Mb0026

Name

: PRASHANT D. DEVALE

Roll Number

: 510932455

Learning Centre Andheri

: KARROX TECHNOLOGIES LTD,

Subject

: Managerial Economics

Date Of Submission : 13th June, 2009 Assignment No. : MB0026

MANAGERIAL ECONIMICS MB0026 SET – 1 Q1. Define Managerial Economics and discuss its importance and functions. Answer – Managerial economics is a science that deals with the application of various economic theories, principles, concepts and techniques to business management in order to solve business and management problems. It deals with the practical application of economic Important Features of managerial Economics:1. It is a new discipline and of recent origin 2. It is a highly specialized and separate branch by itself. 3. It is basically a branch of microeconomics and as such it studies the problems of only one firm in detail. 4. It is mainly a normative science and as such it is a goal oriented and prescriptive science. 5. It is more realistic, pragmatic and highlights on practical application of various economic theories to solve business and management problems. 6. It is a science of decision-making. It concentrates on decisionmaking process, decision models and decision variables and their relationships. 7. It is both conceptual and metrical and it helps the decision maker by providing measurement of various economic variables and their interrelationships. 8. It uses various macro economic concepts like national income, inflation, deflation, trade cycles etc to understand and adjust its policies to the environment in which the firm operates.

9. It also gives importance to the study of no economic variables having implications of economic performance of the firm. For example, impact of technology, environmental forces, sociopolitical and cultural factors etc. 10. It uses the services of many other sister sciences like mathematics, statistics, engineering, accounting, operation research and psychology etc to find solutions to business and management problems. Two major functions of a Managerial Economist. A Managerial Economist is a specialist and an expert in analyzing and finding answers to business and managerial problems. He has in-depth knowledge of the subject. He is an authority and has total command over his subject. A Managerial Economist has to perform several functions in an organization. Among them, decision-making and forward planning are described as the two major functions and all other functions are derived from these two basic functions. A detailed description of the two functions is as follows. 1. Decision-making:The word ‘decision’ suggests a deliberate choice made out of several possible alternative courses of action after carefully considering them. The act of choice signifying solution to an economic problem is economic decision making. It involves choices among a set of alternative courses of action. Decisionmaking is essentially a process of selecting the best out of many alternative Opportunities or courses of action that are open to a management. Decision-making is a management function. Decision making is a routine affair in any business unit. Hence, it is a part of business activity. It is a basic function of a managerial economist. In the day today business, he has to take innumerable decisions. Sometimes the manager takes the decision himself, sometimes in collaboration and consultations with others. Some decisions are taken on the spot and some others are taken after careful thinking. Some decisions are major and complex while others are minor and simple. Some decisions are taken in the absence of any information. Some decisions are taken in the background of

certainty, known factors and information. Some other decisions are taken in the midst of uncertainties. The choice made by the business executives are difficult, crucial and have far-reaching consequences. The basic aim of taking a decision is to select the best course of action which maximizes the economic benefits and minimizes the use of scarce resources of a firm. Hence, each decision involves cost benefit analysis. Any slight error or delay in decision making may cause considerable economic and financial damage to a firm. It is for this reason, management experts are of the opinion that right decision – making at the right time is the secret of a successful manager. 2. Forward planning:The term ‘planning’ implies a consciously directed activity with certain predetermined goals and means to carry them out. It is a deliberate activity. It is a programmed action. Basically Planning is concerned with tackling future situations in a systematic manner. Forward planning implies planning in advance for the future. It is associated with deciding the future course of action of a firm. It is prepared on the basis of past and current experience of a firm. It is prepared in the background of uncertain and unpredictable environment and guess work. Future events and happenings cannot be predicted accurately. The success or failure of the future plan depends on a number of factors and forces which are unknown in nature. Much of economic activity is forward looking. Every time we build a new factory, add to the stocks of inputs, trucks, computers or improvements in R&D, our intension is to enhance the future productivity of the firm. Growing firms devote a significant share of their current output to net capital formation to bolster future economic output. A business executive must be sufficiently intelligent enough to think in advance, prepare a sound plan and take all possible precautionary measures to meet all types of challenges of the future business. Hence, forward planning has acquired greater significance in business circles.

