FUNDAMENTAL CONCEPTS OF MANAGERIAL ECONOMICS

Managerial economics involves applying mathematical and statistical equations to help managers find the most optimal allocation of limited resources. Analysts analyze the data from the results of previous decisions to predict or forecast future decisions. A classic example is analyzing data associated with customer buying habits and behavior patterns to predict what customers will buy in the future. To accomplish this, according to the website Reference for Business, "managerial economics uses a wide variety of economic concepts, tools and techniques in the decision-making process." These concepts, tools and techniques can be organized under three primary categories referred to as the theory of the firm, the theory of consumer behavior and the theory of market structure and pricing. Theory of the Firm  Theory of the firm deals with the primary decision motive of a firm which is to make a profit. The profit motive is the goal of all decisions. Of course, to make a profit, the firm must provide a product or service that consumers want to buy, treat employees well, satisfy demands of stockholders and meet the demands of society, such as environmental concerns. Theory of Consumer Behavior  Theory of consumer behavior involves consumer buying habits. Many factors feed this theory such as income, demographics and socioeconomic issues. While a firm's focus is to maximize profit, consumers' primary objective is to maximize the utility of satisfaction, such as purchasing and consuming the maximum amount of goods for the minimum amount Theory of Market Structure and Pricing  When companies seek to maximize profits, they must consider the competitive market structure. There are four basic market structures: perfect competition, monopolistic competition, oligopoly and monopoly. Each of these identify the level of competition that exist in a given market. Competition affects pricing and the amount of profit companies can make by entering a market. Application

 Using these theories and the formulations that economists have come up with based on them, managerial economics can be applied to any business

within any industry. Companies can integrate their own customer buying habits and behavior data into the applicable formulation and get useful decisionmaking results. The results can help decision makers determine the most optimal allocation of scarce resources in finance, marketing, inventory management and production. Application Example  Wal-Mart has a very sophisticated supply chain where managers have to make purchase decisions regarding thousands of suppliers and the decision variables vary per location. This is an "allocation of capital resources problem" they have to address and solve on a daily basis, and managerial economics concepts and analytical tools play a critical role.

DIFFERENCE BETWEEN MANAGERIAL ECONOMICS AND ECONOMICS
1)

Managerial Economics is micro in character Pure Economics is both micro and macro in character 2) Managerial Economics study only practical application of the Economic principle to the problem of firm Pure Economics deals with the study of principles itself 3) Managerial Economics deals with the Economic problems of the firm while Pure Economics deals with Economic problems of both firm and individuals 4) Managerial Economics deals with profit theory only Pure Economics deals with all distribution theories like rent, wages, interests, and profits.

NATURE AND IMPORTANCE OF MANAGERIAL ECONOMICS
Nature of Managerial Economics: Following points constitute nature of managerial economics 1. Micro Economics 2. Theory of the firm 3. Managerial Economics is Pragmatic (practical in outlook) 4. Managerial economics is normative 5. Using inputs from Macroeconomics 6. It is concerned with Normative Economics Scope of managerial economics:

Operational issues 1. Resource Allocation 2. Demand Analysis and Forecasting 3. Cost and Production Analysis 4. Pricing Decisions, Policies and Practices 5. Profit Management 6. Capital Management 7. Strategic Planning Environmental or external issues · Economic Environment: · Social environment · Political Environment · Technological Environment · International environment

IMPORTANCE OF MANAGERIAL ECONOMICS SCOPE & IMPORTANCE OF MANAGERIAL ECONOMICS:
Out of two major managerial functions served by the subject matter under managerial economics are decision making and forward planning: Lets explore the scope for decision making: 1. Decision relating to demand. 2. Decision related to Cost and production. 3. Decision relating to price and market. 4. Decision relating to profit management. 5. Macro economic factor.

MANAGERIAL ECONOMICS AND BUSINESS ECONOMICS
Managerial Economics is often interchangeable with Business Economics, though there is some difference between these two terms: i) Business Economics - means Economics necessary to be understood for running any business. ii) Managerial Economics - lays more emphasis on the managerial functions in any business firm. Managerial functions are decision making and forward planning.

OPTIMIZATION PROBLEMS
1. FORWARD BACKWARD STOCHASTIC DIFFERENTIAL EQUATIONS. Optimization problems in continuous-time financial models are typically equivalent to a system of Forward-Backward Stochastic Differential Equations (FBSDEs), for which the existence theory has not been fully completed. It is possible that a good way to approach the optimization problems numerically is to try to solve the corresponding FBSDE.

2. NUMERICAL METHODS One of the hardest practical problems of quantitative financial methods is to solve high-dimensional optimization problems. The most famous example of these is pricing high-dimensional American options. In principle, at least in diffusion models, these problems can be solved by solving nonlinear partial differential equations or free boundary problems. However, with many variables (interest rates, volatilities, various stocks and other financial variables), these PDE's are high-dimensional and standard numerical methods do not work. 1. CONTRACT THEORY Many of the above mentioned problems become both more theoretically interesting and more practical when considered in a context of two or more market participants. For instance, in the Principal-Agent problems, the principal hires the agent to perform certain tasks (such as managing an investment fund or running a company). The principal must then design a compensation contract which gives to the agent the incentives to realize the maximal effort for the assigned task. The problem becomes even more interesting (and more challenging) in a dynamic context and in presence of asymmetric information in the sense that the agent may have more information than the principal about the underlying activity risk to which the principal is exposed. 2. PORTFOLIO ALLOCATION Perhaps the most classical optimization problem in finance is the problem of optimal portfolio allocation. Many problems of this type have been solved in complete markets explicitly, and in Markovian models of incomplete markets numerically. Still, in high-dimensions numerical methods are not yet satisfactory, and for practical applications it is often useful to have analytic solutions, especially for problems related to risk management and hedging in incomplete markets.

INPUT AND OUTPUT ANALYSIS
Input-output analysis is a basic method of quantitative economics that portrays macroeconomic activity as a system of interrelated goods and services. In particular, the technique observes various economic sectors as a series of inputs of source materials (or services) and outputs of finished or semi-finished goods (or services). The field is most identified with the work of Wassily

and applications. flour. 2. and milk. and 3. Léon Walras's work Elements of Pure Economics on general equilibrium theory is both a forerunner and generalization of Leontief's seminal concept. Leontief once explained input-output analysis as follows: "When you make bread. Leontief put forward the display of this information in the form of a matrix. who was awarded the 1973 Nobel Prize in Economics for his pioneering work in the area. The International Input-Output Association[1] is dedicated to advancing knowledge in the field of input-output study. Columns 2 and 3 do the same for those industries. There are cooking recipes for all the industries in the economy. Leontief's contribution was that he was able to simplify Walras's piece so that it could be implemented empirically. Rows 2 and 3 do the same for the other industries. an input-output model uses a matrix representation of a nation's (or a region's) economy to predict the effect of changes in one industry on others and by consumers.Leontief (1906-1999). shows how dependent each industry is on all others in the economy both as customer of their outputs and as supplier of their inputs. Suppose there are three industries. which includes "improvements in basic data. and 3. you need eggs. Column 1 reports the value of inputs to Industry 1 from Industries 1. both traditional and novel. Row 1 reports the value of outputs from Industry 1 to Industries 1." And hence." Input-output depicts inter-industry relations of an economy. and foreign suppliers on the economy. A given input is typically enumerated in the column of an industry and its outputs are enumerated in its corresponding row. of input-output techniques. and the chain continues. This format. 2. Wassily Leontief (1905-1999) is credited with the development of this analysis. It shows how the output of one industry is an input to each other industry. And if you want more bread. one industry's output is another's input. in essence. And. you must use more eggs. government. Leontief won the Nobel Memorial Prize in Economic Sciences for his development of this model. therefore. . In economics. Francois Quesnay developed a cruder version of this technique called Tableau économique. theoretical insights and modelling. Each column of the input-output matrix reports the monetary value of an industry's inputs and each row represents the value of an industry's outputs.

