Unit 1 Management e Book

DIWAKAR EDUCATION HUB
BUSINESS MANAGMENT
&MANGERIAL
ECONOMICS
UNIT-1 MANAGEMENT
PREPERED BY – DIWAKAR RAJPUT
2019
N0.1 SUPPORATIVE INSTITUTE UGC-NET

Management: Concept, Definition and
Process
Concept of Management:
One way to analyse management is to think in terms of what a manager does.
Using this approach, we can arrive at the management process which describes
the work of any manager.
The management work can divided into a few basic functions of

management, viz:
(1) Planning,
(2) Organising,
(3) Directing,
(4) Controlling.
Planning is the determination of objectives and formulation of plans, strategies,

programmes, policies, procedures and standards needed to achieve the desired
organisation objectives. To implement the plans there must be some organisation
structure.
The human and material resources or inputs are allocated to the various units
and relationships are established among the sub-units. Organising is the second
function of a manager. Organising is the process of developing a structure among
people, function, and physical facilities to execute the plans and achieve stated
objectives.
The third function of a manager is that of directing stimulating and motivating

people in the organisation to undertake willingly the desired actions as per
predetermined plans and objectives. Motivation is an integral part of direction to
assure desired results.
The fourth and final function of management is that of controlling to assure

directed action as per plans and objectives. Controlling incorporates the
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establishment of standards, measurements and comparison of actual results
against the standard, and necessary corrective action to remove deviations from
the plan.
Experts agree that management is a distinct type of activity primarily responsible

to get things done through other people, and it is different from all other types of
human activities. Similarly they also agree that all managerial functions are
universal and all managers in any field of human efforts perform those typical
managerial functions irrespective of what they are managing.
However, we do not have unified views of authorities on what are the managerial
functions and what is management precisely. The differences of opinion and
approach are reflected in the following often quoted definitions of management.
1. “To manage is to forecast, to plan, to organise, to command, to co-

ordinate and to control.” —Henry Fayol. It attempts to describe management
in terms of what a manager does, and not what management is.
2. “Management is a multipurpose organ that manages a business and
manages manager, and manages worker and work.”— P. Drucker: The
Practice of Management
Drucker stresses three jobs of management:
(i) Managing a business;
(ii) Managing manager; and
(iii) Managing workers and work.
Even if one is omitted, we would not have management any more and we also
would not have a business enterprise or an industrial society. According to P.
Drucker, the manager has to balance and harmonies three major functions of the
business enterprise.
Hence, a manager is a dynamic and life-giving element in every business. Without

efficient management we cannot secure the best allocation and utilisation of
human, material and financial resources.
Definitions of Management:
(i) Generalized Definition of Management:
Management is a distinct ongoing process of allocating inputs of an organisation
(human and economic resources) by typical managerial functions (planning,

organising, directing and controlling) for the purpose of achieving stated
objectives, viz., output of goods and services desired by its customers
(environment).
In the process, work is performed with and through personnel of the organisation
in an ever-changing business environment.
This definition include principal ideas of any school of management

thought:
(1) Functional school sees management as a process of planning, organising,
directing and controlling.
(2) Behavioural school is not interested in the process only but rather in the way
the process affects the organisation, i.e., with and through personnel or human
resources.
(3) Quantitative school wants to improve the quality of decision making, i.e.,
fulfilling the stated objectives of the enterprise.
(4) Systems approach concentrates on the entire organisation, i.e., inputs-

process-outputs.
(5) Contingency approach emphasises dynamic nature of management process in

an ever-changing business environment.
(ii) Precise Definition of Management:

Let us formulate a precise definition of management. It should be the basis of our
study of the principles of management. The substance of management should be
identified as a process. A process is something that a person does.
A process also implies ongoing and unceasing cyclical operations. In management

we have planning-action-control cycle. Our definition must incorporate this
management cycle. A process indicates the dynamic nature of management.
It also implies that change is a constant reality of organisational life and

management is the management of change. Lastly, management is regarded as a
social process because it is directly concerned with management of human
resources in order to secure cooperation and teamwork from the people in their
performance,

There are twin purposes of the management process:
(1) Maximum productivity or profitability and
(2) Maximum human welfare and satisfaction.
There are five parts to a definition of management as a process: first, the co-
ordination of resources; second, the performance of managerial functions as a
means of achieving co-ordination; the third, establishing the objective or purpose
of management process, i.e., it must be purposeful managerial activity; the fourth
aspect is that management is a social process, and the fifth is its cyclical nature.
Let us describe each part separately:

1. Management is Co-Ordination:
The manager of an enterprise must effectively coordinate all activities and
resources of the organisation, namely, men, machines, materials and money the
four M’s of management.
2. Management is a Process:
The manager achieves proper co-ordination of resources by means of the
managerial functions of planning, organising, staffing, directing (or leading and
motivating) and controlling.
3. Management is a Purposive Process:

It is directed toward the achievement of predetermined goals or objectives.
Without an objective, we have no destination to reach or a path to follow to arrive
at our destination, i.e., a goal, both management and organisation must be
purposive or goal-oriented.
4. Management is a Social Process:

It is the art of getting things done through other people.
5. Management is a Cyclical Process:

It represents planning-action-control-re-planning cycle, i.e., an ongoing process
to attain the planned goals.
(iii) Management — an Art, A Science or A Profession?

Science implies existence of a body of knowledge in a systematized form based
upon careful observation, accurate measurement, experimentation and inferences
or conclusions derived from detailed analysis of data, i.e., facts and figures.

The knowledge is verifiable through experiments giving us the cause-effect
phenomenon. In other words, science provides the theory, principles and the laws
on any branch of human knowledge. Science gives knowledge which in turn gives
power for application.
Management is a developing science. It has now evolved certain basic principles

and elements in the form of process of management which has universal
application in each branch of human activity profit-making as well as non-profit
organisations. However, management is riot comparable to exact sciences like
physics, chemistry, biology, etc. It deals with human beings and it is a social
science like the science of economics.
It is quite obvious that principles of management are not fundamental truths and
their application may not yield the desired results always. Human behaviour is
ever-changing and most unpredictable. It is not governed by the laws of
mechanics.
A human being is not an inanimate machine. Hence, management dealing with

complex human beings is bound to be an inexact science. Even then theoretical
base of knowledge is essential for developing sound practice. In fact, theory must
be supplemented by practical knowledge continuously. Science and art are
complementary and each supplements the other.
Art reflects practical application of knowledge and it is perfected through

knowledge and experimentation. Art is not only based on knowledge but it
derives its inspiration through intuition, inspiration and such other purely
subjective attributes.
A manager is not only a scientist but also an artist. As a scientist, he relies on the
existing theory and philosophy of management and develops new knowledge, new
principles and new schools of management thought.
As an artist, he has to depend on his own experience, intuition and judgment

while making a decision on any managerial problem and taking action on the
decisions to realise the set objectives. Scientific attitude and scientific method
shall be applied in problem-solving approach, e.g.. marketing research, business
research, etc. But decision making cannot be totally reduced to science.
In reality, human judgement and experience enjoy the veto power in decision and
as a decision-maker a manager is an artist. In the ultimate analysis, decision

making, the heart of management, is an Art, to be acquired by conscious effort
and practice.
‘Knowledge is power’ is an old saying. But to be correct the saying should be

‘Applied knowledge is power.’ Neither science should and the art of management
go together hand-in-hand and both are mutually interdependent and
complementary. Theoretical teaching of medicine and engineering is almost
invariably accompanied by practical work in a hospital or workshop.
Planning and organising are called mechanics of management and indicate

emphasis on the science of management, whereas direction (including
communication), motivation, coordination and control are the dynamics of
management emphasizing the art of management. Getting work done through
people is an art of management.
It is a tough job demanding initiative, drive, tact, discretion and other higher
qualities. We need artistic managerial ability to perform a managerial job. The art
of management is fully reflected in the decision making capacity of a manager.
Judgment and imagination are essential even in a computerised economy. A
computer cannot replace a manager in decision making.
“A professional manager is one who specialises in the work of

planning, organising, leading and controlling the efforts of others and
does so through systematic use of classified knowledge, a common
vocabulary and principles and who subscribes to the standards of
practice and code of ethics established by recognised body.” — Louis A.
Alien.
Managerial revolution has brought about separation of management from
ownership in corporate management in all countries slowly but steadily. Hence,
management is assuming a professional character during the last three decades.
1. Body of Knowledge:
Management has now developed a specialised body of management theory and
philosophy. Management literature is growing in all countries. In fact,
management knowledge is the best passport to enter the world of employment.
2. Management Tools:
Topis of management have been developed such as, accounting, business law,
psychology, statistics, econometrics, data processing, etc. These branches of

management profession have enhanced the practical utility of the science of
management.
3. Separate Discipline:
Management studies in many universities and institutions of higher learning are
recognised as a separate discipline. Since, 1951, we have even specialised schools
of management offering master’s degree in business management and
administration.
Seminars, special courses, training programmes are becoming fashionable and

popular for orientation and retraining in management areas, e.g., export
management, personnel management, general management, production
management, marketing management, financial management, etc.
4. Specialisation:
There is a growing tendency to select and appoint highly qualified, trained and
experienced persons to manage the business in each functional area of
management. Thus we have today an increasing tendency in favour of
management by experts or professionals.
5. Code of Conduct:
Enlightened businessmen have recognised that business management is a social
institution and it has social responsibilities to be fulfilled — towards customers,
employees, and the public or community. Corporations have now social
conscience and awareness.
Consumer-oriented marketing concept is the reflection of a corporate code of

conduct. Pressure of consumerism, trade unionism, public opinion, and
legislation are definitely inducing the management to evolve a code of ethics. No
longer ‘buyer beware’ is ruling the exchange relations in the market. Now we have
‘seller beware’ in place of ‘buyer beware’ influencing market practices.
6. Professional Association:
We have now Business Management Associations in many countries to promote
the spread of knowledge in all management areas and to build up the bright
public image of managerial profession.

Process of Management:
Principles of Management:
Followers of Fayol gave other principles of management such as universality of
management, control by exception, equality of authority and responsibility,
power and accountability and co-ordination.
By introducing two modifications in Fayol’s concepts, we could easily

install the foundation of modern management theory:
(1) Management is the planning, organising, command, co-ordination and control
of technical, financial, commercial, accounting and security activities.
(2) It is not command but motivation which can help us to understand why men
and women work and how to secure from them maximum productivity.
Thus we substitute motivation for command. Direction and command are not
enough to get things done through people. The manager of today has to
encourage, communicate, develop and stimulate his employees to secure higher
output. Modern management places the greatest emphasis on motivation as the
key to productivity.
The pattern of management that developed in Du Pont Company had a far-

reaching influence on modern business enterprise. The writings of Taylor and
Fayol stimulated further investigations into the theory of management and its
application to business. The example of Du Pont provided a pattern that was
followed with great success by many other companies.
The works of Taylor and Fayol the two pioneers in the evolution of
managerial thought are in reality complementary:

(1) They both pointed out that the problem of personnel and its management at
all levels is the master-key to industrial productivity and progress.
(2) Both implied scientific approach and scientific method to solve the
management problems.
(3) Taylor worked primarily on the operative level from the bottom of the
organisation hierarchy upwards. Whereas Fayol concentrated on the Managing
Director and worked downwards on the organisation hierarchy.
(4) Both, however, stressed on the technical or professional aspects of the

management and both are responsible for the managerial revolution which took
place after 1940.
Comments on Management:
(1) Management is a social process.
(2) It is directly in charge of allocation, utilisation and co-ordination of all human

and material resources to be produced from the business environment or Society.
The environment provides these resources as inputs to a business enterprise.
Most of these resources are scarce and have alternative uses. Management has to
evolve an optimum combination of these resources or inputs.
(3) The resources are co-ordinated and integrated by the management through
performing the typical managerial functions, viz., planning, organising, staffing,
directing, motivating, communicating and controlling. These functions constitute

the process of management. The basic resources are subjected to fundamental
functions of management.
(4) Management process is necessary to determine the objectives and goals and to
take appropriate action, i.e., implement the plan in order to accomplish the stated
objectives. Controlling ensures performance as per plan and enables the
management to remove the deviations, if any, between the actual results, and
expected results.
(5) As people are our greatest resources, management has a special responsibility
to create favourable work environment and ensure maximum employee morale
and productivity. Hence, management has not only to manage the business but
also to manage both managers and workers.
Motivation and leadership are the two unique managerial functions or activities
to ensure maximum use of human resources without sacrificing human welfare
and human satisfaction.
(6) As a manager, you will be called upon to play different roles under different
situations, such as planner, coordinator, leader, liaison (connecting link),
monitor, spokesman, disseminator of information, risk-bearer, resource allocator,
negotiator, disturbance handler, resolver of interpersonal and interdepartmental
conflicts, and so on.
(7) Classical or bureaucratic management is appropriate where the environment

is relatively unchanging. Behavioural and organic management is appropriate
where the environment is dynamic, and innovation and creativity are at a premiu
Management Theory
Ever since the dawn of civilization, one of the biggest concerns of organized
cooperation has been management. While we can trace organization and
management as far back as 530 BC, the systematic study and examination of
management is primarily the product of the last four decades of research. Various
management theories developed during this time and contributed to the way we
currently approach and understand management. In this article, we will explore

management theories by different authors and the difference between
administration and management
Management Theories – Frederick Taylor

The Father of Scientific Management, Frederick Taylor, attempted to use
systematic study in order to find the single best way of doing a task. He laid down
the following four principles of management for all managers:
I. Develop a science for each aspect of work. Also, study and analyze it to find the
single best way to do the work.
II. Ensure that the selection of workers is based on a scientific methodology and not
on nepotism and favoritism. Also, train, teach and develop the workforce allowing
them to reach the optimum potential.
III. Your employees are not your enemies. Therefore, create an environment of
cooperation with them to ensure the implementation of scientific principles.
IV. Divide all work and responsibility equally between the workers and the
management.
Source: Pixabay
Taylor believed that these principles could help determine a fair day’s work for a
fair day’s pay in a manner which was good for both the employees and the
management. He also recommended the use of incentives for employee
motivation.
The management theories which evolved in the early twentieth century were
called the Second Industrial Revolution. Further, there was a lot of criticism and
opposition to similar management theories from other contributors.

Management Theories – Max Weber and Henri Fayol
Max Weber introduced the idea of bureaucratic organizations to the world.
Further, this came at a time when politics and heredity or tradition were the basis
of promotions to prominent positions. By definition, bureaucracy is the exercise of
control based on knowledge, expertise, and/or experience.
He proposed that organizations must adopt policies which are fair as opposed to
favoritism-based and recorded in writing. He also recommended that professional
managers must supervise the organization rather than company owners. Here are
some principles to guide the management of an organization:
 Qualification-based hiring – Hire employees based on their educational

qualification or technical training.
 Merit-based promotion – Managers decide on promotions and base their
decisions on experience or achievement.
 Chain of command – Organizations must have a structure wherein each position
reports and is accountable to a higher position. Also, create a complaints process
to protect the rights of workers in lower positions.
 Division of labor – Responsibilities, tasks, and authority is equally divided and
clearly defined.
 Impartiality – Regardless of the position or status of an employee, all rules and
regulations must apply to all members of the organization.
 Recording in writing – Record every single administrative act, decision, rule or
procedure in writing.
 Owners are not managers – The owners of a company should not manage it.
Henri Fayol
The Father of Modern Management Theory, Henri Fayol, proposed a theory of

general management which is applicable to all types of fields and administration.
He divided all activities of an industrial enterprise in the following six groups:
1. Technical activities pertaining to production

2. Commercial activities (buying/selling)
3. Financial activities pertaining to the optimum utilization of capital
4. Accounting activities (final accounts, costs, statistics, etc.)
5. Security-related activities (protecting the premises)

6. Managerial activities
Of these, Fayol focused his work on describing and explaining managerial
activities. He grouped managerial functions around the activities of planning,
organizing, commanding, coordinating, and controlling. He suggested the
following 14 principles of management:
1. Division of Work: to ensure optimum performance with minimal effort.

2. Authority and Responsibility: Every authority comes with certain responsibilities.
3. Discipline: Employees must respect and obey their superiors.
4. Unity of Command: Every employee must receive orders from only one senior.
5. Unity of Direction: If there are a group of tasks with a common objective, then
there must be a single head and a single plan.
6. Subordination: Individual interest is secondary to the general interest.
7. Remuneration: Wages must afford maximum satisfaction to the employees and
the firm.
8. Centralization: The organization must decide about the amount of authority that
the higher levels would retain or dispersed in the organization.
9. Scalar Chain: The relations between the superiors and subordinates should be
short-circuited and not detrimental to the business.
10. Order: All employees and process must have an appointed place.
11. Equity: Managers must strive for equity and equality of treatment while dealing
with the employees. They must display a combination of kindness and justice.
12. Stability of Tenure of Personnel: Managers must try to reduce employee turnover.
13. Initiative: Managers must take initiatives.
14. Espirit de Corps: There must be an emphasis on teamwork and effective
communication for achieving it.
Behavioralists, Sociologists, and Psychologists

Many behavioralists believed that the study of management must concern itself
with human behavior in organizations. Further, they felt that the effectiveness of
an organization relies on the quality of the relationship among the people working
in it. Also, good management relies on the manager’s ability to develop
interpersonal competence among its members.

Further, the behavioral approach to management drew attention to a lot of socio-
psychological aspects like the dynamics of organizational behavior, groups,
organizational conflict, change, and techniques of organizational development.
Systems Approach
The systems approach defines a system as a set of interdependent and inter-related

parts arranged meticulously to produce a unified whole. Also, systems are of two
types – Open and Closed. An open system recognizes the dynamic interaction
with the environment (suppliers, labor unions, customers, etc.). On the other hand,
in a closed system, the environment has no influence on it.
Inputs Processes Outputs
Human Planning Products
Materials Organizing Services
Equipment Leading Profit/Loss
Financial Controlling Human development
Information Technology Information
Facilities

The management must coordinate all parts of the system to meet the
organization’s goals. Further, the managers must set up feedback mechanisms for
the same.
Administration Management
Policy Making Policy Implementation
Legislative and largely determinative functions Executive and governing functions
Usually, administration concerns with planning and organizing functions Usually, management concerns with motivating and controlling functions
Typically, the Board of Directors is concerned with the administration Personnel below the Directors are concerned with the management

Difference between Administration and Management
In today’s times, management comprises of both the processes – planning as well

as policy-making and execution. Therefore, management includes administrative
and operative management.
The 14 principles of management by Henri Fayol are:
1. Division of work
2. Authority with responsibilities
3. Obey and respect the superiors
4. Single command
5. One direction
6. Preference to the general interest
7. Fair remuneration
8. Centralization and decentralization of authority
9. Optimum relations between superiors and subordinates
10. Everything in its designated place
11. Equity and equality of treatment
12. Minimal employee turnover

13. Taking initiatives
14. Importance of teamwork
What are Management Theories?

Management theories are concepts surrounding recommended management strategies,
which may include tools such as frameworks and guidelines that can be implemented in
modern organizations. Generally, professionals will not rely solely on one management
theory alone, but instead, introduce several concepts from different management
theories that best suit their workforce and company culture.
1. Scientific Management Theory

American mechanical engineer Frederick Taylor, who was one of the earliest
management theorists, pioneered the scientific management theory. He and his
associates were among the first individuals to study work performance scientifically.
Taylor’s philosophy emphasized the fact that forcing people to work hard wasn’t the best
way to optimize results. Instead, Taylor recommended simplifying tasks so as to increase
productivity.
The strategy was a bit different from how businesses were conducted beforehand.
Initially, a factory executive enjoyed minimal, if any, contact with his employees. There
was absolutely no way of standardizing workplace rules and the only motivation of the
employees was job security.
According to Taylor, money was the key incentive to working, which is why he developed
the “fair day’s wages for a fair day’s work” concept. Since then, the scientific
management has been practiced worldwide. The resulting collaboration between
employees and employers evolved into the teamwork that people now enjoy.
2. Systems Management Theory

Systems management offers an alternative approach to the planning and management
of organizations. The systems management theory proposes that businesses, like the
human body, consists of multiple components that work harmoniously so that the larger
system can function optimally. According to the theory, the success of an organization
depends on several key elements: synergy, interdependence, and interrelations between
various subsystems.
Employees are one of the most important components of a company. Other elements
crucial to the success of a business are departments, workgroups, and business units. In
practice, managers are required to evaluate patterns and events in their companies so as
to determine the best management approach. This way, they are able to collaborate on

different programs so that they can work as a collective whole rather than as isolated
units.
3. Contingency Management Theory

The main concept behind the contingency management theory is that no one
management approach suits every organization. There are several external and internal
factors that will ultimately affect the chosen management approach. The contingency
theory identifies three variables that are likely to influence an organization’s structure:
the size of an organization, technology being employed, and style of leadership.
Fred Fiedler is the theorist behind the contingency management theory. Fiedler
proposed that the traits of a leader were directly related to how effectively he led.
According to Fiedler’s theory, there’s a set of leadership traits handy for every kind of
situation. It means that a leader must be flexible enough to adapt to the changing
environment. The contingency management theory can be summed up as follows:
 There is no one specific technique of managing an organization.

 A leader should be quick to identify the particular management style suitable for
a particular situation.
 The primary component of Fiedler’s contingency theory is LPC – the least
preferred co-worker scale. LPC is used to assess how well oriented a manager is.
4. Theory X and Theory Y

Do you believe that every individual gets maximum satisfaction from the work they do?
Or are you of the opinion that some view work as a burden and only do it for the
money? Such assumptions influence how an organization is run. The assumptions also
form the basis of Theory X and Theory Y.
Douglas McGregor is the theorist credited with developing these two contrasting
concepts. More specifically, these theories refer to two management styles: the
authoritarian (theory X) and participative (theory Y).
In an organization where team members show little passion for their work, leaders are
likely to employ the authoritarian style of management. But if employees demonstrate a
willingness to learn and are enthusiastic about what they do, their leader is likely to use
participative management. The management style that a manager adopts will influence
just how well he can keep his team members motivated.
Theory X holds a pessimistic view of employees in the sense that they cannot work in the
absence of incentives. Theory Y, on the other hand, holds an optimistic opinion of
employees. The latter theory proposes that employees and managers can achieve a
collaborative and trust-based relationship.

Still, there are a couple of instances where Theory X can be applied. For instance, large
corporations that hire thousands of employees for routine work may find adopting this
form of management ideal.
Why Study Management Theories?
1. Increasing Productivity
One of the reasons why managers should be interested in learning management theories
is because it helps in maximizing their productivity. Ideally, the theories teach leaders
how to make the most of the human assets at their disposal. So, rather than purchase
new equipment or invest in a new marketing strategy, business owners need to invest in
their employees through training.
It can be seen in Taylor’s scientific management theory. As mentioned earlier, Taylor

proposed that the best way to boost workers’ productivity was by first observing their
work processes and then creating the best policies.

2. Simplifying Decision Making
Another area where management theories have proven to be useful is in the decision-
making process. Max Weber proposed that hierarchical systems encourage informed
decision-making. A report written by the Institute for Employment Studies suggests that
flattening the hierarchy paves the way for local innovation while speeding up the
decision-making process. Flattening out entails getting rid of job titles and senior
positions so as to inspire a cohesive work environment.
3. Encouraging Staff Participation

Management theories developed in the 1900s, aimed at encouraging interpersonal
relationships in the workplace. One such theory that encouraged a collaborative
environment is the human relations approach. According to this theory, business owners
needed to give their employees more power in making decisions.
Key Takeaway
Throughout history, companies have been putting different management theories into
practice. Not only have they helped to increase productivity but they have also improved
the quality of services. Although these management theories were developed ages ago,
they help in creating interconnected work environments where employees and
employers work hand-in-hand. Some of the most popular management theories that are
applied nowadays are systems theory, contingency theory, Theory X and Theory Y, and
the scientific management theory.
What are Management Skills?

Management skills can be defined as certain attributes or abilities that an executive
should possess in order to fulfill specific tasks in an organization. They include the
capacity to perform executive duties in an organization while avoiding crisis situations
and promptly solving problems when they occur. Management skills can be developed
through learning and practical experience as a manager. The skills help the manager to
relate with their fellow co-workers and know how to deal well with their subordinates,
which allows for the easy flow of activities in the organization.

Good management skills are vital for any organization to succeed and achieve its goals
and objectives. A manager who fosters good management skills is able to propel the
company’s mission and vision or business goals forward with fewer hurdles and
objections from internal and external sources.
Management and leadership skills are often used interchangeably as they both involve
planning, decision-making, problem-solving, communication, delegation, and time
management. Good managers are almost always good leaders as well. In addition to
leading, a critical role of a manager is to also ensure that all parts of the organization are
functioning cohesively. Without such integration, several issues can arise and failure is
bound to happen. Management skills are crucial for various positions and at different
levels of a company, from top leadership to intermediate supervisors to first level
managers.
Types of Management Skills

According to American social and organizational psychologist Robert Katz `, the three
basic types of management skills include:

1. Technical Skills
Technical skills involve skills that give the managers the ability and the knowledge to use
a variety of techniques to achieve their objectives. These skills not only involve operating
machines and software, production tools, and pieces of equipment but also the skills
needed to boost sales, design different types of products and services, and market the
services and the products.
2. Conceptual Skills
These involve the skills managers present in terms of the knowledge and ability for
abstract thinking and formulating ideas. The manager is able to see an entire concept,
analyze and diagnose a problem, and find creative solutions. This helps the manager to
effectively predict hurdles their department or the business as a whole may face.
3. Human or Interpersonal Skills

The human or the interpersonal skills are the skills that present the managers’ ability to
interact, work or relate effectively with people. These skills enable the managers to make
use of human potential in the company and motivate the employees for better results.

Examples of Management Skills
There is a wide range of skills that management should possess to run an organization
effectively and efficiently. The following are six essential management skills that any
manager ought to possess for them to perform their duties:
1. Planning
Planning is a vital aspect within an organization. Planning is one’s ability to organize
activities in line with set guidelines while still remaining within the limits of the available
resources such as time, money, and labor. It is also the process of formulating a set of
actions or one or more strategies to pursue to achieve certain goals or objectives with
the available resources. The planning process includes identifying and setting achievable
goals, developing necessary strategies, and outlining the tasks and schedules on how to
achieve the set goals. Without a good plan, little can be achieved.

2. Communication
Possessing great communication skills is crucial for a manager. It can determine how well
information is shared throughout a team, ensuring that the group acts as a unified
workforce. How well a manager communicates with the rest of his team also determines
how well outlined procedures can be followed, how well the tasks and activities can be
completed, and thus, how successful an organization will be.
Communication involves the flow of information within the organization, whether formal
or informal, verbal or written, vertical or horizontal, and it facilitates smooth functioning
of the organization. Clearly established communication channels in an organization allow
the manager to collaborate with the team, prevent conflicts, and resolve issues as they
arise. A manager with good communication skills can relate well with the employees and
thus, able to achieve the company’s set goals and objectives easily.
3. Decision-making
Another vital management skill is decision-making. Managers make numerous decisions,
whether knowingly or not, and making decisions is a key component in a manager’s
success. Making proper and right decisions results in the success of the organization,
while poor or bad decisions may lead to failure or poor performance. For the
organization to run effectively and smoothly, clear and right decisions should be made. A
manager must be accountable for every decision that they make and also be willing to
take responsibility for the results of their decisions. A good manager needs to possess
great decision-making skills, as it often dictates his/her success in achieving
organizational objectives.
4. Delegation
Delegation is another key management skill. Delegation is the act of passing on work-
related tasks and/or authorities to other employees or subordinates. It involves the
process of allowing your tasks or those of your employees to be re-assigned or re-
allocated to other employees depending on current workloads. A manager with good
delegation skills is able to effectively and efficiently re-assign tasks and give authority to
the right employees. When delegation is carried out effectively, it helps facilitate quick
and easy results.
Delegation helps the manager to avoid wastage of time, optimizes productivity, and
ensures responsibility and accountability on the part of employees. Every manager must
have good delegation abilities to achieve optimal results and accomplish the required
productivity results.

5. Problem-solving
Problem-solving is another essential skill. A good manager must have the ability to
tackle and solve the frequent problems that can arise in a typical workday. Problem-
solving in management involves identifying a certain problem or situation and then
finding the best way to handle the problem and get the best solution. It is the ability to
sort things out even when the prevailing conditions are not right. When it is clear that a
manager has great problem-solving skills, it differentiates him/her from the rest of the
team and gives subordinates confidence in his/her managerial skills.
6. Motivating
The ability to motivate is another important skill in an organization. Motivation helps
bring forth a desired behavior or response from the employees or certain stakeholders.
There are numerous motivation tactics that managers can use, and choosing the right
ones can depend on characteristics such as company and team culture, team
personalities, and more. There are two primary types of motivation that a manager can
use, which includes intrinsic and extrinsic motivation.
Bottom Line
Management skills are a collection of abilities that include things such as business
planning, decision-making, problem-solving, communication, delegation, and time
management. While different roles and organizations require the use of various skillsets,
management skills help a professional stand out and excel no matter what their level. In
top management, these skills are essential to run an organization well and achieve
desired business objectives.
Functions of Management
Management has been described as a social process involving responsibility for economical and effective planning & regulation
of operation of an enterprise in the fulfillment of given purposes. It is a dynamic process consisting of various elements and
activities. These activities are different from operative functions like marketing, finance, purchase etc. Rather these activities
are common to each and every manger irrespective of his level or status.
Different experts have classified functions of management. According to George & Jerry, “There are four fundamental functions
of management i.e. planning, organizing, actuating and controlling”.
According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to control”. Whereas Luther Gullick
has given a keyword ’POSDCORB’ where P stands for Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-
ordination, R for reporting & B for Budgeting. But the most widely accepted are functions of management given by KOONTZ
and O’DONNEL i.e. Planning, Organizing, Staffing, Directing and Controlling.
For theoretical purposes, it may be convenient to separate the function of management but practically these functions are
overlapping in nature i.e. they are highly inseparable. Each function blends into the other & each affects the performance of
others.

1. Planning
It is the basic function of management. It deals with chalking out a future course of action & deciding in advance the
most appropriate course of actions for achievement of pre-determined goals. According to KOONTZ, “Planning is
deciding in advance - what to do, when to do & how to do. It bridges the gap from where we are & where we want to
be”. A plan is a future course of actions. It is an exercise in problem solving & decision making. Planning is
determination of courses of action to achieve desired goals. Thus, planning is a systematic thinking about ways &
means for accomplishment of pre-determined goals. Planning is necessary to ensure proper utilization of human &
non-human resources. It is all pervasive, it is an intellectual activity and it also helps in avoiding confusion,
uncertainties, risks, wastages etc.
2. Organizing
It is the process of bringing together physical, financial and human resources and developing productive relationship
amongst them for achievement of organizational goals. According to Henry Fayol, “To organize a business is to
provide it with everything useful or its functioning i.e. raw material, tools, capital and personnel’s”. To organize a
business involves determining & providing human and non-human resources to the organizational structure.
Organizing as a process involves:
 Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.
3. Staffing
It is the function of manning the organization structure and keeping it manned. Staffing has assumed greater
importance in the recent years due to advancement of technology, increase in size of business, complexity of human
behavior etc. The main purpose o staffing is to put right man on right job i.e. square pegs in square holes and round
pegs in round holes. According to Kootz & O’Donell, “Managerial function of staffing involves manning the
organization structure through proper and effective selection, appraisal & development of personnel to fill the roles
designed un the structure”. Staffing involves:
 Manpower Planning (estimating man power in terms of searching, choose the person and giving the right
place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.
4. Directing

It is that part of managerial function which actuates the organizational methods to work efficiently for achievement of
organizational purposes. It is considered life-spark of the enterprise which sets it in motion the action of people
because planning, organizing and staffing are the mere preparations for doing the work. Direction is that inert-
personnel aspect of management which deals directly with influencing, guiding, supervising, motivating sub-ordinate
for the achievement of organizational goals. Direction has following elements:
 Supervision
 Motivation
 Leadership
 Communication
Supervision- implies overseeing the work of subordinates by their superiors. It is the act of watching & directing work
& workers.
Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work. Positive, negative,
monetary, non-monetary incentives may be used for this purpose.
Leadership- may be defined as a process by which manager guides and influences the work of subordinates in
desired direction.
Communications- is the process of passing information, experience, opinion etc from one person to another. It is a
bridge of understanding.
5. Controlling
It implies measurement of accomplishment against the standards and correction of deviation if any to ensure
achievement of organizational goals. The purpose of controlling is to ensure that everything occurs in conformities
with the standards. An efficient system of control helps to predict deviations before they actually occur. According
to Theo Haimann, “Controlling is the process of checking whether or not proper progress is being made towards the
objectives and goals and acting if necessary, to correct any deviation”. According to Koontz & O’Donell “Controlling is
the measurement & correction of performance activities of subordinates in order to make sure that the enterprise
objectives and plans desired to obtain them as being accomplished”. Therefore controlling has following steps:
a. Establishment of standard performance.

b. Measurement of actual performance.
c. Comparison of actual performance with the standards and finding out deviation if any.
d. Corrective action.
Communication
Communications is fundamental to the existence and survival of humans as well
as to an organization. It is a process of creating and sharing ideas, information,
views, facts, feelings, etc. among the people to reach a common understanding.
Communication is the key to the Directing function of management.
A manager may be highly qualified and skilled but if he does not possess good
communication skills, all his ability becomes irrelevant. A manager must
communicate his directions effectively to the subordinates to get the work done
from them properly.

Communications Process
Communications is a continuous process which mainly involves three elements
viz. sender, message, and receiver. The elements involved in the communication
process are explained below in detail:
1. Sender
The sender or the communicator generates the message and conveys it to the
receiver. He is the source and the one who starts the communication
2. Message
It is the idea, information, view, fact, feeling, etc. that is generated by the sender
and is then intended to be communicated further.
3. Encoding
The message generated by the sender is encoded symbolically such as in the form
of words, pictures, gestures, etc. before it is being conveyed.
4. Media
It is the manner in which the encoded message is transmitted. The message may
be transmitted orally or in writing. The medium of communication includes
telephone, internet, post, fax, e-mail, etc. The choice of medium is decided by the
sender.
5. Decoding
It is the process of converting the symbols encoded by the sender. After decoding
the message is received by the receiver.
6. Receiver
He is the person who is last in the chain and for whom the message was sent by
the sender. Once the receiver receives the message and understands it in proper
perspective and acts according to the message, only then the purpose of
communication is successful.

7. Feedback
Once the receiver confirms to the sender that he has received the message and
understood it, the process of communication is complete.
8. Noise
It refers to any obstruction that is caused by the sender, message or receiver during
the process of communication. For example, bad telephone connection, faulty
encoding, faulty decoding, inattentive receiver, poor understanding of message
due to prejudice or inappropriate gestures, etc.
(Source: businessjargons)
Importance of Communication
1. The Basis of Co-ordination
The manager explains to the employees the organizational goals, modes of their
achievement and also the interpersonal relationships amongst them. This provides
coordination between various employees and also departments. Thus,
communications act as a basis for coordination in the organization.
2. Fluent Working
A manager coordinates the human and physical elements of an organization to run

it smoothly and efficiently. This coordination is not possible without proper
communication.

3. The Basis of Decision Making
Proper communication provides information to the manager that is useful for

decision making. No decisions could be taken in the absence of information. Thus,
communication is the basis for taking the right decisions.
4. Increases Managerial Efficiency
The manager conveys the targets and issues instructions and allocates jobs to the
subordinates. All of these aspects involve communication. Thus, communication
is essential for the quick and effective performance of the managers and the entire
organization.
5. Increases Cooperation and Organizational Peace
The two-way communication process promotes co-operation and mutual

understanding amongst the workers and also between them and the management.
This leads to less friction and thus leads to industrial peace in the factory and
efficient operations.
6. Boosts Morale of the Employees
Good communication helps the workers to adjust to the physical and social aspect
of work. It also improves good human relations in the industry. An efficient
system of communication enables the management to motivate, influence and
satisfy the subordinates which in turn boosts their morale and keeps them
motivated.
Types of Communication
1. Formal Communication
Formal communications are the one which flows through the official channels
designed in the organizational chart. It may take place between a superior and a
subordinate, a subordinate and a superior or among the same cadre employees or
managers. These communications can be oral or in writing and are generally
recorded and filed in the office.
Formal communication may be further classified as Vertical communication and

Horizontal communication.

