UACP13A Business Economics I

ACADEMIC YEAR: 2014 2015 REGULATION CBCS - 2012
UACP13A BUSINESS ECONOMICS -I

UNIT I INTRODUCTION OF BUSINESS ECONOMICS
TYPE: 100 THEORY
Questions and answers
PART A
1) What do you mean by business economics? (Nov/Dec 2013)

It is the application of economic theory and methodology to business. Business
involves decision-making..
2) Define business economics? (Apr-May 2015)

Siegel man has defined managerial economic (or business economic) as the
integration of economic theory with business practice for the purpose of facilitating
decision-making and forward planning by management.
3) What is the scope of business economics? (Nov/Dec 2013)

Demand Analysis and Forecasting
Cost and production Analysis.
Pricing Decisions, policies and practices.
Profit Management.
Capital Management.
4) State any two uses of Business Economics. .(April/May 2013)

Economics studies the vital question of satisfying human wants with scare
sources.
To knowledge of the subject tells how the complex forces work in the
economic systems.
5) Define Business profit maximizations.(April/May 2013)
In a competitive market only those firms survive which are able to market
profit.
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Though not perfect, profits the most efficient and reliable measure of the
efficiency of a firm
6) What is the difference between firm and industry?(Nov/Dec 2013)

There can be many firms inside an industry.
Industry is not entity while a firm is a company.
7) What is social Responsibility? ( Nov/Dec 2013, 2015)

Business is an economic activity, which is carried out on a regular basis to
Earn profit.
8) What is the Nature of Business Economics?

Traditional economic theory has developed along two lines; viz., Normative
and positive.
9) Write two point of social responsibility of business concern?

The activities of business towards the welfare of the society earn goodwill and
reputation for the business.
Every business is a part of the society. So for its survival and growth, support
from the society is very much essential.
10) Write various social responsibility of business concern?

Protection of environment
Regular supply of goods and services
Proper working conditions and welfare amenities
11) What is Profit maximization? (Apr-May 2015)

In economics, profit maximization is the short run or long run process by which a firm
determines the price and output level that returns the greatest profit.
12) What is Micro Economics? (Apr-May 2016)

Microeconomics is primarily concerned with the factors that affect individual
economic choices, the effect of changes in these factors on the individual

decisionmakers, how their choices are coordinated by markets, and how prices
and demand are determined in individuals.
13) Define Profit? (Apr-May 2016)

The surplus remaining after total costs are deducted from total revenue, and the
basis on which tax is computed and dividend is paid.
It is the best known measure of success in an enterprise
PART B
1) What are the significance of business economics? .(April/May 2013)
a) Satisfying human wants with scarce resources.
b) It explains the relationship between the producer and customer the labour and the
management, without the knowledge of the working of the economic system,
administrative will not be effective and it may even be impossible.
c) It given the businessmen and industrialists the knowledge of modern methods of
production and production at low cost.
d) Modern governments are actively engaged in economic planning.
e) The knowledge of economics is very essential for the finance Minister; it helps in
framing the just system of taxation.
2) Briefly explain the objectives of profit maximization. .(April/May 2013)

To increase the share holder wealth.
To increase the dividend to share holder.
To get reputation form society.
To sustain from the competitors.

3) Explain the objectives of business economics. ( Nov/Dec 2013)
Economic objectives of business:
Distributes or provides any good and services.
To run the business successfully it is necessary to earn profit.
Customer is ultimate source of happiness to a business.
Innovation is again an important objective of a business.

Social objective of Business:
Supply of quality goods and fair price..

Fair Deal to worker.
Fair Return to investors.
Fair deal with suppliers
4) What are the objectives of business? Explain. ( Nov/Dec 2013)
Profitability
Minimum cost maximum profit.
Productivity:
Employee training, equipment maintenance and new equipment purchase all go into
company productivity.
Customer service:
Keep your customer happy should be a primary objectives of your organization
Employee Retention:
Maintain a productive and positive employee environment improve retention,
Core values:
The companys core values become the objectives necessary to create a
positive corporate culture
Growth:
Historical data and future projection.
Maintaining financing:
Maintaining your ability to finance operations long term as well as short term.
Marketing:
Marketing is more than creating advertising and getting customer input on product
change.
5) Write the difference between business Economics and Managerial economics. (
Nov/Dec 2013)

BUSINESS ECONOMICS MANAGERIAL ECONOMICS

Business Economics has both micro and Managerial Economics is essentially
macro. micro
In character.
Economics is both positive and Managerial Economics is essentially
normative normative in nature.
Science.
Economics deals mainly with the Managerial Economics deals with the
theoretical aspect only. practical aspect.
Economics analyzes problems both from Managerial Economics studies the
micro and macro point of views. activities of an individual firm or unit.
Economics studies human behavior on Managerial Economics as it concerns

the basis of certain assumptions. Mainly with practical problems.
Under Economics we study only the Managerial Economics we have to study

economic aspect of the problems both the economic and non-economic
aspects of the problems
Economics studies principles underlying Managerial Economics we study mainly
rent, wages, interest and profits the
Principles of profit only.
6) Explain the feature of business economics. ( Nov/Dec 2013)

Traditional economic theory has developed along two lines; viz., normative
and positive.
Normative focuses on prescriptive statements, and help establish rules aimed
at attaining the specified goals of business.
However, if the firms are to establish valid decision rules, they must
thoroughly understand their environment.
7) Explain Objectives of profit maximization of the firm.

The Organic objectives of the business are classified into:
a. Survival
b. Growth
c. Prestige
a. Survival:
To survive means, to live longer. Survival is the primary and fundamental objective of
every business firm.
b. Growth:
It is the second major business objective after survival. Business takes place through
expansion and diversification. Business growth benefits promoters, shareholders,
consumers and the national economy
c. Prestige/Recognition:
Prestige means goodwill or reputation arising from success or achievement. This is the third
organic objective after survival and growth. To satisfy the human wants of the society
8. State Maximization of growth rate of a firm? (Apr-May 2015)
Robin Marris in his book The Economic Theory of Managerial Capitalism (1964)
has developed a dynamic balanced growth maximising model of the firm. He

concentrates on the proposition that modem big firms are managed by managers and
the shareholders are the owners who decide about the management of the firms.
The managers aim at the maximization of the growth rate of the firm and
the shareholders aim at the maximization of their dividends and share
prices. To establish a link between such a growth rate and the share prices of
the firm, Marris develops a balanced growth model in which the manager
chooses a constant growth rate at which the firms sales, profits, assets, etc.
grow.

If he chooses a higher growth rate, he will have to spend more on

advertisement and on R & D in order to create more demand and new
products. He will, therefore, retain a higher proportion of total profits for the
expansion of the firm. Consequently, profits to be distributed to shareholders in
the form of dividends will be reduced and the share prices will fall. The threat
of take-over of the firm will loom large among the managers.
As the managers are concerned more about their job security and growth
of the firm, they will choose that growth rate which maximizes the market
value of shares, give satisfactory dividends to shareholders, and avoid the
take-over of the firm. On the other hand, the owners (shareholders) also want
balanced growth of the firm because it ensures fair return on their capital. Thus
the goals of the managers may coincide with that of owners of the firm and both
try to achieve balanced growth of the firm.
PART C
1) Describe the nature, scope and significance of business economics. (April/May 2013)
Nature of Business Economics
Traditional economic theory has developed along two lines; viz.,
normative and positive.
Normative focuses on prescriptive statements, and help establish rules
aimed at attaining the specified goals of business.
However, if the firms are to establish valid decision rules, they must
thoroughly understand their environment.
Scope of business economics

As regards the scope of business economics, no uniformity of views
exists among various authors. However, the following aspects are said to
generally fall under business economics.
o Demand Analysis and Forecasting

o Cost and production Analysis.

o Pricing Decisions, policies and practices.
o Profit Management.
o Capital Management.
Significance Of Business Economics :

Business economics is concerned with those aspects of traditional economics
which are relevant for business decision making in real life.
Business economics takes the help of other disciplines having a bearing on the
business decisions in relation various explicit and implicit constraints subject
to which resource allocation is to be optimized.
Business economics makes a manager a more competent model builder.
Functional areas, such as finance, marketing, personnel and production,
business economics serves as an integrating agent by coordinating the
activities in these different areas.
2) Describe the social responsibility of business. ( Nov/Dec 2013)

Social responsibility has been construed as the social and economic goals of
the business units.
Responsibility involves efficiency in production.
Distributing them at the lowest possible price.
Utilizing the resource effectively,
The responsibility to customers
Share holders and
The community.
This may be include education , training, medical care, health cultural activity
and control pollution.
3. Write the difference between business Economics and Managerial economics.
BUSINESS ECONOMICS MANAGERIAL ECONOMICS

Business Economics has both micro Managerial Economics is essentially micro
and macro. in character

Economics is both positive and Managerial Economics is essentially

normative normative in nature
Science.
Economics deals mainly with the Managerial Economics deals with the
theoretical aspect only. practical aspect
Economics analyzes problems both Managerial Economics studies the activities
from micro and macro point of views. of an individual firm or unit
Economics studies human behavior on Managerial Economics as it concerns

the basis of certain assumptions. mainly with practical problems.
Under Economics we study only the Managerial Economics we have to study both
economic aspect of the problems the economic and non-economic aspects of
the problems
Economics studies principles Managerial Economics we study mainly the
underlying rent, wages, interest and Principles of profit only.
profits
3) Explain objectives of business profit maximization and Explain.

