WHAT IS ECONOMICS

What is Managerial Economics?Managerial economics is essentially applied economics in the field of business management. It is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. It is the application of economic tools and concepts to the solution of business problem or the problem of resource allocation.

The Business Decision

Functions: Role and Responsibilities of a Managerial Economist

Managerial economists tend to rely on the scientific research method in building and empirically testing business oriented economic models. This scientific approach consists of the following steps:Defining the problemFormulation of the hypothesisAbstraction for the model buildingData collectionTesting the hypothesisDeduction based on data analysisEvaluating the test resultsConclusion for decisions

Effective DemandA buyers desire for a product in the market backed by the ability and willing to pay for its price.

Definition of Demand - The demand for a product refers to the amount of it which will be bought per unit of time at a particular price.

Determinants of DemandFactors Influencing Individual DemandPriceIncomeTastes, habits and preferencesPeople with different tastes and habits have different preferences for different goodsRelative prices of other goods substitute and complementary productsConsumers expectationAdvertisement effect

Factors Influencing Market Demand

Price of the productDistribution of income and wealth in the communityGeneral standards of living and spending habits of the peopleNumber of buyers in the market and the growth of populationAge structure and sex ratio of the populationFuture expectationsLevel of taxation and tax structureInventions and innovationsFashionsClimate or weather conditionsCustomsAdvertisement and sales propaganda

Demand FunctionMathematical of expression of functional relationship between determinants (such as price, income, etc., determining variables) and the amount of demand of a given product.In composing the demand function for a product, therefore, one should identify and enlist the most important factors (key variables) which affect its demand. To suggest a few, such as:The own price of the product itself (P)The price of the substitute and complementary goods (Ps or Pc)The level of disposable income (Yd) with the buyers (i.e., income left after direct taxes)Change in the buyers taste and preferences (T)The advertisement effect measured through the level of advertising expenditure (A)Changes in population number or the number of the buyers (N).Using the symbolic notations, we may express the demand function, as follows:Dx = f (Px, Ps, Pc, Yd, T, A, N, u)

Demand ScheduleA tabular statement of price/quantity relationship is called the demand schedule.Individual Demand Schedule

A Market Demand Schedule (Hypothetical Data)

Market Demand CurveIn graphical terms, a market demand curve for a product is derived through the horizontal summation of all individual buyers demand curves for the given product.Demand CurveDemand curve refers to the graph of a demand schedule, measuring price on the Y-axis and quantity demand on the X-axis. Usually, a demand curve has a downward slope, representing an inverse relationship between price and demand.

A Linear Demand Curve

The Law of DemandThe conventional law of demand, however, relates to the much simplified demand function: D = f (P)

Demand Curve

Assumptions Underlying the Law of DemandNo change in consumers incomeNo change in consumers preferencesNo change in the fashionNo change in the price of related goodsNo expectation of future price changes or shortagesNo change in size, age composition and sex ratio of the populationNo change in the range of goods available to the consumersNo change in the distribution of income and wealth of the communityNo change in government policyNo change in weather conditions

Exceptions Demand Curve: Upward-sloping Demand Curve

Exceptional CasesGiffen goodsArticles of snob appealSpeculationConsumers psychological bias or Iillusion

Extension and Contraction of DemandThe terms extension and contraction are technically used in stating the law of demand.

Quantity Demanded

Increase and Decrease in DemandAn increase in demand signifies either that more will be demanded at a given price or same will be demanded at a higher price. An increase in demand really means that more is now demanded than before at each and every price. Likewise, a decrease in demand signifies either that less will be demanded at a given price or the same quantity will be demanded at the lower price. Decrease in demand really means that less is now demanded than before at each and every rise in price. Shifting the demand curves shows the increase and decrease in demand.

Increase in Demand (A) and Decrease in Demand (B)

Reasons For Change (Increase or Decrease) in DemandChanges in incomeChanges in taste, habits and preferenceChange in fashions and customsChange in the distribution of wealthChange in substitutesChange in demand of position complementary goodsChange in populationAdvertisement and publicity persuasionChange in the level of taxationExpectation of future changes in prices

Major Types of Demand

Industry Demand and Firm or Company DemandIndustry and Company Demand

Demonstration effect of consumption by the others lead to the bandwagon effects of change in demand for a product in the market. Advertising and fashion play a significant role in this regard.

Short-run and Long-run Demand Bandwagon Effects

Bandwagon Effect: The Demand Curve Shifts to the RightVeblen EffectSnob appeal of luxury goods leads to the Veblen effect of demand through conspicuous consumption.

The Market Demand Curve for Veblen Effect Product