Unit I

16 Marks Questions and Answers

Explain in detail about the scope of economics

1. Consumption: Satisfaction of human wants is called consumption which forms one of the
important branches of economics. This tells how people behave in consumption of goods and
services in order to maximize their satisfaction.
2. Production: Goods and services have to be produced with the help of factors of production.
So,production is another branch of economics. It concerned with how maximum goods are
produced with minimum cost or how the scarce factors could be utilized economically for better
results.
3. Exchange: Goods and services cannot be produced at one place or at one point of time. Goods
produced by one are exchanged for the goods produced by the others. So, exchange forms
another branch of study in economics.
4. Distribution: Goods and services are produced with efforts, i.e., by combining the factors of
production. These efforts have to be paid for or rewarded. The land gets rent, the labor get
wages,the capital gets interest and the organizer gets profit. This branch of study is called
distribution in economics.
5. Public Finance: This branch of study in economics studies about the sources of revenue to the
government and the principles governing the expenditure for the benefit of the people. It also
studies about public debt and financial administration.

Explain in detail about decision making process

1.Identification of problem: Decision making process begins with the identification of problem
that means recognition of a problem. The managers have to use imagination, experience, and
judgment in order to identify the real nature of the problem.
2. Diagnosis and analysis of the problem: In order to diagnose the problem correctly, a
manager must obtain all pertinent facts and analyze them correctly. The most important part of
the diagnosing problem is to find out the real cause or source of the problem. After analyzing
the problem next phase of the decision making is to analyze problem. This process involves
classifying the problem and gathering information.
3. Search for alternatives: A problem can be solved in many ways. All possible ways cannot be
equally satisfying. Managers are advice to limit him to the discovery of the alternatives which
are strategic or critical to the problem. The principle of limiting factor is given as By
recognizing and overcoming that factor that stand critically in the way of a goal, the best
alternative course of action can be selected. Creative thinking is necessary to develop
alternatives such as decision makers past experience, practices followed by others, and using
creative techniques.
4. Evaluation of alternatives: Evaluation is the process of measuring the positive and negative
consequences of each alternative. Some alternatives offer maximum benefit than others. An
alternative is compared with the others. Management must set some criteria against which the
alternatives can be evaluated. Criteria to weigh the alternative courses of action includes RiskDegree of risk involved in each alternative, Economy of effort- Cost, time and effort involved in
each alternative, Timing or Situation- Whether the problem is urgent & Limitation of resourcesPhysical, financial and human resources available with the organization.
5. Selecting an alternative: In this stage, decision makers can select the best alternatives.
Optimum alternative is one which maximizes the results under given conditions.

6. Implementation and follow-up: Once an alternative is selected, it is put into action in

systematic way. The future course of action is scheduled on the basis of selected alternatives.
When a decision is put into action, it may yield certain results. These results provide the
indication whether decision making and its implementation is proper. The follow-up action
should be in the light of feedback received from the results.
Economics is Art or science- Explain
Economics as a Science: A science is a systematized body of knowledge ascertainable by
observation experimentation. It is a body of generalizations, principles, theories or laws which
traces out a casual relationship between cause and effect.
Economics is a systematized body of knowledge in which economic facts are studied and
analyzed in a systematic manner. For instance, economics is divided into consumption,
production, exchange,distribution and public finance which have their laws are theories on
whose basis these departments are studied and analyzed in a systematic manner.
Hence economics is a science like any other science which has its own theories and laws which
establish a relation between cause and effect. Economics is also a science because its laws
possess universal validity such as the law of diminishing returns, the law of diminishing
marginal utility the law of demand, Greshams law, etc.
Again, economics is a science because of its self corrective nature. It goes on revising its
conclusions in the light of new facts based on observations. Economic theories or principles are
being revised in the fields of macro economics, monetary economics, international economics,
public finance and economic development.
Economics as an Art: Unlike natural science, there is no scope for experimentation in
economics because economics is related to man, his problems and activities. Economic
phenomena are very complex as they related to man whose activities are bound by his tastes,
habits, and social and legal institutions of the society in which he lives.

