerial Economics is used in the process of business decision-making. Economic theories & techniques of economic analysis are applied to analyse business problems, evaluated business options & opportunities with a view to arriving at an appropriate business decision.

Q3. Distinguish Between Average Fixed Cost & Average Variable Cost. Ans. Average Fixed Cost: Average Fixed Cost: equals to total fixed cost divided by

Quantity Average Fixed Cost = Total Fixed Cost / Quantity

Average Variable Cost: Average Variable Cost equals to total variable cost divided by Quantity. Average Variable Cost = Total Variable Cost / Quantity

Q4. When Does A Want Become Demand? Ans. Want become demand only when you have enough money & you ready to spent that

money on the purchase of a commodity then in such a situation want become demand. For example you desire to want T.V. You have enough money but not willing to spent on T.V. then it become want & when you willing to spend on T.V. then want become demand.

Q5. What Are Marginal Cost & Average Variable Cost? Ans. Addition made to total cost by one more unit of a commodity is called marginal cost.

Suppose the total cost of production of 5 units of a commodity is Rs. 140. When 6th units are produced, total cost goes upto 160 then marginal cost of 6th unit can be worked out as follows; MC = Rs. 160 - Rs. 140 = Rs. 20 Average Variable Cost: Average Variable cost equals to total variable cost divided by output Average Variable Cost = Total Variable Cost / Quantity

Q6. Define Demand Forecasting. Ans. Demand forecasting is predicting future demand for a product. The information

regarding future demand is essential for planning .The information about future demand is also essential for the firm to avoid under or over production. Demand forecasting is done with the help of these methods:- a) Survey Method b) Statistical Method

Q7. What Do You Mean By Cost Of Production? Ans. In order to produce a good, every firm makes use Land, Labour, Capital .The amount

spend on the use of these factors termed as cost of production. Cost of production mainly depends on quantity of production, cost of production increases with increase in output. It can therefore be said that cost of production is a function of quantity of output i.e. C = f (Q)



Q8. Explain The Law Of Supply. Ans. Law of supply can be stated as the supply of a product increases with increase in its

price & decrease with decrease in its price, other things remain constant it implies that the supply of a commodity & its price are positively related. Law of supply explain with the help of supply schedule & supply curve

Supply Schedule for Shirts

Price Supply 100 10 200 40 300 55 400 70 600 75

Q9. What a note on short run cost curve? Ans. Short run cost curve are divided into three:

(i) Short run total cost curve (ii) Short run average cost curve (iii) Short run marginal cost curve Short run total cost curve represent the least cost of different quantities of output. Short run Average cost curve refers to minimum possible per unit cost of producing different quantities of output in short period. Marginal cost curve shows the extra cost incurred by producing one more unit of output.

Q10. Long Run Cost. Ans. Long run period is long enough to change all fixed factors of product so in long run all

cost are variable cost. In long run costs are:

Long run total cost

Long run average cost

Long run marginal cost Q 11. Define Giffen Goods. Ans. Giffen goods are inferior goods which consumer treats below their standard of living

when their income rises. Generally law of demand explain that with rise in prices demand decreases & vice versa but in case of Giffen goods when price fall demand also fall as these goods are then considered as poor quality good e.g. Dalda & Bajra are inferior goods.

Q12. Define Price Elasticity Of Demand. Ans. Price Elasticity of demand describes percentage change in quantity demanded as a

result of percentage change in prices. It is denoted by ep EP = % change in qty demand / % change in price or ep = ^q/q \ ^p/p

Q13. Define Demand Function. Ans. Individual demand for a commodity depand upon price of that commodity, its income,

prices of related goods, his tastes & preferences & advertisement expenditure. The demand of a commodity can be expressed mathematically in the following general functional form: qd = f (px, i, pr, t, a) where px = price of that commodity i = income pr = price of related goods t = taste & preference a = advertisement expenditure

Q14 . Define Fixed Cost & Variable Cost. Ans. Fixed cost is that which remain constant irrespective of level of product. That means

firm has to incur fixed burden whether they produce noting or any quantity e.g. depreciation, manager salary, rent of building etc. Variable cost refers to that cost



which keeps on changing with level of output. As output increases variable cost also increase & as it decrease variable cost also decrease.

Q15. What Is Relation Between Ac & Mc. Ans. First of all both AC & MC are calculated from total cost where

AC = TC/ Q MC = Tcn-Tcn-1

Q16. Explain Opportunity Cost. Ans. Opportunity cost of any good is next best alternative good that is sacrificed or

opportunity cost of anything is only next best possible alternative foregone. So opportunity cost of producing a good is not only other alternative good that could be produced with same factors it is only most valuable other good which same factor could produce e.g. farmer who is using land, seed, fertilizer for producing wheat may use same resources for producing potatoes. So opportunity cost of producing wheat is revenue sacrificed which have been earned by selling potatoes.

Q17. What Is Delphi Technique?

Ans. Delphi technique is that method of decision making in which a group is asked to

solve particular problem individually & come into final solution. Then all this decisions are kept together & each member is asked to revise his decision in the light of other decision. This process goes on moving till same final consensus is reached i.e. till the all group members agree to one final decision e.g. for sale forecasting 5 members came with different statements but each will revise his decision till they finalize it as single solution.

Q18. What Is Sample Survey? Ans. Sample represent total universe whenever it is not possible to analysis total

population because of large data then same sample is selected to represent total population for example if we want to analyse average income of people of Punjab then it is not possible to collect data from individuals. What we can do is to collect random (limited) no. of people from different states which will represent their stat & on the basis of collected data from this small group. We can give decision for total population.

Q19. Why Does Demand Curve Slope Downward? Ans. Downward sloping of demand curve is due to same reason like income effect i.e.

change in a persons real income will cause change in quantity demanded of that commodity. As prices of commodity will reduce their will be rise in increase in income of consumer & as a result he will be able to purchase more secondly different uses of a good also enable consumer to demand more of it e.g. if price of milk fall down it won’t only be used for drinking but for cheese, curd etc. also.

Q20. Describe Price Discrimination. Ans. A monopolist often charges different price of the same product from different

consumers & different industries. This price policy of monopolist is called Price Discrimination. Price Discrimination refers to the practice by a seller to charging different prices from different buyers for the same good. “Price Discrimination exist when the same product is sold at different prices to different buyers.”

Q21. What Are The Various Types Of Price Discrimination? Ans. Price Discrimination is mainly of three types:-

a) Personal Price Discrimination b) Geographical Price Discrimination c) Price Discrimination according to use.

Q22. Explain Price Differentiation. Ans. Product Differentiation means that goods are close substitutes but not homogenous.

They differ in colour, name, packing, size, quality, shape etc. One get variety of toothpaste in monopolistic market Forhans, Cibaca, Colgate, Pepsodent, Close-up etc. These toothpaste are close substitutes but at the same time they differ from one another.



According to Chamberlin, Product differentiation satisfies people urge for variety & aim of Product Differentiation is to inspire the consumer to make demand for a particular product.

Q23. Define National Income. Ans. National Income refers to the aggregate income earned by the normal residents of a

nation during a given period as a result of their productive services & it is concerned with a given period of time & this period is of one year. National income is the sum of wages, interest, rent & profit or the sum of earnings of the factors of production.

Main aggregates of National Income are:

a) Gross Domestic Product b) Gross National Product c)Net National Product at Market Price d) Net Domestic Product at Market Price e) Net National Product at Factor Cost f) Net Domestic Product at Factor Cost g) Private Income h) Personal Income i) Disposable Income

Q24. What Is Break Even Analysis? Ans. Break Even analysis refers to the technique of analysis by which the mutual relations

between the volume of Production & Cost of production on one hand & sale proceeds & profit on other hand are analyzed. Break Even analysis is based on the concept of Break Even point. Meaning of Break Even Point: It is that point at which total revenue & total

expenses are equal Break Even point: Total Revenue = Total Cost It is that point at which the form neither suffer any loss nor any profit.

