1

Master of Business Administration - MBA Semester I

MB0042 Managerial Economics - 4 Credits
Book ID: B0908)
Assignment Set- 1 0 Marks)


Note Lach quest|on carr|es 10 Marks Answer a|| the quest|ons

Q.1 Price elasticity of demand depends on various factors. Explain each factor with the
help of an example
Ans Price Elasticity of Demand
%e price elasticity of demand measures te responsiveness of quantity demanded to a
cange in price, wit all oter factors eld constant.
Definition
%e price elasticity of demand,
/
is defined as te magnitude of:

Proportionate cange in quantity demanded
------------------------------------------------------------------------
proportionate cange in price


Since

te quantity demanded decreases wen te price increases,

tis ratio is negative;
owever, te absolute value usually is taken and
/
is reported as a positive number.
Because te calculation uses proportionate canges,

te result is a unit less number
and does not depend on te units in wic te price and quantity are expressed.
As an example calculation, take te case in wic a product's
/
is reported to be 0.5.
%en, if te price

were to increase by 10%, one

would observe a decrease of
approximately 5% in quantity demanded.
n

te above example, we used te word "approximately" because

te exact result
depends on weter te initial point

or te final point is used in te calculation.
%is

matters because for a linear demand curve te price

elasticity varies as one moves
along te curve. For

small canges in price and quantity te difference

between te two
results often is negligible, but

for large canges te difference may be more significant.


%o

deal wit tis issue, one can define te ,7. price elasticity

of demand. %e

arc
elasticity uses te average of te initial and final

quantities and te average of te initial
and final prices

wen calculating te proportionate cange in eac. Matematically,

te
arc price elasticity of demand is defined as:
Q2 - Q1
-----------------------
( Q1 + Q2 ) / 2
-------------------------------
P2 - P1
-----------------------
( P1 + P2 ) / 2
Were
Q1 = nitial quantity
Q2 = Final quantity
P1 = nitial price
P2 = Final price


astic versus Ineastic
> 1
n

tis case, te quantity demanded is relatively elastic,

meaning tat a price cange will
cause

an even larger cange in quantity demanded. %e case of
/
= infinity is referred
to as perfectly elastic. n tis teoretical case, te

demand curve would be orizontal.
For

products aving

a ig price elasticity of demand, a

price increase will result in a
revenue decrease

since te

revenue lost from te resulting

decrease in quantity sold
is

more tan te revenue gained from te price increase.
< 1
n tis case, te quantity demanded is relatively inelastic, meaning

tat a price cange
will cause less of a cange in quantity demanded. %e case of
/
= 0 is referred to as
perfectly inelastic. n

tis teoretical case, te demand curve

would be vertical.
For

products wose quantity demanded is inelastic, a

price increase will result in a
revenue increase since te revenue lost by

te relatively small decrease in quantity is
less

tan te revenue gained from

te iger price.
= 1
n

tis case, te product is said to ave unitary elasticity; small canges in price do not
affect te total revenue.






Factors Affecting the Price asticity of Demand
O Availability of substitutes: te more possible substitutes, te greater te elasticity.
Note tat te number of substitutes depends on ow broadly one defines te
product.
O Degree of necessity or luxury: luxury products tend to ave greater elasticity.
Some products tat initially ave a low degree of necessity are abit forming and
can become "necessities" to some consumers.
O Proportion of te purcaser's budget consumed by te item: products tat
consume a large portion of te purcaser's budget tend to ave greater elasticity.
O %ime period considered: elasticity tends to be greater over te long run because
consumers ave more time to adjust teir beavoir.
O Permanent or temporary price cange: a one-day sale will elicit a different
response tan a permanent price decrease.
O Price points: decreasing te price from $2.00 to $1.99 may elicit a greater
response tan decreasing it from $1.99 to $1.98.



Determinants of Price asticity of Demand
%e elasticity of demand depends on several factors of wic te following are some of te
important ones.

1. Nature of the Commodity

Commodities coming under te category of necessaries and essentials tend to be inelastic
because people buy tem watever may be te price. For example, rice, weat, sugar, milk,
vegetables etc. on te oter and, for comforts and luxuries, demand tends to be elastic e.g.,
%' sets, refrigerators etc.

2. istence of Substitutes

Substitute goods are those that are considered to be economicay interchangeabe by
buyers. f a commodity as no substitutes in te market, demand tends to be inelastic because
people ave to pay iger price for suc articles. For example. Salt, onions, garlic, ginger etc. n
case of commodities aving different substitutes, demand tends to be elastic. For example,
blades, toot pastes, soaps etc.

3. Number of uses for the commodity Singe-use goods are those items which can be
used for ony one purpose and mutipe-use goods can be used for a variety of
purposes. If a commodity as only one use (singe use product) ten demand tends to
be inelastic because people ave to pay more prices if tey ave to use tat product for
only one use. For example, all kinds of. Eatables, seeds, fertilizers, pesticides etc. On
te contrary, commodities aving several uses, [multiple-use-products] demand tends to be
elastic. For example, coal, electricity, steel etc.





4. Durabiity and reparabiity of a commodity
Durabe goods are those which can be used for a ong period of time. Demand t ends
to be elastic in case of durable and repairable goods because people do not buy t em
frequently. For example, table, cair, vessels etc. On te oter and, for perisable and non-
repairable goods, demand tends to be inelastic e.g., milk, vegetables, electronic watces etc.

