MANAGERIAL ECONOMICS JHOSI SIR

14-10-2019

Managerial Economics
Unit 1

Managerial Economics

Intro, Meaning, nature, scope – significance- uses of managerial economics- roles and responsibilities of
managerial Economics Relationship of managerial economics with statistics accounting and operation
research, the basic process of decision making.

Unit 2

Fundamental concepts of Managerial Economics

opportunity costs, incremental principal, Time perspective principle, discounting principle, equine-
managerial principle, theory of firm, firm and industry, forms of ownership, objectives of the firm,
Alternative objectives of the firm, Managerial theories, Baumol’s Model, Marris’s Hypothesis – Williom
Son’s, Behavioural Theory- Smon’s Satisfying model, Cyert and march model, agency theory, Case Study
Badur India Limited, Growing Big and Global.

Unit 3

Demand Analysis

Law of demand, Exception towards the law of demand, Elasticity of demand – Classification of price
income cross elasticity. Advertising and promotional elasticity, uses of elasticity of demand for
managerial decision making, management of elasticity of demand, law of supply – of supply, Demand
forecasting, meaning, significance, methods of demand forecasting.

Unit 4

Cost analysis and production analysis’s

Concepts, types of cost, Cost curves, Cost output relationship, in the short run and in the long run, LAC
curve Long run average , concepts, production function with one variable input, law of variable
proportions, production function with two variable inputs and laws of variable, indifference curves,
isoquants, isocost line, least cost combination factors, economies of the scale and diseconomies of scale,
technological progress and production function, Case study: Automobile industry in India, new
production paradigm
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Unit 5

Market structure and pricing practices

Perfect competition, features, discrimination, of price under perfect competition, monopoly,

features, pricing under monopoly, price discrimination, monopolistic compietion, features,
pricing under monopolistic competition, product differentiation, Oligopoly – Features, linked
demand curve, Cartels- Price Leadership.

Descriptive prising approaches, fill cost prising, product line prising-------

Unit 6

Profits determination of short there and long term analysis, Limitation, uses of breakeven analysis in
managerial decisions,
 MANAGERIAL ECONOMICS JHOSI SIR

Social Sciences:

 Science is in nature. There is no life without science. The significance of scientific method is
admitted in all branches of knowledge.
 Technology is what human beings make it with the help of science. Therefore, there is the cliché
“Today’s science is tomorrow’s technology”.

Technology is applied science:

 Read Brain an American Sociologist: “Technology includes all tools, machines, utensils, weapons,
clothing, communicating and transporting devices and the skills by which
 Social Science is an umbrella term covering economics, sociology, history, political science,
anthropology, law, library science and even psychology to some extent,
 Each discipline has branches. Law is distinguished from legal management. Psychiatry is
distinguished from psychology.
 In Social Sciences there is tremendous scope for inter-disciplinary, multidisciplinary and cross
disciplinary approach

The world Social Science Report:

 The Second World Social Science Report was published in 2010. The report argues the social
sciences are as universal as the nature or physical sciences. Each social science in concerned
with an important part of social behaviour of human.
 Social sciences have of the treaded as behavioural sciences.
 Managerial Economics as a Science:
Milton Friedman (1912-2006) pointing out that economics is a fascinating discipline. Newer and
newer vistas of economics have opened up.
 Managerial Economics is now a conversational branch of economics.

Milton H. Spencer and Siegelman in 1959 stressed decision making and forward planning.

Managerial Economics is a discipline which deals with the application of economic theories to business
management.

 Concept of knowledge economy has emerged.

 Caring Economy or Economics of Household: United Nations Focusing on family.

(There is economics of household management)

 Managerial Economics is the application of economics to the real business activities o as to get
the desired business results.
 It is basically a result oriented branch of Economics. It is Applied Economics.
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Scarcity

unlimited
wants

Limited How to for whom to

Resource Porduce? produce?

Mangagerial Economics when viewd in this way may be tak as economics applied to “problems of
choice” or alternatives of scarce resources by the firms.

