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Idia 2!1"!"

ASSI#N$%N&SP'#'A$S%$%S&%'-ISu*+ect Name $aaeial %coomicsStudy CUN&'. SudaPemaet %ollmet Num*e (P%N) 'oll Num*e IB!1/52!1!-2!12!05

Studet Name S$AIA &A$BA %$AI INS&'UC&INS

a) Studets ae e3uied to su*mit all t4ee assimet sets

ASSI#N$%N& 6%&AIS $A'SAssimet A Fi7e Su*+ecti7e 8uestios 1!Assimet B &4ee Su*+ecti7e 8uestios 9 Case Study 1!Assimet C 0! *+ecti7e 8uestios 1!

*) &otal :ei4tae i7e to t4ese assimets is "!; ' "! $aksc) All assimets ae to *e completed as typed i :od<pd=d) All 3uestios ae e3uied to *e attemptede) All t4e t4ee assimets ae to *e completed *y due dates (speci=ied

=om time to time) ad eed to *e su*mitted =o e7aluatio *y AmityUi7esity

=) &4e e7aluated assimet maks :ill *e made a7aila*le :it4i si>:eeks &4eea=te, t4ese :ill *e destoyed at t4e ed o= eac4 semeste

) &4e studets 4a7e to attac4ed a sca siatue i t4e =om

Siatue 6ate ???15Au2!11??????????????????????????????

( ) &ick mak i =ot o= t4e assimets su*mitted



Assimet @A

Assimet @B

Assimet @C

Managerial Economics

ASSIGNMENTS

Assignment ‘A’

814at ae idi==eece cu7es %>plai t4e cosumes

e3uili*ium ude t4e assumptios o= odial appoac4

Idi==eece cu7es

&4e dial Utility &4eoyThe ordinalist school postulated the utility is not measurable, but is an

ordinal magnitude. It suffices for the consumer to be able to rank the various

baskets of goods according to the satisfaction derived. The main ordinal

theory is known as the indifference-curve theory is based on certain

assumptions.

Rationality of consumer

Utility is ordinal

Diminishing arginal rate of substitution

!onsistency and transitivity of choice

Total utility depends on the "uantities of the commodities consumed

The second condition is that the indifference curve be conve# to the origin.

This condition is fulfilled by the a#iom of diminishing marginal rate of

substitution of # for y and vice versa.



$t the point of tangency %point e& the slopes of the budget line and

of% '#('y& the indifference curve are e"ual) %R*#,y+U#(Uy&

MRS x ,y MUx MU y = PyPx

11"22 Popeties o= Idi==eece Cu7e

$n indifference curve has a negative slope

The further away from the origin an indifference curve lies, the higher the

utility it denotes

Indifference curve do not intersect

The indifference curves are conve# to the origin

&4e cosumes e3uili*ium ude t4e assumptios o= odial

appoac4

&4e Cadial Utility &4eoy

The cardinal school stated that utility can be measured. Under certainty i.e.,complete knowledge of market conditions and income levels over the

planning period utility can be measured in monetary units, called utils. There

are certain assumptions of cardinal utility theory.

Rationality of consumer



!onstant marginal utility of money

Diminishing marginal utility

Total utility is additive

%3uili*ium o= Cosume

$ssuming the simple model of a single commodity #, the consumer caneither buy # or retain his money income y. Under these conditions the

consumer is in e"uilibrium when the marginal utility of # is e"uated to its

market price.

U# + '#

If there are more commodities, the condition for the e"uilibrium is the

e"uality of the ratios of the marginal utilities of the individual commodities

to their prices.

U# + Uy ++ Un

'# + 'y ++ 'n

&4e dial Utility &4eoyThe ordinalist school postulated the utility is not measurable, but is an

ordinal magnitude. It suffices for the consumer to be able to rank the various

baskets of goods according to the satisfaction derived. The main ordinal

theory is known as the indifference-curve theory is based on certain

assumptions.

%3uili*ium o= CosumeThe consumer is in e"uilibrium when he ma#imies his utility, given his

income and the market prices. Two conditions must be fulfilled for the

consumer to be in e"uilibrium.The first condition is that the marginal rate of substitution be e"ual to the

ratio of commodity prices. This is necessary but not sufficient condition.

R*#,y U#Uy '#'y

The second condition is that the indifference curve be conve# to the origin.

This condition is fulfilled by the a#iom of diminishing marginal rate of

substitution of # for y and vice versa.

82 %>amie t4e cocept ad elatios4ip o= &otal, A7eae

ad maial costs :it4 t4e 4elp o= suita*le diaam

&otal, A7eae ad $aial Costs



&otal CostTotal cost is the total e#penditure incurred on the production. It connotes

both e#plicit and implicit money e#penditure and include fi#ed and variable

costs.

! + f ,T ,'f ,/

4ee CD total cost

+ output

T+ technology

'f+ prices of factors

/+ fi#ed factors

T!+T0!1T2!

&otal Cost Cu7es

A7eae cost$verage cost is obtained by dividing the total cost by the total output.

$!+T!+3

$verage cost further can be categoried as average fi#ed cost %$0!& and

average variable cost %$2!&.$0!+T0!+3

$2!+T2!+3

A7eae cost cu7es



$aial Cost

arginal cost is the change in the total cost for producing an e#tra unit ofoutput.

$C D &C< 8

$aial Cost Cu7e

8" 6i==eetiate ad ela*oate t4e cocepts o= etus to scale

ad la: o= 7aia*le popotios

a:s o= 'etus to ScaleIn the long run e#pansion of output may be achieved by varying all factors

by the same proportion or by different proportions. The laws of returns to



scale refer to the effects of scale relationship. Three types of returns to scale

are observed.

!onstant returns to scale

Increasing returns to scale

Decreasing returns to scale

Costat etus to scaleIf the "uantity of all inputs used in the production is increased by a given

proportion and we have output increased in the same proportion4 it is termed

as constant returns to scale.

Iceasi etus to scaleIf output increases by a greater proportion in comparison to a change in the

scale of inputs it is termed as increasing Returns to *cale. The causes of

increasing returns to scale are)

*pecialiation of labor

5Inventory 6conomies

anagerial indivisibilities

Technical indivisibilities



6imiis4i 'etus to ScaleIf output increases by a smaller proportion in comparison to the change in

the scale of inputs, it is described as diminishing returns to scale. Thereasons of diminishing returns to scale are)

anagerial inefficiency

6#haustible natural resources

Increased bureaucratic

7abor inefficiency

'ressure on inputs market due to increasing demand

'ressure on inputs prices due to bulk purchase



a:s o= PoductioThe laws of production analye the technically possible ways of increasing

the level of production. 8utput may increase in various ways. In the shortrun output may be increased by using more of the variable factors while

keeping other constant. This is referred to as 7aw of variable proportions.

9hile in long run output e#pansion may be achieved by varying all factors

and it is known as laws of returns to scale.

a: o= 7aia*le popotiosIn general if one of the factors of productions %usually capital /& is fi#ed

after a certain range of production additional output %i.e., marginal product&

starts to diminish. It is also known as the 7aw of diminishing returns. The

range of output over which the marginal products of the factors are positive

but diminishing is considered as e"uilibrium range of output. The range of

increasing returns to a factor and the range of negative productivity are not

suitable for e"uilibrium.

Three stages of production

804y is demad =oecasti essetial 4at ae t4e

possi*le cose3ueces i= a lae scale =im places its poduct i



t4e maket :it4out 4a7i estimated t4e demad =o its

poduct

6emad =oecasti is essetial

Itoductio

6stimation of demand for a product in a forecast year( period is termed asDemand forecast. Demand forecast is a must for a firm operating its

business as today:s market is competitive, dynamic and volatile.

Pupose ad eed o= =oecasti0orecasting is done both for long term as well as short term. The purpose of

the two however differs. In a short run forecast seasonal patters are of prime

importance. *uch a forecast helps in preparing suitable sales policy and

proper scheduling of output in order to avoid over-stocking or costly delay

in meeting the orders. It helps in arriving at suitable price for the product and

necessary modifications in advertising and sales techni"ues. 7ong run

forecasts are helpful in proper capital planning. It helps in saving the

wastages in material, m -hours, machine time and capacity. 7ong run

forecasting is used for new unit planning, e#pansion of the e#isting units,

planning long run financial re"uirements and manpower re"uirements.

Different set of variables is used in than in short term forecasts.

Speci=ic puposes o= demad =oecasti

;etter planning and allocation of resources

$ppropriate production scheduling

Inventory control

Determining appropriate pricing policies

*etting s les targets and establishing controls and incentives.

'lanning a new unit or e#panding e#isting one

'lanning long term financial re"uirements



'lanning <uman Resource Development strategies.

Steps I7ol7ed i Foecasti

Identification of ob=ective

Determining the nature of goods under consideration.

*electing a proper method of forecasting.

Interpretation of results.

Peiod o= =oecasti

*hort run forecasting) In short run forecasting, we look for factors which

bring fluctuation in demand pattern in the market for e#ample weather

conditions like monsoon affecting the demand.

edium run forecasting) In medium run forecasting is done basically for

timing of an activity like advertising e#penditure.

7ong run forecasting) It is done to ascertain the validity of trend. It is

done for decision like diversification.

e7els o= Foecasti

acroeconomic forecasting is concerned with business conditions of the

whole economy. It is measured with the help of indices like wholesale priceinde#, consumer price inde#.

Industry demand forecasting gives indication to firm regarding direction

in which the whole industry will be moving. It is used to decide the way the

firm should plan for future in relation to the industry.

0irm demand forecasting is done for planning companies overall

operations like sales forecasting etc.

'roduct line forecasting helps the firm to decide which of the product or products should have priority in the allocation of firm:s limited resources.

>eneral purpose or specific purpose forecast helps the firm in taking

general factors into consideration while forecasting for demand.

0orecast of established product or a new product



Types of commodity for which forecast is to be done. >oods can be

broadly classified into capital goods, consumer durable and ?on-durable

consumer goods. 0or each of these categories of goods there is a distinctive

pattern of demand.

