Академический Документы
Профессиональный Документы
Культура Документы
Chapter – 1
Synopsis:
Introduction
Definition of Managerial
Economics
Importance of Managerial
Economics
INTRODUCTION
Managerial economics draws on economic analysis for such concepts as cost,
demand, profit and competition. Managers can take Decision for a business related problems
based on Economic concept.
1. Micro Economics
2. Macro Economics
1. Micro Economics
Micro economics studies the economic behavior of individual decision making units such as
consumers, producers/firms and resource owners. Scope of Managerial Economics Are
c) Market structure
2. Macro Economics
a) Employment
b) National income
c) Foreign Trade
d) Inflation
e) Economic Growth
Chapter – 2
Demand Analysis
Synopsis
Introduction
Meaning of Demand
Definition of Demand
Types of Demand
Law of Demand
Demand Function
Demand Forecasting
MEANING OF DEMAND
Demand for a commodity refers to the quantity of the commodity which an individual
household is willing to purchase per unit of time at a particular price.
DEFINITION OF DEMAND
According to Bober Demand is defined as the various quantities of a
given commodity or service which consumers would buy in one market in
a given period of time at various prices or at various incomes or at various
prices of related goods.
TYPES OF DEMAND
a) Consumer goods Demand and Industrial Goods Demand
Goods and services used for final consumption are called consumer
goods. These include, goods consumed by human-beings, animals, birds
etc.
Producer goods refer to the goods used for production of other goods,
like plant and machines, factory buildings, services of employees, raw
materials etc.
Ex: Consumer goods – Toothpaste, cloth ect.,
Perishable goods become unusable after sometimes, others are durable goods.
Precisely, perishable goods are those which can be consumed only once while in durable
goods, their services only are consumed.
Durable goods pose more complicated problems for demand analysis than do non-
durables. Sales of non-durables are made largely to meet current demands which depend on
The goods whose demand is not tied with the demand for some other goods are said to
have autonomous demand, while the rest have derived demand. Thus the demands for all
producer goods are derived demands as they are needed to obtain consumer or producer
goods. So is money because of its purchasing power. However, there is hardly anything
whose demand is totally independent of any other demand. But the degree of this dependence
varies widely from product to product. Thus the autonomous and derived demands vary in
degree more than in kind.
Ex: Autonomous Demand - all type of consumer goods like car, DVD Player
Market demand is the summation of demand for a good by all individual buyers in the
Market. For example, if the market of good x has, say only three buyers then individual
and market demand represents cumulative demand of all the buyers in a market.
Ex:
8 6 8 5 19
10 4 6 3 13
6 8 10 7 25
Industry Demand - demand for all kinds of cars like, Maruti, Ford, Honda, Toyota ect.,
a) Price
A rise in income would result in the people demanding more of normal goods.
in case of inferior goods rise in income causes a fall in demand. demand for godds of
necessities remains the same with change in price.
• Substitute goods: These goods satisfy the same type of demand and hence can be
used in place of each other ex: tea and coffee. With a rise in price of tea people will
shift their consumption to the relatively cheaper coffee. Hence demand for coffee will
rise. They have a positive relationship
• Complementary goods: These goods are jointly used or consumed together ex: pen
and ink. Increase in the price of ink would cause a decrease in the demand for pen.
Hence the price of ink has a negative relationship with the quantity demanded of pen.
These depend upon the social customs, habits and general lifestyle. Some of
these like fashion keep on changing as a result their demand keeps on changing. For
ex : the craze of being fit has increased the demand for cycles
e) Consumer's expectations
If consumers expect a rise in price of goods in future the demand for these
goods will increase, similarly if they expect a rise in income they will buy more
With the availability of credit sand loans from banks consumers have been
able to afford commodities they would have otherwise not purchased. The demand for
cars has increased due to bank loans.
Larger the population larger will be the number of consumers. Also the
composition of population has an effect on the demand. ex: A higher number of
females will have an increased demand for sarees. These are the demographic effects
on demand for the commodities.
h) Government policy
i) Advertisement:
This factor has gained tremendous importance in the modern
days. When a product is aggressively advertised through all the
possible media, the consumers buy the advertised commodity even
at a high price and many times even if they don’t need it.
j) Season and weather
Based on weather and climate condition the demand of the product will
increase. Demand for woolen clothes goes up in winter whereas their demand is
extremely less in summer.
