Total Marks: 10x2= 20

1. What are the fundamental principles of economics? Explain briefly.

Ans – The fundamental principles of economics include:
1. Scarcity and Choice – Resources are limited, so individuals and societies
must make choices on how to allocate them efficiently.
2. Opportunity Cost – Choosing one option means giving up the next best
alternative.
3. Supply and Demand – Prices and quantities of goods and services are
determined by their availability and consumer demand.
4. Marginal Thinking – Decisions are made by evaluating the additional
(marginal) benefits and costs of an action.
5. Incentives Matter – People and businesses respond to incentives, which
influence their economic behaviour.

2. How does the scarcity of resources impact economic decision-making?

Ans – Scarcity of resources forces individuals, businesses, and governments to
make choices about how to allocate limited resources efficiently. It leads to
prioritization, trade-offs, and opportunity costs, influencing decisions on
production, consumption, and distribution to maximize benefits.

3. Differentiate between microeconomics and macroeconomics.

Ans – Microeconomics focuses on individual economic units like consumers, firms,
and markets. It studies concepts such as demand and supply, pricing, and
consumer behaviour.
Macroeconomics examines the economy as a whole, analyzing aggregate factors
like national income, inflation, unemployment, and economic growth.

4. Briefly discuss the key responsibilities of a managerial economist.

Ans – A managerial economist applies economic principles to business decision-
making. Their key responsibilities include:
1. Demand and Sales Forecasting – Analyzing market trends to predict future
demand and sales.
2. Cost and Production Analysis – Evaluating cost structures and optimizing
production efficiency.
3. Pricing Strategies – Setting competitive and profitable pricing based on
market conditions.
 4. Risk Analysis – Identifying and mitigating economic and business risks.
5. Economic Policy Assessment – Understanding government policies and their
impact on business.
6. Strategic Decision-Making – Providing insights for long-term business growth
and profitability.

5. How does managerial economics aid in profit maximization?

Ans – Managerial economics aids in profit maximization by providing analytical tools
and economic principles to make informed business decisions. It helps managers
optimize resource allocation, set competitive pricing, minimize costs, and analyze
market trends to maximize revenues. By applying concepts like marginal analysis,
demand forecasting, and cost-benefit analysis, businesses can enhance efficiency
and improve profitability.

6. Define the law of demand and the law of supply.

Ans – Law of Demand: The law of demand states that, keeping other factors
constant (ceteris paribus), as the price of a good or service increases, the quantity
demanded decreases, and vice versa.
Law of Supply: The law of supply states that, keeping other factors constant, as the
price of a good or service increases, the quantity supplied also increases, and vice
versa.

7. What is elasticity of demand? Why is it important in managerial decision-making?

Ans – Elasticity of demand measures how the quantity demanded of a good or
service responds to changes in price, income, or other factors. It is important in
managerial decision-making because it helps businesses set optimal pricing,
forecast revenue changes, and make strategic production and marketing decisions.
Understanding demand elasticity allows managers to maximize profits and respond
effectively to market conditions.

8. Explain the concept of consumer preferences and its role in demand analysis.
Ans – Consumer preferences refer to the choices individuals make among different
goods and services based on their tastes, needs, and satisfaction levels. These
preferences influence demand analysis by determining how consumers allocate
their income across various products. In demand analysis, understanding
consumer preferences helps businesses and economists predict market trends,
price sensitivity, and the impact of changes in income or product availability on
demand.
 9. Differentiate between price elasticity and income elasticity of demand.
Ans – Price elasticity of demand measures how the quantity demanded of a good
changes in response to a change in its price, while income elasticity of demand
measures how the quantity demanded changes in response to a change in
consumer income.

10. How is revenue analysis useful in business decision-making?

Ans – Revenue analysis is useful in business decision-making as it helps identify
trends, assess profitability, and evaluate the effectiveness of pricing and sales
strategies. It enables businesses to make informed decisions on cost management,
market expansion, and resource allocation to maximize revenue growth.

Question and answer – 5 marks

1. Discuss the fundamental principles of economics and their relevance in

understanding market behaviour.
Ans – Economics is based on several fundamental principles that help explain how
markets function and how individuals and businesses make decisions. The key
principles include:
1. Scarcity and Choice – Resources (such as labour, capital, and raw materials) are
limited, while human wants are unlimited. This principle forces individuals and
businesses to make choices about how to allocate resources efficiently.
2. Supply and Demand – The interaction between supply (how much of a good or
service producers are willing to offer) and demand (how much consumers want
to buy) determines market prices and quantities. When demand increases,
prices tend to rise, and when supply increases, prices tend to fall.
3. Opportunity Cost – Every economic decision involves a trade-off. The
opportunity cost is the next best alternative that is forgone when a choice is
made. For example, if a company invests in new technology, it may have to cut
spending elsewhere.
4. Marginal Analysis – Economic decisions are often made by comparing the
additional (marginal) benefit of an action to its additional cost. Firms produce
goods up to the point where marginal cost equals marginal benefit.
5. Incentives and Market Efficiency – Incentives (such as profits, wages, and prices)
influence behaviour in markets. Well-functioning markets allocate resources
 efficiently, ensuring that goods and services are produced where they are most
valued.

Relevance to Market Behaviour - These principles help explain how businesses set
prices, how consumers react to price changes, and how governments design
policies to influence economic activity. For instance, understanding supply and
demand helps predict price fluctuations, while opportunity cost analysis aids in
investment decisions. Marginal analysis ensures optimal production levels, and
incentives drive competitive markets.
By applying these principles, individuals, businesses, and policymakers can make
informed decisions to promote economic growth and stability.

2. Explain the different types of costs (fixed, variable, and marginal) and their
relevance in managerial decision-making.
Ans – Types of Costs and Their Relevance in Managerial Decision-Making
1. Fixed Costs: These are costs that remain constant regardless of production
levels. Examples include rent, salaries, and insurance. Fixed costs are
important for long-term planning and budgeting, as they help managers
determine the minimum revenue needed to cover expenses.
2. Variable Costs: These costs change with the level of production. Examples
include raw materials, direct labour, and utilities. Managers use variable
costs to make pricing decisions, assess profitability, and optimize production
efficiency.
3. Marginal Cost: This is the additional cost incurred when producing one more
unit of a product. It helps in determining the optimal production level, pricing
strategies, and cost-benefit analysis for scaling operations.

Relevance in Decision-Making:

1. Helps in pricing strategies by understanding cost behaviour.

2. Assists in profitability analysis and break-even calculations.
3. Supports cost control and budgeting for efficient resource allocation.
4. Guides production decisions, such as increasing or decreasing output based on
marginal cost analysis.
5. Understanding these costs ensures efficient financial planning and strategic
business growth.