MBA Semester I Assignment 2 - Marks 60 (6X10=60)

MB0042 - Managerial Economics - 4 credits

Subject Code -

MB0042

*** Please fill in all the details in complete and only in CAPITAL letters

Name

BIPIN PRASAD

Registration Number

1205011977

INSTRUCTIONS FOR ASSIGNMENT SUBMISSION

1. Completed assignments must be typed and formatted neatly and soft copies should be uploaded on or before the dates mentioned above. (September 15,2012) 2. Ensure that you answer all questions according to the marks allocated.

3. Content that has been directly copied from the Internet or the Book will NOT be accepted. 4. Please attempt all the assignments individually and independently. Assignments that have been copied and shared among students will be automatically rejected and disqualified. 5. Please attach correct assignments to correct subjects. Incase of any errors the student will be marked absent for the specific subject 6. Late submissions will NOT be accepted. 7. Follow assignment format and complete all the details for each assignment individually. 8. Roll no/Registration Number found mentioned anywhere else except the place provided, the assignments will be rejected. 9. Incase students extra details like contact number, Name found listed anywhere on this document, the assignments will be rejected.

Note: Each question carries 10 Marks. Answer all the questions.

Q1. Discuss the various measures that may be taken by a firm to counteract the evil effects of a trade cycle. Answer: By the end of the 19th century, however, many economists had begun to recognize that economies were cyclical by their very nature, and studies increasingly turned to determining which factors were primarily responsible for shaping the direction and disposition of national, regional, and industry-specific economies. Today, economists, corporate executives, and business owners cite several factors as particularly important in shaping the complexion of business environments. VOLATILITY OF INVESTMENT SPENDING Variations in investment spending are one of the important factors in business cycles. There are several reasons for the volatility that can often be seen in investment spending. One generic reason is the pace at which investment accelerates in response

to upward trends in sales. This linkage, which is called the acceleration principle by economists, can be briefly explained as follows. Suppose a firm is operating at full capacity. MOMENTUM Many economists cite a certain "follow-the-leader" mentality in consumer spending. In situations where consumer confidence is high and people adopt more free-spending habits, other customers are deemed to be more likely to increase their spending as well. Conversely, downturns in spending tend to be imitated as well. TECHNOLOGICAL INNOVATIONS Technological innovations can have an acute impact on business cycles. Indeed, technological breakthroughs in communication, transportation, manufacturing, and other operational areas can have a ripple effect throughout an industry or an economy.There are many reasons why the pace of technological innovations varies. Major innovations do not occur every day. Nor do they take place at a constant rate. Chance factors greatly influence the timing of major innovations, as well as the number of innovations in a particular year. Economists consider the variations in technological innovations as random (with no systematic pattern). Thus, irregularity in the pace of innovations in new products or processes becomes a source of business fluctuations. VARIATIONS IN INVENTORIES Variations in inventoriesexpansion and contraction in the level of inventories of goods kept by businessesalso contribute to business cycles. Inventories are the stocks of goods firms keep on hand meeting demand for their products. How do variations in the level of inventories trigger changes in a business cycle? Usually, during a business downturn, firms let their inventories decline. As inventories dwindle, businesses ultimately find themselves short of inventories. As a result, they start increasing inventory levels by producing output greater than sales, leading to an economic expansion. FLUCTUATIONS IN GOVERNMENT SPENDING Variations in government spending are yet another source of business fluctuations. This may appear to be an unlikely source, as the government is widely considered to be a stabilizing force in the economy rather than a source of economic fluctuations or instability. Nevertheless, government spending has been a major destabilizing force on several occasions, especially during and after wars. POLITICALLY GENERATED BUSINESS CYCLES Many economists have hypothesized that business cycles are the result of the politically motivated use of macroeconomic policies (monetary and fiscal policies) that are designed to serve the interest of politicians running for re-election. The theory of political business cycles is predicated on the belief that elected officials (the president, members of congress, governors, etc.) have a tendency to engineer expansionary macroeconomic policies in order to aid their re-election efforts. MONETARY POLICIES Variations in the nation's monetary policies, independent of changes induced by political pressures, are an important influence in business cycles as well. Use of fiscal policy increased government spending and/or tax cutsis the most common way of boosting aggregate demand, causing an economic expansion. Moreover, the decisions of the

