Q1. Define Managerial Economics and explicate its chief features.
Q2. State and explicate the jurisprudence of demand.
Q3. What is Demand Forecasting? Explain in brief assorted methods of calculating demand.
Q4. Specify the term equilibrium. Explain the alterations in market equilibrium and effects of displacements in supply and demand.
Q5. Explain characteristics of LAC curve with a diagram.
Q6. Explain cost end product relationship with mention to
* Total fixed cost and end product
* Total variable cost and end product
* Total cost and end product
Q1. Define Managerial Economics and explicate its chief features Managerial economic sciences is a scientific discipline that trades with the application of assorted economic theories. rules. constructs and techniques to concern direction in order to work out concern and direction jobs. It deals with the practical application of economic theory and methodological analysis to decision-making jobs faced by private. public and non-profit devising organisations.
The same thought has been expressed by Spencer and Seigelman in the undermentioned words. “Managerial Economics is the integrating of economic theory with concern pattern for the intent of easing determination devising and frontward planning by the management” .
Harmonizing to Mc Nair and Meriam. “Managerial economic sciences is the usage of economic manners of idea to analyse concern situation” . Brighman and Pappas define managerial economic sciences as. ” the application of economic theory and methodological analysis to concern disposal practice” . Joel dean is of the sentiment that usage of economic analysis in explicating concern and direction policies is known as managerial economic sciences.
Features of managerial Economicss
1. It is more realistic. matter-of-fact and high spots on practical application of assorted economic theories to work out concern and direction jobs.
2. It is a scientific discipline of decision-making. It concentrates on decision-making procedure. decision-models and determination variables and their relationships.
3. It is both conceptual and metrical and it helps the decision-maker by supplying measuring of assorted economic variables and their interrelatednesss.
4. It uses assorted macro economic constructs like national income. rising prices. deflation. trade rhythms etc to understand and set its policies to the environment in which the house operates.
5. It besides gives importance to the survey of non-economic variables holding deductions of economic public presentation of the house. For illustration. impact of engineering. environmental forces. socio-political and cultural factors etc.
6. It uses the services of many other sister scientific disciplines like mathematics. statistics. technology. accounting. operation research and psychological science etc to happen solutions to concern and direction jobs.
7. It should be clearly remembered that Managerial Economics does non supply ready-made solutions to all sorts of jobs faced by a house. It provides merely the logic and methodological analysis to happen out replies and non the replies themselves. It all depends on the manager’s ability. experience. expertness and intelligence to utilize different tools of economic analysis to happen out the right replies to concern jobs.
It should be clearly remembered that Managerial Economics does non supply readymade solutions to all sorts of jobs faced by a house. It provides merely the logic and methodological analysis to happen out replies and non the replies themselves. It all depends on the manager’s ability. experience. expertness and intelligence to utilize different tools of economic analysis to happen out the right replies to concern jobs.
Features of Managerial Economicss
1. Microeconomicss: It surveies the jobs and rules of an single concern house or an single industry. It aids the direction in prediction and measuring the tendencies of the market.
2. Normative economic sciences: It is concerned with varied disciplinary steps that a direction undertakes under assorted fortunes. It deals with end finding. end development and accomplishment of these ends. Future planning. policy-making. decision-making and optimum use of available resources. come under the streamer of managerial economic sciences.
3. Matter-of-fact: Managerial economic sciences is matter-of-fact. In pure micro-economic theory. analysis is performed. based on certain exclusions. which are far from world. However. in managerial economic sciences. managerial issues are resolved day-to-day and hard issues of economic theory are kept at bay.
4. Uses theory of house: Managerial economic sciences employs economic constructs and rules. which are known as the theory of Firm or ‘Economics of the Firm’ . Thus. its range is narrower than that of pure economic theory.
5. Take the aid of macroeconomics: Managerial economic sciences incorporates certain facets of macroeconomic theory. These are indispensable to groking the fortunes and environments that envelop the on the job conditions of an single house or an industry. Knowledge of macroeconomic issues such as concern rhythms. revenue enhancement policies. industrial policy of the authorities. monetary value and distribution policies. pay policies and antitrust policies and so on. is built-in to the successful operation of a concern endeavor.
6. Purposes at assisting the direction: Managerial economic sciences purposes at back uping the direction in taking disciplinary determinations and charting programs and policies for future.
