MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr.

RAKESH

UNIT-1 INTRODUCTION TO MANAGERIAL

ECONOMICS

 DEFINE ECONOMICS ?

 ADAMSMITH:

Adamsmith, the Father of Economics defined economics as “the study of nature and uses of national wealth”

 ALFRED MARSHALL:

“Economics is a study of man’s actions in the ordinary business of life; it enquires how he gets his income and
how he uses it”

 ROBBINS:

“Economics is the science which studies human behaviour as a relationship between ends and scarce means
which have alternative uses”

 ENDS : We have unlimited number of wants or ends and it is difficult to satisfy all these.

 SCARCE RESOURCES : The available resources to satisfy our ends are very scarce or limited.

 ALTERNATIVE USES : Scarce resources can be put to alternative uses. Ex: money

 MICRO VS MACRO ECONOMICS ?

 MICRO ECONOMICS:

The study of an individual consumer or a firm is called micro economics(Theory of firms).Micro means one
millionth.It deals with behaviour and problems of single individual and of micro organization.

 MACRO ECONOMICS :

The study of aggregate or total level of economic activity in acountry is called macro economics.It deals with total
aggregates like national income,total employment,price level in general.

 MANAGEMENT AND MANAGER ?

 MANAGEMENT:
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

Mangement is the science and art of getting thins done through people in formally organized groups.Different
functions of management are : planning,organizing,staffing,directing and controlling.

 MANAGER:

Manager is a person who gets things done through people.Vital functions of a manager are :To communicate,co-
ordinate,motivate,lead,direct men,material,machinery,money and technology,profit maximization, Decision
making,Production planning,fixing the selling price,optimizing costs etc….

 MANAGERIAL ECONOMICS , NATURE AND SCOPE?

 MANAGERIAL ECONOMICS :

 SPENCER AND SIEGALMAN :

Economics is the integration of economic theory with business practice for the purpose of facilitating
decision making and forward planning by management.

 BRIGHAM AND PAPPA :

Economics is the application of economic theory and methodology to business administration practice.

 MAJOR FEATURES :

 To solve managerial problems

 To minimize cost
 To maximize profits
 To utilize scarce resources
 To analyse problems of decision-making
 To forward planning
 To analyse allocation of resouces
 To provide optimum solutions

 NATURE OF ME :

 Close to micro economics

 Operates against the backdrop of macro economics
 Normative statements
 Prescriptive actions
 Applied in nature
 Offers scope to evaluate each alternative
 Interdisciplinary
 Assumptions and limitations

 SCOPE OF ME :

 Production decisions
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

 Demand decision
 Input-output decision
 Price-output decision
 Profit-related decision
 Reduction of costs
 Determination of price
 Make or buy decisions
 Inventory decisions
 Capital management
 Investment decisions

 LINKAGE WITH OTHER DISCIPLINES ?

 Economics
 Operations Research
 Mathematics
 Statistics
 Accountancy
 Psychology
 Organisational Behaviour

DEMAND ANALYSIS

 DEMAND, NATURE AND TYPES ?

 DEMAND :

Every want supported by by the willingness and ability to buy constitutes demand for a particular product or
service.

 NATURE AND TYPES:

 CONSUMER GOODS VS PRODUCER GOODS :

 Consumer goods are those which are available for ultimate

consumption.Ex:bread,apple,rice etc..
 Producer goods are those which are used for further production. Ex: Machinary

 AUTONOMOUS VS DERIVED DEMAND :

MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

 Autonomous demand is the direct demand for products or services. Ex:

Corporate hospitals
 Derived demand is such a demand which derived from autonomous
demand. Ex: hotels around hospital

 DURABLE VS PERISHABLE DEMAND:

• Durable goods are such a goods which serve for longer period. Ex:
TV,Refrigirator etc..
• Perishable goods are goods which serve for short period. Ex:
milk,vegetables,fish etc

 FIRM VS INDUSTRY DEMAND:

 Firm demand is the demand for single business unit.

 Industry demand refers to the demand for group of firms.

 SHORT-RUN VS LONG-RUN DEMAND:

 Short-run demand is the demand with its immediate reaction to price changes,income fluctuations.
 Long-run demand is the demand which will ultimately exists as a result of changes in
pricing,promotion after enough time is allowed.

 NEW DEMAND VS REPLACEMENT DEMAND:

 New demand is the demand for new products. Ex: cars

 Replacement demand is the demand to maintain the new product in good condition. Ex: spare parts

 TOTAL MARKET VS SEGMENT MARKET DEMAND:

 Total market demand is the demand for the product in a particular region.Ex : Demand for sugar
 Segment market demand is the demand for the product in a particular segment belongs to a
particular region.Ex: demand for sugar in sweet making industry

 FACTORS OR DETERMINANTS OF DEMAND ?

 Price of the product(P)

 Income level of the consumer (I)
 Tastes and Preferences of the consumer (T)
 Prices of related goods like Substitutes/Complimentaries (Pr)
 Expectations about prices(Ep)
 Expectations about Income (Ei)
 Size of population (Sp)
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

 Distribution of consumers (Dc)

 Advertising efforts (A)
 Other factors (O)

 BASIC LAWS OF CONSUMPTION ?

 LAW OF DIMINISHING MARGINAL UTILITY :

Law of diminishing marginal utility states that the marginal utility derived on the consumption of every
additional unit goes on diminishing, other things remaining same.

Number of sweets Amount of total utility Marginal utility

1 20 -
2 35 15
3 47 12
4 55 8
5 55 0
6 48 -7

 EXCEPTIONS OF THE LAW :

 Millionaire who short by one rupee

 Giving water spoon by spoon to a thirsty person.

 LAW OF DIMINISHING MARGINAL UTILITY:

This Law states that the consumer maximizes his total utility by allocating his income among the
goods and services available to him in such a way that the marginal utility from one good equals
the marginal utility from the other good.

Marginal utility of product X = Marginal utility of product Y

Price of X Price of Y

Units Bought Marginal utility Obtained from

Pants Shirts
1 40 35
2 32 28
3 28 20
4 20 10
5 10 8
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

• Assume Each pant or shirt costs Rs.100.The consumer C has Rs.500

 CONSUMER SURPLUS :

Consumer surplus is defined as the difference between the price that the consumer is prepared to
pay and the price that he is exactly paying.
 THE INDIFFERENCE CURVE :

An indifference curve is a curve which reveals certain combination of goods and services which
yields him the same utility.

 ASSUMPTIONS :

 The consumer behaves rationally

 The prices and incomes of the consumer are defined for analysis.

 PROPERTIES OF INDIFFERENCE CURVE:

 It slopes downwards from left to right.

 It is convex to origin.
 It cannot intersect with another indifference curve.

 CONSUMER EQUILIBRIUM
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

 LAW OF DEMAND ?

 DEFINITION:

The Law of Demand states that , when other things remaining same , the amount of quantity
demanded rises with every fall in the price and vice versa.

EXCEPTIONS :

 Fear about shortage of necessaries

 Prestige products Ex:jewellery
 Giffens paradox
 Ignorance of price changes

CHANGE IN DEMAND :

INCREASE & DECREASE IN DEMAND :

MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS BY : Mr. RAKESH

EXTENSION AND CONTRACTION IN DEMAND :