Final Assignment of ME

ASSIGNMENT ON MANAGERIAL ECONOMICS
Question 1: What is pricing policy? What are the internal and

external factors of the policy?
 Introduction:
Standard procedure used by a firm to set wholesale and retail prices for its
products or services. See also pricing strategy. Price planning that takes into view
factors such as a firm's overall marketing objectives, consumer demand, product
attributes, competitors' pricing, and market and economic trends.
 Pricing Factors to Consider:

• Determine primary and secondary market segments. This helps you
better understand the offering's value to consumers. Segments are important
for positioning and merchandising the offering to ensure maximized sales at
the established price point.
• Assess the product's availability and near substitutes. Under pricing hurts
your product as much as overpricing does. If the price is too low, potential
customers will think it can't be that good. This is particularly true for high-
end, prestige brands. One client underpriced its subscription product,
yielding depressed response and lower sales. The firm underestimated the
uniqueness of its offering, the number of close substitutes, and the strength
of the consumer's bond with the product. As a result, the client could
increase the price with only limited risk to its customer base. In fact, the
initial increase resulted in more subscribers as the new price was more in
line with its consumer-perceived value.
• Survey the market for competitive and similar products. Consider

whether new products, new uses for existing products or new technologies
can compete with or, worse, leapfrog your offering. Examine all possible
ways consumers can acquire your product. I've worked with companies that
only take into account direct competitors selling through identical channels.
Don't limit your analysis to online distribution channels.
Competitors may define your price range. In this case, you can price higher
if consumers perceive your product and/or brand is significantly better; price
on parity if your product has better features; or price lower if your product
has relatively similar features to existing products. An information client
faced this situation with a premium product. Its direct competitors
established the price for a similar offering. As the third player in this
RAHUL GUPTA, MBAHCS (1ST SEM), SUBJECT CODE-MB0026, SET-2

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segment, its choices were price parity with an enhanced offering or a lower
price with similar features.
• Examine market pricing and economics. A paid, ad-free site should

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

interacts with the offering. I recommended a content client promote its
advertising-supported free e-zines to incent readers to register. The client
believed the e-zines had no value as the content was repurposed from
another product, so it didn't advertise them. Yet the repurposed content was
exactly what readers viewed as a benefit. By undervaluing its offering, the
client missed an opportunity to increase registrations and, hence, advertising
revenues with a product that effectively had no development costs.
• Test different price points if possible. This is important if you enter a new
or untapped market, or enhance an offering with consumer-oriented benefits.
To determine price, MarketingExperiments.com tested three different price
points for a book. It found the highest price yielded the greatest product
revenue. Interestingly, the middle price yielded greater revenue over time, as
it generated more customers to whom other related products could be
marketed.
• Monitor the market and your competition continually to reassess

pricing. Market dynamics and new products can influence and change
consumer needs.
 Internal Factors: Marketing

Objectives:
Marketing decisions are guided by the overall objectives of the company. While we
will discuss this in more detail when we cover marketing strategy in a later tutorial,
for now it is important to understand that all marketing decisions, including price,
work to help achieve company objectives. Corporate objectives can be wide-ranging
and include different objectives for different functional areas (e.g., objectives for
production, human resources, etc). While pricing decisions are influenced by many
types of objectives set up for the marketing functional area, there are four key
objectives in which price plays a central role. In most situations only one of these

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objectives will be followed, though the marketer may have different objectives for
different products. The four main marketing objectives affecting price include:
• Return on Investment (ROI) – A firm may set as a marketing objective the

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

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For the remainder of this tutorial we look at factors that affect how marketers set
price. The final price for a product may be influenced by many factors which can be
categorized into two main groups:
• Internal Factors –
• Objectives of the firm.
• Production costs.
• Quality of the product and its characteristics.
• Scale of the production.
• Efficient management of the resources.
• Policy towards percentage of profits and dividend
distribution.
• Advertising and sales promotion policies.
• Wage policy and sales turn over policy etc.
• The stages of the product life cycle.
• Use pattern of the product.
• Extent of the distinctiveness of the product and extent of
product differentiation practiced by the firm.
• Composition of the product and life of the firm.
• External Factors –
• Demand, supply and their determinants.

• Elasticity of demand and supply.
• Degree of competition in the market.
• Size of the market.
• Good will, name, fame, reputation of the firm in the market.

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• Trends in the market.

• Purchasing power of the buyers.
• Bargaining power of the customers.
• Availability of the substitutes and complements.
• Government’s policy relating to various kinds of incentives,
disincentives, controls, restrictions and regulations, licensing,
taxation, export and import, foreign aid, foreign capital foreign
technology, MNC’s etc.
• Competitors pricing policy.
• Social consideration.
Question 2: Mention three crucial objectives of price policies?

