mg2452 eefa 2 marks.pdf

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Anna University , Chennai

DEPARTMENT OF COMPUTER SCIENCE & ENGINEERING

QUESTION BANK

SUBJECT CODE : MG2452

SUBJECT NAME : ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING

SEM ESTER : VII

YEAR : IV

REGULATION : 2008

Prepared By

D.Vinod. M.E

Asst.Prof/CSE. A.C.T.C.E.T



UNIT I INTRODUCTION

PART A(2 MARKS)

1. Define Managerial Economics

By combining the basic definition of the two terms Manager and Economics you get the definition of

managerial economics. Managerial Economics is the study of directing resources in a way that it most

efficiently achieves the managerial goals. Managerial Economics is also the application of the tools of economics

analysis in decision making in actual business situations.

2. What is meant by Micro economic analysis?

Micro economic analysis deals with the problems of an individual firm, industry or consumer etc. It helps in dealing

with issues which go on within the firm such as putting the resources available with the firm to its best use,

allocating resources within various activities of the firm to its best use, allocating resources within various activities

of the firm and also deals with being technically and economically efficient.

3. What is meant by Prescriptive approach?

Prescriptive or normative approach tells How things ought to be done.

4. What is meant by descriptive approach?

Descriptive approach tells how things are done.

5. Scope of Managerial Economics:

The following aspects constitute the scope of managerial economics:

1. Objectives of a business firm

2. Demand analysis and forecasting

3. Cost analysis

4. Production management

5. Supply analysis

6. Pricing decisions, policies and practices

7. Profit management

8. Capital budgeting and investment decisions

9. Decision theory under uncertainty

10. Competition



6. Give the Objectives of a business firm

The objectives of a business firm may be varied. Apart from generating profits a firm has many other objectives like

being a market leader, being a cost leader, achieving superior efficiency, achieving superior quality, achieving

superior customer responsiveness etc.

7. What is meant by Supply Analysis?

Supply analysis deals with the various aspects of supply of a commodity. Certain important aspects of supply analysis

are supply schedule, curves and function, elasticity of supply, law of supply and its limitations and factors

influencing supply.

8. What is meant by Capital Budgeting?

Capital budget is the planning of expenditure on assets.

9. Use of Engineering Economics:

Engineering economics accomplishes several objectives. It presents the aspects of traditional economics that are

relevant for business and engineering decision making in real life.

10. Define Logistics:

It is the movement of goods from one place to the other.

11. Define Inbound Logistics:

It is the movement of raw materials to the factory premises.

12. Define outbound logistics:

It is the movement of finished goods to wholesale or retail outlets and to the final consumers.

13. Define Statistics:

Statistics provide the basis for empirical testing of theory. Generalizations or theory cannot be accepted for practice

unless these theories are checked against the data from the reality. This way, theories become more practical and

useful in real life business situation.

14. Define Economics and define the divisions of Economics:



Economics has two divisions namely micro economics and macroeconomics. Micro economics is the branch of

economics where the unit of study is an individual or a firm while macroeconomics is branch of economics where

the unit of study is aggregative in character and considers the entire economy.

15. Define Accounting:

Accounting can be defined as the recording of financial operations of an organization. Managerial decisions on profits

and sales etc. derive input largely from the accounting statement of a firm.

16. Define Managerial Economics and Mathematics:

Many of the theories in mathematics will find use in economics. Concepts such as calculus, vectors, logarithms

and exponentials, determinants and matrix, algebra etc. are some to name a few. Managerial economics is metrical

in character. It estimates various economic relationships prediction relevant economic quantities and uses them in

decision making and planning for the future. So mathematics becomes an important tool in managerial economics.

17. Define Operations research:

Operations research was developed as science during the Second World War to solve the complex operations problems

of planning and resource allocation in defense and in basic industries which specifically supplied military equipments.

These theories find high usage in various field of management to solve problems pertaining to logistics, both inbound

and outbound and also the movement of material within the factory premises etc.

18. Define a competitor.

The competitors of the firm are also likely to react or even pro-act to any decisions made by the firm. Competitors

always try to navigate the competitive advantage gained by the firm. Thus managers will have to make wise

investments

in projects that will be hard to be imitated by the competition.

19. Define Decision theory under uncertainty:

Most of the business decisions taken by the managers are done under uncertainty. Uncertainties pertaining to demand,

cost, price, profit, capital etc. prevail most of the time when decisions are made. This makes the whole decision

making process difficult and complex. The tools used in economic analysis have been modified and refined so as

to take into account the uncertainty and thus help decisions making in logical and scientific manner.



20. Define Profit Management:

All business firms are motivated and committed to produce profits. Profits are one of the tangible yardsticks to measure

the performance of the firm and the managers concerned. It also signifies the health of the firm. Profits are influenced

by various factors such as cost of production, revenues and other factors both internal and external to the firm. Profits

are hard to predict.

21. Define Pricing Decisions

A firms profitability and success greatly depend on the pricing decisions and the pricing policies of the firm.

The patronization of the firms products by the customers, the competition faced by the product along with the profits

of the firm, largely depends on the price of the product. Pricing also depends on the environment in which the firm

operates, competitions, customers etc.

22. Define Production Management:

When a manager organizes and plans the firms production functions i.e. when he tries to convert the raw materials

to finished product, he faces a number of economic problems. The study of production function describes the input

output relationship.

23. Define Cost Analysis:

One way to earn higher profits is by controlling the cost involved in producing the product. Study of cost is necessary

for making efficient and effective managerial decisions. If a detailed cost analysis and estimation is done, the firm can

move upon effective profit management and sound pricing practices.

24. What are the Macro economic Conditions?

(a) The economy in which firms operate is predominantly a free enterprise economy.

(b) The present day economy is undergoing rapid technological and economic changes and,

(c) The government intervening in the economic affairs has increased in the recent times and is likely to go up further.

25. What are the Common points in Managerial Economics?

1. Managerial economics deals with the decision making by managers, executives and engineers of economic nature.

2. Managerial economics is goal oriented.

3. Managerial Economics is both conceptual and metrical.

4. Managerial economics is pragmatic.

PART B (16 MARKS)



1. Explain the nature and scope of managerial economics.

CHIEF CHARACTERISTICS

1. Managerial Economics is micro-economic in character. This is because the unit of study is a firm; it is the problems

of a business firm which are studied in it. Managerial Economics does not deal with the entire economy as a unit of

study.

2. Managerial Economics largely uses that body of economic concepts and principles which is known as Theory of

the Firm or Economics of the Firm. In addition, it also seeks to apply Profit Theory which forms part of

Distribution Theories in Economics.

3. Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves complications

ignored in economic theory to face the overall situation in which decisions are made. Economic theory appropriately

ignores the variety of backgrounds and training found in individual firms but Managerial Economics considers the

particular environment of decision-making.

4. Managerial Economics belongs to normative economics rather than positive economics (also sometimes

known as descriptive economics). In other words, it is prescriptive rather than descriptive. The main body of

economic theory confines itself to descriptive hypothesis, attempting to generalize about the relations among different

variables without judgment about what is desirable or undesirable.

5. Macro-economics is also useful to Managerial Economics since it provides an intelligent understanding of

the environment in which the business must operate. This understanding enables a business executive to adjust in the

best possible manner with external forces over which he has no control but which play a crucial role in the well-being

of his concern.

SCOPE OF MANAGERIAL ECONOMICS

1. Demand Analysis and Forecasting: A major part of managerial decision-making depends on accurate estimates of

demand. Before production schedules can be prepared and resources employed, a forecast of future sales is essential.

2. Cost Analysis: A study of economic costs, combined with the data drawn from the firms accounting

records, can yield significant cost estimates that are useful for management decisions.

