0 valutazioniIl 0% ha trovato utile questo documento (0 voti)
34 visualizzazioni32 pagine
Price elasticity of demand depends on various factors. Explain each factor with the help of an example. Price elasticity measures te responsiveness of quantity demanded to a cange in price. Te exact result depends on weter te initial point or te final point is used in te calculation.
Price elasticity of demand depends on various factors. Explain each factor with the help of an example. Price elasticity measures te responsiveness of quantity demanded to a cange in price. Te exact result depends on weter te initial point or te final point is used in te calculation.
Copyright:
Attribution Non-Commercial (BY-NC)
Formati disponibili
Scarica in formato DOCX, PDF, TXT o leggi online su Scribd
Price elasticity of demand depends on various factors. Explain each factor with the help of an example. Price elasticity measures te responsiveness of quantity demanded to a cange in price. Te exact result depends on weter te initial point or te final point is used in te calculation.
Copyright:
Attribution Non-Commercial (BY-NC)
Formati disponibili
Scarica in formato DOCX, PDF, TXT o leggi online su Scribd
Note Lach quest|on carr|es 10 Marks Answer a|| the quest|ons
Q.1 Price elasticity of demand depends on various factors. Explain each factor with the help of an example Ans Price Elasticity of Demand %e price elasticity of demand measures te responsiveness of quantity demanded to a cange in price, wit all oter factors eld constant. Definition %e price elasticity of demand, / is defined as te magnitude of:
Proportionate cange in quantity demanded ------------------------------------------------------------------------ proportionate cange in price
Since
te quantity demanded decreases wen te price increases,
tis ratio is negative; owever, te absolute value usually is taken and / is reported as a positive number. Because te calculation uses proportionate canges,
te result is a unit less number and does not depend on te units in wic te price and quantity are expressed. As an example calculation, take te case in wic a product's / is reported to be 0.5. %en, if te price
were to increase by 10%, one
would observe a decrease of approximately 5% in quantity demanded. n
te above example, we used te word "approximately" because
te exact result depends on weter te initial point
or te final point is used in te calculation. %is
matters because for a linear demand curve te price
elasticity varies as one moves along te curve. For
small canges in price and quantity te difference
between te two results often is negligible, but
for large canges te difference may be more significant.
%o
deal wit tis issue, one can define te ,7. price elasticity
of demand. %e
arc elasticity uses te average of te initial and final
quantities and te average of te initial and final prices
wen calculating te proportionate cange in eac. Matematically,
te arc price elasticity of demand is defined as: Q2 - Q1 ----------------------- ( Q1 + Q2 ) / 2 ------------------------------- P2 - P1 ----------------------- ( P1 + P2 ) / 2 Were Q1 = nitial quantity Q2 = Final quantity P1 = nitial price P2 = Final price
astic versus Ineastic > 1 n
tis case, te quantity demanded is relatively elastic,
meaning tat a price cange will cause
an even larger cange in quantity demanded. %e case of / = infinity is referred to as perfectly elastic. n tis teoretical case, te
demand curve would be orizontal. For
products aving
a ig price elasticity of demand, a
price increase will result in a revenue decrease
since te
revenue lost from te resulting
decrease in quantity sold is
more tan te revenue gained from te price increase. < 1 n tis case, te quantity demanded is relatively inelastic, meaning
tat a price cange will cause less of a cange in quantity demanded. %e case of / = 0 is referred to as perfectly inelastic. n
tis teoretical case, te demand curve
would be vertical. For
products wose quantity demanded is inelastic, a
price increase will result in a revenue increase since te revenue lost by
te relatively small decrease in quantity is less
tan te revenue gained from
te iger price. = 1 n
tis case, te product is said to ave unitary elasticity; small canges in price do not affect te total revenue.
Factors Affecting the Price asticity of Demand O Availability of substitutes: te more possible substitutes, te greater te elasticity. Note tat te number of substitutes depends on ow broadly one defines te product. O Degree of necessity or luxury: luxury products tend to ave greater elasticity. Some products tat initially ave a low degree of necessity are abit forming and can become "necessities" to some consumers. O Proportion of te purcaser's budget consumed by te item: products tat consume a large portion of te purcaser's budget tend to ave greater elasticity. O %ime period considered: elasticity tends to be greater over te long run because consumers ave more time to adjust teir beavoir. O Permanent or temporary price cange: a one-day sale will elicit a different response tan a permanent price decrease. O Price points: decreasing te price from $2.00 to $1.99 may elicit a greater response tan decreasing it from $1.99 to $1.98.
Determinants of Price asticity of Demand %e elasticity of demand depends on several factors of wic te following are some of te important ones.
1. Nature of the Commodity
Commodities coming under te category of necessaries and essentials tend to be inelastic because people buy tem watever may be te price. For example, rice, weat, sugar, milk, vegetables etc. on te oter and, for comforts and luxuries, demand tends to be elastic e.g., %' sets, refrigerators etc.
2. istence of Substitutes
Substitute goods are those that are considered to be economicay interchangeabe by buyers. f a commodity as no substitutes in te market, demand tends to be inelastic because people ave to pay iger price for suc articles. For example. Salt, onions, garlic, ginger etc. n case of commodities aving different substitutes, demand tends to be elastic. For example, blades, toot pastes, soaps etc.
