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E. NARAYANAN NADARS. VIJAYAN

ECONOMICSMANAGERIAL

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New Delhi-1100012012

E. NARAYANAN NADARAssociate Professor and Head

Postgraduate Department of EconomicsV.H.N. Senthikumara Nadar College

Virudhunagar, Tamil Nadu

S. VIJAYANFormerly Head, Department of Management Studies

V.H.N. Senthikumara Nadar CollegeVirudhunagar, Tamil Nadu

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MANAGERIAL ECONOMICS, Second EditionE. Narayanan Nadar and S. Vijayan

© 2012 by PHI Learning Private Limited, New Delhi. All rights reserved. No part of this bookmay be reproduced in any form, by mimeograph or any other means, without permission inwriting from the publisher.

ISBN-978-81-203-4616-1

The export rights of this book are vested solely with the publisher.

Third Printing (Second Edition) � � � July, 2012

Published by Asoke K. Ghosh, PHI Learning Private Limited, M-97, Connaught Circus,New Delhi-110001 and Printed by Raj Press, New Delhi-110012.

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Preface ......................................................................................................................................... xvPreface to the First Edition .................................................................................................. xvii

CHAPTER 1: INTRODUCTION TO MANAGERIAL ECONOMICS ................... 1–17

1.1 Introduction........................................................................................................................ 11.2 Definitions to Economics ................................................................................................. 1

1.2.1 Wealth Definition ................................................................................................. 21.2.2 Welfare Definition ............................................................................................... 21.2.3 Scarcity Definition ............................................................................................... 31.2.4 Growth Definition ................................................................................................ 4

1.3 Meaning of Managerial Economics ................................................................................ 51.4 Definitions to Managerial Economics............................................................................. 51.5 Nature of Managerial Economics .................................................................................... 61.6 Scope of Managerial Economics ..................................................................................... 7

1.6.1 Demand Analysis .................................................................................................. 71.6.2 Production Analysis.............................................................................................. 81.6.3 Cost Analysis ........................................................................................................ 81.6.4 Pricing Analysis ................................................................................................... 81.6.5 Profit Analysis ...................................................................................................... 91.6.6 Investment Analysis.............................................................................................. 91.6.7 Managerial Techniques ........................................................................................ 9

1.7 Importance of Managerial Economics ............................................................................ 91.8 Distinction between Economics and Managerial Economics ..................................... 101.9 Relation of Managerial Economics to Other Sciences ............................................... 11

1.9.1 Managerial Economics and Microeconomic Theory ...................................... 111.9.2 Managerial Economics and Macroeconomic Theory ...................................... 111.9.3 Managerial Economics and Theory of Decision-making ............................... 121.9.4 Managerial Economics and Operations Research ........................................... 121.9.5 Managerial Economics and Statistics ............................................................... 12

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1.9.6 Managerial Economics and Mathematics ......................................................... 121.9.7 Managerial Economics and Management Accounting .................................... 121.9.8 Managerial Economics and Marketing ............................................................. 131.9.9 Managerial Economics and Psychology and Sociology ................................. 13

1.10 Methods of Managerial Economics ............................................................................... 131.10.1 The Scientific Method ..................................................................................... 131.10.2 The Statistical Method ..................................................................................... 141.10.3 The Method of Intellectual Experiment ........................................................ 141.10.4 The Method of Simulation .............................................................................. 141.10.5 The Historical Method ..................................................................................... 151.10.6 The Descriptive Method .................................................................................. 15

1.11 Role of a Managerial Economist .................................................................................. 151.11.1 Functions of a Managerial Economist ........................................................... 151.11.2 Responsibilities of a Managerial Economist ................................................. 16

Exercises ..................................................................................................................................... 17

CHAPTER 2: FUNDAMENTAL CONCEPTS AND MODELS OFMANAGERIAL ECONOMICS ......................................................... 18–29

2.1 Fundamental Concepts of Managerial Economics ....................................................... 182.1.1 Incremental Concept ........................................................................................... 182.1.2 Time Perspective Concept .................................................................................. 202.1.3 Discounting Concept ........................................................................................... 212.1.4 Opportunity Cost Concept .................................................................................. 222.1.5 Equi-marginal Concept ....................................................................................... 23