$et4ods o= Foecasti



8ualitati7e FoecastSu7ey tec4i3ues

*urvey of business e#ecutives, plant and e"uipment, e#penditure plans.

;asically compilation of e#penditure plans of related industries.

*urvey of plans for inventory changes and sales e#pectations.

*urvey of consumer e#penditure plans.

piio pools

Cosume su7ey In this method the consumers are contacted

personally to disclose their future purchase plans. This could be of two

types-!omplete enumeration and sample survey.

Sales =oce opiio met4od In this method people who are closest to

the

market are asked for their opinion on future demand. Then opinion of

different people is compiled to get overall demand forecast. This method has

advantage that it is based on first hand knowledge of sales people and also it

is cheap and easy. <owever the opinion of the concerned people could be

biased or twisted for their own benefit. Therefore a final ratification has to

be done by the head office.

%>pets opiio met4od In this method opinion of e#perts: in the

related field is solicited and the final forecast based on their opinion. $

special case in this method is the Delphi Techni"ue. In this different sets of

e#perts are given the relevant problem without each knowing about the other

and their opinions or conclusions are compared. If the opinion is matching

then the opinion is accepted other wise the e#perts are asked to sit together

and arrive at a narrow range. Thus the e#perts giving a very high or a very

low value are concerned and the group argues until it comes up with a

narrow range of value. This process is continued till a sufficient range is

reached. Then the mean of the upper and lower values is computed to reach

a point estimate.

Statistical Foecast&ed po+ectio met4odUnder the trend method the time series data on the variable under forecast

are used to fit a trend line or curve either graphically or by means of a



statistical techni"ue known as the 7east *"uares method. Trend pro=ection

method can be used when there is some sort of correlation between the two

variables. It could be linear, logarithmic or power correlation. The linear

regression model will take the form of

@ + a 1 b

Fitti a ted lie *y o*se7atio This method involves the plotting of

the data on the graph and estimating where the trend line lies. The line can

be e#trapolated and the forecast read from the graph.

&ed t4ou4 least s3uaes met4od This method uses statistical

formulae to find the trend line which best fits the available data. The trend

line is the estimating e"uation, which can be used for forecasting demand by

e#trapolating the line for future and reading the corresponding values of

variables on the graph.

&ime seies aalysis This is an e#tension of linear regression which

attempts to build seasonal and cyclical variations into the estimating

e"uation. This method assumes that past data can be used to predict future

sales. This is one of the most fre"uently used forecasting methods. It refers

to he values of variable arrange chronologically by days, weeks, months,

"uarters or years. The first step in time series analysis is usually to plot past

values of the variable that we seek to forecast on vertical a#is and the time

on the horiontal a#is in order to visually inspect the movement of the time

series over time. It assumption is that the time series will continue to move

as in the past. 0or this reason time series analysis is often referred as Anative

forecastingB.

Baometic met4ods;arometric methods are used to forecast or anticipate short term changes in

economic activity by using leading economic indicators. These indicators

are time series that tend to precede changes in the level of economic activity.

There are only three types of indicators)

eadi ecoomic idicato These indicators tend normally toanticipate turning points in a business cycle. There are certain problems

associated with this method. The ma=or problem is not choosing the

techni"ue but choosing the relevant indicator for the product in "uestion.

*econdly even if the relevant



indicator is found out the changes in factors may render the indicator

redundant over time. Thirdly the time lag between the indicator and forecast

could be so small that it could become useless.

Coicidet idicatos These are indicators which move in step or

coincide with movements in general economic activity or business cycle.

ai idicato These are indicators which lag the movements in

economic activity or business cycle.

'eessio met4odIt is one of the statistical tools to fore cast demand. In this estimating

e"uations are established and tests can be carried out to observe any

statistically significant. It involves following steps

Identification of variables which influence the demand for the good

whose function is under estimation.

!ollection of historical data on all relevant variables.

!hoosing an appropriate form of the function.

56stimation of the function

Regression method is popular because it is prescriptive as well as

descriptive. $lso it is not as sub=ective or ob=ective as other methods.

<owever if the variables chosen are wrong then the forecast will also be

wrong. $ typical demand e"uation could be )7og d + -C.E 1 C.FG log y -C. log H 1 .H log v 1 H.G log g 1 C. log e

@ + ?ational income

8 + groundnut oil price

2 + 2anaspati price

> + ghee price

6 + egg, fish and meat price

The above e"uation is a demand forecast e"uation for groundnut oil Simultaeous e3uatio met4od (%coometic $odels)6conometric forecasting incorporates or utilies the best features of other

forecasting techni"ues such as trend and seasonal variation, smoothing

techni"ues and leading indicators. 6conometric forecasting models range

from single e"uation models of the demand that the firm faces for tits

product to large multiple e"uation models describing hundreds of sectors

and industries of the economy.



Sile e3uatio models The simplest form of econometric forecasting is

with the single e"uation model. The first step here is to identify the

determinants of the variable to be forecasted.

3 + aH 1 aC' 1 a@ 1aJ? 1 aE'K 1 aK'c 1 aa 1 e

3 + demand

' + 'rice

@ + disposable income ? + sie of population

's + price of a substitute

'c + price of complement

$ + level of advertising by the firm

$ultiple e3uatio model *ometimes economic relationships may be so

comple# that a multiple e"uation model may be re"uired. This is particularly

used in forecasting micro variables or the demand and sales of ma=or sectors

or industries. ultiple e"uation model for >?'

!t + aC1bC>?'t1uCt

It +a1bIIt-C1Ut

>?'t+ !t1 It1>t

! + consumption e#penditures

>?' + >ross national product in year t

I + investment

II + 'rofit

> + >overnment e#penditures

U + stochastic disturbance %random error term&

T + current year

t-C + previous year2ariables to the left of the e"ual sign are called endogenous variable. These

are the variables that the model seeks to e#plain or predict from the solution

of the model. 6#ogenous variables are those determinants outside the model

or right of the e"ual sign of the e"uation.

Iput utput FoecastiInput output analysis was introduced by 'rof. 7eontief. 9ith this techni"ue

the firm can also forecast using Input output tables. It shows the use of the

output of each industry as input by other industries and for final

consumption. Input and output analysis allow us to trace through all these

inter industry input and outputs flow though out the economy and to

determine the total increase of all the inputs re"uired to meet the increased

demand. In this techni"ue we have two input output matri#es.

Direct Re"uirement atri#



Total Re"uirement atri#

Uses ad s4otcomis o= iput output =oecastiInput output analysis and forecasting has many uses and applications. It is

used by the firm to forecast the raw material, labor and capital re"uirement

needed to meet the forecasted change in the demand for their product. The

shortcomings are that the direct and total coefficients are assumed to befi#ed and thus do not allow input substitution. Input output tables are usually

available with a time lag of many years and while the input output

coefficients do not change very rapidly they can become very biased.

'easos =o =luctuatios i time seies data!hanges occur in secular trend i.e. long run increase or decrease in data

series.

Cyclical =luctuatiosThere are the ma=or e#pansions and contractions in most economic time

series data that seem to re-occur every several years.. $ typical cycle could

last CK-H years.

Seasoal 7aiatioThis refers to regularly recurring fluctuations in economic activity during

each year e.g. a typical factor could be weather and social customs.

Ieula ad adom 7aiatioThis is the variations in the data series resulting from uni"ue events like

wars, natural disasters or strikes. The total variation in the time series is the

result of all the above four factors operating together. They are usually

e#amined separately by "ualitative techni"ues.

Smoot4i &ec4i3uesThis techni"ue predicts feature value of time series on the basis of some

average of its past value only. This techni"ue is useful when the time series

e#hibits little trend or seasonal variation but a great deal of random

variation. There are two smoothing techni"ues.

$o7i a7eae smoot4i tec4i3ueThe simplest smoothing techni"ue is the moving average. <ere the

forecasted value of a time series in a given period is e"ual to the average

value of the time series in a number of previous periods. This method is

more useful the more erratic or random is the time-series data.

%>poetial smoot4i tec4i3ueThis techni"ue is used more fre"uently than simple averages in forecasting.

This method is a refined version of moving average method. The

disadvantage of moving average method is that it gives e"ual weightage to

the data related to different periods %i.e. months& in the past. $ccording to

e#ponential smoothing method more recent the data the more relevant it is



for forecasting and therefore it would be more appropriate to give more

weightage to recent observations. The value given to weightage is normally

chosen to form a geometric progression.

9ith e#ponential smoothing, the forecast for period t 1C %i.e. 0t 1 C& is a

weighted average of the actual and forecasted values of the time series in

period. The value of the time series at period t %i.e. $t& is assigned the weight

of C-w. The greater the value of w, the greater is the weight given to thevalue of the time series in period as opposed to previous periods. Thus, the

value of the forecast of the time series in period t 1Cl is 0t 1 C + 9$C 1 %C-

w& 0t.

In general, different values of 9 are tried, and the one that leads to the

forecast with smallest root-mean-s"uare error %R*6& is actually used in

forecasting.

'isks i 6emad FoecastiDemand forecasting faces two ma=or risks

8verestimation of demand

Underestimation of demand

8ne risk arises from entirely unforeseen events such as war, political

upheavals and natural disasters. The second risk arises from inade"uate

analysis of the market.

$ll these forecasting errors could possibly have been avoided through)

!arefully defining the market for the product to include all potential users

of the market and considering the possibility of product substitution.

Dividing total industry demand into its components and analying each

component separately.

50orecasting the main driver or user of the product in each segment of the

market and pro=ecting how they are likely to change in the future.



85 6iscuss t4e 7aious steps i7ol7ed i a maaeial

decisio maki pocess %>plai, i detail, ay t:o oup

decisio maki tec4i3ues

Itoductio

anagerial 6conomics is the integration of economic theory with business

practices for the purpose of facilitating Decision aking and 0orward

'lanning by the management. $s economics provides as a set of concepts,

these concepts furnish us the tools and techni"ues of analysis. The use of

6conomic $nalysis is to make business decisions involving the best use

%allocation& of scarce resources. 6conomic Theory helps managers to collect

the relevant information and process it in order to arrive at the optimal

decision given the goals of a firm. $ decision is optimal if it brings the firm

closest to its goals. It is in this conte#t economic analysis is an aid to

understand business practices in a given environment. $s decision making is

a basic function of manager, economics is a valuable guide to the manager.

