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Chapter – 1 Introduction to Managerial Economics Chapter – 2 Demand Analysis Chapter – 3 Supply Analyses Chapter – 4 Pricing Decisions
Unit – III Chapter – 1 Introduction to Managerial Economics Synopsis: Introduction Meaning of Managerial Economics Definition of Managerial
Economics Scope of Managerial Economics Importance of Managerial
Economics INTRODUCTION Managerial economics draws on economic analysis for such concepts as cost, demand, profit and competition. Managers can take Decision for a business related problems based on Economic concept. MEANING OF MANAGERIAL ECONOMICS Managerial Economics is a discipline that combines economic theory with managerial practice. DEFINITION OF MANAGERIAL ECONOMICS According to Spencer and Seigelman Managerial Economics is defined as the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management. IMPORTANCE OF MANAGERIAL ECONOMICS Helps to achive firm’s objectives
Helps to make a decision for business related problems
Helps to allocate the resources ( man, Money, materials ect.,)
SCOPE OF MANAGERIAL ECOMOMICS Managerial Economics consist of two branches 1. Micro Economics 2. Macro Economics 1. Micro Economics Micro economics studies the economic behavior of individual decision making units such as consumers, producers/firms and resource owners. Scope of Managerial Economics Are a) Demand Analysis and forecasting
b) Production and Cost Analysis
c) Market structure d) Pricing Decisions, policies and practices
e) Profit management and Profit Analysis. ‡ f) Investment and Capital Management
2. Macro Economics a) Employment b) National income c) Foreign Trade d) Inflation e) Economic Growth f) Government Economic policies
Unit – III Chapter – 2 Demand Analysis .
Synopsis Introduction Meaning of Demand Definition of Demand Types of Demand Determinants or Factors affecting Demand Law of Demand • • • Meaning of law of Demand Assumption of Law of Demand Exemption to Law of Demand Demand Function Elasticity of Demand f Elasticity of Demand • • • • Meaning of Elasticity of Demand Types of Elasticity of Demand Factors affecting Elasticity of Demand Measuring methods of Elasticity of Demand Demand Forecasting • • Meaning of Demand Forecasting Techniques or methods of Demand Forecasting .
MEANING OF DEMAND .INTRODUCTION Demand Analysis is very important to the managers to take production related decision. purchasing required raw materials and machineries ect. Based on Demand Analysis. budget.. the managers have to prepare a production schedule.
raw materials etc. TYPES OF DEMAND a) Consumer goods Demand and Industrial Goods Demand Goods and services used for final consumption are called consumer goods. services of employees.. birds etc. Vegetables. Sales of non-durables are made largely to meet current demands which depend on Ex: Perishable goods – Fruits. Durable goods pose more complicated problems for demand analysis than do nondurables. Ex: Consumer goods – Toothpaste. • • • Desire to buy a commodity Willingness to purchase a commodity Ability to purchase a commodity DEFINITION OF DEMAND According to Bober Demand is defined as the various quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices or at various incomes or at various prices of related goods. b) Perishable and durable goods demand Perishable goods become unusable after sometimes. These include. TV. Dairy products Durable goods – Furniture. cloth ect.Demand for a commodity refers to the quantity of the commodity which an individual household is willing to purchase per unit of time at a particular price. animals. others are durable goods. goods consumed by human-beings. factory buildings. perishable goods are those which can be consumed only once while in durable goods. their services only are consumed. Producer goods refer to the goods used for production of other goods. machinery ect. Precisely. Producer goods – Raw materials. Fridge .. like plant and machines.