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• Profit generally is the making of gain in business activity for the benefit of
the owners of the business. The word comes from Latin meaning "to make
progress", and is defined in two different ways, one for economics and one
for accounting.
• A sales oriented business will focus much more of its energy on selling. This
is usually done by door to door selling or what is called telesales over the
phone. Other sales oriented businesses may rely entirely on social functions
by selling exclusively from booths or kiosks. Some local stores and grocers
also function entirely as a sales oriented business without the use of
conventional advertising.
• Status quo, a commonly used form of the original Latin "statu quo" -
literally "the state in which" - is a Latin term meaning the current or existing
state of affairs.[1] To maintain the status quo is to keep the things the way
they presently are. The related phrase status quo ante, literally "the state in
which before", means "the state of affairs that existed previously"
Question 3: Mention the bases of price discrimination?
INTRODUCTION:
Price discrimination exists when sales of identical goods or services are transacted
at different prices from the same provider. In a theoretical market with perfect
information, no transaction costs or prohibition on secondary exchange (or re-
selling) to prevent arbitrage, price discrimination can only be a feature of monopoly
and oligopoly markets[1], where market power can be exercised. Otherwise, the
moment the seller tries to sell the same good at different prices, the buyer at the
lower price can arbitrage by selling to the consumer buying at the higher price but
with a tiny discount. However, market frictions in oligopolies such as the airlines
and even in fully competitive retail or industrial markets allow for a limited degree
of differential pricing to different consumers. Price discrimination also occurs when

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it costs more to supply one customer than it does another, and yet the supplier
charges both the same price.
The effects of price discrimination on social efficiency are unclear; typically such
behavior leads to lower prices for some consumers and higher prices for others.
Output can be expanded when price discrimination is very efficient, but output can
also decline when discrimination is more effective at extracting surplus from high-
valued users than expanding sales to low valued users. Even if output remains
constant, price discrimination can reduce efficiency by misallocating output among
consumers.
Price discrimination requires market segmentation and some means to discourage

discount customers from becoming resellers and, by extension, competitors. This
usually entails using one or more means of preventing any resale, keeping the
different price groups separate, making price comparisons difficult, or restricting
pricing information. The boundaries set up by the marketer to keep segments
separate are referred to as a rate fence. Price discrimination is thus very common in
services, where resale is not possible; an example is student discounts at museums.
Price discrimination can also be seen where the requirement that goods be identical
is relaxed. For example, so-called "premium products" (including relatively simple
products, such as cappuccino compared to regular coffee) have a price differential
that is not explained by the cost of production. Some economists have argued that
this is a form of price discrimination exercised by providing a means for consumers
to reveal their willingness to pay.
 Types of price discrimination:

First degree price discrimination:
In first degree price discrimination, price varies by customer's willingness or

ability to pay. This arises from the fact that the value of goods is subjective. A
customer with low price elasticity is less deterred by a higher price than a customer
with high price elasticity of demand. As long as the price elasticity (in absolute
value) for a customer is less than one, it is very advantageous to increase the price:
the seller gets more money for fewer goods. With an increase of the price elasticity
tends to rise above one. One can show that in the optimum the price, as it varies by
customer, is inversely proportional to one minus the reciprocal of the price elasticity
of that customer at that price. This assumes that the consumer passively reacts to the
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price set by the seller, and that the seller knows the demand curve of the customer.
In practice however there is a bargaining situation, which is more complex: the
customer may try to influence the price, such as by pretending to like the product
less than he or she really does or by threatening not to buy it.
An alternative way to understand First Degree Price Discrimination is as follows:

This type of price discrimination is primarily theoretical because it requires the
seller of a good or service to know the absolute maximum price that every consumer
is willing to pay. As above, it is true that consumers have different price elasticities,
but the seller is not concerned with such. The seller is concerned with the maximum
willingness to pay (or reservation price) of each customer. By knowing the
reservation price, the seller is able to absorb the entire market surplus, thus taking all
consumer surpluses from the consumer and transforming it into revenues. From a
social welfare perspective, first degree price discrimination is not undesirable. That
is, the market is still entirely efficient and there is no deadweight loss to society.
However, it is the complete opposite of a perfectly competitive market. In a
perfectly competitive market, the consumers receive the bulk of surplus. In a market
with first degree price discrimination, the seller(s) capture all surpluses. Efficiency
is unchanged but the wealth is transferred. This type of market does not much exist
in reality, hence it is primarily theoretical. Examples of where this might be
observed are in markets where consumers bid for tenders, though still, in this case,
the practice of collusive tendering undermines efficiency.
Second degree price discrimination:
In second degree price discrimination, price varies according to quantity sold.

