Sowmya S Rashinkar

Faculty, BIMS,UOM

Managerial Economics-2019
Sec-A
1) Define law of demand. Explain exception to the law of
demand?
Answer:
Introduction: Law of Demand The law states that other things remaining
constant, quantity demanded of a commodity increases with a fall in its
own price and diminishes with a rise in its own price, i.e. there exist a
inverse relationship between price and quantity demanded.
Definition: The law of demand states that other factors being constant
(cetris peribus), price and quantity demand of any good and service
are inversely related to each other. When the price of a product
increases, the demand for the same product will fall.

In microeconomics, the law of demand is a fundamental principle which

states that there is an inverse relationship between price and quantity
demanded.
The law of demand dictates that when prices go up, demand goes
down – and when prices go down, demand goes up.
Sowmya S Rashinkar
Faculty, BIMS,UOM

For instance, a baker sells bread rolls for $1 each. They sell 50 each day
at that price. However, when the baker decides to increase to price to
$1.20 – they only sell 40.
Exceptions to the law of demand:
There are certain situations where the law of demand does not apply or
becomes ineffective, i.e. with a fall in the price the demand falls and
with the rise in price the demand rises are called as the exceptions to the
law of demand.

1. Giffen Goods: Giffen goods are the inferior goods whose demand
increases with the increase in its prices.
2. Veblen Goods: goods like a diamond, platinum, ruby, etc. are bought
by the upper echelons of the society (rich class) for whom the higher the
Sowmya S Rashinkar
Faculty, BIMS,UOM

price of these goods, the higher is the prestige value and ultimately the
higher is the utility or desirability of them.
3. Expectation of Price Change in Future: When the consumer expects
that the price of a commodity is likely to further increase in the future,
then he will buy more of it despite its increased price in order to escape
himself from the pinch of much higher price in the future.
4. Ignorance: Often people are misconceived as high-priced
commodities are better than the low-priced commodities and rest their
purchase decision on such a notion.
5. Emergencies: During emergencies such as war, natural calamity-
flood, drought, earthquake, etc., the law of demand becomes ineffective.
6. Change in fashion and Tastes & Preferences: The change in
fashion trend and tastes and preferences of the consumers negates the
effect of law of demand.

7. Conspicuous Necessities: There are certain commodities which have

become essentials of the modern life. These are the goods which
consumer buys irrespective of an increase in the price. For example TV,
refrigerator, automobiles, washing machines, air conditioners, etc.
8. Bandwagon Effect: Here, the person tries to emulate the buying
behavior and patterns of the group to which he belongs irrespective of
the price of the commodity.
For example, if the majority of group members have smart phones then
the consumer will also demand for the smart phone even if the prices are
high.

Conclusion: The law of demand states that quantity purchased varies

inversely with price. In other words, the higher the price, the lower the
quantity demanded.
Sowmya S Rashinkar
Faculty, BIMS,UOM

2) What is monopolistic competition? Give examples

Answer:

Introduction: Monopolistic competition definition says that it stands for

an industry in which many firms service similar products which are not a
perfect substitute. There are very low barriers to entry or exit in
monopolistic competition. In this competition, one firm decision doesn't
affect the whole industry or another firm. Monopolistic competition is
just related to the business strategy of brand variation.

This can be illustrated as below:

Meaning

Monopolistic competition means monopoly plus a perfect competition.

This market is a perfect mixture of monopoly and perfect competition.
This industry is one of the best classical monopolistic competition
examples.

Monopolistic competition is half monopoly half and perfect competition.

It combines elements of both in a theoretical state. In this competition,
every brand tries to make its own unique product, and they make it
slightly different from other brands of the same item. While we are
Sowmya S Rashinkar
Faculty, BIMS,UOM

judging them roughly, there is no difference as such. Although when we

examine them closely, we can find some little difference between
different brand products.

If we take the soap brands of India as monopolistic competition

examples, it can be easily revealed the idea of monopolistic competition.
Though all the soap brands such as Lux, Dove, Vivel, Fiama, Pears
produce the same item, They contain some different features from others
in their product to make it unique.
Monopolistic competition is a market circumstance in which many
vendors compete for the same product, but each seller's product differs
in some way from every other seller's product in the minds of
consumers.'