3. Number of uses for the commodity Singe-use goods are those items which can be used for ony one purpose and mutipe-use goods can be used for a variety of purposes. If a commodity as only one use (singe use product) ten demand tends to be inelastic because people ave to pay more prices if tey ave to use tat product for only one use. For example, all kinds of. Eatables, seeds, fertilizers, pesticides etc. On te contrary, commodities aving several uses, [multiple-use-products] demand tends to be elastic. For example, coal, electricity, steel etc.
4. Durabiity and reparabiity of a commodity Durabe goods are those which can be used for a ong period of time. Demand t ends to be elastic in case of durable and repairable goods because people do not buy t em frequently. For example, table, cair, vessels etc. On te oter and, for perisable and non- repairable goods, demand tends to be inelastic e.g., milk, vegetables, electronic watces etc.
5. Possibiity of postponing the use of a commodity n case tere is no possibility to postpone te use of a commodity to future, te demand tends to be inelastic because people ave to buy tem irrespective of teir prices. For example, medicines. f tere is possibility to postpone te use of a commodity, demand tends to be elastic e.g., buying a %' set, motor cycle, wasing macine or a car etc.
. Leve of Income of the peope Generally speaking, demand will be relatively inelastic in case of ric people because any cange in market price will not alter and affect teir purcase plans. On te contrary, demand tends to be elastic in case of poor.
7. Range of Prices %ere are certain goods or products like imported cars, computers, refrigerators, %' etc, wic are costly in nature. Similarly, a few oter goods like nails; needles etc. are low priced goods. n all tese cases, a small fall or rise in prices will ave insignificant effect on teir demand. Hence, demand for tem is inelastic in nature. However, commodities aving normal prices are elastic in nature.
8. Proportion of the ependiture on a commodity Wen te amount of money spent on buying a product is eiter too small or too big, in tat case demand tends to be inelastic. For example, salt, newspaper or a site or ouse. On te oter and, te amount of money spent is moderate; demand in tat case tends to be elastic. For example, vegetables and fruits, clots, provision items etc.
9. Habits Wen people are abituated for te use of a commodity, tey do not care for price canges over a certain range. For example, in case of smoking, drinking, use of tobacco etc. n tat case, demand tends to be inelastic. f people are not abituated for te use of any products, ten demand generally tends to be elastic.
10. Period of time Price elasticity of demand varies wit te lengt of te time period. Generally speaking, in te sort period, demand is inelastic because consumption abits of te people, customs and traditions etc. do not cange. On te contrary, demand tends to be elastic in te long period were tere is possibility of all kinds of canges.
11. Leve of Knowedge Demand in case of enligtened customer would be elastic and in case of ignorant customers, it would be inelastic.
12. istence of compementary goods oods or services whose demands are interreated so that an increase in the price of one of the products resuts in a fa in the demand for the other. Goods wic are jointly demanded are inelastic in nature. For example, pen and ink, veicles and petrol, soes and socks etc ave inelastic demand for tis reason. f a product does not ave complements, in tat case demand tends to be elastic. For example, biscuits, cocolates, ice creams etc. n tis case te use of a product is not linked to any oter products.
13. Purchase frequency of a product
f te frequency of purcase is very ig, te demand tends to be inelastic. For e.g., coffee, tea, milk, matc box etc. on te oter and, if people buy a product occasionally, demand tends to be elastic. For example, durable goods like radio, tape recorders, refrigerators etc.
Thus, the demand Ior a product is elastic or inelastic will depend on a number oI Iactors. Q.2 A company is selling a particular brand of tea and wishes to introduce a new flavor. How will the company forecast demand for it?
Ans: Technically speaking, one cannot really Iorecast the demand oI a new Ilavor in a product.
What you could do though, is do a survey, explaining the new Ilavor oI the existing product, maybe test it on a Iew hundred people, and then check out all that data, age groups which preIer it, social status which preIer it, etc. And then would be able to get a rough picture about the general demand. For such an experiment
one will also have to consider Iactors about the changes in the existing product, in this case, whether the Ilavor is appealing? Can it be considered as a necessity? Or an alternative to another existing Ilavor oI the same product?
Demand Iorecasts are necessary since the basic operations process, moving Irom the suppliers' raw materials to Iinished goods in the customers' hands, takes time. Most Iirms cannot simply wait Ior demand to emerge and then react to it. Instead, they must anticipate and plan Ior Iuture demand so that they can react immediately to customer orders as they occur. In other words, most manuIacturers "make to stock" rather than "make to order" they plan ahead and then deploy inventories oI Iinished goods into Iield locations.
The Following things should be kept in mind before forecasting a demand for a new flavor of Tea in the market:
Nature of Customer demand: Most oI the procedures are intended to deal with the situation where the demand to be Iorecasted arises Irom the actions oI the Iirm`s customer base. Customers are assumed to be able to order what, where, and when they desire. The Iirm may be able to inIluence the amount and timing oI customer demand by altering the traditional "marketing mix" variables oI product design, pricing, promotion, and distribution.
