|
AALIM
MUHAMMED SALEGH COLLEGE OF ENGINEERING
|
Engineering Economics & Financial
Accounting
|
|
PART
A & PART B (Q&A) - - -
MOHAMMED ADNAN V.L
|
UNIT
1 INTRODUCTION
PART
A
1. Define Managerial Economics
By combining the basic definition of the two
terms “Manager” and “Economics” you get the definition of “managerial
economics”. “Managerial Economics” is the study of directing resources in a
way that it most efficiently achieves the managerial goals.
Managerial Economics is also the application
of the tools of economics analysis in decision making in actual business
situations.
2. What is meant by Micro economic analysis?
Micro economic analysis deals with the
problems of an individual firm, industry or consumer etc. It helps in dealing
with issues which go on within the firm such as putting the resources
available with the firm to its best use, allocating resources within various
activities of the firm to its best use, allocating resources within various
activities of the firm and also deals with being technically and economically
efficient.
3. What is meant by Prescriptive approach?
Prescriptive or normative approach tells “How
things ought to be done”.
4. What is meant by descriptive approach?
Descriptive approach tells “how things are
done”.
5. Scope of Managerial Economics:
The following aspects constitute the scope of
managerial economics:
1. Objectives of a business firm
2. Demand analysis and forecasting
3. Cost analysis
4. Production management
5. Supply analysis
6. Pricing decisions, policies and practices
7. Profit management
8. Capital budgeting and investment decisions
9. Decision theory under uncertainty
10. Competition
6. Give the Objectives of a business firm
The objectives of a business firm may be
varied. Apart from generating profits a firm has many other objectives like
being a market leader, being a cost leader, achieving superior efficiency,
achieving superior quality, achieving superior customer responsiveness etc.
7. What is meant by Supply Analysis?
Supply analysis deals with the various
aspects of supply of a commodity. Certain important aspects of supply analysis
are supply schedule, curves and function, elasticity of supply, law of supply
and its limitations and factors influencing supply.
8. What is meant by Capital Budgeting?
Capital budget is the planning of expenditure
on assets.
9. Use of Engineering Economics:
Engineering economics accomplishes several
objectives. It presents the aspects of traditional economics that are relevant
for business and engineering decision making in real life.
10. Define Logistics:
It is the movement of goods from one place to
the other.
11. Define Inbound Logistics:
It is the movement of raw materials to the
factory premises.
12. Define outbound logistics:
It is the movement of finished goods to wholesale
or retail outlets and to the final consumers.
13. Define Statistics:
Statistics provide the basis for empirical
testing of theory. Generalizations or theory cannot be accepted for practice
unless these theories are checked against the data from the reality. This way,
theories become more practical and useful in real life business situation.
14. Define Economics and define the divisions
of Economics:
Economics has two division’s namely micro
economics and macro economics. Micro economics is the branch of economics
where the unit of study is an individual or a firm while macro economics is
branch of economics where the unit of study is aggregative in character and
considers the entire economy.
15. Define Accounting:
Accounting can be defined as the recording of
financial operations of an organization. Managerial decisions on profits and
sales etc. derive input largely from the accounting statement of a firm.
UNIT
2 DEMAND AND SUPPLY ANALYSIS
PART
A
1. Define Demand.
Demand indicates the quantities of products
(goods service) which the firm is willing and financially able to purchase at
various prices, holding other factors constant.
2. Define Determinants of Demand:
An individual’s demand for a commodity depends
on his desire and capability to purchase it. Apart from the desire to purchase,
there are many other factors which influence the purchase of a product
(demand). These are known as demand determinants.
3. What is meant by Tastes and preferences of
Consumers?
The change of tastes and preferences of
consumers in favor of a commodity will result in a greater demand for the
commodity. The opposite also holds good i.e. if the tastes and preferences of
consumer change against the commodity, the demand will suffer.
4. What are the two kinds of Consumers
expectations?
Consumers have two kinds of expectations one
pertains to their future income and the second is related to the future prices
of the goods and its related goods.
5. Define Advertising
Advertisements provide information about the
presence of quality products in the market and induce customers to buy more. It
also promotes the latest preferences of the general public to masses.
6. Define the Law of Demand:
The relation of price to quantity demanded /
sales is known as the law of demand. Law of demand states that the higher the
price is the lower the demand is and vice versa, holding other factors as
constant.
7. Define the price quantity relation.
This price quantity relation can be expressed
as demand being a function of price
D=f (p).
8. What Highlights of the law of demand:
1. The relationship between price and quantity
demanded is inverse.
2. Price is the independent variable and
demands the dependent variable.
3. Law of demand assumes that except for price
and demand, other factors remain constant.
9. What is Demand Shift: (Change in demand?)
Factors shift the demand for a particular
product either on the right side of the demand curve or to the left side of the
demand curve based on the changes in price. These factors, other than the price
of a good that influence demand are known as demand shifters. The shift in the
demand either to the left or right is called the demand shift.
10. What are the Exceptions to law of demand?
1. In share markets on would have noticed that
the rise in price of the shares increases, the sales of the shares while
decrease in the price of the shares results in decrease of sale of the shares.
2. Some goods which act as status symbol and
have a snob appeal fall under this category. Here when the price of the product
raises then the appeal of the product also rises and thus the demand. Some
example is diamonds and antiques.
3. Finally, ignorance on the part of the
consumer may cause the consumer to buy at a higher price, especially when the
rise in price is taken to mean an improvement in quality and a reduction in
price as deterioration in quality.
11. Define Individual demand:
The quantity of a product demanded by an
individual purchaser at a given price is known as individual demand.
12. Define Market demand:
The total quantity demanded by all the
purchasers together is known as the market demand.
13. What are the types of Demand Function?
1. Consumption function
2. Product consumption function
3. Differences in regional incomes
4. Income expectation and demand
14. What are the Characteristics of demand
function?
