Monday, November 5, 2012


1. What is managerial economics?
· It is the integration of economic theory with business practice for the purpose of
facilitating decision making and for the purpose of facilitation decision making and
forward planning by management.
· It is an application of that part of microeconomic principles such as demand, production,
cost, pricing, market structure and government regulations which focused attention on
managerial enterprises.
2. Define managerial economics
1. “Managerial economics refers to those aspects of economics and its tools of analysis
most relevant to the firm’s decision-making process”
2. “Managerial economics consists of the use of economic modes of thought to analyse
business situations”
3. Define Marginal and Incremental principle
This principle states that a decision is said to be rational and sound if given the firm’s objective of
profit maximization, it leads to increase in profit, which is in either of two scenarios-
· If total revenue increases more that total cost.
· If total revenue declines less than total cost.
4. State the law of equi-marginal principle
The laws of equi-marginal utility states that a consumer will reach the stage of equilibrium when
the marginal utilities of various commodities he consumes are equal.
5. What is time perspective principle?
According to this principle, a manager/decision maker should give due emphasis, both to shortterm
and long-term impact of his decisions, giving apt significance to the different time periods
before reaching any decision.
6. State discounting principle.
According to this principle, if a decision affects cost and revenues in long run, all those costs
and revenues must be discounted to present values before valid comparison of alternatives is
7. What is firm?
A firm is a unit engaged in production of goods and services. The term firm includes all those
enterprises which are related with the production not only of goods but also of services.
8. Define sole proprietorship
It may be a single owner or proprietary firm in which an individual invests his own or borrowed
capital, uses his own skills in management, and is solely responsible for the results of operations. The
profit or losses are not shared with anyone.
9. Define partnership
It is “relation between persons who have agreed to share the profits of a business carried on by all or
any of them acting for all”
10. What is profit maximization of a firm?
It means the largest absolute amount of profits over a time period, both short term and long term.
Short term is a period where adjustments cannot be made quickly in matters of supply and demand.
Long run however enables adjustment to changed conditions.
11. What is uncertainty?
Uncertainty is a state where there is an unawareness of all the alternatives and so also the outcomeseven
for the known alternatives.
12. What is decision making?
It is process which includes identifying and defining the nature of the situation, identifying acceptable
alternative courses of action, choosing the “best” one and placing it into operation.
13. Write down the steps involved in decision making.
Identifying the problem.
Analyzing the problem
Developing alternative solution for the problem
Evaluating the alternatives
Deciding the best course of action
Conversion of decision into action
14. What is decision analysis?
It is the art and science of formal decision making. It is often employed in making business decisions
reach optimal decisions in an uncertain situation.
15.Differentiate between desire and demand for a commodity.
A desire is just a wish for a commodity and a person may desire for any number of commodities
without having the capacity to buy it from the market. A desire becomes demand when it is backed by
ability and willingness to pay the price for a commodity.
16. What is derived demand?
It is the demand which has been derived from the demand of some other commodity that it helps to
produce e.g. demand for bricks is derived from the demand for construction of a house.
17. What is composite demand?
The demand for a commodity which can be put to several uses and an satisfy two or more than two
wants is called composite demand.
The relationship between the demand for goods and the price of complementary goods is inverse.
When the price of complementary goods falls its demand would increase. It would increase the
demand for goods as they are going to be used along with the complementary goods.
18.State the law of diminishing marginal utility.
It states that with successive increase in the units of consumption of a commodity, every additional
unit of that commodity gives lesser satisfaction to the consumer. Consumption beyond point of
19. What is the meant by the income effect?
Income effect is a part of the price effect. When the price of commodity falls, real income or the
purchasing power of the consumer increase. As a result more of the goods will be demanded due to
increase in real income is called the income effect of the price change.
20. What is meant by the substitution effect?
It is a part of price effect. When the price of a commodity falls, it becomes relatively cheaper than its
substitutes. So the people who were consuming other goods would now start consuming the
commodity whose price has fallen, as a result its demand increases.
21.What are the assumptions of law of demand?
1. Price of related goods remains constant
2. Income of the consumer does not change
3. Tastes and preferences of the people remain unchanged.
22. What are the factors which affect the price elasticity of demand for a commodity?
1. Nature of the commodity
2. Availability of substitutes
3. Share in the total expenditure
4. Different uses of a commodity.
23.What are inferior goods?
It is one which has a lower priority in order of consumer’s preferences because better substitutes exist
which the consumer perceives to be superior. A consumer demands inferior goods when he does not
have adequate income although he may have desire for superior goods.
