TRAINER MANUAL

Managerial Economics

Prepared by:

Ms. Geethanjali sharma

New Horizon Leadership Institute
Bangalore
Managerial Economics:-

I. Course Objective:
Economics is a social science. “Economics is a Study of mankind in the ordinary business of
life” So writer Alfred Marshall, the great 19th century economist modern business Problems
are so complex that decision makers personal experience intuition, insight, foresight alone
are no longer adequate to provide an appropriate solution to complex business problems. It is
here that the subject managerial Economics or applied economics assumes great importance
for the future managers. It will help student , managers to Understand the economic
environment in which we live and work, what is good about it and what’s not so good, how
the policy makers are trying to make it better some times successfully, sometime not.

In developing an economic approach to executive decision, this subject draws upon

economic analysis for the concepts of demand, cost, and profit competition and so on, that
are appropriate for the Managerial decision. X2

The course of Managerial economics have been framed in such a way that it will help
in understanding many of the most pressing issues facing the world today- free market versus
government intervention, resources exhaustion, pollution and environmental degradation,
government taxes and spending employment and unemployment, inflation, changing living
standards in advanced nations, growth and stagnation among many of the world’s poorest
nation. In addition, with increased globalization, the interdependencies among the economies
have become very glaring. This has increased the importance of assessing the impact of
domestic policy changes after taking into account these external influences

Thus, this subject will provide the students with a toolbox that will prove useful in the
world of work.
II. Learning action:
This course would enable the students to-

Understand the basic concept in Micro, Macro and Managerial economics.

Visualize the linkages and interdependencies among the various segments within the
domestic economy as well as impact on the domestic economy policy changes in the
international economy.

III.Course Methodology/ Pedagogy:

The method of teaching would be through case studies, lectures and group discussions.
Key Learning Areas:-

Key learning Areas of Managerial Economics:

Managerial Economics provides students with an understanding of basic economic principles
of production and exchange- essential tools in making business decision in today’s global
economy.

The subject presents the foundation to understanding how the economy works,
covering microeconomic descriptions of business applications, including pricing for profit
maximization, price elasticity, market structures and modeling of business in varying
economic climates. The focus is on market economies, the organizations that operate in them
and their business strategies.

Learning objective:
At the end of the course students would be all to-

• Formulate business policies based on fundamental understanding of supply and

demand conditions.
• Identify economic trends and business currents that affect individual firms and the
wider industry.
• Apply basic economic reasoning to other related topics such as marketing finance and
organization in business studies.
Pattern of Internal Assessment:-

Guidelines for internal assessment:

Internal assessment would comprises of the following segments-

1. Quizzes- Quizzes would be taken after the completion of few chapters to test the
understanding of the concepts by the students. Objective type quizzes would also
prepare the students for the multiple type questions, thereby preparing them for the
examination.

2. Assignment-Topics for them would be prior given to the students during the course
tenure. Four assignments would have to be completed. These topics should be
comprehensively written covering all the possible aspects of it.

3. Seminar presentation-Would be given to the students to test their

communicative ability, together with the knowledge of the subject.
 Detailed Contents

I. Chapter 1.
INTRODUCTION TO ECONOMICS
Economic issues and concepts
Definitions
Introduction to Managerial Concepts
Nature and Scope
Concept of Economic Analysis

II. Chapter2.
DEMAND AND SUPPLY ANALYSIS
1.1 Demand, Law of Demand and Demand Forecasting
1.2 Managerial Utility Analysis
1.3 Supply, Law of supply
1.4 Equilibrium and Determination of Price
1.5 Indifference Curve Analysis
1.6 Elasticity of Demand and supply
1.7 Demand and Revenue Curves
-Relationship between AR and MR
1.8 Concept of Consumer Surplus, Produce Surplus

III. Chapter3.
PRODUCTION AND COST ANALYSIS
1.1 Law of variable production
1.2 Law of Returns to scale
1.3 ISO- quant Curves
1.4 Cost structure of Firms –Long run and Short run
 1.5 Break Even Point
1.6 Economics and Diseconomies of scale

IV. Chapter 4.
PROFIT ANALYSIS
1.1 Profit Theories – Accounting and Economic profit
1.2 Profit Planning and Forecasting
1.3 Profit Maximization
1.4 CVP Relation and Break-even Analyses

V. Chapter 5.
MARKETS AND COMPETITION
1.1 Classification of Markets
Characteristics, Perfect, Monopolistic, Oligopoly,
1.2 Price and Output determination in each market-Equilibrium conditions
1.3 Control and Regulation of Monopoly
1.4 Oligopoly Pricing –Price Leadership Concept of Cartels
Role of Advertising

VI. Chapter 6.
PRICING
1.1 Objectives of Pricing Policy, Pricing Methods
1.2 Role of Costs and demand factor in pricing
1.3 Pricing and Product life Cycles

VII. Chapter 7.

INTRODUCTION TO MACRO ECONOMICS

1.1 Micro-Macro Economics, Macro Economic Issues
1.2 Concept of National Income, its measurement
GDP, GNI, GNP.
 The circular flow of income, output and spending.

