UNIT-I

INTRODUCTION TO BUSINESS ECONOMICS

After completion of your graduation and have joined as an engineer in a

manufacturing organization. What do you do there? You plan to produce
maximum quantity of goods of a given quality at a reasonable cost.
On the other hand, if you are a sale manager, you have to sell a maximum
amount of goods with minimum advertisement costs. In other words, you want to
minimize your costs and maximize your returns and by doing so, you are practicing
the principles of business economics.
Managers, in their day-to-day activities, are always confronted with several
issues such as how much quantity is to be supplied; at what price; should the
product be made internally; or whether it should be bought from outside; how
much quantity is to be produced to make a given amount of profit and so on.
Business economics provides us a basic insight into seeking solutions for managerial
problems.
Business economics, as the name itself implies, is a combination of two
distinct disciplines: Economics and Management. In other words, it is necessary to
understand what these disciplines are, at least in brief, to understand the nature
and scope of business economics.

Introduction to Economics

Economics is a study of human activity both at individual and national level.

Dr. Alfred Marshall, one of the greatest economists of the nineteenth century,
writes “Economics is a study of man’s actions in the ordinary business of life: it
enquires how he gets his income and how he uses it”.

Microeconomics
The study of an individual consumer or a firm is called microeconomics (also
called the Theory of Firm). Microeconomics deals with behavior and problems of
single individual and business organization. Business economics has its roots in
microeconomics and it deals with the micro or individual enterprises. It is
concerned with the application of the concepts such as price theory, Law of
Demand and theories of market structure and so on.

Macroeconomics
The study of ‘aggregate’ or total level of economics activity in a country is
called macroeconomics. It studies the flow of economics resources or factors of
production (such as land, labor, capital, organization and technology) from the
resource owner to the business firms and then from the business firms to the
households. It deals with total aggregates, for instance, total national income total
employment, output and total investment. It is concerned with the level of
employment in the economy. It discusses aggregate consumption, aggregate
investment, price level, and payment, theories of employment, and so on.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 1
 Though macroeconomics provides the necessary framework in term of
government policies etc., for the firm to act upon dealing with analysis of business
conditions, it has less direct relevance in the study of micro economics.

Management
Management is the science and art of getting things done through people
in formally organized groups. Management includes a number of functions:
Planning, organizing, staffing, directing, and controlling. The manager while
directing the efforts of his staff communicates to them the goals, objectives,
policies, and procedures; coordinates their efforts; motivates them to sustain their
enthusiasm; and leads them to achieve the corporate goals.

Business economics

Introduction
Business economics as a subject gained popularity in USA after the
publication of the book “Business economics” by Joel Dean in 1951.
Business economics refers to the firm’s decision making process. It could be
also interpreted as “Economics of Management” or “Industrial Economics”. As Joel
Dean observes business economics shows how economic analysis can be used in
formulating business polices.

Meaning & Definition:

Business economics is “the applications of economics theory and
methodology to business administration practice”.
Business economics bridges the gap between traditional economics theory
and real business practices in two ways. First it provides a number of tools and
techniques to enable the manager to become more competent to take decisions
in real and practical situations. Secondly it serves as an integrating course to show
the interaction between various areas in which the firm operates.

M. H. Spencer and Louis Siegel man explain the “Business economics is the
integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by management”.

Business economics, therefore, focuses on those tools and techniques, which are
useful in business decision-making.

Nature of Business economics

The nature of business economics are explained as below:

(a) It is microeconomics: Business economics is concerned with finding the
solutions for different managerial problems of a particular firm. Thus, it is said
to be microeconomics.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 2

 (b) Operates against the backdrop of macroeconomics: The macroeconomics
conditions of the economy are also to be considered as limiting factors for
the firm to operate. In other words, the managerial economist has to be
aware of the limits set by the macroeconomics conditions such as
government industrial policy, inflation and so on.
(c) Goal Oriented: Business economics is always goal oriented, it is concerned
with problem solving and achieving the objectives of the firm, it suggests
the course of action from the available alternatives for optimal solution.
(d) Applied in nature: Business economics theories and models are of immense
help to managers for decision-making. The different areas where models
are extensively used include inventory control, optimization, project
management etc. In business economics, we also employ case study
methods to conceptualize the problem, identify that alternative and
determine the best course of action.
(e) Evaluate each alternative: Business economics provides an opportunity to
evaluate each alternative in terms of its costs and revenue. The managerial
economist can decide which is the better alternative to maximize the
profits for the firm.
(f) Interdisciplinary: The contents, tools and techniques of business economics
are drawn from different subjects such as economics, management,
mathematics, statistics, accountancy, psychology, organizational behavior,
sociology and etc.
(g) Assumptions and limitations: Every concept and theory of business
economics is based on certain assumption and as such their validity is not
universal. Where there is change in assumptions, the theory may not hold
good at all.

Scope of Business economics:

The scope of business economics refers to its area of study. Business economics is
primarily concerned with the application of economic principles and theories to
five types of resource decisions made by all types of business organizations.
a. The selection of product or service to be produced.
b. The choice of production methods and resource combinations.
c. The determination of the best price and quantity combination
d. Promotional strategy and activities.
e. The selection of the location where to produce and sell goods or service to
consumer.

The scope of business economics covers two areas of decision making

a. Operational or Internal issues

b. Environmental or External issues

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 3

a. Operational issues:
Operational issues refer to those, which wise within the business organization and
they are under the control of the management. Those are:
1. Theory of demand and Demand Forecasting
2. Pricing and Competitive strategy
3. Production cost analysis
4. Resource allocation
5. Profit analysis
6. Capital or Investment analysis
7. Strategic planning
1. Demand Analyses and Forecasting:
Demand analysis should be a basic activity of the firm because many of the
other activities of the firms depend upon the outcome of the demand forecast.
Demand analysis provides:
1. The basis for analyzing market conditions
2. Knowledge about factors, which influence the demand for a product.

2. Pricing and competitive strategy:

Price theory helps to explain how prices are determined under different
types of market conditions. Competitions analysis includes the anticipation of the
response of competitions the firm’s pricing, advertising and marketing strategies.