Larger quantities are available at a lower unit price. This is particularly widespread
in sales to industrial customers, where bulk buyers enjoy higher discounts.
Additionally to second degree price discrimination, sellers are not able to

differentiate between different types of consumers. Thus, the suppliers will provide

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incentives for the consumers to differentiate themselves according to preference. As

above, quantity "discounts", or non-linear pricing, is a means by which suppliers use
consumer preference to distinguish classes of consumers. This allows the supplier to
set different prices to the different groups and capture a larger portion of the total
market surplus.
Third degree price discrimination:
In third degree price discrimination, price varies by attributes such as location or

by customer segment, or in the most extreme case, by the individual customer's
identity; where the attribute in question is used as a proxy for ability/willingness to
pay.
Additionally to third degree price discrimination, the supplier(s) of a market

where this type of discrimination is exhibited are capable of differentiating between
consumer classes. Examples of this differentiation are student or senior discounts.
For example, a student or a senior consumer will have a different willingness to pay
than an average consumer, where the reservation price is presumably lower because
of budget constraints. Thus, the supplier sets a lower price for that consumer
because the student or senior has a more elastic price elasticity of demand (see the
discussion of price elasticity of demand as it applies to revenues from the first
degree price discrimination, above). The supplier is once again capable of capturing
more market surplus than would be possible without price discrimination.
Note that it is not always advantageous to the company to price discriminate even if
it is possible, especially for second and third degree discrimination. In some
circumstances, the demands of different classes of consumers will encourage
suppliers to simply ignore one/some class (es) and target entirely to the other(s).
Whether it is profitable to price discriminate is determined by the specifics of a
particular market.
Question 4: What do you mean by the fiscal policy? What are the

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instruments of fiscal policy? Briefly comment on India’s fiscal

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

• The pattern of resource allocation;
• The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity.
The three possible stances of fiscal policy are neutral, expansionary and
contractionary:
• A neutral stance of fiscal policy implies a balanced budget where G = T

(Government spending = Tax revenue). Government spending is fully
funded by tax revenue and overall the budget outcome has a neutral effect on
the level of economic activity.
• An expansionary stance of fiscal policy involves a net increase in

government spending (G > T) through rises in government spending or a fall
in taxation revenue or a combination of the two. This will lead to a larger
budget deficit or a smaller budget surplus than the government previously
had, or a deficit if the government previously had a balanced budget.
Expansionary fiscal policy is usually associated with a budget deficit.
• A contractionary fiscal policy (G < T) occurs when net government spending

is reduced either through higher taxation revenue or reduced government
spending or a combination of the two. This would lead to a lower budget
deficit or a larger surplus than the government previously had, or a surplus if
the government previously had a balanced budget. Contractionary fiscal
policy is usually associated with a surplus.

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1. To achieve desirable price level:
The stability of general prices is necessary for economic stability. The maintenance
of a desirable price level has good effects on production, employment and national
income. Fiscal policy should be used to remove; fluctuations in price level so that
ideal level is maintained.
2. To Achieve desirable consumption level:
A desirable consumption level is important for political, social and economic

consideration. Consumption can be affected by expenditure and tax policies of the
government. Fiscal policy should be used to increase welfare of the economy
through consumption level.
3. To Achieve desirable employment level:
The efficient employment level is most important in determining the living standard
of the people. It is necessary for political stability and for maximization of
production. Fiscal policy should achieve this level.
4. To achieve desirable income distribution:
The distribution of income determines the type of economic activities the amount of
savings. In this way, it is related to prices, consumption and employment. Income
distribution should be equal to the most possible degree. Fiscal policy can achieve
equality in distribution of income.
5. Increase in capital formation:
In under-developed countries deficiency of capital is the main reason for under-

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

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

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 Instruments of Fiscal Policy:

1. Public expenditure:
Significance
Public expenditure is the value of goods and services bought by the State and its
articulations.
Public expenditure plays four main roles:

1. it contributes to current effective demand;
2. it expresses a coordinated impulse on the economy, which can be used for
stabilization, business cycle inversion, and growth purposes;
3. it increases the public endowment of goods for everybody;
4. it gives rise to positive externalities to economy and society, the more so through
its capital component.
With its prioritized structure and its peculiar decision-making processes, it

substantiates the prevailing kind of State. In democracy, public expenditure is an
expression of people's will, managed through political parties and institutions. At the
same time, public expenditure is characterized by a high degree of inertia and law-
dependency, which tempers the will of the current majority. Public expenditure can
be financed through taxes, public debt, money emission, international aid.
2. Taxes:
To tax (from the Latin taxo; "I estimate", which in turn is from tangō; "I touch") is
to impose a financial charge or other levy upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state such that failure to pay is
punishable by law. Taxes are also imposed by many sub national entities. Taxes
consist of direct tax or indirect tax, and may be paid in money or as its labor
equivalent (often but not always unpaid). A tax may be defined as a "pecuniary
burden laid upon individuals or property to support the government […] a payment
exacted by legislative authority."[1] A tax "is not a voluntary payment or donation,
but an enforced contribution, exacted pursuant to legislative authority" and is "any
contribution imposed by government […] whether under the name of toll, tribute,

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tillage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. In
modern taxation systems, taxes are levied in money, but in-kind and corvée taxation
is characteristic of traditional or pre-capitalist states and their functional equivalents.
The method of taxation and the government expenditure of taxes raised are often
highly debated in politics and economics. Tax collection is performed by a
government agency such as Canada Revenue Agency, the Internal Revenue Service
(IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the
UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or
criminal penalties (such as incarceration) may be imposed on the non-paying entity
or individual.
3. Public debts:
Public debt is, in effect, an extension of personal debt, since individuals make up the
revenue stream of the government. Public debt accrues over time when the
government spends more money than it collects in taxation. As a government
engages in more deficit spending, the amount of public debt increases.
Public debt can be made up of all sorts of different types of debt. A great deal of
public debt is external debt, which is money that is owed by the government to
foreign lenders, either in the form of international organizations, other governments,
or groups like sovereign wealth funds which invest in government bonds. Public
debt is also made up of internal debt, where citizens and groups within the country
lend the government money to continue operating. In some ways, this is a lot like
lending to oneself, since ultimately the responsibility for public debt falls back on
the very people lending money.
Governments with strong economies, who are well trusted in the world, are able to
raise funds by issuing their own securities, usually called government bonds.
Individuals, other nations, and groups buy these bonds, and the government
promises to pay them back at a certain, usually fairly good, interest rate. Less robust
governments, who do not have the trust from the world to be able to issue bonds and
expect people to buy them, may turn to international institutions, or even normal
banks, to give them loans, usually at less favorable rates.
The above mentioned instruments are used by the public authorities to achieve
desirable level of production, consumption and National Income. During
inflationary trend more and more taxes are levied on the community. In this way,

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

said the government cannot indulge in 'reckless borrowing' and did not have
Parliamentary mandate to tweak taxes.
The following is the government's fiscal policy strategy statement that the finance
minister announced in Parliament.
Fiscal Policy Overview
 The Union Budget 2008-09 was presented in the backdrop of impressive

growth in the Indian economy which clocked about 9 per cent of average
growth in the last four years.
 Riding on the path of fiscal consolidation, the Union Budget 2008-09 was
presented with fiscal deficit estimated at 2.5 per cent of GDP and revenue
deficit at 1 per cent of GDP.
 The global financial crisis in the second half of the financial year which
heralded recessionary trends the world over also impacted the Indian
economy causing the focus of fiscal policy to be shifted to providing growth
stimulus.
 The Country is facing difficult economic situation, the cause of which is not
emanating from within its boundaries. However, left unattended, the impact
of this crisis is going to affect us in medium to long term.

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 The Interim Budget 2009-2010 is being presented in the backdrop of

uncertainties prevailing in the world economy. The impact of this is seen in
the moderation of the recent trend in growth of the Indian economy in 2008-
09 which at 7.1 per cent still however makes India the second fastest
growing economy in the World.
Question 5: Comment on the consequences of environmental

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

In economic theory, land clearance or land reclamation involves a market failure.
The market does not value naturally occurring resources in the production process.
Nature's "capital" is not assigned a value by the market. The externalities that lead to
private individuals cutting trees and the real economic costs and benefits to the
nation of doing so arise because some of the biosphere's products, especially
environmental protection functions, are neither produced goods nor do they have
clearly defined ownership. As a consequence, they are regarded as free goods.
Destruction of forested areas, wetlands, grasslands and bodies of water arises

because of the difference between the discount rate of the individual and the society
as a whole. Poor people, who are responsible for a significant share of the losses
because of their pressing current need for fuel, fodder, water and land for
cultivation--assign a higher discount rate to these resources than does society as a
whole.

