MCO 021
Managerial Economics
IGNOU MCO 021 Solved Free Assignment
MCO 021 Solved Free Assignment July 2023 & January 2024
Q. 1. Compare and contrast microeconomics with macroeconomics. How is managerial economics related to diffrent disciplines? Elaborate.
Ans. Microeconomics refers to the study of various decisions that people and businesses make regarding the allocation of resources and prices of goods and services, keeping in mind the taxes and regulations created by governments.
Macroeconomics on the other hand refers to the study of economics which studies the behaviour of the aggregate economy.
Macroeconomics studies the economies aggregates such as Gross National Product, changes in unemployment, national income, and rate of growth, gross domestic product, and inflation and price levels.
Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals.
This may include demand and supply and other forces that determine the price levels various products managed by the organization or organizations.
These two studies of economics tend to be different however are interdependent and complement each other.
For example, the current level of unemployment in the economy as a whole will affect the supply of workers, which an oil company can hire from.
It can well be said that microeconomics takes the bottoms-up approach for analysing the economy where as macroeconomics takes the top-down approach for the economies analysis.
Managerial Economics form a part of microeconomics studies as it deals with studying the various factors that are involved in making rational decisions relating to demand, supply, price, cost of product keeping in mind the various alternatives provided as well.
However, it is also important for the managers to be aware of the macroeconomic studies as well.
That is because of the reason that forces in each of these areas influence firms. As any change in the macroeconomy would affect the industries and firms throughout the economy, which makes it important for managers to understand how these changes can affect managerial decisions, particularly in terms of the micro economy.
Managers are also required to analyse the current policy issues as they relate to the economic environment, industries and firms.
Also in order to be competitive in today’s business world, managers need the understanding of both microeconomics as well as macroeconomics forces so as to make rational decisions.
The relationship between the Managerial Economics and other disciples may be known from the fact that it helps the business management students to identify the best possible alternative in the difficult situation.
It provides the basis for a well formed foundation for the identification and so that the students may relate the various economic fundamentals with other fields of studies as well.
Managerial Economics being one of the parts of microeconomics, therefore a direct relationship may be established or created with the Microeconomic Theory.
Various concepts and tools for analysis of the situation are provided by the Microeconomic Theory to the students and managerial economists who then take a rational decision.
Theories like price theory, demand and supply concepts and various theories of the market structure, etc. Such theories help a great deal in solving the real world day-to-day issues faced by the management students.
A relationship may also be seen between Managerial Economics Integration and Operations Research.
It helps the management students to find out the best available possibilities from the various set of possibilities available with them.
As decision-making is considered as one of the major parts of Managerial Economics thus Linear programming aid is provided by operations research for the facilitation of the decision-making objective of the managers.
This further helps in determining the appropriate distribution pattern for various commodities.
Association between Managerial Economics and statistics should not be overlooked upon.
Statistics may provide for better decisions relating to demand and cost functions, production, sales and distribution of products can be taken in a well planned manner.
Therefore, it may be said that even a statistics student with sound knowledge can become a good manager.
The managers are responsible for taking a lot of decisions which involve a lot of choice and uncertainness because of which the Theory of Decision-Making can come into picture.
This theory provides for undertaking multitasking in the form of handling goals with uncertainty attached in the real world, which allows the students of management a wide scope of experience and enhances their capabilities as a leader as well.
Q. 2. (a) “Managerial Economics serves as a link between traditional economics and decision sciences for business decision-making.”
Ans. By traditional economics we refer the old concepts and methodologies that have been in practice for ages now but the theories still hold true in today’s world.
On the other hand, decision sciences refer to the various tools and techniques of analysis used by the management to take rational decisions affecting the organization.
As according to McNair and Meriam, “Managerial Economics is the use of economic modes of thought to analyze business situations.”
Based on this definition of Managerial Economics, the relationship between economics and management may be justified.
The management provides the guidance, leadership as well as the way to appropriately channelize the efforts of a group of individuals towards the attainment of some common objective.
While economics, provides for analyzing and providing solution to the big question of scarcity of resources. And it is one the basis on such analysis that the management is able to take the right decisions.
According to Prof. Evan J. Douglas, “Managerial Economics is concerned with the application of economic principles and methodologies to the decision-making process within the firm or the organization under the conditions of uncertainty”.
Thus, it can be said on the basis of the above definition that there is close relationship between management and economics.
Managerial Economics helps the management by guiding and acting as leader to focusing the efforts of a group of individuals to achieve the common objective, effectively and efficiently.
And as mostly managerial decisions are economic in nature as the firms’ management is faced with the “problems of choice” in simple words various alternatives.
And it is the management’s responsibility to see that the resources are allocated appropriately as they are scarce in nature. Including the fact that businesses are affected by any change in the external environment that they function in.
Therefore, mana-gerial economic provides for the study of allocation of resources available with firm vis- à-vis its activities, keeping in mind the best possible alternative available to the firm.
The management is therefore responsible for taking rational decisions and future planning with regards to the economic concepts and problem analysis.
As it needs to ensure that scarce resources are utilized to the utmost efficiency and that best results are achieved. The resource allocation decision may include taking decisions pertaining to production and transportation process.
