unit 1 modified
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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