Assignment on

“Managerial Economics”

Executive summaryEconomics is a broader study which aims at satisfying the human wants in an effective way by

the limited wealth’s that a country owns. Inflation is a key concern of economics which is

related to the day to day life of human beings all over the world. Proper economic growth can

enrich the livelihood of the human beings of a nation, so it is one of the major concerns almost in

all the nations. Price elasticity of demand represents the theme that peoples demands for a goods

or services changes on the changes of price related to achieve it. It is also a key issue of the study

of managerial economics. Every nation must have to pay proper importance to the concepts, in

order to enrich the standard of living of the people and also to ensure a sustainable growth of the

country.

Table of ContentsExecutive summary.........................................................................................................................2

Introduction......................................................................................................................................4

Task 1 Knowing the theories of inflation, Distinction between anticipated and unanticipated

inflation and the problems with each type.......................................................................................4

Theories of inflation.....................................................................................................................4

Cost-Push Inflation Theory......................................................................................................5

Sectorial Inflation Theory........................................................................................................6

Demand-Pull Inflation..............................................................................................................6

Pricing Power Inflation............................................................................................................6

Structural Inflation Theory.......................................................................................................6

Anticipated VS unanticipated inflation........................................................................................7

Problems Associated with anticipated and unanticipated inflation.............................................8

Task 2 The process of economic growth, ways to achieve it & pursuit of economic growth is not

in people’s long-term interests.........................................................................................................8

The Process of Economic Growth...............................................................................................8

Ways to Achieve Economic growth.............................................................................................9

Use of Innovation to promote economic growth......................................................................9

Reformation of the strategic Immigration................................................................................9

Technological development.....................................................................................................9

Skilled manpower and management technique improvement................................................10

Pursuit of economic growth is not in people’s long-term interests............................................10

Task 3 Understanding the price elasticity of demand, factors affects it & the part that price

elasticity might play in explaining why passengers on the same train or the same plane may pay

different fares.................................................................................................................................11

Price elasticity of demand..........................................................................................................11

Factors affecting price elasticity of demand..............................................................................13

Available substitute products.................................................................................................14

Type of necessity of the product............................................................................................14

Cost for switching to another product....................................................................................14

Segment of the income of the customer required for the product..........................................14

Customer habit.......................................................................................................................14

Passengers on the same train or the same plane may pay different fares..................................14

Conclusion.....................................................................................................................................15

Reference.......................................................................................................................................16

IntroductionSeveral discipline and practices which aims at combining the theory of Economics with the

Managerial practice is going to represent the Managerial Economics (Block, 2001).Economic

problems all over the society and the possible remedies for those problems via practical use of

the economic theories by the practical managers are the aim of the managerial economics

(Graham &Bodenhorn, 1980). This report focus on knowing the term several concerns of

economics like- inflation, theories related to inflation, difference between the anticipated and

unanticipated inflation, economic growth & the ways to achieve it, price elasticity of demand and

the factors that are related to it. This report will give a complete view of several key concepts of

the managerial economics to the future business leaders (students) and make them competent

about the various terms of economics so that they can use the learnt knowledge in their

professional life and ensure the sustainable growth for the country.

Task 1 Knowing the theories of inflation, Distinction between anticipated and unanticipated inflation and the problems with each typeInflation is the increase of the price level of the goods of services in relation with the purchasing

power of the people of the country (Berlatsk, 2013).Now days the term “inflation” is one of the

major concerns all over the world. Price of the necessary goods and services is rising day by day

and going beyond the purchasing power of the people.

Theories of inflationThe increasing price of the goods and services decreasing the value of currency is represented by

inflation. Because of the inflation, money value is decreasing gradually(Fischl&Dale, 1999). The

quantity of currency is growing very faster compared to the actual output that a nation expects in

a definite year. Theories of inflation can be described by several points like- Cost-push Inflation

Theory, Sectorial Inflation Theory and Structural Inflation Theory.

Cost-Push Inflation TheoryIn case there is a situation that, the cost of production has been increased. At that time, it will be

a cause of fall in the total aggregate supply of the product (Gali&Gertler, 1999). At that time the

price of the products will automatically increase. This type of inflation is representing the cost-

push-inflation theory.In the case of the perfect competitive market it is a common factor. It will

give a more clear view if we see the curve below-

Cost-Push Inflation can be caused by several reasons like-

For the reason of the pressure arise the various labor organizations like trade Union for

increasing the wage rate of the labors.