Q25. What Is Oligopoly? Ans. Oligopoly is a market situation with only few large firms, sale either homogenous or

differentiated products. In India there are several examples of oligopoly like Airlines (Air India, Indian Air Lines, Jet Airways & Sahara Airways). There is a great deal of interdependence among them. An oligopoly is a market of only a few sellers, offering either homogeneous or differentiated products. There are so few sellers that they recognize their mutual dependence. Features of Oligopoly: a) Few sellers & many buyers b) Homogenous or Differentiated Product c) Mutual- Interdependence d) Existence of Price Rigidity e) Keen Competition

Q26. Explain Transfer Pricing. Ans. The large size firms divide their operation into product divisions & subsidiaries.

Growing firms add new divisions or departments & the firms then transfer some of their activities to other divisions. Such firms face the problem of determining an appropriate price for the product transfer from one division, department to another division or department. These problems arise when each division has a separate profit function to maximize. Price of intra-firm “transfer product” is referred to as “Transfer Pricing” In simple the price which is charged by one department from another for transferring their product termed as transfer pricing.

Q27. Define Effective Demand. Ans. According to Keynes Effective Demand consist of Aggregate Demand & Aggregate

Supply



EFFECTIVE DEMAND

AGGREGATE DEMAND=AGGREGATE SUPPLY Aggregate Demand: Aggregate Demand price refers to the total amount which all

the producers expect to receive by selling the output produced at given level of employment. AD = C+I AD = Consumption + Investment Aggregate Supply: Aggregate supply price refers to total amount that all the

producers must receive by selling the output produced at a given level of employment.

Q28. What Is A Monopolist Competition? Ans. Monopolist Competition is the situation of the market wherein there are many sellers

of a commodity but product of each seller is different from the product of other sellers in one way or the other. It means there is product differentiation. Such a product differentiation may be in form of brand name, quality, packing, size, co lour etc. Features of Monopolist Competition: i) Large number of firms ii) Product Differentiation iii) Freedom of Entry & Exit of firms iv) Selling cost v) Non-price competition

Q29. Equilibrium Of Industry Under The Perfect Competition. Ans. An Industry is said to be in equilibrium when no of firms remain constant i.e. no new

firm enter & no old firm leave the industry. Equilibrium profit of industry is determine where demand & supply curve intersect each other. In short run industry in equilibrium can earn losses but in long run industry in equilibrium earn only normal profits.

Q30. What Is Gross Domestic Product? Ans. Gross Domestic Product is defined as market value of all final goods & services

produced in a domestic economy during a period of one year plus income earned locally by foreigners minus mainly income earned from abroad by nationals. GDP = GNP - NFYA

Where GNP = Gross National Product, NFYA = Net Factor Income from Abroad. Q31. What Is Gross National Product? Ans. Gross National product can be defined as value of all f inal goods & services

produced during a specific period plus income earned from abroad by nationals plus income earned locally by foreigners. GNP = GDP + NFYA

Q32. Define Market Penetration. Ans. Market Penetration refers to that pricing strategy which an organisation adopt to

attract maximum market share by decreasing their prices initially & increasing. It slowly when people start adopting that product. Through this strategy manufacturers keep introductory price of a good at a very low level so that more demand may be created eg fair flow introductory offer price is at Rs. 10 & slowly it was raised to 10.50 & now it is at 11.50

Q33. Define Monopoly. Ans. Monopoly is extreme form of market structure in which single producer of a product &

product having no close substitute. It has originated from two Greek words “MONO” + “POLY” mean seller. Monopoly implies absence of all kind of competition e.g. electricity is supplied only by State Electricity Board.

Q34. Define Selling Cost. Ans. For determine Price & Output under monopolistic competion & oligopoly form often

complete by incurring selling cost to attract maximum demand. Selling cost include all those expenditures which are incurred to change, alter or create the demand of a



product or cost of selling include all outlays made in order to secure demand for a product. So it would not only include advertisement expenses but salary paid to sales person, expenses of sales department, window displays, demonstration charges etc are also included.

Q35. Define Average Propensity To Consume. Ans. Average Propensity to consume is fraction of total income that is spend on consumer

goods & services APC = C/ Y

[ C= Consumption, Y= Income] Suppose aggregate demand or income is Rs. 100 cr. & average propensity to consume is 60 percent. It shows consumption expenditure is Rs. 60 crore.

Q36. Define Aggregate Demand. Ans. Aggregate demand refers to aggregate expenditure made by socially at a particular

time period. Generally this time period is one year. Aggregate demand consist of two components: a) Aggregate demand for consumption. b) Aggregate demand for capital goods AD = C+I

Section – A 10 Marks Questions Q1. Define Managerial Economics and explain its nature.

Ans. when the economics tools are used for purpose of solving business problems is

termed as managerial economics. Managerial Economics is used in the process of business decision-making. Economic theories & techniques of economic analysis are applied to analyse business problems, evaluated business options & opportunities with a view to arriving at an appropriate business decision.

(i) Micro-Economic in Character: The whole body of economics may be divided

into two segments- Micro Economics & Macro Economics. Macro Economics is concerned with the whole economy & microeconomics is concerned with smaller parts of economy Managerial economics falls within Microeconomics as it is concerned with the problems of Individual business forms. (ii) Normative Science: Managerial Economics is normative science. It tells us what

should be done under given circumstances. It explains what firms do in order to get good results. (iii) Prescriptive rather than Descriptive: Managerial Economics is normative &

applied science. It suggests the application of economic principles as regard policy formulation, decision-making & future planning. It describes the goals of organisation & prescribes the ways to achieve the goals. (iv) Scientific Art: An art is a system of rules for the attainment of given ends. It is

the best way of doing the things. Managerial economics may also be called an art, because it help the management in efficient utilisation of scarce resources. It facilitate good & result-oriented decisions under of uncertainly.

Q2. Scope Of Managerial Economics Ans. The scope of Managerial Economics include the following fields:-

(i) Theory of Demand (ii) Theory of Production (iii) Theory of Exchange (iv) Theory of Profit (v) Theory of Capital & Investment (vi) Environmental Issues (I) Theory of Demand: Demand theory is the study of behaviour of consumers. In

studying behaviour of consumers it answer questions as:- (i) Why do consumers buy a Particular Commodity?



