Assignment On Managerial Economics

ASSIGNMENT ON MANAGERIAL ECONOMICS
ASSIGNME
NT ON
MANAGERI
AL
ECONOMI
CS
BY RAHUL
GUPTA
Question 1: What is pricing policy? What are
the internal and external factors of the
policy?
Introduction:
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2
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Standard procedure used by a firm to set wholesale

and retail prices for its products or services. See also
pricing strategy. Price planning that takes into view
factors such as a firm's overall marketing objectives,
consumer demand, product attributes, competitors'
pricing, and market and economic trends.
 Pricing Factors to
Consider:
• Determine primary and secondary market
segments. This helps you better understand the
offering's value to consumers. Segments are
important for positioning and merchandising the
offering to ensure maximized sales at the
established price point.
• Assess the product's availability and near

substitutes. Under pricing hurts your product as
much as overpricing does. If the price is too low,
potential customers will think it can't be that
good. This is particularly true for high-end,
prestige brands. One client underpriced its
subscription product, yielding depressed
response and lower sales. The firm
underestimated the uniqueness of its offering,
the number of close substitutes, and the strength
of the consumer's bond with the product. As a
result, the client could increase the price with
only limited risk to its customer base. In fact, the
initial increase resulted in more subscribers as
the new price was more in line with its
consumer-perceived value.
• Survey the market for competitive and

similar products. Consider whether new
products, new uses for existing products or new
technologies can compete with or, worse,
leapfrog your offering. Examine all possible
ways consumers can acquire your product. I've
worked with companies that only take into
account direct competitors selling through
identical channels. Don't limit your analysis to

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online distribution channels.
Competitors may define your price range. In this

case, you can price higher if consumers perceive
your product and/or brand is significantly better;
price on parity if your product has better
features; or price lower if your product has
relatively similar features to existing products.
An information client faced this situation with a
premium product. Its direct competitors
established the price for a similar offering. As
the third player in this segment, its choices were
price parity with an enhanced offering or a lower
price with similar features.
• Examine market pricing and economics. A

paid, ad-free site should generate more revenue
than a free ad-supported one, for example. In
considering this option, remember to incorporate
the cost of forgone revenue, especially as
advertisers find paying customers more
attractive.
• Calculate the internal cost structure and

understand how pricing interacts with the
offering. I recommended a content client
promote its advertising-supported free e-zines to
incent readers to register. The client believed the
e-zines had no value as the content was
repurposed from another product, so it didn't
advertise them. Yet the repurposed content was
exactly what readers viewed as a benefit. By
undervaluing its offering, the client missed an
opportunity to increase registrations and, hence,
advertising revenues with a product that
effectively had no development costs.
• Test different price points if possible. This is

important if you enter a new or untapped
market, or enhance an offering with consumer-
oriented benefits. To determine price,
MarketingExperiments.com tested three
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different price points for a book. It found the

highest price yielded the greatest product
revenue. Interestingly, the middle price yielded
greater revenue over time, as it generated more
customers to whom other related products could
be marketed.
• Monitor the market and your competition

continually to reassess pricing. Market
dynamics and new products can influence and
change consumer needs.
 Internal Factors:
Marketing Objectives:
Marketing decisions are guided by the overall objectives
of the company. While we will discuss this in more
detail when we cover marketing strategy in a later
tutorial, for now it is important to understand that all
marketing decisions, including price, work to help
achieve company objectives. Corporate objectives can
be wide-ranging and include different objectives for
different functional areas (e.g., objectives for
production, human resources, etc). While pricing
decisions are influenced by many types of objectives set
up for the marketing functional area, there are four key
objectives in which price plays a central role. In most
situations only one of these objectives will be followed,
though the marketer may have different objectives for
different products. The four main marketing objectives
affecting price include:
• Return on Investment (ROI) – A firm may set as

a marketing objective the requirement that all
products attain a certain percentage return on the
organization’s spending on marketing the
product. This level of return along with an

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estimate of sales will help determine appropriate

pricing levels needed to meet the ROI objective.
• Cash Flow – Firms may seek to set prices at a
level that will insure that sales revenue will at
least cover product production and marketing
costs. This is most likely to occur with new
products where the organizational objectives
allow a new product to simply meet its expenses
while efforts are made to establish the product in
the market. This objective allows the marketer to
worry less about product profitability and
instead directs energies to building a market for
the product.
• Market Share – The pricing decision may be
important when the firm has an objective of
gaining a hold in a new market or retaining a
certain percent of an existing market. For new
products under this objective the price is set
artificially low in order to capture a sizeable
portion of the market and will be increased as
the product becomes more accepted by the target
market (we will discuss this marketing strategy
in further detail in our next tutorial). For
existing products, firms may use price decisions
to insure they retain market share in instances
where there is a high level of market
competition and competitors who are willing to
compete on price.
• Maximize Profits – Older products that appeal to
a market that is no longer growing may have a
company objective requiring the price be set at a
level that optimizes profits. This is often the case
when the marketer has little incentive to
introduce improvements to the product (e.g.,
demand for product is declining) and will
continue to sell the same product at a price
premium for as long as some in the market is
willing to buy.
Factors Affecting Pricing