Vertical Communication
Vertical Communications as the name suggests flows vertically upwards or

downwards through formal channels. Upward communication refers to the flow of
communication from a subordinate to a superior whereas downward
communication flows from a superior to a subordinate.
Application for grant of leave, submission of a progress report, request for loans
etc. are some of the examples of upward communication. Sending notice to
employees to attend a meeting, delegating work to the subordinates, informing
them about the company policies, etc. are some examples of downward
communication.
Horizontal Communication
Horizontal or lateral communication takes place between one division and

another. For example, a production manager may contact the finance manager to
discuss the delivery of raw material or its purchase.
Types of communication networks in formal communication:
 Single chain: In this type of network communications flows from every superior to
his subordinate through a single chain.
 Wheel: In this network, all subordinates under one superior communicate through
him only. They are not allowed to talk among themselves.
 Circular: In this type of network, the communication moves in a circle. Each
person is able to communicate with his adjoining two persons only.
 Free flow: In this network, each person can communicate with any other person
freely. There is no restriction.
 Inverted V: In this type of network, a subordinate is allowed to communicate with
his immediate superior as well as his superior’s superior also. However, in the
latter case, only ordained communication takes place.
2. Informal Communication
Any communication that takes place without following the formal channels of
communication is said to be informal communication. The Informal
communication is often referred to as the ‘grapevine’ as it spreads throughout the
organization and in all directions without any regard to the levels of authority.
The informal communication spreads rapidly, often gets distorted and it is very
difficult to detect the source of such communication. It also leads to rumors which

are not true. People’s behavior is often affected by the rumors and informal
discussions which sometimes may hamper the work environment.
However, sometimes these channels may be helpful as they carry information

rapidly and, therefore, may be useful to the manager at times. Informal channels
are also used by the managers to transmit information in order to know the
reactions of his/her subordinates.
Types of Grapevine network:
 Single strand: In this network, each person communicates with the other in a
sequence.
 Gossip network: In this type of network, each person communicates with all other
persons on a non-selective basis.
 Probability network: In this network, the individual communicates randomly with
other individuals.
 Cluster Network: In this network, the individual communicates with only those
people whom he trusts. Out of these four types of networks, the Cluster network
is the most popular in organizations.
Barriers to Communication
The communication barriers may prevent communication or carry incorrect
meaning due to which misunderstandings may be created. Therefore, it is essential
for a manager to identify such barriers and take appropriate measures to overcome
them. The barriers to communication in organizations can be broadly grouped as
follows:
1. Semantic Barriers
These are concerned with the problems and obstructions in the process of
encoding and decoding of a message into words or impressions. Normally, such
barriers result due to use of wrong words, faulty translations, different
interpretations etc.
For example, a manager has to communicate with workers who have no

knowledge of the English language and on the other side, he is not well
conversant with the Hindi language. Here, language is a barrier to communication
as the manager may not be able to communicate properly with the workers.

2. Psychological Barriers
Emotional or psychological factors also act as barriers to communication. The

state of mind of both sender and receiver of communication reflects in effective
communication. A worried person cannot communicate properly and an angry
recipient cannot understand the message properly.
Thus, at the time of communication, both the sender and the receiver need to be
psychologically sound. Also, they should trust each other. If they do not believe
each other, they cannot understand each other’s message in its original sense.
3. Organizational Barriers
The factors related to organizational structure, rules and regulations authority

relationships, etc. may sometimes act as barriers to effective communication. In an
organization with a highly centralized pattern, people may not be encouraged to
have free communication. Also, rigid rules and regulations and cumbersome
procedures may also become a hurdle to communication.
4. Personal Barriers
The personal factors of both sender and receiver may act as a barrier to effective
communication. If a superior thinks that a particular communication may
adversely affect his authority, he may suppress such communication.
Also, if the superiors do not have confidence in the competency of their

subordinates, they may not ask for their advice. The subordinates may not be
willing to offer useful suggestions in the absence of any reward or appreciation for
a good suggestion.
Solved Question for You

Q: List the measures to improve communication effectiveness?
Answer: Measures to improve communication effectiveness are as follows
1. Communication of Clarification of the idea.

2. Communication should be according to the needs of the receiver.
3. Consulting others before communication.
4. Awareness about the language, tone and body postures and gestures.
5. Convey information useful to the receiver.

6. Ensure proper feedback.
7. Follow up communications.
8. Be a good listener.
Decision Making: Characteristics,

Nature, Techniques
Decision-making is an important job of a manager. Every day he has to decide
about doing or not doing a particular thing. A decision is the selection from
among alternatives. “It is a solution selected after examining several alternatives
chosen because the decider foresees that the course of action he selects will be
more than the others to further his goals and will be accompanied by the fewest
possible objectionable consequences. It is the selection of one course of action
from two or more alternative courses of action. In the words of Mac Farland, “A
decision is an act of choice wherein an executive forms a conclusion about what
must be done in a given situation.
A decision represents a course of behaviour chosen from a number of possible

alternatives.” The way an executive acts or decides the course of action from
among various alternatives is an act of decision-making. George Terry says,
“Decision-making is the selection based on some criteria from two or more
possible alternatives.” Though there are many alternatives available for a
manager but he has to choose the best out of them.
Characteristics:
Following are the characteristics of decision-making:
1. Decision-making is based on rational thinking. The manager tries to foresee
various possible effects of a decision before deciding a particular one.
2. It is a process of selecting the best from among alternatives available.
3. It involves the evaluation of various alternatives available. The selection of best

alternative will be made only when pros and cons of all of them are discussed and
evaluated.

4. Decision-making is the end product because it is preceded by discussions and
deliberations.
5. Decision-making is aimed to achieve organizational goals.
6. It also involves certain commitment. Management is committed to every

decision it takes.
Nature of Decision-Making:
A decision is always related to some problem, difficulty or conflict. Decisions help
in solving problems or resolving conflicts. There are always differences of
opinions, judgments, etc. Managerial decision helps in maintaining group
effectiveness. All problems may not require decision- making but merely the
supply of information may be sufficient. For example, when will different groups
report for re-orientation? The supply of information about training programme
may be enough.
Decision problems necessitate a choice from different alternatives. A number of

possibilities are selected before making a final selection. Decision-making
requires something more than a selection. The material requiring a decision may
be available but still a decision may not be reached. A decision needs some sort of
prediction for the future on the basis of past and present available information.
The effect of a decision is to be felt in future so it requires proper analysis of
available material and a prediction for the future. If decision premises do not
come true, then decision itself may be wrong.
Sometimes decisions are influenced by adopting a follow- the-leader practice. The

leader of the group or an important manager of a concern sets the precedent and
others silently follow that decision. Whatever has been decided by the leader
becomes a guide for others and they also follow suit. The decisions may also
emerge from answers to pertinent questions about the problem. Such answers try
to narrow down the choice and help in making a decision.
Techniques or Basis for Decision-Making:

Decision-making has become a complex problem. A number of techniques,
extending from guessing to mathematical analyses, are used for decision-making

process. The selection of an appropriate technique depends upon the judgment of
decision-maker.
Following techniques of decision-making are generally employed:

1. Intuition:
Decision-making by intuition is characterized by inner feeling of the person. He
takes a decision as per the dictates of his conscious. He thinks about the problem
and an answer is found in his mind. The decision-maker has his own preferences,
influences, psychological make-up and these things play a vital role in taking a
decision. The past knowledge, training and experience of the decision-maker
plays an important role in intuitive decisions.
With this technique of decision-making, decisions are taken quickly and the
decision-making capability of the person is also used. In case the intuition of the
decision-maker is wrong then decision will also be incorrect. The other
techniques of decision-making are also neglected.
2. Facts:
Facts are considered to be the best basis of decision-making. A decision based on
facts has its roots in factual data. Such decisions will be sound and proper. The
increasing use of computers has helped in systematic analysis of data. The
information has become a major tool in managerial decision-making. It may not
be possible to secure all relevant facts for taking decisions. Managers, generally,
complain of insufficient information. It is also essential that facts should be
properly diagnosed, classified and interpreted. Facts alone may not be sufficient
for decision-making. The imagination, experience and beliefs of the decision-
making also required to comprehend the facts in proper perspective.
3. Experience:
Past experience of a person becomes a good basis for taking decisions. When a
similar situation arises then the manager can rely on his past decisions and takes
similar decisions. The person sees and understands things in terms of concepts
with which he is familiar. Experience should not be followed blindly. The new
situations should be analyzed on the basis of past knowledge. A successful
decision in the past may not prove useful this time also, on the other hand, a
decision once failed need not be avoided for all times in future. Though past

experience is a good basis but present situations should be properly analyzed and
assessed before taking a decision.
4. Considered Opinions:
Some managers use considered opinions as a basis for decision-making. Besides
pertinent statistics, opinions are also given due weightage. Something discussed
and considered by more persons become logical and may form a sound basis for
decision-making. A marketing manager, before deciding whether to market a new
product or not, will like to see marketing statistics as well as considered opinions
before finally making a choice.
5. Operations Research:
The traditional methods of taking decision on the basis of intuition, experience,
etc. are replaced by systematic techniques based on analysis of data. The
operations research is one of the techniques used by modern management for
deciding important matters. It helps managers by providing scientific basis for
solving organizational problems involving interaction of components of the
organization.
6. Linear Programming:
This technique is used to determine the best use of limited resources for achieving
given objectives. This method is based on this assumption that there exists a
linear relationship between variables and that the limits of variations could be
ascertained. Linear programme can be used for solving problems in areas like
production, transportation, warehousing, etc.
Decision Making Conditions:

Decision making involves the selection of one of the alternatives available. A
decision taken at present will have effect in future. A decision-maker tries to
visualize the conditions in future and take decisions accordingly. So decisions are
made in an environment of at least some uncertainty. There are certain risks
involved in decision making and the conditions vary from certainty to complete
uncertainty. The strategy of taking decisions under different conditions vary.
The conditions under which decisions are taken are as follows:

Certainty:
Under the conditions of certainty, people are reasonably sure about what will
happen when they take a decision. The required information is available and it is
reliable and the cause and effect relationships are known. The manager makes
decisions under such situations at different times with the same results. Under
such situations a deterministic model is used, in which all factors are assumed to
be exact with the chance playing no role.
Risk:
In a risk situation, factual information may exist but it may be insufficient. Most
of the business decisions are taken under risk conditions. The available
information does not answer overall questions about the outcome of the decision.
A manager has to develop estimates of the likelihood of the various states of
events occurring. The estimates may be based on past experience, other available
information or intelligence.
In order to improve decision-making under these conditions, one may estimate

the objective probabilities of an outcome by using, for example, mathematical
models. On the other hand, subjective probability, based on judgment and
experiences, may be used. There are a number of tools available which help a
manager in taking decisions under such conditions.
Uncertainty:
Under conditions of uncertainty a manager has only little information and he is
not sure about its reliability also. Since the manager does not have proper
information on which he can develop, the best he can do is to be aware that he
has no chance of predicting the events. The interaction of various variables
cannot be evaluated for taking decisions. The decision making under uncertainty
is a difficult proposition. For example, if a company wants to enter a foreign
market, if may not be sure about the consumer preference for the product,
economic situation, above all the political conditions.
The conditions in a new market may so fluctuate that proper decision taking
becomes a problem. The use of a number of modern techniques may improve the
quality of decisions under uncertain conditions. The use of risk analysis, decision

trees and preference theory can help in making proper decisions under those
situations.
Types of Decisions:
Different decisions differ in nature and significance. Some decisions are taken in
routine while some may have to be carefully evaluated.
Various decisions are discussed as follows:

1. Programmed and Non-Programmed Decisions:
Programmed decisions are of a routine nature and are taken within the specified
procedures. These decisions are made with regard to routine and recurring
problems which require structured solutions. A manager is not required to go
through the problem solving procedures again and again for taking programmed
decisions.
The decision rules for programmed decisions should be prepared carefully and
intelligently so that lower level executives are able to take the decisions without
making references to higher managerial levels. No judgment or discretion is
needed to find out solutions to such problems. These decisions remain consistent
for a relatively longer period of time and over many solutions.
Non-programmed decisions are related to problems which are unique and non-
repetitive. The information and knowledge about such decisions is not available.
Such decisions are made under new and unfamiliar circumstances. The standard
and pre-determined procedures and rules are rendered ineffective in
programmed decisions because every decision will have to be taken separately.
Non-programmed decisions are usually grade for solving unstructured problems
which keep on changing from time to time.
Every problem has to be restructured and analyzed by the manager by using his
skill, judgment and creativity. For example, a decision regarding adding a new
product, purchase of new machinery, opening a new branch, appointment of a
new chief executive are all non- programmed decisions and require separate
attention for each decision.

2. Strategic and Tactical Decisions:
Strategic decisions relate to policy matters and need the development and
analysis of alternatives. These decisions influence organizational structure,
objectives, working conditions, finances etc. Strategic decisions exercise great
influence on the functioning and direction of the organization and have long-term
implications. They also define and establish the relationship of the organization
with external environment. Such decisions require more resources, judgment and
skill. Because of their importance, strategic decisions are taken at top managerial
levels.
The decisions such as adding a new product or service, introduction of new

technology, taking over of another organization, selection of a location are all
strategic decisions. These decisions once taken cannot be easily reversed. The
impact of these decisions is fairly long because expansion, growth, development
and profitability of the organization is linked to them. Strategic decisions
somewhat resemble to non- programmed decisions because they possess the
characteristics of the latter.
In order to implement strategic decisions, management has to make some

tactical, operational or routine decision. One strategic decision may require many
operational decisions. These decisions are concerned with routine and repetitive
matters arising out of the working of the organization. Such decisions do not
require managerial judgment and are taken at lower levels of the management.
Tactical decisions are more specific, functional and have short-term implications.
Such decisions are taken by referring to established rules, procedures and
standards.
3. Individual and Group Decisions:

A decision taken by one person is known as individual decision. In a small
concern normally the owner takes most of the decisions, in a bigger concern the
routine or simple decisions may be left to a particular manager. Such decisions
are generally taken as per predetermined rules and procedures and require less
application of judgment and skill. When a manager is required to take a decision,
he is supplied with information and other inputs needed for this purpose. All

managers, whether at top level or at lower level, take decisions for carrying out
their activities.
When decisions are taken by two or more persons, these are known as group
decisions. Generally, strategic or other important decisions are taken by groups
instead of individuals because of risk involved. The decisions of Board of
Directors or Committees come under this category.
Group decisions are normally important and have long-term implications for the
concern. A decision regarding introducing a new product, shifting to latest
technology, trying labour saving devices etc. may be better taken by a group of
specialists than by an individual. Group decisions are generally time consuming
but otherwise these are well discussed decisions.
7 Best Tools to Help Entrepreneurs to

Take Decisions
T here are several elements that contribute to the success of any

business and one of them is making the right decisions. There are
so many decisions that must be made in running a successful
organization. In order to make the right decision, there are a
number of tools that entrepreneurs can use. However, the process
of decision making may involve a number of steps.
Main Steps of Effective Decision-making:

1. Establish the specific decision: You cannot afford to generalize the
process of decision making. In order to find the right tool that will help you
make the right decision, you need clear on the decision that must be taken.

2. Gather the details: One of the most critical stages in making decisions is
gathering the relevant information. This can be through questionnaires,
self-assessments and external sources and so on.
3. Consider Alternatives: While looking at the various tools to help you
take a decision, you should have a provision for the alternatives that would
help the company achieve the same objective.
4. Weigh all factors: Take time to weigh all the critical factors, especially the
information that you have gathered. This will help you determine if you are
taking the right direction. Ultimately, the decision that you will take should
be in line with the objectives of the company and help solve some of the
challenges that the company is facing.
5. Pick the best option: Once you have all factors in place and the various
alternatives, you should pick the best option. This is what makes
entrepreneurs stand out, due to their ability to make critical decisions.
6. Implement it: Do not stop at the point where the decision is made; take
action to implement it and watch out for the changes.
7. Evaluation: Most of the successful entrepreneurs will rescind any decision
that is not effective. You should review all the decisions after a while so as to
check if the desired results are being achieved. It would be illogical to
uphold a decision that is not bringing the desired gains to your
organization.
With these few steps, you will be able to make practical decisions and help your
organization grow in leaps and bounds. There are a number of tools that you
can use to be able to take the right decisions.
Tools for Decision Making:

There are so many techniques that entrepreneurs can use to take up a decision.
However, it is important to note that while a particular tool may work in one
organization, it may fail in another. A whole range of factors need to be put into
consideration before using a specific tool. There are instances where you will
find that combining several techniques would be the ideal situation. Here are
some of the best tools for decision making:
1) Market Research
Marketing Reasearch is an essential tool, especially when you are gathering the
information before taking a decision. This will include analysis of the potential
customers, state of the market and the competition in the market among

others. This is a strategic tool, which most entrepreneurs rely on to make the
right decision.
2) Decision Matrix
With this tool, you will critically analyze all the available options or alternatives
of a particular decision. This allows you to look at all the options and the
factors that affect each. You can use comparative analysis so that you can find
the best option to help you in decision making. This is one of the most critical
tools for most organizations as it will help reveal the best strategy and decision
to take. Here is below an example of a decision matrix:

3) Cost-Benefit Analysis
With a cost-benefit analysis, you will take the time to assess all the costs that
will be involved in the decision taken and the benefits that the organization will
gain from this. As a result, entrepreneurs will go for the decisions that will have
a greater benefit, in terms of the overall net profits in the organization. The sole
objective of any company is to make profits, and as such, every decision taken
should be towards that direction.
4) T-Chart
This is also among the best tools that can be used for comparative analysis. The
T-Chart is used to weigh the pros and cons of any option that the organization
may be considering. At the end of it all, it helps entrepreneurs to make the right
decision, having weighted in all the advantages and disadvantages of all the
available options.

5) SWOT Analysis
The SWOT analysis is commonly used for strategic planning and eventual
decision making. Using SWOT analysis, entrepreneurs are able to maximize on
the strengths of the organization. The weaknesses are also considered in view
of the available opportunities. The organization will also consider the possible
threats before taking any course of action. This is an effective tool as it allows
entrepreneurs to analyze the company from all possible angles before taking a
decision.
6) Pareto Analysis
This is commonly referred to as the Pareto principle, and it is common when
organizations have to make huge decisions. This is inclined towards the
prioritization in that 20% of the factors that contribute to 80% of the
organization’s growth will be given top priority. This will give the decisions that
have the highest level of impact top priority. Here is an example of a Pareto
analysis diagram:

7) Feasibility Study
Feasibility studies are also used in the strategic planning of the business. In
this case, entrepreneurs will assess the possibility of creating a specific project
and if it can make profits. This is among the tools that should be used at the
very beginning of launching a new product or service. This will help the
company decide if a particular strategy is ideal or feasible for the company or
not.

Conclusion
There are so many other tools that can be used by organizations to facilitate
effective decision making. As mentioned earlier, there may be instances where
you might have to combine a number of strategies so that you can achieve the
best results for your organization. It is important to review every decision that
you have taken progressively so as to ensure that the company is achieving the
set objectives.
Organisational Structure and Design
The organisational landscape in the 21st Century, is

characterised by constant change. The markets that Apex-Pal
competes in are constantly affected by customers' tastes and
advancing technology. Apart from that, the low-barrier-to-entry
nature of the food and beverage (F&B) industry creates an
environment of intense competition. Thus, it is very important that
Apex-Pal's organisational structure should evolve to reflect these
market realities. Some examples of companies that have
successfully transformed their organisational structures from rigid
bureaucracies to become closer to their markets are Terex Corp,
Honey Well Pacific and Bank of Montreal. Without changing their
organisational structure to adapt to the changes in their business
environment, these companies would be hampered in trying to
respond quickly to customer needs.1
1
Stephen P. Robbins and Mary Coulter, Management 9th ed.
(New Jersey, USA: Prentice Hall, 2007), 303.
COMPONENTS OF ORGANISATIONAL STRUCTURE
Work Specialisation
Work specialisation is the degree to which tasks in an

organisation are divided into separate jobs.2 In Apex-Pal, a high

degree of work specialisation occurs at the level of the service
staff working in each sushi chain outlet. Each person at the outlet
has his or her own tasks, which are quite specialised. For
example, chefs are in charge of cooking, cashiers collect
payment and waiters and waitresses serve customers and take
orders.
Further up the hierarchy, jobs are also specialised, in the sense

that each employee has a specific work function, such as human
resource management or marketing. However, the degree of
specialisation is less as the job scope becomes larger, especially
for those people working in the headquarters. For example, a
person may be a Marketing Manager, which has a large scope of
responsibilities, ranging from global marketing to marketing
communications. Thus, while the job is specialised by the
function, the job scope within the function itself is quite varied.
However, we should take note that at Apex Pal, even for

members at the lower levels of the hierarchy, work is not
specialised or rigidly defined all the time. Whenever someone has
a good idea which he/she feels will benefit the company, he/she
can approach the relevant authority to start a new task force to
work on it. The example given by Foo is the new laboratory that
Apex-Pal has set up for research and
Development and food quality testing. Instead of just picking

people from the quality assurance department to work in it,
employees throughout the company with relevant experience are
invited to work there. Another example was given by a service
crew who is in charge doing door-to-door delivery. In an interview
conducted at one of the outlets, he mentioned that when he had
more orders than he could cope with, other colleagues who could
operate a motorcycle would help out with the delivery. Thus,
while their regular jobs are somewhat specialised, they do not
necessarily work on these specialised tasks all the time.

Departmentalisation
Departmentalisation is the basis by which jobs are grouped

together and in this regard, Apex-Pal has functional
departmentalisation, with departments such as Finance,
Marketing, Human Resources, Service Quality and Maintenance.
However, Foo reveals that cross-functional teams, which work on
certain projects such as the new laboratory, also exist in the
company.
Chain of command
The chain of command refers to the continuous line of authority

that extends from the upper organisational levels to the lowest
levels and clarifies who reports to whom.3 Apex-Pal tries to
preserve the unity of command. Managers are given
The appropriate authority and empowerment to make certain

decisions, and employees are encouraged to approach their
direct superiors for direction. Whenever employees have
problems in persuading superiors to accept their ideas, they can
approach Foo for advice on how to put their ideas across to their
superiors. However, Foo will try not to interfere with the chain of
command; rather than he talking to their superiors, Foo would
encourage the employees to make the representations.
Span of control
Span of control is the number of employees a manager can

efficiently and effectively manage.4Individuals are limited in their
capacity to process information and have to make choices on
where to focus their attention. Thus, the span of control of a
manager should be decided based on his/her skills and abilities,
the similarity and complexity of employee tasks, physical
proximity of subordinates, the degree to which standardised
procedures are in place, the sophistication of the organisation's

information system, the strength of the organisation's culture, and
the preferred style of the manager.
At Apex-Pal, the span of control of each manager is determined

by the manager's capability and interest. If a manager feels that
he/she wants to handle more people and the company feels that
he/she is capable of doing so, that manager will be given a larger
span of control.
Centralisation versus Decentralisation
Centralisation describes the degree to which decision-making is

concentrated at the higher levels of an organisation.
Decentralisation in an organisation increases as more lower-level
employees provide input or actually make decisions. Apex-Pal is
quite decentralised. Inputs of employees at all levels are taken
into account, with schemes such as the Staff Suggestion Scheme
which rewards employees whenever a suggestion they have
made is successfully implemented.
Employees in certain positions also have the appropriate amount

of authority, as befits their positions, in order to facilitate efficient
and effective decision making. For instance, outlet managers
have the authority to waive the bill for customers if the situation
warrants it; those in charge of certain projects also have the
authority to make their own decisions without having to seek
approval from higher management.
Formalisation
Formalisation refers to the degree to which jobs within the

organisation are standardised and the extent to which employee
behaviour is guided by rules and procedures. When Apex-Pal first
started, there were no rules and procedures existing in the
company; employees could report to work whenever they liked.
However, Foo soon realised that the company could not run
efficiently without rules and procedures. Thus, relevant rules

which helped in task accomplishments were set out. Some
examples of rules currently in force in the company include the
reporting time of outlet staff and the procedures staff have to go
through to ensure the freshness of the food served to customers.
Other than the rules and procedures needed for the company to
run efficiently, there is not much formalisation in the company.
For example, there is no standard procedure for employees who
want to implement a new idea. Employees who have new
suggestions just have to convince their superiors that their ideas
are sound.
Mechanistic versus Organic Organisation
Organisations are typically classified under two types:

mechanistic or organic. A mechanistic organisation is rigid and
tightly controlled.5 High specialisation, rigid departmentalisation,
narrow spans of control and high formalisation are some of the
characteristics of such an organisation. Also, it has a limited
information network, which consists mostly of information
travelling from bosses to the subordinates, and decision-making
is highly centralised.6
Due to the above defining characteristics of a mechanistic

organisation, it is more suitable to an organisation which aims to
be very efficient. By standardising tasks and requiring employees
to follow rules and procedures strictly, the organisation minimises
the chance that an employee would make a judgment that would
reduce work efficiency. An example of a mechanistic organisation
is McDonald's. McDonald's has standardised processes that each
employee must follow in order to deliver products which have the
same quality across all outlets and countries.
In contrast, an organic organisation has a highly adaptive and

flexible structure. The organic organisation is highly
decentralised, with few standardised rules and procedures,

But many teams and task forces to deal with problems.
Communication channels are also more informal, with information
being shared across departments as well as up and down the
hierarchical structure. Jobs are not standardised as employees
apply their skills to wherever the organisation requires them.
Therefore, if an organisation wishes to be organic and flexible, a

key requirement is that employees must have high levels of skills
and training so that they are able to make knowledgeable
decisions on their own; this would then make formalisation and
tight managerial controls unnecessary.7
Based on the factors discussed above, we conclude that Apex-

Pal has a fairly organic structure. There is division of labour, but
jobs, particularly at the headquarters level, are not highly
standardised. Day-to-day demands of their jobs change
according to the situation and the projects that they are working
on. Take Joyce Lee, for instance. Lee was a newly promoted
manager in the marketing and communications department in
August 2006 when she first mooted the idea of starting up Sho-U,
an up-market brand among Apex-Pal's stable. CEO Foo liked the
idea and Lee was placed in charge of Sho-U, taking care of the
entire project from its interior design to kitchen set-up, and hiring
and training of personnel. Till today, Lee mentioned that it was an
experience she would never forget. What she did certainly went
well beyond the job scope of a marketing and communications
manager, thus affirming the fluid nature of jobs at Apex-Pal.
Employees are also highly empowered to make their own

decisions at all levels of the hierarchy, and they frequently form
work teams from different departments to tackle projects
Such as the setting up of the new laboratory, as mentioned

before.
Communication, according to Foo, is very open in the company.

Employees are encouraged to send feedback to their supervisors

whenever they think they can improve any area of the company's
operations. Besides the traditional top-down communication, 360-
degree feedback is highly encouraged among employees. Also,
lateral communication across functions occurs when employees
across different functions interact in cross-functional teams.
Formal rules exist, but only to the extent that it helps in the
efficient running of the company, as mentioned in the previous
section.
CONTINGENCY FACTORS
There is no single best way to structure or design an

organisation. Instead, structure or design issues should be based
on several contingency factors. Now that the structure of Apex-
Pal has been identified, an analysis is done on these contingency
factors to determine if the structure would aid Apex-Pal's future
growth. The contingency factors are: strategy, size,
environmental uncertainty and technology.8
Strategy and Structure
Apex-Pal's strategy is based on having twin engines of growth.

The first engine is to grow and propel brands to be leaders in
The local and global markets. The second engine is research and
development, to create new concepts which can tap into the first
engine, once they are marketable. Thus, the strategy that Apex-
Pal is following can be termed as one of concurrent growth and
innovation.
In order to follow such a strategy, the structure of the company

should be flexible and ready to take advantage of any
opportunities that come its way. In a market where speed is
necessary, a rigid structure will stifle new ideas or opportunity for
growth. These ideas may not reach the top in time, or may simply

be repressed by superiors who do not see their value. Thus, a
flexible structure is important.
Technology and Structure
One is very tempted to think that technology is not a crucial factor

in the F&B industry. Afterall, isn't success in this industry all about
providing good food and good service? That is where our first
instinct can be wrong. Technology can be used in food production
and in getting the food to the customers. For example, Apex-Pal
uses machines for the production of sushi rice balls to ensure
consistency in size and quality. A computerised interactive menu
and conveyor belt also allow customers to order and get their
food quickly. These technologies help Apex-Pal improve
customer service and save costs by reducing the labour —
intensity of its operations.
Moreover, according to Foo, Apex-Pal is going to set up a

laboratory for two purposes: for R&D and to ensure food quality.
The technology for R&D requires a more customised approach,
as employees must be creative while in the process of developing
new ideas. However, the technology for testing
Food quality should be quite standard, as certain processes have

to be followed in the laboratory to ensure that the food is safe for
consumption. Thus, it would be beneficial if the people working in
the laboratory were split into two departments, one for the R&D
and the other for food quality assurance. While the R&D
department should have a more organic structure, the food
quality assurance department could be more mechanistic.
Environmental Uncertainty and Structure
The environmental uncertainty that Apex-Pal faces is quite high,

as it is focusing on expanding its Sakae Sushi outlets abroad.
Different countries have very different operating environments
and Apex-Pal has to adapt to competing in these different

environments. The company has to come up with new strategies
and take note of obstacles present in those new markets and
decide how to overcome them. Therefore, in this respect, the
company needs a lean, fast and flexible organisational structure.
Appropriateness of the Company's Structure
Based on Apex-Pal's strategy and the uncertainty and instability

existing in their competitive environment, the company should
have a flexible, organic structure. Thus, the company's current
organic structure is rather appropriate considering its present
situation. Even so, the organisational structure of Apex-Pal can
still be improved in certain areas.
RECOMMENDATIONS ON STRUCTURAL ISSUES
Apex-Pal is evolving from a small local company to a large

international company. As the company becomes bigger, it tends
to become more mechanistic in structure as more rules and
procedures are put in place for the efficient running of the
company. However, Apex-Pal needs to stay flexible and organic
in structure in order to grow with their current strategy. Therefore,
recommendations will be focused on how Apex-Pal can maintain
an organic structure even as it grows.
Autonomous Units
The first recommendation is to let separate business units act as

autonomous teams of the company. For example, in Whole
Foods Market, the largest natural-foods grocer in the United
States, each store is an autonomous unit which consists of teams
and team leaders. Each store is thus responsible for its own
profit.
When outlets, which are closest to the customers, become

autonomous, outlet employees automatically become more
involved with the company when they realise that the decisions

which they are empowered to make ultimately affect the outlets'
bottom line. It also benefits the company as these outlets are able
to respond more effectively to their customers' needs. However,
since these employees are given total responsibility over the
running of an outlet, they also have to be accountable for its
performance. Management has to also ensure that these
employees are equipped with the proper skills to handle the
running of the outlet.
For Apex-Pal, autonomy can be given to local outlets, which

would be responsible for their own operations and strategies to
attract customers. When expanding overseas, giving wholly-
owned subsidiaries autonomy is one way to keep the company
flexible. Franchising is also an option. It leaves the headquarters
in Singapore free to pursue new opportunities without having to
worry about the day-to-day operations of all Sakae Sushi outlets
around the world.
We understand that Apex-Pal has already started pursuing this

strategy, with its wholly owned subsidiaries in China, Malaysia
and the United States; and franchises in Indonesia, Philippines
and Thailand.
Total autonomy should not be practised as there is the possibility

that a disaster may happen without the knowledge of the
headquarters. General targets and guidelines should be set for
subsidiaries to ensure that they follow the strategy of the
company. Monitoring of the autonomous unit can be undertaken
through quarterly reports and meetings with the headquarters in
order to update the latter on the recent activities of the
subsidiaries.
If giving individual outlets autonomy is not feasible, the company

can consider organising outlets in close proximity into one
business unit and giving them autonomy in running the day-to-
day operations. The business unit would be like a franchisee

receiving general guidelines, directions and support from the
parent company. Apex-Pal's culture, which takes the welfare of its
employees seriously, and in return, asks the employees to weigh
their actions against the impact on the company, will support
such a structure. Satisfied employees will run the autonomous
units with the good of the company in mind.
Matrix and Project Structures
The matrix structure is one that assigns specialists from different

functional departments to work on one or more projects being led
by project managers. Project teams are formed temporarily from
different functions to address problems which crop up or to
respond to changing customer demands. While working on the
project, project members will be exposed to how people in
different functions work. They will also be in touch with the
technology and methods used by different functions in various
situations. This leads to a more wholesome solution, and when
these team members return to their functional roles, they may
have new ideas and experiences to share with their original unit
to improve performance.
In the project structure, which takes the matrix structure a step

further, employees continuously work on projects instead of
belonging to any certain functional department. Upon the
completion of a project, employees are free to join other projects,
choosing those which can benefit most from their skills, abilities
and experiences. In order to make sure that project teams give
the desired attention to the task, it is recommended that they be
held accountable for the recommendations that they propose. If
the project team is not held accountable, too many competing
demands from their functional bosses will result in them diverting
their attention away from the task.
The advantage of these structures is that it creates a fluid and

flexible organisation that can respond more easily to

environmental changes. Teams can be formed to address
problems as they crop up. Decisions can be made faster without
any obstacles imposed due to the bureaucracy created by
departmentalisation or organisational hierarchy.
A disadvantage of the matrix and project structures is that it is

difficult to implement effectively. First, there is a dual chain of
command. Project leaders have authority over functional
members only in relation to the project's goals while functional
managers still have the responsibility of deciding on the
promotions, salary raises and annual reviews of the employees
under them. Thus, communication and coordination between the
project and functional managers are important in avoiding
conflict. If badly implemented, the employee may feel stuck
between a rock and a hard place, as both managers might insist
that their work be completed first. However, if a matrix system
can be implemented properly, Apex-Pal can benefit from the
flexibility that the structure provides.
Global Structural Issues
When expanding into other countries, it is inevitable that the

company needs to hire employees from those countries. Apex-
Pal needs to take into account the stage of development of that
particular country when deciding on the organisational structure
of the company operating in that country. The professional
education and skills of employees are very important in an
organisation where there is autonomy and employee
empowerment, as employees must be able to make decisions on
their own without supervision from higher level management.
For less developed countries, like Russia or Indonesia, the level

of professional education and skills of the locals in general would
be lower than their counterparts in more developed countries. As
local employees are less skilled to deal with situations that may

occur, it is better to allow them less autonomy, as the danger of
making mistakes is higher.
Instead, more rules and procedures are needed to ensure that a

minimum standard is achieved. Thus, a more mechanistic
organisation with more standard rules and procedures will be
more suitable in this situation.
The locals in more developed countries like the United States and
Singapore tend to possess a higher level of education and skill.
These people will be more equipped to make their own
judgments based on their skills and experience. Thus, they can
be trusted with a higher level of autonomy and empowerment,
making an organic structure more suitable for these countries.
However, Apex-Pal's current growth strategy requires it to be

flexible and adaptable, as mentioned before. A mechanistic
structure in less developed countries would mean that Apex-Pal
has to sacrifice responsiveness and flexibility in those countries.
In order to ensure that the company stays on track with its growth
strategy, it is advisable that it does not expand into the less
developed countries first. Instead, they should focus on more
developed countries like the United States and Europe.
If the company feels that the opportunity in less developed

countries is too good to give up, they could consider first staffing
outlets in these countries with people with the proper skills and
experiences from other countries. These expatriates would serve
two purposes: giving the overseas outlets a good start and
training the locals to acquire the skills needed to stand on their
own in future.
Independent Review Team for New Ideas
The ability of an organisation to grow is dependent on its ability to

generate new ideas and to exploit them effectively for the long-
term benefit of the company. According to Foo,

When employees have an idea which they feel will benefit the
company, they are encouraged to approach their immediate
superiors to ask for permission to proceed. The flaw in this
approach is that superiors may not like the idea and prevent the
employee from going further. As a result, even though the
employee still thinks it is a good idea, he/she might be
discouraged from pursuing the matter further by the superior.
In order to ensure that ideas from employees are given due

consideration, the company can consider setting up an
independent team tasked to review all suggestions made by
employees. The process used by this team to review ideas
should be transparent and open. This ensures that well-meaning
managers do not inadvertently squash good ideas prematurely.
Transparency and openness also encourage employees to turn in
good ideas by showing them that the company takes all their
suggestions seriously. Apex-Pal can benefit from this virtuous
cycle where good ideas submitted are rewarded, which in turn
encourages more good ideas from employees.
Managerial Economics: Concept,

Scope and Other Details
“Managerial economics is concerned with the application of economic principles
and methodologies to the decision-making process within the firm or
organization. It seeks to establish rules and principles to facilitate the
attainment of the desired economic goals of management”-Douglas.
The subject matter of economics comprises a number of concepts and theories.
The application of these concepts and theories in the process of business decision
making is known as managerial economics. In other words, managerial
economics undertakes the study of different economic tools that are used in
business decision making.
Some of the popular definitions of managerial economics are given as

follows:

According to Mansfield, “Managerial economics is concerned with the application
of economic concepts and economics to the problems of formulating rational
decision making.”
In the words of Spencer, “Managerial economics is the integration of economic

theory with business practice for the purpose of facilitating decision making and
forward planning by management”
According to Douglas, “Managerial economics is concerned with the application

of economic principles and methodologies to the decision-making process within
the firm or organization. It seeks to establish rules and principles to facilitate the
attainment of the desired economic goals of management”.
As per Haynes, Mote, and Paul, “Managerial Economics refers to those aspects of
economics and its tools of analysis most relevant to the firm’s business decisions-
making process. By definition, therefore, its scope does not extend to
macroeconomic theory and the economics of public policy an understanding of
which is also essential for the manager.”
From the aforementioned definitions, it can be concluded that managerial

economics serves as a link between the two disciplines, namely management and
economics. The management discipline is concerned with a number of principles
that help in business decision making and improving the effectiveness of business
organizations.
S:T he other hand, economics is related to an optimum allocation of limited

resources for attaining the set objectives of a business organization. Therefore, it
can be said that managerial economics is a special discipline of economics that
can be applied in business decision making of organizations.
The decision-making process of an organization involves selecting the best course

of action from the available alternatives. Therefore, an organization should have a
clear understanding of business environment so that it can take appropriate
business decisions.

