Q1.

Suppose your manufacturing company planning to release a newproduct into mark et, Explain the various methods forecasting for a newproduct. Answer: To deliver the right products to the right customers portably requires a fundamental shift in retail decision making from art to science; and from one t hat is based on human intuition to one that is driven by customer data. Demand Forecasting for a New Product Demand forecasting for new products is quite different from that for established products. Here the firms will not have any past experience or past data for thi s purpose. An intensive study of the economic and competitive characteristics of the product should be made to make efficient forecasts. Professor Joel Dean, ho wever, has suggested a few guidelines to make forecasting of demand for new prod ucts. a) Evolutionary approach The demand for the new product may be considered as an outgrowth of an existing product. For e.g., Demand for new Tata Indica, which is a modified version of Ol d Indica can most effectively be projected based on the sales of the old Indica, the demand for new Pulsar canbe forecasted based on the a sales of the old Puls or. Thus when a new product is evolved from the old product, the demand conditio ns of the old product can be taken as a basis for forecasting the demand for the new product. b) Substitute approach If the new product developed serves as substitute for the existing product, the demand for the new product may be worked out on the basis of a market share . Th e growth of demand for all the products have to be worked out on the basis of i ntelligent forecasts for independent variables that influence the demand for the substitutes. After that, a portion of the market can be sliced out for the new product. For e.g., a moped as a substitute for a scooter, a cell phone as a subs titute for a land line. In some cases price plays an important role in shaping f uture demand for the product. c) Opinion Poll approachUnder this approach the potential buyers are directly contacted , or thr oughout use of samples of the new product and their responses are found out. Th ese are finally blown up to forecast the demand for the new product. d) Sales experience approach Offer the new product for sale in a sample market; say supermarkets or big bazaa rs in big cities, which are also big marketing centers. The product may be offer ed for sale through one super market and the estimate of sales obtained may be bl own up to arrive a t estimated demand for the product. e) Growth Curve approachAccording to this, the rate of growth and the ultimate level of demand for the n ew productare estimated on the basis of the pattern of growth of established pro ducts. For e.g., An Automobile Co., while introducing a new version of a car wil l study the level of demand for the existing car. f) Vicarious approach A firm will survey consumers reactions to a new product indirectly through gett ing in touch with some specialized and informed dealers who have good knowledge about the market, about the different varieties of the product already available in the market, the consumers preferences etc. This helps in making a more effici ent estimation of future demand. These methods are not mutually exclusive. The m anagement can use a combination of several of them, supplement and cross check e ach other.

Q2.Define the term equilibrium. Explain the changes in market equilibrium and ef fects to shifts in supply and demand. Answer: The word equilibrium is derived from the Latin word aequilibrium which means equal balance. It means a state of even balance in which opposing forces or tendencie s neutralize each other. It is a position of rest characterized by absence of ch ange. It is a state where there is complete agreement of the economic plans of t he various market participants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta: Equilibrium denotes in economics a bsence of change in movement. Market Equilibrium There are two approaches to market equilibrium viz., partial equilibrium approac h and the general equilibrium approach. The partial equilibrium approach to pric ing explains price determination of a single commodity keeping the prices of oth er commodities constant. On the other hand, the general equilibrium approach exp lains the mutual and simultaneous determination of the prices of all goods and f actors. Thus it explains a multi market equilibrium position. Earlier to Marshal l, there was a dispute among economists on whether the force of demand or the fo rce of supply is more important in determining price. Marshall gave equal import ance to both demand and supply in the determination of value or price. He compar ed supply and demand to a pair of scissors We might as reasonably dispute whethe r it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. Thus neithe r the upper blade nor the lower blade taken separately can cut the paper; both have their importance in the process of cutting. Likewise neither supply alone, nor demand alone can determine the price of a commodity, both are equally import ant in the determination of price. But the relative importance of the two may va ry depending upon the time under consideration. Thus, the demand of all consumer s