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The private interests of poor people and the social interests of the broader society
diverge. The interest of poor, local people in using these lands and water resources
is intense, immediate and focused--food, fuel, fodder, crop land, and irrigation
water. They will (often unknowingly) incur almost any social cost to permit the
immediate exploitation of these environmental resources to sustain their livelihood.
The interests of loggers, commercial farmers, builders and others who exploit the
forests, range and grasslands and water resources are equally intense, but driven
more by immediate profit considerations, not by the need to survive.
Society, as a whole, traditionally, has not placed a monetary value on the benefits
derived from these resources; as such benefits are not marketable. When society has
recognized these resources as having value, it has assigned a diffused, nonspecific
value to them and has not translated that assigned value into market signals, i.e.,
financial incentives for preservation or disincentives for destruction of these land
and water resources embodied in the nation's legal and administrative system. Thus,
the intense, focused private interests are permitted to discount the value of
environmental resources to the detriment of the longer term benefits to society of
investment in these areas because these resources have neither been given market
values, nor a legal, enforceable means of translating value into market signals. The
Costs of Land Clearance arising from the exploitation of natural resources for
financial gain highlight the problems involved all too clearly, since these resources
provide a myriad of functional processes which go beyond the clearly tangible areas
of providing food and products for commerce. These functional processes are not
merely essential to a sound ecological balance and, therefore, ideologies advocated
and imposed on society by conservationists; they are naturally occurring systems, on
which the economic wellbeing of societies at local, national and international level
depends.
Land degradation:
Forested areas are especially sensitive to population pressure and commercial
exploitation. At a local level, once the trees are felled, the highly productive
potential of that region is immediately threatened, since the quality of the soils is
generally poor. It is in the mass of vegetation that the nutrients essential to fast
growth are stored so that, if the vegetation cover is removed, organic breakdown is
almost immediate and nutrients are quickly washed away. When large gaps in the
forest canopy occur, the microclimate of the area is also likely to be changed and the
forest floor becomes exposed to direct sunlight. Consequently, both air and soil
become dry, to the direct detriment of the land's productivity. Because of these
factors, not only has the forest's capacity to provide fuel, food, fodder and shelter
been removed, but so has the land's capacity to regenerate them. Degradation is
further increased through soil erosion.

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 Erosion:
Around a quarter of a million tons of topsoil are washed from the deforested
mountain slopes of Nepal alone each year. On a global scale, about eleven million
hectares of arable lands are annually lost through erosion, desertification and
toxification; processes which are greatly encouraged by poor resource management.
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It is human activity that causes natural erosion rates to increase many times over.
Steep slopes are cultivated without terracing, irrigation projects are poorly
developed and livestock overgraze grassland.
Flooding:
The socio-economic impact resulting from a decline in productive capacity due to
ecological interactions does not remain localized, especially when forest cover is
lost in a watershed. The soil's water retention capacity is lost and the release of
rainfall becomes erratic; periods of floods followed by droughts become the norm.
Farmers in the valley lands of Southern Asia are particularly vulnerable as rivers
such as the Ganges, Brahmaputra and the Mekong no longer supply regular amounts
of irrigation. Flooding in the Ganges Plain provides a graphic example of the
associated costs of deforestation. As the foothill forests are cleared for agriculture,
the 500 million people in the valleys become more vulnerable to flooding. During
the 1978 monsoon, India suffered losses of $2 billion and hundreds of people
drowned. The impact of watershed degradation even extends into urban areas. In the
hinterland of Panama City and Manila, deforestation has caused so much injury to
the effective functioning of watersheds that domestic water supplies are being
threatened, bringing risk of contamination and pandemics. Once the forests have
been clear felled, the reduction or elimination of resultant flooding may require very
heavy investment in compensatory measures such as channeling, damming, and
diking. These measures to reduce the natural patterns of flooding have the potential
to damage replenishment of alluvial soils and recharges of soil moisture. They may
also damage the vegetation and wildlife on the floodplain, as well as riverine
fisheries.
Reduced economic viability:

The erratic flow of rivers coupled with the problems of erosion is effectively
undermining the potential of irrigation projects, as is so evident in the Sri Lankan
Mahaweli program. Several large dams were constructed for the generation of
energy, as well as for irrigation and flood control downstream. However, the tree
cover reduction in the relevant watershed areas has jeopardized the steady supply of
water to the reservoirs, on which the success of the project is dependant. Projects are

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further undermined by siltation, a process that not only causes river basins to silt up
(thereby reducing storage capacity), but also chokes hydropower dams and
adversely affects coastal fisheries and sensitive coral formations.
Intensification of farming practice:

Intensification of agriculture takes two forms. Clearly, the most destructive is
putting former grass and marsh lands to the plow. These activities have dramatic and
far reaching effects, both on biodiversity and on human communities. Animal and
plant species may become extinct if deprived of the environment in which they
survive. Human communities are affected by the removal of flood control areas and
the land itself is subject to erosion and soil depletion, if not carefully managed.
Intensification on existing agricultural lands can and often does produce significant
environmental degradation. For example, the conversion of grazing land into crop
production often results in the expulsion of the grazers and their livestock into
environmentally sensitive areas, in habitat reduction for wildlife species that coexist
with grazing stock, in the felling of the remaining trees and the clearing of land for
processing facilities. The introduction of machinery often produces a compaction of
the soil, reducing its capacity to absorb rain water, thus speeding up runoff.
A case study: Agricultural

Intensification in a Banana export
industry:
The agro industry is to be developed in a broad valley with very deep alluvial soils.
The valley itself is irrigated by a large river which drains a Hugh watershed in the
mountains behind the farm. It has traditionally supplied a steady flow of irrigation
water all year around. The river does flood in the rainy season, bringing new fertility
to the soils that lie in the floodplain. The land is currently used for small farmer;
mixed crop agriculture. At present, the farmers rotate local tubers with pulses for
subsistence on Leveled fields. The cash crops of sugar and bananas are also grown
on small fields and, with the exception of banana spraying, consume almost no
agrochemicals. The new industry will profoundly affect both the economy and the
ecology of the area. At present, the population is engaged in low input, sustainable
agriculture. The people require little other than the natural fertility for their
agricultural activities.
They produce pulses and tubers for family consumption and sell a small
surplus in local markets; these are often intercropped with bananas. The impact on
the soils is slight, as the farmers rotate their crops and fallow the fields, effectively
Page 18
keeping down pest populations. As most of the labor is manual and supplied by the
family, there is little incentive to clear new fields. Old fields are allowed to return to
fallow when the soil fertility diminishes, and are quickly colonized by the flora and
fauna from the nearby hills. In addition, most of the women keep kitchen gardens, a
few pigs or goats and some poultry. While these animals do forage they do little
harm to the vegetation. The feral pig population is kept in check by steady hunting
pressure. The river is rich in edible fish and its banks are covered by highly varied
vegetation. The mangrove swamp provides additional food and some netted shrimp
to sell to the luxury hotel market for cash income. Recently, farmers have learned to
sink bamboo poles to serve as a medium for growing clams. The bay with the coral
reef is regenerating from the effects of a small port that existed in the late 1930s and
today supplies fish to supplement the diet and to market. The economy is not -
completely agricultural. On-farm income is supplemented by seasonal migratory
labor. The men and the women unencumbered by child rearing duties (or able to
rely on older women to help) migrate to the nearby cities and-earn additional
income. The tropical forests on the lower hills have highly diverse flora and fauna.
The forests lying higher have been undisturbed since colonial times.
The few cocoa trees left from that period have been integrated into the forest
vegetation and serve the community as a source of revenue when they find the cocoa
pods before the rats. The vegetation shelters a wide variety of animals, some quite
rare, and some of the bird species are endangered. The river and its associated
mangrove swamp are equally rich and diverse, as well as very scenic. While the
river does flood during the rainy season, this flooding, except in the extreme cases
which have arisen in recent years with heavy logging and forestry in the watershed,
has little impact on the local population. Their houses are built on stilts.
Furthermore, the flooding brings both new soil and nutrients from the mountains.
Over the centuries, these floods have built up and maintained the fertility of the
valley. In place of this low input agriculture, the valley will be mechanically leveled,
ditched to depths of 10 meters for drainage of heavy rains, irrigated and planted to
high yield bananas. The production system will require the installation not only of
very deep drains but also of substantial infrastructure, such as cableways, and will
rely heavily upon intensive inputs, especially fertilizers and pesticides, to produce
exportable yields four or five-times greater than at present The spray application
program will be by air and that some pesticide drift; into the nearby river and the
mangrove swamp at the mouth of the river is inevitable.
The company will need to "train"" the river drag-lining and dicing it. The
mangrove swamp "plug" lying down river from the farm will be "opened with
canals to help control the flood waters that the new drainage system will pour into
the river. The bananas will be exported from a newly constructed terminal on the
bay just a few miles from the farm. The bay will be dredged to clear some of the
coral heads that obstruct the entry of shipping to the new fruit terminal. In addition,
the valley's rolling hills that are covered with tropical vegetation and currently not
Page 19
"used" will be cleared and planted to citrus. The steeper hills will be cleared of the
tropical forest interspersed with century's old cocoa trees and will be planted to
hybrid coconuts resistant to lethal yellowing. The production of coconuts on a
commercial scale will help alleviate the critical shortage of edible oils. Coconut oil
is the staple of the rural population but because of lethal yellowing, the government
has had to import large quantities of edible oils using scarce exchange reserves. The
processing of both bananas and coconuts will produce substantial volumes of
effluent. The bananas that cannot be exported or sold in local markets will be fed to
pigs whose effluent waste will be dumped unprocessed into the nearby river.
Coconut oil extraction will produce by-products that have no current use and will be
dumped into the environment. The environment will be altered radically by the
installation of a tropical fruit production industry. The vegetation will be clear cut
not only between the plots in the formerly cropped valley, but also on the hills and
mountainsides. The flora will be destroyed and the fauna will retreat into the already
ecologically severely affected mountainsides' many of which have been cleared as
coffee production has moved to cover the higher elevations. The river will die as a
river. It will become an irrigation canal with no vegetation permitted on the banks.
In fact, it will be sprayed regularly with herbicide to keep down the vegetation that
shelters pests. Its former beautiful, winding path will be destroyed as it is widened,
straightened, diced and deepened. The mangrove swamp will also be channeled and
severely impacted, if not destroyed, by the rapid flow of water through the canals
and the heavy doses of chemical run offs that the river will carry. The bay will feel
the effects of these run offs and the coral heads will again be destroyed to make way
for the shipping.
The effect of the project on the human ecology will be massive. The local
largely self sustaining farm villages will become the housing for the wage 1 laborers
the banana citrus and coconut industries. The local people will have difficulty in
continuing to farm, as their time will be dedicated to the industrial regime imposed
by commercial agriculture. Those that want to continue farming will have to move
away, assuming they have adequate funds to buy new land, or wilI be pushed into
forested areas to clear land for crop production. The older farmers who know no
other trade will be left unemployed, as they are not attractive to the new industry
which needs strong, young people. Many of the women will give up the kitchen
garden and child and domestic animal rearing for jobs in the packing sheds, where
they are much preferred to men for their manual dexterity and work habits. The
former pattern of economic activity will, to all intents and purposes, end with the
development of this new industry. The largely self-sustaining village farming
community that sells some surplus, and some seasonal off-farm labor, will
disappear, to be replaced by an industrial village set on the edge of a large plantation
producing tropical fruits for export and some coconut oil for local consumption.
The former diversity of income will cease and the community will depend on wages.
If the industry flourishes the community will see more cash income than at any time
Page 20
before; if the banana industry should collapse due to natural disasters (as it did in the
1930s after severe hurricanes) or should political changes eliminate the preferential
price in the former colonial country, the community will suffer massive economic
dislocation. Its principal source of income will disappear and the community will
plunge into economic depression. To return to the former pattern of economic
livelihood will be almost impossible due to radical changes in the land use and
tenure.
Question 6: Write short notes on the following?
a) Philips curve:
6 a) In economics, the Phillips curve is a historical inverse relationship between the
rate of unemployment and the rate of inflation in an economy. Stated simply, the
lower the unemployment in an economy, the higher the rate of increase in nominal
wages in the short run. It has been observed that there is no relationship between
inflation and unemployment in the long run.
William Phillips, a New Zealand born economist, wrote a paper in 1958 titled The
Relationship between Unemployment and the Rate of Change of Money Wages in
the United Kingdom 1861–1957, which was published in the quarterly journal
Economica. In the paper Phillips describes how he observed an inverse relationship
between money wage changes and unemployment in the British economy over the
period examined. Similar patterns were found in other countries and in 1960 Paul
Samuelson and Robert Solow took Phillips' work and made explicit the link between
inflation and unemployment: when inflation was high, unemployment was low, and
vice-versa.
In the 1920s an American economist Irving Fisher noted this kind of Phillips curve
relationship. However, Phillips' original curve described the behavior of money
wages.[1]