Demand estimation for the firm's products is performed by forecasting the firm's sales. The method includes selecting a set of feasible service offerings to offer for sale to the market from a set of candidate service offerings. Each service offering of the set of feasible service offerings and the set of candidate service offerings is defined by a price and a service level. Advertising costs. barometric economic indicator analysis. Production costs (and physical distribution costs that behave like them) are functionally related to output (or sales) and can therefore be budgeted and controlled by such relationships. including the determination of the total advertising outlay. and estimating a demand of the market for the service based upon the observed response. and it is. .DEMAND ESTIMATION METHOD A method to estimate demand of a market for a service is disclosed. Economical analysis is a basic economic approach to all business problems. not a result of sales. Sales are forecasted through the application of three separate procedures -time series analysis. superior to other methods. Determination of the advertising budget as a percentage of past or expected sales is a method that was dominating in the past and is still widely used. METHODS OF DETETMINING TOTAL ADVERTISING BUDGET Percentage-of-sales Approach. they are a cause. and econometric analysis. It says that advertising expenditure for each product should be pushed to the point where the additional outlay equals the profit from the added sales caused by the outlay. observing a response of the market to the set of feasible service offerings offered for sale. (end of abstract) This research estimates the demand for the goods and services offered by the Wal-Mart chain of retail stores. The resulting total is the advertising budget that will maximize advertising profits in the short run Nature of Advertising Costs. at least logically. in contrast. The distinctive nature of advertising costs makes the analytical problem of determining the most profitable advertising outlay much more complex than an analysis using only production costs. have no necessary functional relationship to output. Economic analysis of the role of advertising (and other pure selling costs) in the competitive adjustment of the enterprise has developed concepts that can be made useful in planning and controlling advertising outlays.

You want to recoup all your investment in the first year. in which you charge on a variable scale according to the results you achieve.Set your price to achieve a target return-oninvestment (ROI). The most extreme variation on this is "pay for performance" pricing for services. • Value-based pricing . if advertising is to be done at all. $300 or more for it. Advertising cost is assumed to include only pure selling costs. energy costs. you could easily charge $200. say. since they would get their money back in a matter of months. or $10 profit per unit.maybe even too cheap.000 units. giving you again a price of $60 per unit. so you need to make $10. your fixed costs come to $30 per unit. you will always be operating at a profit. there is one more major factor that must be considered. • . if you can achieve it. it should be expanded until diminishing returns set in. and assume that you have $10. let's use the same situation as above. In that case. physical distribution costs being included in production costs. your widgets cost $20 in raw materials and production costs. However. • Target return pricing . Your expected sales volume is 1.000 profit on 1. so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as you have your costs calculated correctly and have accurately predicted your sales volume.Simplified Marginal Approach.000 a year in. Let's say that your widget above saves the typical customer $1. $60 seems like a bargain .Set the price at your production cost.Price your product based on the value it creates for the customer. If your product reliably produced that kind of cost savings.000 units in the first year. and customers would gladly pay it. Incremental production costs The rising phase of the advertising cost curve represents the important part of our problem since. and at current sales volume (or anticipated initial sales volume). including both cost of goods and fixed costs at your current volume.000 invested in the company. You decide that you want to operate at a 20% markup. For example. plus a certain profit margin. This is usually the most profitable form of pricing. TYPES OF PRICING Cost-plus pricing . Your total cost is $50 per unit. For example.

you'd have a hard time charging two or three thousand dollars for it -. Now explain these one by one: 1. Automobile purchases tend to rise sharply with higher levels of income. "Enough under $20 to be under $20 with sales tax" is another popular price point. says by the population. you should probably be priced higher than most of your competition. If it's obvious that your product only cost $20 to manufacture. because it's "one bill" that people commonly carry.Psychological pricing . There is simply a limit to what consumers perceive as "fair". . figuring things like: • Positioning . 2.000 in value. The size of the market measured. average level of income. you must take into consideration the consumer's perception of your price.  Fair pricing . even if it delivered $10. and special influences. A little market testing will help you determine the maximum price consumers will perceive as fair. you must be priced lower than your competition. even if you don't have any direct competition. the size of the population. the prices and availability of related goods. If you want to signal high quality. and clearly affects the market demand curve. individuals tend to buy more of almost everything.  Popular price points . The average income of consumers is a key determinant of demand. Meals under $5 are still a popular price point. but more than enough increase in sales to offset it. For example. Dropping your price to a popular price point might mean a lower margin.If you want to be the "low-cost leader". "under $100" is a popular price point.Sometimes it simply doesn't matter what the value of the product is. even if prices don't change.Ultimately. As people's income rise. as are entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu").people would just feel like they were being gouged.  • FACTORS ON WHICH MARKET SIZE DEPENDS A whole array of factors influences how much will be demanded at a given price.There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. individual and social tastes. California 32 million people tend to buy 32 times more apples and cars than do Rhodes island's 1 million people.

or that would occur. Not Contract Paths Efficient transmission prices based on incremental costs are possible. The remaining common costs are then allocated to the incremental party or parties. such as cornflakes and oatmeal. In other words.3. Finally special influences will affect the demand for particular goods. where public transport is plentiful and parking is a nightmare. . ones that tend to perform the same function. Dominion Resources proposes to price the megawatt-miles that flow over each line segment based on the duplication costs of each line. or oil and natural gas. the incremental cost principle can be applied in a sound and practical way. adjusted by the line's loading when the transmission service is committed. the demand for air conditioners will rise in hot weather. 4. In its "Impacted Megawatt-Mile" pricing method. prices need to be set for the real transmission services that are provided based on the actual flows resulting from each transaction. The demand for umbrella is high in rainy Seattle but low in sunny Phoenix. A particularly important connection exists among substitute goods. Actual Flows. the demand for automobile will be low in New York. The price and availability of related goods influence the demand for commodity. from the use or reservation of the transmission system for each incremental power transaction. What must be priced is the changes that occur in transmission system conditions. Duplication Costs Adjusted for Line Loadings Assuming a decision to price actual rather than fictitious uses of the system. small cars and large cars. INCREMENTAL COST PRICING METHODS Variation of the stand-alone technique establishes a priority among users and allocates common costs to the primary party up to the amount of that user's stand-alone costs. pens and pencils. But first they require a new understanding about what must be priced.

Notice that a positive statement can be wrong. Libertarians and socialists. Economists can confine themselves to positive statements. Normative analysis uses economics to make statements about how things should be. study. Economists have found the positive-normative distinction useful because it helps people with very different views about what is desirable to communicate with each other.Prices That Make Sense Incremental pricing makes basic economic sense. One must make a judgment about what goals are desirable (the normative part). Notice that there is no way of disproving this statement. If you disagree with it. A positive statement is a statement about what is and that contains no indication of approval or disapproval. "The world would be a better place if the moon were made of green cheese" is a normative statement because it expresses a judgment about what ought to be. Christians and atheists may have very different ideas about what is desirable. A normative statement expresses a judgment about whether a situation is desirable or undesirable. "The moon is made of green cheese" is incorrect. If their disagreement is on normative grounds. Both positive and normative statements must be combined to make a policy statement. they can try to learn whether their disagreement stems from different normative views or from different positive views. When they disagree. Incremental cost pricing under the Impacted Megawatt-Mile proposal creates strong incentives for efficient use of the existing transmission system and efficient additions to transmission capacity. POSSITIVE AND NORMATIVE ANALYSIS Positive analysis uses economics to explain why things work the way they do in the real world. and decide on a way of attaining those goals (the positive part). but few are willing to do so because such confinement limits what they can say about issues of government policy. and testing may bring them closer together. However. you have no sure way of convincing someone who believes the statement that he is wrong. they know that their disagreement lies outside the realm of economics. so economic theory and evidence will not bring them together. If economists limit . but it is a positive statement because it is a statement about what exists. if their disagreement is on positive grounds. then further discussion. Economists often see cases in which people propose courses of action that will never get them to their intended results.

where demand for one good or service occurs as a result of demand for another. DERIVED DEMAND AND DIRECT DEMAND . which may not be everything they should know. introducing a controversial policy. or negotiating the terms of a contract. they must make decisions in light of everything they can learn about the situation. That is. so does its price. Other decisions made may be more complex such as adopting a new process. allocating resources during a crisis. MPP is the marginal physical product. Some decisions that managers make may be daily and routine such as delegating a task. as coal must be mined for coal to be consumed.themselves to evaluating whether or not proposed actions will achieve intended results. with many invisible assumptions hiding below the surface. The increase in price leads to a higher demand for the resources involved in mining coal. authorizing a vendor request. they are like tips of an iceberg. managers must make choices of action among alternatives. DECISION MAKING AS MANAGERIAL FUNCTION Decision Making is the core of planning. or creating a work schedule. DERIVED DEMAND Derived demand is a term in economics. Rather. Most statements are not easily categorized as purely positive or purely normative. they confine themselves to positive analysis. Managers must make choices on the basis of limited or bounded rationality. And therefore: MRP = MPP * P Where MRP is the marginal revenue product. For example. Nobel Prize winner Herbert Simon identified two definitive types of decision-making. As the demand for coal increases. and P is the price of the physical product. This may occur as the former is a part of production of the second. demand for coal leads to derived demand for mining.