Economics is thus concerned with human beings who act irrationally and there is no scope for
experimentation in economics. Even though economics possess statistical, mathematical and
econometric methods of testing its phenomena but these are not so accurate as to judge the true
4.Explain in detail about the scope of managerial economics
1. Demand Analysis and Forecasting: A major part of managerial decision-making depends on
accurate estimates of demand. Before production schedules can be prepared and resources
employed, a forecast of future sales is essential.
2. Cost Analysis: A study of economic costs, combined with the data drawn from the firms
accounting records, can yield significant cost estimates that are useful for management decisions.
3. Production and Supply Analysis: Production analysis mainly deals with different production
function and their managerial uses. Supply analysis deals with various aspects of supply of a
commodity. Certain important aspects of supply analysis are: Supply schedule, curves and
function. Law of supply and its limitations, Elasticity of supply and Factors influencing supply.
4. Pricing Decisions, Policies and Practices: The important aspects dealt with under this area
are: Price Determination in various Market Forms, Pricing Methods, Differential Pricing,
Product-line Pricing and Price Forecasting.
5. Profit Management: Business firms are generally organized for the purpose of making profits
and, in the long run, profits provide the chief measure of success. In this connection, an
important point worth considering is the element of uncertainty existing about profits because of
variations in costs and revenues which, in turn, are caused by factors both internal and external to
the firm.
6. Capital Management: Capital management implies planning and control of capital
expenditure. The topics dealt with are: Cost of Capital, Rate of Return and Selection of projects.
5.Explain in detail relationship of managerial economics with other disciplines
1. Managerial Economics and Economics: Managerial Economics has been described as

economics applied to decision-making. It may be viewed as a special branch of economics

bridgingthe gulf between pure economic theory and managerial practice. Economics has two
main divisions:micro-economics and macro-economics. Micro-economics has been defined as
that branch where theunit of study is an individual or a firm. Macro-economics, on the other
hand, is aggregative incharacter and has the entire economy as a unity of study.
2. Managerial Economics and statistics: Managerial Economics employs statistical methods
forempirical testing of economic generalizations. These generalizations can be accepted in
practice olywhen they are checked against the data from the world of reality and are found valid.
3. Managerial Economics and Mathematics: Mathematics is yet another important tool-subject
closely related to Managerial Economics. This is because Managerial Economics is metrical in
character, estimating various economics relationships, predicting relevant economic quantities
andusing them in decision-making and forward planning.
4. Managerial Economics and Accounting: Managerial Economics is also closely related to
accounting which is concerned with recording the financial operations of a business firms.
Indeed,accounting information is one of the principal sources of data required by a managerial
economist forhis decision-making purpose.
5. Managerial Economics and Operations Research: The significant relationship between
managerial economics and operations research can be highlighted with reference to certain
importantproblems of managerial economics which are solved with the help of or techniques.
The problemsare: allocation problems, competitive problems, waiting line problems and
inventory problems.
6. Explain in detail about profit maximization
Profit maximization objective of the firm has been the traditional approach to the study of a firm
in equilibrium analysis. Profit maximization means the largest absolute amount of profits over a
time period, both short-term. And long term. The short run is a period where adjustments cannot

be made quickly in matters of supply and demand. Long run however enables adjustment to
changed conditions. Profit can be defined as the difference between total revenue (TR) and total
cost (TC).
Profit=TR-TC
CRITISIMS OF PROFIT-MAXIMISING THEORIES
1. Separation of Ownership from Control: The rise of corporate firm of organization has
resulted in a separation of ownership and control. Ownership is vested with the shareholders and
control is wielded by the managers. It has not been empirically proved that shareholders are
more concerned with profitability than anything else.
2. Difficulties in Pursuing Profit Maximization: The modern firm faces lot uncertainties. As a
result, short run profit maximizing behaviour is subordinated to the more important objective of
long-run survival of the firm, for example, the firms objective to pursue good-will in the longrun may clash with short-run profit objective.
3. Problems in the Measurement of Profit: There are some problems about the measurement
of profit as a measure of firms efficiency. Profit may be the result of imperfection in the market
and profits may be the reward of monopolistic exploitation. Worse still, profit measurement
process itself is dubious.
4. Social responsibility of the firm: he firm is now-a-days not just an economic entity
concerned with production or sales alone. The firm owes a responsibility to offer good, well paid
jobs for employees, to provide efficient services to customers. In short the firm has a social
responsibility beyond profit maximization.
5. Deliberate limitation of profits: Firms may deliberately show lesser profits in the short run in
order to discourage labourers from asking for higher wages or to discourage entry of new firms.
Limited profits may be shown to prevent the government from taking over the business.
6. Aversion for business expansion: Profit maximization requires business expansion and it

means additional risk and responsibility. Businessmen may be satisfied with the prevent level of
profit and may not expand.
7. Explain in detail about engineering economics and its applications
APPLICATIONS OF ENGINEERING ECONOMICS
1. Selection of location and site for a new plant-It is concerned with comparing the cost of
establishment and operation of various locations and sites.
2. Production Planning and Control.
3. Selection of equipment and their replacement analysis.
4. Selection of a material handling system.
5. Determination of plant capacity. It is associated with investment of funds such as initial outlay
and operating expenses which determines the capacity of a plant. The capacity is a measure of
ability to produce goods and services or rate of output.
6. Determination of wage structure of the workers.
7. Selection of choice between a concrete structure and a steel structure, between various
insulation thickness, and between prices at which to sell a product.
8. It can be applied by a major corporation to analyze plans for a new manufacturing facility or a
new research and development (R&D) thrust.