Decision:
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For the remainder of this tutorial we look at factors that

affect how marketers set price. The final price for a
product may be influenced by many factors which can
be categorized into two main groups:
• Internal Factors –
• Objectives of the firm.
• Production costs.
• Quality of the product and
its characteristics.
• Scale of the production.
• Efficient management of the
resources.
• Policy towards percentage of
profits and dividend
distribution.
• Advertising and sales
promotion policies.
• Wage policy and sales turn
over policy etc.
• The stages of the product
life cycle.
• Use pattern of the product.
• Extent of the distinctiveness
of the product and extent of

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product differentiation
practiced by the firm.
• Composition of the product
and life of the firm.
• External Factors –
• Demand, supply and their determinants.
• Elasticity of demand and supply.
• Degree of competition in the market.
• Size of the market.
• Good will, name, fame, reputation of the

firm in the market.
• Trends in the market.
• Purchasing power of the buyers.
• Bargaining power of the customers.
• Availability of the substitutes and

complements.
• Government’s policy relating to various

kinds of incentives, disincentives,
controls, restrictions and regulations,
licensing, taxation, export and import,
foreign aid, foreign capital foreign
technology, MNC’s etc.
• Competitors pricing policy.
• Social consideration.

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Question 2: Mention three crucial objectives

of price policies?
• Profit generally is the making of gain in

business activity for the benefit of the owners of
the business. The word comes from Latin
meaning "to make progress", and is defined in
two different ways, one for economics and one
for accounting.
• A sales oriented business will focus much more

of its energy on selling. This is usually done by
door to door selling or what is called telesales
over the phone. Other sales oriented businesses
may rely entirely on social functions by selling
exclusively from booths or kiosks. Some local
stores and grocers also function entirely as a

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sales oriented business without the use of

conventional advertising.
• Status quo, a commonly used form of the

original Latin "statu quo" - literally "the state in
which" - is a Latin term meaning the current or
existing state of affairs.[1] To maintain the status
quo is to keep the things the way they presently
are. The related phrase status quo ante, literally
"the state in which before", means "the state of
affairs that existed previously"
Question 3: Mention the bases of price

discrimination?
INTRODUCTION:
Price discrimination exists when sales of identical
goods or services are transacted at different prices from
the same provider. In a theoretical market with perfect
information, no transaction costs or prohibition on
secondary exchange (or re-selling) to prevent arbitrage,
price discrimination can only be a feature of monopoly
and oligopoly markets[1], where market power can be
exercised. Otherwise, the moment the seller tries to sell
the same good at different prices, the buyer at the lower
price can arbitrage by selling to the consumer buying at
the higher price but with a tiny discount. However,
market frictions in oligopolies such as the airlines and
even in fully competitive retail or industrial markets
allow for a limited degree of differential pricing to
different consumers. Price discrimination also occurs
when it costs more to supply one customer than it does
another, and yet the supplier charges both the same
price.
The effects of price discrimination on social efficiency
are unclear; typically such behavior leads to lower
prices for some consumers and higher prices for others.
Output can be expanded when price discrimination is

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very efficient, but output can also decline when

discrimination is more effective at extracting surplus
from high-valued users than expanding sales to low
valued users. Even if output remains constant, price
discrimination can reduce efficiency by misallocating
output among consumers.
Price discrimination requires market segmentation and
some means to discourage discount customers from
becoming resellers and, by extension, competitors. This
usually entails using one or more means of preventing
any resale, keeping the different price groups separate,
making price comparisons difficult, or restricting
pricing information. The boundaries set up by the
marketer to keep segments separate are referred to as a
rate fence. Price discrimination is thus very common in
services, where resale is not possible; an example is
student discounts at museums.
Price discrimination can also be seen where the
requirement that goods be identical is relaxed. For
example, so-called "premium products" (including
relatively simple products, such as cappuccino
compared to regular coffee) have a price differential
that is not explained by the cost of production. Some
economists have argued that this is a form of price
discrimination exercised by providing a means for
consumers to reveal their willingness to pay.
 Types of price
discrimination:
First degree price discrimination:
In first degree price discrimination, price varies by
customer's willingness or ability to pay. This arises
from the fact that the value of goods is subjective. A
customer with low price elasticity is less deterred by a
higher price than a customer with high price elasticity
of demand. As long as the price elasticity (in absolute
value) for a customer is less than one, it is very

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advantageous to increase the price: the seller gets more

money for fewer goods. With an increase of the price
elasticity tends to rise above one. One can show that in
the optimum the price, as it varies by customer, is
inversely proportional to one minus the reciprocal of the
price elasticity of that customer at that price. This
assumes that the consumer passively reacts to the price
set by the seller, and that the seller knows the demand
curve of the customer. In practice however there is a
bargaining situation, which is more complex: the
customer may try to influence the price, such as by
pretending to like the product less than he or she really
does or by threatening not to buy it.
An alternative way to understand First Degree Price
Discrimination is as follows: This type of price
discrimination is primarily theoretical because it
requires the seller of a good or service to know the
absolute maximum price that every consumer is willing
to pay. As above, it is true that consumers have different
price elasticities, but the seller is not concerned with
such. The seller is concerned with the maximum
willingness to pay (or reservation price) of each
customer. By knowing the reservation price, the seller is
able to absorb the entire market surplus, thus taking all
consumer surpluses from the consumer and
transforming it into revenues. From a social welfare
perspective, first degree price discrimination is not
undesirable. That is, the market is still entirely efficient
and there is no deadweight loss to society. However, it
is the complete opposite of a perfectly competitive
market. In a perfectly competitive market, the
consumers receive the bulk of surplus. In a market with
first degree price discrimination, the seller(s) capture all
surpluses. Efficiency is unchanged but the wealth is
transferred. This type of market does not much exist in
reality, hence it is primarily theoretical. Examples of
where this might be observed are in markets where
consumers bid for tenders, though still, in this case, the
practice of collusive tendering undermines efficiency.