Assess the product's availability and near substitutes. One client underpriced its subscription product. yielding depressed response and lower sales. Demand for land. prestige brands. This helps you better understand the offering's value to consumers. • All the finished goods have a direct demand. This is particularly true for high-end. are the examples of derived demand. are the examples of direct demand. If the price is too low. potential customers will think it can't be that good. • • • This demand comes from the consumers side. Underpricing hurts your product as much as overpricing does. All factors of production have derived demand. cloth and house etc. Segments are important for positioning and merchandising the offering to ensure maximized sales at the established price point. FACTORS INFLUENCING PRICING POLICIES Pricing Factors to Consider Determine primary and secondary market segments. Survey the market for competitive and similar products. etc. Consider whether new products. Derived Demand: Goods that are needed by the producers are said to have derived demand. capital.Direct Demand: Goods that yield direct satisfaction to the consumers are said to have a direct demand. or new technologies can compete with . This demand comes from the producers side. new uses for existing products. Demand for food. labor.

leapfrog your offering. domestic versus foreign markets.. Examine all possible ways consumers can acquire your product. I recommended a content client promote its advertising-supported free e-zines to incent readers to register..g. The purpose of pricediscrimination is to maximize the profit by . for example.comtested three different price points for a book. worse. This is important if you enter a new or untapped market. doctor service • Lack of distribution channels e. so it didn't advertise them. MarketingExperiments. The electricity of demand must be different in different markets. Calculate the internal cost structure and understand how pricing interacts with the offering.or. • CONDITIONS ESSENTIAL TO MAKE PRICE DISCRIMINATION 1. The client believed the e-zines had no value as the content was repurposed from another product..g. It found the highest price yielded the greatest product revenue. Interestingly.e. Examine market pricing and economics. The market for different classes of consumer must be so separated that buyers form one market are not in position to resell the commodity in the other. • Test different price points if possible. Market dynamics and new products can influence and change consumer needs. transfer of electricity from domestic use (lower rate) to industrial use (higher rate) • 2. Different markets must be separable for a seller to be able to practice discriminatory pricing. ad-free site should generate more revenue than a free ad-supported one. I've worked with companies that only take into account direct competitors selling through identical channels. especially as advertisers find paying customers more attractive. A paid. the middle price yielded greater revenue over time. To determine price. as it generated more customers to whom other related products could be marketed. Monitor the market and your competition continually to reassess pricing. or enhance an offering with consumer-oriented benefits. Markets are separated by :- Geographical distance involving high cost of transportation i. In considering this option. remember to incorporate the cost of forgone revenue. • Exclusive use of the commodity e.

It is the difference in the elasticity which provides an opportunity for price discrimination. that the payback period should be less than infinity).business travelers and discount prices for tourist who have relatively elastic demand. price discrimination would reduce the profit by reducing the demand in the high price markets. First the firm must be able to identify market segments by their price elasticity of demand and second the firms must be able to enforce the scheme. As a stand-alone tool to compare an investment to "doing nothing. [4] For example.exploiting the market with different price elasticities. Airlines must also prevent business travelers from directly buying discount tickets. If priceelasticities of demand in different markets are the same . 3. There must be imperfect competition in the market. it can be quite useful. airlines routinely engage in price discrimination by charging high prices for customers with relatively inelastic demand . and change different prices. Airlines accomplish this by imposing advance ticketing requirements or minimum stay requirements conditions that it would be difficult for average business traveler to meet PAYBACK PERIOD AND LIMITATIONS Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals. The firm must have monopoly over the supply of the product to be able to discrimination between different class of consumers." payback period has no explicit criteria for decision-making (except. Profit maximizing output is much larger than the quantity demand in a single market or section of consumers. 4. There are two conditions that must be met if a price discrimination scheme is to work. When used carefully or to compare similar investments. regardless of academic training or field of endeavour. The airlines enforce the scheme by making the tickets non-transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage). . perhaps.

There is no formula to calculate the payback period. such as the opportunity cost. The payback period is to dependent on cash inflows which are hard to predict. Whilst the time value of money can be rectified by applying a weighted average cost of capital discount. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period. It is easily applied in spreadsheets. financing or other important considerations. They may be grouped in the following two categories: 1.. risk. the sum of all of the cash outflows is calculated. Discounted cash flow criteria • Net present value (NPV) • Internal rate of return (IRR) • Profitability index (PI) Non discounted cash flow criteria • Payback period . To calculate the payback period an algorithm is needed. Alternative measures of "return" preferred by economists are net present value and internal rate of return. APPRAISAL CRITERI OF CAPITAL INVESTMENT A number of investment appraisal criteria or capital budgeting techniques are in use of practice. Then the cumulative positive cash flows are determined for each period. because it does not account for the time value of money. it is generally agreed that this tool for investment decisions should not be used in isolation. does not consider profits. 2. Payback period does not specify any required comparison to other investments or even to not making an investment. The payback period only considers revenue. First. Additional complexity arises when the cash flow changes sign several times.e.The payback period is considered a method of analysis with serious limitations and qualifications for its use. it contains outflows in the midst or at the end of the project lifetime. The modified payback period is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow. i. The modified payback period algorithm may be applied then. The typical algorithm reduces to the calculation of cumulative cash flow and the moment in which it turns to positive from negative. except the simple and unrealistic case of the initial cash outlay and further constant cash inflows or constantly growing cash inflows.

It involves discounted cash flows. GNI. We will show in our following posts the net present value (NPV) criterion is the most valid technique of evaluating an investment project. NNP and NNI. but it is not a true measure of investment profitability.M) . The method for calculating National Income by Output. The basic measures of national income include GDP. What Are The Methods Of Measurement Of National Income? Measurement of national income in an economy is very important because it gives an estimation of the welfare of the economy.Net Indirect Taxes The measurement of National Income by Income Method: NDP at factor cost = compensation of employee + operating surplus + Mixed income of self employee National Income = NDP at factor cost + NFIA (net factor income from abroad) The measurement of National Income by Expenditure Method: GDP = C + I + G + (X . All of these approaches give the same value of the national income.Depreciation + NFIA (Net Factor Income from Abroad) . income approach and expenditure approach. National income is the total of the value of the goods and the services which are produced in an economy.Intermediate consumption NNP at factor cost = GDP at market price . It is consistent with the objective of maximizing the shareholders wealth.• Accounting rate of return • Discounted payback period Discounted payback is a variation of the payback method. GNP. output approach. There are three approaches through which national income can be calculated including. Value Added method: GDP at market price = Value of Output in a year .

as it is used by other Juggernoob production firms.this is a problem in collecting and calculating statistics.Where: C = Personal consumption expenditures I = Gross investment G = Government consumption X = Gross exports M = Gross imports What are the problems involved in measuring national income There are 3 main problems involves in measuring National Income These are: Errors and Omissions . SAVING PATTERNS IN INDIAN ECONOMY INDIAN economy is in a crisis. Over Recording of incomes (Double Counting) .As people pay taxes their incomes are taking into account. This is a problem as people hide what they earn and firms hide their output. this is the black economy also known as the "ray gun" Over recording of figures (Double Counting) . Our country like many other ASIAN countries is undergoing a severe economic crunch. and used to pay such things as benefits and pensions.This is losing all perks as you are not revived and incomes are being counted multiple times. Many INDIAN industries are closing . if these are also counted sleight of hand is in progress. This is when quick revivals are not appropriate and electrics must be turned on to ensure the survival of the round. This also affects firms as their output/produce is taken account for more than once. to avoid paying tax.

