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Q-1 What is production function and its uses? Explain the two types ofproduction functions?Ans- A “production function” expresses the technological or engineeringrelationship between physical quantity of inputs employed and physical quantity of outputs obtained by a rm. It species a ow of output resulting from a ow of inputs during a specied period of time

U!"# $here are se%eral possible combinations of inputs and& decision ma'ers ha%eto choose the most appropriate among them. $he following are some of theimportant

uses of production function:(. It can be used to calculate or wor' out the least cost input combination for a gi%en

output or the maximum output#input combination for a gi%en cost.). It is useful in wor'ing out an optimal and economic combination of inputs for getting

a certain le%el of output.

TWO TYPE O! P"O#$%T&O' !$'%T&O'

(. Short run production function * In this case& the producer will 'eep all xedfactors as constant and change only a few %ariable factor inputs. In the short run&we come across two 'inds of production functions"

law of (aria)le proportions $his law is one of the most fundamental laws of production. It gi%es us some'ey insights in determination of the ideal combination of factor inputs. All factorinputs are not a%ailable in plenty. +ence& in order to expand the output& scarcefactors must be 'ept constant and %ariable factors are to be increased in greaterquantities. Additional units of a %ariable factor on the xed factors will certainly

mean a %ariation in output. $he law can be stated as follows" “As the quantity of only one factor input is

increased to a gi%en quantity of xed factors& beyond a particular point& themarginal& a%erage and total output e%entually decline”.

). Long run production function * In this case& the producer will %ary thequantities of all factor inputs& both xed as well as %ariable in the same proportion&for example& the laws of returns to scale.&so*uants and isocosts

$he prime concern of a rm is to use the cheapest factor combinations toproduce a gi%en quantity of output. $here are a large number of alternati%ecombinations of factor inputs which can produce a gi%en quantity of output for a

gi%en amount of in%estment de%eloped in recent years to show the equilibrium of aproducer with two %ariable factor inputs.

It is a parallel concept to the indi,erence cur%e in the theory of consumption.

"eturns to cale

+aws of returns to scale

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$he concept of returns to scale is a long run phenomenon. In this case& we studythe change in output when all factor inputs are changed or made a%ailable inrequired quantity. An increase in scale means that all factor inputs are increased inthe same proportion.

-#) %onsu,ers inter(iew ,ethod is a sur(ey ,ethod used for esti,atin.

the de,and for new products/ This ,ethod is (ery i,portant with re.ardto collect the rele(ant infor,ation directly fro, the consu,ers withre.ard to their future purchase plans/ Opinion sur(eysand direct inter(iew ,ethod are the two i,portant techni*ues a,on. all/#escri)e thesetwo ,ethods in detail?

Ans-0 %onsu,ers inter(iew ,ethodUnder this method& e,orts are made to collect the rele%ant information directly fromthe consumers with regard to their future purchase plans. In order to gatherinformation from consumers& a number of alternati%e techniques are de%elopedfrom time to time.

a2 ur(ey of )uyers intentions or preferencesIt is one of the oldest methods of demand forecasting. It is also called “pinion

sur%eys”.Under this method& consumer#buyers are requested to indicate their preferencesand willingness about particular products. $hey are as'ed to re%eal their futurepurchase plans with respect to specic items. $hey are expected to gi%e answers toquestions li'e what items they intend to buy& how much quantity& why& where&when& what quality they expect& how much money are they planning to spend& etc.

$he information so collected is consolidated and re%iewed by the top executi%eswith lot of experience.(. $he nature of the questions as'ed). $he ability of the sur%eyed/. $he representati%e of the samples0. 1ature of the product2. 3haracteristics of the mar'et

)2 #irect inter(iew ,ethod4irect and simple questions are as'ed to them. $hey are requested to answerspecically about their budget& expenditure plans& particular items to be selected&the quality and quantity of products& relati%e price preferences& etc. for a particularperiod of time.

i2 %o,plete enu,eration ,ethod: $he answers elicited are consolidated andcarefully studied to obtain the most probable demand for a product. $hemanagement can safely pro5ect the future demand for its products. $his method isfree from all types of pre5udices. $he result mainly depends on the nature of questions as'ed and answers recei%ed from the customers.

ii2 a,ple sur(ey ,ethod or the consu,er panel ,ethod: !xperience of theexperts show that it is impossible to approach all customers therefore& carefulsampling of representati%e customers is essential. +ence& another %ariant of

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complete enumeration method has been de%eloped& which is popularly 'nown assample sur%ey method under this method& di,erent cross sections of customers thatma'e up the bul' of the mar'et are carefully chosen. nly such consumers& who areselected from the rele%ant mar'et through some sampling method& are inter%iewedor sur%eyed. In other words& a group of consumers are chosen and queried abouttheir preferences in concrete situations.

