MBA – 0903 – MANAGERIAL ECONOMICS

Two mark questions with answers

1. What is Managerial Economics?
Spencer and Siegel man defines , “Managerial Economics is the
integration of economic theory with business practices for the purpose of
facilitating decision making and forward planning by management
Brigham and pappas believes that managerial economics is thE , “
application of economic theory and methodology to business
administration practices
2. Define Economics.
Adam smith’s Wealth definition - Economics as the science of
wealth .Economics lays down the principles to make the people and the
sovereign rich . The science provide ways and means of getting plentiful
revenue to the state and more property the people .
Marshall’s Welfare definition – A study of mankind in the ordinary
business life . It examines that part of individual and social action which is
most closely connected with the attainment and with the use of material
requisites of well being
Lionel Robbin’s Scarcity definition - Economics as a science which
studies human behavior as a relationship between ends and scarce meas
which have alternative use
3. What is Business Decision Making?
Business Decision Making involves choices between various courses
of actions and these choices must be made in the environment over which
the decision maker has limited or even no control. Such conditions of the
environment are called states of nature. Normally business decisions have
to be taken very clearly otherwise the decision maker has to face some
consequences.

4.What is marginal analysis ?

Marginal analysis is the analysis of the benefits of costs of the
marginal units of the input and output. This is a technique widely used in
business decision making and ties together much of economic thought . To
do a marginal analysis we have to change variable such as quantity of
good that the firm buys, the quantity of the output they produce , the
quantity of an input they used and ( these variable are usually refereed
they as control variables )
5. State the Law of Diminishing Marginal utility.
Law of diminishing marginal utility states that with successive
increases in the units of consumption of a commodity, every additional unit
of that commodity gives lesser satisfaction to the consumer. Consumption
beyond point of satiety i.e.., maximum satisfaction only yields negative
marginal utility.
6.What is Equi-marginal utility?
A consumer maximizes his total utility by allocating his income
among goods and services(including savings) available to him in such a
way that the marginal utility per rupees worth of one good equals the
marginal utility per rupee’s worth of any other good.
7. What is Demand?
Demand for a commodity refers to the quantity of the commodity
which an individual consumer or household is willing to purchase per unit
of time at a particular price. Demand for a commodity implies –
 Desire of the consumer to buy the product
  Consumer’s willingness to buy the product
 Sufficient purchasing power in consumer’s possession to buy the
product.

8. What are the types of Demand?

Demand for any commodity is determined by its nature. Demand for
such commodities which are essential for the consumer is unaffected
significantly by changes in their market conditions. We can classify the
Demand into following types.
 Demand for consumer’s and producer’s goods.
 Demand for perishable and durable goods
 Derived and autonomous demands.
 Firm and Industry demands
 Demands by total market and market segments
 Short term and long term demand.
9. Define Demand for Consumer’s and producer’s goods.
The consumer’s goods are goods used for final consumption.
Demand for consumer’s goods are also termed as direct demand, and
these goods are used directly for final consumptions.
Example – Food items, readymade dresses, houses, etc..,
The producer’s goods are used for production of other goods.
Demand for producer’s goods is termed as derived demand, for these
goods are demanded not for final consumption but for the production of
other goods.
Example - Machines, Tools, Raw Materials, etc..,

