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Part- A
A seller with market power will have freedom to choose suppliers, set
prices, and use advertising to influence demand. A market is imperfect
when one party directly conveys a benefit or cost to others, or when
one party has better information than others.
Scope.
Competitive markets.
(a) Markets.
8. Market power.
(b) Businesses with market power, whether buyers or sellers, still need
to understand and manage their costs.
(c) In addition to managing costs, sellers with market power need to
manage their demand through price, advertising, and policy
toward competitors.
9. Imperfect Market.
Ans: In economics, the cross elasticity of demand and cross price elasticity
of demand measures the responsiveness of the demand of a good to a
change in the price of another good.
It is measured as the percentage change in demand for the first good that
occurs in response to a percentage change in price of the second good. For
example, if, in response to a 10% increase in the price of fuel, the demand of
new cars that are fuel inefficient decreased by 20%, the cross elasticity of
demand would be −20%/10% = −2.
In the example above, the two goods, fuel and cars(consists of fuel
consumption), are complements; that is, one is used with the other. In these
cases the cross elasticity of demand will be negative, as shown by the
decrease in demand for cars when the price of fuel increased. In the case of
perfect complements, the cross elasticity of demand is negative infinity.
Ans: Economies of scale refers to the decreased per unit cost as output
increases. More clearly, the initial investment of capital is diffused (spread)
over an increasing number of units of output, and therefore, the marginal
cost of producing a good or service is less than the average total cost per unit
(note that this is only in an industry that is experiencing economies of scale).
Examples
Economies of scale — As a firm doubles output, the total cost of inputs less than doubles
Diseconomies of scale — As a firm doubles its output, the total cost of inputs more than
doubles.
-External economies - the cost per unit depends on the size of the
industry, not the firm.
-Internal economies - the cost per unit depends on size of the
individual firm.
Investopedia explains Economies Of Scale
Economies of scale gives big companies access to a larger market by
allowing them to operate with greater geographical reach. For the
more traditional (small to medium) companies, however, size does
have its limits. After a point, an increase in size (output) actually
causes an increase in production costs. This is called "diseconomies
of scale".
Monopolies were a huge problem in the late 19th century in the U.S., and
many would argue certain companies around today have too much of a
monopoly on an industry.
Monopolistic competition is a common market structure where
many competing producers sell products that are differentiated
from one another (that is, the products are substitutes, but are not
exactly alike, similar to brand loyalty). Many markets are
monopolistically competitive; common examples include the
markets for restaurants, cereal, clothing, shoes, and service
industries in large cities. The "founding father" of the theory of
monopolistic competition was Edward Hastings Chamberlin in his
pioneering book on the subject Theory of Monopolistic
Competition (1933)
Major characteristics
• product differentiation
• many firms
• free entry and exit in long run
• Independent decision making
• Market Power
• Buyers and Sellers have perfect information
2. All firms are able to enter the industry if the profits are attractive.
3. All firms are profit maximizers.
4. All firms have some market power, which means none are price
takers.
Over the last couple of months, the topic of user fees has come up on our
EWOT blog a few different times (see here and here, for example). In
putting together my MBA Micro exams, I got wondering why user fees and
peak-load pricing aren't used a lot more often. Here are three cases in point:
(1) Food consumption probably peaks with dinner. Putting the drunks and
others with munchies aside, it must be lowest between midnight and 5 am.
Why don't restaurants use more "smart" pricing during these off-peak
hours? If it can be done in the heavily regulated electricity market, why not
in the food market?
(2) An extremely ugly side of people comes out when it comes to overhead
bins on full flights. Those with briefcases are asked to cram their feet for the
sake of those who want to take large carry-on bags on board. This problem
has gotten much worse since the introduction of fees for checked bags. Why
aren't airlines being entrepreneurial and also charging for bin space?
(3) Why don't rental car companies pro-rate the first and last days of
rentals? If you go over by even an hour on your final day, you're usually
charged for a full day. Wouldn't a profit-maximizing company have a strong
incentive to cut prices substantially on the final day, attract more customers,
and still the car around right away?
Gross domestic product (GDP) is defined as the "value of all final goods
and services produced in a country in 1 year"
Gross National Product (GNP) is defined as the market value of all goods
and services produced in one year by labour and property supplied by the
residents of a country
Part-B
The Business Economics and Managerial Decision Making analyses the growth
and development of privately owned firms and also the decisions made by firms
operating in both private and public sector enterprises. Coverage is clear and
concise, and avoids specialist techniques such as linear programming, which in a
European context tend to belong in courses dealing with operations research.
The book also avoids straying into areas of industrial economics, instead
retaining a sharp focus on relevant issues such as the theory of the firm and the
varying objectives that may be adopted in practice. Key sections are supported
by case studies of real firms and actual decisions made.
Q9b) Define Demand Forecasting. Discuss critically any four important methods
of demand forecasting.