Question 3-a cost schedule is a statement of variations in cost resulting fron variationsin the levels of output and it shows the response of costs to change in output. If werepresent the relationship between changes in the level of output and cost production,we get different types of cost curves in the shortrun. Define the kinds of cost conceptslike T!,T"!,T!,#!,#"!,#!,and $! and its corresponding curves with suitable curveswith suitable diagram for each%

#nswer-T!refers to total money expenses incurred on fixed inputs like plant, machinery, tools andequipments in the short run. Total fixed cost corresponds to the fixed inputs in the short run

production function. TFC remains the same at all levels of output in the short run. It is the sameeven when output is nil. It indicates that whatever may be the quantity of output, whether 1 to units, TFC remains constant. The TFC curve is hori!ontal and parallel to "#$axis, showin% thatit is constant re%ardless of output per unit of time.i

Total "ariable !ost &T"!'T&C refers to total money expenses incurred on the variable factor inputs like raw materials,power, fuel, water, transport and communication, etc, in the short run. Total variable costcorresponds to variable inputs in the short run production function. It is obtained by summin% upthe quantities of variable inputs multiplied by their prices. The formula to calculate T&C is asfollows. T&C ' TC $ TFC. T&C ' f ()*, i.e., T&C is an increasin% function of output. In otherwords T&C varies with output. It is nil, if there is no production. Thus, it is a direct cost of output.

Fi%ure .+ depicts the total variable cost curve. T&C rises sharply in the be%innin%, %radually inthe middle and sharply at the end in accordance with the law of variable proportions. The law ofvariable proportions explains that in the initial sta%es, to obtain a %iven quantity of output, therelative chan%e (variation* in variable factors that are needed are in lower proportion, but after apoint when the diminishin% returns operate, variable factors are to be employed in a lar%erproportion to increase the same level of output.

Total cost &T!'Total cost refers to the a%%re%ate money expenditure incurred by a firm to produce a %ivenquantity of output. The total cost is measured in relation to the production function by multiplyin%the factor quantities with their prices. TC ' f ()* which means that TC varies with output.Theoretically speakin%, TC includes all kinds of money costs, both explicit and implicit cost.

ormal profit is included in the total cost as it is an implicit cost. It includes fixed as well asvariable costs. -ence, TC ' TFC T&C.

#verage fi(ed cost &#!' /vera%e fixed cost is the fixed cost per unit of output. 0hen TFC is divided by total units ofoutput, /FC is obtained, Thus, /FC ' TFC)

/FC and output have inverse relationship. It is hi%her at smaller levels and lower at hi%herlevels of output in a %iven plant. The reason is simple to understand. 2ince /FC ' TFC), it is apure mathematical result that the numerator remainin% unchan%ed, the increasin% denominator

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causes diminishin% cost. -ence, with the increase in output, TFC spreads over each unit ofoutput. Consequently, /FC diminishes continuously. This relationship between output and fixedcost is universal for all types of business concerns.The /FC curve has a ne%ative slope. The curve slopes downwards throu%hout the len%th. The

/FC curve %oes very nearer to # axis, but never touches the #$axis. 3raphically, it will fallsteeply in the be%innin%, %ently in middle and tend to become parallel to "#$axis.

4athematically speakin%, as output increases, /FC diminishes. 5ut /FC will never become !erobecause the TFC is a positive amount. /FC will never fall below a minimum amount because inthe short run, plant capacity is fixed and output cannot be expanded to an unlimited extent.#verage variable cost &#"!'The avera%e variable cost is variable cost per unit of output. /&C can be computed by dividin%the T&C by total units of output. Thus, /&C ' T&C). The /&C will come down in the be%innin%and then rise as more units of output are produced with a %iven plant. This is because, as weadd more units of variable factors in a fixed plant, the efficiency of the inputs first increases andthen decreases.