(ii) How much do they purchase a commodity? (iii) What is the effect of income, habit & taste of consumers on demand for their commodity? (iv) What are other factors affecting demand? (v) Why & when consumers stop to further consume a commodity? (II) Theory of Production: Production & cost analysis is important for the smooth functioning of production process. Certain amount of goods has to be produced to earn a certain level of profit. To obtain such output, some cost are incurred. Then the problem for management is to determine the level of production at which cost may be minimum. Production theory help in determining the size & level of production. It explain how average & Marginal cost change with change of Production & how can optimum size of production be obtained (III) Theory of Exchange or Price Theory: Theory of Exchange is popularly known

as Price theory. It explain how the commodity price are determined under different types of market conditions? How & to what extent advertisement can be helpful in increasing sales of a firm? Price theory is helpful in determining Price policy of firm pricing is important area of managerial economics. Price policy effect the demand for product. It include determination of Product prices under different market conditions, Pricing methods, Pricing policies & price forecasting. (IV) Theory of Profit: Every business & industrial enterprise aims at earning maximum profit. Profit is the difference between total revenue & total cost. Because of these factors Profit is always uncertain: - (i) Demand of Product (ii) Nature & Degree of Competition (iii) Changing Conditions. Hence theory of profit prove helpful for improving earning efficiency of from & most efficient technique used for predicting the future. (V) Theory of Capital & Investment: Theory of Capital investment explain the

following important issues:- (i) Selection of most suitable investment project. (ii) Most efficient allocation of capital (iii) Minimising the possibility of under-capitalisation & over-capitalisation. Capital is foundation of business & like other factors it is also scarce & expensive. It should be allocated in most efficient manner. (VI) Environmental Issues: Certain issues of macro-economics also form part of

Managerial Economics. These relate to social & political environment in which business & industrial firm has to operate. This is governed by such factors as (i) Business cycles (ii) Industrial policy of country (iii) Trade & Fiscal Policy (iv) Taxation Policy (v) Trends in Economy (vi) Political system of country

Q3. Define Managerial Economics. Explain How Micro-Economics Is Different From Macro Economics.

Ans. (I) Micro Economics studies individual units, be a firm or a consumer. While macro economics studies aggregates like national income or national saving. (II) Micro economics deal with product pricing & factor pricing. It also studies Optimum allocation of resources. While macro economics deal with problems

national income, inflation & distributive shares of factors. (III) In microeconomics, market forces of demand & supply determine equilibrium are studied. While in macro, forces of demand & supply of whole economy

determine equilibrium.



(IV) Micro economics studies the problem of optimum allocation of resources. While macro economics studies the problems of full employment & economic growth. (V) Micro economics decision do not hold good for economy as a whole. In macro economic analysis also conclusions can be wrong e.g. increase in national income

does not mean increase in per capita income, if rate of population increase is more than increase in national income.

Q4. What Is Total Cost, Average Cost & Marginal Cost? Ans. Total Cost: The amount of manly spent on the production of different levels of good is

called total cost. If a total sum of 2000 is spent on the total cost of 5000 books will be Rs 2000. TC=Total Fixed Cost + Total Variable Cost Average Cost: Per unit cost of a good is called its average cost. In the words of Ferguson, “Average cost is total cost divided by output.”

AC= TC ¸ Q AC = TC / Q Suppose the total cost of six units of a commodity is Rs 180. Average cost will be = Rs 180 / 6 = Rs 30 AC = Average Fixed Cost + Average Variable Cost Marginal Cost: Addition made to total cost by the production of one more unit of a commodity is called Marginal Cost. Its formula is:- MC=TCn - TCn-1 or MC= ^TC / ^Q suppose the total cost of production of 5 units of a commodity is 140. When 6 units are produced, total cost of production goes upto Rs 180. Marginal cost of 6th unit is :- MC = 180 - 140 = 40 Rs

Q5. Relationship Between Average Cost & Marginal Cost. Ans. Their relationship is explained with the help of table & diagram.

Main points of their relation are:- (i) Both AC & MC are calculated from TC: Average cost & Marginal Cost both

calculated from total cost. AC=TC / Q

I t is clear from table that total cost of 8 units of output is Rs 72 then Average cost is : AC= 72 / 8 = 9 Similarly, MC is also estimated from total cost MC=TCn - TCn - 1 When 7 units are produced total cost is Rs 56 & with the production of 8th unit total cost increase to 72 then Marginal cost of 8th unit is (72 - 56) = 16 Rs. (ii) When AC falls, MC is also falling: When average cost falls, Marginal cost too

falls. In this situation, rate of fall in Marginal Cost is more than average cost as shown in this table. (iii) When AC rises, MC is also rising: When average cost rise MC too rises put rate of increase in MC is more than that of AC. This is also shown in the table & diagram. (iv) MC Cuts AC at its lowest point: Marginal cost always cuts Average cost at its lowest point as shown in the figure. (v) When AC is constant MC become equal to AC: When AC is constant i.e. Rs 8

at the sixth & seventh unit, then MC increases & become equal to it. (vi) Mutual attraction between MC & AC: There is a close mutual attraction

between MC & AC when AC rises, MC too rises & when AC falls, MC too falls. Q6. Explain The Law Of Demand. Ans. According to law of Demand, when price rises, demand falls & when price fall,

demand rises & other things remain constant.



Explanation of Law of Demand: Law of Demand is explained with the help of

demand schedule & Demand curve Demand Schedule: Demand schedule is a table that shows different prices of a good & the quantity of that good demanded at each of these prices. Demand schedule has two aspects. (i) Individual Demand Schedule (ii) Market Demand Schedule Individual Demand Schedule: It is defined as the table that shows quantities of a

given commodity which an individual consumer will buy at all possible Price at given time

Individual Demand Schedule Price per unit Quantity Demanded

1 4 2 3 3 2 4 1

This table shows as price demand fall. Market Demand Schedule: Market Demand Schedule is defined as the quantities of

a given commodity which all the consumers will buy at all possible price at a given moment of time

Market Demand Schedule Price Demand of A Demand of B Market Demand 1 4 5 4 + 5 = 9 2 3 4 3 + 4 = 7 3 2 3 2 + 3 = 5 4 1 2 1 + 2 = 3 (II) Demand Curve: Graphical presentation of demand schedule is known as

demand curve. Demand curve also has two aspects (a)Individual Demand Curve (b)Market Demand Curve Individual Demand Curve: It is a curve that shows different quantities of a

commodity demanded by an individual consumer Market Demand Curve: It is a curve that represents the aggregate demand of all the

consumers in the market at different prices of a particular commodity Figure A shows A’s demand & figure B shows B’s demand at different prices & figure C shows the market demand mean total demand of A & B.

Q7. Explain The Factors Affecting Demand Or Determinants Of Demand. Ans. Demand of a consumer for a particular commodity at any given time is determined by

the following factors (i) Price of a commodity: Ordinarly the demand for a good depend upon its price.

Other determinants remain constant. Normally rise in price accompanied by contraction in demand & fall in price is accompanied by extension of demand. (Diagram)This figure shows as price falls demand extends (ii) Price of related goods: Demand for a commodity depand not only on its own

price of related goods. Related goods classify into: (a)Substitute Goods (b)Complementary Goods Substitute Goods: Substitute Goods are these goods that can be substituted for

each other such as tea & coffee. Demand for tea is related to price of coffee. If price of coffee rise then demand for tea increase Complementary Goods: Complementary Goods are those goods that complete the

demand for each other such as pen & ink. As the price of one rise, demand for other fall.



(iii) Income of Consumer: Income of consumer is another factor affecting demand

of a commodity. In other words, increase in income would increase in demand & decrease in income cause decrease in demand. The relationship between income of consumer & demand is discussed with reference to: Normal Goods: Normal Goods are those goods the demand for which tend to

Increase following increase in consumer income & tend to decrease in consumer income. Inferior Goods: Inferior Goods are those goods the demand for which tend to

decline with rise in income & increase with fall in income. Necessaries of life: In case of necessaries such as salt & match box demand remain constant with the increase or decrease in income. (IV) Taste & Preference: The demand for a goods & services depend on individual taste & preference. They include fashion, habit, custom etc. Taste & preference of the consumers are influenced by advertisement, change in fashion, climate etc. Other things remain constant, demand for goods increases for which consumers develop taste & preference. (V) Size of Population: Demand for a commodity is also influenced by size of

population increase in population lead to more demand & less population, less demand. (VI) Expectation: Change in consumer expectation also make an effect on demand

of a commodity. If consumer expect that price will rise in future, he will buy more goods in the present even when the price high & vice-versa.