1. The long run relationship between
consumption and income is some what stable, and expenditure on consumption is
usually about 85 to 90% of the income.
2. The consumption function is highly unstable
in short runs and the relationship between income and consumption cannot be
predicted by any mathematical formula.
3. During the periods of economic prosperity,
there is an absolute increase in the expenditure on consumption, but decrease
as a percentage of income during periods of depression, the consumption
declines absolutely but the expenditure on the consumption increases as a
percentage of income.
4. In the periods of economic recovery, the
rate of increase in consumption is higher than the rate of the decline in
consumption in times of recession.
15. Define Product consumption function:
This function can be defined as the
relationship between the total income of the consumer and sales of particular
products. It means that when there is a change in income there is a change in
the demand for particular product
UNIT
3
PART
A
1. Say some of the main cost concepts.
1) Actual costs and opportunity costs
2) Incremental costs and sunk costs
3) Explicit costs and implicit costs
4) Past costs and future costs
5) Accounting costs and economic costs
6) Direct cost and indirect cost
7) Private costs and social costs
8) Controllable costs and non controllable
costs
9) Replacement costs and original costs
10) Shutdown costs and abandonment costs
11) Urgent costs and postponable costs
12) Business costs and full costs
13) Fixed costs and variable costs
14) Short run and long run costs
15) Incremental costs and marginal costs
2. What are actual costs and opportunity
costs?
Actual costs which a firm incurs for producing
or acquiring a product or a service. As example for this is the cost on raw
materials, labor, rent, interest.
3. What are incremental costs and sunk costs ?
Incremental cost is the additional cost due to
change in the level of nature or business activity. Sunk costs are the costs
that are not altered by a change in quantity produced and cannot be recovered.
4. What are Explicit costs and implicit costs
?
Explicit or paid out costs are those expenses
which are actually paid by the firm. Implicit costs are the theoretical costs
in the sense that they go unrecognized by the accounting system.
5. What are past costs and future costs ?
Past costs are the actual costs incurred in
the past are generally contained in the financial accounts. Future costs are
costs that are expected to occur in some future period or periods.
6. What are accounting costs and economic
costs ?
Accounting costs are the actual outlay costs.
Economic cost relate to the future,
7. What is direct and indirect cost ?
Direct cost are traceable cost or assignable
cost are the ones that have direct relationship with a unit of operation like a
product, a process or a product, or a department of the firm. On the otherhand,
indirect costs or non traceable costs or common or non assignable costs are the
costs whose course cannot be easily and definitely traced to the plant.
8. What are private costs and social costs ?
Private costs are those which are actually
incurred or provided for the business activity by an individual or the business
firm. Social costs on the otherhand are the total costs to the society on
account of production of a good.
9. What are controllable and non controllable
costs ?
Controllable costs are those which are capable
of being controlled or regulated by the managers ant = d it can be used to
assess the managerial efficiency in controlling the cost in his department. Non
controllable costs are those which cannot be subjected to administrative
controls and supervision.
10. What are replacement costs and original
costs ?
Original costs or the historical costs are the
costs paid for assets such as land, building, cost of plant, equipment and
materials. Replacement costs are the costs that the firm incurs if it wants to
replace or acquire the same assets now.
11. What is shut down cost and abandonment
cost ?
Shutdown costs are costs in which the firm
incurs if it temporarily stop its operation. Abandonment costs are the costs of
retiring altogether a fixed asset from use.
12) What is level of capacity utilization?
The higher the capacity utilization fixed cost
per unit of output in bound to be low.
13) What is output stability?
Stability of output leads to savings in
various kinds of hidden cost interruption and learning.
14)what is size of plants?
Production costs are usually lower in bigger
plants than smaller plants.
15)what is cost?
Cost is the money spent on producing and
selling a product to the customers.the cost of a product starts from the raw
materials through production costs till selling costs include the cost in
maintaining outlets.
UNIT
4 PRICING
PART
A
1) what are the two factors in pricing
strategies?
1) external factors – Raw materials,
substitute prices, national regulations
2) internal factors – Labour cost, Facility
cost
2)what are the external factors in pricing
strategies?
i. The competition in the market
ii. The elasticity of supply and demand
iii. Trends of the market
iv. purchasing power of buyers.
v. government policies towards prices.
3)what are the two factors in pricing strategies?
1) The costs
2) Management policy towards the gross margin
and the sales turnover
4)what are the determinants?
1)objectives of business
2)competition
3)product and promotional strategies
4)Nature of price sensitivity
5)influence of middle men
6)Routinisation of pricing
7)Government regulation
5)What is objectives of business?
The fundamental objective of a firm is to
survive in the business and then thrive.The pricing strategy adopted by a firm
is very much by these factors.
6)what is competition in pricing strategy?
To come out with a pricing policy that will be
advantages to the firm,managers require a perfect understanding of the
competitive environment in which the firm is placed.
7)what are product and promotional strategies?
i. product itself
ii. pricing
iii. promotion activities
iv. distribution of products through the
channel to the consumer.
8)what is nature of price sensitivity?
We know that many factors contribute to the
increase of price sensitivity,but managers should not ignore the factors that
minimize price sensitivity .when designing pricing strategies.
9)what is influence of middlemen?
Middlemen are the ones who stock the finished
product of the manufacturer to sell it to the customers.these are also called
the channel for distribution.
10) What is routinization of price?
This strategy of pricing relies on the tried
and trusted pricing strategies which the organization has followed all along.
This pricing practice is often routinized but the extend varies from company to
company and from product to product.
11) What is the government regulation in
pricing?
Inorder to safeguard the interests of the
public the government acts on their behalf to prevent the abuse of the
monopolistic power and collusion among business.
12) Say some of the objectives of the pricing
policy?
i. profit maximization.
ii. long term welfare of the firm.
iii. facing competition.
iv. flexibility to economic changes.
v. satisfying rate of returns.