5. Possibiity of postponing the use of a commodity
n case tere is no possibility to postpone te use of a commodity to future, te demand tends to
be inelastic because people ave to buy tem irrespective of teir prices. For example,
medicines. f tere is possibility to postpone te use of a commodity, demand tends to be elastic
e.g., buying a %' set, motor cycle, wasing macine or a car etc.


. Leve of Income of the peope
Generally speaking, demand will be relatively inelastic in case of ric people because any
cange in market price will not alter and affect teir purcase plans. On te contrary, demand
tends to be elastic in case of poor.

7. Range of Prices
%ere are certain goods or products like imported cars, computers, refrigerators, %' etc, wic
are costly in nature. Similarly, a few oter goods like nails; needles etc. are low priced goods. n
all tese cases, a small fall or rise in prices will ave insignificant effect on teir demand. Hence,
demand for tem is inelastic in nature. However, commodities aving normal prices are elastic
in nature.

8. Proportion of the ependiture on a commodity
Wen te amount of money spent on buying a product is eiter too small or too big, in tat case
demand tends to be inelastic. For example, salt, newspaper or a site or ouse. On te oter
and, te amount of money spent is moderate; demand in tat case tends to be elastic. For
example, vegetables and fruits, clots, provision items etc.

9. Habits
Wen people are abituated for te use of a commodity, tey do not care for price canges over
a certain range. For example, in case of smoking, drinking, use of tobacco etc. n tat case,
demand tends to be inelastic. f people are not abituated for te use of any products, ten
demand generally tends to be elastic.

10. Period of time
Price elasticity of demand varies wit te lengt of te time period. Generally speaking, in te
sort period, demand is inelastic because consumption abits of te people, customs and
traditions etc. do not cange. On te contrary, demand tends to be elastic in te long period
were tere is possibility of all kinds of canges.

11. Leve of Knowedge
Demand in case of enligtened customer would be elastic and in case of ignorant customers, it
would be inelastic.




12. istence of compementary goods
oods or services whose demands are interreated so that an increase in the price of one
of the products resuts in a fa in the demand for the other. Goods wic are jointly
demanded are inelastic in nature. For example, pen and ink, veicles and petrol, soes and
socks etc ave inelastic demand for tis reason. f a product does not ave complements, in
tat case demand tends to be elastic. For example, biscuits, cocolates, ice creams etc. n tis
case te use of a product is not linked to any oter products.

13. Purchase frequency of a product

f te frequency of purcase is very ig, te demand tends to be inelastic. For e.g., coffee, tea,
milk, matc box etc. on te oter and, if people buy a product occasionally, demand tends to
be elastic. For example, durable goods like radio, tape recorders, refrigerators etc.

Thus, the demand Ior a product is elastic or inelastic will depend on a number oI
Iactors.
Q.2 A company is selling a particular brand of tea and wishes to introduce a new flavor.
How will the company forecast demand for it?

Ans:
Technically speaking, one cannot really Iorecast the demand oI a new Ilavor in a product.

What you could do though, is do a survey, explaining the new Ilavor oI the existing product,
maybe test it on a Iew hundred people, and then check out all that data, age groups which preIer
it, social status which preIer it, etc. And then would be able to get a rough picture about the
general demand. For such an experiment

one will also have to consider Iactors about the changes in the existing product, in this case,
whether the Ilavor is appealing? Can it be considered as a necessity? Or an alternative to another
existing Ilavor oI the same product?


Demand Iorecasts are necessary since the basic operations process, moving Irom the suppliers'
raw materials to Iinished goods in the customers' hands, takes time. Most Iirms cannot simply
wait Ior demand to emerge and then react to it. Instead, they must anticipate and plan Ior Iuture
demand so that they can react immediately to customer orders as they occur. In other words,
most manuIacturers "make to stock" rather than "make to order" they plan ahead and then
deploy inventories oI Iinished goods into Iield locations.











The Following things should be kept in mind before forecasting a demand for a new flavor
of Tea in the market:





Nature of Customer demand:
Most oI the procedures are intended to deal with the situation where the demand to be Iorecasted
arises Irom the actions oI the Iirm`s customer base. Customers are assumed to be able to order
what, where, and when they desire. The Iirm may be able to inIluence the amount and timing oI
customer demand by altering the traditional "marketing mix" variables oI product design,
pricing, promotion, and distribution.

&DGEMENTAL APPROACHES: The essence oI the judgmental approach is to address the
Iorecasting issue by assuming that someone else knows and can tell you the right answer.
Eg.Surveys, Consensus method, Delphi method

EXPERIMENTAL APPROACHES: When an item is "new" and when there is no other
inIormation upon which to base a Iorecast, is to conduct a demand experiment on a small group
oI customers, e.g. Customer surveys, Consumer Panels, Test marketing, etc

RELATIONAL/CA&SAL APPROCHES: There is a reason why people buy our product. II
we can understand what that reason (or set oI reasons) is, we can use that understanding to
develop a demand Iorecast.eg.Econometric models, Input Output models, liIe cycle models,
Simulation models, etc


TIME SERIES APPROACHES: A time series is a collection oI observations oI well-deIined
data items obtained through repeated measurements over time, e.g. Simple moving average, etc.