ASME International supports advancing the understanding. This is a serious drain on INDIAN economy. A cold drink that costs only 70 / 80 paisa to produce is sold for NINE rupees. and the general public. the rupee will devalue further and we will end up paying much more for the same products in the near future.support this approach. and a major chunk of profits from these are sent abroad. Risk analysis is a technically sound and socially responsible method to facilitate decision-making by government. if we do not do this. In a free society. snacks. are critical to good decision-making and to the effective use of technology in addressing complex societal issues. we will be in a critical situation. use. We have nothing against Multinational companies. and is intended to include qualitative and quantitative risk assessment. Risk is the combination of the probability and consequence of each adverse outcome that could result from a proposed course of action. The benefits of risk analysis will be realized only if the public -. The term "risk analysis" is used in this document in the broadest sense.and public policy makers -. risk management and risk communication. With the rise in petrol prices. and engagement of the public in the discussion of viable options. and . produced and consumed here. More than 30000 crore rupees of foreign exchange are being siphoned out of our country on products such as cosmetics. beverages.down. etc which are grown. industry. communication of risks and benefits to the public at large. and acceptance of risk analysis.. but to protect our own interests we request everybody to use INDIAN products only for next two years. tea. It is a structured process that is directed toward developing a better understanding of the risks associated with a proposed course of action. RISK ANALYSIS OF DECISION MAKING IN MANAGERIAL ECONOMICS Risk analysis is a powerful tool for helping to make the right decision on many issues. The INDIAN economy is in a crisis and if we do not take proper steps to control those..

The greater the amount to be sold. the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases (ceteris paribus). as the price of a good or service increases. "If the price of the good increases. its quantity demanded increases. That is. and tastes and preferences of the consumer remain unchanged. while if price of the good decreases. the consumer’s demand for the good will move opposite to the movement in the price of the good. prices of the related goods. all other factors being equal. EXCEPTIONS IN LAW OF DEMAND Exceptions to the law of demand are : ." A microeconomic law that states that. if the income of the consumer. other things remaining constant. consumer demand for the good or service will decrease and vice versa. the smaller the price at which it is offered must be in order for it to find purchasers. the quantity demanded decreases. LAW OF DEMAND In economics. Law of demand states that the amount demanded of a commodity and its price are inversely related.encourages the larger community to join with us in advancing this critical process.

Life saving drugs or emergency products 5.1. Bandwagon effect DEFINITIONS Giffen goods .are products that people continue to buy even at high prices due to lack of substitute products Veblen effect . habits and customs Population Price of related goods Expectation regarding future prices Level of taxes or Government's policy Weather conditions No new product Distribution of income and wealth and Advertisements. Income of the consumer Tastes. Giffen goods 2. • • • • • • • • • • .some buyers have adesire to own unusual or unique products to show that they are different from others Bandwagon effect . Snob effect . Speculative products 4.people tend to buy expensive goods to show off their status conspicuous consumption Snob effect .conspicuous consumption 6. preferences. Veblen effect 3.prefernce for a particular product increases as the the number of buyers purchasing the product increases the following main factors as a constant one for the validity to its law of demand.

Such inferior goods are named as 'Giffen goods'. SO they buy prestige goods like colour T. The demand curve in these cases will be an upward sloping. If a price rise is expected by next week. In the case of these goods when their price falls. better the quality. 4. even at a higher price.. we find that with a fall in the price demand also falls and with a rise in price demand also rises. • Prestige goods: Rich people like to show off their economic status. An Irish economist Sir Robert Giffen observed this tendency of the individuals in the 19th century. Giffen goods or Inferior goods. • Price illusion: There are certain consumers those who are always guided by the price of the commodity.Exception to the Law: Some times. bread. Prestige goods Speculation Price Illusion These different types of exceptions are described in brief explanation as follows:Inferior goods: Some goods like potato. then they will buy more now itself though at present the prices are quite high. These cases are referred to as exceptions to the general law of demand. this purchasing power is used to buy other superior goods. 3. the real income or the purchasing power of the consumer increases. diamond etc. vegetable oil etc.V. Hence they purchase larger quantities of high priced goods. Some of these exceptions are: 1. are called inferior goods. • . • Expectations and speculations: When people expect a rise or fall in price in the near future. the law of demand does not hold good. 2. They always believe that higher the price.

They last long and give good service. • Price of related goods: The price of related goods like substitutes and complementary goods also affect the demand. rise in price of one • . They will buy acommodity to imitate the consumption of their neighbors even if they don't have the purchasing power. Higher the price less is the demand and vice versa. • Ignorance: Sometimes due to ignorance of existing market price. • In the above exceptional cases. In the case of substitutes. • Quality and Branded Goods: Commodities of good standard and quality give proper value for money. So people prefer to buy them even at a higher price. and people buy more at a higher price. the demand graph curve slopes upward showing a positive relationship between price and demand.Demonstration effect: It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. price and demand are inversely related. Determinants of Demand: The determinants of demand have been explained in brief as follows: Price: The price of a commodity is an important determinant of demand.

fall in the price of one commodity lead to rise in demand for both the goods. • Speculation: If the consumers expect a change in price in near future then their present demand will not vary inversely with the present change in price. demand will be more for goods. the moment the seller tries to sell the same good at different prices. while low tax will reduce the price and extend the demand. more will be the demand and vice versa. fashions and habits: These are very effective factors affecting demand for a commodity. • Government policy: High taxes will increase the price and and reduce demand. • Taste. In the case of complementary goods.commodity lead to increase in demand for its substitute. demand will be more. Otherwise. and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage. the buyer at the lower price can arbitrage by selling to the . • PRICE DISCRIMINATION Price discrimination or price differentiation[1] exists when sales of identical goods or services are transacted at different prices from the same provider. demand will be more and if the salesmanship and publicity is effective then the demand for the commodity will be more. • Weather Condition: It is also an important factor to determine the demand for certain goods. If the disposable income increases. perfect substitutes.[2] In a theoretical market withperfect information. Income: This is directly related to demand. • Advertisement and Salesmanship: If the advertisement is very attractive for a commodity. • Money Circulation: More money in circulation. price discrimination can only be a feature ofmonopolistic and oligopolistic markets[3]. preference. • Population: If the size of the population is more. where market power can be exercised.

or restricting pricing information. market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers. where resale is not possible. Price Discrimination . Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay. so-called "premium products" (including relatively simple products. The Digital Millennium Copyright Act has provisions to outlaw circumventing of such devices to protect the enhanced monopoly profits that copyright holders can obtain from price discrimination against higher price market segments. Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and.consumer buying at the higher price but with a tiny discount. competitors. The boundary set up by the marketer to keep segments separate are referred to as a rate fence. For example. In the market for DVDs. Price discrimination also occurs when the same price is charged to customers which have different supply costs. However. such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. product heterogeneity. Price discrimination is thus very common in services. Price discrimination in intellectual property is also enforced by law and by technology. by extension. keeping the different price groups separate. typically such behavior leads to lower prices for some consumers and higher prices for others for example Zain.by law . This usually entails using one or more means of preventing any resale. DVD players are designed . but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. The effects of price discrimination on social efficiency are unclear. making price comparisons difficult. Price discrimination can also be seen where the requirement that goods be identical is relaxed. Even if output remains constant.with chips to prevent use of an inexpensive copy of the DVD (for example legally purchased in India) from being used in a higher price market (like the US). Output can be expanded when price discrimination is very efficient. even in fully competitive retail or industrial markets. price discrimination can reduce efficiency by misallocating output among consumers. an example is student discounts at museums.

E. it must be a price maker with a downwardly sloping demand curve. The firm will increase profits by setting different prices depending upon the slope of the demand curve. E.g. The firm must be able to separate markets and prevent resale. 3. off peak fares cheaper than peak fares. Different consumer groups must have elasticities of demand. Therefore for a group like adults. If there are 2 sub markets with different elasticities of demand. For example: student discounts.the price will be higher For groups like students prices will be lower becaue there demand is elastic . E. E. Third Degree Price Discrimination This involves charging different prices to different groups of people. 3. The firm must operate in imperfect competition.c.g. Second Degree Price Discrimination This involves charging different prices depending upon the quantity consumed.g. There will be no consumer surplus.t. Conditions Necessary for Price Discrimination 1. after 10 minutes phone calls become cheaper. PED is inelastic . OAPs and peak travellers e. To maximise profits a firm sets output and price where MR=MC. First Degree Price Discrimination This involves charging consumers the maximum price that they are willing to pay. 2. students.g. 2. stopping an adults using a childs ticket.This involves charging a different price to different groups of people for the same good. students with low income will be more price elastic. Different Types of Price Discrimination 1.

