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Me T1 Answers

  1. 1. NITTE MEENAKSHI INSTITUTE OF TECHNOLOGY GOVINDPURA, BANGALORE. Master of Business Administration – I Semester Internal - I : 1. What is Managerial Economics? “Managerial economics is a science which studies the economic aspects of behaviour of the firm as an enterprise, and helps to allocate scarce resources to their alternative uses in such a manner as to optimize the firm’s ultimate objective, as an organization and a social institution, under conditions of the imperfect knowledge, risk and uncertainty. It provides principles, method, and techniques of analysis of economic behaviour and at the same time prescribes ways and means to optimize economic efficiency.” 2. Name five economic concepts applied to business analysis. The five Economic concepts applied to business analysis are: a) Opportunity cost; b) Equi-marginal principle, c) Incremental principle, d) Time perspective and e) Discounting principle. 3. What are the basic assumptions in Economic Models? a) Ceteris paribus assumption – “other things being equal”. b) Psychological assumptions – man behaviour is rational and will strive to have maximum utility. c) Structural assumptions – topography of the region, climatic conditions, biological limitations of human resources. d) Institutional assumptions – man’s behaviour is influenced by social, political and economic institutions of the time. (Socialistic, Capitalistic or Mixed economy.) 4. Is Managerial Economics a Normative or a Positive science? Explain. Positive Economics explains the economic phenomenon as “What is, what was and what it will be. Normative Economics prescribes what it ought to be”. Positive sciences simply describe, while normative sciences simply prescribe. According to Prof. Robbins, economics is a positive science. Science is, after all, a search for truth and therefore, economics should study the truth as it is and not as it ought to be. A policy decision is taken after weighing the relative importance of all 1
  2. 2. these factors. There are bound to be differences in respect of policy prescription and it is better to keep away from areas which are controversial and study the facts as they are. According to economists like Marshall and Pigou, the ultimate object of the study of any science is to contribute to human welfare. Thus economics should be a normative science. Not only economists should build up the economic theory but also at the same time they should provide policy measures. We must strike a balance between these two extreme views. As Keynes put it, “The main function of economics is not to provide a body of settled conclusions immediately applicable to policy. It provides a method or a technique of thinking, which enables its possessor to draw correct conclusions.” Managerial economics is a blending of pure or positive science with applied or normative science. It is positive when it is confined to statements about causes and effects and to functional relations of economic variables. It is normative when it involves norms and standards, mixing them with cause-effect analysis. One cannot disregard the normative functions of managerial economics, though the discipline may be treated primarily as a positive science. Normative approach in managerial economics has ethical considerations and involves value judgments based on philosophical, cultural and religious positions of the community. The value judgments and normative aspect and counselling in managerial economic studies can never be dispensed with altogether. We may thus conclude that Managerial Economics is both a Positive and Normative Science. 5. Distinguish between Micro Economics and Macro Economics. Distinguish between Micro and Macro Economics. Broadly speaking, microeconomic analysis is individualistic, whereas macroeconomic analysis is aggregative. Microeconomics deals with the part (individual) units while macroeconomics deals with the whole (all units taken together) of the economy. 1. Difference in nature: Microeconomics is the study of the behaviour of the individual units. Macroeconomics is the study of the behaviour of the economy as a whole. 2. Difference in methodology: Microeconomics is individualistic; whereas macroeconomics is aggregative in its approach. 2
  3. 3. 3. Difference in economic variables: Microeconomics is concerned with the behaviour of microvariables or microquantities.. Macroeconomics is concerned with the behaviour of macrovariables and macroquantities. In short, microeconomics deals with the individual incomes and output, whereas macroeconomics deals with the national income and national output. 4. Difference in field of interest: Microeconomics primarily deals with the problems of pricing and income distribution. Macroeconomics pertains to the problems of the size of national income, economic growth and general price level. 5. Difference in outlook and scope: The concept of ‘industry’ in microeconomics is an aggregate concept but it refers to all firms producing homogenous goods taken together. Macroeconomics uses aggregates which relate to the entire economy or to a large sector of the economy. Aggregate demand covers all market demands. 6. Demarcation in areas of study: Theories of value and economic welfare are major areas in microeconomics. Theories of Income and employment are core topics in macroeconomics. 6. Explain the problem of scarcity and allocation of resources. In all economic systems, the basic problem is the allocation of scarce means among competing ends for the attainment of optimum results. Every economic society, rich or poor, ancient or modern, faces the basic problems of allocation of its scarce resources in relation to its unlimited wants. The main economic problem is optimal allocation of productive resources (land, labour capital and time for organization) for achievement of maximum welfare of the society. The economic problem relates to choosing what, how, how much and for whom to produce in order to achieve maximum welfare of the community. Thus the economic problem will consist of allocation of scarce resources through an organized system to achieve the given end. In doing so the following decisions regarding, production and distribution will have to be taken:- • What goods and services are to be produced? • What quantity of the goods and services are to be produced? • Who will produce? • What and How much resources will be required? • How to mobilize these resources? • How are these resources to be allocated and diverted to the desired productive activity? • How to exploit the resources efficiently? • What techniques and methods are to be employed for efficient utilization • How, to whom and in what quantity are goods to be produced and distributed? 3