Q.2 What is elasticity of demand? Explain the different degree of price elasticity with suitable examples.

Answer – The term elasticity is borrowed from physics. It shows the reaction of one variable with respect to a change in other variables on which it is dependent. Elasticity is an index of Reaction. Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price of a commodity Price Elasticity of Demand:Price elasticity of demand is one of the important concepts of elasticity which is used to describe the effect of change in price on quantity demanded. Different Degree of Price Elasticity of Demand 1.Perfectly Elastic Demand: In this case, a very small change in price leads to an infinite change in demand. The demand cure is a horizontal line and parallel to OX axis. The numerical coefficient of perfectly elastic demand is infinity (ED=00).

2. Perfectly Inelastic Demand: In this case, what ever may be the change in price, quantity demanded will remain perfectly constant. The demand curve is a vertical straight line and parallel to OY axis. Quantity demanded would be 10 units, irrespective of price changes from Rs. 10.00 to Rs. 2.00. Hence, the numerical coefficient of perfectly inelastic demand is zero. ED = 0

3. Relative Elastic Demand: In this case, a slight change in price leads to more than proportionate change in demand. One can notice here that a change in demand is more than that of change in price. Hence, the elasticity is greater than one. For e.g., price falls by 3 % and demand rises by 9 %. Hence, the numerical coefficient of demand is greater than one.

4. Relatively Inelastic Demand In this case, a large change in price, say 8 % fall price, leads to less than proportionate change in demand, say 4 % rise in demand. One can notice here that Change in demand is less than that of change in price. This can be represented by a steeper demand curve. Hence, elasticity is less than one 5. Unitary elastic demand: In this case, proportionate change in price leads to equal proportionate change in demand. For e.g., 5 % fall in price leads to exactly 5 % increase in demand. Hence, elasticity is equal to unity. It is possible to come across unitary elastic demand but it is a rare phenomenon.

Out of five different degrees, the first two are theoretical and the last one is a rare possibility. Hence, in all our general discussion, we make reference only to two terms relatively elastic demand and relatively inelastic demand.

Q.3 Suppose your manufacturing company planning to release a new product into market, Explain the various methods forecasting for a new product Answer – Methods Or Techniques Of Forecasting:Demand forecasting is a highly complicated process as it deals with the estimation of future demand. It requires the assistance and opinion of experts in the field of sales management. While estimating future demand, one should not give too much of importance to either statistical information, past data or experience, intelligence and judgment of the experts. Demand forecasting, to become more realistic should consider the two aspects in a balanced manner. Application of commonsense is needed to follow a pragmatic approach in demand forecasting. Broadly speaking, there are two methods of demand forecasting. They are: 1. Survey methods and 2. Statistical methods. a. Survey Methods:Survey methods help us in obtaining information about the future purchase plans of potential buyers through collecting the opinions of experts or by interviewing the consumers. These methods are extensively used in short run and estimating the demand for new products. There are different approaches under survey methods. They are A. Consumers’ interview method: under this method, efforts are made to collect the relevant information directly from the consumers with regard to their future purchase plans. In order to gather information from consumers, a number of alternative

