Question.

(a)

1.0. Introduction

Managerial economy is the study of how scare resources directed most efficiently to achieve goals.
It is a valuable tool for analyzing business situation to take better decision.

There are different types of economics, household economy, local economy national economy and
international economy but all economies face the same problem, what to produce? why to produce?
when to produce? How to produce? and for whom to produce? An Economy is a system which
attempt to solves this economic problem.

People have limited number of needs and wants which must be satisfied if they are to survive as
human beings. Some are material needs, some are psychological needs and some are emotional
needs. People’s needs are limited. No one would choose to alive at the level of basic human needs.
They want to enjoy standard of living in the world. This is because of want. Wants are unlimited.
(desire for consumption of goods and services). Therefore, the basic economic problem is that the
resources are limited but wants are unlimited which forces us to make choices.

1.1. Managerial Economics

Managerial economics generally refers to the integration of economic theory with business practice.
Economics provides tools managerial economics applies these tools to the management of business. In
simple terms, managerial economics means the application of economic theory to the problem of
management. After the Second World War and particularly after 1950, with the expansion of business all
over the world, the business manager was faced with many problems due to changing business environment.
The prime function of a management executive in a business organization is decision-making and forward
planning. The decisions and forward planning is for the future, which is uncertain. In the real world, the
business manager rarely has complete information as to future sales, costs, profits, capital etc. Managerial
economics viewed as economics applied to problem solving at the level of the firm. It enables the business
executive to assume and analyze things. Every firm tries to get satisfactory profit even though economics
emphasizes maximizing of profit.
Managerial economics becomes necessary to redesign economic ideas to the practical world. It is a branch
of economics that deals with the application of microeconomic analysis to decision-making techniques of
businesses and management units. Economics is a science concerned with the problem of allocating scarce
resources with competing ends. Managerial economics may also be taken as economics applied to problems
of choice of alternatives and allocation of scarce resources by the firms. Managerial economics is goal
oriented and aims at maximum achievement of objectives. Managerial economics emerged only in the early
part of 1950’s. Managerial economics acts as the via media between economic theory and pragmatic
economics. Managerial economics bridges the gap between "theory and practice.

Hence decisions are made and plans formulated on the basis of past data, current information and the
estimates about future predicted as best as possible. As plans are implemented over time, therefore, plans
may have to be revised and different courses of action adopted. Managers are thus engaged in a continuous
process of decision-making through an uncertain future and the overall problem confronting them is one of
adjusting to uncertainty.

In fulfilling the function of decision-making in an uncertainty frame-work, economic theory can be pressed
into service with considerable advantage. Economic theory deals with a number of concepts and principles
relating to profit, demand, c0st, pricing etc. Which aided by allied disciplines like accounting, statistics
and mathematics can be used to solve the problems of business management.

1.2. Definition of Managerial Economics

Managerial economics is the "application of the economic concepts and economic analysis to the
problems of formulating rational managerial decisions". It draws heavily from quantitative techniques such
as regression analysis, correlation and calculus.

Managerial economists have defined managerial economics in a variety of ways:

 Brigham and Pappas, Douglas has defined managerial economics as,” managerial economics is
concerned with the application of economic principles and methodologies to the decision making
process with the firm or organization under conditions of uncertainty. It seeks to establish rules
and principles to facilitate the attainment of the desired economic goals relate to costs, revenues
and profits and are important within both the business and the non-business institutions”.
 Milton H. Spencer and Lonis Siegelman define 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 Floyd E. Gillis, “Managerial Economics deals almost exclusively with those busi-
ness situations that can be quantified and dealt with in a model or at least approximated
quantitatively.”
  According to Spencer and Siegelman, The integration of economic theory with business practice
for the purpose of facilitating decision-making and forward planning by management”.
 According to Mc-Gutgan and Moyer, Managerial economics is the application of economic
theory and methodology to decision-making problems faced by both public and private
institutions”. Managerial economics studies the application of the principles, techniques and
concepts of economics to managerial problems of business and industrial enterprises. The term is
used interchangeably with micro economics, macro- economics, monetary economics.

1.3. Common Features of managerial Economics

Managerial economics is concerned with decision making of economic nature. It deals with identifying
different choices and allocating limited resources.

1. Managerial economics is goal oriented, it aims at maximum achievement of objectives and how
decisions should be made by the manager to achieve the goal.
2. Managerial economics is pragmatic as it deals with matters according to their practical
significance.
3. Managerial economics applies quantitative techniques to business. While measurement
without theory can only lead to faulty conclusions. Precision theory without measurement
cannot be operationally useful.
4. Managerial economics is pragmatic and realistic in nature. It is applied to solve problems faced
by the business firms. These problems are related to choice and allocation of resources which
are economic in character. It should be remembered that decision-making in business is
influenced not only by economic factors, but, also by many other factors such as, Human,
behavioral, technological and Environmental.
2.0. Relationship of managerial economics with other disciplines:

Managerial economics is closely related to other subjects like micro economic theory, macro-economic
theory, mathematics, statistics, accounting and operations research. Managerial economics,” as using the
logic of economics, mathematics and statistics to provide effective ways of thinking about business decision
problems”.
 Figure (1.1) Relationship of managerial economics with other disciplines