3. Production and cost analysis:

Production analysis is in physical terms. While the cost analysis is in monetary
terms cost concepts and classifications, cost-out-put relationships, economies and
diseconomies of scale and production functions are some of the points
constituting cost and production analysis.

4. Resource Allocation:
Business economics deals with wise allocation of scarce resources. In this
respect linear programming techniques has been used to solve optimization
problems.

5. Profit analysis:
Profit making is the major goal of firms. There are several constraints such as
competition from other products, changing input prices and changing business
environment, there is always certain risk is involved. Business economics deals with
techniques of avoiding or minimizing risks and maximizing the profit. Profit theory
guides in the measurement and management of profit.

6. Capital or investment analyses:

Capital is the foundation of business. Lack of capital may result in small size of
operations. The major issues related to capital analysis are:
1. The choice of investment project
2. Evaluation of the efficiency of capital
3. Most efficient allocation of capital
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 4
7. Strategic planning:
Strategic planning provides a framework on which long-term decisions can
be made which has an impact on the behavior of the firm. Strategic planning is
now a new addition to the scope of business economics with the emergence of
multinational corporations. The perspective of strategic planning is global.

B. Environmental or External Issues:

An environmental issue in business economics refers to the general business

environment in which the firm operates. They refer to general economic, social
and political atmosphere within which the firm operates. A study of economic
environment should include:

a. The type of economic system in the country.

b. The general trends in production, employment, income, prices, saving and
investment.
c. Trends in the working of financial institutions like banks, financial
corporations, insurance companies
d. Magnitude and trends in foreign trade;
e. Trends in labour and capital markets;
f. Government’s economic policies viz. industrial policy monetary policy, fiscal
policy, price policy etc.

The social environment refers to social structure as well as social organization

like trade unions, consumer’s co-operative etc.
The Political environment refers to the nature of state activity, chiefly states’
attitude towards private business, political stability etc.
The scope of business economics is ever widening with the dynamic role of big
firms in a society.

Business economics relationship with other disciplines:

It is necessary to trace the roots and relationship of the business economics with
other disciplines for better understanding.
1. Relationship with economics:
Business economics is rooted in Micro Economic theory. Business economics
concentrate in applying economic theory to solve real life problems of business.
Both business economics and economics deal with problems of scarcity and
resource allocation.
2. Management theory and accounting:
A proper knowledge of accounting techniques is very essential for the
success of the firm because profit maximization is the major objective of the firm.

Business economics requires a proper knowledge of cost and revenue information

and accounting data.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 5
3. Business economics and mathematics:
The use of mathematics is significant for business economics in view of its
profit maximization goal long with optimal use of resources. Mathematical
concepts and techniques are widely used in business economics. Also
mathematical methods help to estimate and predict the economic factors for
decision making and forward planning. Geometry, Algebra and calculus are the
major branches of mathematics which are of use in business economics.

4. Business economics and Statistics:

Business economics needs the tools of statistics, thus statistical tools are used
in collecting data and analyzing them to help in the decision-making process.
Statistical tools like the theory of probability and forecasting techniques help the
business in prediction, also make use of correlation and multiple regressions in
related variables like price and demand to estimate the extent of dependence of
one variable on the other.

5. Business economics and Operations Research:

Operations research is concerned with the problem solving arising out of the
management of men, machines, materials and money. Operation research helps
managerial economists in the field of product development, material
management, and inventory control, quality control, marketing and demand
analysis.

6. Business economics and the theory of Decision- making:

The theory of decision-making is developed to explain multiplicity of goals
and lot of uncertainty. As such this new branch of knowledge is useful to business
firms, which have to take quick decision in the case of multiple goals. Viewed this
way the theory of decision making is more practical and application oriented.

7. Business economics and Computer Science:

Computers are used in data and accounts maintenance, inventory and
stock controls and supply and demand predictions. In fact computerization of
business activities on a large scale has reduced the workload of managerial
personnel.
To conclude, business economics, which is a branch traditional economics,
has gained strength to be a separate branch of knowledge. It is combination of
knowledge from various specialized subjects to gain a proper perception for
decision-making.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 6

 THE ROLE OF MANAGERIAL ECONOMIST

Managerial economists have gained importance in recent years with the

emergence of an organizational culture in production and sales activities. A
management economist with sound knowledge of theory and analytical tools
helps in decision making regarding sales, Pricing financial issues, labour relations
and profitability.
• He helps in decision-making keeping in view the different goals of the firm, such
as price fixation, improvement in quality, Location of plant, expansion or
contraction of output etc.

• The role of managerial economist in internal management covers wide areas

of production, sales and inventory schedules of the firm.

• The most important role of the managerial economist relates to demand

forecasting because an analysis of general business conditions is most vital for
the success of the firm.

• A managerial economist who is well equipped with knowledge can help the
firm to plan product improvement, new product policy, pricing, and sales
promotion strategy.

• The managerial economist undertakes an economic analysis of the industry. he

should be able to judge on the basis of cost benefit analysis, whether it is
advisable and profitable to go ahead with the project.

• Another function is an advisory function. Here his advice is required on all

matters of production and trade.

• The managerial economist is a concerned with pricing and related problems.

The success of the firm depends upon a proper pricing strategy. The
managerial economist has to be very alert and dynamic to take correct
pricing decision in changing environment.

• Managerial economist should do an analysis of environmental issues. It refers to

the impact of a firm on environmental factors. It should not have adverse
impact on pollution and if possible, try to contribute to environmental
preservation and protection in a positive way.