3. Production and Supply Analysis: Production analysis mainly deals with different production function and their

managerial uses. Supply analysis deals with various aspects of supply of a commodity. Certain important

aspects of supply analysis are: Supply schedule, curves and function. Law of supply and its limitations, Elasticity of

supply and Factors influencing supply.

4. Pricing Decisions, Policies and Practices: The important aspects dealt with under this area are: Price Determination

in various Market Forms, Pricing Methods, Differential Pricing, Product-line Pricing and Price Forecasting.

5. Profit Management: Business firms are generally organized for the purpose of making profits and, in the long run,

profits provide the chief measure of success. In this connection, an important point worth considering is the element



of uncertainty existing about profits because of variations in costs and revenues which, in turn, are caused by factors

both internal and external to the firm.

6. Capital Management: Capital management implies planning and control of capital expenditure. The topics dealt

with are: Cost of Capital, Rate of Return and Selection of projects.

2. Discuss the relationship between managerial economics and other disciplines.

RELATIONSHIP OF MANAGERIAL ECONOMICS WITH OTHER DISCIPLINES

1. Managerial Economics and Economics: Managerial Economics has been described as economics applied to

decision-making. It may be viewed as a special branch of economics bridging the gulf between pure economic theory

and managerial practice. Economics has two main divisions: micro-economics and macro-economics. Micro-

economics has been defined as that branch where the unit of study is an individual or a firm. Macro-economics, on

the other hand, is aggregative in character and has the entire economy as a unity of study.

2. Managerial Economics and statistics: Managerial Economics employs statistical methods for empirical testing of

economic generalizations. These generalizations can be accepted in practice oly when they are checked against the

data from the world of reality and are found valid.

3. Managerial Economics and Mathematics: Mathematics is yet another important tool-subject closely related to

Managerial Economics. This is because Managerial Economics is metrical in character, estimating various economics

relationships, predicting relevant economic quantities and using them in decision-making and forward planning.

4. Managerial Economics and Accounting: Managerial Economics is also closely related to accounting which is

concerned with recording the financial operations of a business firms. Indeed, accounting information is one of the

principal sources of data required by a managerial economist for his decision-making purpose.

5. Managerial Economics and Operations Research: The significant relationship between managerial economics

and operations research can be highlighted with reference to certain important problems of managerial economics

which are solved with the help of or techniques. The problems are: allocation problems, competitive problems,

waiting line problems and inventory problems.

3. List the basic economic tools in managerial economics.

Opportunity Cost Principle:



By the opportunity cost of a decision is meant the sacrifice of alternatives required by that decision. Thus, it

should be clear that opportunity costs require ascertainment of sacrifices. If a decision involves no sacrifice, its

opportunity cost is nil. For decision-making, opportunity costs are the only relevant costs. The opportunity cost

principle may be stated as under: The cost involved in any decision consists of the sacrifices of alternatives

required by that decision. If there are no sacrifices, there is no cost.

Incremental Principle:

Incremental concept involves estimating the impact of decision alternatives on costs and revenues, emphasizing

the changes in total cost and total revenue resulting from changes in prices, products, procedures, investments or

whatever may be at stake in the decision. The two basic components of incremental reasoning are:

Incremental cost and incremental revenue. Incremental cost may be defined as the change in total cost resulting

from a particular decision. Incremental revenue is the change in total revenue resulting from a particular decision.

Principle of Time Perspective:

The economic concepts of the long run and the short run have become part of everyday language. Managerial

economics are also concerned with the short-run and long-run effects of decisions on revenues as well as costs. The

really important problem in decision- making is to maintain the right balance between the long-run and the short-

run considerations. A decision may be made on the basis of short-run considerations, but may as time elapses have

long- run repercussions which make it more or less profitable than it at first appeared.

Discounting Principle:

One of the fundamental ideas in economics is that a rupee tomorrow is worth less than a rupee today. This seems

similar to saying that a bird in hand is worth two in the bush. If a decision affects costs and revenues at future

dates, it is necessary to discount those costs and revenues to present values before a valid comparison of alternatives

is possible.

Equi-marginal Principle:

This principle deals with the allocation of the available resources among the alternative activities. According

to this principle, an input should be so allocated that the value added by the last unit is the same in all cases. This

generalization is called the equi-marginal principle.

4. Explain the objectives of firms and analyze different theories governing the same.

Baumols Theory of Sales Revenue Maximization

Prof. J. Baumol has postulated seller revenue maximization approach as an alternative to profit maximization

objective. The factors which explain the pursuance of this objective are following:

1. Financial institutions evaluate the success and strength of the firm in terms of rate of growth of its sales revenue.



2. Empirical evidence shows that the stock earnings and salaries of top management are correlated more closely

with sales than with profits.

3. Increasing sales revenue over a period of time gives prestige to the top management, but profits are enjoyed only

by the shareholders.

4. Growing sales means higher salaries and better terms. Hence sales revenue maximizations results in a healthy

personnel policy.

5. It is seen that managers prefer a steady performance with satisfactory profits than spectacular profits year after

year. They will be criticized if spectacular profits decline. Hence they may prefer a safe and steady performance

with satisfactory profits but good sales.

6. Large and increasing sales help the firm to obtain a bigger market share which gives it a greater competitive

power.

ASSUMPTIONS OF BAUMOLS SALE MAXIMIZATION MODEL

i. Sales maximization goal is subject to a minimum profit constrain.

ii. Advertisement is a major instrument of sales maximization i.e., advertisement will shift the demand curve to the

right.

iii. Advertisement costs are independent of production costs.

iv. Price of the product is assumed to be constant.

IMPLICATIONS OF BAUMOLS THEORY

i. His theory is more consistent with observed behavior. In the traditional theory changes in fixed costs do not

influence output or prices except for fixing the breakeven point. But according to Baumol a firm which experiences

any increase in fixed costs will try to reduce them or pass them on to the consumer in the form of higher prices,

through large scales.

ii. This theory also establishes that businessmen may consider non-price competition through sales maximization to

be the more advantageous alternative.

iii. However, Baumols theory does not explain how the firms maximize their sales volume within a profit

constraint. Further it explains business behavior, without elaborating the mechanism by which they try to find new

alternative.

MARRIS THEORY OF MAXIMISATION OF FIRMS GROWTH RATE

According to Robin Marris, managers maximize firms balanced growth rate subject to managerial and financial

constraints. He defines firms balanced growth rate (G) as, G= GD=GC

Where GD=growth rate of demand for firms product and GC=growth rate of capital supply to the firm.



In simple words, a firms growth rate is balance when demand for its product and supply of capital to the firm

increase at the same rate. The two growth rates are according to Marris, translated into utility functions:

(i) Managers utility function: The managers utility function (Um) and owners utility(Uo) may be satisfied as

follows. Um=f(salary, power, job security, prestige, status).

(ii) Owners utility function Owners utility function (Uo): Uo=f (output, capital, market-share, profit, public

esteem), implies growth of demand for firms product and supply of capital.

Therefore, maximization of Uo means maximization of demand for firms product or growth of capital supply.

According to Marris, by maximizing these variables, managers maximize both their own utility function and that of

the owners. The managers can do so because most of the variables (e.g., salaries, status, job security, power, etc)

appearing in their own utility function and those appearing in the utility function of the owners (e.g., profit, capital

market, share, etc) are positively and strongly correlated with a single variable, i.e., size of the firm. Maximization

of these variables depends on the maximization of the growth rate of the firms. The managers, therefore, seek to

maximize a steady growth rate.