1.3 Inflation – Concept and its types

Control of inflation- Monetary and Fiscal Policy
1.4 Business Cycles –phases
Economic Stabilizations policies
1.5 Structure of Indian Economy-Issues of Development, Privatization and Economic
Reforms.
1.6 Balance of Payment –Concept –Disequilibrium in BOP- Causes and kinds of Balance of
Payment Adjustment.
1.7 Consumer Price Index- its calculation Logic of purchasing power parity-Implications
1.8 Globalization of Indian Business.
 READINGS

DEAN JOEL : Managerial Economics

KOUSTOYIANNIS : Modern Micro Economics
D N DWIVEDI : Managerial Economics
LIPSEY& CHRYSTAL : Economics
KPM. SUNDHARAM : Business Economics
E.N SUNDHARAM : Business Economics
V L MOTE : Managerial Economics Concept and Cases
SAMUEL PAUL : Managerial Economics Concept and Cases
G S GUPTA : Managerial Economics Concept and Cases
N.GREGORY MANKIN : Principles of Macro economics
JOEL DEAN : Managerial Economics
RUDDAR DAT, : Indian Economy
KPM SUNDHARAM : Indian Economy
Assignment Topics- Topics for assignment are general in nature which would require the
students to study current situations, thereby giving practical solutions.
 Bring out the application of basic Economic theory to the practical problem of
business firm.
 Forecasting the demand for a new product posses special problems. How is it Possible
to overcome them? enumerate with examples
 Give real life examples of the role of Advertising on demand.
 Describe the various phases of business cycle.
Discuss the steps a businessman may take to safeguard himself against the evil effects
of a business cycle
 What are the first generation and second generation reforms undertaken in Indian
economy.
 Bring out the impact of inflation on various sectors of the economy.

Topics for Seminar Presentation

These topics are based on current issues pertaining exclusively to Indian economy. It would
enable the student to connect the managerial concepts with the current events.

 Stock market and its effect on Economic activity

 United states and the Indian economy –A discussion on the current events
 Impact of Monetary policy on Indian economy.
 Emergence of Multi-National in Indian economy
 Role of Advertising on Demand of the product
 Role of GATT and WTO
 Problems in Demand Analysis
Elasticity
Break –Even Point Analysis
 Calculation the demand schedule for prices of Rs 10, Rs 9, etc. when the demand
function is D = 80 – 4P

 A well- known Mumbai- based firm manufacturing men ties found that the daily demand
for its ties is given by the equation
D = 400-4P
a) How many ties per day can the firm sell at a price of Rs 50, and
b) What price should it charge, if it wants to sell 300 ties a day?
 From the following demand data, calculate the demand equation:
Unit price (Rs) 5432
Quantity Demand (units) 70 80 90 100
 the linear demand function for a product is
D = 120 – 10p
(a) Calculate price elasticity of demand for prices of Rs 10, Rs 8, Rs 6, Rs 4, and Rs 2, per
unit.
(b) Is the demand at these prices elastic or inelastic?
 Calculation the difference between the ruling price P, (Rs 10 or Rs 8 etc) and the price at
which D is zero (Rs 12 in over example) we will have P1-p.
(a) Divide the ruling price (Rs 10 or Rs 8 etc) by the difference and find out the price
elasticity of demand.
 The project and loss data of company for a particular year are given as follows:
Net Sales Rs
Cost of goods sold 1, 00 000
Variable cost 40,000
Fixed cost 10,000
Gross profit 50,000
Selling costs:
Variable cost 10,000
Fixed cost 5,000
Net profit 35,000

(a) Compute the break –even point.

(b) Forecast the profit for the sale volume
(c) Rs 1,60,000 and Rs 70,000
(d) What would be sales volume to earn a net profit of Rs 55,000

 A firm has purchased a plant its manufacturing a new product cost data for the plant is
given below:
Estimated annual sales: 24,000 units
Estimated costs:

Material Rs 4.00 per unit

Direct labour Rs 0.60 per unit
Overhead Rs 24,000 per unit
Administrative Expenses Rs 28,000 per unit
Selling cost of sales Rs 1,590 per unit
(a) calculate the selling price if profit per unit is Rs 1.02 and
(b) find out the break-even point in terms of out put

 From the following data find out BEP

Selling price Rs 50
Cost price Rs 40
Fixed price Rs 5,000
 Model Paper
Instructions:

1. This paper is divided into four sections each section should be attempted
2. Section A - consist of objective-type questions each should be attempted. It
carries 20 marks.
3. Section B - consist of 6 questions out of which 4 should be compulsorarily written
in about 50 words. 4 ×5=20
4. Section C - is a short –essay type which should be written in about 100 words.
Here again 4 should be answered out of 6 4×10=40
5. Section D – it is a case study which has to be analyzed and answered thoughtfully
in full description 20 marks
Section A

Multiple choice questions:

1. The demand curve is downward sloping because of the :
(a) Law of Diminishing Marginal Returns
(b) Law of Increasing Marginal Returns
(c) Law of Diminishing Marginal Utility
(d) Law of Increasing Marginal Utility

2. For an elastic demand curve ( and assume that the supply curve is upward sloping ),
when income of consumers increase, equilibrium price of a good is likely to:
(a) Decrease
(b) Increase
(c) Stay the same
(d) None of the above
 3. For an inelastic demand curve, when income of consumers decrease, equilibrium
priced of a good is likely to:
(a) Decrease
(b) Increase
(c) Stay the same
(d) None of the above

4. If you assume that the demand curve for garments is very elastic, then a price discount
offered by garment – manufacturers is likely to:
(a) Decrease the total revenue they earn
(b) Not change the total revenue they earn
(c) Cannot say what will happen to total revenue
(d) Likely to increase the total revenue they earn
.
5. Consumer surplus is the difference between;
(a) How much consumers think of paying and want to pay.
(b) How much consumers want to pay and think of paying.
(c) How much consumers are willing to pay and actually pay
(d) How much they should pay in different countries.