Ex: Autonomous Demand .all type of industrial goods like cement. while the rest have derived demand.current conditions. c) Autonomous and Derived Demand The goods whose demand is not tied with the demand for some other goods are said to have autonomous demand. Ex: Price of a Product 8 10 6 B1 6 4 8 Individual Demand B2 8 6 10 B3 5 3 7 Market Demand 19 13 25 e) Firm and Industry Demand . For example. But the degree of this dependence varies widely from product to product. DVD Player Derived Demand . Thus the demands for all producer goods are derived demands as they are needed to obtain consumer or producer goods. Thus the autonomous and derived demands vary in degree more than in kind. cotton d) Individual’s Demand and Market Demand Market demand is the summation of demand for a good by all individual buyers in the Market. there is hardly anything whose demand is totally independent of any other demand. However. say only three buyers then individual and market demand represents cumulative demand of all the buyers in a market.all type of consumer goods like car. So is money because of its purchasing power. if the market of good x has. sales of durable goods go partly to satisfy new demand and partly to replace old items. In contrast.
demand for all kinds of cars like.demand for Honda car alone Industry Demand . and if any one or more of these differences were significant in terms of product price. demand for godds of necessities remains the same with change in price.. When price increases demand decreases and vice versa b) Income of the consumer A rise in income would result in the people demanding more of normal goods. Toyota ect. product uses. distribution channels. Ford. in case of inferior goods rise in income causes a fall in demand. f) Demand by Market Segments and by Total Market If the market is large in terms of geographical spread. In that case. seasonal patterns or cyclical sensitivity. Maruti. With a rise in price of tea people will . the total demand would mean the total demand for the product from all market segments while a particular market segment demand would refer to demand for the product in that specific market segment.Goods are produced by more than one firm and so there is a difference between the demand facing an individual firm and that facing an industry. Ex: Firms Demand . Honda. (All firms producing a particular good constitute an industry engaged in the production of that good). profit margins. DETERMINANTS OR FACTORS AFFECTING DEMAND a) Price Demand is inversely proportional to price. c) Price of related goods Related goods may be in the form of substitute or complementary goods • Substitute goods: These goods satisfy the same type of demand and hence can be used in place of each other ex: tea and coffee. then it may be worthwhile to distinguish the market by specific segments for a meaningful analysis. competition. customer sizes or product varieties.
Hence demand for coffee will rise. habits and general lifestyle. The demand for cars has increased due to bank loans. For ex : the craze of being fit has increased the demand for cycles e) Consumer's expectations If consumers expect a rise in price of goods in future the demand for these goods will increase. Increase in the price of ink would cause a decrease in the demand for pen. ex: A higher number of females will have an increased demand for sarees. Some of these like fashion keep on changing as a result their demand keeps on changing.shift their consumption to the relatively cheaper coffee. These are the demographic effects on demand for the commodities. similarly if they expect a rise in income they will buy more f) Consumer credit facility: With the availability of credit sand loans from banks consumers have been able to afford commodities they would have otherwise not purchased. h) Government policy If government imposes taxes on commodities their price will increase and demand will decrease while in case if granting subsidies the price will decrease and hence the demand will increase. g) Size and composition of Population Larger the population larger will be the number of consumers. d) Tastes and preferences These depend upon the social customs. Also the composition of population has an effect on the demand. When a product is aggressively advertised through all the . i) Advertisement: This factor has gained tremendous importance in the modern days. They have a positive relationship • Complementary goods: These goods are jointly used or consumed together ex: pen and ink. Hence the price of ink has a negative relationship with the quantity demanded of pen.
possible media. But there are some exceptional situations under which there may be a direct relationship between price and quantity demanded. No change in the size and composition of population. j) Season and weather Based on weather and climate condition the demand of the product will increase. The Law of Demand expresses the inverse relationship between quantity demanded and price. preference. c. Income of the consumer is given and constant. Exception to Law of Demand . Constancy of the price of other goods. P1 Price P Q1 Q Quantity Demanded Assumptions of the 'law of demand' The law of demand in order to establish the price-demand relationship makes a number of assumptions as follows: a. No change in tastes. d. habits etc. the consumers buy the advertised commodity even at a high price and many times even if they don’t need it. LAW OF DEMAND Meaning of Law of Demand Law of Demand states that the demand of the commodity increase when its price falls and decrease when its price increases. b. Demand for woolen clothes goes up in winter whereas their demand is extremely less in summer.