LAW OF DEMAND
Law of Demand states that the demand of the commodity increase when its price falls
and decrease when its price increases.
The Law of Demand expresses the inverse relationship between quantity demanded
and price. But there are some exceptional situations under which there may be a direct
relationship between price and quantity demanded.
P1
Price
Q1 Q
Quantity Demanded
These are those inferior goods on which the consumer spends a large part of his
income and the demand for which falls with a fall in their price. The demand curve for these
has a positive slope. The consumers of such goods are mostly the poor. a rise in their price
drains their resources and the poor have to shift their consumption from the more expensive
goods to the giffen goods, while a fall in the price would spare the household some money for
more expensive goods. Which still remain cheaper. These goods have no closely related
substitutes; hence income effect is higher than substitution effect.
Goods which serve ' status symbol ' do not follow the law of demand. These are goods of '
conspicuous consumption '.they give their possessor utility in the sense of their ownership.
Rich buy diamond as their possession is prestigious. When their price raises the prestige
value goes up.
a) Speculative goods
If the price of a commodity is rising and is expected to rise in future the demand for the
commodity will increase. Ex: Share
b) Fear of scarcity
At times of war, famine etc. consumers have an abnormal behavior. If they expect
shortage in goods they would buy and hoard goods even at higher prices. In depression they
will buy less at even low prices.
c) Quality-price relationship
Some people assume that expensive goods are of a higher quality then the low priced
goods. In this case more goods are demanded at higher prices.
d) Basic necessities:
These goods are necessity goods to human being. Price of these good increases even
though customers must have to buy these goods for their survival. Ex: Foods, water ect.,
DEMAND FUNCTION
The demand for a commodity arises from the consumer’s willingness and ability to
purchase the commodity. The Demand Theory postulates that the quantity demanded of a
commodity is a function of or depends on not only the price of a commodity, but also
income, price of related goods—both substitutes and complements, taste of consumer, price
expectation and all other factors. Demand function is a comprehensive formulation which
specifies the factors that influence the demand for the product.
Px = Price of substitutes
Pz = Price of complements
B = Income of consumer
ELASTICITY OF DEMAND
where
Q = change in quantity demanded
∆ P = change in price
Q = Original quantity demanded
P = Original Price
The concept of price elasticity reveals that the degree of responsiveness of demand to
the change in price differs from commodity to commodity. Demand for some commodities is
more elastic while that for certain others is less elastic. Using the formula of elasticity, it
possible to mention following different types of price elasticity:
a. Perfectly inelastic demand (ep = 0)
b. Inelastic (less elastic) demand (e < 1)
c. Unitary elasticity (e = 1)
d. Elastic (more elastic) demand (e > 1)
e. Perfectly elastic demand (e = ∞)
Price is not the only determinant of demand. Demand for a commodity changes in
response to a change in income of the consumer. In fact, income effect is a constituent of
the price effect. The income effect suggests the effect of change in income on demand.
The income elasticity of demand explains the extent of change in demand as a result of
change in income. In other words, income elasticity of demand means the responsiveness
of demand to changes in income. Thus, income elasticity of demand can be expressed as:
3. Negative Income Elasticity of Demand (EY< o): It is well known that income effect
for most of the commodities is positive. But in case of inferior goods, the income effect
beyond a certain level of income becomes negative. This implies that as the income
increases the consumer, instead of buying more of a commodity, buys less and switches
on to a superior commodity. The income elasticity of demand in such cases will be
negative.
III. Cross Elasticity of Demand
While discussing the determinants of demand for a commodity, we have observed that
demand for a commodity depends not only on the price of that commodity but also on the
prices of other related goods. Thus, the demand for a commodity X depends not only on the
price of X but also on the prices of other commodities Y, Z….N etc. The concept of cross
elasticity explains the degree of change in demand for X as, a result of change in price of Y.
This can be expressed as:
EC = [Percentage Change in demand for X / Percentage change in price of Y]
The relationship between any two goods is of two types. The goods X and Y can be
complementary goods (such as pen and ink) or substitutes (such as pen and ball pen).
In case of complementary commodities, the cross elasticity will be negative. This means
that fall in price of X (pen) leads to rise in its demand so also rise in t) demand for Y (ink)
On the other hand, the cross elasticity for substitutes is positive which means a fall in
price of X (pen) results in rise in demand for X and fall in demand for Y (ball pen).