As a result, each seller is a monopolist of his 'differentiated product'

under this market system. Buyers can only acquire a specific product
from him. However, there are a number of close replacements available
on the market.

As a result, shoppers compare the pricing of products as well as their

perceived quality. As a result, there is competition among sellers for
market share. As you can see, in this market structure, a set of
companies compete against one another while maintaining monopolies
over their own products.

Example of Monopolistic market is:

Sowmya S Rashinkar
Faculty, BIMS,UOM

i) Grocery stores: Grocery stores exist within a monopolistic market as

there are a large number of firms that sell many of the same goods but
with distinct branding and marketing.

ii) Hotels: Hotels offer a prime example of monopolistic competition.

Conclusion: Monopolistic competition characterizes an industry in

which many firms offer products or services that are similar (but
not perfect) substitutes. Barriers to entry and exit in a monopolistic
competitive industry are low, and the decisions of any one firm do not
directly affect those of its competitors.

3) Explain the law of marginal utility.

Answer:

Intro: The law of diminishing marginal utility states that all else equal,
as consumption increases, the marginal utility derived from each
additional unit declines. Marginal utility is the incremental increase
in utility that results from the consumption of one additional unit.
"Utility" is an economic term used to represent satisfaction or
happiness.

 The law of diminishing marginal utility says that the marginal

utility from each additional unit declines as consumption
increases.1
 The marginal utility can decline into negative utility, as it may
become entirely unfavorable to consume another unit of any
product.
 The marginal utility may decrease into negative utility, as it may
become entirely unfavorable to consume another unit of any
product.
Definition:
Sowmya S Rashinkar
Faculty, BIMS,UOM

According to Marshall, 'The additional benefit which a person derives

from a given increase of his stock of a thing diminishes with every
increase in the stock that he already has'.

An individual consumes only one commodity X and its utility is

measured quantitatively. The total utility and marginal utility schedules
are as shown in Table 1.

Table 1 shows that as the number of units of commodity X consumed

per unit of time increases, TUx increases but at a diminishing rate while
marginal utility MUx decreases consistently. The rate of increase in TUx
as a result of increase in the number of units consumed has been
depicted through the MUx curve in the graph shown in Figure
Sowmya S Rashinkar
Faculty, BIMS,UOM

In Figure, the downward sloping MUx curve shows that the marginal
utility of a commodity consistently decreases as its consumption
increases. When the consumption reaches to 4 units of commodity X,
TUx reaches its maximum level (the point of saturation) marked as M.

Beyond the point of saturation, MUx becomes negative and TUx begins
to decline consistently. The downward slope of MUx explains the law of
diminishing marginal utility. Therefore, according to the law of
diminishing marginal utility, the utility gained from a unit of a
commodity is dependent on the consumer’s desire for the commodity.

Conclusion: When an individual continues to consume additional units

of a commodity, the satisfaction that he/she derives from the
consumption keeps decreasing. This is because his/ her need gets
satisfied in the process of consumption. Therefore, the utility derived
from successive units of the commodity decreases.

4) What is Price leadership? Explain it types

Sowmya S Rashinkar
Faculty, BIMS,UOM

Answer: Price Leadership is a scenario where one firm sets the prices,
and other companies in that industry follow the same price. The firm that
sets the price is usually the firm that is dominant in that industry. Other
companies in the industry are free to decide, i.e., they may or may not
follow the price set by the dominant firm. But, they do follow the
dominant firm pricing because if they do not, they risk losing their
market share or profitability.

The firm that sets the price is the price leader. The price leadership
model is common in industries with oligopolistic market conditions. A
good and most popular example of such an industry and situation is the
airline industry.

Types of price leadership:

1.Barometric
In such leadership, there is usually a firm that is more capable of
recognizing the market trends. Thus, such a company is able to adjust to
the changes in time and sets a price that others need to follow.

2. Collusive
Collusive pricing is a type of price leadership that exists in the
oligopolistic industry, or where the cost of entry is very high. In this, the
dominant firms in the industry enter into an explicit or implicit
agreement over the price. And the smaller players in that industry
segment have no option but to follow the dominant firm in the price
trend.

3. Dominant
As is evident, such leadership involves the price setting by a dominant
firm. The dominant firm is usually the one with the majority market
share. We may also call this as a partial monopoly. In such a model, it is
Sowmya S Rashinkar
Faculty, BIMS,UOM

possible that the dominant firm engages in predatory pricing with an

objective to drive out smaller firms from the industry. Such type of
leadership is illegal in most countries.