Thus ME is the study of resources available to a firm or a unit of management among the activities of
that unit.

Micro economics is a study of individual; macroeconomics was study of whole.

Decision Making and its result

Managment
Decision
Problems

Economics Theory Decision Science

Matatmatics Ecomonist
micro economics
Economisties
macro Economics

Managerial Economics
Application of Econmics Theory
and decision sciene tools solve
managerial decision problems

Optimal Solution to
Managerial Decision Problems
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 ME serves as “a link between economics and the decision making sciences” for business making.
 As Salvatore puts it, Managerial Economics is the application of economic theory and the tools
of decision sciences to examine how an organisation can achieve its aims and objectives most
efficiently.

Optionls Soulution means the ideal solution. It is the best solution. It is the most desirable solution.

 Mnagerial Economics serves as a link between economics and the decision making

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Demand Forecasting

 Success of managerial decision making depends on accurate estimation of demand

 Demand forecasting is for maintaining or strengthening market position
 Discovering the forces determining sales and their management

Production Theory

 Production in the short run

 Production in the long run
 Cost output relationship and their implication for profit.
 Input output relationship and least cost combination
 Economics of scale and returns to scales.
Economies of Scale include both organisational and technical advantages, returns to scale
includes only technical advantages.

Objectives of the firm:

 Profit goal and sales goal

 Maximizing the balanced rate of growth (even in non-traditional theories)
 Goals in the traditional theories and goals in the non-traditional theories
 Challenges before the modern firm.
Maximization of profit and minimization of cost are the goals in traditional theories,

The following are the important challenges:

 Change in technology
 Exploring new market
 Entry of rivals
 Introduction of Substitute product
 Changes in Government policy
 Globalization

Price Determination
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 Price Determination under various forms of market

 Relative significance of demand and supply factors, Changes in circumstances, generally in the
short demand factor is more important than the supply factor
 In the long run the supply factor is more important that the supply factor.

Pricing Methods

 Pricing decisions, methods and policies are to be considered

 Pricing decisions depend on business decisions in general
 Cost planning, inventory management and Advertising
 Pricing policies and factors governing these policies

Economic Efficiency:

 Profit maximisation and cost minimization

 Profit management and the analysis actual and expected behaviour of firms
 Use of sophisticated techniques like linear programming, operations research, inventory models,
bidding modules and the theory of games
 There are many solutions and the firm choose optional solution
There are many solutions to a single problem of a firm. For Ex: Cost can be minimized in various
ways, the firm chooses the most desirable solution for realising the goal of minimizing cost.

Micro Planning:

 Planning and control of capital expenditures

 Capital budgeting process take different forms in different industries
 The most profitable use of funds
This is the primary goal of capital budgeting which means collecting capital resources and
utilising these resources

The above Segments indicates that the major uncertainties faced by the modern faced by the
modern firms are demand uncertainty, cost uncertainty, price uncertainty capital uncertainty and profit
uncertainty.

The subject matter of managerial economics consists of applying principles and concepts
towards adjusting with various uncertainties faced by a business firm.

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Demand Schedule

Demand Schedule also brings out the inverse relationship between price and demand. It is the table or
the list of various quanatitative

All Buyers’
Price of X (Rs.) Buyer 1 Buyer 2 Buyer 3 Market
Demand
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8 5 10 0 15
7 8 12 4 24
6 12 15 7 34
5 20 19 12 51
4 30 25 20 75
3 45 30 30 105
Demand Curve

It is the locus of the points representing the different quantities demanded at different prices. The
market demand curve is the horizontal summation of the individual demand curves.

Demand Points

There Can be

Slope of the demand curve the nature of the slope of the demand curve depends on the relation curve
depends on the relation between price and demand curves have negative slope. The demand curve
slopes downwards from left to right.

Reasons for negative slope.