Figure-1 shows the application of economics in business decision-
making:
Thus, managerial economics deals with the analysis of economic theories and
laws to take decisions based on rational thinking.
Scope of Managerial Economics:

The two branches of economics, which are macroeconomics and microeconomics.
These two branches can be directly or indirectly applied to the business decision
making of an organization depending on the purpose of analysis.
Thus, managerial economics undertakes both macroeconomics and

microeconomics theories. In general sense, managerial economics involves the
application of different economic tools, theories, and methodologies for analyzing
business problems and decision making.
These business problems can be related to demand and supply prospects of an

organization, level of production, pricing, market structure, and extent of
competition. The areas of business problems to which economic tools and
theories can be directly applied are classified into two categories, which are
microeconomics applied to operational or internal issues and macroeconomics
applied to environmental or external issues.
Application of Microeconomics:
In business decisions making, microeconomics can be applied to deal with
operational issues, which are internal to an organization. These issues are under
the control of management and can be solved by taking appropriate decisions.
Basically, an organization has to deal with internal issues related to type of

business and product, size of organization, technology to be used, price
determination, investment decisions, and management of inventory.

Microeconomics strives to solve these issues, which are generally faced by
business organizations.
The operational issues can be solved by using the following

microeconomic theories:
i. Demand Theory:
Refers to a theory that is applied to understand the buying behavior of
consumers. This theory helps managers to determine the factors that affect the
buying decisions of consumers and their needs and requirements.
In addition, the demand theory helps managers to answer the

following questions:
a. Why does a consumer stop consuming certain products?
b. How does a customer react with changes in factors, such as price, tastes and
preferences, and level of income?
Thus, the demand theory is helpful in deciding the type of product to be

produced, determining the level of production, and making pricing decisions in
the present market conditions.
ii. Production Theory:

Refers to the theory that explains the relationship between input and output. The
mainly deals with the Tissues related to production. It explains the changes in the
cost of a product or service and the effect on the total output with change in a
particular factor (input) while keeping the other factors at constant.
Apart from this, the production theory deals with maximization of output (when
the resources ar. limited) and determination of optimum size of output. Therefore
it helps managers to decide the size of an organization, labor and capital to be
employed, and total output.
iii. Price Theory:

Involves determining the price of a product or services under different market
price theory is concerned with the analysis of market structure and determination
of price. It also enables manage to determine the conditions that are conducive

and profitable for price discrimination as well as how advertising would help in
increasing the sales of an organization. Therefore, the price theory and market
analysis helps in finalizing the pricing policies of an organization.
iv. Profit Theory:

Helps organizations to measure the return on capital and total profit. It is a well-
known fact that the main objective of any organization is to earn profit. However,
an organization does not always earn the same amount of profit every time due to
uncertain business conditions with respect to changes in product demand, prices
of input, and competition level. There is always a condition of risk even when an
organization has employed the best technique for production. Therefore,
managing profit of an organization helps in minimizing the risk factor and
predicting the actual profit for future.
v. Capital Theory:
Enables managers to make capital and investment decisions, which determine the
success of an organisation. As we know, capital is a scarce resource of an
organization; therefore, it should be allocated efficiently. Generally, managers,
while managing capital, face issues related to the selection of investment project
and efficient allocation of capital. These issue are dealt with the help of the capital
theory. The capital theory helps managers in investment decision making,
selecting appropriate projects, and capital budgeting.
Application of Macroeconomics:
The macroeconomic theory deals with issues related to the general business
environment in which an organization operates. The environmental issues can be
associated with the economic, political, and social environment of a country.
The economic environment of a country comprises the following

factors:
a. The type of economic system of the country
b. The pattern of national income, employment, saving, and investment of the

country
c. The functioning of the financial sector of the country

d. The structure and nature of foreign trade in the country
e. The trends of labor supply and capital market strength of the country
f. The economic policies of government
g. The value system of society, property rights, customs, and habits
h. The political system of the country
i. The functioning of private and public sectors
j. The impact of globalization on the country
Thus it is not possible for an individual organization to deal with all these factors
that constitute the economic environment of a country. However, all
organizations of a country together stimulate its economic environment. All these
factors have a great impact on the functioning of individual organizations.
Therefore, organizations, while decision making, should take into consideration
the economic, political, and social factors that constitute the economic
environment of a country.
Importance of Managerial Economics:

The main objective of any business organization is to earn maximum profit. For
achieving this objective, an organization needs to ensure the effectiveness of its
decision making process. Decision-making is defined as a process of selecting the
best course of action among the available alternatives, so that the set business
objectives can be achieved.
A comprehensive decision requires a perfect knowledge of various economic

theories, concepts, and tools that are directly included in the business decision
making. Managerial economics enables manager’s in effective business decision
making as it analyzes a business problem rationally and with different
perspectives.
It helps an organization in the following ways:

a. Helps in taking decisions related to type of product, investment, pricing, and
level of production
b. Enables managers to select production techniques and best course of action
c. Comprises various economic concepts, such as demand theory, production

theory, and capital theory, which helps in studying and analyzing different
business problems
d. Helps organization in making future decisions with respect to economic

variables, such as price, demand, supply, and cost
e. Applies different economic theories and tools to the real world business
environment
f. Enables organizations to determine and analyze factors that affect business

decisions
g. Helps in formulating business policies
h. Helps in assessing relationship between different economic variables, such as

demand, supply, income, employment, and profit
Managerial Economics in Other Disciplines:

Managerial economics undertakes the study of economic analysis for solving
different business problems However, there are other disciplines that help in
economic analysis for business decision making.
Thus, managerial economics also involves the study of certain other disciplines.
Some of the important disciplines associated with managerial economics include
mathematics, statistics, operations research, and management theory and
accounting. These disciplines help organizations in economic analysis to a greater
extent.
Let us discuss these disciplines as follows:

i. Mathematics:
Refers to one of the most crucial disciplines of business decisions making.
Organizations generally deal with the concepts that are quantitative in nature,
such as demand, price, cost, and interest rates. These concepts are also called
economic variables, which w related directly or indirectly with each other.
An application of mathematical tools in these concepts not only provides clarity,

but also helps in designing a logical framework to measure relationship between
different economic variables. Apart from this, mathematical tools are also used to
deal with issues related to sales optimization profit maximization, and cost
minimization.
ii. Statistics:
Provides an important aid in business decision-making. An organization uses
various statistical tools to collect and analyze business data as well as to check the
validity of the data before it is applied to business analysis. Some of the
commonly used statistical tools are forecasting techniques and regression
analysis.
These tools help managers in determining economic events that may take place in
future. In addition, these tools enable managers to project probable results of
their business decisions. Thus, the scope of managerial economics also involves
the study of different statistical tools.
iii. Operational Research:

Represents a close relationship with managerial economics. Operational research
is basically concerned with building models for solving various business
problems. It makes use of different economic concepts mathematical techniques,
and statistical tools. The most commonly used operational research technique for
solving business problems is linear programming.
iv. Management theory and accounting:

Refers to the most important disciplines that help in business decision making.
These two disciplines are closely associated with managerial economics.
Management theories help in determining the behavior of an organization while
it is striving to achieve certain predetermined goals and objectives.

Therefore, managers must have proper knowledge of management theories. On
the other hand, accounting helps an organization to know its functioning and
performance. It also enables an organization to determine whether it requires any
course of action for improvement. Thus accounting information serves as a
primary source of data for business decision making.
Demand Analysis
Definition: The Demand Analysis is a process whereby the management makes decisions
with respect to the production, cost allocation, advertising, inventory holding, pricing, etc.
Although, how much a firm produces depends on its production capacity but how much it
must endeavor to produce depends on the potential demand for its product.
Thus, the marketer is required to analyze properly the demand for its product in the market
and must hold inventory accordingly. Such as if there is a potential demand in the future,
then the firm should hold more inventories and in case there is no demand, then the
production remains unwarranted, and hence, lesser inventories are held.
There is a possibility that production might exceed the demand, then the marketer must use
alternative ways such as better advertisements to create a new demand.
The demand shows the relationship between two economic variables, the price of the product
and the quantity of product that a consumer is willing to buy for a given period of time, other
things being equal.
Features/Characteristics of Demand
The following are the main features or characteristics of demand that the marketer must
keep in mind while analyzing the demand for its product:
 The demand is the specific quantity that a consumer is willing to purchase. Thus, it is
expressed in numbers.
 The demand must mean the demand per unit of time, per month, per week, per day.
 The demand is always at a price, e. any change in the price of a commodity will bring
about a certain change in its quantity demanded.
 The demand is always in a market, a place where a set of buyers and sellers meet. The
market needs not to be a geographical area.
Thus, demand plays a crucial role in the success of any business enterprise. And it must be
remembered that demand is always at a price and a particular time period in which it is
created. Such as demand for woolen clothes will be more in winters than in any other season.
Hence, demand analysis is always done in terms of the price and the relevant time period.

Law of demand:
The law of demand describes the inverse relationship of price and the quantity demanded, all else
remaining constant. If the price is high, the quantity demand decreases and if the price decreases,
then the quantity demand will increase.
Substitution effect:
In substitution effect for demand analysis is when the price of a good or product decreases, the
relative price of that product makes the buyer more eager to buy that good or product. When
the price of a good increases, the relative price of that good makes the buyer less eager to buy that
good or product. The price of one product is contrasted with the prices of other products, thus
causing the substitution effect. Consumers usually substitute towards the cheap or less expensive
product.
Income effect:
Income to demand analysis can be measured in terms of the services and goods that someone can
purchase. If the price of goods and services decreases and nominal income remains constant, real
income increases. In this way, when one can buy goods at the cheapest rate, then one’s income goes
furthest and thus increases in real terms.
Change in consumer income:

Changes in consumer income causes demand to fluctuate on par to the change in one’s income. If
income increases, demand for normal goods will increase. If income decreases, demand for normal
goods will decrease. Contrary to that, if income increases, demand for inferior goods decreases and
if the income decreases, the demand for inferior goods will increase.
Change in related goods price:

Price change in one good it can change the demand of other related goods. For example, if the price
of one good increases, more consumers will buy the other relative goods or if the price of the first
good decreases, more consumers will buy it.
Change in consumer expectations:

Any change in consumer expectations affects the demand analysis. If
a consumer behavior expects his or her income to rise in the future, the existing demand will
increase and if the consumer expects his or her income to reduce in the future, the existing demand
will decrease accordingly to that
There are two types of demand functions:

(i) Individual Demand Function. An individual’s demand function refers to the
quantities of a commodity demanded at various prices, given his income, prices of
related goods and tastes. It is expressed as
D=f (P)
(ii)Market Demand Function:

An individual demand function is the basis of demand theory. But it is the market
demand function that is main interest to managers. It refers to the total demand
for a good or service of all the buyers taken together. The market demand
function may be expressed mathematically thus

Dx = f (Px, Py, M, T, A, U)
Where
ADVERTISEMENTS:
Dx = Quantity demanded for commodity x
f = functional relation
Px = Price of commodity x
Pr = Prices of related commodities i.e. substitutes and complementariness
M = The money income of the consumer
T = The taste of the consumer
A = ‘l he advertisement effect
U = Unknown variables
By demand function, economists mean the entire functional relationship. This

means the whole range of price quantity relationship and not just the quantity
demanded at a given price per unit of time. The demand function expressed
above is really just a listing of variables that affect the demand.
The demand function must be made explicit and clear for use in managerial
decision making. The industry must have reasonably good knowledge and
information about its demand function to formulate effective long run planning
decisions and short run operating decisions.
The basic assumption in demand schedule and demand curve has been the
relationship between price and quantity of a commodity signifying a change in
price to bring a change in quantity demanded with all other variables assumed
constant and unchanged. In demand function this assumption is relaxed and it is
held emphatically that besides change in price there are other variables which
influence the demand for a particular commodity.

Classical economists were aware of the fact that the price is not the only factor
which determines sales but that other factors, too, have an important effect on
them. These other factors are the income of the consumer, their tastes, habits,
preferences, etc. When these factors influence the demand the demand is said to
shift. But their price-demand relationship is not as important to the management
as the shift in demand, which constitutes the demand function. Shifting of
demand curve renders the demand analysis difficult.
Therefore, demand function makes use of mathematical formulation to arrive at

correct results. Recently more sophisticated methods have been developed for the
study like simultaneous equation and mathematical programming which helps in
arriving at precise results.
2. Types of Demand
Managerial decisions require the knowledge of various types of demand. We

explain below a few important types.
Demand for Consumers’ Goods and Producers’ Goods:

Consumers’ goods are those final goods which directly satisfy the wants of
consumers. Such goods are bread, milk, pen, clothes, furniture, etc. Producers’
goods are those goods which help in the production of other goods that satisfy the
wants of the consumers directly or indirectly, such as machines, plants,
agricultural and industrial raw material, etc. The demand for consumers’ goods is
known as direct or autonomous demand. The demand for producers’ goods is
derived demand because they are demanded not for final consumption but for the
production of other goods.
Joel Dean gives the following reasons of the demand for producers’
goods:
(1) Buyers are professionals, and hence more expert, price-wise and sensitive to
substitutes.
(2) Their motives are purely economic: products are bought, not for themselves
alone, but for their profit prospects.

(3) Demand, being derived from consumption demand, fluctuates differently and
generally more violently.
The distention between consumers’ goods and producers’ goods is based on the
uses to which these goods are put. There are many goods such as electricity, coal,
etc. which are used both as consumers’ goods and producers’ goods. Still, this
distinction is useful for the appropriate demand analysis.
Demand for Perishable and Durable Goods:

Consumers’ and producer’s goods have been classified further into perishable and
durable goods. In economics, perishable goods are the goods which are used up in
a single act of consumption while durable goods are the goods which can be used
time and again for a considerable period of time.
In other words, perishable goods are consumed automatically while only services
of durable goods are consumed. Thus, perishable goods include all types of
services, foodstuffs, raw materials, etc. On the other hand, durable goods consist
of buildings, machines, furniture’s, etc.
This distinction has great importance because in the demand analysis durable
goods create more complex problems than nondurable goods. Non-durable goods
are often sold to meet the current demand which is based on existing conditions.
On the other hand, the sale of durable goods increases the stock of available
goods whose services are consumed over a period of time.
The demand for perishable goods is more elastic while the demand for non-
durable goods is less elastic in the short-run and their demand tends to be more
elastic in the long run. According to J. Dean, the demand for durable goods is
more unstable in relation to the business conditions. Postponement, replacement,
storage and expansions are inter-related problems which are included in the
determination of demand for durable goods.
Derived and Autonomous Demand:

When the demand for a particular product is dependent upon the demand for
some other goods, it is called derived demand. In many cases, derived demand of

a product is due to its being a component part of the parent product. For
example, demand for cement is dependent upon the demand for houses.
The inputs or commodities demanded for further production have derived

demand. The demand for raw materials, machines, etc. do not fulfill any direct
consumption need of the buyer but they are needed for the production of goods
having direct demand. Therefore, they fall in the category of derived demand. If
demand for final product increases, the derived demand for related product also
increases. If demand for the former falls, the demand for the latter also decreases.
On the other hand, when demand for a particular product is independent of the
demand for other products, such a demand is called autonomous demand. The
demand for consumer goods is autonomous. It is the one where a commodity is
demanded because it is needed for direct consumption. For example, T.V.,
furniture, etc.
To distinguish between derived demand and autonomous demand is not an easy

job. There is a thin line of demarcation between the two. In fact, mostly demand
is derived demand. For example, even the demand for a car by a household is
derived from the demand for transport service. Thus, the distinction between the
two is rather arbitrary and a matter of degree.
Derived demand is generally less price elastic that the autonomous demand. In
the case of derived demand, the impact of price on demand gets diluted by other
components in production whose prices are sticky.
Industry and Company Demand:

Industry demand refers to the total demand for the products of a particular
industry, that is, the total demand for paper in the country On the other hand,
company demand denotes the demand for the products of a particular company
(firm), that is, the demand for paper produced by Bellarpur Paper Mills. Industry
demand covers the demand of all firms producing similar products which are
close substitutes to each other irrespective of differences in trade names, such as
Close-up, Colgate, Pepsodent, etc.
Industry demand is less price elastic than company demand.

However, the structure of the market decides the degree of price-
demand relationship of the company demand:
(i) In the case of perfect competition the degree of substitutability being perfect,
the company demand for the product tends to be perfectly elastic.
(ii) In monopoly market, there is only one firm and the firm is itself an industry.
In such a case, the company demand curve is the same as that of the industry
demand curve.
(iii) In homogeneous oligopoly, business is highly transferable among rivals. The

company demand curve remains uncertain because it depends upon what its
rivals do. Usually, the sellers charge the same price to stay in the market.
(vi) In differentiated oligopoly, the company demand is less closely related to the
industry demand. Sellers try to differentiate their products from each other.
Hence, the price competition is lower than the homogeneous oligopoly market.
(v) If there is monopolistic competition, the company demand curve is more price
elastic than the industry demand curve.
Short-run Demand and Long-run Demand:

In the case of perishable commodities such as vegetables, fruit, milk, etc., the
change in quantity demanded to a change in price occurs quickly. For such
commodities, there is a single demand curve with the usual negative slope. But in
the case of durable commodities such as equipment’s, machines, clothes, and
others, a change in price will not have its ultimate effect on the quantity
demanded until the existing stock of the commodity is adjusted which may take a
long time.
A short-run demand curve shows the change in quantity demanded to a change in

price, given the existing stock of the durable commodity and the supplies of its
substitutes. On the other hand, the long-run demand curve shows the change in
quantity demanded to a change in price after all adjustments have been made in
the long-run.

According to Joel Dean, “Short-run demand refers to existing demand with its
immediate reaction to price changes, income fluctuation, etc., whereas long-run
demand is that which will ultimately exist as a result of the changes in pricing,
promotion or product improvement, after enough time is allowed to let the
market adjust itself to the new situation.”
Joint Demand and Composite Demand:

When two or more goods are jointly demanded at the same time to satisfy a single
want it is called joint or complementary demand. Joint demand refers to the
relationship between two or more commodities or services when they are
demanded together. There is joint demand for cars and petrol, pens and ink, tea
and sugar, etc.
Jointly demanded goods are complementary. A rise in the price of one leads to a
fall in the demand for the other and vice-versa. For example, a rise in the price of
care will bring a fall in their demand together with the demand for petrol and
lower its price, if the supply of petrol remains unchanged.
On the contrary, a fall in the price of cars, as a result of a fall in the cost of
production of cars, will increase their demand, and therefore increase the
demand for petrol and raise its price, if available supplies of petrol are
unchanged. A commodity is said to have composite demand when it can be put to
several alternative uses.
This is not only peculiar to commodities like leather, steel, coal, paper, etc. but
also to factors of production like land, labour and capital. For example, coal is
demanded by railways, by factories, by households, etc. There is competition
among the different uses of a commodity in composite demand. Hence, each use
of the commodity is the rival of the other uses. So it is also called rival demand.
Any change in the demand for a commodity by a user will affect the supply of the
other users which will change their prices.
3. Changes in Demand
Changes in demand take place in two ways:

(1) Increase and decrease in demand; and
(2) Extension and contraction in demand.
(1) Increase and Decrease in Demand:

An individual’s demand curve is drawn on the assumption that factors such as
prices of other commodities, income and tastes influencing his demand remain
constant. What happens to an individual’s demand curve if there is a change in
any one of the factors affecting his demand, the other factors remaining constant?
When any one of the factors changes, the entire demand curve shifts either to the
right or to the left when the consumer buys more of the commodity at the same
price, it is increase in demand. When his money income rises, other factors
remaining constant, his demand curve for a commodity will shift to the right.
This is shown in Figure 4. Before the rise in his income, the consumer is buying
OQ quantity at OP price on the DD demand curve. With the increase in income,
his demand curve shifts to the right as D]D]. He now buys more quantity OQ1 at
the same price OP. On the contrary, if his income falls, his demand curve will
shift to the left.
He will buy less of the commodity at the same price, as shown in Figure.5. Before
the fall in his income, the consumer is on the demand curve D1D1 where he is
buying OQ2 of the commodity at OP price. He now buys less quantity OQ, at the
given price OP. When the consumer buys less of the commodity at a given price,
this is called the decrease in demand.
Demand curves are thus not stationary. Rather, they shift to the right or left due
to a number of causes. There are changes in tastes, habits and customers of the
consumers; changes in income and expenditure; changes in the prices of
substitutes and complements; expectations about future in prices and incomes
and changes in the age and composition of the population, etc.
(2) Extension and Contraction in Demand:

A movement along a demand curve takes place when there is a change in the
quantity demanded due to a change in the commodity’s own price and not due to
any other factor. This is illustrated in Figure 6. Which shows that when the price

is OP1, the quantity demanded is OQ1. With the fall in price, there has been a
downward movement along the same demand curve D1Dl from point A to B.
This is known as extension in demand. On the contrary, if we take В as the
original price-demand point, then a rise in the price from OP 2 to OP1 leads to a fall
in the quantity demanded from OQ2 to OQ1 The consumer moves upwards along
the same demand curve D1D1from point В to A. This is known as contraction in
demand.
4. Income Demand
We have so far studied price demand in its various aspects, keeping other things
constant. Let us now study income demand which indicates the relationship
between income and the quantity of commodity demanded. It relates to the
various quantities of a commodity or service that will be bought by the consumer
at various levels of income in a given period of time, other things being equal.
Things that are assumed to remain equal are the price of the commodity in
question, the prices of related commodities, and the tastes, preferences and
habits of the consumer for it. The income-demand function for a commodity is
written as D = f(y). The income-demand relationship is usually direct.
The demand for the commodity increases with the rise in income and decreases
with the fall in income, as shown in Figure 9. When income is OI, the quantity
demanded is OQ and when income rises to OI, the quantity demanded also
increases to OQ1.The reverse case can also be shown likewise. Thus, the income
demand curve ID has a positive slope. But this slope is in the case of normal
goods.
Let us take the case of a consumer who is in the habit of consuming an inferior
good. So long as his income remains below a particular level of his minimum
subsistence, he will continue to buy more of this inferior good even when his
income increases by small increments. But when his income starts rising above
that level, he reduces his demand for the inferior good. In Figure 9(B), OI is the
minimum subsistence level of income where he buys IQ of the commodity.

Upto this level, this commodity is a normal good for him so that he increases its
consumption when his income rises gradually from ОI1 to OI2As his income rises
above OI, he starts buying less of the commodity. For instance, at OI3 income
level, he buys I3O3 which is less than IQ. Thus, in the case of inferior foods, the
income demand curve ID is backward sloping.
5. Cross Demand
Let us now take the case of related goods and how the change in the price of one
affects the demand of the other. This is known as cross demand and is written as
D =f (pr). Related goods are of two types, substitutes and complementary. In the
case of substitute or competitive goods, a rise in the price of one good A raises the
demand for the other good B, the price of В remaining the same. The opposite
holds in the case of a fall in the price of A when the demand for В falls.
Figure 10 (A) illustrates it. When the price of good A increases from OA to О A,
the quantity of good В also increases from OB to OB1The cross demand curve CD
for substitutes is positively sloping. For with the rise in the price of A, the
consumers will shift their demand to В since the price of В remains unchanged. It
is also assumed here that the incomes, tastes, preferences, etc. of the consumers
do not change.
In case the two goods are complementary or jointly demanded, a rise in the price
of one good A will bring a fall in the demand for good B. Conversely, a fall in the
price of A will raise the demand for В. This is illustrated in Figure 10 (B) where
when the price of Л falls from OA1to OA2 the demand for В increases from OB1 to
OB1The demand curve in the case of complementary goods is negatively sloping
like the ordinary demand curve.
If, however, the two goods are independent, a change in the price of A will have
no effect on the demand for B. We seldom study the relation between two
unrelated goods like wheat and chairs. Mostly as consumers, we are concerned
with the price-demand relation of substitutes and complementary goods.

6. Demand of Determinants
The demand for the product is mainly the attitude of consumers towards the
product. The attitude of consumers gives vise to actions in buying different
products at different prices. The demand for a product is determined by different
factors. The main demand determinants are price, income, price of related goods
and advertising. Therefore, demand is a multivariate relationship, i.e. it is
determined by many factors simultaneously.
(A) Determinants of Individual Demand:

Let us discuss the variables which influence the individual demand.
1. Price of the Commodity:

This is the basic factor influencing the demand. There is a close relationship
between the quantity demanded and the price of the product. Normally a larger
quantity is demanded at a lower price that at a higher price. There is inverse
relationship between the price and quantity demanded. This is called the law of
demand.
2. Income of the Consumer:

The income of the consumer is another important variable which influences
demand. The ability to buy a commodity depends upon the income of the
consumer. When the income of the consumers increases, they buy more and
when income falls they buy less. A rich consumer demands more and more goods
because his purchasing power is high.
3. Tastes and Preferences:

The demand for a product depends upon tastes and preferences of the consumers.
If the consumers develop taste for a commodity they buy whatever may be the
price. A favourable change in consumer preference will cause the demand to
increase. Likewise an un-favourable change in consumer preferences will cause
the demand to decrease.
4. Prices of Related Goods:

The related goods are generally substitutes and complementary goods. The
demand for a product is also influenced by the prices of substitutes and
complements. When a want can be satisfied by alternative similar goods they are
called substitutes, such as coffee and tea. Whenever the price of one good and the
demand for another are inversely related then the goods are said to be
complementary, such as car and petrol.
5. Advertisement and Sales Propaganda:

In modem times, the preferences of consumers can be altered by advertisement
and sales propaganda. Advertisement helps in increasing demand by informing
the potential consumers about the availability of the product, by showing the
superiority of the product, and by influencing consumer choice against the rival
products. The demand for products like detergents and cosmetics is mainly
caused by advertisement.
6. Consumer’s Expectation:
A consumer s expectation about the future changes in price and income may also
affect his demand. If a consumer expects a rise in prices he may buy large
quantities of that particular commodity. Similarly, if he expects its prices to fall in
future, he will tend to buy less at present. Similarly, expectation of rising income
may induce him to increase his current consumption.
(B) Determinants of Market Demand:

Market demand for a product refers to the total demand of all the buyers taken
together. How much quantity the consumers in general would buy at a given
period of time constitutes the total market demand for the product.
The following factors affect the market demand pattern of a commod-

ity:
1. Price of the Product:
The law of demand states that if other things remain the same when price falls,
demand increases and vice-versa.
2. Standard of Living and Spending Habits:

When people are accustomed to high standard of living their spending on
comforts and luxuries also increase, that automatically increase the demand.

3. Distribution of Income Pattern:
If the distribution pattern of income is fair and equal the market demand for
essential items tends to be greater.
4. The Scale of Preferences:

The market demand for a product is also affected by the scale of preference of
buyers. If there is a shift in consumers’ preference from x to y, the demand for у
tends to increase.
5. The Growth of Population:

The growth of population is also another important factor that affects the market
demand. With the increase in population, people naturally demand more goods
for their survival.
6. Social Customs and Ceremonies:

Social customs and ceremonies are usually celebrated collectively. They involve
extra expenditure on certain items and thereby increase the demand.
7. Future Expectation:
People are not sure about their future, because future is uncertain. If the
consumers expect a rise in prices of products, they buy more at present and
preserve the same for the future, thereby the market demand would be affected.
8. Tax Rate:
The tax rate also affects the demand. High tax rate would generally mean a low
demand for the goods. At certain times the government restricts the consumption
of a commodity and uses the tax as a weapon. A highly taxed commodity will have
a lower demand.
9. Inventions and Innovations:

Inventions and innovations introduce new goods in the market. The consumers
will have a strong tendency to purchase the new product. The preference over the
new goods adversely affects the demand for the existing goods in the market.
10. Weather Conditions:

Seasonal factors also affect the demand. The demand for certain items purely
depends on climatic and weather conditions. For example, the growing demand
for cold drinks during the summer season and the demand for sweaters during
the winter season.
11. Availability of Credit:

The purchasing power is influenced by the availability of credit. If there is
availability of cheap credit, the consumers try to spend more on consumer
durables thereby the demand for certain products increase.
12. Pattern of Saving:

Demand is also influenced by the pattern of saving. If people begin to save more,
their demand will decrease. It means the disposable income will be less to
purchase the goods and services. On the contrary, if saving is less their demand
will increase.
13. Demonstration Effect:

Demonstration effect helps to increase human wants. In underdeveloped
countries, there is a desire in the minds of the people to imitate other people for
conspicuous consumption and that is why they are not able to save. This change
in the saving habits of the people is due to “contact effect”. The demonstration
effect has a positive effect on the demand for comforts and luxury goods.
14. Circulation of Money:

An expansion or a contraction in the quantity of money will affect demand. When
more money circulates among the people, more of a thing is demanded by the
people because they have more purchasing power, and vice versa
Utility Analysis of Demand: Law of

Diminishing Marginal Utility
Marginal Utility is the utility at the point where the consumer stops further
consumption of a commodity.
Statement and Explanation of the Law:

A very important law in consumption relates to the fact that as we go on
consuming a commodity, the satisfaction derived from its successive units goes
on decreasing.
It is well known that familiarity breeds contempt. The more we have of a

commodity, the less we want to have more of it. It is the experience of every
consumer that as he goes on consuming a particular commodity, each successive
unit of the commodity yields him less and less satisfaction.
In other words, at each step its utility (marginal utility, not total utility) goes on
decreasing.
Thus if we are very thirsty and buy a drink to quench our thirst, the drink will
yield a great deal of satisfaction at first. After the consumption of the first drink,
however, we would not like to have another, because our want has been
practically satisfied. This is the case with most of the commodities.
Dr. Marshall states the law thus:

“The additional benefit which a person derives from a given increase of his stock
of anything diminishes with the growth of the stock that he has.” In this
statement of the law, the word “Additional” is very important. It is only additional
(marginal) benefit which decrease and not the total benefit as we shall see in the
following table.
The following table relating to an imaginary consumer consuming

‘rasgullas’ illustrates the law:
As the consumer goes on eating ‘rasgullas’, the additional or marginal utility goes
on decreasing. The 7th ‘rasgulla’ yields no additional satisfaction and the 8th and
9th have a negative utility (see column 2). Their consumption, instead of giving
satisfaction or pleasure, causes dissatisfaction.
If you look at column 3, you will find that the total utility goes on increasing up to
a point. It also seems reasonable that the utility of two ‘rasgullas” should be more
than that of one, and the total utility of three more than that of two, and so on.
But if you look at it more carefully, you will notice that although the total utility
does increase, it increases only at a diminishing rate.
(1) No. of (3) Marginal Total Utility

Rasgullas Utility (2)

1 15 15
2 13 28
3 10 38
4 8 46
5 4 50
6 2 52
7 0 52
8 -2 50
9 -5 45
For example, when our friend consumes the second ‘rasgulla’, the increase in
utility is 13; and when he-consumes the third, the total utility increases by 10
only. Column 2 shows the rate at which utility increases. We can see that it
increases at a diminishing rate In other words, the marginal utility decreases. (We
shall discuss marginal utility more fully presently).
Diagrammatic Representation:
This law can be understood better with the help of the following
diagram:
OX and OY are the two axes. Along OX are represented the units of the
commodity, ‘rasgullas’, and along OY is measured the marginal utility corre-
sponding to the consumption of each unit; UU’ is the utility curve. AB is the
utility when one ‘rasgulla’ is taken. CD is the additional utility when two of them
are taken: CD is less than AB. The additional utilities of other successive Units are
EF, GH. KL and MN.
It can be seen that at each step, the additional utility becomes smaller and
smaller. At the seventh unit, there is no addition at all, i.e., the marginal utility is
zero, and then it becomes negative, which is represented by the shaded area
below the axis of X.

We may distinguish between initial utility, total utility, and zero utility and
negative utility.
Initial Utility:
It is the utility of the initial or the first unit. In the table given on the previous
page, the initial utility is 15.
Total Utility:
Look at column 3 of the table. It gives the total utility at earn step. For example, if
you consume one ‘rasgulla’, the total utility is 15; if you consume two, the total
utility is 28, and so on.
Zero Utility:
When the consumption of a unit of a commodity makes no addition to the total
utility, then it is the point of zero utility. In our table, the total utility, after the 6th
unit is consumed, is 52. At the seventh also it is 52. Thus, the seventh ‘rasgulla
results’ in no increase whatsoever. This is the point o’ zero utility, it is thus seen
that the total utility is maximum when the marginal utility is zero.
Negative Utility:
If the consumption of a commodity is carried to excess, then instead of giving any
satisfaction, it may cause dissatisfaction. The utility in such cases is negative. In
the table given above the marginal utility of the 8th and the 9th units is negative.
Limitations or Exceptions:
The Law of Diminishing Utility says that as we go on consuming more and more
units of a commodity, the utility falls with every successive unit consumed. But
this is not always true. We may, therefore, see below what those limitations or
exceptions are.

Dissimilar Units:
If the units are not identical, the law will not apply For instance, if the second
‘rasgulla’ is much larger than the first-one, it will yield more satisfaction than the
first. The law will apply only if the units are similar.
Very Small Units:

If we are given water by the Spoonful when we .are very thirsty, each successive
spoonful will give us more satisfaction. If, however, the unit is the usual tumbler
of water, the law starts working at once. In the case of very small units, the law
applies at a later stage. At first the marginal utility will therefore, increase instead
of decreasing. But ultimately the marginal utility must fall if the consumption is
continued, and this is exactly what the law says.
Too Long an Interval:

Suppose you take your morning meal at 10 A.M. and your dinner at 8 P.M. If you
eat nothing in between, the dinner will probably yield even greater satisfaction
than your breakfast. But if you are asked to take another meal within an hour of
the first, the law undoubtedly applies. The law, therefore, applies only when the
units of the commodity are taken quickly one after another within a reasonable
period of time.
Rare Collections:
The law does not apply in the case of rare collections. If a person has a hobby of
collecting rare coins, the larger the number he collects the greater will be his
happiness, whereas according to this law it should be less and less.
Abnormal Persons:
When we discuss this law, we assume that we are talking of normal persons. But
there are some abnormal people too, e.g., misers. The more money a miser has,
the greater is the satisfaction that he derives. The law, therefore, does not apply to
abnormal persons like misers, drunkards, musicians, etc., who want more and
more of the commodity they are in love with. In such cases, the consumption
excites further desire and hence yields greater satisfaction.
Change in another Person’s Stock:

Sometimes utility changes not because change has taken place in the stock of the
commodity that a person has of clause a change has taken peace in another
person’s stock. Suppose, there are two persons collecting stamps in a town and
both are rivals. Suppose further that by an accident the stock of one of them is

destroyed. Automatically, the value of the stock of the other person will go up
even though there has been no change in his stock.
Changes in Income, Habits and Tastes:

We may add that a change in a consumer’s income, a change in fashion, and a
change in other possessions of the consumer also seem to upset the Law of
Diminishing Marginal Utility. In such cases, increase in consumption may yield
greater and greater satisfaction.
Conclusion:
However, in spite of the above limitations or exceptions, the law has universal
application. This is so because it expresses a basic principle of human behaviour.
Does the Law of Diminishing Marginal Utility Apply to Money?

