DMBA 111

ASSIGMENT SET -1
Q1.
Ans 1-Managerial economics studies decision-making within organizations, particularly how
to manage resources, costs and profits effectively. It helps managers to understand how to
make decisions that will improve the performance of their business in environments such as
competition, demand and markets. Basically, it involves the application of economic concepts
and principles in practice in order to deal with the problems faced by a business and make
informed decisions that lead to favorable outcomes for the business. Think of it as the link
between economic theory and business practice.
The study of managerial economics is vital as it helps in the decision making process of a
business. This tool enables managers to assess and evaluate the difficulties they face, such as
the changing market environment due to competition and changing customer needs. The
following is what makes it so valuable:
(i) Informed decision-making. Through the use of data and economic principles, managers
can make informed decisions in managerial economics, including determining the appropriate
price for a product, deciding on production schedules or allocating resources. This is known
as Managerial Economics.
(ii) Resource optimisation: By optimising resources, it helps firms to maximise the use of
capital, time and manpower and to maximise their potential. This is an important aspect of
resource optimisation.
(iii) Understanding the market: By analysing supply, demand and competition, businesses can
make informed decisions that lead to potential outcomes. They can avoid costly mistakes and
in doing so remain competitive.
(iv) Cost control : Cost management in managerial economics refers to the process of
identifying excessive expenditures and developing cost-saving strategies that can improve
profitability.
(v) Long-term planning: It helps a business to overcome short-term concerns and plan for
future success by examining patterns, customer behaviour and other important economic
factors.
Q2.
Ans 2- Production function is an economic concept that shows how a business transforms its
inputs (such as raw materials, labor, capital) into outputs (goods or services). This function
tells what effect it will have on the output if the inputs are increased or decreased.
In simple words, production function shows how much efficiency and scale a company
should use in its production process, so that it can make as many products as possible from its
available resources.
For example, if a company hired more labor or machinery, would that affect its production?
All this has come to society through the production function.
Types of Production Functions:
(i) Short-Run Production Function: In this, some inputs are kept fixed (like machinery or
factory size), and other inputs (like labor and raw materials) are changed. This time period is
short in which the business cannot change its production capacity instantly.
It is used for short-term decisions, such as allowing a company to adjust labor or materials
according to its daily operations or seasonal demand.
(ii). Long-Run Production Function: All inputs can be adjusted in long run. Meaning, capital
and labor can both be increased or decreased, so in the long-run the company gets time to
optimize its production capacity.
(iii). Cobb-Douglas Production Function: This is a popular form that defines the relationship
between labor (L) and capital (K). Its general form is:
Y=A⋅Lα⋅Kβ
where
A is a constant, and α aur 𝛽 The values of β tell how much impact labor and capital have on
output.
(iv). Leontief Production Function: In this production function the inputs are perfect
complements. That is, if the specific amount of one input (like labor) increases, the other
input (like capital) has to increase by the same amount, without any flexibility.
(v). Linear Production Function: In this, inputs have a direct and proportional relationship
with outputs. By increasing the inputs the output also increases directly, and there is no
concept of diminishing returns.
Uses of Production Function:
1. Input-output analysis:
The production function helps firms understand how much of a given input can be used to
produce what level of output. This helps the firm allocate resources efficiently.
2.Cost optimization:
The production function helps in understanding the cost structure. It tells us which
combination of inputs will be most cost-effective to use to achieve a specific output level.
3.Decision making:
Firms use the production function from time to time when making their production decisions.
This helps them decide how much labor and capital they should use to maximize output.
4.Returns to scale analysis: The production function is used to help firms see how output is
affected when they scale up their inputs. Returns to scale can be understood as if the firm is
getting constant, increasing, then decreasing returns.
5.Forecasting and planning:

The production function helps firms plan their future production. It can tell them what
amount and type of output can be produced in the future given the available inputs.
Q3.
Ans3- Cost is an important concept in business and economics. It tells what level of expenses
are involved in making a product or service. Costs are divided into different categories, which
help in production and business decision-making.
1.FIXED COST:
(i) Definition: Fixed costs are those costs which remain constant even when the production
level changes. That means whether you are producing more or less, your amount will remain
the same.
(ii) Example: Rent, salaries of permanent employees, insurance, machinery depreciation.
(iii) Key Point: These costs do not depend on the production of quantity.
2.Variable Cost:
(i) Definition: Variable costs are costs that directly depend on the level of production. As the
production increases, so will the variable cost.
(ii)Example: Raw materials, wages of temporary workers, electricity used in production.
(iii)Key Point: As production increases or decreases, variable costs also increase or decrease.
3.Total cost:
(i) Definition: Total cost is the sum of fixed cost and variable cost. That is, the total expenses
for the total production process are called total cost.
(ii)Formula:
Total Cost = Fixed Cost + Variable Cost
(iii) Example: If fixed cost Rs. 1600 and variable cost Rs. 2600, then the total cost is Rs. Will
be 4200 .
4.Average Cost
(i) Definition: Average cost is the total cost divided by the total units of output. That is, the
average cost of producing each unit.
(ii) Formula: Average Cost = Total Cost
Output Quantity
(iii) Example: If Total Cost Rs. 8000 and 100 units are produced, then the average cost Rs.
There will be 80 per unit.
5.Marginal Cost
(i) Definition: Marginal cost is the cost of producing one additional unit. This cost tells us
how much additional expense there will be in producing an extra unit.
(ii) Formula
Marginal Cost= Change in Total Cost
Change in Output
(iii) Example: If the total cost of making 100 units is Rs. 8000 and the total cost of making
101 units was Rs. 8100, then marginal cost Rs. Will be 100 (8100-8000).
6.Sunk Cost:
(i) Definition: Sunk costs are costs that have already been incurred and cannot be recovered
even if production is stopped.
(ii) For example: machinery purchase costs and marketing expenses incurred.
(iii) Key Point: Sunk costs do not affect decisions because they have already occurred.
7.Opportunity cost:
(i) Defination - The expense incurred in selecting an option and not choosing the next best
alternative is known as opportunity cost. The opportunity cost is the benefit you lose by
choosing an alternative option.
(ii) For example-If you make Rs, as an illustration, A sum of just Rs 100,000 can yield Rs
100,000.0. Fixed deposit offers offer an opportunity cost of up to Rs 1,00,000 return.
8.Explicit Cost
(i) Defination : Explicit costs are the direct financial payments that a company has to make in
order to use.
(ii) For example : wages are included in expenses for rent and other supplies.
9.Implicit Cost:
(i) Definition: Implicit costs are those costs which do not occur directly in monetary terms,
but are opportunity loss. This cost is the use of the business owner's time and resources that
could have been incurred on the other option.
(ii) Example: If you are starting your business, the time you have to invest in your business,
the potential earning that you can earn from a job, is the implicit cost.
10.Total revenue
(i) The total income generated by a business through the sale of its products or services is
known as gross revenue.
(ii) formula :Total Revenue=Price per Unit × Quantity Sold
(iii) For example: If the price of a product is Rs. 100 and you have sold 100 units, then the
total revenue is Rs. Will be 10,000.
11.Break Even Cost:
(i) Definition: Break-even cost is the level of cost where the firm's total revenue and total cost
are equal. At this point the firm has neither profit nor loss, it is simply covering its costs.
(ii) Key Point: If your total cost is more than your total revenue, then you are making profit;
If there is less then there is still loss.

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ASSIGMENT SET -1

5.Forecasting and planning:

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