6. Suppose consumer income increase so that the demand curve shifts outward, then.
(a) Both equilibrium price and quantity are likely to increase
(b) Equilibrium price will increase but quantity will decrease
(c) Equilibrium price will decrease but quantity will increase
(d) Both equilibrium price and quantity are decrease

7. In the long-run, the average cost curve is U- shaped because of:

(a) Economics of scale
(b) Diminishing marginal returns
(c) Factors of production held fixed
(d) None of the above
8. For a perfectly competitive firm, long-run equilibrium will occur where:
(a) A C are minimized
(b) M C are minimized
(c) M C are minimized
(d) Demand is maximized

9. A monopolist can:
(a) charge as high a price as it wishes
(b) Choose quantity but is constrained by the demand curve to fix price.
(c) Always faces a horizontal demand curve
(d) Can neither fix price or quantity?

10. In the long-run perfectly competitive firm:

(a) Earn only a normal profit.
(b) Minimize costs
(c) Both (a)and (b)
(d) Neither (a)nor(b)

11. Man has unlimited wants but the resources to satisfy them are limited.
12. Profit maximization is the only motive of capitalist economy.
13. Indifference curves always interested each other.
14. The law of Diminishing Marginal Utility applies in case of money.
15. Firms are price-makers in perfect competition
16. M R curve is always above the A R curve
17. B E P is that volume of sales when total revenue of firm exceeds total cost.
18. Inflation in any given country can be controlled only by fiscal measures.
19. In the second stage of production M P curve is below the Average Product Curve.
20. Opportunity cost is also known as Transfer-cost
 Section B
1. What is managerial economics? How does it different from traditional economics.
2. Explain the nature of problems studied in managerial economics.
3. State and explain law of demand
4. Explain the price elasticity of demand.
5. What are the main features of pure competition?
6. What are the two factors which lead to inflation in any given country?

Section C

1. Explain the concept of the break-even point with the help of profit-volume graph.
2. What is a production function? Show how a production function can be plotted in and
isoquant diagram.
3. Explain the cost-Volume profit relations.
4. Distinguish between perfect, Monopoly and Monopolistic competitions
5. Difference between penetration pricing and skimming pricing.
6. Calculate price elasticity of demand of:
Q = 4,000 P1= Rs 20
Q2= 5,000 P2= Rs 19

Section- D
Case study:
Textile Demand in India-
Shri Siddhartha Roy, an Economist, Hindustan lever Ltd, has estimated that if there is
one percent increase in the prices of textiles, the demand for it would come down by 1.4
percent similarly if the food prices go up by one percent the demand for textile would decline
by 0.98% Finally if there is one percent increase in the share of agriculture in the national
income, then the demand for textile would go up by 0.3 % price elasticity is an area where
active intervention by the mills can contribute to the expansion of demand.
The margins in textile business as shown by N CAER and Anubhai and Bijapurkar study
vary from 28 percent to 48 percent ( this includes margins of manufacturer, wholesaler, semi
wholesaler and retailer). If the Distribution system could be rationalized so as to bring down
the final price of cloth, then by exploiting price elasticity alone, demand can go up.

Questions:
1. Identify the various types of demand elasticities relevant to textile demand in India.
2. Clearly define these elasticities and state formula
3. What role has been visualized for price elasticity of demand for textile in India?
 New Horizon Leadership Institute
PGDM- Post Graduate Diploma in Management
Course Title: Managerial Economics
Session : 35 Hrs.
Faculty : Geetanjali Sharma

Session
Topic Pedagogical Tools Remarks
No
1. Introduction to Micro Slides This session would be an
Managerial Economics- introductory class for students
Definitions, Applications. who would understand what
economics is all about – its uses
and applications in day-to-day
life.
2. Nature and Scope of Slides/blackboard This session would highlight the
Managerial Economics application to managerial
economic to future managers
3. Demand Analysis-Case study Slides/blackboard Case study on demand would
enable student to know what
market demand is and what are
the factors governing them.
4 Supply Analysis Determination Slides/Blackboard
of Equilibrium price and output
5 Indifference Curve Analysis of Student will be able to understand
Demand the nature of consumers through
this concept.
6 Quiz on demand and supply
concept

7 Elasticity of Demand and Slides/Blackboard Effect of changes on demand and

Supply supply of consumers and
producers is the core idea of the
concept of elasticity
8 Problem on Elasticity of
demand and supply.
9 Concept of consumer surplus, Slides/Blackboard
producer surplus, AR&MR
Curves
10 Law of variable Proportion Slides This is an important concept to
Returns to Scale the production function of and
firm.
11 Isoquant Curves,Cost structure Slides Behavior of the real world firm its
of firms role in determining the output is
would be well discussed in this
topic
12 Break-Even Analyses Slides This analysis is an important
Problems analytical technique used to study
relationship between lost, revenue
and profits
13 Quiz on Production Function

14 Profit Analysis-Theories Slides

15 Profit Forecasting and CVP Blackboard

Relation
16 Classification of Markets Slides What are the different kinds of
markets system in and economy is
the objective of this chapter. How
do they operali? features etc are
all encompassed in this topic
17 Quiz on Market condition

18 Pricing policy-Product life It is important for the managerial

Cycle-case study student to understand the variety
of pricing rules and methods
adopted by business firms in
complex business scenario
19 Seminar Presentation: Role of
Advertising on Demand
20 Link between Micro and Clippings from A study of another branch of
Macro current Macro Newspapers economics i.e. macro Economics
Economic issues facing Indian is important to understand the
economy workers of the whole economy.
21 Link between Micro and Slides/OHP
Macro current Macro
Economic issues facing Indian
economy
22 Inflation Vs Deflation- Group For an manager it is important to
Discussion know the details of inflation and
how is it affecting our economy,
beyond The knowledge of
Layman
23 Seminar Presentation:
Impact of Monetary Policy on
Indian Economy
24 Phases of Business Cycle Slides/Hopheads Business cycles in economic
activity are essentially perpetual
features of the economic
environment of a country.