Example of price leadership: Apple Brand

Price Leaders tend to drive prices higher. They add more value,
differentiate their products, segment their markets, and strive to win at
higher prices. Apple is certainly a price leader.

5) Define Business Cycle? Explain various phases of business

cycle.

 Answer: Introduction:
 Businesses are principal components of a modern economy. They
engage in the production, distribution and sale of goods and
services. There are many kinds of businesses, from farms and
factories to firms selling services like insurance.

 Their level of economic activity fluctuates – over time it will

increase or decrease, and then decrease or increase again. When
fluctuations in many different businesses coincide, a cycle can be
identified. Every business cycle has a peak and a trough. There is
an expansion phase between its trough and peak, and a contraction
phase between its peak and trough.

 Definition:
John Keynes explains:
 “The occurrence of business cycles is a result of fluctuations in
aggregate demand, which bring the economy to short-term
Sowmya S Rashinkar
Faculty, BIMS,UOM

equilibriums that are different from a full-employment

equilibrium”

There are two types of business cycle:

 The classical cycle refers to rises and falls in total production.

 The growth cycle is concerned with fluctuations in the growth rate
of production.

 The below diagram explains the stages of Business Cycle in

economics:


 1. Expansion
 The first stage in the business cycle is expansion. In this stage,
there is an increase in positive economic indicators such as
Sowmya S Rashinkar
Faculty, BIMS,UOM

employment, income, output, wages, profits, demand, and supply

of goods and services.
 Debtors are generally paying their debts on time, the velocity of
the money supply is high, and investment is high.
 This process continues as long as economic conditions are
favorable for expansion.
 Peak
 The economy then reaches a saturation point, or peak, which is the
second stage of the business cycle. The maximum limit of growth
is attained. The economic indicators do not grow further and are at
their highest. Prices are at their peak. This stage marks the reversal
point in the trend of economic growth. Consumers tend to
restructure their budgets at this point.
 3. Recession
 The recession is the stage that follows the peak phase. The demand
for goods and services starts declining rapidly and steadily in this
phase. Producers do not notice the decrease in demand instantly
and go on producing, which creates a situation of excess supply in
the market. Prices tend to fall. All positive economic indicators
such as income, output, wages, etc., consequently start to fall.
 4. Depression
 There is a commensurate rise in unemployment. The growth in the
economy continues to decline, and as this falls below the steady
growth line, the stage is called a depression.
 5. Trough
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Faculty, BIMS,UOM

 In the depression stage, the economy’s growth rate becomes

negative. There is further decline until the prices of factors, as well
as the demand and supply of goods and services, contract to reach
their lowest point. The economy eventually reaches the trough. It is
the negative saturation point for an economy. There is extensive
depletion of national income and expenditure.
 6. Recovery
 After the trough, the economy moves to the stage of recovery. In
this phase, there is a turnaround in the economy, and it begins to
recover from the negative growth rate. Demand starts to pick up
due to low prices and, consequently, supply begins to increase. The
population develops a positive attitude towards investment and
employment and production starts increasing.
 Employment begins to rise and, due to accumulated cash balances
with the bankers, lending also shows positive signals. In this phase,
depreciated capital is replaced, leading to new investments in the
production process. Recovery continues until the economy returns
to steady growth levels.
 This completes one full business cycle of boom and contraction.
The extreme points are the peak and the trough.
Conclusion: Business Cycle are comprised of concerted cyclical
upswings and downswings in the broad measures of economic
activity—output, employment, income, and sales.

__________________________________________________________
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Sec-B
Sowmya S Rashinkar
Faculty, BIMS,UOM

6) Discuss the various types of costs in detail.

Answer:

Intro: Cost denotes the amount of money that a company spends on the
creation or production of goods or services. It does not include the
markup for profit. From a seller's point of view, cost is the amount of
money that is spent to produce a good or product.

Types of Cost:

1. Opportunity Costs
Sowmya S Rashinkar
Faculty, BIMS,UOM

Opportunity cost is also referred to as alternative cost. Organizations

tend to utilize their limited resources for the most productive alternative
and forgo the income expected from the second-best use of these
resources.
Opportunity cost may be defined as the return from the second-best use
of the firm’s limited resources, which it forgoes in order to benefit from
the best use of these resources.