2.2 Economic Models of Managerial Economics ............................................................... 242.2.1 Meaning of Economic Model ............................................................................ 242.2.2 Economic Model Building ................................................................................. 242.2.3 Algebraic Illustration .......................................................................................... 252.2.4 Types of Models used in Managerial Decision-making .................................. 272.2.5 Usefulness of Economic Models ....................................................................... 28

Exercises ..................................................................................................................................... 29

CHAPTER 3: MODERN BUSINESS FIRM ............................................................. 30–44

3.1 Definition of a Business Firm ....................................................................................... 303.2 Objectives of a Modern Business Firm ........................................................................ 30

3.2.1 Profit Maximization ............................................................................................ 303.2.2 Sales Revenue Maximization ............................................................................. 333.2.3 Growth Maximization ......................................................................................... 373.2.4 Utility Maximization ........................................................................................... 403.2.5 Satisfying Behaviour ........................................................................................... 423.2.6 Long Run Survival ............................................................................................. 433.2.7 Welfare Objectives .............................................................................................. 43

Exercises ..................................................................................................................................... 44

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CHAPTER 4: MARKET MECHANISM AND CIRCULAR FLOW OFECONOMIC ACTIVITY ..................................................................... 45–52

4.1 Market Mechanism .......................................................................................................... 454.1.1 Concept of Market Mechanism ......................................................................... 454.1.2 Concept of Demand Curve ................................................................................ 454.1.3 Concept of Supply Curve ................................................................................... 464.1.4 Market Equilibrium ............................................................................................. 474.1.5 New (Market) Equilibrium ................................................................................. 48

4.2 Circular Flow of Economic Activity ............................................................................. 504.2.1 The Concept ........................................................................................................ 504.2.2 Market Economy ................................................................................................. 504.2.3 Participants in a Market Economy .................................................................... 504.2.4 Components of a Market Economy .................................................................. 514.2.5 Graphical Representation .................................................................................... 514.2.6 Conclusion ........................................................................................................... 52

Exercises ..................................................................................................................................... 52

CHAPTER 5: DEMAND ANALYSIS: PART 1—THEORY OF DEMAND ....... 53–89

5.1 Introduction ....................................................................................................................... 535.2 Meaning of Demand ........................................................................................................ 545.3 Individual Demand and Market Demand ....................................................................... 545.4 Demand Distinctions ........................................................................................................ 55

5.4.1 Consumers’ and Producers’ Goods Demand ................................................... 555.4.2 Durable and Non-durable Goods Demand ...................................................... 565.4.3 Derived and Autonomous Demand .................................................................. 565.4.4 Company and Industry Demand ....................................................................... 565.4.5 Short-run and Long-run Demand ..................................................................... 57

5.5 Demand Determinants ...................................................................................................... 575.5.1 Price of the Product (Own Price) .................................................................... 575.5.2 Income of the Consumers ................................................................................. 575.5.3 Tastes and Preferences of the Consumers ....................................................... 585.5.4 Prices of Other Products ................................................................................... 585.5.5 Size of Population ............................................................................................. 585.5.6 Consumers’ Future Expectations ...................................................................... 585.5.7 Distribution of Income and Wealth ................................................................. 595.5.8 Government Taxation Policy ............................................................................ 595.5.9 Availability of Credit ........................................................................................ 595.5.10 Pattern of Saving ............................................................................................... 595.5.11 Advertisement .................................................................................................... 595.5.12 Climatic Conditions ........................................................................................... 595.5.13 Inventions and Discoveries ............................................................................... 605.5.14 Quantity of Money in Circulation.................................................................... 60

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5.5.15 Demonstration Effect ........................................................................................ 605.5.16 Business Cycle ................................................................................................... 605.5.17 International Trade ............................................................................................ 61

5.6 Demand Function ............................................................................................................ 615.7 Law of Demand .............................................................................................................. 62

5.7.1 Statement of the Law ....................................................................................... 625.7.2 Assumptions of the Law .................................................................................. 625.7.3 Demand Schedule .............................................................................................. 625.7.4 Demand Curve ................................................................................................... 635.7.5 Why does the Demand Curve Slope Downwards from Left to Right? ..... 64

5.8 Variation and Change in Demand ................................................................................ 675.8.1 Variation in Demand ........................................................................................ 675.8.2 Change in Demand ............................................................................................ 68