When their price raises the prestige value goes up. DEMAND FUNCTION . hence income effect is higher than substitution effect. Rich buy diamond as their possession is prestigious. Ex: Share b) Fear of scarcity At times of war. water ect. famine etc. The demand curve for these has a positive slope. The consumers of such goods are mostly the poor. consumers have an abnormal behavior. a rise in their price drains their resources and the poor have to shift their consumption from the more expensive goods to the giffen goods. c) Quality-price relationship Some people assume that expensive goods are of a higher quality then the low priced goods. a) Speculative goods If the price of a commodity is rising and is expected to rise in future the demand for the commodity will increase. These are goods of ' conspicuous consumption '. In depression they will buy less at even low prices. In this case more goods are demanded at higher prices. Which still remain cheaper. If they expect shortage in goods they would buy and hoard goods even at higher prices. b)Veblen goods or Prestige goods: Goods which serve ' status symbol ' do not follow the law of demand.a) Giffen paradox or inferior goods: These are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. Price of these good increases even though customers must have to buy these goods for their survival.they give their possessor utility in the sense of their ownership. d) Basic necessities: These goods are necessity goods to human being. These goods have no closely related substitutes. while a fall in the price would spare the household some money for more expensive goods.. Ex: Foods.
A. Dx = D (Px. I. but also income. T. Demand function is a comprehensive formulation which specifies the factors that influence the demand for the product. IV. the other determinants remaining constant. price of related goods—both substitutes and complements. E.The demand for a commodity arises from the consumer’s willingness and ability to purchase the commodity. III. Price Elasticity of Demand Income Elasticity of Demand Cross Elasticity of Demand Promotional Elasticity of Demand Price Elasticity of Demand . ELASTICITY OF DEMAND Meaning of Elasticity of Demand Elasticity of demand refers to the degree of change in quantity demanded or the degree of responsiveness of the quantity to a change in any one of the determinants of demand. Py. II. B. U) where Dx = Demand for item X Px = Price of substitutes Pz = Price of complements B = Income of consumer E = Price expectation of the user T = Taste or preference of user U = all other factors. taste of consumer. Pz. The Demand Theory postulates that the quantity demanded of a commodity is a function of or depends on not only the price of a commodity. Types of Elasticity of Demand I. price expectation and all other factors.
Price elasticity of demand (Ed) measures the degree of responsiveness of quantity demanded of a product to changes in its own price. Perfectly inelastic demand (ep = 0) b. Inelastic (less elastic) demand (e < 1) c. Demand for some commodities is more elastic while that for certain others is less elastic. Unitary elasticity (e = 1) d. Using the formula of elasticity. Perfectly elastic demand (e = ∞) a) Perfectly inelastic demand (ep = 0) This describes a situation in which demand shows no response to a change in price. Elastic (more elastic) demand (e > 1) e. It can be depicted by means of the alongside diagram. The vertical straight line demand curve as shown alongside reveals that with a change in price (from OP to . it possible to mention following different types of price elasticity: a. whatever be the price the quantity demanded remains the same. In other words. In mathematical form it is expressed as: Ed = Percentage change in quantity demanded Percentage change in price where Q = change in quantity demanded ∆ P = change in price Q = Original quantity demanded P = Original Price Types of price Elasticity of Demand The concept of price elasticity reveals that the degree of responsiveness of demand to the change in price differs from commodity to commodity.
. In this case an insignificant change in price produces tremendous change in demand. It can be noticed that in the above example the percentage change in demand is greater than that in price. In the alongside figure percentage change in demand is smaller than that in price. perfectly inelastic demand ( see Fig a). demand does not at all respond to a change in price. (See Fig b) c) Unitary elasticity demand (e = 1) When the percentage change in price produces equivalent percentage change in demand. hence e = 1. we have a case of unit elasticity. It means a small change in price induces a significant change in. Hence. Thus ep = O. the elastic demand (e>1) (see Fig d ). This is referred to as an inelastic demand (see Fig e ). b) Perfectly elastic demand (e = ∞) This is experienced when the demand is extremely sensitive to the changes in price. The alongside figure shows this type. demand.Op1) the demand remains same at OQ. Hence. The demand curve showing perfectly elastic demand is a horizontal straight line. In this case percentage change in demand is equal to percentage change in price. This can be understood by means of the alongside figure. It means the demand is relatively c less responsive to the change in price. The rectangular hyperbola as shown in the figure demonstrates this type of elasticity. e) Relatively Inelastic (less elastic) demand (e < 1) In this case the proportionate change in demand is smaller than in price. (See Fig c) d) Relatively Elastic (more elastic) demand (e > 1) In case of certain commodities the demand is relatively more responsive to the change in price. Thus.
