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Economics is a social science that studies how society chooses to allocate its scarce resources, which have alternative uses, to provide goods and services for present and future consumption.
Content
Introduction, demand theory & analysis Cardinal and ordinal utility approach Revealed preference theory Price elasticity Production function Cost function Market structure Price and output decisions under different mkt structures, price discrimination Macro economics, monetary and fiscal policy
Books:
Managerial Economics by D N Dwivedi Managerial Economics: Varshney & Maheshwary Managerial Economics: Reckie & crooke Managerial Economics: Craig Peterson An Introduction to Positive Economics: Lipsey Chrystal, Eighth edition
Sessions 1
Importance of economics Managerial economics Difference between micro and macro, Law of demand, Utility concept, Total and Marginal utility
Managerial economics
The discipline of managerial economics deals with aspects of economics and tools of analysis, which are employed by business enterprises for decision-making. Managerial economics is thereby a study of application of managerial skills in economics. It helps in anticipating, determining and resolving potential problems or obstacles. These problems may pertain to costs, prices, forecasting future market, human resource management, profits and so on.
Micro vs Macro
Micro Economics:
Micro Economics studies the economic decisions of individual and business units such as a firm, an industry etc. Micro Economic studies the problems of price determination, resource allocation etc. While formulating economic theories, Micro Economics assumes that other things remain constant. The main determinant of Micro Economics is price.
Macro Economics:
Macro Economics studies behavior of economy viz., National Income, Total Savings etc. Macro Economics studies the problems of economic growth, employment and income determination etc. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.
Consumer Demand
Demand is the mother of all production
Quantity Demanded refers to the amount (quantity) of a good that buyers are willing and able to purchase at alternative prices for a given period. High demand means high business prospects in future and vice versa.
Consumer Demand
Therefore it is essential for business managers to have a clear understanding of the following aspects of demand for their products: 1. What is the basis of demand for their commodity? 2. What are the determinants of demand ? 3. How do the buyers decide the quantity of a product to be purchased ? 4. How do the buyers respond to change in the product prices, their incomes and prices of the related goods? 5. How can the total or market demand for a product be assessed and forecasted ?
Law of Demand
The Law of Demand states that as price of the commodity increases, the quantity demanded reduces and vise versa; other things remaining constant.
Income level should remain constant Tastes of the buyer should not alter Prices of other goods should remain constant No new substitutes for the commodity Price rise in future should not be expected Advertising expenditure should remain the same
Some concepts
Demand schedule Demand curve Derivation of market demand Shift in demand curve
Law of Demand
Exceptions to the Law of Demand :
1.
2. 3. 4.
Expectations of further price rise in future. Status Goods. Giffen Goods Essential goods
Total Utility
Total Utility: is defined as the sum of the
utility derived by a consumer from various units of goods and services consumed at a point or over a period of time . For Eg : A consumer consume 4 units of a commodity, X, at a time and derives utility from the successive units of consumption as U1, U2, U3 & U4. His total utility (Ux) from commodity X can be then measured as follows: Ux= U1 +U2 + U3 + U4
Total Utility
If a consumer consumes n number of commodities, his total utility, TUn is the sum of the utility derived from each commodity. For instance, if the consumption goods are X, Y and Z and their total respective utilities are Ux, Uy and Uz, then TUn = Ux + Uy + Uz
Marginal Utility
Marginal Utility : may be defines in number of ways. It is defined as the utility derived from the marginal or one additional unit consumed or It may be defined as the addition to the total utility resulting from the consumption of one additional unit Marginal Utility (MU) thus refers to the change in Total Utility ( TU) obtained from the consumption of an additional unit of a commodity, say X. It may be expressed as : MUx = TUx Qx
Assumptions to Law
1.
2. 3.
4.
The unit of the consumer good must be standard one, eg a cup of tea, a bottle of cold drink, a pair of shoes etc. If the units are excessively small or large, the law may not hold. The consumer taste, preference must remain the same during the period of consumption. There must be continuity in consumption. Where a break in continuity is necessary, the time interval between the consumption of two units must be appropriately short. The mental Condition of the consumer must remain normal during the period of consumption.
Assumptions to Law
In cases like accumulation of money, collection of stamps, old coins, rare paintings or melodious songs, the marginal utility may initially increase rather than decrease.
Money is a general purchasing power. It enables a purchaser to buy anything he likes. That is why it is said one can never reaches a stage where money eases to be desired. That is the marginal utility of money goes on increasing with its increase. This is opposite to the law of diminishing marginal utility.