7. A scientific art: Science is a system of regulations and rules engendered for achieving given terminals. Scientific methods have been credited as the optimum way to accomplishing one’s ends. Managerial economic science has been is besides called a scientific art because it helps the direction in the best and efficient use of scarce economic resources. It considers production costs. demand. monetary value. net income. hazard etc. It assists the direction in singling out the most executable option. Managerial economic sciences facilitates good and consequence oriented determinations under conditions of uncertainness.
8. Prescriptive instead than descriptive: Managerial economic sciences is a normative and applied subject. It suggests the application of economic rules with respect to policy preparation. decision-making and future planning. It non merely describes the ends of an administration but besides prescribes the agencies of accomplishing these ends.
The term of demand is different from desire. privation. will or wish. In the linguistic communication of economic sciences. demand has different significance. Any want or desire will non represent demand. The term demand refers to entire or given measure of a trade good or a service that are purchased by the consumer in the market at a peculiar monetary value and at a peculiar clip. The Law of Demand:
It explains the relationship between monetary value and measure demanded of a trade good. It says that demand varies reciprocally with the monetary value. The jurisprudence can be explained in the undermentioned mode: “Keeping other factors that affect demand invariable. a autumn in monetary value of a merchandise leads to increase in measure demanded and a rise in monetary value leads to diminish in measure demanded for the product” . The jurisprudence can be expressed in mathematical footings as “Demand is a diminishing map of price” . Symbolically. therefore D = F ( P ) where. D represents Demand. P stands for Price and F denotes the Functional relationship. The jurisprudence explains the cause and consequence relationship between the independent variable [ monetary value ] and the dependant variable [ demand ] . The jurisprudence explains merely the general inclination of consumers while purchasing a merchandise. A consumer would purchase more when monetary value falls due to the undermentioned grounds: * A merchandise becomes cheaper. [ Price consequence ]
* Buying power of a consumer would travel up. [ Income consequence ] * Consumers can salvage some sum of money.
* Cheaper merchandises are substituted for dearly-won merchandises [ permutation consequence ] .
Important Features of Law of Demand:
* There is an reverse relationship between monetary value and measure demanded. * Price is an independent variable and demand is a dependent variable * It is merely a qualitative statement and as such it does non bespeak quantitative alterations in monetary value and demand. * Generally. the demand curve inclines downwards from left to compensate.
The operation of the jurisprudence is conditioned by the phrase “Other things being equal” . It indicates that given certain conditions. certain consequences would follow. The opposite relationship between monetary value and demand would be valid merely when gustatory sensations and penchants. imposts and wonts of consumers. monetary values of related goods. and income of consumers would stay changeless. Exceptions to the Law of Demand:
By and large talking. clients would purchase more when monetary value falls in conformity with the jurisprudence of demand. Exceptions to jurisprudence of demand provinces that with a autumn in monetary value. demand besides falls and with a rise in monetary value demand besides rises. This can be represented by lifting demand curve. In other words. the demand curve inclines upwards from left to right. It is known as an exceeding demand curve or unusual demand curve. It is clear from the diagram that as monetary value rises from Rs. 4. 00 to Rs. 5. 00. measure demanded besides expands from 10 units to 20 units.
1. Giffen’s Paradox: A paradox is an incompatibility or contrary. Sir Robert Giffen. an Irish Economist. with the aid of his ain illustration ( inferior goods ) disproved the jurisprudence of demand. The Giffen’s paradox holds that “Demand is strengthened with a rise in monetary value or weakened with a autumn in price” . He gave the illustration of hapless people of Ireland who were utilizing murphies and meat as day-to-day nutrient articles. When monetary value of murphies declined. clients alternatively of purchasing larger measures of murphies started purchasing more of meat ( superior goods ) . Therefore. the demand for murphies declined in malice of autumn in its monetary value. 2. Veblen’s consequence: Thorstein Veblen. a celebrated American Economist contends that there are certain trade goods which are purchased by rich people non for their direct satisfaction. but for their ‘snob – appeal’ or ‘ostentation’ . Veblen’s consequence states that demand for position symbol goods would travel up with a rise in monetary value and vice-versa. In instance of such position symbol trade goods it is non the monetary value which is of import but the prestigiousness conferred by that trade good on a individual makes him to travel for it. More normally cited illustrations of such goods are diamonds and cherished rocks. universe celebrated pictures. trade goods used by universe celebrated personalities etc.