The income effect suggests the effect of change in income on demand. II. income elasticity of demand can be expressed as: EY = [Percentage change in demand / Percentage change in income] Types of income elasticity of Demand 1.(a)) . In other words. Thus.Zero income Elasticity (EY=0) Changes in income has no effect on the quantity demanded ( fig . In fact. Demand for a commodity changes in response to a change in income of the consumer. Income Elasticity of Demand Price is not the only determinant of demand. income elasticity of demand means the responsiveness of demand to changes in income.. The income elasticity of demand explains the extent of change in demand as a result of change in income. income effect is a constituent of the price effect.
Zero Income Elasticity of Demand (EY=o): This is the case when change in income of the consumer . the demand for a commodity X depends not only on the price of X but also on the prices of other commodities Y. This means that fall in price of X (pen) leads to rise in its demand so also rise in t) demand for Y (ink) 4. But in case of inferior goods. the income effect beyond a certain level of income becomes negative. The concept of cross elasticity explains the degree of change in demand for X as. the cross elasticity will be negative. a greater portion of income is being spent on a commodity with an increase in income. buys less and switches on to a superior commodity. Z…. EY = 1 or the income elasticity is unitary. Thus. III. instead of buying more of a commodity. This can be expressed as: EC = [Percentage Change in demand for X / Percentage change in price of Y] The relationship between any two goods is of two types. a result of change in price of Y.Positive income Elasticity Positive income elasticity may be dived into 3 types (i) Income Elasticity of Demand Greater than One: When the percentage change in demand is greater than the percentage change in income.income elasticity is said to be greater than one. Cross Elasticity of Demand While discussing the determinants of demand for a commodity. we have observed that demand for a commodity depends not only on the price of that commodity but also on the prices of other related goods. Negative Income Elasticity of Demand (EY< o): It is well known that income effect for most of the commodities is positive. (ii) Income Elasticity is unitary: When the proportion of income spent on a commodity remains the same or when the percentage change in income is equal to the percentage change in demand. 3. (iii) Income Elasticity Less Than One (EY< 1): This occurs when the percentage change in demand is less than the percentage change in income. In case of complementary commodities. does not bring about any change in the demand for a commodity. The goods X and Y can be complementary goods (such as pen and ink) or substitutes (such as pen and ball pen).N etc. This implies that as the income increases the consumer. The income elasticity of demand in such cases will be negative.2.
If two commodities. IV. . cross elasticity will be of three types: 1. When an increase in current price is expected to result in future prices then E= 1. if increase in future price is more than proportional to current price rise. This is defined as the percentage change in the level of future prices (Pt+1) expected as a result of a change in the level of current prices (P1). for less the proportional increase. In short. 2. consumers may be affected by 1 per cent rise or fall in price of a flat but are insensitive to such fluctuations in prices of pens. Percentage of income: Big items in a budget tend to have a more elastic demand than small items. Positive cross elasticity – Substitutes. Substitutes: Items that can be substituted easily have a more elastic demand than those that do not.On the other hand. 2. 3. Elasticity of Demand with Respect to Advertisement and promotion It is the ratio of percentage change in the quantity demanded of a commodity (Q) to Percentage in the advertisement outlay on the commodity (A). then E is greater than one. FACTORS DETERMINING ELASTICITY OF DEMAND 1. Purchasers can stop buying the luxury goods when their prices rise. For example. Demand for X as a result of change in price of Y. the cross elasticity for substitutes is positive which means a fall in price of X (pen) results in rise in demand for X and fall in demand for Y (ball pen). Negative cross elasticity – Complementary commodities. 3. It is also called promotional elasticity and plays an important role in the context of marketing management. E is less than one. are unrelated there will be no change i. Cross elasticity in cad of such unrelated goods will then be zero. It measures the ratio of the percentage rise in expected future prices to the percentage rise in its current price. while necessity goods have an inelastic demand. Zero cross elasticity – Unrelated goods.Luxury or necessity goods: Luxury goods tend to have an elastic demand. say X and Y.