10. State the Law of Demand.

 The Law of Demand states that “The amount demanded of a
commodity increases when there is a fall in price, and the amount
demanded of a commodity diminishes at the time of rise in prices”.
That is if the price of the good increases its quantity demanded
decreases, while if the price of the good decreases its quantity demanded
increases.
11. Explain the assumptions in Law of Demand.
The law of demand is based on certain assumptions:
 There is no change in consumer’s tastes and preferences.
 Income should remain constant.
 Prices of other goods should not change.
 There should be no substitutes for the commodity.
 The commodity should not confer any distinction.
 The demand for the commodity should be continuous.
 People should not except any change in the price of a commodity.
12. Define Elasticity of Demand.
The Elasticity of demand is defined as the percentage change in
quantity demanded caused by one percent change in the demand
determinant under consideration, while other determinants are held
constant.
The formula for finding the EOD is
Percentage change in the quantity demanded of good X
Ed = Percentage change in determinant Z
13. Give short note on Derived and Autonomous Demand.
When the demand for a product is tied to the purchase of
some parent product, its demand is called as Derived.
For Example
 Demand for cement is a derived demand since it is needed for its
own sake but for satisfying the demand for buildings.
An autonomous demand for a commodity is one that arises on its
own out of a natural desire to consume or possesses a commodity.
Autonomous demand is independent of the demand for any other
commodity.