It is sometimes said that the law of diminishing marginal utility could not apply
to money. Since money can command an endless variety of commodities and
services, there can be no end to a craving for money. More money will be
welcomed even if a person has already much of it.
The more he has of it, the more he would like to have it. It would enable him to
enjoy not only a large variety of material objects, but would also bring him
prestige, power and distinction. Therefore, it is urged that the law of diminishing
marginal utility does not apply to money. But a little thought will show that even
money is no exception to the law. Every addition to our stock of money, however
welcome it may be, has less significance, i.e., we do not attach the same
importance to it. As a man grows rich, he becomes careless in spending money.
He wastes it on useless luxuries which do him no good.
It only means that a person does not attach the same importance to additional
wealth, or that its marginal utility decreases. That is why the-Government taxes
the rich people. The richer they are, the higher the taxes they have to pay. The
basis of the principle of progressive taxation is the law of diminishing marginal
utility. Hence the law of diminishing marginal utility undoubtedly applies to
money.
Marginal Utility:
We have been talking about marginal utility without clearly explaining to the
student what it means. We shall now explain it fully. We may say roughly that

Marginal Utility is the utility at the point where the consumer stops further
consumption of a commodity.
That is why it is also called the find utility. But where does a consumer stop? If
you are invited by a friend to a feast of ‘rasgullas,’ you will stop when the satiety
level is reached, i.e., when you cannot eat any more ‘rasgullas’. In other words,
you will stop at the joint of zero utility. This is the case, however, when you have
not got to pay anything for the ‘rasgullas’.
One does not, however, receive invitation to a least every day. A consumer has
ordinarily to pay for what he wants to take. In that case, he will naturally weigh in
his mind the price that he has to pay and the pleasure that he gets. So long as the
utility is greater than the price, he will go on consuming. But as he goes on, the
utility steadily decreases. Sooner or later, a point will be reached when the utility
and price balance each other.
Obviously, he will stop eating at this point, for if he goes further, the utility will be
less than the price and he will be closer. This is the point of marginal utility. At
this point, the benefit received is just equal to the price that has been paid.
Properly speaking, Marginal Utility may be defined as the addition to the total
utility by the consumption of the last unit considered just worthwhile.
If our consumer stops after consuming the 5th “rasgulla,’ the marginal utility is 4.
Where he actually stops will depend on the price of the commodity. Because if the
price falls, he will consume more and the marginal utility will go down, and vice
versa.
We may here warn the student that it is wrong to say that the marginal utility in
this case is (he utility of the 5th ‘ragulla.’ All the ‘rasgullas’ arc alike, they cannot
have different utilities. But because a ‘rasgulla’ happens to be taken in the 5th
place, its utility is less than that of each of those taken previously. Hence, it is best
to say that the marginal utility is what is added to the previous total when the
unit, which is considered just worthwhile purchasing, is consumed.
Margin is not fixed:

It moves back and forth. If the price rises, we shall stop earlier. But if it falls, we
shall purchase more. Thus, the margin is shifted as the price of the commodity
changes.

The relation between price and marginal utility is discussed below:
Marginal Utility and Price:
Suppose each unit of marginal utility is worth ten paisa. This would mean that the
utility of the first ‘rasgulla’ is equal to fifteen ten paisa. Suppose ‘rasgullas’ are
being sold at 80 paisa each. Then we shall stop buying at the 4th because at this
point marginal utility and price have been equalised. At the third, the utility is
worth Re. 1, whereas the price is 80 paisa. Hence we are tempted to buy the next,
i.e., the 4th, but no more.
At this point, the price is 80 paisa and the utility is also worth 80 paisa. The two
coincide. If the price of a ‘rasgulla’ were to fall to twenty paisa each, we shall buy
even the 6th, for it is at that point that the marginal utility and the price will be
equal. This is how the margin will shift with each change in price and the shifting
will continue until price and marginal utilityhave been equalized.
That is why it is said that price measures marginal utility. When we pay a certain
price for a commodity, it can be taken for granted that we think that the
satisfaction is at least equal to the price paid. Hence we say that price measures
the marginal utility or that marginal utility indicates the price.
Marginal Utility does not determine Price. The relation between marginal utility
and price may be carefully understood. They move together. If the price goes up,
the marginal utility also goes up because now we buy less, and vice versa. The two
coincide. But it is wrong to say that the marginal utility determines or governs
price. It simply indicates it Instead of marginal utility determining price both
marginal utility and price are governed by demand and supply.
Importance of the Law of Diminishing Marginal Utility:

The law of diminishing marginal utility expresses a basic principle of a
consumer’s behaviour. And the law is of immense use to a person in almost every
walk of life.
In Taxation:
We have seen that the law is applicable in the sphere of taxation a man’s income
increases; he is more heavily taxed, for the utility of money to a rich person is less
than that to a poor person. The principle of progressive taxation is based on this
law.
In Determining Prices:

The law also applies to the determination of market price increase in the stock of
a commodity brings a person less satisfaction; therefore he can be induced to buy
more only if the price is lowered. Thus, great the supply, the lower should be the
price to clear it, and vice versa.
In Support of Socialism:
Socialists, take their stand on this law when they advocate a more equal
distribution of Wealth. They argue that excessive wealth in the hands of the rich is
not so useful from the social point of view, as it would be if the excess of wealth is
transferred the poor. In the hands of the poor, it will satisfy more urgent needs. It
is due to the law of diminishing marginal utility that, beyond a certain point,
wealth will have less utility for a rich man. If it is transferred to the poor, it will
have much greater utility.
In Household Expenditure:
The law of diminishing marginal utility regulates our daily expenditure. We know
that as we go on buying more of a commodity, its marginal utility falls. Having
only a limited amount of money at our disposal,’ we cannot waste it unnecessarily
on a large quantity of any one commodity. We, therefore, stop purchasing it at a
point where the utility of money spent is equal to the utility of the last unit of the
commodity purchased. We spend the rest of our money on some other
commodities.
Basis of Some of Economic Laws:

Several very important laws and concepts of Economics arc based on the law of
diminishing marginal utility, e.g., the Law of Demand, the concept of Consumer’s
surplus, the concept of Elasticity of demand, the Law of Substitution. All these
laws and concepts have ultimately been derived from the Law of diminishing
Marginal Utility.
Indifference Curve
A popular alternative to the marginal utility analysis of demand is the Indifference
Curve Analysis. This is based on consumer preference and believes that we cannot
quantitatively measure human satisfaction in monetary terms. This approach
assigns an order to consumer preferences rather than measure them in terms of
money. Let us take a look.

What is an Indifference Curve?
It is a curve that represents all the combinations of goods that give the same
satisfaction to the consumer. Since all the combinations give the same amount of
satisfaction, the consumer prefers them equally. Hence the name Indifference
Curve.
Here is an example to understand the indifference curve better. Peter has 1 unit of
food and 12 units of clothing. Now, we ask Peter how many units of clothing is he
willing to give up in exchange for an additional unit of food so that his level of
satisfaction remains unchanged. Peter agrees to give up 6 units of clothing for an
additional unit of food. Hence, we have two combinations of food and clothing
giving equal satisfaction to Peter as follows:
1. 1 unit of food and 12 units of clothing

2. 2 units of food and 6 units of clothing
By asking him similar questions, we get various combinations as follows:
Combination Food Clothing
A 1 12
B 2 6
C 3 4
D 4 3
Graphical Representation:

The diagram shows an Indifference curve (IC). Any combination lying on this
curve gives the same level of consumer satisfaction. It is also known as Iso-Utility
Curve.
Indifference Map
An Indifference Map is a set of Indifference Curves. It depicts the complete
picture of a consumer’s preferences. The following diagram showing an
indifference map consisting of three curves:

We know that a consumer is indifferent among the combinations lying on the
same indifference curve. However, it is important to note that he prefers the
combinations on the higher indifference curves to those on the lower ones. This is
because a higher indifference curve implies a higher level of satisfaction.
Therefore, all combinations on IC1 offer the same satisfaction, but all
combinations on IC2 give greater satisfaction than those on IC1.
Marginal Rate of Substitution

This is the rate at which a consumer is prepared to exchange a good X for Y. If we
go back to Peter’s example above, we have the following table:
Combination Food Clothing MRS
A 1 12 –
B 2 6 6
C 3 4 2

D 4 3 1
In this example, Peter initially gives up 6 units of clothing to get an extra unit of
food. Hence, the MRS is 6. Similarly, for subsequent exchanges, the MRS is 2 and
1 respectively. Therefore, MRS of X for Y is the amount of Y whose loss can be
compensated by a unit gain of X, keeping the satisfaction the same.
Interestingly, as Peter accumulates more units of food, the MRS starts falling –
meaning he is prepared to give up fewer units of clothing for food. There are two
reasons behind this:
1. As Peter gets more units of food, his intensity of desire for additional units of food
decreases.
2. Most of the goods are imperfect substitutes for one another. If they could
substitute one another perfectly, then MRS would remain constant.
Properties of an Indifference Curve or IC

Here are the properties of an indifference curve:
An IC slopes downwards to the right
This slope signifies that when the quantity of one commodity in combination is
increased, the amount of the other commodity reduces. This is essential for the
level of satisfaction to remain the same on an indifference curve.
An IC is always convex to the origin
From our discussion above, we understand that as Peter substitutes clothing for
food, he is willing to part with less and less of clothing. This is the diminishing
marginal rate of substitution. The rate gives a convex shape to the indifference
curve. However, there are two extreme scenarios:
1. Two commodities are perfect substitutes for each other – In this case, the
indifference curve is a straight line, where MRS is constant.
2. Two goods are perfect complementary goods – An example of such goods would
be gasoline and water in a car. In such cases, the IC will be L-shaped and convex to
the origin.

Indifference curves never intersect each other
Two ICs will never intersect each other. Also, they need not be parallel to each
other either. Look at the following diagram:
Fig 3 shows tow ICs intersecting each other at point A. Since A and B lie on IC1,
the give the same satisfaction level. Similarly, A and C give the same satisfaction
level, as they lie on IC2. Therefore, we can imply that B and C offer the same
level of satisfaction, which is logically absurd. Hence, no tow ICs can touch or
intersect each other.
A higher IC indicates a higher level of satisfaction as compared to a lower IC
A higher IC means that a consumer prefers more goods than not.
An IC does not touch the axis
This is not possible because of our assumption that a consumer considers different
combinations of two commodities and wants both of them. If the curve touches
either of the axes, then it means that he is satisfied with only one commodity and
does not want the other, which is contrary to our assumption.
Budget Line
Since a higher indifference curve represents a higher level of satisfaction, a
consumer will try to reach the highest possible IC to maximize his satisfaction. In
order to do so, he has to buy more goods and has to work under the following two
constraints:
1. He has to pay the price for the goods and

2. He income is limited, restricting the availability of money for purchasing these
goods
As can be seen above, a budget line shows all possible combinations of two goods
that a consumer can buy within the funds available to him at the given prices of
the goods. All combinations that are within his reach lie on the budget line.
A point outside the line (point H) represents a combination beyond the financial
reach of the consumer. On the other hand, a point inside the line (point K)
represents under-spending by the consumer.
Solved Question for You

Q: What are the assumptions underlying the indifference curve approach?
Ans: The Assumptions are as follows,
 The consumer is rational. Also, he possesses full information about all the relevant
aspects of the economic environment in which he lives.
 The consumer can rank combination of goods based on the satisfaction they yield.
However, he can’t quantitatively express how much he prefers a certain good over
the other.
 If a consumer prefers A over B and B over C, then he prefers A over C.
 If a combination X has more commodities than the combination Y, then X is
preferred over Y.

Forecasting Demand and Measuring Price
Elasticity
Elasticity of Demand
Elasticity of demand can be defined as the percentage change in quantity demanded caused by one
percent change in the demand determinant under consideration, while other determinants remain
constant.

Where Ed is the elasticity of demand
Q is the quantity demanded
Z is the determinant of demand, and
 is the change
Different types of elasticity measures

1. Price elasticity of demand:
The measure of relative responsiveness of quantity demanded to price along a given demand curve is
known as price elasticity of demand. In other words, we can say that the price elasticity of demand
measures the responsiveness of quantity demanded of a product caused by a change in the
price of that product.
Ep = (Q / Q) / (P / P)
(Q2 - Q1) / Q
(P2 - P1) / P
(Q2 – Q1) / [(Q1+Q2)/2]
(P2 – P1) / [(P1+P2)/2]

(Q / P) x [(P1+P2) / (Q1+Q2)]
Examples:
a. A firm producing product X charged Rs. 5 for X per unit to have a sale of 200 units. When the price
has increased to Rs. 6 the demand of X has decreased to 180 units. Calculate the price elasticity of
demand.
Solution
Ep = (Q / P) x [(P1+P2) / (Q1+Q2)]
Q1 = 200; Q2 = 180; P1 = 5; P2 = 6;
Q = Q2 – Q1 = -20; P = P2 – P1 = 1;
Ep = (-20/1) x [(5+6)/(200+180)]
= -20 x (11/380) = -220/380 = -0.58
b. Markus, a store selling shoes. Found out that a survey has been conducted by a research
organization for the market in which the firm is operating and it was found that the weekly demand for
shoes (Q) can be expressed in terms of price (P) as:
Q=880 – 1.3P
i. How many shoes can the store sell per week if P = Rs. 200?
ii. What must be the price of the shoes if the store wishes to sell 750 shoes?
iii. Find the elasticity of demand when P1 = 200 and P2 = 210
Part I - Solution
Demand expressed in the form of equation is Q = 880 – 1.3P
P is given as Rs. 200
So, Q = 880 – (1.3x200)
Q = 880 - 260 = 620 i.e. the firm can sell 620 pairs of shoes when the price is Rs. 200
Part II - Solution
Q is given as 750, so the equation can be written as 750 = 880 – 1.3P
1.3P = 880 – 750
P = 130 /1.3 = 100. Hence to sell 750 pairs of shoes the firm can charge Rs. 100 per pair
Part I - Solution
P1 = 200 to have Q1 620

P2 = 210 to have Q2 = 880 – (1.3x210) = 607
Q = Q2 – Q1 = -13; P = P2 – P1 = 10;
Ep = (-13/10) x [(200+210)/(620+607)]
= -1.3 x (410/1227) = -1.3 x 0.334 = -0.434
c. Neutron Electric Co. is developing a new design for its electric hair-dryer. Test market data indicates
demand for the new hair-dryer as follows:
Q = 30,000 – 1000P
How many hair-dryers could Neutron sell at a price of Rs. 20?
Calculate the point elasticity of hair-dryer when the price is Rs. 20.
Part I - Solution
P is given as Rs. 25 to have Q = 30,000 – (1000 x 20) = 10000
Hence, the firm can sell 5000 hair-dryers at a price of Rs. 25
Ep = (Q / P) x (P/Q)
Ep = -1000 x (20/10000) = -2
Types of Price elasticity of demand:
 Perfectly elastic demand

 Absolutely inelastic demand
 Unit elasticity of demand
 Relatively elastic demand
 Relatively inelastic demand
2. Income elasticity of demand:

Income elasticity of demand can be defined as the ratio of percentage change in the quantity demanded
of a good, say X, to the percentage change in income of the consumer.
Ey = Percentage change in quantity demanded of a good X ÷ Percentage change in income of the consumer
Ey = (Q / Y) x [(Y1+Y2) / (Q1+Q2)]
Where Y is the income of consumer
Types of income elasticity:

 High income elasticity
 Unitary income elasticity
 Low income elasticity
 Zero income elasticity
 Negative income elasticity
Income elasticity of demand Vs Income sensitivity of demand:
Income elasticity is concerned about the changes in the units of physical goods purchased due to a
change in the consumer’s income. The income sensitivity studies the changes in rupees expenditure
due to change in incomes. Income sensitivity is defined as a ratio of percentage change in rupee
expenditure to percentage change in disposable income during that period.
Sy = % change in rupee expenditure during a period‘t’ ÷ % change in disposable income during‘t’
Income elasticity Vs Propensity to consume
Average propensity to consume is the ratio of aggregate consumption to aggregate income.
APC = C / Y; Where APC is the average propensity to consume, C is the aggregate consumption and Y
is the aggregate household income.
Uses of the concept of Income elasticity:
 Forecasting demand
 Planning for firm’s growth
 Formulating marketing strategies
3. Cross Elasticity of Demand:
Cross elasticity of demand is the ratio of the percentage change in demand of good X to the percentage
change in the price of its related good, say good Y.
Exy = (Qx / Py) x [(Py1+Py2) / (Qx1+Qx2)]
4. Promotional (or, Advertising) Elasticity of demand:

Advertising elasticity of demand measures the response of quantity demanded to change in expenditure
on advertising and other sales promotions.
Ea = (Q / A) x [(A1+A2) / (Q1+Q2)]
Factors influencing advertisement elasticity of demand:
 Stage of product life-cycle

 Effect of advertising in terms of time
 Effect of the advertisements by competitors
Demand Estimation
 What is demand estimation?
 Methods of demand estimation:
o Market Experiment Method

 Actual Market Method: From different sales outlets across the product market and
marketing executives
 Expensive
 Time consuming
 Unlimited data
 Market Simulation Method: By creating a replicated market environment, the
researchers allow the customers to purchase the products as how they do during their
daily life.
 Consumers are aware that they are the part of an experiment
 Expensive
o Survey Method
 Sample Survey Method
 Population Survey Method
o Regression Analysis: It is a statistical method by which demand is estimated with the help of
certain independent variables (like income, price, etc.)
Demand Forecasting
 What is demand forecasting? How is it different from Demand Estimation?
 Classification of demand forecasting:
o Passive forecasts: Where prediction of future is based on the assumption that the firm does not
change the course of its action.
o Active forecasts: Where forecasting is gone under the condition of likely future changes in
action by the firm
 Purpose of forecasting demand:

o To identify seasonal changes and adopt short-run strategies
o To identify the long-run changes and to prepare the long-term strategies
 Steps involved in forecasting
o Identification of objectives
o Determining the nature of goods under consideration
o Selecting a proper method of forecasting
o Interpreting the results
 Methods of Forecasting
o Opinion polling Methods
 Consumers’ survey method
 Complete enumeration (Population survey)
 Sample survey & Test Marketing
 End-use
 Sales force opinion method
 Experts’ opinion method
o Statistical Methods
 Trend Projection Methods
 Barometric Techniques
 Regression Method
 Simultaneous equation method
Market Structure & Pricing Decisions

Price determination is one of the most crucial aspects in economics.
Business managers are expected to make perfect decisions based on
their knowledge and judgment. Since every economic activity in the
market is measured as per price, it is important to know the concepts
and theories related to pricing. Pricing discusses the rationale and
assumptions behind pricing decisions. It analyzes unique market needs
and discusses how business managers reach upon final pricing decisions.
It explains the equilibrium of a firm and is the interaction of the demand
faced by the firm and its supply curve. The equilibrium condition differs
under perfect competition, monopoly, monopolistic competition, and
oligopoly. Time element is of great relevance in the theory of pricing
since one of the two determinants of price, namely supply depends on
the time allowed to it for adjustment.
Market Structure
A market is the area where buyers and sellers contact each other and
exchange goods and services. Market structure is said to be the
characteristics of the market. Market structures are basically the number
of firms in the market that produce identical goods and services. Market
structure influences the behavior of firms to a great extent. The market
structure affects the supply of different commodities in the market.
When the competition is high there is a high supply of commodity as
different companies try to dominate the markets and it also creates
barriers to entry for the companies that intend to join that market. A
monopoly market has the biggest level of barriers to entry while the
perfectly competitive market has zero percent level of barriers to entry.
Firms are more efficient in a competitive market than in a monopoly
structure.
Perfect Competition
Perfect competition is a situation prevailing in a market in which buyers
and sellers are so numerous and well informed that all elements of
monopoly are absent and the market price of a commodity is beyond the
control of individual buyers and sellers
With many firms and a homogeneous product under perfect competition
no individual firm is in a position to influence the price of the product
that means price elasticity of demand for a single firm will be infinite.
Pricing Decisions
Determinants of Price Under Perfect Competition
Market price is determined by the equilibrium between demand and
supply in a market period or very short run. The market period is a
period in which the maximum that can be supplied is limited by the

existing stock. The market period is so short that more cannot be
produced in response to increased demand. The firms can sell only what
they have already produced. This market period may be an hour, a day
or a few days or even a few weeks depending upon the nature of the
product.
Market Price of a Perishable Commodity

In the case of perishable commodity like fish, the supply is limited by the
available quantity on that day. It cannot be stored for the next market
period and therefore the whole of it must be sold away on the same day
whatever the price may be.
Market Price of Non-Perishable and Reproducible Goods

In case of non-perishable but reproducible goods, some of the goods can
be preserved or kept back from the market and carried over to the next
market period. There will then be two critical price levels.
The first, if price is very high the seller will be prepared to sell the whole
stock. The second level is set by a low price at which the seller would not
sell any amount in the present market period, but will hold back the
whole stock for some better time. The price below which the seller will
refuse to sell is called the Reserve Price.
Monopolistic Competition
Monopolistic competition is a form of market structure in which a large
number of independent firms are supplying products that are slightly
differentiated from the point of view of buyers. Thus, the products of the
competing firms are close but not perfect substitutes because buyers do
not regard them as identical. This situation arises when the same
commodity is being sold under different brand names, each brand being
slightly different from the others.
For example − Lux, Liril, Dove, etc.
Each firm is therefore the sole producer of a particular brand or
“product”. It is monopolist as far as a particular brand is concerned.
However, since the various brands are close substitutes, a large number
of “monopoly” producers of these brands are involved in a keen
competition with one another. This type of market structure, where there
is competition among a large number of “monopolists” is called
monopolistic competition.
In addition to product differentiation, the other three basic characteristics
of monopolistic competition are −
 There are large number of independent sellers and buyers in the market.
 The relative market shares of all sellers are insignificant and more or less equal. That is,
seller-concentration in the market is almost non-existent.

 There are neither any legal nor any economic barriers against the entry of new firms into
the market. New firms are free to enter the market and existing firms are free to leave
the market.
 In other words, product differentiation is the only characteristic that distinguishes

monopolistic competition from perfect competition.
Monopoly
Monopoly is said to exist when one firm is the sole producer or seller of a
product which has no close substitutes. According to this definition, there
must be a single producer or seller of a product. If there are many
producers producing a product, either perfect competition or
monopolistic competition will prevail depending upon whether the
product is homogeneous or differentiated.
On the other hand, when there are few producers, oligopoly is said to
exist. A second condition which is essential for a firm to be called
monopolist is that no close substitutes for the product of that firm should
be available.
From above it follows that for the monopoly to exist, following things are
essential −
 One and only one firm produces and sells a particular commodity or a service.
 There are no rivals or direct competitors of the firm.
 No other seller can enter the market for whatever reasons legal, technical, or economic.
 Monopolist is a price maker. He tries to take the best of whatever demand and cost
conditions exist without the fear of new firms entering to compete away his profits.
The concept of market power applies to an individual enterprise or to a

group of enterprises acting collectively. For the individual firm, it
expresses the extent to which the firm has discretion over the price that
it charges. The baseline of zero market power is set by the individual
firm that produces and sells a homogeneous product alongside many
other similar firms that all sell the same product.
Since all of the firms sell the identical product, the individual sellers are
not distinctive. Buyers care solely about finding the seller with the lowest
price.
In this context of “perfect competition”, all firms sell at an identical price
that is equal to their marginal costs and no individual firm possess any
market power. If any firm were to raise its price slightly above the
market-determined price, it would lose all of its customers and if a firm
were to reduce its price slightly below the market price, it would be
swamped with customers who switch from the other firms.

Accordingly, the standard definition for market power is to define it as
the divergence between price and marginal cost, expressed relative to
price. In Mathematical terms we may define it as −
L=
(P − MC) P
Oligopoly
In an oligopolistic market there are small number of firms so that sellers
are conscious of their interdependence. The competition is not perfect,
yet the rivalry among firms is high. Given that there are large number of
possible reactions of competitors, the behavior of firms may assume
various forms. Thus there are various models of oligopolistic behavior,
each based on different reactions patterns of rivals.
Oligopoly is a situation in which only a few firms are competing in the
market for a particular commodity. The distinguishing characteristics of
oligopoly are such that neither the theory of monopolistic competition nor
the theory of monopoly can explain the behavior of an oligopolistic firm.
Two of the main characteristics of Oligopoly are briefly explained below −
 Under oligopoly the number of competing firms being small, each firm controls an
important proportion of the total supply. Consequently, the effect of a change in the price
or output of one firm upon the sales of its rival firms is noticeable and not insignificant.
When any firm takes an action its rivals will in all probability react to it. The behavior of
oligopolistic firms is interdependent and not independent or atomistic as is the case under
perfect or monopolistic competition.
 Under oligopoly new entry is difficult. It is neither free nor barred. Hence the condition of
entry becomes an important factor determining the price or output decisions of
oligopolistic firms and preventing or limiting entry of an important objective.
For Example − Aircraft manufacturing, in some countries: wireless

communication, media, and banking.
What is PRICE DETERMINATION?

The price of a product is determined by the law of supply and demand. Consumers have a desire to acquire a
product, and producers manufacture a supply to meet this demand. The equilibrium market price of a good is the
price at which quantity supplied equals quantity demanded. Graphically, the supply and demand curves intersect
at the equilibrium price.

Effect of Prices on Demand
Generally, consumers are willing to pay a particular price for a product depending on their income levels and
intensity of desire to own the product. This relationship is expressed in economic terms by the demand curve. If

the price of a good goes up, consumers will buy less of it. Conversely, consumers will purchase more of a
product if the price goes down.
However, economic forces are not always that simple. Other factors come into play to influence the equilibrium
price as determined by the supply-demand equations of economics.

Factors That Shift the Demand Curve
When a change increases the desire of consumers to purchase a good, the demand curve shifts to the right. If
the change decreases consumers' willingness to acquire a product, the demand curve shifts to the left.
The following are changes in demand-related factors that affect the quantities demanded at every price along the
demand curve:
Consumer preferences: Consumer tastes are constantly changing as new technology comes out or clothing
fashions change. For example, the introduction of cell phones eliminated consumer preferences for pagers.
Income of consumers: Changes in consumer incomes will shift the demand curve. For example, consumers
with higher incomes are more likely to buy brand-name grocery products instead of generic brands. On the other
hand, consumers are more able to purchase a car when they have higher incomes instead of taking the bus,
thereby reducing the demand for bus services.
Price of other consumer products-substitutes or complements: Two goods are complements if a price
increase in one causes a drop in demand for the other. For example, if computer prices increase, decreasing the
demand, consumers will have less need for software; so the demand for software apps will drop. Other examples
are eggs and bacon, and bagels and cream cheese; price changes in one product will affect the demand for the
other.
Expectations about the future: Expectations about the future affects consumer behavior. If consumers believe
that prices for a product will rise in the future, they will purchase more of the product now, shifting the demand
curve to the right.
Effect of Supply
Movements along the supply curve are only caused by changes in the price of the good.
The law of supply says that producers will increase output when the price of a good increases. A shortage of
supply will drive prices up. Consumers fear that they will not be able to obtain the product, so they are willing to
pay more for it.
An excess of supply will cause producers to cut prices to reduce the inventory that is building up in their
warehouses.

Factors That Shift the Supply Curve
When a change increases the willingness of manufacturers to offer more of a good at the same price, the supply
curve shifts to the right. If the change decreases the willingness of the producer to sell the good at the same
price, the supply curve shifts to the left.
Input prices: When the prices of raw materials go up, the profits on certain products go down. As a result,
manufacturers will reduce production volume and focus on products with higher profits. The supply curve will shift
to the left.
Number of sellers: The supply curve moves to the right when new sellers enter the market. Competition
increase as more products become available, putting downward pressure on prices.
Technology: Advances in technology increase productivity in the manufacturing processes, making goods more
profitable and shifting the supply curve to the right.

Effects of Elasticity on Prices
Elasticity is another theory of price determination. It is a ratio of how much one variable changes in percentage
versus a one percent change in a different variable. In economics, price elasticity is a measure of how much
demand changes with an increase or decrease in price.
The formula to calculate price elasticity is as follows:
Elasticity = (percent change in quantity demanded)/(percent change in price)
When a one percent price change results in a greater than one percent change in quantity demanded, the
demand curve is elastic.
If a one percent change in price leads to a less than one percent change in demand, the demand curve is
considered inelastic.
Let's take a few examples to explain these economic theories in common situations.
Suppose the price of a chocolate bar increased by 10 percent and the demand dropped by 20 percent. The price
elasticity would be:
Price elasticity = -20 percent/10 percent = -2
In this case, the price elasticity for a chocolate bar is highly elastic; in other words, demand is very sensitive to
changes in prices. Higher absolute numbers indicate more price elasticity.
A few more examples of price elastic products:
Beef: Food products are price elastic when alternate products exist. Price increases of beef will cause
consumers to buy more chicken and pork.
Luxury sports cars: Luxury cars are expensive and represent a large portion of a consumer's income. Price
increases of high-priced autos will reduce demand unless consumer incomes are going up rapidly.

Airline tickets: Airlines compete fiercely on ticket prices. Consumers have numerous choices to compare prices;
they can also choose to travel by train or car where the cost of transportation may be lower.
Consider a product where the demand is inelastic: gasoline. People must have gas to drive to work, go to the
grocery store and take the kids to soccer practice. If gas prices go up, consumers will still buy gasoline; they don't
have many alternatives, at least in the short term.
Take this example: gas prices increase by 15 percent and demand goes down by 1 percent.
Price elasticity = -1 percent/15 percent = -0.07
Although gasoline prices are inelastic in the short term, higher prices will drive consumers to purchase more fuel-
efficient cars in the long term.
A marketer must understand the elasticity dynamics of the products to develop pricing strategies. A mistake in
anticipating how the consumer will react to price changes can have devastating results on sales and profits.
Other examples of products with inelastic demand:
Salt: The consumption of salt represents a small portion of the consumer's income, and no good substitutes
exist. A price increase in salt will have little effect on demand.
Water: Water is a necessity. If the local water utility raises prices, consumers would have to pay up. Besides,
they don't have alternate sources, other than the more expensive bottled water.
Cigarettes: The demand for addictive products is usually inelastic. If governments place more taxes on
cigarettes, the demand will not drop appreciably, until taxes become extremely high.
The methods of price determination in economics include the laws of supply and demand, and the effects of price
elasticity. Numerous factors enter the economic equations that determine equilibrium prices; marketers have to
understand the pricing dynamics in their markets to develop effective pricing strategies.
What is National Income: Basic Concepts
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.
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
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
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.
What is Inflation, Measurement, Types

and Effects of Inflation

Definition of Inflation
The simplest definition is Inflation is “a rise in the general level of prices”. By the term general, we
mean if the price of one good has gone up it is not inflation, it is inflation only if the prices
of most goods have gone up. The opposite of inflation is deflation which means a fall in the
general level of prices.
How is Inflation Measured in India

In India, inflation is measured on two price indices, viz, wholesale price index (WPI) and
consumer price index (CPI). WPI measures price rise or inflation at the level of seller or retailer
who buy commodities in bulk or ‘whole sale’. CPI is also called retail inflation since it measures
inflation at the retail or consumer level. In India, WPI is the basis for determining the inflation of
the economy.
About Wholesale Price Index (WPI)

WPI is measured on weekly basis. The first index of wholesale prices commenced in India for the
week January 10, 1942. The base year of WPI is revised periodically. Till date, 5 revisions have
take place. The current WPI base year is 2004-05 based on prices of 670 commodities.
Recently, a Working Group was set up under chairmanship of Prof. Abhijit Sen to recommend
new series of WPI. The committee recommendations have been accepted by the govt.
For determining WPI, commodities are divided into three categories – Primary Articles (102
items), Fuel & Power (19 items), and Manufactured Products (555 items). As you can see, the
weight assigned to manufacturing is highest at 82% followed by primary articles like fruits and
vegetables.
About Consumer Price Index (CPI)

Unlike WPI, there is not a single measure of CPI. In India, four CPI indices are used to determine
inflation at the consumer level. These are: CPI-IW (Industrial Worker), CPI-UNME (Urban Non-
Manual Employees), CPI-AL (Agricultural Labourers), and CPI-RL (Rural Labourers).

Unlike the WPI, the new series of CPI based on recommendations of Abhijit Sen committee
assigns the highest weight to primary articles like food, beverages and tobacco (49%).
Causes of Inflation
There are two main causes of inflation: cost push and demand pull.
Cost-Push Inflation occurs when general prices of commodities increases due to increase in
production cost. Demand-Pull Inflation is the result of mismatch between demand and supply.
Either the demand increases over the same level of supply or the supply decreases with the
same level of demand.
Types of Inflation
Inflation may be classified into three main categories.
Low Inflation
Such inflation is slow and on predictable lines which might be called small or gradual. It is
sometimes also called ‘creeping inflation‘. For example monthly inflation that increases in single
digits like 2.3%, 2.8%, 3.2%, 3.5% etc.
Galloping Inflation
This is very high inflation running in double or triple digits like 20%, 100% or 200% a year. Such
kind of inflation was observed in certain Latin American countries like Argentina.
Hyper Inflation
This form of inflation is ‘large and accelerating‘ which might have annual rates in million or even
trillion. Such rate of inflation was recently observed in Zimbabwe. In such inflation not only range
of increase is very large but the increase takes place in a very short span of time and prices
shoot up overnight.
Effects of Inflation
Inflation has multi-dimensional effects on an economy. Effects of inflation on different sectors and
segments is explained below.

On Creditors and Debtors
Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit
from inflation. This is true assuming that salaries would also increase due to price rise. This
results in repaying the same amount of money with extra money at hand due to wage hike or
increase in Dearness Allowance (DA for government employees).
On Aggregate Demand
Rising prices usually results in higher demand as it comparatively lower supply. However if
inflation results from higher input costs (cost-push), aggregate may demand may or may not
increase comparative to price rise.
On Investment
Inflation increases the investment in an economy in the short run as it encourages producers to
expand or increase production. Also, in the short run, higher the inflation lower is the cost of loan.
On Saving
In the short run, rising prices encourages people to deposit cash in hand with banks as money
loses value so holding it does not much sense. However in the long run, rising prices depletes
the saving rate in an economy.
On Exchange Rate
Rising prices generally leads to depreciation of the currency which implies that the currency
loses its exchange value in front of a foreign currency. But this is relative to the pressure on the
foreign currency against which the exchange rate is compared. For instance, from 2013 till mid-
2014, even though there was relatively high inflation in India, still it did not lose much value vis-a-
vis the US dollar since the dollar was also under inflationary pressure.

On Export
With inflation, exportable items of an economy gain competitive prices in the world market. This
boost a country’s exports. This happens since value of currency falls so it makes it cheaper for
importing countries to buy the exporting countries produce.
On Imports
Inflation gives an economy advantage of lower imports and import-substitution as foreign goods
become costlier.
On Wages
Inflation increases the nominal or face value of the wages while its real value falls. Simply put,
even though wages may increase to offset inflation the actual value of money falls.
Business Ethics and Social

Responsibility
The study of business ethics refers to the ethical dimensions of productive organizations and commercial
activities, according to the Stanford Encyclopedia of Philosophy. It applies to the production, distribution,
marketing, sale and consumption of goods and services. It can include potentially controversial issues like insider
trading, bribery and discrimination.
From its roots in ancient Greece to modern topics like unequal gender pay, business ethics is a large field of
study. There are several journals devoted to business ethics, and it appears in mainstream philosophy and social
science journals as well. However, there is a difference between business ethics and social responsibility (and
corporate social responsibility).
The Daily Impact of Business Decisions
Business decisions related to ethics impact the daily lives of professionals and consumers. Many people are
employed at organizations that sell or provide goods and services. Professionals like lawyers and accountants
are bound by codes of conduct from professional societies, and other professionals must practice sound
business ethics in their role and with co-workers, clients and the public.

Consumers interact with the brands and people in a business, and these exchanges affect the success of the
business. For example, small businesses depend on reputation and trust among people in the community. By
treating employees and customers well, businesses can gain the community’s support.
Unethical business practices can have the opposite effect on customers. False or discriminatory advertising,
negative treatment of employees and ignoring safety concerns in products can undermine consumer confidence.
Legal action can also result.
Relating Business Ethics and Social Responsibility
Business leaders and organizations can examine how their decisions relate to social responsibility, which is a
general concept that can include social as well as cultural, economic and environmental issues. By integrating
business ethics and principles of social responsibility, organizations can make a difference in the world and
enhance their reputation.
Some companies have adopted the social entrepreneurship model of business that focuses on applying practical,
innovative and sustainable approaches to benefit society. The shoe retailer TOMS is one of the most popular
examples of the social entrepreneurship model. For every pair of shoes sold, the company provides a new pair of
shoes to children in developing countries.
Another example of combining business ethics and social responsibility is by focusing on benefiting the
environment. Forbes notes some of the reasons why Seventh Generation, a Burlington, Vermont-based company
that produces and distributes green products, was recognized as the best company for the environment.
 Selling products such as biodegradable, vegetable-based cleaning products, chlorine-free tampons and paper
towels and natural lotion baby wipes.
 Developing an employee bonus program that awards workers who figure out how to make the company’s goods
even more sustainable.
 Having an LEED-certified building where more than a quarter of the company’s fleet is comprised of low-
emissions cars and more than a quarter of the energy burned in manufacturing its products comes from
renewable energy.
Business Ethics and Corporate Social Responsibility

Definition and Characteristics
Corporate social responsibility is similar to ideas of social responsibility for individuals and businesses. Some
sources provide similar definitions for the two terms, but corporate social responsibility is a specific business
approach that began in the 1950s and 1960s, with definitions expanding in the ensuing decades.
There is no universally accepted definition of corporate social responsibility, according to the Journal of Business
Ethics, but two features can be used to differentiate corporate social responsibility from other activities: 1) They
partly or entirely benefit society and/or general interests; and 2) they are not obligated by law. Other aspects of
corporate social responsibility can vary.