E. old people are more likely to be poor.G. Disadvantages of Price Discrimination 1. Therefore this justifies selling the remaining tickets at a low price. 4. 5.Advantages of Price Discrimination 1. For example price discrimination is important for train companies who offer different prices for peak and off peak. OAPs well off. PRODUCTION FUNCTION . 2. Profits from price discrimination could be used to finance predatory pricing. Decline in consumer surplus. Increased revenues can be used for research and development which benefit consumers 3. 2. adults could be unemployed. This is why sometimes prices for airlines can be very low just before their date. Importance of Marginal Cost in Price Discrimination In markets where the marginal cost of an extra passenger is very low. Some consumers will benefit from lower fares. Some consumers will end up paying higher prices. 3. E. a bus traveller the firm has an incentive to use price discrimination to sell all the tickets. There may be administration costs in separating the markets. E. Firms will be able to increase revenue. THEORY OD DETERMINATIONS Theory of income determination postulates that the level of national income is determined where aggregate demand equals aggregate supply. old people benefit from lower train companies. This will enable some firms to stay in business who otherwise would have made a loss. Once the company is due to fly the MC of an extra passenger will be very low.g.G. Those who pay higher prices may not be the poorest. These higher prices are likely to be allocatively inefficient because P>MC.

The relationship between the quantities of inputs and the maximum quantities of outputs produced is called the "production function. based on the current state of engineering knowledge. The transformation of inputs into outputs is determined by the technology in use. Some nonmainstream economists." ELASTICITY OF DEMAND The degree of buyers' responsiveness to price changes. or an entire economy for all combinations of inputs. however. Limited quantities of inputs will yield only limited quantities of outputs.a production function is a function that specifies the output of a firm. food. e. The ''total outlays'' method has two steps.. and capital -. luxury goods. This method is only an approximate method of determining elasticity.g. either on the firm level or the aggregate level. the production function is one of the key concepts of mainstream neoclassical theories. which will be outlined later in this section. The most accurate method is the arc method of elasticity. but rather is an externally given entity that influences economic decisionmaking. A simple method of measuring the price elasticity of demand is the total outlays method. reject the very concept of an aggregate production function.plus raw materials and business services. Inputs are the factors of production -. Production is the transformation of inputs into outputs. Elasticity is measured as the percent change in quantity divided by the percent change in price. labor. The second step is to look at the change in total revenue . This function is an assumed technological relationship. an industry. where a rise in price causes a decrease in demand. In this sense. e. A large value (greater than 1) of elasticity indicates sensitivity of demand to price.land. The first is to prepare a total outlay or total revenue table for the good or service under investigation. where a rise in price has little or no effect on the quantity demanded by buyers. Almost all economic theories presuppose a production function. Goods with a small value of elasticity (less than 1) have a demand that is insensitive to price. it does not represent the result of economic choices..g.

One place we all encounter it a lot is air travel. where it seems no two passengers paid the same price for their tickets on any given flight. These factors include: Price of the Product There is an inverse (negative) relationship between the price of a product and the amount of that product consumers are willing and able to buy. FACTORS AFFECTING DEMAND OF A PRODUCT 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. This inverse relationship between price and the amount consumers are willing and able to buy is often referred to as The Law of Demand. The Consumer's Income The effect that income has on the amount of a product that consumers are willing and able to buy depends on the type of good we're talking about.received and compare it with the direction of the price change that caused the change in total revenue. DIFFERENTIAL PRICING Differential pricing occurs when a company attempts to charge different prices to two different customers for what is essentially the same product. For . Consumers want to buy more of a product at a low price and less of a product at a high price. it is important to examine all of the factors that affect the demand for a good or service.

if you hear that Apple will soon introduce a new iPod that has more memory and longer battery life. if a celebrity endorses a new product. when less students are taking classes. For example. . Think about two goods that are typically consumed together. For example. for these goods when income rises the demand for the product will increase. 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. The Price of Related Goods As with income. the demand for their product will decrease because the number of consumers in the area has significantly decreased. 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. a pizza shop located near a University will have more demand and thus higher sales during the fall and spring semesters. The Number of Consumers in the Market 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. We call these types of goods normal goods. For example. In other words.one's expectations for the future can also affect how much of a product one is willing and able to buy. this may increase the demand for a product. bagels and cream cheese. For example. you (and other consumers) may decide to wait to buy an iPod until the new product comes out. We call these types of goods compliments The Tastes and Preferences of Consumers This is a less tangible item that still can have a big impact on demand. In the summers.most goods. when income falls. the demand for the product will decrease. the effect that this has on the amount that one is willing and able to buy depends on the type of good we're talking about. The Consumer's Expectations It doesn't just matter what is currently going on .

It provides a simple picture of a business . users must understand that ordering is never a fixed amount per month. and forecast error. This is product ordered over the forecasted allotment to act as a buffer. as well as formal methods such as analysis of historical data and data from current test markets.Advantages And Disadvantages Of Break-Even Analysis Break-even is an excellent method of analysing a business. Instead. If a company uses a fixed order system rather than integrated planning. Its advantages are • • It is cheap to carry out and it can show the profits/losses at varying levels of output. replenishment frequency. Integrated Inventory Planning  Any demand forecasting software must be able to help the user determine the amount of inventory he needs to order. The goal of demand forecasting is to determine the amount of merchandise that customers will buy. It assumes that all of the output is sold at the same price . TOOLS USED IN DEMAND FORECASTING  Demand forecasting helps companies devise plans for future product sales. A break-even analysis can have some disadvantages • • It assumes that everything produced is sold whereas it is often the case that not all output will be sold. . it often ends up with too much of some product and not enough of others.often a business will have to lower its price in order to increase its sales. Techniques include the informal method of educated guesses. as well as the safety stock. demand forecasting works in a range. However. not an exact number to be ordered. Calculations include lead time. An important factor to consider for an accurate range is safety stock.a new business will often have to present a break-even analysis to its bank in order to get a loan. calculations go into deciding the amount to order. When working on the integrated inventory planning.

they are likely to demand similar concessions). Among the conditions that are typically required for the optimal sales price to depend only on the variable costs of the one transaction the company now faces are: (1) excess production capacity (so that the sales order does not displace existing orders). . marginal production costs consist of all variable production costs. Typically.FACTORS THAT SHIFT THE DEMAND CURVE • • • • Change in consumer tastes Change in the number of buyers Change in consumer incomes Change in the prices of complementary and substitute goods Change in consumer expectations • ROLE OF COST IN PRICING Short-Run Pricing Decisions: Occasionally. a company faces a sales opportunity for which the only relevant costs and revenues are the incremental costs and revenues for that one transaction. because the company should be willing to set the sales price at any amount in excess of marginal cost (marginal production cost plus any marginal non-manufacturing costs such as distribution and marketing costs). than one might infer from Eliyahu Goldratt’s popular business novel The Goal). and (3) a customer not in the company’s normal sales channels (because if other customers learn that the company has given another customer a price break. These opportunities probably occur relatively infrequently (certainly less often. In this situation. accurate information about marginal costs are important. for example. (2) a one-time customer (since the price the customer is willing to pay in the future might depend on the price the customer pays today).