 Managerial economics and micro economics: Managerial economics is mainly micro economic
in character, making use of many of the concepts and tools provided by micro-economic theory.
The concept of elasticity of demand, marginal cost, market structures, the theory of the firm and
the theory of pricing of micro-economics are fully made use of by managerial economics
 Managerial economics and macro-economic: Macro-economics is concerned with aggregates
and macro-economic concepts are used in managerial economics in the area of forecasting general
business conditions. Macro-economic concepts like national income, social accounting, managerial
efficiency of capital, multiplier, business cycles, fiscal policies etc. Both micro and macro-
economics are closely related to managerial economics. Managerial economics draws from micro
and macro-economics, thus, it can apply these principles to solve the day-to-day problems faced by
businessmen.
 Managerial economics and mathematics: Managerial economics is becoming increasingly
mathematical in character. Businessmen deal with various concepts which are measurable. The
use of mathematical logic provides clarity of concepts. It also gives a systematic frame-work within
which quantitative relationship maybe analyzed. Mathematics, therefore, is of great help to
managerial economics. The major problem confronting businessmen is to minimize cost or
 maximize profit or optimize sales. To find out the solution for the overall problems, mathematical
concepts and techniques are widely used. Mathematical techniques like linear programming,
games theory etc. It helps managerial economists to solve many of their problems.
 Managerial economics and statistics:
Statistics is a very useful science for business executives because a business runs on
estimates and probabilities. Statistics supplies many tools to managerial economics.
Suppose forecasting has to be done. In managerial economics, measures of central
tendency like the mean, median, mode, and measures of dispersion, correlation, regression,
least square, estimators are widely. Statistical tools are widely used in the solution of
managerial problems. For example, sampling is very useful in data collection. Statistics is
useful to managerial economics in many ways:
a. Managerial economics requires marshalling of quantitative data to find out functional
relationship involved in decision-making.

b. Statistical methods are useful for empirical testing in managerial economics.

c. The business executives have to work and take decisions in an uncertainty frame-work. The
theory of probability evolved by statistics helps managerial economists for taking a logical
decision.

 Managerial economics and accounting: Accounting information is one of the primary

sources of data required for managerial economists for the decision-making purpose. The
information it contains can be used by the managerial economist to throw some light on
the future course of action. Managerial economics is closely related to accounting. It is
recording the financial operation of a business firm. The buying of goods, sale of goods,
payment of cash, receipt of cash and similar dealings are called business transactions. The
business transactions are varied and multifarious.

There are three classes of accounts: (i) Personal account, (ii) Property accounts, and (iii)
Nominal accounts. Management accounting provides the accounting data for taking
business decisions. The accounting techniques are very essential for the success of the firm
because profit maximization is the major objective of the firm.
  Managerial economics and operations research: Operations research is the,” application of
mathematical techniques in solving business problems”. It deals with model building that is
construction of theoretical-models that help the decision-making process. Though the roots of
operations research lie in military studies, it is now largely used in business administration,
planning and control. Linear programming and allied concepts of operations research are used in
managerial economics.

3.0. Nature of Managerial Economics:

 Managerial economics is concerned with the analysis of finding optimal solutions to

decision making problems of businesses/ firms (micro economic in nature).
 Managerial economics is a practical subject therefore it is pragmatic.
 Managerial economics describes, what is the observed economic phenomenon (positive
economics) and prescribes what ought to be (normative economics)
 Managerial economics is based on strong economic concepts. (conceptual in nature)
 Managerial economics analyses the problems of the firms in the perspective of the economy
as a whole (macro in nature)
 It helps to find optimal solution to the business problems (problem solving)

4.0.

Different between managerial economic and other discipline

 The relationship between managerial economics and other disciplines are described as follows:
Managerial economics provides a link between economic theory and decision.

Figure 1.2: Managerial economics links between economic theory and decision sciences
 Problem faced by
decision makers in
management

Managerial
Economics, which
applies and extends
Economic Theory economics and the Decision Science
decision sciences to
solve management
Problems

Solutions to decision
problems faced by
Managers

 Managerial economics is largely prescriptive, that is, it attempts to establish rules and techniques
to fulfill specified goals.
 Managerial economics draws heavily on the decision sciences as well as traditional economics.
 The decision sciences provide ways to analyze the impact of alternative courses of action.
Managerial economics uses optimization techniques to determine optimal courses of action for
decision maker.
 In business administration, managerial economics provide fundamental analytical tools that can be
used in the study of finance, marketing and production.

Managerial Economics Assignment

M60101170094 (Asia e University)

5.0. Conclusion

Managerial economics has its relationship with other disciplines for propounding its theories and concepts
for managerial decision making. Essentially it is a branch of economics. Managerial economics is closely
related to certain subjects like statistics, mathematics, accounting and operations research. Managerial
Economics is closely related to various subjects. All these subjects bringing them to bear on business
problem of a firm. In particular, all these subject are getting closed to managerial Economic and there an
appears to be trends towards their integration.

Managerial economics helps in estimating the product demand, planning of production schedule, deciding
the input combinations, estimation of cost of production, achieving economies of scale and increasing the
returns to scale. It also includes determining price of the product, analyzing market structure to determine
the price of the product for profit maximization, which helps them to control and plan capital in an effective
manner. Successful mangers make good decisions, and one of their most useful tools is the methodology
of managerial economics.

Warren E Buffett, the renowned chairman and CEO of Berkshire Hathaway Inc., invested $100 and went
on to accumulate a personal net worth of $30 billion. Buffett credits his success to a basic understanding of
managerial economics. Buffett’s success is a powerful testimony to the practical usefulness of managerial
economics. Managerial economics has a very important role to play by helping managements in successful
decision making and forward planning. To discharge his role successfully, a manager must recognize his
responsibilities and obligations. There is a growing realization that the managers contribute significantly to
the profitable growth of the firms. To conclude that managerial economics consists of applying economic
principles and concepts towards adjusting with various uncertainties faced by a business firm.

Question. (b)

Discuss basic process of decision making with the help of illustrates and appropriate example.