Marriss theory, though more rigorous and sophisticated than Baumols sales revenue maximization, has its own

weaknesses. It fails to deal to deal satisfactorily with oligopolistic interdependence & it ignores price determination

which is the main concern of profit maximization hypothesis

WILLIAMSONS THEORY OF MAXIMIZATION OF MANAGERIAL UTILITY FUNCTION

Like Baumol and Marris, Willamson argues that managers have discretion to pursue objectives other than profit

maximization. The managers seek to maximize their own utility function subject to a minimum level of profit.

Managers utility function (U) is expresses as: U = f(S, M, ID)

Where S= additional expenditure on staff, M= managerial emoluments, ID= discretionary investments.

According to Williamsons theory managers maximize their utility function subject to a satisfactory profit. A

minimum profit is necessary to satisfy the shareholders or else managers job security is endangered. The utility

functions which managers seek to maximize include both quantifiable variables like salary and slack earnings, and

non-quantitative variable such as prestige power, status, job security, professional excellence, etc. The non-

quantifiable variables are expresses, in order to make them operational, in terms of expense preference defined as

satisfaction derived out of certain types of expenditures (such as slack payments), and ready availability of funds

for discretionary investments.

Williamsons theory suffers from certain weakness. His model fails to deal with problem of oligopolistic

interdependence. Williamsons theory is said to hold only where rivalry between firms is not strong. In case of

strong rivalry, profit maximization is claimed to be a more appropriate hypothesis. Thus, Williamsons managerial

utility function too does not offer a more satisfactory hypothesis than profit maximization.



CYERT-MARCH THEORY OF SATISFICING BEHAVIOUR

Cyert-March theory is an extension of Simons theory or firms. Satisfying behaviour or satisfying behaviour.

Simon had argued that the real business world is full of uncertainly; accurate and adequate data are not readily

available; where data are available managers have little time and ability to process them; and managers work under

a number of terms of rationality postulated under profit maximization hypothesis. Nor do the firms seek to

maximize sales, growth or anything else. Instead they seek to achieve a satisfactory profit a satisfactory growth,

and so on. This behaviour of firms is termed as Satisfaction Behaviour.

Cyert and March added that, apart from dealing with an uncertain business world, managers have to satisfy a variety

of groups of people-managerial staff, labour, shareholders, customers, financiers, input suppliers, accountants,

lawyers, authorities etc. All these groups have their interest in the firms-often conflicting. The managers

responsibility is to satisfy them all. Thus, according to the Cyert-March, firms behaviour is satisfying

behaviour. The satisfying behaviour implies satisfying various interest groups by sacrificing firms interest

or objective. The underlying assumption of Satisfying Behaviour is that a firm is a coalition of different groups

connected with various activities of the firms, e.g., shareholders, managers, workers, input supplier, customers,

bankers, tax authorities, and so on. All these groups have some kind of expectations-high and low- from the firm,

and the firm seeks to satisfy all of them in one way or another in sacrificing some of its interest.

In order to reconcile between the conflicting interests and goals, managers form an aspiration level of the firm

combining the following goals: (a) Production goal, (b) Sales and market share goals, (c) Inventory goal, and (d)

Profit goal. These goals and aspiration level are set on the basis of the managers past experience and their

assessment of the future market conditions. The aspiration levels are modified and revised on the basis of

achievements and changing business environment.

The behavioural theory has, however, been criticized on the following grounds. First, though the behavioural theory

deals realistically with the firms activity, it does not explain the firms behaviour under dynamic conditions in the

long run. Secondly, it cannot be used to predict exactly the future course of firms activities; thirdly, this theory

does not deal with the equilibrium of the industry. Fourthly, like other alternative hypotheses, this theory too fails to

deal with interdependence of the firms and its impact on firms behaviour.

5. What are the sources of business risk?

1. Risk of Market Fluctuation: General economic conditions are rarely stable. Firms face booms and depressions.

Though with the help of certain forecasting techniques the firm can somewhat hedge itself against cyclical



fluctuation, but there is no way the firm can generally know with certainty the timing and volatility of changes. The

firm is, therefore, unstable to completely prepare itself for these changes.

2. Risk of Industry Fluctuations: There may be fluctuations specific to the industry, which are least as uncertain and

may not always coincide with those of the overall market.

3. Competition risks: These are the risk arising from the policy changes of the rivals, which include things like

changes in prices, product line, advertisement expenditure, etc.

4. Risk of technological change: This is also called the risk of obsolescence, which grows with advancement of an

economy. These risks arise from the possibility of newly installed machinery becoming obsolete with the discovery

of new and more economical process of production.

5. Risk of taste fluctuation: In many cases, vagaries of consumer demand create uncertain conditions.

Successful product of one season may become discarded in the next season. These risks are most common in fashion

and entertainment industries.

6. Risk of cost fluctuation: Unless contractually agreed upon, the future prices of labour, material etc. may change.

Thus estimates of future expenditure are subject to uncertainty.

7. Risk of public policy: Government policy regarding business undergoes a change over time, some of which

cannot be precisely predicted. These relate to price control, foreign trade policy, corporate taxation etc.

6. Explain the features and steps in Decision-making process.

FEATURES OF DECISION MAKING

1. Selection process: Decision making is a selection process. The best alternative is selected out of many available

alternatives.

2. Goal-oriented process: Decision making is goal-oriented process. Decisions are made to achieve some goal or

objective.

3. End process: Decision making is the end process. It is preceded by detailed discussion and selection of

alternatives.

4. Human and Rational process: Decision making is a human and rational process involving the application of

intellectual abilities. It involves deep thinking and foreseeing things.



5. Dynamic process: Decision making is a dynamic process. An individual takes a number of decisions each day.

6. Situational: Decision making is situational. A particular problem may have different decisions at different times,

depending upon the situation.

7. Continues or Ongoing process: Decision making is a continuous or ongoing process. Managers have to take a

series of decisions on particular problems.

8. Freedom to the decision makers: Decision making implies freedom to the decision makers regarding the final

choice. It also involves the using of resources in specified ways.

9. Positive or Negative: Decision may be positive or negative. A decision may direct others to do or not to do.

10. Gives happiness to an Endeavour: Decision making gives happiness to an Endeavour who takes various steps

to collect all the information which is likely to affect decisions.

STEPS IN DECISION MAKING PROCESS IN AN ORGANIZATION

1. Identification of problem: Decision making process begins with the identification of problem that means

recognition of a problem. The managers have to use imagination, experience, and judgment in order to

identify the real nature of the problem.

2. Diagnosis and analysis of the problem: In order to diagnose the problem correctly, a manager must obtain all

pertinent facts and analyze them correctly. The most important part of the diagnosing problem is to find out the real

cause or source of the problem. After analyzing the problem next phase of the decision making is to analyze

problem. This process involves classifying the problem and gathering information.

3. Search for alternatives: A problem can be solved in many ways. All possible ways cannot be equally satisfying.

Managers are advice to limit him to the discovery of the alternatives which are strategic or critical to the problem.

The principle of limiting factor is given as By recognizing and overcoming that factor that stand critically in the

way of a goal, the best alternative course of action can be selected. Creative thinking is necessary to develop

alternatives such as decision makers past experience, practices followed by others, and using creative techniques.

4. Evaluation of alternatives: Evaluation is the process of measuring the positive and negative consequences of

each alternative. Some alternatives offer maximum benefit than others. An alternative is compared with the

others. Management must set some criteria against which the alternatives can be evaluated. Criteria to weigh the

alternative courses of action includes Risk- Degree of risk involved in each alternative, Economy of effort- Cost,

time and effort involved in each alternative, Timing or Situation- Whether the problem is urgent & Limitation of

resources- Physical, financial and human resources available with the organization.