Page 21
Phillips Curve in the U.S in the 1960's
In the years following Phillips' 1958 paper, many economists in the advanced
industrial countries believed that his results showed that there was a permanently
stable relationship between inflation and unemployment. One implication of this for
government policy was that governments could control unemployment and inflation
with a Keynesian policy. They could tolerate a reasonably high rate of inflation as
this would lead to lower unemployment – there would be a trade-off between
inflation and unemployment.
For example, monetary policy and/or fiscal policy (i.e., deficit spending) could be
used to stimulate the economy, raising gross domestic product and lowering the
unemployment rate. Moving along the Phillips curve, this would lead to a higher
inflation rate, the cost of enjoying lower unemployment rates.
During the 1960s, a leftward movement along the Phillips curve described the path
of the U.S. economy. This move was not a matter of deciding to achieve low
unemployment as much as an unplanned side-effect of the Vietnam war.[citation needed]
In other countries, the economic boom was more the result of conscious policies.
[citation needed]
Most economists no longer use the Phillips curve in its original form because it was
shown to be too simplistic. This can be seen in a cursory analysis of US inflation
and unemployment data 1953-92. There is no single curve that will fit the data, but
there are three rough aggregations—1955-71, 1974-84, and 1985-92—each of
which shows a general, downwards slope, but at three very different levels with the
shifts occurring abruptly. The data for 1953-54 and 1972-73 do not group easily,
and a more formal analysis posits up to five groups/curves over the period.
But still today, modified forms of the Phillips Curve that take inflationary
expectations into account remain influential. The theory goes under several names,
with some variation in its details, but all modern versions distinguish between short-
run and long-run effects on unemployment. The "short-run Phillips curve" is also
called the "expectations-augmented Phillips curve", since it shifts up when
inflationary expectations raise, Edmund Phelps and Milton Friedman argued. In the
long run, this implies that monetary policy cannot affect unemployment, which
adjusts back to its "natural rate", also called the "NAIRU" or "long-run Phillips
curve". However, this long-run "neutrality" of monetary policy does allow for short
run fluctuations and the ability of the monetary authority to temporarily decrease
unemployment by increasing permanent inflation, and vice versa. Blanchard (2000,