Therefore. trade goods holding ‘snob – appeal’ are to be considered as exclusions to the jurisprudence of demand. 3. Fear of deficit: When serious deficits are anticipated by the people. ( e. g. . during the war period ) they purchase more goods at present even though the current monetary value is higher. 4. Fear of future rise in monetary value: If people expect future hiking in monetary values. they buy more even though they feel that current monetary values are higher. Otherwise. they have to pay a still high monetary value for the same merchandise. 5. Guess: Guess implies purchase or sale of an plus with the hope that its monetary value may lift or autumn and do bad net income. Normally guess is witnessed in the stock exchange market. People purchase more portions merely when their monetary values show a lifting tendency. This is because they get more net income. if they sell their portions when the monetary values really rise. Therefore. guess becomes an exclusion to the jurisprudence of demand. 6. Conspicuous ingestion: Conspicuous
ingestion are those points which are purchased by consumers even though their monetary values are lifting on history of their particular utilizations in our modern manner of life.
In instance of articles like carpus tickers. scooters. bikes. tape recording equipments. nomadic phones etc. clients buy more in malice of their high monetary values. 7. Emergencies: During exigency periods like war. dearth. inundations. cyclone. accidents etc. . people buy certain articles even though the monetary values are rather high. 8. Ignorance: Sometimes people may non be cognizant of the monetary values prevailing in the market. Hence. they buy more at higher monetary values because of sheer ignorance. 9. Necessities: Necessities are those points which are purchased by consumers whatever may be the monetary value. Consumers would purchase more necessities in malice of their higher monetary values. Changes or Shifts in Demand
It is to be clearly understood that if demand alterations merely because of alterations in the monetary value of the given trade good. in that instance there would be either enlargement or contraction in demand. Both of them can be explained with the aid of merely one demand curve. If demand alterations non because of monetary value alterations but because of other factors or forces. so in that instance there would be either increase or diminish in demand. If demand additions. there would be frontward displacement in the demand curve to the right and if demand decreases. so there would be backward displacement in the demand remedy.
Q3. What is Demand Forecasting? Explain in brief assorted methods of calculating demand. Meaning and Features
Demand calculating seeks to look into and mensurate the forces that determine gross revenues for bing and new merchandises. Generally companies plan their concern – production or gross revenues in expectancy of future demand. Hence forecasting future demand becomes of import. The art of successful concern prevarications in avoiding or minimising the hazards involved every bit far as possible and face the uncertainnesss in a most befitting mode. Therefore Demand Forecasting refers to an appraisal of most likely future demand for merchandise under given conditions. Important characteristics of demand prediction
* It is an informed and good thought out guessing.
* It is in footings of specific measures
* A prognosis is made for a specific period of clip which would be sufficient to take a determination and set it into action. * It is based on historical information and the past information. Demand prediction is needed to cognize whether the demand is capable to cyclical fluctuations or non. so that the production and stock list policies. etc. can be appropriately formulated. Demand prediction is by and large associated with calculating gross revenues A house can do usage of the gross revenues prognosiss made by the industry as a powerful tool for explicating gross revenues policy and gross revenues scheme. They can go action ushers to choose the class of action which will maximise the firm’s net incomes. To utilize demand prediction in an active instead than a inactive manner. direction must acknowledge the grade to which gross revenues are a consequence non merely of external economic environment but besides of the action of the company itself. Managerial utilizations of demand prediction:
In the short tally:
Demand prognosiss for short periods are made on the premise that the company has a given production capacity and the period is excessively short to alter the bing production capacity. Generally it would be one twelvemonth period. * Production planning: It helps in finding the degree of end product at assorted periods and avoiding under or over production. * Helps to explicate right purchase policy: It helps in better stuff direction. of purchasing inputs and command its stock list degree which cuts down cost of operation. * Helps to border realistic pricing policy: A rational pricing policy can be formulated to accommodate short tally and seasonal fluctuations in demand. * Gross saless prediction: It helps the company to put realistic gross revenues marks for each single salesman and for the company as a whole. * Helps in gauging short tally fiscal demands: It helps the company to be after the fundss required for accomplishing the production and gross revenues marks. The company will be able to raise the needed finance good in progress at sensible rates of involvement. * Reduce the dependance on opportunities: The house would be able to be after its production decently and confront the challenges of competition expeditiously. * Helps to germinate a suited labor policy: A proper gross revenues and production policies help to find the exact figure of laborers to be employed in the short tally. In the long tally:
Long tally prediction of likely demand for a merchandise of a company is by and large for a period of 3 to 5 or 10 old ages. * Business planning: It helps to be after enlargement of the bing unit or a new production unit. Capital budgeting of a house is based on long run demand prediction. * Financial planning: It helps to be after long tally fiscal demands and investing plans by drifting portions and unsecured bonds in the unfastened market. * Manpower planning: It helps in fixing long term planning for leaving preparation to the bing staff and recruit skilled and efficient labor force for its long tally growing. * Business control: Effective control over entire costs and grosss of a company helps to find the value and volume of concern. This in its bend helps to gauge the entire net incomes of the house. Thus it is possible to modulate concern efficaciously to run into the challenges of the market. * Determination of the growing rate of the house: A steady and good conceived demand calculating find the velocity at which the company can turn.