techniques are developed from time to time. Among them, the following are some of the important ones. Survey of buyer’s intentions or preferences: It is one of the oldest methods of demand forecasting. It is also called as “Opinion surveys”. Under this method, consumer buyers are requested to indicate their preferences and willingness about particular products. They are asked to reveal their ‘future purchase plans with respect to specific items. They are expected to give answers to questions like what items they intend to buy, in what quantity, why, where, when, what quality they expect, how much money they are planning to spend etc. Generally, the field survey is conducted by the marketing research department of the company or hiring the services of outside research organizations consisting of learned and highly qualified professionals. The heart of the survey is questionnaire. It is a comprehensive one covering almost all questions either directly or indirectly in a most intelligent manner. It is prepared by an expert body who are specialists in the field or marketing. The questionnaire is distributed among the consumer buyers either through mail or in person by the company. Consumers are requested to furnish all relevant and correct information. The next step is to collect the questionnaire from the consumers for the purpose of evaluation. The materials collected will be classified, edited analyzed. If any bias prejudices, exaggerations, artificial or excess demand creation etc., are found at the time of answering they would be eliminated. The information so collected will now be consolidated and reviewed by the top executives with lot of experience. It will be examined thoroughly. Inferences are drawn and conclusions are arrived at. Finally a report is prepared and submitted to management for taking final decisions. The success of the survey method depends on many factors. 1) The nature of the questions asked, 2) The ability of the surveyed 3) The representative of the samples 4) Nature of the product 5) Characteristics of the market 6) Consumer buyer’s behavior, their intentions, attitudes, thoughts, motives, honesty etc.

7) Techniques of analysis 8) Conclusions drawn etc. The management should not entirely depend on the results of survey reports to project future demand. Consumer buyers may not express their honest and real views and as such they may give only the broad trends in the market. In order to arrive at right conclusions, field surveys should be regularly checked and supervised. This method is simple and useful to the producers who produce goods in bulk. Here the burden of forecasting is put on customers. However this method is not much useful in estimating the future demand of the households as they run in large numbers and also do not freely express their future demand requirements. It is expensive and also difficult. Preparation of a questionnaire is not an easy task. At best it can be used for short term forecasting. B. Direct Interview Method Experience has shown that many customers do not respond to questionnaire addressed to them even if it is simple due to varied reasons. Hence, an alternative method is developed. Under this method, customers are directly contacted and interviewed. Direct and simple questions are asked to them. They are requested to answer specifically about their budget, expenditure plans, particular items to be selected, the quality and quantity of products, relative price preferences etc. for a particular period of time. There are two different methods of direct personal interviews. They are as follows: i. Complete enumeration method : Under this method, all potential customers are interviewed in a particular city or a region. The answers elicited are consolidated and carefully studied to obtain the most probable demand for a product. The management can safely project the future demand for its products. This method is free from all types of prejudices. The result mainly depends on the nature of questions asked and answers received from the customers. However, this method cannot be used successfully by all sellers in all cases. This method can be employed to only those products whose customers are

concentrated in a small region or locality. In case consumers are widely dispersed, this method may not be physically adopted or prove costly both in terms of time and money. Hence, this method is highly cumbersome in nature. ii. Sample survey method or the consumer panel method : Experience of the experts’ show that it is impossible to approach all customers; as such careful sampling of representative customers is essential. Hence, another variant of complete enumeration method has been developed, which is popularly known as sample survey method. Under this method, different cross sections of customers that make up the bulk of the market are carefully chosen. Only such consumers selected from the relevant market through some sampling method are interviewed or surveyed. In other words, a group of consumers are chosen and queried about their preferences in concrete situations. The selection of a few customers is known as sampling. The selected consumers form a panel. This method uses either random sampling or the stratified sampling technique. The method of survey may be direct interview or mailed questionnaire to the selected consumers. On the basis of the views expressed by these selected consumers, most likely demand may be estimated. The advantage of a panel lies in the fact that the same panel is continued and new expensive panel does not have to be formulated every time a new product is investigated. As compared to the complete enumeration method, the sample survey method is less tedious, less expensive, much simpler and less time consuming. This method is generally used to estimate short run demand by government departments and business firms. Success of this method depends upon the sincere cooperation of the selected customers. Hence, selection of suitable consumers for the specific purpose is of great importance. Even with careful selection of customers and the truthful information about their buying intention, the results of the survey can only be of limited use. A sudden change in price, inconsistency in buying intentions of consumers, number of sensible questions asked and dropouts from the panel for various

