UNIT-IINTRODUCTION

ORIGIN

MANAGGERIAL ECONOMICS WAS BASICALLTY IDENTIFIED BY PROF. JOEL DEAN IN 1951.

DEFINITION

IT IS A SCIENCE WHICH DEALS WITH THE APPLICATION OF ECONOMIC THEORY IN MANAGERIAL PRACTICES. IT IS ECONOMICS APPLIED IN DECISION MAKING

MILTON H. SPENCER AND LOUIS SIEGELMAN-”THE INTEGRATION OF ECONOMIC THEORY WITH BUSINESS PRACTICE FOR THE PURPOSE OF FACILITATIOG DECISION MAK9ING AND FORWARD PLANNING BY MANAGEMENT”.

MANAGERIAL ECONOMICS

BUSINESS DECISIONS

ECONOMICTHEORY

MANECO

SCOPE

1. NORMATIVE ANLAYSIS2.AREA OF STUDY DEMAND ANALYSIS AND FORECASTING COST ANALYSIS PRODUCTION ANALYSIS PROFIT MAXIMISATION CAPITAL MANAGEMENT LINEAR PROGRAMMING 3. PROFIT MAXIMISATION4. OPTIMISATION5. RELATION OF MANAGETRIAL ECONOMICS

WITH OTHER DISCIPLINE

RELATION OF MANAGETRIAL ECONOMICS WITH OTHER DISCIPLINE

OPERATIONSRESEARCH

DECISIONMAKING

ACCOUNTING STATICS

MATHEMATICS

MACRO

MICRO

MANAGERIALECONOMICS

IMPORTANCE

1. HELPS IN BUSINESS DECISION MAKING2. HELPS COMMAN MAN IN TAKING

DECISIONS IN THE DAY TO DAY AFFAIRSIN RELATION TO MONEY AND MONEY MATTERS

3. OFFERS MANY PRACTICAL SOLUTIONS4. TAKES INTO ACCOUNT INTERNAL AND

EXTERNAL SOURCES BEFORE TAKING DECISIONS

FUNDAMENTAL CONCEPT THAT AIDS DECISION MAKING

1. INCREMTNATL CONCEPT2. TIME PERSPECTIVE3. DISCOUNTING PRINCIPLE4. OPPORTUNITY COST5. EQUI-MARGINAL CONCEPT

INCREMENTAL CONCEPT

IT INVOLVES ESTIMATION OF THE IMPACT OF DECISION ALTERNATIVES ON COSTS, REVENUE THAT RESULTS IN CHANGES IN PRICES, PRODUCTS, PROCEDURES, INVESTMENTS, ETC.

A DECISIN IS PROFITABLE ONLY IF1. IT INCREASES REVENUE MORE THAN

COST2. IT DECRASES SOME COST MORE

THAN IT INCREASSS OTHERS3. IT INCREASES SOME REVENUE MORE

THAN IT DECREASES OTHERS4. IT REDUCES COSTS MORE THAN

REVENUE

SIGNIFICANCE OF INCREMENTAL REASONING

IN BUSINESS PEOPLE ALWAYS TRY TO MAKE PROFIT.THIS IS GIVEN WITH AN EXAMPLE.

A FIRM GETS AN ORDER WHICH WILL GIE THEM ADDITIONAL REVENUE OF RS7,000/-. THE FULL COSST TO EXECUTE THE ORDER IS AS FOLLOWS

ILLUSTRATION

MATERIAL COST

4000

LABOUR COST 3000

OVERHEAD CHARGES AT 10% OF LABOUR COST

300

SELLING & ADV EXPENSES AT 20% OF LABOUR & MATERIAL COST

1400

FULL COST 8700

MATERIAL COST

4000

LABOUR COST 2000

OVERHEAD CHARGES

100

SELLING & ADV EXPENSES

NIL

TOTAL INCREMENTAL COST

6100

FROM THE ESTIMATE GIVEN BY THE ACCOUNTANT THIS ORDER APPEARS TO BE UNPROFITABLE BUT IF THERE EXISTS SOME IDLE LABOUR CAPACITY THIS ORDER WILL COST ONLY RS 100/- OF OVERHEAD CHARGES AND ADERTISING AND SELLING EXPENSES WILL NOT COME HERE.

ACCORDING TO ACCOUNTANTS ESTIMATE THIS ORDER WILL RESULT IN LOSS OF RS 1700 BUT FROM THE CONCEPT OF INCREMENTAL REASONING THIS ORDER WILL GIVE RS 900 ADDITIIONAL REVENUE.

INCREMENTALISM & MARGINALISM

MARGINAL ANALYSIS MEANS ADDITIIONS MADE TO THE TOTAL REVENUE BY SELLING AN ADDITIONAL OR EXTRA UNIT OF THE OUTPUT.