CARDINAL APPROACH
This school believes that Utility is measurable and is a quantifiable entity. Cardinal Utility Approach attributed to Alfred Marshal and his followers, is also called the neo-classical approach, which gives exact measurement by assigning definite numbers such as 1,2,3, etc. Examples are temperature can be measured in degrees, distant can be measure in kilometers, weight, height, length and air pressures.
Assumptions:
Rationality Limited money income Maximisation of satisfaction Utility is cardinally measurable Diminishing marginal utility Constant marginal utility of money Utility is additive
Dr. Alfred Marshall-was of the view that the law of demand and so the demand curve can be derived with the help of utility analysis. He explained the derivation of law of demand (i) in the case of a single commodity and (ii) in the case of two or more than two commodities: In the utility analysis of demand, the following assumptions are made.
Dr. Alfred Marshall derived the demand curve with the aid of law of diminishing marginal utility. The law of diminishing marginal utility states that as the consumer purchases more and more units of a commodity, he gets less and less utility from the successive units of expenditure. At the same time, as the consumer purchases more and more units of one commodity, then lesser and lesser amount of money is left with him to buy other goods and services
A rational consumer, therefore, while purchasing a commodity compares the price of the commodity which he has to pay with the utility of the commodity he receives from it. So long as the marginal utility of a commodity is higher than its price MUx > Px, the consumer would demand more and more units of it till its marginal utility is equal to its price MUx = Px or the equilibrium condition is established.
To put it differently, as the consumer consumes more and more units of a commodity, its marginal utility goes on diminishing. So it is only at a diminishing price at which the consumer would like to demand more and more units of a commodity. This is explained with the help of the following diagram:
Derivation of demand Curve in case of a single commodity Law of Diminishing Marginal Utility
In figure the Mux is negatively sloped. It shows that as the consumer acquires larger quantities of good x, its marginal utility diminishes. Consequently, at diminishing price, the quantity demanded of the good x increases as is shown in figure. At x, quantity the marginal utility of a good is Mu1. This is equal to p1 by definition.
The consumer here demands Ox1 quantity of the commodity at P1 price. In the same way x2 quantity of the good is equal to p2. Here at P2 price, the consumer will buy ox2 quantity of commodity. At x3 quantity the marginal utility is Mu3, which is equal to p3. At p3, the consumer will buy ox3 quantity and so on.
The law of equi-marginal utility explains the consumer's equilibrium in a multi-commodity model. The law states that a consumer consumes various goods in such quantities that MU derived per unit of expenditure from each good is the same.
When a consumer has to spend a certain given income on a number of goods, he attains maximum satisfaction when the marginal utilities of the goods are proportional to their prices as stated below.
(Constant).
5. Thus in response to decrease in the price from Px to Px1, the quantity demanded of a good X increases from OQ1 to OQ2. The DD is a negatively sloped demand curve.
3. Transitivity and Consistency of choice: Consumers choice are summed to be transitive. Transitivity of choice means that a consumer prefers A TO B and B to C, he must prefer A to C, or if he must treat A=B and B=C, he must treat A=C.
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Indifference curve
Locus of points, each represents a different combinations of two substitutes goods, which yield the same utility or satisfaction to the consumers.
It has a negative slope Convex to the origin Do not intersect nor tangent to other IC Upper IC indicates higher level of satisfaction.
The slope of the indifference curve is the rate at which you are willing to trade off one good to get another good. It is called the marginal rate of substitution or MRS
A MRS = 6
-6
12
10
The marginal rate of substitution (MRS) quantifies the amount of one good a consumer will give up to obtain more of another good MRS is measured by the slope of the indifference curve
B
-4
8 6 4 2 1
D
1 -2
1 -1
MRS = 2 E
1
MRS = - C / F
Perfect Substitutes
4
Apple Juice (glasses) Perfect Substitutes
3 Two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant.
1
Orange Juice (glasses)
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Perfect Complements
IC2
tires
4
IC1
You need exactly 4 tires with 1 car body (ignoring the spare tire). Having more than 4 tires with 1 car body doesnt increase utility. Also having more than 1 car body with only 4 tires doesnt increase utility either.
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car bodies
Budget line
Consumer equilibrium
Income-Consumption Curve
Y
IC3 IC2 IC1 C Y3 B Y2 Y1
The curve that traces out these points is called the incomeconsumption curve. For two normal goods, the curve slopes upward. It may be convex (as drawn here), concave, or linear.
X1 X2 X3
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Price Effect