1. MANAGERIAL ECONOMICS
UNIT-2

2. CONTENTS
 Utility Analysis
 Marshal Approach
 Demand Analysis
 Demand Function
 Law of Demand
 Elasticity of Demand and demand forecasting
 Law of Supply and Supply Analysis

3. DEMAND

4. DEMAND
DEMAND= DESIRE + ABILITY + WILL TO SPEND

5. DEMAND
• The quantity of a product consumers are
willing and able to buy at different prices in a
specified time period.

6. DETERMINANTS OF DEMAND
• Price of
Product

7. DETERMINANTS OF DEMAND
• Income of Consumer
• Tastes and Preferences

8. DETERMINANTS OF DEMAND
• Advertising
• Consumer’s expectation of
future Income and Price
• Seasonal conditions
• Price of Related Good

9. FACTORS INFLUENCING MARKET DEMAND
• Price of the product
• Distribution of income &
wealth in the community
• Community’s common habits
• Standard of living
• Number of Buyers
• Growth in population

10. • Age structure & sex ratio
of the population
• Level of taxation & tax
structure
• Inventions & innovations
• Climate or weather
conditions
• Customs
• Advertisements & sales
propaganda
• Fashions

11. DEMAND FUNCTION
Dx = f (Px, Py, M, T, A, U) where,
• Dx = Quantity demanded for commodity X.
• f = functional relation.
• Px = The price of commodity X.
• Py = The price of substitutes and complementary goods.
• M = The money income of the consumer.
• T = The taste of the consumer.
• A = The advertisement effects.
• U = Unknown variables or influences.

12. MANAGERIAL USES

13. DEMAND ANALYSIS
FORECASTING DEMAND MANIPULATING DEMAND
Serves Two Major Purposes
Ancillary Functions
1. Appraisal of performance of a salesman
2. Fixing sales quota
3. Company’s competitive position
DEMAND ELASTICITY

14. DEMAND SCHEDULE
• It shows the price and output relationship.
• Tabular representation of price and demand.

15. DEMAND CURVE
• The geometrical representation of demand
schedule is called the demand curve.

16. LAW OF DEMAND
• As the price of a good rises, quantity
demanded of that good falls.
• As the price of a good falls, quantity
demanded of that good rises.
• Ceteris paribus.

17. DEMAND FUNCTION
• When we express the relationship between
demand and its determinant mathematically, the
relationship is known as demand function.
• The demand for product X can be written in
functional form as-
Dx= f (Px, Y, Po, T, A, Ef, N )

18. ASSUMPTIONS
NO CHANGE IN……………..
• Consumer income
• Consumer preference
• Price of related goods
• Demography
• Range of goods
• Distribution of income
• Government policy
• Weather conditions

19. EXCEPTIONS TO THE LAW OF DEMAND
• Inferior Goods/Giffen goods
• Snob Appeal
• Future Expectation of
Prices/Speculation
• Goods with no Substitutes
• Bandwagon Effect

20. CHANGE IN DEMAND VS. CHANGE IN
QUANTITY DEMANDED
• A shift of the entire demand curve to a new
position is called change in demand.
• Changes in non-price determinants of demand.

22. QUANTITY DEMANDED
• Fluctuations in price, another determinant of
demand, cause movement along the demand curve.

23. Why the demand curve slope
downwards?
• Law of diminishing marginal utility.
• Income effect.
• Substitution effect.
• New consumers.
• Multiple use of commodity.

24. Consumer demand in the new
age market
• Consumer trust & loyalty
• Motivation
• Easiness
• Consumer freedom
• Confidence

25. Consumer demand in the new
age market
• Just in time
• Consumer ego
• Beyond expectations
• Reward
• Relation
• Pricing strategy

26. • Elasticity in general terms, refer to easy
expansion or contraction of an object.

27. ELASTICITY OF DEMAND
• Elasticity of demand is defined as the
responsiveness of the quantity of a good to
changes in one of the variables on which
demand depends-
Price of the commodity
Income of the Consumer
Various other factor

28. PRICE ELASTICITY
DEFINATION-’’The elasticity of
demand measures the response of the
demand for the commodity to change
in price”.

29. PRICE ELASTICITY OF DEMAND
• The price elasticity of demand is the percentage
change in quantity demanded divided by the
percentage change in price.
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price

30. PRICE ELASTICITY OF
DEMAND
/
/
P
Q Q Q P
E
P P P Q
 
  
 
Point Definition
Arc Definition 2 1 2 1
2 1 2 1
P
Q Q P P
E
P P Q Q
 
 
 

31. Perfectly Inelastic Demand: Elasticity Equals “0”
Copyright©2003 Southwestern/Thomson Learning
$5
4
Quantity
Demand
100
0
1. An
increase
in price . . .
2. . . . leaves the quantity demanded unchanged.
Price

32. Inelastic Demand: Elasticity Is Less Than 1
Quantity
0
$5
90
Demand
1. A 25%
increase
in price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100

33. Unit Elastic Demand: Elasticity Equals 1
Copyright©2003 Southwestern/Thomson Learning
2. . . . leads to a 25% decrease in quantity demanded.
Quantity
4
100
0
Price
$5
75
1. A 25%
increase
in price . . .
Demand

34. Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
100
0
Price
$5
50
1. A 25%
increase
in price . . .
2. . . . leads to a 50% decrease in quantity demanded.

35. Perfectly Elastic Demand: Elasticity Equals
Infinity
Quantity
0
Price
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
1. At any price
above $4, quantity
demanded is zero.
3. At a price below $4,
quantity demanded is infinite.