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Second degree price

discrimination:
In second degree price discrimination, price varies
according to quantity sold. Larger quantities are
available at a lower unit price. This is particularly
widespread in sales to industrial customers, where bulk
buyers enjoy higher discounts.
Additionally to second degree price discrimination,
sellers are not able to differentiate between different
types of consumers. Thus, the suppliers will provide
incentives for the consumers to differentiate themselves
according to preference. As above, quantity "discounts",
or non-linear pricing, is a means by which suppliers use
consumer preference to distinguish classes of
consumers. This allows the supplier to set different
prices to the different groups and capture a larger
portion of the total market surplus.
Third degree price discrimination:

In third degree price discrimination, price varies by
attributes such as location or by customer segment, or in
the most extreme case, by the individual customer's
identity; where the attribute in question is used as a
proxy for ability/willingness to pay.
Additionally to third degree price discrimination, the
supplier(s) of a market where this type of discrimination
is exhibited are capable of differentiating between
consumer classes. Examples of this differentiation are
student or senior discounts. For example, a student or a
senior consumer will have a different willingness to pay
than an average consumer, where the reservation price
is presumably lower because of budget constraints.
Thus, the supplier sets a lower price for that consumer
because the student or senior has a more elastic price
elasticity of demand (see the discussion of price
elasticity of demand as it applies to revenues from the

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first degree price discrimination, above). The supplier is

once again capable of capturing more market surplus
than would be possible without price discrimination.
Note that it is not always advantageous to the company
to price discriminate even if it is possible, especially for
second and third degree discrimination. In some
circumstances, the demands of different classes of
consumers will encourage suppliers to simply ignore
one/some class (es) and target entirely to the other(s).
Whether it is profitable to price discriminate is
determined by the specifics of a particular market.
Question 4: What do you mean by the fiscal

policy? What are the instruments of fiscal
policy? Briefly comment on India’s fiscal
policy?
Introduction:
In economics, fiscal policy is the use of government
spending and revenue collection to influence the
economy. Fiscal policy can be contrasted with the other
main type of economic policy, monetary policy, which
attempts to stabilize the economy by controlling interest
rates and the supply of money. The two main
instruments of fiscal policy are government spending
and taxation. Changes in the level and composition of
taxation and government spending can impact on the
following variables in the economy:
• Aggregate demand and the level of economic
activity;
• The pattern of resource allocation;

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• The distribution of income.

Fiscal policy refers to the overall effect of the budget
outcome on economic activity. The three possible
stances of fiscal policy are neutral, expansionary and
contractionary:
• A neutral stance of fiscal policy implies a
balanced budget where G = T (Government
spending = Tax revenue). Government spending
is fully funded by tax revenue and overall the
budget outcome has a neutral effect on the level
of economic activity.
• An expansionary stance of fiscal policy involves
a net increase in government spending (G > T)
through rises in government spending or a fall in
taxation revenue or a combination of the two.
This will lead to a larger budget deficit or a
smaller budget surplus than the government
previously had, or a deficit if the government
previously had a balanced budget. Expansionary
fiscal policy is usually associated with a budget
deficit.
• A contractionary fiscal policy (G < T) occurs
when net government spending is reduced either
through higher taxation revenue or reduced
government spending or a combination of the
two. This would lead to a lower budget deficit or
a larger surplus than the government previously
had, or a surplus if the government previously
had a balanced budget. Contractionary fiscal
policy is usually associated with a surplus.
1. To achieve desirable price level:
The stability of general prices is necessary for economic

stability. The maintenance of a desirable price level has
good effects on production, employment and national
income. Fiscal policy should be used to remove;

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fluctuations in price level so that ideal level is

maintained.
2. To Achieve desirable consumption

level:
A desirable consumption level is important for political,

social and economic consideration. Consumption can be
affected by expenditure and tax policies of the
government. Fiscal policy should be used to increase
welfare of the economy through consumption level.
3. To Achieve desirable employment

level:
The efficient employment level is most important in

determining the living standard of the people. It is
necessary for political stability and for maximization of
production. Fiscal policy should achieve this level.
4. To achieve desirable income

distribution:
The distribution of income determines the type of

economic activities the amount of savings. In this way,
it is related to prices, consumption and employment.
Income distribution should be equal to the most possible
degree. Fiscal policy can achieve equality in distribution
of income.
5. Increase in capital formation:
In under-developed countries deficiency of capital is the

main reason for under-development. Large amounts are
required for industry and economic development. Fiscal
policy can divert resources and increase capital.
6. Degree of inflation:
In under-developed countries, a degree of inflation is

required for economic development. After a limit,
inflationary be used to get rid of this situation.