1.0

Introduction

We are faced with situations in life that require us to make choice for every day. Some of these
choices are easy, and at times, some of them can be difficult. Easy decisions consist of things like
what clothing you should wear; most people choose what to wear based on the season of the year,
the weather of the day, and where they might be going. Other easy decisions consist of things like
what to eat, what movie to see, and what television programs to watch. Decisions that seem to be
the most difficult are those that require a deeper level of thought. Examples of difficult decisions
consist of things like where to attend college, what career path would be best, and/or whether or
not to marry and start a family. These types of decisions are difficult because they are life changing
decisions; they shape who we are, and they shape our future.

1.1

Process of decision making

Every organization operate by people making decisions. A manager plans, organizes, staffs, leads,
and controls her team by executing decisions. The effectiveness and quality of those decisions
determine how successful a manager will be. Managers are constantly called upon to make
decisions in order to solve problems.

Decision making and problem solving are ongoing processes of evaluating situations or problems,
considering alternatives, making choices, and following them up with the necessary actions.
Sometimes the decision‐making process is extremely short, and mental reflection is essentially
instantaneous. In other situations, the process can drag on for weeks or even months. The entire
decision‐making process is dependent upon the right information being available to the right
people at the right times. The decision‐making process involves the following steps:

Figure 1.1: Basic steps in the decision making process

Establish or Identify Objectives

Step Establishing what an organization is trying to achieve is crucial in
1 decision making. Unless we know of what are we trying to achieve,
there is no sensible ways to make the decision.

Define the problem

Step The Most difficult parts of decision making is to determine exactly
2 what the problem is.

Identify Possible Solutions

Step Once the problem is defined, trying to construct and identify possible
3 solutions.
 Select the Best Possible Solutions
Step Evaluate each of the possible solution and determine which is the best
4 possible solution in order to achieve the objective of the organization.

Implement the Decision

Step Once a particular solution is having been chosen it must be
5 implemented in order to be effective.

Figure 1.1 summarizes the decision making process.

Figure 1.2: Summarizes of 5 basic steps in the decision making process

1 Establish the Objectives

2 Define the Problem

3 Identify Possible Solutions

Consider Legal and other

Consider input 4 Select the Best Possible Constraints
constraints Solutions

5 Implement the Decision

2.0. The five steps involved in managerial decision making process are explained belows:

1. Establishing the Objective: The decision making process is to establish the objective of the
business enterprise. The important objective of a private business enterprise is to maximize profits.
However, a business firm may have some other objectives such as maximization of sales or growth
of the firm.

2. Defining the Problem: The second step in decision making process is one of defining or
identifying the problem. The nature of the problem is important because decision making is after
all meant for solution of the problem. For instance, a cotton textile firm may find that its profits
are declining. It needs to be investigated what are the causes of the problem of decreasing profits.
Whether it is the wrong pricing policy, bad labor-management relations or the use of outdated
technology which is causing the problem of declining profits. The source or reason for falling
profits has been found, the problem has been identified and defined.

3. Identifying Possible Alternative Solutions: The next step is to find out alternative solutions to
the problem, once the problem has been identified. This will require considering the variables that
have an impact on the problem. In this way, relationship among the variables and with the problems
has to be established.
For example, in case of the problem mentioned above, if it is identified that the problem of
declining profits is due to be use of technologically inefficient and outdated machinery in
production. The choice between these alternative courses of action depends on which will bring
about larger increase in profits.

The two possible solutions of the problem are:

(1) Updating and replacing only the old machinery.

(2) Building entirely a new plant equipped with latest machinery.

4. Evaluating Alternative Courses of Action:

Business decision making is to evaluate the alternative courses of action. The collection and
analysis of the relevant data is requiring in this step. Some data will be available within the various
departments of the firm and the other may be obtained from the industry and government.

Methods such as regression analysis, differential calculus, linear programming, cost- benefit
analysis are used to arrive at the optimal course. The optimum solution will be one that helps to
achieve the established objective of the firm. The data and information so obtained can be used to
evaluate the outcome or results expected from each possible course of action. A manager works
under certain constraints; it may be further noted that for the choice of an optimal solution to the
problem. The constraints may be legal such as laws regarding pollution and disposal of harmful
wastes; the way be financial (i.e. limited financial resources). They may relate to the availability
of physical infrastructure and raw materials, and they may be technological in nature which set
limits to the possible output to be produced per unit of time. The crucial role of a business manager
is to determine optimal course of action and he has to make a decision under these constraints.

5. Implementing the Decision:

The implementation of the decision requires constant monitoring so that expected results from the
optimal course of action are obtained. Thus, if it is found that expected results are not forthcoming
due to the wrong implementation of the decision, then corrective measures should be taken.

However, it should be noted that once a course of action is implemented to achieve the established
objective, changes in it may become necessary from time to time in response in changes in
conditions or firm’s operating environment on the basis of which decisions were taken.

3.0. Example of improving Strategic decision making Process

Effective strategic business decisions bring together the right resources for the right markets at the
right time. Timing is crucial. For example, Tesco developed its online ordering and delivery
service as internet shopping expanded. Virgin sold off its music stores as downloading music
became more popular. The quality of a company's decision making helps it gain an advantage over
competitors. Business decisions must reflect an organization’s aims (its purpose), such as to
maximize returns for its shareholders. They should also relate to its objectives (its goals), such as
to be the market leader in its field. To achieve its aims and objectives, a business puts in place
strategies. This approach applies regardless of the size of the business.

Consider a local bakery that operates a small cafe business. The cafe is open from 9am to 4pm,
Monday to Friday. Competition from a nearby supermarket and fast food outlets is preventing the
cafe business from growing. What action could the cafe take to increase sales? The key issue to
identify is why customers are choosing other outlets. Is it because of location, price or product
quality? Analyzing a problem of this kind needs a systematic approach. Talking to customers about
what they like, visiting other outlets to see the competition and examining in-house data on costs,
pricing and service could provide valuable information. Based on this research, alternative courses
of action might include cutting costs in order to reduce prices or promoting the cafe in different
ways. The business chooses actions based on evidence in support of its objectives. The decision
may be a hard one. As a last resort, the bakery may need to exit the cafe market altogether if it
cannot combat the competition and increase sales. Monitoring the feedback from, or outcomes of,
a decision allows the business to know what is working and what is not, which leads to a new
decision making cycle.