25 Quiz on Monetary and Fiscal

Policy
26 Discussion on issues of Indian Knowledge of the issue
Economic Development surrounding the Indian economy
is must to enable the students to
have complete understanding of
 achievements, goals, future
prospects of Indian economic
scenario
27 Seminar Presentation:
Emergence of Mncs
28 Balance of Payment Slides
Adjustments-
29 Group Discussion on First &
second Generation Reforms of
India (1991)
30 Consumer Price Index and
Purchasing Power Index
31 Discussion on impact of
Foreign Exchange Volatility on
Indian Economy
32 Seminar Presentation on Stock
on Economic Activity
33 Case study on Globalization of
Indian Business
34 Discussion on Current Event- News Paper
US and India Economy Clippings
35 Group Discussion on Fiscal News Paper
Situation of Indian Economy Clippings
SIGNIFICANCE OF CASE METHOD

This significance of case method as a teaching technique as against the methods of

class-room lecture and text-book reading is proved beyond doubt both for gaining sound
foundation in management principles and practices and for developing the requisite practice
and experience in decision-making in actual business situation .Of course, the case methods
is not to be regarded as a substitute of other methods of teaching. In order that the
participants are able to obtain the maximum value from the use of case method, they should
first understand the basic principles of the particular subject and then be asked to analyze the
case. The case method provides opportunities to business students to develop their analytical
abilities and decision-making skills and to utilize their imagination in devising feasible
programmes of action. Certain valuable skills that case analysis enables one to learn are
given below:
1. Thinking logically and meaningfully in a given business situation:
2. Identifying the basic problem amidst the complexities of business situation:
3. Analyzing, interpreting and weighing the available evidence bearing upon the
Business:
4. Recognizing the limits on efficient decision-making where complete data are not
obtainable:
5. Recognizing what additional information can possibly be acquired:
6. Distinguishing relevant material from irrelevant material:
7. Reaching a decision with the co-operation of others
8. Case will be presented to the students after the end of the topics.
The case method has come to occupy a significant in the tool-kit of management education.
A case may be defined as ‘narration of facts and other relating to problem-loaded business
situation.

To conclude, the case method has large educational value as the class-room
discussion of case studies helps the management trainees in developing necessary skills for
successful decision-making in actual business situations.
 Case study method has also been found useful in training programmes for working
executives. The realism of the case material makes many managers relate what they are
learning to their own situations. They use their own experience in analyzing the cases and
derive management principles from the discussion their analysis.

LIMITATIONS
The case study method takes getting used to. Trainees who have not had previous
experience with this method can become quite frustrated when they find that there is no
“right” answer to the case problem is and that there even may be a question as to just what
the problem is. “How can I learn to manage,” they ask, “if no one is sure of what is wrong or
what should be done about it?” Most trainees pass through this stage successfully; they learn
eventually that management situations often are ambiguous and that there frequently is no
single best solution.

CASES
CASE 1: ENERGY FOODS
The top management of Energy Foods (Private) Ltd. were considering a report
submitted by one of their executives in June, 1995. The report was a study of the implications
of the Government of Indian’s changed import policy. The problem facing the management
was whether to depend solely on imported basic raw material, as hitherto, for the preparation
of baby foods inside the country till its imports were totally banned and then try to switch on
to local substitutes or go out of production, or else to resort forthwith to a blend of
indigenous raw material land imported stocks to feed the company’s factory, thus stretching
the period of part-availability of the imported material for as long as possible.

Energy Foods is a subsidiary of Energy Foods, USA, which has branches all over
the world. In India it produces baby foods and also processes and repacks some other
commodities imported in bulk.
The principals in the USA produce the raw material on a larges scale. This is sold to bulk
purchasers throughout the world.

In India, the largest importers of the raw material are Baby Foods (Private) Ltd., and
Energy Foods (Private) Ltd. These two firms are also the largest sellers of quality baby foods
in the Indian market. Hence the effective competition for sale is between these two. The cost
of raw material imported by them is about the same.

Both these firms normally keep stocks of raw materials in hand sufficient to meet
their requirements for at least one year. And being competing firms, they sell at price parity.

The changed import policy of the Government, however, made some adjustments
necessary in the import programs of these companies. The executives of Energy Foods who
had made a careful study of the national import policy felt convinced that imports were going
to be slashed considerably and were likely to be stopped ultimately. So in order to see that
their company was not caught napping, the executives were considering reduction of reliance
on the imported raw material and as a first step towards this new policy were thinking of
establishing contact with indigenous manufactures of the same raw materials.