Example: Let us assume that an organisation has a capital resource of

1,00,000 and two alternative courses to choose from. It can either
purchase a printing machine or photo copier, both having a productive
life span of 12 years.

2. Explicit costs
Explicit costs, also referred to as actual costs, include those payments
that the employer makes to purchase or own the factors of production.
These costs comprise payments for raw materials, interest paid on loans,
rent paid for leased building or machinery and taxes paid to the
government.
An explicit cost is one that has occurred and is clearly reported in
accounting books as a separate cost.

Example: if an organisation borrows a sum of 70,00,000 at an interest

rate of 4% per year, the interest cost of 2,80,000 per year would be an
explicit cost for the organisation.

3. Implicit costs

Unlike explicit costs, there are certain other costs that cannot be reported
as cash outlays in accounting books. These costs are referred to as
implicit costs. Opportunity costs are examples of implicit cost borne by
an organisation.

Example: An employee in an organisation takes a vacation to travel to

his relative’s place. In this case, the implicit costs borne by the employee
Sowmya S Rashinkar
Faculty, BIMS,UOM

would be the salary that the employee could have earned if he/she had
not taken the leave. Implicit costs are added to the explicit cost to
establish a true estimate of the cost of production. Implicit costs are also
referred to as imputed costs, implied costs or notional costs.
4. Accounting costs

Accounting costs include the financial expenditure incurred by a firm in

acquiring inputs for the production of a commodity. These expenditures
include salaries/wages of labor, payment for the purchase of raw
materials and machinery, etc.

Accounting costs are recorded in the books of accounts of a firm and

appear on the firm’s income statement. Accounting costs include all
explicit costs along with certain implicit costs of an organisation.

Example: depreciation expenses (implicit cost) are included in the

books of account as a firm’s accounting costs.

5. Economic costs

Economic costs include the total cost of opting for one alternative over
another.

The concept of economic costs is similar that of opportunity costs or

implicit costs with the only difference that economic costs include the
accounting cost (or explicit cost) as well as the opportunity cost (or
implicit cost) incurred to carry out an action over the forgone action.

Example: if the economic cost of the employee in the above example

would include his/her week’s pay as well as the expense incurred on the
vacation.

6. Business costs
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Business costs include all the expenditures incurred to carry out a

business. The concept of business cost is similar to the explicit costs.

Business costs comprise all the payments and contractual obligations

made by a business, added to the book cost of depreciation of plant and
equipment. These costs are used to calculate the profit or loss made by a
business, filing for income tax returns and other legal procedures.

7. Full costs

The full costs include business costs, opportunity costs, and normal
profit. Full costs of an organisation include cost of materials, labour and
both variable and fixed manufacturing overheads that are required to
produce a commodity.

8. Fixed costs

Fixed costs refer to the costs borne by a firm that do not change with
changes in the output level. Even if the firm does not produce anything,
its fixed costs would still remain the same.

Example: depreciation, administrative costs, rent of land and buildings,

taxes, etc. are fixed costs of a firm that remain unchanged even though
the firm’s output changes. However, if the time period under
consideration is long enough to make alterations in the firm’s capacity,
the fixed costs may also vary.

9. Variable costs

Variable costs refer to the costs that are directly dependent on the output
level of the firm. In other words, variable costs vary with the changes in
the volume or level of output.
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Example: if an organisation increases its level of output, it would

require more raw materials. Cost of raw material is a variable cost for
the firm.
Other examples of variable costs are labour expenses, maintenance costs
of fixed assets, routine maintenance expenditure, etc. However, the
change in variable costs with changes in output level may not
necessarily be in the same proportion.

10. Incremental costs

Incremental costs involve the additional costs resulting due to a change

in the nature of level of business activity.

It characterizes the additional cost that would have not been incurred if
an additional unit was not produced. As these costs may be avoided by
avoiding the possible variation in the production, they are also referred
to as avoidable costs or escapable costs.

Example: if a production house has to run for additional two hours, the
electricity consumed during the extra hours is an additional cost to the
production house. The incremental cost comprises the variable costs.

Conclusion: cost, in common usage, the monetary value of goods and

services that producers and consumers purchase. In a basic economic
sense, cost is the measure of the alternative opportunities foregone in the
choice of one good or activity over others. This fundamental cost is
usually referred to as opportunity cost.