* Establishment of stableness in the working of the house: Fluctuations in production cause ups and downs in concern which retards smooth operation of the house. Demand calculating reduces production uncertainnesss and aid in stabilising the activities of the house. * Indicates mutuality of different industries: Demand prognosiss of peculiar merchandises become the footing for demand prognosiss of other related industries. e. g. . demand prognosis for cotton fabric industry supply information to the most likely demand for textile machinery. coloring material. dye-stuff industry etc. . * More utile in instance of developed states: It is of great usage in industrially advanced states where demand conditions fluctuate much more than supply conditions. The above analysis clearly indicates the significance of demand prediction in the modern concern set up. Survey Methods: Survey methods help us in obtaining information about the future purchase programs of possible purchasers through roll uping the sentiments of experts or by questioning the consumers.
These methods are extensively used in short tally and gauging the demand for new merchandises. There are different attacks under study methods. They are Consumers’ interview method: Under this method. attempts are made to roll up the relevant information straight from the consumers with respect to their future purchase programs. In order to garner information from consumers. a figure of alternate techniques are developed from clip to clip. Among them. the followers are some of the of import 1s. 1. Survey of buyer’s purposes or penchants: It is one of the oldest methods of demand prediction. It is besides called “Opinion surveys” . Under this method. consumer-buyers are requested to bespeak their penchants and willingness about peculiar merchandises. They are asked to uncover their ‘future purchase plans with regard to specific points. They are expected to give replies to inquiries like what points they intend to purchase. in what measure. why. where. when. what quality they expect. how much money they are be aftering to pass etc. By and large. the field study is conducted by the selling research section of the company or engaging the services of outside research organisations dwelling of learned and extremely qualified professionals.
The bosom of the study is questionnaire. It is a comprehensive one covering about all inquiries either straight or indirectly in a most intelligent mode. It is prepared by an adept organic structure who are specializers in the field or selling. The questionnaire is distributed among the consumer purchasers either through mail or in individual by the company. Consumers are requested to supply all relevant and right information. The following measure is to roll up the questionnaire from the consumers for the intent of rating. The stuffs collected will be classified. edited analyzed. If any prejudice biass. hyperboles. unreal or extra demand creative activity etc. . are found at the clip of replying they would be eliminated. The information so collected will now be consolidated and reviewed by the top executives with batch of experience. It will be examined exhaustively. Inferences are drawn and decisions are arrived at. Finally a study is prepared and submitted to direction for taking concluding determinations. * The success of the study method depends on many factors: * The nature of the inquiries asked
* The ability of the surveyed
* The representative of the samples
* Nature of the merchandise
* Features of the market
* Consumer-buyers behaviour. their purposes. attitudes. ideas. motivations. honestness etc. The direction should non wholly depend on the consequences of study studies to project future demand. Consumer purchasers may non show their honest and existent positions and as such they may give merely the wide tendencies in the market. In order to get at right decisions. field studies should be on a regular basis checked and supervised. This method is simple and utile to the manufacturers who produce goods in majority. Here the load of prediction is put on clients. However this method is non much utile in gauging the future demand of the families as they run in big Numberss and besides do non freely show their hereafter demand demands. It is expensive and besides hard. Preparation of a questionnaire is non an easy undertaking. At best it can be used for short term prediction. 2. Direct Interview Method