and the supply of all firms together determine the price of a commodity in the market. Equilibrium between demand and supply price: Equilibrium between demand and supply price is obtained by the interaction of th ese two forces. Price is an independent variable. Demand and supply are dependen t variables. They depend on price. Demand varies inversely with price; arise in price causes a fall in demand and a fall in price causes a rise in demand. Thus the demand curve will have a downward slope indicating the expansion of demand w ith a fall in price and contraction of demand with a rise in price. On the other hand supply varies directly with the changes in price, a rise in price causes a rise in supply and a fall in price causes a fall in supply. Thus the supply curv e will have an upward slope. At a point where these two curves intersect with ea ch other the equilibrium price is established. At this price quantity demanded i s equal to the quantity demanded. This we can explain with the help of a table a nd a diagram. Price in Rs 30 25 20 10 5 Demand in units 5 10 15 20 30 Supply in units 25 20 15 10 5 State of market D<S D<S D=S D>S D>S Pressure on price PPNeutral P PIn the table at Rs.20 the quantity demanded is equal to the quantity supplied. S ince the price is agreeable to both the buyer and sellers, there will be no tend ency for it to change; this is called equilibrium price. Suppose the price falls to Rs.5 the buyer will demand 30 units while the seller will supply only 5 unit s. Excess of demand over supply pushes the price upward until it reaches the equ ilibrium position supply is equal to the demand. On the other hand if the price rises to Rs.30 the buyer will demand only 5 units while the sellers are ready to supply 25 units. Sellers compete with each other to sell more units of the comm odity. Excess of supply over demand pushes the price downward until it reaches t he equilibrium. This process will continue till the equilibrium price of Rs.20 i s reached. Thus the interactions of demand and supply forces acting upon each ot her restore the equilibrium position in the market. In the diagram DD is the dem and curve, SS is the supply curve. Demand and supply are in equilibrium at point E where the two curves intersect each other. OQ is the equilibrium output. OP i s the equilibrium price. Suppose the price OP2 is higher than the equilibrium pr

ice OP. at this point price quantity demanded is P2D2. ThusD2S2 is the excess su pply which the seller wants to push into the market, competition among the selle rs will bring down the price to the equilibrium level where the supply is equal to the demand. At price OP1, the buyers will demand P1D1 quantity while the sell ers are ready to sell P1S1. Demand exceeds supply. Excess demand for goods pushe s up the price; this process will go until equilibrium is reached where supply b ecomes equal to demand. Changes in Market Equilibrium The changes in equilibrium price will occur when there will be shift either in demand curve or in supply c urve or both: Effects of Shift in demand: Demand changes when there is a change in the determinants of demand like the income, tastes, prices of substitutes and complements, size of the population etc. If demand raises due to a change in an y one of these conditions the demand curve shifts upward to the right. If, on th e other hand, demand falls, the demand curve shifts downward to the left. Such r ise and fall in demand are referred to as increase and decrease in demand. A cha nge in the market equilibrium caused by the shifts in demand can be explained wi th the help of a diagram Effects of Changes in Both Demand and Supply Changes can occur in both demand an d supply conditions. The effects of such changes on the market equilibrium depen d on the rate of change in the two variables. If the rateo f c h a n g e i n d e m a n d i s matched with the rate of change in supply there will be no change i n the market equilibrium, the new equilibrium shows expanded market with increas ed quantity of both supply and demand at the same price. This is made clear from the diagram below: Similar will be the effects when the decrease in demand is greater than the decr ease insupply on the market equilibrium Q3.Explain how a product would reach equilibrium position with the help of ISO-Q uants and ISO-Cost curve. Answer: Economies of scale external to the firm (or industry wide scale economies) are o nly considered examples of network externalities if they are driven by demand si de economies. In many industries, the production of goods and services and the d evelopment of new products requires the use of specialized equipment or support services. An individual company does not provide a large enough market for these services to keep the suppliers in business. A localized industrial cluster can solve this problem by bringing together many firms that provide a large enough m arket to support specialized suppliers. This phenomenon has been extensively doc umented in the semiconductor industry located in Silicon Valley. Labor Market Po oling A cluster of firms can create a pooled market for workers with highly spec ialized skills. It is an advantage for: Producers -- They are less likely to suffer from labor