5. Selecting an alternative: In this stage, decision makers can select the best alternatives. Optimum alternative is

one which maximizes the results under given conditions.

6. Implementation and follow-up: Once an alternative is selected, it is put into action in systematic way. The

future course of action is scheduled on the basis of selected alternatives. When a decision is put into action, it may

yield certain results. These results provide the indication whether decision making and its implementation is proper.

The follow-up action should be in the light of feedback received from the results.

7. Explain the rational decision making and explain it's types.

RATIONAL DECISION MAKING

Decision making is the process of selection from a set of alternative courses of action which is thought to fulfil the

objective of the decision problem more satisfactorily than other. The concept of rationality is defined in terms of

objective and intelligent action.

TYPES OF DECISION MAKING DEPENDING UPON RATIONALITY

1. Major and supplementary decisions: Major decisions refer to the decisions with regard to the quality of the

product, price of the product, developing a new product etc.These decisions have direct bearing on the achievement

of the goals of the concern and so these decisions should be made very carefully. Minor or supplementary decisions,

on the other hand, are made in the course of conversion of major decisions into action.

2. Organizational and personal decision: Organizational decisions are made by the executive in his capacity as

manager in order to achieve the best interests of the organization. These decisions can be delegated to the other

members in the organization. Personal decisions, on the other hand, are made by the manager in his personal

capacity and not in his capacity as a member of the organization. These decisions are not delegated. These

decisions relate to the executives personal work.

3. Basic and routine decisions: Basic decisions involve long range commitment and large funds. Decisions with

regard to selection of a location, selection of a product line, merger of the business are known as basic decisions. As

these decisions affect the entire organization, they are considered as basic decisions. They are also now as vital

decisions. Decisions that are taken to carry out the day-today activities are called routine decisions. These

decisions are repetitive in nature. They have only a minor impact on the business. These decisions are made at

middle and lower levels of management. For eg., purchase of sundry materials.

4. Group and individual decisions: If the decision is taken by one person, it is called individual decision. Group

decisions are taken by a group of persons.

5. Policy and operating decisions: Policy decisions are made at top management levels. These decisions are taken

to determine the basic policies and goals of the organization. Operating decisions are taken to execute the policy



decisions. These decisions are taken at the middle and lower management levels and are related to routine

activities of business.

6. Programmed decision: Programmed decision is otherwise called routine decision or structured decision. The

reason is that these types of decision are taken frequently and they are repetitive in nature. Such decision is

generally taken by middle or lower level managers, and has a short term impact. This decision is taken within the

preview of the policy of the organization.

7. Non-Programmed decision: Non programmed structures are otherwise called strategic decisions or basic

decision or policy decision or unstructured decisions. This decision is taken by top management people

whenever the need arises. This decision deals with unique or unusual or non- routine problems. Such problems

cannot be tackled in a predetermined manner. There are no established methods or readymade answers for

such problems.

8. Organizational decisions: Organizational decisions are decisions taken by an individual in his official capacity to

further the interest of the organization known as organizational decision. These decisions are based on rationality,

judgment and experience.

9. Personal decisions: Personal decisions are decisions taken by an individual based on his personal interest. it is

oriented to the individuals goals. These decisions are based on self ego, self prestige etc.

10. Objectively rational decision: If the decision is really the correct behavior for maximizing given values in a

given situation, then it is called objectively rational decision.

11. Subjectively rational decision: If a decision maximizes attainment relative to the actual knowledge of the

subject, then it is called subjectively rational decision.

12. Consciously rational decision: A decision is consciously rational to extend that he adjustment of means to ends

is a conscious process.

13. Economic model: Economic rationality implies that decision making tries to maximize the values in a given

situation by choosing the most suitable course of action. A rational business decision is one which effectively and

efficiently assures the attainment of aims for which the means are selected.



UNIT II DEMAND AND SUPPLY ANALYSIS

PART A (2 MARKS)

1. Define Demand.

Demand indicates the quantities of products (goods service) which the firm is willing and financially able to purchase

at various prices, holding other factors constant.

2. Define Determinants of Demand:

An individuals demand for a commodity depends on his desire and capability to purchase it. Apart from the desire

to purchase, there are many other factors which influence the purchase of a product (demand). These are known as

demand determinants.

3. What is meant by Tastes and preferences of Consumers?

The change of tastes and preferences of consumers in favour of a commodity will result in a greater demand for

the commodity. The opposite also holds good i.e. if the tastes and preferences of consumer change against the

commodity, the demand will suffer.

4. What are the two kinds of Consumers expectations?

Consumers have two kinds of expectations one pertains to their future income and the second is related to the future

prices of the goods and its related goods.

5. Define Advertising

Advertisements provide information about the presence of quality products in the market and induce customers to buy

more. It also promotes the latest preferences of the general public to masses.

6. Define the Law of Demand:

The relation of price to quantity demanded / sales is known as the law of demand. Law of demand states that the higher

the price is the lower the demand is and vice versa, holding other factors as constant.

7. Define the price quantity relation.

This price quantity relation can be expressed as demand being a function of priceD=f (p).

8. What Highlights of the law of demand:

1. The relationship between price and quantity demanded is inverse.



2. Price is the independent variable and demands the dependent variable.

3. Law of demand assumes that except for price and demand, other factors remain constant.

9. What is Demand Shift: (Change in demand?)

Factors shift the demand for a particular product either on the right side of the demand curve or to the left side of the

demand curve based on the changes in price. These factors, other than the price of a good that influence demand are

known as demand shifters. The shift in the demand either to the left or right is called the demand shift.

10. What are the Exceptions to law of demand?

1. In share markets on would have noticed that the rise in price of the shares increases, the sales of the shares while

decrease in the price of the shares results in decrease of sale of the shares.

2. Some goods which act as status symbol and have a snob appeal fall under this category. Here when the price

of the product raises then the appeal of the product also rises and thus the demand. Some example is diamonds and

antiques.

3. Finally, ignorance on the part of the consumer may cause the consumer to buy at a higher price, especially when the

rise in price is taken to mean an improvement in quality and a reduction in price as deterioration in quality.

11. Define Individual demand:

The quantity of a product demanded by an individual purchaser at a given price is known as individual demand.

12. Define Market demand:

The total quantity demanded by all the purchasers together is known as the market demand.

13. What are the types of Demand Function?

1. Consumption function

2. Product consumption function

3. Differences in regional incomes

4. Income expectation and demand

14. What are the Characteristics of demand function?

1. The long run relationship between consumption and income is somewhat stable, and expenditure on consumption

is usually about 85 to 90% of the income.

2. The consumption function is highly unstable in short runs and the relationship between income and consumption

cannot be predicted by any mathematical formula.



3. During the periods of economic prosperity, there is an absolute increase in the expenditure on consumption, but

decrease as a percentage of income during periods of depression, the consumption declines absolutely but the

expenditure on the consumption increases as a percentage of income.

4. In the periods of economic recovery, the rate of increase in consumption is higher than the rate of the decline

in consumption in times of recession.

15. Define Product consumption function:

This function can be defined as the relationship between the total income of the consumer and sales of particular

products. It means that when there is a change in income there is a change in the demand for particular products.

16. Define Income expectations and Demand:

Expectations are related to peoples estimates of the level and durability of the future economic conditions. The

demand for many consumer durables (household appliances like TV, Washing machine, etc) is often sensitive to

general expectations regarding income level.

17. What are the features of advertising demand relationship?

1. Even when there is no advertising effort done, there will be a certain amount of sales possible for a particular

product

by virtue of its presence in the market.

2. There is a direct relationship between advertising and sales. Thus when there is an increased spending on

advertisements. It will bring in more sales.

