Answer – 2016

1) Managerial Economics – Nature,Scope,Charaterstics

2) Determinants of Demand
3) Production Function
4) Price Formulation
5) Break Even Analysis
6) National Income
7) Business Cycle
8) Profit Planning
1).Managerial Economics : - Defintion , Nature ,
Charaterstics , Scope,Importance
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 Determinants of Demand

https://www.slideshare.net/SakshiAgarwal37/demand-and-its-determinants

There are various factors on which the market demand and individual demand for a product depends.
These factors are known as determinants of demand. The knowledge of the determinants of market
demand for a product and the nature of relationship between the demand and its determinants proves
very helpful in analyzing and estimating demand for the product. These factors can be summarized as
follows

(Write at least 6)

 Price of the product

 Price of Related goods

 Substitutes

 Complements

 Income of the Consumer

 Essential consumer goods

 Inferior goods
 Normal goods
 Prestige or luxury good
 Consumer’s taste and preferences
 Advertisement Expenditure
 Consumer’s Expectations of future Income and Price
 Population of the Country
 Demonstration Effect
 Credit Facility
 Growth of Economy

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 1. Price of the product

The price of a product is one of the most important determinants of its demand in the long run and the
only determinant in the short run. The quantity of the product demanded by the consumer inversely
depends upon the price of the product. If the price rise demand falls and vice versa. The relation between
price and demand is called Law of demand. It is not only the existing price but also the expected changes
in price which affect demand.

2. Price of Related goods

The demand for a commodity is also affected by the changes in the price of its related goods. Related
goods may be substitutes or complementary goods.

(a) Substitutes

Two commodities are substitutes for one another if change in the price of one affects the demand for the
other in the same direction. For example, X and Y are substitutes for one another. If price for X increases,
demand for Y increases and vice versa. Tea and coffee, hamburgers and hot dogs, Coke and Pepsi are
some examples of substitutes in the case of consumer goods.

Assuming goods X and Y to be substitutes for one another, the demand function for X and Y with respect
to the price of their substitutes can be written as follows:
(b) Complements

Complementary goods are those goods which complete the demand for each other, such as car and petrol
or pen and ink. There is an inverse or negative relationship between the demand for first good and price
of the second which happens to be complementary to the first. For example, an increase in the price of
petrol causes a decrease in the demand of car and other petrol run vehicles, other things remaining same.
The demand function for car (Dc) in relation to petrol (Pp) can be written as:

The relationship between the demand for a product (car) and the price of its complement (petrol) is
shown in the figure below:

3. Income of the Consumer

Income is the basic determinant of quantity of product demanded since it determines the purchasing
power of the consumer. Income as determinant of demand is equally important in both short run and
long run. The relationship between the demand for a commodity say, X and the household income Y,
assuming all other factors to remain constant, is expressed by a demand function such as :
Experience shows that numerically there is a positive relationship between income of the consumer and
his demand for a good. In other words, an increase in income would cause an increase in demand and
economists therefore call such goods as normal goods. Normal goods are goods for which an increase in
consumer’s income results in an increase in demand. There are some goods, however which are called
inferior goods. Inferior good is a good for which an increase in consumer’s income results in a decrease
in its demand.

Thus, relationship between income of the consumer and demand for a commodity is discussed with
reference to :

a) Essential consumer goods

b) Inferior goods

c) Normal goods

d) Prestige or luxury good

a) Essential consumer goods (ECG)

Essential consumer goods are those which serves the basic needs and are consumed by all persons of a
society e.g. food grains, vegetable oils, cooking fuel, salt, minimum clothing, housing etc. Quantity
demanded of this category of goods increases with increase in consumer’s income but only upto a
certain limit, even though the total expenditure may increase in accordance with the quality of goods
consumed, other factors remaining same. The relationship between goods of this category and
consumer’s income is shown by the ECG curve in the below figure. As shown in the figure consumer’s
demand for essential goods increases only until his income rises to It tends to saturate beyond this level
of income.

b) Inferior goods (IG)

Inferior goods are those goods, the demand for which tends to decline with increase in consumer’s
income and tends to increase with fall in his income. So, there is an inverse relationship between
income of the consumer and demand for the commodity. Inferior and superior goods are widely known
to both consumers and sellers. For example, every consumer knows that kerosene is inferior to cooking
gas, travelling by bus is inferior to travelling by taxi. The relation between income and demand for an
inferior good is shown by the curve IG in the figure. Demand for such goods rises only upto a certain
level of income say and declines as income increases beyond this level.

c) Normal goods (NG)

Normal goods are those goods the demand for which tends to increase with increase in consumer’s
income, and tends to decrease with decrease in his income. So there is a positive relationship between
consumer’s income and quantity demanded. Clothing, household furniture and automobiles are some of
the important examples of this category of goods. The nature of relation between income and demand
for the goods of this category is shown by the curve NG. As the curve shows demand for normal goods
increases rapidly with the increase in the consumer’s income but slows down with further increases in
income.

