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

8/9/2019 Q.1 What is pricing policy? What are the internal and external factors of the policy?

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MANAGERIALECONOMICSBYZAMIR AHMAD

Q.1 What is pricing policy? What are the internal and external factors of the policy?Pricing Policies:Pricing Policies refer to the policy of setting the price of the product or prod

uct & 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. Itneeds 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 buyquality products at reasonable prices. Employees' efficiency can also reduce th

e 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 rolein the price decisions of the company because a global brand will usually charg

e premium prices. On the other hand, the external factors include government policies, competitors' prices, costs of raw materials, consumers expectations anddemand and supply of the product. Government sets the price floors to save the

interest of the borrowers and the sellers, therefore, government policies shouldbe also take into consideration. Expectations of the consumers or consumer rese

rvation 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.

Q.3 Mention the bases of price discrimination.Ans:PRICE DISCRIMINATIONThe 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 ata different price. Each buyer is made to pay the amount he is willing to pay ra

ther 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 willcharge separate price in such a way that the buyer is divided into different gr

oups 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 andthe demand condition of that sub-market. The seller practising price discrimina

tion 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 itsrevenue 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 werenot 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 t

ax 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 (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 tax2. Regressive tax3. Proportional taxProgressive 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 yourincome increases the contribution through tax decreases. Low income people willpay 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 ta



x 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 acommunity.Ans:Environmental DegradationFor 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 landrepresents the heritage of a nation. The environment damages in the developingcountries 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 metalin 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 gettingaffected 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 tothe 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. Deforestation- Forest is the most important source to protect environmen

t. 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 leadingto many serious problems for the human being.Q.6 Write short notes on the following:a) Philips curveAns: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 to1957. 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 = StagflationStagnation = Slow or no growth. Inflation = Rises in price.



Stagflation is an economic trend in which inflation and unemployment rise whilegeneral 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 toavoid stagflation through fiscal policy, by promoting even and healthy growth and attempting to prevent inflation. If stagflation continues long enough, it willtrigger 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 manycountries. When the economy is working normally, slow economic growth reduces demand, which keeps prices low, preventing inflation. Stagflation can only occurwhen fiscal or monetary policy sustains high prices, and inflation, despite slowgrowth. 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 actu

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