Q8. What Is Elasticity Of Demand? What Are The Various Types Of Elasticity Of

Demand? Ans. Elasticity of Demand: Elasticity of demand refers to a percentage change in

quantity demanded of a commodity as a result of a percentage change in price. The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods & changes in consumer income. Types of Elasticity of Demand: Elasticity of Demand is of three types:

(a) Price Elasticity of Demand (b) Income Elasticity of Demand (c) Cross Elasticity of Demand

(a) Price Elasticity of Demand

Price elasticity of demand is the ratio of percentage change in quantity demanded of a commodity to a percentage change in Price. Price elasticity of demand denotes the ratio at which demand contracts with rise in price & extend with fall in price. There is an inverse relationship between price & quantity demanded. Elasticity of demand is expressed by (-) sign. E = (-) % Change in Quantity Demanded / % Change in Price. Suppose fall in price by 10% is followed by extension in demand by 20%. E = (-) 20% / 10% = (-) -2 = 2.

(b) Income Elasticity Of Demand.

Other things, such as price of given commodity, Price of related goods,. taste of consumer etc. remain constant. Percentage change in quantity demand of a good caused by a given percentage change in income of consumer is called Income Elasticity of Demand. “Income elasticity of demand means. the ratio of percentage change in quantity demanded to a percentage change in income.” Ey = % Change in Quantity demanded / % Change in Income

(c )Cross Elasticity Of Demand.



Cross elasticity of demand is a measure of change in quantity demanded of good Y as a result of change in Price of good X. “The cross elasticity of demand is a measure of the responsiveness of Purchases of Y to change in price of X.”

Cross elasticity of demand is measured by the following formula Ec = % Change in quantity demanded of Good ´ / % Change in the price of good Y. For example change in price of tea ordinary cause change in demand for coffee.

Q9. What Is Elasticity Of Demand? Explain the five degrees Of Elasticity Of Demand?

Ans. Elasticity of Demand: Elasticity of demand refers to a percentage change in

quantity demanded of a commodity as a result of a percentage change in price. The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods & changes in consumer income.

1. Unit Elasticity:

Demand is unit elastic when percentage change in quantity demand and percentage

in price are equal.

2. Relatively elastic demand (ed > 1):

The demand is relative elastic or more than unity when relative change in quantity

demanded is more than the relative change in price. In such cases the demand curve is

of less slope.

3. Relatively inelastic demand (ed < 1):

Demand is said to be relatively inelastic or less than unity when proportionate change in

demand is less than proportionate change in price. In such cases the slope of demand

curve falls rapidly.

4. Perfectly inelastic demand (ed = 0):

When there is no change in demand as a result of increase or decrease in price then the

demand is perfectly inelastic. The demand curve is vertical on OX axis

5. Perfectly elastic demand (ed = oc):

The demand is perfectly elastic when even a small change in price cause an infinite large

change in amount demanded.

A small rise in price on the part of a seller reduces the demand to zero. In such cases the

demand curve is parallel to OX axis.

Q10. Explain The Concept Of Price Elasticity Of Demand. Ans. Price Elasticity of Demand is the ratio of percentage change in quantity demanded of

a commodity to a percentage change in Price. E (-) = % Change in Quantity Demanded / % Change in Price According to Boulding, “Price elasticity of demand measures the responsiveness of the quantity demanded to the change in Price.”



Measurement of Price elasticity of Demand

(i) Total Expenditure Method (ii) Proportionate Method (iii) Point Elasticity Method (iv) Arc Elasticity Method (v) Revenue Method Total Expenditure Method: According to this method, in order to measure elasticity

of demand it is essential to know how much & in what direction the total expenditure has changed as a result of changed as a result of change in price of a good. (i) Elasticity of Demand is unity, when due to rise or fall in price, total expenditure

remains unchanged. (ii) Elasticity of demand is greater than unity, when due to fall in price, total expenditure remain unchanged. (iii) Elasticity of demand is less than unity, when due to fall in price total expenditure

also fall & rise in price, total expenditure also rise. Proportionate or Percentage Method: As per this method proportionate change in

demand is divided by proportionate change in price. Point Method: Point method refers to price elasticity of demand at any point on

demand curve. Arc Elasticity Method: Arc elasticity of demand is the elasticity at the mid-point of an arc of a demand curve. Arc elasticity is calculated as: E = (-) Q1 - Q / Q1 + Q x P1 + P / P1 - P Revenue Method: Fifth method of calculating Price elasticity of demand is called revenue method. Sale proceed that a firm obtain by selling its products is called its revenue. Suppose by selling 10 metre of cloth, a firm get Rs 50, then this amount of Rs 50 will be total revenue of firm. When total revenue divided by number of units sold we get average revenue. AR = 50 / 10 = 5 per metre. Addition made to total revenue by the sale of one additional unit of a commodity is called Marginal revenue of firm selling 11 metre of cloth total revenue goes upto Rs 54. Then Marginal revenue = (54 - 50) = Rs 4. Price elasticity of demand is measured with the help of Average & Marginal revenue as per the following formula. E = AR / AR- MR

Q11. What Are The Various Types Of Costs In Short Run and long run? Explain In

Detail. Ans. Costs are studied in two parts of the basis of time period.

(a) Cost in short-run (b) Cost in long-run Cost in short run: Short run refers to that period of time in which some factors of

production are fixed & other are variable. A detailed study of total cost, Average cost & marginal cost in short-run is made as under (I) Total Cost: The amount of money spent on the production of different level of a

good is called total cost. If a total sum of Rs 2000 is spent on production of 5000 books, then total cost of 5000 books Rs 2000. TC = TFC + TVC Total Fixed Cost: Fixed cost are cost which don’t change with change in quantity of

output. Fixed costs remain the same. Total Variable Cost: Variable cost is one, which varies as the level of output varies. If output fall these cost also fall & if output rise total cost rise. (II) Average cost: Per unit cost of a good is called the average cost.

AC=TC / Q



Suppose the total cost of six units of commodity is Rs 180. AC = 180 / 6 = Rs 30. AC = AFC + AVC (III) Marginal Cost: Addition made to total cost by the production of one more units

of a commodity is called Marginal cost. MC = TCn - TCn - 1 or MC = ^TC / ^Q Suppose the total cost of Production of 5 units of a commodity of Rs 140 when 6th unit is produced total cost of production goes upto Rs 180. MC = 180 - 140 = Rs 40.

Cost Under Long Run. The long run is the period in which all factors are variable. As in short-run, there are three concept of cost in long run also. (a) Long run Total Cost: The long run total cost of production is the least possible cost of producing any given level of output when all the factors are variable. (b) Long run Average Cost: Long run average cost refers to minimum possible per

unit cost of producing different quantities of output of good in the long period. In the word of J.S. Bain, “The long run average cost curve shows for each possible output, the lowest cost of producing that output in the long run.” (c) Long run marginal cost: Change in total cost, in the long run, due to production of one more or one less unit of a commodity is called Long run Marginal cost.

Q12. What Are The Various Types Of Cost? Ans. Mainly the cost is divided into three types

Total cost, Average Cost & Marginal Cost Total Cost: The amount of money spent on the production of different levels of a

good is called total cost. If a total sum of 5000 spent on the production of 1000 pens, then the total cost of producing 1000 pens will be Rs 5000. Total cost = Total Fixed Cost + Total Variable Cost. Average cost: Per unit cost of a good is called its average cost.