It may be noted from the figure that upto certain level of income () the relation between income and
demand for all types of goods is similar. The difference is only in degree.

d) Luxury and Prestige goods (LG)

All such goods that add to the pleasure and prestige of the consumer without enhancing his earning fall
in the category of luxury goods. For example, stone studded jewellery, costly cosmetics, luxury cars, stay
in 5 star hotels etc. can be treated as luxury goods. Demand for such goods arises beyond a certain level
of consumer’s income.

4. Consumer’s taste and preferences

The demand for any goods and service depends on individual’s taste and preferences. They include
fashion, habit, custom etc. Tastes and preferences of the consumers are influenced by advertisement,
changes in fashion, climate, new invention. Other things being equal, demand for those goods increases
for which consumers develop taste and preferences. Contrary to it, an unfavourable change in consumer
preferences and tastes for a product will cause demand to decrease.

5. Advertisement Expenditure

Advertisement costs are incurred with the objective of promoting sale of the product. help in increasing
the demand in the following ways:

1. By informing potential consumers about the product and its availability

 2. By showing its superiority over rival product

3. By influencing consumer’s choice against the rival products

4. By setting new fashions and changing tastes.

There are instances when have changed lifestyle of people. Cadbury India has revolutionized the market
for its leading product Dairy Milk through high profile advertising featuring Amitabh Bachchan with a
slogan “Kuch mitha ho jai”.

6. Consumer’s Expectations of future Income and Price

Consumers do not make purchases only on the basis of current price structure. Especially in case of
durables, when demand can be postponed, consumers decide their purchase on the basis of future price
and income. If they expect their income to increase or price to fall in future, they will postpone their
demand on the other hand if they expect price to increase in future they will hasten the purchase. For
example, purchase of cars and other durables increases before budget is announced if consumers fear
that prices may rise after budget. Or, when people expect pay revisions, they wait for major purchases till
pay is revised.

7. Population of the Country

Size of population, age distribution, rural urban distribution and gender distribution affect aggregate
demand. If population of a country is constantly increasing, more food items and other goods and services
will be needed to satisfy the needs of the people. Age distribution of the population determines what kind
of commodities will be demanded. If population mostly consists of aged people, there will be demand of
more medicines and health care services. On the other hand, if major section of population is youth, there
will be more demand for education, employment opportunities and designer apparels.

8. Demonstration Effect

When new commodities or new models of existing one appear in the market rich people buy then first.
For example, if new model of a car appears in the market, rich people would mostly be the first buyers.
Some people buy new models of goods because they have genuine need for them or have excess
purchasing power. Some others do so because they want to exhibit their affluence. But once new
commodities are in vogue, many households buy then bot because they have a genuine need for them
but because their neighbors have bought these goods. The purchase made by the latter category of the
buyers arise out of such feelings as jealousy, competition and equality in peer group, social inferiority and
the desire to raise their social status. Purchases made on account of these factors are the result of what
economists call “demonstration effect” or the “band- wagon effect”. These effects have positive effect on
demand. On the other hand, when commodity becomes the thing of common use, some people mostly
rich, decrease or give up the consumption of such goods. This is known as the “Sob Effect”. It has a
negative effect on the demand for the related goods.

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9. Credit Facility

Availability of credit to the consumers from the sellers, banks, relations and friends, or from other source
encourages the consumers to buy more than what they would buy in absence of credit availability. That
is why consumers who can borrow more can consume more than those who cannot borrow. Credit facility
mostly affects the demand for durable goods, particularly those which require bulk payment at the time
of purchase. The managers who are assessing the prospective demand for their products should,
therefore take into account the availability of credit to the consumers.

10. Growth of Economy

Economy’s growth rate determines the general mood of business and general standard of living. If an
economy is growing, it will have increased demands for goods of better quality. Consumers will have
higher paying capacity and greater willingness to pay higher for quality. Thus, producers will be under
pressure to produce good quality products and add variety to their existing products.