The quality of the indigenous raw material, however, compared unfavorably with the
imported material. Again the color of the final product became off grade with the use of the
indigenous raw material instead of the crystal white finished product which resulted from the
use of the imported material.
Moreover, the cost of the indigenous supply was considerably higher than that of the
imported raw material ranged between Rs. 3.75 and Rs. 4 a Ib. while the cost of the
indigenous material varied from Rs.4.50to Rs.5 per Ib.
The use of local raw material was likely to raise the cost of production and the hence
the price of the final product. It was estimated that the use of local raw material would
increase the price of baby foods by about 25%.
 The executives of Energy Foods thought that instead of confronting the market with a
25% rise in price later, they would raise their price by 12.5 immediately and begin to mix
local raw material to the imported material gradually increasing the proportion of the former
to the latter.

Baby Foods, on the other hand, were thinking along the following lines-to carry on
production as long as possible with imported material and seek alternative source of supply
only when forced to do so. The policy was hardly likely to raise the cost of production
immediately because they would be operating from stocks in hand. And they had stocks
enough to last for a year.

As a result of the policy which Energy Foods were thinking of pursuing a rise in price
by 12.5% was inevitable. Baby foods, on the other hand, could maintain their present selling
price for some time more.

The sales executives of Energy Foods informed the management that the company
would lose 50% of its share of the national market during the coming year in case it decided
to use local raw material thus necessitating a 12.5% increase in price with immediate effect.
What should the company do?

Case 2. SIMPLEX COMPANY

Early in January 1973 the sales manager and controller of the simplex company met
for the purpose of preparing joint principles accommodation for Item 345. After the
Management Director approved their recommendation, the price would be announced
through letters to retail customers. In accordance with the company and industry practice,
announced price were adhered to for the year unless radical changes in market conditions
occurred.
The simplex company was one of large companies in the textile industry; its 1972
sales had exceeded Rs.60 lacks. Company salesmen were kept on a straight salary basis, and
each salesman sold the full range of the goods. Most of the simplex competitors were small
and usually they waited for the simplex company to announce price before they mailed out
their own price lists.
Item 345 was the sole product of a department whose facilities could not be utilized
on other items in the product line. In January 1971, the Simplex Company had raised its price
from Rs. 15 to Rs. 20 per meter. This had been done to bring the profit per meter on Item 345
up to that of other products in the line. Although the company was in a strong position
financially, considerable capital would be required in the next few years to finance a recently
approved long-term modernization and expansion programme. The 1971 pricing decision had
been one of the several changes advocated by the directors in an attempt to funds would be
available for this programme.
Competitors of the simplex Company had held their prices on products similar to
Item 345 at Rs. 15 during 1971 and 1972. The industry and Simplex Company volumes for
Item 345 for the years 1967-72, as estimated by the sales managers, are shown in Table 1.
As shown by Table 1, Simplex Company had lost significance portion of the former
market position held by it. In the opinion of the sales manager, a reasonable forecast of
industry volume for 1973 was 7, 00,000 meters. He was certain that the company could sell
25% of the 1973 industry volume if the Rs. 15 price were adopted. He feared a further
volume decline if the competitive price were not maintained. On the other hand, as many
consumers were convinced of the superiority of the simplex product, the sales managers
reasoned, sales of Item 345 would probably not fall below 75,000 meters even at Rs. 20-00 a
meter.
TABLE: Price and Production, Item 345, 1967-72
Production (meters’) Prices charged by
Industry Most competitors Simplex
year
Total
Simplex
(Rs.) (Rs.)
1967 610,000 213,000 20.00 20.00
1968 575,000 200,000 20.00 20.00
1969 430,000 150,000 15.00 15.00
1970 475,000 165,000 15.00 15.00
1971 500,000 150,000 15.00 20.00
1972 625,000 125,000 15.00 20.00

During the pricing discussions, the controller and the sales manager had considered two other
aspects of the problem. The controller was concerned about the possibility that competitors
would reduce their prices below Rs. 15 if the simplex announced Rs.15.00 price for item 345.
The sales manager confident that competitors would not go below Rs.15 because they all had
higher costs and several of them were in tight financial straits. He believed that action taken
on items 345 would not have any substantial repercussion and other items in the line.

The controller prepared estimated costs of items 345 at various volumes of production
as given below:
Production cost per meter-

Production 75 100 125 150 175 200

(000 meters) Rs Rs Rs Rs Rs Rs
Direct Labour 4.00 3.90 3.80 3.70 3.80 4.00
Material 2.00 2.00 2.00 2.00 2.00 2.00
Material spoilage Dept.Exps 0.20 0.20 0.19 0.10 0.10 0.20
Direct1 0.60 0.56 0.50 0.50 0.50 0.50
Indirect2 4.00 3.00 2.40 2.00 1.80 1.50
General overhead3 1.20 1.17 1.14 1.11 1.14 1.20

Factory cost 12.00 10.83 10.03 9.50 9.43 9.40

Selling & Adm. Expenses4 7.80 7.04 6.52 6.18 6.13 6.11
Total Cost 19.80 17.87 16.55 15.68 15.56 15.51

These estimated costs reflected current labour and material costs. They were based on past
experience except for the estimates of 75,000 and 100,000 meters.

Case 3: PHILIPS INDIA LIMITED

The union government has issued a ‘show cause’ notice to Philips India Limited., a
multinational company, for alleged violation of industries (Development and Regulation)
Act, 1951.

Notice has been issued against the company for alleged unauthorized manufacture and sale of
cassettes for tape-recorders, it is learnt. The ministry of industry is believed to have made an
inquiry in to allegation made by some MP’s that Philips were engaged in such activities. The
government had assured parliament that the matter would be fully inquired into.
The unauthorized manufacture of cassettes for tape-recorders by the company violates not
only the industries (Development and Regulation) Act but also attracts actions under the
monopolies and restrictive Trade Practices Act.