reasons put a serious limitation on the practical usefulness of the panel method. C. Collective opinion method or opinion survey method This is a variant of the survey method. This method is also known as “Sales – force polling” or “Opinion poll method”. Under this method, sales representatives, professional experts and the market consultants and others are asked to express their considered opinions about the volume of sales expected in the future. The logic and reasoning behind the method is that these salesmen and other people connected with the sales department are directly involved in the marketing and selling of the products in different regions. Salesmen, being very close to the customers, will be in a position to know and feel the customer’s reactions towards the product. They can study the pulse of the people and identify the specific views of the customers. These people are quite capable of estimating the likely demand for the products with the help of their intimate and friendly contact with the customers and their personal judgments based on the past experience. Thus, they provide approximate, if not accurate estimates. Then, the views of all salesmen are aggregated to get the overall probable demand for a product. Further, these opinions or estimates collected from the various experts are considered, consolidated and reviewed by the top executives to eliminate the bias or optimism and pessimism of different salesmen. These revised estimates are further examined in the light of factors like proposed change in selling prices, product designs and advertisement programs, expected changes in the degree of competition, income distribution, population etc. The final sales forecast would emerge after these factors have been taken into account. This method heavily depends on the collective wisdom of salesmen, departmental heads and the top executives. It is simple, less expensive and useful for short run forecasting particularly in case of new products. The main drawback is that it is subjective and depends on the intelligence and awareness of the salesmen. It cannot be relied upon for long term business planning. D. Delphi Method or Experts Opinion Method

This method was originally developed at Rand Corporation in the late 1940’s by Olaf Helmer, Dalkey and Gordon. This method was used to predict future technological changes. It has proved more useful and popular in forecasting non– economic rather than economical variables.It is a variant of opinion poll and survey method of demand forecasting. Under this method, outside experts are appointed. They are supplied with all kinds of information and statistical data. The management requests the experts to express their considered opinions and views about the expected future sales of the company. Their views are generally regarded as most objective ones. Their views generally avoid or reduce the “Halo – Effects” and “Ego – Involvement” of the views of the others. Since experts’ opinions are more valuable, a firm will give lot of importance to them and prepare their future plan on the basis of the forecasts made by the experts. E. End Use or Input – Output Method Under this method, the sale of the product under consideration is projected on the basis of Demand surveys of the industries using the given product as an intermediate product. The Demand for the final product is the end – use demand of the intermediate product used in the production of the final product. An intermediate product may have many end – users, For e.g., steel can be used for making various types of agricultural and industrial machinery, for construction, for transportation etc. It may have the demand both in the domestic market as well as international market. Thus, end – use demand estimation of an intermediate product may involve many final goods industries using this product, at home and abroad. Once we know the demand for final consumption goods including their exports we can estimate the demand for the product which is used as intermediate good in the production of these final goods with the help of input – output coefficients. The input – output table containing input – output coefficients for particular periods are made available in every country either by the Government or by research organizations. This method is used to forecast the demand for intermediate products only. It is quite useful for industries which are largely producers’ goods, like aluminum, steel etc. The main limitation of

the method is that as the number of end – users of a product increase, it becomes more inconvenient to use this method.