In the following we shall be discussing the decision making process of the

management and how managerial economics and its various tools and

techni"ues help a manager in this process.

6ecisio $aki PocessDecision making is commonly defined a choosing from among alternatives.

Decision is a choice made from alternative courses of action in order to deal

with a problem. $ problem is the difference between a desired situation and

the actual situation. Therefore, decision making is the process of choosing

among alternative courses of action to solve a problem. The Decision

making process is construed as searching the environment for conditions

calling for a decision4 inventing, developing and analying the available

courses of action4 and choosing one of the particular courses of action.

$ second and more detailed method is the following)

5Identify the problem.

Diagnose the situation.



!ollect and analye data relevant to the issue.

$scertain solution that may be used in solving the problem

$nalye these alternative solutions.

*elect the approach that appears most likely to solve the problem

Implement it.

$aaemet 6ecisio Po*lems

L 'roduct 'rice and 8utput

L 'roduction Techni"ue

L *tock 7evels

L $dvertising edia and intensity

L 7abor hiring and firing

L Investment and 0inancing

$ practical e#ample can be found in the following)

Copoate 6ecisio $aki Fod Itoduces t4e &auus&ypes o= 6ecisio

anagers make many decisions, in order to answer the following

"uestions)

9hat goods shall firm produceM

<ow should firm raise the necessary capital and what shall be its legal

form.

9hat techni"ue shall be adopted, and what shall be the scale of

operationsM

9here production is locatedM



<ow shall its product be distributedM

<ow shall resources be combinedM

9hat shall be the sie of outputM

<ow shall it deal with its employeesManagers make these decisions, and in order to obtain a clear understanding

of the decision

making process, a classification system is useful. Three such systems are

available4 each based on different types of decisions.

8rganiational and personal decisions,

;asic and routine decisions

'rogrammed and non-programmed decisions.

8rganiational decisions are those e#ecutives make in their official role as

managers. The adoption of strategies, the setting of ob=ectives and the

approval of plans constitute only a few of these. *uch decisions are often

delegated to others, re"uiring the support of many people throughout the

organiational if they are to be properly implemented.

'ersonal decisions are related to the managers as an individual, not as a

member of the organiations. *uch decisions are not delegated to others

because their implementation does not re"uire the support of organiational personnel. Deciding to retire, taking a =ob offer from a competitive firm, or

slipping out and spending the afternoon on the golf course are all personal

decisions.

$ second approach is to classify decisions into basic and routine categories.

;asic decisions can be viewed a much more important than routine ones.

They involve long-range commitments, large e#penditures of funds, and

such a degree of importance that a serious mistake might well =eopardie the

well being of the company. *election of a product line, the choice of a new

plant site, or a decision to integrate vertically by purchasing sources of raw

materials to complement the current production facilities are all basic

decisions.



Routine decisions are often repetitive in nature, having only a minor impact

on the firm. 0or this reason, most organiations have formulated a host of

procedures to guide the manager in handing these matters. *ince some

individuals in the organiation spend most of their time making routine

decisions, these guidelines are very useful to them.

Taking a cue from computer technology, decision could be classified as

computer technology programmed and non-programmed. These two types

can be viewed on a continuum, programmed being at one end and non-

programmed at the other. 'rogrammed decisions correspond roughly to the

routine decisions, with procedures playing a key role. ?on programmed

decisions are similar to the category of basic decisions, being highly novel,

important, and unstructured in nature. The value of viewing decision making

in this manner is that it permits a clearer understanding of the methods that

accompany each type.

Coditios A==ecti 6ecisio $akiIn an ideal business situation, managers would have al of the information

they need to make decisions with certainty. ost business situations

however are characteried by incomplete or ambiguous information, which

affects the level of certainty with which a manager makes a decision. There

are three conditions that affect decision making)

!ertainty

Risk

Uncertainty

!ertainty is the condition that e#ists when decision makes are fully informed

about a problem its alternative solutions, and their respective outcomes.

Under this condition, individuals can anticipate, and even e#ercise some

control over, events and their outcomes.In the conte#t of decision making, risk is the condition .that e#ists when

decision-makers must rely on incomplete, yet reliable information. Under a

state of risk, the decision-maker does not know with certainty the future

outcomes associated with alternative courses of action4 the results are

sub=ects to chance. <owever, the manager has enough information to



determine the probabilities associated with each alternative. <e or she can

then choose. The alternative that has the highest probability of success.

Uncertainty is the condition that e#ists when little or no factual information

is available about a problem, its alternative solution, and their respective

outcomes. In a state of uncertainty, the decision-maker does not have enough

information to determine the probabilities associated with each alternative.

In actually, the decision-maker may have so little information that he or shemay be unable even to define the problem, let alone identify alternative

solutions and possible outcomes.

&4e Steps o= 6ecisio $aki

Identifying the problem

>enerating the alternative course of action

6valuating the alternative

*electing the best alternative

Implementing the decision4 and

56valuating the decision

The first step in the decision-making process is identifying the problem.

'roblem identification is probably the most critical art of the decision

making process, for it is what determines the direction that the decision

making process takes, and, ultimately, the decision that is made.The second step in decision-making process is generating alternative

solutions to the problem. This step involves identifying items or activities

that could reduce or eliminate the difference between the actual situation and

the desired situation. 0or this step to be effective, the decision makers must

allot enough time to generate creative alternatives as well as ensure that all

individuals involved in the process e#ercise patience and tolerance of others

and their ideas.

In the 'ursuit of N"uick fi#B managers too often shortchange this step by

failing to consider more than one or two alternatives, which reduces theopportunity to identify effective solutions. $fter generating a list of

alternatives, the arduous task of evaluating each of them begins. ?umerous

methods e#ist for evaluating the alternatives, including determining the pros

and cons of each4 performing a cost-benefit analysis for each alternative4 and



weighting factors important in the decision, ranking each alternative relative

to its ability to meet each factor, and then multiplying cumulatively to

provide a final value for each alternative.

Selecti t4e Best Alteati7e$fter the decision-makers have evaluated all the alternatives, it is time for

the fourth step in the decision-making process4 choosing the best alternative.

Depending on the evaluation method used, the selection process can be

fairly straightforward. The best alternative could be the one with the most

AprosA and the fewest AconsA4 the one with the greatest benefits and the

lowest costs4 or the one with the highest cumulative value, if using

weighting.

Implemeti t4e 6ecisioThis is the step in the decision making process that transforms the selected

alternative from an abstract situation into reality. Implementing the decision

involves planning and e#ecuting the actions that must take place so that the

selected alternative can actually solve the problem.

%7aluati t4e 6ecisio

In evaluating the decision, the si#th and final step in the decision-making

process, managers gather information to determine the effectiveness of their

decision. <as original problem identified in the first step been resolvedM If

not, is the company closer to the situation it desired than it was at the

beginning of the decision-making processM6ecisio $aki $odel

There are basically two ma=or models of decision-making -the classical

model and the administrative

model.

&4e Classical $odelThe classical model of decision making is a prescriptive approach that

outlines how managers should make decisions. $lso called the rational

model, the classical model is based on economic assumptions and asserts

that managers are logical, rational individuals who make decision that are in

the best interest of the organiation. The classical model is characteried by

the following assumptions)

The manager has completed information about the decision situation and

operations under a condition of certainty.



The problem is clearly defined, and the decision-maker has knowledge of

all possible alternatives and their outcomes.

Through the use of "uantitative techni"ues, rationality, and logic, the

decision-maker evaluates the alternatives and selects the optimum

alternative -the one that will ma#imie the decision situation by offering the

best solution to the problem.&4e Admiistati7e $odel

The $dministrative model of decision making is a descriptive approach that

outlines how managers actually do make decisions. $lso called the

organiational, neoclassical, or behavioral model, the administrative model

is based on the work of economist <erbert $. *imon recognied that people

do not always make decisions with logic and rationality, and he introduced

two concepts that have become hallmarks of the administrative model-

bounded rationality and satisfying.

;ounded rationality means that people have limits, or boundaries, to their

rationality. These limits e#ist because people are bound by their own values

and skills, incomplete information, and their own inability-due to time,

resource, and rational decisions. ;ecause managers often lack the time of

ability to process complete information about comple# decisions, they

usually wind up having to make decisions with only partial knowledge about

alternative solutions and their outcomes. this leads managers often forgo the

si# steps of decision making in favor of a "uicker, yet satisfying, process-

satisficing. The $dministrative model of decision making also have some

basic assumptions)

5The manager has incomplete information about the decision situation and

operates under a condition of risk or uncertainty.

The problem is not clearly defined, and the decision-maker has limited

knowledge of possible alternatives and their outcomes.

The decision-maker satisfies by choosing the first satisfactory alternative-

one that will resolve the problem situation by offering a good solution to the

problem.

6ecisio $aki &ec4i3ues



It is useful to e#amine some of the specific techni"ue that has proved

valuable in the decision making process, two of which are marginal analysis

and financial analysis.

$aial AalysisThe Amarginal productA of a productive factor is the e#tra product or output

added by one e#tra unit of that factor, while other factors are being held

constant. 7aborOs marginal product is the e#tra output you get when you addone unit of 7abor holding all other inputs constant. *imilarly, land:s marginal

-product is the change in total product resulting from one additional unit of

land with all other inputs held constant. The manager can use the concept to

answer "uestions such as how much more output will result if one more

worker is hiredM The answer often called marginal physical product,

provides a basis for determining whether or not one new man will bring

about profitable additional output.

Fiacial AalysisThe firms are supposed to safeguard their interest and avert the possibilities

of risk or try to minimie it. 0or this a firm needs to analye the assets as

well as liabilities, efficiency of capital investment, choice of pro=ect and

various vital ratios. The cost benefit analysis ensures the firms to take

prudent financial decision.