36. FACTORS INFLUENCING PRICE ELASTICITY OF
DEMAND
• Nature of commodity
• Availability of substitute
• Number of uses
• Height of price and range of price change
• Proportion of expenditure
• Durability of the commodity

37. • Influence of habit & income
• Complementary goods

38. PRACTICAL SIGNIFICANCE
• Its importance to the businessman
• Importance to government
• Importance to trade unionist
• Importance to economists
• International trade

39. INCOME ELASTICITY
• The degree of responsiveness of the demand for the
commodity to a change in the income of the consumer.
• It is defined as Ratio of percentage change in the quantity
demanded of a commodity to the percentage change in the
income of consumer

40. • Negative ( inferior commodities )
• Zero ( neutral commodities )
• Greater than zero but less than 1( normal
commodities )
• Greater than unity ( Luxurious commodity )
INCOME ELASTICITY

41. INCOME ELASTICITY
• Ey= Q/Y. Y1/Q1

42. USES OF THE CONCEPTS
• Economic development
• Economic fluctuations
• Economic planning
• Demand forecasting
• Foreign trade

43. Cross Elasticity of Demand (CED)
• Cross price elasticity (CED) measures the
responsiveness of demand for good X following a
change in the price of good Y (a related good)
• CED = % change in quantity demanded of product A
% change in price of product B

44. • With cross price elasticity we make an
important distinction between substitute
products and complementary goods and
services.

45. Substitutes
Price of
Good S
Quantity demanded of Good T
Demand
Two Weak Substitutes
P1
P2
Goods S and T are
weak substitutes
A rise in the price of
Good S leads to a
small rise in the
demand for good T
tea and coffee
+

46. Complements
Price of
Good X
Quantity demanded of
Good Y
Demand
Two Close Complements
P2
P1
Goods X and Y are
close complements
A fall in the price of
good X leads to a
large rise in the
demand for good Y
Petrol and
petrol car
-

47. Goods with zero cross-price elasticity of demand .
INDEPENDENT
Price of
Good A
Quantity demanded of
Good B
Demand
P1
P2
P3
Goods A and B have no
relationship.
A fall in the price of good A
leads to no change in the
demand for good B
Therefore the cross-price
elasticity of demand is zero
salt!

48. • Ec= Qx
Py
Py
Qx


49. DEMAND FORECASTING
• Demand forecasting is a prediction or estimation
of the future demand. It tries to find out expected
future sales level, given the present state of
demand determinants.

50. • Passive Forecasts: Where prediction about future
is based on the assumption that the firm does not
change the course of its action.
• Active Forecasts: Where forecasting is done under
the condition of likely future changes in the action
by the firm.

51. The following steps are necessary to
have an efficient forecast of demand:
• Identification of objective
• Determining the nature of goods under
consideration
• Selecting a proper method of
forecasting
• Interpretation of Results

52. USES
• Fulfillment of objectives of the plans
• Preparation of budget
• Stabilization of employment & production
• Expansion of firms
• Other uses

53. Factors influencing
• Time period
• Level of forecast
• General & specific
• Established products and new
products
• Product classification
• other

54. Demand for established product,
therefore, may be forecasted by two
broad methods:
• 1) Opinion Polling Method
• 2) Statistical Method

55. Opinion polling method can be
of three types:-
• Consumer‘s Survey Method
• Sales Force Opinion Method
• Expert‘s Opinion Method

56. Consumer‘s Survey Method is further of
three types:
• Complete Enumeration Survey
• Sample Survey and Test Marketing
• End use

57. Statistical Methods can be of four types:
• Mechanical Extrapolation or Trend
Projection Method
• Barometric Techniques
• Regression Method
• Simultaneous Equation Method

58. • Trend projection method refers to the ―Time Series
Analysis‖ which can be done through:
 Fitting trend line by observation
 Least Squares linear regression
 Moving Average and Annual Difference
 Exponential Smoothing
 ARIMA (Auto Regressive Integrated Moving Averages) Method

59. Palak has Rs. 300 to spend on sugar and spice. Palak’s marginal
utilities from sugar and spice are shown in the following table.
Suppose that a unit of sugar is priced at Rs. 50 and the price of a unit of
spice is Rs.100
Quantity
of Sugar
MU MU/P Quantity
of Spice
MU MU/P
1 1000 1 1000
2 800 2 800
3 600 3 600
4 400 4 400
5 200 5 200
6 100 6 100

60. 1. Assume the price of pizza is $2.00 and the price of Beer is $1.00
and that at your current levels of consumption, the Marginal Utility
from pizza is 10 and the Marginal Utility from beer is 6.
True or false: You can increase total utility by buying more beer and
less pizza.
→ TRUE
→ Calculate the marginal utility per dollar from each of the goods:
Pizza: MU/$ = 10/2 = 5 Beer: MU/$ = 6/1 = 6
⇒ you receive higher marginal utility from a dollar spent on beer than
from pizza, so to increase your total utility you should buy more beer and
less pizza.

61. 2. The price of vegetable is Rs. 7 per Kg, and the price of chicken is
Rs. 2 per Kg. Your mother currently receives a marginal utility of
14 from consuming vegetable this week and 6 from consuming
chicken this week. The marginal utility of chicken is therefore less
than that of vegetable. Does this imply that your mother should buy
less chicken this week? Explain.
→

62. •Demand function for a product is
Qd=120-P. Workout the demand schedule
for the price Rs. 120,100,80,60,40, and
Rs. 20.

63. • The income increases from Rs. 80,000 to
Rs. 81,000 the quantity demanded of a
good x increases from 3000 to 3050
compute income elasticity of demand