Manegerial Economics

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 20 (5679 words) Published: May 20, 2011

1.What are the various factors which may influence the demand for intermediate goods like cables? Explain the most appropriate method of forecasting the demand for such an item.

2. a) Explain the method of cost-plus pricing and state its limitations. Point out cases where it is suitable.
b) Briefly outline the statistical method of estimating cost function.

3. a) Explain the concept of law of diminishing marginal utility with a suitable example. Why is it relevant for managers in taking decisions relating to expansion or diversification? b) A consumer utility function is U = 1 log x1 + log x2. His budget constraint is given by 2x1 + 4x2 = 36. Find out how many units of x1 and x2 should the consumer buy in order to maximize his utility.

4. Why is demand analysis significant for management? Identify various concepts of demand relevant for various functional areas of management.

5. State the assumption underlying the economists' theory of firm. Develop a critique of the theory and suggest the need for alternative models.


1 A )
Marketing practitioners regard forecasting as an important part of their jobs. For example, Dalrymple (1987), in his survey of 134 US companies, found that 99% prepared formal forecasts when they developed written marketing plans. In Dalrymple (1975), 93% of the companies sampled indicated that sales forecasting was ‘one of the most critical’ aspects, or a ‘very important’ aspect of their company’s success. Jobber, Hooley and Sanderson (1985), in a survey of 353 marketing directors from British textile firms, found that sales forecasting was the most common of nine activities on which they reported. We discuss methods to forecast demand. People often use the terms ‘demand’ and ‘sales’ interchangeably. It is reasonable to do so because the two equate when sales are not limited by supply. Sometimes it is appropriate to forecast demand directly. For example, a baker might extrapolate historical data on bread sales to predict demand in the week ahead. When direct prediction is not feasible, or where uncertainty and changes are expected to be substantial, marketing managers may need to forecast the size of a market or product category. Also, they would need to forecast the actions and reactions of key decision makers such as competitors, suppliers, distributors, collaborators, governments, and themselves – especially when strategic issues are involved. These actions can help to forecast market share. The resulting forecasts allow one to calculate a demand forecast. These forecasting needs and their relationships are illustrated in Figure. FIGURE 1


Needs for marketing forecasts

In this section we provide brief descriptions of forecasting methods and their application. Detailed descriptions are provided in forecasting textbooks such as Makridakis, Wheelwright, and Hyndman (1998). Forecasting methods and the relationships between them are shown in Figure 2, starting with the primary distinction between methods that rely on judgement and those that require quantitative data.

Methods Based on Judgment
Unaided judgment
It is common practice to ask experts what will happen. This is a good procedure to use when 1. • experts are unbiased
2. • large changes are unlikely
3. • relationships are well understood by experts (e.g., demand goes up when prices go down) 4. • experts possess privileged information
5. • experts receive accurate and well-summarized feedback about their forecasts.

Unfortunately, unaided judgement is often used when the above conditions do not hold. Green and Armstrong (2005a), for example, found that experts were no better than chance when they use their unaided judgement to forecast decisions made by people in conflict situations. If this surprises you, think of the ease with which producers of current affairs programmes seem able to assemble plausible...
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