Monopoly power of the business can cause profit-push inflation

Increase in the cost of collecting raw materials for any reason can increase the total cost

as well as the price of the products.

Sectorial Inflation TheoryIt is slightly different from the Cost-Push Inflation Theory. If there is an increase in the prices of

various sectors (commercial) of that area in relation with the enhancement of the prices of the

raw materials and other restated items this types of inflation will occur (Berlatsk., 2013).

Increase of product demand, change of pricing power is related to the theory.

Demand-Pull InflationIf the demand of the product suddenly increase of in demand exceeds the total supply there is an

increase in the prices of the goods and services. This type of inflation is representing the

Demand-Pull-inflation.

Pricing Power InflationIn case the business sectors of a nation are determined to enhance the prices of the goods and

services in order to increase the profit margin of the business, the price of the goods will be

automatically raised(Berlatsk., 2013). It will create inflation.

Structural Inflation TheoryThe main reason of structural inflation is the slow or unstable growth rate in export. If there is a

very slow or unstable growth in the export sector, it is not sufficient for achieving the expected

growth of the economy(Fischl&Dale, 1999). If there is a very slow growth or uniform growth

this will lead a cost pressure permanently in the service sector and lead to a lower productivity of

a country. For the reason there is a supply inelasticity that leads to an increase in the agricultural

products prices.Supply elasticity will be clearer by the figure below-

Anticipated VS unanticipated inflationAnticipated and unanticipated inflation is defined based on the assumption capacity of the human

beings(Gali&Gertler, 1999). In case of anticipated inflation the people of the country can predict

the rate of inflation that can be occurred with the passage of time. In this case they can take

necessary steps for protecting themselves from the effect of inflation. On the other hand in case

of unanticipated inflation the situation is totally different. Prediction power of the human being is

not applicable here(Gali&Gertler, 1999). In this case inflation varies from year to year and

mainly volatile in nature. For this reason correct prediction of the inflation for future is too

difficult for the people. As there is no prediction is applicable here, people can’t make

themselves prepare for facing this kind of inflation. As an example of anticipated inflation we

can mention a very practical phenomenon around the society. Almost all the household has

savings account (deposit) in the bank or any financial organization. They kept their assets there

for keeping their assets safe and getting a high rate of interest so that it can make up the changing

value of money over a definite time (Berlatsk, 2013). In case of unanticipated inflation we can

mention an example- In case of a sudden fall of production of agricultural products in a country

can cause sudden high inflation. It is quit unexpected and beyond the prediction of the people of

the society.

Problems Associated with anticipated and unanticipated inflationInflation has a very damaging effect on the development of the society. Though anticipated

inflation is not so much harmful as the unanticipated inflation, it has some negative impact also.

If the inflation is higher than anticipated inflation it leads to low rate in wage the job providers

get expense of labors(Berlatsk, 2013). If the real inflation is higher than the anticipation labors

achieve the expense of the job providers. Inflation higher than the anticipation causes low rate of

the wages.

In case of the unanticipated inflation lending or borrowing fluctuates frequently. There will be a

too much borrowing and lending or it will be too low. Lenders have huge risk in case of

borrowing money. Unanticipated inflation causes a great loss for the lenders. It can leadnet

exports to a falling situation and high increase in the price level.There will be greater lose in case

of the employees or the labors because the employers will provide the same sate of wages as it

was before but for the changing situation of the inflation this payment is too low(Fischl&Dale,

1999). So the purchasing power of the employees will be decrease because of the unanticipated

inflation as well as the decreased value of the currency.

Task 2 The process of economic growth, ways to achieve it & pursuit of economic growth is not in people’s long-term interests

The Process of Economic GrowthEconomic growth of a country refers to the transformation of structure of the countries form

“poor country products” to “rich country products”(Friedman, 2005). A very strong demand for

the countries is a pre-condition for the process. In this case it is more comfortable for the

exporters to grape the advantages of the global markets having no fear for the negative effects of

trade and commerce. There are a lot of countries in where a weak for domestic demand is

arranged so that it can be effective in case of ensuring high income per capital growth rate of the

country. Economic growth is the long-term enhancement of the ability of the economy in case of

producing output(Friedman, 2005). Economic growth of a country is achieved by the

enhancement in the quality as well as quantity of the resources. Land, labor, capital and

entrepreneurship are the key elements for the development of business sector in a country.

