INTRODUCTION TO MANAGERIAL ECONOMICS

UNIT - 1

Origin of EconomicsOrigin of Economics

Our activities to generate income are termed as economic activities, which are responsible for the origin and development of Economics as a subject.

1776 : Adam Smith (Father of Economics) – Science of Wealth

Economics…Economics is “the study of the

behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.” (McConnell, 1993)

Management…

Management is the discipline of organizing and allocating a firm’s scarce resources to achieve its desired objectives.

Managerial Economics…

Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

Definitions• Managerial Economics is defined as “ the

integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.” – Spencer and Siegelman.

In simple terms it is the study of economics by managers.

• Managerial Economics is the discipline which deals with the application of economic theory to business management. – Brigham and pappas.

Microeconomics is the study of individual consumers and producers in specific markets.

– Supply and demand– Pricing of output– Production processes– Cost structure– Distribution

Macroeconomics is the study of the aggregate economy.

– National income analysis– Gross domestic product– Unemployment– Inflation– Fiscal policy– Monetary policy

Nature Of Managerial Economics

Micro-economic in character. Operates against the backdrop of Macro

Economics. Normative Statements. Prescriptive Actions. Applied in nature. Offers scope to evaluate each alternative. Interdisciplinary (Economics, OR,

Mathematics, Statistics, Accountancy, Psychology, OB etc.)

Assumptions and limitations.

How Managerial Economics Helps

Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost.

Concepts and

Techniques of ME

Managerial Decision Areas:

•Demand Decisions• Production

• Cost Control• Price

Determination• Make or buy

decisions• Inventory Decisions

• Capital Investment Decisions

• Profit planning and Management

Optimal Solutio

ns

Managerial Economics Vs Other Disciplines

Economics Operations Research Mathematics Statistics Accountancy Psychology Organizational behavior

What is Demand?

Demand for a commodity refers to the quantity of the commodity which an individual consumer or a household is willing to purchase per unit of time at a particular price.

It implies:a) Desire to buyb) Willingness to buyc) Purchasing power

Classification Individual Demand Household Demand Market Demand or Aggregate Demand

Nature of DemandAutonomous Demand Vs Derived DemandProducers’ Goods & Consumers’ Goods Demand for Durable Goods & Non-durable

Goods Industry Demand and Firm Demand Total Demand and Market Segment Demand Short run Demand and Long run DemandNew Demand Vs Replacement Demand

DEMAND DETERMINANTS

GENERAL FACTORS

ADDITIONAL FACTORS

RELATED TO LUXURY GOODS AND DURABLES

ADDITIONAL FACTORS

RELATED TO MARKET DEMAND

Price of the product Income of the consumerTastes and PreferencesPrice of related goods

Expectations of future pricesExpectations of future income

PopulationSocial, Economic, Demographic distribution of consumersAdvertisementsOthers

DEMAND FUNCTION

A mathematical expression of the relationship between quantity demanded of the commodity and its determinants is known as Demand Function.

Qd = f (P, I, T, PR, EP, EI, P, DC, A, O)

LAW OF DEMANDLaw of Demand states that higher the price, lower the quantity Demanded, and vice versa, other things remaining constant.

Q = f(P)

Where, Q is the quantity demanded f is the function, and

P is the price.

DEMAND CURVE

CHANGE IN DEMANDAn increase or decrease in demand due to change in the factors other than price is called change in demand.

Why do Demand Curves Slope Downwards???

Reasons:

Law of Diminishing Marginal Utility Commodity tends to put to more

use when it becomes cheaper Rise in consumer’s real income Substitution effect

Exceptions to the law of Demand

☺ Giffen Goods☺ Commodities which are used as status

symbols☺ Expectations of change in the price of

the commodity

CHANGE IN QUANTITY

DEMANDED

CHANGE IN

DEMAND

Change in Quantity Demanded is because of the change in own price of the commodity whereas,

Change in Demand is because of change in factors other than own price of the commodity.

A INCOME = 1000

CAKE QD

70 -

60 -

50 -

40 2

30 4

20 10

A INCOME = 4000

CAKE QD

70 1

60 2

50 4

40 6

30 10

20 20

ELASTICITY OF DEMAND

Meaning & Definition

According to Dr. Marchall – Elasticity demand means the degree of responsiveness of demand or the sensitiveness of demand to change in price.