5.9 Theory of Consumer Behaviour .................................................................................... 685.9.1 Cardinal Utility Approach ................................................................................ 685.9.2 Law of Diminishing Marginal Utility ............................................................ 695.9.3 Law of Equi-marginal Utility ......................................................................... 715.9.4 Ordinal Utility Approach ................................................................................. 745.9.5 Indifference Curve Analysis............................................................................. 745.9.6 Budget Line ....................................................................................................... 79

5.10 Consumer’s Equilibrium ................................................................................................ 805.11 Price, Income and Substitution Effect ......................................................................... 82

5.11.1 Price Effect ........................................................................................................ 825.11.2 Income Effect .................................................................................................... 825.11.3 Substitution Effect ............................................................................................ 835.11.4 Revealed Preference Analysis .......................................................................... 85

5.12 Concept of Consumer’s Surplus .................................................................................... 865.12.1 Tabular Explanation .......................................................................................... 865.12.2 Diagrammatical Explanation............................................................................. 87

Exercises ..................................................................................................................................... 89

CHAPTER 6: DEMAND ANALYSIS: PART 2—ELASTICITY OF DEMAND .... 90–108

6.1 Meaning of Elasticity of Demand ................................................................................ 906.2 Kinds of Elasticity of Demand ..................................................................................... 90

6.2.1 Price Elasticity of Demand .............................................................................. 906.2.2 Income Elasticity of Demand ........................................................................ 1006.2.3 Cross Elasticity of Demand ........................................................................... 102

6.3 Advertising (or Promotional) Elasticity of Demand ................................................ 1036.3.1 Factors Influencing Advertising Elasticity ................................................... 1056.3.2 Methods of Determining Advertising Expenditure ..................................... 105

6.4 Relationship between Price Elasticity of Demand, Average Revenue,Marginal Revenue and Total Revenue ........................................................................ 106

Exercises ................................................................................................................................... 108

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CHAPTER 7: DEMAND ANALYSIS: PART 3—DEMAND FORECASTING .....109–120

7.1 Meaning of Demand Forecasting ................................................................................. 1097.2 Types of Demand Forecasting ..................................................................................... 1097.3 Objectives of Demand Forecasting .............................................................................. 1107.4 Factors Involved in Demand Forecasting ................................................................... 110

7.4.1 Time Period Forecast ...................................................................................... 1107.4.2 Level of Forecast ............................................................................................. 1117.4.3 Nature of Forecast ........................................................................................... 111

7.5 Stages of Demand Forecasting..................................................................................... 1117.6 General Approach to Demand Forecasting ................................................................. 1117.7 Methods of Demand Forecasting for Established Products ...................................... 112

7.7.1 Survey Method ................................................................................................. 1127.7.2 Trend Projection Method ................................................................................ 1137.7.3 Barometric Method .......................................................................................... 1167.7.4 Econometric Model Building Method ........................................................... 116

7.8 Methods of Demand Forecasting for New Products .................................................. 1177.9 Criteria for an Ideal Forecasting Method ................................................................... 1187.10 Practical Usefulness of Demand Forecasting ............................................................. 119Exercises ................................................................................................................................... 120

CHAPTER 8: PRODUCTION ANALYSIS ............................................................ 121–139

8.1 Introduction .................................................................................................................... 1218.2 Meaning of Production ................................................................................................. 1218.3 Production Function ...................................................................................................... 122

8.3.1 Meaning of Production Function ................................................................... 1228.3.2 Assumptions of Production Function ............................................................. 1228.3.3 Usefulness of Production Function ................................................................ 1238.3.4 Limitations of Production Function ............................................................... 123

8.4 Forms of Production Function ..................................................................................... 1238.4.1 Linear Homogeneous Production Function ................................................... 1248.4.2 Cobb–Douglas Production Function .............................................................. 1248.4.3 Constant Elasticity of Substitution Production Function ............................. 1268.4.4 Fixed Proportions Production Function ......................................................... 127

8.5 Production Theory ......................................................................................................... 1288.5.1 Production with One Variable Input or Law of Variable Proportions ........ 1298.5.2 Production with Two Variable Inputs or Isoquants ....................................... 1318.5.3 Production with All Variable Inputs or Returns to Scale ............................. 133

8.6 Economies of Scale ....................................................................................................... 1378.6.1 Internal Economies ........................................................................................... 1378.6.2 External Economies .......................................................................................... 138

8.7 Diseconomies of Scale .................................................................................................. 1388.7.1 Internal Diseconomies ...................................................................................... 1388.7.2 External Diseconomies ..................................................................................... 139