It is presumed that business has the only objective of earning profit. profit maximization the
business also has certain objectives towards the society as well as the nation.
I. Organic objectives
The Organic objectives of the business are classified into:
a. Survival
b. Growth
c. Prestige
a. Survival:
To survive means, to live longer. Survival is the primary and fundamental objective of
every business firm.

b. Growth:
It is the second major business objective after survival. Business takes place through
expansion and diversification. Business growth benefits promoters, shareholders,
consumers and the national economy.
c. Prestige/Recognition:
Prestige means goodwill or reputation arising from success or achievement. This is the
third organic objective after survival and growth. To satisfy the human wants of the
society
4) What are the social responsibilities of a business concern? Explains in detail. ( Nov/Dec
2013,Apr-May 2016)
Social responsibility has been construed as the social and economic goals of
the business units.
Responsibility involves efficiency in production.
Distributing them at the lowest possible price.
Utilizing the resource effectively,
The responsibility to customers
Share holders and
The community.
This may be include Education, training, medical care, health cultural activity
and control pollution.

ACADEMIC YEAR: 2016- 2017 REGULATION CBCS - 2012
UACP13A BUSINESS ECONOMICS -1

UNIT II DEMAND ANALYSIS
TYPE: 100 % THEORY
QUESTION BANK
Demand analysis Demand schedule- demand curve- Different types of elasticity of
demand- measurement-importance of elasticity of demand.
PART - A
1) What is demand Analysis? (Nov/Dec 2013, Apr. 2016)

2) Define law of demand .(April/May 2013)
3) What do you mean by elasticity of demand? (Nov/Dec 2013, 2015)
4) Define demand scheduling. .(April/May 2013 ,2015)
5) Define statistical methods of demand forecasting.
6) Write exceptions from the demand law.
7) What is price elasticity of demand?
8) Write point of measurement of demand?
9) What Arc methods of elasticity of demand?
10) What is cross elasticity of demand?
11) What is demand curve? (Nov 2014)
12) What is elasticity of demand? (Apr-May 2015 ,2016, Nov. 2016)
PART B
1) What is demand scheduled? Explain with suitable diagram. .(April/May 2013)
2) Briefly explain Income elasticity of demand. ? (Nov/Dec 2013)
3) Explain about demand curve. ? (Nov/Dec 2013)
4) What are the causes of changes in demand? .(April/May 2013)
5) What are the factors affecting demand?
6) Write Assumption of demand law.
7) Write reason for demand curve slope download. (Nov/Dec 2016)
8) Explain exceptions from the demand law? (Apr-2014, 2016)
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ACADEMIC YEAR: 2016- 2017 REGULATION CBCS - 2012
9) Explain the determinants of demand? (Apr-May 2015)

10) List out the various factors influencing elasticity demand.(Apr-May 2016)
PART C
1) Elucidate the different types of demand elasticity. What their uses? ?(Nov/Dec 2013)
2) Discuss about the measurement of elasticity of demand. ? (Nov/Dec 2013, 2016, Apr-
May2016)
3) What is demand law? Explain. (Nov/Dec 2013)
4) What are the factors influencing Demand? Explain.
5) Discuss about demand analysis? (Nov 2014)
6) Describe the various methods of demand forecasting?(APR-May 2015)
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UACP 13A- BUSINESS ECONOMICS-I

UNIT-3 UTILITY ANALYSIS
100% Theory
Answers
PART A QUESTION
1. What is break-even point?(Nov-14)
The break-even point (BEP) in economics, business, and specifically cost accounting,
is the point at which total cost and total revenue are equal: there is no net loss or
gain, and one has "broken even." A profit or a loss has not been made,
2. Write any two-substitute product? (Nov-14)
Substitute goods or substitutes are products that a consumer perceives as similar or

comparable, so that having more of one product makes them desire less of the other
product. Formally, X and Y are substitutes if, when the price of X rises, the demand
for Y rises.
Tea
Coffee
3. What is meant by utility?(Nov/Dec-11)

Large firm that owns and/or operates facilities used for generation and transmission
or distribution of electricity, gas, or water to general public.
4. Draw an indifference curve? (Nov/Dec-11)

Indifference curves are lines in a coordinate system for which each of its points
express a particular combination of a number of goods or bundles of goods that the
consumer is indifferent to consume.
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5. What cardinal analysis? (Nov-14)

In economics, a cardinal utility function or scale is a utility index that
preserves preference orderings uniquely up to positive affine transformations.
6. What total utility analysis? (Apr/May-14)

The aggregate level of satisfaction or fulfillment that a consumer receives through the
consumption of a specific good or service
7. What do you know about indifference curve? (Apr/May-14)

Consumer theory uses indifference curves and budget constraints to generate consumer
demand curves. For a single consumer, this is a relatively simple process. First, let one good
be an example market e.g., carrots, and let the other be a composite of all other goods.
8. What is excess profit? (Apr/May-14)

A level of profit that is higher than a level regarded as normal
9. Define profit?
A financial benefit that is realized when the amount of revenue gained from a business
activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that
is gained goes to the business's owners, who may or may not decide to spend it on the
business.
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10. What is utility? (Apr/May-14)

In economics, utility is a measure of preferences over some set of goods and services. The
concept is an important underpinning of rational choice theory.
11. What is indifference curve? (Apr/May-14)

In microeconomic theory, an indifference curve is a graph showing different
bundles of goods between which a consumer is indifferent. That is, at each point on the
curve, the consumer has no preference for one bundle over another
12. What is rent theory of profit?

The Rent Theory of Profit, as it may be called, was propounded by the American
economist, FA. Walker. He was the first to introduce a distinction between a capitalist
and an employer. An entrepreneur need not be a capitalist. He is a person who may
undertake a business without using any of his own capital.
13. What is Schumpeter theory profit?
Schumpeterian profits are defined as those profits that arise when firms are able to
appropriate the returns from innovative activity. We first show the underlying equations for
Schumpeterian profits.
PART B
1. Explain the innovation theory of profit? (Nov-14)
Innovation profit is the economic profit generated by a firm or production activity that
arises due to the introduction and application of an innovation. The innovation might be a
new product or a new production technique or a new technology or any of a myriad of
changes in existing institutional changes that benefit society. The profit generated is
usually measured in monetary terms, but can also accrue in other non monetary ways.
Profit Types
Normal Profit: The first notion of profit is the opportunity cost of using
entrepreneurial abilities in the production of a good, or the profit that could have been
received by entrepreneurship in another business venture. Like the opportunity costs
of other resources, normal profit is a cost that is deducted from revenue when
determining economic profit.
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Economic Profit: The notion of profit preferred in economics is the difference

between the total revenue received by a firm and the total opportunity cost of
production, including normal profit. Economic profit is what remains after ALL
opportunity cost associated with production, the opportunity cost incurred by ALL
factors of production, is deducted from the revenue generated by the production.
Economic profit is the "conceptually correct" notion of profit used in economics.
Monopoly Profit: This is economic profit generated as a result of a firm's market
control. It is termed monopoly profit as a reflection of the most prominent market
structure with market control--monopoly. However, any market structure with market
control, including oligopoly and monopolistic competition, can generate monopoly
profit. The existence of monopoly profit is an indication that a firm is NOT efficiently
allocating resources. While market control in no way guarantees that a firm receives
monopoly profit, there is no way to obtain monopoly profit WITHOUT market
control.
2. What are the assumptions of diminishing marginal utility? (Nov-14)
The law of DMU operates under certain specific conditions. Economists call them the
assumptions of this law.
These are as follows:

1. Cardinal measurement of utility:
It is assumed that utility can be measured and a consumer can express his satisfaction in
quantitative terms such as 1, 2, 3, etc.
2. Monetary measurement of utility:

It is assumed that utility is measurable in monetary terms.
3. Consumption of reasonable quantity:

It is assumed that a reasonable quantity of the commodity is consumed. For example, we
should compare MU of glassfuls of water and not of spoonfuls. If a thirsty person is given
water in a spoon, then every additional spoon will yield him more utility. So, to hold the law
true, suitable and proper quantity of the commodity should be consumed.
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4. Continuous consumption:
It is assumed that consumption is a continuous process. For example, if one ice-cream is
consumed in the morning and another in the evening, then the second ice-cream may
provide equal or higher satisfaction as compared to the first one.
5. No change in Quality:
Quality of the commodity consumed is assumed to be uniform. A second cup of ice-cream
with nuts and toppings may give more satisfaction than the first one, if the first ice-cream
was without nuts or toppings.
6. Rational consumer:
The consumer is assumed to be rational who measures, calculates and compares the utilities
of different commodities and aims at maximizing total satisfaction.
7. Independent utilities:
It is assumed that all the commodities consumed by a consumer are independent. It means,
MU of one commodity has no relation with MU of another commodity. Further, it is also
assumed that one persons utility is not affected by the utility of any other person.
8. MU of money remains constant:

As a consumer spends money on the commodity, he is left with lesser money to spend on
other commodities. In this process, the remaining money becomes dearer to the consumer
and it increases MU of money for the consumer. But, such an increase in MU of money is
ignored. As MU of a commodity has to be measured in monetary terms, it is assumed that
MU of money remains constant.
9. Fixed Income and prices:

It is assumed that income of the consumer and prices of the goods which the consumer
wishes to purchase remain constant.
3. Examine Schumpeters theory of profit? (Nov/Dec-11)
Schumpeter classifies innovation into five categories as follows:

(i) Introduction of new type of goods.
(ii) Introduction of new methods of production.
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(iii) Opening of new markets.
(iv) Discovering of new sources of raw materials.
(v) Change in the organization of an industry, like the creation of a monopoly, trust, or
cartel or breaking up of a monopoly, cartel, etc.
Innovation, however, does not arise spontaneously. It must be actively promoted by

some agency in the economic system. Such an agent, according to Schumpeter, is an
entrepreneur, entrepreneurs are innovators.
To carry cut his innovative function, the entrepreneur needs two things. First, he must
have the technical knowledge to produce new products or new services. Second, since the
introduction of innovation presupposes the diversion of the means of production from the
existing to new channels, the entrepreneur must also possess the power of disposal over the
factors of production.
The necessary command over the productive factor is provided by the monetary factor
in the form of credit. The entrepreneur secures funds for his project not from saving out of his
own income but from the crediting bank system.
Thus, money capital and bank credit play a significant role in the Schumpeterian
theory. According to Schumpeter, credit is important only in so far as the innovation is
concerned in the context of a progressing economy, and only if the innovator requires credit
to carry on his function, i.e., innovative activity. In the absence of innovation, in a circular
flow of money economy, where Says Law of Market operates in toto, no credit is required.
4. Explain law of equi-marginal utility concept? (Nov/Dec-11)
Law of Equi Marginal Utility:
The law of equi marginal utility was presented in 19th century by an Australian
economists H. H. Gossen. It is also known as law of maximum satisfaction or law of
substitution or Gossen's second law. A consumer has number of wants. He tries to spend
limited income on different things in such a way that marginal utility of all things is equal.
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When he buys several things with given money income he equalizes marginal utilities of all
such things. The law of equi marginal utility is an extension of the law. The consumer can
get maximum utility by allocating income among commodities in such a way that last dollar
spent on each item provides the same marginal utility.
Assumptions of the Law of Equi Marginal Utility:
1. There is no change in the prices of the goods.