#oup 6ecisio &ec4i3uesThere are several group decision techni"ues)

Baistomi;rainstorming is a techni"ue in which group members spontaneously

suggest keys to solve a problem. Its primary purpose is to generate a

multitude of creative alternatives, regardless of the likelihood of their beingimplemented.

Nomial #oup &ec4i3ueThe ?ominal >roup Techni"ue involves, the use of highly structured

meeting agenda and restricts discussion or interpersonal communication

during the decision making process. 9hile the group members are all

physically present, they are re"uired to operate independently.

6elp4i #oup &ec4i3ueThe Delphi group Techni"ue employs a written survey to gather e#pert

opinions from a number of people without holding a group meeting. Unlike

in brainstorming and nominal groups, Delphi group participants never meet

fact to face4 in fact, they may be located in different cities and never see

each other.

6ecisio $aki &ools



The ma=or decision- making tools are as under)

iea Poammi8ne of the most widely used techni"ues is that of linear programming. It has

been described as a techni"ue for specifying how to use limited resources or

capacities of a business to obtain a particular ob=ective, such as least cost,

highest margin, or least time, when those resources have alternative uses. It

is a techni"ue that systematies for certain conditions the process ofselecting the most des able course of action from a number of available

courses of action, thereby giving management information for making a

more effective decision about the resources under its control. $ll linear

programming problems must have two basic characteristics. 0irst, two or

more activities must be competing for limited resources. *econd, all

relationships in the problem must be linear.

7inear programming can be used in the solution of many kinds of allocation

decision problems, but its application is certainly limited. 0or e#ample, to be

employed effectively the decision problem must be formulated in

"uantitative terms. ?evertheless, the approach has many advantages and its

application in the area of business decision making is increasing.

I7etoy Cotol$ problem faced by managers is that of maintaining ade"uate inventories.

8n the one hand, no one wants to have too many units available because

there are costs associated with carrying these customersOs future business.

There are two types of costs that merit the manager:s consideration. 8ne way

for the manager to solve the inventory problem is to make certain

assumptions regarding future demand and then attempt a solution. Three of

the most common assumptions made in determining optimal inventory sie

are) demand is known with certainty4 the lead time necessary for recording

goods is also known with certainty4 and the inventory will be depleted at a

constant rate. ?ow, the manager has to decide if he or she wishes to use what

can be labeled a trial-and -error approach, or if he wants to employ an 8R

%8perations Research& tool known as the economic order "uantity formula

which can be given by) 83 + PD$Q S vr



9here)

D + e#pected annual demand

$ + $dministrative costs per order

2 + 2alue per item

r + 6stimate for ta#es, insurance and other e#penses

The 683 formula is used by many firms in solving inventory control problems. <owever, it is only one of many mathematical techni"ues that

lave been developed to help the manager make decisions.

$nother important tool in taking one of the most economical decisions is

ADecision TreesA

any managers weight alternatives base don their immediate or short-run

results, but a decision- tree format permits a more dynamic approach

because it makes some elements e#plicit that are generally implicit in other

analyses. $ decision tree is a graphic method that the manager. can employ

in identifying the alternative courses of action available to him in solving a

problem4 assigning payoff corresponding to each act-event combination.



0or e#ample, consider the case of a firm that has e#pansion funds and must

decide what to do with them. $fter careful analysis, three alternatives

identified)

Use the money to buy a new company

e#pand the facilities of the current firm

put the money in a saving account$nd wait for better opportunities. In deciding which alternative is best, the

company has gathered all the available information and constructed the

decision tree.

In the figure there are four important components. 8ne is the decision point,

represented by a s"uare, which indicates where the decision maker must

choose a course of action. second is a chance point, represented by a circle,

which indicates where a chance event is e#pected, such as solid economic

growth, stagnation, or high inflation. $ third is the branch, represented by a

line flowing from the chance points, which indicates an event and its

likelihood such as H.K per solid growth, H.J for stagnation or H. for high

inflation. 0inally, at the far right is a payoff associated with the each branch.

It is called a conditional payoff since its occurrence depends on certain

conditions. 0or e#ample, in figure the conditional R8I %Return on

Investment& associated with buying a new firm and having solid economic

growth is CK per cent, but this return is conditional on the two preceding

factors %buying the firm and having solid growth&.

In building a decision tree, the company will start by identifying the three

alternatives, the probabilities and events associated with each alternative,

and the amount of return that can be e#pected from each. <aving thenconstructed the tree, the firm will roll back it from right to left, analying as

it goes.

This analysis is conducted, first by taking the conditional R8ls at the far

right of the tree and multiplying them by the probability of their occurrence.

0or e#ample, if the company buys a new firm and there is solid growth in

the economy, as seen in figure, it will obtain a CK per cent R87 <owever,

the probability of such an occurrence is H.K 7ikewise, the probabilities

associated with stagnant growth, where the return will be percent, and high

inflation, where the return will be J percent, are .J and . respectively. In

order to determine the e#pected return associated with buying a new firm,

each of the conditional R8lOs is multiplied by its respective probability and

the products are then totaled. 0or alternative one, buying the firm, the

calculation is as follows)

!onditional R8I 'robability 6#pected Return



CK.H H.K

F.K

.H H.J

.F

J.H .H

H.

CH.G

0or alternative two, e#panding current facilities, the calculation is)


CH.H H.K

K.H

C.H H.J

J.

E.H H.

H.G

.E

0or alternative three, e#panding current facilities, the calculation is)


.K H.K

J.K

.H H.JC.GH

.H H.

C.H

.K

These e#pected returns are often placed over the chance points on the

decision tree. They can be determined only after the tree has been drawn and

the analysis of the branches has been conducted. The first alternative is the

best, because it offers the greatest e#pected return. In evaluating alternatives,

decision these help the manager identify both what can happen and the

likelihood of its occurrence .In building the tree we moved from left to right

but in analying we moved from right to left. In the final analysis the

decision tree does not provide any definitive answers. <owever, it does

allow the manager to allow benefits against costs by assigning probabilities

to specific events and then ascertaining the respective payoff.



Assimet @B

814y a =im is pice take ad ot a pice make ude pe=ect

maket coditios

Itoductioa#imiation of output or optimiation of cost or optimiation of resource

allocation is only one aspect of the profit ma#imiing behavior of the firm.

$nother and e"ually important aspect of 'rofit a#imiation is to find the

price from the set of prices revealed by the demand schedule that is in

agreement with the profit ma#imiation ob=ective of the firm.

The profit ma#imiing price does not necessarily coincide with minimum

cost of production. ;esides, the level of profit-ma#imiing price also

depends on the nature of competition prevailing in the market. Therefore,

while determining the price for its product, a firm has to take into account

the degree of competition.

$eai o= maket$ market is a group of people and firms which are in contact with one

another for the purpose of buying and selling some product. It is not

necessary that every member of the market be in contact with each other.arket structure refers to the number and sie distribution of buyers and

sellers in the market for a good or service. The market structure for a product

not includes firms and individuals currently engaged in ;uying and selling

but also the potential entrants.

Classi=icatio o= $aket Stuctue8n the basis of the degree of competition, arkets are traditionally

classified as)

'erfect !ompetition

Imperfect !ompetition

Pe=ect Competitio!haracteristics of 'erfect !ompetition)



ae um*e o= small selles ad *uyes The number of buyer as

well as seller is so large that the share of each buyer in total market demand

and the share of each seller in total market supply is insignificant and hence

no individual buyer or seller can influence the market price.

Eomoeeous poducts 'roducts supplied by the firms are identical

and are regarded as perfect substitute to each other.

Pe=ect mo*ility o= =actos o= poductio 0or a market to be perfectly

competitive, the factors of production must be in the position of moving

freely into or out of the industry and from one firm to another.

Fee ety ad =ee e>it o= t4e =ims ?o legal or otherwise restrictions

on the entry and e#it of the firms.

Pe=ect dissemiatio o= t4e i=omatio to the buyers and sellers.

No o7emet ite7etio and $bsence of collusion.

%>amples $gricultural commodities and *tock market

Pice utput 6etemiatio Ude Pe=ect CompetitioIn a perfectly competitive market, where large number of sellers selling

homogeneous product, no single seller can influence the market price.

*imilarly, each buyer has too small share in total market demand to

influence the price. arket 'rice is therefore determined by the market

demand and market supply for the industry and is given for each individual

firm and for each buyer. Thus, a seller in a perfectly competitive market is a

price-takerO not a price makerO. This means the individual firm will face a

horiontal demand curve. It will be horiontal at the market price,

established by supply and demand on the market as a whole.

%3uili*ium i S4ot 'u$ *hort run is a period in which firms can neither change their sie nor "uit,

nor can new firms enter the industry. 0irms can increase %or decrease& the

supply of the product by increasing %or decreasing& the variable inputs.

Therefore, supply curve is elastic in short run.



The determination of market price in the short run is illustrated in the 0ig.

E.C%a& and ad=ustment of output by the firms to the market price and firmOs

e"uilibrium are shown in 0ig. E.%b&.

0ig. E.C%a& shows the price determination for the industry by the demand

curve D and supply curve * at the price 8'. This price is fi#ed for all the

firms in the industry. >iven the 'rice 8', an individual firm can produce and

sell any "uantity at this price. To determine the profit ma#imiing output,firmOs cost curves are re"uired to be studied.

The process of firmOs output determination and its e"uilibrium are shown in

the 0ig E.%b&. 'rofit ma#imiing condition for a firm is R+!. *ince

price is fi#ed at 8', firmOs average revenue $R+ 8' and also if $R is given,

R+$R. 0irmOs upward sloping ! curve intersects R

Pe=ect Competitio i t4e o 'uIn the long run, entry and e#it become possible. 9hyM ;ecause potential

firms can buy fi#ed inputs and become actual firms. $nd e#isting firms can

sell off or stop renting their fi#ed inputs and go out of business.

0irms will choose to enter the industry if the e#isting firms in the industry

are making economic profits. The profits are an incentive to enter. $s a

result the total market supply will increase and, therefore, the market supply

curve must shift to the right. It drives down the price on the market, thereby

reducing the profits of each firm.