Decreasing phase 6 In the first phase from / to 5, /&C declines. /s the output expands, the /&C declines because when we add more quantity of variable factors to a %iven quantity

of fixed factors, output increases more efficiently and more than proportionately due tothe operation of increasin% returns.

Constant phase 6 In the II phase, i.e. at 5, /&C reaches its minimum point. 0hen the proportionof both fixed and variable factors are ideal, the output will be optimal. /fter the firm operates atits normal full capacity, output reaches its !enith and as such /&C will reach its minimum point.Increasing phase – In the III phase, from 5 to C, /&C rises. /fter the normal capacity is crossed,the /&C rises sharply. This is because additional units of variable factors will not result in morethan proportionate output. -ence, %reater output may be obtained but at much %reater /&C. It isclear that as lon% as increasin% returns operate, /&C falls and when diminishin% returns set in,

/&C tends to increase.#verage total cost &#T!' or average cost &#!'

/C refers to cost per unit of output. /C is also known as the unit cost since it is the cost per unit

of output produced. /C is the sum of /FC and /&C. /vera%e total cost or avera%e cost isobtained by dividin% the total cost by total output produced. /C ' TC). /lso, /C is the sum of

/FC and /&C.In the short run, /C curve also tends to be 7$shaped. The combined influence of /FC and /&Ccurves will shape the nature of /C curve

/s we observe, avera%e fixed cost be%ins to fall with an increase in output while avera%evariable cost declines and subsequently rises. /s lon% as the fallin% effect of /FC is much morethan the risin% effect of /&C, the /C tends to fall. /t this sta%e, increasin% returns andeconomies of scale operate and complete utilisation of resources forces the /C to fall.0hen the firm produces the optimum output, /C drops to its minimum. This is called as least6cost output level. /%ain, at the point where the rise in /&C exactly counterbalances the fall in

/FC, the balancin% effect causes /C to remain constant.In the third sta%e, when the rise in avera%e variable cost is more than drop in /FC, then the /Cshows a rise, 0hen output is expanded beyond the optimum level of output, diminishin% returnsset in and diseconomies of scale starts operatin%. /t this sta%e, the indivisible factors are usedin sub$optimal proportions. Thus, /C starts risin% in the third sta%e.$arginal cost &$!'4ar%inal Cost may be defined as the net addition to the total cost as one more unit of output isproduced. In other words, it implies additional cost incurred to produce an additional unit. Forexample, if it costs 8s. 199 to produce :9 units of a commodity and 8s. 19: to produce :1 units,

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then 4C would be 8s. :. It is obtained by calculatin% the chan%e in total costs as a result of achan%e in the total output. /lso, 4C is the rate at which total cost chan%es with output. -ence,4C ' TC T). 0here, TC stands for chan%e in total cost and T) stands for chan%e

in total output. /lso 4Cn ' TCn 6TC n$1

It is necessary to note that 4C is independent of TFC and it is directly related to T&C as wecalculate the cost of producin% only one unit. In the short run, the 4C curve also tends to be 7$

shaped.

Question )-inflation is the global phenomenon which is associated with high price causes declinein the value of money. It e(ist when the amount of money in the country is in e(cess of thephysical volume of goods and services. *(plain the reason for this monetary phenomenon%

#nswer $Inflation has become a %lobal phenomenon in recent years. ;evelopment economics isvery much associated with inflation. /n in$depth study of inflation is of paramount importance toa student of mana%erial economics. The term inflation is used in many senses and hence it isvery difficult to %ive a %enerally accepted, universally a%reeable, and precise definition to theterm inflation. <opularly, inflation is associated with hi%h prices, which causes a decline in thevalue of money.

