managerial economics introduction

1. INTRODUCTION TO MANAGERIAL
ECONOMICS
UNIT - 1

2. 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

3. 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.

4. 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.

5. 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.

6. Microeconomics is the study of individual
consumers and producers in specific
markets.
– Supply and demand
– Pricing of output
– Production processes
– Cost structure
– Distribution

7. Macroeconomics is the study of the aggregate
economy.
– National income analysis
– Gross domestic product
– Unemployment
– Inflation
– Fiscal policy
– Monetary policy

8. 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.

9. How Managerial Economics Helps
Managerial Economics deals with allocating the
scarce resources in a manner that minimizes the
cost.

10. 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
Solutions

11. Managerial Economics Vs Other
Disciplines
 Economics
 Operations Research
 Mathematics
 Statistics
 Accountancy
 Psychology
 Organizational behavior

12. 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 buy
b) Willingness to buy
c) Purchasing power

13. Classification
 Individual Demand
 Household Demand
 Market Demand or Aggregate
Demand

14. Nature of Demand
Autonomous Demand Vs Derived Demand
Producers’ 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 Demand
New Demand Vs Replacement Demand

15. 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 consumer
Tastes and Preferences
Price of related goods
Expectations of
future prices
Expectations of
future income
Population
Social,
Economic,
Demographic
distribution
of consumers
Advertisements
Others

16. 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)

17. LAW OF DEMAND
Law 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.

18. DEMAND CURVE

19. CHANGE IN DEMAND
An increase
or decrease
in demand
due to
change in the
factors other
than price is
called
change in
demand.

20. Why do Demand Curves Slope
Downwards???

21. 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

22. Exceptions to the law of Demand
☺ Giffen Goods
☺ Commodities which are used as status symbols
☺ Expectations of change in the price of the
commodity

23. CHANGE IN
QUANTITY
DEMANDED
CHANGE
IN
DEMAND

24. 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.

25. 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

26. ELASTICITY OF
DEMAND

27. 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”.

28. Formulae
Proportionate change in quantity demand of X
Ep = --------------------------------------------------------------
proportionate change in its determinate of Y

29. Measurement of Elasticity
 Perfect elastic demand
 Perfect in elastic demand
 Relatively elastic demand
 Relatively in elastic demand
 Unitary elastic demand

30. 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
X
M M1
Pprice
Quantity demand

31. 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
X
M
P
P1
price
Quantity demand

32. 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
X
M1
P
P1
price
Demand
M
A
B
D
D

33. 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
X
M1
P1
Demand
Price
M
P
A
B
D
D

34. 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
X
M1
P
P1
price
Demand
M
A
B
D
D

35. Types
 Price Elasticity Demand
 Income Elasticity Demand
 Cross Elasticity Demand

36. Importance of price elastic demand
 Importance to Monopolistic
 Importance to finance manager/minister
 Importance to international trade
 Help full to decision making process

37. 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 X
Ep = --------------------------------------------------------
proportionate change in its determinate of Y
Q P
Ep = ------ / -----
Q P

38. 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 product
Ey = --------------------------------------------------------------------
proportionate change in its determinate of a consumer
Q Y
Ey = ------ / -----
Q Y

39. Cross Elasticity Demand
Proportionate change in quantity demand of X
Exy = ---------------------------------------------------------
proportionate change in price of Y
Q X P Y
Exy = ------ /-------
QX P Y

40. 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

41. What is a forecast???
A forecast is a
prediction or estimation
of a future situation,
under given conditions.

42. Need for Demand Forecasting
 Demand is uncertain
 Production decisions
 Supply decisions
 Expectations of future growth
 Decisions on various types of expenditures

43. FACTORS GOVERNING DEMAND
FORECASTING
o Functional Nature of Demand
o Types of forecasts
o Forecasting level
o Degree of Orientation
o Established or New products
o Nature of Goods
o Degree of Competition
o Market Demand
o Other factors

44. DEMAND FORECASTING TECHNIQUES
 Non- Statistical Techniques
 Statistical Techniques

45. 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

46. DEMAND FORECASTING
NON – STATISTICAL METHODS STATISTICAL METHODS
Mechanical Extrapolation / Trend Projection Methods
Barometric Techniques
Correlation and Regression Methods
Simultaneous Equations Method

47. Mechanical Extrapolation / Trend Projection Methods
Fitting Trend Line by Observation
Time Series Analysis using Least Squares Method