MBA-102

Q1. What do you understand by Law of demand?

Ans: The law of demand is one of the most fundamental concepts in economics. It works with the law
of supply to explain how market economies allocate resources and determine the prices of goods and
services that we observe in everyday transactions.

The law of demand states that the quantity purchased varies inversely with price. In other words, the
higher the price, the lower the quantity demanded. This occurs because of diminishing marginal
utility.1 That is, consumers use the first units of an economic good they purchase to serve their most
urgent needs first, then they use each additional unit of the good to serve successively lower-valued
ends

 The law of demand is a fundamental principle of economics that states that at a higher price,
consumers will demand a lower quantity of a good.
 Demand is derived from the law of diminishing marginal utility, the fact that consumers use
economic goods to satisfy their most urgent needs first.
 A market demand curve expresses the sum of quantity demanded at each price across all
consumers in the market.
 Changes in price can be reflected in movement along a demand curve, but by themselves, they
don't increase or decrease demand.
 The shape and magnitude of demand shifts in response to changes in consumer preferences,
incomes, or related economic goods, not usually to changes in price.

Q4. Clarify marginal utility and law of diminishing utility?

Ans: Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good
or service. The concept of marginal utility is used by economists to determine how much of an item
consumers are willing to purchase.

Positive marginal utility occurs when the consumption of an additional item increases the total utility. On
the other hand, negative marginal utility occurs when the consumption of one more unit decreases the
overall utility.

 Marginal utility is the added satisfaction a consumer gets from having one more unit of a good or
service.
 The concept of marginal utility is used by economists to determine how much of an item
consumers are willing to purchase.
 The law of diminishing marginal utility is often used to justify progressive taxes.
 Marginal utility can be positive, zero, or negative.
The law of diminishing marginal utility explains that as a person consumes an item or a product, the
satisfaction or utility they derive from the product wanes as they consume more and more of that
product. For example, an individual might buy a certain type of chocolate for a while. Soon, they may
buy less and choose another type of chocolate or buy cookies instead because the satisfaction they
were initially getting from the chocolate is diminishing.

 The law of diminishing marginal utility explains that as a person consumes more of an item or
product, the satisfaction (utility) they derive from the product wanes.
 Demand curves are downward sloping in microeconomic models since each additional unit of a
good or service is put toward a less valuable use.
 Salespeople often use different methodologies of soliciting sales as different customers have
different reasons for buying a single quantity of an item.
 Marketers use the law of diminishing marginal utility because they want to keep marginal utility
high for products that they sell.

Q5. Explain the type of market on the basis of competition.

 Ans: According to economic theory, market structure describes how firms are differentiated and categorized by the
types of products they sell and how those items influence their operations. A market structure helps us to understand
what differentiates markets from one another.

In economics, market structure is the number of firms producing identical products which are homogeneous. The
types of market structures include the following:

1. Monopolistic competition, also called competitive market, where there is a large number of firms, each having a
small proportion of the market share and slightly differentiated products.

2. Oligopoly, in which a market is by a small number of firms that together control the majority of the market share.

3. Duopoly, a special case of an oligopoly with two firms.

4. Monopsony, when there is only one buyer in a market.

5. Oligopsony, a market in which many sellers can be present but meet only a few buyers.

6. Monopoly, in which there is only one provider of a product or service.

7. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size
of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any
combination of two or more smaller, more specialized firms.

8. Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of
producers and consumers, and a perfectly elastic demand curve

Q6. What is the meaning of break-even analysis, describe assumptions and limitations?

A break-even analysis is a financial calculation that weighs the costs of a new business, service or product
against the unit sell price to determine the point at which you will break even. In other words, it reveals the
point at which you will have sold enough units to cover all of your costs. At that point, you will have neither
lost money nor made a profit.