The role of management economist lies not in taking decision but in analyzing,
concluding and recommending to the policy maker. He should have negotiation
to act in advisory capacity to the top executive as well as getting co-operation
from different departments for his economic analysis.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 7

 QUESTIONS

1. What is business economics? Explain its focus areas.

2. Point out the importance of business economics in decision making
3. Business economics is the discipline which deals with the applications of
economic theory to business management discuss.
4. Discuss the nature & Scope of Business economics
5. Business economics is the study of allocation of resources available to a firm
or other unit of management among the activities of that unit explains.
6. Explain the role and responsibilities of a business economics?
7. “Business economics is an integration of economic theory and with business
practice for the purpose of facilitating decision making and forward
planning” explain.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 8

 DEMAND ANALYSIS

Introduction & Meaning:

Demand in common parlance means the desire for an object. But in

economics demand is something more than this.
According to Stonier and Hague, “Demand in economics means demand
backed up by enough money to pay for the goods demanded”. Thus demand in
economics means the desire backed by the willingness to buy a commodity and
the purchasing power to pay.
In the words of “Benham” “The demand for anything at a given price is the
amount of it which will be bought per unit of time at that Price”. (Thus demand is
always at a price for a definite quantity at a specified time.) Thus demand has
three essentials – price, quantity demanded and time. Without these, demand has
no significance in economics.

LAW of Demand:
Law of demand shows the relation between price and quantity demanded
of a commodity in the market. In the words of Marshall, “the amount demand
increases with a fall in price and decrease with a rise in price”.
The law of demand may be explained with the help of the following
demand schedule.
Demand Schedule.
Price of Apple Quantity
(In. Rs.) Demanded
10 1
8 2
6 3
4 4
2 5

When the price falls from Rs. 10 to 8 quantity demand increases from 1 to 2. In the
same way as price falls, quantity demand increases on the basis of the demand
schedule we can draw the demand curve.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 9

 The demand curve DD shows the inverse relation between price and
quantity demand of apple. It is downward sloping.
Assumptions:
Law is demand is based on certain assumptions:
1. There is no change in consumers taste and preferences.
2. Income should remain constant.
3. Prices of other goods should not change.
4. There should be no substitute for the commodity
5. The demand for the commodity should be continuous

Demand Function
Demand function shows the functional relationship between Quantity
demanded for a commodity and its various Determinants.

Dx =f (Px, Py, T, I, O)
1) Dx = Demand of Commodity
2) Price of Commodity or service (Px)
3) Price of Substitute or Complementary goods (Py)
4) Taste and preference of consumers (T)
5) Incomes of consumers (I)
6) Other factors (O)

Factors Affecting Demand:

There are certain factors which determines the demand for a commodity
such are economic, social as well as political factors.

1. Price of the Commodity:

The most important factor-affecting amount demanded is the price of the
commodity. The relation between price and demand is called the Law of
Demand. It is not only the existing price but also the expected changes in price,
which affect demand.

2. Income of the Consumer:

The second most important factor influencing demand is consumer’s
income. In fact, we can establish a relation between the consumer income and
the demand at different levels of income, price and other things remaining the
same. The demand for a normal commodity goes up when income rises and falls
down when income falls.

3. Prices of related goods:

The demand for a commodity is also affected by the changes in prices of
the related goods also. Related goods can be of two types:
(i). Substitutes which can replace each other in use; for example, tea and
coffee are substitutes. The change in price of a substitute has effect on a
commodity’s demand in the same direction in which price changes. The rise in
price of coffee shall raise the demand for tea;
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 10
 (ii). Complementary goods are those which are jointly demanded, such as
pen and ink. In such cases complementary goods have opposite relationship
between price of one commodity and the amount demanded for the other.

4. Tastes and preferences of the Consumers:

The amount demanded also depends on consumer’s taste. Tastes include
fashion, habit, customs, etc. A consumer’s taste is also affected by advertisement.

5. Population:
Increase in population increases demand for necessaries of life. The
composition of population also affects demand. Composition of population
means the proportion of young and old and children as well as the ratio of men to
women. A change in composition of population has an effect on the nature of
demand for different commodities.

6. Government Policy:
Government policy affects the demands for commodities through taxation.
Taxing a commodity increases its price and the demand goes down. Similarly,
financial help from the government increases the demand for a commodity while
lowering its price.

7. Future Expectations
If consumers expect changes in price of commodity in future, they will
change the demand at present even when the present price remains the same.

8. Climate and weather:

The climate of an area and the weather prevailing there has a decisive
effect on consumer’s demand. In cold areas woolen cloth is demanded. During
hot summer days, ice is very much in demand. On a rainy day, ice cream is not so
much demanded.

9. State of business:
The level of demand for different commodities also depends upon the
business conditions in the country. If the country is passing through boom
conditions, there will be increase in demand. On the other hand, the level of
demand goes down during depression.
Exceptions to the Law of Demand
Normally the law of demand applies to a large number of goods. However,
there are some circumstances when the law of demand does not apply which are
known as Exceptions to the law of demand. Exception to the law of demand
states that a change in pierce does not result in change in the quantity
demanded of particular products or services. In such cases the demand curve will
be as follows.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 11

1. Giffen paradox:
These are the inferior goods on which the poor consumer spends a large
part of his income and the demand for which falls with a fall in their price. The
demand curve for these has a positive slope. A rise in their price drains their
resources and the poor have to shift their consumption from the more expensive
goods to the Giffen goods, while a fall in the price would spare the household
some money for more expensive goods. which still remain cheaper. These goods
have no closely related substitutes; hence income effect is higher than substitution
effect.
2. Veblen or Demonstration effect:
‘Veblan’ has explained the exceptional demand curve. Rich people buy
certain good because it gives social status or prestige for example diamonds are
bought by the richer class for the prestige it possesses. The more expensive these
commodities become, the higher their value as a status symbol and hence, the
greater the demand for them. The amount demanded of these commodities
increase with an increase in their price and decrease with a decrease in their
price. Also known as a Veblen goods.
3. Ignorance:
Sometimes, the quality of the commodity is Judge by its price. Consumers think
that the product is superior if the price is high. As such they buy more at a higher
price.
4. Speculative effect:
If the price of the commodity is increasing the consumers will buy more of it
because of the fear that it increase still further, Thus, an increase in price may not
be accomplished by a decrease in demand.
5. Fear of shortage:
During the times of emergency of war People may expect shortage of a
commodity. At that time, they may buy more at a higher price to keep stocks for
the future.
6. Necessaries:
In the case of necessaries like rice, vegetables etc. people buy more even at a
higher price.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 12

