SRI BALAJI UNIVERSITY PUNE (SBUP)

BIMM

SEMESTER-I-BATCH -2020-22

MANAGERIAL ECONOMICS

ASSIGNMENT – 1(UNIT-1)

(a)  Name of Student: - Manish Chauhan

(b)  Reg. No: - 09-1128
(c)  Specialization: - Marketing
(d)  Batch: - 2020-2022
(e)  Institute: - Balaji Institute of Modern Management
(f)  Semester: - Semester 1
(g)  Subject Name: - Managerial Economics
(h)  Assignment No: - 1
(i)  Submission Date: -04/12/2020
(j)  Total no. of pages written: - 11
Q1. Define law of demand. Distinguish between individual demand and market demand
for Hitachi air conditioners. List the determinants of demand for the same.

Ans) The law of demand states that other factors being constant, price and quantity demand
of any good and service are inversely related to each other. When the price of a product
increases, the demand for the same product will fall. There are two basic types of demand:
individual and market.

The individual demand is the demand of one individual or firm. It represents the quantity of
a good that a single consumer would buy at a specific price point at a specific point in time.
While the term is somewhat vague, individual demand can be represented by the point of
view of one person, a single family, or a single household. Ex – In case of Hitachi air
conditioners, the demand of the AC by a particular family X living in a Y locality would be
individual demand.

Market demand provides the total quantity demanded by all consumers. In other words, it
represents the aggregate of all individual demands. Ex – In case of Hitachi air conditioners, if
we add the entire demand of the families living in Y locality, then it would result in market
demand of the AC for that locality.

When price changes, quantity demanded will change. That is a movement along the same
demand curve. When factors other than price changes, demand curve will shift. These are the
determinants of the demand curve.

1) Income:
A rise in a person’s income will lead to an increase in demand (shift demand curve to the
right), a fall will lead to a decrease in demand for normal goods. Goods whose demand
varies inversely with income are called inferior goods (e.g. Hamburger Helper).

2) Consumer Preferences:
Favorable change leads to an increase in demand, unfavorable change lead to a decrease.
3) Number of Buyers:
The more buyers lead to an increase in demand; fewer buyers lead to decrease.

4) Price of related goods:

a. Substitute goods (those that can be used to replace each other): price of substitute and
demand for the other good are directly related. Example: If the price of coffee rises, the
demand for tea should increase.
b. Complement goods (those that can be used together): price of complement and demand
for the other good are inversely related. Example: if the price of ice cream rises, the
demand for ice-cream toppings will decrease.
c.
5) Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher future
prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect higher future
income; their demand will decrease if they expect lower future income.

The determinants of the demand are as follows:

1. The price of the good or service.

2. The income of buyers.
3. The prices of related goods or services
4. The tastes or preferences of consumers will drive demand.
5. Consumer expectations.
Q2. Discuss the salient features and significance of managerial economics. Why do you
need to study managerial economics as a management student?

Ans) Economics is the social science which studies human behaviour as a relationship
between multiple ends and scarce resources which have alternative usage. It is the study of
scarcity and how people use resources and respond to incentives, or the study of decision-
making. It often involves topics like wealth and finance, but it’s not all about money.
Economics is a broad discipline that helps us understand historical trends, interpret today’s
headlines, and make predictions about the coming years. Economics ranges from the very
small to the very large. The study of individual decisions is called microeconomics. The
study of the economy as a whole is called macroeconomics. A microeconomics might focus
on family’s medical debt, whereas a macroeconomic might focus on sovereign debt.

Managerial economics is a discipline that combines economic theory with managerial

practice. It helps in covering the gap between the problems of logic and the problems of
policy. The subject offers powerful tools and techniques for managerial policy making. It is
concerned with the application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions.

Different authorities on the subject matter of managerial economics have given differently.
However, the following characteristics seem to these viewpoints as:

1) Micro Economic Character

Managerial economics is micro economic in character because it is a unit of study i.e.
firm. It only deals the problems of firms but not deal with the entire economy as a unit of
study. However, it takes the help of macroeconomic to understand and adjust to the
environment in which the firm operates.

2) Choice and Allocation

Managerial economics is concerned with decision-making of economic nature. This
implies that managerial economics deals with identification of economic choices and
allocation of scarce resources.

3) Goal Oriented
Managerial economics is goal-oriented and prescriptive. It deals with how decisions
should be formulated by managers to achieve the organizational goals.