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 1) Production Function
https://www.slideshare.net/nethanp/production-managerial-economics

https://www.slideshare.net/tanveerabbott/production-function-15871760

https://www.slideshare.net/mansityagi3323/production-function-ppt-in-economics (Refer this one)

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 Price Formulation
http://www.yourarticlelibrary.com/managerial-economics/8-types-of-pricing-strategies-normally-
adopted-by-firms-economics/29028

https://www.slideshare.net/NavikaJoshi/pricing-methods-25725346

Cost-based Pricing:
Cost-based pricing refers to a pricing method in which some percentage of desired profit margins is
added to the cost of the product to obtain the final price. In other words, cost-based pricing can be
defined as a pricing method in which a certain percentage of the total cost of production is added to the
cost of the product to determine its selling price. Cost-based pricing can be of two types, namely, cost-
plus pricing and markup pricing.

These two types of cost-based pricing are as follows:

I. Cost-plus Pricing:

Refers to the simplest method of determining the price of a product. In cost-plus pricing method, a fixed
percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total cost to set
the price. For example, XYZ organization bears the total cost of Rs. 100 per unit for producing a product.
It adds Rs. 50 per unit to the price of product as’ profit. In such a case, the final price of a product of the
organization would be Rs. 150.

Cost-plus pricing is also known as average cost pricing. This is the most commonly used method in
manufacturing organizations.
In economics, the general formula given for setting price in case of cost-plus pricing is as follows:

P = AVC + AVC (M)

AVC= Average Variable Cost

M = Mark-up percentage

AVC (m) = Gross profit margin

Mark-up percentage (M) is fixed in which AFC and net profit margin (NPM) are covered.

AVC (m) = AFC+ NPM

ii. For determining average variable cost, the first step is to fix prices. This is done by estimating the
volume of the output for a given period of time. The planned output or normal level of production is
taken into account to estimate the output.

The second step is to calculate Total Variable Cost (TVC) of the output. TVC includes direct costs, such as
cost incurred in labor, electricity, and transportation. Once TVC is calculated, AVC is obtained by dividing
TVC by output, Q. [AVC= TVC/Q]. The price is then fixed by adding the mark-up of some percentage of
AVC to the profit [P = AVC + AVC (m)].

The advantages of cost-plus pricing method are as follows:

a. Requires minimum information

b. Involves simplicity of calculation

c. Insures sellers against the unexpected changes in costs

The disadvantages of cost-plus pricing method are as follows:

a. Ignores price strategies of competitors

b. Ignores the role of customers

iv. Markup Pricing:

Refers to a pricing method in which the fixed amount or the percentage of cost of the product is added
to product’s price to get the selling price of the product. Markup pricing is more common in retailing in
which a retailer sells the product to earn profit. For example, if a retailer has taken a product from the
wholesaler for Rs. 100, then he/she might add up a markup of Rs. 20 to gain profit.

It is mostly expressed by the following formulae:

a. Markup as the percentage of cost= (Markup/Cost) *100

b. Markup as the percentage of selling price= (Markup/ Selling Price) *100

c. For example, the product is sold for Rs. 500 whose cost was Rs. 400. The mark up as a percentage to
cost is equal to (100/400) *100 =25. The mark up as a percentage of the selling price equals (100/500)
*100= 20.

Demand-based Pricing:

Demand-based pricing refers to a pricing method in which the price of a product is finalized according to
its demand. If the demand of a product is more, an organization prefers to set high prices for products
to gain profit; whereas, if the demand of a product is less, the low prices are charged to attract the
customers.

The success of demand-based pricing depends on the ability of marketers to analyze the demand. This
type of pricing can be seen in the hospitality and travel industries. For instance, airlines during the
period of low demand charge less rates as compared to the period of high demand. Demand-based
pricing helps the organization to earn more profit if the customers accept the product at the price more
than its cost.

Competition-based Pricing:
Competition-based pricing refers to a method in which an organization considers the prices of
competitors’ products to set the prices of its own products. The organization may charge higher, lower,
or equal prices as compared to the prices of its competitors.

The aviation industry is the best example of competition-based pricing where airlines charge the same
or fewer prices for same routes as charged by their competitors. In addition, the introductory prices
charged by publishing organizations for textbooks are determined according to the competitors’ prices.

Other Pricing Methods:

In addition to the pricing methods, there are other methods that are discussed as follows:

i. Value Pricing:

Implies a method in which an organization tries to win loyal customers by charging low prices for their
high- quality products. The organization aims to become a low-cost producer without sacrificing the
quality. It can deliver high- quality products at low prices by improving its research and development
process. Value pricing is also called value-optimized pricing.

ii. Target Return Pricing:

Helps in achieving the required rate of return on investment done for a product. In other words, the
price of a product is fixed on the basis of expected profit.

iii. Going Rate Pricing:

Implies a method in which an organization sets the price of a product according to the prevailing price
trends in the market. Thus, the pricing strategy adopted by the organization can be same or similar to
other organizations. However, in this type of pricing, the prices set by the market leaders are followed
by all the organizations in the industry.

iv. Transfer Pricing:

Involves selling of goods and services within the departments of the organization. It is done to manage
the profit and loss ratios of different departments within the organization. One department of an
organization can sell its products to other departments at low prices. Sometimes, transfer pricing is used
to show higher profits in the organization by showing fake sales of products within departments.