For Example
The demand for commodities which arises directly from the
biological or physical needs of human beings like food, dresses, shelter,
etc..,
14. Define Demand Schedule.
Demand Schedule is a list of quantities of a commodity purchased
by the consumer at different prices. The Law of Demand may be explained
with the help of Demand Schedule.
The following table shows the demand schedule of commodity X
Price of X (Rs) Quantity
Demanded
10 1
8 2
6 3
4 4
2 5
When the price falls from Rs 10 to Rs 8, quantity demanded increases
from 1 to 2 in the same way as price falls, quantity demanded increases.
15. What is Demand Forecasting? What are its types?
A forecast is a prediction or estimation of future situation.
Since the future is uncertain no forecasts can be 100% accurate and
current data. Here the forecast has been made about the demand
conditions for the particular commodity.
Types of Forecast
  Passive Forecast
 Active Forecast
 Long term Forecast
 Short term forecast
1. Passive Forecast- It predict the future situation in the absence of any
action by the firm.
2. Active Forecast- It estimate the future situation taking into account the
likely future actions of the firm.
3.Short term forecast – Usually made for a period upto one year . It made
in order to know the effect of current policies of the firm .Made for the
established products of the firm
4. Long term Forecast- Relates to the production for a year or more . It is
usually made when a new product has to be launched
16. What are the steps involved in scientific approach to Forecasting?
The following steps constitute a scientific approach to Demand
forecasting.
 Identify and state the objectives of forecasting clearly.
 Select appropriate method of forecasting in the right of objectives.
 Identify the variables affecting demand for the given product or
service.
 Express these variables in appropriate form
 Collect the relevant data to represent the variables
 Determine the most probable relationship between the dependent
and independent variables.
 Make appropriate assumptions to forecasts and interpret
17. Explain the criteria for the choice of good forecasting method.
The following criteria have to be followed while choosing the
forecasting method. They are
  The result achievable by a forecasting method must be weighted
against the cost of the method
 The use to which the forecast can be made should be well
understood. Infact, it is not a question of results achievable but
results achieved by forecasting method.
 It is quite easy to judge the existing trend. But for a good forecast it
is necessary that it should also predict deviations and turning points
so that the forecasts are more effective.
 There is a time gap between the occurrence of an event and it
forecast- known as the lead time.
18. Explain the traditional steps involved in Forecasting method.
The following are the steps involved in forecasting method.
They are
 Identification of objective
 Determining the nature of goods under consideration
 Selecting a proper method of forecasting
 Interpretation of results
19. What is Price Determination?
 A firm cannot arbitrarily fix the price of its products to achieve its
objective of maximizing profit. There can be only one optimal price
for a product that can maximize the profit, under a given set of
conditions.
 The price is generally different in different kinds of markets,
depending on the level of competitions between the sellers.
 The sellers should not charge the price for their products as they
like.
20. What is Supply?
 The term supply denotes the quantity of goods or services offered for
sale at various prices at any moment of time or during a specified time
period, say, a week, month, year and so on, but the conditions of supply
remains same.
And the term supply also indicates the willingness and ability of
producers to produce for sale various amounts of goods and services at
each specific price in a set of possible price during a specified period of
time.
21. Define Elasticity of Supply.
The Elasticity of Supply is defined as the degree of
responsiveness of the quantity of a commodity supplied for a small change
in price.
It may also be defined as the ratio of percentage change in the
quantity supplied of a commodity to the percentage change in its price.
Proportionate change in quantity supplied of the product X
Es = Proportionate change in price of the product X
22. What are the determinants of Pricing?
The following are the factors that determine the price of a
commodity:
 The demand
 Cost of Production
 Objectives of its producers
 Nature of the competition
 Government policy
23. What do you mean by Giffen Paradox?
Giffen goods are commodities with less quality and less cost.
These goods are available in all places and these goods are sometimes
called as Inferior Goods.
24. Explain the determinants of supply .
 The main determinants of the supply are
 Price of the good
 Prices of other goods
 Prices of factor of production
 Producers objectives
 State of technology
25.Explain the meaning of Production.
Production is an activity that transforms inputs into output. Production is
any activity that increases consumer usability of goods and services thus
production consists of producing , storing and distributing tangible of goods
and services
For example : A sugar mill uses such inputs as labour, raw material like
sugarcane and capital invested in machinery, factory building to produce
sugar.
26. Explain short run and long run production .
Short run production.
The short run is that period of time in which some of the firm’s inputs
are fixed – these fixed inputs act as a limiting factor on change in output. In
the short run at least one of the inputs remains constant , while the other
inputs are vary in nature. Simply, if the firm uses more then two inputs but
only two of them are variable and other is fixed is said to be short run
Long run.
The long run term is that period of time in which there are no limiting
factors on output change. In long run all the variables are variable in nature
and there is no fixed input like short run . Simply, if the firm uses only two
inputs and both of them variable in nature is said to be long run.
27. Define Production function with its assumptions.
The production function is purely a technological relationship which
expresses the relation between output of a good produced and the
different combinations of inputs used in its production. It means the
maximum Amount of output that can be produced with the help of each
possible combination of inputs. The production function can be
mathematically written as
Q= F(L,N,K…..)
Assumptions :
1. technology is invariant
2. Production function includes all the technically efficient methods of
production
28. Define law of variable propositions .
The law of variable propositions states that as more and more of one
factor input is employed , all other input quantities held constant , a point
will eventually be reached where additional quantities of the varying input
will yield diminishing marginal contributions to total product
This law is also called as law of diminishing marginal returns
29. Define Isoquant with its types .
An Isoquant is a curve representing the various combination of two
inputs that produce the same amount of output . An Isoquant is defined
as curve which shows the different combinations of the two inputs
producing a given level of output.
Types :
1. Linear Isoquant
2. Input- output Isoquant
3. Kinked Isoquant
4. Smooth convex Isoquant
30..What do you mean by Return to Scale ?
The percentage increase in output when all inputs vary in the same
proportion is known as returns to scale. Obviously return to scale relate to
greater use of inputs maintaining the same technique of production
1.Write Cobb- Douglas production function and its properties.
The production function suggested by C.W.Cobb, was of the following
form :
 Q=ALb kl-h
Where Q = Total output
L = Units of labour
K = Units of Capital
A = a constant
B = a parameter

Essay type questions

1. Explain the scope of managerial economics
2. Explain the role of managerial economist
3. Explain the types of Demand and the determinants of demand.
4. What is Demand Forecasting? Explain its methods.
5. Explain the types of Price Elasticity of Demand.
6. Explain the factors governing Elasticity of Demand.
7. Explain the types of Income Elasticity demand.
8. Explain the methods available for measuring the Price elasticity of
demand.
9.Explain the nature of decision making with an example
10. Explain the business decision making process
11. Explain elasticity of supply and its types .
12. What is production function ?Discuss Short run and Long Run
production function
13.. Explain Cobb – Douglas Production Function
14.Define Iso-quants and its types
15.Explain the three stage of Return to Scale .