Experience has shown that many clients do non react to questionnaire addressed to them even if it is simple due to varied grounds. Hence. an alternate method is developed. Under this method. clients are straight contacted and interviewed. Direct and simple inquiries are asked to them. They are requested to reply specifically about their budget. outgo programs. peculiar points to be selected. the quality and measure of merchandises. comparative monetary value penchants etc. for a peculiar period of clip. There are two different methods of direct personal interviews. They are as follows: Complete numbering method:
Under this method. all possible clients are interviewed in a peculiar metropolis or a part. The replies elicited are amalgamate and carefully studied to obtain the most likely demand for a merchandise. The direction can safely project the future demand for its merchandises. This method is free from all types of biass. The consequence chiefly depends on the nature of inquiries asked and replies received from the clients. However. this method can non be used successfully by all Sellerss in all instances. This method can be employed to merely those merchandises whose clients are concentrated in a little part or vicinity. In instance consumers are widely dispersed. this method may non be physically adopted or turn out dearly-won both in footings of clip and money. Hence. this method is extremely cumbrous in nature. Sample study method or the consumer panel method:
Experience of the experts’ show that it is impossible to near all clients ; as such careful sampling of representative clients is indispensable. Hence. another discrepancy of complete numbering method has been developed. which is popularly known as sample study method. Under this method. different transverse subdivisions of clients that make up the majority of the market are carefully chosen. Merely such consumers selected from the relevant market through some sampling method are interviewed or surveyed. In other words. a group of consumers are chosen and queried about their penchants in concrete state of affairss. The choice of a few clients is known as sampling. The selected consumers form a panel. This method uses either random sampling or the graded sampling technique. The method of study may be direct interview or mailed questionnaire to the selected consumers. On the footing of the positions expressed by these selected consumers. most likely demand may be estimated.
The advantage of a panel lies in the fact that the same panel is continued and new expensive panel does non hold to be formulated every clip a new merchandise is investigated. As compared to the complete numbering method. the sample study method is less boring. less expensive. much simpler and less clip devouring. This method is by and large used to gauge short run demand by authorities sections and concern houses. Success of this method depends upon the sincere co-operation of the selected clients. Hence. choice of suited consumers for the specific intent is of great importance. Even with careful choice of clients and the true information about their purchasing purpose. the consequences of the study can merely be of limited usage. A sudden alteration in monetary value. incompatibility in purchasing purposes of consumers. figure of reasonable inquiries asked and dropouts from the panel for assorted grounds put a serious restriction on the practical utility of the panel method. Corporate sentiment method or sentiment study method:
This is a discrepancy of the study method. This method is besides known as “Sales – force polling” or “Opinion canvass method” . Under this method. gross revenues representatives. professional experts and the market advisers and others are asked to show their considered sentiments about the volume of gross revenues expected in the hereafter. The logic and concluding behind the method is that these salesmen and other people connected with the gross revenues section are straight involved in the selling and merchandising of the merchandises in different parts. Salesmans. being really near to the clients. will be in a place to cognize and experience the customer’s reactions towards the merchandise. They can analyze the pulsation of the people and place the specific positions of the clients. These people are rather capable of gauging the likely demand for the merchandises with the aid of their confidant and friendly contact with the clients and their personal judgements based on the past experience. Therefore. they provide approximate. if non accurate estimations.