Inflation is commonly understood as a situation of substantial and rapid increase in the level ofprices and consequent deterioration in the value of money over a period of time. It refers to theavera%e rise in the %eneral level of prices and fall in the value of money. Inflation is an upwardmovement in the avera%e level of prices. The opposite of inflation is deflation, a downwardmovement in the avera%e level of prices. The common feature of inflation is rise in prices andthe de%ree of inflation may be measured by price indices.Inflation is statistically measured in terms of percenta%e increase in the price index, as a rate(percent* per unit of time$ usually a year or a month. The trend of price indices reveals thecourse of inflation in the economy. 7sually, the 0holesale <rice Index (0<I* numbers are usedto measure inflation. /lternatively, the Consumer <rice Index (C<I* or the cost of livin% index canbe adopted to measure the rate of inflation. In order to measure the percenta%e rate of inflation,the followin% formula can be used.services inevitably results in price rise. Inflation exists when

the amount of money in the country is in excess of the physical volume of %oods and services. Itis a situation where too much of money chases too few %oods. 4oney supply and risin% pricelevel are both causes and effects by themselves.Inflation is that state of disequilibrium in which an expansion of purchasin% power tends tocause or is the effect of an increase of the price level. 2ome economists state that inflation isalways and everywhere a monetary phenomenon. The classical economists advocated quantitytheory of money and they analysed the causes of inflation in terms of money. This approachfailed to explain the causes of hyperinflation, which appeared in 3ermany after the First 0orld0ar. Increase in a%%re%ative effective demand is responsible for inflation. In this case,a%%re%ate demand exceeds a%%re%ate supply of %oods and services. 4ana%erial

;emand rises much faster than supply. 0e can enumerate the followin% reasons for increase ineffective demand.

Increase in money supply 6 2upply of money in circulation increases on account of the followin%reasons= deficit financin% by the %overnment, expansion in public expenditure, expansion inbank credit and repayment of past debt by the %overnment to the people, increase in le%altender money and public borrowin%.Increase in disposable income 6 /%%re%ate effective demand rises when disposable income ofthe people increases. ;isposable income rises on account of the followin% reasons= reduction inthe rates of taxes, increase in national income while tax level remains constant, and decline inthe level of savin%s.

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Increase in private consumption expenditure and investment expenditure 6 /n increase inprivate expenditure both on consumption and on investment leads to emer%ence of excessdemand in an economy. 0hen business is prosperous, business expectations are optimistic andprices are risin%. 4ore investments are made by private entrepreneurs causin% an increase infactor prices. 0hen the income of the factors rise, there is more expenditure on consumer%oods.

Increase in exports 6 /n increase in the forei%n demand for a country>s exports reduces thestock of %oods available for home consumption. This creates shorta%es in the country leadin% toa rise in price level.Existence of black money 6 The existence of black money in a country due to corruption, taxevasion, black$marketin%, etc. increases the a%%re%ate demand. <eople spend suchunaccounted money extrava%antly and create unnecessary demand for %oods and servicesthus causin% inflation.Increase in foreign exchange reserves 6 This may increase on the account of inflow of forei%nmoney into the country. Forei%n direct investment may increase and non$resident deposits mayalso increase due to the policy of the %overnment.Increase in population growth 6 This creates an increase in demand for many types of %oodsand services in a country.

High rates 6 -i%her rates of indirect taxes would lead to a rise in prices.Reduction in the rates of direct taxes – This would leave more cash in the hands of peopleinducin% them to buy more %oods and services leadin% to an increase in prices.Reduction in the level of savings – This creates more demand for %oods and services.2upply side3enerally, the supply of %oods and services do not keep pace with the ever$increasin% demandfor %oods and services. Thus, supply does not match the demand. 2upply falls short of demand.Increase in supply of %oods and services may be limited because of the followin% reasons.hortage in the supply of factors of production 6 0hen there is shorta%e in the supply of factorsof production like raw materials, labour, capital equipments, etc. there will be a rise in theirprices. Thus, when supply falls short of demand, a situation of excess demand emer%escreatin% inflationary pressures in an economy.

!peration of law of diminishing returns 6 0hen the law of diminishin% returns operates, increasein production is possible only at a hi%her cost which demotivates the producers to invest in lar%eamounts. Thus, production will not increase proportionately to meet the increase in demand.-ence, supply falls short of demand.Hoardings by traders and speculators 6 ;urin% the period of shorta%e and rise in prices,hoardin%s of essential commodities by traders and speculators with the ob?ective of earnin%extra profits in the future creates an artificial scarcity of commodities. This creates a situation ofexcess demand pavin% the way for further inflation.Hoardings by consumers 6 Consumers may also hoard essential %oods to avoid payment ofhi%her prices in the future. This leads to an increase in the current demand, which in turnstimulates prices.Role of trade unions 6 Trade union activities leadin% to industrial unrest in the form of strikes

and lockouts also reduce production. This will lead to creation of excess demand that eventuallybrin%s a rise in the price level.Role of natural calamities – atural calamities such as earthquake, floods, and drou%htconditions also affect the supplies of a%riculturalproducts adversely. They also create shorta%e of food %rains and raw materials, which in turncreates inflationary conditions."ar 6 ;urin% the period of war, shorta%e of essential %oods creates a rise in prices.International factors – These factors would cause either shorta%e of %oods and services or risein the prices of factor inputs leadin% to inflation. @.%., hi%her prices of imports.