13) What are the cost oriented pricing method?
i. cost plus pricing or full cost pricing.
ii.marginal cost pricing or incremental or
direct cost pricing.
iii.target pricing or rate pricing.
iv. programme pricing.
14) What are the competition oriented pricing
method?
i.going rate pricing.
ii.loss reader pricing.
iii.customery pricing.
iv.price leadership pricing.
v.trade association pricing.
vi.cyclical pricing.
vii.imitative pricing.
viii.turnover pricing.
15) What are the praising based methods?
i.administered pricing.
ii.dual pricing.
iii.price discrimination or differential
pricing.
UNIT 5 FUNDAMENTALS OF
ACCOUNTING
PART A
1) What is fixed assets?
Their life period is very long, these are
purchased for carrying out the operation in a company. Using this the company
can generating revenue.
2) What is investment?
The long term and short term financial
securities owned by a company comes under this category. Here lomg term
investments means buying shares of the other companies.
3) What is current assets?
Any asset that can be converted into cash
within one year of time is called as current asset. They would be converted
into cash at the end of the operating cycle of a firm.
4) What are the items come under this current
assets?
i.cash.
ii.debtors.
iii.inventories.
5) What is loans and advances?
It is the amont that a company loans to its
employees, advances given to supplies, government contractors and other
agencies it is also include prepaid expenses.
6) What are the types of liabilities?
i.share capital.
ii.resreves and surpluses.
iii.secured loans.
iv.unsecured loans.
v.current liabilities.
7) What is meant by share capital?
It includes both equity share capital and
preference share capital. Equity share holders are the owners of a company they
take risk and their dividend is not fixed but is case of preference share
capital the dividend rate is fixed.
8) What is meant by Reserves and Surpluses?
It is nothing but the profit that is retained
by accompany not by not paying it as dividend to the shareholders.
9) What are the types of reserves ?
i.revenue reserve.
ii.caapital reserve.
10) What is meant by secured loans?
Loan amount borrowed by the firm by pledging
assets (ie) securities are provided for these loans.
11) What is meant by unsecured loans?
In this case nosecurity is provided examples
are fixed deposits, loans and advances.
12) What is meant by current liabilities?
This consists of amount that is to the
suppliers when goods are purchased on a credit basis, advance payments received
accured expenses, provisions for tax.
13) What is meant by income statement?
The companies act does not any particular way
in which the profit and loss account or the income statement has to be
prepared. This statement reflects the performance of a company over a period of
time.
14) Who are all the users of financial statement?
i.management.
ii.shareholders, investors, anlyst.
iii.lenders
iv.suppliers.
v.customers.
vi.employees.
vii.government and regularity agencies.
viii.others
15) What is meant by cash flow statement?
A firm would enter into trouble if it spends
more cash than it is able to generate. The firm should generate adequate
capital for it survival.
UNIT 1 INTRODUCTION
PART B
1.
Define scope of economics?
Economics
is the study of how societies use scarce resources to produce valuable commodities
and distribute them among different people.
SCOPE OF
ECONOMICS
a.
Consumption: Satisfaction of
human wants is called consumption which forms one of the important branches of
economics. This tells how people behave in consumption of goods and services in
order to maximize their satisfaction.b
b.
Production: Goods and services
have to be produced with the help of factors of production. So, production is
another branch of economics. It concerned with how maximum goods are produced with
minimum cost or how the scarce factors could be utilized economically for
better results.
c.
Exchange: Goods and services
cannot be produced at one place or at one point of time. Goods produced by one
are exchanged for the goods produced by the others. So, exchange forms another
branch of study in economics
d.
Distribution: Goods and
services are produced with efforts, i.e., by combining the factors of production.
These efforts have to be paid for or rewarded. The land gets rent, the labor
get wages, the capital gets interest and the organizer gets profit. This branch
of study is called distribution in economics.
e.
Public Finance: This branch of
study in economics studies about the sources of revenue to the government and
the principles governing the expenditure for the benefit of the people. It also
studies about public debt and financial administration.
2.
Is economics Science or an Art.
Please discuss.
Economics as a Science: A science is a systematized body of knowledge ascertainable by observation
experimentation. It is a body of generalizations, principles, theories or laws
which races out a casual relationship between cause and effect.
Economics is a systematized body of
knowledge in which economic facts are studied and analyzed in a systematic
manner. For instance, economics is divided into consumption, production,
exchange, distribution and public finance which have their laws are theories on
whose basis these departments are studied and analyzed in a systematic manner.
Hence economics is a science like any
other science which has its own theories and laws which establish a relation
between cause and effect. Economics is also a science because its laws possess universal
validity such as the law of diminishing returns, the law of diminishing
marginal utility the law of demand, Gresham’s law, etc.
Again, economics is a science because of
its self corrective nature. It goes on revising its conclusions in the light of
new facts based on observations. Economic theories or principles are being
revised in the fields of macro economics, monetary economics, international
economics, public finance and economic development.
Economics as an Art: Unlike natural science, there is no scope for experimentation in
economics because economics is related to man, his problems and activities.
Economic phenomena are very complex as they related to man whose activities are
bound by his tastes, habits, and social and legal institutions of the society
in which he lives.
Economics is thus concerned with human
beings who act irrationally and there is no scope for experimentation in
economics. Even though economics possess statistical, mathematical and econometric
methods of testing its phenomena but these are not so accurate as to judge the
true validity of economic laws and theories. As a result, exact quantitative
predication is not possible in economics.
Economics as both a
Science and an Art: Economics is not only a
science but also an art. It is a science in its methodology and an art in its
application. It has a theoretical aspect and is also an
applied science in its practical aspects
3.
Discuss about the fundamental
economic problems?