 ELASTICITY OF DEMAND

Elasticity of demand explains the relationship between a change in price and

consequent change in amount demanded. “Marshall” introduced the concept of
elasticity of demand. Elasticity of demand shows the extent of change in quantity
demanded to a change in price.
The concept of elasticity of demand refers to the degree of responsiveness
of quantity demanded of a product to the change in its price, consumers income
and price of related goods.
Types of Elasticity of Demand:
There are three types of elasticity of demand:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand

1. Price elasticity of demand:

Price elasticity of demand measures changes in quantity demand to a
change in Price. It is the ratio of proportionate change in quantity demanded to a
proportionate change in price.
Proportionate change in the quantity demanded
Price elasticity = ------------------------------------------------------------------
Proportionate change in the price of commodity

There are five types of price elasticity of demand

A. Perfectly elastic demand:

When small change in price leads to an infinitely large change is quantity
demand, it is called perfectly or infinitely elastic demand. In this case E=∞. The
demand curve D is horizontal straight line. It shows the at “OP” price any amount is
demand and if price increases, the consumer will not purchase the commodity.

Ep = ∞

B. Perfectly Inelastic Demand

There is no change in the quantity demanded in response to the change in
price. The demand curve remains vertical. Demand is completely unresponsive to
the change in price. When price increases from ‘OP’ to ‘OP 1’, the quantity
demanded remains the same. In other words, the response of demand to a
change in Price is nil. In this case ‘E’=0.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 13

C. Relatively elastic demand:
Demand changes more than proportionately to a change in price. i.e. a
small change in price loads to a very big change in the quantity demanded. In this
case E > 1. This demand curve will be flatter. When price falls from ‘OP’ to ‘OP1’,
amount demanded increase from “OQ’ to “OQ1’ which is larger than the change
in price.

D. Relatively in-elastic demand.

Quantity demanded changes less than proportional to a change in price. A
large change in price leads to small change in amount demanded. Here E < 1.
Demanded carve will be steeper. When price falls from “OP’ to ‘OP1 amount
demanded increases from OQ to OQ1, which is smaller than the change in price.

E. Unitary elasticity of demand:

The change in demand is exactly equal to the change in price. When both are
equal E=1 and elasticity if said to be unitary.
When price increased from ‘OP’ to ‘OP1’ quantity demanded decreases
from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted in an equal change in
quantity demanded so price elasticity of demand is equal to unity.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 14
2. Income elasticity of demand:
Income elasticity of demand shows the change in quantity demanded as a
result of a change in income of the consumer. Income elasticity of demand can
be stated in the form of a formula as follows.
Proportionate change in the quantity demand of commodity
Income Elasticity = -----------------------------------------------------------------------------------
Proportionate change in the income of the Consumer

Income elasticity of demand can be classified in to five types.

A. Zero income elasticity:

Quantity demanded remains the same, even though consumer income
increases. Symbolically, it can be expressed as Ey=0. It can be depicted in the
following way:
As income increases from OY to OY1, quantity demanded never changes.

B. Negative Income elasticity:

When income increases, quantity
demanded falls. In this case, income
elasticity of demand is negative. i.e., Ey <
0. When income increases from OY to OY1,
demand falls from OQ to OQ1.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 15

c. Unitary income elasticity:
When an increase in income brings about a proportionate increase in
quantity demanded, and then income elasticity of demand is equal to one. Ey = 1
When income increases from OY to OY1, Quantity demanded also increases
from OQ to OQ1.

d. Income elasticity greater than unity:

An increase in income brings about a more than proportionate increase in
quantity demanded. Symbolically it can be written as Ey > 1.
It shows high-income elasticity of demand. When income increases from OY
to OY1, Quantity demanded increases from OQ to OQ1.

E. Income elasticity leas than unity:

An increase in income brings about a Less than proportionate increase in
quantity demanded. In this case Ey < 1.
An increase in income from OY to OY, brings what an increase in quantity
demanded from OQ to OQ1, But the increase in quantity demanded is smaller
than the increase in income. Hence, income elasticity of demand is less than one.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 16

3. Cross elasticity of Demand:
A change in the price of one commodity leads to a change in the quantity
demanded of another commodity. This is called a cross elasticity of demand. The
formula for cross elasticity of demand is:

Proportionate change in the quantity demand of commodity “X”

Cross elasticity = -----------------------------------------------------------------------------------------
Proportionate change in the price of commodity “Y”

a. In case of substitutes, cross elasticity of demand is positive. Eg: Coffee and Tea
When the price of coffee increases, Quantity demanded for tea increases. Both
are substitutes.

b. Incase of complimentary goods: cross elasticity is negative. If increase in the

price of one commodity leads to a decrease in the quantity demanded of
another and vice versa.
When price of Motor Bikes goes up from OP to OP!, the quantity demanded
of Petrol decreases from OQ to OQ!. The cross-demanded curve has negative
slope.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 17

c. In case of unrelated commodities: cross elasticity of demanded is zero. A
change in the price of one commodity will not affect the quantity demanded of
another. Quantity demanded of commodity “b” remains unchanged due to a
change in the price of ‘A’, as both are unrelated goods.

Factors influencing the elasticity of demand

Elasticity of demand depends on many factors.

1. Nature of commodity:
Elasticity or in-elasticity of demand depends on the nature of the
commodity i.e. whether a commodity is a necessity, comfort or luxury, normally;
the demand for Necessaries like salt, rice etc. is inelastic. On the other band, the
demand for comforts and luxuries is elastic.
2. Availability of substitutes:
Elasticity of demand depends on availability or non-availability of substitutes.
In case of commodities, which have substitutes, demand is elastic, but in case of
commodities, which have no substitutes, demand is in elastic.
3. Postponement of demand:
If the consumption of a commodity can be postponed, than it will have
elastic demand. On the contrary, if the demand for a commodity cannot be
postpones, than demand is in elastic. The demand for rice or medicine cannot be
postponed, while the demand for Cycle or umbrella can be postponed.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 18
4. Amount of money spent:
Elasticity of demand depends on the amount of money spent on the
commodity. If the consumer spends a smaller for example a consumer spends a
little amount on salt and matchboxes. Even when price of salt or matchbox goes
up, demanded will not fall. Therefore, demand is in case of clothing a consumer
spends a large proportion of his income and an increase in price will reduce his
demand for clothing. So the demand is elastic.