The better a company can assess future demand, the better it can plan its
resources. Each company is exposed to three types of factors influencing
demand: company, competitive and macroeconomic factors.
There are several methods to assess and forecast demand. None yields
demand numbers that are a 100% guaranteed. However, using more than one
method improves accuracy and confidence levels. Most companies use
Simple Sales Analysis and Forecasting. Most companies also use Market
Size and Market Share Research. One of the most accurate method used
today is the combination of Market Size Research and Mind Share
Research.
Market Size Research combined with Mind Share Research is a good way to
forecast corporate demand. It combines macroeconomic trends with
microeconomic and competitive performance. It is based on the fact that
customers will only buy your product if they
Market Size Research quantifies the first two issues while Mind Share
Research quantifies the last two. Together they quantify or forecast future
corporate demand as well as future market share.
Market Size Research combined with Market Share Research is often used
to forecast corporate demand. It combines macroeconomic trends with
competitive performance. It is based on the fact that customers will only buy
your product if they need your product or service and are able to pay for it
(macroeconomic trends). It also assumes that your company's market share
will not change in the future.
The advantage of this method is that this information is often well known
and publicized. Several companies offer syndicated reports on these issues.
Customized studies can be performed whenever the information of your
market segment is not published. The disadvantage lies in the assumption
that your market share stays stable.
Microeconomic methods
Past sales can be used to forecast future demand. Past sales are broken into:
While this method is easy to use, it is based on past behavior and does not
include new company, competitor or macroeconomic developments.
Sales numbers from several time periods are correlated to one or several
factors such as price, advertising, market share, competitor price
demographics, product life stage, etc. Regression analysis and curve fitting
is then used to predict future demand.
Macroeconomic methods
Econometric Modeling
If you have not already done so, look at how the parameters of a Cobb-Douglas
production function can be estimated: Estimating a Cobb-Douglas production
function.
Production functions need to have certain properties, to ensure that we can solve
the least-cost problem: Check any of the many textbooks. If for given values of
L,K, and M, the Hessian of the production function f is negative definite, then its
isoquants at that point are concave to the origin.
David Hillary thinks we can use a Cobb-Douglas production function to
estimate the effects of income taxes (incidentally, Fred Foldvary's succinct
post today is devastating). He says:
This post examines the effect of Income Tax on rent using the Cobb-
Douglas production and Solow Growth Model.
The fundamental fallacy in this approach is to assume that what factors are
paid is a measure of what they contribute to income (Y). It is particularly
dubious in the case of land. The supply of land is fixed. Thus it cannot
explain any of the increase (or decrease) in Y. It is labour, capital and,
especially, entrepreneurship and innovating activities, that explain growth.
Land is entirely passive, but is needed, and hence gets a "reward" (income)
in the form of rent-as-surplus.
Q11 B)
Distinguish between Balance of Trade and Balance of Payments. Explain
the policy measures to correct disequilibrium in BOP.
Ans: Balance of trade is actually the legally imports and exports
of the country is in equilibrium states.means the total export
done by nation and total import coming from another nation is
equal or equilibrium.while the balance of payment is slightly
different form balance of payment,balance of payment is
actually based on current account,capital account and official
settelments acount,balance of payment is,doing payment to
abroad and the payment which comes from the abroad is
balanced.balance of trade is the part of balance oy payment.
Balance of Payments is the difference between the money coming into a
country and the money leaving the same country. In economics, the balance
of payments, (or BOP) measures the payments that flow between any
individual country and all other countries. It is used to summarize all
international economic transactions for that country during a specific time
period, usually a year. The BOP is determined by the country's exports and
imports of goods, services, and financial capital, as well as financial
transfers. It reflects all payments and liabilities to foreigners (debits) and all
payments and obligations received from foreigners (credits). Balance of
payments is one of the major indicators of a country's status in international
trade, with net capital outflow.
Balance of trade represents the net of imports and exports, while balance pf
payments includes trade as well as capital flows.
The world is becoming an integrated market place and trade equations are
changing rapidly. Realizing the importance of private capital inflow for the
development of a country, many countries are taking numerous measures to
attract foreign investors.
Balance of Payment (BoP) can be defined as a systematic record of all
economic transactions between the residents of the reporting country and the
residents of the rest of the world.
Disequilibrium in the BoP can be corrected with the help of both monetary
and non-monetary measures. Monetary measures include deflation,
exchange rate depreciation, devaluation and exchange control. Non-
monetary measures include tariffs (import duties), import quotas and export
promotion polices and programmes. Exchange rate means the price of one
currency in terms of another. Exchange rates are either fixed by
governments or determined by the market forces. The two basic exchange
rate regimes are the fixed exchange rate and the floating/flexible exchange
systems.
There are three ways of calculating GDP - all of which should sum to
the same amount since by identity:
GDP = C + I + G + (X-M)
Transfer payments (e.g. the state pension, income support and the
Jobseekers' Allowance)
Income that is not registered with the Inland Revenue (note here
the effects of the Black or shadow economy where goods and
services are exchanged but the value of these transactions is hidden
from the authorities and therefore does not show up in the official
statistics!)