1) The main force behind the law of demand in the law of diminishing marginal utility. In simple
words, the law of diminishing marginal utility states that more of a thing we have, less of it we
want to have. Conversely, less of a thing we have.
2)
3) According to the law, of diminishing marginal utility, as a person acquires more and more units
of a commodity successively, the additional or the managerial utility goes on declining. The
utility of commodity cannot be measured directly, but it can be measured directly, but it can be
measured indirectly. The price the consumer is willing to pay measures the utility that he hopes
to derive. A rational consumer equates his marginal utility with price.

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Exception of law of demand

 MANAGERIAL ECONOMICS JHOSI SIR

1. Giffen goods: The Giffen Goods are a special type of inferior goods on which the consumer
spends substantial portion of his income. Rise in the price in the giffen good results in increased
sale of this good in the market. Fall in the price of this good results in decreased sale. Sir Robert
Giffen (1837-1910) identified this good in the 19th century in Ireland, then poor country.
2. Fear of Shortage: When a shortage is feared, people become panicky and buy more even though
the price is rising.
3. Veblen Effect, ‘An American Economist Veblen 1857-1929 explained what came to be called
snob effect’. To Exhibit superiority some people, purchase more of a commodity whose price
has risen e.g Diamond
4. Ignorance of buyers: Sometimes people buy at a higher price in sheer ignorance.
5. Expectation on the future prices: In the speculative market, a rise in prices of shares and stocks
is followed by large purchase while a fall in their prices is followed by less purchase.

Types of Demand:

 Price Demand: Price demand refers to the list of different quantities of a commodity demanded
at different prices of that commodity, other conditions remaining equal. It may be written as
D=f(P).
 Income Demand: Income demand explains the direct relationship between income and the
demand. It refers to the different quantities of a commodity purchased by the consumers at
different levels of income. It may be shown as D=f(Y), other conditions remaining equal.
 Cross Demand: Cross demand explains the relationship between the price of commodity and the
quantity demanded of its related commodity (substitute or complement). It may be shown as
D=f(Pr), other conditions remaining equal.

1) Elasticity of Demand:

Elasticity of demand means sensitiveness of demand, to changes in price. It can also be considered as
responsiveness of demand to changes in price.

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Let Po be

2) Point method

In this method elasticity at a given point on a linear demand curve is measured by applying the following
formula:
𝐿𝑜𝑤𝑒𝑟 𝑠𝑒𝑔𝑚𝑒𝑛𝑡
Elasticity of Demand 𝑈𝑝𝑝𝑒𝑟 𝑠𝑒𝑔𝑚𝑒𝑛𝑡
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A B C

3) Formula Method
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑
Price elasticity of demand=
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

Factors Influencing Elasticity of demand

 Nature of the commodity

 Existence of substitute
 Possibility of postponement of consumption
 Proportion of income spent
 Number of uses of the community
 Durability of the commodity
 Range of prices

Demand for necessaries is generally inelastic on the other hand, demand for comforts and luxuries is
generally elastic.

Demand for a commodity which has no substitute generally inelastic, on the other hand demand for a
commodity which ha substitute is generally elastic.

Demand for a commodity the consumption of which can be postponed is generally inelastic on the other
hand demand for a commodity the consumption of which can be postponed in elastic

Demand for a commodity for the purchase of which an insignificant proportion of income is spent is
generally inelastic.

Demand for a commodity for the purchase of which considerable proportion of income is spent is
generally elastic.

Demand for a single use commodity is generally inelastic, on the other hand demand for a multiple use
commodity is generally elastic.

Demand for less durable product is generally inelastic.

 MANAGERIAL ECONOMICS JHOSI SIR

Demand for more durable product is generally elastic

A commodity (TV SET) may have different ranges of price there can be very high range of price of Rs one
lakh (1,00,000) there can also be very low range of prise of Rs (20,000)

What is the state of the demand?

Demand for a product with a very high range is generally inelastic

Merits of market similuation

1) Useful information on consumer behaviour.

2) Experiments are useful in case of new products.
3) Surperior to market survey because consumer behaviour is observed.

Demerits oif makrtes simiulation

Test maketing.