Economic Problem: Due to the scarcity of
means and the multiplicity of ends, the economic problem lies in making the
best possible use of our resources so as to get maximum output satisfaction in
the case of a consumer and maximum output or profit for a producer. Hence
economic problem consists in making decisions regarding the ends to be pursued
and the goods to be produced and the means to be used for the achievement of
certain ends.
Fundamental problems
facing the economy:
1.
What to produce: The first major decision relates to the quantity and the range of
goods to be produced. Since resources are limited, we must choose between
different alternative collection of goods and services that may be produced. It
also implies the allocation of resources between the different types of goods.
Example: Consumer goods and capital goods.
2.
How to produce: Having decided the quantity and the type of goods to be produced,
we must next determine the techniques of production to be used. Example: labor
– intensive or capital – intensive.
3.
For whom to produce: This means how the national product is to distributed, i.e., who
should get how much. This is the problem of the sharing the national product. Are
the Resources Economically Used? This is the problem of economic efficiency or
welfare
maximization. There is to be no waste or misuse of resources since
they are limited.
4.
Problem of Full employment: Fullest possible use must be made of the available resources. In other
words, an economy must endeavor to achieve full employment not only of labor
but of all its resources.
5.
Problem of Growth: Another problem for an economy is to make sure that it keeps
expanding or developing so that it maintains conditions of stability. It is not
to be static. Its productive capacity must continue to increase. If it is an
under – developed economy, it must accelerate its process of growth.
4.
Explain decision making, its
features and steps in decision making process?
Decision making is the process of selection from a set of
alternative courses of action which is thought to fulfil the objective of the
decision problem more satisfactorily than other.
FEATURES OF DECISION MAKING
1.
Selection process: Decision
making is a selection process. The best alternative is selected out of many
available alternatives.
2.
Goal-oriented process: Decision
making is goal-oriented process. Decisions are made to achieve some goal or
objective.
3.
End process: Decision making is
the end process. It is preceded by detailed discussion and selection of
alternatives.
4.
Human and Rational process:
Decision making is a human and rational process involving the application of
intellectual abilities. It involves deep thinking and foreseeing things.
5.
Dynamic process: Decision
making is a dynamic process. An individual takes a number of decisions each
day.
6.
Situational: Decision making is
situational. A particular problem may have different decisions at different
times, depending upon the situation.
7.
Continues or Ongoing process:
Decision making is a continuous or ongoing process. Managers have to take a
series of decisions on particular problems.
STEPS IN DECISION MAKING PROCESS IN AN ORGANIZATION
1. Identification of problem: Decision making process begins with
the identification of problem that means recognition of a problem. The managers
have to use imagination, experience, and judgment in order to identify the real
nature of the problem.
2. Diagnosis and analysis of the problem: In order to diagnose the
problem correctly, a manager must obtain all pertinent facts and analyze them correctly.
The most important part of the diagnosing problem is to find out the real cause
or source of the problem. After analyzing the problem next phase of the
decision making is to analyze problem. This process involves classifying the
problem and gathering information.
3. Search for alternatives: A problem can be solved in many ways.
All possible ways cannot be equally satisfying. Managers are advice to limit
him to the discovery of the alternatives which are strategic or critical to the
problem. The principle of limiting factor is given as “By recognizing and overcoming
that factor that stand critically in the way of a goal, the best alternative
course of action can be selected”. Creative thinking is necessary to develop
alternatives such as decision makers past experience, practices followed by
others, and using creative techniques.
4. Evaluation of alternatives: Evaluation is the process of
measuring the positive and negative consequences of each alternative. Some
alternatives offer maximum benefit than others. An alternative is compared with
the others. Management must set some criteria against which the alternatives
can be evaluated. Criteria to weigh the alternative courses of action includes
Risk- Degree of risk involved in each alternative, Economy of effort- Cost,
time and effort involved in each alternative, Timing or Situation- Whether the
problem is urgent & Limitation of resources- Physical, financial and human
resources available with the organization.
5. Selecting an alternative: In this stage, decision makers can
select the best alternatives. Optimum alternative is one which maximizes the
results under given conditions.
6. Implementation and follow-up: Once an alternative is selected, it
is put into action in systematic way. The future course of action is scheduled
on the basis of selected alternatives. When a decision is put into action, it
may yield certain results. These results provide the indication whether
decision making and its implementation is proper. The follow-up action should
be in the light of feedback received from the results.
5.
Discuss importance and
characteristics of engineering economics?
It is the application of economic
principles to engineering problems. For example, in comparing the comparative
costs of two alternative capital projects
IMPORTANCE OF ENGINEERING ECONOMICS:
1. Engineering economics is concerned
with the monetary consequences (or) financial analysis of the projects,
products and processes that engineers design.
2. Engineers are required to use economic
concepts in the major fields such as increasing production, improving
productivity, reducing human efforts, increasing wealth by maximizing profit,
controlling and reducing cost.
3. Engineering economics provides has
very important role to play in all engineering decisions.
4. Engineering economics provides a
number of tools and techniques to solve engineering problems related to
product-mix, output level, pricing the product, investment, quantum of
advertisement, etc.
5. Engineering economics helps in
understanding the market conditions, general economic environment in which the
firm is working. Engineering economics provide basis for resource allocation
problem.
6.
Engineering economics deals with
identification of economic choices, and is concerned with the decision making
of engineering problems of economic nature.
CHARACTERISTICS OF ENGINEERING ECONOMICS
1. Engineering economics is a traditional
and important part of engineering practice.
2. Engineering economics is concerned
with application of economic principles in technical and managerial decision
making.
3. Engineering economics embarrasses both
micro and macroeconomic principles when applied to engineering problems. For
example, the study of demand analysis is mostly concerned with individual or
household as a small unit of study. Whereas, the study of impact of taxes on
raw- materials will influence engineers to look for alternative materials for
manufacturing or designing a product or processes which is of course a macro
economic issue. The demand analysis is microeconomic principle.
