UNIT 3 Companies using this strategy need to record their costs in detail to ensure they have a The authority

nies using this strategy need to record their costs in detail to ensure they have a The authority may have options other than to use peak load pricing or enhance its
comprehensive understanding of their overall costs.[2] This information is necessary to infrastructure. However, enhancing infrastructure requires a lot of investment. Furthermore, it
1. explain the help of appropriate diagram the price output decision in multi plant and generate accurate cost estimates. may remain out of use or waste during the off-season or non-peak time.
multi product firm
Cost-plus pricing is especially common for utilities and single-buyer products that are Peak Load Pricing helps in useful aid use and avoiding wastage. It helps firms charge more and
ans: In the long run, a monopoly organisation with a number of plants may increase (or
manufactured to the buyer's specification, such as for military procurement earn a profit during peak hours while offering discounts during the low-demand time.
decrease) the number of its plants with a view to obtain the profit-maximising solution.
Now, each plant of the monopolist may be of a different size, and in the long run the size
of each plant is a variable.
Merits : Simple to implement , It’s easier to communicate changes in your cost-plus pricing & (b) average cost pricing
Cost-plus pricing provides a consistent rate of return
However, in the long run since all sorts of input adjustments are possible, the LAC curve
and the associated SAC curves of each plant of the monopolist would be identical, for
what is good for a particular plant is good for every other plant. The size of each plant Average cost pricing is one of the ways the government regulates a monopoly market.
Demerits : You can’t gain a competitive advantage, Cost-plus pricing can sideline the crucial Monopolists tend to produce less than the optimal quantity pushing the prices up. The
should be such as would enable the firm to produce the same quantity of output at the
aspect of market research. government may use average cost pricing as a tool to regulate prices monopolists may
same minimum possible (average) cost.
charge. Average cost pricing forces monopolists to reduce price to where the
That is, in the long run the monopolist will select the minimum point on the identical LAC firm's average total cost (ATC) intersects the market demand curve.
3. Comment on the following: (a) consumer welfare is higher under perfect competition
curve of each plant, which is also the minimum point of the associated SAC curve. This
than under monopoly
point would be like the point R. At this point, the quantity of output to be produced at
each plant is q 0 and the minimum long-run average cost of production at q = q 0 would be 5. How are prices and output determined in a multiproduct firm?
R0q0—this is also the minimum possible average cost in the long run of his total output of
all the plants taken together. Ans In contrast with firms in perfect competition, a monopoly is allocatively inefficient
because in monopoly the price is greater than the marginal cost, thus resulting in dead- Ans: In economics, the theory of production and cost states that the cost of a product is
weight welfare loss for consumers determined by the sum total of the cost of all the resources that went into making it. There are
multiple factors to be considered when determining the cost of a product.

In a monopoly, consumer surplus is always lower (relative to perfect competition). –

But it could be that the increase in the firm's profit more than offsets the decrease in In the model of perfect competition, we assume that a firm determines its output by finding
consumer surplus. the point where the marginal revenue and marginal cost curves intersect. Provided that price
exceeds average variable cost, the firm produces the quantity determined by the intersection
of the two curves.
4. Write short notes on the following

6. Describe various general pricing strategies

2. explain the method of cost plus pricing. What are the merits and demerits of this (a) peak load pricing
method? Ans: Some of these pricing strategies can co-exist as your product evolves through its lifecycle
Ans : The Peak Load Pricing definition involves a mechanism where customers must pay higher in the market; some elements must coexist. You need an overall price strategy (e.g., cost-
Ans: Cost-plus pricing is a pricing strategy by which the selling price of a product is determined prices for a service during peak demand. The price of the services or goods is not fixed in peak based or value-based), you need to determine generally how high or low the price will be
by adding a specific fixed percentage to the product's unit cost. Essentially, the markup load pricing. Instead, they vary with factors like demand, market conditions, or type of (skimming and penetration pricing), and you need to respond to competitors (competition-
percentage is a method of generating a particular desired rate of return. An alternative pricing customers. based pricing).
method is value-based pricing.[3]
The primary focus of this practice is to control the demand according to the supply capacity. For example, you may want to initially price your product using a value-based approach, then
Cost-plus pricing has often been used for government contracts (cost-plus contracts), and has For example, peak load pricing can also be applied to highways or roads. Firms often charge a switch to a skimming strategy and conclude with penetration pricing
been criticized for reducing incentive for suppliers to control direct costs, indirect higher toll during peak traffic hours to avoid undue congestion. Some travelers may alter their
costs and fixed costs whether related to the production and sale of the product or service or route or schedule to avoid the higher toll, leading to lesser traffic. If this pricing strategy is not
not. followed, it will create a huge jam on the road, leading to trouble for the rules.
7. Explain price determination under public utilities