Exercises ................................................................................................................................... 139

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CHAPTER 9: COST AND REVENUE ANALYSIS ............................................. 140–157

9.1 Introduction .................................................................................................................... 1409.2 Meaning of Cost ............................................................................................................ 1409.3 Cost Concepts ................................................................................................................ 141

9.3.1 Money Cost versus Real Cost ........................................................................ 1419.3.2 Opportunity Cost ............................................................................................. 1419.3.3 Explicit Cost versus Implicit Cost ................................................................. 1419.3.4 Fixed Cost versus Variable Cost.................................................................... 1429.3.5 Total Cost, Average Cost and Marginal Cost .............................................. 142

9.4 Sunk Cost....................................................................................................................... 1449.4.1 Short-run Cost versus Long-run Cost ............................................................. 144

9.5 Cost Function (Cost–Output Relationship) ................................................................. 1449.5.1 Short-run Cost Function .................................................................................. 1459.5.2 Long-run Cost Function .................................................................................. 148

9.6 Cost Control .................................................................................................................. 1499.7 Cost Reduction .............................................................................................................. 1519.8 Relevance of Cost Analysis ......................................................................................... 151

9.8.1 Relevance of Short-run Cost Analysis .......................................................... 1529.8.2 Relevance of Long-run Cost Analysis ........................................................... 152

9.9 Revenue Analysis .......................................................................................................... 1539.9.1 Meaning of Revenue ....................................................................................... 1539.9.2 AR and MR Curves under Perfect Competition .......................................... 1559.9.3 AR and MR Curves under Monopoly ........................................................... 1559.9.4 Special Cases of Revenue Curves ................................................................. 1569.9.5 Relevance of Revenue Analysis ..................................................................... 157

Exercises ................................................................................................................................... 157

CHAPTER 10: SUPPLY ANALYSIS...................................................................... 158–164

10.1 Meaning of Supply ....................................................................................................... 15810.2 Supply Function ............................................................................................................ 15810.3 Determinants of Supply ................................................................................................ 159

10.3.1 Price of the Product (Own Price) .................................................................. 15910.3.2 Prices of Related Products .............................................................................. 15910.3.3 Prices of Inputs ................................................................................................ 15910.3.4 Change in Technology .................................................................................... 15910.3.5 Time Periods .................................................................................................... 15910.3.6 Government Policy .......................................................................................... 16010.3.7 The Nature ....................................................................................................... 160

10.4 Law of Supply ............................................................................................................... 16010.4.1 Statement of the Law ...................................................................................... 16010.4.2 Supply Schedule .............................................................................................. 16010.4.3 Supply Curve ................................................................................................... 161

10.5 Elasticity of Supply....................................................................................................... 162Exercises ................................................................................................................................... 164

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CHAPTER 11: PRICING ANALYSIS .................................................................... 165–190

11.1 Introduction .................................................................................................................... 16511.1.1 Perfect Competition ......................................................................................... 16511.1.2 Pure Competition versus Perfect Competition .............................................. 16611.1.3 Conditions of Equilibrium under Perfect Competition ................................ 167

11.2 Equilibrium of the Firm and Industry under Perfect Competition ........................... 16711.2.1 Equilibrium of the Firm .................................................................................. 16711.2.2 Equilibrium of the Industry ............................................................................ 16911.2.3 Pricing under Perfect Competition ................................................................. 171

11.3 Monopoly ....................................................................................................................... 17111.3.1 Meaning ............................................................................................................ 17111.3.2 Features ............................................................................................................. 17211.3.3 Types ................................................................................................................ 17211.3.4 Pricing under Monopoly ................................................................................. 172

11.4 Discriminating Monopoly ............................................................................................. 17411.4.1 Meaning ............................................................................................................ 17411.4.2 Definition .......................................................................................................... 17511.4.3 Types ................................................................................................................ 17511.4.4 Degrees ............................................................................................................. 17511.4.5 Conditions......................................................................................................... 17611.4.6 Pricing under Discriminating Monopoly ....................................................... 176

11.5 Monopolistic Competition ............................................................................................ 17711.5.1 Meaning ............................................................................................................ 17711.5.2 Features ............................................................................................................. 17711.5.3 Pricing under Monopolistic Competition ....................................................... 178