&DGEMENTAL APPROACHES: The essence oI the judgmental approach is to address the Iorecasting issue by assuming that someone else knows and can tell you the right answer. Eg.Surveys, Consensus method, Delphi method
EXPERIMENTAL APPROACHES: When an item is "new" and when there is no other inIormation upon which to base a Iorecast, is to conduct a demand experiment on a small group oI customers, e.g. Customer surveys, Consumer Panels, Test marketing, etc
RELATIONAL/CA&SAL APPROCHES: There is a reason why people buy our product. II we can understand what that reason (or set oI reasons) is, we can use that understanding to develop a demand Iorecast.eg.Econometric models, Input Output models, liIe cycle models, Simulation models, etc
TIME SERIES APPROACHES: A time series is a collection oI observations oI well-deIined data items obtained through repeated measurements over time, e.g. Simple moving average, etc.
Q.3 The supply of a product depends on the price. What are the other factors that will affect the supply of a product? Ans: Supply is one oI the two Iorces that determine the price oI a commodity in the market. Supply means the amount oIIered Ior sale at a given price. According to Thomas, 'The supply oI goods is the quantity oIIered Ior sale in a given market at a given time at various prices. According to ProI. Macconnel 'supply may be deIined as a schedule which shows the various amounts oI a product which a producer is willing to and able to produce and make available Ior sale in the market at each speciIic price in a set oI possible prices during some given period. Thus supply of a product refers to the various amounts which are offered for sale at a particular price during a given period of time.
Supply can be equal, more or less, than the current production depending upon the nature oI the commodity, price and the requirements oI the producers.
Supply is also diIIerent Irom stock. Stock is the total volume of a commodity which can be brought into the market for sale at a short notice and supply means the quantity which is actually brought in the market. For perishable commodities, like Iish and Iruits, supply and stock are the same because they cannot be stored. The commodities which are not perishable can be held back, iI prices are not Iavorable and released in large quantities when prices are Iavorable. In short, stock is potential supply.
Supply Iunction is a comprehensive one as it analyses the causes Ior changes in supply in a detailed manner. Mathematically a supply Iunction can be represented in the Iollowing manner. Sx I (PI, T, Cp,Gp,N...etc) Where Sx supply oI a given product x PI price oI Iactor input T Technology Cp cost oI production Gp Government policy N Number oI Iirms etc
Determinants of Supply Apart Irom price, many Iactors bring about changes in supply. Among them the important Iactors are:
1. Natural factors: Favorable natural Iactors like good climatic conditions, timely, adequate, well distributed rainIall results in higher production and expansion in supply. On the other hand, adverse Iactors like bad weather conditions, earthquakes, droughts, untimely, ill-distributed, inadequate rainIall, pests etc., may cause decline in production and contraction in supply.
2. Change in techniques of production: An improvement in techniques oI production and use oI modern, highly sophisticated machines and equipments will go a long way in raising the output and expansion in supply. On the contrary, primitive techniques are responsible Ior lower output and hence lower supply.
3. Cost of production: Given the market price oI a product, iI the cost oI production rises due to higher wages, interest and price oI inputs, supply decreases. II the cost oI production Ialls, on account oI lower wages, interest and price oI inputs, supply rises.
4. Prices of related goods: II prices oI related goods Iall, the seller oI a given commodity oIIer more units in the market even though, the price oI his product has not gone up. Opposite will be the case when the price oI related goods rises.
5. Government policy: When the government Iollows a positive policy, it encourages production in the private sector. Consequently, supply expands. For example granting oI subsidies, development rebates, tax concession, etc,. On the other hand, output and supply cripples when the government adopts a negative policy. For example withdrawal oI all concessions and incentives, imposition oI high taxes, introduction oI controls and quota system etc.
6. Monopoly power: Supply tends to be low, when the market is controlled by monopolists, or a Iew sellers as in the case oI oligopoly. Generally supply would be more under competitive conditions.
7. Number of sellers or firms: Supply would be more when there are a large number oI sellers. Similarly production and supply tends to be more when production is organized on large scale basis. II rate or speed oI production is high, supply expands. Opposite will be the case when number oI sellers is less, small scale production and low rate oI production.
8. Complementary goods: In case oI joint demand, the production & sale oI one product may lead to production and sale oI other product also.
9. Discovery of new source of inputs: Discovery oI new sources oI inputs helps the producers to supply more at the same price & vice-versa.
10
10. Improvements in transport and communication: This will Iacilitate Iree and quick movements oI goods and services Irom production centers to marketing centers.
11. Future rise in prices: When sellers anticipate a Iurther rise in price, in that case current supply tends to Iall. Opposite will be the case when, the seller expect a Iall in price. Thus, many Iactors inIluence the supply oI a product in the market. A Iirm should have a thorough knowledge oI all these Iactors because it helps in preparing its production plan and sales strategy.
11
Q.4 Show how producers equilibrium is achieved with isoquants and isocost curves.? Ans
1
1
1
1
1
Q.5 Discuss the full cost pricing and marginal cost pricing method. Explain how the two methods differ from each other: Ans: @he D|fference between Iu|| cost r|c|ng and marg|na| cost pr|c|ng |s as fo||ows Full cost pricing: Full cost pricing is a practice where the price oI a product is calculated by a Iirm on the basis oI its direct costs per unit oI output plus a markup to cover overhead costs and proIits. The overhead costs are generally calculated assuming less than Iull capacity operation oI a plant in order to allow Ior Iluctuating levels oI production and costs.
a||ent o|nts on Iu|| Cost p|us r|c|ng Traditional method oI pricing a product; Most commonly used method; Prices are set by adding a percentage oI proIit (either a mark up or a margin) to the total cost oI the product; Consistent with the absorption costing technique; Commonly used by wholesalers, retailers, construction contractors, services, government contractors; UseIul in situation where: Products are made based on speciIication by the customers; Main objective is to make proIit aIter considering Iixed costs oI the business; The costs are diIIicult to estimate in advance; Expected demand at diIIerent price levels is diIIicult to estimate.
