Managerial Economics

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 14 (3912 words) Published: May 14, 2013
Master of Business Administration- MBA Semester 1
MB0042 – Managerial Economics - 4 Credits
(Book ID: B 1625 )
Assignment Set -1 (60 marks)
Note: Assignment Set -1 must be written within 6-8 pages. Answer all questions.

Q1. Discuss profit maximising model in detail. 10 marks(350-400 words) Answer : Profit maximization is the rational behaviour of equilibrium assumption. Any firm which aiming at profit maximization model; will go increasing its output till it reaches maximum profit output. Profit is known nothing but differences between total revenue and total cost. The more the differences between total revenue and total cost will create maximum profit. So, the equilibrium for a firm will be when there is maximum difference between the total cost and total revenue.

Economist Theory of Firm:
According to the Economist Theory of Firm, a firm is a transformation unit, which converts input into output and while doing so, tries to create surplus value. This surplus value is nothing but the difference between the value of the product and the value of the factors of production. The firm aiming for profit maximization reaches its equilibrium only when it produces profit maximizing output. The firm maximizes profit by equating marginal revenue with marginal cost.

Behavioural Theory of Cyert & March:
According to the theory, in a large multi-product firm the management is not the owner. There are forms of business firm which compromises the group of individuals and not controlled by single entity.

Marris Growth Maximization Model:

Robin Marris is the developer of the model. According to this theory, modern firms are managed by both the manager and the shareholders. A manager aims to maximize the rate of growth of the firm and the shareholders will try to maximize the dividend and the increase the share price. Sales Maximization Model:

This is alternative model for profit maximization model. The model has been propounded by W.J. Baumol who was an American Economist. The assumption in this theory is relation about business behaviour. Baumol thinks managers are more interested in maximizing sales rather than profit.

Williamson’s Managerial Discretionary Theory:
According to the theory, in a firm, shareholders and managers are two separate groups. The firm tries to get maximum returns on investment and get maximum profit, whereas managers try to maximize profit in their satisfying function. At last, Williamson’s managerial discretion theory shows the utility function of a manager. In this theory, the firm will try to get maximum returns or maximum profit where as manager try to maximum utility satisfying function. They are in equilibrium when the utility has maximum amount.

Q2. Discuss the various survey methods to forecast demand. 10 marks(350-400 words) Answer : Demand forecasting seeks to investigate and measure the forces that determine sales for existing and new products. Generally companies plan their business – production or sales in anticipation of future demand. Hence forecasting future demand becomes important. The art of successful business lies in avoiding or minimizing the risks involved as far as possible and face the uncertainties in a most befitting manner.

Methods of Forecasting:

Demand forecasting is a highly complicated process as it deals with the estimation of future demand. It requires the assistance and opinion of experts in the field of sales management. Demand forecasting, to become more realistic should consider the two aspects in a balanced manner. Application of commonsense is needed to follow a pragmatic approach in demand forecasting.

Broadly speaking, there are two methods of demand forecasting.

They are:
1) Survey methods and
2) Statistical methods

Figure: Methods of Demand Forecasting

1) Survey Methods:
Survey methods help us in obtaining information about the future purchase plans of potential buyers through collecting the opinions of experts or...
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