Ans: Determination of Prices means to determine the cost of goods sold and services rendered  Conceptual difficulties
in the free market. In a free market, the forces of demand and supply determine the prices.
The Government does not interfere in the determination of the prices. the consumers of a 1. Product Method  Statistical difficulties
public service are required to pay the price fixed by the PS A. Conceptual difficulties
Under this method, we add the values of output produced or services rendered by the different
8. Dumping analysis 1. It is difficult to calculate the value of some of the items such as services rendered
sectors of the economy during the year in order to calculate the National Income.
for free and goods that are to be sold but are used for self-consumption.
Ans: Dumping is a term used in the context of international trade. It's when a country
or company exports a product at a price that is lower in the foreign importing market In this method, we include only the value added by each firm in the production process in the 2. Sometimes, it becomes difficult to make a clear distinction between primary,
than the price in the exporter's domestic market. Because dumping typically involves output figure. Hence, we use the value-added method. The value-added output of all the intermediate and final goods.
substantial export volumes of a product, it often endangers the financial viability of sectors of the economy is the GNP at factor cost.
the product's manufacturer or producer in the importing nation. B. Statistical difficulties

Dumping is considered a form of price discrimination. It occurs when a manufacturer However, this method is unscientific as it adds the value of only those goods and services that 1. In case of changes in the price level, we need to use the Index numbers which have
lowers the price of an item entering a foreign market to a level that is less than the are sold in the market or are available for sale in the market their own inherent limitations.
price paid by domestic customers in the originating country. The practice is considered
intentional with the goal of obtaining a competitive advantage in the importing 2. Statistical figures are not always accurate as they are based on the sample surveys.
Income Method Also, all the data are not often available.
market.
3. Short not on (a) risk analysis
UNIT 4 Under this method, we add all the incomes from employment and ownership of assets before
taxation received from all the production activities in an economy.
1. Explain the factors affecting the locational choice of a firm Ans : Risk analysis is the process of identifying and analysing potential future events
that may adversely impact a company. A company performs risk analysis to better
The main factors that affect location decisions include regional factors, community Thus, it is also the Factor Income method. We also need to add the undistributed profits of the understand what may occur, the financial implications of that event occurring, and
considerations, and site-related factors. Community factors consist of quality of life, private sector and the trading surplus of the public sector corporations. what steps it can take to mitigate or eliminate that risk.
services, attitudes, taxes, environmental regulations, utilities, and development
support.
However, we need to exclude items not arising from productive activities such as sickness sometimes, risk analysis is important because it guides company decision-making.
benefits, interest on the national debt, etc. Consider the example of a company considering whether to move forward with a
project. The decision may be as simple as identifying, quantifying, and analyzing the
2. Discuss various methods of computing national income and narrate the practical Expenditure Method risk of the project.
difficulties in the estimation of national income.