Different methods are used for measuring the elasticity of demand. it is the case of unit elasticity. 2. It means if the total revenue (price x Quantity bought) remains the same in spite of a change in price. ep > 1. 1. e = 1.If 5% change in price leads to exactly 5% change in demand. meaning thereby the demand is inelastic. 1. i. Time: The demand for a product becomes more elastic the longer the time period under consideration. ep > 1.4.e. Percentage Method: In this method. If price and total revenue are inversely related. the demand is said to be inelastic pr e < 1. 1. Measurement methods of Elasticity of Demand For practical purposes. It takes time to decide about other p product before buying it as one develops a habit of using a particular product. it is essential to measure the exact elasticity of demand. Total Outlay Method: The elasticity of demand can be measured by considering the changes in price and the consequent changes in demand causing changes in the total amount spent on the goods... percentage change in demand is equal to percentage change in price . i. ep = 1. 3. e > 1. If a given change in price fails to bring about any change in the total outlay. i. it is a case of unit elasticity. By measuring the elasticity we can know the extent to which the demand is elastic or inelastic.e. Viz. if total revenue falls with rise in price or rises with fall in price. When price and total revenue are directly related. The change in price changes the demand for a commodity which in turn changes the total expenditure of the consumer or total revenue of the seller. 2. 3. . the percentage change in demand and percentage change in price are compared. e > 1. demand is said to be elastic or e > 1. ep = [Percentage change in demand / Percentage change in price] In this method. it means the demand is elastic. ‘ep’ is said to be equal to 1 2.If percentage change in demand is less than that in price.If percentage change in demand is greater than percentage change in price. three values of ‘ep’ can be obtained.e. if total revenue rises with a rise in price and falls with a fall in price.
and cut inventories. Helpful in deciding to enter a new market or not. Accurate forecasts allow scheduler to use machine capacity efficiently. Deciding the channels of Distribution Methods or Techniques of Forecasting The two general types of forecasting techniques used for demand forecasting are: Qualitative methods and Quantitative methods Techniques of Demand Forecasting Qualitative or Judgemental Method Sales force opinion Executive opinion Delphi Technique Market Research Customer survey Quantitative or causal Method Linear Regression Time Series simple Average Weighted Average Exponential smoothing . Importance of Demand Forecasting Determining the sales territories. qualitative methods drawing on managerial experience. and acquiring additional resources. reduce production times. Product mix decisions. scheduling existing resources. or a combination of both. In deciding the number of salesmen required to achieve the sales objective.DEMAND FORECASTING Meaning of Demand Forecasting Forecasts are needed to aid in determining what resources are needed. Forecasting methods may be based on mathematical models using historical data available. Forecasting demand in such situations require uncovering the underlying patterns from available information. Helpful in determining how much capacity to be built up. Assessing the effect of a proposed marketing programme.
But it also has several disadvantages. This approach has several advantages. b) Executive opinion Executive opinion is a forecasting method in which the opinions. distribution. expert opinions. salespeople may underestimate their forecasts so that their performance will look good when they exceed their projections or may work hard only until they reach their required minimum sales. other more cautious. firms rely on managerial judgment and experience to generate forecasts. some people are naturally optimistic. • • The sales force is the group most likely to know which products or services customers will be buying in the near future. which translate the opinions of managers. consumer surveys and sales force estimates into quantitative estimates. If the firm uses individual sales as a performance measure. As we will discuss later. and technical knowledge of one or more managers are summarized to arrive at a single forecast. and in what quantities. Executive opinion can also be used for technical . and sales force staffing purposes.I. Judgement or Qualitative Methods Qualitative methods include judgement methods. • • • Individual biases of the sales people may taint the forecast. Sales territories often are divided by district or region. such as a new sales promotion or unexpected international events. moreover. a) Sales Force Estimate Sales force estimates are forecasts compiled from estimates of future demand made periodically by members of a company’s sales force. Information broken down in this manner can be useful for inventory management. When adequate historical data are lacking. • The forecasts of individual sales force members can be combined easily to get regional or national sales. executive opinion can be used to modify an existing sales forecast to account for unusual circumstances. as new product is introduced or technology is expected to change. Sales people may not always be able to detect the difference between what a customers “wants” (a wish list) and what a customer “needs” (a necessary purchase).