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 Instruments of Fiscal
Policy:
1. Public expenditure:
Significance
Public expenditure is the value of goods and services

bought by the State and its articulations.
Public expenditure plays four main roles:
1. it contributes to current effective demand;
2. it expresses a coordinated impulse on the economy,
which can be used for stabilization, business cycle
inversion, and growth purposes;
3. it increases the public endowment of goods for
everybody;
4. it gives rise to positive externalities to economy and
society, the more so through its capital component.
With its prioritized structure and its peculiar decision-
making processes, it substantiates the prevailing kind of
State. In democracy, public expenditure is an expression
of people's will, managed through political parties and
institutions. At the same time, public expenditure is
characterized by a high degree of inertia and law-
dependency, which tempers the will of the current
majority. Public expenditure can be financed through
taxes, public debt, money emission, international aid.
2. Taxes:
To tax (from the Latin taxo; "I estimate", which in turn
is from tangō; "I touch") is to impose a financial charge
or other levy upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state
such that failure to pay is punishable by law. Taxes are
also imposed by many sub national entities. Taxes
consist of direct tax or indirect tax, and may be paid in

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money or as its labor equivalent (often but not always

unpaid). A tax may be defined as a "pecuniary burden
laid upon individuals or property to support the
government […] a payment exacted by legislative
authority."[1] A tax "is not a voluntary payment or
donation, but an enforced contribution, exacted pursuant
to legislative authority" and is "any contribution
imposed by government […] whether under the name of
toll, tribute, tillage, gabel, impost, duty, custom, excise,
subsidy, aid, supply, or other name. In modern taxation
systems, taxes are levied in money, but in-kind and
corvée taxation is characteristic of traditional or pre-
capitalist states and their functional equivalents. The
method of taxation and the government expenditure of
taxes raised are often highly debated in politics and
economics. Tax collection is performed by a
government agency such as Canada Revenue Agency,
the Internal Revenue Service (IRS) in the United States,
or Her Majesty's Revenue and Customs (HMRC) in the
UK. When taxes are not fully paid, civil penalties (such
as fines or forfeiture) or criminal penalties (such as
incarceration) may be imposed on the non-paying entity
or individual.
3. Public debts:
Public debt is, in effect, an extension of personal debt,

since individuals make up the revenue stream of the
government. Public debt accrues over time when the
government spends more money than it collects in
taxation. As a government engages in more deficit
spending, the amount of public debt increases.
Public debt can be made up of all sorts of different
types of debt. A great deal of public debt is external
debt, which is money that is owed by the government to
foreign lenders, either in the form of international
organizations, other governments, or groups like
sovereign wealth funds which invest in government
bonds. Public debt is also made up of internal debt,
where citizens and groups within the country lend the
government money to continue operating. In some
ways, this is a lot like lending to oneself, since

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ultimately the responsibility for public debt falls back

on the very people lending money.
Governments with strong economies, who are well
trusted in the world, are able to raise funds by issuing
their own securities, usually called government bonds.
Individuals, other nations, and groups buy these bonds,
and the government promises to pay them back at a
certain, usually fairly good, interest rate. Less robust
governments, who do not have the trust from the world
to be able to issue bonds and expect people to buy them,
may turn to international institutions, or even normal
banks, to give them loans, usually at less favorable
rates.
The above mentioned instruments are used by the public

authorities to achieve desirable level of production,
consumption and National Income. During inflationary
trend more and more taxes are levied on the community.
In this way, purchasing power of the people can be
decreased and desirable price level is achieved. During
inflation public expenditure is decreased so that all in
production may decrease high prices and increase the
value of money. During deflationary period taxes are
reduced and public expenditure is increased. In this way
incentives to invest are increased and national income
begins to rise. For economic development public debts
are necessary. In under developed countries, due to
insufficient resources economic development is not
possible. Public loans are drawn internally and
externally. The above mentioned methods are called
budgetary policy of the government. This policy can
increase national income, production level and maintain
full employment level.
India’s Fiscal Policy:

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External Affairs and Finance Minister Pranab

Mukherjee [Images ] on Monday said the government
cannot indulge in 'reckless borrowing' and did not have
Parliamentary mandate to tweak taxes.
The following is the government's fiscal policy strategy
statement that the finance minister announced in
Parliament.
Fiscal Policy Overview

 The Union Budget 2008-09 was presented in the
backdrop of impressive growth in the Indian
economy which clocked about 9 per cent of
average growth in the last four years.
 Riding on the path of fiscal consolidation, the
Union Budget 2008-09 was presented with fiscal
deficit estimated at 2.5 per cent of GDP and
revenue deficit at 1 per cent of GDP.
 The global financial crisis in the second half of
the financial year which heralded recessionary
trends the world over also impacted the Indian
economy causing the focus of fiscal policy to be
shifted to providing growth stimulus.
 The Country is facing difficult economic
situation, the cause of which is not emanating
from within its boundaries. However, left
unattended, the impact of this crisis is going to
affect us in medium to long term.
 The Interim Budget 2009-2010 is being
presented in the backdrop of uncertainties
prevailing in the world economy. The impact of
this is seen in the moderation of the recent trend
in growth of the Indian economy in 2008-09
which at 7.1 per cent still however makes India
the second fastest growing economy in the
World.