Average cost = Total cost / Quantity Suppose the total cost of producing 6 unit is Rs 180. Average cost = 180 / 6 = Rs 30 AC = Average Fixed Cost + Average Variable Cost Marginal Cost: Addition made to total cost by the production of one more unit of a

commodity is called Marginal Cost. MC = TCn - TCn - 1

Other Types Of Cost. Opportunity cost: Opportunity cost of particular product is the value of foregone

alternative products that resources used in production, could have produced. Suppose a farmer can grow both wheat gram on a farm. If one a farm, he grow only wheat, he foregoes the production of gram. Thus, the price of a gram that the farmer has to forego in order to produce wheat is called opportunity cost of wheat. Explicit Cost: All those cost that a firm incurs to make payment to others are called

explicit cost. Explicit cost are those cash payments which firm make outsiders for their services & goods. For example: wages to labourers, cost of raw-material, interest on loan all are the examples of explicit cost. Implicit cost: These are those cost of an enterpreneur own factors or resources.

These arise when a firm makes use of its own resources i.e. its own land, own building, own capital etc. Implicit cost refers to the cost of self-owned & self-employed resources.

Q13. “Demand Curve Is Always Negatively Sloped” Explain.



Ans. There is an inverse relationship between demand & supply with i.e. increase in price

there is decrease in demand & vice-versa. There are few reasons for this negative relationship: (a) Law of Diminishing Marginal Utility: A consumer want commodity because it

give him some satisfaction. As he consumes additional units of that commodity only if he has to pay less price of additional units. A consumer will stop his purchase where marginal utility of commodity is equal to price paid for it. (b) Income Effect: Income Effect is the effect that a change in person real income

caused by change in price of commodity has on quantity of that commodity. Suppose your income is Rs 50 & you want to purchase apples whose price are 5 per kg. That mean with your fixed income you can buy 10 kgs of apples. Now if a price of apple falls to Rs 4 now after buying 10 kg of apples you left with Rs 10 extra that you can spend on purchasing additional apples. (c) Different Uses: Some goods have more than of such products are reduced

consumer can start using that product for several purposes. e.g. for curd, cheese, crease etc. (d) Size of Consumer Group: When prices of some product change many additional

consumers either are included or excluded from that group e.g. if price of gold is Rs 5500/- for 10gm. then it won’t be within reach of ordinary persons but if it fall down to Rs 4000/- for 10gm. purchase it & will be included in consumer group.

Q14. Discuss Various Methods of Demand Forecasting. Ans. Demand Forecasting refers to the prediction of future is uncertain & risky so it is very

essential for every manufacturer to estimate future demand as all activities of his business are directly related to future demand. Various methods used for demand forecasting are: (I) Survey Method

a) Complete enumeration (b) Sample Survey

(II) Export Opinion Method

(a) Delphi Technique (b) Sale force survey

(III) Market Experiment Method

(a) Test Market (b) Controlled Experiment Method

(IV) Trend Analysis

(a) Naive Model (b) Proportion Change Method

(V) Econometric Method

These methods are explained as under:

(i) Survey Method: This method take into account direct contact with all users of a product either through observation, mail, personal interview etc. for predicting future demand all consumers are considered for obtaining information then it is known as complete enumeration method. But this method is applicable if limited number of people is to be contracted. But if the data is to be collected from large number of people scattered widely then sample survey method is best in which from total population sample is chosen which represent view about total population. (ii) Expert Opinion Method: In this method, future demand about the product is collected from those who are very close to market information e.g. shopkeepers, agents, brokers etc. under sale force survey sale managers, salesman who have direct contact with customers. Whereas in the case of Delphi technique a group is



assigned job to work individually on estimation of future demand. Each individual come with personal opinion based on his observation. Now each individual is asked to revise his decision. This process is repeated till final conclusion is reached (iii) Market Experiment: In this method, seller to estimate future demand introduce

their new product in one test market which they select carefully & this market represent behaviour of total market e.g. if we want to introduce product in Punjab then instead of introducing it all over Punjab we select one place to introduce it all over Punjab we select one place to introduce it as small scale e.g. Ludhiana whereas under controlled experiment method consumer is personally invited to same shop handed over with same income & ask to choose brand at different prices. (IV) Trend Analysis: This method takes into consideration historical data to predict

future demand. eg. If there is constant increase in demand for past 5 years then we predict future demand at such constant increased sale. (V) Econometric Models: These are statistical tools like regression analysis, extra-

polation, intrapolation etc., which are used as mathematical tool to predict demand.

Q15. What Are The Various Market Structures? Ans. Market Structures are mainly divided into

(i) Perfect Competition (ii) Monopoly (iii) Monopolistic Competition Perfect Competition: Perfect competition is that situation of the Market wherein there are large number of buyers & sellers of a homogenous product & the price of such a product is determined by the market forces i.e. the industry. For example there are many shops selling paper in your city is a case of perfect market structure Features of Perfect Competition (i) Large number of buyers & sellers (ii) Homogenous Products (iii) Perfect Knowledge (iv) Free Entry & Exit of firms (v) Perfect Mobility (vi) Lack of Transport cost (vii) Lack of Selling Cost (viii) Same Price

Monopoly.

Monopoly is that situation in which there is a single seller of a product. It is explained

with help of an example. You get your electricity supply from one agency that is State Electricity Board. Monopoly is a market situation in which there is a single seller, there is no close substitute of product it produce & there are barriers on the entry of firms. Features of Monopoly; One seller & large number of buyers: Under monopoly there should be single

producer of the commodity. But the buyers of the product are in large number. Restrictions on the entry of new firms: Under monopoly there are some restriction

on the entry of new firms. There is no competitor of a monopoly firm. No close substitute: The commodity produced by the firm should have no close substitute otherwise the monopolist will not be able to determine the price of his commodity as over his discretion. Price maker: A monopolist has full control over the supply of the commodity.

Monopolist has power to fix their own price & he may charge different prices of the same product from different buyers. Monopoly is also an industry: Under monopoly, there is only one firm & the

difference between firm & industry disappears.



Monopolistic Competition is the situation of the market wherein there are many sellers of a commodity, but the product of each seller is different from the product of other sellers in one way or the other. It mean there is product differentiation. Such product differentiation may be in the form of difference in brand name, trade-mark, quality, Packing & difference in facilities & services offered to the consumers. Monopolistic Competition is a market situation where there are many producers but each offer a slightly differentiated product. Features of Monopolistic Competition:

(i) Large Number of Firms & Buyers (ii) Product Differentiation (iii) Freedom of Entry & Exit of Firms (iv) Selling Cost (v) Imperfect Knowledge (vi) Price Policy (vii) Less Mobility (viii) Non-price Competition These are the various types of market structures.

Q16. Define Monopoly. How Can Price Be Determine Under Monopoly. Ans. Monopoly is a market situation in which there is a single seller of a product. It is

explained with help of an example. You get your electricity supply from one agency that is State Electricity Board. Monopoly is a market situation in which there is a single seller, there is no close substitute of product it produce & there are barriers on the entry of firms. Determination of Price under Monopoly: A monopolist will so determine the price

of a product as to get maximum profit under Monopoly price & equilibrium are determine by two different approaches. (a) Total Revenue & Total Cost Analysis (b) Marginal Revenue & Marginal Cost Analysis Total Revenue & Total Cost Analysis: Monopolist can earn maximum profit by

selling that amount of output at which difference between total revenue & total cost is maximum. By charging different prices of a monopolist tries to find out the level of output at which difference total cost & total revenue is maximum. (b) Marginal Revenue & Marginal Cost Approach: According to this approach, a monopolist will be in equilibrium when two conditions are fulfilled . MC = MR

MC cuts MR from below Price also determine under monopoly with reference to time period. (a) Short Period (b) Long Period Short Period: A monopolist under short period may face any of the three situations

(a) Super Normal Profit (b) Normal Profit (c) Loss Super Normal Profit: If the price fix by monopolist is more than average cost then

he will get super normal profits. Normal Profit: If the monopolist fix price at which average revenue is equal to

average cost he will earn only profit. Minimum Loss: If the monopolist is obliged to fix a price which is less than average

cost then the monopolist incur less & he will prefer to stop production. Long Period: In long period the monopolist will fix the price in such a way as to earn

super-normal profit.