1
Simple Illustration: et`s look at Product A: Production cost as Iollows: Variable cost -material l $1.50 Variable cost- labor $1.50 Total variable cost $3.00 Fixed cost $3.00 (Excludes administrative and selling overheads) Required 50 mark up on total production cost. For Full-Cost Plus Pricing: Total cost $3.00$3.00 $6.00 50 on total/Iull cost 50 x $6.00 $3.00 Hence, Selling price $6.00$3.00 $9.00 per unit. By pricing at $9.00, the company wants Product A to at least cover its total production cost. Advantages oI Full Cost plus Pricing: O Easy and simple to understand; O Pricing decisions become standardized; O Adopts a conservative approach that in the long run to at least ensure the recovery oI Iixed cost oI a business; ODiIIicult oI estimating demands can be avoided. Disadvantages oI Full Cost Plus Pricing: OTendency to set prices on inaccurate estimates; OChallenges oI apportioning the Iixed overheads properly into diIIerent products 1
OUnsuitable Ior short term decisions making particularly in situation like surplus production capacity, tendering Ior contracts price and others; OIgnores competition and price elasticity oI demand and OIgnores opportunity costs and relevant costs.
Marginal cost-plus pricing:
Marginal cost-plus pricing/mark- up pricing is a method oI determining the sales price by adding a proIit margin on to either marginal cost oI production or marginal cost oI sales. Whereas a Iull cost- plus approach to pricing draws attention to net proIit and the net proIit margin, a variable cost-plus approach to pricing draws attention to gross proIit and the gross proIit margin, or contribution.
The advantages of a marginal cost-plus approach to pricing are as follows.
- It is a simple and easy method to use.
- The mark-up percentage can be varied, and so mark- up pricing can be adjusted to reIlect demand conditions.
- It draws management attention to contribution, and the eIIects oI higher or lower sales volumes on proIit. In this way, it helps to create better awareness oI the concepts and implications oI marginal costing and cost - volume-proIit analysis. For example, iI a product costs Rs 10 per unit and a mark - up oI 150 is added to reach a price oI Rs.25 per unit, management should be clearly aware that every additional Rs.1 oI sales revenue would add 60 pence to contribution and proIit.
- In practice, mark-up pricing is used in businesses where there is a readily identiIiable basic variable cost. Retail industries are the most obvious example, and it is quite common Ior the prices oI goods in shops to be Iixed by adding a mark- up (20 or 33.3,say ) to the purchase cost.
There are, of course, drawbacks to marginal cost- plus pricing ,
- Although the size oI the mark-up can be varied in accordance with demand conditions, it does not ensure that suIIicient attention is paid to demand conditions, competitors` prices and proIit maximization.
- It ignores Iixed overheads in the pricing decision, but the sales price must be suIIiciently high to ensure that a proIit is made aIter covering Iixed costs. 1
Approach to pricing might be taken when a business is working at Iull capacity, and is restricted by a shortage oI resources Irom expanding its output Iurther. By deciding what target proIit it would like to earn, it could establish a mark-up per unit oI limiting Iactor.
Q.6 Discuss the price output determination using profit maximization under perfect competition in the short run.?
Ans: Profit-maximization implies earning highest possible amount of profits during a given period of time. A Iirm has to generate largest amount oI proIits by building optimum productive capacity both in the short run and long run depending upon various internal and external Iactors and Iorces. There should be proper balance between short run and long run objectives. In the short run a Iirm is able to make only slight or minor adjustments in the production process as well as in business conditions. The plant capacity in the short run is Iixed and as such, it can increase its production and sales by intensive utilization oI existing plants and machineries, having over time work Ior the existing staII etc. Thus, in the short run, a Iirm has its own technical and managerial constraints. But in the long run, as there is plenty oI time at the disposal oI a Iirm, it can expand and add to the existing capacities build up new plants; employ additional workers etc to meet the rising demand in the market. Thus, in the long run, a Iirm will have adequate time and ample opportunity to make all kinds oI adjustments and readjustments in production process and in its marketing strategies.
Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. The reality is that most markets are imperfectly competitive. Nonetheless, there is some value in understanding how price, output and equilibrium is established in both the short and the long run in a market that holds true to the tough assumptions oI a world oI perIect competition.
0
Establishing price and output in the short run under perfect competition
The previous diagram shows the short run equilibrium Ior perIect competition. In the short run, the twin Iorces oI market demand and market supply determine the equilibrium ~market- clearing price Ior the industry. In the diagram below, a market price P1 is established and output Q1 is produced. This price is taken by each oI the Iirms. The average revenue curve (AR) is their individual demand curve. Since the market price is constant Ior each unit sold, the AR curve also becomes the Marginal Revenue curve (MR). 1
For the Iirm, the proIit maximizing output is at Q2 where MCMR. This output generates a total revenue (P1 x Q2). The total cost oI producing this output can be calculated by multiplying the average cost oI a unit oI output (AC1) and the output produced. Since total revenue exceeds total cost, the Iirm in this example is making abnormal (economic) proIits. This is not necessarily the case Ior all Iirms. It depends on their short run cost curves. Some Iirms may be experiencing sub- normal proIits iI average costs exceed the market price. For these Iirms, total costs will be greater than total revenue.