MR=R2-R1/Q2-Q1R1-OLD TOTAL REVENUER2-NEW TOTAL REVENUEQ1-OLD QUANTITY OF OUTPUT SOLDQ2-NEW QUANTITY OF OUTPUT SOLD

INCREMENTAL REVENUE MEASURES THE DIFFERENCE BETWEEN OLD AND NEW REVENUE. IT IS NOT RESTRICTED TO THE EFFECTS OF A CHANGE IN PRICE, NOR CHANGE IN OUTPUT.

INCREMENTAL COST REFERS TO THE DIFFERENCE BETWEEN OLD AND NEW TOTAL COSTS, WHILE MARGINAL COST REFERS TO PER UNIT CHANGE OF OUTPUT.

IC=C2-C1MC=C2-C1/Q2-Q1

TIME PERSPECTIVETIME PLAYS AN IMPORTANT ROLE IN ECONOMIC THEORY ESPECIALLY IN FIXING PRICE. THHIS CONCEPT IS INTRODUCED BY ALFRED MARSHALL.HE INTRODUCED 4 FORMS OF TIME.

DISCOUNTING PRINCIPLEA RUPEE IS WORTH MORE TODAY THAN A RUPEE TOMORROW. WITH TIME MONEY ADDS AND GETS INTEREST ALONG WITH IT. THE PRINCIPE OF DISCOUNTING CHANGES AND ACQUIRES SIGNIFICANCE WITH CHANGES IN RATE OF INTEREST. FORMULA TO FIND THIS IS

X/(1+r)n

OPPORTUNITY COSTTHIS IS NOT THE PAIN OR STRAIN INVOLVED IN MAKING A PRODUCT, BUT THE SACRIFICE OF ALTERNATIVE PRODUCT THAT COULD HAVE BEEN PRODUCED. THIS MEANS THAT THE COST OF USING SOMETHING IN A PARTICULAR VENTURE IS THE BENEFIT FOREGONE BY NOT USING IT IN ITS BEST ALTERNATIVE USE. THE OPPORTUNITY COST OF ANY GOOD IS THE NEXT BEST ALTERNATIVE GOODS SACRIFICED.

EQUI-MARGINAL CONCEPTAS PER THIS CONCEPT, AN INPUT SHOULD BE ALLOCATED IN SUCH A WAY THAT THE VALUE ADDED BY THE LAST UUNIT IS THE SAME IN ALL CASES.

IF A FIRM HAS 4 ACTIVITIES A,B,C,D BEFORE IT. IF THE FIRM FINDS THAT THE VALUE OF MARGINAL PRODUCT IN ONE ACTIVITY IS GREATER THAN IN ANOTHER, THEN IT IS EVIDENT THAT AN OPTIMUM HAS NOT BEEN ACHIEVED.

FORMULA V(MP)A=V(MP)B=V(MP)C=V(MP)D

THIS CONCEPT IS HIGHLY USEFUL IN CAPITAL BUDGETING WHERE THE LIMITED RESOURCES OF THE FIRM HAVE TO BE ALLOCATED IN A RATINAL MANNER.THIS PRINCIPLE HOLDS GOOD ONLY IN CASES WHERE THE LAW OF DIMINISHING RETURNS OPERATES.

DEMAND AND SUPPLY ANALYSIS

UNIT-II INTRODUCTION

SALES OF PRODUCTS DEPEND UPON THE DEMAND OF THE MPRODUCT. DEMAND INTUNE DEPEND UPON VARIOUS FACTORS LIKE THE FOLLOWING

1.PRICE OF THE PRODUCT2.INCOME OF THE BUYERS3.PRICE OF SUBSTITUTES4.CREDIT AVAILABILITY5.BUYER’S TASTE AND PREFERENCE

FACTORS INFLUENCING DAMAND1. PRICE OF THE PRODUCT2. INCOME OF THE BUYERS3. PRICE OF SUBSTITUTES4. CREDIT AVAILABILITY5. BUYER’S TASTE AND PREFERENCE6. CREDIT AVAILABILITY7. THRIFT HABIT OF THE PEOPLE8. STATUS OF CONSUMERS9. GEOGRAPHICAL LOCATION10. CLIMATIC CONDITION11. EXPECTED FUTURE TREND IN PRICE,FASHION, ETC12. POPULATION13. ADVERTISEMENTS &OTHER PROMOTIONAL MEASURES14. COMPETITION15. TYPE OF MARKET16. TIME PERIOD17. AVAILABILITY18. EXPORT/IMPORT OF COMMODITIES

What is Demand?It refers to the desire backed by the necessary purchasing power. “By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time, at various prices or at various incomes or at various prices of related goods.

The term “demand”indicates1.Desire backed by willingness to purchase2.Demand is always related to price3.Demand should be referred to per unit of time4.Demand varies for a commodity with variations in

income5.Demand for a commodity varies with variaions of

prices of related goods.