and long term. 3. and only fair for the long term. it sometimes gets out of control. and the competitive environment.forecasting. if executives are allowed to modify a forecast without collectively agreeing to the changes. A coordinator sends a question to each member of the group of outside experts. is participating. 2. d) Delphi method The Delphi method is process of gaining consensus from a group of experts while maintaining their anonymity. mailings. . medium. changes in society. Designing a questionnaire that request economic and demographic information from each person interviewed and asks whether the interviewee would be interested in the product or services. Accuracy is excellent for the short term. Selecting a representative sample of households to survey. The Delphi method can be used to develop long-range forecasts of product demand and new product sales projections. Conducting a market research study includes 1. make allowance for economic or competitive factors not included in the questionnaire. and analyze whether the survey represents a random sample of the potential market. good for the medium term. the resulting forecast will not be useful. Deciding how an administrative sample of household to survey. This form of forecasting is useful when there are no historical data from which to develop statistical models and when managers inside the firm have no experience on which to base informed projections. This method of forecasting has several disadvantages. It can also be used for technological forecasting. c) Market research Market research is a systematic approach to determine consumer interest in a product or services by creating and testing hypotheses through data-gathering surveys. whether by telephone polling. In addition. and 4. who may not even know who else. Although that may be warranted under certain circumstances. Analyzing the information using judgment and statistical tools to interpret the responses. determine their adequacy. or personal interviews. Executive opinion can be costly because it takes valuable executive time. government regulations. which should include a random selection within the market area of the proposed product or service. The Delphi methods can be used to obtain a consensus from a panel of experts who can devote their attention to following scientific advances. Market research may be used to forecast demand for the short.
Quantitative Methods Quantitative methods include casual methods and time series analysis. There is little evidence that Delphi forecasts achieve high degrees of accuracy. • Poorly designed questionnaires will result in ambiguous or false conclusions. including the following major ones. they are known to be fair.good in identifying turning points in new product demand. opinion of through questionnaire Merits: • • • • • • • Direct sources from customer No personal bias of surveyor Simple method Save time and coat Sometimes consumers are not answered Possible for sample error Information used only for short period marketexperts Demerits II. • • Responses may be less meaningful than if experts were accountable for their responses. to predict demand. economics conditions.to. Casual method based historical data on independent variables. . However. confounding the results or at least further lengthening the process. Time series analysis is a statistical approach that relies heavily on historical demand data to project the future size of demand and recognize trends and seasonal patterns. and competitors’ actions. e) Customer survey Method Survey conducted about the intention of consumer. such as promotional campaigns.The Delphi method has some shortcomings. During that time the panel of people considered to be experts may change. • The process can take a long time (sometime a year or more).
Dt-n+1 n n = total number of periods in the average . The forecast will be more responsive than the simple t = Dt + Dt+1 + Dt-2 +…. The value of r can range from – 1.a) Linear regression In linear regression. The advantage of a weighted moving average method is that it allows you to emphasize recent demand over earlier demand. r.00 to + 1. the forecast period t + 1. the dependent variable is a function of only one independent variable. measures the direction and strength of the relationship between the independent variable and the dependent variable. called a dependent variable. It is most useful when demand has no pronounced trend or seasonal influences..0.00. and therefore the theoretical relationship is a straight line: Y=a + bX Where Y = dependent variable X = independent variable a = Y-intercept of the line b = slope of the line. In the weighted moving average method. one variable. 1/n. can be calculated as Ft+1 = sum of last n demands n where Dt = actual demand in period Ft+1 = forecast for period t + 1 Weighted Moving Averages: In the simple moving average method. The objectives of linear regression analysis is to find values of a and b that minimize the sum of squared deviations of the actual data points from the graphed line. Specially. b) Time series methods Simple Moving Averages: The simple moving average method is used to estimate the average of demand time series and thereby remove the effects of random fluctuation. In the simple linear regression models. The sum of the weight equal 1. The sample correlation coefficient. each demand has the same weight in the average --namely. is related to one or more independent variables by a linear equation. each historical demand in the average can have its own weight.