Q.3 The supply of a product depends on the price. What are the other factors that will
affect the supply of a product?
Ans: Supply is one oI the two Iorces that determine the price oI a commodity in the market.
Supply means the amount oIIered Ior sale at a given price. According to Thomas, 'The supply oI
goods is the quantity oIIered Ior sale in a given market at a given time at various prices.
According to ProI. Macconnel 'supply may be deIined as a schedule which shows the various
amounts oI a product which a producer is willing to and able to produce and make available Ior
sale in the market at each speciIic price in a set oI possible prices during some given period.
Thus supply of a product refers to the various amounts which are offered for sale at a
particular price during a given period of time.

Supply can be equal, more or less, than the current production depending upon the nature oI the
commodity, price and the requirements oI the producers.

Supply is also diIIerent Irom stock. Stock is the total volume of a commodity which can be
brought into the market for sale at a short notice and supply means the quantity which is
actually brought in the market. For perishable commodities, like Iish and Iruits, supply and
stock are the same because they cannot be stored. The commodities which are not perishable can
be held back, iI prices are not Iavorable and released in large quantities when prices are
Iavorable. In short, stock is potential supply.




Supply Iunction is a comprehensive one as it analyses the causes Ior changes in supply in a
detailed manner. Mathematically a supply Iunction can be represented in the Iollowing manner.
Sx I (PI, T, Cp,Gp,N...etc)
Where
Sx supply oI a given product x
PI price oI Iactor input
T Technology
Cp cost oI production
Gp Government policy
N Number oI Iirms etc








Determinants of Supply
Apart Irom price, many Iactors bring about changes in supply. Among them the important Iactors
are:

1. Natural factors: Favorable natural Iactors like good climatic conditions, timely, adequate,
well distributed rainIall results in higher production and expansion in supply. On the other hand,
adverse Iactors like bad weather conditions, earthquakes, droughts, untimely, ill-distributed,
inadequate rainIall, pests etc., may cause decline in production and contraction in supply.

2. Change in techniques of production: An improvement in techniques oI production and use
oI modern, highly sophisticated machines and equipments will go a long way in raising the
output and expansion in supply. On the contrary, primitive techniques are responsible Ior lower
output and hence lower supply.

3. Cost of production: Given the market price oI a product, iI the cost oI production rises due to
higher wages, interest and price oI inputs, supply decreases. II the cost oI production Ialls, on
account oI lower wages, interest and price oI inputs, supply rises.

4. Prices of related goods: II prices oI related goods Iall, the seller oI a given commodity oIIer
more units in the market even though, the price oI his product has not gone up. Opposite will be
the case when the price oI related goods rises.

5. Government policy: When the government Iollows a positive policy, it encourages
production in the private sector. Consequently, supply expands. For example granting oI
subsidies, development rebates, tax concession, etc,. On the other hand, output and supply
cripples when the government adopts a negative policy. For example withdrawal oI all
concessions and incentives, imposition oI high taxes, introduction oI controls and quota system
etc.


6. Monopoly power: Supply tends to be low, when the market is controlled by monopolists, or a
Iew sellers as in the case oI oligopoly. Generally supply would be more under competitive
conditions.

7. Number of sellers or firms: Supply would be more when there are a large number oI sellers.
Similarly production and supply tends to be more when production is organized on large scale
basis. II rate or speed oI production is high, supply expands. Opposite will be the case when
number oI sellers is less, small scale production and low rate oI production.

8. Complementary goods: In case oI joint demand, the production & sale oI one product may
lead to production and sale oI other product also.

9. Discovery of new source of inputs: Discovery oI new sources oI inputs helps the producers
to supply more at the same price & vice-versa.

10

10. Improvements in transport and communication: This will Iacilitate Iree and quick
movements oI goods and services Irom production centers to marketing centers.

11. Future rise in prices: When sellers anticipate a Iurther rise in price, in that case current
supply tends to Iall. Opposite will be the case when, the seller expect a Iall in price.
Thus, many Iactors inIluence the supply oI a product in the market. A Iirm should have a
thorough knowledge oI all these Iactors because it helps in preparing its production plan and
sales strategy.

11


Q.4 Show how producers equilibrium is achieved with isoquants and isocost curves.?
Ans

1





1




1




1




1

Q.5 Discuss the full cost pricing and marginal cost pricing method. Explain how the two
methods differ from each other:
Ans: @he D|fference between Iu|| cost r|c|ng and marg|na| cost pr|c|ng |s as fo||ows
Full cost pricing:
Full cost pricing is a practice where the price oI a product is calculated by a Iirm on the basis oI
its direct costs per unit oI output plus a markup to cover overhead costs and proIits. The
overhead costs are generally calculated assuming less than Iull capacity operation oI a plant in
order to allow Ior Iluctuating levels oI production and costs.


a||ent o|nts on Iu|| Cost p|us r|c|ng
Traditional method oI pricing a product;
Most commonly used method;
Prices are set by adding a percentage oI proIit (either a mark up or a margin) to the total cost oI
the product;
Consistent with the absorption costing technique;
Commonly used by wholesalers, retailers, construction contractors, services, government
contractors;
UseIul in situation where:
Products are made based on speciIication by the customers;
Main objective is to make proIit aIter considering Iixed costs oI the business;
The costs are diIIicult to estimate in advance;
Expected demand at diIIerent price levels is diIIicult to estimate.