Growth rate of production is a better indication of the economic growth. In case there is an

increase in the total production and quality of goods and services it will indicate the economic

growth. Economic growth process will be facilitated if a country can ensure several factors like-

labor quality, quality of capital; natural resource quality and effective investment etc.(Png&

Lehman, 2007). Aggregate demand and aggregate supply are the two main aspects of the

economic growth.

Ways to Achieve Economic growthTo ensure proper economic growth of a country, the country should take effective precautions

and actions in order to increase the total productivity and quality(Png& Lehman, 2007). We can

mention several measures that can be effective in case of ensuring the economic growth of the

country like-

Use of Innovation to promote economic growthInnovation of the new technology and techniques can raise the total growth. The country can

develop new strategy and techniques in order to remain fit with the changing situations. If the

country can raise their economic growth via innovation process, it will not only serve the current

people but also will be considered for the next generation also(Friedman, 2005).

Reformation of the strategic ImmigrationIn case of skilled immigration, the country should make it easier for the foreign entrepreneurs. It

will help to have more strong immigration and development. It will increase job facilities, ensure

economic recovery; develop international leadership in innovation as well as new

entrepreneurship throughout the country (Friedman, 2005). More green cards should be allotted

for the immigrants have registered via business and contribute to meet up the employment

opportunities and investment benchmarks in the country. The most positive impacts of this will

be the creation of huge job opportunities for the people of the country.

Technological developmentIn case of achieving economic growth, improvement in the technology is a must. The more a

country will be developed in the technological sides, the more they can use the forces to the

development program of the country. It will help to gain a sustainable growth in the nations

GDP.

Skilled manpower and management technique improvementIf the country can ensure skilled manpower by providing proper education and training facilities

to the human beings, it will contribute a lot in the growth of the country. The skilled employees

will be more productive and more efficient in their performances (Pauly, 2003).

If the country can ensure the employment of the unemployed, sufficient amount of capital for

business, increase in education, technological development the total capacity of production will

be increased. It will help to achieve economic growth.

Pursuit of economic growth is not in people’s long-term interestsPercentage change in the output of a country is representing the economic growth. Real income

that has been increased over a specific time is also bearing the same meaning. This indicated that

there is an increase in the in the real income of the people as well as increase in the standard of

living of the people of a country(Graham &Bodenhorn, 1980). So in this sense we can say that

economic growth and standard of living is closely related to each other. If the economy is richer

than before, there will be a better impact on the life of the individuals also. Idle resources have

no use of society at all. Economics aims at using those resources to ensure better profitability.

After the utilization of those resources, the country can have growth in the new enhanced

productivity. GrossDomestic income of the people of the society is the most common form of

measurement of the earnings of the nation. If we gather the total value of the output of the

country, it will give a view of the GDP. Figure of GDP of a country can be misleading also. In

case of a developing country it can have a raising situation in the production level but on the

other hand it may also have a raising rate of birth. This type of growth in the population performs

against the real development as well as the living standards of the people of the country(Pauly,

2003). High rate of growth of a country often cause a sudden inflation. But this inflation is not

considered with proper interest.This has a negative impact in the standard of living. So the

pursuit of economic growth is not in people’s long-term interests.

Task 3 Understanding theprice elasticity of demand, factors affects it & thepart that price elasticity might play in explaining why passengers on the same train or the same plane may pay different fares

Price elasticity of demandPrice elasticity of demand represents the change of percentage of the demand of the services or

goods in relation with the change of the prices of goods or services. We all know demand of a

product or service is highly dependable of the price related with it. Price elasticity of demand

measures the degree of responsiveness of the change of total quantity that has been demanded

due to the change in price(Pauly, 2003). In represents the intensity of interdependence between

the price and quantity demanded. While measuring this it is assumed that all the other factors

related to the demand is constant. It is measured by dividing the percentage change in the

demanded quantity by the change in percentage of the prices of products or services.