4. Engineering economics also take in its
fold certain concepts and principles from other fields such as statistics,
accounting, management, etc.
5. Engineering economics aids decision
making aspect of an engineer and it avoids the abstract nature of economic
theory.
6. Engineering economics is mostly an
application tool, whereas economics is a social science with broad
characteristics,
7.
Economic theory conveniently ignores the significant backgrounds which
are common to individual firms but engineering economics take in to
consideration the individual firms’ environment of decision making. Engineering
economics provides an analytical and scientific approach resulting in
qualitative decisions.
UNIT 2 DEMAND AND SUPPLY ANALYSIS
PART B
1.
Discuss about demand and its
various types of demand?
The demand for a commodity is its quantity
which consumers are able and willing to buy at various prices during a given
period of time. Demand is a function of Price (P), Income (Y), Prices of
related goods(PR) and tastes (T) and expressed as D=f(P,Y,PR,T). When income,
prices of related goods and tastes are given, the demand function is D=f (P).
It shows quantities of a commodity purchased at given prices.
THE VARIOUS
TYPES OF DEMAND
i. Price
demand: Price demand refers to various quantities of a commodity or
service that a consumer would purchase at a given time in a market at various
hypothetical prices. It is assumed that other things, such as consumer‘s
income, his tastes and prices of inter- related goods, remain unchanged. The
demand of the individual consumer is called individual demand and the total
demand of the entire consumer combined for the commodity or service is called
industry demand. The total demand for the product of an individual firm at
various prices is known as firms demand or individual sellers demand.
ii. Income
demand: Income demand indicates the relationship between income and
the quantity of commodity demanded. It relates to the various quantities of a
commodity or service that will be bought by the consumer at various level of
income in a given period of time, other things equal. The income demand
function for a commodity increases with the rises in income and decreases with
fall income. The income demand curve has a positive slope. But this slope is in
the case of normal goods. In the case of inferior goods the demand curve id is
backward sloping
iii. Cross
demand: In case of related goods the change in the price of one
affects the demand of the other this known as cross demand and its written as
d=f(pr). Related goods are of two types, substitutes and complementary. In the
case of the substitutes or competitive goods, a rise in the price of one good a
raises the demand, arise in the price of one good a raises the demand for the
other good b, the price of remaining the same the opposite holds in the case of
a fall in the price of a when demand for b falls.
2. Discuss about various demand
distinctions?
i. Derived demand and autonomous: Those
inputs or commodities which are demanded to help in further production of
commodities are said to have in further production of commodities are said to
have derived demand. For example, raw material, labour machines etc are
demanded not because they serve only direct consumption need of the purchaser
but because they are needed for the production of goods having direct demand
(say , food , scooter . building ,etc)
ii. Demand for producer’s goods and consumer’s goods: The
difference in these two types of demand is that consumer‘s goods are needed for
producing other goods (consumer‘s goods or further producer‘s goods)
iii. Demand for durable goods non durable goods: Durable
goods whether producer‘s durable or consumer‘s durable are the ones which can
be stored and whose replacement can be postponed. On the other hand, the non
durables are needed as a routine and their demand is their fore made largely to
meet day– to- day needs.
iv. Industry demand and firm or company demand: The term company demand denotes demand for a particular product
of a particular firm Industry demand refers to the total demand for the product
of a particular industry.
v. Total demand and market segment demand: Demand for
the market segments is to be studied by breaking the total demand into
different segments like geographical areas , sub-products, product use,
distribution channels, size of customer groups, sensitivity to price etc. The market
segments are so demarcated that each segment has its own homogenous demand
characteristics. Further, each of these market segments must differ
significantly in terms of delivered prices, net profit margins, and number of
substitutes, competition, seasonal, patterns and cyclical sensitivity.
vi. Short run demand and long run demand: Short run
demand refers to demand with its immediate reactions to price changes, Income
fluctuations etc. Whereas long run demand is that which will ultimately exist
as a result demand of the change in pricing promotion or products improvement ,
after enough time is allowed to lat the market adjust itself to the new
situation.
3. Discuss
elasticity of demand?
Elasticity of demand may be defined as the ratio of the
percentage change in demand to the percentage change in price. Ep= Percentage
change in amount demanded Percentage change in price
TYPES OF ELASTICITY DEMAND
i. Price elasticity of demand:
Elasticity of demand may be defined as the ratio of the
percentage change in price.
Ep = percentage change in quantity demanded / percentage
change in price
ii. Income elasticity of demand:
The income elasticity of demand (Ey) express the responsiveness
of a consumer demand or expenditure or consumption) for any good to the change
in his income .it may be defined as the ratio of percentage change in the
quantity demanded of a commodity to the percentage in income. Thus
Ey = percentage change in quantity demanded / percentage
change in income
iii. Cross elasticity of demand:
The cross elasticity of demand is the relation between
percentage change in the quantity demanded of a good to the percentage change
in the price of a related good. The cross elasticity good A and good B is
Eba= percentage change in the quantity demanded of B/
percentage change in price of A
4. Discuss the
importance of Elasticity of Demand?
i. Taxation: The tax will no doubt raises
the prices but the demand being in elastic, people must continue to buy the
same quantity of the commodity. Thus the demand will not decrease.
ii. Monopoly prices: In the same manner, the
businessman, especially if he is a monopolist, will have to consider the nature
of demand while fixing his price. In case I is in elastic, it will pay him to
him to change a higher price and sell a smaller quantity. If, on the other
hand, the demand is elastic he will lower the prices, stimulate demand and thus
maximize his monopoly net revenue
iii. Joint products: In such cases separate costs
are not ascertainable the producers will be guided mostly by demand and its
nature fixing his price. The transport authorities fix their rates according to
this principle when we say that they charge what the traffic will bear‘
iv. Increasing returns: When an industry is subject
to increasing returns the manufacturer lowers the price4 to develop the market
so that he may be able to produce more and take full advantage of the economies
of large scale production.
v. Output: Elasticity
of demand affects industrial output reduction in price will certainly increases
the sale in the market as a whole.
vi. Wages: Elasticity of demand also
exerts its influence on wages. If demand for a particular type of labour is
relatively inelastic, it is easy to raise wages, but not otherwise.
vii. Poverty in plenty: The concept of elasticity
explains the paradox of poverty in the midst of plenty. This is specially so if
produce is perishable. A rich harvest may actually fetch less money a poor one.