shortages. Workers -- They are less likely to become unemployed. Knowledge Spillovers -- Knowledge is one of the important input factors in highl y innovative industries. The specialized knowledge that is crucial to success in innovative industries co mes from : Research and development efforts. Reverse engineering. Informal exchange of information and ideas. As firms become larger and their scale of operations increase they are able to e xperience reductions in their average costs of production. The firm is said to b e experiencing increasing returns to scale. Increasing returns to scale results in the firm s output increasing at a great proportion than its inputs and hence its total costs. As a consequence its average costs fall. Thus initially the fir m s long run average cost curve slopes downward as the scale of the enterprise e xpands. The firm enjoys benefits called internal economies of scale. These are c ost reductions accruing to the firm as a result of the growth of the firm itself . (An external economy of scale is a benefit that the firms experience as a resu lt of the growth of the industry). After the firm has reached its optimum scale

of output, where the long run average cost curves are at their lowest point, con tinued expansion means that its average costs may start to rise as the firm now experiences decreasing returns to scale. The long run average cost curve therefo re starts to curve upwards. This occurs because the firm is now experiencing int ernal diseconomies of scale. Types of internal economies of scale Financial The farm has been able to gain loans and assistance at preferential interest rat es from the EIB, World Bank and the EU. Marketing It has managed to dedicate resources to its strategy of niche marketing. Techni cal The access to finance has allowed it to invest in sophisticated Israeli irri gation technology. Managerial Its large size enables it to employ specialized personnel such as estate manage rs. Risk bearing The farm has used some of its land to diversify into producing fresh vegetables for export as well as continue producing maize. These large scale farms are attr acting a considerable amount of overseas development aid funding from organizati ons such as the World Bank and the European Union as they see as being an integr al part of the export earning capacity of the country. Q4.Critically examine the Marris growth maximizing model. Answer: Profit maximization is traditional objective of a firm. Sales maximization objec tive is explained by Prof. Boumal. On similar lines, Prof. Marris has developed another alternative growth maximization model in recent years. It is a common fa ctor to observe that each firm aims at maximizing its growth rate as this goal w ould answer many of the objectives of a firm. Marris points out that a firm has to maximize its balanced growth rate over a period of time. Marris assumes that the ownership and control of the firm is in the hands of two groups of people, i .e. owner and managers. He further points out that both of them have two distinc tive goals. Managers have a utility function in which the amount of salary, stat us, position, power, prestige and security of job etc are the most import variab le where as in case of are more concerned about the size of output, volume of pr ofits, market shares and sales maximization. Utility function of the manager and that the owner are expressed in the following mannerUo= f [size of output, mark et share, volume of profit, capital, public esteem etc.] Um= f [salaries, power, status, prestige, job security etc.] In view of Marris the realization of these two functions would depend on the size of the firm. Larger the firm, greater wo uld be the realization of these functions and vice-versa. Size of the firm accor ding to Marris depends on the amount of corporate capital which includes total v olume of the asset, inventory level, cash reserve etc. He further points out tha t the managers always aim at maximizing the rate of growth of the firm rather th an growth in absolute size of the firms. Generally managers like to stay in a gr ouping firm. Higher growth rate of the firm satisfy the promotional opportunity of managers and also the share holders as they get more dividends. Marris identifies two constraints in the rate of growth of a firm: 1. There is a limit up to which output of a firm can be increased more economica lly, limit t o m a n a g e t h e f i r m e f f i c i e n t l y , l i m i t t o e m p l o y h i g h l y q u a l i f i e d a n d e x p e r i e n c e d managers, l imit to research and development and innovation etc. 2. The ambition of job security puts a limit to the g r o w t h r a t e o f t h e f i r m i t s e l f deliberately. If growth reaches the maximum, then there w ould be no opportunity to e x p a n d further and as such the managers may loose their jobs. R a p i d g r o w t h a n d financial soundness should go together. Managers hesitate to take unwanted risks and uncertainties in the organization at the cost of their jobs they would like to avoid risky investment projects, co ncentrate on generating more internal funds and invest more finance on only thos e products and services which brings more profits Hence, managers would like to seek their job security through adoption of a cautious and prudent financial pol

