Managerial Economics- An Introduction

 It is the discipline that deals with application of economic concepts, theories and methodologies to practical problems of businesses/firms.  Subject that uses the theories of economics and the methodologies of decision sciences for managerial decision-making is known as managerial economics.

 It is micro-economic in character.  It largely uses the economic concepts and principles which is known as ‘ The theory of the firm’ or ‘ Economics of the firm’  Pragmatic in nature.  It belongs to normative economics rather than positive economics  Macro-economics is also useful since it provides an intelligent understanding of the environment in which the business must operate.

 The following aspects fall under M.E:  Demand analysis and Forecasting  Cost Analysis  Production and Supply Analysis  Pricing Decisions, Policies and Practices  Profit Management and  Capital Management

 Decisions are very important factors that determine the growth of organizations o Establishment of firm’s objectives o Identification of problems involved in achievement of those objectives o Development of various alternative solutions o Selection of best alternative and finally implementation of the decision

 The success of management in any business firm depends on the decision process. The various steps includes:  Establishing objectives  Defining problems  Identification of alternatives  Selection of best alternatives  Implementation of the decision.

 The factors that influence the business have two categories.  External factors- beyond the control of management which operates outside the firm (national income, value of trade etc)  Internal factors- within the control of management like expansion, level of activity, investment etc

 The other functions performed are  Sales forecasting  Market research  Pricing problems  Production programmes  Investment analysis  Environmental forecasting.

 What products and services should be produced?  What inputs and production techniques should be used?  When should be equipment replaced?  How the available capital be allocated?

 To make a reasonable profit on capital employed  Successful forecasts  To assure the management of a particular trend  To establish and maintain contacts with individuals and data sources  His status in the firm.

 Incremental Concept  Discounting Principle  Opportunity Cost  Time perspective  Equi-marginal principle.

 Demand- is the amount that people are ready to buy at various prices within some given time period, other factors held constant.  Demand depends on: a) Desire to buy b) Ability to pay and c) Willingness to pay.

 The law of demand states the relationship between the price of a commodity and the quantity demanded in the market.  Higher the price, lower the demand and vice versa, other things remaining the same  There is a inverse relationship between price and demand.

 Price demand- commodity or service that a consumer purchases at a given time in a market at various prices  Income demand- commodity or service that consumer purchase at a given time in a market at various income levels.  Cross demand- interrelated goods or services (incase of substitute goods and complementary goods)

 A mathematical expression of relationship between dd of a commodity and its price- dd function.  Dx= f(Px, Y, Ps, Pc,A, T)  Y- consumer’s income  Ps- price of substitutes  Pc- price of complements  A- advertisement expenditure  T - consumer’s tastes

 Law of diminishing marginal utility  Substitution effect  Income effect  Effect of tastes and preferences of consumers.

 In sometimes dd curve slopes upwards due to the following conditions  Status symbol commodity  Ignorance  Necessities of life  Giffen’s paradox.

 Price of the product  Price of related goods  Consumer’s income  Consumer’s taste and preferences  Advertisement expenditure  Consumer’s expectations  Population of the country  Distribution of national income  Climate & season

 Quantity of demand changes due to change in price. Ep = proportionate change in demand _________________________________ proportionate change in price

 Change in demand in relation to certain change in price  ep = proportionate change in demand _________________________________ proportionate change in price

 Substitutes  Nature of the commodity  Extent of use  Income level  Proportion of income spent on commodity  Postponement of purchases  Price level

 The responsiveness of quantity demanded to changes in income is called income elasticity of demand. e i = proportionate change in demand _________________________________ proportionate change in income

 The cross elasticity measures the responsiveness of quantity demanded to changes in price of other goods and services. e y = proportionate change in dd of A ________________________________ proportionate change in price of B.

 It is helpful in determining the price of product  Budget formulation- shifting of tax  Terms of trade  Effectiveness of price control  Forecasting demand

 Elastic Demand- a change in price, results in a greater than proportional change in the quantity demanded ED>1.  Inelastic Demand- a change in price results in a less than proportional change ED<1.  Unitary Demand- a change in price results in equal proportionate change ED=1.  Perfectly elastic Demand- dd changes when price remains unchanged e= ∞  Perfectly inelastic Demand- change in price does not result in any change e= 0.

 Total outlay method  Proportionate method  Arc method  Point method

 Zero income elastic demand (e¡=0) eg.salt  Negative income elasticity e.g.inferior goods  Positive income elasticity e,g. superior goods.

 Zero cross elastic demand (e¡=0)  Infinite cross elastic demand (e¡=∞)  Unitary elastic cross demand (e¡=1)  Relatively elastic cross demand (e¡>1)  Relatively inelastic cross demand (e¡<1).

 It is the combination of two commodities which gives consumer the same level of satisfaction  What does Indifference Curve mean?  A diagram depicting equal levels of utility for a consumer faced with various combinations of goods. Properties of Indifference Curve- slopes downwards to right, do not intersect, convex to the origin, represents higher level of satisfaction than a lower indifference curve.

 An estimate of future situation, prediction of demand for good or service on the basis of present and past behavioral patterns of some related events.  A good forecast should be accurate, simple, economical, consistent and timely.

 Two types of forecasting  Short-term – not exceeding one year eg. clothes  Long- term- plan for new units, new projects, new plants, expansion, technological development eg. Petroleum, paper, shipping.  Objectives of short term forecasting- framing suitable production policy, inventory management, sales strategy, financial requirements etc.  Objectives of Long term forecasting- long term business planning, financial planning, man-power planning.

Forecasts on the basis of :  What people say- the opinion of the buyers  What people do- the buyer response  What people have done- analyzing the past records.

Methods of forecasting Survey methodOpinion survey Consumers interview Statistical method Trend projections& barometric method