Master of Business Administration - MBA Semester I MB0042 Managerial Economics - 4 Credits Book ID: B0908) Ass|gnment et 2 (60 Marks)
Note Lach quest|on carr|es 10 Marks Answer a|| the quest|ons
1 Income e|ast|c|ty of demand has var|ous app||cat|ons Lxp|a|n each app||cat|on w|th the he|p of an examp|e?
Ans C1 lncome elasLlclLy of demand has varlous appllcaLlons Lxplaln each appllcaLlon wlLh Lhe help of an example? Ans lncome elasLlclLy of demand may be deflned as Lhe raLlo or proporLlonaLe change ln Lhe quanLlLy demanded of a commodlLy Lo a glven proporLlon change ln Lhe lncome ln shorL lL lndlcaLes Lhe exLenL Lo whlch demand changes wlLh a varlaLlon ln consumer's lncome 1he followlng formula helps Lo measure Lhe lncome elasLlclLy (Ly) Ly ercenLage change ln demand ercenLage change ln lncome Cr Ly u ? ? u
Where - Ly ls lncome elasLlclLy of demand - u ls change ln demand - u ls orlglnal demand - ? ls change ln lncome - ? ls orlglnal lncome
Lxample Crlglnal demand00 unlLs Crlglnal lncome 000 unlLs new demand 00 unlLs new lncome 000 unlLs Change ln demand 0000 00 unlLs change ln lncome000000000 Pence Ly00/000*000/001 Cenerally speaklng Ly ls poslLlve 1hls ls because Lhere ls a dlrecL relaLlonshlp beLween lncome and demand le hlgher Lhe lncome hlgher would be Lhe demand and vlce versa Cn Lhe basls of Lhe numerlcal value of Lhe coefflclenL Ly ls classlfled as greaLer Lhan one less Lhan one equal Lo one equal Lo zero and negaLlve 1he concepL of ey helps us ln classlfylng commodlLles ln Lo dlfferenL caLegorles 1 When Ly ls poslLlve Lhe commodlLy ls normal (used ln dayLoday llfe) When Ly ls negaLlve Lhe commodlLy ls lnferlor (lor example [owar beedl eLc) When Ly ls poslLlve and greaLer Lhan one Lhe commodlLy ls luxury When Ly ls poslLlve buL less Lhan one Lhe commodlLy ls essenLlal When Ly ls zero Lhe commodlLy ls neuLral Lg SalL maLch box eLc
ract|ca| app||cat|on of |ncome e|ast|c|ty of demand 1 ne|ps |n determ|n|ng the rate of growth of the f|rm lf Lhe growLh raLe of Lhe economy and lncome growLh of Lhe people ls reasonable lorecasLed ln LhaL case lL ls posslble predlcL expecLed lncrease ln Lhe sales of a flrm and vlce versa
2 ne|ps |n the demand forecast|ng of a f|rm lL can be ln esLlmaLlng fuLure demand provlded Lhe raLe of lncrease ln lncome and Ly for 1he producLs are known 1hus lL helps ln demand forecasLlng acLlvlLles of a flrm
ne|ps |n product|on p|ann|ng and mar ket|ng 1he knowledge of Ly ls essenLlal for producLlon plannlng formulaLlng markeLlng SLraLegy decldlng adverLlslng expendlLures and naLure of dlsLrlbuLlon channel eLc ln Lhe Long run
4 ne|ps |n ensur|ng stab|||ty |n product|on roper esLlmaLlon of dlfferenL degrees of lncome elasLlclLy of demand for dlfferenL Lypes of producL helps ln avoldlng overproducLlon or underproducLlon of a flrm Cne should know wheLher rlse or fall ln lncome ls permanenL or Lemporary S ne|ps |n est|mat|ng construct|on of houses 1he raLe of growLh ln lncomes of people also helps ln houslng programs ln a counLry 1hus lL helps a loL ln managerlal declslons of a flrm
2 when |s the op|n|on survey method used and what |s the effect|veness of the method Ans Survey of buyer's lnLenLlon or preference ls one of Lhe lmporLanL meLhods of demand lorecasLlng lL ls also called Cplnlon Survey MeLhod" Under tis metod, consumer buyers are requested to indicate teir preference and Willingness about a particular product. %ey are about to reveal teir future purcase plans wit #espect to specific items. %ey are expected to give answer to question like wat items tey intends to buy, in wat Quantity, wy, were, wat quality tey expect, ow muc tey are planning to spend etc. Generally, te field surveys are conducted by te marketing researc departments of te Company or iring te services of outside researc organization consisting of learned and igly Qualified professionals.
%e eart of te survey is questionnaire. t is a compreensive one covering almost all Questions eiter directly or indirectly in a most intelligent manner. t is prepared by an expert Body wo are specialist in te field or marketing.
%e questionnaire is distributed among te consumer eiter troug mail or in person by te company. Consumers are requested to furnis all relevant and correct information.