A rational decision making approach can help to reduce uncertainty. However, the external
environment of a business adds variable factors which can increase risk. For example, suppose an
engineering business needs new cost-saving technology to improve production and make it
competitive. Justifying this expenditure becomes more difficult in a recession. However, what is
the risk of not taking action? Will the business survive without the technology?

It is also important to balance risk against the likely return on investment. The extent to which this
happens may depend on the organizational culture. Some businesses encourage risk taking; some
are more risk-averse. Virgin reflects its owner, Richard Branson, an entrepreneur who thrives on
risk taking (both in business and in his personal life). The Nationwide Building Society, which has
a duty to safeguard its members' money, adopts a more cautious approach. High-performing
organizations use the skills of their people to ensure they make more effective decisions than poor
ones.
4.0. Conclusion

Every steps in the decision making process is important and needs proper consideration by
managers. Management decisions are just not possible without decision making as it is an intergal
aspects of management process itself. Decision making process is the key parts of manaager’s
activities. Decision are important as they determine both managerial and organizational actions.
Decision cannot be fully independent. Managerial decisions are interlinked and interdependent. A
manager has to make adjestements or compromises while making decisions. For example, for
reducing price,some compromise with the quality may be necessary. A manager gives more
importance to one and less to the other. He takes one decisions which is rational at the same time
makes some compromise int the other decisions. As a results, other decisions is not likely to be
fully rational. In shorts, business decisions are interlinked. This brings an element of irrationality
in some decisions.

Question-c

1.0 Introduction

Break-even analysis is useful in the determination of the level of production or in a targeted desired
sales mix. The analysis is for management’s use only as the metric and calculations are often not
required to be disclosed to external sources such as investors, regulators or financial institutions.
Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional
unit produced and sold. In general, a company with lower fixed costs will have a lower break-even
point of sale. For example, a company with $0 of fixed costs will automatically have broken even
upon the sale of the first product assuming variable costs do not exceed sales revenue. However,
the accumulation of variable costs will limit the leverage of the company as these expenses are
incurred for each item sold.

1.1 Definition and the Concept of Break-even analysis

Break-even analysis entails the calculation and examination of the margin of safety for an entity
based on the revenues collected and associated costs. Analyzing different price levels relating to
various levels of demand, an entity uses break-even analysis to determine what level of sales are
needed to cover total fixed costs. A demand-side analysis would give a seller greater insight
regarding selling capabilities. The concept of break-even analysis deals with the contribution
margin of a product. The contribution margin is the excess between the selling price of the good
and total variable costs. For example, if a product sells for $200, total fixed costs are $50 per
product and total variable costs are $120 per product, the product has a contribution margin of the
product is $80 ($200 - $120). This $80 reflects the amount of revenue collected to cover fixed
costs and be retained as net profit. Fixed costs are not considered in calculating the contribution
margin.

1.2 Formulas for Break-Even Analysis

Break-even analysis may be performed using two formulas. First, the total fixed costs are divided
the unit contribution margin.

Alternatively, the break-even point in sales dollars is calculated by dividing total fixed costs by
the contribution margin ratio. The contribution margin ratio is the contribution margin per unit
divided by the sale price.

Example one, assume total company fixed costs are $20,000. With a contribution margin of $40,
the break-even point is 500 units ($20,000 divided by $40). Upon the sale of 500 units, all fixed
costs will be paid for, and the company will report a net profit or loss of $0.

Example two, the contribution margin ratio is 40% ($40 contribution margin per unit divided by
$100 sale price per unit). Therefore, the break-even point in sales dollars is $50,000 ($20,000 total
fixed costs divided by 40%). This figured may be confirmed as the break-even in units (500)
multiplied by the sale price ($100) equals $50,000.

1.3 The advantages of break-even chart in the decision making process

Under the right conditions, break-even charts can produce useful projections of the effect of the
output rate on costs, receipts and profits.

A firm may use the break-even chart to determine the effect of a projected decline in sales on
profits.
A firm may also use the break-even chart to determine the number of units of a product it must
sell in order to break-even.

2.0. Calculation of the ABC Company Limited

TR= P x Q,

Total Costs= Total Fixed Cost + Total Variable Costs

Total Variable Costs= AVC x Q

Total Fixed Costs= $ 300,000.00, AVC= $ 2.00, P = $ 5.00

At Break-even Point

Profit = TR- TC

0 = TR-TC

0 = P x Q – (TFC+ TVC)

PxQ = TFC+ TVC

5xQ = 300,000 + (AVC x Q)

5Q- 2Q = 300,000

3Q = 300,000

Q = $100,000

Total Variable Costs = AVC x Q

= $ 2.00 x 100,000

= $ 200,000.00
Total of all costs = $ 300,000.00 + $ 200,000.00

= $ 500,000.00

Total Revenue = $ 5.00 x $100,000

= $ 500,000.00

Profits =$0

Break-Even Chart Analysis

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0
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Managerial Economics Assignment

M60101170094 (Asia e University)

 0.00%

40.00%

60.00%

Fixed % Total Variable % Profit %

Pie Chart

For example, Company ABC normally sells 10,000 widgets at $5 each, its typical revenue is
$50,000. If the company increases the selling price of each widget by $1, and sales remain stable,
revenue is increased by $10,000.