5. Discuss the
importance and limitations of law of equi-marginal utility?
IMPORTANCE OF THE LAW OF EQUI-MARGINAL UTILITY
i. It applies to consumption: Every
consumer, if he is wise wants to get maximum satisfaction
out of his limited resource. In arranging his expenditure to
that end he must substitute the thing till marginal utilities are equalized. In
this way, the consumer‘s satisfaction is maximized.
ii. Its
application to production: To the business man the
manufactures the law is of special importance. He works towards the most
economical combination of the factors of production employed by him for this
purpose; he will substitute one factor for another till their marginal
productivities are made the same. In case he finds that marginal productivity
of one factor, say labour is greater than that of capital it will pay him to
substitute the former for the latter in this way he will be able to maximize
his profit.
iii. Its application to exchange: In all our
exchanger this principle work for exchange is nothing else but substitution of
one thing for another. The substitutional character of our exchange is
sufficient to basic economic principle.
iv. Price determination: This principle has an
important bearing on the determination of value. When there is scarcity of a
commodity the law of substitution to our help. We commodity, the law
substitution comes to our help. We start substituting the less, scarce goods
for the more scarce ones. The scarcity of the latter is thus relived and its
price comes down.
v. Its application to distribution: In
distribution we are concerned with the determination of the rewards of the
various agents of production‘s, determination of rent wages interest and profit
these shares are determined-- according to the principle of marginal
productivity. The use of each agent of producing is pushed by the entrepreneur
to the margin of profitableness till the marginal product in each case in the
same in case it is not the same the law of substitution will come into play to
equalize their marginal productivity this is how the law of substitution proves
useful in the field of distribution of the national dividend among the various
agents of production.
vi. Public finance: Public expenditure of the
government conforms to this law even a government is under the necessity of
deriving maximum amount of the benefit from its public expenditure it must try
to maximize welfare of the commodity. For this purpose it must cut down all
wasteful expenditure.
LIMITATION OF THE LAW OF EQUI MARGINAL UTILITY
i. The law
of equi marginal utility involves very careful calculation of the excepted
satisfaction: The fact is that most of our expenditure is governed by habit .
there is not much of conscious calculation and careful weighing of the
utilities.
ii. Not applicable in case of small purchases: Only in the
case of big expenditure a prudent persons goes through a certain amount of
thinking here we may take it that this expenditure does roughly conforms to the
law of maximum satisfaction but not applicable in case of small purchases
iii. Law will not hold good in irrational purchases: All the
rational and prudent persons are excepted to act upon this law consciously or
un consciously.
iv. Ignorance of consumer: The consumer may not be aware of
other more useful alternatives. Hence, no substitution does not operate.
v. Incapable
of rational consumption: People are sometimes slaves of customs or fashion and
are incapable of rational consumption. Without being rational and calculating,
a consumer cannot substitute one thing for another.
vi. Goods are not divisible into small bits: Another
limitation arises from the fact that goods are not divisible into small bots to
enable consumers to equalize marginal utilities cannot be equalisied.
vii. Resource are unlimited: The law of substitution has no
place when the resource are unlimited as in the case of free goods in such
cases there is no need to re-arrange expenditure because no price is to be paid
whatever the quantity used.
UNIT 3
PART B
1.
Discuss briefly
the different cost concepts relevant to managerial decisions of conitrol.
a)actual
cost- these cost are the costs that are generally recorded in the account books.
b)opportunity
cost- it is defined as the revenue foregone by not making the best alternative
use.
c)incremental
cost- it is the additional cost incurred due to a change in the level or nature
of business activity.
d)Sunkcost-it
is a cost which is not affected or altered due to change in the level or nature
of business activity
e)Fixed
cost- these cost are those whose total will be constant regardless of changes
in volume of production or level of activity.
f)Variable
cost- those costs are vary proportionally to the level of activity or changes
in volume of production.
g)Semi
fixed and semivariable cost- these cost may change in the same directions as
volume but not in direct proportions, certain cost may be fixed upto a level of
activity and beyond that the begin to change.
h)Short
run cost and long run cost- Short run is defined in economics as a period
during which at least one factor of production remains fixed in supply, it will
be the plant and equipment used in production
i)
Long run cost- the cost will be the basis for investment decision-making by the
firm when a firm plans for expansion of the plant size, it will take long run
cost into consideration. defined as one during which all inputs are variable.
j)
Business cost and full cost- it is used to calculate the profits and losses of
business for the purpose of filing income tax returns and to meet other legal
obligations.
k)
Explicit cost and implicit cost-
Explicit cost-Those expenses which are actually paid by the firm. These
cost appear in the accounting records of the firm. The amount paid out as rent,
wages, utility expenses etc.
l)
Implicit cost- theoretical cost in the sense that they go unrecognized by the
accounting system. They do not require current cash expenditure.
m)
Out of pocket cost and book cost- all expenses which involves cash payments are
called as out of pocket cost. It is called so since cash physically goes out of
the firm.
n)Book
cost- this is a cost which does not involve cash payments, but provisions are
made for these costs an hence they are entered in the account book.
o) total cost- it refers to the total outlay of money expenditure for the production of goods and service
o) total cost- it refers to the total outlay of money expenditure for the production of goods and service
p)
historical cost and replacement cost- cost of assets which have been acquired
in the past is termed as historical cost, these cost for accounting purpose.
q)
Private cost and social cost, the costs which are paid by the firm and for
which the firm makes provision is called as private cost, all the goods and
services purchased by the firm are private cost.
r)
Social cost- The part of these costs is paid by the society and hence they are
called as social cost, for example considers a firm having a textile dying
unit. The firm usually discharges its waste in rivers causing water pollution.