11.6 Oligopoly ....................................................................................................................... 17911.6.1 Meaning ............................................................................................................ 17911.6.2 Types ................................................................................................................ 18011.6.3 Features ............................................................................................................. 18011.6.4 Pricing under Oligopoly .................................................................................. 18011.6.5 A Note on “Duopoly” ..................................................................................... 18111.6.6 A Note on “Bilateral Monopoly” ................................................................... 182

11.7 Pricing Policy ................................................................................................................ 18211.7.1 Objectives of Pricing Policy ........................................................................... 18311.7.2 Factors Involved in the Pricing Process ........................................................ 183

11.8 Pricing Methods ............................................................................................................ 18311.8.1 Full-cost (Cost-plus) Pricing ........................................................................... 18311.8.2 Going Rate Pricing .......................................................................................... 18411.8.3 Product-line Pricing ......................................................................................... 18411.8.4 Pricing of New Products ................................................................................. 18511.8.5 Dual Pricing ..................................................................................................... 18611.8.6 Marginal (Incremental) Cost Pricing ............................................................. 18611.8.7 Price Lining ...................................................................................................... 186

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11.8.8 Target Rate of Return Pricing....................................................................... 18611.8.9 Recommended Pricing .................................................................................... 18711.8.10 Administered Pricing ...................................................................................... 18711.8.11 Pricing over the Life Cycle of a Product ................................................... 18711.8.12 Price Discount ................................................................................................. 18911.8.13 Peak Load Pricing ........................................................................................... 18911.8.14 Transfer Pricing ............................................................................................... 189

Exercises ................................................................................................................................... 189

CHAPTER 12: PROFIT ANALYSIS ...................................................................... 191–202

12.1 Meaning and Nature of Profit .................................................................................... 19112.2 Profit Theories .............................................................................................................. 191

12.2.1 Rent Theory of Profit .................................................................................... 19112.2.2 Wage Theory of Profit ................................................................................... 19212.2.3 Dynamic Theory of Profit ............................................................................. 19212.2.4 Innovation Theory of Profit .......................................................................... 19212.2.5 Risk-bearing Theory of Profit ....................................................................... 19212.2.6 Uncertainty-bearing Theory of Profit ........................................................... 193

12.3 Profit Policy .................................................................................................................. 19312.4 Profit Planning .............................................................................................................. 193

12.4.1 Profit Budget ................................................................................................... 19412.4.2 Break-even Analysis ........................................................................................ 19412.4.3 Rate of Return on Investment ....................................................................... 200

12.5 Profit Forecasting ......................................................................................................... 20012.5.1 Spot Projections ............................................................................................... 20112.5.2 Break-even Analysis ........................................................................................ 20112.5.3 Environmental Analysis .................................................................................. 201

Exercises ................................................................................................................................... 201

CHAPTER 13: INVESTMENT ANALYSIS .......................................................... 203–216

13.1 Capital Budgeting .......................................................................................................... 20313.1.1 Meaning of Capital Budgeting....................................................................... 20313.1.2 Need for Capital Budgeting ........................................................................... 20313.1.3 Steps Involved in Capital Budgeting ............................................................ 20413.1.4 Forms of Capital Budgeting........................................................................... 20413.1.5 Nature of Capital Budgeting Problem .......................................................... 205

13.2 Evaluation of Capital Investment Decisions .............................................................. 20513.2.1 Pay-back Period Method ................................................................................ 20513.2.2 Average Return on Investment Method ........................................................ 20613.2.3 Net Present Value Method ............................................................................. 20713.2.4 Internal Rate of Return Method .................................................................... 20813.2.5 Limitations of Capital Budgeting .................................................................. 210

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13.3 Cost of Capital .............................................................................................................. 21013.3.1 Meaning of Cost of Capital ........................................................................... 21013.3.2 Importance of Cost of Capital ....................................................................... 21013.3.3 Forms of Cost of Capital ............................................................................... 21013.3.4 Sources of Cost of Capital ............................................................................ 21013.3.5 Measurement of Cost of Capital ................................................................... 212

Exercises ................................................................................................................................... 216

CHAPTER 14: MANAGERIAL TECHNIQUES ................................................... 217–234

14.1 Linear Programming..................................................................................................... 21714.1.1 Meaning of Linear Programming .................................................................. 21714.1.2 Concepts of Linear Programming ................................................................. 21714.1.3 Assumptions of Linear Programming ........................................................... 21814.1.4 Uses of Linear Programming......................................................................... 21914.1.5 Limitations of Linear Programming ............................................................. 22014.1.6 Graphic and Algebraic Solution .................................................................... 220