2. The income of consumer is fixed.
3. The marginal utility of money is constant.
4. Consumer has perfect knowledge of utility obtained from goods.
5. Consumer is normal person so he tries to seek maximum satisfaction.
6. The utility is measurable in cardinal terms.
7. Consumer has many wants.
8. The goods have substitutes.
Limitations:
1. The law is not applicable in case of knowledge. Reading of books provides more
satisfaction and knowledge to the scholar. Different books provide variety of
knowledge and satisfaction.
2. The law is not applicable in case of indivisible goods. The consumer is unable to
divide the goods to adjust units of utility derived from consumption of goods.
3. There is no measurement of utility. It is psychological concept. It is not possible to
express it into quantitative form.
4. The law does not hold well in case fashion and customs. The people like to spend
money on birthdays, marriages and deaths.
5. The does not hold well in case of very low income. The maximization of utility is not
possible due to low income.
Importance:
The law of equi marginal utility is helpful in the field of production. The producer has
limited resources. He uses limited resources to purchase production factors. He tries
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to equalize marginal utility of all factors. He wishes to get maximum output and
profit.
National income is distributed among factors of production according to this law. An
entrepreneur can pay factors of production equal to marginal product measured in
money terms. He will substitute one factor for another until marginal productivity of
all factors is equal to prices of their services.
The law is used in the field of exchange. The people like to exchange a commodity
having low utility with a commodity having high utility. There is maximum benefit
from exchange of commodities. The law is helpful in exchange of wealth, trade,
import and export.
The law is applicable in consumption. A rational consumer tries to get maximum
satisfaction when he spends his limited resources on various things. He tries to
equalize weighted marginal utility of all the things.
The law is applicable in public finance. The government can spend its revenue to get
maximum social advantage. The marginal utility of each dollar spent in one sector
must be equal to marginal utility derived from all other sectors.
5. Explain the rent theory of profit? (Nov/Dec-13)
(A) The Dynamic Theory
Prof. JB Clark propounded the dynamic theory of profit and according to him; profit is
the difference between the price and the cost of production of the commodity. But the profit
is the result of dynamic change. In a dynamic state, five generic changes are going on, every
one of which reacts on structure of society. They are (1) population is increasing (2) Capital
is increasing (3) Methods of production are improving (4) The forms of industrial
establishment are changing the less efficient shops etc. are passing from the field and the
most efficient are surviving (5) The wants of consumers are multiplying.
(B) The innovative Theory
Prof. Schumpeter attributes profit to dynamic changes resulting from an innovation.

To start with he takes a capitalist closed economy which is in a stationary equilibrium. This
equilibrium is characterized by what Schumpeter calls a circular flow which continues to
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repeat itself for ever. In such a static state, there is perfectly competitive equilibrium. The
price of each product just equals its cost of production and there is no profit.
Only exogenous factors like weather conditions can cause changes in the circular flow
position. In the circular flow position goods are being produced at a constant rate. This
routine work is being performed by the salaried managers. It is the entrepreneur who disturbs
the channels of this circular floe by the introduction of an innovation. Thus Schumpeter
assigns the role of an innovator not to the capitalist but to the entrepreneur.
(C) The Risk Theory
The risk theory of profit is associated with FB Hawley who regards risk taking as the
main function of the entrepreneur. Profit is the residual income which the entrepreneur
receives for the reason that he assumes risks. The entrepreneur exposes his business to risk
and receives in turn a reward in the form of profit since the task of risk taking is infuriating.
Profit is an excess of payment above the actuarial value of risk. No entrepreneur will be
willing to undertake risks if he gets only the normal return. Hence the reward for risk taking
must be higher than the actual value of risk.
(D) The uncertainty Bearing Theory
Prof. Frank H knight regards profit as the reward of bearing non insurable risks and
uncertainties. He distinguishes amidst insurable and non-insurable risks. Certain risks are
measurable in as much as the probability of their occurrence can be statistically calculated.
The risk of fire theft of merchandise and of death by accident is insurable. Such risks are
borne by the insurance company. There are certain unique risks which are incalculable. The
probability of their occurrence cannot be statistically computed for the reason that of the
presence of uncertainty in them.
Such unforeseen risks relate to changes in prices, demand and supply etc. No
insurance company can calculate the loss expected from such risks and hence they are non-
insurable. Profit according to Knight is the reward of bearing non-insurable risks and
uncertainties. It is a deviation arising from uncertainty between earning ex post and ex ante.
(E) Shackles Theory
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Prof. GLS Shackle has extended Knights theory of profit by introducing expectations
under conditions of uncertainty. According to him, expectations are of two types: general and
particular. General expectations relate to variables general to the economy as a whole. They
are associated with such micro variables as the future reaction of a particular marketing
strategy adopted by a firm, the future pricing policy of a competitive firm etc.
The decisions of the business community are generally based on general expectations.
If it regards them favorable investments are made. But there is subjective certainty in the case
of general expectations. Their time horizon is about 12 months. As the general expectations
have subjective certainty and their time horizon is also of reasonable duration, the business
community is able to anticipate price and income increases correctly for the economy as a
whole and by adopting appropriate inventory policies it earns windfall profit.
Rent Theory of Profit
The rent theory was developed by an American economist Francis L Walker. Walker
maintains that profit is the rent of ability. Like different grades of land, entrepreneurs are also
of different abilities. Entrepreneurs of superior ability earn profit just as superior lands earn
rent. According to Walker just as there is the marginal or no rent land, similarly there exists a
marginal or no profit entrepreneur who earns only wages only wages of management. The
marginal or no profit entrepreneur is the least efficient one earning profit not beyond an
amount just sufficient to keep him in his present industry.
The industry managed by the marginal entrepreneur is similar to the marginal land. Just as
land at the margin is no rent land, similarly the marginal entrepreneur earns no profit.
6. Explain about the law of equi-marginal utility? (Apr/May-14) (Nov/Dec-11)
INTRODUCTION:
It is a classical theory of consumer behavior, law of substitution in consumption or
maximum satisfaction.
STATEMENT OR DEFINITION OF LAW:
The law of equi-marginal utility states that A rational person in order to get
10 | P a g e
maximum satisfaction allocates his expenditures on purchase of different goods in such a

way that marginal utility of the last Rs. Spent in each direction is the same. This is called
the law of satisfaction because we substitute more useful goods to less useful goods. This is
called the law of maximum satisfaction because through it we get maximum satisfaction
and it is called the law of equi-marginal utility because through it when the marginal
utilities are equalized, through the process of substitution, the maximum satisfaction is
attained.
EXPLAINATION WITH THE HELP OF SCHEDULE:

The law can be explained with the help of schedule.
A hypothetical person has to spend Rs. 7. He is going to buy two commodities A & B. the
price of each commodity is Rs. 1 unit. Our hypothetical consumer is a rational person.
SCHEDULE:
Rs. MU of commodity A MU of commodity B
1 40 35
2 35 30
3 30 25
4 25 20
5 20 15
6 15 10
7 10 05
SUM 175 140
It is clear from the above scheduling that when our hypothetical consumer spends Rs.
4 on commodity A and Rs. 3 on commodity B. The marginal utilities are equal at that
point. The total utility is 220, which is maximum in any other case.
Suppose, 6 rupees spend on A and 1 rupee on B [40+35+30+25+20+15+35 = 200]
If he changes his plan i.e. spends more on commodity B and less on commodity A.
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The marginal utilities would not be equal and he would not gain maximum satisfaction. The
total utility would also be less in any case other than when the marginal utilities are equal
and satisfaction is maximum.
ASSUMPTIONS:
Following are the assumptions of the law.

Independent Utilities:
The marginal utilities of different commodities should be independent of each other
and diminishes with more and more purchase.
Marginal Utility of Money:
The marginal utility of money should remain constant for the consumer as he spends
more and more of it on the purchase of goods.
Rationality:
Every consumer should be rational in the purchase of goods. His aim should be to
maximize the total utility and nothing else.
Substitution of Goods:
It is assumed that goods are naturally substitutes of each other. The result of
substitution will be the MU of one commodity will fall and that of another commodity will
rise.
Awareness of Market:
It is assumed that consumer has much awareness about the market.
Divisibility of Goods:.
7. Explain in-difference curve analysis (Apr/May-14)
Meaning of Indifference Curve:

When a consumer consumes various goods and services, then there are some
combinations, which give him exactly the same total satisfaction. The graphical
representation of such combinations is termed as indifference curve.
Indifference curve refers to the graphical representation of various alternative

combinations of bundles of two goods among which the consumer is indifferent. Alternately,
indifference curve is a locus of points that show such combinations of two commodities
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which give the consumer same satisfaction. Let us understand this with the help of following
indifference schedule, which shows all the combinations giving equal satisfaction to the
consumer.
Table 2.5: Indifference Schedule

Apples Bananas
Combination of Apples and
(A) (B)
Bananas
P 1 15
Q 2 10
R 3 6
S 4 3
T 5 1
8. What are the importance of law of diminishing return? (Apr/May-13)
Law Of Diminishing Returns: With Limitations
Statement of the Law:

Every farmer knows by experience that, if a particular piece of land is cultivated over and
over again, it generally yields less than proportionate returns. If every year more, and still
more, units of labour and capital are put into it, the successive return per unit does not
increase, but actually decreases.
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Dr. Marshall states the law thus:

An increase in the capital and labour applied in the cultivation of land causes in general a
less than proportionate increase in the amount of the produce raised, unless it happens to
coincide with an improvement in the art of agriculture.
Explanation:
Suppose there is a farmer who cultivates a small farm. He applies some capital and labour to
his farm in certain fixed quantities, which we call doses.
Suppose each dose of capital and labour costs him Rs. 500 and the return to each dose is
as follows:
It appears that as more doses are applied, the marginal return (i.e., the additional
return) goes on decreasing. The second dose adds 10 quintals, the third 8 quintals, the fourth
5, and so on (see column 3). The total return no doubt goes on increasing (column 2) but it
should be carefully noted that it does not increase proportionately.
For example, when the first dose of Rs. 500 is applied, the yield is 12 quintals and
when two doses are applied, the total return is 22 quintals and not 24. It does not become
double, because the yield of the second dose is not equal to that of the first. The increase is
less than proportionate. We can say that the total return increases but at a diminishing rate.
We may also notice that even the total return begins decreasing at a certain stage. The
stage of diminishing returns in the case of total return, however, comes much later, and if the
farmer is prudent, it may never come. The 6th dose makes no addition to the total, and the 7th
even decreases it. It seems that at this stage too many men or too much manure has been
applied so that, instead of doing any good, they have done harm.
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Diagrammatic Representation:
The above illustration can be represented diagrammatically as follows:
In Fig. 22.1, along OX are represented doses applied, and along OY the marginal returns
corresponding to each dose. As more and more doses are applied, the marginal return falls.
Hence the curve slopes downwards from left to right. At the 5th dose, the marginal return is
stationary, at the 6th it is zero, and at the 7th it is negative.
The law of diminishing returns can also be called the law of increasing cost. When
increased investment of labour and capital results in less and less production, it means that
the cost of production per unit goes up as industry is expanded. This is the law of increasing
cost.
9. What is utility and explain with suitable example? (Apr/May-13)
Meaning of Utility:
Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or
expected, derived from the consumption of a commodity. Utility differs from person- to-
person, place-to-place and time-to-time. In the words of Prof. Hobson, Utility is the ability
of a good to satisfy a want.
In short, when a commodity is capable of satisfying human wants, we can conclude that the
commodity has utility.
How to Measure Utility?

After understanding the meaning of utility, the next big question is: How to measure
utility? According to classical economists, utility can be measured, in the same way, as
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weight or height is measured. For this, economists assumed that utility can be measured in
cardinal (numerical) terms. By using cardinal measure of utility, it is possible to numerically
estimate utility, which a person derives from consumption of goods and services. But, there
was no standard unit for measuring utility. So, the economists derived an imaginary measure,
known as Util.
Utils are imaginary and psychological units which are used to measure satisfaction (utility)
obtained from consumption of a certain quantity of a commodity.
Example Measurement of satisfaction in utils:

Suppose you have just eaten an ice-cream and a chocolate. You agree to assign 20
utils as utility derived from the ice-cream. Now the question is: how many utils be assigned
to the chocolate? If you liked the chocolate less, then you may assign utils less than 20.
However, if you liked it more, you would give it a number greater than 20. Suppose, you
assign 10 utils to the chocolate, then it can be concluded that you liked the ice-cream twice as
much as you liked the chocolate.
SECTION C
1. Explain the law of diminishing marginal utility? (Nov-14) (Apr/May-14) (Nov/Dec-11)
Law Of Diminishing Returns: With Limitations
Statement of the Law:

Every farmer knows by experience that, if a particular piece of land is cultivated over
and over again, it generally yields less than proportionate returns. If every year more, and still
more, units of labour and capital are put into it, the successive return per unit does not
increase, but actually decreases.
Dr. Marshall states the law thus:

An increase in the capital and labour applied in the cultivation of land causes in
general a less than proportionate increase in the amount of the produce raised, unless it
happens to coincide with an improvement in the art of agriculture.
Explanation:
16 | P a g e
Suppose there is a farmer who cultivates a small farm. He applies some capital and labour to
his farm in certain fixed quantities, which we call doses.
Assumptions of the Law of Equi Marginal Utility:
1. There is no change in the prices of the goods.

2. The income of consumer is fixed.
3. The marginal utility of money is constant.
4. Consumer has perfect knowledge of utility obtained from goods.
5. Consumer is normal person so he tries to seek maximum satisfaction.
6. The utility is measurable in cardinal terms.
7. Consumer has many wants.
8. The goods have substitutes.
Suppose each dose of capital and labour costs him Rs. 500 and the return to each dose is
as follows:
It appears that as more doses are applied, the marginal return (i.e., the additional
return) goes on decreasing. The second dose adds 10 quintals, the third 8 quintals, the fourth
5, and so on (see column 3). The total return no doubt goes on increasing (column 2) but it
should be carefully noted that it does not increase proportionately.
For example, when the first dose of Rs. 500 is applied, the yield is 12 quintals and
when two doses are applied, the total return is 22 quintals and not 24. It does not become
double, because the yield of the second dose is not equal to that of the first. The increase is
less than proportionate. We can say that the total return increases but at a diminishing rate.
17 | P a g e
We may also notice that even the total return begins decreasing at a certain stage. The
stage of diminishing returns in the case of total return, however, comes much later, and if the
farmer is prudent, it may never come. The 6th dose makes no addition to the total, and the 7th
even decreases it. It seems that at this stage too many men or too much manure has been
applied so that, instead of doing any good, they have done harm.
Diagrammatic Representation:
The above illustration can be represented diagrammatically as follows:
In Fig. 22.1, along OX are represented doses applied, and along OY the marginal
returns corresponding to each dose. As more and more doses are applied, the marginal return
falls. Hence the curve slopes downwards from left to right. At the 5th dose, the marginal
return is stationary, at the 6th it is zero, and at the 7th it is negative.
The law of diminishing returns can also be called the law of increasing cost. When increased
investment of labour and capital results in less and less production, it means that the cost of
production per unit goes up as industry is expanded. This is the law of increasing cost
Limitations:
6. The law is not applicable in case of knowledge. Reading of books provides more
satisfaction and knowledge to the scholar. Different books provide variety of
knowledge and satisfaction.
7. The law is not applicable in case of indivisible goods. The consumer is unable to
divide the goods to adjust units of utility derived from consumption of goods.
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8. There is no measurement of utility. It is psychological concept. It is not possible to

express it into quantitative form.
9. The law does not hold well in case fashion and customs. The people like to spend
money on birthdays, marriages and deaths.
10. The does not hold well in case of very low income. The maximization of utility is not
possible due to low income.
2. Explain consumer equilibrium with indifference curve analysis? (Nov-14)

An indifference curve is a graph showing combination of two goods that give the consumer
equal satisfaction and utility. Each point on an indifference curve indicates that a consumer
is indifferent between the two and all points give him the same utility.
Its Assumptions:
The indifference curve analysis of consumers equilibrium is based on the following
assumptions:
The consumers indifference map for the two goods X and Y is based on his scale of
preferences for them which does not change at all in this analysis.
His money income is given and constant. It is Rs. 10 which he spends on the two
goods in question.
Prices of the two goods X and Y are also given and constant. X is priced at Rs. 2 per
unit and Y at Rs. 1 per unit.
The goods X and Y are homogeneous and divisible.
There is no change in the tastes and habits of the consumer throughout the analysis
There is perfect competition in the market from where he makes his purchases of the
two goods.
The consumer is rational and thus maximizes his satisfaction from the purchase of the
two good
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Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The
graph shows a combination of two goods that the consumer consumes.
LIMITATIONS:
Robertson blamed this analysis by pointing out it as an old wine in a new bottle. Many other
economists such as F.H. Knight, Armstrong, Boulding criticised the analysis in several ways.
Some of the limitations of this analysis are:
(i) The indifference curve analysis is utility analysis in a new grab. It has simply substituted
new concepts and equations instead of the old ones.
(ii) Indifference curve analysis assumes that consumers are familiar with their preference
schedules. But, it is not possible for a consumer to have a complete knowledge of all the
combinations of the two commodities, total satisfactions from them, rates of substitutions and
total incomes.
(iii) This analysis is confined to the case of only two commodities. For covering a large
number of commodities, one commodity, say, Y has to be taken as a composite commodity
(represented by money) such that prices of all the commodities comprising the composite
commodities increase or decrease simultaneously and by the same proportion.
.(iv) This analysis assumes rationality of the consumer. In many situations, however,
consumer behaves in an irrational and thoughtless manner.
(v) Indifference curve analysis is introspective, as it studies consumer behaviour on the basis
of imaginary drawn indifference curves. Further, it is based on weak ordering hypothesis.
Thus, consumer is indifferent towards some combinations.
(vi) This analysis assumes perfect divisibility of the commodities. But, consumer is often
faced by lumpy units. So, the continuity of indifference curves is not ensured as assumed by
indifference curves analysis, as also large number of very closed placed indifference curves.
(vii) Indifference curve analysis is micro economic in character. It is not possible to draw
indifference curves indicating the choices of a group or a country as a whole. In this respect,
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utility analysis has an edge over, as it goes by a general opinion based on past experience and
observation.
(viii) Indifference curve analysis is not amenable to statistical investigation and empirical
research, as the entire analysis is based upon theoretically formulated cross-effect
relationships and not upon statistical observations. In view of Samuelsson, indifference
curves are imaginary.
(ix) Indifference curve analysis fails to explain consumer behaviour under risk and
uncertainty.
3. Describe indifference curve analysis with suitable diagram? (Apr/May-13)
An indifference curve is a graph showing combination of two goods that give the consumer
equal satisfaction and utility. Each point on an indifference curve indicates that a consumer
is indifferent between the two and all points give him the same utility
Its Assumptions:
The indifference curve analysis of consumers equilibrium is based on the following
assumptions:
The consumers indifference map for the two goods X and Y is based on his scale of
preferences for them which does not change at all in this analysis.
His money income is given and constant. It is Rs. 10 which he spends on the two
goods in question.
Prices of the two goods X and Y are also given and constant. X is priced at Rs. 2 per
unit and Y at Rs. 1 per unit.
The goods X and Y are homogeneous and divisible.
There is no change in the tastes and habits of the consumer throughout the analysis
There is perfect competition in the market from where he makes his purchases of the
two goods.
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The consumer is rational and thus maximizes his satisfaction from the purchase of the
two good
The above diagram shows the U indifference curve showing bundles of goods A and B. To
the consumer, bundle A and B are the same as both of them give him the equal satisfaction.
In other words, point A gives as much utility as point B to the individual. The consumer will
be satisfied at any point along the curve assuming that other things are constant.
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UACM35 BUSINESS ECONOMICS