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 Break Even Analysis

http://www.yourarticlelibrary.com/economics/the-break-even-analysis-explained-with-
diagrams-economics/29085

https://www.slideshare.net/asrar121/breakeven-analysis-36650460
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 National Income

https://www.slideshare.net/VasundharaGhose/presentation-on-national-income

https://www.slideshare.net/arnab2010/national-income-concepts

https://www.slideshare.net/rarichanm/national-income-42518576

http://mba-ocean.blogspot.com/2013/01/national-income-basic-concepts.html

https://www.scribd.com/presentation/252591902/Unit-v-Managerial-Economics#download

National Income is total amount of goods and services produced within the nation during the given
period say, 1 year.

National Income is total amount of goods and services produced within the nation during the given
period say, 1 year. It is the total of factor income i.e. wages, interest, rent, profit, received by factors of
production i.e. labour, capital, land and entrepreneurship of a nation.

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 Concepts of National Income

There are various concepts of National Income, such as GDP, GNP, NNP, NI, PI, DI, and PCI which explain
the facts of economic activities.

1. GDP at market price: Is money value of all goods and services produced within the domestic domain
with the available resources during a year.

GDP = (P*Q)

Where,

GDP = gross domestic product

P = Price of goods and services

Q= Quantity of goods and services

GDP is made up of 4 Components

 consumption
 investment
 government expenditure
 net foreign exports of a country

GDP = C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

1. Gross National Product (GNP): Is market value of final goods and services produced in a year by the
residents of the country within the domestic territory as well as abroad. GNP is the value of goods and
services that the country's citizens produce regardless of their location.

GNP=GDP+NFIA or,
 GNP=C+I+G+(X-M) +NFIA

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

NFIA= Net factor income from abroad.

1. Net National Product (NNP) at MP: Is market value of net output of final goods and services produced
by an economy during a year and net factor income from abroad.
NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M) +NFIA- IT-Depreciation

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

NFIA= Net factor income from abroad.

IT= Indirect Taxes

1. National Income (NI): Is also known as National Income at factor cost which means total income earned
by resources for their contribution of land, labour, capital and organisational ability. Hence, the sum of
the income received by factors of production in the form of rent, wages, interest and profit is called
National Income.

Symbolically,
NI=NNP +Subsidies-Interest Taxes
or, GNP-Depreciation +Subsidies-Indirect Taxes
or, NI=C+G+I+(X-M) +NFIA-Depreciation-Indirect Taxes +Subsidies

1. Personal Income (PI): Is the total money income received by individuals and households of a country
from all possible sources before direct taxes. Therefore, personal income can be expressed as follows:

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits- Social Security Contribution

+Transfer Payments.
2. Disposable Income (DI) : It is the income left with the individuals after the payment of direct taxes from
personal income. It is the actual income left for disposal or that can be spent for consumption by
individuals.

Thus, it can be expressed as:

DI=PI-Direct Taxes

1. Per Capita Income (PCI): Is calculated by dividing the national income of the country by the total
population of a country.

Thus, PCI=Total National Income/Total National Population

Measurement of National Income

There are three methods to calculate National Income:

1. Income Method
2. Product/ Value Added Method
3. Expenditure Method

 INCOME METHOD

In this National Income is measured as flow of income.

We can calculate NI as:

NET NATIONAL INCOME = Compensation of Employees+ Operating surplus mixed (w +R +P +I) + Net
income + Net factor income from abroad.

Where,

W = Wages and salaries

R = Rental Income

P = Profit

I = Mixed Income
 Product/ Value Added Method

In this National Income is measured as flow of goods and services.

We can calculate NI as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES

 Expenditure Method

In this National Income is measured as flow of expenditure.

We can calculate NI through Expenditure method as:

National Income=National Product=National Expenditure.

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 Business Cycle
https://www.slideshare.net/AWAIS008/business-cycle-11905024

https://www.slideshare.net/anuragnvs/phases-of-business-cycle

https://www.slideshare.net/nethanp/business-cycle-managerial-economics

https://www.slideshare.net/ujjmishra1/business-cycles-28840557

https://www.youtube.com/watch?v=Y5jr_zv2Y9M

https://corporatefinanceinstitute.com/resources/knowledge/economics/business-cycle/ (Refer this)

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 Profit Planning
https://www.slideshare.net/firozmuhuammed/profit-analysis-and-profit-policies
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