AKGEC/IAP/FM/01

AJAY KUMAR GARG ENGINEERING COLLEGE, GZB

DEPT. OF APPLIED SC. AND HUMANITIES
SESSIONAL TEST- 1
B.Tech: V Sem
Subject: Engineering & Managerial Economics
Section: A, B, C, D, E, F, G, H, I, J, K
Max. Marks: 30

Course: EHU-501
Time: 1 Hrs.

Note-1. All questions are compulsory

2. All questions carry equal marks
Q-1. Managerial economics plays a crucial role in engineering. Comment and explain various
differences
between
macro
and
micro
economics.
(10)
Ans- Engineering is pool of knowledge. It is science or systematic knowledge of industrial art.
There four major roots of modern technology. These are the reorganization of labour, the use of
machines in manufacturing, the exploitation of man made material and application of new sources
of energy. Economic development takes place even through a natural process. But the rate of such
natural development is very slow. The economic development depends upon the rate of economy
growth; itself is the result of greater productivity. In process of production, the most important
factor is technology. Technologies progress results from new and improved way of accomplishing
traditional task. Technology can be divided into three categories. These are neutral technology,
capital saving and labour augmenting. Technology facilities process of production in agriculture
and industrial sectors. Production can be carried out with the help of old machines and techniques.
But the use of new machines and techniques results in more output of a country leads to more
volume of Gross Nominal Product. A continuous increase in the national income of a country may
result in visible economic development. The use of modern technology effectively required to
fulfill certain preconditions.
Micro Economics: It deals with an individual's economic behavior.
It deals with the pricing of a particular commodity in an industry.
It deals with the income of a particular set of people.
Study of micro economics is important for resource utilization, public finance, and for taking
business decisions.
The concepts of micro-economics are independent concepts.
The concepts were popularized by the famous Alfred Marshall.
These concepts have more theoretical value.
Macro Economics: It deals with aggregate economic behavior of the people in general.
It deals with the general price level in the economy, National income accounting, etc.

Study of macro economics is important for formulation of economic policy of the whole nation.

The concept of macro economics is interdependent on one another.

Q-2. What are the various demand determinants? Explain the concept of price elasticity of
demand with the help of suitable examples.
(10)

Ans- Determinants of demand

After having understood the nature of demand and law of demand, it is easy to ascertain the
determinants of demand. We have mentioned above that an individual demand for a commodity
depends on desire for the commodity and his capability to purchase it. The desire to purchase is
revealed by tastes and preferences of the individuals. The capability to purchase depends upon his
purchasing power, which in turn depends upon his income and price of the commodity. Since an
individual purchases a number of commodities, how much quantity of a particular commodity he
chooses to purchase depends upon the price of that particular commodity and prices of the other
commodities, beside his income?
Prices of related commodities
When a change in price of the other commodity leaves the amount demanded of the commodity under
consideration unchanged, we say that the two commodities are unrelated, otherwise these are related.
The related commodities are of two types substitutes and complements. When the price of one
commodity and the quantity demanded of the other commodity move in the same direction (i.e., both
increase together and decrease together).
Income of the individual
The amount demanded of a commodity also depends upon the income of an individual. With an
increase in income, increased amount of most of the commodities in his consumption bundle, though
the extent of the increase may differ between commodities.
Tastes and preferences
It is quite well that the change in tastes and preferences of consumers in favor of a commodity results
in smaller demand for the commodity. Modern business firms, which sell product with different brand
names, rely a great deal on influencing tastes and preferences of households in favor of their products
(with the help of advertisements, etc.) in order to bring about increase in demand of their products.
Tastes of the consumers
The amount demanded also depends on consumers taste. Tastes include fashion, habit, customs, etc. A
consumers taste is also affected by advertisement. If the taste for a commodity goes up, its amount
demanded is more even at the same price and vice-versa.

Wealth
The amount demanded of a commodity is also affected by the amount of wealth as well as its
distribution. The wealthier are the people, higher is the demand for normal commodities. If wealth is
more equally distributed, the demand for necessaries and comforts is more. On the other hand, if some
people are rich, while the majority is poor, the demand for luxuries is generally less.
Expectations regarding the future
If consumers expect changes in price of a commodity in future, they will change the demand at present
even when the present price remains the same. Similarly, if consumers expect their incomes to rise in
the near future, they may increase the demand for a commodity just now.
Climate and weather
The climate of an area and the weather prevailing there has a decisive effect on consumers demand. In
cold areas, woolen cloth is demanded. During hot summer days, ice is very much in demand. On a
rainy day, ice-cream is not so much demanded.
State of business
The level of demand for different commodities also depends upon the business conditions in the
country. If the country is passing through boom conditions, there will be a marked increase in demand.
On the other hand, the level of demand goes down during depression.
Elasticity:
Elasticity is the ratio of the percent change in one variable to the percent change in another variable. It
is a tool for measuring the responsiveness of a function to changes in parameters in a unit-less way.
Price elasticity of demand -Price elasticity of demand measures the percentage change in quantity
demanded caused by a percent change in price. As such, it measures the extent of movement along the
demand curve. This elasticity is almost always negative and is usually expressed in terms of absolute
value. If the elasticity is greater than 1 demand is said to be elastic; between zero and one demand is
inelastic and if it equals one, demand is unit-elastic.
SignificanceThe concept of elasticity has an extraordinarily wide range of applications in economics. In particular,
an understanding of elasticity is fundamental in understanding the response of supply and demand in a
market.

Effect of changing price on firm revenue.

Analysis of incidence of the tax burden and other government policies.
Price elasticity of demand can be used as an indicator of industry health, future consumption
patterns and as a guide to firms investment decisions.
Effect of international trade and terms of trade effects.

