KSBM – Managerial Economics-Which economic theory is used to solve the problem

Which economic theory is used to solve the problem

KSBM – Managerial Economics

Case Study 1: Economic Analysis of Organization ABC

Organization ABC was one of the leading organizations in manufacturing soaps. After a certain point of time, the organization found that there was an increase in its cost and reduction in profits. However, the economy of the nation was at boom. Apart from this, the manufacturing industry was also enjoying high profits. Therefore, Chief Executive Officer (CEO) of the organization decided to take suggestions from economists regarding the deteriorating condition of the organization. The economists first analyzed the problem and collected relevant data. They found that the price of the organization’s product was quite high as compared to the market price. Moreover, substitute products were easily available in the market. Therefore, consumers were not willing to purchase ABC’s product due to the availability of similar products at cheap prices. To overcome the problem, economists suggested the organization to lower down its prices and observe the effect on demand. In addition, economists recommended the organization to organize promotional campaigns. Based on suggestions, the organization reduced the prices by 5% and organized various promotional campaigns, As a result, the demand for the organization’s product increased by 3%. This helped the organization to come back to its previous position.


Q1. Which economic theory is used to solve the problem in the case study?

Q2. Which economics concept is used in this case study?

Case Study 2: Kingfisher Airlines Pricing Strategies

Kingfisher Airlines (KFA), India-based airline group, is a wholly owned subsidiary of United Breweries (UB) Group. The parent organization is India’s largest producer of beer and established its operations in India in 2005. KFA is positioned as a budget airline rather than a low cost carrier airline. The reason is that the low cost carrier airline is treated as low quality and delayed flight service provider. The passengers of KFA are treated as honored guests and the flight is not referred as a journey but an experience of a lifetime. During the launch, Vijay Mallya, chairman and Chief Executive Officer (CEO) of KFA, said “Kingfisher Airlines will have a ‘Fly the Good Times’ approach and this will reflect in the experience what we will offer to passengers. With costs lower than economy class travel on full service airlines and marginally more than the bus services type low cost competition, Kingfisher Airlines offers a far better value proposition. The aircraft and service will reflect the Kingfisher lifeline imagery and credibility that has been built over the years.” KFA’s strategy is to differentiate itself from other airlines by providing value-added air travel services at reasonable fares. KFA offers three kinds of services for different types of customers namely Kingfisher First for business-class customers, Kingfisher Class for upper-class customers, and Kingfisher Red for middle-class and lower-class customers. It provides a fun-filled experience with in–flight entertainment systems and well-designed interiors. KFA provides quality services, screens and headphones, specialized meals and beverages, and free gifts to guests. In the year of its launch, KFA was voted as the best new airline of the year. KFA has an advantage of familiarity of brand with the customers. Thus, it does not conduct marketing and promotional activities. The pricing strategy of the aviation industry is also affected by the environment-related factors, such as crude oil prices, dollar rates, and competition. When KFA was launched, it was called as the budget airline as the ticket prices charged, were lower than its competitors, such as Indian Airlines, Jet, and Sahara. The ticket prices were 25% lower than Jet Airways and around `20% more than Air Deccan. Jet Airways brought down its fares to compete with KFA when it took over Sahara Airlines. These competitive price pressures lead KFA to provide more value-added services, including mobile updates and home delivery of air tickets. According to Mallya, “We are offering our passengers’ more than just value-based fares; we will offer a complete lifestyle experience.” In this high competition, KFA has positioned itself as a successful airline in a shorter period of time. The targeted segments of KFA are high and middle income customers. It also targeted the youth and high lifestyle segments. Mostly, the targeted population is modern and trendy that is looking for a great flying experience. It has been termed as a true value carrier and awarded as the prestigious 5- Star Airline Status by Skytrax, which is the world’s leading independent research and quality evaluation body for airlines.


Q1. What pricing strategy was followed by Kingfisher to complete in the aviation industry? Was it competition or cost-based strategy?

Q2. Do you think that pricing acts as a differentiating factor in the aviation industry?

Case Study 3: The Business Cycle of ABC Country

ABC country was facing a downturn in its economy. All the economic factors, such as production, prices, savings, and investment, of the country started decreasing. In the initial phases of downturn, businessmen were not able to recognize it. They considered it minor fluctuations in the economy, which could be easily handled by market forces. Therefore, they continued to produce goods and services at the same rate as they were doing earlier. As a result, the supply of goods and services exceeded the demand. Gradually, businessmen realized that they had overinvested. This problem of one industry spread in other industries, due to interlink among different industries. At this time, businessmen stopped any type of further investment in consumer and capital goods. Consequently, they started reducing the cost on labor, machinery, furniture and other factors of production. As a result, various economic factors, such as consumption, savings, and employment, started decreasing. In addition, debtors were not able to repay their debts and creditors were not ready to lend more money. Apart from this, individuals and businesses were not ready to invest in stock markets. Many weak organizations left industries or dissolved. At this point of time, the economy had reached its bottom level and from this point, individuals and organizations tried to become optimistic. Therefore, organizations started hiring employees at low wages. Employees accepted the amount of salary provided to them by organizations because they wanted to fulfill their basic needs. In addition, consumers also had an opinion that the price of products and services would not fall now. Therefore, they started increasing their consumption rate. This consumption rate stimulated the demand and consequently the production. As a result, the investment and bank credit also increased. The economy started running back on the growth path.


Q1. What are the phases of business cycle explained in the case study?

Q2. What are the main causes of recession in ABC country?