Statistical Method : It is the second most popular method of demand forecasting. It is the best available technique and most commonly used method in recent years. Under this method, statistical, mathematical models, equations etc are extensively used in order to estimate future demand of a particular product. They are used for estimating long term demand. They are highly complex and complicated in nature. Some of them require considerable mathematical back – ground and competence. They use historical data in estimating future demand. The analysis of the past demand serves as the basis for present trends and both of them become the basis for calculating the future demand of a commodity in question after taking into account of likely changes in the future. There are several statistical methods and their application should be done by some one who is reasonably well versed in the methods of statistical analysis and in the interpretation of the results of such analysis. Trend Projection Method An old firm operating in the market for a long period will have the accumulated previous data on either production or sales pertaining to different years. If we arrange them in chronological order, we get what is called as ‘time series’. It is an ordered sequence of events over a period of time pertaining to certain variables. It shows a series of values of a dependent variable say, sales as it changes from one point of time to another. In short, a time series is a set of observations taken at specified time, generally at equal intervals. It depicts the historical pattern under normal conditions. This method is not based on any particular theory as to what causes the variables to change but merely assumes that whatever forces contributed to change in the recent past will continue to have the same effect. On the basis of time series, it is possible to project the future sales of a company.

Further, the statistics and information with regard to the sales call for further analysis. When we represent the time series in the form of a graph, we get a curve, the sales curve. It shows the trend in sales at different periods of time. Also, it indicates fluctuations and turning points in demand. If the turning points are few and their intervals are also widely spread, they yield acceptable results. Here the time series show a persistent tendency to move in the same direction. Frequency in turning points indicates uncertain demand conditions and in this case, the trend projection breaks down. The major task of a firm while estimating the future demand lies in the prediction of turning points in the business rather than in the projection of trends. When turning points occur more frequently, the firm has to make radical changes in its basic policy with respect to future demand. It is for this reason that the experts give importance to identification of turning points while projecting the future demand for a product. The heart of this method lies in the use of time series. Changes in time series arise on account of the following reasons: 1. Secular or long run movements: Secular movements indicate the general conditions and direction in which graph of a time series move in relatively a long period of time. 2. Seasonal movements: Time series also undergo changes during seasonal sales of a company. During festival season, sales clearance season etc., we come across most unexpected changes. 3. Cyclical Movements: It implies change in time series or fluctuations in the demand for a product during different phases of a business cycle like depression, revival, boom etc. 4. Random movement. When changes take place at random, we call them irregular or random movements. These movements imply sporadic changes in time series occurring due to unforeseen events such as floods, strikes, elections, earth quakes, droughts and other such natural calamities. Such changes take place only in the short run. Still they have their own impact on the sales of a company.

Q4. Define the term equilibrium. Explain the changes in market equilibrium and effects to shifts in supply and demand. Answer – Meaning of equilibrium The word equilibrium is derived from the Latin word “equilibrium” which means equal balance. It means a state of even balance in which opposing forces or tendencies neutralize each other. It is a position of rest characterized by absence of change. It is a state where there is complete agreement of the economic plans of the various market participants so that no one has a tendency to revise or alter his decision. In the words of professor Mehta: “Equilibrium denotes in economics absence of change in movement.”

Changes in Market Equilibrium:The changes in equilibrium price will occur when there will be shift either in demand curve or in supply curve or both. Effects of shit in demand Demand changes when there is a change in the determinants of demand like the income, tastes, prices of substitutes and complements, size of the population etc. If demand raises due to a change in any one of these conditions the demand curve shifts upward to the right. If, on the other hand, demand falls, the demand curve shifts downward to the left. Such rise and fall in demand are referred to as increase and decrease in demand. A change in the market equilibrium caused by the shifts in demand can be explained with the help of a diagram Quantity demanded and supplied is shown on OX axis, Price is shown on OY axis. SS is the supply curve which remains unchanged. DD is the demand curve. Demand and supply curves intersect each other at point E. Thus OP is the equilibrium price and OQ is the equilibrium quantity demanded and supplied. Now, suppose the demand increases. The demand curve shifts forward to D1D1. The new