?ow the firms are making profits, but smaller profits than before. ;ut if

there are still economic profits being made, more firms will enter. This must

continue until there are no economic profits. 9hat has to be true when

profits e"ual eroM

TR + T!

pVW" + "W$T!

pV + $T!

*o entry finally stops when firms are producing at their lowest average total

cost. <ere is a diagram of the final, long-run e"uilibrium under perfect

competition)

9hat if typical firm is making lossesM Then the reverse process will take

place. 0irms will e#it the market, causing a left shift of market supply,causing a rise in market price, causing a reduction of losses. This continues

until losses are ero. Thus, 7ong Run competitive e"uilibrium consists of

two conditions)

L pV + !

L pV + minimum $T!



The first condition is caused purely by profit ma#imiation, and itOs true in

both the *R and the 7R. The second condition, however, is caused by entry

and e#it in the 7R. It wonOt necessarily be true in the *R.

These two conditions have important efficiency implications. arginal-cost

pricing %pV+ !& means that consumers who buy the product face the true

opportunity cost of their choices. They will only buy the good if the value to

them is greater than the price, which represents the value of the resourcesthat went into making the product. inimum average cost pricing %pV +

minimum $T!& means that the product is being made at the lowest average

cost possible, so that no resources are being wasted in its production.

The conclusion that firms make ero profit in the 7R may seem odd, given

the profits that many firms earn in reality. 9hat could e#plain the difference

between theory and realityM %C& Reality may differ from the perfectly

competitive model, and to that e#tent economic profits can be made. ;ut

also, %& the profits we generally hear about are accounting profits, not

economic profits. To find out whether these NprofitableB firms are really

making economic profits, weOd need more information about their implicit

costs.

0inally, %J& we may be observing short-run profits, not long-run profits.

Pe=ect Competitio ad Plat SieIt turns out that the perfectly competitive firm produces not =ust at the

minimum of its *R$T!, but also its 7R$T!. 9hyM ;ecause any '! firm

not at its minimum 7R$T! will, in the 7R, change its input combination to

take advantage of lower average costs. If firms are able to make positive

profits by moving outward on the 7R$T! curve, those profits will attract

entrants into the industry in the usual fashion. *o by the same arguments as before, profits will eventually dissipate to ero. The price must be at the

bottom of the 7R$T!, not =ust the *R$T!.

Pe=ect Competitio ad t4e ' Supply Cu7e$s we have seen, changes in demand in a '! market create profits and

losses for firms. In the *R, this has no effect on the supply curve4 but in the

7R, firms enter for profits and leave to escape losses, leading to supply

curve shifts. 9e want to use this information to derive a 7R supply curve. $

7R supply curve, =ust like a *R supply curve, shows the total "uantity that

will be supplied in a market at different prices4 but unlike the *R supply

curve, it shows the "uantity supplied after all long-term changes, including

entry and e#it of firms, have been taken into account.

In the basic supply-and-demand framework, notice that we can use demand

curves and e"uilibrium points to Ntrace outB the supply curve. If you look at

three



different demand curves, and then mark the e"uilibrium point on each one,

you can

connect the e"uilibrium points to find where the supply curve must be.

?ow weOre going to use the same basic techni"ue to trace out the 7R supply

curve. 9e can do this by changing demand, and then finding the e"uilibrium

points after allowing 7R ad=ustments, including entry and e#it. *tart with an

initial %short-run& supply and demand. If we are in long-run e"uilibrium, profits are ero. ?ow, let demand shift to the right. In the short-run, price

rises a lot. ;ut the higher price creates profits, and profits attract entry in the

long run. *o eventually supply shifts to the right as well, pushing price back

down %though possibly not as low as it was before&. 8nce profits are back to

ero again, youOre in a new long-run e"uilibrium. Do this all again to find a

third long run e"uilibrium, and then connect the dots to get the long-run

supply curve.

The interpretation of the 7R supply curve is pretty much the same as the *R

supplycurve) it shows the willingness of producers to sell at each price. ;ut the 7R

supply

curve measures this willingness in the broadest sense, including all firms

that might

potentially supply this product.



?otice that the 7R supply curve is flatter than the *R supply curve. This

must be so,

since the 7R supply curve takes into account the "uantity responses of all

firms, not =ust the ones currently in the market, but potential firms as well. It

is even possible that the 7R supply curve can be downward-sloping. 9hyM

!onsider what must happen if entry and e#it do not affect the cost curves of

individual firms. Then after all ad=ustment to a change in demand has taken place, the market price must have returned to the lowest point on the

7R$T!, which is e#actly where it was before. *o in this case, the 7R supply

curve must be horiontal. 9e call this a constant--cost industry. This is most

likely to be the case when the industry in "uestion constitutes only a small

portion of the demand for its inputs.

If the industry in "uestion has a large impact on the markets for its inputs,

then the 7R supply curve may slope upward or downward. If the effect of

entry into the industry is to bid up the price of inputs, so that a firmOs cost

curves rise as a result of the entry of new firms, then the market price after

ad=ustment will be higher than it was before. In this case, the 7R supply

curve must be upward-sloping as in the picture above4 this is called an

increasing-cost industry, which results from e#ternal diseconomies. 8n the

other hand, if entry into the industry creates a greater demand for inputs that

allows those inputs to be produced through mass production techni"ues %i.e.,

at lower average cost&, then the industry can benefit from lower costs of

production. In this case, the 7R supply curve is downward-sloping. This is

called a decreasing-cost industry, which results from e#ternal economies.

They face a perfectly elastic demand curve arket prices change only if

demand and supply change

o 'u %3uili*ium



5 ?ormal profit is necessary to attract and maintain capital investment

arginal $nalysis

$' D $C +X ?ormal 'rofits

8utput will settle at the point where4

P D $C D AC D $' Supply Cu7e ude Pe=ect Competitio

*hort Run 0irm *upply Y ! curve is the *R supply curve so long as ' X

$2!

7ong Run firm *upply Y 7! curve is the 7R supply curve so long as '

X $T!

In the 7R, the firm must cover all necessary costs of production and earn

a normal profit

$oopoly $aket$ monopoly market is one in which there is only one seller of a product

having no close substitutes. The firm has substantial control over the price.

0urther, if product is differentiated and if there are no threats of new firms

entering the same business, a monopoly firm can manage to earn e#cessive

profits over a long period.

8nly one firm produces the product

7ow cross elasticity of demand between the monopolistOs product and

any other product4 that is no close substitute products.

*ubstantial barriers to entry that prevents competition from entering the

industry.

4y do $oopolies e>ist

;arriers to 6ntry

a& !ontrol of scarce resources or input



b& 6conomies of scale natural monopolies

c& Technological superiority

d& >ovt. created barriers

e& 'atentsEquilibrium of the Firm:

5onopoly firmsO ability to set price is limited by the demand elasticity

*upernormal profits may be earned in the 7ong Run since there is no

entry

' X competitive price

3 Z competitive "uantity

The monopolist will always try to operate on the elastic portion of thedemand curve

Pice 6iscimiatio



'rice discrimination means selling the same or slightly differentiated product

to different sections of consumers at different prices. The necessary

conditions for price discrimination are)

Different markets must be separable

The elasticity of demand must be different in different markets

There must be imperfect competition in the market

'rofit ma#imiing output is much larger than the "uantity demanded in a

single market

'rice discrimination can be categoried into three types)

0irst degree of price discrimination Y !harging two different prices in

different markets having demand curves with different elasticities.

*econd degree of price discrimination Y !harging more than two

different prices from each customerOs block

Third degree of price discrimination Y !harging different prices from

each consumer. The demand curve becomes the marginal revenue curve of

the seller.

82 Po=it ma>imiatio is t4eoetically t4e most soud *ut

pactically uattaia*le o*+ecti7e o= *usiess =ims I t4e li4t

o= t4is statemet citically appaise t4e Baumols sales e7eue

ma>imiatio t4eoy as a alteati7e o*+ecti7e o= t4e =im

Itoductioa#imiation of output or optimiation of cost or optimiation of resource

allocation is only one aspect of the profit ma#imiing behavior of the firm.

$nother and e"ually important aspect of 'rofit a#imiation is to find the



price from the set of prices revealed by the demand schedule that is in

agreement with the profit ma#imiation ob=ective of the firm.

The profit ma#imiing price does not necessarily coincide with minimum

cost of production. ;esides, the level of profit-ma#imiing price also

depends on the nature of competition prevailing in the market. Therefore,

while determining the price for its product, a firm has to take into account

the degree of competition.

ItoductioTraditional theories of the firm advocated that profit ma#imiation is the

goal of the firms. This ob=ective was based on the single entity of ownership

and management. 9ith the course of development simple business activities

turned into comple# organiations dealing with specialied and classified

activities. This development has led to the separation of ownership and

management. 0urther with this division the utility functions of both parties

faced confrontation in certain areas and profit ma#imiation did not remain

the single ob=ective of the firm. In this wake several ob=ectives were

identified and proved to be true in real business practices. !oordination and

compromise between organiational parameters of concern and their

managerial counterparts is necessary. 8rganiation could aim at profits, net

worth, growth and diversification and managers may aim at *alary, 'erks,

'romotion, [ob *ecurity and !areer.

Baumols Sales 'e7eue $a>imisatio &4eoy

anagerOs rewards are more closely linked to *ales rather than 'rofits.

0irms aim to ma#imie *ales Revenue, but sub=ect to a 'rofit !onstraint.

'rofit constraint is e#ogenously determined by the demand and

e#pectations of the shareholders, banks and other financial institutions.



$ *ales Revenue a#imiing firm, in general, produces a greater output

than a 'rofit a#imiing 0irm and sells at a price lower than the profit

ma#imier.

The ma#imum sales revenue will be where e + C %and hence R + H& and

will be earned only if the profit constraint is not operative.

If the profit constraint is operative the sales revenue ma#imier will

operate in the area

where price elasticity is greater than unity.