Q17. What Is Circular Flow Of Income? What Are The Methods Of National Income Measurement?

Ans. Circular Flow of National Income: National Income is a flow. Every year a large

number of goods & services i.e. national incomes are produced. Firms with the help of different factors of production produce these goods. Firms buy these services of these factors. In return of their services firms pay them reward. They use the reward that a factor gets in terms of money from the firms in buying goods from these very firms. Thus, there is a flow of income from household to firms. This flow of national income is perennial. It has neither any beginning nor any end. That is why flow of National Income is called Circular Flow. Methods of National Income Measurement:

There are mainly three methods. (i) Income Method (ii) Product Method (iii) Expenditure Method

1. Income Method

According to this method income received by the normal residents of a country as reward for their factor services viz. wages, interest, rent & profit during a year is added to obtain National Income. Accordingly to estimate, national income by this, method following items is summed up: (i) Wages (ii) Rent (iii) Interest (iv) Profit 2. Product Method: Product Method of measuring national income is also called Inventory Method under this method; economy is divided into various sectors. According to this method, Market value of final goods & services produced in a year us added up. For example if the value of Biscuit has been counted in national income then value of intermediary goods like maida, sugar etc.is not taken into account. In order to avoid double counting, value added at each stage of production is added up. It is called Value Added Method.

Value added = Selling price - Cost of Material Used Value Added Approach

Stage of Production Selling Price Cost of Material Value Added Wheat 0.50 _ 0.50 Maida 1.00 0.50 0.50 Bread 2.00 1.00 1.00 Total 3.50 1.50 2.00 3. Expenditure Method: According to this method, national method, national income

is estimating by aggregating expenditure on all the final goods & services in an economy in a year. Income of a country spent on consumption goods & investment goods. Thus to estimate national income by expenditure method, one aggregates the expenditure incurred by the residents on consumption & investment as also the expenditure incurred by the government. With the view to estimate national income by this method, following expenditure is included: (i) Personal Consumption Expenditure (ii) Investment (iii) Government Purchase of goods & services. In personal expenditure the expenditure on durable goods such as car, TV etc. are included or expenditure or non-durable goods like food, clothing etc. & services of doctor, lawyer, teacher are included. The expenditure incurred on New investment, replacement of old machines with new, investment on purchase of building are included. The expenditure incurred by government on purchase of goods is also included.



Q18. Briefly explain the concept of pricing methods used to determine the price of a product.

Ans. Various Pricing Method usually employed by the businessman. These methods are: Cost Oriented: Under cost oriented the following pricing methods are discussed:

(i) Cost-plus or full cost pricing (ii) Marginal Cost Pricing Competition Oriented

(iii) Going rate pricing (iv) Customary Pricing (v) Sealed bid Pricing Cost-plus or full cost Pricing: This is the most common method used for pricing.

Under this method set to cover cost such as (material, labour & overhead cost) & a predetermine percentage of profit. This method is beneficial for a firm as there total cost are covered & profit also earned by the firm Marginal Cost Pricing: Under full costing, prices are based on total cost comprising

fixed & variable cost but under Marginal cost pricing fixed cost are ignored & prices are determine on the basis of marginal cost. In simple while deciding the price of a product, only variable cost are considered because marginal cost include only variable cost & fixed cost are completely ignored. Going Rate Pricing: Instead of cost, emphasis here is on market. The firm structure

in the industry. Under this method, firm adopts a price that is prevailing in the market. Many big American Companies have adopted a policy of following competitors. Customary prices: Price of certain goods become more or less fixed, not by

deliberate action on the seller part but as a result of their having prevailed for a considerable period of time. For such goods, changes in cost or quantity are usually reflected in changes in quality or quantity. For example: The new model of an electric fan may be price at a lower cost. The lower price may cause an adverse reaction on the competitors leading them to a price war as also on consumer may think that quality of new model is inferior. Sealed bid Pricing: This method of pricing is quite popular in construction activities.

Here the buyers & sellers are asked to quote their prices. All the offers are opened at a preannounced time of a day in the presence of all the bidders. The buyer who quote the highest & the seller who quote the lowest is awarded the contract

Q19. Define Price Discrimination? Ans. When a monopolist charge different prices of the same product from different

consumers or different industries. This price policy of the monopolist is called Price Discrimination. “Price discrimination exists when same product is sold at different prices to different buyers.” Kinds of Price Discrimination: (i) Personal Price Discrimination: When a monopolist charges different prices from different customers for the same product is called Personal Price Discrimination.

(ii) Price Discrimination according to use: When a monopolist charge different price for different uses of a product then it is called price discrimination according to use. For instance rate of electricity charge per unit for domestic use is more than that of commercial unit. Conditions of Price Discrimination: Price Discrimination possible when following

conditions prevail in the market: (a) Existence of Monopoly: Price Discrimination possible only when monopoly

exists. (b) Separate Market: Another condition for price discrimination is that there must be

two or more markets which can be separated & can be kept separate.



(c) Difference in Elasticity of Demand: Price discrimination is possible when

elasticity of demand will be different in different markets. (d) Legal sanction: In some cases price discrimination is legally sanctioned. For

instance electricity board charge higher rate of electricity for domestic use & lower rate for industrial use (e) Product Differentiation: A number of monopolist by changing the packing, name, label etc. of the good can charge different prices. (f) Behaviour of the Consumers: Behaviour of the consumers also account for

Price discrimination. For instance, sophisticated consumers prefer to buy goods from 17th Sector in Chandigarh. Thus if a seller has one shop in Sec. 17 & other in Sec. 22 then he may charge higher price for the same product in the shop in Sec. 17 than in the shop in Sec. 22.

Q20. Define Monopolistic Competition? How Price & Output Determine

Under Monopolistic Competition? Ans. Monopolistic Competition is the situation of the market wherein there

are many sellers of a commodity but the product of each seller is different from other seller in one way or other. It means there is P roduct differentiation. Such product differentiation may be in form of difference in brand name, quality, packing etc. Features of Monopolistic Competition :

(a) Large number of buyers & sellers (b) Product Differentiation (c) Selling Cost (d) Price Policy (e) Imperfect knowledge (f) Non-price competition Price & output determination under Monopolistic Competition : Price

is determined with reference to time period (a) Short Period (b) Long Period (a) Short Period: In short f irm will be in equilibrium when

(a) MC = MR (b) MC cuts MR from below. In short period f irm may face any of three situations (i) Super Normal Profit: Firm earn super normal prof it only where AR is

greater than AC. (ii) Normal Profit: Firm earns normal prof it only where AR is equal to AC. (iii) Loss: Firm earn loss only where AC is more than average method.