The small-scale industries have been the pioneers in the field of cassettes for tape-recorders.
The small-scale manufacture of cassettes started as early as 1973. There are also in the
market foreign brand name cassettes which are claimed to be made in India. It is not known
whether the department concerned as inquired in to the matter.

Qualified observers say that there was no need for the country to support foreign brand
names in such a simple consumer item has cassettes.

Viewed in this light, the government action is stated to be significant in extending protection
to the small-scale sector. Though no official statistics of production of cassettes for tape-
recorders are readily available, it is stated that demand for the item would amount to one
million.

It is also pointed out that the item has large demand potential at home and in foreign markets.
Since it is rather skill-oriented and highly labour-intensive, the government has been wanting
as a matter of policy to encourage production the small-scale sector.

Case 4- CHEAPER INPUTS AND SCALE OF ECONOMY WILL CUT TV PRICES*

The high cost of television receivers is mainly due to scale of production and cost of the
input raw materials. The degree of automation and efficiency and technology are additional
factors which determine the cost of components.

In India, the input materials are subject to very high customs duties. Because of the split up
of the licenses presumably with a view to avoiding a monopoly situation. The scales of
operation are far lower in India than in countries overseas. Small volume of production has
engendered the use of manual techniques of production which pushes up costs. Though
wages may be comparatively lower in India than in
Western countries, the industry in India is plagued with lower productivity, labour unrest and
power shortage. These factors push up the cost substantially.
The electronic components industry in general and the picture tube industry in
particular, will need protection by way of import duties. The protection being given to the
electronic component industry is in no way different from the treatment accorded to other
engineering industry.
It would be impossible to grow in India an indigenous electronic components industry
without protection unless all inputs are available at international prices and unless production
is geared to international levels of operations. As electronic components are the building
bricks of the electronics industry, such growth should be nurtured.
A 20-inch TV receiver is available in the Western markets at about US $90. The cost
of components in a set would be of the order of US $60, including the cost of the picture
tube. Balance of US $30 covers assembly, testing, marketing, financing and profit, in India,
the build-up of the cost is as follows: price of components including the picture tube (Rs.
1285+ Rs. 80 towards freight and mortality) = Rs. 1,365.00; Cost of manufacture and
marketing including profit Rs. 235.00; Dealers commission is Rs.200; Excise on Rs. 1,600 is
Rs. 84; sales tax (10%) is Rs. 184.40; Total Rs. 2,072.40. this represents cheapest model
available today.
In western countries the cost of assembly, testing, marketing, financing and profit,
including dealer’s commission, amount to only US $30 or 435 in spite of the so-called cheap
labour.
A cost comparison of components available to the television industry in India as
against what television manufacturers in Western countries are able to obtain is given in the
Table below:
 Item Western prices Indian Difference
Picture tube $ 18.00 405.00 24.00
Tuner (Rs.162.00) 125.00 89.00
Cabinet $ 4.00 (Rs. 125.00 80.00
Deflection 36.00)
components $ 5.00 (Rs. 100.00 68.50
Semi-conductors 45.00) 250.00 195.00
Passive components 180.00 -
Other components $ 3.50 (Rs. 100.00 28.00
31.50)
$ 6.00 (Rs.
54.00)
$ 20.00 (Rs.
180.00)
$ 8.00 (Rs.
72.00)
$ 64.50 (Rs.
Total 1,285.50 704.50
580.50)

Notes: 1. Assumed US $ 1 = 9
2. Accessories like antenna and installation are extra and cost nearly Rs 200 in
Indian.
It will be seen that apart from the picture tube the other components are as expensive
A mass produced plastic cabinet will be available in Western countries to the TV receivers
industry at about US $ 5 whereas a wooden cabinet produced in India costs as much as Rs.
125. There is a feeling that as that as the wooden cabinets are made by the small-scale
industry, it would be advisable to stick to his approach. Cost reduction would be difficult
with such approaches. Again, in the case of tuners and deflection components, the Indian
price is nearly 3 to 4 times the price of similar components available overseas. Semi-
conductors are expensive.

Therefore, it is stated that it would not be appropriate to single out the picture tube as the
main culprit leading to the high cost of components for a television set. It would be necessary
to look at the cost structure of the electronic components industry in general for the answer.
It should be possible to produce a molded cabinet in Indian provided all the manufacturers
join together as a consortium and set up the necessary facilities or and MNC who has
considerable experience in the field is asked to produce the cabinet, it may protect the small-
scale industry at the expense of the consumers.

Unless the scales of operation for the other components increase and unless input raw
material are made available at international prices. It would be difficult for the electronic
components industry to bring down the prices t international level.

One may argue why a high cost electronic components industry should be supported
in India, and take the view that it may be advisable to import the components. The suggestion
may be valid when we are flush with foreign exchange. The situation was quite different a
few years back. In any case, for the healthy growth of the electronics industry it is essential
that the building bricks-electronic components-are made in the country. Industry’s attempt
should be towards policy which enables components to be made economically and it is
essential that all steps are taken no look into the difficulties of the electronic components
industry and remedy the same.