%e next step is to collect te questionnaire from te consumers for te purpose of
Evaluation. %e materials collected will be classified, edited and analyzed. f any bias Prejudices, exaggerations, artificial or excess demand creation are found at te time of Answering tey would be eliminated.
%e information so collected will now be consolidated and reviewed by te top Executives wit lot of experiences. t will be examined torougly. nferences are drawn and Conclusions are arrived at. Finally a report is prepared and submitted to te management for %aking final decisions.
%he success of the survey method depends on many factors:
1. %e nature of te question asked. 2. %e ability of te surveyed. 3. %e representative of te sample 4. Nature of te product 5. Caracteristics of te market 6. Consumer beavior 7. %ecniques of analysis 8. Conclusion drawn etc. %e management sould not entirely depend on te result of survey reports t project future Demand. Consumer may not express teir onest and real views and as suc tey may give only te broad trends in te market. n order to arrive, at rigt conclusion, field surveys sould be regularly cecked and supervised.
%is metod is simple and useful to te producers wo produce goods in bulk. Here te Burden of forecasting is put on te customers.
However tis metod is not muc useful in estimating te future demand of te Houseold as tey run in a large numbers and also do not freely express teir future demand #equirements. t is expensive and so difficult. Preparation of questionnaire is not an easy task. At best it can be used for sort term forecasting.
".3 Show how pr ice is determined by the forces of demand and suppy, by using forces of quiibrium.
Ans: %e word equilibrium is derived from te Latin word "a equilibrium wic Means equal balance. t means a state of even balance in wic opposing forces or tendencies neutralize eac oter. t is a position of rest caracterized by absence of cange. t is a state were tere is complete agreement of te economic plans of te various market Participants so tat no one as a tendency to revise or alter is decision. n te words of Professor Meta: "Equilibrium denotes in economics absence of cange in movement.
Market quiibrium There are two approaches to market equilibrium viz., partial equilibrium approach And the general equilibrium approach. The partial equilibrium approach to pricing Explains price determination oI a single commodity keeping the prices oI other Commodities constant. On the other hand, the general equilibrium approach explains the Mutual and simultaneous determination oI the prices oI all goods and Iactors. Thus it explains a multi market equilibrium position.
Earlier to Marshall, there was a dispute among economists on whether the Iorce oI Demand or the Iorce oI supply is more important in determining price. Marshall gave Equal importance to both demand and supply in the determination oI value or price. He Compared supply and demand to a pair oI scissors ' We might as reasonably dispute whether It is the upper or the under blade oI a pair oI scissors that cuts a piece oI paper, as whether Value is governed by utility or cost oI production. Thus neither the upper blade nor the lower blade taken separately can cut the paper; both have their importance in the process oI cutting. ikewise neither supply alone, nor demand alone can determine the price oI a commodity, both are equally important in the determination oI price. But the relative importance oI the two may vary depending upon the time under consideration. Thus, the demand oI all consumers and the supply oI all Iirms together determine the price oI a commodity in the market.
E q u i l i b r i u m b e t w e e n d e m a n d a n d s u p p l y p r i c e : Equilibrium between demand and supply price is obtained by the interaction oI these two Iorces. Price is an independent variable. Demand and supply are dependent variables. They depend on price. Demand varies inversely with price, a rise in price causes a Iall in demand and a Iall in price causes a rise in demand. Thus the demand curve will have a downward slope indicating the expansion oI demand with a Iall in price and contraction oI demand with arise in price. On the other hand supply varies directly with the changes in price, a rise in price causes a rise in supply and a Iall in price causes a Iall in supply. Thus the supply curve will have an upward slope .At a point where these two curves intersect with each other the equilibrium price is established. At this price quantity demanded is equal to the quantity demanded. This we can explain with the help oI a table and a diagram
rlce ln 8s uemand ln use Supply ln unlLs SLaLe of markeL ressure on prlce 0 uS 10 0 uS 0 1 1 uS neuLral 10 0 10 uS 0 uS
ln Lhe Lable aL 8s0 Lhe quanLlLy demanded ls equal Lo Lhe quanLlLy supplled Slnce Lhe prlce ls agreeable Lo boLh Lhe buyer and sellers Lhere wlll be no Lendency for lL Lo change Lhls ls called equlllbrlum prlce Suppose Lhe prlce falls Lo 8s Lhe buyer wlll demand 0 unlLs whlle Lhe seller wlll supply only unlLs Lxcess of demand over supply pushes Lhe prlce upward unLll lL reaches Lhe equlllbrlum poslLlon supply ls equal Lo Lhe demand Cn Lhe oLher hand lf Lhe prlce rlses Lo 8s0 Lhe buyer wlll demand only unlLs whlle Lhe sellers are ready Lo supply unlLs Sellers compeLe wlLh each oLher Lo sell more unlLs of Lhe commodlLy Lxcess of supply over demand pushes Lhe prlce downward unLll lL reaches Lhe equlllbrlum 1hls process wlll conLlnue Llll Lhe equlllbrlum prlce of 8s0 ls reached 1hus Lhe lnLeracLlons of demand and supply forces acLlng upon each oLher resLore Lhe equlllbrlum poslLlon ln Lhe markeL ln Lhe dlagram uu ls Lhe demand curve SS ls Lhe supply curve uemand and supply are ln equlllbrlum aL polnL L where Lhe Lwo curves lnLersecL each oLher CC ls Lhe equlllbrlum ouLpuL C ls Lhe equlllbrlum prlce Suppose Lhe prlce C ls hlgher Lhan Lhe equlllbrlum prlce C AL Lhls polnL prlce quanLlLy demanded ls u 1hus uS ls Lhe excess supply whlch Lhe seller wanLs Lo push lnLo Lhe markeL compeLlLlon among Lhe sellers wlll brlng down Lhe prlce Lo Lhe equlllbrlum level where Lhe supply ls equal Lo Lhe demand AL prlce C1 Lhe buyers wlll demand 1u1 quanLlLy whlle Lhe sellers are ready Lo sell 1S1 uemand exceeds supply Lxcess demand for goods pushes up Lhe prlce Lhls process wlll go unLll equlllbrlum ls reached where supply becomes equal Lo demand