7) Explain the characteristics features of monopolistic completion.

Answer:

Intro: Monopolistic Competition-Monopolistic Competition is that

condition of market in which there are many sellers of any commodity
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Faculty, BIMS,UOM

but commodity of every seller is different from commodities of other

sellers in any way. Therefore, product differentiation is main quality of
monopolistic competition

Characteristics of Monopolistic Competition Following are the main

characteristics of Monopolistic Competition—

1. Large Number of Firms and Buyers: Firm producing differentiated

product and sellers are large in numbers in monopolistic competition.

2. Product Differentiation: Product differentiation is the main feature

of monopolistic competition. Product differentiation means that product
of different types, brands, and qualities will be available to customers in
a fixed time period. Product differentiation occurs when buyer of
product can differentiate between two products. In this, firms are in large
number but their products are different from each other in anyway, but
these products are close substitutes of each other. Product differentiation
is obtained due to characteristic of product like shape, measurement,
colour, durability, quality etc. There are many examples of product
differentiation like bath soaps Lux, Godrej, Camay, Rexona, etc.

3. Freedom of Entry and Exit of Firms: In the situation of

monopolistic competition there is freedom of entry and exit of firms in
the industry like perfect competition. It should be noticed that
Chamberlin has used group at the place of industry for group of firms
which produce differentiated products under the monopolistic
competition.

4. Selling Cost: An important characteristic of monopolistic

competition is that every firm spends more money in promoting its
product under it. Firm gives advertisements in newspapers, cinemas,
magazines, radio, T.V. etc. for selling its product in the maximum
amount. The investment done on all these is called as Selling Costs.
Sowmya S Rashinkar
Faculty, BIMS,UOM

5. Price Control: Every firm has limited control on the cost of product.
Average income and limit end income curve of a firm fall down like
monopoly in monopolistic competition. It means that in this situation,
firm can slow down the price for selling more products and raise price
for fewer products. In monopolistic competition, a firm has control on
cost of its production due to the product differentiation. But due to the
availability of close substitute of opposite product firms do not have full
control on cost in monopolistic competition. The cost of every firm is
affected by cost policy of its competitors in market up to the certain
limpghit.

6. Limited Mobility: In monopolistic competition, sources of

production and products and do not have mobility in services.

7. Imperfect Knowledge: In the situation of monopolistic competition,

buyers, sellers of products, and owners of sources do not have
knowledge of different prices of product. The reason is that comparison
between productions of different firms is not possible due to product
differentiation. Customers are fond of the production of any one specific
firm. They only buy the production of that firm even if it costs higher
than others. In this way even sources of production are not able to know
fully that how much the different firms are costing to the sources of
services.

8. Non-Price Competition: The main characteristic of monopolistic

competition is that under it different firms without changing the costs of
products compete with each other like the example of companies
producing ‘Surf’ and ‘Ariel’. If you take a box of ‘Surf’, you will get a
glass utensil similarly, with the box of ‘Ariel’ you will get the steel
spoon. In this way, firms, by providing different types of facilities and
products etc. to customers to attracts them toward their products. This
type of competition is called as Non-Price Competition.
Sowmya S Rashinkar
Faculty, BIMS,UOM

This can be better illustrated with the graph:For short term and long term
profit
Sowmya S Rashinkar
Faculty, BIMS,UOM

•
Sowmya S Rashinkar
Faculty, BIMS,UOM

Conclusion: Under, the Monopolistic Competition, there are a

large number of firms that produce differentiated products which
are close substitutes for each other. In other words, large sellers
selling the products that are similar, but not identical and compete
with each other on other factors besides price.

• The monopolistic competition is also called as imperfect

competition

8) Define GDP? Which are the different methods used for its
accounting?

Answer:

Intro: Gross domestic product (GDP) is the total monetary or market

value of all the finished goods and services produced within a country’s
borders in a specific time period. As a broad measure of overall
domestic production, it functions as a comprehensive scorecard of a
given country’s economic health.