Then. the positions of all salesmen are aggregated to acquire the overall likely demand for a merchandise. Further. these sentiments or estimations collected from the assorted experts are considered. amalgamate and reviewed by the top executives to extinguish the prejudice or optimism and pessimism of different salesmen. These revised estimations are farther examined in the visible radiation of factors like proposed alteration in selling monetary values. merchandise designs and advertisement plans. expected alterations in the grade of competition. income distribution. population etc. The concluding gross revenues prognosis would emerge after these factors have been taken into history. This method to a great extent depends on the corporate wisdom of salesmen. departmental caputs and the top executives. It is simple. less expensive and utile for short tally calculating peculiarly in instance of new merchandises. The chief drawback is that it is subjective and depends on the intelligence and consciousness of the salesmen. It can non be relied upon for long term concern planning. Delphi Method or Experts Opinion Method:
This method was originally developed at Rand Corporation in the late 1940’s by Olaf Helmer. Dalkey and Gordon. This method was used to foretell future technological alterations. It has proved more utile and popular in calculating non-economic instead than economic variables. It is a discrepancy of sentiment canvass and study method of demand prediction. Under this method. outside experts are appointed. They are supplied with all sorts of information and statistical informations. The direction requests the experts to show their considered sentiments and positions about the expected future gross revenues of the company. Their positions are by and large regarded as most nonsubjective 1s. Their positions by and large avoid or cut down the “Halo – Effects” and “Ego – Involvement” of the positions of the others. Since experts’ sentiments are more valuable. a house will give batch of importance to them and fix their hereafter program on the footing of the prognosiss made by the experts. End Use or Input – Output Method
Under this method. the sale of the merchandise under consideration is projected on the footing of demand studies of the industries utilizing the given merchandise as an intermediate merchandise. The demand for the concluding merchandise is the terminal – use demand of the intermediate merchandise used in the production of the concluding merchandise. An intermediate merchandise may hold many terminal – users. For e. g. . steel can be used for doing assorted types of agricultural and industrial machinery. for building. for transit etc. It may hold the demand both in the domestic market every bit good as international market. Therefore. stop – usage demand appraisal of an intermediate merchandise may affect many concluding goods industries utilizing this merchandise. at place and abroad.
Once we know the demand for concluding ingestion goods including their exports we can gauge the demand for the merchandise which is used as intermediate good in the production of these concluding goods with the aid of input – end product coefficients. The input – end product tabular array incorporating input – end product coefficients for peculiar periods are made available in every state either by the Government or by research organisations. This method is used to calculate the demand for intermediate merchandises merely. It is rather utile for industries which are mostly producers’ goods. like aluminum. steel etc. The chief restriction of the method is that as the figure of terminal – users of a merchandise addition. it becomes more inconvenient to utilize this method. Q4. Specify the term equilibrium. Explain the alterations in market equilibrium and effects of displacements in supply and demand. Meaning of equilibrium
The word equilibrium is derived from the Latin word “aequilibrium” which means equal balance. It means a province of even balance in which opposing forces or inclinations neutralize each other. It is a place of remainder characterized by absence of alteration. It is a province where there is complete understanding of the economic programs of the assorted market participants so that no 1 has a inclination to revise or change his determination. In the words of professor Mehta: “Equilibrium denotes in economic sciences absence of alteration in motion. ” Market Equilibrium:
When the supply and demand curves intersect. the market is in equilibrium. This is where the measure demanded and measure supplied are equal. The corresponding monetary value is the equilibrium monetary value or market-clearing monetary value. the measure is the equilibrium measure. Changes in Market Equilibrium:
The alterations in equilibrium monetary value will happen when there will be displacement either in demand curve or in supply curve or both: Supply and demand is an economic theoretical account of monetary value finding in a market. It concludes that in a competitory market. the unit monetary value for a peculiar good will change until it settles at a point where the measure demanded by consumers ( at current monetary value ) will be the measure supplied by manufacturers ( at current monetary value ) . ensuing in an economic equilibrium of monetary value and measure. The four basic Torahs of supply and demand are:
1. If demand additions and supply remains unchanged. so it leads to higher equilibrium monetary value and higher measure 2. If demand lessenings and supply remains unchanged. so it leads to take down equilibrium monetary value and lower measure. 3. If supply additions and demand remains unchanged. so it leads to take down equilibrium monetary value and higher measure. 4. If supply lessenings and demand remains unchanged. so it leads to higher equilibrium monetary value and lower measure.
Effectss of Shift in demand
Demand alterations when there is a alteration in the determiners of demand like the income. gustatory sensations. monetary values of replacements and complements. size of the population etc. If demand raises due to a alteration in any one of these conditions the demand curve displacements upward to the right. If. on the other manus. demand falls. the demand curve displacements downward to the left. Such rise and autumn in demand are referred to as addition and lessening in demand. A alteration in the market equilibrium caused by the displacements in demand can be explained with the aid of a diagram.