A bump in revenue has a trickle-down effect on profitability metrics. Gross profit, for example, is
equal to total revenue minus the cost of goods sold, or COGS. Thus, if a company increases the
selling price of its product but sales and COGS remain stable, the gross profit is given a boost
equal to the increase in revenue. If company ABC has typical COGS of $5,000 for the 10,000
widgets its sells each year, its gross profit jumps from $45,000 to $55,000 as a result of the $1
price increase, all else remaining unchanged. This is important because the higher a company's
gross profit, the more revenue remains to take care of the myriad other expenses required to run a
business. Businesses with weak gross profits tend to have less than robust net profits, making them
less desirable to investors. However, price changes are rarely so straightforward, and often a price
increase must be accompanied by an improvement in product quality commensurate with the
 higher cost to consumers. If the price of a product is increased too much, sales may falter as
customers choose to do business elsewhere, leading to lower revenue and diminished profits.

When we further re-arrange the equation, we will obtain the following:

Fixed Costs + Profits

Unit Sales =
Selling Price per Unit - Variable Costs per Unit

$300,000 + $0
Unit Sales =
$5 - $2

= 100,000 Units (In Zero Unit, the unit of sales)

when the ABC Company Reduce price 1$

$300,000 + $0
Unit Sales =
$4 - $2

= 150,000 Units

(The Company will be sell more (100,000-150,000=50,000) Units in order to achieve Zero
profit)

The 100,000 and 150,000 units can be converted to dollars as follows: $500,000 ($5 x 100,000
units) and $600,000 ($4 x 150,000 units), respectively.

Total Costs= Total Fixed Cost + Total Variable Costs

Total Variable Costs= AVC x Q

Total Fixed Costs= $ 300,000.00, AVC= $ 2.00, P = $ 5.00

At Break-even Point

Profit = TR- TC

1 = TR-TC
 1 = P x Q – (TFC+ TVC)

PxQ = TFC+ TVC

4xQ = 300,000 + (AVC x Q)

4Q- 2Q = 300,000

2Q = 300,000

Q = $150,000

Total Variable Costs = AVC x Q

= $ 2.00 x 150,000

= $ 300,000.00

Total of all costs = $ 300,000.00 + $ 300,000.00

= $ 600,000.00

Managerial Economics Assignment

M60101170094 (Asia e University)

Total Revenue = $ 4.00 x $150,000

= $ 600,000.00

Profits =$0

If the price is reducing, the product will be sell 150,000 Units. But the profit is same $0 Profit.
No effect to change for Company.
 Break-Even Chart Analysis

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0

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Question C (2)

Six Factors that affecting Demand

An increase or decrease is any of these factors affecting demand will result in a shift in the demand
will result in a shift in the demand curve. Depending on whether it is an inwards or outward shift,
there will be a change in the quantity demanded and price.

1. Normal Goods
When there is an increase in the consumer’s income, there will be an increase in demand
for a good. If the consumer’s income falls, then there will be a fall in demand.
2. Change in preference
If there is a change in preferences, then there will be a change in demand. For example:
Yoga become mainstream a couple of a years ago and health enthusiasts promoted its
benefits. This led to an increase in demand for yoga classes.
3. Complementary Goods
 When there is a decrease in the price of compliments then the demand for its compliments
will increase. Compliments are goods you usually together, like bread and butter, tea and
milk. If the prices of one goes up, the demand for the other goods will fall. For example, if
the price of Yoga classes fell then there would be increase in demand for Yoga Mats.
4. Substitutes
An increase in the price of the substitutes will affects demand curve. Substitute are goods
that can be bought in place of the like how Coca Cola and Pepsi are very close to substitute.
If the prices of demand ones go up, the demand for the other will raise. For example, if
meditation classes become more expensive then there would be an increase in demand for
Yoga classes.
5. Market Size
If the size of the market increased, like if a country’s population increases or there in an
increase a number of people in certain age group them the demand for the product will
increase. For example, birth rate suddenly skyrocketed, then there would be an increase in
demand for baby products.
6. Price expectation
When there is an expectation of price change, if people expected the price of a goods to
increase in the near future, then they are more likely to purchase to sooner, which would
increase demand for the product. For example, if people are expectation the price of the
laptop fall then they will delay their purchase till the price lowers

These are the Six factors that effecting demand. These factors are not the same as movement along
the demand curve, which is affected by the price or quantity demanded. A shifts can be an increase
in demand, move towards the rights or upwards, while the decrease in demand is a shift downwards
or to the left.

In the diagrams bellows shows an increase in demand. This results in the demand curve Shifting
from D to D1. This shift can occur because of any of determinant of demand mentioned below.
Due to the demand shift, we see an increase in quantity demanded from Q1 to Q2 and increase in
Price from P1 to P2.

Increase in Demand
 P S

Price

P2

P1

D2

D1 Q

Q1 Q2 Quantity

Reasons for Increase and Decrease in Demand!

The determinants of demand other than price such as consumers’ tastes and preferences, income,
price of the related goods change, the whole demand curve will change. Increase in demand
means the consumer buys more of the good at various prices than before. For example, if the
income of a consumer increases, or if the fashion for a goods increases, the consumer will buy
greater quantities of the goods than before at various given prices. As a result, the whole demand
curve will shift upward, flow considers Figure 7.
In the beginning, the demand curve is DD. If there is a favorable change in the factors
determining the demand and the demand curve for the goods shift upward to D’D’, increase in
demand has occurred when the demand curve for the goods is DD, then the price OF, OM
quantity of the goods is demanded, but with the demand curve D’D’, at the same price OP, a
greater quantity OH is demanded.

Likewise, at other prices also, at the demand curve D’D’, more quantity is demanded than at the
demand curve DD.

In brief increase in demand occurs due to the following reasons: -

(i) The fashion for a goods increases or people’s tastes and preferences become more favorable
for the good;

(ii) Consumer’s income increases.

(iii) Prices of the substitutes of the goods in question have risen.

(iv) Prices of complementary goods have fallen.