  4. 4. • What is to be the level of employment, income and consumption ideally suited for achieving maximum welfare? If these issues are properly attended, the scarce resources would be deployed properly and the end of achieving optimum welfare of the community will be realized. 7. Explain the three fundamental concepts of Pricing Distribution & welfare by means of a chart. The following chart gives the various theories employed in the three fundamental concepts – Pricing, Distribution and Welfare. Chart – Page 15 (Dr. Mithani) Pricing: Microeconomics assumes the quantity of resources in an economy as given. Allocation of resources is dependent on relative price & profitability of diff. Goods. To explain allocation, microeconomics brings in price theory. Price Theory consists of Theory of demand or the analysis of consumer behaviour. Theory of production and cost or the analysis of producer behaviour. Theory of product pricing or price determination under different market structures. Distribution: This theory is concerned with pricing of various factors of production -Land, Labour, Capital & Enterprise. Rewards of Land – Rent Labour – Wages Capital – Interest Enterprise – Profits Thus, Theory of Distribution deals with General Theory of Distribution as well as those dealing with factors of production. Welfare: Welfare economics. Along with individual economic welfare, welfare economics is also concerned with social welfare, which is based on overall economic efficiency of the system. When maximum individual wants are satisfied at the best possible optimum level by a production pattern through efficient allocation of resources, overall economic efficiency or ‘Pareto optimality’ condition is reached. Such a situation can raise the standard of living of the population and maximize social welfare. 8. Explain in detail the method of managerial economic analysis. 4
  5. 5. Method of Managerial Economic Analysis: Managerial economics adopts the scientific approach of economic analysis in building and empirically testing business oriented economic models. The method consists of the following steps:- ► Defining the problem. ► Formulation of the hypothesis. ► Abstraction for the model building. ► Data collection. ► Deduction based on data analysis. ► Testing the hypothesis. ► Evaluating the test results. ► Conclusion for decisions. Defining the Problem: First we put down exactly what the problem is. The problem is to be clearly defined and involves framing relevant questions to be explored. Defining the problem helps the manager in shaping the nature, course and direction of the business research. Formulation of Hypothesis: We try to find out what can be the cause for such an effect taking place and try to assume an hypothesis, to identify the pattern of economic behaviour and discover the relationship between the various economic variables. Once such a relationship is established, it is possible to test the proposition or hypothesis and draw references. Abstraction for the model building: The process involves eliminitating irrelevant information and build an appropriate model based on abstraction of reality using only simplified relevant assumptions. This model should represent the real world situation. Data Collection: As specified in the model, the data of variables such as price, demand, sales, advertisement expenditure, and so on have to be collected. The data may be time series, cross-sectional or pooled. Testing the Hypothesis: By using the relevant data, the hypothesis is tested on empirical basis to find out the acceptability or otherwise of our assumptions. Deduction: If properly formulated hypothesis is able to confirm the cause effect relationship, it is accepted. It can be used for predictions and forecasts or conclusions by logical deductive reasoning. Evaluating the Test Result: When real world events confirm the hypothesis, it is accepted, meaning the hypothesis is not disproved and can be used in our research by examining its predictions in the light of experimental and observational facts. If it survives a number of tests repeatedly, it acquires the status of a theory. If the hypothesis is unable to prove the assumptions and predictions, it is rejected. 5
  6. 6. Conclusion: When a hypothesis passes various statistical tests, it can be used for making inferences and drawing conclusions about a business situation for decision making. 9. As a Manager how will you conduct a detailed Case Study analysis? Explain step by step. A case represents a real business situation – which is a problem faced by the manager – for which he has to find the answers and take a decision . The Manager has to study every aspect of the case, familiarize himself with the situation faced by him, find out what the heart of the problem, and find ways and means to solve it. Having found the ways and the means to carry out his remedial action, he takes a decision, or if the decision is to be taken by higher authorities, he makes a list of recommendations, by means of a report. Case analysis is a comprehensive process involving logical reasoning induction and deduction and judgement. It involves the logical skill of the manager. Steps involved in Case Analysis are :- 1. Familiarisation 2. Situation Study 3. Arriving at core problem 4. Analysis and inferences 5. List of recommendations 6. Presentation of case report. Familiarization: Manager has to familiarise himself with the situation. It implies – Data collection such as History of the organization, Management, Financial position of the firm, Industrial situation at large. In the process of studying the firm, He has to study its organisational chart. SWOT analysis of the firm. Who are the firm’s customers? What are the basic products? What is the speciality of the firm or product? Market share? Who are its competitors? What is the reputatioin of the firm? What are its future goals? Situation Study: In anlysing the business situation the manager has to study its various dimensions:- 6
  7. 7. The size and growth trends in the industry. The market structure The competitive position of the firm. Prevailing economic condition, especially cyclical behaviour. The nature of socio-economic dynamism.Demographic feature of the country. Technological advancements. Impact of Global economic and political events. Government policies. Demand determinants of the firm’s product. Customer’s patronisation. Product life cycle. Market territories. Impact of advertising on demand manipulation. Identification of market segments. Possibility and feasibility of different marketing strategies. Firm’s resource capacity, its flexibility in business policies. Nature and availability of business finance. Comparison of firm’s key financial ratios with the industry. Core Problem: Situation analysis helps in arriving at the core or fundamental problem which created the situation. ► Symptoms underlying the problem are detected. ► These require thorough study in the case analysis and arrive at the correct cause. Analysis and Inferences: Once the problem is identified, it is thoroughly analyzed for its causes. Alternatives are chosen which can eliminate the problem causes. ► These alternative solutions are studies based on quantitative and qualitative norms and their financial impact. Recommendations: Based on such a study of the alternative solutions, recommendations are made making use of those areas where the firm is strong and avoiding those where it is weak. The suggestion also should take into account the capacity of the firm’s finances. Recommendations are also made for taking such actions which can prevent a similar situation from recurring. Presentation of the Case Report: Normally if it is within the powers of the Manager, he takes immediate remedial steps. 7
  8. 8. But if the problem involves major decisions, the matter is referred to the Board of Directors or other higher authority, by means of the detailed case study report, containing all that the manager has done in trying to solve the problem. 8