demand curve intersects the supply curve at point E1, where the quantity demanded increases to OQ1 and price to OP1. In the same way, if the demand curve shifts backwards and assumes the position D2D2, the new equilibrium will be at E2 and the quantity demanded will be OQ2, price will be OP2. Thus the market equilibrium price and quantity demanded will change when there is and increase or decrease in demand. Effects of Shifts In Supply To study of the effects of changes in supply on market equilibrium we assume the demand to remain constant. An increase in supply is represented by a shift of the supply curve to the right and a decrease in supply is represented by a shift to the left. The general rule is, if supply increases, price falls and if supply decreases price rises. We can show the effects of shifts in supply with the help of a diagram In the diagram supply and demand curves intersect each other at point E, establishing equilibrium price at OP and equilibrium quantity supplied and demanded at OQ. Suppose, supply increases and the supply curve shifts from SS to S1S1. The new supply curve intersects the demand curve at E1 reducing the equilibrium price to P1 and raising the quantity demanded to OQ1. On the other hand if the supply decreases and the supply curve shifts backward to S2S2, the equilibrium price is pushed upwards to OP2 and the quantity demanded is reduced to OQ2. Thus changes in supply, demand remaining constant will cause changes in the market equilibrium. Effects of Changes In Both Demand And Supply: Changes can occur in both demand and supply conditions. The effects of such changes on the market equilibrium depend on the rate of change in the two variables. If the rate of change in demand is matched with the rate of change in supply there will be no change in the market equilibrium, the Effects Of Changes In Both Demand And Supply Changes can occur in both demand and supply conditions. The effects of such changes on the market equilibrium depend on the rate of change in the two variables. If the rate of change in demand is matched with the rate of change in supply there will be no change in the market equilibrium, the new equilibrium shows expanded market with increased quantity

of both supply and demand at the same price. If the increase in demand is greater than the increase in supply, the new market equilibrium is at a higher level showing a rise in both the equilibrium price and the equilibrium quantity demanded and supplied. On the other hand if the increase in supply is greater than the increase in demand, the new market equilibrium is at lower level, showing a lower equilibrium price and a higher quantity of good supplied and demanded. Q.5 Give a brief description of Implicit and Explicit cost Actual and opportunity cost Answer – Implicit and Explicit Costs:Explicit costs are those costs which are in the nature of contractual payments and are paid by an entrepreneur to the factors of production [excluding himself] in the form of rent, wages, interest and profits, utility expenses, and payments for raw materials etc. They can be estimated and calculated exactly and recorded in the books of accounts. Implicit or imputed costs are implied costs. They do not take the form of cash outlays and as such do not appear in the books of accounts. They are the earnings of owner employed resources. For example, the factor inputs owned by the entrepreneur himself like capital can be utilized by himself or can be supplied to others for a contractual sum if he himself does not utilize them in the business. It is to be remembered that the total cost is a sum of both implicit and explicit costs. Actual costs and Opportunity Costs:Actual costs are also called as outlay costs, absolute costs and acquisition costs. They are those costs that involve financial expenditures at some time and hence are recorded in the books of accounts. They are the actual expenses incurred for producing or acquiring a commodity or service by a firm. For example, wages paid to workers, expenses on raw materials, power, fuel

and other types of inputs. They can be exactly calculated and accounted without any difficulty. Opportunity cost of a good or service is measured in terms of revenue which could have been earned by employing that good or service in some other alternative uses. In other words, opportunity cost of anything is the cost of displaced alternatives or costs of sacrificed alternatives. It implies that opportunity cost of anything is the alternative that has been foregone. Hence, they are also called as alternative costs. Opportunity cost represents only sacrificed alternatives. Hence, they can never be exactly measured and recorded in the books of accounts. The knowledge of opportunity cost is of great importance to management decision. They help in taking a decision among alternatives. While taking a decision among several alternatives, a manager selects the best one which is more profitable or beneficial by sacrificing other alternatives. For example, a firm may decide to buy a computer which can do the work of 10 laborers. If the cost of buying a computer is much lower than that of the total wages to be paid to the workers over a period of time, it will be a wise decision. On the other hand, if the total wage bill is much lower than that of the cost of computer, it is better to employ workers instead of buying a computer. Thus, a firm has to take a number of decisions almost daily.

