Managerial Economics / Economics for Managers

S. No.

Questions

1.

Distinguish between the following:

a) Industry demand and Firm (Company) demand, b) Short-run demand and Long run demand, and
c) Durable goods demand and Non-durable goods demand.

2.

What are the problems faced in determining the demand for a durable good?
Illustrate with example of demand for households refrigerator or television set.
Analyze the method by which a firm can allocate the given advertising budget between
different media of advertisement.
What kind of relationship would you postulate between short-run and long-run average
cost curves when these are not U-shaped as suggested by the modern theories?
How do demand forecasting methods for new products vary from those for established products?

3.
4.
5.

Ans:- The demand forecasting method goes by the phrase "supply and demand" as the forecasting
method provides products both currently and popularly in demand. Meanwhile, established products
work with the forecasting method as a means to remind everyone that there are products for those
whom could not otherwise afford a product similar to the one currently in demand by the suppliers
selling the product.

Input determines the quantity of output Ex. output depends upon input. In
starting point and output is the end point of production process and such
output relationship is called a production function. All factors of productio
labor, capital and technology are required in combination at a time to prod

commodity. In economics, production means creation or an addition of ut

Factors of production (or productive 'inputs' or 'resources') are any comm
or services used to produce goods or services
3-Production itself cannot have inelastic demand, only supply. I will look at both cases.
The demand for rice as a good is very inelastic. This is because people will buy rice no matter
the price, because in many places of the world, it is their main source of food. Recently rice
as skyrocketed in price (resulting in riots in places), but people still buy it. This is mainly
out of necessity, but alternatives are emerging.
The elasticity of supply is also inelastic, as we are looking at a huge rise in prices, but a very
small change in production.
Digram:-

6.

Is rice production consider as Inelastic demand or elastic demand?

What are the different methods of measuring national income? Which methods have been followed in India?
Ans:-

3 Important Methods for Measuring National Income

The national income of a country can be measured by three alternative meth

(i) Product Method (ii) Income Method, and (iii) Expenditure Method.

1. Product Method:
In this method, national income is measured as a flow of goods and services.

We calculate money value of all final goods and services produced in an econ

during a year. Final goods here refer to those goods which are directly consu
not used in further production process.

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Goods which are further used in production process are called intermediate goods.
In the value of final goods, value of intermediate goods is already included therefore
we do not count value of intermediate goods in national income otherwise there will be

double counting of value of goods.

To avoid the problem of double counting we can use the value-addition method in
which not the whole value of a commodity but value-addition (i.e. value of final good
value of intermediate good) at each stage of production is calculated and these are
summed up to arrive at GDP.
The money value is calculated at market prices so sum-total is the GDP at market
prices. GDP at market price can be converted into by methods discussed earlier.
2. Income Method:
Under this method, national income is measured as a flow of factor incomes. There
are generally four factors of production labour, capital, land and entrepreneurship.
Labour gets wages and salaries, capital gets interest, land gets rent and
entrepreneurship gets profit as their remuneration.
Besides, there are some self-employed persons who employ their own labour and
capital such as doctors, advocates, CAs, etc. Their income is called mixed income.
The sum-total of all these factor incomes is called NDP at factor costs.
3. Expenditure Method:
In this method, national income is measured as a flow of expenditure. GDP is
sum-total of private consumption expenditure. Government consumption
expenditure, gross capital formation (Government and private) and net exports
(Export-Import).
2-

Methods Of Measuring National Income

Posted by: BeenaaManivannan on 8:24 PM Categories: Fiscal Management

What is Measuring National Income:

Measures of national income and output are used in economics to estimate total economic ac

country or region, including gross domestic product (GDP), gross national product (GNP), and
income (NNI). In nutshell it is a measure how much output, spending and income has been
generated

in

given

tim

Methods:

1.Output Method: The total value of the output of goods and services produced in India. It i

total output of a nation by directly finding the total value of all goods and services a nation pr
method only the final value of a good or service is included in total output.

2. Income Method: The total income generated through production of goods and services. I
total
output of a nation by finding the total income received by the factors of production
3. Expenditure Method: The total amount of expenditure taking place in the economy. It is
output of a nation by finding the total amount of money spent. GDP = C + I + G + (X - M).

7.

What do you understand by the investment multiplier? In what way does it defend the policy of public works
on the part of the state during business depression?
Ans:- Investment Multiplier

In economics, the multiplier effect refers to the idea that an initial spending rise can lead to even greater increase in
national income. In other words, an initial change in aggregate demand can cause a further change in aggregate output
for the economy
investment multiplier is simply the multiplier effect of an injection of investment into an economy.
In general, a multiplier shows how a sum injected into an economy travels and generates more output.

For example: a company spends $1 million to build a factory. The money does not disappear, but rather becomes wages to
builders, revenue to suppliers etc. The builders will have higher disposable income as a result, so consumption, hence
aggregate demand will rise as well. Say that all of these workers combined spend $2 million dollars in total, since there was
an initial $1 million input which created a $2 million output, the multiplier is 2.
Another example is when a tourist visits somewhere they need to buy the plane ticket, catch a taxi from the airport to the
hotel, book in at the hotel, eat at the restaurant and go to the movies or tourist destination. The taxi driver needs petrol for
his cab, the hotel needs to hire the staff, the restaurant needs attendants and chefs, and the movies and tourist destinations
need staff and cleaners.
It must be noted that the extent of the multiplier effect is dependent upon the marginal propensity to consume and marginal
propensity to import. Also that the multiplier can work in reverse as well, so an initial fall in spending can trigger further falls
in aggregate output.
The basic formula for the economic multiplier, in macroeconomics, the change in equilibrium GDP divided by the change in
investment (i.e. the initial increase in spending).
It is particularly associated with Keynesian economics; some other schools of economic thought reject, or downplay the
importance of multiplier effects, particularly in the long run. The multiplier has been used as an argument for government
spending or taxation relief to stimulate aggregate demand.
The reader should know that "Keynesian economics" is something quite different from the "economics of Keynes". Thus the
"other" schools that reject the multiplier effects are those associated with the "economics of Keynes". This school sees the
so-called "multiplier effect" as being a variant of the "broken window fallacy" While there may indeed be some small short run
impact on unemployed resources from an "initial" cash infusion due to "money illusions", by definition, when inputs are fully
employed, by definition, there is no socially useful purpose served by this infusion, other than to fool people into working
harder than they wish, for the returns they receive by "working".

8.

The concept of the economic multiplier on a macroeconomic scale can be extended to any economic region. For example,
building a new factory may lead to new employment for locals, which may have knock-on economic effects for the city or
region.
Discuss the various phases of business cycle:
Are cyclical fluctuations necessary for economic growth?
b. Suggest appropriate fiscal and monetary policies for depression