Managerial Economics - MB0026

MBA – 1 SEM Assignment Set- 2

Q.1 What is pricing policy? What are the internal and external factors of the
policy?
Ans:

Pricing Policies
Pricing Policies refer to the policy of setting the price of the product or product & services
by the management after taking into account of various internal and external factors,
forces and its own business objectives. The decision of pricing is very important in any
business. Price once fixed is never permanent. It needs to be reviewed and revised
according to the market conditions.

Internal factors which can affect the pricing decisions of the company include suppliers,
employees efficiency, profit margin, production cost and other expenses, brand image
and expectations of the company. Suppliers provide the raw materials to the company
and good relations with suppliers can make the company to buy quality products at
reasonable prices. Employees' efficiency can also reduce the costs of the company and
company can charge lower prices. Product cost also determines the prices of the
products because all of the companies have to cover up the product costs. Moreover,
image of the company also plays an important role in the price decisions of the company
because a global brand will usually charge premium prices.

On the other hand, the external factors include government policies, competitors' prices,
costs of raw materials, consumers expectations and demand and supply of the product.
Government sets the price floors to save the interest of the borrowers and the sellers,
therefore, government policies should be also take into consideration. Expectations of
the consumers or consumer reservation prices are also considered in the price
decisions. Costs of raw materials in the market also determine the pricing strategies.
Moreover, the prices offered by the competitors can also impact the pricing decisions of
the company.

Q.2 Mention three crucial objectives of price policies.

Ans :
Price policy has certain objectives:-
1. To maximize profits:- Every firm tries to maximize their profits. So they should have a
price policy, which fetches them maximum revenue. Every firm should have a price
policy keeping the long run prospects in mind.
2. Price Stability :- Always fluctuating price is not for the goodwill of the company. A
stable price always wins the confidence of customers.
3. Ability to pay :- The price should be fixed according to the ability of consumer to pay;
high price for rich customers and low for poor customers. This can be applied in case of
services given by doctors, lawyers etc.

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Q.3 Mention the bases of price discrimination.
Ans:

PRICE DISCRIMINATION
The monopoly seller has the advantage of price discrimination, as he is the only
producer in the market. Price discrimination is charging different price to different buyer
for the same product.
DEGREES OF PRICE DISCRIMINATION
1. First degree price discrimination – It is also called perfect price discrimination, as it
involves maximum exploitation of the consumer in the interest of the seller. It happens
when the seller is able to sell each unit separately and at a different price. Each buyer is
made to pay the amount he is willing to pay rather going without it. The seller will make
different bargain with each buyer. Such type of price discrimination enjoyed by the seller
is called first degree price discrimination.
2. Second degree price discrimination – It happens when the monopoly seller will
charge separate price in such a way that the buyer is divided into different groups
according to the price elasticity of demand for his product.
3. Third degree price discrimination – When the seller will be divided into sub-market
and charge different price depending on the output sold in the market and the demand
condition of that sub-market. The seller practising price discrimination between the
domestic market and international market, the seller will charge higher price in the
domestic market, where he enjoys monopoly and charge low price in the international
market, where he has to face more competition.

Q.4 What do you mean by the fiscal policy? What are the instruments of fiscal
policy? Briefly comment on India’s fiscal policy.

Ans:

Fiscal policy is a policy, which affects aggregate output, employment, saving, investment
etc. A responsible government would contain its expenditure within its revenue and thus
making the budget balanced. The instruments of Fiscal Policy are Automatic Stabilizer
and Discretionary Fiscal Policy:
i) Automatic Stabilizer: The tax structure and expenditure are programmed in such a
way that there is increase in expenditure and decrease in tax in recession and decrease
in expenditure and increase in tax revenue in the period of inflation. It refers to built-in
response to the economic condition without any deliberate action on the part of
government. It is called built- in- stabilizer to correct and thus restore economic
stability. It works in the following manner,
Tax revenue: Tax revenue increases when the income increases; as those who
were not paying tax go into the higher income tax bracket. When there is depression, the
income decreases and many people fall in the no-income-tax bracket and the tax
revenue decreases.
ii) Discretionary Fiscal Policy: Under this, to stabilize the economy, deliberate
attempts are made by the government in taxation and expenditure. It entails definite and
conscious actions.