(b) Long Run: In long run firm, may earn only normal profit. Q21. Define Perfect Competition? How Price & Equilibrium Determine By

Firm Under Perfect Competition? Ans. Perfect competition is a situation in which there are many f irms selling

identical products with no f irm large enough relative to a entire market to be able to inf luence market price. Hence in perfect competition there are large number of buyers & sellers of a homogenous product. Price determination under Perfect Competition Determination of equilibrium: Equilibrium determine with reference to

time period (a) Short period (b) Long Period Short Period: In short period the f irm may face any of the situations (i) Super Normal Prof it: Where AR is greater than AC. (ii) Normal Prof it: Where AR is equal to AC. (iii) Loss: When AC is more than average method, f irm suffer a loss Long Period: In long period f irm may earn only normal prof it



Q22. Define Oligopoly. Classification Of Oligopoly. Ans. An Oligopoly is a market of only few sellers sale either homogenous or

differentiated products. In India there are few examples of oligopoly like Airlines (Air India, Indian Airlines, Jet Airways, Sahara Airways) There is a great deal of interdependence among them. Features of oligopoly:

(i) Few sellers or many buyers (ii) Homogenous or differentiated product (iii) Mutual Independence (iv) Advertisement (v) Price Rigidity (vi) Keen competition Classification of Oligopoly : Oligopoly is classif ied into following:

(i) Perfect & Imperfect Oligopoly (ii) Open & Closed Oligopoly (iii) Partial & Full Oligopoly (iv) Collusive & Non-Collusive Oligopoly Perfect & Imperfect Oligopoly : Perfect oligopoly is that situation in which all the f irms produce homogenous products. On the other hand imperfect oligopoly is that market situation in which all the f irms produce differentiated but close substitute. Open & Closed Oligopoly: Open oligopoly is that situation in which there

is no barrier on the entry on f irm in industry. The entry of f irm is free. On the other hand in closed oligopoly there is barrier on the entry of f irm in industry. Partial & Full Oligopoly: Partial oligopoly is that situation in which there

is dominant f irm in industry. This dominant f i rm is the price leader. Full oligopoly on the other hand is that situation in which there is no dominant f irm. Collusive & Non-Collusive Oligopoly: Collusive oligopoly is that

oligopoly in which f irms co-operate with each other in determining price & in non-collusive oligopoly f irms act indepently.

Q23. What Are The Difficulties In Measurement Of National Income. Ans. Many diff iculties are faced to estimate national income. These diff iculties

are theoretical as well as practical. (I) Conceptual Difficulties : Main theoretical diff iculties of measuring

national income are as under: (a) Difference between Final & Intermediate Goods : As we know, f inal goods & services alone are included in national income but many a times, it become diff icult to decide which good are f inal & which are intermediate. For example: Paper used as a item of stationery in off ice is f inal good but if used in book it become intermediate good (b) Change in price : Continuous change in price of good renders the

measurements of national income inconsistent. (c) Service without reward : Generally only those services are included in national incomes that are measured in terms of money. But in real life there are several services, which can’t be measured in terms of mainly. For example, service of lecturers in college are paid for, but when the same lecturers teach their own children at home they don’t get any reward in return. (d) Double Counting : Many a times, one faces counting while estimating

the national income. Double counting refers to the counting of the value of goods more than once. For example, a woodcutter sells a log of wood for Rs. 20 to carpenter. The latter makes the table & sells to same



furniture vendor at Rs 40. The price wood is counted in price every time then national income amount of Rs 60 but actually it is Rs 40. (II) Practical Difficulties (a) Unreliable Statistics : In under-developed countries, because of mass

illiteracy no accounts are maintained in respect of production & expenditure etc. It renders the estimate of national income diff icult. (b) Existence of barter system of exchange: Barter system continues

exist in backward countries for want of development of money exchange system. Thus goods are exchanged for goods & even services are paid in kind. Under these circumstances, it becomes diff icult to calculate the national income. (c) Production for Domestic Consumption : In under-developed countries like India, large part of agriculture production is used for domestic consumption. It is not recorded anywhere. It renders the correct measurement of national income all the more diff icult.

Q24. What do you mean by returns to scale? Explain in detail

ANS. LAWS OF RETURNS TO SCALE law of returns to scale is a long run analysis. In the long period, law of returns to scale seeks to analyse the effects of scale on the level of output. If the firm increases the units of both factors labour and capital, its scale of production increases. The return to scale may be increasing, constant or diminishing. We shall now examine these three kinds of returns to scale.

(a)Increasing Returns to Scale

When inputs are increased in a given proportion and output increases in a greater proportion, the returns to scale are said to be increasing. In other words, proportionate increase in all factors of production results in a more than proportionate increase in output It is a case of increasing returns to scale. For example, if the inputs are increased by 40% and output increased by 50%, return to scale are increasing (= >1). It is the first stage of production. If the industry is enjoying increasing returns, then its marginal product increases. As the output expands, marginal costs come down. The price of the product also comes down.

(b)Constant Return to Scale

When inputs are increased in a given proportion and output increases in the same proportion, constant return to scale is said to prevail. For example, if inputs are increased by 40% and output also increases by 40%, the return to scale are said to be constant ( = 1). This may be called homogeneous production function of the first degree. In case of constant returns to scale the average output remains constant. Constant returns to scale operate when the economies of the large scale production balance with the diseconomies.

(c )Decreasing Returns to Sale

Decreasing returns to scale is otherwise known as the law of diminishing returns. This is an important law of production. If the firm continues to expand beyond the stage of constant returns, the stage of diminishing returns to scale will start operate. A proportionate increase in all inputs results in less than proportionate increase in output, the returns to scale is said to be decreasing. For example, if inputs are increased by 40%, but output increases by



only 30%, ( = < 1), it is a case of decreasing return to scale. Decreasing return to scale implies increasing costs to scale

Q25. Explain the Law of Equi-Marginal Utility in Detail. ANS. It is the desire of every consumer that he wants to get maximum satisfaction from his

limited resources. He can solve this problem if he spends his income in such a way that the last rupee spent on each item gives him the same amount of satisfaction. It is called the law of equi marginal utility. This law can be explained with the help of following schedule, assuming that our consumer has only Rs. 5/- to spend. Further it is assumed that there are two commodities Apple and Orange.

According to this schedule if one consumer spends his Rs. 5/- on one thing then he will get only 30 or 20 units of satisfaction. To get maximum satisfaction a consumer will spend Rs. 3/- on Apple and Rs. 2/- on Orange. Because in this way the total amount of utility will be maximum. When a consumer will spend Rs. 3/- on Apple he will get = 10 + 8 + 6 = 24 By spending two rupees on Oranges he will get = 8 + 6 = 14 Total amount of satisfaction will be 24 + 14 = 38 If he will adopt any other method, he would not get such amount of utility.So we find that when the marginal utilities ( 6 = 6 ) are equal the total utility is maximum. No combination will give him more satisfaction except this one.

EXPLANATION :- In this diagram MM' is the marginal utility curve of Apple. If consumer spends Rs. 3/- on Apple. The 3rd rupees utility is FG, KK' the marginal utility curve of orange. The last rupee utility is HJ. Both the marginal utilities FG = HJ. LIMITATIONS OF THE LAW OF EQUI MARGINAL UTILITY 1. Unmeasurable concept :- The concept of utility is unmeasurable so it is very difficult to behave according to the law. 2. Carelessness :-

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Sometimes due to ignorance people do not obtain the maximum advantage by equating the marginal utilities. 3. Indivisible units :-

If the unit of expenditure is indivisible then this law will not operate. 4. Customs :-

People are slave of customs and traditions, so they use the goods like gold even there is less utility. 5. Freedom of choice :-

If there is no perfect freedom to choose between various commodities, then the law will not operate.

Q26. Explain various Economies and Diseconomies of scale

ANS. Internal economies

Internal economies are associated with the expansion of the scale of output of the firm itself.

They are not derived indirectly as a result of expansion of the industry to which it belongs.

Listed below are some of the leading sources of such economies.

1. Managerial Economies:

These economies arise on account of the scope of employing better qualified and trained

managers and other employees who are able to take quicker and more profitable decisions.