3\ + 'rofit a#imiing 8utput

3* + *ales a#imiing 8utput

3R* + !onstrained *ales a#imiing 8utput

\ + 'rofit !urve

8" 6istiuis4 *et:ee skimmi pice ad peetatio pice policy

4ic4 o= t4ese policies is ele7at i pici a e: poduct ude

di==eet competiti7e coditios i t4e maket

Pici $et4ods



;efore we proceed with the various pricing methods, it is essential for us to

understand the 7ife cycle concept. any products generally have a

characteristic known as :'erishable distinctiveness.O The product cycle

begins with the invention of a new product followed by patent protection

and further development to make it saleable. This is usually followed by a

rapid e#pansion in its sales as the product gains its market acceptance. Then

the competitor enters the field with the imitation and the rival products andthe distinctiveness of the new product starts diminishing. The speed of

degeneration differs from product to product. The innovation of new product

and its degeneration into a common product is termed as 7ife !ycle of the

'roduct.A

There are five distinct stages in the 7ife !ycle of the product:. They are as

follows)

ItoductioResearch or engineering skills lead to the product development. There are

high promotional costs involved, volume of sales is low and there may be

heavy losses.

'ricing 'olicies in Introductory phase largely depend on the close substitutes

available in the market. >enerally two kinds of pricing policies are

suggested, Skimmi Pici) This pricing strategy is adopted when close substitutes

of a new product are not available in the market. To e#tract the consumer

surplus, setting up a very high price initially and then a subse"uent lowering

of prices in a series of reduction.

Peetatio Pici This pricing policy is generally adopted in case of the

availability of close substitutes of the new product in the market. To penetrate in the market, initially a lower price is designed, as soon the

product captures the market, price is gradually raised up.

#o:t4Due to the cumulative effects of introduction stage the product begins to

make rapid sales gain. <igh and sharply rising profits may be witnessed.

!onsumer satisfaction has to be ensured.

$atuity

*ales growth continue, but at a diminishing rate, because of the decliningnumber of the potential customers who remain unaware of the product or

have taken no action. 'rofit margin slips despite rise in the sale.

During aturity stage, firm should move in the direction of 'roduct

improvement and market segmentation.

Satuatio



*ales reach and remain on a plate marked by the level of the replacement

demand. There is a little additional demand to be stimulated.

6eclie*ales begin to diminish absolutely as the customers begin to tire of the

product and the product is gradually edged out by better products or the

substitutes.

The life cycle broadly gives the different stages through which a product

passes through. There are changes taking place in the price and promotional

elasticity of demand as also in the production and distribution cost of the

product. 'ricing 'olicy, therefore, must be properly ad=usted over the various

phases of the life cycle of the product.

&4e 7aious Pici met4ods ae

arginal cost pricing,

0ull !ost method pricing,

7imit pricing

ark-up and ark-down pricing,

Rate of Return pricing,

>oing rate pricing,

5Team pricing,

2alue pricing,

'osition based pricing,

6#ports pricing,

Dual pricing

$dministered pricing,

*kimming pricing,

'enetration pricing,



'eak load priding,

!harm pricing,

Discrimination pricing.,

'roduct mi# pricing.

Cost-plus o =ull-cost pici

This is the most common method used for pricing. Under this method, the

price is set to cover the costs %materials, labour and overhead& and a

predetermined percentage for profit. The percentage differs from industry to

industry. This may reflect differences in competitive intensity, differences in

cost base, differences in rate of turnover and risk.

8rdinarily the profits are kept at a margin sensitive to the market conditions.

ark-ups may be determined by trade associations either by the means ofadvisory price-list or by actual list of mark ups distributed to members.

Usually profit margins under price control are so set as to make it possible

for even the least efficient firms to survive.

This method ignores the demands -there is no necessary relationship

between the costs and what the people pay for the product. $lso it fails to

reflect the forces of the competition ade"uately.

6#ample) $ll the stationery products are priced in this way.

CAS% S&U6.

Itoductio

$ic4ael ol=so, a compute poamme 4ad a decet +o* :it4 t4e=iacial po:e4ouse Bea, Steas G Co No:, 4e e=u*is4escomputes at t4e *asemet i 4is 4ouse ad sells it t4ou4 e-*ay Eeplas to +oi as a sc4ool teac4e $ic4ael lost 4is +o* i 2!!" Ee :as



told t4at 4is +o* is *ei outsouced to Idia Paul Sc4:at, amai=ame poamme, :4o :as eai H !,!!! a yea :as told t4at4is se7ices :ee o loe e3uied Ee suspects t4at 4is +o* 4as *eeoutsouced to Idia

&4ee is o:i disset amo t4e Ameicas aaist t4e iceasi

pactice o= outsouci It 4as *ecome a electoal issue i t4e comipesidetial electios i t4e US &4e 6emocatic cadidate, Jo4 ey4as made it a emoti7e issue, despite ecoomists tyi to potay t4epositi7e aspects o= outsouci

&4ee ae umeous easos =o t4e o:i apat4y to:adsoutsouci &4e pe7aili ecoomic situatio ad t4e iceasi

+o*lessess i t4e US 4a7e added =uel to t4e =ie Eo:e7e, mayaalysts =eel t4at +o*lessess i t4e US is cyclical i atue esulti=om t4e ecessio o= 2!!1 ad 4ece, a eco7ey :ill ceate +o*

oppotuities

$oeo7e, accodi to t4e US-Idia Busiess Coucil, t4e iceasiuemploymet is also due to copoate estuctui ad +ust a 3uateo= t4e +o* loss is due to outsouci Sice, t4e *eii o= 2!!1, t4eeal +o* loss i US is estimated to *e 2" millio I compaiso, t4eactual +o* loss due to outsouci is estimated to *e oly 2!!,!!! &4us,it ca *e said t4at t4ee ae 7aious ot4e easos =o +o*lessess i t4eUS &4e outcy aaist outsouci seems to *e di7e moe *y politics

at4e t4a ecoomicsutsouci =oms a small popotio o= t4e +o*s t4at ae eulalyc4ued i t4e US ecoomy a a7eae, 20 millio +o*s ae c4uedi t4e US e7ey mot4 I t4e pocess, esouces ae allocated, =o moepoducti7e puposes &o come out o= t4e ecessio ad aise t4estadads o= li7i, 4i4e poducti7ity seems to *e t4e oly solutio&4e de*ate o outsouci at4eed mometum oly i t4e ecet pastA study *y Foeste, a eseac4 oup, i t4e yea 2!!2, *ou4t t4eissue ito limeli4t &4e epot claims t4at *y 2!15, "" millio :4ite-

colla +o*s i t4e US :ould *e tas=eed to couties like Idia

&4e %coomics o= utsouci

But is outsouci so *ad =o t4e US ecoomy #eoy $aki:,po=esso o= ecoomics at t4e Ea7ad Ui7esity ad 4ead o= PesidetBus4Ks Coucil o= %coomic Ad7ises, ecetly told pesspesos t4at



outsouci o= +o*s is i *ette iteest o= US Accodi to 4im,outsouci lo:es t4e cost =o cosumes, maki t4e copoatiosmoe e==iciet &4ee :ee a seies o= aticles i &4e %coomist,4i4li4ti t4e ad7ataes o= outsouci

&4ee ae may i=luetial oups i t4e US :4o ae petu*ed *y t4e

ecet outcy aaist outsouci Says C4ales % $oiso, Pesidet,%ast est Cete, a US *ased t4ik tak, L==-s4oi is ot aecoomic po*lem, *ut a ecoomic oppotuityL $ay aalysts i t4eUS =eel t4at ati o==-s4oi *ills i t4e US :ould po7e to *eie==ecti7e Simila 7ie:s :ee ec4oed *y $ic4ael & Clak o= US-Idia*usiess coucil Ee says t4at, LJo*s lost to o==-s4oi :ee less t4a a3uate o= all +o*s lost i t4e US i 2!!2 &4e est :ee lost due tocopoate estuctui &4e cuet de*ate i t4e US o o==-s4oi isi=omed *y lack o= =actsL

I a aticle, L4y .ou Jo* IsKt $o7i to Baalore"i t4e Ne:.ok &imes, Jadis4 B4a:ati, a seio =ello: at t4e Coucil o Foei'elatios ad po=esso at Colum*ia Ui7esity :ites t4at t4e paicad =uo o7e outsouci is completely u:aated Ee =ut4e sayst4at o +o*s ae *ei take a:ay =om Ameica Ee says t4at t4e a==ecto= c4aes i tec4oloy is *ei =elt i t4e la*o itesi7e idustiesAccodi to 4im, t4e loss o= +o*s i t4e US is due to tec4oloicalc4aes

Po=esso B4a:ati is also citical a*out politicii t4e :4ole issue Eesays t4at outsouci :ill stet4e t4e competiti7eess o= t4e UScompaies Fims ioi t4e c4eape supplies :ould lose outPo=esso B4a:ati =ut4e says t4at outsouci se7ice +o*s is ot4idi==eet =om impoti o= la*o-itesi7e te>tiles ad ot4e oodsAccodi to 4im, all empiical studies i t4e US o7e t4e last t:odecades suest t4at :ae staatio i t4e mau=actui idusty ismoe due to automatio o= t4e pocesses, ot t4e c4eape impots &4esame is applica*le to se7ice idusty as :ell

Jae ide o= AccetueKs Istitute =o Stateic C4ae says t4atcompaies outsouci t4e taditioal *ack-o==ice :ok 4a7e moecotol ad disciplie o7e t4ei opeatios $oeo7e, employees o= t4ecompay ca cocetate o =ami stateies Fut4e, outsoucialso esults i eate e==iciecy ad lo:ei costs &4is allo:scompaies to o==e *ette se7ices to customes A study doe *y$cisey #lo*al Istitute e7eals t4at =o e7ey dolla o= :ok



outsouced *y t4e US, it ets *ack H110 f as icome, ad t4e coutiesto :4ic4 t4e :ok is *ei outsouced ais "5 cets &4is s4o:s t4atoutsouci is a :i-:i situatio o *ot4 t4e couties

Bee=its =o US Bee=its =o Idia

Sa7is to US i7estos o customes !5 a*o !1

Impots o= US oods ad se7ices *ypo7ides i Idia

!!5Po=its etaied i

Idia!1

&as=e o= po=its *y US *ased

po7ides i Idia *ack to US

!!0 Supplies !!M

Net diect *ee=it etaied i US !/Cetal

o7emet ta>es!!"