5. Time:
Elasticity of demand varies with time. Generally, demand is inelastic during
short period and elastic during the long period. Demand is inelastic during short
period because the consumers do not have enough time to know about the
change is price. Even if they are aware of the price change, they may not
immediately switch over to a new commodity, as they are accustomed to the old
commodity.

6. Range of Prices:
Range of prices applies an important influence on elasticity of demand. At a
very high price, demand is inelastic because a slight fall in price will not induce the
people buy more. Similarly at a low price also demand is inelastic. This is because
at a low price all those who want to buy the commodity would have bought it and
a further fall in price will not increase the demand. Therefore, elasticity is low at
very him and very low prices.

Importance of Elasticity of Demand:

The concept of elasticity of demand is of much practical importance.

1. Price fixation:
Each seller under monopoly and imperfect competition has to take into
account elasticity of demand while fixing the price for his product. If the demand
for the product is inelastic, he can fix a higher price.

2. Production:
Producers generally decide their production level on the basis of demand
for the product. Hence elasticity of demand helps the producers to take correct
decision regarding the level of cut put to be produced.

3. International Trade:
Elasticity of demand helps in finding out the terms of trade between two
countries. Terms of trade refers to the rate at which domestic commodity is
exchanged for foreign commodities. Terms of trade depends upon the elasticity of
demand of the two countries for each other goods.
4. Public Finance:
Elasticity of demand helps the government in formulating tax policies. For
example, for imposing tax on a commodity, the Finance Minister has to take into
account the elasticity of demand.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 19
 Demand Forecasting

Introduction:
The information about the future is essential for both new firms and those
planning to expand the scale of their production. Demand forecasting refers to an
estimate of future demand for the product.

In recent times, forecasting plays an important role in business decision-making.

Demand forecasting has an important influence on production planning. It is
essential for a firm to produce the required quantities at the right time. Demand
forecasts relate to production, inventory control, timing, reliability of forecast etc.
Types of demand Forecasting:

Based on the time span and planning requirements of business firms, demand
forecasting can be classified in to
1. Short-term demand forecasting and 2. Long – term demand forecasting.

1. Short-term demand forecasting:

Short-term demand forecasting is limited to short periods, usually for one
year. It relates to policies regarding sales, purchase, price and finances. It refers to
existing production capacity of the firm. Short-term forecasting is essential for
formulating a suitable price policy. If the business people expect of rise in the
prices of raw materials of shortages, they may buy early. This price forecasting
helps in sale policy formulation. Production may be undertaken based on
expected sales and not on actual sales. Further, demand forecasting assists in
financial forecasting also. Prior information about production and sales is essential
to provide additional funds on reasonable terms.

2. Long – term forecasting:

In long-term forecasting, the businessmen should know about the long-term
demand for the product. Planning of a new plant or expansion of an existing unit
depends on long-term demand. Similarly, a multi-product firm must take into
account the demand for different items. When forecast is mode covering long
periods, the probability of error is high. It is very difficult to forecast the production,
the trend of prices and the nature of competition.

Methods of Demand Forecasting:

Several methods are employed for forecasting demand. All these methods can be
grouped under survey method and statistical method. Survey methods and
statistical methods are further subdivided in to different categories.
1. Survey Method:
Under this method, information about the desires of the consumer and
opinion of experts are collected by interviewing them. Survey method can be
divided into four type’s viz., Option survey method; expert opinion; Delphi method
and consumers interview methods.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 20
a. Opinion survey method:
This method is also known as sales-force composite method (or) collective
opinion method. Under this method, the company asks its salesman to submit
estimate of future sales in their respective territories. Since the forecasts of the
salesmen are biased due to their optimistic or pessimistic attitude ignorance about
economic developments etc. these estimates are consolidated, reviewed and
adjusted by the top executives.
This method is more useful and appropriate because the salesmen are more
knowledge. They can be important source of information. They are cooperative.
The implementation within unbiased or their basic can be corrected.

B. Expert opinion method:

Apart from salesmen and consumers, distributors or outside experts may also
e used for forecasting. In the United States of America, the automobile companies
get sales estimates directly from their dealers. Firms in advanced countries make
use of outside experts for estimating future demand. Various public and private
agencies all periodic forecasts of short or long term business conditions.

C. Delphi Method:
A variant of the survey method is Delphi method. Under this method, a panel
is selected to give suggestions to solve the problems in hand. Both internal and
external experts can be the members of the panel. Panel members one kept apart
from each other and express their views in an anonymous manner. There is also a
coordinator who acts as an intermediary among the panelists. At the end of each
round, he prepares a summary report. On the basis of the summary report the
panel members have to give suggestions. This method has been used in the area
of technological forecasting. It has proved more popular in forecasting. It has
provided more popular in forecasting non-economic rather than economic
variables.
D. Consumers interview method:
In this method the consumers are contacted personally to know about their
plans and preference regarding the consumption of the product. A list of all
potential buyers would be drawn and each buyer will be approached and asked
how much he plans to buy the listed product in future. He would be asked the
proportion in which he intends to buy. This method seems to be the most ideal
method for forecasting demand.
2. Statistical Methods:
Statistical method is used for long run forecasting. In this method, statistical
and mathematical techniques are used to forecast demand. This method relies on
post data.
a. Time series analysis or trend projection methods:
A well-established firm would have accumulated data. These data are
analyzed to determine the nature of existing trend. Then, this trend is projected in
to the future and the results are used as the basis for forecast. This is called as time
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 21
series analysis. This data can be presented either in a tabular form or a graph. In
the time series post data of sales are used to forecast future.
b. Barometric Technique:
Under Barometric method, present events are used to predict the directions
of change in future. This is done with the help of economics and statistical
indicators. Those are (1) Construction Contracts awarded for building materials (2)
Personal income (3) Agricultural Income. (4) Employment (5) Gross national
income (6) Industrial Production (7) Bank Deposits etc.
c. Regression and correlation method:
Regression and correlation are used for forecasting demand. Based on post
data the future data trend is forecasted. If the functional relationship is analyzed
with the independent variable, it is simple correction. When there are several
independent variables, it is multiple correlation. In correlation we analyze the
nature of relation between the variables while in regression; the extent of relation
between the variables is analyzed. The main advantage of this method is that it
provides the values of the independent variables from within the model itself.

