1. Introduction to Managerial economics

2. Economics: Study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scare resources. Management: The discipline of organizing and allocating a firms scare resources to achieve its desired objectives. ME: It is the use of economic analysis to make business decisions involving the best use of an organizations scare resources. Economics of business or managerial decisions. Integration of economic principles with business practices. Pertains to economic analysis that can help in solving business problems, policy and planning. Traditional Economics & Tools & Techniques of Decision SciencesMEBusiness Management in theory& Practice: Decision, Problems 3. In Economic Theory: Assumption of a single Goal i.e. rational consumer aims at maximization of utility and a firm tries to maximize its profit. ET is based on Ceteris Paribus i.e. given conditions with certainty of actions or events or within the framework of axioms. In Business Decision Making: Multiple goals in running a business. Lack of certainty due to dynamic changes. Uncertainty may create disappointment in the realizations of business expectations. ET cant provide clear cut solutions but helps in arriving at abetter decision. ME helps bridge the gap between purely analyticalproblems dealt in ET and decision problems faced in real business. 4. MAIN CHARACTERISTICS OF ME Applied Micro economics Science as well as art of management disciplines. Concerned with the firm's behavior in optimal allocation of resources. Provides tools for best alternatives and competing activities in any productive sector. Incorporates both Micro and Macro Economics for optimal decisions. Helps Manager to understand the intricacies of the business problems which make the problem solving easier and quicker.contd. 5. .Study of managerial economics essentially involves the analysis of certain major subjects like: The business firm and its objectives Demand analysis, estimation and forecasting Production and Cost analysis Pricing theory and policies Profit analysis with special reference to break-even point Capital budgeting for investment decisions Competition. 6. Managerial Economics:Uses analytical tools of mathematical and econometrics with two main approachesDescriptive Models are data based in describing and exploring economic relationships of reality in simplified abstract sense. Describe the economic forces that shape the internal and external environments of a business firm. Prescriptive models are the optimizing models to guide the decision makers about set goal. Prescribe rules for managerial decision-making that furthers the objective of the firm. DM provide a building block for developing optimizing models in solving the managerial and business problems. Helps in depth analysis of key elements involved in the business. 7. IS ME POSITIVE OR NORMATIVE? +ve economics explains the economic phenomenon as what is, what was and what will be. Normative economics prescribes what it ought to be. ME is a blending of pure or +ve science with applied or normative science. +ve when confined to statements about causes and effects and to functional relations of the economic variables. It is normative when it involves norms and standards, mixing them with the cause effect analysis. ME is a mix of both consideration in scientific approach. 8. DUTIES OF A MANAGERIAL ECONOMIST Two broad aspects of his duties are Decision Making Forward Planning Demand Estimation and forecasting Business and sales forecasting Analysis for extent and nature of competition. Analyzing the issues and problems of the concerned industry. Assisting the bus Planning process of the firm. Discovering the new and possible fields of business endeavors and its cost benefit analysis. Advising on pricing , investment, and capital budget policy. Evaluation of capital budgets. Building micro and macro eco models for solving business problems. Directing Economic research activities. Briefing the management on current domestic and global economic issues and emergiing challenges. Keeps an eye on fast changing technological developments. 9. Managerial Economic analysis in Decision Making ME adopts the scientific approach of economic analysis: Define the problem Formulation of the hypothesis Abstraction for the model building Data collection Deduction based on data analysis Testing the hypothesis Evaluating the test results Conclusion for decisions 10. A Decision-Making Model ObjectivesDefine the problem Alternative SolutionsSocial constraintsEvaluationOrganizational and input constraintsImplement and monitor the decision 11 11. Scope of ME Objectives of a firm Demand Analysis and Forecasting Cost and Production Analysis Pricing Decisions, Policies and Practice Profit Management Capital Budgeting Linear Programming and the theory of games Market structure and conditions Strategic Planning Others Areas (Macroeconomic Management, Fiscal and MonetaryPolicy, Impact of Liberalization, Globalization, privatization, marketization, international changes, environmental degradation, socio-political, cultural and external forces on management) 12. Importance of Managerial Eco. It gives guidance for identification of key variables in decision makingprocess. It helps the business executives to understand the various intricacies of business and managerial problems and to take right decision at the right time. It provides the necessary conceptual, technical skills, toolbox of analysis and techniques of thinking to solve various business problems. It is both a science and an art. In the context of globalization, privatization, liberalization and a highly competitive dynamic economy, it helps in identifying various business and managerial problems, their causes and consequence, and suggests various policies and programs to overcome them. 13. responsive, realistic and competent to face the ever changing challenges in the modern business world. It helps in the optimum use of scarce resources of a firm tomaximize its profits. It also helps in achieving other objectives a firm like attainingindustry leadership, market share expansion and social responsibilities etc. It helps a firm in forecasting the most important economicvariables like demand, supply, cost, revenue, price, sales and profit etc and formulate sound business polices It also helps in understanding the various external factors andforces which affect the decision making of a firm.. It helps the business executives to become much more 14. Demand and demand analysis 15. Market system- basics Market System where buyers and sellers interact to determine the price and quantity of goods or service. Based on two market forces demand and supply. Purview of the market depends upon the expanse of its buyers and sellers. Buyers and sellers need not come into personalcontact. Market refers to a commodity/ service or a geographical area. Markets distinguished basis nature of goods and services and extent of competition. 16. Definition of Demand The demand for a product refers to the amount of itwhich will be bought per unit of time at a particular price. 