4 D| s t | ngu| s h bet ween f | xed cos t and var | ab| e cost us | ng an examp| e?
Ans: Fi xed cost :
These costs are incurred on Iixed Iactors like land, building, equipments, plants, superior types oI labor, top management etc. Fixed costs in the short run remains constant because the Iirm does not change the size oI plant and the amount oI the Iixed Iactors employed. Fixed costs do not vary with either expansion or contraction in output. These cost are to be incurred by a Iirm even output is zero. Even iI the Iirm close down its operation Ior sometime temporarily in the short run, but remains in business, these cost have to be borne by it. Hence, these costs are independent oI output and are reIerred to as unavoidable contractual cost.
ProI. Marshall called Iixed cost as supplementary costs. They include such items as contractual rent payments, interest on capital borrowed, insurance premium, depreciation and maintenance allowance, administrative expenses like manager`s salary or salary oI the permanent staII, property and business taxes, license Iees, etc. They are called as over- head costs because these costs are to incurred whether there is production or not. These costs are to be distributed on each units oI output produced by a Iirm. Hence, they are called as indirect costs.
Va r i a b l e Co s t s :
The costs corresponding to variable Iactors are described as variable costs. These costs are incurred on raw materials, ordinary labor, transport, power, Iuel, water etc, which directly vary in the short runs.
Variable costs are directly and proportionately increases or decreases with the level oI output. II a Iirm shut down Ior some times in the short run; then it will not use the variable Iactors oI production and will not thereIore incurs any variable costs. Variable costs are incurred only when some amount oI output is produced. Total variable cost increases with the level oI increase in the level oI production and vice-versa. ProI. Marshall called variable costs as prime costs or direct costs because the volume oI output produced by a Iirm depends directly upon Lhem
lL ls clear from Lhe above descrlpLlon LhaL a producLlon cosL conslsLs of boLh flxed as well as varlable cosLs 1he dlfference beLween Lhe Lwo ls meanlngful and relevanL only ln Lhe shorL run ln Lhe long run all cosLs become varlable because all facLors of producLlon become ad[usLable and varlable ln Lhe long run
Powever Lhe dlsLlncLlon beLween Lhe flxed and varlable cosLs ls very lmporLanL ln Lhe shorL because lL lnfluences Lhe average cosLs behavlor of Lhe flrm ln Lhe shorL run even lf a flrm wanLs Lo close down lLs operaLlon buL wanLs Lo remaln ln Lhe buslness lL wlll have Lo lncur flxed cosLs buL lL musL cover aL leasL lLs varlable cosLs
Q. 5 Di s c u s s Ma r r i s Gr o wt h Ma x i mi z a t i o n mo d e l a nd s h o w h o w i t i s di f f e r e n t f r o m t h e Sal es maxi mi zat i on model ? Ans:
ProIit maximization is traditional objective oI a Iirm. Sales maximization objective is explained by ProI. Boumal. On similar lines, ProI. Marris has developed another alternative growth maximization model in recent years. It is a common Iactor to observe that each Iirm aims at maximizing its growth rate as this goal would answer many oI the objectives oI a Iirm. Marris points out that a Iirm has to maximize its balanced growth rate over a period oI time. Marris assumes that the ownership and control oI the Iirm is in the hands oI two groups oI people, i.e. Owner and managers. He Iurther points out that both oI them have two distinctive goals. Managers have a utility Iunction in which the amount oI salary, status, position, power, prestige and security oI job etc are the most import variable where as in case oI are more concerned about the size oI output, volume oI proIits, market shares and sales maximization.