 Domains include environmental friendliness, community support, local products promotion, fair employee
treatment and more.
 Stakeholders include employees, suppliers, customers, communities, the environment, investors and regulators.
 Policies and activities include cause-related marketing (marketing programs that combine sales objectives and
helping worthy causes), sponsorship (connecting worthy causes to a brand or organization for money) and
corporate philanthropy (charitable donations).
Some organizations engage in corporate social responsibility activities for intrinsic reasons: to help out and make
societal contributions. Another motive is extrinsic, which relates to a company expecting financial or other
benefits for socially responsible behavior. Many studies reflect positive organizational outcomes for corporate
social responsibility activities, the Journal of Business Ethics reports. Finally, a third motive for corporate social
responsibility activities is meeting societal expectations and stakeholder pressure.
Interaction
According to a paper in Procedia Economics and Finance, corporate social responsibility is a subset of business
ethics. This conclusion was made when viewing corporate social responsibility under the normative stakeholder
theory, or a philosophy that “affirms that business corporations are ‘morally’ responsible to look after the
concerns of a larger group of stake holders which could include owners, customers, vendors, employees and
community rather than its stockholders.” Some sources define stakeholders as groups that the organization
depends on for its existence.
In this context, corporate social responsibility becomes synonymous with the duties and relationship between the
business and the environment that facilitates its existence. And thus, it is not enough to cover certain ethical
practices in businesses. For instance, corporate social responsibility does not include the ethicality of how the
organization pursues profits or subscribes to political associations.
Corporate social responsibility is related to business ethics, but the former is a narrow topic within the latter area.
Businesses should use corporate social responsibility along with processes like corporate governance, corporate
outreach and politics, business process redesign and corporate strategy to reconcile with the ethicality of doing
business, according to Procedia Economics and Finance.
Applying Ethics to a Career in Business
Business professionals should have a solid grasp of ethical practices for their careers. Grace College’s business
programs are rooted in sound moral and ethical approaches to business, with a focus on Christian servant
leadership.
Grace’s fully online Bachelor of Science in Business Administration focuses on the skills and tools graduates
need to adapt and excel in the business world. This GOAL (Grace Opportunities for Adult Learners) program is
designed for students balancing personal commitments while pursuing an education. It is priced substantially
below most degree completion programs and can be completed in as little as 16 months.
Grace’s fully online Master of Business Administration provides students with a strong foundation in marketing,
accounting, finance and human resources as well as coursework in entrepreneurship. This program can help
graduates pursue leadership opportunities in business.

What Is an Ethical Dilemma?
Social workers are routinely confronted with ethical dilemmas in practice, and social work programs infuse
their courses with professional ethics and values to help students prepare for this eventuality. The Council on
Social Work Education (2008) requires that students learn how to “apply social work ethical principles to guide
practice, engage in ethical decision making, recognize and manage personal values in a way that allows
professional values to guide practice, and tolerate ambiguity in resolving ethical conflicts” (EPAS 2.1.2).
Social work students become familiar with the Code of Ethics, learn one of the various models on ethical
decision making (Congress, 1999; Dolgoff, Loewenberg, & Harrington, 2009; Reamer, 1995) and, at some point in

their education, are typically required to write a paper on an ethical dilemma. However, students are not
routinely taught how to recognize what an ethical dilemma is. Correctly identifying an ethical dilemma is the first
step in resolving it.
What Is an Ethical Dilemma?
There are three conditions that must be present for a situation to be considered an ethical dilemma. The first
condition occurs in situations when an individual, called the “agent,” must make a decision about which course of
action is best. Situations that are uncomfortable but that don’t require a choice, are not ethical dilemmas. For
example, students in their internships are required to be under the supervision of an appropriately credentialed
social work field instructor. Therefore, because there is no choice in the matter, there is no ethical violation or
breach of confidentiality when a student discusses a case with the supervisor. The second condition for ethical
dilemma is that there must be different courses of action to choose from. Third, in an ethical dilemma, no matter
what course of action is taken, some ethical principle is compromised. In other words, there is no perfect solution.
In determining what constitutes an ethical dilemma, it is necessary to make a distinction between ethics,
values, morals, and laws and policies. Ethics are prepositional statements (standards) that are used by members
of a profession or group to determine what the right course of action in a situation is. Ethics rely on logical and
rational criteria to reach a decision, an essentially cognitive process (Congress, 1999; Dolgoff, Loewenberg, &
Harrington, 2009; Reamer, 1995; Robison & Reeser, 2002). Values, on the other hand, describe ideas that we
value or prize. To value something means that we hold it dear and feel it has worth to us. As such, there is often a
feeling or affective component associated with values (Allen & Friedman, 2010). Often, values are ideas that we
aspire to achieve, like equality and social justice. Morals describe a behavioral code of conduct to which an
individual ascribes. They are used to negotiate, support, and strengthen our relationships with others (Dolgoff,
Loewenberg, & Harrington, 2009).
Finally, laws and agency policies are often involved in complex cases, and social workers are often legally
obligated to take a particular course of action. Standard 1.07j of the Code of Ethics (NASW, 1996) recognizes that
legal obligations may require social workers to share confidential information (such as in cases of reporting child
abuse) but requires that we protect confidentiality to the “extent permitted by law.” Although our profession
ultimately recognizes the rule of law, we are also obligated to work to change unfair and discriminatory laws.
There is considerably less recognition of the supremacy of agency policy in the Code, and Ethical Standard 3.09d
states that we must not allow agency policies to interfere with our ethical practice of social work.
It is also essential that the distinction be made between personal and professional ethics and values (Congress,
1999; Wilshere, 1997). Conflicts between personal and professional values should not be considered ethical
dilemmas for a number of reasons. Because values involve feelings and are personal, the rational process used for
resolving ethical dilemmas cannot be applied to values conflicts. Further, when an individual elects to become a
member of a profession, he or she is agreeing to comply with the standards of the profession, including its Code of
Ethics and values. Recent court cases have supported a profession’s right to expect its members to adhere to
professional values and ethics. (See, for example, the Jennifer Keeton case at Augusta State University and the
Julea Ward case at Eastern Michigan University.) The Council on Social Work Education states that students
should “recognize and manage personal values in a way that allows professional values to guide practice” (EPAS
1.1). Therefore, although they can be difficult and uncomfortable, conflicts involving personal values should not
be considered ethical dilemmas.
Two Types of Dilemmas
An “absolute” or “pure” ethical dilemma only occurs when two (or more) ethical standards apply to a situation
but are in conflict with each other. For example, a social worker in a rural community with limited mental health
care services is consulted on a client with agoraphobia, an anxiety disorder involving a fear of open and public
spaces. Although this problem is outside of the clinician’s general competence, the limited options for treatment,
coupled with the client`s discomfort in being too far from home, would likely mean the client might not receive
any services if the clinician declined on the basis of a lack of competence (Ethical Standard 1.04). Denying to see
the patient then would be potentially in conflict with our commitment to promote the well-being of clients
(Ethical Standard 1.01). This is a pure ethical dilemma because two ethical standards conflict. It can be resolved
by looking at Ethical Standard 4.01, which states that social workers should only accept employment (or in this
case, a client) on the basis of existing competence or with “the intention to acquire the necessary competence.”

The social worker can accept the case, discussing the present limits of her expertise with the client and following
through on her obligation to seek training or supervision in this area.
However, there are some complicated situations that require a decision but may also involve conflicts between
values, laws, and policies. Although these are not absolute ethical dilemmas, we can think of them as
“approximate” dilemmas. For example, an approximate dilemma occurs when a social worker is legally obligated
to make a report of child or domestic abuse and has concerns about the releasing of information. The social
worker may experience tension between the legal requirement to report and the desire to respect confidentiality.
However, because the NASW Code of Ethics acknowledges our obligation to follow legal requirements and to
intervene to protect the vulnerable, technically, there is no absolute ethical dilemma present. However, the social
worker experiences this as a dilemma of some kind and needs to reach some kind of resolution. Breaking the
situation down and identifying the ethics, morals, values, legal issues, and policies involved as well as
distinguishing between personal and professional dimensions can help with the decision-making process in
approximate dilemmas. Table 1 (at beginning of this article) is an illustration of how these factors might be
considered.
Conclusion
When writing an ethical dilemma paper or when attempting to resolve an ethical dilemma in practice, social
workers should determine if it is an absolute or approximate dilemma; distinguish between personal and
professional dimensions; and identify the ethical, moral, legal, and values considerations in the situation. After
conducting this preliminary analysis, an ethical decision-making model can then be appropriately applied.
Corporate Governance - Definition, Scope

and Benefits
Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and
managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors
and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals , as
well as, economic and social goals.
Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s
management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners
and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see
that individual’s actual performance is according to the standard performance. These dimensions of corporate governance
should not be overlooked.
Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their
investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the
deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather,
harmonizing.
Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and
complete responsibility to the Board of Directors. In today’s market- oriented economy, the need for corporate governance
arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is
essential to develop added value to the stakeholders.
Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures
that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all
shareholders fully exercise their rights and that the organization fully recognizes their rights.
Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages
a trustworthy, moral, as well as ethical environment.
Benefits of Corporate Governance
1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital
efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the
shareholders and the organization.

6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.
What does it mean to be a values-based

organization?
A values-based organization (VBO) is a living, breathing culture of shared core values among all
employees. This is different from the traditional structure which is a more machine-like, business
approach that focuses on an authoritarian type relationship or rigid organizational structure. A values-
based organization is a culture shaped by a clear set of ground rules establishing a foundation and
guiding principles for decision-making, actions and a sense of community. In a values-driven culture,
employees find alignment between their personal values and the organization’s values creating a
unified and motivated workforce. Management and leadership set examples for their organizations
and live the values they preach. Strongly held value-systems rarely change yet remain flexible to
handle changes in strategy or outside influences such as competition or the economy. A strongly held
values-based culture or purpose will remain more stable over time characterized by productivity and
employee commitment.
How to Build an Organization Based on

Values
Sample Workplace Value-based Actions
If you value integrity and you experience a quality problem in your manufacturing process, you
honestly inform your customer of the exact nature of the problem. You discuss your actions to
eliminate the problem, and the anticipated delivery time the customer can expect. If integrity is
not a fundamental value, you may make excuses and mislead the customer.
If you value and care about the people in your organization, you will pay for health
insurance, dental insurance, retirement accounts, and provide regular raises and bonuses for
dedicated staff. If you value equality and a sense of family, you will wipe out the physical
trappings of power, status, and inequality such as executive parking places and offices that grow
larger by a foot with every promotion.
Whatever You Value Is What You Live in Your Organization
You know, as an individual, what you personally value. However, most of you work in
organizations that have already operated for many years. The values, and the
subsequent culture created by those values are in place, for better or worse.
If you are generally happy with your work environment, you undoubtedly selected an organization
with values congruent with your own. If you're not, watch for the disconnects between what you
value and the actions of people in your organization.

As an HR professional, you will want to influence your larger organization to identify its core
values and make them the foundation for its interactions with employees, customers, and
suppliers. Minimally, you will want to work within your own HR organization to identify a strategic
framework for serving your customers that is firmly value-based.
Strategic Framework
Every organization has a vision or picture of what it desires for its future, whether foggy or crystal
clear. The current mission of the organization or the purpose for its existence is also understood
in general terms. The values that members of the organization manifest in daily decision making,
and the norms or relationship guidelines which informally define how people interact with each
other and customers, are also visible. But are these usually vague and unspoken understandings
enough to fuel your long-term success?
I don’t think so.
Every organization has a choice. You can allow these fundamental underpinnings of your
organization to develop on their own with each individual acting in a self-defined vacuum. Or, you
can invest the time to proactively define them to best serve members of the organization and its
customers. Many successful organizations agree upon and articulate their vision, mission or
purpose, values, and strategies so all organization members can enroll in and own their
achievement.
Want the background about why values are important in an organization? See the impact
that identifying organizational values can have. Values are traits or qualities that are considered
worthwhile; they represent an individual’s highest priorities and deeply held driving forces.
Value statements are grounded in values and define how people want to behave with each other
in the organization. They are statements about how the organization will value customers,
suppliers, and the internal community. Value statements describe actions that are the living
enactment of the fundamental values held by most individuals within the organization.
Vision is a statement about what the organization wants to become. The vision should resonate
with all members of the organization and help them feel proud, excited, and part of something
much bigger than themselves. A vision should stretch the organization’s capabilities and image
of itself. It gives shape and direction to the organization’s future.
Mission/Purpose is a precise description of what an organization does. It should describe the

business the organization is in. It is a definition of "why" the organization exists currently. Each
member of an organization should be able to verbally express this mission. Strategies are the
broadly defined four or five key approaches the organization will use to accomplish its mission
and drive toward the vision. Goals and action plans usually flow from each strategy.
One example of a strategy is employee empowerment and teams. Another is to pursue a new
worldwide market in Asia. Another is to streamline your current distribution system using lean
management principles. I recommend that you start developing this strategic framework by
identifying your organization’s values. Create an opportunity for as many people as possible to
participate in this process. All the rest of your strategic framework should grow from living these.
What Values Are
The following are examples of values. You might use these as the starting point for discussing
values within your organization:
 ambition

 competency
 individuality
 equality
 integrity
 service
 responsibility
 accuracy
 respect
 dedication
 diversity
 improvement
 enjoyment/fun
 loyalty
 credibility
 honesty
 innovativeness
 teamwork
 excellence
 accountability
 empowerment
 quality
 efficiency
 dignity
 collaboration,
 stewardship
 empathy
 accomplishment
 courage
 wisdom
 independence
 security
 challenge
 influence
 learning
 compassion
 friendliness
 discipline/order
 generosity
 persistence
 optimism
 dependability
 flexibility
Identifying and Establishing Values
Effective organizations identify and develop a clear, concise and shared meaning of
values/beliefs, priorities, and direction so that everyone understands and can contribute. Once
defined, values impact every aspect of your organization. You must support and nurture this
impact or identifying values will have been a wasted exercise. People will feel fooled and misled
unless they see the impact of the exercise within your organization. If you want the values you
identify to have an impact, the following must occur.
 People demonstrate and model the values in action in their personal work behaviors,
decision making, contribution, and interpersonal interaction.
 Organizational values help each person establish priorities in their daily work life.

 Values guide every decision that is made once the organization has cooperatively
created the values and the value statements.
 Rewards and recognition within the organization are structured to recognize those people
whose work embodies the values the organization embraced.
 Organizational goals are grounded in the identified values.

 Adoption of the values and the behaviors that result is recognized in regular performance
feedback.
 People hire and promote individuals whose outlook and actions are congruent with the
values.
 Only the active participation of all members of the organization will ensure a truly
organization-wide, value-based, shared culture.

BUSINESS MANAGEMENT &
MANAGERIAL ECONOMICS
MULTIPLE
1: Consider the following statements:

Planning involves
1. Forecasting
2. Choice among alternative courses of action.
3. Wishful thinking
4. Decision only by production manager
Of these statements:
A. 1, 2, 3 and 4 are correct
B. 1, 3 and 4 are correct
C. 1 and 2 are correct
D.2 and 3 are correct
2: Overall and strategic planning is done by the

A. Top management
B. Middle level management
C. Supervisory level management
D.All of the above
3: If a general manager asks the sales manager to recruit some salesman

on his behalf, it is an instance of
A. Division of authority
B. Decentralisation of authority
C. Delegation of authority
D.Delegation of responsibility
4: Consider the following basic steps involved in the process of control:
1. Identifying the strategic control points
2. Establishment of the standards
3. Measuring performance against standards
4. Correcting deviations from the standards
A. 1,4,3,2
B. 1,2,3,4
C. 2,1,3,4
D.2,3,1,4
5: An organisation structure is effective if it enables individuals to

contribute to the objectives of the enterprise. This is known as
A. Scalar principle
B. Principle of functional definition
C. Principle of unity of objectives
D.None of the above
6: While delegating, a superior delegates

A. Only authority
B. Authority and responsibility
C. Authority, responsibility and accountability
D.Authority and responsibility but not accountability
7:
Match the following
List I List II
(a) Fayol 1. Grapevine
(b) Simon 2. Cybernetics
(c) Shannon 3. Gang plank
(d) Weiner 4. Noise
A. a-3, b-4, c-2, d-1
B. a-3, b-2, c-4, d-1

C. a-3, b-1, c-4, d-2
D.a-3,b-4,c-1,d-2
8: Directing function of management implies

1. Planning 2. Staffing
3. Leadership 4. Motivation
Choose the correct answer using the codes given below:

A. 1 and 2
B. 3 and 4
C. 2 and 4
D.2,3 and 4
9: Whlch of the following is true with respect to planning function?

A. To make a blue print of ideas and work
B. To tell the work allocation to all
C. Monitoring whether the things allocated are done properly

D.None of the above
10: Which of the following pairs are correctly matched ?

1. 3D Theory V.J. Peddin
2. Life Cycle Theory Paul Hersey and Blandard
3. Continuum Approval Tannenbaum and Schmidt
4. Managerial Grid Mountain & Black
Select the correct answer using the codes given below?
A. 1, 2, 3 and 4
B. 3 and 4
C. 2 and 4
D.1 and 2
11: Each subordinate should have only one superior whose command he
has to obey. This is known as
A. Division of work
B. Exception principle
C. Unity of Command principle

D.Authority - responsibility principle
12: In line and staff organisation the staff performs the function of
A. Management
B. Advising the management
C. Assigning responsibility
D.None of the above
13: Planning function is mainly performed at

A. Top management level
B. Middle management level
C. Lower management level
D.None of the above
14: Which one of the following may not necessarily be an advantage of

coordination?
A. Effective supervision
B. Unity of direction
C. Creative force
D.Summarisation of all management functions
15: Leadership is a function of all the following factors except

A. Work group
B. Product or service
C. Leader
D.Situation
16: Which of the following is not true in respect of planning?

A. Planning is an intellectual activity
B. Planning function is not performed by the top management

C. Planning is related to objectives
D.Planning is forward-looking
17: Which one of the following orders indicates the correct logical order
of managerial functions?
A. Organising, Planning, Directing, Staffing, Coordination and Control
B. Planning, Organising, Staffing,Directing, Control and Coordination
C. Planning, Directing, Organising, Staffing, Control and Coordination
D.Organising, Planning, Staffing,Directing, Control and Coordination
18: Which of the following skills is equally important at all levels of

management?
A. Technical skill
B. Human relation skill
C. Conceptual skill
D.All of the above
19: Consider the following statements:

1. Decentralisation and delegation are closely interrelated
2. Delegation and decentralisation both are desirable
3. Decentralisation is not suitable for large organisation
4. Delegation is not possible in the case of small organisations
Of these statements:
A. 1 and 2 are correct
B. 2 and 3 are correct
C. 1 and 4 are correct
D.1,3 and 4 are correct
20: Consider the following office equipments used in various offices:

1. Fax
3. Dictaphone
2. Typewriter
4. Letter opener
The correct order in which they are used is
A. 1 2 3 4
B. 4 3 2 1
C. 2 4 3 1
D.3 2 4 1
21: Which one of the following formulae is used to calculate "Cross

Relationship" under span of control?
A. n (n - 1)
B. n (2n/2 - 1)
C. n (2n/2 + n -1)
D.None of the above
22: Which of the following is not an advantage of MBO?

A. Success without planning
B. Employee commitment
C. Better appraisal
D.Self control
23: Motivational process and not the motivators as such is associated

with the
A. Need hierarchy theory
B. Two-factor theory
C. ERG Theory
D.Expectancy theory
24: Which one of the following is the oldest form of organization?

A. Functional organization
B. Staff organization
C. Line and Staff organization
D.Departmentation
25: The potential disadvantage of MBO is
A. Its inability to control progress of work and achievement of results
B. Its over-emphasis on production and productivity
C. The additional commitment to the organisation
D.The absence of short-term and long-term planning
26: Delegation of authority is linked to

A. Managerial planning
B. Management coordination
C. Management control
D.Scientific management
27: Organisation Theory deals with

A. Forms of business organisation
B. Structure of an organisation
C. Industrial relations
D.Incentives and wage policy
28: Consider the following steps:

1. Analysis of variances
2. Initiating corrective action
3. Measurement of Actual performance
4. Establishment of standards
What is the sequence of steps?
A. 1,2,3,4
B. 2,3,1,4
C. 3,1,2,4
D.4,3,1,2
29: The following steps are involved in managing by objectives
1. Preliminary setting of objectives at the top
2. Setting subordinates objectives
3. Tying resources with the goals
4. Clarifying the organisational roles
The correct sequence of these steps is
A. 1,2,3,4
B. 1,2,4,3
C. 1,3,2,4
D.1,4,2,3
30: The main advantage of functional organisation is

A. Specialisation
B. Simplicity
C. Expert advice
D.Experience
31: In a Functional organization

A. There are no advisers, the executive alone having the authority and
competence
B. There are specialist advisers having no authority
C. The entire organization is divided into functions with specific role for
specialists.
D.The organization is divided into functions with specialists having
authority.
32: TQM's major emphasis is on

A. Company profitability
B. Product quality
C. Customer delight
D.Employee training
33: Which of the following functions is known as the essence of

management?
A. Planning
B. Organising
C. Co-ordinating
D.Control
34: The following steps are involved in the process of organising

1. Forming supportive objectives
2. Delegating to the head of each group the authority necessary to
perform the activities
3. Establishing enterprise objectives
4. Identifying and classifying activities
The correct sequence of steps is :
A. 3,1,2,4
B. 3,1,4,2
C. 1,3,4,2
D.1,3,2,4
35: In line and staff organisation, the authority lies in

A. Line
B. Staff
C. Both line and staff
D.None of the above
36: 'Matrix organisation' refers to a term of

A. Organisation where authority and responsibility coexist
B. Organisation in which two or more basic types of departmentation are
combined.
C. Mathematical arrangement of events in columns and rows.
D.None of the above
37: Decentralisation of an organization is commanded on account of

which of the following advantages?
1. Reduced burden on top executives
2. Executive development
3. Improvement of morale
4. Solves problems of coordination
Select the correct answer from the codes given below and mark your
answer accordingly.
A. 2 and 3
B. 1,2, and 4
C. 1,2 and 3
D.3 and 4
38: In Taylor's functional organisation, gang boss

A. lnspects the quality of work done
B. Issues instructions to workers
C. Sets up tools and machines for work
D.Compiles cost of production
39: MBO is a technique which requires that the objectives of the

enterprise
A. Be written and defined in broad terms
B. Lay down the time period for achieving the desired results
C. Include a plan of action for achieving the desired result
D.Be defined in terms of measurable results
40: When management pays attention to more important areas and when
the day to day routine problems are looked after by lower level
management, it is known as
A. Management by objectives
B. Management by Exception
C. Participative Management
D.Critical path method
41: Staffing includes

1. Training 2. Appraisal
3. Placement 4. Directing
Choose the correct answer using the codes given below:
A. 1 and 3
B. 2 and 3
C. 1,2 and 3
D.1,2,3 and 4
42: Repeated use plans or standing plans include

A. Objectives and policies
B. Procedures and methods
C. Rules
D.All of the above
43: Span of controls means that

A. An organization consists of various departments
B. Each person's authority is clearly defined.
C. Every subordinate has one superior
D.A manager can supervise only a limited number of subordinates
44: If the span of control is narrow, a number of managers would be

required in each unit of the organization and there would be many
managerial levels or layers, such an organizational structure is referred to
as
A. Flat structure
B. Tall structure
C. Matrix structure
D.Project structure
45: The famous book 'General and Industrial Management' was written by
A. Oliver Sheldon
B. Henri Fayol
C. Elton Mayo
D.Maslow
46: Consider the following elements:

1. Indicators
2. Objectives
3. Controls
4. Key Result Areas
5. Roles and Missions
6. Action plans
Their correct sequence in management by objectives and results is
A. 5 4 2 1 3 6
B. 4 5 2 1 3 6
C. 5 4 1 2 6 3
D.4 5 1 2 6 3
47: Who wrote Management & Moral?

A. Taylor
B. Riggs
C. Dimock
D.Roethliberger
48: The following steps are involved in the process of organizing

1. Forming supportive objectives
2. Delegating to the head of each group the authority
3. Necessary to perform the activities
4. Establishing enterprise objectives
The correct sequence of these steps is
A. 3,1,2,4
B. 4,1,2,3
C. 1,3,4,2
D.1,3,2,4
49: According to the principle of "Span of control" there is

A. A tendency of overload supervisors with too much of work
B. A limit to the number of subordinates a supervisor can effectively
supervise.
C. No limit to the number of subordinates a supervisor can supervise.
D.A limit to delegation of authority to the subordinate.
50: Which one of the following statement is correct?

A. Planning and controlling are essentially one and the same.
B. Controlling is a part of the planning process.
C. Controlling is a substitute for planning
D.A control process is meaningless without pre-set goals.
51: In the process of controlling office management certain steps are

normally taken.
These include
1. Analysing the actual performance.
2. Finding out the reasons for discrepancies.
3. Evaluating the performance.
4. Establishing the standards of work performance.
The correct sequence in which these steps are usually taken is
A. 4,1,2,3
B. 1,4,2,3
C. 1,4,3,2
D.4,1,3,2
52: What is the correct sequence of the following functions of a manager

in an organisation?
1. Motivation 2. Controlling
3. Organising 4. Planning
Select the correct answer using the codes given below.
A. 4,3,2,1
B. 4,3,1,2
C. 3,4,2,1
D.3,4,1,2
MULTIPLE CHOICE ANSWERS

1.C 12.B 23.D 34.B 45.B
2.A 13.A 24.B 35.A 46.A
3.C 14.A 25.B 36.C 47.D
4.B 15.B 26.C 37.C 48.B
5.C 16.B 27.B 38.C 49.B
6.A 17.B 28.D 39.D 50.D
7.C 18.B 29.B 40.B 51.D
8.D 19.A 30.A 41.C 52.B
9.A 20.B 31.D 42.D
10.A 21.C 32.B 43.D
11.C 22.A 33.C 44.B
Multiple Choice Questions
Q.1. What is meant by the phrase CSR?
a) Corporate Social Responsibility b) Company Social Responsibility
c) Corporate Society Responsibility d) Company Society Responsibility
Ans: a
Q.2. What is meant by the phrase 'teleological ethics'?
a) Is used to judge is an action is right, fair and honest.
b) An action can only be judged by its consequences.
c) Developing the individual personal characteristics.

d) The key purpose of ethics is to increase freedom.
Ans: b
Q.3. For Karl Marx, where do our values come from?
a) They are a product of our upbringing and our parents.
b) They are a product of the economic system within which we live.
c) They are a product of social inequality.
d) They are a product of what we are taught at school.
Ans: b
Q.4. What does Milton Friedman believe to be the sole responsibility of
business?
a) The only social responsibility of business is to its shareholders.
b) Managers should act in ways that balance the interest of society and
shareholders.
c) The primary responsibility organizations have is to its employees.
d) The primary responsibility organizations have is to its stakeholders.
Ans: a
Q.5. What, according to Adam Smith, is the best way to promote collective
interest?
a) Through government making decisions about what is in the public interest.
b) Through everyone working together to support each other.
c) Through everyone working on their own self-interest
d) Through individuals forgoing their personal interest for the good of the
collective.
Ans: c
Q.6. Why, according to stakeholder theory, is it in companies' best interests to

pay attention to their stakeholders?
a) If firms only act in their own self-interest employees may feel exploited.
b) If firms only act in their own self-interest government might put more
regulation
on them.
c) If firms only act in their own self-interest customers might not like the image
that the company portray.
d) If firms only act in their own self-interest and inflict harm on stakeholders
then
society might withdraw its support.
Ans: d
Q.7. What is the enlightened self-interest model of CSR?
a) That it is in an organization's own best interest to put itself first rather than
its
ethics.
b) That it is in an organization's best interest to consider what a shareholder
would want.
c) That it is in an organization's own best interest to act in an ethical way.
d) That it is in an organization's own best interest to follow the legislation and
abide by the law.
Ans: c
Q.8. What is green washing?
a) Transforming products to be more ethical.
b) Making a product appear more ethical that it really is.
c) Converting the company to green production methods.
d) Convincing customers to buy ethically.

Ans: b
Q.9. What is triple bottom line?
a) An accounting tool that looks at the impact on people, planet and profits.
b) A management strategy which states all the attention should be on profits.
c) An accounting tool that looks at cost, profit and loss.
d) A management strategy which focuses on corporate social responsibility.
Ans: a
Q.10.Why do alternative organizations run differently from conventional
shareholder led approach?
a) They do not have shareholders.
b) They are run in non-hierarchical ways which aim to provide a positive

impact
on society rather than to make profit.
c) They priorities corporate social responsibility.
d) They aim to give money to charities and good causes.
Ans: b
Q.11.What does and Ethical Foundation for an organisation embody?
a) The structure, operational and conduct of the activities of the organization
b) The basic principles which govern the external and internal relations of the
organization
c) Neither of the above
d) All of these
Ans: b
Q.12.What does the importance of ethical behaviour, integrity and trust call
into
question?
a) The extent to which managers should attempt to change the underlying

beliefs
and values of individual followers
b) Who does what
c) What we do next
d) None of the above
Ans: a
Q.13.A ________ _________ sets out the purpose and general direction for the
organisation?
a) Mission statement b) Purpose statement
c) Vision d) Profit statement
Ans: a
Q.14.Which of the following would most effectively act as the primary objective
of a business organisation?
a) To make a profit
b) To procure resources
c) To communicate with shareholders
d) To mediate between the organisation and the environment
Ans: a
Q.15.What is the purpose of a balanced scorecard?
a) To measure contribution of people to business growth
b) To combine a range of qualitative and quantitative indicators of performance
c) To relate business performance to customer satisfaction
d) To relate business performance to financial measures

e) All of the above
Ans: b
Q.16.Which of the following does the term Corporate Social Responsibility
relate to?
a) Ethical conduct b) Environmental practice
c) Community investment d) All of the above
Ans: d
Q.17.Who are organisational stakeholders?
a) Government b) Employees
c) Customers d) All of the above
Ans: d
Q.18.What is Ethics to do with?
a) The wider community b) Business
c) Right and wrong d) Nothing
Ans: c
Q.19.Which of the following is an example of an area where business ethics
apply?
a) Conduct of international operations
b) Nowhere
c) In the personal life of staff
d) None of the above
Ans: a
Q.20.Which legislation relates to the concept of business ethics?
a) Freedom of Information Act b) Food Act
c) Building regulations d) All of these

Ans: a
Q.21.The four types of social responsibility include:
a) legal, philanthropic, economic, and ethical
b) ethical, moral, social, and economic
c) philanthropic, justice, economic, and ethical
d) legal, moral, ethical, and economic
Ans: a
Q.22.The ________ dimension of social responsibility refers to a business's
societal contribution of time, money, and other resources.
a) Ethical b) Philanthropic
c) Volunteerism d) Strategic
Ans: b
Q.23.A stakeholder orientation includes all of the following activities except:
a) generating data about stakeholder groups
b) assessing the firm's effects on stakeholder groups
c) distributing stakeholder information throughout the firm
d) minimizing the influence of stakeholder information on the firm
Ans: d
Q.24.Stakeholders are considered more important to an organization when:
a) they can make use of their power on the organization
b) they do not emphasize the urgency of their issues
c) their issues are not legitimate
d) they can express themselves articulately
Ans: a
Q.25.A (n) ________ is a problem, situation, or opportunity requiring an

individual, group, or organization to choose among several actions that
must be evaluated as right or wrong.
a) Crisis b) ethical issue
c) indictment d) fraud
Ans: b
Q.26.Which moral philosophy seeks the greatest good for the greatest number
of people?
a) Consequentialism b) Utilitarianism
c) Egoism d) Ethical formalism
Ans: b
Q.27.What type of justice exists if employees are being open, honest, and
truthful in their communications at work?
a) Procedural b) Distributive
c) Ethical d) Interactional
Ans: d
Q.28.A high-commitment approach to environmental issues may include all of
the following except:
a) risk analysis
b) stakeholder analysis
c) green-washing
d) strategic sustainability auditing
Ans: c
Q.29.Better access to certain markets, differentiation of products, and the sale
of pollution-control technology are ways in which better environmental
performance can:
a) increase revenue b) increase costs
c) decrease revenue d) decrease costs
Ans: a
Q.30.Atmospheric issues include all of the following except:
a) acid rain b) global warming
c) air pollution d) water quantity
Ans: d
Q.31.To be successful, business ethics training programs need to:
a) focus on personal opinions of employees.
b) be limited to upper executives.
c) educate employees on formal ethical frameworks and models of ethical
decision making.
d) promote the use of emotions in making tough ethical decisions.
Ans: c
Q.32.Most companies begin the process of establishing organizational ethics
programs by developing:
a) ethics training programs.
b) codes of conduct.
c) ethics enforcement mechanisms.
d) hidden agendas.
Ans: b
Q.33.For referent power to be effective, what must exist between individuals in
the relationship?
a) Antipathy b) Rivalry
c) History d) Empathy
Ans: d
Q.34.When a firm charges different prices to different groups of customers, it
may be accused of:
a) cultural relativism b) money laundering
c) facilitating payments d) price discrimination
Ans: a
Q.35.The ability to interpret and adapt successfully to different national,
organizational, and professional cultures is called:
a) national competitiveness. b) global development.
c) cultural intelligence. d) stakeholder sensitivity.
Ans: c
Q.36.Successful global initiatives addressing standards for business must
begin and end with:
a) the role of corporate governance and shareholder power in corporate decision
making.
b) social activism
c) the implementation of standardized ethics programs.
d) the consolidation of economic and environmental efforts.
Ans: a
Q.37.The social economy partnership philosophy emphasizes:
a) cooperation and assistance.
b) profit maximization.
c) competition.
d) restricting resources and support.
Ans: a
Q.38.Which of the following is not a driver of responsible competitiveness?
a) Policy drivers b) Development drivers
c) Business action d) Social enablers
Ans: b
Q.39.Which of the following is a problem presented by ethics audits?
a) They may be used to reallocate resources.
b) They identify practices that need improvement.
c) Selecting auditors may be difficult.
d) They may pinpoint problems with stakeholder relationships.
Ans: c
Q.40.The first step in the auditing process should be to secure the commitment
of:
a) employees. b) top executives and directors.
c) stockholders. d) customers.
Ans: b
Q.41.Codes of conduct and codes of ethics
a) are formal statements that describe what an organization expects of its
employees.
b) become necessary only after a company has been in legal trouble.
c) are designed for top executives and managers, not regular employees.
d) rarely become an effective component of the ethics and compliance program.
Ans: a
Q.42.Which of the following is NOT one of the primary elements of a strong
organizational compliance program?
a) A written code of conduct

b) An ethics officer
c) Significant financial expenditures
d) A formal ethics training program
Ans: c
Q.43.______________ are standards of behaviour that groups expect of their
members.
a) Codes of conduct. b) Group values.
c) Group norms. d) Organizational norms.
Ans: c
Q.44.In a ______________ organization, decision making is delegated as far
down the chain of command as possible.
a) Decentralized b) Creative
c) Flexible d) Centralized
Ans: d
Q.45.____________ refers to a strategic process involving stakeholder
assessment to create long-term relationships with customers, while
maintaining, supporting, and enhancing the natural environment.
a) Eco-strategy
b) Green marketing
c) Superfund reauthorization
d) Recycle and reprocess management
Ans: b
Q.46.The hand-of-government refers to the
a) ability of the government to interfere in business negotiations
b) role of corporations to be profitable within the law

c) effect of national politics on business decisions
d) impact of changing government regulations
Ans: b
Q.47.An organisation's obligation to act to protect and improve society's
welfare as well as its own interests is referred to as
a) organisational social responsibility
b) organisational social responsiveness
c) corporate obligation
d) business ethics
Ans: a
Q.48.The view that business exists at society's pleasure and businesses should
meet public expectations of social responsibility is the
a) iron law of responsibility argument
b) enlightened self-interest argument
c) capacity argument
d) anti-freeloader argument
Ans: b
Q.49.Managerial ethics can be characterised by all of the following levels except
a) immoral management b) amoral management
c) demoral management d) moral management
Ans: c
Q.50. Which of the following is not one the underlying principles of the
corporate governance Combined Code of Practice?
a) Openness b) Integrity
c) Accountability d) acceptability
Ans: d
Q.51. External audit of the accounts of a limited company is required
a) because it is demanded by the company’s bankers
b) by the Companies Act 2006
c) at the discretion of the shareholders
d) to detect fraud
Ans: b
Q.52. Directors’ responsibilities are unlikely to include.
a) a fiduciary duty
b) a duty to keep proper accounting records
c) a duty to propose high dividends for shareholders
d) a duty of care
Ans: c
Q.53. A company may become insolvent if it
a) has negative working capital
b) cannot meet its budgeted level of profit
c) makes a loss
d) cannot pay creditors in full after realisation of its assets
Ans: d
Q.54. A director of a limited company may not be liable for wrongful trading if
he
or she
a) took every step to minimise the potential loss to creditors
b) increased the valuation of its inventories to cover any potential shortfall
c) introduced into the balance sheet an asset based on a valuation of its brands
sufficient to meet any shortfall
d) brought in some expected sales from next year into the current year
Ans: a
Q.55. Fraudulent trading may be
a) a civil offence committed by any employee
b) a criminal offence committed only by directors of a limited company
c) a civil and a criminal offence committed only by directors of a limited
company
d) a civil and a criminal offence committed by any employee
Ans: d
Q.56. Disqualification of directors may result from breaches under the
a) Sale of Goods Act 1979
b) Financial Services Act 1986
c) Companies Act 2006 and Insolvency Act 1986
d) Health and Safety at Work Act 1974
Ans: c
Q.57. Directors may not be disqualified for
a) continuing to trade when the company is insolvent
b) persistent breaches of company legislation
c) paying inadequate attention to the company finances
d) being convicted of drunken driving
Ans: d
Q.58. Which of the following actions will not help directors to protect
themselves from non-compliance with their obligations and
responsibilities?
a) keeping themselves fully informed about company affairs
b) ensuring that regular management accounts are prepared by the company
c) seeking professional help
d) including a disclaimer clause in their service contracts
Ans: d
Q.59. Co-ording to Cadbury (2002), corporate governance is an issue of power
and:
a) Rights b) Accountability
c) Profit d) Appropriability
Ans: b
Q.60. The OECD argues that corporate governance problems arise because:
a) Ownership and control is separated
b) Managers always act in their own self interest
c) Profit maximization is the main objective of organizations
d) Stakeholders have differing levels of power
Ans: a
Q.61. The Institute of Chartered Accountants in England and Wales considers
argue that one particular stakeholder group should have primacy over all
other groups. Which stakeholder group are they referring to?
a) Customers b) Managers
c) Shareholders d) Society
Ans: c
Q.62. An organization that is owned by shareholders but managed by agents

on
their behalf is conventionally known as the modern:

a) Conglomerate b) Corporation
c) Company d) Firm
Ans: b
Q.63. The modern corporation has four characteristics. These are limited
liability, legal personality, centralized management and:
a) Fiduciary duty b) Stakeholders
c) Shareholders d) Transferability
Ans: d
Q.64. What makes a corporation distinct from a partnership?
a) If the members of a corporation die, the corporation remains in existence
providing it has capital
b) If the members of a corporation die, the corporation ceases to exist
c) A corporation cannot own property
d) A corporation cannot be held responsible for the illegal acts of its employees
Ans: a
Q.65. The term 'asymmetry of information' means information in a corporation
is:
a) Transferable to all stakeholders
b) Not transferable to all stakeholders
c) Not equally transparent to all stakeholders
d) Equally transparent to all stakeholders
Ans: c
Q.66. The view that sees profit maximization as the main objective is known as:
a) Shareholder theory b) Principal-agent problem
c) Stakeholder theory d) Corporation theory

Ans: c
Q.67. Where an organization takes into account the effect its strategic
decisions
have on society, this is known as:
a) Corporate governance
b) Business policy
c) Business ethics
d) Corporate social responsibility
Ans: d
Q.68. Which intervention resulted from the Enron scandal?
a) The Hampel Committee
b) The Sarbannes-Oxley Act
c) The Greenbury Committee
d) The Cadbury Committee
Ans: b
Q.69. Executive pay in the UK was reviewed by:
a) The Greenbury Committee
b) The Hampel Committee
c) The Cadbury Committee
d) The Higgs Committee
Ans: a
Q.70. In Japan, some corporations operate within the philosophy of 'kyosei'.