UNIT-4 DEMAND FORECASTING
100% Theory
Answers
Syllabus: [Regulation: 2012]
UNIT IV: Demand forecasting- different types of demand
forecasting.
PART A (ANSWERS)
1. Define demand forecasting (Nov-14)
Demand forecasting is the activity of estimating the quantity of a product or service that
consumers will purchase. Demand forecasting may be used in making pricing decisions, in
assessing future capacity requirements, or in making decisions on whether to enter a new
market.
2. State any two advantages of demand? (Nov/Dec-11)
Efficient Supply Chain Scheduling

Better Labor Management
Adequate Cash Flow
More Accurate Budgeting
3. What are the objectives of demand forecasting? (Apr/May-14)
4. What is demand forecasting? (Apr/May-14)
Demand forecasting and estimation gives businesses valuable information about the markets
in which they operate and the markets they plan to pursue
5. State any two importance of demand forecasting? (Nov/Dec-13)
1. Forecast can be made quickly and economically

2. This is a reliable method because estimates are made on the basis of knowledge and
experience of sales experts.
3. The firm need not spare its time on preparing estimates of demand.
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4. This method is suitable for new products.
6. Mention any two limitations of demand forecasting? (Apr/May-13)

1. This method is expensive.
2. This method sometimes lacks reliability
SECTION B (answers)
1. What are the various objectives of demand forecasting?(Nov-14)
Objectives of Demand Forecasting

A. Short Term Objectives
1. To help in preparing suitable sales and production policies.
2. To help in ensuring a regular supply of raw materials.
3. To reduce the cost of purchase and avoid unnecessary purchase.
4. To ensure best utilization of machines.
5. To make arrangements for skilled and unskilled workers so that suitable labour
force may be maintained.
Long term Objectives

1. To plan long term production.
2. To plan plant capacity.
3. To estimate the requirements of workers for long period and make arrangements.
4. To determine an appropriate dividend policy.
5. To help the proper capital budgeting.
6. To plan long term financial requirements.
2. Discuss about the statistical method of demand forecasting(Nov-14)
Statistical Methods
Statistical methods use the past data as a guide for knowing the level of future demand.
Statistical methods are generally used for long run forecasting. These methods are used for
established products. Statistical methods include:
Trend projection method,

Regression and Correlation,
Extrapolation method,
Simultaneous equation method, and
Barometric method.
Advantages of Statistical Methods
The method of estimation is scientific
Estimation is based on the theoretical relationship between sales (dependent
variable) and price, advertising, income etc. (independent variables)
These are less expensive.
Results are relatively more reliable.
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Disadvantages of Statistical Methods

These methods involve complicated calculations.
These do not rely much on personal skill and experience.
These methods require considerable technical skill and experience in order to be
effective.
3. Explain the need for demand forecasting? (Nov/Dec-11)
1. To help in preparing suitable sales and production policies.
2. To help in ensuring a regular supply of raw materials.
3. To reduce the cost of purchase and avoid unnecessary purchase.
4. To ensure best utilization of machines.
5. To make arrangements for skilled and unskilled workers so that suitable labour
6. force may be maintained.
7. To help in the determination of a suitable price policy.
8. To determine financial requirements.
9. To determine separate sales targets for all the sales territories.
10. To plan long term production.
11. To plan plant capacity.
12. To estimate the requirements of workers for long period and make arrangements.
13. To determine an appropriate dividend policy.
14. To help the proper capital budgeting.
15. To plan long term financial requirements.
16. To forecast the future problems of material supplies and energy crisis.
4. Explain the limitations of demand forecasting? (Nov/Dec-11)
Prevailing business conditions: While preparing demand forecast it becomes necessary to

study the general economic conditions very carefully. These include the price level changes,
change in national income, percapita income, consumption pattern, savings and investment
habits, employment etc.
Conditions within the industry: Every business enterprise is only a unit of a particular
industry. Sales of that business enterprise are only a part of the total sales of that industry.
Therefore, while preparing demand forecasts for a particular business enterprise, it becomes
necessary to study the changes in the demand of the whole industry, number of units within
the industry, design and quality of product, price policy, competition within the industry etc.
Conditions within the firm: Internal factors of the firm also affect the demand forecast.
These factors include plant capacity of the firm, quality of the the product, advertising and
distribution policies, production policies, financial policies etc.
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Factors affecting export trade: If a firm is engaged in export trade also it should consider
the factors affecting the export trade. These factors include import and export control, terms
and conditions of export, EXIM policy, export conditions, export finance etc.
Market behavior : While preparing demand forecast, it is required to consider the market
behavior which brings about changes in demand.
Psychological conditions: While estimating the demand for the product, it becomes
necessary to take into consideration such factors as changes in consumer tastes, habits,
fashions, likes and dislikes, attitudes, perception, life styles, cultural and religious bents etc.
5. Explain the method of demand forecasting? (Apr/May-13)
There are several methods to predict the future demand. All methods can be broadly
classified into two. (A) Survey methods, (B) Statistical methods
(A) Survey methods

Under this method surveys are conducted to collect information about the future purchase
plans of potential consumers. Survey methods help in obtaining information about the
desires, likes and dislikes of consumers through collecting the opinion of experts or by
interviewing the consumers.
(b)Collective opinion method: Under this method the salesmen estimate the expected sales
in their respective territories on the basis of previous experience. Then demand is estimated
after combining the individual forecasts (sales estimates) of the salesmen. This method is also
known as sales force opinion method.
(c)Experts' opinion method: This method was originally developed at Rand Corporation in
1950 by Olaf Helmer, Dalkey and Gordon. Under this method, demand is estimated on the
basis of opinions of experts and distributors other than salesmen and ordinary consumers.
This method is also known as Delphi method. Delphi is the ancient Greek temple where
people come and prey for information about their future.
(d)Consumer clinics: In this method some selected buyers are given certain amounts of
money and asked to buy the products. Then the prices are changed and the consumers are
asked to make fresh purchases with the given money. In this way the consumers" responses
to price changes are observed. Thus the behavior of the consumers is studied. On this basis
demand is estimated. This method is an improvement over consumers interview method.
Statistical Methods
established products. Statistical methods include: (i) Trend projection method, (ii) Regression
and Correlation, (iii) Extrapolation method, (iv) Simultaneous equation method, and (v)
Barometric method.
6. Explain the factors responsible for demand forecasting? (Apr/May-14)
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1. Prevailing business conditions: While preparing demand forecast it becomes necessary

to study the general economic conditions very carefully. These include the price level
changes, change in national income, per capita income, consumption pattern, savings and
investment habits, employment etc.
2. Conditions within the firm: Internal factors of the firm also affect the demand forecast.
These factors include plant capacity of the firm, quality of the product, price of the product,
advertising and distribution policies, production policies, financial policies etc.
3. Factors affecting export trade: If a firm is engaged in export trade also it should
consider the factors affecting the export trade. These factors include import and export
control, terms and conditions of export, exim policy, export conditions, export finance etc.
4. Market behavior : While preparing demand forecast, it is required to consider the market
behavior which brings about changes in demand.
5. Sociological conditions: Sociological factors have their own impact on demand forecast
of the company. These conditions relate to size of population, density, change in age groups,
size of family, family life cycle, level of education, family income, social awareness etc.
6. Psychological conditions: While estimating the demand for the product, it becomes
necessary to take into consideration such factors as changes in consumer tastes, habits,
fashions, likes and dislikes, attitudes, perception, life styles, cultural and religious bents etc.
7 . Competitive conditions: The competitive conditions within the industry may change.
Competitors may enter into market or go out of market. A demand forecast prepared without
considering the activities of competitors may not be correct.
7. What are the qualities of demand forecasting? (Apr/May-14):
(A) Survey methods