Utility Iunction oI the manager and that the owner are expressed in the Iollowing manner Uo I |size oI output, market share, volume oI proIit, capital, public esteem etc.| Um I |salaries, power, status, prestige, job security etc.| In view oI Marris the realization oI these two Iunctions would depend on the size oI the Iirm. arger the Iirm, greater would be the realization oI these Iunctions and vice-versa. Size oI the Iirm according to Marris depends on the amount oI corporate capital which includes total volume oI the asset, inventory level, cash reserve etc. He Iurther points out that the managers always aim at maximizing the rate oI growth oI the Iirm rather than growth in absolute size oI the Iirms. Generally managers like to stay in a grouping Iirm. Higher growth rate oI the Iirm satisIy the promotional opportunity oI managers and also the share holders as they get more dividends. oumal ` s Sal es Maxi mi zat i on model : Sales maximization model is an alternative Ior proIit maximization model. This model is developed by ProI. W.J. Boumal, an American economist. This alternative goal has assumed greater signiIicance in the context oI the growth oI the oligopolistic Iirms. The model highlights that the primary objective oI the Iirm is to maximize its sales rather than proIit maximization. It states that the goal oI the Iirm is maximization oI sales revenue subject to a minimum proIit constraint. The minimum proIit constraint is determined by the expectation oI the shareholders. This is because no company can displease the shareholders. It is to be noted here that maximization oI sales does not mean maximization oI physical sales but maximization oI total sales revenue. Hence, the managers are more interested in increasing sales rather than proIit. The 0
basic philosophy is that when sales are maximized automatically proIits oI the company would also go up. Hence, attention is diverted to increase the sales oI the company in recent years in the context oI highly competitive market. How Profit Maximization model differs from Sales Maximization model: O The sale maximization model diIIers on the Iollowing grounds:
O Emphasis is given on maximizing sales rather than proIit.
O Increase the competitive and operational ability oI the company.
O The amount oI slack earning and salaries oI the top managers are directly linked to it.
O It helps in enhancing the prestige and reputation oI top management, distributes more dividends to share holders and increases the wage oI the workers and keeps them happy.
O The Iinancial and other lending institutions always keep a watch on the sales revenue oI a Iirm as it is an indication oI Iinancial health oI the Iirm.
Q. 6 Expl ai n how f i scal pol i cy i s used t o achi eve economi c st abi l i t y?
Ans: In order to achieve a stable economic condition, Iiscal policy has to play a positive and constructive role both in developed and developing nations. The speciIic role to be played by Iiscal policy can be discussed as Iollows:
O To a c t a s o pt i mu m a l l o c a t o r o f r e s o u r c e s :
As most oI the resources are scarce in their supply, careIul planning is needed in its allocation so as to achieve the set targets .Rational allocation would ensure IulIillment oI various objectives.
O To a c t a s a s a v e r :
1. It should Iollow a rational consumption policy reduces the MPC and raises the MPS. 2. Taxation policy has to be modiIied to raise the rates oI old taxes, introduces new additional taxes, and extends the tax-nets. 3. ProIit earning capacity oI public sector units are to be raise substantially to mop-up Iinancial resources. 4. The government should borrow more money both in the country and outside the country. 5. Higher the rates oI interest are to be oIIered Ior government bonds and security
1
O To a c t a s a n i n v e s t o r : Mere mobilization oI Iinancial resources is not an end in itselI. It should result in the creation oI real resources which are more important in accelerating the growth process. Rapid economic growth depends upon the volume oI investment. Hence, Iiscal policies have to be ensuring higher volume oI investment in both private and public sectors.
O To a c t a s p r i c e s t a bi l i z e r : Price stability is oI paramount oI importance in an economy .Extreme levels oI both inIlation and deIlation would disrupt and disturb the normal and regular working oI an economic system. This would come in the way oI stable and persistent growth. Hence all measures are to be taken to check these two dangerous situations so as to create necessary congenial atmosphere to prepare the background Ior rapid economic growth.
O To a c t a s a n e c o n o mi c s t a b i l i z e r : Price stability would create the necessary back ground Ior over all economics stability. Upswing and downswing in the level oI economic activities are to be avoided. II an economy is subject to Irequent Iluctuation in the Iorm oI trade cycle, certainly, it would undermine and disturb the growth process. Instability would come in the way oI persistent and consistent growth in a country. Hence all measure to be taken to ensure economic stability.
O T o a c t a s a n e m p l o y m e n t g e n e r a t o r : Fiscal policy should help in mobilizing more Iinancial resources, convert them in to investment and create more employment opportunity to absorb the huge unemployed man power.
O T o a c t a s b a l a n c e r : There must be proper balance between aggregate saving and aggregate investment, demand and supply, income and output and expenditure, economic overhead capital and social overhead capital etc. Any sort oI imbalance would result in either surpluses or scarcity in diIIerent sectors oI the economy leading to Iast growth in some sectors Iollowed by lagging oI some other sectors.
O T o a c t a s g r o w t h p r o m o t e r : The basic objective oI any economic policy is to ensure higher economic growth rates. This is possible when there is higher national savings, investment, production, employment and income. Hence, Iiscal policy is to be designed in such a manner so as to promote higher growth in an economy.
O To a c t a s i n c o me r e d i s t r i b ut e : Fiscal policy has to minimize inequalities and ensure distributive justice in an economy. This is possible when a rational taxation and public expenditure policy is adopted. More money is collected Irom richer section oI the society through various imaginative taxation policies and a larger amount oI money is to be spent in Iavor oI poorer sections oI the society. Thus, inequality is to be reduced to the minimum.
O To a c t a s s t i mu l a t o r o f l i v i n g s t a nd a r d s o f p e o p l e : The Iinal objective is to raise the level oI living standards oI the people. This is possible when there is higher output, income and employment leading to higher purchasing power in the hands oI common man. Hence, Iiscal policy should help in creating more wealth in the economy. II there is economic prosperity, then it is possible to have a satisIactory, contended and peaceIul liIe.
Thus, Iiscal policy has to play a major role in promoting economic growth in a country.