QUESTIONS

1. What is meant by elasticity of demand? Discuss price elasticity of demand?

2. What is the utility of demand forecasting? What are the forecasting
methods?
3. Explain in law of demand. Explain the exceptions to law of demand?
4. What is cross elasticity of demand? Is it positive for substitute or
complements? Show in a diagram relating to the demand for coffee to the
price of tea?
5. Income elasticity of demand and distinguish its, various tapes.
6. What is demand analysis? Explain the factor influencing the demand for a
product?

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 22

 UNIT - II

PRODUCTION FUNCTION

The production function expresses a relationship between physical inputs

and physical outputs of a firm at any particular time period. Mathematically
production function can be written as

Q= f (A, B, C, D)

Where “Q” stands for the quantity of output and A, B, C, D are various input
factors such as land, labour, capital and organization. Here output is the function
of inputs. Hence output becomes the dependent variable and inputs are the
independent variables.
In order to express the quantitative relationship between inputs and output,
Production function has been expressed in a precise mathematical equation i.e.

Y= a+b(x)

Which shows that there is a constant relationship between applications of input

(the only factor input ‘X’ in this case) and the amount of output (y) produced.
Production function can be fitted the particular firm or industry or for the
economy as whole. Production function will change with an improvement in
technology.

Cobb-Douglas production function:

Production function of the linear homogenous type was first tested by C. W.
Cobb and P. H. Dougles in 1928. This famous statistical production function is
known as Cobb-Douglas production function. Originally the function is applied on
the empirical study of the American manufacturing industry. Cobb – Douglas
production function takes the following mathematical form.

Y= (AKX L1-x)
Where Y=output
K=Capital
L=Labour
A=positive constant
Importance of Production Function

1. When inputs are specified in physical units, production function helps to

estimate the level of production.
2. It indicates the manner in which the firm can substitute on input for another
without altering the total output.
3. When price is taken into consideration, the production function helps to
select the least combination of inputs for the desired output.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 23

 4. The production function explains the maximum quantity of output, which
can be produced, from any chosen quantities of various inputs or the
minimum quantities of various inputs that are required to produce a given
quantity of output.

Types of Production Functions

There are two types of production functions to be discussed under theory of
production:

Short Run Production Function: Short run refers to a period of time in which
quantities of one or more factors of production cannot be changed. In other
words, in the short run there is at least one factor that cannot be varied.
Long Run Production Function: That time period over which a firm can vary
quantities of all the factors of production and therefore, can switch between
different scales of operation. In case of long run production function all inputs are
variable. There are two alternative theories to these production functions i.e.
• Law of Variable Proportions (or) Law of Diminishing Returns (Short-Run
Analysis of Production)
• Law of Returns to Scale (to analyze production in the long period)

LAWS OF PRODUCTION:
Production analysis in economics theory considers two types of input-output
relationships.
1. When quantities of certain inputs, are fixed and others are variable
2. When all inputs are variable.

These two types of relationships have been explained in the form of laws.

i) Law of variable proportions

ii) Law of returns to scale

Law of variable proportions

The law of variable proportions is the modern approach to the ‘Law of

Diminishing Returns’ It is now usually called the Law of Variable Proportions. The law
of variable proportions shows the production function with one input factor
variable while keeping the other input factors constant.
As quantity of variable factor increases and quantity of fixed factor remains
constant, normally the marginal product and average product of the variable
factor will increase upto a certain point. Thereafter, marginal production will start
falling, the decline in marginal product will pull down the average product.
As the composition between variable factor and fixed factor changes,
resultant change in output occurs in varying proportions. The behavior of output
with varying composition of fixed and variable factors can be divided into three
distinct stages of production and returns to a factor.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 24

Assumptions to the Law:
The law is based upon the following assumptions:
i) The state of technology remains constant. If there is any improvement in
technology, the average and marginal output will not decrease but
increase.
ii) Only one factor of input is made variable and other factors are kept
constant.
iii) All units of the variable factors are homogenous.
Stages of Production
• First, Total product first increases at an increasing rate and then at a
decreasing rate and this continues till the end of this stage. Average
product is continuously increasing. MP first increases, becomes maximum
and then starts falling. But the marginal product remains higher than the
average product, The stage I ends where average product reaches its
highest point, so there, the efficiency of variable factor (labour) is maximum.
• In the second stage, total product continues to increase at a diminishing
rate until it reaches its maximum point at the end of this stage. Both AP and
MP diminish, but remain positive. At the end of the second stage, MP
becomes zero. TP is maximum when MP is zero. AP shows a steady decline
throughout this stage. Since both AP and MP decline, this stage is known as
stage of diminishing returns. The main cause of application of the law of
diminishing returns is the scarcity of fixed factor or the other factor of
production.
• In the third stage, total product will start declining. The marginal product of
the variable factor will become negative whereas the average product will
remain greater than zero. The phenomenon of negative returns emerges as
a result of application of excessive units of variable factor in relation to fixed
factor, with the result that TP starts diminishing.

The three stages can be better understood by following the table.

Fixed Variable Total product Average Marginal Product
factor factor Product
(Labour)
1 1 100 100 -
1 2 220 120 120 Stage I
1 3 270 90 50
1 4 300 75 30
1 5 320 64 20 Stage II
1 6 330 55 10
1 7 330 47 0
Stage III
1 8 320 40 -10

Production function with one variable input and the remaining fixed inputs is
illustrated as below

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 25

 ( TP = Total Production, AP = Average Production, MP = Marginal Production )

II. Law of Returns of Scale:

As the law of variable proportion is a short run production function theory,

law of returns to scale is a long run production function theory. In this theory all
factors of production are variable no factors are fixed. With the change in the
factors of production scale of production will change accordingly.
The term returns to scale refers to the changes in output as all factors
change by the same proportion.

