Economics PPt 1

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Managerial EconomicsMeaning ,Scope & Methods:

Why Study Managerial Economics ?


Sound Economic Business Decision: Factors Influencing:


Managerial economics tells managers how things should be done to achieve objectives efficiently, and helps them recognize how economic forces affect organizations.* Definition: Economics is a social science, which studies human behavior in relation to optimizing allocation of available resources to achieve the given ends.

Meaning :Is a Discipline that deals with the application of Economic Concepts ,Theories and methods to the practical problem of the Business to formulate rational Management decision.

Problems may be relating to costs,prices,forecasting the future market,human resource management, profits etc.

It is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity .


Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization.

Helps in the following : Demand Analysis and Forecasting : Cost Analysis : Production And Supply Analysis: Pricing Decisions

Difference B\W Accounting Profit & Economic Profit:

Accounting Profit

Economic Profit :

Revenue - Cost.

Opportunity Cost - Revenue

Significant in Number


Why Do Profits among Firms Vary ?Disequilibrium Profit Theories: Markets are sometimes in disequilibrium because of unanticipated changes in demand or cost conditions.

Profits are sometimes above or below normal because of factors that prevent instantaneous adjustment to new market conditions. Monopoly profits exist when firms are sheltered from competition by high barriers to entry. Economies of scale, high capital requirements, patents, or import protection, among other factors, enable some firms to build monopoly positions that allow above-normal profits for extended periods.

Compensatory Profit Theories: Innovation profit theory, describes the above-normal profits that arise following successful invention or modernization.

As in the case of frictional or disequilibrium profits, innovation profits are susceptible to the onslaught of competition from new and established competitors. Compensatory profit theory describes above-normal rates of return that reward firms.

Superior firms provide goods and services that are better, faster or cheaper than the competition.


Business contributes significantly to social welfare. These contributions stem directly from the efficiency of business in serving the economic needs of customers.

Social Responsibility of Business:

The firm can be viewed as a collaborative effort on the part of management, workers, suppliers, and investors on behalf of consumers. Taxes and restrictions on firms are taxes and restrictions on people associated with the firm.

Economic Concepts

Text Books Managerial Economics: Joel Dean. Managerial Economics: Mote Paul & Gupta. Managerial Economics: James pappas & Mark

Hershey. Managerial Economics: Milton Spencer & Louis Siegleman. Economics : Samuelson

Economic Concepts Demand:

Refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between Price and quantity demanded is called as Demand Relationship.


Represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.

Types of Demand: Individual demand: Market demand:

Joint demand: Composite demand: Number of Uses. Competitive demand: close substitutes .

Derived demand: Variation in demand: Direct demand:

Exceptions to the Law of Demand: Speculative Market: Inferior goods: Increase in Purchasing Power. Prestige goods: Status Attached ( Veblen effect) Price Illusions: Quality related to price.

Demonstration effect: Snob Effect:

In the Above cases the Demand curve is Upward showing a positive relationship between Price and demand.

Chief Characteristics Of Demand:

Inverse Relationship: Price ,an Independent while Demand is Dependant Variable: Other Things remaining Constant: Determinants of Demand: Income: Price: Weather Conditions: Fashion: Money Circulation: Advertisement and salesmanship:

Price Elasticity of Demand Meaning: Definition: (PED or Ed)

The degree of responsiveness of quantity demanded to a change in price Formula :

Proportionate change in quantity demanded _______________________________________________ Proportionate change in Price

Types of Elasticity of Demand Income Elasticity:

Demand for a good is the ratio of the percentage change in the amount spent on the commodity to a percentage change in the consumers income.

Proportionate change in the quantity purchased _____________________________________________ Proportionate change in Income

Cross Elasticity :

A change in the price of one good causes a change in the demand for another. Proportionate change in purchases of commodity X ----------------------------------------------------------------------

Proportionate change in the price of commodity Y Complementary Goods: Substitutes:

Perfectly Elastic Demand: Where No Reduction In price is Needed to Increase Demand. Perfectly Inelastic Demand: Where Change in Demand results in no change in price .Demand with Unity Elasticity: Equal Change Relatively Elastic Demand: Reduction in price leads to relatively more change in demand. Relatively inelastic Demand: Where reduction in price leads to less change in demand.

Determinants Of PED

Availability of substitute goods: Income: Necessity: Brand loyalty: Who pays: Proportionate of Income spend:

Opportunity Cost: Is meant the sacrifice of alternatives required by that decision. Ex: Funds, Time. Production function Is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs Q = f(X1,X2,X3,...,Xn) where: Q = quantity of output X1,X2,X3,...,Xn = quantities of factor inputs (such as capital, labour, land or raw materials)

The law of supplyThis Law demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue. Factors Effecting Supply:

Input prices Technology Expectations -

Law of Demand

The Law of Demand

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C)

Law of Supply

Supply (s)

P3Supply Relationship






A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on

Demand Forecast Meaning:

Length of Forecast: Short term Forecasting: up to 12 months used for inventory control, productions plans etc Medium term forecasting: 1- 2 years used for rate of

maintenance, schedule of operations etc Long term forecasting: 3 10 years used for manpower

planning, capital expenditure etc

Levels : Macro Level : National Income ?& Expenditure. Industry Level : Firm Level:

Purposes of Short term Forecasting Appropriate Production: Reducing Costs: Determining appropriate Pricing Policy : Setting Sales targets: Advertising Decision: Financial Requirement:

Purposes of Long term Forecasting Expansion Plans: Long term financial requirement: Planning Man Power:

Classification of Forecasting Passive Forecasting Active Forecasting

Demand Distinctions:Producers Goods Consumable : Coal , Oil etc.. Durable Goods : Machines etc Consumers goods Durable Goods: Characteristics Non - durable goods: Single Usage

Durable Goods : Derived Demand : Automous Demand :Independent Industry Demand: Company Goods:

Market Share Concept : Factors Determining Market Share : Price Charged & Price Differentiated: Promotional expenditure: Product Improvement:

Criteria for a good forecasting Method: Accuracy: Si