4) Conceptual and Metrical

Managerial economics is both ‘Conceptual and Metrical’. An intelligent application of
quantitative techniques to business presupposes considered judgment and hard and careful
thinking about the nature of the particular problem to be solved. Managerial economics
provides necessary conceptual tools to achieve this. Moreover, it helps the decision-
maker by providing measurement of various economic entities and their relationships.
This metrical dimension of managerial economics is complementary to its conceptual
framework.
 5) Pragmatic
Managerial economics is pragmatic. It is concerned with those analytical tools, which are
useful in improving decision-making. Economic theory appropriately ignores the variety
of backgrounds and training found in individual firms but managerial economics
considers the particular environment of decision making.

6) Normative
Managerial economics belongs to normative economics rather than positive economics.
In other words, it is prescriptive rather than descriptive. The main body of economic
theory confines itself to descriptive hypothesis, attempting to generalize about the
relations among different variables without judgment about what is desirable or
undesirable. Managerial economics firstly tells what aims and objectives a firm should
pursue and secondly, it tells how best to achieve these aims in particular situations.

7) Multi-disciplinary
Managerial economics is related with different disciplines such as Statistics,
Mathematics, Management, Operational Research, Psychology etc.

Significance of managerial economics:

1.     It helps in decision making

2.     Decision making means a balance between simplification of analysis to be manageable

and complication of factors in hand

3.     It helps the manager to become an more competent builder

4.     It helps in providing most of the concepts that are needed for the analysis of business
problems, the concepts such as elasticity of demand ,fixed, variable cost, SR and LR costs,
opportunity costs, NPV etc.,

Managerial economics is very much important for a manager to understand. It mainly deals
with the development of economic theory of the firm and help the managers to take decision
smoothly with regard to sales and profits. It also enables to take decisions about production as
well as inventory policies for the future. Decision making is an integral part of the
management. In order to take important decisions a manager needs to have a clear idea about
the management concept like managerial economics. Managerial economics is very much
important for a manager to understand. It mainly deals with the development of economic
theory of the firm and help the managers to take decision smoothly with regard to sales and
profits. It also enables to take decisions about production as well as inventory policies for the
future. In order to increase the efficiency of the production process, this concept is important
because it help the managers to analyze risk and production. Through this concept one can
understand how much fund is available and how much one can invest in his business. It also
enables to understand the demand as well as forecasts on sales. Demand analysis is an
important part of managerial economics. Apart from this it also assists the managers to
understand competition well as well as the strategies of competitors. Pricing is also an
integral part; managers need to understand which price to fix and in future what kind of
pricing strategies they can take to increase the profit of the organization. It helps to
understand the how much revenue a company is earning. Concepts of pricing, pricing
forecasting, product like pricing etc. are covered in managerial economics. Managerial
economics also deals with cost estimates also.

Q3. Define elasticity of demand for Indian airline and discuss its determinants. Draw a
graph to explain.

Ans) The Indian airline industry is an extremely unstable industry because it is highly
dependent upon current market conditions. Events such as inflation, terrorist attacks, and
the price of oil have greatly influenced the demand for airline tickets throughout the years.
Competition consistently affects the price of airline tickets because it gives the customer
other options. Substitutes that are existence is traveling by train, car, or avoiding travel
whenever possible. Customers have resorted to all named substitutes during turbulent times
in our economy. The elasticity of demand is greatly affected by the customer’s purpose for
travel. Airline customers typically fly for business or pleasure. With the wave of
technology, a large percentage of business travel has been eliminated to conserve spending.
A good example of how elastic demand is related to the airline industry is in relation to
travel for pleasure. Pleasure travelers will be affected by the amount of travel they do
based on the demand increase or decrease, affected by prices that lower with high demand
or prices that rise with low demand; directly attributed to competition in this market.
Inversely, the business traveler would apply to an inelastic demand for this market. This
has shown by demand increases or decreases, as well as the price distribution attributed,
which has little effect on the buying power of the business person. Externalities, such as
noise ordinances, can cause negative effects, driving cost upward and threatening loss in
demand due to a price sensitive customer base. Since deregulation, competition in the
economy have kept prices in the industry low and have caused airlines to force cuts in
areas such as wages; contributing to a growing concern of wage inequality.