Types of return to scale

The concept of returns to scale assumes only two factors of productions i.e.
capital and labour, this analysis helps to understand the change or scale in
production due to change in the factors.

Increasing returns to scale: Increasing returns to

scale means an increase in a level of output
more than the increase in the inputs. For
example, if an output increases by 35% with an
increase in all inputs by only 15% increasing
returns to scale prevails. In other words, a
proportionate change in output brings about
less proportionate change in inputs it is called
increasing returns to scale. Where, OA>AB>BC.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 26

Decreasing returns to scale: Decreasing
returns to scale means an increase in a level
of output less that the increase in the inputs.
For example, if an output increase by 25%
with an increase in all inputs by 35%
decrease in returns to scale prevails. In other
words, a proportionate change in output
brings more proportionate change in inputs
it is called decreasing returns to scale.
Where OA<AB<BC.

Constant returns to scale: Constant returns to scale means an increase in a level of

output is constant that the increase in the inputs. For example, if an output
increase by 25% with an increase in all inputs by 25% constant in returns to scale
prevails. In other words, a proportionate change in output brings constant change
in inputs it is called constant returns to scale. Where OA=AB=BC.

ISOQUANTS:

The term Isoquants is derived from the words ‘iso’ and ‘quant’ – ‘Iso’ means equal
and ‘quant’ implies quantity. Isoquant therefore, means equal quantity. An
isoquant represents all possible combinations of labour & capital that can be
employed to produce a given level of output. It is also known producer’s
indifference curve or production indifference curve because the producer is
indifferent between these combinations of factors.
Isoquants are the curves, which represent the different combinations of
inputs producing a particular quantity of output. Any combination on the isoquant
represents the some level of output.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 27
For a given output level firm’s production become,

Q= f (L, K)

Where ‘Q’, the units of output is a function of the quantity of two inputs ‘L’ and ‘K’.

Thus an isoquant shows all possible combinations of two inputs, which are capable
of producing equal or a given level of output. Since each combination yields
same output, the producer becomes indifferent towards these combinations.

Assumptions:

1. There are only two factors of production, viz. labour and capital.
2. The two factors can substitute each other up to certain limit
3. The shape of the isoquant depends upon the extent of substitutability of the
two inputs.
4. The technology is given over a period.

An isoquant may be explained with the help of an arithmetical example.

Combinations Labour (units) Capital Output

(Units) (quintals)
A 1 10 20
B 2 7 20
C 3 4 20
D 4 4 20
E 5 1 20

Combination ‘A’ represent 1 unit of labour and 10 units of capital and

produces ‘20’ quintals of a product all other combinations in the table are
assumed to yield the same given output of a product say ‘20’ quintals by
employing any one of the alternative combinations of the two factors labour and
capital. If we plot all these combinations on a paper and join them, we will get
continues and smooth curve called Iso-product curve as shown below.

Labour is on the X-axis and capital is on the Y-axis. IQ is the ISO-Product

curve which shows all the alternative combinations P,Q,R,S,T which can produce
20 quintals of a product.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 28

Producer’s Equilibrium
The basic objective of rational producer is to maximize his profits and
produces a given quantity of output with that combination of factors that is
‘OPTIMUM’.
The optimum combination of resources is that results in
there are 2 cases of producer’s equilibrium:
1. Minimization of cost subject to an output constraint.
2. Maximization of output subject to a cost constraint.

L K Q Cost of labour Cost of capital Total cost

Units Units Output (Rs. 3 perunit) (Rs. 4 per unit)
( L x 3) ( K x 4)
10 45 100 30 180 210
20 28 100 60 112 172
30 16 100 90 64 154
40 12 100 120 48 168
50 8 100 150 32 182

It is clear from the above that 10 units of ‘L’ combined with 45 units of ‘K’ would
cost the producer Rs. 210 . But if 17 units reduce ‘K’ and 10 units increase ‘L’, the
resulting cost would be Rs. 172/-. Substituting 10 more units of ‘L’ for 12 units of ‘K’
further reduces cost pf Rs. 154/-/
However, it will not be profitable to continue this substitution process further
at the existing prices since the rate of substitution is diminishing rapidly. In the
above table the least cost combination is 30 units of ‘L’ used with 16 units of ‘K’
when the cost would be minimum at Rs. 154/-. So this is they stage “the producer is
in equilibrium”.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 29

 ISO-COST

The isocost line is an important component when analyzing producer’s

behaviour. The isocost line illustrates all the possible combinations of two factors
that can be used at given costs and for a given producer’s budget. In simple
words, an isocost line represents a combination of inputs which all cost the same
amount. Now suppose that a producer has a total budget of Rs 120 and for
producing a certain level of output, he has to spend this amount on 2 factors A
and B. Price of factors A and B are Rs 15 and Rs. 10 respectively.

Combinations Units of Capital Units of Labour Total expenditure

Price = 15 Rs Price = 10 Rs ( in Rupees)
A 8 0 120
B 6 3 120
C 4 6 120
D 2 9 120
E 0 12 120

The isocost line shows all the possible combinations of two factors Labour and
capital.
Marginal Rate of Technical Substitution (MRTS)

• MRTS refers to the rate at which one input factor is substituted with the other
to attain a given level of output. In other words the lesser units of one input
must be compensated by increasing amounts of another input to produce
the same level of output.
• MRTS is existed to produce the same level of quantity with the help of
technical substitution.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 30

 ECONOMIES OF LARGE SCALE PRODUCTION

Production may be carried on a small scale or o a large scale by a firm.

When a firm expands its size of production by increasing all the factors, it secures
certain advantages known as economies of production. Marshall has classified
these economies of large-scale production into internal economies and external
economies.

Internal Economies of Large Scale

Internal economies are those, which are opened to a single factory or a
single firm independently of the action of other firms. They result from an increase
in the scale of output of a firm and cannot be achieved unless output increases.
Hence internal economies depend solely upon the size of the firm and are
different for different firms. Internal economies may be of the following types.