“The concept of Elasticity of demand explain How much demand increases due to a certain fall in price and How much demand decreases due to a certain rise in the price”.

“The term Elasticity is defined as the rate of responsiveness in the demand of a commodity for a given change in price or any other determinants of demand”.

Formulae

Proportionate change in quantity demand of XEp = --------------------------------------------------------------

proportionate change in its determinate of Y

Measurement of Elasticity

Perfect elastic demand Perfect in elastic demand Relatively elastic demand Relatively in elastic demand Unitary elastic demand

Perfect elastic demand ( Ep=Infinity)

If a negligible change in price leads to an infinitive change in demand is said to be perfectly elastic demand. The infinity elastic demand curve is a horizontal straight line to X axis

Y

O XM M1

Pprice

Quantity demand

Perfect in elastic demand (Ep=0)

Even a great rise or fall in price does not lead and change in quantity demand is known as perfectly in elastic demand

Y

O XM

P

P1

price

Quantity demand

Relatively elastic demand (Ep greater than 1)

When a proportionate change in price leads to a more then proportionate change in quantity demand is called relatively elastic demand

Y

O XM1

P

P1

price

DemandM

A

B

D

D

Relatively in elastic demand (Ep less than 1)

When a proportionate change in price leads to a less then proportionate change in quantity demand is called relatively elastic demand.

Y

O XM1

P1Demand

PriceM

PA

B

D

D

Unitary elastic demand (Ep=1)

If the proportionate change in price leads to the same proportionate change in quantity demand is called unitary elastic demand

Y

O XM1

P

P1

price

DemandM

A

B

D

D

Types

Price Elasticity Demand

Income Elasticity Demand

Cross Elasticity Demand

Importance of price elastic demand

Importance to Monopolistic

Importance to finance manager/minister

Importance to international trade

Help full to decision making process

Price Elasticity Demand

It means the degree of responsiveness or sensitiveness of a demand for a commodity to changes in its price (Ep)

Proportionate change in quantity demand of XEp = --------------------------------------------------------

proportionate change in its determinate of Y

Q PEp = ------ / -----

Q P

Income Elasticity Demand

It means the ratio of proportionate change in the quantity of demand for a commodity to given proportionate change in income of a product.

Proportionate change in quantity demand of a productEy = --------------------------------------------------------------------

proportionate change in its determinate of a consumer

Q YEy = ------ / -----

Q Y

Cross Elasticity Demand

Proportionate change in quantity demand of XExy = ---------------------------------------------------------

proportionate change in price of Y

Q X P YExy = ------ /-------

QX P Y

Factors governing elasticity of demand

Nature of product Time frame Degree of postponement Number of alternative uses Tastes and preferences of the consumer Availability of substitutes Complementary products Expectation of price Durability of the product Govt. policies

What is a forecast???

A forecast is a prediction or estimation of a future situation, under given conditions.

Need for Demand Forecasting

Demand is uncertain Production decisions Supply decisions Expectations of future growth Decisions on various types of

expenditures

FACTORS GOVERNING DEMAND FORECASTING

o Functional Nature of Demando Types of forecastso Forecasting levelo Degree of Orientationo Established or New productso Nature of Goodso Degree of Competitiono Market Demando Other factors

DEMAND FORECASTING TECHNIQUES

Non- Statistical Techniques Statistical Techniques

DEMAND FORECASTING

NON – STATISTICAL METHODS STATISTICAL METHODS

Complete Enumeration Survey

Sales force Opinion Method

Sample Method

Expert Opinion Method Delphi Technique / GD

Test Marketing

Controlled Experiments

Judgemental Approach

DEMAND FORECASTING

NON – STATISTICAL METHODS STATISTICAL METHODS

Mechanical Extrapolation / Trend Projection Methods

Barometric Techniques

Correlation and Regression Methods

Simultaneous Equations Method

Mechanical Extrapolation / Trend Projection Methods

Fitting Trend Line by Observation

Time Series Analysis using Least Squares Method