 Gross domestic product (GDP) is the monetary value of all

finished goods and services made within a country during a
specific period.
 GDP provides an economic snapshot of a country, used to estimate
the size of an economy and growth rate.
 GDP can be calculated in three ways, using expenditures,
production, or incomes. It can be adjusted for inflation and
population to provide deeper insights.
 Though it has limitations, GDP is a key tool to guide
policymakers, investors, and businesses in strategic decision-
making.
Sowmya S Rashinkar
Faculty, BIMS,UOM

Three Important Methods for Measuring National Income

There are three techniques to compute national income:
 Income Method
 Product/ Value Added Method
 Expenditure Method

Income Method
National income is calculated using this method as a flow of factor
incomes. Labor, capital, land, and entrepreneurship are the four main
components of production. Labour is compensated with wages and
salaries, money is compensated with interest, the land is compensated
with rent, and entrepreneurship is compensated with profit.

Furthermore, certain self-employed individuals, such as doctors,

lawyers, and accountants, use their own labour and capital. Their
earnings are classified as mixed-income. NDP at factor costs is the total
of all of these factor incomes.
National Income is calculated as a flow of income in this case.
NI can be calculated as follows:

Employee compensation + Operating surplus (w + R + P + I) + Net

income + Net factor income from overseas = Net national income.

Where,
Wage stands for wage and salaries
R stands for rental income.
P stands for profit.
I stand for mixed-income.

Product/ Value Added Method

National income is calculated using this method as a flow of goods and
services. During a year, we determine the monetary value of all final
goods and services generated in an economy. The term "final goods"
Sowmya S Rashinkar
Faculty, BIMS,UOM

refers to goods that are consumed immediately rather than being

employed in a subsequent manufacturing process.
Intermediate goods are goods that are used in the manufacturing process.
Because the value of intermediate products is already included in the
value of final goods, we do not count the value of intermediate goods in
national income; otherwise, the value of goods would be double-
counted.

To avoid duplicate counting, we can use the value-addition approach,

which calculates value-addition (i.e., the value of the end good plus the
value of the intermediate good) at each stage of production and then
adds them together to get GDP.
The sum-total is the GDP at market prices since the money value is
measured at market prices. The methods outlined before can be used to
convert GDP at market price.
The flow of goods and services is used to calculate national income.
NI can be calculated as follows:

G.N.P. - COST OF CAPITAL – DEPRECIATION – INDIRECT

TAXES = NATIONAL INCOME

Expenditure Method
National income is calculated using this method as a flow of
expenditure. The gross domestic product (GDP) is the total of all private
consumption expenditures. Government consumption expenditure, gross
capital formation (public and private), and net exports are all factors to
consider (Export-Import).
As said above, the flow of expenditure is used to calculate national
income.
The Expenditure technique can be used to calculate NI as follows:

NationalIncome+NationalProduct+NationalExpenditure=National
Income+National Product+National Expenditure=National
Expenditure.
Sowmya S Rashinkar
Faculty, BIMS,UOM

9) Explain the various methods of forecasting demand?

Answer:
Demand forecasting is the process of predicting what the demand for
certain products will be in the future. It identifies what both current and
future customers will want to buy and tells manufacturing facilities what
they should actually produce.

Ideally, manufacturing companies want to be able to accurately predict

customer demands so that they can produce the right amount of
products. Producing too little items leads to stock shortages and can
negatively impact customer relationships. On the other hand, having too
much inventory is costly and can lead to having excess stock if the items
become obsolete.
Methods of Demand Forecasting

1] Survey of Buyer’s Choice

When the demand needs to be forecasted in the short run, say a year, then
the most feasible method is to ask the customers directly that what are
they intending to buy in the forthcoming time period. Thus, under this
method, potential customers are directly interviewed. This survey can be
done in any of the following ways:

a. Complete Enumeration Method: Under this method, nearly all the

potential buyers are asked about their future purchase plans.
b. Sample Survey Method: Under this method, a sample of potential
buyers are chosen scientifically and only those chosen are
interviewed.
c. End-use Method: It is especially used for forecasting the demand of
the inputs. Under this method, the final users i.e. the consuming
industries and other sectors are identified. The desirable norms of
Sowmya S Rashinkar
Faculty, BIMS,UOM

consumption of the product are fixed, the targeted output levels are
estimated and these norms are applied to forecast the future demand
of the inputs.

2] Collective Opinion Method

Under this method, the salesperson of a firm predicts the estimated future
sales in their region. The individual estimates are aggregated to calculate
the total estimated future sales. These estimates are reviewed in the light
of factors like future changes in the selling price, product designs, changes
in competition, advertisement campaigns, the purchasing power of the
consumers, employment opportunities, population, etc.