icy. He further points out that a high risk-loving management would like to main tain a relatively low amount of cash on h a n d a n d i n v e s t m o r e o n b u s i n e s s , b o r r o w m o r e external funds and invest more in business e xpansion and keep low profit levels. On the other hand, a highly risk-averting m anagement may have e x a c t l y o p p o s i t e p o l i c y . Ultimately, it is the job security which puts a constraint on business decisions by the managers. The Marris growth maximization model. Highlights on achieving a balanced growth rate of a firm. Maximum growth rate [g] is equal to two important variables 1. The rate of demand for the products [gd] 2. Growth rate of capital [gc] Hence, Max g = gd = gc. The growth rate of the f irm depends on two factors- a] the rate of diversification [d]and [b] the averag e profit margin. The diversification rate depends on the number of new products introduced per unit of time and the rate of success of new products in the marke t. The success of new products is determined by its changes in fashion styles, c onsumption habits, the range of products offered etc. More over diminishing marg inal returns would operate in any business and as such there is a limit to diver sification. Similarly, market price of the given product, a v a i l a b i l i t y o f a l t e r n a t i v e substitute products and their relative prices, publi city, propaganda and advertisements, R&D expenses and utility and comparative va lue of the product etc would decide the profit ratio. Higher expenditure on sales promotion and R&D would certainly reduce profits lev el as there are limits to them. The rate of capital growth is determined by eith er i s s u e o f n e w s h a r e s t o o b t a i n additional funds and external funds and generation of more internal surplus. Generally a firm would select th e last one to avoid higher degrees of risks in the business. The Marris model st ates that in order to maximize balanced g r o w t h r a t e o r r e a c h equili brium position, there should be equality between the growth rate in demand for t he p r o d u c t s a n d g r o w t h rate in supply of capital. This implies the satisfaction of t h r e e conditions. 1. The management has to maintain a low l iquidity ratio, ie, liquid asset / total assets. B u t t h i s r a t i o s h o u l d n o t c r e a t e a n y f i n a n c i a l e m b a r r a s s m e n t t o m e e t t h e r e q u i r e d payments to all the concerned parties. 2. The managem ent has to maintain a proper leverage ratio between value of debts/Total assets so that it will have enough money to invest in order to stimulate growth. 3. The management has to keep a high level of retained profits for further expansion a nd development but it should not displease the shareholders i.e. (Retained Profi ts / Total Profits) by giving low dividends. In this case, the mangers would max imize their utility function and the owners would maximize their utility functio ns. The managers are able to get their job security with a high rate of growth o f the firm and share holder would become happy as they get higher amount of divi dends. Demerits 1 . It is doubtful whether both managers and owners would maximi ze their utility functions simultaneously always. 2. The assumption of constant price and production costs are not correct. 3. It is difficult to achieve both g rowth maximization and profit maximization together. Q5.What do you mean by pricing policy? Explain the various objective of pricing policy of a firm. Answer: Pricing Policies A detailed study of the market structure gives us information a bout the way in which prices are determined under different market conditions. H owever, in reality, a firm adopts different policies and methods to fix the pric e of its products. Pricing policy refers to the policy of setting the price of t he product or products and services by the management after taking into account of various internal and external factors, forces and its own business objectives. Pricing Policy basically depends on price theory that i s the corner stone of economic theory. Pricing is considered as one of the basic

and central problems of economic theory in a modern economy. Fixing prices are the most important aspect of managerial decision making because market price cha rged by the company affects the present and future production plans, pattern of distribution, nature of marketing etc. Generally speaking, in economic theory, w e take into account of only two parties, i.e., buyers and sellers while fixing t he prices. However, in practice many parties are associated with pricing of a pr oduct. They are rival competitors, potential rivals, middlemen, wholesalers, ret ailers, commission agents and above all the Govt. Hence, we should give due cons ideration to the influence exerted by these parties in the process of price dete rmination. Broadly speaking, the various factors and forces that affect the pric e are divided into two categories. They are as follows: I External Factors (Outs ide factors) 1. Demand, supply and their determinants. 2. Elasticity of demand a nd supply. 3. Degree of competition in the market. 