LAW OF DEMANDTHE LAW OF DEMAND INDICATES THE RELATIONSHIP BETWEEN THE PRICE OF A COMMODITY AND THE QUANTITY DEMANDED IN THE MARDET.

“OTHERTHINGS BEING EQUAL, THE QUANTITY DEMANDED EXTENDS WITH A FALL IN PRICE AND CONTRACTS WITH A RISE IN PRICE”.

MARSHALL’S DEFINITION: THE GREATER THE AMOUNT TO BE SOLD, THE SMALLER MUST BE THE PRICE AT WHICH IT IS OFFERED IN ORDER THAT IT MAY FIND PURCHASERS, OR INN OTHERWORDS THE AMOUNT DEMANDED INCREASES WITH A FALL IN PRICE AND DIMINISHES WITH A RISE IN PRICE.

OTHERTHINGS BEING EQUAL- INDICATES THAT THIS LAW HOLDS GOOD ONLY UNDER STATIC CONDITIONS, AND UNDER DYNAMIC CONDITIONS, THERE ARE OTHER FACTORS WHICH MAY INFLUENCE THE DEMAND, IRRESPECTIVE OF THE CHANGE IN PRICE.

THERE ARE VARIOUS PARAMETERS WHICH DETERMINE AND INFLUENCE DEMAND. THE LAW OPERATES ONLY IF THE ABOVE MENTINED THINGS REMAIN UNCHANGED.

DEMAND SCHEDULE AND DEMAND CURVETHIS CONCEPT IS INTRODUCED BY ALFRED MARSHALL.IT IS A STATEMENT SHOWING HOW MUCH OF A COMMODITY IS DEMANDED IN A PARTICULAR MARKET AT DIFFERENT PRICES.IT IS A LIST OF PRICES AND QUANTITIES AND IT CAN BE A MARKET DEMAND SCHEDULE OR INDIVIDUAL DEMAND SCHEDULE. A MARKET DEMAND SCHEDULE IS THE SUM TOTAL OF INDUVIDUAL DEMAND SCHEDULE.IT IS DIFFICULT TO ADD UP ALL THE INDIVIDUAL SCHEDULES, SO WE TAKE THE DEMAND OF A TYPICAL OR REPRESENTATIVE CONSUMER SCHEDULE.

INDIVIDUAL DEMAMND SCHEDULE

PRICE OF RICE PER KG IN RUPEES

QUANTITY OF RICE DEMANDED IN KG PER MONETH

40 2

36 4

32 6

28 8

24 10

20 12

MARKET DEMAND SCHEDULE FOR RICE IN CHENNAI

PRICE OF RICE PER KG IN RS

DEMAND OF THE TYPICAL REPRESENTATIVE CONSUMER IN KG

NUMBER OF CONSUMERS IN THE MARKET

MARKET DEMAND PER MONTH IN KGS

40 4 10,000 40,000

36 5 10,000 50.000

32 6 10,000 60,000

28 7 10,000 70,000

24 8 10,000 80,000

20 10 10,000 1,00,000

WHY DOES THE DEMAND CURVE SLOPES DOWNWARDS?1. OPERATION OF THE LAW OF

DIMINISHING MARGINAL UTILITY2. INCOME EFFECT3. SUBSTITUTION EFFECT

EXCEPTINS TO THE LAW OF DEMAND

1. PRESTIGE GOODS-VEBLEN EFFECT2. SPECULATIVE GOODS3. GIFFEN EFFECT OR GIFFEN PARADOX4. DEMAND FOR NECESSRIES5. SCARCITY/INFLATION

ELASTICITY OF DEMANDLAW OF DEMAND STUDIES THE RELATION

BETWEEN DEMANED ON ONE SIDE AND PRICE ON THE OTHER. BUT IT DOES NOT TELLS ABOUT THE QUANTUM OF CHANGE.THIS IS EXPLAINED BY THE ELASTICITY OF DEMAND.

THE RELATIONBETWEEN SMALL CHANGE IN PRICE AND CONSEQUENT CHANGE IN QUANTITY DEMAND IS KNOWN AS ELASTICITY OF DEMAND.

THIS CONCEPT WAS INTRODUCED BY ALFRED MARSHALL.

DEFINITIONSMARSHALL: THE ELASTICITY OF DEMAND

IN A MARKET IS GREATER OR SMALL ACCORDING TO THE AMOUNT DEMANDED INCREASES MUCH OR LITTLE FOR A GIVEN FALL IN PRICE AND DIMINISHES MUCH OR LITTLE FOR A GIVEN RISE IN PRICE.

STONEAR & HAGUE: IT IS A TECHNICAL TERM USED TO DESCRIBE THE DEGREE OF RESPONSIVENESS OF THE DEMAND FOR A COMMODITY TO A FALL IN ITS PRICE.