24. State the assumption of the law of supply
1. Price of related goods remains unchanged
2. Technology of production should not change.
3. Cost of factors of production should remain the same
4. Goals of the firm should not change.
25. Give any three factors affecting elasticity of supply.
1. Nature of commodity
2. Cost of production
3. Time element
26. What are the determinants of supply?
1. Price of the product
2. Technology changes
3. Resources supplies
4. Tax/subsidy
5. Expectations about future price
6. Price of other goods purchased
27. Define market demand.
Market demand is the total quantity demanded by all the purchasers together.
28. What is capital?
It is the value of resources owned and deployed in a business. Initially, business promoters provide
capital either from their won sayings or loans from outside. This cash is converted into assets such as
land building, plant and machinery, etc.
29. State the law of supply.
The law of supply states that the quantity of a commodity supplied varies directly with the price,
other determinants of supply remaining constant.
30.Define price elasticity of supply.
Price elasticity of supply measures the relationship between change in quantity supplied and a change
in price.
31. What is disequilibrium?
When supply and demand are equal the economy is said to be at equilibrium. At this point, the
same as the amount of goods being demanded.
32. What is fixed cost?
Fixed costs are the costs which do not change with change in the level of output. Fixed costs
include the following expenses:
1. Rent of the building used for business.
2. Wages of permanent employees.
33. Define marginal cost
Marginal cost is the change in total cost by producing an additional unit of output.
34. State the factors influencing pricing decisions.
1. Cost of manufacturing
2. Objectives and policies of management
3. Demand of the product
4. Competitor’s influences in the market
5. Purchasing power of the consumer
6. Distribution strength of the firm
7. Government policies
35. Explain short run period in economics.
It is defined as a period during which at least one element of factor input is in fixed input is in fixed
supply, the fixed factor input is plant and equipment.
36. State and explain the law of demand?
The law of demand states, that other things being equal, demand expands when price falls and
contracts when price rises.
37. Define Cross-elasticity of demand.
Cross elasticity of demand is the responsiveness of demand for a commodity, say ‘x’, to a given
change in the price of a related commodity, say ‘y’.
38. List out the different methods of demand forecasting.
1. Delphi method
2. Nominal group method
3. Market research method
4. Sales force composite method
5. Simple average method
6. Moving average method
7. Trend projection method
8. Correlation regression method
39. What is meant by incremental cost?
Incremental cost is the additional cost due to a change in the level or nature of business actitvity.
40. What is break- even point?
Break-even point for a firm occurs where it’s TR=TC, i.e., total revenue equals total costs. The firm
in this situation makes normal profits only or it is a no profit- no los situation. The long run
equilibrium of all competitive firms will occur only at the break-even point.
41. List out the various pricing policies in India.
1. Skim pricing
2. Penetration pricing
3. Mixed pricing
4. Absorption cost pricing
5. Market pricing
6. Sealed-bid pricing
42. What is meant by opportunity cost?
Opportunity cost of a factor refers to is value in its next best alternative use.
It is also known as transfer earnings on the cost of foregone alternatives.
43. What is per capita income?
Per capita income means the amount of income per person, calculated by dividing the total
income of a group by the number of individuals comprises.
44. What is survey method of forecasting?
It is a systematic gathering, recording and analyzing of primary data through survey which is
conduction of interview with a target population by administration structured questionnaire.
45. What is average cost?
Average cost is per unit cost of producing a commodity, i.e., total cost divided by the number of
units of output.
46. Explain fixed cost.
These are the costs incurred on fixed factor inputs. Remains fixed at all levels of output. Fixed
costs are incurred even at zero output level.
47. What are the pricing methods?
1. Cost-plus pricing method
2. Break-even analysis method
3. Target rate-of-return method
4. Leadership pricing method
5. Going rate pricing method
6. Marginal cost pricing method
48. What is price index?
The ratio of one or combination prices to the price of the same item or combination of items at a
different time.
49. Name the factors influencing demand.
1. Changes in the price of other goods.
2. State of trade
3. Changes of taste and fashion
4. Changes in the quantity of money
5. Changes in the size of population
6. Changes in real income
7. Advertisement expenditure
8. Changes in availability of credit
50. What is demand forecasting?
Demand forecasting is the estimate of level of demand amount or quantity to be expected for
goods or services for some period of time in the future.
51. Define incremental cost.
It is the additional cost due to a change in the level of business activity. The change may take several
forms, like addition of new products, adding new machines etc.