Case Study 4: Russian Economy from 1990 to 2007

The Russian Federation (Russia) faced several economic problems when it was formed after the dissolution of Union of Soviet Socialist Republic (USSR) or the Soviet Union. Therefore, Boris Yeltsin the first President of Russia implemented various measures for the economic growth of Russia, such as stabilization policies and economic restructuring. These measures helped the Russian economy to become market-focused economy from a centrally planned economy. These measures are briefly discussed in the present case study. In addition, the case study also analyzes the policy measures presented by Vladimir Putin, Russia’s second President. It also focuses on the economic conditions of Russia in the Presidency of Boris Yeltsin and Vladimir Putin and the impact of their policies on the economy. Towards the end, the case study highlights the challenges faced by the Russian economy. Several Russian officials and economists have described the economic conditions of Russia in different time period as follows: According to Mark Spelmen, Accenture Energy Analyst, in July 2007, “Everyone is focusing on the fact that there are more billionaires in Moscow than there are in London, but what we’re actually also seeing is that the disposable income of skilled people in Russia is going up. You see a lot of infrastructure a lot of housing, shopping malls. The commodity boom is now percolating beyond Moscow.” According to prominent Russian intellectuals in the late 1990s, “The catastrophe has run its course. The economic policy of Yeltsin’s and Chernomyrdin’s aides has made a small section of the farmer communist nomenclature and of the “new Russians” unbelievably rich, plunged most of the nation’s industry into paralysis, and reduced the majority of the population to poverty. As far as property ownership is concerned, the gap between the rich and poor is much deeper now than that which led to the [1917] October [Bolshevik] Revolution.” Earlier to 1991, Russia was considered as the biggest republic with the name Russian Soviet Federative Socialist Republic (RSFSR) in Soviet Union. In 1990-1991, the inflation rate in Russia was very high and there was a shortage of supply in every industry. At the time, the GDP of Russia shows a decline of 17% and retail prices reached to 140%. The political conditions of Russia were also not good at this time. As a result, the Soviet Union was dissolved in 1991. After that, Boris Yeltsin was elected as the President of Russia. Boris Yeltsin took several measures to transform the Russian economy in the market-based economy. In 1991, Boris Yeltsin along with his advisors and an economist, Yegor Gaidar implemented certain measures for bringing up the Russian economy form inflation. The measures taken by him were stabilization measures and economic restructuring. The stabilization measures involved decreasing the government budget deficit, increasing government revenues, and controlling the supply of money by subsidizing credit provided to business persons. In addition, he enforced price control policies, made several amendments in tax policies, and increased privatization. In the initial stages, the policies made by Boris Yeltsin were not able to achieve its goals. However, with the introduction of monetary and fiscal policies, the government was able to implement such measures and achieved its goals and objectives. In 1996, Boris Yeltsin was again elected as the President of Russia. After that, Russia faced a situation of decrease in the foreign exchange reserves and the economy started showing another decline. In 1998, Russian economy experienced a financial crisis in which its currency, ruble, showed a decline of 75%. The financial crisis in Russia made people against Boris Yeltsin; as a result, he faced high opposition in the parliament. The State Duma elections of 1999 and Presidential elections of 2000 brought a major change in the Russian politics. Vladimir Putin was elected as the President of Russia on 2000. The Parliament of Russia started supporting policies introduced by Vladimir Pultin, the President of Russia and Mikhail Kasyanov, the Prime Minister of Russia. Both of them look various legislative initiatives and measures to transform the Russian economy in the market-based economy. In 2007, the Gross Domestic Product (GDP) of Russia was above $1 trillion. In the mid of 2000s, the growth of Russian economy was very fast that is mostly contributed by the growth in domestic energy industry of Russia. According to various Russian analysts, the major source of income for the Russian economy was oil exports. Therefore, the Russian economy showed a drastic change with the change in the prices of oil. Therefore, the decline in oil prices was considered as a risk factor for the sustainability of the Russian economy. According to the report of World Bank in 2007, Russia should have taken measures to control inflation as the global economy was going to face an inflationary condition, which might affect the Russian economy. However, Russia was the least affected country in the global economic slowdown of 2007. It is because of the fact that the major contribution in GDP of Russia came from its fossil fuels and natural resources that were hardly affected by recession. In addition, Russian trade with United States, which is the source of financial crisis of 2007, was very limited.


Q1. What are the measures adopted by Boris Yeltsin to overcome inflation?

Q2. What are the measures used by a government for controlling inflation?

Case Study 5: Competition in Magazine Industry

Earlier, there were only few organizations operating in the magazine publication industry. At that time, it became a trend to provide free gifts, audio and video CDs, DVDs, and scented candles, to customers along with magazines. The concept of free gifts was introduced to increase customer base. However, after some time, it became a problem for the entire industry as he cost of production was increasing. In such a situation, some organizations stopped providing free gifts, so that the cost of production could be reduced. Consequently, these organizations lost their customers. This is because at this point, customers preferred free gifts with magazines. On the other hand, some organizations increased the prices of magazines to overcome the cost of production. However, these organizations did not succeed in their strategy, as the customers were not willing to buy magazines at higher prices. Even some of the organizations reduced the prices of magazines to increase the number of customers, generate revenue, and overcome the production cost. As a result, rest of the organizations in the industry also reduced their prices to earn profit and minimize cost of production. This led to heavy losses for organizations that initially reduced the prices. Therefore, organizations were bound to provide magazines at fixed rate along with free gifts.


Q1. What type of market structure is prevailing in the magazine industry? Why?

Q2. What are the problems faced by organizations in the magazine industry due to oligopoly?

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