interviewing the consumers.
after combining the individual forecasts (sales estimates) of the salesmen. This method is also
known as sales force opinion method.
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Statistical Methods
Barometric method.
8. What are the advantages and limitations of demand forecasting? (Apr/May-14)
Advantages
It is a simple method because it is not based on past record.
It suitable for industrial products.
The results are likely to be more accurate.
This method can be used for forecasting the demand of a new product.
It is based on the first hand knowledge of Salesmen.
This method is particularly useful for estimating demand of new products.
It utilizes the specialized knowledge of salesmen who are in close touch with the
prevailing market conditions.
Forecast can be made quickly and economically
This is a reliable method because estimates are made on the basis of knowledge and
experience of sales experts.
The firm need not spare its time on preparing estimates of demand.
This method is suitable for new products.
Disadvantages
It is expensive and time consuming.
Consumers may not give their secrets or buying plans.
This method is not suitable for long term forecasting.
It is not suitable when the number of consumer is large.
The forecasts may not be reliable if the salespeople are not trained.2. It is not suitable
for long period estimation.
It is not flexible.
Salesmen may give lower estimates that make possible easy achievement of sales
quotas fixed for each salesman.
This method is expensive.
This method sometimes lacks reliability
PART C Answers
1. Explain the various methods of demand forecasting in detail?(Apr/May-14)
There are several methods to predict the future demand. All methods can be broadly
classified into two. (A) Survey methods, (B) Statistical methods
(A) Survey methods
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interviewing the consumers. Survey methods are used for short term forecasting. Important
survey methods are (a) consumers interview method, (b) collective opinion or sales force
opinion methodic) experts opinion method, (d) consumers clinic and (f) end use method.
(a) Consumers' interview method (Consumers survey): Under this method, consumers are
interviewed directly and asked the quantity they would like to buy. After collecting the data,
the total demand for the product is calculated. This is done by adding up all individual
demands. Under the consumer interview method, either all consumers or selected few are
interviewed. When all the consumers are interviewed, the method is known as complete
enumeration method. When only a selected group of consumers are interviewed, it is known
as sample survey method
after combining the individual forecasts (sales estimates) of the salesmen. This method is
also known as sales force opinion method.
e) End use method: This method is based on the fact that a product generally has different
uses. In the end use method, first a list of end users (final consumers, individual industries,
exporters etc.) is prepared. Then the future demand for the product is found either directly
from the end users or indirectly by estimating their future growth. Then the demand of all
end users of the product is added to get the total demand for the product.
Statistical Methods
Barometric method.
i)Trend projection method: Future sales are based on the past sales, because future is the
grand-child of the past and child of the present. Under the trend projection method demand is
estimated on the basis of analysis of past data. This method makes use of time series (data
over a period of time). We try to ascertain the trend in the time series. The trend in the time
series can be estimated by using any one of the following four methods: (a) Least-square
method, (b) Free- hand method, (c) Moving average method and (d)
semi-average method.
(ii) Regression and Correlation: These methods combine economic theory and statistical
technique of estimation. Under these methods the relationship between the sales (dependent
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variable) and other variables (independent variables such as price of related goods, income,
advertisement etc.) is ascertained. Such relationship established on the basis of past data may
be used to analyze the future trend. The regression and correlation analysis is also called the
econometric model building.
(iii) Extrapolation: Under this statistical method, the future demand can be extrapolated by
applying Binomial expansion method. This method is used on the assumption that the rate of
charge in demand in the past has been uniform.
(iv) Simultaneous equation method.-This involves the development of a complete
econometric model which can explain the behavior of all the variables which the company
can control. This method is not very popular.
(v) Barometric technique: This is an improvement over the trend projection method.
According to this technique the events of the present can be used to predict the directions of
change m the future. Here certain economic and statistical indicators from the selected time
series are used to predict variables. Personal income, non-agricultural placements, gross
national income, prices of industrial materials, wholesale commodity prices, industrial
production, bank deposits etc. are some of the most commonly used indicators.
2. Describe the different types of demand? (Nov/Dec-13)
Methods of Demand Forecasting for New Products

Demand forecasting of new product is more difficult than forecasting for existing product.
The reason is that the product is not available. Hence, no historical data are available. In
these conditions the forecasting is to be done by taking into consideration the inclination and
wishes of the customers to purchase. For this a research is to be conducted. But there is one
problem that it is difficult for a customer to say anything without seeing and using the
product before. Thus it is very difficult to forecast the demand for new products. Any way
Prof. Joel Dean has suggested the following methods
for forecasting demand of new products:
1. Evolutionary approach: This method is based on the assumption that the new product
is the improvement and evolution of the old product. The demand is forecasted on the basis
of the demand of the old product. For example, the demand for black and white TV should
be taken in to consideration while forecasting the demand for color TV sets because the latter
is an improvement of the former.
2. Substitute approach: Here the new product is treated as a substitute of an existing
product, e.g. polythene bags for cloth bags. Thus the demand for a new product is analyzed as
a substitute for some existing goods or service.
3. Growth curve approach: Under this method the growth rate of demand of a new product
is estimated on the basis of the growth rate of demand of an existing product. Suppose Pears
soap is in use and a new cosmetic is to be introduced in the market. In this case the average
sale of Pears soap will give an idea as to how the new cosmetic will be accepted by the
consumers.
4. Opinion poll approach: Under this method the demand for a new product is estimated on
the basis of information collected from the direct interviews (survey) with consumers.
5. Sales Experience approach: Under this method, the new product is offered for sale in a
sample market, i.e. by direct mail or through multiple shop or departmental shop. From this
the total demand is estimated for the whole market.
8|Page
6. Vicarious approach: This method consists of surveying consumers' reactions through

the specialized dealers who are in touch with consumers. The dealers are able to know as to
how the customers will accept the new product. On the basis of their reports demand can be
estimated. The above methods are not mutually exclusive. It is de desirable to use a
combination of two or more methods in order to get better results.
3. Differentiate short-term demand forecasting and long term demand forecasting?

(Nov-14)
Long-Term vs. Short-Term Forecasting for the Apparel Forecasting

Process
Short-Term Forecast Process

Some fashion consultants stay relevant by issuing updated forecasts on a weekly basis,
according to Fashion Forecasting, by Kathryn McKelvey and Janine Munslow. The authors
interviewed a working consultant, who explains that her business clients typically want up-to-
date information about hot trends, especially right before the start of a fashion season. Places
consultants might monitor for upcoming movements include clubs, fashion-forward stores
and other trendy locations.
Revenue Goals
If your long-term revenue goal is to double revenue by the end of the current fiscal year,
another example of a supporting short-term goal is to contract an advertising consultant for
one month to help you analyze and capitalize on your customer's buying trends. Another
short-term goal example is to spend the next month learning your primary competition and
brainstorming on what you offer that they don't. Take this research and design a new
advertising campaign that highlights the unique points about your
Employee Appreciation Goals

Implement a long-term employee appreciation goal of awarding an employee of the year
award to the employee who provides the most creative input during the year in terms of
practical ideas to improve the company. Supporting short-term goals are to award employee
of the month designations each month throughout the year to mark the progression of creative
input, and to include more employees in the reward process than is possible with a single
annual award.
Community Outreach Goals

Set the long-term goal of building the company's name recognition within the community
through community outreach projects. Examples of short-term supporting goals are to reward
employees who volunteer with designated community programs with additional time off,
bonuses or gift cards. Another short-term supporting goal is to choose one or two high-profile
annual charity events to sponsor.
Website Traffic Goals

A long-term goal regarding web traffic is to increase traffic to your company's site by at least
50 percent by the end of the current fiscal year. Supporting short-term goals are to research
and purchase web traffic analysis software to better pinpoint current traffic trends, to hire a
9|Page
web consultant for one month to propose and implement programming changes to make the
site appeal to a broader audience than your traffic trend research suggests currently exist.
Another example of a short-term goal is to select a medium for advertising your site other
than the Web, such as a bus campaign where you advertise your site address on the side of
city buses for one month, or billboards, where you lease a billboard in a conspicuous place in
town for one month.
Long-Term Forecast Process

Some fashion consultants forecast trends 18 months to 2 years in advance. Consultants might
analyze fabric samples, color predictions for upcoming fashion seasons and picture portfolios
of clothing items from various fashion designers, as well as attend fashion shows to network
with the fashion elite. Some high-end consultants work directly for businesses, providing
long and detailed manifests containing their predictions.
4. Discuss different procedures involved in forecasting demand? (Nov/Dec-14)
Determine the purpose for which forecasts are used.

Subdivide the demand forecasting programme into small I parts on the basis of
product or sales territories or markets.
Determine the factors affecting the sale of each product and their relative importance.
Select the forecasting methods.
Study the activities of competitors.
Prepare preliminary sales estimates after, collecting necessary data.
Analyses advertisement policies, sales promotion plans, personal sales arrangements
etc. and ascertain how far these programmes have been successful in promoting the
sales.
Evaluate the demand forecasts monthly, quarterly, half yearly or yearly and necessary
adjustments should be done.
Prepare the final demand forecast on the basis of preliminary forecasts and the results
of evaluation.
10 | P a g e
UACP 13 A BUSINESS ECONOMICS

UNIT-5 PRODUCTION FUNCTION
100% Theory
SECTION-A
1. What is diminishing return to scale? (Nov-14)

In economics, diminishing returns (also called law of diminishing returns, law of variable
proportions, principle of diminishing marginal productivity, or diminishing marginal
returns) is the decrease in the marginal (incremental) output of a production process
as the amount of a single factor of production is incrementally increased, while the
amounts of all other factors of production stay constant.
2. What is production function? (Nov/dec-11) (Apr/May-14)

The production function is one of the key concepts of mainstream neoclassical theories,
used to define marginal product and to distinguish allocative efficiency, the defining
focus of economics. The primary purpose of the production function is to address
allocative efficiency in the use of factor inputs in production and the resulting
distribution of income to those factors.
3. What is an internal economy of scale? (Nov/dec-11) (Apr/May-14) (Nov/Dec-13)

A measure of how efficient a company is at making its products that the business has the
ability to manage directly. Internal economies of scale are related to the shift in average
production costs for a business as it boosts its overall product output and the average
cost per unit falls until maximum efficiency is attained.
4. What are the factors of production? (Apr/May-14)

Economists divide the factors of production into four categories:
Land,
Labor,
Capital, and
Entrepreneurship
.
5. What is production? (Nov/Dec-13)
RAAK/B.COM C.A/MANIKKAVALLI.M /I YEAR/I Sem/UACP 13A /BUS.ECO /UNIT-

5 Answers/
Unit 5 Answers Page 1 of 15
The processes and methods used to transform tangible inputs (raw materials, semi-
finished goods, sub-assemblies) and intangible inputs (ideas, information, knowledge)
into goods or services. Resources are used in this process to create an output that is suitable
for use or has exchange value.
6. Define productivity? (Apr/May-13)

Productivity is an average measure of the efficiency of production. It can be expressed as
the ratio of output to inputs used in the production process, i.e. output per unit of input.
When all outputs and inputs are included in the productivity measure it is called
total productivity.
7. What is labour productivity? (Apr/May-13)

A measurement of economic growth of a country. Labor productivity measures the
amount of goods and services produced by one hour of labor. More specifically, labor
productivity measures the amount of real GDP produced by an hour of labor. Growing
labor productivity depends on three main factors: investment and saving in physical
capital, new technology and human capital.
8. What is law of variable proportion?

