ASSIGNMENT 'A'

Q.1 How does economic theory contribute to managerial decisions?Ans:

Managerial Economics is the integration of economic theory with business practices
for the purpose of facilitating Decision Making and Forward Planning by the management.As
economics provides as a set of concepts, these concepts furnish us the tools and
techniques of analysis. It s in this content economic analysis is an aid to understand
business practices in a givenenvironment.As decision making is a basic function of manager,
economics is a valuable guide to the manager.Decision making is commonly defined a
choosing from among alternatives. Decision is a choicemade from alternative courses of
action in order to deal with a problem. A problem is the difference between a desired
situation and the actual situation. Therefore, decision making is the process
of choosing among alternative courses of action to solve a problem.The Decision making
process is construed as searching the environment for conditions calling for adecision;
inventing, developing and analyzing the available courses of action; and choosing
one of the particular courses of action.A second and more detailed method is the
following:Identify the problem.Diagnose the situation.Collect and analyze data relevant to the
issue.Ascertain solution that may be used in solving the problemAnalyze these alternative
solutions.Select the approach that appears most likely to solve the problemImplement it.A
practical example can be found in the following:Managers make many decisions, in order to
answer the following questions:What goods shall firm produce?How should firm raise the
necessary capital and what shall be its legal form.What technique shall be adopted, and what
shall be the scale of operations?Where production is located?How shall its product be
distributed?How shall resources be combined?What shall be the size of output?
Q.2 Explain the Law of Demand. Briefly discuss the exception to the Law of demand.Ans:
Demand can be said to be the requirement of a product by consumer (s). It is a
multivariaterelationship, that is , it is determined by many factors simultaneously,
Some of the most importantdeterminants of the market demand for a particular
product are its own price, consumer's income, price of other commodities,
consumer's tastes, income distribution, total population, consumer'swealth, credit
availability, government policies, past level of demand and past level of income. The
traditional theory of demand depends on four of the above determinants that are
the price of
thec o m m o d i t y , o t h e r p r i
c e s , i n c o m e a n d t a s t e
s , Demand for a commodity implies:1 . D e s i r e t o a c q u i r e
i t , 2 . Wi l l i n g n e s s t o p a y f o r i t 3 . A b i l i t y t o p a y f o r i t Thus the
demand for any commodity is the desire for that commodity backed by the
will ingness aswell as the ability to pay for it and is always defined with reference
to a particular time and givenvalues of variables on which it depends.Demands for a
commodity can be grouped into various categories for better understanding of
itscharacteristics. The main categories may be:A. Demand f or cons umer goods and
pr oducer s goods B. Demand f or per i s habl e and dur abl e
goods C. Der i ved and aut onomous demandD. Fi r m and
I ndus t r y demandE. Demand by t ot al mar ket and i ndus t r y s egment s LAW OF
DEMANDA microeconomic law that states that, all other factors being equal, as the price of a
good or
servicei n c r e a s e s , c o n s u m e r d e m a n d f o r t h e g o o d o r s e r v i c
e w i l l d e c r e a s e a n d v i c e v e r s a . This law summarizes the effect price
changes have on consumer behavior. For example, a consumer wi l l pur chas e mor e
pi z z as i f t he pr i ce of pi z z a f al l s . The oppos i t e i s t r ue i f t he pr i ce of
pi z z aincreases



Q.3 Explain the various components of demand function.Ans:
In economics, aggregate demand is the total demand for goods and services in the
economy( Y) dur i ng a s peci f i c t i me per i od. An aggr egat e demand cur ve i s
t he s um of i ndi vi dual demandcurves. The aggregate demand function is represented as
:Yd= C+I+G+Nb.Thi s f unct i on s hows t hat t he aggr egat e demand equal t o t he
s um of cons umpt i on ( C) , Investment (I), Government spending (G) and the
Net export (Nb). In fact, many people would ask about the relationship between
output and the price level. Does changing prices affect the output?The answer is
yes, but many economics books assume that the price level is constant, just to
keept he r el at i ons hi ps bet ween t he economi c f act or s s i mpl e. I t i s of t en
cal l ed ef f ect i ve demand. Put another way, it is the demand for the gross domestic
product of a country when, and only when, it isin equilibrium (the total new production
sold through the market). This demand consists of four major parts, which can be stated
in either nominal or "real" terms: personal consumption expenditures (C) or
"consumption," demand by households and unattachedindividuals; its determination
is described by the consumption function. The consumption functionisC= a + (mpc)(Y-
T)a is autonomous consumption, mpc is the marginal propensity to consume, (Y-T)
is the disposableincome. Gross private domestic investment (I), demand by business firms and
some individuals, for new factories, machinery, computer software, housing, other structures,
and inventories. In addition,Investment is effected by the output and the interest rate (i).
Consequently, we can write it as I(Y,i).Investment has positive relationship with
the output and negative relationship with the interest rate.For example, when Y goes
up, the investment will increase.gross government investment and consumption expenditures
(G).net exports (Nb and sometimes (b-M)), i.e., net demand by the rest of the world
for the country' soutput.In Keynesian economics, not all of gross private domestic
investment counts as part of aggregatedemand. Much or mos t of t he i nves t ment
i n i nvent or i es can be due t o a s hor t - f al l i n demand(unplanned inventory
accumulation or "general over-production"). (Inventory accumulation
wouldcor r es pond t o an exces s s uppl y of pr oduct s ; i n t he Nat i onal I ncome
and Pr oduct Account s , i t i s t r eat ed as a pur chas e by i t s pr oducer . ) Thus ,
onl y t he pl anned or i nt ended or des i r ed par t of investment (Ip) is counted as part
of aggregate demand.In sum, for a single country at a given time, aggregate demand
(D or AD) = C + Ip + G + (b-M).Strictly speaking, it is questionable whether this
aggregation is possible, as it is impossible to forms u c h ma c r o v a r i a b l e s f r o m
s o me mi c r o v a r i a b l e s : h o w d o y o u a d d u p l i t r e s o f g a s o l i n e
a n d toothbrushes? In the sense of nominal monetary values (prices) this is possible;
but in the sense of real goods it is not. Therefore it might be argued that an
"aggregate demand curve" does not evenexist in an (income,spending)-space.


Q.4 (i) Given the demand functionQd =12-pa)Find the demand and revenue
schedules.b) Fi nd t he MR when p - 10, 6 and 2.