calculate the average of several recent periods of demand. Exponential smoothing requires an initial forecast to get started. Smaller α values treat past demand more uniformly and result in more stable forecasts. The effect of the initial estimate of the average on successive estimate of the average diminishes over time because. Nonetheless. There are two ways to get this initial forecast: Either use last period’s demand or. as in the case of a demand series with a trend. . However. This lag is specially noticeable with a trend because the average of the time series is systematically increasing or decreasing. the weights given to successive historical demands used to calculate the average decay exponentially. its simplicity also is disadvantage when the underlying average is changing. The exponential smoothing method is a sophisticated weighted moving average method that calculates the average of a time series by giving recent demands more weight than earlier demands. Ft+1 =α (Demand this period) + (1-α ) (Forecast calculated last period)= α Dt+(1-α )Ft Ft+1 =Ft + α (Dt-Ft) Larger α values emphasize recent levels of demand and result in forecasts more responsive to changes in the underlying average. It is inexpensive to use and therefore very attractive to firms that make thousands of forecasts for each time period.moving average forecast to changes in the underlying average of the demand series. the weighted moving average forecast will still lag behind demand because it merely averages past demands. It is the most frequently used formal forecasting methods because of its simplicity and the small amount of data needed to support it. if some historical data are available. c) Exponential smoothing. Exponential smoothing has the advantages of simplicity and minimal data requirements. with exponential smoothing.
Assumptions made are that producers aim is to maximize profits and that ceteris paribus holds. DEFINITION OF SUPPLY Supply can be defined as the quantity of a commodity offered for sale at a price during a given period of time FACTORS AFFECTING SUPPLY • • • • • • • Price of the good itself Number of sellers Technology Resource Prices Taxes and subsidies Expectations of producers Prices of other goods the firm could produce 1. ..III Chapter – 3 Supply Analysis Synopsis Introduction Meaning Definition Factors Affecting Law of Supply Supply MEANING OF SUPPLY It is the amount of good the producer is willing and able to offer at a certain period of time. Price of the commodity Higher the price of a commodity larger will be the quantity supply and vice – versa.Unit .
Prices of factors of production If price of factors of production increases – (labour and capital) – cost of production increases and output will decline. A producer who aims at maximizing his sales will produce and sell more. Future Expectation Seller sells the commodity or supplies on the basis of the prevailing prices. If a producer aims at maximizing profit. Higher prices always bring profit to producers. 6. Wages. if the price of good A rises. Goal of Producers . The reverse will happen in the case of a fall in the price of a factor. A change in the price of another commodity also affects the supply of a commodity. rawmaterial etc influences on cost of production. 8. he will reduce the present supply of the product. . 7. 5. Cost of Production The cost of production is an important item affecting the supply. State of Technology 4. When producer/sellers are few – supply will be will be small and vice – versa. rate of interest. For instance. 2. If new and improved methods of production are are used – they tend to increase the supply of used – of commodities. If he feels that future prices will be higher. of firms/sellers producing and selling in the market. Number of firms and sellers existence Supply in a market depends on the no. the producer of good B may produce less of good B and switch over to the production of good A in order to sell more to make an profit. price of machinery and equipment. Prices of related commodities 3. he will produces less of commodity and will involve large risks.
9. An increase in tax will reduce the supply and granting of subsidy and incentive will increase the supply LAW OF SUPPLY Meaning of Law supply Law of supply states that the supply for commodity increases when its price increases and falls when its price decreases. Change in Government Policy Any change in government policy will affect the supply. If he feels that future prices may fall will be tempted to sell more at the current prices. other things remaining constant price P1 P Q Q1 Quantity supplied . A fresh tax or levy of excise duties on commodity will affect the price of the commodity and as a result the supply will get affected.