Analysis of consumption and saving behavior.

Analysis of advertising on consumer demand for particular goods.

Q-3. Discuss any two methods of demand forecasting and explain short run production
function briefly with suitable graph.
Ans- - Expert Opinion Method
The Delphi technique helps to capture the knowledge of diverse experts while avoiding the
disadvantages of traditional group meetings. The latter include bullying and time-wasting.
To forecast with Delphi the administrator should recruit between five and twenty suitable experts and
poll them for their forecasts and reasons. The administrator then provides the experts with anonymous
summary statistics on the forecasts, and experts reasons for their forecasts. The process is repeated
until there is little change in forecasts between rounds two or three rounds are usually sufficient. The
Delphi forecast is the median or mode of the experts final forecasts.
The forecasts from Delphi groups are substantially more accurate than forecasts from unaided
judgment and traditional groups, and are somewhat more accurate than combined forecasts from
unaided judgment.
Merits
- Allows participants to remain anonymous
- Inexpensive
- Free of social pressure, personality influence and individual dominance
- A reliable judgment or forecast results
- Allows sharing of information and reasoning among participants
-Conducive to independent thinking and gradual formulation
- A well-selected respondent panel that can provide a broad analytical perspective on potential growth
impacts
- Can be used to reach consensus among groups hostile to each other
Demerits
- Judgments are those of a selected group of people and may not be representative
- Tendency to eliminate extreme positions and force a middle-of-the-road consensus
- More time-consuming than the group process method
- Should not be viewed as a total solution to forecasting
- Requires skill in written communication
- Requires adequate time and participant commitment
Ex post studies of demand forecasts
Ex post studies compare actual with predicted outcomes of forecasts. Such studies generally find
demand forecasts to be highly inaccurate. For instance, a statistically valid study of demand forecasts
in 210 large public works projects, led by Oxford University professor Bent Flyvbjerg, found that for
rail projects the average demand (passenger) forecast was overestimated by a full 106 percent. For
roads, half of all demand (vehicle) forecasts were wrong by more than 20 percent; a fourth of forecasts
were wrong by more than 40 percent.

Short run production function

The Law of Variable Proportions Is also called the Law of Decreasing marginal returns. It states that
An increase in some inputs relative to other fixed inputs will, in a given state of technology, cause the
output to increase, however after a certain point extra output resulting from the same additions of extra
inputs will become less and less ".
Relationship between TP & MP
1. When TP increases at increasing rate, MP also increases.
2. When TP starts increasing at decreasing rate, MP decreases but remains positive
3. When TP is maximum & constant MP is O (zero)
4. When TP begins to fall, MP is negative
Relationship between AP & MP
1. Both AP & MP cures are derived from TP since, AP = TP & MP = TP
L
L
2. When MP is greater than AP, AP rises but MP rises at faster pace.
3. When MP equals to AP, AP is constant
4. When MP is less than AP, AP falls but MP falls at higher rate
Law of variable proportions or Returns to factor
It states that as more & more units of a variable factor are applied to a given quantity of a fixed factor
the total product may increase at an increasing rate initially but eventually it will increase at a
diminishing rate.
Assumptions
1. The law applies only in the short run.
2. One factor of production is variable & others are fixed.
3. All units of variable factor are homogeneous.
4. State of technology is given & remains the same.
5. Factor proportions can he changed.

There are 3 stages of law of Variable proportions

1. Increasing returns: - In this stage, TP increase at increasing rate & later at the diminishing
rate.
AP increases & reaches at its maximum
MP initially increases then starts decreasing but continues to remain above AP
2. Diminishing Return :- TP increases at a diminishing rate till it reaches at maximum point &
then becomes constant
AP continues to fall
MP decreases & finally becomes zero (o).
3. Negative Returns :- TP begins to fall AP continues to fall but remains positive
MP becomes negative
Causes of 3 stages of Law of variable proportion
Increasing return to a factor:(i)

Fuller utilization of fixed factor : In the initial stages Fixed factor remain under
utilized its fuller utilization starts with the more application of variable factor, hence,
initially additional unit of variable factors add more to the total output

(ii)

2.

Specialization of Labour: - Additional application of Variable factor causes process

based division of Labour that raises the efficiency of factors. Accordingly marginal
productivity tends to rise.
Diminishing return to a factor:-

(i)

Imperfect factor substitutability: - Factors of production are imperfect substitutes of

each other. More & more of Labour, for eg. Cannot be continuously used in place of
additional capital. Accordingly diminishing returns to variable factor becomes
inevitable.

(ii)

Disturbing the optimum proportion: - Continuous increase in application of variable

factor along with fixed factors beyond a point crosses the limit of ideal factor ratio. This
results in poor co-ordination between the fixed & variable factors which causes
diminishing return to a factor.

3.

Negative returns to a factor :(i)

(ii)

Overcrowding :- When more & more variable factors are added to a given quantity of
fixed factor it will lead to over crowding & due to this MP of the Labours decreases & it
goes into negative
Management Problems: - When there are too many workers they may shift the
responsibility to others & it becomes difficult for the management to coordinate with
them. The Laborers avoid doing work. All these things lead to decrease in efficiency of
Laborers. Thus the output also decreases.

A rational producer would always prefer to operate in the 2nnd stage. He will not stay in Ist stage
because it is the stage of increasing returns under no circumstances he will also not operate under 3 rd
stage where the total product starts decreasing. The 1st & 3rd stages are called stages of economic
absurdity hence a rational producer would like to operate in 2nd stage because it is the stage where AP
& MP of variable factor are declining but remain positive thus this is the best stage to work.