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Increase in prices of inputs within the country 8ole of expectations@xpectations also play a si%nificant role in accentuatin% inflation. The followin% points are worthmentionin%=If people expect further rise in price, the current a%%re%ate demand increases, which in turncauses a rise in the prices.

@xpectations about hi%her wa%es and salaries affect the prices of related %oods.@xpectations of wa%e increase often induce some business houses to increase prices evenbefore upward wa%e revisions are actually made.

Question +-discuss the practical application of price elasticity and income elasticity%#nswer ractical application of price elasticity of demand

Production planning 6 It helps a producer to decide about the volume of production. If thedemand for his products is inelastic, specific quantities can be produced while he has toproduce different quantities, if the demand is elastic.Helps in fixing the prices of different goods 6 It helps a producer to fix the price of his product. If

the demand for his product is inelastic, he can fix a hi%her price and if the demand is elastic, hehas to char%e a lower price. Thus, price$increase policy is to be followed if the demand isinelastic in the market and price$decrease policy is to be followed if the demand is elastic..Helps in fixing the rewards for factor inputs Factor rewards refer to the price paid for theirservices in the production process. It helps the producer to determine the rewards for factors ofproduction. If the demand for any factor unit is inelastic, the producer has to pay hi%her rewardfor it and vice$versa.Helps in determining the foreign exchange rates – @xchan%e rate refers to the rate at whichcurrency of one country is converted in to the currency of another country. It helps in thedetermination of the rate of exchan%e between the currencies of two different nations. For e.%. if the demand for 72 dollar to an Indian rupee is inelastic, in that case, an Indian has to pay moreIndian currency to %et one unit of 72 dollar and vice$versa.

Helps in determining the terms of trade t is the basis for decidin% the Aterms of trade>between two nations. The terms of trade implies the rate at which the domestic %oods areexchan%ed for forei%n %oods. For e.%. if the demand for Bapan>s products in India is inelastic, wehave to pay more in terms of our commodities to %et one unit of a commodity from Bapan andvice$versa.Helps in fixing the rate of taxes 6 Taxes refer to the compulsory payment made by a citi!en tothe %overnment periodically without expectin% any direct return benefit from it. It helps theFinance 4inister to formulate sound taxation policy of the country. -e can impose more taxeson those %oods for which the demand is inelastic and lower taxes if the demand is elastic in themarket.Helps in declaration of public utilities 6 <ublic utilities are those institutions which provide certainessential %oods to the %eneral public at economical prices. The %overnment may declare a

particular industry as Apublic utility> or nationalise it, if the demand for its products is inelastic.Poverty in the midst of plenty The concept explains the paradox of poverty in the midst ofplenty. / bumper crop of rice or wheat, instead of brin%in% prosperity to farmers, may actuallybrin% poverty to them because the demand for rice and wheat is inelastic.

ractical application of income elasticity of demand/elps in determining the rate of growth of the firm – If the %rowth rate of the economy andincome %rowth of the people is reasonably forecasted, in that case, it is possible to predictexpected increase in the sales of a firm and vice$versa.

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Helps in the demand forecasting of a firm – It can be used in estimatin% future demand providedthat the rate of increase in income and the @y for the products are known. Thus, it helps indemand forecastin% activities of a firm./elps in production planning and marketing – The knowled%e of @y is essential forproduction plannin%, formulatin% marketin% strate%y, decidin% advertisin% expenditure andnature of distribution channel, etc. in the lon% run.

