MANAGERIAL ECONOMICS DEFINITION OF ECONOMICS 1. A Science of Wealth 2. A Science of Material Welfare 3. A Science of Scarcity and 4. A Science of Dynamic Growth and Development

ECONOMICS ECONOMIC PROBLEMS ENDS MEANS UNLIMITED GRADED ON LIMITED ATERNATIVE NUMBER PRIORITY BASIS USES SCARCITY OF RESOURCES

DEFINITION OF MANAGERIAL ECONOMICS 1. ECONOMICS APPLIED IN DECISION – MAKING. 2. SPECIAL BRANCH OF ECONOMICS BRIDGING THE GAP BETWEEN ABSTRACT THEORY AND MANAGERIAL PRACTICE.

CONCEPT OF BUSINESS ECONOMICS BUSINESS ECONOMICS ATTEMPTS TO INDICATE HOW BUSINESS POLICIES ARE FIRMLY ROOTED IN ECONOMIC PRINCIPLES. DISTINCTION BETWEEN BUSINESS ECONOMICS AND MANAGERIAL ECONOMICS.

BUSINESS ECONOMICS USES MICRO-ECONOMIC ANALYSIS OF THE BUSINESS UNIT AND MACROECONIMIC ANALYSIS OF THE BUSINESS ENVIRONMENT. BUSINESS ECONOMICS IS THUS MORE COMPREHENSIVE AND BROAD BASED THAN MANAGERIAL ECONIMICS WHICH IS MOSTLY MICRO – ECONOMICS WITH HIGH – PITCHED DEGREE OF ANALYTICAL RIGOUR THROUGH SOPHISTICATED TOOLS AND TECHNIQUES OF ECONOMETRICS AND OPERATIONS RESEARCH

DEMAND DEMAND IN ECONOMICS MEANS DESIRE BACKED BY PURCHASING POWER AS WELL AS WILLINGNESS TO SPEND FOR THE GOODS DESIRED. DEMAND IS THUS REFLECTED IN TERMS OF QUANTITY OF A GOODS OR SERVICE THAT CONSUMERS ARE WILLING AND ABLE TO PURCHASE AT VARIOUS PRICES DURING A GIVEN PERIOD OF TIME.

DETERMINANTS OF AN INDIVIDUAL CONSUMER’S DEMAND OWN PRICE OF GOODS PRICE OF RELATED GOODS COMPETITIVE / SUBSTITUTE GOODS COMPLEMENTARY GOODS INCOME OF CONSUMER NECESSARY GOODS COMFORTS AND LUXURIES SUBJECTIVE FOCTORS

WHAT ARE THE DETERMINANTS OF AGGREGATE DEMAND. i. e WHAT ARE THE DETERMINANTS OF AGGREGATE DEMAND ? i.e., DEMAND FOR GOODS IN THE MARKET SIZE AND COMPOSITION OF POPULATION LEVEL AND DISTRIBUTION OF INCOME ADVERTISEMENT THE NUMBER OF CONSUMERS IN THE MARKET CHANGES IN PROPENSITY TO CONSUME AND SAVE QUALITY OF PRODUCT MODE OF PAYMENT EXPECTATION ABOUT FUTURE STATE OF ECONOMY WEATHER CONDITION ASSET / LIQUIDITY PREFERENCE NATURE OF PRODUCT’S MARKET DEVELOPMENT

ELASTICITY OF DEMAND Elasticity of Demand= percentage change in Quantity demanded Elasticity of Demand= percentage change in determining factor Elasticity of demand measures the degree of responsiveness or sensitivity of quantity demanded to a change in a particular determining factor when all other determinants of demand remain unchanged at a particular point of time. Different Types of Elasticities of Demand Price-elasticity of demand: Price elasticity = Percentage change in price

THE DIFFERENT SEGMENTS OF PRICE ELASTICITY OF DEMAND ARE AS FOLLOWS: Inelastic demand: Elastic demand: Unity elastic demand: Perfectly elastic demand: Perfectly inelastic demand:

INCOME ELASTICITY OF DEMAND: Percentage change in quantity demanded Income elasticity= Percentage change in consumer income Cross –elasticity of demand: Percentage change in quantity demanded of X Cross –elasticity of demand = Percentage change in price of Y Elasticity of substitution: Proportionate change in the ratio of the two consumed goods Proportionate change in their marginal rate of substitution

SIGNIFIANCE OF CROSS-ELASTCITY Case I: If cross elasticity is positive then there exists a relation of substitution between the said two goods. Case II: If it is negative in sign, the two commodities must be complementary to each other. Advertising Elasticity of Demand Percentage change in sales Percentage change in advertising expenditure

PRODUCTION FUNCTION Production function refers to the technical, quantitative and physical interrelationship between output of a product with one/more of its inputs at a particular point of time when the method and technology of production remains unchanged. Production function must be considered with respect to a particular point of time. Production function of a firm is determined by the state of technology.

DIFERENT TYPES OF PRODUCTION FUNCTION A) Short run and long run production function: B) Fixed proportions production function and variable proportion function: C) Homogenous production function and Cobb-Douglas production function:

THE LAW OF VARIABLE PROPORTIONS P.A. Samuelson: ”An increase in some inputs relative to other fixed inputs will, in a given state of technology, cause output to increase, but after a point the extra output resulting from the same additions of extra inputs will become less and less

DIFFERENT STAGES OF THE LAW OF VARIABLE PROPORTIONS STAGE I: STAGE OF INCREASING RETURN: TP POINT OF INFLEXION I II III OUTPUT MP AP VARIABLE FACTOR

CAUSES OF INCREASING RETURNS DURING THE FIRST STAGE: Abundance of fixed factor: Indivisibility of fixed factor: Division of labour:

STAGE II: STAGE OF DECREASING RETURNS: Explanation of decreasing returns: Disturbance to optimum proportion: Imperfect substitutability of factors of production:

STAGE III: STAGE OF NEGATIVE RETURNS: Explanation of negative returns: Abundance of variable factor: Declining efficiency of fixed factor:

THE LAW OF RETURNS TO SCALE RETURNS TO SCALE REFER TO CHANGE IN OUTPUT WHEN ALL THE FACTORS ARE CHANGED IN THE SAME PROPORTION. A LONG RUN HOMOGENOUS PRODUCTION FUNCTION EXHIBITS RETURNS TO SCALE.