Law of variable proportions occupies an important place in economic theory. This law
examines the production function with one factor variable, keeping the quantities of
other factors fixed. In other words, it refers to the input-output relation when output is
increased by varying the quantity of one input.
9. Explain economies of scale?

The cost advantage that arises with increased output of a product. Economies of scale
arise because of the inverse relationship between the quantity produced and per-unit fixed
costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost
because these costs are shared over a larger number of goods.
10. Point out any two assumptions of production function?

Technical knowledge during that period of time remains constant
The producers used the best technique available.
11. What is an external economy of scale?

The lowering of a firm's costs due to external factors. External economies of scale will
increase the productivity of an entire industry, geographical area or economy. The

5 Answers/
external factors are outside the control of a particular company, and encompass positive
externalities that reduce the firm's costs.
SECTION-B
1. What are the importances of law of diminishing returns? (Apr/May-13)
1. Theory of Population:
Malthusian theory of population is based on the law of diminishing returns.
According to Malthusian theory, production of food grains does not increase in the same
proportion in which population increases.
2. Basis of the Theory of Production:

The law of diminishing returns helps the producer to calculate the optimum
production.
Law signifies whether the optimum level of production in any field has reached or
not.
3. Basis of Innovation:
o Every producer wants to postpone the law.
o It is only possible when the new methods of production, new tools, raw materials
etc ar innovated.
o All these factors put a check on the operation of the law of diminishing returns.
4. Basis of the Theory of Rent:

o Ricardian theory of rent is also based on this very law.
o According to Ricardian theory, rent Arises due to difference in fertility.
o First dose of labour and capital applied to land yields more return as compared to
o second dose
o The difference between first and second dose is called the rent.
o Rent = Produce from first dose Produce from second dose.

5 Answers/
5. Basis of the Theory of Distribution:

Marginal productivity theory of distribution is also based on the law of diminishing
returns.
According to this theory, as the producer employs more and more factors of production,
the marginal productivity of each factor of production goes on falling
6. Importance to Industry:
The manufacturing industry has a great significance of the law of diminishing returns
Every manufacturing industry has a higher per capita income as compared to
agricultural sector.
The reason is that this law operates at a very early stage in the agricultural sector and
the per capita income remains low.
2. Explain the various factors of production? (Nov/dec-11) (Nov/dec-13)

(i) Land:
It refers to all natural resources which are free gifts of nature. Land, therefore,
includes all gifts of nature available to mankindboth on the surface and under the
surface, e.g., soil, rivers, waters, forests, mountains, mines, deserts, seas, climate, rains, air,
sun, etc. Land is a passive factor whereas labour is an active factor of production. Actually, it is
labour which in cooperation with land makes production possible. Land and labour are also
known as primary factors of production as their supplies are determined more or less
outside the economic system itself.
(ii) Labour:
Human efforts done mentally or physically with the aim of earning income is
known as labour. Thus, labour is a physical or mental effort of human being in the process
of production. The compensation given to labourers in return for their productive work is
called wages (or compensation of employees).
(iii) Capital:
All man-made goods which are used for further production of wealth are included in
capital. Thus, it is man-made material source of production., all man-made aids to
production, which are not consumed/or their own sake, are termed as capital.It is the
produced means of production. An increase in the capital of an economy means an increase

5 Answers/
in the productive capacity of the economy., capital is derived from land and labour and has
therefore, been named as Stored-Up labour.
(iv) Entrepreneur:
An entrepreneur is a person who organizes the other factors and undertakes the
risks and uncertainties involved in the production.
He hires the other three factors, brings them together, organizes and coordinates them so
as to earn maximum profit
3. What is economies of scale (Apr/May-14) (Nov-14)

The cost advantage that arises with increased output of a product.
Economies of scale arise because of the inverse relationship between the quantity
produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the
lower the per-unit fixed cost because these costs are shared over a larger number of
goods.
Economies of scale may also reduce variable costs per unit because of operational
efficiencies and synergies.
Economies of scale can be classified into two main types: Internal arising from within
the company; and External arising from extraneous factors such as industry size.
Internal economies of scale:

A measure of how efficient a company is at making its products that
the business has the ability to manage directly.
Internal economies of scale are related to the shift in average production costs for a
business as it boosts its overall product output and the average cost per unit falls
until maximum efficiency is attained.
External economies of scale:

The lowering of a firm's costs due to external factors.
External economies of scale will increase the productivity of an entire industry,
geographical area or economy.
The external factors are outside the control of a particular company, and
encompass positive externalities that reduce the firm's costs.
4. Explain the assumptions of production function? (Apr/May-14)

5 Answers/
The production is based on the following assumptions:

It relates to the particular point of time
Technical knowledge during that period of time remains constant
The producers used the best technique available.
The factors of production is divisible into most viable
There are two types of production function:
CobbDouglas production function
Short run production
The CobbDouglas production function is a particular functional form of the production

function, widely used to represent the technological relationship between the amounts of two or
more inputs, particularly physical capital and labor, and the amount of output that can be
produced by those inputs. Sometimes the term has a more restricted meaning, requiring that the
function display constant returns to scale (in which case in the formula below)
The short run, at least one factor of production is fixed; this means that output can be
increased by adding more variable factors such as employing more workers and buying in
more raw materials
5. List out the assumptions of variable proportion?(Nov-14)

The law of variable proportions or diminishing returns, as stated above, holds good
under the following conditions:
1. First, the state of technology is assumed to be given and unchanged. If there is
improvement in the technology, then marginal and average products may rise instead of
diminishing.
2. Secondly, there must be some inputs whose quantity is kept fixed. This is one of the
ways by which we can alter the factor proportions and know its effect on output. This law does
not apply in case all factors are proportionately varied. Behaviour of output as a result of the
variation in all inputs is discussed under returns to scale.
3. Thirdly the law is based upon the possibility of varying the proportions in which the
various factors can be combined to produce a product. The law does not apply to those cases
where the factors must be used in fixed proportions to yield a product.

5 Answers/
When the various factors are required to be used in rigidly fixed proportions, then the
increase in one factor would not lead to any increase in output, that is, the marginal product of
the factor will then be zero and not diminishing. It may, however, be pointed out that products
requiring fixed proportions of factors are quiet uncommon. Thus, the law of variable proportion
applies to most of the cases of production in the real world.
The law of variable Assume that there is a given fixed amount of land, with which more units of
the variable factor labour, is used to produce agricultural output.
SECTION-C
1. What is mean by economies of scale and what are the types of economies of scale?
(Nov-14)
The cost advantage that arises with increased output of a product.
Economies of scale arise because of the inverse relationship between the quantity
produced and per-unit fixed costs;
i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because
these costs are shared over a larger number of goods.
Economies of scale may also reduce variable costs per unit because of operational
efficiencies and synergies.
Economies of scale can be classified into two main types: Internal arising from within
the company; and External arising from extraneous factors such as industry size.
Internal economies of scale:

A measure of how efficient a company is at making its products that the business has
the ability to manage directly.
Internal economies of scale are related to the shift in average production costs for a
business as it boosts its overall product output and the average cost per unit falls until
maximum efficiency is attained.
External economies of scale:

The lowering of a firm's costs due to external factors.
External economies of scale will increase the productivity of an entire industry,
geographical area or economy.

5 Answers/
The external factors are outside the control of a particular company, and
encompass positive externalities that reduce the firm's costs.
Internal diseconomies of scale:

Growing beyond a certain output can cause a firms average costs to rise.
This is because a firm may encounter a number of problems including:

i. Difficulties controlling the firm:
It can be hard for those managing a large firm to supervise everything that is happening
in the business. Management becomes more complex.
A number of layers of management may be needed and there may be a need for more
meetings. This can increase administrative costs and make the firm slower in responding
to changes in market conditions.
ii. Communication problems:

It can be difficult to ensure that everyone in a large firm have full knowledge about their
duties and available opportunities (like training etc.).
Also, they may not get the opportunity to effectively communicate their views and ideas
to the management team.

5 Answers/
iii. Poor industrial relations:

Large firms may be at a greater risk from a lack of motivation of workers, strikes and
other industrial action.
This is because workers may have less sense of belonging, longer time may be required
to solve problems and more conflicts may arise due to the presence of diverse opinions.
EXTERNAL DISECONOMIES OF SCALE

External diseconomies of scale are the disadvantages that arise due to over concentration
and over-production as a result of an increase in the number of firms in an industry. There are a
number of factors which might give rise to external diseconomies of scale.
1. The concentration of similar firms in an area, may lead to an increase in demand for raw
material is used by the firms. This will cause the prices of raw materials to increase provided the
supply of the raw materials remains unchanged. This consequently would increases the cost of
production in the industry.
2. The localization of firms in an area results in urbanization problems such as traffic congestion.
This slows down the movement of labor, goods and raw materials and thereby retarding the rate
at which goods and services are produced. This increases the cost of production in the industry.
3. As the industry grows, demand for skilled labor mainly needed in the industry increases. Wage
rates will tend to increase as firms begin to compete for the services of the skilled workers.
4. Problems of waste disposal may arise. Firms may be compelled to employed costly waste
disposal methods in order to keep the area clean.
5. Competitive advertisement would have to be resorted to and more money will have to be spent
on that if each firm is to maintain its position.
6. Structural unemployment may be created as the size of the industry grows. This may be due to
changes in taste and preference. This may create declining industry.
2. Explain the law of variable proportion with suitable diagram? (Nov/Dec-11) (Apr/May-
14)
Law of Variable Proportions: Meaning, Definition, Assumption and Stages!

Meaning:
Law of variable proportions occupies an important place in economic theory.

