BUSINESS ECONOMICS

Part 1

A1)

1. 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.
2. 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.
3. 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. For instance, the law of demand states that as price increases. Demand goes down or
vice-versa but this statement does not tell whether the outcome is good or bad. Managerial
Economics, however, is concerned with what decisions ought to be made and hence involves value
judgments.
4. Managerial Economics micro-economic in character

A3) A curve that graphically represents the relation between average total cost
incurred by a firm in the short-run product of a good or service and the quantity
produced. The average total cost curve is constructed to capture the relation
between average total cost and the level of output, holding other variables, like
technology and resource prices, constant. The average total cost curve is one the
three average curves. The other two are average variable cost curve and average
fixed cost curve. It is U-shaped because it begins with relatively high but falling
cost for small quantities of output, reaches a minimum value, then has rising cost
at large quantities of output.

A4) The factors affecting supply are-

1. Price of the commodity-More the price of the commodity, more the supply and less
the price of the commodity, less the supply.
2. Price of factors of production (e.g. land, labour)-More the price of the factors of
production, less the supply and vice versa.
3.Price of related goods-Suppose a farmer grows rice and wheat on his one farm. If
the price of rice rises, he will grow more of it, and less of wheat, so his supply of
wheat falls.
4. Technology-Better the technology, more the supply.

A5) Production function states the relationship between inputs and outputs.

Mathematical representation
of the relationship: Q = f (K, L, La)
 Output (Q) is dependent upon the amount of capital (K), Land (L) and Labour
(La) used.

• In the short run at least one factor fixed in supply but all other
factors capable of being changed
• In the long run, the firm can change all its factors of
production thus increasing its total capacity.

A7) Price Rigidity is a condition where one follows a decrease in price but not an
increase in price. This is due to the ability of other firms to match prices with it and it
often leads to a kinked demand curve.

KINKED-DEMAND CURVE: A demand curve with two distinct segments which

have different elasticities that join to form a corner or kink. The primary use of the
kinked-demand curve is to explain price rigidity in oligopoly. The two segments are:
(1) a relatively more elastic segment for price increases and (2) a relatively less elastic
segment for price decreases. The relative elasticities of these two segments is based
on the interdependent decision-making of oligopolistic firms.

A9) Advantages of Price Discrimination

1. Firms will be able to increase revenue. This will enable some firms to stay in business
who otherwise would have made a loss. For example price discrimination is important
for train companies who offer different prices for peak and off peak.

2. Increased revenues can be used for research and development which benefit
consumers

3. Some consumers will benefit from lower fares. E.G. old people benefit from lower
train companies, old people are more likely to be poor.

A8) Selling cost are the expenses incurred in the marketing and distribution of a
product.

Selling (Advertising) Cost: Selling Cost (SC) is another outstanding feature of a

monopolistic competitive market. This in the form of advertisement expenditure.
Selling Cost and Product Differentiation together enable the producer to maintain
some control over market conditions and influence the shape of the demand curve.
Both features are interdependent. Whenever a product is differentiated it is necessary
to inform buyers; and advertisement is the only medium through which buyers can be
told about superiority of that product. Selling Cost by itself is apparent product
differentiation. When a product does not contain any genuine qualitative difference,
buyers can be made to treat a product differently through advertisements. So
whenever products are differentiated and advertised, the market becomes a
monopolistic competition. These are the hallmarks of this form of market. The
presence of selling cost increases the firm’s cost of production. In order to recover it,
firms have to charge a higher price. The net effect of a monopolistic competitive
market is pricing goods at a higher rate. Consumers have to bear this extra
expenditure.
Part 2

A2) 1. Survey of buyers’ intentions: also known as Opinion surveys.

Useful when customers are industrial producers. (However, a
number of biases may creep up). Not very useful for household
consumers.

Limitation: passive and “does not expose and measure the variables
under management’s control”

2. Delphi method: it consists of an effort to arrive at a consensus in

an uncertain area by questioning a group of experts repeatedly until
the results appear to converge along a single line of the issues
causing disagreement are clearly defined.

3. Expert opinion / “hunch” method

To ask “experts in the field” to provide estimates, eg., dealers,

industry analysts, specialist marketing consultants, etc.

4. Collective opinion method

Also called “sales force polling”, salesmen are required to estimate

expected sales in their respective territories and sections.

5. Smoothing techniques

A. Moving average: are averages that are updated as new

information is received. With the moving average a manager simply
employs, the most recent observations, drops the oldest
observation, in the earlier calculation and calculates an average
which is used as the forecast for the next period.

B. Exponential smoothing: uses weighted average of past data as

the basis for a forecast.

6 Analysis of time series and trend projections

The time series relating to sales represent the past pattern of

effective demand for a particular product. Such data can be
presented either in a tabular form or graphically for further analysis.
The most popular method of analysis of the time series is to project
the trend of the time series.a trend line can be fitted through a
series either visually or by means of statistical techniques. The
analyst chooses a plausible algebraic relation (linear, quadratic,
logarithmic, etc.) between sales and the independent variable, time.
The trend line is then projected into the future by extrapolation.
A5) Pricetakers – have little or no control
over the price they charge.

Price Leadership – Dominant firm sets price, rest have to take

this price

Price Fixing – where firm/s fix prices at levels above equilibrium

on account of their market power or through selling/distribution
arrangements generally termed collusion.

Price Discrimination-Charging different prices for the same product or service.

A1) http://www.scribd.com/doc/3038245/Ch-4-BUDGET-LINE-CONSUMER-
EQUILIBRIUM

Slide no:-8-11

A3) isocost-isoquant analysis: cost minimization

A6) Opportunity cost is the next-best choice available to someone who has picked
between several mutually exclusive choices.

A7) Advantages
1. market economies can adjust to change easily( If there is a demand for one thing,
companies have the ability to change what they produce instead of having to go
through too much government protocol first)
2. Rational self interest in market economies are also encouraged (allow freedom for
people to do what they want, make what they want, and, sell what they want -to a
certain extent-, this can also be described as being able to decide what is going to be
produced , how it is going to be produced and for whom it is going to be produced).
the government tries to stay out of the way of businesses- Although the government
sets certain standards businesses must follow- for the most part businesses can do as
they please.
3. there is a great variety of goods and services for consumers ( If there is a demand
for a good or service, the demand will almost always be met in a market economy).
4. market economy encourage competitive environment, ( competition does
encourage innovation, and the free market economy has produced well over a century
of dizzying technical progress. At the same time productivity has also increased at a
phenomenal rate. competition is one of the basic reasons why there are generally so
many different varieties of goods for consumers to choose from .
On the production side of the market, firms making goods which is more popular
with consumers can sell them at competitive prices and earn profits.

Disadvantages

http://www.docstoc.com/docs/2481114/free-market-economy-system-advantages/

slide no:-1-2

A8) An externality is a cost or benefit that arises from production

and falls on someone other than the producer, or a cost or benefit
that arises from consumption and falls on someone other than the
consumer.

A negative externality imposes a cost and a positive

externality creates a benefit.

Negative Externalities Of a producing unit

Some examples are noise from aircraft and trucks, polluted rivers
and lakes, the destruction of animal habitat, and air pollution in
major cities from auto exhaust.

Positive Externalities Of aproducing unit

Positive production externalities are less common that negative

externalities.

Two examples arise in honey and fruit production. By locating

honeybees next to a fruit orchard, fruit production gets an external
benefit from the bees, which pollinate the fruit orchards and boost
fruit output; and honey production gets an external benefit from the
orchards.