14.2 Input-Output Analysis ................................................................................................... 22614.2.1 Meaning of Input-Output Analysis ............................................................... 22614.2.2 Features of Input-Output Analysis ................................................................ 22614.2.3 Assumptions of Input-Output Analysis ......................................................... 227

14.3 Input-Output Analysis: An Illustration....................................................................... 22714.3.1 Transaction Matrix .......................................................................................... 22714.3.2 Technology Matrix .......................................................................................... 22814.3.3 Construction of Input-Output Tables ............................................................ 22914.3.4 Technical Co-efficient .................................................................................... 23014.3.5 Usefulness of Input-Output Analysis ............................................................ 23114.3.6 Limitations of Input-Output Analysis ........................................................... 231

14.4 Game Theory ................................................................................................................. 23214.4.1 Criticisms of Game Theory ........................................................................... 233

Exercises ................................................................................................................................... 234

CHAPTER 15: MACROECONOMIC ANALYSIS .............................................. 235–283

15.1 Macroeconomics ............................................................................................................ 23515.1.1 Meaning of Macroeconomics ......................................................................... 23515.1.2 Importance of Macroeconomics ..................................................................... 23515.1.3 Limitations of Macroeconomics..................................................................... 236

15.2 National Income ............................................................................................................ 23615.2.1 Meaning of National Income ......................................................................... 23615.2.2 Concepts of National Income ........................................................................ 23715.2.3 Methods of Estimating National Income...................................................... 23715.2.4 Difficulties in the Estimation of National Income ..................................... 23815.2.5 Uses of National Income Estimation ............................................................ 238

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15.3 Trade Cycle ................................................................................................................... 23915.3.1 Meaning of Trade Cycle ............................................................................... 23915.3.2 Features of a Trade Cycle ............................................................................ 23915.3.3 Phases of a Trade Cycle ............................................................................... 24015.3.4 Theories of Trade Cycle ............................................................................... 24115.3.5 Anti-cyclical Measures ................................................................................... 243

15.4 Inflation ......................................................................................................................... 24315.4.1 Types of Inflation .......................................................................................... 24415.4.2 Causes of Inflation ......................................................................................... 24415.4.3 Effects of Inflation ........................................................................................ 24515.4.4 Anti-inflationary Measures ............................................................................ 245

15.5 Monetary Policy ............................................................................................................ 24615.5.1 Meaning of Monetary Policy ........................................................................ 24615.5.2 Objectives of Monetary Policy ..................................................................... 24615.5.3 Instruments of Monetary Policy ................................................................... 247

15.6 Fiscal Policy .................................................................................................................. 24815.6.1 Meaning of Fiscal Policy .............................................................................. 24815.6.2 Objectives of Fiscal Policy ........................................................................... 24915.6.3 Instruments of Fiscal Policy ......................................................................... 249

15.7 Theory of Employment ................................................................................................ 25015.7.1 Classical Theory of Employment ................................................................. 25015.7.2 Keynesian Theory of Employment .............................................................. 250

15.8 Consumption Function .................................................................................................. 25215.8.1 Meaning of Consumption Function .............................................................. 25215.8.2 Properties of Consumption Function ........................................................... 25315.8.3 Factors Determining Consumption Function ............................................... 25415.8.4 Importance of Consumption Function ......................................................... 25515.8.5 Theories on Consumption Function ............................................................. 256

15.9 Investment Function ..................................................................................................... 25615.9.1 Meaning ........................................................................................................... 25615.9.2 Types of Investment ...................................................................................... 25615.9.3 Factors Determining Investment Function .................................................. 257

15.10 Multiplier ....................................................................................................................... 25815.10.1 Meaning of Multiplier ................................................................................... 25815.10.2 Magnitude of Multiplier ................................................................................ 25815.10.3 Assumptions of Multiplier ............................................................................ 25915.10.4 Working of Multiplier ................................................................................... 25915.10.5 Usefulness of Multiplier ................................................................................ 26115.10.6 Criticisms of Multiplier ................................................................................. 261

15.11 Accelerator ..................................................................................................................... 26215.11.1 Meaning of Accelerator ................................................................................. 26215.11.2 Magnitude of Accelerator .............................................................................. 26215.11.3 Assumptions of Accelerator .......................................................................... 26215.11.4 Working of Accelerator ................................................................................ 262

