Name : Abha Kumari

Subject : Managerial Economics

Roll No : 2314101973
Program : Master Of Business Administration
Batch : 05
Semester : First
 Assignment Set - 1

1) Managerial economics
It can be defined as, applica on of economics that involves the study and uses of organiza onal
principles for decision-making. Therefore, it is also called as business economics, as it used to solve
business problems by applying its economic theory.

According to Spencer and Siegel, Managerial Economics is also an integra on of economic theory in
the applica on of business to improve decision-making, planning and development of future road
map for an organiza on.

Managerial economics, gives an insight into the opera ons of the organiza on. Managers prefer
using the principles, to a ain a smooth func oning of the organiza on.

Significance of Managerial Economics

The fundamental goal is to apply concepts to find solu ons for organiza onal issues which appear
frequently.

o Business Planning
Analysts use the economic theory to understand the market, demand and project on how to
drive the company opera ons, to generate highest possible revenue for the organiza on.

By incorpora ng the ideas from other disciplines of science, it helps in op mal usage and
alloca on of resources.

o Cost Control
By choosing and op mal path for the organiza on, analysts can predict the profitability and
control the costs of the service of product. This helps the company in crea ng more sales
when costs and expenses are kept under check.

o Price Regula on
One can easily understand the market and make decision on pricing using the concepts of
managerial economics.

o Understanding the working of Economic System

The economy itself is an extremely complex system. It helps in understanding the complexity
of a market and the reasons for the complica ons which exists in the economy.

o Decision Making and Direc ng

Managers can use this economic theory, to make decisions which are suitable for the company
within proper me.

o Economic well-being
It recognizes the importance of the interac on between the society and the organiza on. It
 acts as an agent to a ain the social and economic welfare goals.

o Achieving End Goals

With proper understanding of organiza on and the society, it can help in achieving the
company’s goal without any hurdles.

o Formula on of Business Policy

It assists an organiza on and improves their ability to depict the most significant factors of
economy. The organiza on can update their opera onal policies in accordance with the
current demand, supply, sales and profit etc.

o Solving mul ple business issues

It helps the organiza on, to find and solve issues related to demand and supply, cost and
expenses, sales and profit etc.
2) Produc on Func on
Produc on func on is evalua on of the rela onship between the physical inputs (ex: capital or labor)
and the quan ty of goods produced. It means, a mathema cal representa on of the connec on
between measurable inputs and the measurable output of an organiza on, while manufacturing of
goods.

It can be represented, by the formula Q = f(K, L) or Q = K+L

Here, Q represents the output, K represents the capital, f is the func on, and L stands for labour.

There are two types of factors for input.

o Fixed Inputs
The inputs whose value remains unchanged, regardless of the organiza on’s output are Fixed
Inputs.
Ex: Land, Building, Machines, Tools, Equipment, Skilled Labour and Higher Management.

o Variable Inputs
The Inputs whose value keeps changing, with any type of fluctua ons in the organiza on’s
produc on are Variable Inputs.
Ex: Raw Material, Power, Petrol, Water, Transporta on and so on.

Types of Produc on func on

o Short Run Produc on Func on
In the short-run produc on func on, the firm is unable to alter the quan es of its inputs.
Here, the law of variable propor on comes into play. The short-run func on con nues to
operate at the same level. Considering all the other variables to be constant, only one input
varies, causing the ra o of factors to fluctuate. Exit hurdles exist for the manufacturing
companies. As a result, they can be permanently turned off but cannot stop producing.

The type of produc vity func on one selects depends only on the nature of the input
variable for any produc on organisa on. It is a short-run produc vity func on if one u lises
variable input; otherwise, it is a long-run func on.

o Long Run Produc on Func on

All of the inputs, including labour and raw materials for a par cular length of me, are
changeable in the long-run produc on func on. As a result, the process is adaptable because
all the input variables can be altered to meet the needs of the company. The law of equi-
marginal returns to scale is another tool that producers can employ in the economics
produc on func on. Even a er reaching the maximum produc on capacity, increasing input
results in a smaller increase in output. It implies that the maker can always choose the ideal
condi ons and alter the manufacturing size. As a result, the factor ra o is unchanged.

Low barriers also give businesses long-term freedom to enter and quit.

o Leon ef produc on func on

It is a type of func on that is used to determine the ra o of the input required and the
quan ty of output to be produced.
3) Cost
Cost can be defined as the expenses a company incurs, to provide goods and services to its clients. It
is the total sum of money spent by the organiza on to manufacture the specified quan ty of
products.

Types Of Cost

o Opportunity and Actual cost

Opportunity cost refers to the price of subs tuted or foregone alterna ves. The opportunity
cost is the reduc on in expected returns from the resource's secondary use that was
sacrificed in order to realise the benefits from its first use.

