Question

Question No. 2:                                                                                              [6+5+8+6=25 Marks]

• Distinguish between the terms ‘primary industry’ and secondary industry’. Use examples to illustrate your answer. (6marks)
• Opportunity cost is what you give up to have something else. Discuss why?
• Critically explain the features of managerial economics? (8 marks)
• Critically explain the law of diminishing marginal return. (6 marks)

Answer 1

1.Primary industries develop and use natural resources, examples are agriculture and mining. Secondary industries use yields from primary industries and convert them into consumer goods, which include automotive, stationary, etc. Primary industry is the part of the economy that produces raw materials; Secondary Industry involve
manufacturing businesses that take materials from primary industries and other secondary industries and make them into goods.Primary Sector is unorganised sector and secondary sector is organized sector. Primary sector use traditional or Advanced Techniques whereas Secondary sector uses Scientific Techniques. Primary sector relates to Agriculture, dairy, mining, fishing, forestry, animal husbandry, pasturing, hunting and gathering, etc.Secondary Sector involves Manufacturing, production and conversion of goods, trade and commerce, engineering, transport and communication.

2.Opportunity Cost is when in making a decision the value of the best alternative is lost. e.g. choosing electricity over gas, the opportunity cost is what you've lost from not picking gas. Firms take decision about what economic activity they want to be involved in.Governments also have to make this important choice like deciding to devote more resources to the NHS would mean that those resources weren't spent in other sectors like defense. Economic analysis helps explain how choices are made and how they could be improved.

Opportunity cost is the loss of the potential gain from other options when one option is chosen. An example of a situation that qualifies as opportunity cost is the scenario in which there is a car and a bike that you want to buy. You decide to buy the car instead of the bike. You decide to go for college post graduation instead of job. You prefer to go on vacation instead of buying a electonic gadget.

3.The applications of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Features of Managerial Ecomomics

Microeconomics

It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market. For example a firm may be interested in evaluating a project by use of NPV or IRR methods of evaluation.

Normative Economics

It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision-making and optimal utilization of available resources, come under the banner of managerial economics.

Helping Management

Managerial economics aims at supporting the management in taking corrective decisions and charting plans and policies for future. For examole it help in taking decision whether to do inhouse inhouse production or to outsource it after weighing various pros and cons.

Uses theory of firm

Managerial economics employs economic concepts and principles, which are known as the theory of Firm or ‘Economics of the Firm’. Thus, its scope is narrower than that of pure economic theory..

Limitations

• Managerial economics focus on management analysis based on financial and cost accounting data. Thus, the reliability of this data depends on the accuracy of the financial accounting information.
• Analysis is mainly based on past information. But in the changing circumstances conclusions cannot be drawn based on past data.
• The personal preference of managers can distort the decision making process thus wrong decidion may be implemented affecting profits of firm.
• It is an expensive and time consuming process and requires specialized managers for correct decision making.

4. According to Law of Dimnishing Marginal Return as successive units of a variable resource are added to a fixed resource, beyond some point the extra, or marginal, product attributable to each additional unit of variable resource will decline.The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output.
After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yields decreased per-unit incremental returns, the law says. A good example of diminishing returns includes the use of chemical fertilisers- a small quantity leads to a big increase in output. However, increasing its use further may lead to declining Marginal Product (MP) as the efficacy of the chemical declines.

Assumptions

• The law is used mostly by taking a short-run production scenario into consideration. This is because the principle lies in keeping all other factors of production as constant, except the one used to correlate with output. This is not possible in a long-run view of production.
• The input and the processes should be held independent of technological aspects as technology can play its part in improving efficiencies in production.