Federal Reserve, which controls interest rates, can have a dramatic impact on consumer and investor confidence as well. FLUCTUATIONS IN EXPORTS AND IMPORTS The difference between exports and imports is the net foreign demand for goods and services, also called net exports. Because net exports are a component of the aggregate demand in the economy, variations in exports and imports can lead to business fluctuations as well. There are many reasons for variations in exports and imports over time Q2. Define the term equilibrium. Explain the changes in market equilibrium and effects to shifts in supply and demand. Answer: The term equilibrium means, a state of even balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized by absence of change. It is a state where there is complete agreement of the economic plans of the various market participants so that no one has a tendency to revise or alter his decision. It means a state of even balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized by absence of change. It is a state where there is complete agreement of the economic plans of the various market participants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta: Equilibrium denotes in economics absence of change in movement. Market Equilibrium There are two approaches to market equilibrium viz., partial equilibrium approach and the general equilibrium approach. The partial equilibrium approach to pricing explains price determination of a single commodity keeping the prices of other commodities constant. On the other hand, the general equilibrium approach explains the mutual and simultaneous determination of the prices of all goods and factors. Thus it explains a multi-market equilibrium position. Earlier to Marshall, there was a dispute among economists on whether the force of demand or the force of supply is more important in determining price. Marshall gave equal importance to both demand and supply in the determination of value or price. He compared supply and demand to a pair of scissors We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. Thus neither the upper blade nor the lower blade taken separately can cut the paper; both have their importance in the process of cutting. Likewise neither supply alone, nor demand alone can determine the price of a commodity, both are equally important in the determination of price. But the relative importance of the two may vary depending upon the time under consideration. Thus, the demand of all consumers and the supply of all firms together determine the price of a commodity in the market.

Market equilibrium and effects

Equilibrium between demand and supply price is obtained by the interaction of these two forces. Price is an independent variable. Demand and supply are dependent variables. They depend on price. Demand varies inversely with price; arise in price causes a fall in demand and a fall in price causes a rise in demand. Thus the demand curve will have a downward slope indicating the expansion of demand with a fall in price and contraction of demand with a rise in price. On the other hand supply varies directly with the changes in price, a rise in price causes arise in supply and a fall in price causes a fall in supply. Thus the supply curve will have an upward slope. At a point where these two curves intersect with each other the equilibrium price is established. At this price quantity demanded is equal to the quantity demanded. This we can explain with the help of a table and a diagram

In the table at Rs.20 the quantity demanded is equal to the quantity supplied. Since the price is agreeable to both the buyer and sellers, there will be no tendency for it to change; this is called equilibrium price. Suppose the price falls to Rs.5 the buyer will demand 30 units while the seller will supply only 5 units. Excess of demand over supply pushes the price upward until it reaches the equilibrium position supply is equal to the demand. On the other hand if the price rises to Rs.30 the buyer will demand only 5 units while the sellers are ready to supply 25 units. Sellers compete with each other to sell more units of the commodity. Excess of supply over demand pushes the price downward until it reaches the equilibrium. This process will continue till the equilibrium price of Rs.20 is reached. Thus the interactions of demand and supply forces acting upon each other restore the equilibrium position in the market. In the diagram DD is the demand curve, SS is the supply curve. Demand and supply are in equilibrium at point E where the two curves intersect each other. OQ is the equilibrium output. OP is the equilibrium price. Suppose the price OP2 is higher than the equilibrium price OP. at this point price quantity demanded isP2D2. Thus D2S2 is the excess supply which the seller wants to push into the market, competition among the sellers will bring down the price to the equilibrium level where the supply is equal to the demand. At price OP1, the buyers will demand P1D1 quantity while the sellers are ready to sell P1S1. Demand exceeds supply. Excess demand for goods pushes up the price; this process will go until equilibrium is reached where supply becomes equal to demand.