Effectss of Changes in Demand and Supply:
Changes can happen in both demand and supply conditions. The effects of such alterations on the market equilibrium depend on the rate of alteration in the two variables. If the rate of alteration in demand is matched with the rate of alteration in supply there will be no alteration in the market equilibrium. the new equilibrium shows expanded market with increased measure of both supply and demand at the same monetary value. This is made clear from the diagram below:
Similar will be the effects when the lessening in demand is greater than the lessening in supply on the market equilibrium.
Q5. Explain characteristics of LAC curve with a diagram
Features of long tally AC curves:
1. Tangent curve: Different SAC curves represent different operational capacities of different workss in the short tally. LAC curve is locus of all these points of tangency. The SAC curve can ne’er cut a LAC curve though they are digressive to each other. This implies that for any given degree of end product. no SAC curve can of all time be below the LAC curve. Hence. SAC can non be lower than the LAC in the long tally. Therefore. LAC curve is digressive to assorted SAC curves.
2. Envelope curve: It is known as Envelope curve because it envelopes a group of SAC curves appropriate to different degrees of end product.
3. Flatter U-shaped or dished curve: The LAC curve is besides U shaped or serve shaped cost curve. But It is less marked and much flatter in nature. LAC bit by bit falls and rises due to economic systems and diseconomies of graduated table.
4. Planing curve: The LAC remedy is described as the Planning Curve of the house because it represents the least cost of bring forthing each possible degree of end product. This helps in bring forthing optimal degree of end product at the minimal LAC. This is possible when the enterpriser is choosing the optimal graduated table works. Optimum graduated table works is that size where the minimal point of SAC is tangent to the minimal point of LAC.
5. Minimal point of LAC curve should be ever lower than the minimal point of SAC curve: This is because LAC can ne’er be higher than SAC or SAC can ne’er be lower than LAC. The LAC curve will touch the optimal works SAC curve at its minimal point. A rational enterpriser would choose the optimal graduated table works. Optimum graduated table works is that size at which SAC is tangent to LAC. such that both the curves have the minimal point of tangency. In the diagram. OM2 is regarded as the optimal graduated table of end product. as it has the least per unit cost. At OM2 end product LAC = SAC.
LAC curve will be tangent to SAC curves lying to the left of the optimal graduated table or right side of the optimal graduated table. But at these points of tangency. neither LAC is minimal nor will SAC be minimal. SAC curves are either lifting or falling bespeaking a higher cost Managerial Use of LAC
The survey of LAC is of greater importance in managerial determination doing procedure.
It helps the direction in the finding of the best size of the works to be constructed or when a new one is introduced in acquiring the minimal cost end product for a given works. But it is interested in bring forthing a given end product at the minimal cost. The LAC curve helps a house to make up one’s mind the size of the works to be adopted for bring forthing the given end product. For outputs less than cost heavy combination at the optimal graduated table i. e. . when the house is working capable to increasing returns to scale. it is more economical to under utilize a somewhat big works runing at less than its minimal cost – end product than to overdrive smaller unit. Conversely. at end product beyond the optimal degree. that is when the house experience diminishing return to graduated table. it is more economical to over utilize a somewhat smaller works than to under utilize a somewhat larger one. Therefore. it explains why it is more economical to over utilize a somewhat little works instead than to under usage a big works.
LAC is used to demo how a house determines the optimal size of the works. An optimal size of works is one that helps in best use of resources in the most economical mode.
Long Run Marginal cost:
A long-term fringy cost curve can be derived from the long-term norm cost curve. Merely as the SMC is related to the SAC. likewise the LMC is related to the LAC and. hence. we can deduce the LMC straight from the LAC. In the diagram we have taken three works sizes ( for the interest of simpleness ) and the corresponding three SAC and SMC curves. The LAC curve is drawn by enfolding the household of SAC curves. The points of tangency between the SAC and the LAC curves indicate different end products for different works sizes. If the house wants to bring forth ON end product in the long tally. it will hold to take the works size matching to SAC1. The LAC curve is tangent to SAC1 at point A. For ON end product. the mean cost is NA and the corresponding fringy cost is NB If LAC curve is tangent to SAC1 curve at point A. the corresponding LMC curve will hold to be equal to SMC1 curve at point B. The LMC will go through through point B.