If the price leader is not followed by the rest of the market.g. rebuilt. sell the inkjet printer at or near cost. Salaried employees can be hired. The timing for eliminating unprofitable products might depend on when the costs of fixed assets associated with those products can be avoided. purchased or sold. Factories and warehouses can be built. the company’s revenues must exceed its costs. The price leader may also have a distinct product advantage or enough advertising resources to sustain a higher price than its competitors. production levels and product mix. but the company can make meaningful decisions about product prices. price leadership Situation in which a market leader sets the price of a product or service. or given incentives to resign or retire. if it is to survive. and make high profit margins on sales of ink cartridges). microeconomics provides analytical tools for jointly determining the optimal sales price and production level to maximize profits. Long-term leases and other contracts come up for renewal. fired. Price leadership is effective in the prevention of price wars and in reaching a consensus on pricing without collusion in violation of antitrust laws. The price leader usually has greater capital resources and economies of scale that enable it to risk sustaining lower prices than its competitors.. For these decisions. The solution to this problem depends on the elasticity of demand and also on variable production costs (marginal production cost. costs associated with many fixed assets are unavoidable. unless there are extenuating circumstances such as a product that serves as a “loss leader” (e. Therefore. in the terminology of economics). Management should consider dropping products that are unable to cover their full costs (manufacturing costs plus non-manufacturing costs). Dominant competitor in a market whose price changes are matched by the rest of the competitors. all fixed costs become relevant costs. . the leader is at risk of losing market share. Long-Run Pricing Decisions: In the long-run. and competitors feel compelled to match that price. reassigned.Intermediate-Run Pricing Decisions: Over the course of several months to a year or two. the management accounting system should provide managers information about whether sales prices for products are sufficiently in excess of their full cost of production to cover non-manufacturing costs and still provide the company a reasonable rate of return. In the long-run.

and thus the price. perfect competition (having many suppliers) and monopoly (having only one supplier). . patents. In oligopolistic markets. access to materials. but must consider the reaction of its sole competitor (unless both have formed an illegal collusive duopoly). (2) taking over their ownership (called 'nationalization'). and petroleum markets. and much more common than. differentiated mainly by heavy advertising and promotional expenditure. and can anticipate the effect of one another's marketing strategies. automotive. to realize economies of scale for competing internationally. Examples include airline. or where two or more producers would be wasteful or pointless (as in the case of utilities ). Although monopolies exist in varying degrees (due to copyrights.MONOPOLY Market situation where one producer (or a group of producers acting in concert) controls supply of a good or service. or unfair trade practices) almost no firm has a complete monopoly in the era of globalization. DUOPOLY Market situation in which only sellers supply a particular commodity to many buyers. OLIGOPOLY Market situation between. Monopolist firms (in their attempt to maximize profits) keep the price high and restrict the output. exclusive tech nologies. Sometimes governments facilitate the creation of monopolies for reasons of national security. banking. and show little or no responsiveness to the needs of their customers. independent suppliers (few in numbers and not necessarily acting in collusion) can effectively control the supply. or (3) by breaking them up into two or more competing firms. Either seller can exert some control over the output and prices. thereby creating a seller's market. and where the entry of new producers is prevented or highly restricted. Mirror image of oligopsony. They offer largely similar products. Most governments therefore try to control monopolies by (1) imposing price controls.

confectionary and other non-essentials show elasticity of demand whereas most necessities (food.[1] It is a key concept in economics. It has been described as expressing "the basic relationship between scarcity and choice. basic clothing) show inelasticity of demand (do not sell significantly more or less with changes in price). PRICE REDGITY Price Rigidity is a condition where one follows a decrease in price but not an increase in price. opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone. PRICE DETERMINATIONS Keyenes Model of income determination theory stated that people will put aside the same level of income or save the same amount of money at all possible . Normally. cars.[3] Thus. This is due to the ability of other firms to match prices with it and it often leads to a kinked demand curve.OPPURTUNITY COST Opportunity cost is the cost related to the next-best choice available to someone who has picked among several mutually exclusive choices. Value Maximization The act or process of adding to an individual's net worth by increasing the share price of the common stock in which that individual has invested. sales increase with drop in prices and decrease with rise in prices. See also cross price elasticity of demand. ELASTICITY OF DEMAND Responsiveness of the demand for a good or service to the increase or decrease in its price. pleasure or any other benefit that provides utility should also be considered opportunity costs. lost time. appliances. As a general rule. medicine."[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.

or the amount people put aside for emergency purposes. . Or transaction demand for money. Lagrangian calculus (linear). Pricing analysis . joint product pricing. price discrimination.microeconomic techniques are used to analyse various pricing decisions including transfer pricing. and risk quantification techniques are used to assess the riskiness of a decision.various uncertainty models. is a branch of economics that applies microeconomic analysis to specific business decisions. As such. Those motives are for 1) Transactional. He concluded that the level of a person's income determined the amount of money people demand to hold or save.rates of interest. it bridges economic theory and economics in practice. the amount of money people put aside for the purchase of earning assets (or to invest). decision rules. or for day to day purchases2)Precautionary motives. If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity. optimum factor allocation.microeconomic techniques are used to analyse production efficiency. Almost any business decision can be analyzed with managerial economics techniques. for example through the use of operations research and programming.Investment theory is used to examine a firm's capital purchasing decisions. price elasticity estimations. but it is most commonly applied to: • • • • Risk analysis . and choosing the optimum pricing method. (2) Aggregate quantity of a product or service estimated to be bought at a particular price. Production analysis . It draws heavily from quantitative techniques such as regression analysis and correlation.and 3)Speculative motives. DEMAND Desire for certain good or service supported by the capacity to purchase it. costs. economies of scale and to estimate the firm's cost function. Capital budgeting . Keyenes theorized the three reasons people demand money to hold (or save). MANAGERIAL ECONOMICS Managerial economics (also called business economics). (3) Total amount of funds which individuals or organizations want to commit for spending on goods or services over a specific period.

interest. 2. government expenditure and net exports. and pension payments to residents of the nation. 5. NATIONAL INCOME The total net value of all goods and services produced within a nation over a specified period of time. All firms have a relatively small market share. and Net National Income (NNI). by summing consumption. All firms are price takers. Buyers know the nature of the product being sold and the prices charged by each firm. representing the sum of wages. All firms sell an identical product. investment. The expenditure approach determines aggregate demand. Some of the more common measures are Gross National Product (GNP). profits. 4. They use a system of national accounts or national accounting developed by Simon Kuznets in the 1960s. Gross National Income (GNI). theincome approach and the closely .PERFECT COMPETITION What Does Perfect Competition Mean? A market structure in which the following five criteria are met: 1. 3. MEASURES OF NATIONAL INCOME Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. Net National Product (NNP). Sometimes referred to as "pure competition". The industry is characterized by freedom of entry and exit. rents. Gross Domestic Product (GDP). or Gross National Expenditure. On the other hand. There are at least two or three different ways of calculating these numbers.

Land Resources like coal. the geographical location of these natural resources affect the level of GNP. In other words. there will be minor differences in the results obtained from the various methods due to changes in inventory levels. Factors of Production Normally the more efficient and richer the resources. . the higher the level of national income or GNP will be. but not yet sold (and therefore not yet included in GNE). Factors Affecting National Income 1. iron & timber are essential for heavy industries so that they must be available and accessible. (GNP=GNI=GNE by definition) In actual fact.related output approach can be seen as the summation of consumption. This is because goods in inventory have been produced (and therefore included in GDP). Similar timing issues can also cause a slight discrepancy between the value of goods produced (GDP) and the payments to the factors that produced the goods (particularly if inputs are purchased on credit). The three methods must yield the same results because the total expenditures on goods and services (GNE) must by definition be equal to the value of the goods and services produced (GNP) which must be equal to the total income paid to the factors that produced these goods and services (GNI). savings and taxation.

regulations that affect exchanges. Wars. Government Government can help to provide a favourable business environment for investment. It provides laws and order. Labour & Entrepreneur The quality or productivity of human resources is more important than quantity. Measurement of National Income There are mainly 3 approaches to measure GNP. Technology This factor is more important for nations with little natural resources. Investment in turn depends on other factors like profitability. strikes and social unrests will discourage investment and business activities. 2. Manpower planning and education affect the productivity and production capacity of an economy. The relationship of the 3 approaches is shown by the diagram below. .Capital Capital is greatly determined by investment. In HK. Political Stability A stable economic and political system helps the allocation of resources. 3. the government promotes free trade and competition which encourage economic activities. The development in technology is affected by the level of invention and innovation on production. 4. political stability etc.

economists develop 3 approaches to measure GNP. 1.e.e. Output or Value-Added Approach The total value of all final goods & services ( i. . outputs ) can be found by adding up the total values of outputs produced at different stages of production. Based on these 3 directions of flows.The Circular Flow of Economic Activities Expenditures ($) Product Market $ Output Househol d s Income by production $ Factor Costs Firms The 3 arrows in the diagram show the overall level of economic activities. i. & a flow of expenditures. a flow of output. a flow of income.