ans: National income is the value of the aggregate output of the different sectors during This method measures the total domestic expenditure of the economy. It consists of two 4. Short note on locational choice of firm
a certain time period. In other words, it is the flow of goods and services produced in an elements, viz. Consumption expenditure and Investment expenditure.
economy in a particular year. Thus, the measurement of National Income becomes Ans: Firms producing consumer products tend to locate in cities or regions with
important. larger population whereas industrial goods producers will locate near to industries
Consumption expenditure includes consumption expenditure of the household sector on goods
and services and consumption outlays of the business sector and public authorities. having special need for that product. Labour is considered as the most complicated
There are three ways of measuring the National Income of a country. They are from the income
among the primary location factor
side, the output side and the expenditure side. Thus, we can classify these perspectives into the
following methods of measurement of National Income. Investment expenditure refers to the expenditure on the making of fixed capital such as Plant
and Machinery, buildings, etc. 5. What are the different stages of business cycle?
Methods of Measuring National Income
Difficulties in Measurement of National Income Ans: The business cycle is a term used by economists to describe the increase and decrease in
Product Method economic activity over time. The economy is all activities that produce, trade, and consume
Following are the difficulties in estimating the National Income goods and services within the U.S.—such as businesses, employees, and consumers. Thus, the
 Income Method measured amount of productivity is what the business cycle refers to.
 Expenditure Method

When businesses are increasing production, they need more employees. As a result, more Spending– Government spending plays a vital role in shaping the overall economy.
people are hired, there is more money to spend, and businesses make more profits and can
Thus, trillions of amounts are spent on wealth transfers such as social security,
focus on growth. The rate at which production and consumption change positively is called
"economic expansion." It continues until circumstances occur that cause production to slow. Medicaid, and Medicare. Even in other developed nations, social transfers and
healthcare are high expenditures
If business production slows, not as many employees are needed. As a result, consumers have
7.describe various types of inflation? Explain cause of demand pull and cost push inflation
less spending money, and businesses reduce spending on growth. The rate at which production
and consumption as a whole change negatively is called "economic contraction."
Ans: inflation is the rate at which prices for goods and services rise. Inflation is sometimes
The duration of a business cycle is the period containing one expansion and contraction in classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation. The
sequence. One complete business cycle has four phases: expansion, peak, contraction, and most commonly used inflation indexes are the Consumer Price Index and the Wholesale Price
trough. They don’t occur at regular intervals or lengths of time, but they do have recognizable Index.
indicators.

6. Describe the objective and tools of fiscal policy the difference between these two types of inflation? Let’s learn about them.
1. Demand-pull inflation is caused when the need for services and goods exceeds the
Ans: The primary objective of the fiscal policy is to regulate the case of economic stability, full available supply. This can happen when economic growth leads to an increase in
employment and stabilize the growth rate. consumer spending. It can also happen when the government increases its spending or
if there is a boost in exports. When demand exceeds supply, prices go up.
Objective: 2. Cost-push inflation happens when the cost of goods and services goes up. This can be
caused by a hike in the price of raw materials, or by a rise in wages. When the cost of
goods and services goes up, businesses pass these costs on to consumers in the form of
a. Economic growth– As an economy develops, its citizens become flourishing on the
higher prices.
whole. Also, the economy’s government should be careful, as a violent fiscal policy may
3. So basically, demand-pull inflation happens when a request for services and goods
turn destructive in the long run.
exceeds the available supply. Cost-push inflation happens when the cost of goods and
b. Full employment– It is the primary objective of a government to get people into work.
services goes up. Both Cost-Push and Demand-Pull Inflation can lead to higher prices.
Not only do the higher taxes benefit the governments, but also the lower expenditures on
4. Demand-pull inflation is caused by excess demand, while cost-push inflation is caused
social security. Although, an expansionary policy may invest in infrastructure to create
by excess costs.
employment opportunities in future. Likewise, it may also minimize taxes to supply more
5. Demand-pull inflation tends to be more short-term, while cost-push inflation can be
money to consumers to stimulate employment indirectly from purchases.
more long-term.
c. Control debt– Operating a budget deficit is not a harm. It creates more and more debt
6. Demand-pull inflation is usually caused by strong economic growth, while cost-push
over time. If the tax receipts and economic growth do not increase its line, a nation
inflation is usually caused by an increase in cost
witnesses an unsustainable debt. Thus, a rational fiscal policy tends to control to avoid
drastic action.
Tools of fiscal policy:

There are two main fiscal policy instruments, i.e., taxation and spending.
Taxation– Governments optimize taxation as a way of capitalizing expenditures. The
higher taxes are not popular with voters. Still, they want higher spending on defence,
education and healthcare. It aims at encouraging investment, reducing inequality,
regulating consumption, preventing domestic industries etc.