The decision-making process also involves an important decision relating to fixing the prices of the products. For which various methods may be adopted keeping in mind that the price is neither too high nor too low.
The aim of the economic activity is to strike a balance between ends and means due to the scarcity of resources.
It can be said that the center of economic activity is decision making by management, as it involves making a choice among the various alternative courses of action.
Thus, the best economic choices, keeping in mind the objectives and obstacles are the outcome of best decision-making skills.
Therefore, it is a true fact that economics and management goes hand in hand with the help from various concepts, tools and methodologies.
It also enhances the role and function of a manager as it helps the manager to take rational decisions and to appropriately plan for the future based on the analysis of the information available with him.
(b) Which problems of an economy constitute the subject matter of microeconomics.
Ans. According to Prof. Evan J. Douglas, “Managerial Economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or the organization under the conditions of uncertainty”.
Thus, it can be said on the basis of the above definition that there is close relationship between management and economics.
Managerial Economics helps the management by guiding and acting as leader to focusing the efforts of a group of individuals to achieve the common objective, effectively and efficiently.
Managerial economics caters to the fundamental question of scarcity of resources by providing the organization with effective utilization of the factors of production dertaken by the organization vis-à-vis the best possible alternative for the
As the scarcity of resources is the result factor from the following facts, namely:
(a) Human wants being unlimited and insatiable.
(b) Limited economic resources available to satisfy the wants and desires.
Thus, it is very important that the available resources are efficiently and effectively utilized to their maximum capacity.
Also that maximum returns are possible from their usage and profit factor is also enhanced. It is a purposive process, whose purpose is to maximize the returns and thereby the profits.
It helps the management by providing answers through appropriate analysis for the best possible alternative available with the organization to deploy its factors of production.
Since the resources are scarce and limited in comparison to the individuals wants and desires, thus it makes it important for the firm to make a choice by answering the following questions:
(a) What to produce?
(b) How to produce?
(c) For whom to produce?
Therefore, it is vital to strike a balance between the wants and the resources available to meet the same. factor should not be ignored; as it is the resources are scarce in nature.
Unlimited Choice
IGN/
What to produce?
SCARCITY
How to produce?
Limited Resources
For whom to produce?
But the efficiency
It is also important for the firm to know the demand expected for the product that it is going to produce and also the rate of supply for the same.
These factors of demand and supply and the market economic forces form the center of market mechanism. There are four groups of problems that fall under decision making and forward planning namely:
Resource Allocation: Since the resources are scarce in nature as compared to the unlimited wants and desires of individuals, which makes it important for the resources to be properly allocated so that the best results are achieved from the same.
This problem also caters to the questions pertaining to planning the production process and the problem of transporting the necessary factors of production to the particular activity.
Therefore it is the manager’s responsibility to decide the appropriate areas for resource allocation keeping in mind the achievement of the organizational objectives.
Inventory and Queuing Problem: The managers are also faced with inventory issues, which involve taking decisions pertaining to holding the appropriate levels of stock of raw materials and finished goods for a period of time.
For which it is important to understand the demand and supply conditions in the market. Queuing problems relate to the decisions regarding the installation of additional machines or hiring extra labour.
Pricing Problem: The decision-making process also involves an important decision relating to fixing the prices of the products.
For which various methods may be adopted keeping in mind that the price is neither too high nor too low for example, demand elasticity study.
As, if the price is high, it will be out of reach for various individuals and if the price is too low then people may tend to have second thoughts about its quality.
As the firms operate for profits thus accurate price decisions play a vital role in the growth of the organization as a whole.
Investment Problem: The managers are also faced with taking decisions regarding future planning. It relates to taking various investment decisions. For example, investing in new plants, how much to invest, sources of funds, etc.
Q. 3. (a) What do you mean by opportunity cost? Also explain the concept of the invisible hand.
Ans. Opportunity Cost: It refers to the amount of cost forgone when one activity is chosen above the other. It is called the cost of the next best alternative.
In economic concepts terminology it is termed as “cost is the forgone alternative” or “choosing is refusing”. It can also be defined as the amount of the benefits you could have received by taking an alternative action.
It can also be said that the opportunity cost of any thing is the return that can be had from the next best alternative use. Sometimes these costs are also referred to as ‘cost of sacrificed alternatives’.
Opportunity cost can also be related with marginal cost, as marginal cost is the cost of the additional unit or the next unit. And opportunity cost also refers to the amount of next alternative cost forgone.
However, the choice to bear a particular cost or not is totally situation specific. For example, the value of a cup of water is very low to someone who can quickly obtain it from a bottle whereas its value is high to someone dying of thirst in a desert.
As it is a known fact that goods and services are scarce as compared to the unlimited wants, that’s makes it all the more important for the manager to take rational decisions regarding their usage.
Whenever, the manager takes a decision he chooses one course of action vis-à-vis sacrificing the other alternative courses.
For example, A machine can produce either X or Y. The opportunity cost of producing a given quantity of X is the quantity of Y, which it would have produced. This is also called the Opportunity Cost Principle.