Page 22
chapter 8) gives a textbook presentation of the expectations-augmented Phillips

curve.
An equation like the expectations-augmented Phillips curve also appears in many

recent New Keynesian dynamic stochastic general equilibrium models. In these
macroeconomic models with sticky prices, there is a positive relation between the
rate of inflation and the level of demand, and therefore a negative relation between
the rate of inflation and the rate of unemployment. This relationship is often called
the "New Keynesian Phillips curve." Like the expectations-augmented Phillips
curve, the New Keynesian Phillips curve implies that increased inflation can lower
unemployment temporarily, but cannot lower it permanently. Two influential papers
that incorporate a New Keynesian Phillips curve are Clarida, Galí, and Gertler
(1999) and Blanchard and Galí (2007).
b) Stagflation:
6b) Stagflation is an economic situation in which inflation and economic stagnation

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

Page 23
excessively simulative monetary policy to counteract the resulting recession,

causing a runaway wage-price spiral.

Page 24

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ASSIGNMENT ON MANAGERIAL ECONOMICS

Question 1: What is pricing policy? What are the internal and

 Pricing Factors to Consider:

• Survey the market for competitive and similar products. Consider

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

• Examine market pricing and economics. A paid, ad-free site should

• Calculate the internal cost structure and understand how pricing

• Monitor the market and your competition continually to reassess

 Internal Factors: Marketing

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

• Return on Investment (ROI) – A firm may set as a marketing objective the

Factors Affecting Pricing Decision:

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

• Demand, supply and their determinants.

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

• Trends in the market.

Question 2: Mention three crucial objectives of price policies?

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

Question 3: Mention the bases of price discrimination?

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

Price discrimination requires market segmentation and some means to discourage

 Types of price discrimination:

In first degree price discrimination, price varies by customer's willingness or

An alternative way to understand First Degree Price Discrimination is as follows:

Second degree price discrimination:

In second degree price discrimination, price varies according to quantity sold.

Additionally to second degree price discrimination, sellers are not able to

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

incentives for the consumers to differentiate themselves according to preference. As

Third degree price discrimination:

In third degree price discrimination, price varies by attributes such as location or

Additionally to third degree price discrimination, the supplier(s) of a market

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

instruments of fiscal policy? Briefly comment on India’s fiscal

• Aggregate demand and the level of economic activity;

• A neutral stance of fiscal policy implies a balanced budget where G = T

• An expansionary stance of fiscal policy involves a net increase in

• A contractionary fiscal policy (G < T) occurs when net government spending

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

1. To achieve desirable price level:

2. To Achieve desirable consumption level:

A desirable consumption level is important for political, social and economic

3. To Achieve desirable employment level:

4. To achieve desirable income distribution:

5. Increase in capital formation:

In under-developed countries deficiency of capital is the main reason for under-

In under-developed countries, a degree of inflation is required for economic

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

 Instruments of Fiscal Policy:

Public expenditure plays four main roles:

With its prioritized structure and its peculiar decision-making processes, it

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

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

India’s Fiscal Policy:

External Affairs and Finance Minister Pranab Mukherjee [Images ] on Monday

Fiscal Policy Overview

 The Union Budget 2008-09 was presented in the backdrop of impressive

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

 The Interim Budget 2009-2010 is being presented in the backdrop of

Question 5: Comment on the consequences of environmental

The theory of land degradation:

Destruction of forested areas, wetlands, grasslands and bodies of water arises

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