UNIT - I
MANAGERIAL ECONOMICS
Introduction to Management
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It’s a group of people
It’s a Profession
It’s a Discipline
It’s a Process
Introduction to Management
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Management is concerned with Ideas, Things, People of an
organization
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Management has deals with human behavior under dynamic
conditions
Definition
“Management is science and art of getting things done
through people formally organized groups.”
According to lousis allen Management is “what managers
do” is called management.
Introduction to Economics
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It’s a study of human activity both at Individual & National level
It’s also called as “Science of wealth”
Its satisfying human needs such as food, clothing and shelter
Meaning & Definition
According to Adam smith- Economics as the “study of nature
and uses of national wealth”
According to A. Marshal- Economics is a “study of man’s
actions in the ordinary business life, its enquires how he gets his
income and how he uses it”.
According to Robbins- “Economics as the science which
studies human behavior as a relationship b/w ends and scarce
means which have alternative uses”.
Types of Economics
Micro Economics
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The study of individual consumer or a firm is called micro economics
It is also called as “Theory of firm”.
It deals with behavior & Problems of individual persons & small
organizations
Its includes price theory, law of demand and theory of market
Types of Economics (contd.)
Macro Economics
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Its means the study of aggregate or total level of economic activities in a
country
It studies flow of economic resource or factors of production
Factors of production includes L,L,C,O,T
Its capital structure
Welfare economics
welfare economics is that branch of economics which
primary deals with talking of poverty, famine and distribution of
wealth in an economy. This is also called as “developmental
economics.”
Managerial Economics
Spencer and Siegel man- “Managerial economics as the
integration of economic theory and methodology to business
administration practice.”
Brigham- “Managerial economics as the application of
economic theory with business practice or business administrative
practices.”
Huger- “Managerial economics is a fundamental academic
subject which seeks to understand and to analyze the problems of
business decision making.”
Scope of ME
Managerial decisions areas
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Concepts
& Techniques
of ME
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Production
Reduction or control of costs
Price of a product
Make or buy decisions
Inventory decisions
Capital management
Profit planning Management
Investment decisions
Optimum
solutions
Main areas of ME
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Demand decisions
Input-Output decisions
Price-Output decisions
Profit related decisions
Investment decisions
Forecasting & Forward decisions
Linkages with other discipline of ME
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Economics
Operation research
Mathematics
Statistics
Accountancy
Psychology
HRM
Organizational behavior
Nature of ME
Economic
Theory
Decision
Science
ME
Solutions
To Business
Problems
Role of ME in decision making process
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Objectives of the firm
Allocation of resources
Demand analysis and forecasting
Competitive analysis
Strategic planning
Production planning
Cost analysis
Pricing strategies
Market structure analysis
Capital budgeting decisions
Marketing strategies
Achieving economic scale
Introduction to Demand
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Asking with authority
Popularity
Good will of a product
Claim
Need
Want
Request
Call for authority
Introduction to Demand
Basically 3 concepts included in Demand
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Consumer’s desire to purchase the product
Consumer’s willingness to purchase the product
Sufficient purchasing power or ability to pay
Types Demand
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Individual Demand
when demand arises from an individual consumer, it is called as
individual demand. Individual consumers usually demand for product
like clothes, foot wares
House hold Demand
when demand arises from a house hold, it is called house hold
demand, house hold demand generally demand for refrigerator, TV,
washing machine
Market Demand
when demand arises of all individual and house hold for a product
in given a market is considered, it is called market demand.
Demand analysis
Y
In above diagrams Q1,Q2 are
quantities of the commodities at the
prices of P1,P2 respectively., i.e
Price is P1 (Low) the quantity
demanded is Q2 (High) and it the
price is P2 (High) the quantity
demanded
is
Q2
(Low)
D
P2
P1
D
O
Q1 Q2
X
Price
Demand
Increase
Decrease
Decrease
Increase
Demand function
Basically 2 types of functions
1.Individual function
Qx = f {Px, I, P1…Pn, T, A, Ep, Ei, U}
Qx = Quantity demanded of the commodity ‘X’
Px = Price of the commodity
I = Consumer’s income
P1..Pn = Prices of the other related goods
T = Consumer’s tastes and preferences
A = Advertisement
Ep = Consumer’s expectations about future prices
Ei = Consumer’s expectations about future income
U = Other determinants
F = Function
Demand function
2. Market Demand Function
Qx = f {Px, I, P1…Pn, T, A, Ep, Ei, U}
Qx = Quantity demanded of the commodity ‘X’
Px = Price of the commodity
I = Consumer’s income
P1..Pn = Prices of the other related goods
T = Consumer’s tastes and preferences
A = Advertisement
Ep = Consumer’s expectations about future prices
Ei = Consumer’s expectations about future income
P = Population or market size
D = Distribution or the consumers in the market according to income,
age, demand etc
U = Other determinants
F = Function
Law of Demand
“The law of demand states that a consumer’s behavior, in
demanding a commodity in relation to the variations in its prices”.
“Other things remaining the same, the amount of the quantity
demanded arises with every fall in the prices and vice versa.”
The law of demand states that other things remaining constant,
the higher the price of the commodity, the lower is the demand and
low the price, higher is the quantity demanded.