If two commodities, say X and Y, are unrelated there will be no change i. Demand for X
as a result of change in price of Y. Cross elasticity in cad of such unrelated goods will then be
zero.
In short, cross elasticity will be of three types:
1. Negative cross elasticity – Complementary commodities.
2. Positive cross elasticity – Substitutes.
3. Zero cross elasticity – Unrelated goods.
In this method, three values of ‘ep’ can be obtained. Viz., ep = 1, ep > 1, ep > 1.
1.If 5% change in price leads to exactly 5% change in demand, i.e. percentage change in
demand is equal to percentage change in price , e = 1, it is a case of unit elasticity. 2.If
percentage change in demand is greater than percentage change in price, e > 1, it means the
demand is elastic. 3.If percentage change in demand is less than that in price, e > 1, meaning
thereby the demand is inelastic.
2. Total Outlay Method: The elasticity of demand can be measured by considering the
changes in price and the consequent changes in demand causing changes in the total amount
spent on the goods. The change in price changes the demand for a commodity which in turn
changes the total expenditure of the consumer or total revenue of the seller.
1. If a given change in price fails to bring about any change in the total outlay, it is the case of
unit elasticity. It means if the total revenue (price x Quantity bought) remains the same in
spite of a change in price, ‘ep’ is said to be equal to 1
2. If price and total revenue are inversely related, i.e., if total revenue falls with rise in price
or rises with fall in price, demand is said to be elastic or e > 1. 3. When price and total
revenue are directly related, i.e. if total revenue rises with a rise in price and falls with a fall
in price, the demand is said to be inelastic pr e < 1.
DEMAND FORECASTING
Meaning of Demand Forecasting
Forecasts are needed to aid in determining what resources are needed, scheduling
existing resources, and acquiring additional resources. Accurate forecasts allow scheduler to
use machine capacity efficiently, reduce production times, and cut inventories.
Forecasting methods may be based on mathematical models using historical data available,
qualitative methods drawing on managerial experience, or a combination of both.
Forecasting demand in such situations require uncovering the underlying patterns from
available information.
Importance of Demand Forecasting
Determining the sales territories.
Helpful in deciding to enter a new market or not.
Helpful in determining how much capacity to be built up.
In deciding the number of salesmen required to achieve the sales objective.
Assessing the effect of a proposed marketing programme.
Product mix decisions.
Deciding the channels of Distribution
Methods or Techniques of Forecasting
The two general types of forecasting techniques used for demand forecasting are: Qualitative
methods and Quantitative methods
Qualitative or Judgemental
Quantitative or
Method
causal Method
II.Quantitative Methods
Quantitative methods include casual methods and time series analysis.
Casual method based historical data on independent variables, such as promotional
campaigns, economics conditions, and competitors’ actions, to predict demand. Time series
analysis is a statistical approach that relies heavily on historical demand data to project the
future size of demand and recognize trends and seasonal patterns.
a) Linear regression
In linear regression, one variable, called a dependent variable, is related to one or more
independent variables by a linear equation.
In the simple linear regression models, the dependent variable is a function of only one
independent variable, and therefore the theoretical relationship is a straight line:
Y=a + bX
Where Y = dependent variable
X = independent variable
a = Y-intercept of the line
b = slope of the line.
The objectives of linear regression analysis is to find values of a and b that minimize the sum
of squared deviations of the actual data points from the graphed line.
The sample correlation coefficient, r, measures the direction and strength of the relationship
between the independent variable and the dependent variable. The value of r can range from –
1.00 to + 1.00.
b) Time series methods
Simple Moving Averages: The simple moving average method is used to estimate
the average of demand time series and thereby remove the effects of random fluctuation. It is
most useful when demand has no pronounced trend or seasonal influences.
Specially, the forecast period t + 1, can be calculated as
Weighted Moving Averages: In the simple moving average method, each demand has the
same weight in the average --namely, 1/n. In the weighted moving average method; each
historical demand in the average can have its own weight. The sum of the weight equal 1.0.
The advantage of a weighted moving average method is that it allows you to emphasize
recent demand over earlier demand. The forecast will be more responsive than the simple
moving average forecast to changes in the underlying average of the demand series.
Nonetheless, the weighted moving average forecast will still lag behind demand because it
merely averages past demands. This lag is specially noticeable with a trend because the
average of the time series is systematically increasing or decreasing.
c) Exponential smoothing.