2. Financial Economies:

It is a common knowledge that most firms have to depend upon borrowed funds. The

lenders, while deciding the rate of interest to be charged on their loans, give due importance

to the 'creditworthiness' of the borrower. And other things being equal, bigger firms enjoy

greater creditworthiness than the smaller one. Accordingly, they are able to borrow funds

at lower interest rates. For the same reason, they have also the option of raising additional

sources through equity capital.

3. Technical Economies:

With an increase in the scale of output, the choice of input its and their varieties becomes

wider for the firm. It can go in for those machines and equipment etc. which have a

higher marginal productivity as compared with their cost. In other words, it is possible to get

a larger output per unit of cost incurred on them.

4. Bye-products:

An increase in the scale of output also generates bigger flows of wastes. When the scale is

small, the firm is not able to use these products for additional earnings. However, when the

generation of waste crosses a critical limit, it often becomes possible for the firm to produce

certain bye-products or sell off the waste to other firms and thus add to its income.

5. Better Utilization of inputs:

Various inputs, particularly machines and equipment are lumpy and indivisible. They also

require time intervals for 'maintenance’ and 'servicing’ etc. Any one of them can go out of



order and require repairs. If a machine goes out of order, or is otherwise not able to operate,

then a firm with a small scale is not able to find its substitute and its production suffers.

6. Economies of Inventories:

A bigger-size firm is In a better position to adjust its stocks of inputs and finished products

etc. in such a manner that the normal discrepancy between flows of production and sales

are ironed out.

6. Marketing Economies:

A large firm also reaps the advantages of buying and selling in bulk. As a result, it is able to

procure its inputs at concessional prices.

7. Advertising:

When a firm is not operating under conditions of perfect competition, it is obliged to

undertake various activities to promote its sales of which advertising happens to be an

integral part. It is found that a small firm is not able to afford advertising

External economics of Scale

These economies are those which are reaped by a firm not on account of its own efforts and

increase in its scale, but on account of the expansion and growth of the industry to which it

belongs

Some of the sources of these economies are as under:

1. Economies of Information:

Availability of information is cheaper when we consider the industry as a whole. A firm

requires continuous information regarding the prices of inputs and its product, as also likely

changes in them on account of shifts in government policies and other developments

2. Research and development:

The results of research undertaken by the authorizes or by the industry as a whole are

economical for the firm of use. Also, it is generally commercially viable for a research

organization to undertake research or its own and sell the findings to individual firms on

payment basis than for the firms to undertake the same individually.

3. Economics of Concentration:

When an industry is concentrated in a central locality or region, its firms get incidental saving

in costs in the form of cheaper and morereliable services. These services cover, for

example, repairs, consultancy, banking, credit, insurance, financial advice, packing,

transport, housing, communication, training, housing, health care and so on. An individual

firm is able to make use of these services at competitive and economical prices.

4. Economics of Specialization:

When a number of associated and interlinked industries get located in the neighborhood, they all provide support to each other and their cross comes down. As a result, the individual firms also benefit from the development Q27. Explain the features of perfect competition in detail.

ANS. A perfect market is one where there is perfect competition. According to Boulding,

“the competitive market may be defend as a large number of buyers and sellers all engaged



in the purchase and sale of identically similar commodity, who are in close contact with one

another and who buy and sell freely among themselves”.

Features of Perfect Competition

1. Large number:

In perfect competition, there must be large number of buyers and sellers. Each buyer buys a

small quantity of the total amount. Each seller is so large that no single buyer or seller can

influence the price and affect the market.

2. Homogeneous product:

Under perfect competition, the product offered for sale by all the seller must be identical in

every respect. The goods offered for sale are perfect substitutes of one another. Buyers

have no special preference for the product of a particular seller. No seller can raise the price

above the prevailing price or lower the price below the prevailing price.

3. Perfect knowledge

It is assumed that all sellers and buyers have complete knowledge of the conditions of the

market. This knowledge refers not only to the prevailing conditions in the current period but

in all future periods as well.

4. Free entry exit

There is no barrier to entry or exit from the industry. Entry or exit may take time but firms

have freedom of movement in and out of the industry. If the industry earns abnormal profits,

new firms will enter the industry and compete away the excess profits. Similarly, if the firms

in the industry are incurring losses some of them will leave the industry which will reduce the

supply of the industry and will thus raise the price and wipe away the losses.

5. Absence of transport costs

In a perfectly competitive market, it is assumed that there are no transport costs.

6. Absence of government regulation

There is no government intervention in the form of tariffs, subsidies, relationship of production or demand.

Q28. What do you mean by Indifference Curve. What are its assumptions

and properties.

ANS An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.



Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.

The above diagram shows the U indifference curve showing bundles of goods A and B. To the consumer, bundle A and B are the same as both of them give him the equal satisfaction. In other words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any point along the curve assuming that other things are constant.

An indifference curve, since it represents level of satisfaction, is a subjective phenomenon.

Each person has a unique set of indifference curves. Because satisfaction derived from a

commodity differs from person to person. However, all indifference curves possess some

common characteristics, which are known as properties of indifference curves. The following

are those properties:

Indifference curve has a negative slope

In order to remain on the same level of satisfaction (same indifference curve), the

consumer must sacrifice one commodity for another. For this reason, an indifference

curve always has a negative slope.

Indifference curves are not influenced by market or economic circumstances.

An indifference curve is purely a subjective phenomenon and it has nothing to do

with the external economic forces.

Indifference curves do not intersect

Indifference curves cannot intersect each other. Suppose there are two indifference

curves – ‘A’ and ‘B’. These two indifference curves represent two different levels of

satisfaction. If these indifference curves intersect each other, the intersection will

represent same level of satisfaction, which is impossible.

Indifference curves do not touch either axes



An indifference curve represents various combinations of two commodities. If an

indifference curve touches horizontal axis or vertical axis, it implies that the customer

prefers only one commodity because when it touches axes, one of the commodities

becomes zero quantity. This violates the basic definition of an indifference curve.

Hence, an indifference curve does not touch either horizontal axis or vertical axis.

Indifference curve to the right represent higher level of satisfaction

The first property tells you that there are infinite indifference curves. All these

indifference curves represent different levels of satisfaction. Higher indifference

curve represents higher level of satisfaction.

Q29) Differentiate between the following concepts:- (i) Extension and Contraction of supply (ii) Increase and Decrease of supply

Extension and Contraction of Supply:

When Other factors remaining constant, as the price increases, the quantity supplied increases. This is known as extension of supply, i.e., when prices increases from P0 to P2, the quantity supplied also increases from Q0 and Q2. As the price decreases, the quantity supplied also decreases. This is known as contraction of suply. In the figure, the quantity supplied declines from Q0 and Q1, if price decreases from P0 to P1. The extension and contraction of supply take place in the same supply curve.

ii) Increase and Decrease in Supply

When there is a change in supply due to changes in any of the factors other than price, the supply curve is shifted upward or downward. (E.g.) when the technology improves, for the same price an increased quantity will be supplied. This is called increase-in-supply. If supply increases from Q0 to Q2, as shown in figure 5.2, then, it is increase in supply. Then, the supply curve, S0S0, shifts downward or away from origin, i.e., S2S2. Similarly, due to flood, fire etc. for the same price, the quantity supplied will be less resulting in decrease-in-supply.



The quantity supplied decreases from Q0 to Q1 and the supply curve S1S1moves upward.

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Section A 2 Marks Questions Q1. Define Demand. Ans.gdinfotech.com/gd_tutorial/managerial_economics.pdf · · 2018-01-06Section – A 2 Marks Questions Q1. Define Demand. Ans