(v) Propensity to consume of the people has increased and

(vi) Owing to the increase in population and as a result of expansion in market, the number of
consumers of the goods has increased.

If there is any above change, demand will increase and the demand curve will shift to an upward
position.

Decrease in demand means that at various prices, less is demanded than before. The decrease in
demand does not occur due to the rise in price but due to the changes in other determinants of
demand.

Decrease in demand may occur due to the following reasons:

(i) A goods have gone out of fashion or the tastes of the people for a commodity have declined.

(ii) Incomes of the consumers have fallen.

(iii) The prices of the substitutes of the commodity have fallen.

(iv) The prices of the complements of that commodity have risen and

(v) The propensity to consume of the people has declined. In other words, the propensity to save
has increased. Increase and decrease in demand is depicted in Figure 7. In this figure DD is the
demand curve for the goods in the beginning. If due to the above reasons the demand for the
goods declines, the whole demand curve will shift below. In figure 7 as a result of the decrease in
demand, demand curve has shifted below to the position D” D”.

when the demand curve shifts below from DD to D” D”, at price OP, quantity demanded
decreases from OM to OL. A glance at the demand curve D” D” will reveal that at prices other
than Op also, less quantity of the good is demanded at the demand curve D”D” than at the
demand curve DD.

1.3. Factors Influencing Demand for a Commodity:

It is important to examine all of the factors that affect the demand for a good or service, even
though the focus in economics is on the relationship between the price of a product and how much
consumers are willing and able to buy. They are many factors on which the demand for a
commodity depends. They are called determinants of demand. They are discussed as under:

1. Income of the consumer:

A consumer’s demand is influenced by the size of his income. With increase in the level of
income, there is increase in the demand for goods and services. A rise in income causes a rise
in consumption. As a result, a consumer buys more. For most of the goods, the income effect
is positive. But for the inferior goods, the income effect is negative. That means with a rise in
income, demand for inferior goods may fall. The effect that income has on the amount of a
product that consumers are willing and able to buy depends on the type of goods. There is a
positive (direct) relationship between a consumer's income and the amount of the good that
one is willing and able to buy. In other words, for these goods when income rises the demand
for the product will increase; when income falls, the demand for the product will decrease.
These types of goods are normal goods. For example, think about a low-quality (high fat-
content) ground beef. You might buy this while you are a student, because it is inexpensive
relative to other types of meat. But if your income increases enough, you might decide to stop
 buying this type of meat and instead buy leaner cuts of ground beef, or even give up ground
beef entirely in favor of beef tenderloin. If this were the case (that as your income went up,
you were willing to buy less high-fat ground beef), there would be an inverse relationship
between your income and your demand for this type of meat. We call this type of good
an inferior good.

There are two important things to keep in mind about inferior goods. They are not necessarily low-
quality goods. The term inferior (as we use it in economics) just means that there is an inverse

relationship between one's income and the demand for that good. Also, whether a good is normal
or inferior may be different from person to person. A product may be a normal good for you, but
an inferior good for another person.
In Figure 22 (A) the ICC curve slopes upwards with the increase in income up to the equilibrium
point R at the budget line P1Q1 on the indifference curve 1. Beyond this point it becomes horizontal
which signifies that the consumer has reached the saturation point with regard to the consumption
of good Y. The second type of ICC curve may have a positive slope in the beginning but become
and stay horizontal beyond a certain point when the income of the consumer continues to increase.

Figure 22 (B) shows a vertical income consumption curve when the consumption of good X
reaches the saturation level R on the part of the consumer. He has no inclination to increase its
purchases despite further increases in his income. He continues to purchase OA of it even at higher
income levels. The last two types of income consumption curves relate to inferior goods. The
demand of inferior goods falls, when the income of the consumer increases beyond a certain level,
and replaces them by superior substitutes. The Business man may replace coarse grains by wheat
or rice, and coarse cloth by a fine variety. In Figure 22 (C), good Y is inferior and X is a superior
or luxury good.

In Figure 22 (D), good X is shown as inferior and У is a superior good beyond the equilibrium
point R when the ICC curve turns back upon itself. In both these cases the income effect is negative
beyond point R on the income-consumption curve ICC.’ Up to point R the ICC curve has a positive
slope and beyond that it is negatively inclined. The consumer’s purchases of Y fall with the
increase in income.

2. Consumer Income

When your income goes up, you can afford to buy more goods and services, as incomes rise,
consumers are able to buy more products at each and every price

Result: Shift to the right

Decrease in income - Loss of income would cause people to buy less of a good at each and
every price

Demand curve then shifts to the left, showing decrease in demand.

Change in Demand
 P

Price

P0

D2

Q2 Quantity (Unit /time)

2. Price of the commodity:

Price is a very important factor, which influences demand for the commodity. Generally, demand
for the commodity expands when its price falls, in the same way if the price increases, demand for
the commodity contracts. It should be noted that it might not happen, if other things do not remain
constant. Consumers want to buy more of a product at a low price and less of a product at a high
price. There is an inverse relationship between the price of a product and the amount of that product
consumers are willing and able to buy. This is often referred to as The Law of Demand.

Table 3.1 illustrates the Law of Demand. The relation between price and the quantity demanded
of a particular commodity, say, carrots. Column (i) in Table 3.1 shows the different quantities of
carrots a hypothetical consumer, say, Mr. X, would be ready to buy at 6 different prices. This Table
is known as the demand schedule. It shows, for example, that at a price of Rs. 2.00 per kg his
quantity demanded is 2 kg per week; at a price of Rs. 1.00 his quantity demanded is 6 kg per week
and so forth. Each price quantity combination is indicated by a reference point such as a, b, c……
etc.
We measure price on the vertical axis and quantity on the horizontal axis. Point a shows that when
price is Rs. 2.50 the quantity demanded is zero. Point b shows that when price is Rs. 2.00 the
quantity demanded is 2 kg. Other points represent four other prices quantity combinations
(originally shown in Table 3.1). The extreme point f shows that 10 kg of carrots would be
demanded if it were a free good (where price was zero).