A). Technical Economies.

Technical economies arise to a firm from the use of better machines and
superior techniques of production. As a result, production increases and per unit
cost of production falls. A large firm, which employs costly and superior plant and
equipment, enjoys a technical superiority over a small firm. Another technical
economy lies in the mechanical advantage of using large machines. The cost of
operating large machines is less than that of operating small machines.
B). Managerial Economies:
These economies arise due to better and more elaborate management,
which only the large size firms can afford. There may be a separate head for
manufacturing, assembling, packing, marketing, general administration etc. Each
department is under the charge of an expert. Hence the appointment of experts,
division of administration into several departments, functional specialization and
scientific co-ordination of various works make the management of the firm most
efficient.

C). Marketing Economies:

The large firm reaps marketing or commercial economies in buying its
requirements and in selling its final products. The large firm generally has a
separate marketing department. It can buy and sell on behalf of the firm, when
the market trends are more favorable. In the matter of buying they could enjoy
advantages like preferential treatment, transport concessions, cheap credit,
prompt delivery and fine relation with dealers.

D). Financial Economies:

The large firm is able to secure the necessary finances either for fixes capital
purposes or for working capital needs more easily and cheaply. It can barrow from
the public, banks and other financial institutions at relatively cheaper rates. It is in
this way that a large firm reaps financial economies.
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 31
E). Risk bearing Economies:
The large firm produces many commodities and serves wider areas. It is,
therefore, able to absorb any shock for its existence. For example, during business
depression, the prices fall for every firm. There is also a possibility for market
fluctuations in a particular product of the firm. Under such circumstances the risk-
bearing economies or survival economies help the bigger firm to survive business
crisis.

F). Economies of Research:

A large firm possesses larger resources and can establish it’s own research
laboratory and employ trained research workers. The firm may even invent new
production techniques for increasing its output and reducing cost.

G). Economies of welfare:

A large firm can provide better working conditions in-and out-side the
factory. Facilities like subsidized canteens, crèches for the infants, recreation room,
cheap houses, educational and medical facilities tend to increase the productive
efficiency of the workers, which helps in raising production and reducing costs.

External Economies.
External economies are those benefits, which are shared in by a number of
firms or industries when the scale of production in an industry or groups of industries
increases. Hence external economies benefit all firms within the industry as the size
of the industry expands. Business firm enjoys a number of external economies,
which are discussed below:

A). Economies of Concentration:

When an industry is concentrated in a particular area, all the member firms
reap some common economies like skilled labour, improved means of transport
and communications, banking and financial services, supply of power and
benefits from subsidiaries. All these facilities tend to lower the unit cost of
production of all the firms in the industry.

B). Economies of Information

The industry can set up an information centre which may publish a journal
and pass on information regarding the availability of raw materials, modern
machines, export potentialities and provide other information needed by the firms.
It will benefit all firms and reduction in their costs.

c). Economies of Specialisation:

The firms in an industry may also reap the economies of specialization. When
an industry expands, it becomes possible to spilt up some of the processes which
are taken over by specialist firms. For example, in the cotton textile industry, some
firms may specialize in manufacturing thread, others in printing, still others in
PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 32
dyeing, some in long cloth, some in dhotis, some in shirting etc. As a result the
efficiency of the firms specializing in different fields increases and the unit cost of
production falls.

Thus internal economies depend upon the size of the firm and external economies
depend upon the size of the industry.

DISECONOMIES OF LARGE SCALE PRODUCTION

Internal and external diseconomies are the limits to large-scale production. It

is possible that expansion of a firm’s output may lead to rise in costs and thus result
diseconomies instead of economies. When a firm expands beyond proper limits, it
is beyond the capacity of the manager to manage it efficiently. This is an example
of an internal diseconomy. In the same manner, the expansion of an industry may
result in diseconomies, which may be called external diseconomies.

The major diseconomies of large-scale production are discussed below:

Internal Diseconomies:

A). Financial Diseconomies:

For expanding business, the entrepreneur needs finance. But finance may
not be easily available in the required amount at the appropriate time. Lack of
finance affects the production plans thereby increasing costs of the firm.
B). Managerial diseconomies:
There are difficulties of large-scale management. Supervision becomes a
difficult job. Workers do not work efficiently, wastages arise, decision-making
becomes difficult, coordination between workers and management disappears
and production costs increase.
C). Marketing Diseconomies:
As business is expanded, prices of the factors of production will rise. The cost
will therefore rise. Raw materials may not be available in sufficient quantities due
to their scarcities. Additional output may depress the price in the market. The
demand for the products may fall as a result of changes in tastes and preferences
of the people. Hence cost will exceed the revenue.

D). Technical Diseconomies:

There is a limit to the division of labour and splitting down of production
processes. The firm may fail to operate its plant to its maximum capacity. As a
result cost per unit increases. Internal diseconomies follow.

E). Diseconomies of Risk-taking:

As the scale of production of a firm expands risks also increase with it. Wrong
decision by the management may adversely affect production.

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 33

External Diseconomies:

When many firms get located at a particular place, the costs of

transportation increases due to bottlenecks. The firms have to face considerable
delays in getting raw materials and sending finished products to the marketing
centers.
The localization of industries may lead to scarcity of raw material, shortage
of various factors of production like labour and capital, shortage of power, finance
and equipment. All such external diseconomies tend to raise cost per unit.

QUESTIONS

1. Why does the law of diminishing returns operate? Explain with the help of a
diagram.
2. Explain the nature and uses of production function.
3. Explain and illustrate law of returns to scale.
4. a. Explain how production function can be used to reduce cost of
Production.
b. Explain the law of constant returns scale.
5. Explain Economies of returns to scale. Explain the factors, which causes
increasing returns to scale.
(a) Explain the law of variable proportions
5. Define production function, explain is equate and is cost curves.
6. Discuss the equilibrium of a firm with isoquants.
7. (a) What are iso-cost curves and iso quants?

PRINCIPLES OF BUSINESS ECONIMICS AND ACCOUNTANCY 34