4. Size of the market. 5. Goo d will, name, fame and reputation of a firm in the market. 6. Trends in the mark et. 7. Purchasing power of the buyers. 8. Bargaining power of customers. 9. Buye rs behavior in respect of particular product. II. Internal Factors (Inside Facto rs) 1. Objectives of the firm. 2. Production Costs. 3. Quality of the product an d its characteristics. 4. Scale of production. 5. Efficient management of resour ces. 6. Policy towards percentage of profits and dividend distribution. 7. Adver tising and sales promotion policies. 8. Wage policy and sales turn over policy e tc. 9. The stages of the product on the product life cycle. 10. Use pattern of t he product. Objectives of the Price Policy: A firm has multiple objectives today . In spite of several objectives, the ultimate aim of every business concern is to maximize its profits. This is possible when the returns exceed costs. In this context, setting an ideal price for a product assumes greater importance. Prici ng objectives has to be established by top management to ensure not only that th e companys profitability is adequate but also that pricing is complementary to th e total strategy of the organization. While formulating the pricing policy, a fi rm has to consider various economic, social, political and other factors. Following objectives are to be considered while fixing the prices of the product : 1. Profit maximization in the short term The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achieve this objecti ve should be formulated in such a way as to maximize the sales revenue and profi t. Maximum profit refers to the highest possible of profit. In the short run, a firm not only should be able to recover its total costs, but also should get exc ess revenue over costs. This will build the morale of the firm and instill the s pirit of confidence in its operations. 2. Profit optimization in the long run Th e traditional profit maximization hypothesis may not prove beneficial in the lon g run. With the sole motive of profit making a firm may resort to several kinds of unethical practices like charging exorbitant prices, follow Monopoly Trade Pr actices (MTP), Restrictive Trade Practices (RTP) and Unfair Trade Practices (UTP ) etc. This may lead to opposition from the people. In order to over- come these evils, a firm instead of profit maximization, and aims at profit optimization. Optimum profit refers to the most ideal or desirable level of profit. Hence, ear ning the most reasonable or optimum profit has become a part and parcel of a sou nd pricing policy of a firm in recent years. 3. Price Stabilization Price stabil ization over a period of time is another objective. The prices as far as possibl e should not fluctuate too often. Price instability creates uncertain atmosphere in business circles. Sales plan becomes difficult under such circumstances. Hen ce, price stability is one of the prerequisite conditions for steady and persist ent growth of a firm. A stable price policy only can win the confidence of custo mers and may add to the good will of the concern. It builds up the reputation an d image of the firm. 4. Facing competitive situation One of the objectives of th e pricing policy is to face the competitive situations in the market. In many ca ses, this policy has been merely influenced by the market share psychology. Wher ever companies are aware of specific competitive products, they try to match the prices of their products with those of their rivals to expand the volume of the ir business. Most of the firms are not merely interested in meeting competition

but are keen to prevent it. Hence, a firm is always busy with its counter busine ss strategy. 5. Maintenance of market share Market share refers to the share of a firms sales of a particular product in the total sales of all firms in the mark et. The economic strength and success of a firm is measured in terms of its mark et share. In a competitive world, each firm makes a successful attempt to expand its market share. If it is impossible, it has to maintain its existing market s hare. Any decline in market share is a symptom of the poor performance of a firm . Hence, the pricing policy has to assist a firm to maintain its market share at any cost. Q6.Discuss the various measures that may be taken by a firm to counteract the ev il effects of trade cycle. Answer: Control of trade cycle has become an important objective of all most all economi es at present. Broadly speaking, the remedial measures can be classified under t hree heads, viz., monetary, fiscal and miscellaneous measures. 