1

Simple Illustration:
et`s look at Product A:
Production cost as Iollows:
Variable cost -material l $1.50
Variable cost- labor $1.50
Total variable cost $3.00
Fixed cost $3.00
(Excludes administrative and selling overheads)
Required 50 mark up on total production cost.
For Full-Cost Plus Pricing:
Total cost $3.00$3.00 $6.00
50 on total/Iull cost 50 x $6.00 $3.00
Hence, Selling price $6.00$3.00 $9.00 per unit.
By pricing at $9.00, the company wants Product A to at least cover its total production cost.
Advantages oI Full Cost plus Pricing:
O Easy and simple to understand;
O Pricing decisions become standardized;
O Adopts a conservative approach that in the long run to at least ensure the recovery oI
Iixed cost oI a business;
ODiIIicult oI estimating demands can be avoided.
Disadvantages oI Full Cost Plus Pricing:
OTendency to set prices on inaccurate estimates;
OChallenges oI apportioning the Iixed overheads properly into diIIerent products
1

OUnsuitable Ior short term decisions making particularly in situation like surplus
production capacity, tendering Ior contracts price and others;
OIgnores competition and price elasticity oI demand and
OIgnores opportunity costs and relevant costs.


Marginal cost-plus pricing:

Marginal cost-plus pricing/mark- up pricing is a method oI determining the sales price by adding
a proIit margin on to either marginal cost oI production or marginal cost oI sales.
Whereas a Iull cost- plus approach to pricing draws attention to net proIit and the net proIit
margin, a variable cost-plus approach to pricing draws attention to gross proIit and the gross
proIit margin, or contribution.

The advantages of a marginal cost-plus approach to pricing are as follows.

- It is a simple and easy method to use.

- The mark-up percentage can be varied, and so mark- up pricing can be adjusted to reIlect
demand conditions.

- It draws management attention to contribution, and the eIIects oI higher or lower sales volumes
on proIit. In this way, it helps to create better awareness oI the concepts and implications oI
marginal costing and cost - volume-proIit analysis. For example, iI a product costs Rs 10 per unit
and a mark - up oI 150 is added to reach a price oI Rs.25 per unit, management should be
clearly aware that every additional Rs.1 oI sales revenue would add 60 pence to contribution and
proIit.

- In practice, mark-up pricing is used in businesses where there is a readily identiIiable basic
variable cost. Retail industries are the most obvious example, and it is quite common Ior the
prices oI goods in shops to be Iixed by adding a mark- up (20 or 33.3,say ) to the purchase
cost.

There are, of course, drawbacks to marginal cost- plus pricing ,

- Although the size oI the mark-up can be varied in accordance with demand conditions, it does
not ensure that suIIicient attention is paid to demand conditions, competitors` prices and proIit
maximization.

- It ignores Iixed overheads in the pricing decision, but the sales price must be suIIiciently high
to ensure that a proIit is made aIter covering Iixed costs.
1

Approach to pricing might be taken when a business is working at Iull capacity, and is restricted
by a shortage oI resources Irom expanding its output Iurther. By deciding what target proIit it
would like to earn, it could establish a mark-up per unit oI limiting Iactor.




Q.6 Discuss the price output determination using profit maximization under perfect
competition in the short run.?

Ans:
Profit-maximization implies earning highest possible amount of profits during a given
period of time.
A Iirm has to generate largest amount oI proIits by building optimum productive capacity both in
the short run and long run depending upon various internal and external Iactors and Iorces. There
should be proper balance between short run and long run objectives. In the short run a Iirm is
able to make only slight or minor adjustments in the production process as well as in business
conditions. The plant capacity in the short run is Iixed and as such, it can increase its production
and sales by intensive utilization oI existing plants and machineries, having over time work Ior
the existing staII etc.
Thus, in the short run, a Iirm has its own technical and managerial constraints. But in the long
run, as there is plenty oI time at the disposal oI a Iirm, it can expand and add to the existing
capacities build up new plants; employ additional workers etc to meet the rising demand in the
market. Thus, in the long run, a Iirm will have adequate time and ample opportunity to make all
kinds oI adjustments and readjustments in production process and in its marketing strategies.

Perfect competition describes a market structure whose assumptions are extremely strong and
highly unlikely to exist in most real-time and real-world markets. The reality is that most markets
are imperfectly competitive. Nonetheless, there is some value in understanding how price,
output and equilibrium is established in both the short and the long run in a market that holds
true to the tough assumptions oI a world oI perIect competition.













0




Establishing price and output in the short run under perfect competition





The previous diagram shows the short run equilibrium Ior perIect competition. In the short run,
the twin Iorces oI market demand and market supply determine the equilibrium ~market-
clearing price Ior the industry. In the diagram below, a market price P1 is established and
output Q1 is produced. This price is taken by each oI the Iirms. The average revenue curve (AR)
is their individual demand curve. Since the market price is constant Ior each unit sold, the AR
curve also becomes the Marginal Revenue curve (MR).
1

For the Iirm, the proIit maximizing output is at Q2 where MCMR. This output generates a total
revenue (P1 x Q2). The total cost oI producing this output can be calculated by multiplying the
average cost oI a unit oI output (AC1) and the output produced. Since total revenue exceeds total
cost, the Iirm in this example is making abnormal (economic) proIits. This is not necessarily the
case Ior all Iirms. It depends on their short run cost curves. Some Iirms may be experiencing sub-
normal proIits iI average costs exceed the market price. For these Iirms, total costs will be
greater than total revenue.





