Similarly. the value of exports must be added to C. we have : G N P at market prices = C + I + G +X-M DEPRECIATION . We could not buy all our outputs because some are exported to overseas. In 1995. the government started to release GNP data.This method is to avoid the so-called double-counting or an over-estimation of GNP. 2. It is from 1980 that the H. They are the households. However. I & G whereas the value of imports must be deducted from the above amount. there are 3 main agencies which buy goods & services. our consumption expenditures may include the purchases of some imports. In economics. In order to find the GNP. Expenditure Approach The amount of expenditures refers to all those spending on currentlyproduced final goods & services only. government started to collect data by this approach. firms and the government.K. there are difficulties in the collection and calculation of data obtained. In an economy. Finally. we have the following terms: C = Private Consumption Expenditure ( of all households ) I = Investment Expenditure ( of all firms) G = Government Consumption Expenditure ( of the local government ) The expenditure approach is to measure the GNP.

Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. Example: a depreciation expense of 100 per year for 5 years may be recognized for an asset costing 500. The latter affects net income. and declining balance methods. allocation of the cost of tangible assets to periods in which the assets are used. not giving them time to react. In economics. The former affects values of businesses and entities. This can take the competition by surprise. among the periods in which the asset is expected to be used. nation or other entity. depreciation is the decrease in the economic value of the capital stock of a firm. investment is I and depreciation D. including fixed percentage. either through physical depreciation. and 2.D. The advantages of penetration pricing to the firm are: It can result in fast diffusion and adoption. Methods of computing depreciation may vary by asset for the same business.Depreciation refers to two very different but related concepts: 1. to attract new customers. straight line. Methods and lives may be specified in accounting and/or tax rules in a country. This can achieve high market penetration rates quickly.  . rather than to make profit in the short term. Several standard methods of computing depreciation expense may be used. Such expense is recognized by businesses for financial reporting and tax purposes. the capital stock at the end of the period. C1. The strategy works on the expectation that customers will switch to the new brand because of the lower price. often lower than the eventual market price. as depreciation expense. If capital stock is C0 at the beginning of a period. Generally the cost is allocated. is C0 + I . PENETRATION PRICING Penetration pricing is the pricing technique of setting a relatively low initial entry price. Depreciation expense generally begins when the asset is placed in service. decline in value of assets. obsolescence or changes in the demand for the services of the capital in question.

[1] In other words. It is the opposite of an explicit cost. which is economically efficient.  It creates cost control and cost reduction pressures from the start. Since economic profit includes these extra opportunity costs. The term also applies to forgone income from choosing not to work. which is borne directly. This can create more trade through word of mouth.It can create goodwill among the early adopters segment. Price skimming is sometimes referred to as riding down the demand curve. it is almost impossible for a firm to capture all of this surplus. selling.  SKIMMING PRICE Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first. Implicit costs also represent the divergence between economic profit (total revenues minus total costs. an implicit cost is any cost that results from using an asset instead of renting. IMPLICIT COST an implicit cost.  It can create high stock turnover throughout the distribution channel. is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. This can create critically important enthusiasm and support in the channel. or lending it. then theoretically no customer will pay less for the product than the maximum they are willing to pay. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price. or notional cost. then lowers the price over time. leading to greater efficiency.  It can be based on marginal cost pricing. Low prices act as a barrier to entry (see: porter 5 forces analysis). it will always be less than or equal to accounting profit . It is a temporal version of price discrimination/yield management.  It discourages the entry of competitors. also called an imputed cost. implied cost. If this is done successfully. The objective of a price skimming strategy is to capture theconsumer surplus. In practice. where total costs are the sum of implicit and explicit costs) and accounting profit(total revenues minus only explicit costs).

one should buy a stock when it is worth more than its price on the market. also known as the "cromo effect" and closely related to opportunism.. as fads and trends clearly do. The bandwagon effect is well-documented in behavioral science and has many applications. the margin of safety gives the investor room for error. and behaviorism—that people often do and believe things merely because many other people do and believe the same things.MARGIN OF SAFETY Margin of safety (safety margin) is the difference between the intrinsic value of a stock and its market price. One should also analyze financial statements and footnotes to understand whether companies have hidden assets (e. Using margin of safety. The general rule is that conduct or beliefs spread among people. Because fair value is difficult to accurately compute. The margin of safety protects the investor from both poor decisions and downturns in the market. The bandwagon effect is the reason for the bandwagon fallacy's success. though strictly speaking. is a phenomenon—observed primarily within the fields of microeconomics. The effect is often called herd instinct. with "the probability of any individual adopting it increasing with the proportion who have already done so". This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing. investments in other companies) that are potentially unnoticed by the market. political science. this effect is not a result of herd instinct. BANDWAGON EFFECT IN DEMAND he bandwagon effect. As more people .g. Benjamin Graham suggested to look at unpopular or neglected companies with low P/E and P/B ratios.

be that a national. In contrast. microeconomics is primarily focused on the actions of individual agents. output. others also "hop on the bandwagon" regardless of the underlying evidence. and how prices. regional. unemployment rates. such as firms and consumers. behavior and decision-making of the entire economy. and how their behavior determines prices and quantities in specific markets. there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle). savings. . Macroeconomists develop models that explain the relationship between such factors as national income. or the global economy.come to believe in something. in turn. unemployment. int ernational trade and international finance. macroeconomics is one of the two most general fields in economics. and price indices to understand how the whole economy functions. The tendency to follow the actions or beliefs of others can occur because individuals directly prefer to conform. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services. and the attempt to understand the determinants of long-run economic growth (increases in national income). structure.[1] typically in markets where goods or services are being bought and sold. investment. Both explanations have been used for evidence of conformity in psychological experiments. which determines prices. With microeconomics. or because individuals derive information from others. MACRO ECONOMICS Macroeconomics is a branch of economics that deals with the performance. Macroeconomists study aggregated indicators such as GDP. the household and the firms. inflation. make decisions to allocate limited resources. determine the quantity supplied and quantity demanded of goods and services. While macroeconomics is a broad field of study. consumption. MICRO ECONOMICS Microeconomics is a branch of economics that studies how the individual parts of the economy.

THEORY OF FIRM The theory of the firm consists of a number of economic theories that describe the nature of the firm. behavior. Heterogeneity of firm actions/performances – what drives different actions and performances of firms? Firms exist as an alternative system to the market-price mechanism when it is more efficient to produce in a non-market environment. PERISHABLE GOODS . in a labor market. firms engage in a long-term contract with their employees to minimize the cost. Organization – why are firms structured in such a specific way. the theory of the firm aims to answer these questions: 1. Thus. structure. it might be very difficult or costly for firms or organization to engage in production when they have to hire and fire their workers depending on demand/supply conditions. company.Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy. or corporation. why are not all transactions in the economy mediated over the market? 2. For example. including its existence. In simplified terms. and relationship to the market. Boundaries – why is the boundary between firms and the market located exactly there as to size and output variety? Which transactions are performed internally and which are negotiated on the market? 3. Existence – why do firms emerge. for example as to hierarchy or decentralization? What is the interplay of formal and informal relationships? 4. It might also be costly for employees to shift companies everyday looking for better alternatives.

Price is interrelated with both of these measures of value. After a certain time they can't be eaten. the resource cost of the good or service an appraised value (such as the discounted present value). CUT THROAT COMPETITION . economic value and intrinsic value.. all pasta types.Perishable foods are something liable to perish. MARKET PRICE In economics. canned goods. Shifts due to changing consumer preferences will inherently influence market price. Non-perishable foods is the opposite.. meaning that the higher the price climbs. market price is the economic price for which a good or service is offered in the marketplace. the greater the supply is demanded . and rational expectations. market pricing is primarily determined by the interaction of supply and demand. for example. spices are non perishable as well. sugar. seafood. and ripe fruits. Market price is just one of the number of ways to establish the monetary value of a good or a transaction. decay or spoil rapidly.. NORMAL PRICE Equilibrium price of a good or service in a perfectly competitive market (see perfect competition). the lower amount of the supply is demanded. flour. Conversely. It is of interest mainly in the study of microeconomics. Perishable foods include meat. While non-perishable are items that do not spoil or decay. the lower the price. In classical economics. such as fresh meat. Other measures of value include historical cost. Perishable foods are foods that perish. They last for a long time and don't perish. curls (and chips if air-sealed). The relationship between price and supply is generally negative.. equilibrium.. Non-perishable foods include canned goods. Market value and market price are equal only under conditions of market efficiency. the price that is equal to the lowest possible average total cost of production plus normal profit.