Oalue =o US la*o eemployed!05-!0

State o7emetta>es !!1

Potetial et *ee=it =o US112-110

Net *ee=it to Idia !""

Souce $ckisey #lo*al Istitute

&4ee is a de=iite cost ad7atae i o==-s4oi :ok to Idia &4esead7ataes ae a esult o= lo:e :aes i t4e de7elopi couties alo:it4 t4e de7elopmet o= telecommuicatios i t4ese couties A epotpu*lis4ed *y ESBC, :4ic4 4as o==-s4oed moe t4a 0,!!! +o*s toIdia, says t4at t4e telep4oe costs =om Idia to Ameica ad Bitai4as deceased *y almost !;, sice Jauay 2!!1 &4e :ae di==eece*et:ee t4ese couties is also a =acto t4at =oces t4e compaies to



outsouce t4ei *usiess pocesses to Idia A study doe *yNASSC$, says t4at t4e a7eae salay o= a I& po=essioal i U isHM/,!!!, i US it is H5,!!!, :4eeas i Idia it is +ust H2/,!!! &4e :aedi==eece *et:ee t4e lo: ed call cete +o*s o= *ot4 t4e couties isalso 7ey :ide A a7eae call cete employee i U eas H2!,!!! ot4e a7eae 4eeas, a call cete po=essioal i Idia *aely maaes

to ea oe tet4 o= t4e eais o= t4ei Bitis4 coutepats

==s4oi allo:s compaies to :ok oud t4e clock It i7es ampletime to t4e compaies to t4ik a*out t4ei I& po*lems 'ecetly,Ameica %>pess paid H5,!!! to a oup o= so=t:ae poammes iIdia, to de7elop a packae =o t4em &4e same :ould 4a7e cost t4emse7eal millio dollas i US

&4e *ee=its o= outsouci o muc4 *eyod t4e cost ad7atae Aaticle i $ckisey 3uately suests t4at t4e compaies eed to look *eyod cost sa7is &4e aticle says t4at LCompaies ae meelyeplicati :4at t4ey do at 4ome, :4ee la*o is e>pesi7e ad capital iselati7ely c4eap, i couties i :4ic4 t4e e7ese is tueL

Ala #eespa, US Fedeal 'ese7e C4aima, is a stauc4 suppoteo= outsouci Ee is o= t4e opiio t4at ay mo7e to cu* outsoucio= :ok to couties like Idia ad C4ia, mi4t i7e +ust a tempoayelie= 'eacti to t4e poposed leislatios i t4e US *aioutsouci, #eespa said, LA e: oud o= potectioist steps is

*ei poposed aaist outsouci &4ese alleed cues :ill makemattes :oseL #eespa =eels t4at ay e==ot to potect US +o*st4ou4 leislatio :ould *ack=ie

Not all compaies 4a7e take =ull ad7atae o= outsouci Accodito Eais $ille, pesidet o= t4e I=omatio &ec4oloy Associatio o= Ameica (I&AA), a lo**y oup, so =a oly "-0 ; o= all Ameicacompaies outsouce t4ei pocesses &4e emaii still ests :it4Ameica =ims A epot pu*lis4ed *y Foeste, i 6ecem*e 2!!",says t4at /!; o= t4e Fotue 1!!! compaies 4a7e a elii*le o eail pesece i o==-s4oi 'epot also suests t4at 0!; o= t4e :ok o= t4ese compaies could *e outsouced &4us, t4e potetial =o o:t4 ioutsouci is still immese

Ad7acemet i t4e tec4oloy ca i7e a =ut4e pus4 to t4e o==-s4oi acti7ity &4e i=le>i*le ac4itectue o= t4e cuet tec4oloies



is acti as a 4idace i o==-s4oi, says Simo Eeap o= Bai G Co, acosultacy =im &4e ad7acemet i so=t:ae ad 4ad:ae :ouldea*le t4e compaies to o==-s4oe e7e small acti7ities Fims :ould *ea*le to o==-s4oe t4e acti7ities o= t4e etie depatmet, say *illi o= customes

Eo:e7e, ot e7eyoe seems to aee :it4 t4e suppotes o= outsouci Step4e 'oac4, t4e c4ie= ecoomist at $oa Staley,says t4at it is oly t4e :ae di==eece t4at is ecouai compaies tooutsouce :ok to Idia o ay ot4e de7elopi couty Ee =ut4esays t4at +o*lessess is taki a:ay t4e c4am o= eco7ey i t4e US

$ay aalysts also =eel t4at compaies s4ould take some cocete stepsto miimie t4e a==ects o= outsouci Compaies s4ould make t4epocess o= +o* tas=es to o==s4oe destiatios moe smoot4 Bitis4&elecom e>4i*ited a pocess o= outsouci t4at ca *e used as a model*y ot4e compaies

I 2!!", :4e B& aouced t4at it is plai to ope t:o call cetesi Idia, :it4 a capacity o= 22!! people, it :as citicied =om allcoes It :as said t4at B& :as ot acti i a socially esposi*lemae 'ealii t4e a7ity o= t4e situatio, B& appoac4edSustaia*ility, a iteatioal cosultacy, specialii i *usiessstatey ad sustaia*le de7elopmet &4e cosultacy =im :as askedto =id :4et4e o ot outsouci ad copoate social esposi*ility

(CS') co-e>ist

Sustaia*ility oted t4at t4e immediate impact o= outsouci :ould *e +o* loss =o t4e employees, ad t4e esulti a==ect o t4e society &4ecosultacy =im :as o= t4e opiio t4at *e=oe outsouci, compaiess4ould addess t4e eati7e impact o= outsouci I ode to c4eck t4eeati7e impact o= o==-s4oi, =ims s4ould cosult :it4 employees,tade uios, commuities ad ot4e key stake4oldes %mployeess4ould *e i7ol7ed i t4e pocess o= ay suc4 decisio makiSustaia*ility also suested t4at =ims s4ould *e taspaet ad maket4e employees ko: t4e se7ices t4at ae *ei outsouced

Fims s4ould also make a attempt to edeploy t4e employees i someot4e depatmets &4is :ould miimie layo==s A attempt s4ould *emade to etai t4e edudat :okes A pat o= t4e sa7is =om o==-s4oi s4ould *e i7ested =o t4is pupose As pe t4e suestio made



*y $cisey #lo*al Istitute, 0-5; o= t4e esulti sa7is =om o==-s4oi s4ould *e used =o isuace policy =o employees to co7e t4elost :aes

US :as oe o= t4e pime suppotes o= =ee tade US :as least *ot4eed

a*out t4e coces o= may ot4e de7elopi couties :4e t4ey aisedt4ei 7oices aaist +o* losses as a esult o= t4e c4eap e>pots But, t4isaessi7eess seems to 4a7e mello:ed do: i ecet days It al:ayspopaated t4at ie==iciet idusties s4ould *e closed e o= t4epimay tasks o= t4e US &ade 'epesetati7eKs o==ice :as to keep ac4eck o t4e :old makets It assesses t4e makets :4ic4 ae opeiup ad :4ic4 ae etti closed as a esult o= 4i4 tai==s ad ot4e3uatitati7e estictios No:, :it4 t4e o:i e==iciecy o= de7elopicouties i t4e se7ice sectos, may +o*s i t4ese sectos ae *eitas=eed to de7elopi couties (o= :4ic4 a ma+o c4uk is comi

to Idia) US is :oied a*out t4e iceasi +o*lessess *ut t4at seemspaado>ical It 4ails lo*aliatio *ut :4e it comes to t4e de7elopicouties tyi to eap t4e *ee=its o= lo*aliatio, it aises all sots o= issues

'ecetly t4e US o7emet 4as ti4teed t4e 7isa oms &4e um*eo= E-1B 7isas issued to Idia so=t:ae poammes =ell to /5,!!! =om1,M5,!!! i 2!!" Aalysts =eel t4at t4is :ould icease outsouci o=

+o*s =ut4e, paticulaly to Idia Accodi to Cai Baett, t4e c4ie=

e>ecuti7e o= Itel, ati o= =e:e 7isas :ould =oce t4e compaies tos4i=t t4ei +o*s to couties like Idia, :4ee t4ee is o deat4 o= 3uali=ied eiees

6espite o *a =om t4e =edeal aut4oities o outsouci, may States4a7e iitiated t4e pocess o= putti estictios o outsoucio7emet :ok to =oei couties &4e la:makes i t4e state o= Ne: Jesey 4a7e poposed a *ill t4at stops =ims to outsouce ayo7emet elated :ok to a =oei couty Succum*i to t4e pu*licpessue, t4e o7emet :as =oced to *i *ack a 4elplie =o

:el=ae ecipiets t4at :as *ei outsouced to Idia Similaly, t4estate o= Idiaa :it4de: a H 15 millio cotact =om a Ameicasu*sidiay o= a Idia I& =im Commeti o t4e mo7e, t4e Idiaao7eo said t4at cotact :as ot i tue :it4 IdiaaKs 7isio o= po7idi *ette ad moe +o* oppotuities to local compaies ad:okes Eo:e7e, aalysts =eel t4at t4ese decisios 4a7e *ee



i=lueced *y political pessue i t4e *ackdop o= comi pesidetialelectios i t4e US

&4e Idia 'espose

&4e Idia BP idusty is ot taki t4e outcy aaist outsouci it4e US seiously Idia BP =ims ae o loe +ust call cetes &4eiacti7ities o: co7e maketi ad ko:lede *ased se7ices &4esecompaies ae o: aspii to *ecome stateic pates =o UScompaies &4ee is a sudde sput i t4e um*e o= 7etue capitalists:illi to i7est i di==eet aeas &4ou4, some so=t:ae compaiescaKt 4ide t4ei coce o7e t4e leislatios *ai o7emetelated o==-s4oi i t4e lo-u *ut, =o o: t4ey ae clea t4at, t4eseleislatue :ill 4a7e elii*le e==ect o t4e cuet cotacts :it4 t4e

pi7ate compaies 'eacti to t4e :4ole issue, Naayaa $ut4y,C4aima ad C4ie= $eto o= I=osys said t4at t4ee is o issue to:oy a*out Ee temed t4e outcy as omal Ee suested t4at at4et4a etti :oied ad aitated, Idias s4ould put =o:ad t4eipoit o= 7ie: ad e>plai t4e ad7ataes o= o==-s4oi Ee said t4at t4epeset ucetai ecoomic situatio is esposi*le =o t4e coce o7et4e +o* losses i t4e US