2.
Explain briefly
cost output relationship in short run cost curve and long run cost curve.
Short
run cost curve- it is clear that in the short run, fixed remains constant.
Moreover a firm can increase its output only by increasing its variable cost
The
short run cost curve are studied in terms of
Average
fixed cost, average variable cost, average total cost and marginal cost
ATC=
AFC+AVC
IF
both AVC, ATC AND AFC
IF
AFC Falls but AVC will fall
If
AFC falls but AVC rises.
Long
run cost curve- it refers to the cost of producing different levels of output,
by changing the size of the plant or scale production. This time period is
termed as long run because during this period the firm can alter its assets
like plant , building , equipment , machinery etc in order to produce more .
LAC
curve is tangential to various SAC curves hence it is an envelope curve.
This
is because for any given output the average cost cannot be higher in long run
than that in short run. The cost curves are used in understanding how a firm
attains optimum size. A firm which is of optimum size produces maximum output
at the lowest average cost in the long run.
Here
the LAC curve helps the organization to determine the size of the plant to be
adopted for producing the given output. When a firm is operating to increasing
returns to scale it is more economical to under use a slightly larger plant
operating at less than its minimum cost output level than to over use a smaller
plant.
3.
Write short notes
on a) economies of scale b) expansion path c) law of proportions
a)
economies of scale arises
when the average cost of production goes down as more number of output is produced, this trend will not go on forever
because after a certain point, the cost will begin to rise with the increase in
output due to the inefficiencies
associated with large scale production .
b)
expansion path- it refers to
the line representing the least cost combination of inputs P,Q,R for different
levels of output. Expansion path indicate how production can be expanded along
this path if the factor prices are given. The expansion path is also called
scale line as it indicates how to adjust the scale of operations as the firm
changes its output. The scale line is
already reckoned to decide on the
issues relating to expansion or contraction of output given the relative prices of inputs,
c)
law of proportions- the
state of technology remains constant, if there is any improvement in
technology, the average and marginal output will not decrease but increase
only one factor of input is made variable and other factor are
kept constant. this law does not apply to those cases where the factors must be
used in rigidly fixed proportions
all units of the variable factors are homogenous.
It can be used to calculate the least cost input combination for a
given output.
It can be used to calculate the maximum input –output combination
for a given cost
4.
Explain the
nature and managerial uses of production function.
Though
production functions may seem to be highly abstract and unrealistic in fact
they are both logical and useful. There
are several managerial uses of production
It
can be used to calculate the least cost input combination for a given output.
It can be used to calculate the maximum input –output combination
for a given cost
Knowledge of production
function is useful in deciding on the value of employing a variable input
factor in the production process.
Production functions also aid in long run decision making.
The opposite is true if there is decreasing returns to scale
The producer will be indifferent about increasing or decreasing
the production incase of constant returns to scale provided the demand is of no
constraint.
5.
Explain the
various types of isoquants.
Isoquants
may take different shapes depending on the degree substitutability of inputs.
The various types of isoquants are
1.Linear
isoquants
2.Input
output isoquant or right angled isoquant
3.Kinked
isoquant or convex isoquant
4.Smooth
convex isoquant
Linear isoquant-
this is a production situation where it is assumed that perfect
substitutability between the factors of production is possible.
Input output isoquant or right angled isoquant- we assume strict complementarities or zeros substitutability between the inputs. When there is only one method of production for any commodity its isoquants takes the shape of right angle.
Input output isoquant or right angled isoquant- we assume strict complementarities or zeros substitutability between the inputs. When there is only one method of production for any commodity its isoquants takes the shape of right angle.
Kinked isoquant or convex isoquant-it assumes limited substitutability of capital and labour. Since
there are only a few processes available for producing any commodity of input
factors is possible only at kinks.
Smooth convex isoquant- this forms of isoquant assumes continuous substitutability of
capital labour only over a certain range beyond which input factors cannot
substituted for each other before we tool into the long run production function
we will first discuss on the optimal combination of input factors.
UNIT 4 PRICING
PART B
1.
Explain market
and classification based on the time periods?
Market is a place where buyers &
sellers meet in order to buy & sell goods at a price.
CLASSIFICATION OF MARKETS BASED ON TIME
PERIODS
A. Very Short Period or Market period: This type of market is for perishable goods where the time period
is very short & the supply of goods is perfectly inelastic. It means that
the price alone will change according to demand but the supply will not change.
B. Short Period: This
type of market is for Reproducible goods or durable goods where the businessman
has got enough time to wait for the right price & the supply of goods is
normal in the beginning & it becomes perfectly inelastic only in the later
stage.
C. Long Period: During
this period all the firms will try to earn normal profits by charging a low
price, so that they can be stable in the market.
2.
Discuss the
various types and conditions of price discrimination?
THE VARIOUS TYPES OF PRICE DISCRIMINATION
i. Personal price discrimination based on the income of the
customer: For example, doctors and lawyers
charge different fees from different customers on the basis of their incomes.
Higher fees are charged to rich persons and lower to the poor.
ii. Price discrimination based on the nature of the product: Paperback is cheaper than the deluxe edition of the same book, for
the former is bought by the majority of readers, and the latter by libraries.