Q.6 Critically examine Boumal’s static and dynamic models. Answer – Boumal’s Static And Dynamic Models:Sales maximization model is an alternative model for profit maximization. This model is developed by Prof. W.J.Boumal, an American economist. This alternative goal has assumed greater significance in the context of the growth of Oligopolistic firms. The

model highlights that the primary objective of a firm is to maximize its sales rather than profit maximization. It states that the goal of the firm is maximization of sales revenue subject to a minimum profit constraint. The minimum profit constraint is determined by the expectations of the share holders. This is because no company can displease the share holders. It is to be noted here that maximization of sales does not mean maximization of physical sales but maximization of total sales revenue. Hence, the managers are more interested in maximizing sales rather than profit. The basic philosophy is that when sales are maximized automatically profits of the company would also go up. Hence, attention is diverted to increase the sales of the company in recent years in the context of highly competitive markets. In defense of this model, the following arguments are given. 1. Increase in sales and expansion in its market share is a sign of healthy growth of a normal company. 2. It increases the competitive ability of the firm and enhances its influence in the market. 3. The amount of slack earnings and salaries of the top managers are directly linked to it. 4. It helps in enhancing the prestige and reputation of top management, distribute more dividends to share holders and increase the wages of workers and keep them happy.

5. The financial and other lending institutions always keep a watch on the sales revenues of a firm as it is an indication of financial health of a firm. 6. It helps the managers to pursue a policy of steady performance with satisfactory levels of profits rather than spectacular profit maximization over a period of time. Managers are reluctant to take up those kinds of projects which yield high level of profits having high degree of risks and uncertainties. The risk averting and avoiding managers prefer to select those projects which ensure steady and satisfactory levels of profits. Prof, Boumal has developed two models. The first is static model and the second one is the dynamic model. The Static Model:This model is based on the following assumptions. 1. The model is applicable to a particular time period and the model does not operate at different periods of time. 2. The firm aims at maximizing its sales revenue subject to a minimum profit constraint. 3. The demand curve of the firm slope downwards from left to right. 4. .The average cost curve of the firm is Unshaped one. Sales maximization [dynamic model] In the real world many changes takes place which affects business decisions of a firm. In order to include such changes, Boumal has developed another dynamic model. This model explains how changes in advertisement expenditure, a major determinant of demand, would affect the sales revenue of a firm under severe competitions. Assumptions:1. Higher advertisement expenditure would certainly increase sales revenue of a firm.

2. Market price remains constant. 3. Demand and cost curves of the firm are conventional in nature. Generally under competitive conditions, a firm in order to increase its volume of sales and sales revenue would go for aggressive advertisements. This leads to a shift in the demand curve to the right. Forward shift in demand curve implies increased advertisement expenditure resulting in higher sales and sales revenue. A price cut may increase sales in general. But increase in sales mainly depends on whether the demand for a product is elastic or inelastic. A price reduction policy may increase its sales only when the demand is elastic and if the demand is inelastic; such a policy would have adverse effects on sales. Hence, to promote sales, advertisements become an effective instrument today. It is the experience of most of the firms that with an increase in advertisement expenditure, sales of the company would also go up. A sales maximizer would generally incur higher amounts of advertisement expenditure than a profit maximizer. However, it is to be remembered that amount allotted for sales promotion should bring more than proportionate increase in sales and total profits of a firm. Otherwise, it will have a negative effect on business decisions Thus, by introducing; a non price variable in to his model, Boumal makes a successful attempt to analyze the behavior of a competitive firm under oligopoly market conditions. Under oligopoly conditions as there are only a few big firms competing with each other either producing similar or differentiated products, would resort to heavy advertisements as an effective means to increase their sales and sales revenue. This appears to be more practical in the present day situations.