Instruments of Fiscal Policy: Some important instruments of fiscal policy are:-

1. TAXATION: Taxation is always a very important source of revenue for both
developed and developing countries. Tax comes under two heading –Tax on individual

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(direct tax) and tax on commodity (indirect tax or commodity tax).Direct tax includes
income tax, corporate tax, taxes on property and wealth. Indirect tax is tax on the
consumptions. It includes sales tax, excise duty and custom duties. Direct tax structure
can be divided into three bases-
1. Progressive tax
2. Regressive tax
3. Proportional tax
Progressive tax: Progressive tax says that higher the level of income, greater the
volume of tax burden you have to bear. This means as income increases, the tax
contribution should also increase. Low income group people pay low tax, whereas the
high income group people pay higher tax.
Regressive tax: It is theoretically possible, though no government implements such tax
structure, because that leads to unequal distribution of income. As your income
increases the contribution through tax decreases. Low income people will pay more and
high income people will pay less.
Proportional tax: When the tax imposed is irrespective of the income you earn, every
income group, high or low pay the same amount of tax.

2. INDIRECT TAX OR CONSUMPTION TAX: Indirect tax differs from direct tax. Tax
which is imposed on every unit of product is known as lump sum tax. E.g. excise tax and
sales tax. Taxes depending on the value of particular product are called ‘ad valorem tax’
e.g. tax on airline tickets.
A good tax structure has to control and bring stability in economic system. There are few
requirement of a good tax structure. They are –
The revenue earned through tax structure should be adequate.
The distribution of tax burden should be equal.
Administration cost should not be more than revenue earned.
Tax burden should be borne by the person who is taxed.

Q.5 Comment on the consequences of environmental degradation on the

economy of a community.
Ans:
Environmental Degradation
For sustainable economic growth, the environment should be properly preserved and
improved. The stocks may remain constant or it can even rise but the environment
resources are the base of the country and the quality of air, water and land represents
the heritage of a nation. The environment damages in the developing countries are the
main concern nowadays. Environmental damages can be in these categories-
Water pollution – the water quality is continuously deteriorating due to contamination
from the industrial waste, by throwing out chemical waste and heavy metal in the river. It
is difficult to remove the pollutants form the water to make it good for drinking purpose.
The capacity of the water to preserve the aquatic life is becoming more and more
difficult. The under ground water is also getting affected by the industrial waste, as they
some times get discharged directly into underground water.
Air pollution- air pollution can be contributed to the three man made sources, industrial
production, vehicles and the energy. Human suffering increases due to the air pollution.
Respiratory disorders and cancers are due to inhalation of polluted air. The vehicle
increases the sulpur dioxide concentration in the air creating breathing problems for the
children and affects their neurological developments.

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Deforestation- Forest is the most important source to protect environment. They protect
soil erosion and regulate the ecological balance of the nature. They i affect the nature
and the climatic condition of the region. The blind increase in the industrial growth is
leading to cutting down of many forest leading to many serious problems for the human
being.
Q.6 Write short notes on the following:
a) Philips curve
Ans:

Philips Curve describes the relationship between inflation and unemployment in an economy.
New Zealand-born economist A.W Philips first put this theory forward in 1958 gathered the data
of unemployment and changes in wage levels in the UK from 1861 to 1957. He observed that one
stable curve represents the trade-off between inflation and unemployment and they are
inversely/negatively related. In other words, if unemployment decreases, inflation will increase,
and vice versa.

For example, after the economy has just been in recession, the unemployment
level will be fairly high. This will mean that there is a labor surplus.
As the economy has just started growing, the aggregate demand (AD) will
increase and therefore leading to an increase in employment. In the beginning,
there will be little pressure for a raise in wages. However, as the economy grows
faster and more people are employed, wages will start rising slowly.

B) Stagflation
Ans:

Stagnation + Inflation = Stagflation

Stagnation = Slow or no growth. Inflation = Rises in price.

Stagflation is an economic trend in which inflation and unemployment rise while general
growth of the economy is slow. It can be difficult to correct stagflation, because focusing
on one aspect of the problem can exacerbate other aspects. Many governments try to

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avoid stagflation through fiscal policy, by promoting even and healthy growth and
attempting to prevent inflation. If stagflation continues long enough, it will trigger an
economic recession and an ultimate self-correction.
Stagflation is when the economy experiences slow GDP growth (stagnation) with high
inflation and high level of unemployment. This occurred in the 1970's in many countries.
When the economy is working normally, slow economic growth reduces demand, which
keeps prices low, preventing inflation. Stagflation can only occur when fiscal or monetary
policy sustains high prices, and inflation, despite slow growth. Stabilization policies to
control stagflation.
1. The money supply should be tightened to check inflation.
2. We can control inflationary wage and price increases with direct controls. Government
can limit increases by law or constrain them through tax policies.
3. Protect people against the effects of inflation. All wages, including the minimum wage,
could be increased automatically when the Consumer Price Index increases.
Government bonds could pay a fixed real interest rate by adjusting the actual interest
rate for inflation.
Stagflation is difficult to control without government controls. Therefore, political will is
necessary for formulating the measures to stop stagflation.

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