Assignment-I

1. What is Managerial Economics? Why is it important to study by the future managers of Business?
2. Discuss the Laws of Demand & Supply. What are their implications on business management?
3. Explain the significance of LAC Curve in decision making.

Answers:
1. What is Managerial Economics? Why is it important to study by the future managers of Business?
Answer:-

According to McNair and Meriam, “Managerial economics consists of the use of economic models of
thought to analyze business situations”.

M.H. Spencer and Louis Siegelman have defined managerial economics as “the integration of economic
theory with business practice for the purpose of facilitating decision-making and forward planning by
management”.

According to Evan J. Douglas, “managerial economics is concerned with the application of economic
principles and methodologies to the decision-making process within the firm or organization.”

A future manager who study Managerial Economics can play a very important role by assisting the
management in using the increasingly specialized skills and sophisticated techniques which are required
to solve the difficult problems of successful decision-making and forward planning. He can have
following roles in an organization

• Operations Research & System Analyst

• Architect……planning

• Rational Choice maker

• Economic n Financial Advisor

• Effective model builder

• Friend, Philosopher & guide

1. Economics provides a more comprehensive view of business

Looking at business through an economic perspective can provide a more complete picture of the
relationship between society and the markets. Being able to see the “forest through the trees” without
losing site of individual parts of the business landscape is an important leadership skill to have.
Economics help leaders create more effective business strategies.

2. Understanding economics can improve decision-making

With a more holistic view of the inter-relationships between individuals, markets and the larger
economy, leaders can make more informed decisions and guide their organizations to higher profits.
Understanding past trends in light of today’s particular challenges can mean making more powerful
contributions to company goal-setting. In addition, a wider knowledge of economics also allows business
leaders to create more persuasive arguments when attempting to affect positive change within an
organization.

3. Socially responsible leadership includes economic responsibility

As the global business environment continues to evolve, customers across the world are becoming more
active in demanding strong triple bottom line performance ratings from the companies in which they
choose to invest. Understanding the role of big business in economies across the world can give small
and medium-sized leaders insight into how they should invest their own profits. Understanding the
balance between micro and macro-economic forces at play can help businesses gauge their own
involvements and can help guide responsible and ethical investing.

Responsibilities of Managerial Economist:

• Alert & Objective

• Diplomatic

• Challenging

• Spirit of accommodation

• Harmonious public relations

• Dynamic
2. Discuss the Laws of Demand & Supply. What are their implications on business management?
Answer:-

In the context of supply and demand discussions, demand refers to the quantity of a good that is
desired by buyers. An important distinction to make is the difference between demand and the
quantity demanded. The quantity demanded refers to the specific amount of that product that buyers
are willing to buy at a given price. This relationship between price and the quantity of product
demanded at that price is defined as the demand relationship.

Supply is defined as the total quantity of a product or service that the marketplace can offer. The
quantity supplied is the amount of a product/service that suppliers are willing to supply at a given
price. This relationship between price and the amount of a good/service supplied is known as
the supply relationship.

When thinking about demand and supply together, the supply relationship and demand relationship
basically mirror each other at equilibrium. At equilibrium, the quantity supplied and quantity demanded
intersect and are equal.
In the diagram below, supply is illustrated by the upward sloping blue line and demand is illustrated
by the downward sloping green line. At a price of P* and a quantity of Q*, the quantity
demanded and the supply demanded intersect at the Equilibrium Price. At equilibrium price,
suppliers are selling all the goods that they have produced and consumers are getting all the goods
that they are demanding

This is the optimal economic condition, where both consumers and producers of goods and
services are satisfied.
The Law of Demand:
Very simply, the law of demand states that if all other factors remain constant, if a good's price is higher,
fewer people will demand it. As the price of that good goes down, the quantity of that good that the market
will demand will increase. In the diagram below, you see this relationship. At price P1, the quanity of that
good demanded is Q1. If the price of this good were to be decreased to P2, the quantity of that good demanded
would increase to Q2. The same is true for P3 and Q3. When prices move up or down (assuming all else is
constant), the quantity demanded will move up or down the demand curve and define the new quantity
demanded.

The Law of Supply:

The law of supply states that as the price rises for a given product/service, suppliers are willing to supply
more. Selling more goods/services at a higher price means more revenue. In the diagram below, you
can see that as the price shifts from P1 to P2, the quantity supplied of that good shifts from Q1 to
Q2. The movement in price (up or down) causes movement along the supply curve and the quantity
demanded will change accordingly.
Implications on business management
A business management must always be thinking in terms of supply and demand. How much people
want a particular product and how much of that product a company can push to market. While
classical economic theory might insist that price is the only determinant of the supply/demand equation,
Steve Jobs of Apple has made an art form of creating an artificially short supply of electronic gadgets,
insuring they will be in high demand.

Market:
Without a market, you have no supply or demand, and, therefore, no business at all, because there's no
one to sell anything to. Thus, the first factor a business should consider in the supply and demand arena
is whether there is indeed a market of buyers who want a particular item and sellers who want to sell it
to them. With many buyers and sellers in a competitive market, each has little effect on the price,
allowing it to be driven by overall sentiment.

Supply:
The supply side of the theory refers to how much of a product a business can supply to buyers and at
what price. There's no justification for pricing an item artificially low if he doesn't have the
manufacturing output to keep up with a spike in demand of people who want to get it at the low price.
The exception is if his tactic is simply designed to draw attention to his business, hoping to make enough
of a splash that sellers will return for more of the product at a higher price later on.

Demand:
The law of demand states that, all other factors being equal, demand will be reduced as the price of a
product is raised. It falls to the business owner to find the pricing sweet spot that will capture as much
of a profit as possible without causing demand to retract. When the ultimate goal is to be profitable, a
close and continual analysis of the supply and demand of every product line is essential to staying
competitive in the market.

Price:
Sometimes an imbalance occurs in the market, causing a short supply of an item that is in high demand,
thus allowing those who do produce the product to raise the price, sometimes precipitously. Consider as
an example the spike in gasoline prices at some convenience stores in the hours following the 9/11
attacks. Price per gallon leaped from around $2 to $6 or $7 a gallon. There was no immediate shortage
of product. The supply of gas was the same, but people switched into panic mode and were afraid there
was an imminent shortage and that they should buy as much as they could.