 Price elasticity of demand can be of several kinds. Such as-

If there is a situation that demand is not changing due to the change in price, in that case this type

of elasticity of demand will be called perfectly inelastic(Ed = 0). So the demand of the product is

not affected by the percentage change of the products here.

If the situation is like this, there is a relationship between price change and quantity demand

0<Ed<1 than it will be called inelastic demand(Hughes &Sperling, 2006). So percentage change

of the demand is smaller than the change in price here.

When the situation is like Ed=1 than it will be calledUnit elastic demand. Change in quantitate

demanded is equivalent to the change in price. No effect has occurred at all.

IfEd=∞ it is called perfectly elastic demand. It indicates if there is any change in price of the

goods, it will cause a dramatic change in the demand(Hughes &Sperling, 2006). If there is a rise

in price the demand will approximately zero. If there is decrease in the price, it will generate a

huge demand of the product.

When it is Ed> 1, it is called elastic demand. It indicated any change in the price will cause much

more change in the demand of the products.

Factors affecting price elasticity of demandThere are several factors that have a huge influence in case of the price elasticity of

demand(Pauly, 2003). Price elasticity of demand is shaped by these factors. Several points

related to it are discussed below-

Available substitute productsIf there is a huge availability of the substitute products at the marketplace, the demand will be

more elastic in that situation. Any change in the pricelevel can cause a huge change in the

amount of quantity that has been demanded before.

Type of necessity of the productIn case of a more necessary products (i.e. rice, bread), the portion of change response to the price

change is not so high but if the product or service is luxury (i.e.laptops ) one it can cause a huge

change in the demand of the people or the situation is more elastic here(Pauly, 2003).

Cost for switching to another productIf there is an involvement of extra cost in case of switching to the other substitutes, in this time

demand can remain inelastic. Only a very little or several changes happened in this situation.

Segment of the income of the customer required for the productIf the product costs a high portion of the income of the customer, there is a huge change of

changing the demand or demand of the product will be more elastic(Hughes &Sperling, 2006).

Customer habitOf the customer is highly habituated with that product (i.e. -cigarettes), change in the price level

of that product will have a little impact of its demand. Though there are a lot of substitutes, those

are not effective to satisfy him properly.

Passengers on the same train or the same plane may pay different fares

Price elasticity of demand theory has a very practical implementation in the public transportation

like train or plane.According to the price elasticity of demand theory demand of the product or

services changes relating with the changes of the price level related to it(Hughes &Sperling,

2006).The payment of the various seats in train or plane is also different. The seats with high

class facility will be more costly than the medium or economic seats. Medium level seats will

provide less facility than high class and some extra features than the economic class seats. As

price elasticity of demand descries the amount of percentage change for the changing price of

product or services, in case of train or plane travel this theory is practically applicable(Pauly,

2003). In case of price change of the train, there are alternatives like bus, but it is not so much

effective for the long journey travel and also it is time killing.The location of the market where

the price of the service has been changed varies the air travel demand. In case of air travel there

is often confusion about the price senility of the travellers in case of price change. But now days

the travellers are being more sensible in case of price. Various classes of seats with various

service levels is in on one of the most disaggregate level position(Block, 2001). In case of price

increase of the air travel due to any reason give a very low choose to shift to another one.

Because there was lack of substitute option available there. Cross price elasticity’s and own price

can be reflected by aggregation in this case. As there is a huge cost in case of travelling by plane

and the cost is in an increasing situation it cost a huge portion of the human income at the same

time. But price elasticity is not active enough because of the lack of alternatives or in this case

we can say, highly inelastic demand is applicable here.

ConclusionInflation is one of the major key concerns in almost every nation. Anticipated inflation is less

harmful than the unanticipated inflation. If unanticipated inflation is low, it is helpful to ensure

the economic growth of the country(Pauly, 2003). Innovation, technological development,

Reformation of the strategic Immigration,Skilled manpower and management technique

improvement etc. are help to ensure the economic growth of the country. Relation between the

price change and demand change is described by price elasticity of demand(Karlan&Zinman,

2013). In can be different according to the various situations.

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