 A break-even analysis reveals when your investment is returned dollar for dollar, no more and no less, so
that you have neither gained nor lost money on the venture.
 A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP).
In general, lower fixed costs lead to a lower break-even point.
 A business will want to use a break-even analysis anytime it considers adding costs—remember that a
break-even analysis does not consider market demand.
 There are two basic ways to lower your break-even point: lower costs and raise prices

 A break-even analysis is a financial calculation used to determine a company’s break-even point

(BEP). It is an internal management tool, not a computation, that is normally shared with
outsiders such as investors or regulators. However, financial institutions may ask for it as part of
your financial projections on a bank loan application.

 The formula takes into account both fixed and variable costs relative to unit price and profit. Fixed
costs are those that remain the same no matter how much product or service is sold. Examples of
fixed costs include facility rent or mortgage, equipment costs, salaries, interest paid on capital,
property taxes and insurance premiums.

 Variable costs rise and fall according to changes in sales. Examples of variable costs include
direct hourly labor payroll costs, sales commissions and costs for raw material, utilities and
shipping. Variable costs are the sum of the labor and material costs it takes to produce one unit of
your product.

 Total variable cost is calculated by multiplying the cost to produce one unit by the number of units
you produced. For example, if it costs $10 to produce one unit and you made 30 of them, then the
total variable cost would be 10 x 30 = $300.
 Q7. Explain definition, nature and scope of economics
Society is formed by civilised people who indulge in day-to-day transactions. These transactions are based on cultural values, human
interactions and economic and financial decisions. Economics is the language and theory of these interactions. It is concerned with the
consumption of goods and services that help regular functioning.

Few theorists regard it as a social science. Moreover, it is not merely concerned with the numbers, statistics, and graphs that showcase
prudent progress or decline; it covers all the central issues society faces. Hence, it is safe to state that economics is vital for understanding
society and the people who constitute it.

Nature of Economics
It is divided into two fields with respect to nature – Science and Arts. Though divided into these two fields, it is considered a part of both.

Economics as an Art

Art is a field that dwells on the means of expression and application of any skills, whether creative, pragmatic, or emotional. Art exists all
around us, and it takes a great mind to appreciate art. Like any other art form, economics requires a great deal of imagination; however, the
imagination has to be in the context of reality and cannot be a fleeting idea.

Furthermore, economics is goal-oriented. It states the means to achieve an end; similar is the case with arts. For instance, Arts tells us the
‘how to’ part of anything. Economics also states theories that discuss the ‘how to’ part of an end goal. Therefore, arts and economics deal
with the practical application of book-based knowledge. Both bring life to the theories.

Economics as a Science

Science determines the cause and effect relationship. It is quantifiable and uses a proven apparatus to predict the desired results. It is based
on experimentation. Economics has all these qualities; it establishes a strong cause and effect relationship for the consumption of goods and
services between demand and supply.

Moreover, it can be measured or quantified in graphs and charts and, more importantly, money. It uses its own methods to forecast the end
result. Hence, economics is a science and can be of two types:

 Positive: It is based on cause and effect relationship between variables and lays down the facts.
 Normative: It is based on value judgements and is to do with ‘how’ things should be.

Hence, economics as a science deals with the theory and the principles; economics as an art deals with the application and execution.

Scope of Economics
Scope refers to the extent to which something deals with or the extent to which something is concerned. Consumption of goods and services
is the most basic way to define its scope. However, in reality, the scope of economics is much more than the regular consumption of goods
and services. It can be distinguished as follows:

Microeconomics

Micro refers to small; it is the study of individual units of consumption of goods and services as well as that of production and much more. It
is concerned with one single household, office, industry or market.

Moreover, concepts such as product pricing and consumer or firm behaviour are a part of it. Various types of markets are also studied under
this. Hence, the consumption of goods and services and the behaviour responsible for it is a part of microeconomics.

Macroeconomics

Macro means large; it is the study of the overall production and consumption of goods and services. It is concerned with national income,
GDP, GNP or gross national product. Concepts such as macro-level business cycles, national budget, unemployment and money supply are
a part of macroeconomics.