The
term 'kyosei' means:
a) No man shall be richer than another man

b) All stakeholders are equal
c) Living and working for the common good
d) If the corporation is bad, society is bad
Ans: c
Q.71. When managerial self-dealings are excessive and left unchecked,
a) they can have serious negative effects on share values
b) they can impede the proper functions of capital markets.
c) they can impede such measures as GDP growth.
d) all of the above
Ans: d
Q.72. Corporate governance structure
a) varies a great deal across countries.
b) has become homogenized following the integration of capital markets.
c) has become homogenized due to cross-listing of shares of many public
corporations.
d) none of the above
Ans: a
Q.73. In a public company with diffused ownership, the board of directors is
entrusted with
a) monitoring the auditors and safeguarding the interests of shareholders.
b) monitoring the shareholders and safeguarding the interests of management.
c) monitoring the management and safeguarding the interests of shareholders.
d) none of the above
Ans: c
Q.74. The key weakness of the public corporation is

a) too many shareholders, which makes it difficult to make corporate decision.
b) relatively high corporate income tax rates.
c) conflicts of interest between managers and shareholders.
d) conflicts of interests between shareholders and bondholders.
Ans: c
Q.75. When company ownership is diffuse,
a) a "free rider" problem discourages shareholder activism.
b) the large number of shareholders ensures strong monitoring of managerial
behavior because with a large enough group, there's almost always
someone who will to incur the costs of monitoring management.
c) few shareholders have a strong enough incentive to incur the costs of
monitoring management.
d) both a) and c) are correct
Ans: d
Q.76. In many countries with concentrated ownership
a) the conflicts of interest between shareholders and managers are worse than
in countries with diffuse ownership of firms.
b) the conflicts of interest are greater between large controlling shareholders
and small outside shareholders than between managers and shareholders.
c) the conflicts of interest are greater between managers and shareholders
than between large controlling shareholders and small outside shareholders.
d) corporate forms of business organization with concentrated ownership are
rare.
Ans: b
Q.77. In what country do the three largest shareholders control, on average,

about 60 percent of the shares of a public company?
a) United States b) Canada
c) Great Britain d) Italy
Ans: d
Q.78. The public corporation
a) is jointly owned by a (potentially) large number of shareholders.
b) offers shareholders limited liability.
c) separates the ownership and control of a firm's assets.
d) all of the above
Ans: d
Q.79. Periodic ethics audits
a) Are required by the Indian stock exchange
b) A method of fostering ethics
c) A method of quantitative assessment
d) Always use external consultants
Ans: b
Q.80. Political intrusion into business
a) May be desirable in some circumstances
b) Is anathema
c) Politics should have no say in how business is conducted
d) state legislation over-rides Federal Legislation
Ans: a
Q.81. The reach of codes is
a) Restricted to those obliged to conform by virtue of membership
b) Applicable to all
c) Applicable to the public only
d) the same as the reach of the law
Ans: a
Q.82. East India Company
a) Was always a management agency for the British government
b) had a continuous trade monopoly until 1873
c) Went out of existence at the time of Indian independence
d) Largely set commercial and management practices for India
Ans: d
Q.83. Quantification in ethics may be done by
a) Putting monetary value on prospective actions
b) Comparing the value of one action with another
c) Both A and B
d) Neither A or B
Ans: c
Q.84. When communicating a code of conduct
a) Focus on values that should guide decision making
b) Provide the same code of conduct to all departments regardless of its length.
c) Refrain from changing the code of conduct regularly
d) Fewer employees will read the code if it is short
Ans: a
Q.85. The __________ approach to formal corporate ethics initiatives is
proactive and inspirational.
a) Rules b) Compliance
c) Principles d) Values
Ans: d
Q.86. The _________ approach to formal corporate ethics initiatives focuses on
meeting required behavior norms or obeying the letter of the law
a) Rules b) Compliance
c) Principles d) Values
Ans: b
Q.87. Which of the following is associated with the classical view of social
responsibility?
a) economist Robert Reich
b) concern for social welfare
c) stockholder financial return
d) voluntary activities
Ans: c
Q.88. How many stages are in the model of an organization social responsibility
progression?
a) 3 b) 4
c) 5 d) 6
Ans: b
Q.89. The belief that a firm pursuit of social goals would give them too much
power is known as what argument in opposition to a firm being socially
responsible?
a) Costs
b) lack of skills
c) lack of broad public support
d) too much power

Ans: d
Q.90. Social obligation is the obligation of a business to meet its
_______________.
a) social and technological responsibilities
b) economic and legal responsibilities
c) technological and economic responsibilities
d) economic and social responsibilities
Ans: b
Q.91. Under the concept of social obligation, the organization
________________.
a) does what it can to meet the law, and a little bit more for stakeholders
b) fulfills its obligation to the stakeholders, which makes it fulfill the law, too
c) does the minimum required by law
d) fulfills its obligation to the law and its stakeholders
Ans: c
Q.92. Social responsiveness refers to the capacity of a firm to adapt to

changing
_________________.
a) societal conditions b) organizational conditions
c) societal leaders d) organizational managers
Ans: a
Q.93. Applying social criteria to an investment decision refers to
________________.
a) socioeconomic view b) social responsiveness
c) social responsibility d) social screening

Ans: d
Q.94. Which of the following is a basic definition of ethics?
a) moral guidelines for behavior
b) rules for acknowledging the spirit of the law
c) rules or principles that define right and wrong conduct
d) principles for legal and moral development
Ans: c
Q.95. Reasoning at the ______________ level of moral development indicates
that moral values reside in maintaining the conventional order and the
expectations of others.
a) Preconventional b) Conventional
c) Principled d) arrival
Ans: b
Q.96. A personality measure of person’s convictions is _______________.
a) moral development b) ego strength
c) locus of control d) social desirability
Ans: b
Q.97. Which of the following organizational structural characteristics would
most likely result in managerial ethical behavior?
a) few job descriptions
b) formal rules
c) mixed messages from authority figures
d) All of these
Ans: b
Q.98. Global organizations must __________ their ethical guidelines so that

employees know what is expected of them while working in a foreign
location
a) Clarify b) Provide
c) Establish d) broaden
Ans: a
Q.99. _____________ is a document that outlines principles for doing business
globally in the areas of human rights, labor, the environment, and
anticorruption.
a) A code of ethics
b) The Global Compact
c) The Foreign Corrupt Practices Act
d) Global Ethics
Ans: b
Q.100. A _____________ is a formal statement of an organization primary values
and the ethical rules it expects its employees to follow
a) mission statement b) statement of purpose
c) code of ethics d) vision statement
Ans: c
PART-4
1) The condition of a continually rising price level is defined as
(a) stagflation.
(b) stagnation.
(c) disinflation.
(d) inflation.
Answer: D
2) The economist who proposed that, “Inflation is always and everywhere a

monetary phenomenon”
was
(a) John Maynard Keynes.
(b) John R. Hicks.
(c) Milton Friedman.
(d) Franco Modigliani.
Answer: C
3) Monetarists and Keynesians both agree with Milton Friedman that
(a) the demand for money is insensitive to changes in the interest rate.
(b) velocity is predictable and fairly constant.
(c) inflation is a monetary phenomenon.
(d) the price level and the money supply are unrelated.
(e) all of the above are true.
Answer: C
4) Complete Milton Friedman’s famous proposition: “Inflation is always and

everywhere a _____
phenomenon.”
(a) monetary
(b) political
(c) policy
(d) budgetary
Answer: A
5) At first cut, the simple solution to fighting inflation is
(a) reducing the growth rate of the money supply.
(b) limiting the number of terms that politicians can serve in elective office.
(c) returning the economy to barter by prohibiting the use of fiat money.
(d) to impose price controls on businesses that attempt to raise prices.
Answer: A
6) “How do we prevent the inflationary fire from igniting again and stop the
roller coaster ride in the
inflation rate of the last 40 years?” Milton Friedman’s famous proposition

suggests the simple
solution:
(a) reduce the number of terms that politicians are allowed to serve.
(b) reduce the growth rate of the money supply.
(c) reduce the marginal tax rate on low-income wage earners.
(d) increase the marginal tax rates on businesses that hike prices in excess of 5
percent per year.
Answer: B
7) Milton Friedman’s proposition concerning the cause of inflation implies a

simple solution to the
inflation problem:
(a) reduce government budget deficits.
(b) limit the ability of fiscal policymakers to bring pressure to bear on the
monetary authority.
(c) limit the number of terms that politicians are allowed to serve.
(d) reduce the growth rate of the money supply.
Answer: D
8) Milton Friedman’s proposition that inflation is always and everywhere a
monetary phenomenon
holds only if
(a) government budget deficits do not rise continually.
(b) the unemployment rate does not rise continually.
(c) the price level rises continually.
(d) the United States does not experience more than one negative supply shock
per decade.
Answer: C
9) The monetarists’ proposition that inflation is always and everywhere a

monetary phenomenon holds
only if
per decade.
Answer: C
10) The Keynesians are willing to accept the monetarists’ proposition that
inflation is a monetary
phenomenon under the condition that
per decade.
Answer: C
11) Inflation occurs whenever
(a) the price level rises.
(b) the money supply increases.
(c) the price level rises continuously over a period of time.
(d) the price level falls continuously over a period of time.
(e) none of the above occur.
Answer: C
12) Evidence strongly supports the view that countries with high inflation also
have
(a) the lowest nominal interest rates.
(b) the highest rates of money growth.
(c) the smallest budget deficits.
(d) the lowest interest rates.
Answer: B
13) Countries with the highest inflation rates are likely to have
(a) the highest rates of money growth.
(b) large budget deficits.
(c) the lowest interest rates.
(d) both (a) and (b) of the above.
Answer: D
14) Countries with the highest inflation rates are likely to have
(a) the highest rates of money growth.
(b) small budget deficits relative to GDP.
(c) the lowest interest rates.
(d) all of the above.

Answer: A
15) The proposition that inflation is the result of a high rate of money growth is
(a) not supported by evidence from the German hyperinflation.
(b) held only by sociologists and is no longer believed by economists.
(c) supported by evidence from inflationary episodes throughout the world.
(d) largely a political fabrication designed to make the Fed a scapegoat for poor
fiscal policy.
Answer: C
16) Which of the following would provide the strongest evidence that rapid
money growth is the driving
force behind inflation?
(a) An endogenous increase in the money supply that preceded the onset of
inflation
(b) An exogenous increase in the money supply that preceded the onset of
inflation
(c) An endogenous increase in the money supply that lagged the onset of
inflation
(d) An exogenous increase in the money supply that lagged the onset of
inflation
Answer: B
17) The German hyperinflation of 1921–1923 provides important support for

the view that high money
growth causes high inflation because
(a) the growth in the German money supply appears to have been due to
exogenous forces.
(b) reverse causation in this case is highly implausible.
(c) it is hard to imagine a third factor that could have been the driving force
behind both inflation
and explosion in the German money supply.
(d) of all of the above.
(e) of only (a) and (b) of the above.
Answer: D
18) The initiating causes of the inflationary monetary policy adopted by the
German authorities in the
early 1920s included
(a) the government’s unwillingness to raise taxes to finance war reparations.
(b) the government’s inability to borrow sufficient funds to finance its

expenditures.
(c) the government’s unwillingness to print additional fiat currency.
(e) only (a) and (b) of the above.
Answer: E
19) The German authorities in the early 1920s appear to have resorted to
increasing the money supply as
a way of raising revenues because
(a) raising taxes would have been politically unpopular.
(b) raising taxes would have been unconstitutional.
(c) there was no way to collect taxes in those days.
(d) none of the above.
Answer: A
20) The German hyperinflation of the 1920s supports the proposition that
excessive monetary growth
causes inflation and not the other way around since the increase in monetary
growth appears to have
been
(a) unintentional.
(b) intentional.
(c) simultaneous.
(d) exogenous.
(e) endogenous.
Answer: D
21) Evidence for Latin American countries over the ten-year period 1989–1999
indicates that
(a) in every case in which a country’s inflation rate is extremely high for any
sustained period of
time, its rate of money growth is extremely high.
(b) a country can experience high inflation for a sustained period of time
without an increase in its
rate of money growth.
(c) a country can experience a significant increase in its money supply for a
sustained period of time
without an increase in its rate of inflation.
(d) both (b) and (c) above are possible.
Answer: A
22) A one-time increase in the price level
(a) is rarely reported by the news media as inflation, but is nevertheless

considered to be inflation
by economists.
(b) is regularly reported by the news media as inflation, but is not considered to
be inflation by
economists.
(c) is rarely reported by the news media as inflation because it is not considered
to be inflation by
economists.
(d) is regularly reported by the news media as inflation because it is considered

to be inflation by
economists.
Answer: B
23) A one-time increase in the money supply
(a) is synonymous with inflation.
(b) cannot cause inflation.
(c) leads to an increase in the price level.
(d) results in both (a) and (c) of the above.
(e) results in both (b) and (c) of the above.
Answer: E
24) If inflation is defined as a condition of a continually, rapidly rising price

level, then
(a) monetarists contend that inflation is a monetary phenomenon.
(b) Keynesians are willing to accept that inflation is a monetary phenomenon.
(c) Keynesians are unwilling to accept that inflation is a monetary

phenomenon.
Answer: D

level, then
(a) Keynesians contend that inflation is not a monetary phenomenon.
(b) monetarists are unwilling to accept that inflation is a monetary

phenomenon.
(c) both (a) and (b) of the above.
(d) neither (a) nor (b) of the above.
Answer: D

level, then
(a) monetarists are unwilling to accept that inflation is a monetary

phenomenon.
(b) Keynesians are willing to accept that inflation is a monetary phenomenon.
(c) Keynesians are unwilling to accept that inflation is a monetary

phenomenon.
Answer: B
27) When inflation is defined to be a condition of a continually rising price

level,
(a) only monetarists agree with Milton Friedman’s proposition that inflation is a
monetary
phenomenon.
(b) only Keynesians agree with Milton Friedman’s proposition that inflation is a
monetary
phenomenon.
(c) both monetarists and Keynesians agrees with Milton Friedman’s proposition
that inflation is a
monetary phenomenon.
(d) neither monetarists nor Keynesians agrees with Milton Friedman’s

proposition that inflation is a
monetary phenomenon.
Answer: C
28) According to monetarist analysis, in order for inflation to occur,

(a) the money supply must continually increase, causing the aggregate demand
curve to continually
shift right.
(b) the aggregate supply curve must continually shift left, as wages rise in
response to higher prices.
(c) the price level must continually rise.
(d) all of the above must occur.
(e) only (a) and (c) of the above must occur.
Answer: D
29) According to monetarist analysis, in order for inflation to occur,
shift right.
(b) the aggregate supply curve must continually shift right, as wages rise in
response to higher
prices.
(d) only (a) and (c) of the above must occur.
Answer: D
30) Factors other than money growth that can generate an inflation in
monetarist analysis include:
(a) an increase in government spending.
(b) a tax reduction.
(c) an increase in net exports.
Answer: D
31) According to the monetarists, inflation is caused by

(a) supply shocks.
(b) expansionary fiscal policies.
(c) expansionary monetary policies.
(d) rising prices.
Answer: C
32) According to the monetarists, inflation is caused by
(a) supply shocks.
(d) government regulations.
Answer: C
33) According to the monetarist view of inflation, an increase in the money

supply will
(a) increase output above the natural rate level for a brief period of time.
(b) have no lasting effect on real output.
(c) cause prices to rise.
Answer: D
Question Status: Previous Edition
Chapter 27 Money and Inflation 971
34) According to the monetarist view of inflation, an increase in the money

supply will cause
(a) output to increase in the short run, but not in the long run.
(b) an increase in the price level, but no permanent effect on aggregate output.
(c) government budget deficits to increase.

Answer: E
35) According to the monetarist view of inflation, a continually increasing

money supply
(a) causes the aggregate demand curve to shift continually to the right.
(b) causes the aggregate demand curve to shift continually to the left.
(c) is shown as a movement along the aggregate demand curve.
(d) does none of the above.
Answer: A

money supply causes
(a) the aggregate demand curve to shift continually to the right, and the price
level to increase
continually.
(b) the aggregate demand curve to shift continually to the left, and the price
level to increase
continually.
(c) the aggregate supply curve to shift continually to the right, and the price
level to increase
continually.
Answer: A

money supply causes
(a) the aggregate demand curve to shift right along a stationary aggregate
supply curve, leading to
continually increasing aggregate output and prices.
(b) the aggregate supply curve to shift left along a stationary aggregate demand
curve, leading to
continually contracting aggregate output and prices.
(c) the aggregate demand curve to shift continually to the right as the aggregate
supply curve shifts
continually inward, leading to higher and higher price levels.
(d) the aggregate demand curve to shift continually to the left as the aggregate
supply curve shifts
continually outward, leading to higher and higher price levels.
Answer: C
Figure 27-1
38) In Figure 27-1, the initial effect of an increase in the money supply is to
shift the economy from
(a) point 1 to point 2.

(b) point 2 to point 1.
(c) point 1 to point 1′.
(d) point 1′ to point 1.
(e) point 1 to point 4.
Answer: C
39) In Figure 27-1, a one-time increase in the money supply causes
(a) the aggregate demand curve to shift from AD1 to AD2.
(b) the aggregate demand curve to shift from AD1 to AD2 to AD3 to AD4.
(c) the aggregate supply curve to shift from AS1 to AS2.
(d) the aggregate supply curve to shift from AS1 to AS2 to AS3 to AS4.
(e) no change in the graph.
Answer: A
40) In Figure 27-1, a continuous increase in the money supply causes
Answer: B
Answer: D
42) In Figure 27-1, a one-time increase in government spending causes
Answer: A
43) In Figure 27-1, the initial impact of a one-time increase in government

spending causes the economy
to shift from
(e) point 1 to point 4.
Answer: C
44) According to Keynesian analysis, a continuous increase in the money

supply causes
(a) the price level to increase, but has no lasting effect on the inflation rate.
(b) the price level to fall.
(c) inflation.
(d) output to increase, but leaves the price level and inflation unchanged.
(e) none of the above.
Answer: C
45) According to Keynesian analysis, in order for inflation to occur,

shift right.
(b) the aggregate supply curve must continually shift left, as wages rise in
response to higher prices.
(e) only (a) and (c) of the above.
Answer: D
46) According to Keynesian analysis, in order for inflation to occur,
shift right.
(b) the aggregate supply curve must continually shift right, as wages rise in
response to higher
prices.
(e) only (a) and (c) of the above.
Answer: E
47) Keynesians conclude that rapidly growing _____ will cause the price level to
rise continually, thus
generating an inflation.
(a) money supply
(b) government spending
(c) interest rates
(d) consumer expenditure

Answer: A
48) According to Keynesian analysis, an increase in government spending will

shift the aggregate
demand curve to the _____, causing output to _____ above the natural rate
level.
(a) right; fall
(b) right; rise
(c) left; fall
(d) left; rise
Answer: B
49) According to Keynesian analysis, a(n) _____ in government spending will

shift the aggregate
demand curve to the right, causing output to rise above the natural rate level.
The aggregate supply
curve will shift _____, and the price level will rise.
(a) increase; rightward
(b) increase; leftward
(c) decrease; rightward
(d) decrease; leftward
Answer: B
50) According to Keynesian analysis,
(a) a continually increasing level of government expenditure could cause a

continually rising price
level.
(b) a continually increasing level of government expenditure is not a politically

feasible policy.
(c) high inflation cannot be driven by fiscal policy alone.

Answer: D
(a) a continually increasing level of government expenditure could cause a

continually rising price
level, but this is not a politically feasible policy.
(b) negative supply shocks cannot drive a continually rising price level.
(c) high inflation cannot be driven by fiscal policy alone.
Answer: D
(a) high inflation can be driven by fiscal policy alone.
(b) negative supply shocks can cause a continually rising price level.
(c) the money supply must continually increase for inflation to occur.
(d) only (a) and (c) of the above are true.
Answer: C
(a) the net result of the negative supply shock is that we return to full
employment at the initial price
level and an inflation does not result.
(b) negative supply shocks cannot drive a continually rising price level.
(c) high inflation can be driven by fiscal policy alone.
(d) only (a) and (b) of the above.
Answer: D
54) According to the Keynesians, inflation is caused by
(a) supply shocks.
(d) rising prices.
Answer: C
55) According to the Keynesians, inflation is caused by
(a) supply shocks.
(d) wage push.
Answer: C
56) Keynesian analysis indicates that a continually increasing money supply

will cause
(a) a one-time increase in the price level.
(b) the price level to rise continually.
(c) employment to decline continually.
(d) unemployment to decline continually.
Answer: B
57) Keynesian analysis indicates that
(a) a one-time increase in government expenditures leads to only a temporary

increase in the
inflation rate.
(b) a continually increasing level of government expenditures is not a feasible

policy.
(c) negative supply shocks are the source of high inflation in the United States.
(d) only (a) and (b) of the above are correct.
Answer: D
(a) a one-time increase in government expenditures leads to only a temporary

increase in the
inflation rate.
(b) a continually increasing level of government expenditures is not a feasible

policy.
(c) negative supply shocks are not the source of high inflation in the United
States.
(d) all of the above are correct.
(e) only (a) and (b) of the above are correct.
Answer: D
(a) supply-side phenomena are one source of high inflation.
(b) fiscal policy actions drive changes in the price level.
(c) inflation is not a monetary phenomenon.
(e) none of the above are correct.
Answer: E
(a) supply-side phenomena cannot be the sole source of high inflation.
(b) high inflation cannot be driven by fiscal policy alone.
(c) inflation is a monetary phenomenon.
Answer: D
61) According to the Keynesian view of inflation, an increase in the money
supply will
(a) increase output above the natural rate level for a brief period of time.
(b) have no lasting effect on real output.
(c) cause prices to rise.
(d) do all of the above.
Answer: D
62) According to the Keynesian view of inflation, an increase in the money

supply will cause
(a) output to increase in the short run, but not in the long run.
(b) an increase in the price level, but no permanent effect on aggregate output.
(c) government budget deficits to increase.
Answer: E
63) According to the Keynesian view of inflation, a continually increasing

money supply
(a) causes the aggregate demand curve to shift continually to the right.
(b) causes the aggregate demand curve to shift continually to the left.
(c) is shown as a movement along the aggregate demand curve.
(d) does none of the above.
Answer: A

money supply causes
(a) the aggregate demand curve to shift continually to the right, and the price
level to increase
continually.
(b) the aggregate demand curve to shift continually to the left, and the price
level to increase
continually.
(c) the aggregate supply curve to shift continually to the right, and the price
level to increase
continually.
Answer: A

money supply causes
(a) the aggregate demand curve to shift right along a stationary aggregate
supply curve, leading to
continually increasing aggregate output and prices.
(b) the aggregate supply curve to shift left along a stationary aggregate demand
curve, leading to
continually contracting aggregate output and prices.
(c) the aggregate demand curve to shift continually to the right as the aggregate
supply curve shifts
continually inward, leading to higher and higher price levels.
(d) the aggregate demand curve to shift continually to the left as the aggregate
supply curve shifts
continually outward, leading to higher and higher price levels.
Answer: C
66) Keynesian analysis indicates that negative supply shocks
(a) decrease the price level, but cannot decrease the inflation rate.
(b) increase the price level, but cannot increase the inflation rate.
(c) increase both the price level and the inflation rate.
(d) decrease both the price level and the inflation rate.
Answer: B
67) In the absence of accommodating policy, the net result of a negative supply
shock is that
(a) the economy returns to full employment at the initial price level.
(b) the economy returns to full employment at a higher price level.
(c) the economy returns to full employment at a lower price level.
(d) aggregate output increases above the natural rate level, but only
temporarily.
Answer: A
68) A continually increasing level of government expenditures cannot cause

high inflation because
(a) constitutional budget constraints limit policymakers’ ability to raise

spending.
(b) public and political perceptions impose limits on the degree to which
government expenditures
can increase.
(c) politicians cannot increase expenditures without increasing taxes.
(d) of none of the above.
Answer: B
69) Factors other than money growth that can generate an inflation in
Keynesian analysis include
(a) an increase in government spending.
(b) a tax reduction.
(c) an increase in net exports.
Answer: D
70) A one-shot increase in government expenditure causes
(a) continual inflation.
(b) continual wage increase.
(c) a one-shot increase in the price level.
(d) a one-shot increase in unemployment.
Answer: C
71) According to Keynesians, a one-shot increase in government spending

causes
(a) a permanent increase in the inflation rate.
(b) a temporary increase in the inflation rate.
(c) a permanent decrease in the inflation rate.
(d) a temporary decrease in the inflation rate.
(e) no change in aggregate demand.
Answer: B
Figure 27-2
72) In Figure 27-2, the initial impact of a one-time increase in government
spending causes the economy
to move from
(e) stay at point 1.
Answer: C
Question Status: New
73) In Figure 27-2, the initial impact of a tax cut causes the economy to move
from

Answer: C
980 Frederic S. Mishkin • Economics of Money, Banking, and Financial

Markets, Seventh Edition
74) In Figure 27-2, the long-run effect of a one-time increase in government

spending causes the
economy to move from
Answer: A
75) In Figure 27-2, the long-run effect of a tax increase causes the economy to
move from
Answer: B

76) A one-shot increase in wages due to a successful wage push by labor
unions causes
(a) continual inflation.
(b) a one-shot increase in the price level.
(c) a one-shot increase in real output.
(d) both (a) and (c) of the above to occur.
Answer: B
Chapter 27 Money and Inflation 981
Figure 27-3
77) In Figure 27-3, the initial impact of a negative supply shock is to cause the
(a) point 1 to point 1′.
(b) point 1 to point 1′ and then back to point 1.
(c) point 1′ to point 1 and then back to point 1′.
Answer: A
78) In Figure 27-3, the long-run effect of an nonaccommodated negative supply

shock is to cause the
(a) point 1 to point 1′.
(b) point 1 to point 1′ and then back to point 1.
(c) point 1′ to point 1 and then back to point 1′.

Answer: B
79) Keynesian analysis indicates that a continuous increase in the money

supply causes
(a) aggregate demand to increase continuously.
(b) the price level to increase continuously.
(c) demand-pull inflation.
Answer: D
80) If by inflation one means a continual increase in the price level at a rapid
rate, then Keynesian and
monetarist views of the inflation process are
(a) quite different as Keynesians emphasize the significance of supply shocks

while monetarists
stress the significance of money growth.
(b) quite different as Keynesians stress the importance of expansionary fiscal

actions while
monetarists stress the significance of money growth.
(c) quite different as Keynesians stress the importance of business confidence

while monetarists
stress the significance of money growth.
(d) not very different.
Answer: D
81) To say that inflation is a monetary phenomenon seems to beg the question:
(a) Why does inflationary monetary policy occur?

(b) Why do politicians seek reelection?
(c) Why is the Fed independent?
(d) Why does the U.S. Treasury print so much money?
Answer: A
82) The monetarist position that inflation is a monetary phenomenon should

not preclude going behind
the proximate cause of inflation. Thus, to say that inflation is a monetary

phenomenon is somewhat
misleading because
(a) fiscal expansions that are not accommodated by the Fed can be inflationary.
(b) supply shocks that are not accommodated by the Fed can be inflationary.
(c) inflationary monetary policy is an offshoot of other government policies.
Answer: C
83) To say that inflation is a monetary phenomenon is somewhat misleading

since
(a) fiscal expansions that are not accommodated by the Fed can be inflationary.
(b) supply shocks that are not accommodated by the Fed can be inflationary.
(c) excessive money growth often results from an accommodating monetary

policy.
Answer: C
84) An unrealistically low unemployment target will most likely result in
(a) inflation.
(b) an unemployment rate falling below the natural rate.
(c) excessive monetary growth.

(e) both (a) and (c) of the above.
Answer: D
85) Which of the following help explain inflationary money growth?
(a) The federal government’s commitment to high employment since 1946
(b) One-shot supply shocks
(c) One-shot tax cuts
(d) All of the above
Answer: A
86) Which of the following help explain inflationary money growth?
(a) The federal government’s commitment to high employment since 1946
(b) Successful wage push by workers
(c) Politicians unwillingness to raise taxes to finance increased government

expenditures
(d) All of the above
Answer: D
87) The combination of a successful wage push by workers and the

government’s commitment to high
employment leads to
(a) demand-pull inflation.
(b) supply-side inflation.
(c) supply-shock inflation.
(d) cost-push inflation.
Answer: D
88) If the Fed responds by increasing the money supply in response to a
successful wage push by
workers, monetary policy is said to be
(a) accomplishing.
(b) nonaccommodating.
(c) nonaccomplishing.
(d) accommodating.
Answer: D
89) If workers continually demand higher wages, which are accommodated by

expansionary monetary
policy, the resulting inflation is known as
(b) cost-push inflation.
(c) not enough information to distinguish.
Answer: B
90) If workers do not believe that policymakers are serious about fighting
inflation, they are most likely
to push for higher wages, which will shift the aggregate _____ curve _____ and
lead to
unemployment or inflation or both.
(a) demand; inward
(b) demand; outward
(c) supply; inward
(d) supply; outward
Answer: C
91) If a cost-push inflation occurs because of the push by workers to get higher
wages, then one can
infer that the government
(a) has a high employment target.
(b) has pursued an accommodating monetary policy.
(c) has chosen to reduce its budget deficit.
(d) only (a) and (b) of the above.
Answer: D
92) Workers are more likely to push for higher wages if they know that the
government
(a) will not pursue an accommodating policy.
(b) has a high employment target.
(c) does not desire to pursue stabilization policies.
Answer: B
93) Workers will have greater incentives to push for higher wages when
government policymakers place
greater concern on _____ than _____ and are thus _____ likely to adopt
accommodative policies.
(a) inflation; unemployment; less
(b) inflation; unemployment; more
(c) unemployment; inflation; less
(d) unemployment; inflation; more
(e) unemployment; inflation; not
Answer: D
94) In the absence of an accommodating monetary policy, a push by workers to

get higher wages will
cause
(a) cost-push inflation.
(b) demand-pull inflation.
(c) higher unemployment.
Answer: C
95) Cost-push inflation can result when
(a) workers decide to raise wages because they want to increase their real
wages.
(b) workers decide to raise wages because they expect inflation to be high and
want higher wages in
order to keep up with inflation.
(c) the government gives in to the demands of workers for higher wages by
implementing policies
to raise aggregate demand.
(d) all of the above occur.
Answer: D
96) Cost-push inflation can result when
(a) workers decide to accept lower wages because they want to remain
employed.
(b) government fiscal policies become more expansionary.
(c) the government gives in to the demands of workers for higher wages by
implementing policies
to raise aggregate demand.
(d) only (a) and (b) of the above occur.
Answer: C
97) If workers believe that government policymakers will increase aggregate
demand to avoid a
politically unpopular increase in unemployment when workers demand higher

wages, then workers
will not fear higher unemployment and their wage demands will result in
(b) hyperinflation.
(c) deflation.
(d) cost-push inflation.
(e) disinflation.
Answer: D
98) If workers decide to raise wages because they want to increase their real
wages, then inflation results
(a) even when government fiscal and monetary policies remain unchanged.
(b) if government fiscal and monetary policies become more contractionary.
(c) if government fiscal and monetary policies become more expansionary.
(d) when either (a) or (c) occur.
Answer: C
986 Frederic S. Mishkin • Economics of Money, Banking, and Financial

Markets, Seventh Edition
99) If workers decide to raise wages because they want to increase their real
wages, then
(a) aggregate output declines below its natural rate level if government fiscal
and monetary policy
remains unchanged.
(b) the price level will rise if the government gives in to the demands of workers
for higher wages
by implementing policies to raise aggregate demand.
(c) inflation will result even if the government does not give in to the demands
of workers for
higher wages by implementing policies to raise aggregate demand.
(d) all of the above are possible.
(e) only (a) and (b) of the above are possible.
Answer: E
100) If policymakers set a target for unemployment that is too low because it is
less than the natural rate
of unemployment, this can set the stage for a higher rate of money growth and
(a) cost-push inflation.
(b) demand-pull inflation.
(c) cost-pull inflation.
(d) demand-push inflation.
Answer: B
101) Distinguishing a demand-pull inflation from a cost-push inflation is

difficult in practice because
(a) economists and policymakers find it difficult to measure the natural rate of
unemployment.
(b) a cost-push inflation can be initiated by a demand-pull inflation.
(c) budget deficits are responsible for initiating both types of inflation.
(d) of all of the above.
(e) of only (a) and (b) of the above.
Answer: E
102) Theoretically, one can distinguish a demand-pull inflation from a cost-

push inflation by comparing
(a) how fast prices rise relative to wages.