Actual costs are those incurred as a result of paying for labour, supplies, equipment,
buildings, construc on, machinery, and other similar things. The total financial outlays listed
in the books of accounts are what are known as actual costs. Outlay expenses are a common
term used to describe actual costs.

o Direct and Indirect cost

Direct costs are expenditures that can be directly linked to a par cular product, division, or
manufacturing procedure.

Costs such as RA materials, worker gas costs, and manager salaries are examples of indirect
costs because they cannot be directly linked to a par cular unit of ac vity. They cannot be
connected to a department, a process, a product, or an expense on a bill for energy or water.

o Past and Future cost

Costs from previous periods are referred to as Past costs.
Future costs are charges that will be incurred in the future.

o Fixed and Variable cost

For a specific output, fixed costs are those that are fixed in volume. Fixed costs are those that
don't change in response to an increase or decrease in produc on. They are hopeful even
though there is no produc on.

Costs that vary in response to shi s in total produc on are known as variable costs. Direct
labour costs, raw material costs, and other costs are examples of variable costs.

o Marginal and Incremental cost

The price of manufacturing an extra unit or more is known as the marginal cost. Producing
an extra unit of produc on comes at an addi onal cost.

Incremental costs are the costs related to producing a batch or collec on of outputs. They
are the extra costs incurred as a result of a modifica on in the volume or kind of business
opera ons.
o Implicit and Explicit cost
The payment provided to self-owned resources u lised in produc on is referred to as implicit
cost; it is the profit earned by the owner's resources when they are employed in their best
alterna ves.

Payments that must be given to outside forces are referred to as explicit costs. They are
required payments made by the business owner for the acquisi on or use of various non-
owned produc ve forces, such as rent, wages, and so on.

o Accoun ng and Economic cost

Accoun ng costs are those that have already been considered during a product's produc on.
It only includes the purchase price.

Economic costs are what a business owner pays out of pocket for various alterna ve
projects. When making judgements, it entails taking opportunity cost into account.
 Assignment Set - 2

4) Infla on
Infla on can be defined as a condi on where prices increase quickly, and money's purchasing power
gradually depreciates. It alludes to both the decline in currency value and the typical rise in the
general level of prices.

Rising prices that reduces the purchasing power of money are a sign of infla on.

Causes Of Infla on
Infla on can occur due to any modifica on in Demand, Supply and Expecta ons of the market.
Below are the details on the factors for the cause of infla on.

a) Demand Side
An increase in the aggressive impact of demand causes infla on. In this instance, the total
demand for products and services is greater than the total supply. Supply is growing far more
slowly than demand.

The following factors contribute to a rise in effec ve demand.

1. Money supply.
Increased public borrowing, increased public spending, increased bank credit, payback of earlier
public debt owed to the people, financing of government deficits, and expansion of legal tender
money are all ways to increase the amount of money in circula on. Increase in the money supply
causes infla on.

2. Exports
A country's exports are less likely to be available due to domes cally accessible goods being in
higher demand abroad. This causes shortages across the na on, which drives up prices.

3. Disposable income.
A growth in disposable income among people increases aggregate effec ve demand. Increases in
na onal income while tax rates remain the same, lower tax rates, and a decline in the amount of
savings all increase disposable income.

4. Popula on growth
A country demands directly depends on its popula on. With higher popula on growth, demand
for goods and services also get higher.

5. Direct taxes
Lower rates in Direct taxes, will increase people's income, and results in purchasing of more goods
and services. This leads to rise of prices.

6. Indirect taxes
Higher rates in Indirect taxes causes price increase and results in infla on.

7. Savings
Savings directly affects the purchasing capacity of an individual. Which can cause change in
demand and price of goods and services.
b) Supply Side
Generally, there is not enough supply of products and services to sa sfy the rising demand for the
public. Supply therefore falls short of need and does not meet demand.

The following problems limits the expansion of the supply of goods and services.

1. Shortage in produc on
Raw resources, labour, capital equipment, and other components of manufacturing that are in
short supply cost more to use. An access demand situa on arises when supply is insufficient to
meet demand, which causes infla onary pressure in the economy.

2. Law of diminishing returns

The law of diminishing returns prevents producers from making huge purchases since increasing
output incurs increased costs. Because of this, the output won't increase propor onately to
sa sfy the growing demand. As a result, the supply cannot keep up with the demand.

3. Hoardings of goods
In order to avoid future price increases, consumers could hoard necessi es. This increases exis ng
demand, which drives up prices.

c) Expecta ons
Expecta ons play a part in escala ng infla on as well.

People's expecta ons of price rises might raise current aggregate demand, which drives up prices.
The pricing of connected commodi es is influenced by wage and pay expecta ons. Some
businesses o en raise prices even before pay increases are implemented because of expecta ons
of wage increases.
5) Pricing Policies
A thorough analysis of market structure reveals, the process of establishing a price in a market in
various condi ons. The pricing of a company's items is decided by applying varying set of rules and
procedures. Pricing policies are the guidelines, the management a er accoun ng for several internal
and external factors, customer needs, and company goals, establish a product's or service's price.