5 Answers/
This law examines the production function with one factor variable, keeping the
quantities of other factors fixed.
In other words, it refers to the input-output relation when output is increased by varying
the quantity of one input.
When the quantity of one factor is varied, keeping the quantity of other factors constant,
the proportion between the variable factor and the fixed factor is altered

The ratio of employment of the variable factor to that of the fixed factor goes on
increasing as the quantity of the variable factor is increased.
Since under this law we study the effects on output of variation in factor proportions, this is also
known as the law of variable proportions. Thus law of variable proportions is the new name for
the famous Law of Diminishing Returns of classical economics. This law has played a vital
role in the history of economic thought and occupies an equally important place in modern
economic theory. This law has been supported by the empirical evidence about the real world.
The law of variable proportions or diminishing returns has been stated by various
economists in the following manner:
As equal increments of one input are added; the inputs of other productive services being
held constant, beyond a certain point the resulting increments of product will decrease, i.e., the
marginal products will diminish, (G. Stigler)
As the proportion of one factor in a combination of factors is increased, after a point,

first the marginal and then the average product of that factor will diminish. (F. Benham)
An increase in some inputs relative to other fixed inputs will, in a given state of
technology, cause output to increase; but after a point the extra output resulting from the same
addition of extra inputs will become less. (Paul A. Samuelson)
Marshall discussed the law of diminishing returns in relation to agriculture. He defines

the law as follows: An increase in the capital and labour applied in the cultivation of land
causes in general a less than proportionate increase in the amount of product raised unless it
happens to coincide with an improvement in the arts of agriculture.
It is obvious from the above definitions of the law of variable proportions (or the law of
diminishing returns) that it refers to the behaviour of output as the quantity of one factor is

5 Answers/
increased, keeping the quantity of other factors fixed and further it states that the marginal
product and average product will eventually decline.
Assumptions of the Law:

The law of variable proportions or diminishing returns, as stated above, holds good under
the following conditions:
1. First, the state of technology is assumed to be given and unchanged. If there is
improvement in the technology, then marginal and average products may rise instead of
diminishing.
2. Secondly, there must be some inputs whose quantity is kept fixed. This is one of the
ways by which we can alter the factor proportions and know its effect on output. This law does
not apply in case all factors are proportionately varied. Behaviour of output as a result of the
variation in all inputs is discussed under returns to scale.
3. Thirdly the law is based upon the possibility of varying the proportions in which the
various factors can be combined to produce a product. The law does not apply to those cases
where the factors must be used in fixed proportions to yield a product.
When the various factors are required to be used in rigidly fixed proportions, then the
increase in one factor would not lead to any increase in output, that is, the marginal product of
the factor will then be zero and not diminishing. It may, however, be pointed out that products
requiring fixed proportions of factors are quiet uncommon. Thus, the law of variable proportion
applies to most of the cases of production in the real world.
The law of variable Assume that there is a given fixed amount of land, with which more
units of the variable factor labour, is used to produce agricultural output.

5 Answers/
With a given fixed quantity of land, as a farmer raises employment of labour from one unit to 7
units, the total product increases from 80 quintals to 504 quintals of wheat. Beyond the
employment of 8 units of labour, total product diminishes. It is worth noting that up to the use of
3 units of labour, total product increases at an increasing rate.
This fact is clearly revealed from column 3 which shows successive marginal products of labour
as extra units of labour are used. Marginal product of labour, it may be recalled, is the increment
in total output due to the use of an extra unit of labour.
Beyond the use of eight units of labour, total product diminishes and therefore marginal product
of labour becomes negative. As regards average product of labour, it raises upto the use of fourth
unit of labour and beyond that it is falling throughout.
Three Stages of the Law of Variable Proportions:

The behaviour of output when the varying quantity of one factor is combined with a fixed
quantity of the other can be divided into three distinct stages. In order to understand these three
stages it is better to graphically illustrate the production function with one factor variable.
In this figure, on the X-axis the quantity of the variable factor is measured and on the F-
axis the total product, average product and marginal product are measured. How the total
product, average product and marginal product a variable factor change as a result of the increase
in its quantity, that is, by increasing the quantity of one factor to a fixed quantity of the others
will be seen from Fig. 16.3.

5 Answers/
In the top Danel of this figure,

the total product curve TP of variable factor goes on increasing to a point and alter that it starts
declining. In the bottom pane- average and marginal product curves of labour also rise and then
decline; marginal product curve starts declining earlier than the average product curve.
The behavior of these total, average and marginal products of the variable factor as a
result of the increase in its amount is generally divided into three stages which are
explained below:
Stage 1:

5 Answers/
In this stage, total product curve TP increases at an increasing rate up to a point from the
origin to the point F, slope of the total product curve TP is increasing, that is, up to the point F,
the total product increases at an increasing rate (the total product curve TP is concave upward
upto the point F), which means that the marginal product MP of the variable factor is rising.
From the point F onwards during the stage 1, the total product curve goes on rising but its slope
is declining which means that from point F onwards the total product increases at a diminishing
rate (total product curve TP is concave down-ward), i.e., marginal product falls but is positive.
The point F where the total product stops increasing at an increasing rate and starts increasing at
the diminishing rate is called the point of inflection. Vertically corresponding to this point of
inflection marginal product is maximum, after which it starts diminishing.
Thus, marginal product of the variable factor starts diminishing beyond OL amount of the
variable factor. That is, law of diminishing returns starts operating in stage 1 from point D on the
MP curve or from OL amount of the variable factor used.
Whereas marginal product curve of a variable factor rises in a part and then falls, the
average product curve rises throughout. In the first stage, the quantity of the fixed factor is too
much relative to the quantity of the variable factor so that if some of the fixed factor is
withdrawn, the total product will increase. Thus, in the first stage marginal product of the fixed
factor is negative.
Stage 2:
The total product continues to increase at a diminishing rate until it reaches its maximum point H
where the second stage ends. In this stage both the marginal product and the average product of
the variable factor are diminishing but remain positive.
At the end of the second stage, that is, at point M marginal product of the variable factor is zero
(corresponding to the highest point H of the total product curve TP). Stage 2 is very crucial and
important because as will be explained below the firm will seek to produce in its range.
Stage 3: Stage of Negative Returns:

The increase in the variable factor the total product declines and therefore the total
product curve TP slopes downward. As a result, marginal product of the variable factor is
negative and the marginal product curve MP goes below the X-axis. In this stage the variable

5 Answers/
factor is too much relative to the fixed factor. This stage is called the stage of negative returns,
since the marginal product of the variable factor is negative during this stage.

5 Answers/

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UACP13A Business Economics I

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ACADEMIC YEAR: 2014 2015 REGULATION CBCS - 2012

UACP13A BUSINESS ECONOMICS -I

1) What do you mean by business economics? (Nov/Dec 2013)

2) Define business economics? (Apr-May 2015)

3) What is the scope of business economics? (Nov/Dec 2013)

4) State any two uses of Business Economics. .(April/May 2013)

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

6) What is the difference between firm and industry?(Nov/Dec 2013)

7) What is social Responsibility? ( Nov/Dec 2013, 2015)

8) What is the Nature of Business Economics?

9) Write two point of social responsibility of business concern?

10) Write various social responsibility of business concern?

11) What is Profit maximization? (Apr-May 2015)

12) What is Micro Economics? (Apr-May 2016)

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

13) Define Profit? (Apr-May 2016)

2) Briefly explain the objectives of profit maximization. .(April/May 2013)

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

Social objective of Business:

Supply of quality goods and fair price..

4) What are the objectives of business? Explain. ( Nov/Dec 2013)

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

BUSINESS ECONOMICS MANAGERIAL ECONOMICS

Economics studies human behavior on Managerial Economics as it concerns

Under Economics we study only the Managerial Economics we have to study

6) Explain the feature of business economics. ( Nov/Dec 2013)

7) Explain Objectives of profit maximization of the firm.

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

The Organic objectives of the business are classified into:

8. State Maximization of growth rate of a firm? (Apr-May 2015)

has developed a dynamic balanced growth maximising model of the firm. He

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

If he chooses a higher growth rate, he will have to spend more on

Scope of business economics

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

o Cost and production Analysis.

Significance Of Business Economics :

2) Describe the social responsibility of business. ( Nov/Dec 2013)

BUSINESS ECONOMICS MANAGERIAL ECONOMICS

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

Economics is both positive and Managerial Economics is essentially

Economics studies human behavior on Managerial Economics as it concerns

3) Explain objectives of business profit maximization and Explain.

The Organic objectives of the business are classified into:

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

RAAK/ B.com(CA) /I YEAR/I SEM/UACP13A/SUGUMARI/ BUSINESS ECONOMICS - I/I QB/VER 1.0

UACP13A BUSINESS ECONOMICS -1

1) What is demand Analysis? (Nov/Dec 2013, Apr. 2016)

RAAK/ B.Com(CA) /I YEAR/I SEM/UACP13A//SUGUMARI/ BUSINESS ECONOMICS - I/II QB/VER 1.0

9) Explain the determinants of demand? (Apr-May 2015)

RAAK/ B.Com(CA) /I YEAR/I SEM/UACP13A//SUGUMARI/ BUSINESS ECONOMICS - I/II QB/VER 1.0

UACP 13A- BUSINESS ECONOMICS-I

1. What is break-even point?(Nov-14)

2. Write any two-substitute product? (Nov-14)

Substitute goods or substitutes are products that a consumer perceives as similar or

3. What is meant by utility?(Nov/Dec-11)

4. Draw an indifference curve? (Nov/Dec-11)

RAAK/B.COM(CA)/S.MANIKKAVALLI /I YEAR/I Sem/ UACP13A /BUS.ECO/UNIT-3 QB/VER 1.0

5. What cardinal analysis? (Nov-14)

6. What total utility analysis? (Apr/May-14)

7. What do you know about indifference curve? (Apr/May-14)

8. What is excess profit? (Apr/May-14)

RAAK/B.COM(CA)/S.MANIKKAVALLI /I YEAR/I Sem/ UACP13A /BUS.ECO/UNIT-3 QB/VER 1.0

10. What is utility? (Apr/May-14)