In other words. where LAC is equal to SAC curve ( for a given end product ) the LMC will hold to be equal to a given SMC. If end product OQ is to be produced in the long tally. it will be done at point degree Celsius which is the point of tangency between SAC2 and the LAC. At point C. the short –run norm cost ( SAC2 ) and the short-term fringy cost ( SMC2 ) are equal and. hence. the LAC for end product OQ is QC and the corresponding LMC is besides QC. The LMC curve will. therefore base on balls through point C. Finally. for end product OR. at point D the LAC is tangent to SAC3. For OR end product at point E LMC is go throughing through SMC3. By linking points B. C and E. we can pull the long-term fringy cost curve.
Cost of Production: Formulas
Q6. Explain cost end product relationship with mention to
* Total fixed cost and end product
* Total variable cost and end product
* Total cost and end product
Cost-output relationship and nature and behaviour of cost curves in the short tally In order to analyze the relationship between the degree of end product and matching cost of production. we have to fix the cost agenda of the house. A cost-schedule is a statement of a fluctuation in costs ensuing from fluctuations in the degrees of end product. It shows the response of cost to alterations in end product. A conjectural cost agenda of a house has been represented in the undermentioned tabular array.
On the footing of the above cost agenda. we can analyze the relationship between alterations in the degree of end product and cost of production. If we represent the relationship between the two in a geometrical mode. we get different types of cost curves in the short tally. In the short tally. by and large we study the undermentioned sorts of cost constructs and cost curves. 1. Entire fixed cost ( TFC )
TFC refers to entire money disbursals incurred on fixed inputs like works. machinery. tools & A ; equipments in the short tally. Entire fixed cost corresponds to the fixed inputs in the short tally production map. TFC remains the same at all degrees of end product in the short tally. It is the same when end product is nil. It indicates that whatever may be the measure of end product. whether 1 to 6 units. TFC remains changeless. The TFC curve is horizontal and parallel to OX-axis. demoing that it is changeless regardless of out put per unit of clip. TFC starts from a point on Y-axis indicating that the entire fixed cost will be incurred even if the end product is zero. In our illustration. Rs 360=00 is TFC. It is obtained by summing up the merchandise or measures of the fixed factors multiplied by their several unit monetary value. 2. Entire variable cost ( TVC )
TVC refers to entire money disbursals incurred on the variable factor inputs like natural stuffs. power. fuel. H2O. conveyance and communicating etc. in the short tally. Entire variable cost corresponds to variable inputs in the short tally production map. It is obtained by summing up the production of measures of variable inputs multiplied by their monetary values. The expression to cipher TVC is as follows. TVC = TC-TFC. TVC = degree Fahrenheit ( Q ) i. e. TVC is an increasing map of out put. In other words TVC varies with end product. It is nil. if there is no production. Therefore. it is a direct cost of end product. TVC rises aggressively in the beginning. bit by bit in the center and aggressively at the terminal in conformity with the jurisprudence of variable proportion. The jurisprudence of variable proportion explains that in the beginning to obtain a given measure of end product. comparative fluctuation in variable factors-needed are in less proportion. but after a point when the diminishing returns operate. variable factors are to be employed in a larger proportion to increase the same degree of end product. TVC curve incline upwards from left to compensate. TVC curve rises as end product is expanded. When out put is Zero. TVC besides will be zero. Hence. the TVC curve starts from the beginning. 3. Entire cost ( TC )
The entire cost refers to the aggregative money outgo incurred by a house to bring forth a given measure of end product. The entire cost is measured in relation to the production map by multiplying the factor monetary values with their measures. TC = degree Fahrenheit ( Q ) which means that the T. C. varies with the end product. Theoretically talking TC includes all sorts of money costs. both expressed and inexplicit cost. Normal net income is included in the entire cost as it is an inexplicit cost. It includes fixed every bit good as variable costs. Hence. TC = TFC +TVC. TC varies in the same proportion as TVC. In other words. a fluctuation in TC is the consequence of fluctuation in TVC since TFC is ever changeless in the short tally. The entire cost curve is lifting upwards from left to compensate. In our illustration the TC curve starts from Rs. 360-00 because even if there is no end product. TFC is a positive sum. TC and TVC have same form because an addition in end product additions them both by the same sum since TFC is changeless. TC curve is derived by adding up vertically the TVC and TFC curves. The perpendicular distance between TVC curve and TC curve is equal to TFC and is changeless throughout because TFC is changeless.