Master of Business Administration - MBA Semester I
MB0042 Managerial Economics - 4 Credits
Book ID: B0908)
Ass|gnment et 2 (60 Marks)

Note Lach quest|on carr|es 10 Marks Answer a|| the quest|ons

1 Income e|ast|c|ty of demand has var|ous app||cat|ons Lxp|a|n each app||cat|on w|th the
he|p of an examp|e?

Ans C1 lncome elasLlclLy of demand has varlous appllcaLlons Lxplaln each appllcaLlon wlLh Lhe
help of an example?
Ans lncome elasLlclLy of demand may be deflned as Lhe raLlo or proporLlonaLe change ln Lhe
quanLlLy demanded of a commodlLy Lo a glven proporLlon change ln Lhe lncome ln shorL lL
lndlcaLes Lhe exLenL Lo whlch demand changes wlLh a varlaLlon ln consumer's lncome 1he
followlng formula helps Lo measure Lhe lncome elasLlclLy (Ly)
Ly ercenLage change ln demand
ercenLage change ln lncome
Cr Ly u ?
? u

Where
- Ly ls lncome elasLlclLy of demand
- u ls change ln demand
- u ls orlglnal demand
- ? ls change ln lncome
- ? ls orlglnal lncome


Lxample
Crlglnal demand00 unlLs Crlglnal lncome 000 unlLs
new demand 00 unlLs new lncome 000 unlLs
Change ln demand 0000 00 unlLs change ln lncome000000000
Pence Ly00/000*000/001
Cenerally speaklng Ly ls poslLlve 1hls ls because Lhere ls a dlrecL relaLlonshlp beLween lncome
and demand le hlgher Lhe lncome hlgher would be Lhe demand and vlce versa Cn Lhe basls
of Lhe numerlcal value of Lhe coefflclenL Ly ls classlfled as greaLer Lhan one less Lhan one
equal Lo one equal Lo zero and negaLlve 1he concepL of ey helps us ln classlfylng commodlLles ln Lo
dlfferenL caLegorles
1 When Ly ls poslLlve Lhe commodlLy ls normal (used ln dayLoday llfe)
When Ly ls negaLlve Lhe commodlLy ls lnferlor (lor example [owar beedl eLc)
When Ly ls poslLlve and greaLer Lhan one Lhe commodlLy ls luxury
When Ly ls poslLlve buL less Lhan one Lhe commodlLy ls essenLlal
When Ly ls zero Lhe commodlLy ls neuLral Lg SalL maLch box eLc

ract|ca| app||cat|on of |ncome e|ast|c|ty of demand
1 ne|ps |n determ|n|ng the rate of growth of the f|rm
lf Lhe growLh raLe of Lhe economy and lncome growLh of Lhe people ls reasonable
lorecasLed ln LhaL case lL ls posslble predlcL expecLed lncrease ln Lhe sales of a flrm and
vlce versa

2 ne|ps |n the demand forecast|ng of a f|rm
lL can be ln esLlmaLlng fuLure demand provlded Lhe raLe of lncrease ln lncome and Ly for
1he producLs are known 1hus lL helps ln demand forecasLlng acLlvlLles of a flrm




ne|ps |n product|on p|ann|ng and mar ket|ng
1he knowledge of Ly ls essenLlal for producLlon plannlng formulaLlng markeLlng SLraLegy
decldlng adverLlslng expendlLures and naLure of dlsLrlbuLlon channel eLc ln Lhe Long run

4 ne|ps |n ensur|ng stab|||ty |n product|on
roper esLlmaLlon of dlfferenL degrees of lncome elasLlclLy of demand for dlfferenL Lypes of
producL helps ln avoldlng overproducLlon or underproducLlon of a flrm Cne should know
wheLher rlse or fall ln lncome ls permanenL or Lemporary
S ne|ps |n est|mat|ng construct|on of houses
1he raLe of growLh ln lncomes of people also helps ln houslng programs ln a counLry 1hus lL
helps a loL ln managerlal declslons of a flrm

2 when |s the op|n|on survey method used and what |s the effect|veness of the method
Ans Survey of buyer's lnLenLlon or preference ls one of Lhe lmporLanL meLhods of demand
lorecasLlng lL ls also called Cplnlon Survey MeLhod"
Under tis metod, consumer buyers are requested to indicate teir preference and
Willingness about a particular product. %ey are about to reveal teir future purcase
plans wit #espect to specific items.
%ey are expected to give answer to question like wat items tey intends to buy, in
wat Quantity, wy, were, wat quality tey expect, ow muc tey are planning to
spend etc. Generally, te field surveys are conducted by te marketing researc
departments of te Company or iring te services of outside researc organization
consisting of learned and igly Qualified professionals.

%e eart of te survey is questionnaire. t is a compreensive one covering almost all
Questions eiter directly or indirectly in a most intelligent manner. t is prepared by an
expert Body wo are specialist in te field or marketing.

%e questionnaire is distributed among te consumer eiter troug mail or in person
by te company. Consumers are requested to furnis all relevant and correct
information.

%e next step is to collect te questionnaire from te consumers for te purpose of


Evaluation. %e materials collected will be classified, edited and analyzed. f any bias
Prejudices, exaggerations, artificial or excess demand creation are found at te time of
Answering tey would be eliminated.

