MBA0042- MANAGERIAL ECONOMICS

Rohit Yadav
japezopo@gmail.com
9711860287
Question 1- Inflation is a global Phenomenon which is associated with high price causes decline in
the value for money. It exists when the amount of money in the country is in excess of the physical
volume of goods and services. Explain the reasons for this monetary phenomenon. (10marks)
Answer- Popularly, inflation is associated with high prices, which causes a decline in the value of
money. Inflation is commonly understood as a situation of substantial and rapid increase in the level
of prices and consequent deterioration in the value of money over a period of time. It refers to the
average rise in the general level of prices and fall in the value of money. Inflation is an upward
movement in the average level of prices. The opposite of inflation is deflation, a downward
movement in the average level of prices. The common feature of inflation is rise in prices and the
degree of inflation may be measured by price indices.
There are certain reasons for inflation. First we will discuss about Demand side operations:1.) Increase in money supply- Supply of money in circulation increases on account of the
following reasons: deficit financing by the government, repayment of past debt by the
government to the people, increase in legal tender money and public borrowing.
2.) Increase in disposable income- Aggregate effective demand rises when disposable income
of the people increases. Disposable income rises on account of the following reasons:
reduction in the rate of the taxes, increase in national income while tax level remains
constant, and decline in the level of savings.
3.) Increase in private consumption expenditure and investment expenditure- An increase in
private expenditure both on consumption and on investment leads to emergence of excess
demand in an economy. When business is prosperous, business expectations are optimistic
and prices are rising. More investments are made by private entrepreneurs causing an
increase in factor prices. When the income of the factors rise, there is no more expenditure
on consumer goods.
4.) Increase in exports- An increase in the foreign demand for a countrys exports reduces the
stock of goods available for home consumption. This creates shortages in the country
leading to a rise in price level.
5.) Increase in population growth- This creates an increase in demand for many types of goods
and services in a country.
6.) High rates- Higher rates of indirect taxes would lead to a rise in prices.
7.) Reduction in the rates of direct taxes- This would leave more cash in the hands of people
inducing them to buy more goods and services leading to an increase in prices.
8.) Reduction in the level of savings- This creates more demand for demand and services.

Supply side: - Generally, the supply of goods and services do not keep pace with ever increasing
demand for goods and services. Thus, supply does not match the demand. Supply falls short of
demand. Increase in supply of goods and services may be limited because of the following reasons.
1.) Shortage in the supply of factors of production- When there is shortage in the supply of
factors of production like raw materials, labour, capital equipments, etc. there will be a rise
in their prices. Thus, when supply falls short of demand, a situation of excess demand
emerges creating inflationary pressures in an economy.
2.) Hoardings by traders and speculators- During the period of shortage and rise in prices,
hoardings of essential commodities by traders and speculators with the objective of earning
extra profits in the future creates an artificial scarcity of commodities. This creates a
situation of excess demand paving the way for further inflation.
3.) Hoardings by consumers- Consumers may also hoard essential goods to avoid payment of
higher prices in the future. This leads to an increase in the current demand, which in turn
stimulates prices.
4.) Role of trade unions- Trade union activities leading to industrial unrest in the form of strikes
and lockouts also reduce production. This will lead to creation of excess and lockouts also
reduce production. This will lead to creation of excess demand that eventually brings a rise
in the price level.
5.) Role of natural calamities- Natural calamities such as earthquake, floods and drought
condition also affect the supplies of agriculture products adversely. They also create
shortage of food grains and raw material, which in turn creates inflationary conditions.
6.) War- During the period of war, shortage of essential goods creates a rise in products.
Role of expectations:Expectations also play significant role in accentuating inflation. The following points are worth
mentioning:
1.) If people expect further rise in price, the current aggregate demand increases, which in turn
causes a rise in the prices.
2.) Expectations about higher wages and salaries affect the prices of related goods.
3.) Expectations of wage increase often induce some business houses to increase prices even
before upward wage revisions are actually made.
Question 2- Monopoly is the situation there exists a single control over the market producing a
commodity having no substitutes with no possibilities for anyone to enter the industry to
compete. In that situation, they will not charge a uniform price for all the customers in the market
and also the pricing policy followed in that situation.
Answer- A market structure characterized by a single seller, selling a unique product in the market.
In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close
substitute. In a monopoly market, factors like government license, ownership of resources,
copyright and patent and high starting cost make an entity a single seller of goods. All these factors
restrict the entry of other sellers in the market. Monopolies also possess some information that is
not known to other sellers.

Characteristics associated with a monopoly market make the single seller the market controller as
well as the price maker. He enjoys the power of setting the price for his goods.
1.) Large Number of Sellers: There are large numbers of firms selling closely related, but not
homogeneous products. Each firm acts independently and has a limited share of the market.
So, an individual firm has limited control over the market price. Large number of firms leads
to competition in the market.
2.) Product Differentiation: Each firm is in a position to exercise some degree of monopoly (in
spite of large number of sellers) through product differentiation. Product differentiation
refers to differentiating the products on the basis of brand, size, colour, shape, etc. The
product of a firm is close, but not perfect substitute of other firm.
Implication of Product differentiation is that buyers of a product differentiate
between the same products produced by different firms. Therefore, they are also willing to
pay different prices for the same product produced by different firms. This gives some
monopoly power to an individual firm to influence market price of its product.
3.) Selling costs: Under monopolistic competition, products are differentiated and these
differences are made known to the buyers through selling costs. Selling costs refer to the
expenses incurred on marketing, sales promotion and adver-tisement of the product. Such
costs are incurred to persuade the buyers to buy a particular brand of the product in
preference to competitors brand. Due to this reason, selling costs constitute a substantial
part of the total cost under monopolistic competition. There are no selling costs in perfect
competition as there is perfect knowledge among buyers and sellers. Similarly, under
monopoly, selling costs are of small amount (only for informative purpose) as the firm does
not face competition from any other firm.
4.) Freedom of Entry and Exit: Under monopolistic competition, firms are free to enter into or
exit from the industry at any time they wish. It ensures that there are neither abnormal
profits nor any abnormal losses to a firm in the long run. However, it must be noted that
entry under monopolistic competition is not as easy and free as under perfect competition.
5.) Lack of Perfect Knowledge: Buyers and sellers do not have perfect knowledge about the
market conditions. Selling costs create artificial superiority in the minds of the consumers
and it becomes very difficult for a consumer to evaluate different products available in the
market. As a result, a particular product (although highly priced) is preferred by the
consumers even if other less priced products are of same quality.
6.) Pricing Decision: A firm under monopolistic competition is neither a price- taker nor a pricemaker. However, by producing a unique product or establishing a particular reputation,
each firm has partial control over the price. The extent of power to control price depends
upon how strongly the buyers are attached to his brand.
7.) Non-Price Competition: In addition to price competition, non-price competition also exists
under monopolistic competition. Non-Price Competition refers to competing with other
firms by offering free gifts, making favorable credit terms, etc., without changing prices of
their own products. Firms under monopolistic competition compete in a number of ways to
attract customers. They use both Price Competition (competing with other firms by reducing
price of the product) and Non-Price Competition to promote their sales.

Question 3- Define monopolistic competition and explain its characteristics.

Answer-

Question 4- When should a firm in perfectly competitive market shut down its operation?
AnswerQuestion 5- Discuss the practical application of Price elasticity and Income elasticity of demand.
AnswerQuestion 6- Discuss the scope of managerial economics.
Answer-