1. Monetary measu resAccording to hawtrey, Hicks and many others expansion and contraction of supp ly of money is the major cause of operation of trade cycle. Monetary policy and the expansionary phase: When the economy is moving fast in the upward direction, the monetary measures should aim at (i) restricting the issue of legal tender m oney. (ii) putting restrictions to the expansion of bank credit by adopting both quantitative and qualitative techniques of credit control. As expansionary phas e is mainly supported by bank credit, adoption of a dear money policy can put an effective check on further expansion. A rise in the Bank Rate, by raising the l ending rates of the commercial banks, making credit costly will have a discourag ing effect on more borrowings. A check can be imposed on the liquidity position of the commercial bank by raising the Cash Reserve Ratio and Statutory Liquidity Ratio. Open market sale of securities can also be conducted to make bank rate m ore effective. Selective techniques, like raising of margin requirements, ration ing of credit, moral suasion, direct action, publicity etc., can also be used ef ficiently to tighten the credit situation in the economy. Apart from these direc t measures indirect measures like wages control, price control etc., can also be adopted to put a check on the inflationary trend in the economy. Such monetary measures are found fairly successful in controlling unwieldy expansion of the ec onomy. Many countries like U.K., U.S.A., France, Germany and India have used mon etary measures to control inflation. Monetary policy and the phase of depression : During the period of depression, to enlarge employment opportunities and raise the level of income all out measures are to be adopted to increase the level of investment. To encourage investment activity the central bank has to follow a c heap money policy. The bank rate and the lending rates of the commercial banks s hould be reduced; money should be made available freely by reducing the CRR and SLR. Through open market sale of securities, Cash reserves with the bank should be increased to enable them to lend money easily for various investment activiti es. Various qualitative techniques of credit control like reducing the margin re quirements, moral suasion etc., may be adopted to encourage businessmen to borro w and invest. Cheap money policy, to induce businessmen to borrow and invest is not very effective as investment is more guided by the marginal efficiency of ca pital than the rate of interest. Because of low level of income and low price an d the low profit margins entrepreneurs do not come forward to borrow and invest in spite of the low rates of interest. One can take a horse to the water but can not force to have it; a plethora of money cannot induce the public horse to have it. Thus monetary policy as a remedy to solve depression has its own limitation s. 2. Fiscal policyDuring the period of inflation or uptrend in the economy, whe n the private enterprise is over enthusiastic and there is over expansion and ov er production government can use taxation and licensing policy as very effective instruments to check such unwieldy growth. Price control measures can be adopte d. Government should adopt surplus budget, reduce public expenditure and resort to public borrowing. The cumulative result of these measu

res would reduce the supply of money in circulation, purchasing power and demand . On the contrary, during the period of depression government should adopt defic it budget, Increase the volume of public expenditure, redeem public debt and res ort to external borrowings, indulge in a moderate dose of deficit financing, red uce tax rates, grant subsidies, development rebates, tax-concessions, tax-reliefs and freight concessions etc. as a result of these measures, supply of money in circulation will increase. This in its turn would raise the purchasing power, de mand for goods and services, production and employment etc. J.M.Keynes recommend ed a number of public works programmers to be launched by the government to cure depression. The New Deal policy of President Roosevelt in the U.S.A. and Blum e xperiment in France were based on this very belief. 3. Physical controlsDuring t he period of inflation, a price control policy has to be adopted where as during depression a price-support policy has to be followed. During the period of cont raction unemployment insurance schemes, proper management of savings, investment s, production, distribution, expansion of income and employment etc., are needed depending upon the nature of economic fluctuations. 4. Miscellaneous measuresi) Introduction of automatic stabilizers: An automatic stabilizer (or built in sta bilizer) is an economic shock absorber that helps to smoothen the cyclical busin ess fluctuations of its own accord, without requiring deliberate action on the p art of government e.g., progressive taxation policy, unemployment Insurance sche me adopted in the U.S.A. ii) Price support policy followed in the U.S.A. during the post war period to fight the prospects of depression. iii) The policy of sta bilization of the prices of agricultural products in India through procurement a nd building up of buffer stock aim at economic stability. iv) Foreign aid is als o used for influencing the aggregate demand and supply of goods in a country. v) Granting of aid might help in recovering from slump. In addition to these, some of the measures can be adopted at international level to mitigate the adverse e ffects of trade cycle and promote stability in the world economic growth like co ntrol of private investment, control and distribution of essential goods, regula tion of international investments in developing nations, creation of internation al buffer stocks etc. thus, several measures are to be taken to smoothen the cyc lical movements and to ensure economic stability in an economy.