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15.11.5 Importance of Accelerator ............................................................................ 26315.11.6 Limitations of Accelerator ............................................................................ 26315.11.7 Supermultiplier ............................................................................................... 263

15.12 Economic Planning ....................................................................................................... 26415.12.1 Meaning and Definition ................................................................................ 26415.12.2 Features ........................................................................................................... 26415.12.3 Evolution ......................................................................................................... 26515.12.4 Planning Systems ........................................................................................... 26515.12.5 Rolling Plan .................................................................................................... 267

15.13 Planning Machinery in India ....................................................................................... 26715.13.1 Planning Commission .................................................................................... 267

15.14 National Development Council .................................................................................... 26815.15 Five Year Plans ............................................................................................................ 269

15.15.1 First Five Year Plan (1951–56) ................................................................... 26915.15.2 Second Five Year Plan (1956–61) ............................................................... 27015.15.3 Third Five Year Plan (1961–66) ................................................................. 27115.15.4 Annual Plans (1966–69) ................................................................................ 27215.15.5 Fourth Five Year Plan (1969–74) ............................................................... 27215.15.6 Fifth Five Year Plan (1974–79) .................................................................. 27415.15.7 Sixth Five Year Plan (1980–85) .................................................................. 27515.15.8 Seventh Five Year Plan (1985–90) ............................................................. 27515.15.9 Eighth Five Year Plan (1992–97) ............................................................... 27715.15.10 Ninth Five Year Plan (1997–2002) ............................................................. 27915.15.11 Tenth Five Year Plan (2002–2007) ............................................................. 28115.15.12 Eleventh Five Year Plan (2007–2012) ........................................................ 282

Exercises ................................................................................................................................... 285

CHAPTER 16: INTERNATIONAL TRADE AND FINANCE ........................... 286–294

16.1 International Trade ....................................................................................................... 28616.1.1 Meaning ........................................................................................................... 28616.1.2 Advantages ...................................................................................................... 28616.1.3 Disadvantages .................................................................................................. 28716.1.4 Comparative Cost Theory ............................................................................. 28716.1.5 Terms of Trade .............................................................................................. 28816.1.6 Gains from Trade ........................................................................................... 28816.1.7 Free Trade versus Protection ........................................................................ 289

16.2 Balance of Payments .................................................................................................... 28916.3 Foreign Exchange ......................................................................................................... 29016.4 International Finance .................................................................................................... 291

16.4.1 International Monetary Fund (IMF) ............................................................ 29116.4.2 International Bank for Reconstruction and Development (IBRD) ........... 292

16.5 International Debt Crisis .............................................................................................. 29316.6 Euro-Currency/Euro-Dollar Market ............................................................................ 293Exercises ................................................................................................................................... 294

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CHAPTER 17: ANALYSIS OF RISK AND UNCERTAINTY .......................... 295–299

17.1 Risk Analysis ................................................................................................................. 29517.2 Uncertainty Analysis ..................................................................................................... 296

17.2.1 Avoidance of Analysis .................................................................................... 29717.2.2 Simplification of the Problem ....................................................................... 29717.2.3 Application of the Insurance Principle ......................................................... 29717.2.4 Hedging ............................................................................................................ 29717.2.5 Searching for Additional Information .......................................................... 29717.2.6 Sampling .......................................................................................................... 29817.2.7 Flexibility ......................................................................................................... 29817.2.8 Diversification .................................................................................................. 29817.2.9 Control over the Future ................................................................................. 29817.2.10 Application of Statistical Probability Theory .............................................. 298

Exercises ................................................................................................................................... 299

CHAPTER 18: CASES FOR DISCUSSION ......................................................... 300–304

Case I Hindustan Toys Limited ...................................................................................... 300Case II Hi-Tech Company ................................................................................................. 301Case III National Electric Company (NEC) ..................................................................... 302Case IV Apple Toothpaste Company (ATPC) ................................................................. 302Case V Freshco Beverages Company (FBC) ................................................................... 303Case VI Sleep-Sound Company (SSC) .............................................................................. 304

Bibliography .................................................................................................................... 305–306

Index ................................................................................................................................ 307–310

Managerial Economics

Publisher : PHI Learning ISBN : 9788120346161Author : E. NarayananNadar, S. Vijayan

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