$ay aalysts =eel t4at t4e oppositio to outsouci may ot ed :it4

t4e US pesidetial electios it4 may o= t4e Ameica States, comiout :it4 leislatios *ai o7emet cotacts to ot4e couties,t4e issue o= o==-s4oi is oi to *e ali7e Coditios =o o==-s4oimay *ecome =a7oa*le :it4 t4e impo7emet i t4e pe=omace o= t4eUS ecoomy

8uestio =o discussio

8ue 1 #i7e you opiio o outsouci ad its impact o t4e pospectso= o:t4

o= t4e ecoomy o= 4ome Natio ad 4ost atio

#uidelies =o t4e as:e 6iscuss t4e issue i t4e pespecti7e o=oppotuity ad t4eats =aced *y de7elopi ad de7eloped atios



Assimet @C

Multiple Choice Questions

Q.1. A change in quantity demanded refers to

(a) Contraction along a demand curve

(b) Shift of the demand curve

(c) $o7emet alo a demad cu7e()

(d) Expansion along a demand curve

Q.2. A change in demand refers to

(a) Contraction along a demand curve

(b)S4i=t o= t4e demad cu7e ()(c) Movement along a demand curve

(d) Expansion along a demand curve

Q.3. If two goods are substitutes, the price elasticity of demand is

(a) Negative

(b)Positi7e()

(C) Zero

(d) Not defined

Q.4 If two goods are complementary, the price elasticity of demand is

(a)Neati7e()



(b) Positive

(C) Zero

(d) Not defined

Q.5. Price elasticity of demand is defined as

(a)A*solute c4ae i 3uatity demaded due to a*solute

c4ae i pice()

(b) Percentage change in quantity demanded due to percentage change in

price

(c) Relative change in quantity demanded due to change in price

(d) Marginal change in quantity demanded due to marginal change in price

Q.6. Total revenue will increase if

(a) Demand is elastic

(b)6emad is ielastic ()

(c) Demand is unitary elastic

(d) None of the above

Q.7. An isoquant shows

(a) All combinations of labor and capital

(b)All com*iatios o= ood Q ad ood .()

(c) All combinations of labor and capital

(d) All combinations of labor and capital

Q.8. Changes in income are shown by

(a) Parallel shift of isoquant

(b) Movement along the budget line

(c) Parallel shift of budget line



(d) Bot4 (*) G (c)()

Q.9. The relationship between elasticity and total revenue

(a) MR = p C +C

e

fffg

(b) MR = p CDC

e

fffg

(c) MR= p C@C

e

fffg

(d)Noe o= t4e a*o7e()

Q.10. In case of inferior goods the income elasticity is

(a) Positive

(b)Neati7e()

(c) Zero

(d) None of the above.

Q.11. An indifference curve is the locus of

(a) All the combinations of good X and Y giving different level of satisfaction

(b) All the combinations of capital and labor giving same level of output

(c)All t4e com*iatios o= ood Q ad . i7i same le7el o=satis=actio ()

(d) All the combinations of capital and labor giving different level of output

Q.12. Short run in production function refers to



(a) When all factors of production become variable

(b) One factor of production varies keeping all other constant

(c) When all factors of production become variable

(d) Noe o= t4e a*o7e ()

Q.13. Opportunity cost refers to

(a) The expected return from the use of the resource

(b)&4e e>pected etu =om t4e secod *est alteati7e use o= t4e

esouce ()

(C) Accounting cost less of unilateral transfers


Q.14 Long run average cost curve is also known as

(a) %7elope cu7e()

(b) Angel curve

(c) Laffer curve


Q.15. Internal economies of scale determine

(a) The position of long run average cost curve

(*) &4e s4ape o= lo u a7eae cost cu7e()

(c) The shape of short run average cost curve

(d) The position of short run average cost curve

Q.16. The nature and shape of AFC is

(a) A rectangular Hyperbola

(a) A horizontal Line

%b& It is RU s4aped()

(c) A vertical Line



Q.17. Which one of the statement is correct

(a) All costs are variable costs in the long run except LMC

(b) TFC is inverse “S“Shaped reflecting Laws of Returns.

(b) Over a very long range of Operation, AFC is Zero.

(c) Noe o= t4e a*o7e is coect()

Q.18. Explicit cost is also known as –

(a) Imputed Cost

(b)Implied Cost

(c) Accouti Cost()

(d)Opportunity Cost

Q.19. The use of highly structured meeting agenda and restricted discussion or

interpersonal communication during the decision making process is known

as –

(a) Nomial #oup &ec4i3ue,()

(b) Brainstorming,

(c) Delphi Group Technique,

(d) Both (b) & (c)

Q.20. Variation in Data occurring due to regularly recurring fluctuations in

economic activity during each year is

(a) Cyclical fluctuations

(b)Seasoal Oaiatios()

(c) Random Variation

(d) Irregular Variation



Q.21. In the short run the supply curve of a firm in perfectly competitive market is

(a) Average cost curve

(b) Total cost curve

(c) Marginal cost curve

(d) Noe o= t4e a*o7e ()

Q.2.2. A firm is price taker in perfect competition market structure because

(a) Single firm supplies significant part of total market supply

(b)Single firm supplies insignificant part of total market supply

(c) Sile =im supplies Eomoeeous poduct ()

(d) Both (b) and (c)

Q.23. Highest degree of allocative inefficiency is the feature of

(a)Pe=ect competitio ()

(b) Monopoly

(C) Oligopoly

(d) Not defined

Q.24 Cartels and collusion are

(a) Illegal activities

(*) eal =ame:ok ()

(C) Authorized framework

(d) Not defined

Q.25. As more labor is added to a fixed amount of input, the rate at which output goes

up begins to decrease. This is called

(a) Diminishing marginal utility.

(b) Diminishing marginal productivity.



(b) 6imiis4i maial costs()

(c) Diminishing marginal profit.

Q.26. If the cost of sugar rises and sugar is a major ingredient in jelly beans, then the jelly

bean

(a) demand curve shifts to the left.

(a) supply cu7e s4i=ts to t4e le=t()

(b) supply curve shifts to the right.

(c) demand and supply curves both shift to the right.

Q.27. Which one of the following is not the characteristic of Perfect Competition

(a)$ll firms sell an identical product.

%b&$ll firms are price takers.

%c&$ll firms have a relatively small market share.

(d)Buyes do ot ko: t4e atue o= t4e poduct *ei sold

ad t4e pices c4aed *y eac4 =im()

Q.28. Which one of the following is not the characteristic of demand

%a& There should be the willingness to purchase

%b& There should be the capacity to purchase

(c) Speci=ic time =ame()

%d& Real market place is re"uired

Q.29. For a normal good:



a) The price elasticity of demand is negative; the income elasticity of

demand is negative

b) The price elasticity of demand is positive; the income elasticity of demand

is negative

c) The price elasticity of demand is negative; the income elasticity of

demand is positive

d)&4e pice elasticity o= demad is positi7eT t4e icome

elasticity o= demad is positi7e()

Q.30. Which of the following is true?

a) If the marginal cost is greater than the average cost the average cost falls

b)I= t4e maial cost is eate t4a t4e a7eae cost t4e

a7eae cost iceases ()

c) If the marginal cost is positive total costs are maximised

d) If the marginal cost is negative total costs increase at a decreasing rate if

output increases

Q.31. If marginal cost is positive and falling:

a)&otal cost is =alli ()

b) Total cost is increasing at a falling rate

c) Total cost is falling at a falling rate

d) Total cost is increasing at an increasing rate

Q.32. To maximise sales revenue a firm should produce where:

a) Marginal cost is zero

b) Marginal revenue is maximised

c)$aial e7eue is eo ()



d) Marginal revenue equals marginal cost

Q.33. Normal profit occurs when:

a) Average revenue equals average variable cost

*) $aial e7eue e3uals maial cost()

c) Average revenue equals marginal cost

d) Average revenue equals average cost

Q.34 Barriers to entry:

a) Do not exist in monopoly

b) Cannot exist in oligopoly

c) Do not exist in monopolistic competition

d) 6o e>ist i pe=ect competitio ()

Q.35. Which best describes price discrimination?

a) C4ai di==eet pices =o di==eet poducts()

b) Charging the same prices for different products

c) Charging the same prices for the same products

d) Charging different prices for the same products

Q.36. In perfect price discrimination:

a) Consumer surplus is maximized

*) Cosume suplus is eo ()

c) Producer surplus is zero

d) Community surplus is maximised

Q.37. In perfect price discrimination:

a) The demand curve is the marginal cost curve

b) The average revenue equals the average cost

c) The marginal cost is the average cost curve



d) &4e demad cu7e is t4e maial e7eue ()

Q.38. If a few firms dominate an industry the market is known as:

a) liopoly ()

b) Competitively monopolisticc) Duopoly

d) Monopolistic competition

Q.39. In case certain goods are not sold within a reasonable time, the retailer pulls

the price down, it is known as

(a) Adjustment pricing

(b) Administered pricing

(c) $ak-do: pici ()

(d) Mark-up pricing

Q.40. This pricing strategy acts as a barrier to entry to new firms

(a) Limit Pricing

(b) Administered Pricing

(c) Peak –Load Pricing

(d) Skimmi Pici()

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MBA SEMESTER 1 ASSIGNMENT ME.doc