%e information so collected will now be consolidated and reviewed by te top
Executives wit lot of experiences. t will be examined torougly. nferences are drawn
and Conclusions are arrived at. Finally a report is prepared and submitted to te
management for %aking final decisions.



%he success of the survey method depends on many factors:

1. %e nature of te question asked.
2. %e ability of te surveyed.
3. %e representative of te sample
4. Nature of te product
5. Caracteristics of te market
6. Consumer beavior
7. %ecniques of analysis
8. Conclusion drawn etc.
%e management sould not entirely depend on te result of survey reports t project
future Demand. Consumer may not express teir onest and real views and as suc
tey may give only te broad trends in te market. n order to arrive, at rigt conclusion,
field surveys sould be regularly cecked and supervised.


%is metod is simple and useful to te producers wo produce goods in bulk. Here te
Burden of forecasting is put on te customers.

However tis metod is not muc useful in estimating te future demand of te
Houseold as tey run in a large numbers and also do not freely express teir future
demand #equirements. t is expensive and so difficult. Preparation of questionnaire is
not an easy task. At best it can be used for sort term forecasting.












".3 Show how pr ice is determined by the forces of demand and suppy, by using
forces of quiibrium.

Ans: %e word equilibrium is derived from te Latin word "a equilibrium wic
Means equal balance. t means a state of even balance in wic opposing forces or
tendencies neutralize eac oter. t is a position of rest caracterized by absence of
cange. t is a state were tere is complete agreement of te economic plans of te
various market Participants so tat no one as a tendency to revise or alter is decision.
n te words of Professor Meta: "Equilibrium denotes in economics absence of cange
in movement.

Market quiibrium
There are two approaches to market equilibrium viz., partial equilibrium approach
And the general equilibrium approach. The partial equilibrium approach to pricing Explains
price determination oI a single commodity keeping the prices oI other Commodities constant. On
the other hand, the general equilibrium approach explains the Mutual and simultaneous
determination oI the prices oI all goods and Iactors. Thus it explains a multi market equilibrium
position.

Earlier to Marshall, there was a dispute among economists on whether the Iorce oI Demand or
the Iorce oI supply is more important in determining price. Marshall gave Equal importance to
both demand and supply in the determination oI value or price. He Compared supply and
demand to a pair oI scissors ' We might as reasonably dispute whether It is the upper or the
under blade oI a pair oI scissors that cuts a piece oI paper, as whether Value is governed by
utility or cost oI production. Thus neither the upper blade nor the lower blade taken separately
can cut the paper; both have their importance in the process oI cutting. ikewise neither supply
alone, nor demand alone can determine the price oI a commodity, both are equally important in
the determination oI price. But the relative importance oI the two may vary depending upon the
time under consideration. Thus, the demand oI all consumers and the supply oI all Iirms together
determine the price oI a commodity in the market.



E q u i l i b r i u m b e t w e e n d e m a n d a n d s u p p l y p r i c e :
Equilibrium between demand and supply price is obtained by the interaction oI these two Iorces.
Price is an independent variable. Demand and supply are dependent variables. They depend on
price. Demand varies inversely with price, a rise in price causes a Iall in demand and a Iall in
price causes a rise in demand. Thus the demand curve will have a downward slope indicating the
expansion oI demand with a Iall in price and contraction oI demand with arise in price. On the
other hand supply varies directly with the changes in price, a rise in price causes a rise in supply
and a Iall in price causes a Iall in supply. Thus the supply curve will have an upward slope .At a
point where these two curves intersect with each other the equilibrium price is established. At
this price quantity demanded is equal to the quantity demanded. This we can explain with the
help oI a table and a diagram



rlce ln 8s uemand ln use Supply ln unlLs SLaLe of markeL ressure on prlce
0 uS
10 0 uS
0 1 1 uS neuLral
10 0 10 uS
0 uS



ln Lhe Lable aL 8s0 Lhe quanLlLy demanded ls equal Lo Lhe quanLlLy supplled Slnce Lhe prlce ls
agreeable Lo boLh Lhe buyer and sellers Lhere wlll be no Lendency for lL Lo change Lhls ls called
equlllbrlum prlce Suppose Lhe prlce falls Lo 8s Lhe buyer wlll demand 0 unlLs whlle Lhe seller
wlll supply only unlLs Lxcess of demand over supply pushes Lhe prlce upward unLll lL reaches
Lhe equlllbrlum poslLlon supply ls equal Lo Lhe demand Cn Lhe oLher hand lf Lhe prlce rlses Lo
8s0 Lhe buyer wlll demand only unlLs whlle Lhe sellers are ready Lo supply unlLs Sellers
compeLe wlLh each oLher Lo sell more unlLs of Lhe commodlLy Lxcess of supply over demand
pushes Lhe prlce downward unLll lL reaches Lhe equlllbrlum 1hls process wlll conLlnue Llll Lhe
equlllbrlum prlce of 8s0 ls reached 1hus Lhe lnLeracLlons of demand and supply forces acLlng
upon each oLher resLore Lhe equlllbrlum poslLlon ln Lhe markeL ln Lhe dlagram uu ls Lhe
demand curve SS ls Lhe supply curve uemand and supply are ln equlllbrlum aL polnL L where
Lhe Lwo curves lnLersecL each oLher CC ls Lhe equlllbrlum ouLpuL C ls Lhe equlllbrlum prlce
Suppose Lhe prlce C ls hlgher Lhan Lhe equlllbrlum prlce C AL Lhls polnL prlce quanLlLy
demanded ls u 1hus uS ls Lhe excess supply whlch Lhe seller wanLs Lo push lnLo Lhe
markeL compeLlLlon among Lhe sellers wlll brlng down Lhe prlce Lo Lhe equlllbrlum level where
Lhe supply ls equal Lo Lhe demand AL prlce C1 Lhe buyers wlll demand 1u1 quanLlLy whlle
Lhe sellers are ready Lo sell 1S1 uemand exceeds supply Lxcess demand for goods pushes up
Lhe prlce Lhls process wlll go unLll equlllbrlum ls reached where supply becomes equal Lo
demand