Unbranded products, like open tea are sold at lower prices than branded
products like brooke bond or lipton tea. Economy size tooth pastes are
relatively cheaper than ordinary sized tooth pastes. In the case of services
too, such price discrimination is practiced when off-season rates of holds at
hill stations are very low as compared to the peak season. Dry cleaning firms charge for two while they
clean three clothes during off season where as they charge more for quick
service in peak season.
iii. Price discrimination related to the age, gender and status: price discrimination is also related to the age, gender and status
of the customers. Barbers charge less for children‟s haircuts. Certain cinema
halls admit ladies only at lower rates. Military personnel in uniform are
admitted at concessional rates in all cinema houses.
iv. Discrimination is also based on the time of service: Cinema houses at certain places, like new delhi, charge half the
rates in the morning show than in the afternoon shows.
v. Geographical or local discrimination: There is geographical or local discrimination when a monopolist
sells in one market at a higher price than in the other market.
vi. Discrimination based on the use of the product: Railways charge different rates for different compartments or for
different services. Less is charged for the transportation of coal than for
bales of cloth on the same route. State power boards charge low rates for
industrial use than for domestic consumption of electricity.
THE VARIOUS CONDITIONS OF PRICE DISCRIMINATION
i. Market imperfection: The individual seller is able to divide and keep his market into
separate parts only if it is imperfect. Customers do not move readily from one
market to the other because of ignorance.
ii. Agreement between rival sellers: price discrimination also takes place when the seller of a
commodity is a monopolist or when rivals enter into an agreement for the sale
of the product at different prices to different customers. This is usually
possible in the sale of direct services.
iii. Geographical and tariff barriers: The monopolist may discriminate between home and foreign buyers by
selling at a lower price in the foreign market than in the domestic market.
This type of discrimination is known as dumping
iv. Differential products: Discrimination is possible when buyers need the same service in
connection with differential products.
v. Ignorance of buyers: Discrimination also occurs when small manufacturers sell goods
made to order. They charge different rates to different buyers depending upon
the intensity of their demand for the product
vi. Artificial difference between goods: A monopolist may create artificial difference by presenting the
same commodity in different quantities. He may present it under different names
and lables, one for rich and snobbish buyers and the other for the ordinary.
Thus he may charge different prices for substantially the same product.
vii. Difference in demand: For price discrimination, the demand in the separate markets must
be considerably different. Different prices can be charged in separate markets
based on differences of elasticity of demand, low price is charged where demand
is more elastic and high price in the market with the less elastic demand.
3.
Discuss various
features of monopolistic competition?
Monopolistic competition refers to a market situation where are
many firms selling a differentiated product.
THE VARIOUS FEATURES OF
MONOPOLISTIC COMPETITION
i.
Large number of sellers: In monopolistic competition the number of sellers is large. No
seller by changing its price-output policy can have any perceptible effect on
the sales of others and in turn be influenced by them.
ii.
Product Differentiation: One of the most important features of the monopolistic competition
is product differentiation. “A general class of product is differentiated if
any significant basis exists for distinguishing the goods(or services) of one
seller from those of another “.
iii.
Freedom of Entry and Exit of firms: Another features of monopolistic competition is the freedom of
entry and exit of firms. The fact that firms are small size and are capable of
producing close subsitiutes make it possible for them to leave or enter the industry
or group in the long run. In fact, product differentiation tends to increase
rather than reduce the entry of new firms in the group, for each firm produces
a distinct product from the other.
iv.
Nature of Demand Curve: Under monopolistic competition no single firm controls more than a
small portion of the total output of a product. No doubt there is an element of
differentiation, nevertheless the products are close substitutes. As a result,
a reduction in its price will increase the sales of the firm but it will have
little effect on the price-output conditions of other firms, each will lose
only a few of its customers. Likewise, an increase in its price will reduce its
demand substantially but each of its rivals will attracts only a few of its customers. Therefore, the demand curve (average
revenue curve) of a firm under monopolistic competition slopes downward to the
right.
4.
Discuss on the criticism of excess
capacity under monopolistic competition?
i. Restriction of output: One
of the workers of imperfect competition is the restriction of output so that
price is kept higher than the marginal cost.
ii. Competitive advertisement: Expenditure
on competitive advertisement is usually regarded as a waste of competition.
iii. Cross-Transport: Another
similar waste is “expenditure” on cross-transport.
iv. Specialization: The failure
of each firm is an industry to specialization in the production of those things
for which it is best suited.
v. Valuable resources are wasted: Valuable
resources are wasted because of excess capacity resulting in idle plant and
manpower in each firm.
vi. Prevent Standardization: Imperfect
competition may prevent that standardization of commodities which is essential
if the most efficient methods of production are to be adopted.
vii. Excess capacity: Monopolistic
competition has also been criticized on the ground that the firms under this
type of market operate with excess capacity.
5.
Define Oligopoly and characteristic
features?
OLIGOPOLY
It is a market situation in which
there are a few firms selling homogenous or differentiated products. It is
difficult to pinpoint the number of firms in the oligopolistic market. There
may be three, four or five firms. It is also known as competition among the
few.
CHARACTERISTIC FEATURES OF OLIGOPOLY
i. Interdependence: There
is a recognized interdependence among the sellers in the oligopolistic market.
ii. Advertisement: One
producer’s fortunes are dependent on the policies and fortunes of the other
producers in the industry. It is for this reason that oligopolistic firms spend
much on advertisement and customer services.
iii. Competition: In
oligopolistic market, each seller is always on the alert over the moves of its
rivals in order to have a counter-move.
iv. Barriers to Entry of Firms: As there is keen competition in an oligopolistic industry, there
are no barriers to entry into or exit from it.
v. Lack of Uniformity: In oligopoly market, there is a lack of uniformity in the size of
firms.
vi. Demand Curve: Under oligopoly, the exact behaviour pattern of a producer cannot
be ascertained with certainty his demand curve cannot be drawn accurately.
vii. No Unique Pattern of Pricing
Behaviour: The rivalry arising from
interdependence among the oligopolists leads to two conflicting motives. So it
is not possible to predict any unique pattern of pricing behavior in oligopoly
markets.