17. Individual demand and Market demand Individual demand is a single consuming entitysdemand Market demand is the total demand of all individual buyers at a particular price and over a given period of time. 18. Determinants of demand Factors influencing Individual demand Price of product Income availability Tastes , habits and preferences Price of substitutes and compliments Consumer expectation Advertisement effect Season prevailing at the time of purchase Fashion 19. DeterminantsMarket demand Price Distribution of income and wealth in the community. Standards of living and spending habits Growth of population Number of buyers in the market Age group Gender ratio Future Expectations Taxation and tax structure Fashion and Innovation Climate Customs Advertisements 20. Demand Function Mathematical expression establishing relationship between demand and its various variables Dx= F(Px, Ps,Pc,Yd,T, A, N, u) Px Own price Ps - Price of a substitute Pc Price of complements Yd Disposable income T - buyers tastes and preferences A effect of advertisement N- population growth U other aspects 21. Demand Function - contd.. A linear demand function is as below : D= a bP D= Units demanded a = Constant parameter signifying initial demand irrespective of price. b = Constant parameter representing functional relationship between D and P. Also measures the slope of the demand curve. 22. Law of demand All other things remaining constant (ceteris paribus), the quantity demanded of a commodity increases when its price decreases and decreases when its price increases. Demand curve : demand curve Price of Shirts1000 500demand curve0 8153040No Of Shirts5580 23. Assumptions underlying the Law of Demand Habits, tastes and fashions remain constant. Money, income of the consumer does not change. Prices of other goods remain constant. The commodity in question has no substitute or is notin competition by other goods. The commodity is a normal good and has no prestige or status value. People do not expect changes in the price. Price is independent and demand is dependent. 24. Demand Schedule Demand schedule is a tabular representation of thequantity demanded of a commodity at various prices. For instance, there are four buyers of apples in the market, namely A, B, C and D. The demand by Buyers A, B, C and D are individual demands. Total demand by the four buyers is market demand. Therefore, the total market demand is derived by summing up the quantity demanded of a commodity by all buyers at each price. 25. Demand Schedule for apples PRICE (Rs. Buyer A per dozen) (demand in dozen)Buyer B (demand in dozen)Buyer C (demand in dozen)Buyer D (demand in dozen)Market Demand (dozens)10103049316414872972571141210376136141245 26. Demand Curve Demand curve is a diagrammatic representation of demand schedule. It is a graphical representation of price- quantity relationship. Individual demand curve shows the highest price which an individual is willing to pay for different quantities of the commodity. While, each point on the market demand curve depicts the maximum quantity of the commodity which all consumers taken together would be willing to buy at each level of price, under given demand conditions. 27. Demand Curve 28. Features of demand curve Demand curve has a negative slopeThe reasons for a downward sloping demand curve can be explained as follows Income effect- With the fall in price of a commodity, thepurchasing power of consumer increases. Thus, he can buy same quantity of commodity with less money or he can purchase greater quantities of same commodity with same money. Similarly, if the price of a commodity rises, it is equivalent to decrease in income of the consumer as now he has to spend more for buying the same quantity as before. This change in purchasing power due to price change is known as income effect. 29. . Substitution effect- When price of a commodityfalls, it becomes relatively cheaper compared to other commodities whose price have not changed. Thus, the consumer tend to consume more of the commodity whose price has fallen, i.e, they tend to substitute that commodity for other commodities which have not become relatively dear. 30. .Law of diminishing marginal utility It is the basic cause of the law of demand. It states that as an individual consumes more and more units of a commodity, the utility derived from it goes on decreasing. So as to get maximum satisfaction, an individual purchases in such a manner that the marginal utility of the commodity is equal to the price of the commodity. When the price of commodity falls, a rational consumer purchases more so as to equate the marginal utility and the price level. Thus, if a consumer wants to purchase larger quantities, then the price must be lowered. This is what the law of demand also states. 31. Exceptions to the law of demand There are certain goods which are purchased mainly for theirsnob appeal/ as status symbol, such as, diamonds, air conditioners, luxury cars, antique paintings, etc. The more expensive these goods become, more valuable will be they as status symbols and more will be there demand. Thus, such goods are purchased more at higher price and are purchased less at lower prices. Such goods are called as conspicuous goods. The law of demand is also not applicable in case of giffen goods.Giffen goods are those inferior goods, whose income effect is stronger than substitution effect. These are consumed by poor households as a necessity. For instance, potatoes, animal fat oil, low quality rice, etc. An increase in price of such good increases its demand and a decrease in price of such good decreases its demand. 32. Exceptions to the law of demand The law of demand does not apply in case ofexpectations of change in price of the commodity, i.e, in case of speculation. Consumers tend to purchase less or tend to postpone the purchase if they expect a fall in price of commodity in future. Similarly, they tend to purchase more at high price expecting the prices to increase in future. 33. Change in Quanity demanded Vs Change in demand Extension and contraction of demand- Movementalong the same demand curve and represents the change in quantity demanded because of the change in price of the product. 34. Change in demand Increase and decrease in demand More is demanded at a given price when demand increases and vice versa. This change in demand is due to other factors than price. 35. Network externalities in demand Dependence of individual demand on the demand of other people in case of some products is network externality. Two externalities : i) Bandwagon effect ii) Veblen effect 36. Bandwagon effect The demand for products is not by their usefulness but mostly influenced by trend setters/ pace setters. It is the result of the buyers desire to be in style or fashion. This forms the basic objective of advertising and marketing of many products and manipulates market demand. Helps in determining the pricing strategy of the business firm for such firms. 37. Veblen effect The desire of a person to own exclusive/ uniqueproduct as a status symbol. A rise in price of such products enhances their snob appeal and shifts the demand curve upwards. Network externality is negative. The product loses its prestige when it starts getting commonly used. 38. Veblen paradox At high prices, limited but high demand from the rich. Slight upward variation in demand when the prices are reduced a little. After a certain extent of price reduction, demand dips. Once the product is made available to the common man, it follows the usual law of demand.