CAUSES OF MONOPOLY Most economists regard monopoly as an exceptional case in a modern economy. particularly fixed costs. Other practices that fall short of the formation of a cartel but are nonetheless against the public interest and illegal include: (a) the setting of minimum prices. (e) exchanging information. Collusion resulting in the formation of a cartel is one such practice. (d) setting different prices for different buyers (discriminatory pricing). Thus. In an economy populated by alert profit-seekers. what the "barrier to entry" might be. The aim of restrictive practices is to raise prices and restrict output to the benefit of the companies practicing them. we ask what might create the exception -what might "cause" a monopoly. Most texts give four causes of monopoly. This may arise in secularly declining or "sick" industries with high levels of excess capacity or where frequent cyclical or random demand downturns are experienced. which I will also give and add a fifth. For a monopoly to be stable. . there must be some "barrier to entry. (c) the refusal to supply retailers that stock the products of other competitors. also known as destructive or ruinous competition. • • • • • patents and other forms of intellectual property control of an input resource government decreasing cost crime RESTRICTIVE TRADE PRACTICE The term restrictive trade practice is used for any strategy used by producers to restrict competition within a given market." The assumption of free entry into the industry must not apply.Cut-throat competition. (b) agreements to share markets. it seems that any profitable monopoly would quickly attract competitors. refers to situations when competition results in prices that do not chronically or for extended periods of time cover costs of production.

Price fixing Any agreement between competitors fixing the price of goods or services is illegal. It is illegal for competitors to get together to fix prices or share markets. Boycotts Competitors are prohibited from getting together and restricting the flow of goods or services to another person. Exclusive Dealing It is illegal to supply goods or services on the condition that the buyer will not acquire those goods or services exclusively or principally from a competing supplier. Examples of anti-competitive conduct are market sharing and bid rigging (collusive tendering). where the arrangement is also likely to substantially lessen competition in a market ("tying").What are restrictive trade practices? These include: Anti-competitive arrangements Competitors must not enter arrangements that will substantially lessen competition in a market. Misuse of Market Power A supplier with substantial market power must not damage a competitor or competitive conduct generally. It is illegal to enter agreements (known as primary boycotts). A supplier must not supply goods or services on the condition that the buyer obtains other goods or services from a third party ("third line forcing"). which have the effect of excluding a person or class of persons from a particular market. Resale Price Maintenance . which is deemed to be the largest area within which substitutable products are sold. Informal arrangements made over lunch or on the tennis court may be held to be as illegal as formal written agreements.

nominal capital stock is the total value. CONCEPT OF DUMPING Exporting goods at prices lower than the home-market prices. nominal gross domestic product refers to a total number of dollars spent during a specific time period. and interpretation of data. such as a year. inventories. For example. . It deals with all aspects of this. the exporter uses higher home-prices to supplement the reduced revenue from lower export prices. cash incentives. and has units of dollars/year. of equipment. if it is a genuine recommendation. 2004). Flow is roughly analogous to rate or speed in this sense. In contrast. The diagram provides an intuitive illustration of how the stock of capital currently available is increased by the flow of new investment and depleted by the flow of depreciation. U. and has units of dollars.S.It is illegal for suppliers to try to force resellers not to discount or not to advertise discounts (although they can set maximum prices). and related fields often distinguish between quantities that are stocks and those that are flows. In price-to-price dumping. the U. the exporter is subsidized by the local government with duty drawbacks. buildings. business. etc. with which it is often grouped. which may have accumulated in the past. Therefore a flow would be measured per unit of time (say a year). and other real assets in the U. December 31. Provision of a recommended retail price is not illegal. These differ in their units of measurement. A supplier must not demand that resellers charge a specified minimum price. and represents a quantity existing at that point in time (say. STOCK AND FLOW CONCEPT Economics. accounting. organization. A flow variable is measured over an interval of time.S. in dollars. Therefore it is a flow variable. including the planning of data collection in terms of the design of surveys and experiments. If injury is established.[1] Statistics is closely related to probability theory. Dumping islegal under GATT (now WTO) rules unless its injurious effect on the importing country's producers can be established. A stock variable is measured at one specific time. economy. In price-cost dumping.S. STSTISTICS Statistics is the science of the collection.

Demand Forecasting in Managerial Economics One of the crucial aspects in which managerial economics differs from pure economic theory lies in the treatment of risk and uncertainty. i. which is named forecasting. the backward projection of data may be named ‘back casting’. he can predict the future. in fact. Concepts of Forecasting: The manager can conceptualize the future in definite terms. Thus prediction and projection-both have reference to future. one needs to consider the projected course of general price index (variable). If he is concerned with future event.GATT rules allow imposition of anti-dumping duty equal to the difference between the exporter's home-market price and the importer's FOB price. the manager needs to predict the future event. To cope with future risk and uncertainty. inventory etc. what is relevant is forecasting. the forward projection of data. a tool used by the new economic historians. but the real world business is full of all sorts of risk and uncertainty. For practical managers concerned with futurology. intensity and duration. forecasting. price or profit. Suppose. which supports the production of an event.like demand. business forecasting is an essential ingredient of corporate planning. Such forecasting enables the manager to minimize the element of risk and uncertainty. The likely future event has to be given form and content in terms of projected course of variables. A manager cannot.its order. afford to ignore risk and uncertainty. it is predicted that there will be inflation (event). Thus. By contrast. It is a forward projection of data variables. he can project the future. Traditional economic theory assumes a risk-free world of certainty. The element of risk is associated with future which is indefinite and uncertain. To establish the nature of this event.e. . If he is concerned with the course of future variables. one supplements the other. Demand forecasting is a specific type of business forecasting. the predicted event of business recession has to be established with reference to the projected course of variables like sales. Exactly in the same way. therefore. Projection is of two types – forward and backward.

Thus. depending upon their functional area. he must establish its basis in terms of trends in sales data. if a marketing manager fears demand recession. Demand forecasting is essential for a firm because it must plan its output to meet the forecasted demand according to the quantities demanded and the time at which these are demanded. They need to forecast demand.term forecasting can be undertaken by affirm for the following purpose. price. short. The forecasting demand helps a firm to arrange for the supplies of the necessary inputs without any wastage of materials and time and also helps a firm to diversify its output to stabilize its income overtime. This trend estimation is an exercise in forecasting. (1) The purpose of the Short term forecasting: It is difficult to define short run for a firm because its duration may differ according to the nature of the commodity. while for another plant duration may extend to 6 months or one year. Time duration may be set for demand forecasting depending upon how frequent the fluctuations in demand are. need various forecasts. For a highly sophisticated automatic plant 3 months time may be considered as short run. Need for Demand Forecasting Business managers. . Sales constitute the primary source of revenue for the corporate unit and reduction for sales gives rise to most of the costs incurred by the firm. profit. he can estimate such trends through extrapolation of his available sales data. supply. costs and returns from investments. The purpose of demand forecasting differs according to the type of forecasting. The question may arise: Why have we chosen demand forecasting as a model? What is the use of demand forecasting? The significance of demand or sales forecasting in the context of business policy decisions can hardly be overemphasized.

• Appropriate scheduling of production to avoid problems of over production Proper management of inventories Evolving suitable price strategy to maintain consistent sales Formulating a suitable sales strategy in accordance with the changing Forecasting financial requirements for the short period. More over the time duration also depends upon the nature of the product for which demand forecasting is to be made.production. unit. Fluctuations of a larger magnitude may take place in the distant future. • • • pattern of demand and extent of competition among the firms. It takes time to raise financial Arranging suitable manpower. diversification and technological up gradation. In fast developing economy the duration may go up to 5 or 10 years. • Planning for a new project.term forecasting: The concept of demand forecasting is more relevant to the long-run that the short-run. The purposes are. and under. It can help a firm to arrange for specialized Evolving a suitable strategy for changing pattern of consumption. • resources. It is comparatively easy to forecast the immediate future than to forecast the distant future. • labour force and personnel. while in stagnant economy it may go up to 20 years. • . expansion and modernization of an existing Assessing long term financial needs. • • (2) The purpose of long.

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