Assumptions of Law of Demand
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Consumer income throughout the operation of law of demand remain
unchanged
Consumer tastes & preferences remain unchanged
No change in fads, fashions & latest trends
Prices of the related goods un changed or are equal
Exceptions of Law of Demand
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Giffen goods or Giffen paradox
Goods of status
Future prices of goods
Ignorance effect
War or emergency
Basic Law of Demand
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Consumption
Production
Exchange
Distribution
Demand schedule
A demand schedule is a tabular presentation of the relationship
between the amount demanded of a commodities and different price
levels of that commodity.
In other words demand schedule is a tabular statement of price
and quantity relationship.
Price of the
Commodity (Y)
Demand of a
Commodity (X)
5
15
8
14
10
12
12
10
15
8
20
5
Characteristics of Demand schedule
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A demand schedule shows variations in demand of a commodity at its
varying prices
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It indicated behavior of an individual consumer in purchasing the
commodity at alternative prices
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It shows the inverse relationship b/w demand and price of a
commodity
Types of Demand schedule
Price of oranges
Per dozen (Rs)
Demand of
Oranges (Nos)
45
2
38
3
30
4
25
6
20
10
Individual Demand Schedule
Types of Demand schedule
Price of the
Commodity
Demand by
Individuals
Total Market
demand
A
B
C
6
1
1
2
4
5
2
3
4
9
4
3
5
5
13
3
4
6
7
17
2
5
7
10
22
1
6
8
12
26
Market Demand Schedule
Various types of Demand
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Price Demand
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Income Demand
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Cross Demand
Price Demand
It shows the inverse relationship b/w the prices of a commodity
and its demand of a commodity. That means other things being
constant if price fall demand extends, and if price rises demand
contracts.
Income Demand
It shows the functional relationship b/w income of a consumer
and quantity demand when other factors are constant. That means
when other things constant if the income of consumer increases the
quantity demand also increase and if income decreases the quantity
demand falls.
Cross Demand
Basically 2 types
1.
Substitute goods :
the goods satisfy the same want are called
substitute goods. Eg. Coffee and Tea
1.
Complementary Goods : The goods required at the same time to satisfy a
want are called complementary goods. Eg. Car
and petrol
Elasticity Demand
 It means expanding
 Its process
 It’s a product capacity
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 X
Ep = -------------------------------------------------------proportionate change in its determinate of Y
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 X
Ep = -------------------------------------------------------proportionate change in its determinate of Y
Ep =
Q
P
------ * ----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 product
Ey = -------------------------------------------------------------------proportionate change in its determinate of a consumer
Ey =
Q
Y
------ / ----Q
Y
Cross Elasticity Demand
Proportionate change in quantity demand of X
Exy = --------------------------------------------------------proportionate change in price of Y
Exy =
QX
PY
------ /------QX
PY
Measurement of Elasticity
 Perfect elastic demand
 Perfect in elastic demand
 Relatively elastic demand
 Relatively in elastic demand
 Unitary elastic demand
Types of price elasticity demand
Numerical
Measures
Types of elasticity
Relationship of demand with the
price
1. Ed =
Perfectly elastic
demand
Increase or decrease in demand to any extent
irrespective of change in price.
Eg. Imaginary
2.Ed=0
Perfectly inelastic
demand
Demand does not change with the change in
price.
Eg. Salt
3.Ed>1
Relative elastic
demand
Percentage change in demand more then
percentage change in price.
Eg. Petrol
4.Ed<1
Relative inelastic
demand
Percentage change in demand is lesser than
the percentage change in price.
Eg. Sugar
5.Ed=1
Unitary elastic
demand
Percentage change in demand is equal to
percentage change in price.
Eg. Cloth
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
price
P
O
X
M
M1
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
price
P
P1
O
X
M
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
price
D
A
P
B
P1
D
O
X
M
M1
Demand
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
P
Y
D
D
A
B
P1
price
A
P
B
Demand
D
P1
D
O
O
X
M M1
Price
X
M
M1
Demand
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
Significance of Elastic demand
 Prices of factors of production
 Price fixation
 Govt. policies
 Forecasting demand
 Planning the level of output and price
Importance of Elasticity of Demand
 Finance minister
 Monopolist
 Terms of Trade
 Determination of wages
 Price under discriminating monopoly
Demand forecasting
“Demand forecasting is the key driver for success or failure.
Future demand of the product acts as a game changing factor in
today’s competitive business environment”.
Demand forecasting
 The importance of demand forecasting is paramount when either
production or demand is uncertain.
 When the supply is not in accordance with the demand, it results in
the development of black market or excessive prices.
 The results of demand forecasting guide the entrepreneur to set up
their business or industrial activities accordingly
Importance of Demand forecasting
 Price control
 Business planning
 Competitive strategy
Types of Demand forecasting (based on time)
 Short-term demand forecasting
 Long-term demand forecasting
Types of Demand forecasting (based on level)
 Firm level
 Industry level
 National level
 Global level
Factors affecting demand forecasting
 Nature of demand
 Types of forecasting
 Forecasting level
 Degree of orientation
 Introduce new products
 Nature of goods
 Degree of competition
 Market demand
Methods of demand forecasting
Quantitative Methods
Time series
analysis
Smoothing
Technique
Qualitative Methods
Barometric
Technique
Econometric
method
Survey
Method
Economi
c polls
1.Moving average method
2.Exponential smoothing
Census
method
1.Trend line method
2.Time series analysis
3.Least square method
Equation
Method
Correlation
analysis
Regression
analysis
Sample
method