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Question 5: Comment on the consequences of

environmental degradation on the economy
of a community?
The theory of land

degradation:
In economic theory, land clearance or land reclamation
involves a market failure. The market does not value
naturally occurring resources in the production process.
Nature's "capital" is not assigned a value by the market.
The externalities that lead to private individuals cutting
trees and the real economic costs and benefits to the
nation of doing so arise because some of the biosphere's
products, especially environmental protection functions,
are neither produced goods nor do they have clearly
defined ownership. As a consequence, they are regarded
as free goods.
Destruction of forested areas, wetlands, grasslands and
bodies of water arises because of the difference between
the discount rate of the individual and the society as a
whole. Poor people, who are responsible for a
significant share of the losses because of their pressing
current need for fuel, fodder, water and land for
cultivation--assign a higher discount rate to these
resources than does society as a whole.
The private interests of poor people and the social
interests of the broader society diverge. The interest of
poor, local people in using these lands and water
resources is intense, immediate and focused--food, fuel,

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fodder, crop land, and irrigation water. They will (often

unknowingly) incur almost any social cost to permit the
immediate exploitation of these environmental
resources to sustain their livelihood. The interests of
loggers, commercial farmers, builders and others who
exploit the forests, range and grasslands and water
resources are equally intense, but driven more by
immediate profit considerations, not by the need to
survive.
Society, as a whole, traditionally, has not placed a
monetary value on the benefits derived from these
resources; as such benefits are not marketable. When
society has recognized these resources as having value,
it has assigned a diffused, nonspecific value to them and
has not translated that assigned value into market
signals, i.e., financial incentives for preservation or
disincentives for destruction of these land and water
resources embodied in the nation's legal and
administrative system. Thus, the intense, focused
private interests are permitted to discount the value of
environmental resources to the detriment of the longer
term benefits to society of investment in these areas
because these resources have neither been given market
values, nor a legal, enforceable means of translating
value into market signals. The Costs of Land Clearance
arising from the exploitation of natural resources for
financial gain highlight the problems involved all too
clearly, since these resources provide a myriad of
functional processes which go beyond the clearly
tangible areas of providing food and products for
commerce. These functional processes are not merely
essential to a sound ecological balance and, therefore,
ideologies advocated and imposed on society by
conservationists; they are naturally occurring systems,
on which the economic wellbeing of societies at local,
national and international level depends.
Land degradation:
Forested areas are especially sensitive to population
pressure and commercial exploitation. At a local level,
once the trees are felled, the highly productive potential
of that region is immediately threatened, since the
quality of the soils is generally poor. It is in the mass of

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vegetation that the nutrients essential to fast growth are

stored so that, if the vegetation cover is removed,
organic breakdown is almost immediate and nutrients
are quickly washed away. When large gaps in the forest
canopy occur, the microclimate of the area is also likely
to be changed and the forest floor becomes exposed to
direct sunlight. Consequently, both air and soil become
dry, to the direct detriment of the land's productivity.
Because of these factors, not only has the forest's
capacity to provide fuel, food, fodder and shelter been
removed, but so has the land's capacity to regenerate
them. Degradation is further increased through soil
erosion.
Erosion:
Around a quarter of a million tons of topsoil are washed
from the deforested mountain slopes of Nepal alone
each year. On a global scale, about eleven million
hectares of arable lands are annually lost through
erosion, desertification and toxification; processes
which are greatly encouraged by poor resource
management. 10 It is human activity that causes natural
erosion rates to increase many times over. Steep slopes
are cultivated without terracing, irrigation projects are
poorly developed and livestock overgraze grassland.
Flooding:
The socio-economic impact resulting from a decline in
productive capacity due to ecological interactions does
not remain localized, especially when forest cover is
lost in a watershed. The soil's water retention capacity is
lost and the release of rainfall becomes erratic; periods
of floods followed by droughts become the norm.
Farmers in the valley lands of Southern Asia are
particularly vulnerable as rivers such as the Ganges,
Brahmaputra and the Mekong no longer supply regular
amounts of irrigation. Flooding in the Ganges Plain
provides a graphic example of the associated costs of
deforestation. As the foothill forests are cleared for
agriculture, the 500 million people in the valleys
become more vulnerable to flooding. During the 1978
monsoon, India suffered losses of $2 billion and