4 D| s t | ngu| s h bet ween f | xed cos t and var | ab| e cost us | ng an examp| e?

Ans: Fi xed cost :

These costs are incurred on Iixed Iactors like land, building, equipments, plants, superior types oI
labor, top management etc. Fixed costs in the short run remains constant because the Iirm does
not change the size oI plant and the amount oI the Iixed Iactors employed. Fixed costs do not
vary with either expansion or contraction in output. These cost are to be incurred by a Iirm even
output is zero. Even iI the Iirm close down its operation Ior sometime temporarily in the short
run, but remains in business, these cost have to be borne by it. Hence, these costs are
independent oI output and are reIerred to as unavoidable contractual cost.


ProI. Marshall called Iixed cost as supplementary costs. They include such items as contractual
rent payments, interest on capital borrowed, insurance premium, depreciation and maintenance
allowance, administrative expenses like manager`s salary or salary oI the permanent staII,
property and business taxes, license Iees, etc. They are called as over- head costs because these
costs are to incurred whether there is production or not. These costs are to be distributed on each
units oI output produced by a Iirm. Hence, they are called as indirect costs.

Va r i a b l e Co s t s :

The costs corresponding to variable Iactors are described as variable costs. These costs are
incurred on raw materials, ordinary labor, transport, power, Iuel, water etc, which directly vary in
the short runs.

Variable costs are directly and proportionately increases or decreases with the level oI output. II
a Iirm shut down Ior some times in the short run; then it will not use the variable Iactors oI
production and will not thereIore incurs any variable costs. Variable costs are incurred only
when some amount oI output is produced. Total variable cost increases with the level oI increase
in the level oI production and vice-versa. ProI. Marshall called variable costs as prime costs or
direct costs because the volume oI output produced by a Iirm depends directly upon Lhem

lL ls clear from Lhe above descrlpLlon LhaL a producLlon cosL conslsLs of boLh flxed as well as
varlable cosLs 1he dlfference beLween Lhe Lwo ls meanlngful and relevanL only ln Lhe shorL run
ln Lhe long run all cosLs become varlable because all facLors of producLlon become ad[usLable
and varlable ln Lhe long run

Powever Lhe dlsLlncLlon beLween Lhe flxed and varlable cosLs ls very lmporLanL ln Lhe shorL
because lL lnfluences Lhe average cosLs behavlor of Lhe flrm ln Lhe shorL run even lf a flrm
wanLs Lo close down lLs operaLlon buL wanLs Lo remaln ln Lhe buslness lL wlll have Lo lncur flxed
cosLs buL lL musL cover aL leasL lLs varlable cosLs



Q. 5 Di s c u s s Ma r r i s Gr o wt h Ma x i mi z a t i o n mo d e l a nd s h o w h o w i t
i s di f f e r e n t f r o m t h e Sal es maxi mi zat i on model ?
Ans:

ProIit maximization is traditional objective oI a Iirm. Sales maximization objective is explained
by ProI. Boumal. On similar lines, ProI. Marris has developed another alternative growth
maximization model in recent years. It is a common Iactor to observe that each Iirm aims at
maximizing its growth rate as this goal would answer many oI the objectives oI a Iirm. Marris
points out that a Iirm has to maximize its balanced growth rate over a period oI time.
Marris assumes that the ownership and control oI the Iirm is in the hands oI two groups oI
people, i.e. Owner and managers. He Iurther points out that both oI them have two distinctive
goals. Managers have a utility Iunction in which the amount oI salary, status, position, power,
prestige and security oI job etc are the most import variable where as in case oI are more
concerned about the size oI output, volume oI proIits, market shares and sales maximization.

Utility Iunction oI the manager and that the owner are expressed in the Iollowing manner
Uo I |size oI output, market share, volume oI proIit, capital, public esteem etc.|
Um I |salaries, power, status, prestige, job security etc.|
In view oI Marris the realization oI these two Iunctions would depend on the size oI the Iirm.
arger the Iirm, greater would be the realization oI these Iunctions and vice-versa. Size oI the
Iirm according to Marris depends on the amount oI corporate capital which includes total volume
oI the asset, inventory level, cash reserve etc. He Iurther points out that the managers always aim
at maximizing the rate oI growth oI the Iirm rather than growth in absolute size oI the Iirms.
Generally managers like to stay in a grouping Iirm. Higher growth rate oI the Iirm satisIy the
promotional opportunity oI managers and also the share holders as they get more dividends.
oumal ` s Sal es Maxi mi zat i on model :
Sales maximization model is an alternative Ior proIit maximization model. This model is
developed by ProI. W.J. Boumal, an American economist. This alternative goal has assumed
greater signiIicance in the context oI the growth oI the oligopolistic Iirms. The model highlights
that the primary objective oI the Iirm is to maximize its sales rather than proIit maximization. It
states that the goal oI the Iirm is maximization oI sales revenue subject to a minimum proIit
constraint. The minimum proIit constraint is determined by the expectation oI the shareholders.
This is because no company can displease the shareholders. It is to be noted here that
maximization oI sales does not mean maximization oI physical sales but maximization oI total
sales revenue. Hence, the managers are more interested in increasing sales rather than proIit. The
0