52. What is meant by perfect competition?
It is usually, another name for pure competition. According to some writers, a market characterized
by pure completion, complete freedom of entry, and no special advantages of any seller over another,
along with total mobility of productive factors from one industry to another.
53. Define imperfect competition.
A market situation in which neither absolute monopoly nor perfect competition prevail; a situation
closest to real life in most circumstances.
54. List three semi-variable costs.
1. Electricity charges
2. Telephone charges
3. Depreciation
4. Maintenance expenses
55. Define ‘perfect completion’
It is a market situation in which there is a large number of buyers and sellers and a uniform price
prevails in the market. Individual buyers and sellers cannot influence price.
56. Define monopolistic competition
It is a market situation in which both the monopolistic element and the competitive element are
present. There is a large number of buyers and sellers and the existence of differentiate produced
where firms can enter or leave the industry freely.
57. Define monopoly
A monopoly is a market situation in which there is a single seller of the commodity with no close
substitutes available in the market. The single seller can influence the price by varying his sales.
58. Define oligopoly
Oligopoly is a market situation in which there are a few sellers of the commodity, each producing a
substantial proportion to the total output of the industry.
59. Explain the basic economic concept of scarcity.
Scarcity is a relative term, indicating shortage in relation to demand. It is only because of scarcity that
price exists.
60. What is meant by supply in economics?
Supply is the amount of commodity or service which will be offered for sale at a given price per unit
of time.
61. Explain the relationship between cost and output.
The cost of production in an industry depends on the rate of output which is important in economic
analysis of cost. The relationship between cost and output determines the cost function.
62. List the main difference between short term and long term cost.
The short term cost are cost which are recurring but the long term cost are used over a period of time
i.e., the time duration is longer. For example, capital investment is a long term cost whereas the
purchase of raw-materials is a short-term cost.
63. What is monopolistic competition?
It is a market situation in which competition exists between each of two or more sellers whose
products are close, but not perfect, substitutes for one another. Products are differentiated by means of
distinctive brand names, variations in preparation and presentation and bye advertising.
64. What is full-cost pricing?
Full- cost pricing is one of the popular methods of pricing under which the final price of a product is
determined after adding some markup to the full cost.
65. Define safety margin
Safety margin is the difference between the actual sales quantity and the break-even sales quality
expressed in monetary terms or as a percentage.
66. What are producer’s goods? Give examples.
Producer’s goods are economic goods made for the purpose of producing consumer goods and other
capital goods. Example: machinery of all kinds, cotton, cement, process materials, components parts
67. State four pricing methods employed by businessmen.
1. Full costpricing
2. Target rate of return pricing
3. Going rate pricing
4. Sealed-bid pricing.
68. What is increase in demand?
Increase in demand occurs when the price falls.; this will be illustrated by the downward
sloping curve of demand curve.
69. Name the types of elasticity of demand.
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
70. What is utility?
It is the capacity of a good or service to satisfy a human want. Utility cannot be measured in any
definite quantitative form.
71. List the various types of competitions existing in the market.
1. Perfect competition
2. Imperfect competition
3. Monopolistic competition
4. Oligopoly
5. Monopoly
6. Monopsony
7. Oligopsony
72. What is engineering economics?
Engineering economics is concerned with the application of economic principles to engineering
73. What are the various methods of presenting comparative financial statement?
1. Ratio analysis
2. Funds flow statement
3. Cash flow statement
4. Comparative income statement
5. Comparative balance sheet
6. Common size statement
7. Trend percentage
74. What is balance sheet?
The balance sheet comprises of a list of assets, liabilities and capital fund at a given date. It sets
forth the financial condition of a business concern as revealed by the accounting records.
75. Explain rate of return.
It is the ratio of return from the investment of a sum of money over a period to the amount of money
invested. Also know as yield or accounting rate of return on investment.
76. Define capital budgeting
It can be defined as a function which is concerned with designing and carrying through a systematic
investment programme for acquiring fixed assets. Such as land, building, plant, equipments etc.
77. Define pay back period
It is the length of time it will take an investment to return what was put in. this technique is generally
used for forecasting when a project will reaches breakeven point.
78. Define cash flow.
It is the amount of cash being received and expended by a business, which is often analysed into its
various components. It projection sets out all the expected payments and receipts in a given period.
79. What is ratio analysis?
An analysis of financial statements based on ratios is known as ratio analysis. A ratio is a
mathematical relationship between two or more items taken from the financial statements.
80. What are the components of cost?
1. Prime cost
2. Factory cost
3. Office cost
4. Total cost