The principle underlying this method is that as the salesmen are closest to
the consumers they are more likely to understand the changes in their
needs and demands. They can also easily find out the reasons behind the
change in their tastes.

3] Barometric Method

This method is based on the past demands of the product and tries to
project the past into the future. The economic indicators are used to predict
the future trends of the business. Based on future trends, the demand for
the product is forecasted. An index of economic indicators is formed.
There are three types of economic indicators, viz. leading indicators,
lagging indicators, and coincidental indicators.
The leading indicators are those that move up or down ahead of some
other series. The lagging indicators are those that follow a change after
some time lag. The coincidental indicators are those that move up and
down simultaneously with the level of economic activities.

4] Market Experiment Method

Sowmya S Rashinkar
Faculty, BIMS,UOM

Another one of the methods of demand forecasting is the market

experiment method. Under this method, the demand is forecasted by
conducting market studies and experiments on consumer behavior under
actual but controlled, market conditions.

Certain determinants of demand that can be varied are changed and the
experiments are done keeping other factors constant. However, this
method is very expensive and time-consuming.

5] Expert Opinion Method

Usually, market experts have explicit knowledge about the factors

affecting demand. Their opinion can help in demand forecasting. The
Delphi technique, developed by Olaf Helmer is one such method.

Under this method, experts are given a series of carefully designed

questionnaires and are asked to forecast the demand. They are also
required to give the suitable reasons. The opinions are shared with the
experts to arrive at a conclusion. This is a fast and cheap technique.

6] Statistical Methods

The statistical method is one of the important methods of demand

forecasting. Statistical methods are scientific, reliable and free from
biases. The major statistical methods used for demand forecasting are:

a. Trend Projection Method: This method is useful where the

organization has a sufficient amount of accumulated past data of the
sales. This date is arranged chronologically to obtain a time series.
Thus, the time series depicts the past trend and on the basis of it, the
future market trend can be predicted. It is assumed that the past trend
will continue in the future. Thus, on the basis of the predicted future
trend, the demand for a product or service is forecasted.
Sowmya S Rashinkar
Faculty, BIMS,UOM

b. Regression Analysis: This method establishes a relationship between

the dependent variable and the independent variables. In our case, the
quantity demanded is the dependent variable and income, the price of
goods, the price of related goods, the price of substitute goods, etc.
are independent variables. The regression equation is derived
assuming the relationship to be linear. Regression Equation: Y = a +
bX. Where Y is the forecasted demand for a product or service.

Conclusion: Thus There are several different ways to do demand

forecasting. Your forecast may differ based on the forecasting model
you use. Best practice is to do multiple demand forecasts. This will give
you a more well- rounded picture of your future sales. Using more than
one forecasting model can also highlight differences in predictions.
Those differences can point to a need for more research or better data
inputs.
10) Discuss the different types of collusive oligopoly?
Answer:
Intro: Collusive oligopoly is a market situation wherein the firms
cooperate with each other in determining price or output or both. A
non-collusive oligopoly refers to a market situation where the firms
compete with each other rather than cooperating.
Sometimes, firms may try to remove uncertainty related to acting
independently and enter into price agreements with each other. This is
collusion. Collusion is either formal or informal. It can take the form of
cartel or price leadership.
A cartel is an association of independent firms within the same industry
which follow the common policies relating to price, output, sale, profit
maximization, and the distribution of products. Price leadership is based
 Sowmya S Rashinkar
Faculty, BIMS,UOM

on informed collusion. Under price leadership, one firm is a large or

dominant firm and acts as the price leader who fixes the price for the
products while the other firms allow it.
Collusion is an anticompetitive business practice where firms work
together to engage in illegal acts of market manipulation that earn them
greater profits at the expense of the consumer.

Collusion is most common within industries where there are relatively

few firms operating, high fixed costs, high barriers to entry, relatively
inelastic demand for goods, and limited government regulations.

 Example: The Organization of Petroleum Exporting Countries (OPEC)

is a cartel of oil-producing nations that collude to fix the price of oil and
restrict production through a quota system.

Types of Collusion
Collusion between firms can be observed in two different forms: explicit
collusion and implicit collusion.