basic philosophy is that when sales are maximized automatically proIits oI the company would
also go up. Hence, attention is diverted to increase the sales oI the company in recent years in the
context oI highly competitive market.
How Profit Maximization model differs from Sales Maximization model:
O The sale maximization model diIIers on the Iollowing grounds:

O Emphasis is given on maximizing sales rather than proIit.

O Increase the competitive and operational ability oI the company.

O The amount oI slack earning and salaries oI the top managers are directly linked to it.

O It helps in enhancing the prestige and reputation oI top management, distributes more
dividends to share holders and increases the wage oI the workers and keeps them happy.

O The Iinancial and other lending institutions always keep a watch on the sales revenue oI a
Iirm as it is an indication oI Iinancial health oI the Iirm.



Q. 6 Expl ai n how f i scal pol i cy i s used t o achi eve economi c st abi l i t y?

Ans: In order to achieve a stable economic condition, Iiscal policy has to play a positive and
constructive role both in developed and developing nations. The speciIic role to be played by
Iiscal policy can be discussed as Iollows:

O To a c t a s o pt i mu m a l l o c a t o r o f r e s o u r c e s :

As most oI the resources are scarce in their supply, careIul planning is needed in its
allocation so as to achieve the set targets .Rational allocation would ensure IulIillment oI
various objectives.


O To a c t a s a s a v e r :

1. It should Iollow a rational consumption policy reduces the MPC and raises the MPS.
2. Taxation policy has to be modiIied to raise the rates oI old taxes, introduces new additional
taxes, and extends the tax-nets.
3. ProIit earning capacity oI public sector units are to be raise substantially to mop-up Iinancial
resources.
4. The government should borrow more money both in the country and outside the country.
5. Higher the rates oI interest are to be oIIered Ior government bonds and security

1

O To a c t a s a n i n v e s t o r :
Mere mobilization oI Iinancial resources is not an end in itselI. It should result in the creation oI
real resources which are more important in accelerating the growth process. Rapid economic
growth depends upon the volume oI investment. Hence, Iiscal policies have to be ensuring higher
volume oI investment in both private and public sectors.

O To a c t a s p r i c e s t a bi l i z e r :
Price stability is oI paramount oI importance in an economy .Extreme levels oI both inIlation and
deIlation would disrupt and disturb the normal and regular working oI an economic system. This
would come in the way oI stable and persistent growth. Hence all measures are to be taken to
check these two dangerous situations so as to create necessary congenial atmosphere to prepare
the background Ior rapid economic growth.


O To a c t a s a n e c o n o mi c s t a b i l i z e r :
Price stability would create the necessary back ground Ior over all economics stability. Upswing
and downswing in the level oI economic activities are to be avoided. II an economy is subject to
Irequent Iluctuation in the Iorm oI trade cycle, certainly, it would undermine and disturb the
growth process. Instability would come in the way oI persistent and consistent growth in a
country. Hence all measure to be taken to ensure economic stability.


O T o a c t a s a n e m p l o y m e n t g e n e r a t o r :
Fiscal policy should help in mobilizing more Iinancial resources, convert them in to investment
and create more employment opportunity to absorb the huge unemployed man power.

O T o a c t a s b a l a n c e r :
There must be proper balance between aggregate saving and aggregate investment, demand and
supply, income and output and expenditure, economic overhead capital and social overhead
capital etc. Any sort oI imbalance would result in either surpluses or scarcity in diIIerent sectors
oI the economy leading to Iast growth in some sectors Iollowed by lagging oI some other sectors.

O T o a c t a s g r o w t h p r o m o t e r :
The basic objective oI any economic policy is to ensure higher economic growth rates. This is
possible when there is higher national savings, investment, production, employment and income.
Hence, Iiscal policy is to be designed in such a manner so as to promote higher growth in an
economy.


O To a c t a s i n c o me r e d i s t r i b ut e :
Fiscal policy has to minimize inequalities and ensure distributive justice in an economy. This is
possible when a rational taxation and public expenditure policy is adopted. More money is
collected Irom richer section oI the society through various imaginative taxation policies and a
larger amount oI money is to be spent in Iavor oI poorer sections oI the society. Thus, inequality
is to be reduced to the minimum.



O To a c t a s s t i mu l a t o r o f l i v i n g s t a nd a r d s o f p e o p l e :
The Iinal objective is to raise the level oI living standards oI the people. This is possible when
there is higher output, income and employment leading to higher purchasing power in the hands
oI common man. Hence, Iiscal policy should help in creating more wealth in the economy. II
there is economic prosperity, then it is possible to have a satisIactory, contended and peaceIul
liIe.

Thus, Iiscal policy has to play a major role in promoting economic growth in a country.