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hundreds of people drowned. The impact of watershed

degradation even extends into urban areas. In the
hinterland of Panama City and Manila, deforestation has
caused so much injury to the effective functioning of
watersheds that domestic water supplies are being
threatened, bringing risk of contamination and
pandemics. Once the forests have been clear felled, the
reduction or elimination of resultant flooding may
require very heavy investment in compensatory
measures such as channeling, damming, and diking.
These measures to reduce the natural patterns of
flooding have the potential to damage replenishment of
alluvial soils and recharges of soil moisture. They may
also damage the vegetation and wildlife on the
floodplain, as well as riverine fisheries.
Reduced economic
viability:
The erratic flow of rivers coupled with the problems of
erosion is effectively undermining the potential of
irrigation projects, as is so evident in the Sri Lankan
Mahaweli program. Several large dams were
constructed for the generation of energy, as well as for
irrigation and flood control downstream. However, the
tree cover reduction in the relevant watershed areas has
jeopardized the steady supply of water to the reservoirs,
on which the success of the project is dependant.
Projects are further undermined by siltation, a process
that not only causes river basins to silt up (thereby
reducing storage capacity), but also chokes hydropower
dams and adversely affects coastal fisheries and
sensitive coral formations.
Intensification of
farming practice:
Intensification of agriculture takes two forms. Clearly,
the most destructive is putting former grass and marsh
lands to the plow. These activities have dramatic and far
reaching effects, both on biodiversity and on human
communities. Animal and plant species may become
extinct if deprived of the environment in which they

Page 23
survive. Human communities are affected by the

removal of flood control areas and the land itself is
subject to erosion and soil depletion, if not carefully
managed.
Intensification on existing agricultural lands can and
often does produce significant environmental
degradation. For example, the conversion of grazing
land into crop production often results in the expulsion
of the grazers and their livestock into environmentally
sensitive areas, in habitat reduction for wildlife species
that coexist with grazing stock, in the felling of the
remaining trees and the clearing of land for processing
facilities. The introduction of machinery often produces
a compaction of the soil, reducing its capacity to absorb
rain water, thus speeding up runoff.
A case study:
Agricultural
Intensification in a
Banana export
industry:
The agro industry is to be developed in a broad valley
with very deep alluvial soils. The valley itself is
irrigated by a large river which drains a Hugh watershed
in the mountains behind the farm. It has traditionally
supplied a steady flow of irrigation water all year
around. The river does flood in the rainy season,
bringing new fertility to the soils that lie in the
floodplain. The land is currently used for small farmer;
mixed crop agriculture. At present, the farmers rotate
local tubers with pulses for subsistence on Leveled
fields. The cash crops of sugar and bananas are also
grown on small fields and, with the exception of banana
spraying, consume almost no agrochemicals. The new
industry will profoundly affect both the economy and
the ecology of the area. At present, the population is
engaged in low input, sustainable agriculture. The
people require little other than the natural fertility for
their agricultural activities.

Page 24
They produce pulses and tubers for family

consumption and sell a small surplus in local markets;
these are often intercropped with bananas. The impact
on the soils is slight, as the farmers rotate their crops
and fallow the fields, effectively keeping down pest
populations. As most of the labor is manual and
supplied by the family, there is little incentive to clear
new fields. Old fields are allowed to return to fallow
when the soil fertility diminishes, and are quickly
colonized by the flora and fauna from the nearby hills.
In addition, most of the women keep kitchen gardens, a
few pigs or goats and some poultry. While these
animals do forage they do little harm to the vegetation.
The feral pig population is kept in check by steady
hunting pressure. The river is rich in edible fish and its
banks are covered by highly varied vegetation. The
mangrove swamp provides additional food and some
netted shrimp to sell to the luxury hotel market for cash
income. Recently, farmers have learned to sink bamboo
poles to serve as a medium for growing clams. The bay
with the coral reef is regenerating from the effects of a
small port that existed in the late 1930s and today
supplies fish to supplement the diet and to market. The
economy is not - completely agricultural. On-farm
income is supplemented by seasonal migratory labor.
The men and the women unencumbered by child rearing
duties (or able to rely on older women to help) migrate
to the nearby cities and-earn additional income. The
tropical forests on the lower hills have highly diverse
flora and fauna. The forests lying higher have been
undisturbed since colonial times.
The few cocoa trees left from that period have
been integrated into the forest vegetation and serve the
community as a source of revenue when they find the
cocoa pods before the rats. The vegetation shelters a
wide variety of animals, some quite rare, and some of
the bird species are endangered. The river and its
associated mangrove swamp are equally rich and
diverse, as well as very scenic. While the river does
flood during the rainy season, this flooding, except in
the extreme cases which have arisen in recent years with
heavy logging and forestry in the watershed, has little
impact on the local population. Their houses are built on
stilts. Furthermore, the flooding brings both new soil

Page 25
and nutrients from the mountains. Over the centuries,

these floods have built up and maintained the fertility of
the valley. In place of this low input agriculture, the
valley will be mechanically leveled, ditched to depths of
10 meters for drainage of heavy rains, irrigated and
planted to high yield bananas. The production system
will require the installation not only of very deep drains
but also of substantial infrastructure, such as cableways,
and will rely heavily upon intensive inputs, especially
fertilizers and pesticides, to produce exportable yields
four or five-times greater than at present The spray
application program will be by air and that some
pesticide drift; into the nearby river and the mangrove
swamp at the mouth of the river is inevitable.
The company will need to "train"" the river
drag-lining and dicing it. The mangrove swamp "plug"
lying down river from the farm will be "opened with
canals to help control the flood waters that the new
drainage system will pour into the river. The bananas
will be exported from a newly constructed terminal on
the bay just a few miles from the farm. The bay will be
dredged to clear some of the coral heads that obstruct
the entry of shipping to the new fruit terminal. In
addition, the valley's rolling hills that are covered with
tropical vegetation and currently not "used" will be
cleared and planted to citrus. The steeper hills will be
cleared of the tropical forest interspersed with century's
old cocoa trees and will be planted to hybrid coconuts
resistant to lethal yellowing. The production of coconuts
on a commercial scale will help alleviate the critical
shortage of edible oils. Coconut oil is the staple of the
rural population but because of lethal yellowing, the
government has had to import large quantities of edible
oils using scarce exchange reserves. The processing of
both bananas and coconuts will produce substantial
volumes of effluent. The bananas that cannot be
exported or sold in local markets will be fed to pigs
whose effluent waste will be dumped unprocessed into
the nearby river. Coconut oil extraction will produce
by-products that have no current use and will be
dumped into the environment. The environment will be
altered radically by the installation of a tropical fruit
production industry. The vegetation will be clear cut not
only between the plots in the formerly cropped valley,