1. Meaning
o The process through which different projects are evaluated is
known as capital budgeting
o Capital budgeting is defined “as the firm’s formal process for the
acquisition and investment of capital. It involves firm’s decisions to invest its
current funds for addition, disposition, modification and replacement of fixed
assets”.
o Capital budgeting consists in planning development of available
capital for the purpose of maximising the long term profitability of the concern”
– Lynch
o The main features of capital budgeting are
o a. potentially large anticipated benefits
o b. a relatively high degree of risk
o c. relatively long time period between the initial outlay and the
anticipated return.
o
o Significance of capital budgeting
o The success and failure of business mainly depends on how the
available resources are being utilised.
o Main tool of financial management
o All types of capital budgeting decisions are exposed to risk and
uncertainty.
o They are irreversible in nature.
o Capital rationing gives sufficient scope for the financial manager
to evaluate different proposals and only viable project must be taken up for
investments.
o Capital budgeting offers effective control on cost of capital
expenditure projects.
o It helps the management to avoid over investment and under
investments.
o
o Capital budgeting process involves the following
o 1. Project generation : Generating the proposals for investment is
the first step.
o The investment proposal may fall into one of the following
categories:
o Proposals to add new product to the product line,
o proposals to expand production capacity in existing lines
o proposals to reduce the costs of the output of the existing
products without altering the scale of operation.
For example, if the firm invests too much it will cause higher
depreciation and expenses. On the other hand, if the firm does not invest
enough, the firm will face a problem of inadequate capacity and thus, lose its
market share to its competitors.
where the terms follow their traditional definitions (w and x are vector of
factor prices and factor demands respectively). Notice that output price (p)
and factor prices (w) the only parameters entering into profit-function.
A microeconomic law that states that all things being equal, as the price of a
good or service increases, the quantity of that good or service offered by
suppliers increases and vice versa.
Q4 What is elasticity?
Ans: Elasticity is the amount of stretch that an object contains. It is property
by virtue of which matter keeps its shape from deforming into another.
When an external force is applied to an object the size and shape of the
object may change, for example, an appropriate force is applied to a spring
can elongate it. If the force ceases to act the object may restore to its original
size and shape. An object is said to be elastic if it restores its original size
and shape. This property of an object is known as elasticity.
The cost of capital is the cost of a company's funds (both debt and equity),
or, from an investor's point of view "the expected return on a portfolio of all
the company's existing securities."[1] It is used to evaluate new projects of a
company as it is the minimum return that investors expect for providing
capital to the company, thus setting a benchmark that a new project has to
meet.
What Does Cost Of Capital Mean?
The required return necessary to make a capital budgeting project,
such as building a new factory, worthwhile. Cost of capital includes
the cost of debt and the cost of equity.
Q7 What is GNP
Ans: Definition
Gross National Product. GNP is the total value of all final goods
and services produced within a nation in a particular year, plus
income earned by its citizens (including income of those located
abroad), minus income of non-residents located in that country.
Basically, GNP measures the value of goods and services that the
country's citizens produced regardless of their location. GNP is
one measure of the economic condition of a country, under the
assumption that a higher GNP leads to a higher quality of living,
all other things being equal.
Q8 Define inflation.
There are different schools of thought as to what causes inflation. Most can
be divided into two broad areas: quality theories of inflation, and quantity
theories of inflation. Many theories of inflation combine the two. The
quality theory of inflation rests on the expectation of a buyer accepting
currency to be able to exchange that currency at a later time for goods that
are desirable as a buyer. The quantity theory of inflation rests on the
equation of the money supply, its velocity, and exchanges. Adam Smith and
David Hume proposed a quantity theory of inflation for money, and a quality
theory of inflation for production.
The role of inflation in the economy: In the long run, inflation is generally
believed to be a monetary phenomenon, while in the short and medium term,
it is influenced by the relative elasticity of wages, prices and interest rates.
[1] The question of whether the short-term effects last long enough to be
important is the central topic of debate between monetarist and Keynesian
schools. In monetarism, prices and wages adjust quickly enough to make
other factors merely marginal behavior on a general trendline. In the
Keynesian view, prices and wages adjust at different rates, and these
differences have enough effects on real output to be "long term" in the view
of people in an economy.
Inflation also gives central banks room to maneuver, since their primary tool
for controlling the money supply and velocity of money is by setting the
lowest interest rate in an economy - the discount rate at which banks can
borrow from the central bank. Since borrowing at negative interest is
generally ineffective, a positive inflation rate gives central bankers
"ammunition", as it is sometimes called, to stimulate the economy.
Part-B
Q9A) State the scope and importance of managerial economics in a business
organization
a. What to produce?
b. How to produce?
c. For whom to produce?
2. Production analysis
3. Equilibrium analysis focusing cost and revenue