The glass shell for the picture tube is being imported and current c.i.f. price is about
Rs.80. An import duty of 75 per cent pushes up the cost to Rs. 140. Taking damage in transit
into account, the price per glass shell comes to Rs. 150. There is a freight element of Rs. 23
in the c.i.f. cost of Rs. 80. Duty is payable on freight and the element of freight cost plus duty
amounts to Rs.40 out of the total cost of Rs.150.
Question Bank
Introduction to Economics
Topic-1

1. Explain the nature and scope of managerial Economics.

2. “Managerial economics is economics applied in decision-making”, Explain.
3. Distinguish between
4. What are basic functions of business managers? How does economics help business
managers in performing their function?
5. Define scarcity and opportunity cost. What role do these two concepts play in the
making of management decisions?
6. Explain the concept of Economic Analysis.
7. “Managerial economics bridges gap between economic theory and business practice”
Explain with example.
 8. What are the various forms of economic systems prevalent in the world state their
feature.
9. What is the role of managerial economics in making managers?
10. Show the significance of economic analysis in business decision.

II Demand and supply Analysis

1. What is meant by Demand schedule, Demand curve and Demand Function?
2. State and explain the Law of Demand. What are its exceptions?
3. Define price elasticity of demand and distinguish in various types.
4. Calculate the demand schedule for prices of Rs.10, Rs.9, etc when the demand
function is
D = 80-4p
5. A well-known Mumbai based firm manufacturing men’s ties found that the
daily demand for its ties is given by the equation
D= 400-4p
(a) How many ties per day can the firm sell at a price of Rs.50 and
(b) What price should it change if it wants to sell 300 ties a day?
6. Show how the demand for a commodity depends
(a) The price of what commodity
(b) The income of the consumers
(c) Price of other related goods
7. What are the properties of indifference curves Explain consumers equilibrium
with the help of indifference curve.
8. What are the different methods of Demand forecasting?
9. Distinguish between average revenue and marginal revenue and explain how
the two are related to each other.
 10. Critically examine the concept of consumer’s surplus and bring out the
practical importance of the concept of consumer’s surplus.
III Production and cost Analysis
1. Define a production function. Explain and illustrate isoquants and isocost curves.
2. Explain clearly the ‘returns to scale’
3. Explain the law of diminishing returns and explain the explain the cause for its
operations.
4. State the salient features of LAC curve and discuss its usefulness in Managerial
decision-making.
5. Discuss the various economics of scale, do they result in monopolies.
6. What is the difference between direct and indirect cost.

7. The output, total cost data for a firm are given below .work out the following costs:
TFC, TVC, AFC, AVC, ATC, MC at various levels of ‘output’
Units of output: 0, 1, 2, 4, 5, 6,
TC : 120, 180, 200, 210, 225, 260, 330
8. Discuss briefly different cost concepts relevant to managerial decisions of planning
and control.
9. Discuss the various cost concepts relevant for decision-making at the
Firm level. Do you feel that ‘break-even analysis could be a useful tool to Indian
managers?
10. Define short run costs and long-run costs what is the practical usefulness of
distinguishing between them.
IV Profit analysis
1. Distinguish between risk and uncertainty.
2. Contrast briefly the various theories of profit regarding their explanation of the source
of profit.
3. Distinguish between economic profit and accounting profit with suitable examples.
4. Profit is the reward for risk-learning function of the enterprenuer.Examine critically.
V Pricing Markets and Competition
 1. What are the main features of pure competition? How does a firm adjust its policies
to a purely competitive situation?
2. How does the equilibrium of the firm under perfect competition differ from that of a
monopolist?
3. Explain the following propositions?
If demand rises, prices goes up.
If supply rises, prices goes down.
If both demand and supply increase increase sales are bound to increase, but
price may or may not.

4. Explain what price and output decision are made by:

A firm buying competitively and selling monopolistically.
A firm selling competitively and buying monopolistically.
A firm buying monopolistically and selling monopolistically.
5. Could long-range profits ever exist in a market of monopolistic completion? Why or
why not?
6. Explain the meaning of price-leadership .what is the conditions necessary for
effective price leadership?
7. How is the equilibrium of a firm determined
Under competitive conditions
Under monopolistic conditions
8. The kinked demand curve can explain both interdependence of firms and stickness of
prices under Oligopoly. Comment
9. Discuss the main features of monopolistic competition.
10. What is Oligopoly? Explain price rigidly under oligopoly in terms of kinked demand
curve.

VI Pricing
1. How does consumer behavior affect. Pricing policies.
 2. Critically examine price as a weapon of competition.
3. What is the most important group or individual factors which influence the price of a
product?
4. Discuss the different methods of pricing products and state the method that would be
adopted by a firm under monopolistic completion.
5. Would you prefer a low penetration price to a high & initial price for a new product?
6. What is meant by price discrimination? What are its objectives? Is price discrimination
anti-docial?
7. What are the advantages and limitations of marginal pricing?
8. Explain the method of cost plus pricing and state its limitations.

VII Business and Government Decisions

1. What is meant by Economic Growth? How is economic growth measured?
2. Describe the various methods of measuring national income. How is a method chosen
for measuring national income?
3. Distinguish between nit-product method and factor-income method. Which of these
methods is followed in India?
4. What is meant by business cycle? What are the different phases of a business cycle?
5. Explain the concept of Balance of Payment. Explain current account and capital
account.
6. What are the causes of disequilibrium In BoP?
7. What are the different economic systems and explain the role of government in each
type of economic system.
8. What are the factors leading to inflation in an economy?
9. Explain the purchasing power parity theory of exchange rate determination.
Domestic Airlines in India: Leveraging Price
Till the year 2002, the Indian traveler rarely traveled by air as the fares were much
higher than those for road and tail travel. But in 2002, the companies offering air travel
changed the market dynamics completely. For the first time in the history of the industry,
efforts were made to make air travel affordable to a larger section of the population, leading
to an unprecedented development in the commercial aviation industry in the country.