Explicit collusion happens when a group of firms establish a formal

agreement to engage in collusive commercial practices. However, since
collusive practices are generally illegal, firms are likely to avoid creating
documentation of any such agreement. A contract detailing the terms of
collusion might also be difficult to enforce in court for the same reason.
Instead, a formal agreement to collude may be reached verbally and in-
person.

Implicit collusion happens when a group of firms manipulate the

marketplace through interdependent actions, but without coming to a
formal agreement. Price leadership, a practice where one firm sets the
price for a good and other firms simply follow suit, is a classic example
of implicit collusion in business.
Sowmya S Rashinkar
Faculty, BIMS,UOM

Conclusion: When a group of firms cooperates to maximize their profits

in the marketplace instead of competing with each other, this is known
as collusion. Collusion gives firms an unfair advantage in the
marketplace and collusive practices like price fixing are designed to
unfairly benefit firms at the expense of the consumer.

Sec-C-Case study
Case Study:
Multiplex pricing [1*20 = 20] Multiplex business has gained steady
momentum in India. Ticket prices in such multiplexes are adjusted in
accordance with the movie, time of the day and day of the week. Hit
movies on a weekend or a holiday are charged maximum, while during
weekdays, when prices are kept lower, the benefit goes to the audience.
Besides taking over the metros, these multiplexes have undertaken the
risk of broadening their network to non-metros. But the game in the non-
metros is slightly different from that in metro. The profit margin is
slightly different in non-metros, classified according to the affordability
factor, taste and preferences. During weekdays, the prices of the ticket
vary from ₹ 150 - ₹ 200 in metros and soar up during the weekends
making the tickets available at ₹200 - ₹250. The morning shows are
priced at ₹60, ₹80 or ₹100 attracting the school or college students.
The price of tickets in non-metros varies from ₹80 - ₹100 during a
week. “Customers in these towns would not have the capacity to pay
upwards of ₹100 for a ticket, hence we have entered these towns under
separate brand name of PVR Talkies”
Questions:
1. What type of pricing strategy is adopted in the case of Multiplexes?
Evaluate on the basis of various pricing categories.
Sowmya S Rashinkar
Faculty, BIMS,UOM

2. Is this price discrimination or flexible pricing? Explain

3. Evaluate the objective of Multiplexes on the basis of their pricing
strategy
Solution:
Summary:
Multiplex business has gained steady momentum in India. Ticket prices
in such multiplexes are adjusted in accordance with the movie, time of
the day and day of the week. Hit movies on a weekend or a holiday are
charged maximum, while during weekdays, when prices are kept lower,
the benefit goes to the audience. The profit margin is slightly different in
metros and non metro cities according to the purchasing power of the
audience. In non metros PVR talkies were introduced for customers who
cannot afford expensive tickets.
1. What type of pricing strategy is adopted in the case of
Multiplexes? Evaluate on the basis of various pricing
categories.
Answer: Price Discrimination involves charging a different price to
different groups of consumers for the same good. Price discrimination
can provide benefits to consumers, such as potentially lower prices,
rewards for choosing less popular services and helps the firm stay
profitable and in business. The advantages of price discrimination will
be appreciated more by some groups of consumers.
Some other benefits are:
 Allows an unprofitable business to avoid going bankrupt.
 Some groups benefit from cheaper prices
 Sowmya S Rashinkar
Faculty, BIMS,UOM

 Low-income consumers may be able to benefit from cheaper

prices.
 Price discrimination helps a firm to become more profitable. This
may enable the firm to invest in increased capacity.
2) Is this price discrimination or flexible pricing? Explain
Answer:
Here multiplex is following price discrimination pricing strategy as
multiplex is charging different prices at different places and also
different prices for different shows in different days of the week.
3) Evaluate the objective of Multiplexes on the basis of their pricing
strategy
Answer:
Objectives are as follows:

1. To charge different prices from different consumers according to their

paying capacity, such as – to charge more price from rich consumers and
less price from poor consumers.
2. To charge Different prices from different consumers on the basis of their
geographical locations.
3. To charge different prices from different consumers, on the basis of use
of the product by these consumers
4. To discriminate in the price with an object of entering into a new market
or with an object of expanding the market.
5. To discrimination in the price with an object to discourage possible
competition in a particular area.

End
Sowmya S Rashinkar
Faculty, BIMS,UOM