The Invisible Hand: The father of modern economics Adam Smith believed in the concept of Invisible Hand.
According to him the economic system is ruled over by an invisible hand and that the economic system is self-regulating, if left to it, as the system tries to enhance its economic well being.
This can be proven from the fact that firms main objective is profit motive by providing goods and services to satisfy the consumption demand of the individuals.
And maintaining minimum possible costs to maximize the profits attains this. However, in the conditions of competition among the firms, the prices of the products are kept low so that more consumers are attracted to their products.
The theory also takes into account the individuals decisions relating to saving and investment.
For example, a part of the household’s income is saved and deposited in banks or invested in shares or debentures. Thereby the producer’s can borrow this money from the banking system.
It is the firm’s discretion on the quality and quantity of the product it wishes to produce.
There is no gover-nment authority that would determine these stats. Therefore, it is because of the presence of the invisible hand theory that firms produce goods and services and the individuals consume as per their needs.
In other words, with the operation of the market forces the basic economic problems of the society are solved.
(b) What is bundling? Give examples. Do you think this is anti-consumer?
Ans. Bundling is defined as the practice of selling two or more separate products together for a single price. In other words, the goods and services, which can be sold separately, are sold as a package, bundling takes place.
Take for example, the advertisement specifying ‘buy one get one free’ or ‘buy one and get the second one for half-price’ are classic cases of bundling.
Another example may be hotel rooms, which provide complimentary breakfast to its customers, or when a digital camera is sold with a free MB card in a box.
Bundling can be of the following types:
. Pure Bundling
. Mixed Bundling
- Tying
Pure Bundling takes place where products are sold only as bundles, whereas in mixed bundling products may be sold separately and as a bundle.
In case of tying, the purchase of the main product requires the purchase of another product, which is generally an additional complementary product.
Since bundling reduces the search costs from the consumer’s point of view as well as the distribution costs for the sellers because of which they are treated good for the consumers.
With the help of bundling the producer is able to lower their transaction costs as well, as they are able to carry out multiple costs than a single purchase as a single time.
Take for example, someone may purchase various parts of the computer and then assemble it by oneself.
It can also be added that bundling in perfectly competitively markets is only possible in situations where it is more effective than selling products separately.
However, in case of non-perfect market structures the act of bundling benefits the consumers than the producers.
On the contrary if the firm may indulge in price discrimination if it has the market power, as different bundles of goods and prices may appeal to different customers.
It was the case of Microsoft that was accused of anti-competitive conduct in bundling. As Internet Explorer and Windows are a pure, however, Microsoft denied it being a bundle.
It was said that they are treated as a single product incapable of being broken into parts. This was the only case, which was treated as an exception to the concept of bundling.
Q. 4. Suppose a small locality has a single grocery store selling multiple products. (a) It is a monopoly? (b) If yes, then give arguments in support of your answer.
Ans. (a) Since there is only one seller in the locality who supplies the various products to the buyers is thus a case of a monopolistic market structure. It can be said that the monopolistic is a single seller of a differentiated product.
(b) As being the single seller, with no competitors, the grocery store has the power to influence the prices. The monopolistic grocery store may though charge a high price but it needs to ensure that profit is being maximized at the same time.
It can also be said that the market structure may change with the opening of another grocery store in the same locality.
A monopoly market is characterized by the profit maximizer, price maker, high barriers to entry, single seller, and price discrimination.
Monopoly charac-teristics include profit maximizer, price maker, high barriers to entry, single seller, and price discrimination.
Sources of monopoly power include economies of scale, capital requirements, technological superiority, no substitute goods, control of natural resources, legal barriers, and deliberate actions.
A monopoly can be recognized by certain characteristics that set it aside from the other market structures:
. Profit maximizer: A monopoly maximizes profits. Due to the lack of competition a firm can charge a set price above what would be charged in a competitive market, thereby maximizing its revenue.
. Price maker: The monopoly decides the price of the good or product being sold. The price is set by determining the quantity in order to demand the price desired by the firm (maximizes revenue).
High barriers to entry: Other sellers are unable to enter the market of the monopoly.
. Single seller: In a monopoly one seller produces all of the output for a good or service. The entire a single firm. For practical purposes the firm is the same as the industry.
- Price discrimination: In a monopoly the firm can change the price and quantity of the good or service. In an elastic market the firm will sell a high quantity of the good if the price is less. If the price is high, the firm will sell a reduced quantity in an elastic market.
Q. 5. A TV company sells colour TV sets at Rs. 15,000 each. Its fixed costs are Rs. 30,000, and its average variable costs are Rs. 10,000 per unit. Find out BEP. Draw its breakeven graph, and then determine its breakeven rate of production.
Ans. Given TFC 30000 Rs.
Price (P) = 15000 Rs.
AVC = 10,000 Rs.
At breakeven point, TR = TC
PXQ TFC (AVC × Q)
Q= TFC
P-AVC
30,000
15000 -10000
Q=6
Hence Q stands for breakeven volume of output Multiplying Q with price (P) we get the breakeven value of output P * Q = 15000 × 6 = 90,000