The exponential smoothing method is a sophisticated weighted moving average
method that calculates the average of a time series by giving recent demands more weight
than earlier demands. It is the most frequently used formal forecasting methods because of its
simplicity and the small amount of data needed to support it.
Ft+1 =α (Demand this period) + (1-α ) (Forecast calculated last period)= α Dt+(1-α )Ft
Ft+1 =Ft + α (Dt-Ft)
Larger α values emphasize recent levels of demand and result in forecasts more
responsive to changes in the underlying average. Smaller α values treat past demand more
uniformly and result in more stable forecasts.
Exponential smoothing requires an initial forecast to get started. There are two ways
to get this initial forecast: Either use last period’s demand or, if some historical data are
available, calculate the average of several recent periods of demand. The effect of the initial
estimate of the average on successive estimate of the average diminishes over time because,
with exponential smoothing, the weights given to successive historical demands used to
calculate the average decay exponentially.
Exponential smoothing has the advantages of simplicity and minimal data
requirements. It is inexpensive to use and therefore very attractive to firms that make
thousands of forecasts for each time period. However, its simplicity also is disadvantage
when the underlying average is changing, as in the case of a demand series with a trend.
Unit - III
Chapter – 3
Supply Analysis
Synopsis
Introduction
Meaning
Definition
Factors Affecting
Supply
Law of Supply
MEANING OF SUPPLY
It is the amount of good the producer is willing and able to offer at a certain period of
time,.
Assumptions made are that producers aim is to maximize profits and that ceteris paribus
holds.
DEFINITION OF SUPPLY
Supply can be defined as the quantity of a commodity offered for sale at a price
during a given period of time
7. Cost of Production
The cost of production is an important item affecting the supply.
Wages, rate of interest, price of machinery and equipment, raw-
material etc influences on cost of production.
8. Future Expectation
Seller sells the commodity or supplies on the basis of the prevailing
prices.
If he feels that future prices will be higher, he will reduce the
present supply of the product.
If he feels that future prices may fall will be tempted to sell more at
the current prices.
9. Change in Government Policy
Any change in government policy will affect the supply.
A fresh tax or levy of excise duties on commodity will affect the
price of the commodity and as a result the supply will get affected.
An increase in tax will reduce the supply and granting of subsidy
and incentive will increase the supply
LAW OF SUPPLY
Meaning of Law supply
Law of supply states that the supply for commodity increases when its price increases
and falls when its price decreases, other things remaining constant
price P1
Q Q1
Quantity supplied
Unit - III
Chapter – 4
Pricing Decision
Synopsis
Introduction
Definition of pricing
Objectives of pricing
Pricing methods
INTRODUCTION
Price involves the cost of the product. The manager have to fix a reasonable price for
a product based demand, marker structure and cost of production
MEANING OF PRICE
The amount of money charged for a product or service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service
MEANING OF PRICING
Pricing is the process of fixing the value for the product attributes expressed in
monetary terms which a consumer pays or is expected to pay in exchange for a product or
service.
DEFINITION OF PRICING
According to W.J. Stanton “Price is the amount of money which is needed to acquire
a product.
OBJECTIVES OF PRICING
• Profit maximization in the short run, and profit optimization in the long run.
• Assured minimum return on investment or sales turnover.
• Ensure a specified targeted sales volume or market share.
• Make entry into new market share.
• Maintain price leadership or price parity with competitors.
• Launch price war to check competitors activity or keep competitors out of the race.
• Improving cash flow through faster sales.
• Liquidation of accumulated inventory of products
6. Differentiated pricing
In different pricing, marketers adopt different prices for the same product at different
locations or for different types of customers.
7. Value pricing
This kind of pricing means companies charge a fairly low price for a high-quality
offering so that the price should represent a high value to the customer.
Ex: Declining prices of computers, P&G
Value pricing is a method in which marketers offer low prices for high quality
products or services.
8. Skimming Pricing
In skimming pricing, the objective is to skim the market and take the cream, by
pricing the new product high and concentrating on market segment which are not price
sensitive. This strategy will bring in high profits which would ploughed back for further
market development and promotion. There are two ways of skimming - rapid skimming and
slow skimming. Later, the company could reduce the price while going in for mass markets
which are more price sensitive.
This strategy involves setting a price which is higher than expected price. May be
used in Monopoly situation.
9. Market Penetration Pricing
Under this a low initial price is set for the product in order to reach a mass market &
capture it then later the can increase the price .