Page 26
but also on the hills and mountainsides. The flora will

be destroyed and the fauna will retreat into the already
ecologically severely affected mountainsides' many of
which have been cleared as coffee production has
moved to cover the higher elevations. The river will die
as a river. It will become an irrigation canal with no
vegetation permitted on the banks. In fact, it will be
sprayed regularly with herbicide to keep down the
vegetation that shelters pests. Its former beautiful,
winding path will be destroyed as it is widened,
straightened, diced and deepened. The mangrove swamp
will also be channeled and severely impacted, if not
destroyed, by the rapid flow of water through the canals
and the heavy doses of chemical run offs that the river
will carry. The bay will feel the effects of these run offs
and the coral heads will again be destroyed to make way
for the shipping.
The effect of the project on the human ecology
will be massive. The local largely self sustaining farm
villages will become the housing for the wage 1 laborers
the banana citrus and coconut industries. The local
people will have difficulty in continuing to farm, as
their time will be dedicated to the industrial regime
imposed by commercial agriculture. Those that want to
continue farming will have to move away, assuming
they have adequate funds to buy new land, or wilI be
pushed into forested areas to clear land for crop
production. The older farmers who know no other trade
will be left unemployed, as they are not attractive to the
new industry which needs strong, young people. Many
of the women will give up the kitchen garden and child
and domestic animal rearing for jobs in the packing
sheds, where they are much preferred to men for their
manual dexterity and work habits. The former pattern of
economic activity will, to all intents and purposes, end
with the development of this new industry. The largely
self-sustaining village farming community that sells
some surplus, and some seasonal off-farm labor, will
disappear, to be replaced by an industrial village set on
the edge of a large plantation producing tropical fruits
for export and some coconut oil for local consumption.
The former diversity of income will cease and the
community will depend on wages. If the industry
flourishes the community will see more cash income
Page 27
than at any time before; if the banana industry should

collapse due to natural disasters (as it did in the 1930s
after severe hurricanes) or should political changes
eliminate the preferential price in the former colonial
country, the community will suffer massive economic
dislocation. Its principal source of income will
disappear and the community will plunge into economic
depression. To return to the former pattern of economic
livelihood will be almost impossible due to radical
changes in the land use and tenure.
Question 6: Write short notes on the
following?
a) Philips curve:
6 a) In economics, the Phillips curve is a historical
inverse relationship between the rate of unemployment
and the rate of inflation in an economy. Stated simply,
the lower the unemployment in an economy, the higher
the rate of increase in nominal wages in the short run. It
has been observed that there is no relationship between
inflation and unemployment in the long run.
William Phillips, a New Zealand born economist, wrote

a paper in 1958 titled The Relationship between
Unemployment and the Rate of Change of Money
Wages in the United Kingdom 1861–1957, which was
published in the quarterly journal Economica. In the
paper Phillips describes how he observed an inverse
relationship between money wage changes and
unemployment in the British economy over the period
examined. Similar patterns were found in other
countries and in 1960 Paul Samuelson and Robert
Solow took Phillips' work and made explicit the link
between inflation and unemployment: when inflation
was high, unemployment was low, and vice-versa.
In the 1920s an American economist Irving Fisher noted
this kind of Phillips curve relationship. However,
Phillips' original curve described the behavior of money
wages.[1]

Page 28
Phillips Curve in the U.S in the 1960's

In the years following Phillips' 1958 paper, many
economists in the advanced industrial countries believed
that his results showed that there was a permanently
stable relationship between inflation and
unemployment. One implication of this for government
policy was that governments could control
unemployment and inflation with a Keynesian policy.
They could tolerate a reasonably high rate of inflation
as this would lead to lower unemployment – there
would be a trade-off between inflation and
unemployment.
For example, monetary policy and/or fiscal policy (i.e.,

deficit spending) could be used to stimulate the
economy, raising gross domestic product and lowering
the unemployment rate. Moving along the Phillips
curve, this would lead to a higher inflation rate, the cost
of enjoying lower unemployment rates.
During the 1960s, a leftward movement along the
Phillips curve described the path of the U.S. economy.
This move was not a matter of deciding to achieve low
unemployment as much as an unplanned side-effect of
the Vietnam war.[citation needed] In other countries, the
economic boom was more the result of conscious
policies.[citation needed]
Most economists no longer use the Phillips curve in its
original form because it was shown to be too simplistic.
This can be seen in a cursory analysis of US inflation