3. Increase in advertisements will lead to more than proportionate increase in sales only to a point. After that any

increase in advertisement will have only less than proportionate effect on sales.

18. Define Elasticity of Demand?

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.

19. Define demand determinant

It is the degree of change in demand to the degree of change in any of the demand determinants.

20. What are the Various Elasticitys?

1. Price elasticity of demand

2. Income elasticity of demand



3. Cross elasticity of demand

4. Promotional elasticity

5. Exportations elasticity of demand

21. Define Price Elasticity of Demand

Price elasticity of demand can be defined as the degree of responsiveness of quantity demanded to a change in price.

22. What are the Types of price elasticity?

1. Perfectly elastic demand

2. Absolutely inelastic demand or perfectly inelastic demand

3. Unit elasticity of demand

4. Relatively elastic demand

5. Relatively inelastic demand

23. Define absolutely inelastic demand or perfectly inelastic demand.

Absolutely inelastic demand is where a change in price howsoever large, causes no change in the quantity demanded

of a product. Here, the shape of the demand curve is vertical.

24. Define Relatively elastic demand (ep>1):

It is where a reduction in price leads to more than proportionate change in demand. Here the shapes of the demand

curve in flat.

25. What are the Factors determining price elasticity of Demand?

The elasticity of demand depends on the following factors namely

1. Nature of the product

2. Extent of usage

3. Availability of substitutes

4. Income level of people

5. Proportion of the income spent of the product

6. Urgency of demand and

7. Durability of a product.



PART - B (16 MARKS)

1. What is demand? Explain the various types of demand.

The demand for a commodity is its quantity which consumers are able and willing to buy at various prices during a

given period of time. Demand is a function of Price (P), Income (Y), Prices of related goods(PR) and tastes (T) and

expressed as D=f(P,Y,PR,T). When income, prices of related goods and tastes are given, the demand function is

D=f (P). It shows quantities of a commodity purchased at given prices.

THE VARIOUS TYPES OF DEMAND

i. Price demand: Price demand refers to various quantities of a commodity or service that a consumer would

purchase at a given time in a market at various hypothetical prices. It is assumed that other things, such as consumers

income, his tastes and prices of inter- related goods, remain unchanged. The demand of the individual consumer is

called individual demand and the total demand of the entire consumer combined for the commodity or service is

called industry demand. The total demand for the product of an individual firm at various prices is known as firms

demand or individual sellers demand.

ii. Income demand: Income demand indicates the relationship between income and the quantity of commodity

demanded. It relates to the various quantities of a commodity or service that will be bought by the consumer at

various level o f income in a given period of time, other things equal. The income demand function for a commodity

increases with the rises in income and decreases with fall income. The income demand curve has a positive slope. But

this slope is in the case of normal goods. In the case of inferior goods the demand curve id is backward sloping.

iii. Cross demand: In case of related goods the change in the price of one affects the demand of the other this

known as cross demand and its written as d=f(pr). Related goods are of two types, substitutes and complementary.

In the case of the substitutes or competitive goods, a rise in the price of one good a raises the demand, arise in the

price of one good a raises the demand for the other good b, the price of remaining the same the opposite holds in the

case of a fall in the price of a when demand for b falls.

2. Explain the determinants of demand.

THE VARIOUS DETERMINATS OF MARKET DEMAND

i. Price of the product: The law of demand states that the quantity demanded of a product which its consumers

users would like to buy per unit of time, increases when its price falls and decreases when its price increases other

factors remaining constant.

ii. Price of the related goods: The demand for a commodity is also affected by the changes in the price of its

related goods. Related goods may be substitutes or complementary goods



iii. Consumer income: Income is the basic determinant of quantity of a product demanded since it determines the

purchasing power of the consumer. That is why higher current disposable incomes spend a larger amount on

consumer goods and services than those with lower income.

iv. Consumer taste and preferences: Taste and preferences generally depend on the life style social customs

religious value attached to a commodity, habit of the people, the general levels of living of the society and age and

sex of the consumers taste and preferences. As a result, consumers reduce or give up the consumption of the some

goods and add new ones to their consumption pattern

v. Advertisement expenditure: Advertisement costs are incurred with the objective of promoting sale of the

product. Advertisement helps in increasing demand for the product.

vi. Consumers exceptions: Consumers exceptions regarding the future prices incomes and supply position of

goods, etc play an important role in determining the demand for goods and services in the short run.

vii. Demonstration effect: When new commodities or new models of existing one appear in the market rich people

buy them first.

viii. Consumer credit facility: Availability of credit to the consumers from to the seller banks relation and friends,

or from other source encourages the consumer to buy more that what they is why consumers who can borrow more

can consume more than those who cannot borrow. Credit facility mostly affects the demand for durable goods,

particularly those which requires bulk payment at the time of purchase.

ix. Population of the country: The total domestic demand for a product of mass consumption depends also on the

size of the population. Give n the price, per capita income taste and preference etc, the larger the population the

larger and demand for a product. With an increase (or decrease) in the size of population and with the employment

percentage remaining the same demand for the product tends to increase (or decrease).

x. Distribution of National Income: The level of national income is the basic determinant of the market demands

for a productthe higher the national income, the higher the demand for all normal goods and services. A past from

its level the distribution pattern of national income is also an important determinant of a product.

3. What is elasticity of demand? Explain also it's types.

ELASTICITY OF DEMAND

Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in

price. Ep= Percentage change in amount demanded / Percentage change in price

TYPES OF ELASTICITY DEMAND

i. Price elasticity of demand: Elasticity of demand may be defined as the ratio of the percentage change in price.

Ep = percentage change in quantity demanded / percentage change in price



ii. Income elasticity of demand: The income elasticity of demand (Ey) express the responsiveness of a consumer

demand or expenditure or consumption) for any good to the change in his income .it may be defined as the ratio of

percentage change in the quantity demanded of a commodity to the percentage in income. Thus

Ey = percentage change in quantity demanded / percentage change in income

iii. Cross elasticity of demand: The cross elasticity of demand is the relation between percentage change in the

quantity demanded of a good to the percentage change in the price of a related good. The cross elasticity good A and

good B is

Eba= percentage change in the quantity demanded of B/ percentage change in price of A

TYPES OF PRICE ELASTICITY OF DEMAND

i. Perfectly elastic demand: Where no reduction in price is needed to cause an increase in quantity demanded. This

is explained with the help of a diagram.

X axis-quantity demanded

Y axis- price

DD1- demand curve

Explanation: Price elasticity of demand is infinity when a small change in price leads to an infinitely large change in

the amount demanded. It is perfectly elastic demand. [E=]

ii. Perfectly in elastic demand: Here a large change in price causes no change in quantity demanded. It is zero

elastic demand [E=0]. This is explained with the help of a diagram.


Y axis- price

DD1- demand curve



Explanation: The figure shows that even if the price decrease from p to p1 there is no change in the quantity

demand. This happens in case of necessities like salt.

iii. Unitary elastic: Where a given proportionate change in price causes an equally proportionate change in

quantity demand. This is explained with the help of a diagram.


Y axis- price

DD1- demand curve

Explanation: Price elasticity of demand is unity when the change in demand is exactly proportionate to the change in

price. [E=1].

iv. Relatively elastic: Where a small change in price causes a more than proportionate change in quantity

demanded. The price elasticity of demand is greater than unity [E >1]. This is explained with the help of a diagram.