Q3. What do you mean by pricing policy? Explain the various objective of pricing policy of a firm. Answer: Pricing Policies: A detailed study of the market structure gives us information about the way in which prices are determined under different market conditions. However, in reality, a firm adopts different policies and methods to fix the price of its products. Pricing policy refers to the policy of setting the price of the product or products and services by the management after taking into account of various internal and external factors, forces and its own business objectives. Pricing Policy basically depends on price theory that is the corner stone of economic theory. Pricing is considered as one of the basic and central problems of economic theory in a modern economy. Fixing prices are the most important aspect of managerial decision making because market price charged by the company affects the present and future production plans, pattern of distribution, nature of marketing etc. They are as follows: 1) External Factors (Outside factors) 1. Demand, supply and their determinants. 2. Elasticity of demand and supply. 3. Degree of competition in the market. 4. Size of the market. 5. Good will, name, fame and reputation of a firm in the market. 6. Trends in the market. 7. Purchasing power of the buyers. 8. Bargaining power of customers 9. Buyers behavior in respect of particular product 2) Internal Factors (Inside Factors) 1. Objectives of the firm. 2. Production Costs. 3. Quality of the product and its characteristics. 4. Scale of production. 5. Efficient management of resources. 6. Policy towards percentage of profits and dividend distribution. 7. Advertising and sales promotion policies. 8. Wage policy and sales turn over policy etc. 9.The stages of the product on the product life cycle. 10. Use pattern of the product. The Following objectives are to be considered while fixing the prices of the product. 1. Profit maximization in the short term The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achieve this objective should be formulated in such a way as to maximize the sales revenue and profit. Maximum profit refers to the highest possible of profit. In the short run, a firm not only should be able to recover its total costs, but also should get excess revenue over costs. This will build the morale of the firm and instill the spirit of confidence in its operations. 2. Profit optimization in the long run The traditional profit maximization hypothesis may not prove beneficial in the long run. With the sole motive of profit making a firm may resort to several kinds of unethical practices like charging exorbitant prices, follow Monopoly Trade Practices (MTP), Restrictive Trade Practices (RTP) and Unfair Trade Practices (UTP) etc. This may lead to opposition from the people. 3. Price Stabilization

Price stabilization over a period of time is another objective. The prices as far as possible should not fluctuate too often. Price instability creates uncertain atmosphere in business circles. Sales plan becomes difficult under such circumstances4. Facing competitive situation One of the objectives of the pricing policy is to face the competitive situations in the market. In many cases, this policy has been merely influenced by the market share psychology. 5. Maintenance of market share Market share refers to the share of a firms sales of a particular product in the total sales of all firms in the market. The economic strength and success of a firm is measured in terms of its market share Hence, the pricing policy has to assist a firm to maintain its market share at any cost. Q4. Critically examine the Marris growth maximizing model. Answer: Profit maximization is traditional objective of a firm. Sales maximization objective is explained by Prof. Boumal. On similar lines, Prof. Marris has developed another alternative growth maximization model in recent years. It is a common factor to observe that each firm aims at maximizing its growth rate as this goal would answer many of the objectives of a firm. Marris points out that a firm has to maximize its balanced growth rate over a period of time. Marris assumes that the ownership and control of the firm is in the hands of two groups of people, i.e. owner and managers. He further points out that both of them have two distinctive goals. Managers have a utility function in which the amount of salary, status, position, power, prestige and security of job etc are the most import variable where as in case of are more concerned about the size of output, volume of profits, market shares and sales maximization. Utility function of the manager and that the owner are expressed in the following mannerIn view of Marris the realization of these two functions would depend on the size of the firm. Larger the firm, greater would be the realization of these functions and vice-versa. Size of the firm according to Marris depends on the amount of corporate capital which includes total volume of the asset, inventory level, cash reserve etc. He further points out that the managers always aim at maximizing the rate of growth of the firm rather than growth in absolute size of the firms. Generally managers like to stay in a grouping firm. Higher growth rate of the firm satisfy the promotional opportunity of managers and also the shareholders as they get more dividends. How Profit Maximization model differs from Sales Maximization model: The sale maximization model differs on the following grounds: 1. Emphasis is given on maximizing sales rather than profit. 2. Increase the competitive and operational ability of the company. 3. The amount of slack earning and salaries of the top managers are directly linked to it. 4. It helps in enhancing the prestige and reputation of top management, distributes more dividends to shareholders and increases the wage of the workers and keeps them happy.