3. Changes in the prices of related goods:

Sometimes, the demand for a good might be influenced by prices changes of other goods. There
are two types of related goods. They are substitutes and complements. Tea and Coffee are good
substitutes. A rise in the price of coffee will increase the demand for tea and vice versa. Bread and
butter are complements. A fall in the price of bread will increase the demand for butter and vice
versa. As with income, the effect that this has on the amount that one is willing and able to buy
depends on the type of good. For example, bagels and cream cheese. We call these types of
goods compliments. If the price of a bagel goes up, the Law of Demand tells us that we will be
willing/able to buy fewer bagels. But if we want fewer bagels, we will also want to use less cream
cheese (since we typically use them together). Therefore, an increase in the price of bagels means
we want to purchase less cream cheese. We can summarize this by saying that when two goods
are complements, there is an inverse relationship between the price of one good and the demand
for the other good.

On the other hand, some goods are considered to be substitutes for one another: you don't consume
both of them together, but instead choose to consume one or the other. For example, for some
people Coke and Pepsi are substitutes (as with inferior goods, what is a substitute good for one
person may not be a substitute for another person). If the price of Coke increases, this may make
Pepsi relatively more attractive. The Law of Demand tells us that fewer people will buy Coke;
some of these people may decide to switch to Pepsi instead, therefore increasing the amount of
Pepsi that people are willing and able to buy. We summarize this by saying that when two goods
are substitutes, there is a positive relationship between the price of one good and the demand for
the other good.

In economics the terms change in quantity demanded and change in demand are two different
concepts. Change in quantity demanded refers to change in the quantity purchased due to increase
or decrease in the price of a product. (Increase prices of Hamburgers, decrease in demand for
hamburger buns)

In such a case, it is incorrect to say increase or decrease in demand rather it is increase or decrease
in the quantity demanded.
Increase in Demand

Y ($)

Price of Tea D D1

D D1 X

O Q Q1 Quantity

Demand of Tea (in Units)

Demand Curve of given commodity (tea) shift towards rights from DD to D1D1 Due to increase
in price of substitute good (coffee) at the same price of OP.

4. Tastes and preferences of the consumers:

Demand depends on people’s tastes, preferences, habits and social customs. A change in any of
these must bring about a change in demand. For example, if people develop a taste for tea in place
of coffee, the demand for tea will increase and that for coffee will decrease. This is a less tangible
item that still can have a big impact on demand. There are all kinds of things that can change one's
tastes or preferences that cause people to want to buy more or less of a product. For example, if a
celebrity endorses a new product, this may increase the demand for a product. On the other hand, if
a new health study comes out saying something is bad for your health, this may decrease the
demand for the product. Another example is that a person may have a higher demand for an
umbrella on a rainy day than on a sunny day.
One of the determinants of demand is the current state of tastes and preferences for the good or
service. In this example, we will be focusing on the services for Romanian translation. This may
seem like an obscure topic, and it is to most people which will limit our demand for the
service. Because of our tastes or preferences for this specific service, we will have a low demand
for it, especially compared to the demand for Spanish or Chinese translation services. But imagine
if the U.S. or Europe signed a new free trade agreement, or began spending billions of dollars in
business opportunities in Romania.

This would potentially change our tastes and preferences for this service, and likely shift the
demand curve right/up. Tastes and preferences for a good or service are held constant when we
construct the demand curve, the only things that we are allowing to change are the price and the
quantity. Because of this, when some event occurs, like increased business opportunities in
Romania, we will see a change in preferences to conduct business with Romanian translation
companies. For example, it is a positive change in preferences (more business opportunities) so
we will see the demand curve shift right/up or increase, which is shown in the graph below:

You can see that when we increase demand (shift the demand curve right/up) it results in an
increase of both equilibrium price AND quantity. This is easily visible by looking at the red dots
marked 1 and 2. Initially we were at equilibrium point 1 in the market for Romanian translation
services, but after the news of increased business opportunities we move to equilibrium point
2. This means that prices for these services have gone up, as well as the total quantity of these
services that are now used.
Consumer Tastes

Consumers don’t always want the same things

 Advertising, news reports, fashion trends, introduction of new products

 Advertising helps promote products – When popularity of products increases, people buy
more of it
 When consumers want more of an item, they tend to buy more of it at each and every price.
 Result: The demand curve shifts to the right

If people get tired of a product, they buy less at each and every price – causing shift to the left

P D2

Price

P0

Q2 Quantity (Unit /time)

5. Change in the distribution of income:

If the distribution of income is unequal, there will be many poor people and few rich people in
society. The level of demand in such a society will be low. On the other hand, if there is equitable
distribution of income, the demand for necessaries commonly consumed by the poor will increase
and the demand for luxuries consumed by the rich will decrease. However, the net effect of an
equitable distribution of income is an increase in the level of demand.

For Example:

Change in the income Per Household Member

by Recent Fertility: 2006-2014
3
2
1
0
-1
-2

All Man All Women with a birth in the past Percent Change22

Note: All income Level collect 2014-dollar Value.

6. Price expectations:

Expectations of people regarding the future prices of goods also influence their demand. If people
anticipate a rise in the prices of goods in future due to some reasons, the demand for goods will
rise to avoid more prices in future. Contrarily, if the people expect a fall in price, the demand for
the commodity will fall.