Y axis- price

DD1- demand curve



Explanation: The figure shows that there is a small decrease in price from P to P1, but it has resulted in a large

increase in quantity demanded from Q to Q1. It is also known as relatively elastic demand.

v. Relatively inelastic demand: Where a change in price causes a less than proportionate change in quantity

demanded. The price elasticity of demand is lesser than unity [E



X axis quantity demanded

Y axis Income

DD- demand curve

Explanation: The curve Ey shows a positive and elastic income demanded. In the case of necessities, the coefficient

of income of income elasticity is positive but low, Ey=1. Income elasticity of demanded is low when the demand for

a commodity rises less than proportionate to the rise in the income.

ii. Positive but inelastic income demand: It is low if the relative change in quantity demanded is less than the

relative change in money income. Ey




Y axis Income

DD- demand curve

Explanation: The curve Ey shows unitary income elasticity of demand. In the case of comforts, the coefficient of

income elasticity is unity (Ey=1) when the demand for a commodity rises in the same proportions as the increases in

income.

iv. Zero income elasticity: A change in income will have no effect on the quantity demanded. The value of the

coefficient Ey is equal to zero. This is explained with the help of a diagram.


Y axis Income

DD- demand curve

Explanation: The curve shows a vertical income, elasticity demand curve Ey with zero elasticity. If with the

increases in income, the quantity demanded remains unchanged the coefficient of income elasticity, Ey=0.

v. Inferior goods: Inferior goods have negative income elasticity of demand. It explains that less is bought at higher

incomes and more is bought at lower incomes. The value of the coefficient Ey is less than zero or negative in this

case. This is explained with the help of a diagram.



Explanation: The coefficient of income elasticity of demand in the case of inferior goods is negative. In the case of

an inferior good, the consumer will reduce his purchases of it, when his income increases.

DIFFERENT TYPES OF CROSS ELASTICITY OF DEMAND

A. CROSS ELASTICITY OF SUBSTITUTES: In case of substitutes, as the price of one good increases the

demand for the other good also increase at the same time.

i. Relatively elastic: Where a small change in price of good A causes a large change in quantity demanded of

good B. The elasticity of substitutes is greater than unity [E >1].This is explained with the help of a diagram.

X axis quantity demanded of B

Y axis price of A

DD demand curve

Explanation: The figure shows that there is a small increase in price of good A from a to a1, but it has resulted in a

large increase in quantity demanded of B from b to b1. It is also known as relatively elastic demand.

ii. Relatively inelastic demand: Where a large change in price of good A causes a small change in quantity

demanded of good B. The elasticity of substitutes is lesser than unity [E



Explanation: The figure shows that there is a large increase in price of good A from a to a1, but it has resulted in

only a small increase in quantity demanded of good B from b to b1. It is also known as relatively in elastic demand.

iii. Unitary elastic: Here a given proportionate change in price causes an equally proportionate change in quantity

demand. This is explained with the help of a diagram.

X axis-quantity demanded of good B

Y axis- price of good A

DD- demand curve


price. [E=1].

iv. Perfectly in elastic demand: Here a large change in price causes no change in quantity demanded. It is zero

elastic demand [E=0]. This is explained with the help of a diagram.

X axis-quantity demanded of good B.

Y axis- price of good A.

DD- demand curve

Explanation: The figure shows that even if the price increases from a to a1 there is no change in the quantity




v. Unrelated goods: If two goods are not at all related then they have negative elasticity of demand. This is

explained with the help of a diagram.

X axis-quantity demanded of good B.

Y axis- price of good A.

DD- demand curve

Explanation: The figure shows that even if the price increases from a to a1 there is no change in the quantity


v. Unrelated goods: If two goods are not at all related then they have negative elasticity of demand. This is


X axis quantity demanded of good B.

Y axis Price of good A.

DD- demand curve

Explanation: The figure shows that in case on unrelated goods if the price of good A increase from a to a1, then the

demand for good B will decrease from b to b1.



B. CROSS ELASTICITY OF COMPLIMENTARY GOODS:

In case of complimentary goods, as the price of one good increases the demand for the other good decreases at the

same time.

(i) Perfectly elastic demand: Where no reduction in price is needed to cause an increase in quantity demanded.

This is explained with the help of a diagram.



DD- demand curve

Explanation: Price elasticity of demand is infinity when a small change or no change in price of good A leads to an

infinitely large change in the amount demanded of good B. It is perfectly elastic demand. [E=]

ii. Perfectly in elastic demand: Here a large change in price of good B causes no change in quantity demanded of

good B. It is zero elastic demand [E=0]. This is explained with the help of a diagram.



DD- demand curve



Explanation: The figure shows that even if the price of good B decreases from a to a1 there is no change in the

quantity demand of good A. This happens in case of necessities like salt.


quantity demand. This is explained with the help of a diagram.



DD- demand curve


price. [E=1].

iv. Relatively elastic: Where a small change in price of good B causes a more than proportionate change in

quantity demanded of good A. The price elasticity of demand is greater than unity [E >1].This is explained with the

help of a diagram.

X axis quantity demanded of good B

Y axis price of good A

DD demand curve



Explanation: The figure shows that there is a small decrease in price from a to a1, but it has resulted in a large

increase in quantity demanded from b to b1. It is also known as relatively elastic demand.

v. Relatively inelastic demand: Where a change in price causes a less than proportionate change in quantity

demanded. The price elasticity of demand is lesser than unity [E



iv. Substitutes: The main cause of difference in the responsiveness of the demand for that there are more

completing substitutes for some goods than for others. When the price of tea rises, we may curtail its purchase and

take of coffee, and vice versa. In a case like this a change in price will lead to expansion or contraction in demand.

v. Goods having several uses: Coal is such a commodity when it will be used for several purposes e.g, cooking

heating and industrial purposes; and its demand will increase. But , when the price goes up, it use will be restricted

only to very urgent uses and consequently less will be purchased when the prices rises the demand will thus contract

when wheat becomes very cheap it can be used even as cattle feed hence demand for a commodity having several

uses is elastic

vi. Joint demand: If for instance, carriages become cheap but the prices of horses continue to rule high, demand

for carriage will not extend much. In other words the demand for jointly demanded goods is less elastic.

vii. Goods the use of which can be postponed: Most of us during the war postponed our purchases where we could

e.g. building a house, buying furniture or having a number of warm suits. We go in for such things in a large

measure when they are cheap demand for such goods is elastic.

viii. Level of prices: If a thing is either very experience or very cheap, the demand will be in elastic. If the price is

too high, a fall in it will not increase the demand much. If on the other hand , it is too low, people will have already

purchased as much as they wanted: any further fall will not increase the demand.

ix. Market imperfections: Owing to ignorance about market trends the demand for a good may not increase hen

its price falls for the simple reasons that consumers may not be aware of the fall in price.

x. Technological factors: Low price elasticity may be due o some technical reasons. For example lowering of

elasticity may be electricity rates may not increase consumption because the consumers are unable to buy the

necessary electric appliances.

xi. Time period: The elasticity of demand is greater in the long run than in the short run for the simple reasons that

the consumer has more time to make adjustment in his scheme of consumption. In other word he is able to increase

or decrease his demand for a commodity

IMPORTANCE (OR) SIGNIFICANCE OF ELASTICITY OF DEMAND

i. Taxation: The tax will no doubt raises the prices but the demand being in elastic, people must continue to buy

the same quantity of the commodity. Thus the demand will not decrease.

ii. Monopoly prices: In the same manner, the businessman, especially if he is a monopolist, will have to consider

the nature of demand while fixing his price. In case I is in elastic, it will pay him to him to change a higher price and

sell a smaller quantity. If, on the other hand, the demand is elastic he will lower the prices, stimulate demand and

thus maximize his monopoly net revenue



iii. Joint products: In such cases separate costs are not ascertainable the producers will be guided mostly by

demand and its nature fixing his price. The transport authorities fix their rates according to this principle when we

say that they charge what the traffic will bear

iv. Increasing returns: When an industry is subject to increasing returns the manufacturer lowers the price4 to

develop the market so that he may be able to produce more and take full advantage of the economies of large scale

production.

v. Output: Elasticity of demand affects industrial output reduction in price will certainly increases the sale in

the market as a whole.

vi. Wages: Elasticity of demand also exerts its influence on wages. If demand for a particular type of labour is

relatively inelastic, it is easy to raise wages, but not otherwise.

vii. Poverty in plenty: The concept of elasticity explains the paradox of poverty in the midst of plenty. This is

specially so if produce is perishable. A rich harvest may actually fetch less money a poor one.

viii. Effect on the economy: The working of the economy in general is affected by the nature of consumer demand.