Page 29
and unemployment data 1953-92. There is no single

curve that will fit the data, but there are three rough
aggregations—1955-71, 1974-84, and 1985-92—each
of which shows a general, downwards slope, but at three
very different levels with the shifts occurring abruptly.
The data for 1953-54 and 1972-73 do not group easily,
and a more formal analysis posits up to five
groups/curves over the period.
But still today, modified forms of the Phillips Curve
that take inflationary expectations into account remain
influential. The theory goes under several names, with
some variation in its details, but all modern versions
distinguish between short-run and long-run effects on
unemployment. The "short-run Phillips curve" is also
called the "expectations-augmented Phillips curve",
since it shifts up when inflationary expectations raise,
Edmund Phelps and Milton Friedman argued. In the
long run, this implies that monetary policy cannot affect
unemployment, which adjusts back to its "natural rate",
also called the "NAIRU" or "long-run Phillips curve".
However, this long-run "neutrality" of monetary policy
does allow for short run fluctuations and the ability of
the monetary authority to temporarily decrease
unemployment by increasing permanent inflation, and
vice versa. Blanchard (2000, chapter 8) gives a textbook
presentation of the expectations-augmented Phillips
curve.
An equation like the expectations-augmented Phillips
curve also appears in many recent New Keynesian
dynamic stochastic general equilibrium models. In these
macroeconomic models with sticky prices, there is a
positive relation between the rate of inflation and the
level of demand, and therefore a negative relation
between the rate of inflation and the rate of
unemployment. This relationship is often called the
"New Keynesian Phillips curve." Like the expectations-
augmented Phillips curve, the New Keynesian Phillips
curve implies that increased inflation can lower
unemployment temporarily, but cannot lower it
permanently. Two influential papers that incorporate a
New Keynesian Phillips curve are Clarida, Galí, and
Gertler (1999) and Blanchard and Galí (2007).

Page 30
b) Stagflation:
6b) Stagflation is an economic situation in which
inflation and economic stagnation occur simultaneously
and remain unchecked for a significant period of time.
The portmanteau stagflation is generally attributed to
British politician Iain Macleod, who coined the term in
a speech to Parliament in 1965. The concept is notable
partly because, in postwar macroeconomic theory,
inflation and recession were regarded as mutually
exclusive, and also because stagflation has generally
proven to be difficult and costly to eradicate once it gets
started.
Economists offer two principal explanations for why
stagflation occurs. First, stagflation can result when an
economy is slowed by an unfavorable supply shock,
such as an increase in the price of oil in an oil importing
country, which tends to raise prices at the same time
that it slows the economy by making production less
profitable. This type of stagflation presents a policy
dilemma because most actions to assist with fighting
inflation worsen economic stagnation and vice versa.
Second, both stagnation and inflation can result from
inappropriate macroeconomic policies. For example,
central banks can cause inflation by permitting
excessive growth of the money supply, and the
government can cause stagnation by excessive
regulation of goods markets and labor markets,
together, these factors can cause stagflation; equally,
either can, if taken to such an extreme that it must be
reversed. Both types of explanations are offered in
analyses of the global stagflation of the 1970s: it began
with a huge rise in oil prices, but then continued as
central banks used excessively simulative monetary
policy to counteract the resulting recession, causing a
runaway wage-price spiral.

Page 31

Assignment On Managerial Economics

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ASSIGNMENT ON MANAGERIAL ECONOMICS

Standard procedure used by a firm to set wholesale

• Assess the product's availability and near

• Survey the market for competitive and

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

online distribution channels.

Competitors may define your price range. In this

• Examine market pricing and economics. A

• Calculate the internal cost structure and

• Test different price points if possible. This is

different price points for a book. It found the

• Monitor the market and your competition

• Return on Investment (ROI) – A firm may set as

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

estimate of sales will help determine appropriate

Factors Affecting Pricing

For the remainder of this tutorial we look at factors that

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

• Demand, supply and their determinants.

• Elasticity of demand and supply.

• Degree of competition in the market.

• Size of the market.

• Good will, name, fame, reputation of the

• Trends in the market.

• Purchasing power of the buyers.

• Bargaining power of the customers.

• Availability of the substitutes and

• Government’s policy relating to various

• Competitors pricing policy.

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

Question 2: Mention three crucial objectives

• Profit generally is the making of gain in

• A sales oriented business will focus much more

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

sales oriented business without the use of

• Status quo, a commonly used form of the

Question 3: Mention the bases of price

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

very efficient, but output can also decline when

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

advantageous to increase the price: the seller gets more

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

Second degree price

Third degree price discrimination:

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

first degree price discrimination, above). The supplier is

Question 4: What do you mean by the fiscal

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

• The distribution of income.

1. To achieve desirable price level:

The stability of general prices is necessary for economic

RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

fluctuations in price level so that ideal level is

2. To Achieve desirable consumption

A desirable consumption level is important for political,

3. To Achieve desirable employment

The efficient employment level is most important in

4. To achieve desirable income

The distribution of income determines the type of

5. Increase in capital formation:

In under-developed countries deficiency of capital is the

In under-developed countries, a degree of inflation is