Helps in ensuring stability in production – <roper estimation of different de%rees of incomeelasticity of demand for different types of products helps in avoidin% over$production or underproduction of a firm. "ne should also know whether rise or fall in income is permanent ortemporary.Helps in estimating construction of houses – The rate of %rowth in incomes of the people alsohelps housin% pro%rammes in a country. Thus, it helps a lot in mana%erial decisions of a firm

.Question 0-discuss the scope of managerial economics%

#nswer $ 4ana%erial economics is a science that deals with the application of variouseconomic theories, principles, concepts and techniques to business mana%ement in order tosolve business and mana%ement problems. It deals with the practical application of economic

theory and methodolo%y in decision$makin% problems faced by private, public and non$profitmakin% or%anisations.The same idea has been expressed by2pencer and 2ie%elman, in the followin% words= 4ana%erial economics is the inte%ration ofeconomic theory with business practice for the purpose of facilitatin% decision makin% andforward plannin% by the mana%ementD1. 4c air and 4eriam say, 4ana%erial economics is the use of economic modes of thou%ht toanalyse business situationD+

1cope of $anagerial *conomicsIn this section we will discuss the scope of mana%erial economics. The scope helps inunderstandin% the sub?ect, area of the study, boundaries and width of the sub?ect. 5usinesseconomics is comparatively a new and 4ana%erial @conomics

upcomin% sub?ect. Consequently, there is no unanimity amon% different economists with respectto the exact scope of business economics. -owever, the followin% topics are explained in thissub?ect="b?ectives of a firm;emand analysis and Forecastin%<roduction and Cost /nalysis<ricin% ;ecisions, <olicies and <ractices<rofit 4ana%ementCapital 4ana%ementEinear <ro%rammin% and the Theory of 3ames4arket 2tructure and Conditions

2bectives of a firm-istorically, profit maximisation has been considered as the main ob?ective of a business unit.

/ll business or%anisations have multiple ob?ectives which are multidimensional out of whichsome are supplementary and some are competitive. Few others are inter$connected and fewothers are opposin%. There are various %oals like social, economic, or%anisational, human, andnational.Demand analysis and forecasting4ostly, a firm is a producin% unit. It produces different kinds of %oods and services. It has tomeet the requirements of consumers in the market. The basic problems like= what to produce

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where to produce for whom to produce how to produce how much to produce and how todistribute them in the market, are to be answered by a firm

roduction and cost analysis<roduction means conversion of inputs into the final output. It may be either in physical or inmonetary terms. <hysical production deals with the production of outputs by a firm, byemployin% different factor inputs in proper proportions. /lways, the most basic %oal of any firm is

to increase the output. <roduction analysis deals with production function, laws of returns,returns to scale, economies of scale, etc..ricing decisions, policies and practices<ricin% decisions means to fix the prices for all the %oods and services of any firm. This is basedon the pricin% policy and practices of that particular firm. /mon%st all the policies the mostimportant policy of any firm would be the price settin% policy. The pricin% decision depends onthe revenue (amount*, income (level* and profits (volume* earned by a firm.rofit management5asically, a firm can be a commercial or a business unit. Consequently, its success or failure ismeasured in terms of the amount of profit it is able to earn in a competitive market. Themana%ement %ives top most priority to this aspect. There are many theories in profitmana%ement, like emer%ence of profit, functions of profit and its measurement, profit policies,

techniques, profit plannin%, profit forecastin% and break even point.!apital managementThis is one of the essential areas of business unit. The success of any business is based onproper mana%ement and adequate capital investment. 5usiness mana%ers, as part of cost$benefit analysis, have to study the cost of employin% capital and the rate of return expected fromeach and every 4ana%erial @conomics

pro?ect. 7nder capital mana%ement, mana%ers should assess capital requirement, methods ofcapital mobilisation, capital bud%etin%, optimal allocation of capital, selection of hi%hly profitablepro?ects, cost of capital, return on capital, plannin% and control of capital expenditure, etc.4inear programming and theory of gamesThe term linear means that the relationships handled can be represented by strai%ht lines andthe term pro%rammin% implies systematic plannin% or decision$makin%. It implies maximisation

or minimisation of a linear function of variables sub?ect to a constraint of linear inequalities. Itoffers actual numerical solution to the problems of makin% optimum choices. It involves eithermaximisation of profits or minimisation of costs..$arket structure and conditionsThe information on market structure and conditions of various markets is the most importantpart of the business. The nature, extent and de%ree of competition, number of sellers andbuyers, etc. determine the nature of policies to be adopted by a firm in the market.

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