It affects the total volume of goods and services produced in the country. It also affects producers demand for

different factors of production their allocation and remuneration.

ix. Economies policies: Modern governments regulate output and prices. The government can create public utilities

where demand is inelastic and monopoly element is present.

x. International trade: The nature of demand for the internationally traded goods is helpful in determining the

quantum of again of gain accruing to the respective countries. Thus is how it determines the terms of trade.

xi. Price determination: The concept of elasticity of demand is used in explaining the determination of price under

various market conditions.

xii. Rate of foreign exchange: With fixing the rate of exchange, the government has to consider the elasticity or

otherwise of its imports and exports.

xiii. Relation between price elasticity average revenue and marginal revenue: This relationship enables us to

understand and compare the conditions of equilibrium under different market conditions.

xiv. Price determination: Price determination is forced to be profitable if elasticity of demand in another. The

monopolist can charge a higher price in the market where elasticity of demand is less and a lower price where

elasticity of demand is greater

xv. Measuring degree of monopoly power: The less is the elasticity of demand higher will be the price and wider

the difference between the marginal cost and greater the monopoly power, and vice versa.

xvi. Classification of goods as substitutes and complements: Goods are classified as substitutes on the basis of cross

elasticity. Two commodities may be considered as substitutes if cross elasticity is positive and complements when

elasticity is negative.



xvii. Boundary between industries: Cross elasticity of demand is also useful in indicating boundaries between

industries. Goods with high cross elasticitys constitute one industry, where as goods with lower elasticity constitute

different industries.

xviii. Market forms: The concept of cross elasticity help[s to understand different market forms infinite cross

elasticity indicates perfect market forms infinite cross elasticity indicates perfect competitions, where as zero or hear

zero elasticity indicates pure monopoly and high elasticity indicates imperfect competition

xix. Incidence of taxes: The concept of elasticity of demand is used in explaining the incidence of indirect taxes like

sales tax and excise duty. less is the elasticity of demand higher the incidence, and vice versa. In case of inelastic

demand the consumer have to buy the commodity and must bear the tax.

xx. Theory of distribution: Elasticity of demand is useful in the determination of relative shares of the various

factors determination of relative shares of the various factors of production is loss elastic, its share in the national

dividend is higher, and vice versa. If elasticity of substitution is high the share will be low.

5. Define Supply. Explain the determinants of supply.

The supply of a commodity means the amount of that commodity which producers are able and willing to offer for

sale at a given price. The supply curve is explained with the help of a diagram.

X axis-----Quantity Supplied

Y axis------Price

Explanation: The figure shows that as the price of a commodity increases from P to P1, the supply also increases

from Q to Q1. It means that price & supply are directly related.

Reserve Price

If the price falls too much, supply may dry up altogether. The price below which the seller will refuse to sell is

called Reserve Price. At this price, the seller is said to buy his own stock.



DETERMINANTS OF SUPPLY

i. Goals of firms: The supply of a commodity depends upon the goals of firms.

ii. Price of the commodity: The supply of a commodity depends upon the price of that commodity. Ceteris

paribus the higher the price of the commodity the more profitable it will be to make that commodity. One expects,

therefore, that the higher the price, the greater will be the supply.

iii. Prices of all other commodities: The supply of a commodity depends upon the prices of all other commodities.

Generally, an increase in the price of other commodities will make production of the commodity whose price does

not rise relatively less attractive than it was previously. We thus expect that ceteris paribus, the supply of one

commodity would fall as the price of other commodities rises.

iv. Prices of factors of production: The supply of a commodity depends upon the prices of factors of production. A

rise in the price of one factor of production will cause a large increase in the costs of making those goods which use

a great deal of that factor, and only a small increase in the cost of producing those commodities which use a small

amount of the factor.

v. State of technology: The supply of a commodity depends upon the state of technology.

vi. Time factor: Time factor can also determine elasticity of supply. Time can be broadly classified into three

categories: Market period is the one where supply is fixed as no factor of production can be altered.

vii. Short period is the time period when it is possible to adjust supply only by changing the variable factors like

raw- material, labor, etc., and Long period where supply can be changed at will because all the factors can be

changed.

viii. Agreement among the producers: Supply may be consciously decreased by agreement among the producers.

ix. To raise price: Supply may also be destroyed to raise price.

x. Taxation on output or imports: Supply may also be affected by taxation on output or imports. Government

may also restrict production of certain commodities on grounds of health (e.g., opium in India).

xi. Political disturbances or war may also create scarcity of certain goods.

6. What is the concept of elasticity of supply? Explain the types of elasticity of supply.

ELASTICITY OF SUPPLY

It can be defined as the degree of responsiveness of supply to a given change in price. The formula to

find out the elasticity of supply is:

Es = percentage change in quantity supplied / percentage change in price



TYPES OF ELASTICITY OF SUPPLY

i. Perfectly elastic supply: Where no change in price is needed to cause an increase in quantity supplied. This is


X axis-quantity supplied

Y axis- price

SS- supply curve

Explanation: The elasticity of supply is infinity when a small change in price leads to an infinitely large change in

the quantity supplied. It is perfectly elastic supply. [E=]

ii. Perfectly in elastic supply: Here a large change in price causes no change in quantity supplied. It is zero elastic

supply [E=0]. This is explained with the help of a diagram.



X axis-quantity supplied

Y axis- price

SS- supply curve

Explanation: The figure shows that even if the price increases from p to p1 there is no change in the quantity

supplied.


quantity supplied. This is explained with the help of a diagram.

X axis-quantity supplied, Y axis- price, SS- supply curve

Explanation: Elasticity of supply is unity when the change in supply is exactly proportionate to the change in price.

[E=1].

iv. Relatively elastic: Where a small change in price causes a more than proportionate change in quantity supplied.

The price elasticity of supply is greater than unity [E >1].This is explained with the help of a diagram.

X axis-quantity supplied, Y axis- price, SS- supply curve



Explanation: The figure shows that there is a small increase in price from P to P1, but it has resulted in a large

increase in quantity supplied from Q to Q1. It is also known as relatively elastic supply.

v. Relatively inelastic Supply: Where a large change in price causes a less than proportionate change in quantity

supplied. The elasticity of supply is lesser than unity [E



iii. Take account of discontinuities: The further away the forecast the less accurate it is likely to be. In all forecasts,

it is important to take account of discontinuities, which can affect the data trend.

iv. Statistical tools and techniques: The analysis of various factors may require the use of various statistical tools and

techniques.

v. Feedback mechanism: All forecasting system should include a feedback mechanism where the actual results are

compared with the forecast values and the forecasting system is modified to make it more accurate in future.