ECONOMIES AND DISECONOMIES OF SCALE INTERNAL ECONOMIES AND DISECONOMIES a) TECHNICAL ECONOMIES & DISECONOMIES b) PRODUCTION ECONOMIES AND DISECONOMIES c) MARKETING ECONOMIES & DISECONOMIES d) MANAGERIAL ECONOMIES & DISECONOMIES e) FINANCIAL ECONOMIES & DISECONOMIES f) RISK – BEARING ECONOMIES g) ECONOMIES OF RESEARCH AND DEVELOPMENT h) ECONOMIES OF WELFARE

ECONOMIES AND DISECONOMIES OF SCALE EXTERNAL ECONOMIES AND DISECONOMIES a) CHEAPER RAW MATERIALS AND CAPITAL EQUIPMENTS b) TECHNOLOGICAL EXTERNAL ECONOMICS c) DEVELOPMENT OF SKILLED LABOUR d) GRPWTH OF ANCILLARY INDUSTRIES e) BETTER TRANSPORTATION AND MARKETING FACILITIES

HOW PRODUCER’S EQUILIBRIUM IS REACHED THROUGH OPTIMAL INPUT COMBINATION? Let the profit function be represented by, total revenue be TR and total cost be TC, then, =TR-TC= pq-C(P=commodity price, q=quantity) we assume that commodity price is given, i.e., p=p, therefore = pq-C. Problem I: When producer is asked to produce a specified output, i.e., q=q, =pq-C. Therefore will be maximum when C is minimum. Problem II: When the cost is specified, i.e. c=c then =pq-c, then will be maximum if q is maximum. So this is a problem of output maximization.

THE DIFFERENCE BETWEEN FIXED COST AND VARIABLE COST 1) The short run cost of production can be divided into two parts (i) Fixed cost and (ii) Variable cost Fixed Costs are those cost items which do not change with changes in level of output, that means, they are independent of output. Fixed costs are contractually fixed. Variable Costs are those items of costs which change with changes in the level of output in the short run i.e. they increase or decrease with the rise or fall of the output e.g. wages of labour, prices of raw materials, fuel, power etc.

COST FUNCTION Cost function is a derivative function from production and is also determined by prices of inputs. Cost function refers to the mathematical relationship which exists between cost of a product and various determinants of cost. Symbolically it is represented by : C=f (O, S, T, U, P,……………) Where C= Cost, O = Level of output, T = Time period under consideration, S= Size of plant, P= Prices of factors of production, U= Technology etc.

MEANING OF MARKET “ MARKET “ REFERS TO A SYSTEM OF NETWORK OR DEALINGS BETWEEN BUYERS AND SELLERS WHERE THEY BARGAIN FOR THE PRICE OF PRODUCT, SETTLE THE PRICE AND BUY AND SELL THE PRODUCT.

DIFFERENT TYPES OF MARKET ON THE BASIS OF DEGREE OF COMPETITION PERFECT COMPETITION MONOPOLY MONOPOLISTIC COMPETITION OLIGOPOLY MARKET DUOPOLY BILATERAL MONOPOLY MONOPSONY OLIGOPSONY

PERFECT COMPETITION MARKET MANY FIRMS HOMOGENOUS PRODUCTS FREE ENTRY AND EXIT NO GOVERNMENT INTERVENTION PROFIT MECHANISM PERFECT KNOWLEDGE ABOUT MERKET CONDITIONS PERFECT FLUIDITY OF FACTORS OF PRODUCTION ABSENCE OF DISCRIMINATION ABSENCE OF TRANSPORT COST

MONOPOLY MARKET MONOPOLY IS A MARKET IN WHICH THERE IS A SINGLE SELLER, THERE ARE LARGE NUMBER OF BUYERS , THE PRODUCT HAS NO CLOSE SUBSTITUTE AND THERE ARE BARRIERS TO ENTRY.

THE FEATURES OF MONOPOLISTIC COMPETITION A LARGE NUMBER OF FIRMS PRODUCT DIFFERENTIATION FREE ENTRY AND EXIT NON-PRICE COMPETITION GROUP CONCEPT HIGH ELASTIC DEMAND CURVE PRODUCT VARIATION SOME INFLUENCE OVER PRICES

FEATURES OF OLIGOPOLY NUMBER DIFFERENTIATION ENTRY INTERDEPENDENCE IN DECISION MAKING GROUP BEHAVIOUR PREPONDENCE OF ADVERTISEMENT AND SELLING COSTS INDETERMINATE DEMAND CURVE

SWEEZY’S KINKED DEMAND CURVE MODEL P D G O D Q

(A) PRICE REDUCTION : (B) PRICE HIKE: CONCLUSION: Each oligopolist finds himself placed in such a position that he expects that price cuts by him will be followed by price cuts by other firms but price hike by him will not be followed by price increase by other firms – so that oligopolists will stick to existing prices and given this view of competitor’s reaction pattern the firm’s demand curve will be composite curve DGD characterised by kink /bent (G) at the prevailing price level.