 The financial and other lending institutions always keep a watch on the sales revenue of a firm as it is an indication of financial health of the firm. Q5. Explain how a product would reach equilibrium position with the help of ISO Quants and ISO-Cost curve Answer: When producing a good or service, how do suppliers determine the quantity of factors to hire? Below, we work through an example where a representative producer answers this question. Lets begin by making some assumptions. First, we shall assume that our producer chooses varying amounts of two factors, capital (K) and labor (L). Each factor was a price that does not vary with output. That is, the price of each unit of labor (w) and the price of each unit of capital (r) are assumed constant. Well further assume that w = $10 and r = $50. We can use this information to determine the producers total cost. We call the total cost equation an iso-cost line (its similar to a budget constraint). The producers iso-cost line is: 10L + 50K = TC (1) The producers production function is assumed to take the following form: q = (KL) 0.5 (2) Our producers first step is to decide how much output to produce. Suppose that quantity is 1000 units of output. In order to produce those 1000 units of output, our producer must get a combination of L and K that makes (2) equal to 1000. Implicitly, this means that we must find a particular isoquant. Set (2) equal to 1000 units of output, and solve for K. Doing so, we get the following equation for a specific isoquant (one of many possible iso-quants): K = 1,000,000/L (2a) For any given value of L, (2a) gives us a corresponding value for K. Graphing these values, with K on the vertical axis and L on the horizontal axis, we obtain the blue line on the graph below. Each point on this curve is represented as a combination of K and L that yields an output level of 1000 units. Therefore, as we move along this iso-quant output is constant (much like the fact that utility is constant as A basic understanding of statistics is a critical component of informed decision making. Q6. Suppose your manufacturing company planning to release a new product into market, Explain the various methods forecasting for a new product. Answer: When a manufacturing companies planning to release a new product into the market, it should perform the demand forecasting to check the demand of the product in the market and also the availability of similar product in the market. Demand forecasting for new products is quite different from that for established products. Here the firms will not have any past experience or past data for this purpose. An intensive study of the economic and competitive characteristics of the product should be made to make efficient forecasts. As per Professor Joel Dean, few guidelines to make forecasting of demand for new products are:

a. Evolutionary approach: The demand for the new product may be considered as an outgrowth of an existing product. For e.g., Demand for new Tata Indica, which is a modified version of Old Indica can most effectively be projected based on the sales of the old Indica, the demand for new Pulsor can be forecasted based on the sales of the old Pulsar. Thus when a new product is evolved from the old product, the demand conditions of the old product can be taken as a basis for forecasting the demand for the new product. b. Substitute approach: If the new product developed serves as substitute for the existing product, the demand for the new product may be worked out on the basis of a market share. The growths of demand for all the products have to be worked out on the basis of intelligent forecasts for independent variables that influence the demand for the substitutes. After that, a portion of the market can be sliced out for the new product. For e.g., A moped as a substitute for a scooter, a cell phone as a substitute for a land line. In some cases price plays an important role in shaping future demand for the product. c. Opinion Poll approach: Under this approach the potential buyers are directly contacted, or through the use of samples of the new product and their responses are found out. These are finally blown up to forecast the demand for the new product. d. Sales experience approach: Offer the new product for sale in a sample market; say supermarkets or big bazaars in big cities, which are also big marketing centers. The product may be offered for sale through one super market and the estimate of sales obtained may be blown up to arrive at estimated demand for the product. e. Growth Curve approach: According to this, the rate of growth and the ultimate level of demand for the new product are estimated on the basis of the pattern of growth of established products. For e.g., An Automobile Co., while introducing a new version of a car will study the level of demand for the existing car. f. Vicarious approach: A firm will survey consumers reactions to a new product indirectly through getting in touch with some specialized and informed dealers who have good knowledge about the market, about the different varieties of the product already available in the market, the consumers preferences etc. This helps in making a more efficient estimation of future demand.