(b) the unemployment rate with its natural rate level.
(c) when prices rise relative to wages.
Answer: B
103) Demand-pull inflation can result when
(a) policymakers set an unemployment target that is too low because it is less
than the natural rate
of unemployment.
(b) a persistent budget deficit is financed by money creation.
(c) the deficit is financed by selling bonds
(d) all of the above occur. (e) only (a) and (b) of the above occur. Answer: D
PART-4
1. Suppose an economy�s expenditures are equal to $7,000 billion. Income in the

economy is:
a. Less than $7,000 billion.
b. More than $7,000 billion.
c. Exactly $7,000 billion.
d. Somewhere between $7,000 billion and $8,000 billion.
2. National income accounting:

a. Provides a set of rules for determining macroeconomic policy.
b. Provides a set of rules and definitions for measuring economic activity in the
aggregate economy.
c. Is a useful tool for microeconomists.
d. Can be used to measure a nation's output but not its production or
consumption.
3. Real gross domestic product is best defined as:

a. The market value of goods and services produced in an economy.
b. All goods and services produced in an economy stated in the prices of a given
year.
c. The market value of all final goods and services produced in an economy
stated in the prices of a given year.
d. The market value of goods and services produced in an economy stated in
current-year prices.
4. The United States produces and sells millions of types of products. To add
them up to a single aggregate, each good is weighted by:
a. Its cost of production.
b. Its market price.
c. Its utility to consumers.
d. Its contribution to corporate profits.
5. To calculate nominal GDP:

a. Sum the quantity of all final goods and services produced in an economy in a
year.
b. Sum the quantity of all goods and services sold in an economy in a year.
c. Weight the output of each final good and service produced in an economy in
a year by its price that year and then sum the result.
d. Weight the output of each good and service produced in an economy in a year
by its price in that year, and then sum the result.
6. To compute GDP, the quantity of each final good or service produced must first
be weighted by:
a. Its market price.
b. Its cost of production.
c. Its share of total output.
d. Its contribution to corporate profits.
Intermediate and Final Goods and Services
7. Which of the following is an example of an intermediate product?

a. A pair of skis sold by a sporting goods retailer to a skier.
b. A share of IBM stock.
c. The lumber produced by Boise Cascade and sold to a builder of new houses.
d. An antique car sold to the highest bidder.
8. Which of the following is an example of a final good or service?

a. Unemployment compensation.
b. A CD player purchased as a gift.
c. Steel used in the production of appliances.
d. Vegetables purchased by local restaurants to make soup.
9. Double counting in the national income accounts will not occur if GDP is
computed by summing all:
a. Sales of final output.
b. Sales of final output and intermediate goods.
c. Sales.
d. Production costs.
10. Use the following information to answer the question. There are three firms
in an economy: X, Y, and Z. Firm X buys $200 worth of goods from Y, and $300
worth of goods from firm Z, and produces 250 units of output at $4 per unit. Firm
Y buys $150 worth of goods from firm X, and $250 worth of goods from firm Z,
and produces 300 units of output at $6 per unit. Firm Z buys $75 worth of goods
from firm X, and $50 worth of goods from firm Y, and produces 500 units at $2
per unit. Given this information, what is the economy�s GDP? Hint: remember
that part of each firm�s production is used by one of the other firms as a
production input (an intermediate product).
a. $1825.
b. $2700.
c. $2775.
d. $3800.
Components of GDP
11. Investment is the purchase of capital equipment, inventories, and:

a. Structures.
b. Nondurable goods.
c. Depreciation.
d. Import investment.
12. Which of the following would be considered an investment expenditure?

a. The Smith�s buy a home that was built in 1990.
b. The federal government pays the salary of a captain in the Air Force.
c. Jack�s Boat Storage buys a new boat lift.
d. Chairs-R-Us buys a used lathe to manufacture chairs.
13. For purposes of calculating GDP, which of the following payments is not included in
the government spending component?
a. Social security payments.
b. Wages paid by a local government to its road crew.
c. Wages paid by a state government to the workers in its welfare department.
d. The federal government�s purchase of a submarine from a shipbuilder.
14. Spending on capital equipment, inventories, and structures is referred to as:
a. Consumption expenditure (C).
b. Investment expenditure (I).
c. Government expenditure (G).
d. Expenditure on net exports (X � M)
15. The sale of illegal drugs:

a. Is included in GDP under services.
b. Is included in GDP under investment.
c. Is included in GDP as a component of home production (non-market activity).
d. Is not included in GDP.
16. Which of the following would be counted in the calculation of GDP?

a. The sale of a rare coin to a coin collector.
b. Homes that are rebuilt after being completely destroyed by a hurricane.
c. The sale of a 1966 Ford Fairmont.
d. The sale of cocaine in the black market.
17. Which of the following would NOT be counted as a final good for inclusion in GDP?
a. A piece of glass bought by a consumer to fix a broken window.
b. A sheet of glass purchased by a commercial builder of a new home.
c. A sheet of glass produced this year and ending up in the inventory of a retail store.
d. A home that is built this year, but is not sold.
18. Which of the following economic activities would not be included in US

GDP?
a. Dick hires a nanny for $10 an hour to help his wife take care of their kids.
b. Jose is a great hairdresser, often receiving $20 tips (which he reports on his
income taxes).
c. MaxiPress adds $8,000 worth of books to its inventory which remains unsold
by the end of the year.
d. Rita has a job after school washing dishes 2 hours each evening in her parents
diner. The other dishwashers get $6 an hour, but her parents give her room and
board instead.
19. Which of the following is not a part of US GDP?

a. The value of an insurance policy on a new BMW sold by a U.S. company.
b. The value of a BMW imported from Germany.
c. The value of a BMW produced in the U.S.
d. The commissions earned by a BMW dealership in the US.
20. If a used car dealer buys a car for $6,000 and resells it for $6,500, how much
has been added to GDP?
a. Nothing.
b. $500.
c. $6,000
d. $6,500.
GDP Calculations
21. If U.S. imports of goods and services exceed exports:

a. U.S. GDP is less than the sum of consumption, investment, and government purchases.
b. U.S. GDP exceeds the sum of consumption, investment, and government purchases.
c. U.S. net exports are positive.
d. U.S. GDP equals the sum of consumption, investment, and government purchases.
billions of
dollars
Consumption 4,900
Investment 1,300
Transfer payments 1,050
Government expenditures 1,200
Exports 1,050
Imports 950
Net foreign factor income 20
22. Use the table above to calculate GDP.

a. 6,200.
b. 7,400.
c. 7,500.
d. 8,450.
23. Use the table above to calculate net exports.

a. -100.
b. 100.
c. 950.
d. 1050.
In billions of dollars
Consumption 3600
Investment 800
Transfer payments 750
Government expenditures 1000
Exports 650
Imports 450
Net foreign factor income -30
24. Calculate GDP using the table above.

a. 5570
b. 5600
c. 6050
d. 6320
25. Calculate net exports using the table above.

a. 170
b. 200
c. 450
d. 650
In trillions of dollars
GDP 5.0
Government purchases 1.0
Transfer payments 0.2
Exports 0.4
Imports 0.5
Net foreign factor income 0.4
26. Refer to the table above. What is consumption in this economy?

a. $3.6 trillion.
b. $3.9 trillion.
c. $4.1 trillion.
d. There is not sufficient information to compute consumption.
Per-Capita GDP
27. Per capita real output product is best defined as:

a. The market value of all final goods and services produced in an economy in
current prices.
b. The market value of all final goods and services produced in an economy in
current prices divided by the population.
c. The market value of all final goods and services produced in an economy in
the prices of a given year.
d. The market value of all final goods and services produced in an economy in
the prices of a given year divided by the population.
28. Suppose the Gross Domestic Product in a country is $450 million and the population of
that country is $150 million. What is the per-capita GDP of that country?
a. $300 million.
b. $30 million.
c. $3 million.
d. $0.3 million.
Uses and Limitations of National Income Accounting
29. GDP is a:
a. Good measure of relative welfare in various countries.
b. Good measure of relative prices in various countries.
c. Good measure of relative living standards in various countries.
d. Good measure of market activities at market prices.
30. Comparisons of GDP levels across countries are most accurate when:
a. The value of non-market activities is the same across countries.
b. Prices are the same across countries.
c. Prices and the value of non-market activities are the same across countries.
d. Prices for non-market activities are the same across countries.
.C
2. B
3. C
4. B
5. C
6. A
7. C
8. B
9. A
10. C
11. A
12. C
13. A
14. B
15. D
16. B
17. B
18. D
19. B
20. B
21. B
22. C
23. B
24. B
25. B
26. D
27. D
28. C
29. D
30. C
MCQ’s on economics for practice
PART—1
1. Frequency density of a class is defined as—
(A) Frequency of the class/Interval of the class
(B) Frequency of the class/ Cumulative frequency for the class
(C) Cumulative frequency for the class/Frequency of the class
(D) Frequency of the class/ Frequency of the previous class
2. Which of the following is statistics?

(A) Profit of a firm has gone up
(B) The production of wheat has increased
(C) The temperature of Delhi is 5 degree more than the temperature of Mumbai
(D) The birth rate has declined in India
3. At end March 2009, India‟s total foreign exchange reserves stood at?
(A) Approximately $ 150 billion
(B) Approximately $ 200 billion
(C) Approximately $ 250 billion
(D) Approximately $ 300 billion
4.A firm is called maximum efficient firm if it has?

(A) Minimum Total Cost
(B) Minimum Average Cost
(C) Minimum Variable Cost
(D) Minimum Marginal Cost
5. Implicit cost may be considered as?

(A) Social cost
(B) Private cost
(C) Normal cost
(D) Variable cost
6 „The Mid-day Meal‟ scheme is covered under the Ministry of?

(A) Human Resource Development
(B) Health and Family Welfare
(C) Social Justice and Empowerment
(D) Consumer Affairs, Food and Public Distribution
7. Which of the following associate bank has been taken over by the State Bank of India in 2008?
(A) State Bank of Travancore
(B) State Bank of Hyderabad
(C) State Bank of Mysore
(D) State Bank of Saurashtra
8. Which of the following demand curves is not a constant elasticity curve?

(A) Vertical
(B) Horizontal
(C) Linear
(D)Rectangular hyperbola
9. The following theory of profit has been given by J. A. Schumpeter?

(A) Risk theory of profit
(B) Uncertainty bearing theory of profit
(C) Innovation theory of profit
(D) Dynamic theory of profit
10. The formula for determination of number of class-interval for a frequency distribution is given by?
(A) Connor
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(B) Spur
(C) Sturges
(D) Secrist
11. In the Union Budget, the term „Primary Deficit‟ means?

(A) Revenue Deficit — Interest Payment
(B) Fiscal Deficit — Interest Payment
(C) Revenue Expenditure — Revenue Receipts
(D) Total Expenditure — Total Borrowing
12. As a measure to unearth black money, the demonetisation of Rupees 1000 currency notes in
India was done in the year?
(A)1968
(B) 1978
(C)1988
(D)1998
13. The Lead Bank scheme was launched in India on the recommendation of?
(A) M. Narasimhan
(B) F. K. F. Nariman
(C) D. T. Lakdawala
(D) V. M. Dandekar
14. Firms have chronic excess production capacity in?

(A) Duopoly
(B) Oligopoly
(C) Pure competition
(D) Monopolistic competition
15. In a two sector model when consumption is equal to 40 + 0.90 Y and investment is equal to 50,
the equilibrium output will be equal to?
(A) 500
(B) 700
(C) 900
(D) 1100
16. The positional average is shown by ?

(A) Mean deviation
(B) Standard deviation
(C) Mean
(D) Median
17. The shutdown point is that level of output of a firm where?

(A) MC=AFC
(B) MC=AVC
(C) MC=TFC
(D) MC=TVC
18. Which of the following functions is not a component of Kaldor‟s model of grow?
(A) Employment function
(B) Technical progress function
(C) Saving function
(D) Investment function
19. Walra‟s Law states that the sum of the excess demand for money, bonds and current output must
be?
(A) Less than zero
(B) Equal to zero

(C) Equalto one
(D) More than zero
20. For a unitary elastic demand curve, when price increases ,the amount spent by a consumer on a
/good?
(A) Decreases
(B) Increases
(C) Remains unchanged
(D) Becomes zero
21. Correlation coefficient is significant if it is?

(A) Less than 6 times of pro able error
(B) More than 6 times of probable error
(C) Equal to probable error
(D) Equal to standard error
22. The term rainy day‟ used by Keynes is related with?

(A) Effective demand
(B) Precautionary demand
(C) Investment multiplier
(D) Inflationary gap
23. Root mean square of all the deviations is known as?

(A) Mean deviation from median
(B) Mean deviation from mode
(C) Standard deviation
(D) Quartile deviation
24. If there is perfect correlation between two variables, then the regression lines are?
(A) Parallel
(B)Perpendicular
(C)Coincidental
(D)Intersectional
25. A producer‟s surplus is equal to?

(A) AR—MC
(B) AR—AC
(C) AR-MR
(D) TR—TC
26. According to 2001 census, the total number of persons living in urban slums was approximately?
(A)1 crore
(B) 2 crore
(C)3crore
(D) 4 crore
27. The tax called CENVAT is related to?

(A) Central Sales Tax
(B) Union Excise Duty
(C) Corporate Tax
(D) Custom Duty
28. The price and quantity,both are indeterminate under?

(A) Pure competition
(B) Perfect competition
(C) Monopoly
(D) Bilateral monopoly

29. Which of the following is not an example of Internal Economies?
(A) Economies of superior technology
(B) Economies of division of labour
(C) Economies of competition
(D) Economies of management
30. Which of the following type of facts are not Considered under the study of statistics
(A) Quantitative facts
(B) Qualitative facts
(C) Comparative facts
(D) Relative facts
31. The statistical calculations in classified data are based on?

(A) The actual values of observations
(B) The upper class limits
(C) The lower class limits
(D) The mid-points of the classes
32. The concept of merit goods has been introduced by?

(A)Buchanan
(B) Musgrave
(C)Samuelson
(D) Tiebout
33. The Child Labour (Prohibition and Regulation) Act, 1986 prohibits the employment of Children
below the age of?
(A) 10 years
(B) 12 years
(C) 14years
(D) 16years
34. The Prime Lending Rate of Commercial Banks are decided by?
(A)Positive
(B) Negative
(C)Zero
(D) Infinite
35. The cross elasticity of demand for substitute commodities is always?

(A)Positive
(B) Negative
(C)Zero
(D) Infinite
36. The K-factor analysis is related with?

(A)Economic growth rate
(B)Tends in foreign trade
(C)Causes of mortality
(D)Infrastructure facilities
37. The „knife-edge equilibrium‟ in Harrod‟s model is an equality between?
(A) G and Gw
(B) Gw and Gn
(C) G and Gn
(D) G,Gw and Gn
38. Stratified sampling is preferred, where?

(A) Population is homogeneous
(B) Population is heterogeneous

(C) Random sampling is not possible
(D) Small samples are required
39. Pure interest is?

(A) Equal to the gross interest
(B) Less than gross interest
(C) More than gross interest
(D) Not related to gross interest
40. Which of the following is totally different from logical multiplier?

(A) Instant multiplier
(B) Lagless multiplier
(C) Static multiplier
(D) Dynamic multiplier
41. Availability hypothesis explains a country‟s

(A) Production capacity
(B) Natural resources availability
(C) Commodity composition of foreign trade
(D) Consumption pattern
42. For a Giffen good

(A) Income effect is positive and substitution effect is negative
(B) Income effect is negative and substitution effect is positive
(C) Income effect and substitution effect both are positive
(D)Income effect and substitution effect both are negative
43. To meet the objective of inflation control, the Central Bank should adopt following policy
measures
(A) Increase in cash reserve ratio, along with purchase of securities under open market operations
(B) Increase in cash reserve ratio, along with sale of securities under open market operations
(C) Decrease in cash reserve ratio, alongwith purchase of securities under pen market operations
(D) Decrease in cash reserve ratio, alongwith.sale of securities under open market operations
44. The relative measures of dispersion are generally called?

(A) Dispersion coefficient
(B) Dispersion multiplier
(C) Dispersion accelerator
(D) Dispersion variable
45. Which of the following is not expressed by a transformation curve?

(A) Choice
(B) Scarcity
(C) Factor price
(D) Opportunity cost
46. The central theme of the World Development Report, 2009 pub lished by the World Bank is?
(A) Agriculture for development
(8) Development and next generation
(C) A better investment climate for every one
(D) Reshaping economic geography
47. Under the first degree of price discrimination in discriminating monopoly, the consumer‟s surplus
will be?
(A) Zero
(B) Maximum
(C) Minimum
(D) Indeterminate

48.A rational consumer moves to a higher indifference curve due to?
(A) Monotonic preference
(B) Polytonic preference
(C) Convex preference
(D) Concave preference
49. When was the concept of core sector introduced in Indian industries ?
(A)1970
(B) 1980
(C)1990
(D) 2000
50 .Which is the apex bank for micro finance in India?

(A) State Bank of India
(B) Industrial Development Bank of India
(C) Small Industries Development Bank of India
(D) National Bank for Agriculture and Rural Development
Answers:
1 A
2 C
3 C
4 B
5 B
6 A
7 D
8 C
9 C
10 C
11 B
12 B
13 B
14 D

15 C
16 D
17 B
18 B
19 B
20 C
21 B
22 B
23 C
24 C
25 B
26 D
27 B
28 D
29 C
30 B
31 D
32 B
33 C
34 B
35 A

36 C
37 D
38 B
39 D
40 D
41 B
42 B
43 B
44 A
45 C
46 B
47 A
48 C
49 A
50 D
1. When the given values of x form geometric series and values of y form arithmetic series, the
relationship between The variables is given by
(A) Lemon function
(B) Lemon homogeneous function
(C) Binomial function
(D) Exponential function
2. Statistical distrusts are due to?

(A) Nature of statistics
( B)Limited scope of statistics
(C) insufficient tools of statistics
(D) Misuse of statistics

3. Circular test is satisfied by the following index
(A) Laspeyre‟s index
(B) Pasche‟s index
(C) Fisher‟s index
(D) Kelly‟s index
4.Which of the following is the largest component of India‟s external debt?

(A) Commercial borrowings
(B) NRI deposits
(C) Multilateral debt
(D) Bilateral debt
5. Tobin tax is related with?

(A) Black money transactions
(B) Commodity transactions
(C) Service transactions
(D) Foreign exchange transactions
6. The terms Static‟ and Dynamic‟ in economics were first used by?
(A)Malthus
(B) Mill
(C)Marshall
(D) Walras
7. A metropolitan city is one which has a population size of more than?

(A)10 lakh
(B) 15 lakh
(C) 20 lakh
(D) 25 lakh
8.According to fifth economic census, the highest number of industrial units in the country are
located in the State of?
(A) Maharashtra
(B) Gujarat
(C) Andhra Pradesh
(D) Tamil Nadu
9. Under perfect competition, the entrepreneur‟s power of control over the price of the commodity
Is?
(A) Total
(B) Considerable
(C)Some
(D) None
10. Who has regarded the concept of „ideal output‟ as an indicator of economic welfare?
(A)Hicks
(B) Pareto
(C)Pigou
(D) Kaldor
11. The technique of presenting data by pictogram was developed by?

(A) Croxton and Cowden
(B) Johnson and Jackson
(C) Otto Neurth
(D) Horace Secrist
12 The monetization of economy is measured by?

(A)M0/GDP
(B) M1/GDP

(C) M2/GDP
(D) M3/GDP
13. The shape of average selling cost curve is?

(A) Hyperbola shaped
(B) Rectangular Hyperbola shaped
(C) L-shaped
(D) U-shaped
14. The National Institute of Training for Standardization (NITS) is located at?
(A)Hyderabad
(B) Nagpur
(C)Chandigarh
(D) Noida
15. NABARD is a?
(A) Commercial Bank
(B) Lead Bank
(C) Refinance Bank
(D) Cooperative Bank
16. Cost-plus principle is related with?

(A)Production theory
(B) Value theory
(C) Marginal uti theory
(D) Distribution theory
17. Which one of the following is not a feature of Stagflation?

(A) High input cost
(B) Excess in aggregate demand
(C) High price level
(D) High unemployment level
18.. The Hayek theory of trade cycle is related with?

(A) Over-investment
(B) Price fluctuation
(C) Interaction of multiplier and accelerator
(D) Interaction of saving and investment
19. Which one of the following is a two-dimensional diagram?

(A) Pictogram
(B) Histogram
(C) Bar diagram
(D) Line diagram
20. A firm‟s learning curve shows the following relationship between average cost of production and
total output over time
(A) Decline in average cost with increase in total output
(B) Decline in average cost with decline in total output
(C) Increase in average cost with decline in total output
(D) Increase in average cost with increase in total output
21. Select the correct statement regarding Harrod‟s accelerator and Domar‟s accelerator and decide
which one is true
(A) Harrod‟s accelerator is psychological and Domar‟s accelerator is technological
(B) Harrod‟s accelerator is technological arid Domar‟s accelerator is psychological
(C) Harrod‟s accelerator is psychological and Domar‟s accelerator is also psychological
(D) 1-larrod‟s accelerator is technological and Domar‟s accelerator is also technological

22. The transfer payment multiplier in the Keynesian system will be equal to?
(A) MPC/MPS
(B)MPS/MPC
(C)MPS/(1-MPC)
(D)MPC/(1—MPS)
23. The difference between Natural rate‟ and „Market rate‟ of interest has been done by?
(A)Robertson
(B) Keynes
(C)Fisher
(D) Wicksell
24. The quartile deviation for a normal distribution is always equal to?
(A) (2/3)σ
(B) (3/4)σ
(C) (4/5)σ
(D) (5/6)σ
25. Which of the following is not a „shift factor of demand‟?

(A)Income
(B) Price
(C)Fashion
(D) Taste
Answers:
1 D
2 D
3 D
4 A
5 A
6 B
7 A
8 D
9 D
10 C
11 C

12 B
13 D
14 B
15 C
16 D
17 B
18 A
19 B
20 A
21 D
22 A
23 D
24 A
25 B
1. The concept of „costing margin‟ in the pricing theory was introduced by?
(A)Andrews
(B) Baumol
(C)Cournot
(D) Williamson
2. The Keynesian theory of employment provides the solution of?

(A) Frictional unemployment
(B) Disguised unemployment
(C) Cyclical unemployment
(D) Seasonal unemployment
3. Four heads of expenditure of the Union Budget 2009-10 are given

below—
1. Plan expenditure
2. Non-plan expenditure
3. Revenue expenditure

4. Capital expenditure
Arrange the expenditure heads in descending order using the codes
given below
(A)2,3,4,1
(B) 3,4,2, 1
(C)3,2,1,4
(D) 2,1,4,3
4. In the year 2007-08 the per capita NNP at current prices was?
(A) More than Rs. 20,000
(B) More than Rs. 30,000
(C) More than Rs. 40,000
(D) More than Rs. 50,000
5. Mathematics was first used economic theory by?

(A)Weiser
(B) Walras
(C)Cournot
(D) Pigou
6. India‟s foreign exchange rate system is?

(A) Free float
(B) Managed float
(C) Fixed
(D) Fixed target of band
7. The terms „NEER‟ and „REER‟ are related with?

(A) Foreign exchange rate
(B) External economic resources:
(C) National and regional economic equality
(D) Environmental regulation
8. For the calculation of percentile, the data should be arranged in?

(A) Ascending order
(B) Descending order
(C) Random order
(D) Either random or descending order
9. As per BASEL-II norms, a bank‟s capital to risk weighted assets ratio (CRAR) should be at least?
(A) 8%
(B) 10%
(C) 12%
(D) 14%
10. The shape of a frequency curve cannot be?

(A) U-shaped
(B) V Shaped
(C) J-shaped
(D) S-shaped
11. According to the Planning Cornmission, for infrastructure development during Eleventh Five Year
Plan, the required investment is?
(A) Approximately $ 250 billion
(B) Approximately $ 500 billion
(C) Approximately $ 750 billion
(D) Approximately $ 1000 billion
12. India‟s first port-based Special Economic Zone named Inter national Container Transshipment
Terminal (ICTI) is being set-up at?

(A) Kandla
(B) Kochi
(C)Goa
(D) Tuticorin
13. Which of the following is pure unitless number?
(A) Mathematical average

(B) Statistical average
(C) Absolute measure of dispersion
(D) Relative measure of dispersion
14. The user cost of capital is?

(A) The real rate of interest plus the rate of depreciation
(B) The nominal rate of interest plus the rate of depreciation
(C) The real rate of interest only
(D) The nominal rate of interest only
15. The number of items reserved for the exclusive manufacture by micro and small enterprises is
currently?
(A) Less than 25
(B) Less than 50
(C) Less than 75
(D) Less than 100
16.A new housing price index RESIDEX has been launched by?
(B) Planning Commission
(C) Housing Development Finance Corporation
(D) National Housing Bank
(A) Central Statistical Organization
17. Which one of the following is not a feature of current Indian Planning?
(A) Structural Planning
(B) Indicative Planning
(C) Functional Planning
(D) Decentralised Planning
18. The concept of disinvestment was introduced by?

(A) Friedman
(B) Kaldor
(C)Keynes
(D) Myrdal
19. Which of the following is average of second order?

(A) Arithmetic mean
(B) Geometric mean
(C) Second quartile
(D) Standard deviation
20.. Which average is most affected by the extreme observations?

(A) Arithmetic mean
(B) Geometric mean
(C) Median
(D) Mode
21.If the covariance of two variables is equal to the product of the standard deviations of the
variables, then the correlation
coefficient will be?
(A) -1

(B) +1
(C) 0
(D) Between 0 and -1
22 The term „Animal Spirit‟ was used by Keynes for?

(A) Consumption
(B) Investment
(C) Income
(D) Interest
23. The index of Financial Inclusion has been launched for the first time in 2008 by?
(A) Confederation of Indian Industries (CII)
(B) Federation of Indian Chamber of Commerce and Industry (FICCI)
(C) National Council of Applied Economic Research (NCAER)
(D) Indian Council for Research on International Economic Relations (ICRIER)
24. The elasticity of factor substitution for constant elasticity substitution production function is
always?
(A) Zero
(B) One
(C) A positive value
(D) A negative value
25. The Revealed Preference theory assumes?

(A) Weak ordering
(B) Strong ordering
(C) Constant ordering
(D) Multiple ordering
26. Which of the following is not an item of transfer payment?

(A)Pension
(B) Scholarship
(C)Dividend
(D) Subsidy
27 The United Nation‟s Millennium Development Goals are to be reached by the year?
(A) 2010
(B) 2015
(C) 2020
(D) 2025
28. The number of women entrepreneurs in small scale industrial region is highest in the state of?
(A) Karnataka
(B) Kerala
(C) Maharashtra
(D) Tamil Nadu
29. Which of the following is not an effect of lump sum tax imposed on monopolist?
(A) Output sold is unchanged
(B) Price is unchanged
(C) Profit reduces
(D) Incidence of tax is wholly on buyer
30. A distributed lag for net investment may be due to?

(A) A decrease in the capital output ratio
(B) An increase in the capital output ratio
(C) Limited, short-run production capabilities in capital goods industry
(D) Limited long-run production capabilities in capital goods industry

31. The concept of Adjusted Net Saving has been given by?
(A)Hamilton
(B) Friedman
(C)Keynes
(D) Pigou
32. The product of regression coefficients is always?

(A) Positive
(B) Negative
(C) Zero
(D) A complex number
33. The nature of classical unemployment is?

(A) Disguised
(B) Frictional
(C)Open
(D) Structural
34. Which one of the following properties shows the high degree of dispersion?
(A) Homogeneity
(B) Consistency
(C) Uniformity
(D) Variability
35. The New Exploration License Policy (NELP) of the Government of India is related with?
(A) Coal and Lignite
(B)Uranium and Thorium
(C) Diamond and Precious Stones
(D) Oil and Gas
36. Full employment is a situation when?

(A) Cyclical unemployment is zero
(B) Frictional unemployment is zero
(C) Seasonal unemployment is zero
(D) Disguised unemployment is zero
37. Which Indian Company has been included for the first time in U.S. A‟s index NASDAQ-100?
(A)Infosys
(B) Tata Motors
(C) ICICI Bank
(D) Videsh Sanchar Nigam Limited
38. The natural rate of unemploy ment is the sum of?

(A) Frictional unemployment and Structural unemployment
(B) Frictional unemployment and Cyclical unemployment
(C) Structural unemployment and Cyclical unemployment
(D) Structural unemployment and Seasonal unemployment
39. The nature of statistical inference is?

(A) Inductive
(B) Deductive
(C) Descriptive
(D) Objective
40. Mean deviation is always?
(A) Equal to the standard deviation than the standard

(B) Less than the standard deviation

(C) More than the standard deviation
(D) Twice of the standard deviation
41. The coefficient of alienation is known as?

(A) Against correlation
(B) Against variance
(C) Against association
(D) Against determination
42. The Divergence Indicator is related with?

(A) Wage rate of workers
(B) Exchange rate of currencies
(C) Profit of firms
(D) Market price of shares
43. Which one of the following taxes has not been abolished in recent Union Budgets?
(A) Banking Cash Transaction
(B) Commodity Transaction Tax
(C) Fringe Benefit Tax
(D) Securities Transaction Tax
44. The Samuelson-Holt formula provides a measure of?

(A) Consumer‟s equilibrium
(B) Consumer‟s surplus
(C) Elasticity of demand
(D) Marginal utility
45. The most liquid asset among the following is?

(A) Gold
(B) Share
(C)Cash
(D) Land
46. Ricardian Equivalence‟ is related with?

(A) Low deficit, less saving
(B) Low deficit, more saving
(C) High deficit, less saving
(D) High deficit, more saving
47. The „Swiss Formula‟ of World Trade Organisation is related with?

(A) Patent of drugs
(B) Agricultural subsidy
(C) Transboundary services
(D) Non-agricultural tariff
48. The Securities and Exchange Board of India has recently made the rating of Initial Public offerings
mandatory. The total number of such grades are?
(A) Three
(B) Four
(C)Five
(D) Six
49. Consider the following statement—

“Once a person has spent his entire income, he would have maximized his total pleasure from it only
if the satisfaction gained from the last item of each commodity bought was the same for the each
commodity.”
The above statement is related to?
(A) Gossen‟s First Law
(B) Gossen‟s Second Law

(C) Gossen‟s Third Law
(D) Gossen‟s Fourth Law
50. Which of the following results in an increase in inventory sales ratio?

(A) A decrease in the cost of holding inventory
(B) An increase in probability delivery delays for materials
(C) A decrease in the probability delivery delays for materials
(D) An increase in the cost of: holding inventory
51. Harris-Todaro model is related with?

(A) Growth and unemployment
(B) Growth and migration
(C) Unemployment and migration
(D) Unemployment and inflation
52. Density test is used for?

(A) Median
(B) Mean
(C) Mode
(D) Quartile
53. In the Keynesian saving function, the parameter is ?

(A) Disposable income
(B) Total saving
(C) Marginal propensity to save
(D) Autonomous saving
54. A simple correlation can defined as the tendency of?

(A) Independent variation
(B) Dependent variation
(C) Simultaneous variation
(D) Instantaneous variation
55. For implementing a comprehensive Khadi Reform Programme, a financial aid of $ I million over a
period of three years has recently been tied up with?
(A) International Monetary Fund
(B) International Development Agency
(C) Asian Development Bank
(D) International Finance Corporation
56. For n consecutive natural numbers, the following relationship is correct?

(A) Mode = Mean
(B) Mean = Median
(C) Mode > Median
(D) Mode < Mean
57. The measure of the degree of association between the values of two random variables is called?
(A) Correlation
(B) Association
(C) Regression
(D) Co-variance
58. The current level of maternal morality rate in India is approximately?

(A) 150 per one lac live births
(B) 250 per one làc live births
(C) 350 per one lac live births
(D) 450 per one lac live births

59. In any set of numbers, the geometric mean exists only when all numbers are?
(A) Positive
(B) Negative
(C) Zero
(D) Positive, zero or negative
60. If correlation coefficient is equal to zero, then variables will be?

(A)Associated
(B)Correlated
(C)Independent
( D) Dependent
Answers:
1B
2C
3C
4B
5A
6B
7A
8A
9C
10 D
11 B
12 B
13 D
14 A
15 A
16 D
17 C
18 C
19 D
20 A
21 B
22 D
23 D
24 C
25 B
26 C
27 B
28 D
29 D
30 B
31 A
32 A
33 C
34 D
35 D
36 A
37 A
38 A
39 B
40 B
41 D
42 B
43 D
44 C
45 C

46 D
47 D
48 C
49 B
50 D
51 C
52 C
53 A
54 B
55 C
56 B
57 A
58 B
59 A
60 C
.......................................................=============================........................
..................
Model test paper and Multiple choice Questions Quiz on indian Economy and theory of economics
1. Under which one of the following conditions, does product
exhaustion theorem hold?
(a) Increasing return to scale
(b) Decreasing return to scale
(c) Constant return to scale
(d) Constant return to factors of production
2. Public goods are characterized by:
1. collective consumption.
2. divisibility.
3. non-exclusion.
4. rival-consumption.
Select the correct answer using the code given below
(a) 1 and 2
(b) 1 and 3
(c) 1and 4
(d) 2 and 4
3. Capital Deepening refers to which one of the following:
(a) Going for more fixed capital
(b) Emphasis on social overhead capital
(c) A constant capital-output ratio

(d) An increasing capital-output ratio
4. Disguised underemployment refers to the situation when:
(a) people seems occupied on a full time basis even though the services they render require less than
full time?
(b) workers are underpaid despite doing full time job
(c) there is a co-existence of unemployment and inflation
(d) the economy experiences underemployment equilibrium
5. Which one of the following is explained-by Fei-Rariis model?
(a) The inter-relationship between the agricultural and the industrial sectors
(b) Planning methods when labour is in short supply
(c) Growth process of the industrial sector
(d) A neo-classical framework of growth analysis
6. Consider the following statement:
1. The Solow model explains a capita/labour ratio which does not grow under equilibrium condition.
2. Substituting capital for labour is possible in the Solow model.
Which of the statements-given above is/are correct?
(a) 1 only
(b) 2 only
(c)Both 1 and 2
(d) Neither 1 nor 2
7. Consider the following statements:
1. Dualism refers to the existence and persistence of increasing divergences between rich and poor
nations and rich and poor people at various Levels.
2. Dualism is the political division of the society into two broad groups of the rightists and the leftists
in modem democracy.
Which of the statements given above is correct?
(a)1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
8. Directions: The following item consists of two statements, one labelled as the „Assertion (A) „and
the other as‟ Reason (R)‟ — You are to examine these two statements carefully and select the answer
using the code given below.

Assertion (A) : The doctrine of unbalanced growth is based on creation of imbalances in the economy
in a conscious manner.
Reason (R) : Unequal development of various sectors often generates conditions for rapid
development.
Code:
(a) Both A and R are individually true and R is the correct explanation o &
(b)Both A and R are individually true, but R is not correct explanation bf A
(c) A is true, but R is false
(d) A is false, but R is true
9. Suppose the market demand function of a perfect competitive industiy is given by Q(d) = 4,750—
50P
and market supply function is given by
Q(s) = 1,750+ 50P.
Price is expressed in rupees. Which one of the following is equal to the market
equilibrium price?
(a) Rs. 30.
(b) Rs. 20
(c) Rs. 25
(d) Rs. 26
10. Market failure occurs because of:
I. Externality
2. Asymmetric information
3. Perfect competition
(a) 1,2and3
(b) I only
(c)1 and 2
(d)2 and 3
11. If personal income is Rs. 57,000 ;
personal income tax Rs. 9,000;
consumption Rs. 43,000;
interest payment Rs 10,000;
personal saving Rs. 40,000;

then the disposable personal income would be equal to:
(a)Rs. 50,000
(b) Rs. 47,000
(c)Rs. 48,000
(d) Rs. 40,000
12. A discriminating monopolist charges a
(a) higher price in the, sub-market where price elasticity of demand is high
(b) higher price in the sub-market where price elasticity of demand is low
(c) lower price in the sub where price elasticity of demand is low
(d) higher price in the sub-market where demand is low
13. In the long run, the cost and output relationship depends on
which one of the following?
(a) Return to scale
(b) Fixed proportion of the variables
(c) Return to the variable factor
(d) Return to the fixed factor
14. Consider to following statements with respect to a duopoly market with firms AandB:
I. If both firms act as followers, then they will have reaction functions
2. If Firm A acts as leader and firm B acts as follower, then firm A will not have any reaction function.
3. If both firms act as leaders, then the outcome is economic
warfare.
Which of the statements given above are correct?
(a) 1 and 2
(b) 1 ,2 and 3
(c) 1 and 3
(d) 2 and 3
15. Consider the following:
According to Ricardian theory of distribution
I. rent is price determined.
2. land is supposed to have various alternative used.
3. marginal land earns no rent,
4. rent is a surplus in the sense that it is an excess over transfer earnings.