Unit . The manager have to fix a reasonable price for a product based demand. or the sum of the values that consumers exchange for the benefits of having or using the product or service MEANING OF PRICING Pricing is the process of fixing the value for the product attributes expressed in monetary terms which a consumer pays or is expected to pay in exchange for a product or service. marker structure and cost of production MEANING OF PRICE The amount of money charged for a product or service.III Chapter – 4 Pricing Decision Synopsis Introduction Meaning of Price and Pricing Definition of pricing Objectives of pricing Pricing methods INTRODUCTION Price involves the cost of the product. .
000 to set up his business.DEFINITION OF PRICING According to W. Mark-up pricing involves fixing a price for a product by adding (marking up) a margin to its cost price 2.J. a marketer adds a mark-up on its cost of the product.15 *100. Mark-up pricing Firms fix a selling price on the products they produce. which normally exceeds the costs incurred in producing these products .In this type of pricing. Assured minimum return on investment or sales turnover. 100. Liquidation of accumulated inventory of products • • METHODS OR TYPES OF PRICING 1. He expects that he will be able to sell 500 units. Target returns pricing The target return pricing is set by marketers to achieve a specified rate of return on their investments.000/500 = 230 Price = 230 Rs. Improving cash flow through faster sales. Make entry into new market share. OBJECTIVES OF PRICING • • • • • • Profit maximization in the short run. Perceived value pricing . A marketer can fix the price of his products on the investment with the help of following formula Target return pricing = Unit cost + (desired cost * invested) / Unit sales Suppose a marketer produces a product and the cost of each unit is 200. and profit optimization in the long run. Stanton “Price is the amount of money which is needed to acquire a product. He made an investment of Rs. Ensure a specified targeted sales volume or market share. He will price his product at 200 + 0. Launch price war to check competitors activity or keep competitors out of the race. and obtain 15 % return on investment. Maintain price leadership or price parity with competitors. 3.
After receiving the sealed bids. where the price of the product or service is usually quoted in a sealed cover.Marketer normally use advertising and sales promotional activities to enhance the perceived value of the product in the market. P&G Value pricing is a method in which marketers offer low prices for high quality products or services. the organization will normally purchase the product or service from the company. Value pricing This kind of pricing means companies charge a fairly low price for a high-quality offering so that the price should represent a high value to the customer. Ex: Declining prices of computers. Whenever a government organization needs to purchase a product or service. 7. . Going rate pricing Going rate pricing is a simple method in which a company simply follows the prevailing pricing patterns in the market. 6. it is required to call for bids and several companies are invited to quote their prices in a sealed form. Sealed bid pricing In some markets. which has bid the least price. 4. Differentiated pricing In different pricing. marketers adopt different prices for the same product at different locations or for different types of customers. business is carried out on the basis of sealed bids rather than on the basis of openly setting prices for products. in this method. The company adopts the pricing strategy similar to those adopted by the major players in the market or slightly adjust its price to suit the company’s system and process. Generally. This type of pricing is more suitable for industrial products.In this type (perceived value) of pricing. marketers set the prices of the products on the basis of their perceived value in the minds of customers’ . Many companies compete in this process. marketers give importance to price changes made by the market leader and alter their own prices accordingly 5. The sealed bid method is usually followed by government organizations. If the marketer overestimates the value of the product. the customer will not buy the product and will be difficult for him to survive in market.
rather than rational basis Ex: Rs. Skimming Pricing In skimming pricing. by pricing the new product high and concentrating on market segment which are not price sensitive. Ex: Setting Odd Amounts Such as 499. Odd pricing or Psychological pricing To get a customer to respond on an emotional. It was originally adopted by the FOOTWEAR Industry. Later. Retailers believe that this will result in larger sales and would give an impression to buyers that price calculations are accurate 11.rapid skimming and slow skimming. 299. This strategy involves setting a price which is higher than expected price. Market Penetration Pricing Under this a low initial price is set for the product in order to reach a mass market & capture it then later the can increase the price . Geographical pricing Different prices for customers in different parts of the world. May be used in Monopoly situation. 10. 199. the objective is to skim the market and take the cream. or place Ex: Petrol and diesel price in india . Include shipping costs. 100 price point perspective At the retail level it is commonly used. This strategy will bring in high profits which would ploughed back for further market development and promotion. the company could reduce the price while going in for mass markets which are more price sensitive. 99 not Rs. 9. There are two ways of skimming .8.95.
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