It doesn't just matter what is currently going on - one's expectations for the future can also affect
how much of a product one is willing and able to buy. For example, if you hear that Apple will
soon introduce a new iPod that has more memory and longer battery life, you (and other
consumers) may decide to wait to buy an iPod until the new product comes out. When people
decide to wait, they are decreasing the current demand for iPods because of what they expect to
happen in the future. Similarly, if you expect the price of gasoline to go up tomorrow, you may fill
up your car with gas now. So your demand for gas today increased because of what you expect to
happen tomorrow. This is similar to what happened after Hurricane Katrina hit in the fall of 2005.
Rumors started that gas stations would run out of gas. As a result, many consumers decided to fill
up their cars (and gas cans), leading to long lines and a big increase in the demand for gas. This
was all based on the expectation of what would happen.

Foer Example, Natural Gas price in 2017 and 2018 are expected to be higher than last year

Natural gas exports are also expected to increase. Export growth in 2017 largely reflects additional
capacity coming online at Cheniere’s Sabine Pass liquefied natural gas (LNG) liquefaction plant
in Louisiana. The 2018 growth is driven by the expected start of Cove Point LNG in Maryland in
December 2017 and new projects at Cameron LNG and Freeport LNG on the U.S. Gulf Coast
during the second half of 2018. A small increase in pipeline exports to Mexico is expected in both
years.

Imports of natural gas are expected to remain relatively stable over the forecast period at slightly
more than 8 Bcf/d. With expected growth in exports and stable import levels, the United States is
expected to become a net exporter of natural gas on an annual basis in 2018.

7. State of economic activity:

The state of economic activity is major determinant influencing the demand for a commodity.
During the period of boom, prosperity prevails in the economy. Investment, employment and
income increase. The demand for both capital goods and consumer goods increase. But in period
of depression demand declines due to low investment and low income.

The level of demand for a commodity is also influenced by other factors like population,
composition of population, taxation policy of the government, advertisement, natural calamities,
pattern of saving, inventions and discoveries and outbreak of war, emergencies, weather, technical
progress etc.

8. The Number of Consumers in the Market

Consumer Market often defined more precisely by separating and identifying key customer groups.
Factors use for this purposes include demographic, psychographic, behavioral and geographic
characteristic. Demographic Characteristic include different in gender, age, ethnic, background,
income, occupation and education. Other include size of household, religious affiliation,
nationality or social class. Usually and education are further defined within given ranges.

Psychographic Characteristic include interests, activities, opinion, value and attitudes. Such
information helps business better understand what might appeal to their customers when designing
advertising and marketing campaigns. Behavioral Characteristic include product usage rates,
brand loyalty and length of patronage. By distinguishing between heavy, medium and light user,
marketing departments can determine whom they should target and with what type of advertising.
Geographic Characteristic are often based on market size, region, population density and climate.
This kind of information clarifies preference in taste and style in different region, and can help
small retailer find opportunities where larger competitors have no interest.

As more or fewer consumers enter the market this has a direct effect on the amount of a product
that consumers (in general) are willing and able to buy. For example, a pizza shop located near a
University will have more demand and thus higher sales during the fall and spring semesters. In
the summers, when less students are taking classes, the demand for their product will decrease
because the number of consumers in the area has significantly decreased.

Pizza Industry International Growth Rates 2014

30% Column1 Column2 Column3
27%
25%

20%
18.57%

15% 15.27%
13.37%
10%
8.21% 8.09%
5%

0% 0.14%
Asia Pacific middle East Esterm Europe latin America North Africa Australia Western
and Africa Europe

Managerial Economics Assignment

M60101170094 (Asia e University)

 World Pizza Market 2014
Middle East and
Australia,
Africa, 3.842
2.685
Asia Pacific, 11.627

Latin America,
18.891 Westerm Europea,
50.412

North America,
42.277

Westerm Europea North America Latin America Asia Pacific Middle East and Africa Australia

Conclusion

Demand drives economic growth. Businesses want to increase demand so they can
increase profits. Price. The law of demand states that when prices rise, the quantity of demand falls.
That also means that when prices drop, demand will grow. People base their purchasing decisions
on price if all other things are equal. The exact quantity bought for each price level is described in
the demand schedule. Income. When income rises, so will the quantity demanded. When income
falls, so will demand. But if your income doubles, you won't always buy twice as much of a
particular good or service. Prices of related goods or services. The price of complementary goods or
services raises the cost of using the product you demand, so you'll want less. For example,
when gas prices rose to $4 a gallon in 2008, the demand for Hummers fell. Gas is a complementary
good to Hummers. The cost of driving a Hummer rose along with gas prices. The opposite reaction
occurs when the price of a substitute rises. When that happens, people will want more of the good
or service and less of its substitute. That's why Apple continually innovates with its iPhones and
iPods. As soon as a substitute, such as a new Android phone, appears at a lower price, Apple comes
out with a better product. Then the Android is no longer a substitute. Tastes. When the public’s
desires, emotions or preferences change in favor of a product, so does the quantity demanded.
Likewise, when tastes go against it, that depresses the amount demanded. Brand advertising tries
to increase the desire for consumer goods. For example, Buick spent millions to make you think
its cars are not only for older people. Expectations. When people expect that the value of something
will rise, then they demand more of it. That explains the housing asset bubble of 2005. Housing
prices rose, but people bought more because they expected the price to continue to go up. That
drove prices even further until the bubble burst in 2006. Between 2007 and 2011, housing prices
fell 30 percent. But the quantity demanded didn't increase. Number of buyers in the market. The
number of consumers affects overall, or “aggregate,” demand. As more buyers enter the market,
demand rises. That's true even if prices don't change. That was another reason for the housing
bubble. Low-cost and sub-prime mortgages increased the number of people who could afford a
house. The total number of buyers in the market expanded, which increased demand for housing.
When housing prices started to fall, many realized they couldn't afford their mortgages. At that
point, they foreclosed. That reduced the number of buyers, driving down demand. This is how
each element affects demand.
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