The product is actually sold in certain segments of the market regarded as the test market. Demand is
forecasted on the basis of actual sales of the product in the test markets and the product is launched in
the entire market later.

Merits

1) Most reliable
2) Very suitable for new products
3) Less risky than launching the product across a wide region.

Demerits

1) Time consuming in case of durable items

2) Very difficult in a country like India with diverse regions

Trend Projection:

Trend projection is a powerful statistical tool that is frequently used to predict a future value of
a variable on the basis of time series data. Time series data are arrangement of the values of a variable
in chronological order of days, weeks, months, quarters or years. Trend in a general pattern of change in
the long run. The assumption is that the past trend is likely to continue. Components of the time series
data are Secular Trend, Seasonal Trend, Cyclical Trend and Random Events.

Secular Trend:

Secular Trend refers to change occurring consistently over a long time and is relatively smooth in
its path. Examples of personal computers and jute products.
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Seasonal Trend refers to seasonal variations of the data within a year. Ex: Demand for woollens and ice
cream

Additive form a component is based on the assumption that each of these components acts
independently.

Y=T+S+C+R The Multiplicative form can be written as Y=T.S.C.R. It is based on the assumption that the
componets act in a related or interdependent manner. The multiplicative form can be written as

Log Y = Log T + Log S + Log C + Log R where Y= Value of time series S=

Merits

1) It is simply to apply
2) It is reliable
3) It has definite components

Demerits

1) Not reliable if there is no authentic time series data

2) It is not helpful in the case of new products
3) It is based on the assumption that

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Forms of market perfect competition. Monopoly. Monopolistic competition. Oligopoly: collusive

oligopoly and non- collusive oligopoly. Many techniques of demand forecasting deliver the goods.

Perfect competition Features

1) Large number of buyer and sellers

2) Perfect knowledge of the market
3) Homogeneous product
4) Absence of transport cost
5) Perfect mobility of factors of production
6) Free entry or exit of firms

Large number of buyers and sellers means that no individual buyer or seller can influence the price of
the commodity through his independent action.

Buyers in the perfectly competitive market have perfect knowledge about market conditions. No seller
can decive the buyers. Sellers have a perfect knowledge of the market there for no buyer can decive the
sellers.

Products bought and sold in the market are completely identical.

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Demand for the product of a single seller in a perfectively market. He is perfectly in elastic. It’s an
individual sell up. The price of his product, his sales will drop down to “0”.

Transport cost is 0 therefore the work and the price worktime

In a market carret arrived by effect competition, all fabrical production are freely moniled. There is no
any check….

There arer three important situation

1) Profits are normal average cost = average revenue

2) Profits are super normal if average revenue is grater that average cost
3)

If in the long run profits are super normal, few firms will enter the industry or market and therefore
competition gets intensified as in super normal profits will be confuted away. In the long run there only
normal profit as average cost= average revenue.

In case in the long run, average cost is more than average revenue firms are getting sub normal will
quite the industry or market.

Competition is not reduced as some firms move out of the market to goes until average cost in the long
run free entry and exit the firm, ensure normal profits.

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At E1 the first condition of equilibrium of MC & MR is satisfied but at this point, the marginal cost curve
cuts the MR curve from below. It means that the firm contains to gain by expanding its output beyond
OM1 level until it reaches OM level at OM level both the conditions are fulfilled

Therefore, E0 and E1 are called equilibrium of competitive firm.

In the short run there are various possiblilites for a competitive firm at the point of equilibrium.

AC may be a little more than AR. But the priceis such that its AVC is covered.\

If even AVC is not covered, the firm may shut down in the short run itself,

AC may super normal profit

Long run equilibrium

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Marginal cost = Marginal Revenue

Marginal cost curve*(LMC) Cuts the marginal revenue curve from below.

Average cost = average revenue

Therefore, the firm enjoys the normal profit

Thus a firm under perfect combination trys to again equilibrium in the long run by making all possible
effortsn

AT THE POINT OF EQUILBRIM AVERAGE COS