In the current economy, pricing is one of the significant studies of economic theory.

Objec ves Of Pricing Policy

In addi on to short-term objec ves, many firms also have long-term aspira ons. A company's pricing
strategy can be a crucial instrument for achieving a variety of objec ves, such as:

Profit

One of the most fundamental company objec ves is typically to make a profit and increase revenue.
Profit maximisa on may therefore be crucial for some businesses soon.

Pricing plan should be developed as a means of achieving this goal in order to maximise sales
revenue and profit. The highest possible profit is referred to as the "maximum profit". A company
should be able to both return its en re cost and create addi onal revenue above and above its
expenses in the short term. It may employ a price-skimming strategy, charging a very high price when
the product is first made available to sa sfy the needs of a select group of people.

As an alterna ve, it might use a penetra on pricing strategy, which over me charges a li le less in
later phases to draw in more customers.

In the long run, the conven onal profit maximisa on theory might be ineffec ve. The term
"op mum profit" refers to the degree of profit that is most desired or ideal. Therefore, in recent
years, a key element of a sound pricing policy has become earning the most equitable or op mal
profit.

Price Stability

This is also another crucial goal for a business. Price stability over me is a good indicator of a
company's effec veness. However, price stability cannot be a ained in prac se due to fluctua ng
costs. Every vendor seeks to preserve price stability in a market with few sellers. One producer sets
the price, and the others follow him. He takes the lead in fixing prices.

Limi ng Compe on

Depending on how a firm is set up, it can be able to provide a good at a cost that no other business
can match. Companies may u lise the policy to seize market share or to surpass compe tors as the
primary supplier of a good or service.
Increasing Market Share

Businesses may also develop a strategy to increase their market share because doing so has both
tac cal and financial benefits.

Customer Sa sfac on
Customers' expecta ons regarding the price they should pay for a product vary. Because of this,
businesses may set their prices for their goods and services in accordance with consumer
expecta ons.
6) Monetary Policy
Monetary Policy is a policy that controls the amount and rate of expansion of the money supply in an
economy. It is an effec ve strategy for controlling macroeconomic factors like unemployment and
infla on. It is only a programme of ac on carried out by the monetary authori es, frequently the
central bank, to control and manage the flow of credit as well as the supply of money to the public in
order to achieve economic stability and specific predetermined macroeconomic goals.

The total supply of legal tender money, which includes currency notes and coins, the total amount of
credit money, the level of interest rates, the exchange rate policy, and the general liquidity situa on
of a na on are all factors in monetary policy.

Objec ves of Monetary Policy

Below are the objec ves of monetary policy, with respect to developing countries.

o Infla on
Infla on levels might be the objec ve of monetary measures. A li le infla on is thought to be
good for the economy. A contrac onary policy can be used to combat high infla on.

o Economic Growth
Poli cians and economists from across the world have recently given economic development a
lot of a en on. To increase the na on's per capita income, we must also make use of our
natural, human, and other resources.

The bulk of the me, a country's per capita income determines its economy. Increasing per
capita income is an aim of monetary policy that is crucial if we want to strengthen the economy
of the country.

o Money Neutrality
Several dis nguished economists, notably Wick Steed and Robertson, are the main defenders of
the neutral money objec ve of monetary policy. According to the policy, the government must
work to keep money from being in sync with the country's economy. Any change in currency has
the poten al to cause economic instability. They argue that changing any aspect of policy will
have a detrimental effect on the en re state of the economy of the country.

Addi onally, they maintain that strict adherence to the neutral monetary policy will reduce
cyclical varia ons and shield the country's economy from trade cycles, infla on, and defla on.
The local government keeps the currency in check. The perfect stability of the money supply is
the key objec ve of this monetary policy objec ve.

o Banking
In order to increase public acceptance of the usage of diverse credit instruments, monetary
authori es must use crea ve and successful measures. They should start to accept banking
transac ons as a regular part of their lives.

It must offer several financial incen ves to persuade the average person to save money. It must
take the required steps to establish financial infrastructure in the na on and mobilise savings.

o Unemployment
The level of unemployment in the economy can be impacted by monetary policies. For instance,
a monetary policy that is expansionary tends to reduce unemployment since it encourages
economic ac vity and the growth of the labour market.
o Foreign Exchange Stability
A central bank can control the exchange rates between its own currency and other currencies by
using its budgetary authority.

For instance, the central bank might raise the amount of money available by issuing addi onal
money. The indigenous currency then becomes more affordable in comparison to its overseas
counterparts.

o Stability in the Balance of Payments

The balance of payments is another objec ve of monetary policy. A er the war, it was ini ally
made available. The main purpose of this monetary policy objec ve is to address the issue of
inadequate interna onal liquidity in global trade.

The increase in the payment balance deficit was thought to have lessened. Many less developed
countries cut back on imports, which has a nega ve effect on the economy and progress of the
country. As a result, this objec ve results in a balance in the payments.