(a) 1,2and 4
(b) 1,3 and 4
(c) 2 and3
(d) 1 and 4
16 If two commodities perfectly/substitutable (competitive), the direction of change of the cross

elasticity of demand between then be?
(a) zero
(b) positive
(c) negative
(d) infinity
17. From which of the following axioms does the property that „indifference curves for a consumer
cannot intersect each other‟ follow?
I. Axiom of non-satiation
2. Axiom of transitivity
3. Axiom of reflexivity
4. Axiom of convexity
select the correct answer using the code given below
(a) 1 and 3
(b) 1and 4
(c) 2 and 3
(d) 1 and 2
18. Consider the following statements
Under flexible exchange fate system, balance of payments
disequilibria are corrected by:
1. changes in the exchange rates.
2. international flow of money and reserves.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

19. Which one of the following is implied by interest parity?
(a) Interest rates are at par in all the countries
(b) Movements in spot rates and forward fates in the foreign exchange market are same
(c) Potential holders of foreign currency deposits view them as not equally desirable assets
(d) A condition that the expected returns on deposits of any two countries are equal when measured
in the same currency
20. Which one of the following best describes the nineteenth century
gold standard system?
(a) Regulated system with floating exchange rates
(b) Automatic system with fixed exchange rates
(e) Regulated system with fixed exchange rates
(d) Automatic system with floating exchange rates
21 Consider the following statements regarding the features of the
World Bank:
1. The Board of Governors is the supreme body.
2. The voting power of the Governor of a member country is related to the financial contribution of
the country concerned.
3. It gives short-term loan to its members to correct their temporary balance of payments
disequilibrium.
Which of the statements given above is/are correct?
(a)1 only
(b) 1and 2
(c) 2and3
(d) l,2 and 3
22. Which of the following is/are the reasons for the collapse of Bretton-Woods system?
I. The refusal by the U.S. Treasury to convert short-term liability into gold.
2. The U.S. move to make dollar inconvertible.
3. The devaluation of U.S. dollar in 1973.
(a) 1 only
(b) 1 and 2
(c)2 and 3
(d) l,2 and 3

23. Tariffication refers to:
(a) replacement of quotas by tariffs only
(b) replacement of all existing non-tariff restrictions by tariff
(c) scaling dow.of tariffs in general
(d) obtaining sanction to increase tariff rates
24. Which of the following are the components of foreign capital?
1. Grants and loans.
2. External commercial borrowings.
3. Foreign direct investment.
4. Deposits from non-residents.
Select the correct an using the code given below
(a) 1,2,3 and 4
(b) 1,2 and 4
(c) l and 2
(d)3 and 4
25. Under loanable funds theory of interest, which of the following
are included in the supply of loanable funds?
1. Current savings.
2. Funds released from embodiment in working capital.
3. Bank loans.
(a) 1 and2
(b) 2and3
(c) l and 3
(d)1,2and3
26. Which one of the following is represented by the intersection of
the IS curve and the LM curve?
(a) Only a flow equilibrium
(b) Only a stock equilibrium
(c) A stock-cum-flow equilibrium
(d) Moving away from equilibrium
27. Which one of the following situations occurs during the period

when borrowers and lenders expect inflation?
(a) The nominal rate of interest exceeds real rate of interest
(b) The real rate of interest exceeds the nominal rate of interest
(c) The nominal rate of interest equals the real rate of interest
(d) Nominal and real rates of interest become zero
28. With whom, among the following, is the theory that the rate of interest is also a factor for
transaction demand for money, associated?
(a) Baumol and Tobin
(b) Pigou
(c) Keynes
(d) Samuelson
29. According to Friedman, on which of the following does the
velocity of circulation of money depend?
I. Market interest rate on bonds.
2. Rate of change in general price level.
3. Ratio of physical non-human wealth to human wealth.
4. Ratio of savings to investment.
(a) 1 and 3
(b) l, 2 and 4
(c) l, 2 and 3
(d) 4 only
I. Lower the currency-deposit ratio, higher the money
multiplier.
2. Lower the reserve-deposit ratio, higher the money multiplier.
3. Larger the monetary base, higher is the money supply.
4. Larger the monetary base, lower is the money supply.
(a) l and 3
(b) 1,2and4
(c) l, 2 and 3

(d) 2 and 4
31. In the standard Keynesian IS-LM model, a decrease in minimum
cash reserve ratio will:
(a) create demand-pull inflation in full-employment
(b) create cost-push inflation in full-employment
(c) create mark up inflation in full-employment
(d) create demand-pull inflation if there is unemployment
32. When one of the following is not correct in the context of IS and LM framework of the theory of
interest?
(a) It integrated money interest and income into a general equilibrium model of product and money
market
(b) Investment and interest are the two important variable in the model
(c) The theory is propounded by JR. Hicks
(d) IS represents the money market equilibrium and LM represents the product market equilibrium
33. The accelerator model predicts that the changes in investment is determined by the changes in:
(a) inventory
(b) capital
(c) interest
(d) output
34. Given, MPC = 0.8 and the threshold consumption = 100,
which one of the following is the corresponding saving function?
(a)100+0.2Y
(b)-100+0.8Y
(c) -100+ 0.2Y
(d) 400+ 0.2Y
35. According to the classical theory of employment, deviations from the state of full employment are
of:
(a) permanent nature
(b) purely temporary nature
(c) imaginary situations
(d) normal situations
36. Effective demand is that level of demand at which:
(a) aggregate demand is fore than aggregate supply

(b) aggregate demand is less than aggregate supply
(c) aggregate demand is equal to aggregate supply
(d) output is maximum
37. In national income accounting, which one of the following is the
difference between gross aggregates and net aggregates?
(a) The value of net indirect taxes
(b) The value of consumption of fixed capital
(c) The value of intermediate consumption
(d) The value of final consumption expenditure
38. Consider the following statements relating to gross investment in
the national income accounts:
1.It includes the items relating to residential arid non-residential construction.
2.It takes care of spending on producers durable goods.
3.It includes changes in business inventories.
(a)l and 2
(b) 2 and 3
(c) l and 3
(d) l, 2 and 3
I. Pigou held the view that employment depends upon money wages and could be substantially
increased by curtailing wages.
2. Keynes held the view that employment depends upon the level of effective demand which can be
increased by leaving money intact. - -
Which of the statements given above is correct?
(a)1 only
(b) 2 only
(c)Both 1 and 2
(d) Neither 1 and 2
40. Which one of the following is related to the theory that supply created its own demand and
therefore full employment I s a natural situation?
(a) Say‟s law
(b) Pigou‟s law of employment

(c) Giffen paradox
(d) Keynesian theory of employment
41. The life cycle hypothesis of consumption implies that
consumption is related to
(a) price expectation over one‟s life time
(b) permanent income
(c) transitory income
(d) expected life income
42. According to Keynes, which one of the following is meant by
liquidity preference?
(a) Refraining from saving
(b) Desire to hold cash
(c) A preference to hold assets like bonds and securities which are liquid
(d) Increasing savings in terms of precious metals
43. The currency notes in circulation as well as the proportion of total money supply held in the form
of currency are influenced by which of the following?
I. The physical volume of trade and transactions.
2. The level of prices in the economy.
3. The development of bank and banking habits of the people.
(a) 1 only
(b) 2 only
(c) 1,2 and3
(d) 1 and 3
44. Imposition of a tariff will change the income distribution of the tariff-imposing country in favour of
the scarce factor and against the abundant factor. This is known as:
(a) Leontief paradox
(b) Lerner paradox
(c) Stolper-Samuelson theorem
(d) Metzler-paradox
Directions : The following two (2) items consist of two statements, one labeled as the „Assertion (A)
„and the other as „Reason (R)‟. You are to examine these two statements carefully and select the
answers to these items using the code given below.

Code:
(a) Both A and R tare individually true and R is the correct explanation of A
(b) Both A and R are individually true, but R is not the correct explanation of A
(c) A is true, but R is false
(d) A is false, but R is true
45. Assertion (A) The money creation multiplier is equal to the reciprocal of the minimum reserve
ratio:
Reason (R): The banking system as a whole can grant new credit up to an amount of excess
reserves.
46. Assertion (A): Inflationary gap is caused by excess demand.
Reason (R) : Excess demand is due to scarcity of supply of money.
I. Bond price and interest rate vary indirectly.
2. A tax on personal income reduces disposable income.
3. According to Say‟s Law, demand creates its own supply.
(a) 1 and 2
(b) 2 and 3
(c) 1 and 3
(d) 1,2 and 3
48. Which of the following are included in broad money (M 3) in
India?
I. Currency with the public.
2. Demand deposits with banks.
3. Time deposits with banks.
4. „Other‟ deposits with RBI.
Select be correct answer using the code given below
(a)l,2 and 3
(b) 1 and2
(c)3 and 4
(d)l,2,3and4

In competitive markets, incidence of tax
1. is shared by buyers and sellers.
2. on buyers increases if elasticity of supply increases.
3. is fully borne by buyers if elasticity of demand is zero.
4. is independent of elasticities.
(a) l and 2
(b) l,2 and 3
(c)3 and 4
(d)2 and 4
50. Which one of the following is not a tax sacrifice principle?
(a) Equal absolute sacrifice
(b) Equal proportional sacrifice
(c) Equal marginal sacrifice
(d) Equal average sacrifice
Answers:
1 c
2 b
3 a
4 a
5 a
6 c
7 d
8 a
9 a
10 b

11 c
12 b
13 a
14 b
15 b
16 a
17 d
18 c
19 a
20 b
21 b
22 a
23 b
24 a
25 c
26 c
27 c
28 a
29 c
30 c
31 a

32 d
33 d
34 c
35 b
36 c
37 b
38 d
39 c
40 a
41 d
42 b
43 c
44 b
45 a
46 a
47 a
48 d
49 b
50 d
.......................................................--------------------------------
.....................................................
MCQ economics questions test exercises

1. Under monopolistic competition the cross elasticity of demand for the product of a firm will be?
(A) Perfectly elastic
(B) Perfectly inelastic
(C) Highly elastic
(D) Highly inelastic
2. Which of the following curves is not „U‟ shaped?

(A) Average Cost Curve
(B) Average Variable Cost Curve
(C) Average Fixed Cost Curve
(D) Marginal Cost Curve
3.Loss of information occurs during?

(A) Collection of data
(B) Presentation of data
(C) Classification of data
(D) Interpretation of data
4. Which of the following indices is based on only base year quantities?
(A) Laspeyre‟s index

(B) Fisher‟s index
(C) Kelley‟s index
(D) Pasche‟s index
5. The first State in India- which published its State Human Development Report, is?
(A) Kerala
(B) Madhya Pradesh
(C) Gujarat
(D) Andhra Pradesh
6. The Utility Index Number has been developed by?

(A) Marshall and Edgeworth
(B) Hall and Hitch
(C) Neumann and Morgenstern
(D) Hicks and Hanson
7. The following theory is treated as „the third root of the logical theory of demand‟?
(A) Diminishing marginal utility theory
(B) Equi-marginal utility theory
(C) Revealed preference theory
(D) Theory of consumer‟s surplus
8. Employment elasticity of growth is measured as?

(A) Employment growth rate / GDP growth rate
(B) Employment growth rate/Population growth rate
(C) Employment growth rate/Unemployment growth rate
(D) Employment growth rate// Per capita income growth rate
9. The fundamental equation in Harrod‟s growth model is defined?

(A) In terms of rate of growth of output
(8) In terms of rate of growth of technology

(C) In relation to the path of capital-labour ratio
(D) In terms of rate of change of capital-output ratio
10. The best average for the construction of index number is?
(A) Geometric mean
(B) Arithmetic mean
(C) Harmonic mean
(D) Weighted mean
11. The minimum price below which the seller will not sell the goods, is known as?
(A) Estimated price
(B) Administered price
(C) Reserve price
(D) Shadow price
12. In the equation C = C0 + alpha,Y, the behavioural coefficient is?

(A)C
(B) C0
(C)alpha
(D)Y
13. Automatic stabilizer is a tool of?

(A) Taxation policy
(B) Employment policy
(C) Population policy
(D) Export policy
14. The price of a commodity will increase if the increase in demand is?
(A) More than increase in supply
(B) Less than increase in supply
(C) Equal to the increase in supply
(D) Not related to the increase in supply,
15. Which of the following assumptions is not correct for the Lewis model of growth?
(A) The economy has two sectors
(B) Capitalists reinvest all theirprofits
(C) Rural wage is determined by marginal product of labour
(D) The supply of rural labour to modern sector is perfectly elastic
16. The Durbin-Watson test is used for?

(A) Autocorrelation
(B) Multiple correlation
(C) Partial correlation
(D) Simple correlation
17. The following Industrial Policy Resolution is known as the Economic Constitution of India?
(A) Industrial Policy, 1948
(B) Industrial Policy, 1956
(C) Industrial Policy, 1980
(D) Industrial Policy, 1991

18. If two regression lines are perpendicular to each other, the correlation coefficient will be?
(A)+1
(B) —1
(C)Zero
(D) Indetermined
19. Under the second degree of price discrimination in discriminating monopoly, the buyers are
divided into?
(A) One single group only of all buyers
(B) Two groups only of all buyers
(C) Many groups of buyers according to their demand
(D) Number of groups which is equal to number of buyers
20. If an economy is purely competitive static economy, then the economic profit will be?
(A)Minimum
(B) Maximum
(C)Zero
(D) Negative
21. Who is known as the „Architect‟ of Indian Planning?

(A) Dadabhai Naoroji
(B) M. Visvesaraia
(C) P. C. Mahalanobis
(D) Ardeshir Dalal
22. The entertainment tax in India was first introduced in the State of?
(A)Bengal
(B) Bihar
(C) Rajasthan
(D) Maharashtra
23. The Laffer curve shows the relationship between?

(A) Per capita income and environmental pollution
(B) Rate of unemployment and rate of inflation
(C) Tax rate and tax revenue
(D) Economic growth and income inequality
24. The shape of the indifference curve indicates?

(A) Income of the consume
(B) Taste of the consumer
(C) Prices of the commodities
(D) Quality of the commodities
25. Which of the following has highest quantitative value in a positively skewed distribution?
(A)Mean
(B) Median
(C)Mode
(D) First quartile
26. Which of the following is also known as mixed sample?

(A) Systematic sample
(B) Stratified sample

(C) Random sample
(D) Multi-stage sample
27. According to Harvey Leibenstein, two types of incentives work in under-developed countries?
(A) Positive-sum incentives and Negative-sum incentives
(B) Zero-sum incentives and negative-sum incentives
(C) Positive-sum incentives and Multiple-sum incentives
(D) Zero-sum intcentives and Positive-sum incentives
28. During recent past, the highest GDP growth rate has been
achieved in the year?
(A)2005-06
(B) 2006-07
(C)2007-08
(D) 2008-09
29 A factor of production is used by a producer at that stage where the marginal production of the
factor is?
(A) Increasing, but positive
(B) Increasing, but negative
(C) Decreasing, but positive
(D) Decreasing, but negative
30. The doctrine of consumer‟s surplus is based on?

(A) Indifference curve analysis
(B) Revealed preference analysis
(C) Law of substitution
(D) Law of diminishing marginal utility
31. Big-mac index is based on?

(A) Official exchange rate
(B) Real effective exchange rate
(C) Nominal effective exchange rate
(D) Purchasing power parity exchange rate
32. The New Tax Code which is pro posed to come into effect from April 1st, 2011 covers?
(A) Direct taxes only
(B) Indirect taxes only
(C) Both direct and indirect taxes
(D) State level taxes only
33. In the Union Budget 2009-10, total amount of interest payments is estimated?
(A) More than Rs. 1.0 lakh crore
(B) More than Rs. 1.5 lakh crore
(C) More than Rs. 2.0 lakh crore
(D) More than Rs. 2.5 Iakh crore
34. Which of the following is related with monopoly?

(A)Advertisement cost
(B) Selling cost
(C) Price discrimination
(D) Product differentiation

35. The modern money is not?
(A) Token money
(B) Fiat money
(C) Fiduciary money
(D) Full bodied money
36. The outcome budget is a?

(A) Pre-outlay instrument
(B) Post-outlay instrument
(C) Pre-expenditure instrument
(D) Post-expenditure instrument
37. In the theory of kinked demand curve, the lower segment of the demand curve is?
(A) Perfectly inelastic
(B) Perfectly elastic
(C) Highly elastic
(D) Less elastic
38. The catJse of difference between: GDP and NDP is?

(A) Net foreign income
(B) Depreciation
(C) Subsidies
(D) Net indirect tax
39. Arithmetic mean of deviation is always?

(A) A positive value
(B) A negative value
(C) Equal to zero
(D) Equal to one
40. Which one of the following is an item of current account of the balance of payments?
(A) Foreign investment
(B) External commercial borrowings
(C) Foreign grants
(D) Non-resident Indian deposits
41. Charlier‟s check for accuracy is used for?

(A)Mean
(B)Median
(C)Correlation
(D) Standard deviation
42. The empirical study of economic theories is considered under?

(A) Aggregate economics
(B) Applied economics
(C) Social economics
(D) Welfare economics
43 Elinor Ostrom, the first woman to win the Nobel Prize in economics in 2009. has been awarded for
her contribution in the field of?
(A) Resolving business conflicts
(B) Inflationary trends

(C) Management of common property
(D) Capital market analysis
44. The Kuznet‟s curve shows the relationship between?

(A) Economic growth and income inequality
(B) Unemployment and inflation
(C) Tax rate and tax revenue
(D) Economic growth and inflation
45. Slutsky‟s substitution effect is based on?

(A) Cost variation
(B) Cost difference
(C) Compensating variation
(D) Compensating difference
46. The correlation coefficient is independent of?

(A) Change of scale only
(B) Change of origin only
(C) Both the changes of scale and origin
(D) Neither the change of origin nor the change of scale
47. The data represented through arithmetic line graph help in understanding?
(A)Trend
(B) Randomness
(C) Cyclicity
(D) Seasonality
48. Select the correct statements regarding the Balanced Growth theory
Statements:
1 It is a static concept
2. It is a dynamic concept
3. It recognises the significance of economic independence
4. It recognises the significance of economic interdependence.
Code
(A) 1 and 4
(B) 2and 3
(C)1 and 3
(D) 2 and 4
49. For setting up new industrial parks and in established industrial parks, the Foreign Direct
Investment under automatic route has been allowed?
(A) Upto 26percent
(B) Upto 49 per cent
(C) Upto 74 per cent
(D) Upto 100 per cent
50. The Euler‟s theorem is satisfied only with?

(A) Homogeneous function
(B) Heterogeneous function
(C) Endogeneous function
(D) Exogeneous function

Answers:
1 C
2 C
3 A
4 A
5 A
6 C
7 C
8 A
9 D
10 A
11 C
12 C
13 A
14 A
15 C
16 A
17 B
18 C
19 C
20 C

21 B
22 A
23 C
24 B
25 A
26 B
27 A
28 B
29 C
30 D
31 D
32 A
33 C
34 C
35 D
36 A
37 D
38 B
39 C
40 C
41 A

42 D
43 C
44 A
45 B
46 C
47 A
48 D
49 D
50 A
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PART- 4
1-Demand for a commodity refers to:

a. Need for the commodity
b. Desire for the commodity
c. Amount of the commodity demanded at a particular price and at a particular time
d. Quantity demanded of that commodity
(Ans: c)
2-Which among the following statement is INCORRECT?

a. On a linear demand curve, all the five forms of elasticity can be depicted’
b. If two demand curves are linear and intersecting each other then coefficient of elasticity
would be same on different demand curves at the point of intersection.
c. If two demand curves are linear, and parallel to each other then at a particular price the
coefficient of elasticity would be different on different demand curves.
d. The price elasticity of demand is expressed in terms of relative not absolute, changes in
Price and quantity demanded’
(Ans: b)
3-If the demand for a good is inelastic, an increase in its price will cause the total
expenditure of the consumers of the good to:
a. Increase
b. Decrease
c. Remain the same
d. Become zero
(Ans: a)
4-The horizontal demand curve parallel to x-axis implies that the elasticity of
demand is:
a. Zero
b. Infinite
c. Equal to one
d. Greater than zero but less than infinity
(Ans: b)
5-An individual demand curve slopes downward to the right because of the:
a. Working of the law of diminishing marginal utility
b. substitution effect of decrease in price
c. income effect of fall in Price
d. All of the above
(Ans: d)
6-Income elasticity of demand is defined as the responsiveness of:

a. Quantity demanded to a change in income
b. Quantity demanded to a change in price
c. Price to a change in income
d. Income to a change in quantity demanded
(Ans:a)
7-The supply of a good refers to:

a. Stock available for sale
b. Total stock in the warehouse
c. Actual Production of the good
d. Quantity of the good offered for sale at a particular price per unit of time
(Ans: d)
8-In the short run, when the output of a firm increases, its average fixed cost:
a. Remains constant
b. Decreases
c. Increases
d. First decreases and then rises
(Ans: b)
9-The cost of one thing in terms of the alternative given up is called:

a. Real cost
b. Production cost
c. Physical cost
d. opportunity cost
(Ans: d)
10-Assume that consumer’s income and the number of sellers in the market for
good X both falls. Based on this information, we can conclude with certainty that the
equilibrium:
a. Price will decrease
b. Price will increase
c. Quantity will increase
d. Quantity will decrease
(Ans: d)
11-The economist’s objections to monopoly rest on which of the following grounds?

a. There is a transfer of income from consumers to the monopolist
b. There is welfare loss as resources tend to be misallocated under monopoly
c. Only A is correct
d. Both A and B are correct
(Ans: d)
12-In which of the following market structure is the degree of control over the price
of its product by a firm very large?
a. Imperfect competition
b. Perfect competition
c. Monopoly
d. In A and B both
(Ans: c)
13-The offer curves introduced by Alfred Marshall, helps us to understand how the
______ is established in international trade.
a. Terms of trade
b. Equilibrium price ratio
c. Exchange rate
d. Satisfaction level
(Ans: a)
14-Demand for factors of production is:

a. Derived demand
b. Joint demand
c. Composite demand
d. None of the above
(Ans: a)
15-The producer’s demand for a factor of production is governed by the ___ of that
factor.
a. Price
b. Marginal Productivity
c. Availability
d. Profitability
(Ans: b)

16-Under conditions of perfect competition in the product market:
a. MRP=VMP
b. MRP > VMP
c. VMP > MRP
(Ans: a)
17-Which among the following statements is INCORRECT?

a. Coefficient of correlation can be computed directly from the data without measuring
deviation.
b. Measures of Dispersion are also called averages of the second order.
c. Standard deviation can be negative.
d. Mean deviation can never be negative.
(Ans: c)
18-One of the methods to find out Mode is:

a. Mode = 3 Median + 2 Mean
b. Mode=3 Median – 3 Mean
c. Mode = 2 Median – 3 Mean
d. Mode=3 Median – 2 Mean
(Ans: d)
19-Which among the following statements is INCORRECT?

a. Index number is a relative measurement.
b. In fact all index numbers are weighted.
c. Theoretically the best average in construction of index numbers is Geometric mean.
d. It is not possible to shift the base if it is the case of fixed base index
(Ans: d)
20-Mean Deviation can be calculated from:

a. Mean
b. Median
c. Mode
d. Any of the above
(Ans: d)
21-Scatter diagram is used to study ___ in economic statistics.

a. Variability in the series
b. Nature of Correlation in the two series
c. Regression
d. Secular trend
(Ans: b)
22-Coefficient of Correlation (r) is significant, if:

a. r > 5 times Probable Error
b. r < 6 times Probable Error
c. r > 6 times Probable Error
d. r = 6 times Probable Error
(Ans: c)
23-Which statistical measure helps in measuring the purchasing power of money?

a. Arithmetic average
b. Index numbers

c. Harmonic mean
d. Time series
(Ans: b)
24-Fisher’s ideal index number is:

a. Arithmetic mean of Laspeyre’s and Paasche’s index
b. Harmonic mean of Laspeyre’s and Paasche’s index
c. Geometric mean of Laspeyre’s and Paasche’s index
(Ans: c)
25-Which among the following is NOT a correct statement?

a. Welfare economics is based on value judgements.
b. Welfare economics is also called ‘economics with a heart’.
c. Welfare economics focuses on questions about equity as well as efficiency.
d. The founder of Welfare economics was Alfred Marshall.
(Ans: d)
26-Who is the ‘lender of the last resort’ in the banking structure of India?
a. State Bank of India
b. Reserve Bank of India
c. EXIM Bank of India
d. Union Bank of India
(Ans: b)
27- ____ is the official minimum rate at which the Central Bank of a country is
prepared to rediscount approved bills held by the commercial banks.
a. Repo rate
b. Bank rate
c. Prime lending rate
d. Reverse repo rate
(Ans: b)
28-In order to control credit, Reserve Bank of India should:

a. Increase CRR and decrease Bank rate
b. Decrease CRR and reduce Bank rate
c. Increase CRR and increase Bank rate
d. Reduce CRR and increase Bank rate
(Ans: c)
29-Which among the following is a function of the Reserve Bank of India?

a. Bank issues the letters of credit to their customers certifying their creditability
b. Collecting and compilation of statistical information relating to banking & other financial
sectors
c. Banks under write the securities issued by public or private organizations
d. Accepting deposits from the public
(Ans: b)
30-Credit creation power of the commercial banks gets limited by which of the
following?
a. Banking habits of the people
b. Cash reserve ratio
c. Credit policy of the central bank

d. All of the above
(Ans: d)
31-Number of times a unit of money changes hands in the course of a year is

called_______
a. Supply of money
b. Purchasing power of money
c. Velocity of money
d. Value of money
(Ans: c)
32-_____ is the difference between total receipts and total expenditure.

a. Capital deficit
b. Budget deficit
c. Fiscal deficit
d. Revenue deficit
(Ans: b)
33-What is meant by Autarky in international trade?

a. Monopoly in international trade
b. Imposition of restrictions in international trade
c. Removal of all restrictions from international trade
d. The idea of self sufficiency and no international trade by a country
(Ans: d)
34-The following is the direct tax among:

a. House tax
b. Entertainment tax
c. Service tax
d. Value Added tax
(Ans: a)
35-Which among the following is a cause of inflation?

a. Deficit financing
b. Rise in external loans
c. Unfavourable balance of payment
d. A hike in the CRR by the central bank of the country
(Ans: a)
36-Cost push inflation occurs because of:

a. Wage push
b. Profit push
c. Both A and B
d. Ineffective policies of the government
(Ans: c)
37-Which among the following is NOT correct?

a. During inflation lenders suffer and borrowers benefit out’
b. Rising inflation indicates rising aggregate demand and indicates comparatively lower
supply and higher purchasing capacity among the consumers’
c. With rising inflation the currency of the economy depreciates provided it follows the
flexible currency regime.
d. Inflation decreases the nominal (face) value of the wages while the real value increases.

(Ans:d)
38-The capital that is consumed by an economy or a firm in the production process

is known as:
a. Capital loss
b. Production cost
c. Dead-weight loss
d. Depreciation
(Ans: d)
39-Who propounded the opportunity cost Theory of international trade?

a. Ricardo
b. Marshall
c. Heckscher & Ohlin
d. Haberler
(Ans: d)
40-Which among the following is NOT correct?

a. Floating exchange rate system works on the market mechanism
b. Floating exchange rate breeds uncertainties and speculation
c. Economic and political factors and value judgments influence the choice of the exchange
rate system
d. The system of floating exchange rate requires comprehensive government intervention
(Ans: d)
41-Which among below is NOT a correct statement?

a. Bretton Woods conference gave birth to two international organizations-
b. Theory of Absolute Advantage in international trade is given by Adam Smith’
c. Pure and perfect competition is the same market structures.
d. Mint par theory of exchange rate determination is applicable in countries under gold
standard.
(Ans: c)
42-Terms of trade that relate to the Real Ratio of international exchange between
commodities is called:
a. Real cost terms of trade
b. Commodity terms of trade
c. Income terms of trade
d. Utility terms of trade
(Ans: c)
43-Who among the following enunciated the concept of single factoral terms of
trade?
a. Jacob Viner
b. G.S.Donens
c. Taussig
d. J.S.Mill
(Ans: a)
44-‘Infant industry argument’ in international trade is given in support of:

a. Granting Protection
b. Free trade

c. Encouragement to export oriented small and tiny industries
(Ans: a)
45-Which of the following is also known as International Bank for Reconstruction

and Development?
a. Asian Development Bank
b. World Bank
c. Reserve Bank of India
d. International Monetary Fund
(Ans: b)
46-Which among the following is not a function of International Monetary Fund?

a. It serves a medium term and long term credit institution’
b. It provides a mechanism for improving short term balance of payments position’
c. It provides machinery for international consultations’
d. It provides reservoir of the currencies of the member countries and enables members to
borrow one another’s currency’
(Ans: a)
47-The new world Trade organization (WTO), which replaced the GATT came into
effect from____
a. 1ST January 1991
b. 1st January 1995
c. 1st April 1994
d. 1st May 1995
(Ans: b)
48-A change in fiscal policy affects the balance of payments through:

a. The current account only
b. The capital account only
c. Both, the current account and capital account
d. Neither current account nor capital account
(Ans: c)
49-Fiscal Policy means:

a. Policy relating to money and banking in a country
b. Policy relating to non-banking financial institutions
c. Policy relating to government spending’ taxation and borrowing
d. Policy relating to financial matters of international trade
(Ans: c)
50-Which one of the following is NOT the objective of fiscal policy of government of
India?
a. Full employment
b. Price stability
c. Regulation of inter-state trade
d. Economic growth
(Ans: c)
51-Monetary policy is implemented by in India.

a. The Ministry of Finance
b. Planning Commission

c. The Parliament
d. Reserve Bank of India
(Ans: d)
52-Under the Industrial policy of 1991:

a. The mandatory convertible clause is applicable to all term loans.
b. The mandatory convertible clause is applicable to term loans of more than 10 years.
c. The mandatory convertible clause is applicable to term loans of less than 10 years.
d. The mandatory convertible clause is no longer applicable.
(Ans: d)
53-Balance of Payment on capital account includes:

a. Balances of private direct investments
b. Private portfolio investments
c. Government loans to foreign governments
d. All of the above
(Ans: d)
54-Which country was the first to adopt a gold standard in the modern sense?
a. Italy
b. France
c. Great Britain
d. Portugal
(Ans: c)
55-To eradicate the problem of poverty, Twenty Point Economic Programme was
launched for the first time in India on:
a. 7th July, 1971
b. 7th July, 1975
c. 26th January, 1951
d. 15th August, 1983
(Ans: b)
56-_____unemployment may result when some workers are temporarily out of

work while changing job
a. Seasonal
b. Frictional
c. Disguised
d. Technical
(Ans: b)
57-Which among below is the economic effect of population pressure in India?

a. Higher burden of unproductive consumers on total population
b. Disintegration of family
c. Overcrowding of cities
d. Ecological degradation
(Ans: a)
58-Which among the following may be considered as a significant cause of low

agriculture productivity in India?
a. Defective tenancy reforms
b. Lack of enthusiasm among farmers
c. Conservative social systems

d. Absence of agricultural inputs to raise productivity
(Ans: a)
59-What have been the reasons of deficit in India’s Balance of Trade in the past?
a. Very large rise in imports
b. Modest growth of exports
c. High cost and low quality production
d. All of the above
(Ans: d)
60-A high average level of rear income per head is always associated with a high
proportion of the working population engaged in __________ sector.
a. Primary
b. Secondary
c. Tertiary
(Ans: c)
61-Natural resources determine the course of development and constitute the

challenge which may not be accepted by the human mind. “Who has said it”?
a. W. Arthur Lewis
b. J.I. Fisher
c. Jan Tinbergen
d. W.W. Rostow
(Ans: a)
62-The credit of developing the concept of modern economic growth goes to:
a. Arthur Lewis
b. Michael P. Todaro
c. Gunnar Mydral
d. Simon Kuznets
(Ans: d)
63-The most simple and popular method of measuring economic development is to

calculate the trend of gross national product (GNP) at __________
a. Current prices
b. Constant prices
c. Both of the above
(Ans: b)
64-“Underdeveloped countries are the slums of the world Economy.” This statement
is by
a. Ragnar Nurkse
b. A.N. Caimcross
c. Colin Clark
d. Jagdish Bhagwati
(Ans: b)
65-Which among the following is a characteristic of underdevelopment?

a. Vicious circle of poverty
b. Rising mass consumption
c. Growth of industries

d. High rate of urbanization
(Ans: a)
66-According to W.W. Rostow, the stages of economic growth are:

a. Two
b. Three
c. Four
d. Five
(Ans: d)
67-Most of the underdeveloped economies suffer from ____ which do not let the
rate of growth go up from a lower level.
a. High population pressures
b. High infant mortality
c. Hugh monetary mismanagement
d. High level of technological unemployment
(Ans: a)
68-By __ growth rate of an economy can be speeded up.

a. Investment in share market
b. Investment abroad
c. Investment in human capital formation
d. Investment in primary sector
(Ans: c)
69-When the population growth rate of an economy becomes greater than the
achievable economic growth rate, it is known as:
a. Population Explosion
b. Population Trap
c. Population Crisis
(Ans: b)
70-‘Planning from below’ is known as:

a. Centralized planning
b. Functional planning
c. Decentralized planning
d. Structural planning
(Ans: b)
71- _________ got the highest priority during the first plan period in India.
a. Self reliance
b. Growth with social justice
c. Development of Agriculture including irrigation
d. Removal of unemployment
(Ans: c)
72-An expression coined by economists to describe im economy that is growing at

such a slow pace that more jobs are being lost than are being added:
a. Stagflation
b. Recession
c. Growth Recession
d. Ritchet Inflation

(Ans: c)
73-Which five year plan in India gave emphasis on Co-operative Federalism?

a. Ninth five year plan
b. Tenth five year plan
c. Eleventh five year plan
d. Twelfth five year plan
(Ans: a)
74-Which Five year plan in India had ‘poverty alleviation’ as one of its objectives?
a. First five year plan
b. Third five year plan
c. Fifth five year plan
d. Seventh five year plan
(Ans: c)
75-Who has contributed the modem theory of interest rate determination?

a. Paul A. Samuelson
b. Gunnar Myrdal
c. Knut Wicksell
d. J.R. Hicks
(Ans: d)
76-Whose name is associated with the “Uncertainty-bearing theory of profit”?

a. J. Schumpeter
b. F.H. Knight
c. J.B. Clark
d. F.W. Watker
(Ans: b)
77-Who has sought to measure Consumer’s Surplus with the help of indifference
curve technique?
a. Alfred Marshall
b. Edgeworth
c. J.R. Hick
d. Pareto
(Ans: c)
78-Who among the following has given the modem theory of distribution?
a. Nicholas Kaldor
b. Wicksteed
c. David Ricardo
d. Mrs. Joan Robinson
(Ans: a)
79-ln a free enterprise economy, which among the following are the determinants of
Investment?
a. Rate of interest
b. Marginal efficiency of capital
c. Both A and B
(Ans: c)

80- _____ factors determine the position and slope of consumption curve.
a. Objective
b. Subjective
c. Both A and B
(Ans: b)
81-Keynes believed that the equality between savings and investment is brought
about by:
a. Rate of interest
b. Changes in income
c. Availability of capital
d. Marginal efficiency of investment
(Ans: b)
82-Which among the following is NOT an assumption of Pareto optimality?

a. Every consumer wishes to maximize his level of satisfaction.
b. All the factors of production are used in the production of every commodity.
c. Conditions of perfect competition exist making all the factors of production perfectly
mobile
d. The concept of utility is cardinal and cardinal utility function of every consumer is given.
(Ans: d)
83-“Money is a matter of functions four, a medium, a measure, a standard and

_______”. What is the fourth function of money indicated in this popular phrase?
a. A stock
b. A flow
c. A store
d. A payment
(Ans: c)
84-Which of the following measure of the high-power money supply (H) has been
used by RBI of India
a. Currency held by the public + Other deposits with the RBI
b. Cash reserves of the commercial banks + Other deposits with the RBI
c. Currency held by the public + cash reserves of the commercial banks + other deposits
with the RBI
d. Currency held by the public + cash reserves of the commercial banks + Time deposits of
the commercial banks + other deposits with the RBI
(Ans: c)
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Unit 1 Management e Book

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Unit 1 Management e Book

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The management work can divided into a few basic functions of

Planning is the determination of objectives and formulation of plans, strategies,

The third function of a manager is that of directing stimulating and motivating

The fourth and final function of management is that of controlling to assure

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Experts agree that management is a distinct type of activity primarily responsible

1. “To manage is to forecast, to plan, to organise, to command, to co-

(ii) Managing manager; and

(iii) Managing workers and work.

Hence, a manager is a dynamic and life-giving element in every business. Without

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This definition include principal ideas of any school of management

(4) Systems approach concentrates on the entire organisation, i.e., inputs-

(5) Contingency approach emphasises dynamic nature of management process in

(ii) Precise Definition of Management:

A process also implies ongoing and unceasing cyclical operations. In management

It also implies that change is a constant reality of organisational life and

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(2) Maximum human welfare and satisfaction.

Let us describe each part separately:

3. Management is a Purposive Process:

4. Management is a Social Process:

5. Management is a Cyclical Process:

(iii) Management — an Art, A Science or A Profession?

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Management is a developing science. It has now evolved certain basic principles

A human being is not an inanimate machine. Hence, management dealing with

Art reflects practical application of knowledge and it is perfected through

As an artist, he has to depend on his own experience, intuition and judgment

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‘Knowledge is power’ is an old saying. But to be correct the saying should be

Planning and organising are called mechanics of management and indicate

“A professional manager is one who specialises in the work of

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Seminars, special courses, training programmes are becoming fashionable and

Consumer-oriented marketing concept is the reflection of a corporate code of

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By introducing two modifications in Fayol’s concepts, we could easily

The pattern of management that developed in Du Pont Company had a far-

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(4) Both, however, stressed on the technical or professional aspects of the

(2) It is directly in charge of allocation, utilisation and co-ordination of all human

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(7) Classical or bureaucratic management is appropriate where the environment

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Management Theories – Frederick Taylor

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 Qualification-based hiring – Hire employees based on their educational

The Father of Modern Management Theory, Henri Fayol, proposed a theory of

1. Technical activities pertaining to production

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1. Division of Work: to ensure optimum performance with minimal effort.

Behavioralists, Sociologists, and Psychologists

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The systems approach defines a system as a set of interdependent and inter-related

Inputs Processes Outputs

Human Planning Products

Materials Organizing Services

Equipment Leading Profit/Loss

Financial Controlling Human development

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