The reason for this change in strategy is not very difficult to understand. Though
there were only three major players in the Indian aviation market, namely Jet Airways (JA),

Air Sahara (Sahara), and the state-owned Indian Airlines (IA), competition was getting
fiercer by the day. To counter the competition, the companies had to resort to pricing wars.
It started in June 2002 when IA announced a 3-15% cut in fares for all classes on the
western sector and on Delhi-Srinagar, Delhi-Jammu, and Delhi-Khajuraho route. The next
day, JA reduced its prices by Rs.635 for the economy class on the Mumbai-Nagpur route and
the Mumbai-Goa route.

One of the most innovative offers (following the global aviation industry’s footsteps)
was the advanced Purchase Excursion (APEX) fares scheme. Under which passengers who
booked their tickets at least three weeks in advance, got a huge discount in fares. IA
introduced the APEX fares under its ‘U can Fly’ scheme and JA under the ‘Everyone Can
Fly’ scheme.

However, passengers had to face two disadvantages under the APEX scheme.
Planning air travel three weeks in advance was not very convenient. Cancellation charges
were also high. Passengers had to lose 50% of the ticket price if the ticket was canceled less
than 21 days before the travel date. Despite these disadvantages, the scheme proved very
successful for IA. Around 1,600 passengers fly every day under the scheme. Revenue
generation and passenger load factor have also increased.
JA also reported an increase in the number of passengers flying after the introduction
of APEX fares. Saroj Dutt, Executive Director, JA, said, “The average number of passengers
flying out on advance purchase tickets is around 1,500 per day. That means we are selling
most of the 1,850-2,000 seats offered every day under the concessional window. The
response is very encouraging for a scheme which has been introduced only recently”.

Sahara went in for a different approach. It adopted an intelligent marketing strategy,

offering innovative schemes rather than APEX fares. U. K. Bose, CEO, Sahara, said, “While
the two rival’s fish for railway passengers, let’s tap their customer base. Therefore, Air
Sahara has advance purchase offers on the Net with high discounts while going all out
through the marketing network with its ‘Sixer’ and ‘Super Sixer’ schemes, which are free of
the rides that dog advance purchase fares. For a fixed sum, both schemes offer travel on six
sectors, with no need for advance booking or photo-identity, which is necessary for APEX
concession”.

In March 2002, Sahara launched a unique ‘Wings & Wheels’ scheme in the metros-
Delhi, Mumbai, Kolkata, and Chennai. The scheme offered complementary air-conditioned
coach services for picking up passengers at designated points in the cities and dropping them
at the airport, the coaches also dropped passengers from the airport at certain locations within
the city, the coach with attended on board, offered add-ons like magazines, newspapers,
mineral water, soft drinks, and other refreshments.

During July-August, Sahara launched the ‘Sixer’ offer, a limited scheme for all
passengers, which enabled the passengers to buy a six-flight coupon ticket and fly any six
sectors on the carrier’s network for Rs. 25,000. The validity of the ticket was till December
2002. Analysts felt that the scheme was successful became of the flexibility it offered. If one
planned properly, the price of the tickets would work out to less than the APEX fares offered
by IA and JA.

However, what attracted the most attention from industry observes was Sahara’s
‘steal a seat’ online bid scheme in August 2002, Under the scheme, the base price for the
tickets was kept at Re 1, and the scheme was open to passengers flying 25 days later, For
unsuccessful bidders, there was another scheme called the ‘Steal Buys’ scheme under which
they could bid 24 -15 days in advance at a reserve price, which could work out much cheaper
than the APEX fares offered by IA and JA. Sahara also offered the Delhi-Mumbai tickets for
Rs.4,000 if it was bought between 15-19 days in advance, whereas IA and JA charged at Rs.
5,535 and Rs.5, 405 respectively for the same time period.

On August 15, 2002, IA launched the scheme ‘wings of Freedom,’ valid from August
15 to March 31, 2003. This scheme offered unlimited travel on the domestic network for
seven days for Rs. 15,000 (economy class) and Rs. 20,000 (business class. The airline also
planned to increase the commission of its agents and offer incentives for the most productive
agents. At the same time, it also launched the ‘Bharat Darshan,’ (India tour) which allowed
unlimited travel for passengers who bought tickets worth more than Rs. 80,000.

Industry observers remarked that the most interesting feature of the price war in 2002
was that Sahara, the smallest of the Big Three, was the most aggressive. Apart from
launching the novel bid schemes, it also offered the highest agent commission to increase
volumes of the tickets sold, while maintaining the lowest fares. Moreover, while IA and JA
were expected to revert to the original prices at the end of the learn season, i.e., October,
many of Sahara’s schemes would stretch till the year-end.

Though the fare war is not expected to end very soon. Analysts feel it will affect the
financial stability of the private carriers in the long run. While IA owns the aircraft and is
funded by the government, both the private carriers survive on leased aircraft. This lowers
their margins and makes it difficult for them to sustain these costs in the long run.

Some analysts feel that it is too early to predict the impact of the price war. Though
the number of passengers increased in 2002 as compared to 2001, it was mainly attributed to
school holidays and increase in the number of business travelers.