NEED OF FORECASTING OR APPLICATIONS OF FORECASTING WITHIN INDUSTRY

i. Inventory control/production planning: forecasting the demand for a product enables us to control the stock of raw

materials and finished goods, plan the production schedule, etc

ii. Investment policy: forecasting financial information such as interest rates, exchange rates, share prices, the price

of gold, etc. This is an area in which no one has yet developed a reliable (consistently accurate) forecasting

technique (at least if they have or they havent told anybody)

iii. Economic policy: forecasting economic information such as the growth in economy, unemployment, the

inflation rate, etc is vital both to government and business in planning for the future.

iv. Compel to think ahead: The process of making forecast and their review by authorities compel them to think

ahead, looking to the future, and providing for it.

v. Disclose the areas where necessary control is lacking: Preparation of the forecast may disclose the areas where

necessary control is lacking in the organization for its future course of action.

vi. Helps to unity and coordinate plans: Forecasting, especially when there is participation throughout the

organization, helps to unity and coordinate plans.

vii. Helps in promotion of organization: Forecasting certainly helps in promotion of organization by achieving its

objectives in best possible way, since forecasting of future events is of direct relevance in achieving an objective.

viii. Key to planning process: Forecasting is the essential step in planning process. So, it is a key to planning process.

Planning decides the future course of action but forecasting to decide it. Therefore, forecasting generates the

planning process.

LIMITATIONS OF FORECASTING

i. Based on wrong assumptions: Forecasting is based on some assumptions. It assumes that events do not change

rapidly or haphazardly but change on a regular pattern. These assumptions may not hold good for all conditions or

situations.

ii. Indicate the trend of future happening: they are not always true: Forecasts merely indicate the trend of future

happening: they are not always true. This is so because of the factors taken into account for making the forecast.

These factors are affected by human who are highly unpredictable. Period of forecasting is also one of the factors

affecting the forecast. Degree of error increases with increases in period of forecast.



iii. Time and cost factor: Another important of forecasting is time and cost factor, forecasting requires past data and

information. The collection and proper arrangement of such information and data requires lot of time and money.

Moreover, it requires lot of calculations and selection of proper calculation method which requires lot of manpower

and money. Therefore, most of the smaller organization does not go for formal system forecasting.

VARIOUS TYPES OF FORECASTING

i. Long-range and is used research and forecast: The long-range forecast usually covers a period of three to more

years in areas such as planning for new products, facility location or expectation, development, and capital

expenditures.

ii. Short- range forecast: The short- range forecast covers a time span of up to one year, but often it is less than

three months. It is used in areas such as purchasing, planning, job assignments and scheduling, and levels of work

force.

iii. Medium-range forecast: The medium- range forecast usually covers a time period from three months to three

years and finds applications in many areas including sales planning, budgeting, and production planning.

VARIOUS STEPS IN FORECASTING

i. Determine the objective: Determine the forecast applications and objective.

ii. Choose the items: Choose with care the items to be forecasted.

iii. Time horizon: Determine the forecast time horizon (i.e., long, short, or medium)

iv. Forecasting models: Chose appropriate forecasting models.

v. Collect data: Collect the appropriate data required to make the forecasting under consideration.

vi. Validate forecasting model: Validate the forecasting model with care.

vii. Relevant forecasts: Make all relevant forecasts.

viii. Implement results: Implement the appropriate results.

VARIOUS METHODS OF FORECASTING

A. Qualitative Method: The qualitative methods provide forecasts that incorporate factors such as the decision

makers emotions, personal experiences, and intuition. Some examples of the qualitative methods are jury of

executive opinions, Delphi method, consumer market survey, and sales force opinion composite

i. Jury of Executive Opinion: This is the simplest method, in that the executive of the organization each provides an

estimate of future volume, and the president provides a considered average of these estimates.

ii. Delphi Method: The Delphi method makes use of a panel of experts, selected based on the areas of expertise

required. The Delphi method is an exercise in group communication among a panel of geographically dispersed

experts. The technique allows experts to deal systematically with a complex problem or task.



iii. Consumer Market Survey: This method is mainly useful for predicting the sales forecast when it is introduced in

the market. For a new product, there will be no historic or past data available to forecast. In this method, field

surveys are conducted to gather information on the intentions of the concerned people.

iv. Sales Force Opinion Composite: In this method, members of the sales force estimate sales in their own territory,

regional sales managers adjust these estimates for their opinion or permission of individual sales people, and the

general sales mangers massages the figures to account for new products or factors of which individual salesman

are unaware.

v. Scenario Building: In this method, the parameters of importance to the company are first recorded. A number of

assumptions are then followed through on how these parameters may change. Several scenarios are developed based

on the assumptions.

vi. Judgment Decomposition: The idea behind judgmental decomposition is to divide the forecasting problem into

parts that are easier to forecast than the whole. One then forecasts the parts individually, using methods appropriate

to each part. Finally, the parts are combined to obtain a forecast.

B. Quantitative Method: The quantitative methods provide forecasts that were obtained by employing various

mathematical models that use past data or causal variables to forecast demand.

i. Time series Methods/Analysis: Methods of this type are concerned with variable that changes with time and which

can be said to depend only upon the current time and the previous values that it took.

ii. Simple Moving Average: This method uses the average of the previous N periods to estimate the demand in

any future period.

iii. Weighted Moving Average: In the weighted moving average method, for computing the average of the most

recent N periods, the recent observations are typically given more weight than older observations.

iv. Exponential Smoothing: This is frequently used and sophisticated weighted moving-average forecasting method.

The method is fairly easy to use and requires very little record keeping of past data.

C. Econometric Forecasting: In this method of forecasting, the analyst finds the cause-and-effect relationship

between the demand and some other phenomena that are related to the demand. There are many dependent variables

that interact with each other via series of equations, the form of which is given by economic theory. Economic

theory gives some insight into the basic structural relationship between variables. The precise numeric relationship

between variables must often be deduced by examining data. This process is called economic forecasting.

Econometric analysis utilizes correlation and regression techniques.

i. Correlation Analysis: In this method, correlation coefficient is measures of the extension to which variables (e.g.

number of trucks sold and clutch plates sold) are associated.

ii. Regression Analysis: Regression models assume that a linear relationship exists between a variable designated

the dependent (unknown) variable and one or more dependent (known) variable.



D. Technological forecasting: Technological forecasting may be defined as the forecasting the future technology

may affect the operations of the enterprise. It is a prediction, based on confidence that certain developments can

occur within a specified time period with a given level or resource allocation. Two types of technological

forecasting should be considered: normative and exploratory.

i. Normative forecasting: In normative forecasting, some desired future goal is selected, and a process is developed,

working backward from the future to the present, designed to achieve this goal.

ii. Exploratory forecast: An exploratory forecast begins with the present stage of technology and explicates into the

future assuming some expected rate of technical progress. Delphi method is one such a technique which is already

discussed elaborately in topic Delphi Method.

iii. Technology S-curve: Another useful model for technological forecasting is the technology S-curve. The

performance gained from a new technology tends to start slowly, and then raise almost exponentially as many

scientists and engineers begin applying themselves to product improvement. Ultimately, as the technology becomes

mature, performance gains become more and more difficult to attain, and performance approaches some natural

limit.

iv. Internet: Another tool for forecasting is the internet, which has become a powerful tool at a companys disposal

for evaluating the composition, predicting the market, and establishing trend, one method is that company web

pages may be equipped with counters to keep track of visitors and even set feedback forms to gather additional

information. This information allows a company to evaluate their customers habits and determine the most

appropriate and beneficial way to deal with each one. This activity also provides database information for trending

and predicting future responses.

8. What is Consumer Surplus? Explain in detail about the effects of consumer equilibrium curve.

CONSUMER SURPLUS

The excess of the price which he would be willing to pay rather than go without thing, over that which he actually

does pay, is the economic measure of this

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