The determinants for Elasticity of demand for Indian Airlines are as follows:

1) Fall in Demand and Rises of Substitute Service

2) Airline’s Short Run Decision to Shutdown
3) Competitive Firms are Price Takers
4) Increase in the price of turbine fuel
 Price elastic
curve

As soon as there is any change in the prices of Indian airlines, the customers of India will
shift to the substitutes available in the market. As the people of India are price sensitive,
they will change their demand as according to the price of the airlines.

Q4. What is linear function? What factors determine a specific form of a linear
function? Show a linear function with a graph.

Ans) A linear function can be stated in the following general form:

Y = a + bX

Where a and b are positive constants and are called parameters of the function. Note that
parameters of a function are variables that are fixed and given in a specific function. The
values of constants a and b determine the specific nature of a linear function.
The linear demand function with price as the only independent variable is written as:

Qd = a – bP

The minus sign before coefficient b indicates that quantity demanded of a commodity is
negatively related with price of the commodity. That is, if price of a commodity falls, its
quantity demand increases and vice versa.

If a equals 7 and b equals 0.5, the linear demand function can be expressed in the
following specific form:

Qd = 7 – 0.5 P

The above specific demand function shows that a unit fall in price of the commodity will
cause 0.5 units increase in the quantity demanded of the commodity. If price (P) is zero, the
second term (0.5P) in the demand function drops out and the quantity demanded is equal to 7.

We can take various values of P and find out different quantities (Qd) of a commodity
demanded at them. In Figure 5.1 we have noted these price-quantity combinations on a graph
and have obtained demand curve DD of the commodity representing the given demand
function (Qd = 7- 0.5P).

It should be noted that, contrary to mathematical practice, by convention in economics to

represent demand function we show the independent variable (price in the above case of
demand function) on the y-axis and the dependent variable (the quantity demanded in the
present case) on the x-axis. Graph of linear demand function is shown in Figure 5.1.

It is worth noting that slope of the demand function curve in Figure 5.1 will represent ∆P/
∆Q. However, if we represent quantity demanded (Qd) on the y-axis, and price (Px) on the x-
axis; the slope of the demand curve so drawn would be equal to ∆Q/∆P.
Multivariate Linear Demand Function:

Linear demand function with more than one independent variables, can be written in
the following way:

Qx = a + b1 Px + b2 Py+ b3 M + b4 T + b5 A

Where b1, b2, b3, b4, are the coefficients of the respective variables. In economics the effect of
variables other than the own price of a commodity in the demand function are depicted by
shifts in the demand curve. For instance when income (M) of the consumers increases
consumers will demand more of the product X at a given price. This implies shifting of the
demand curve to the right.

The linear multivariate function is written in the following form:

Y = 4 – o.4X1 + 0.2X2+ 0.3X3 + 0.5 X4

In this function the coefficients 0.4, 0.2, 0.3 and 0.5 show the precise impact of the
independent variables X1, X2, X3, X4 on the dependent variable Y.

Q5. Distinguish between Movement along with demand curve and shift in demand
curve. Elaborate your answer with the examples from automobile sector.

Ans-Movement along the demand curve

A change in price causes a movement along the demand curve. It can either be contraction
(less demand) or expansion/extension (more demand).

Contraction in demand - An increase in price from Rs. 12 to Rs. 16 causes a movement

along the demand curve, and quantity demand falls from 80 to 60. We say this is a
contraction in demand.
Expansion in demand - A fall in price from $16 to $12 leads to an expansion (increase) in
demand. As price falls, there is a movement along the demand curve and more is bought.

Shift in the demand curve

A shift in the demand curve occurs when the whole demand curve moves to the right or left.
This happens when quantity demanded changes due to any other factor, keeping the price
constant. For example, an increase in income would mean people can afford to buy more
widgets even at the same price.

The demand curve could shift for the following reasons:

 The good became more popular (e.g. fashion changes or successful advertising
campaign)
 The price of a substitute good increased.
 The price of a complement good decreased.
 A rise in incomes (assuming the good is a normal good, with positive YED)
 Seasonal factors.
 Movement in Demand curve
Meaning Movement in the demand curve is
when the commodity experience
changes in both the quantity
demanded and price, causing the
curve to move in a specific
direction.
Shift in Demand curve
The shift in the demand curve is
when, the price of the commodity
remains constant, but there is a
change in quantity demanded due
to some other factors, causing the
curve to shift to a particular side.

Change Change along the curve. Change in the position of the

curve.

Indicates Change in Quantity Demanded Change in Demand

Result Demand Curve will move upward Demand Curve will shift rightward
or downward. or leftward.

For Example – If the price of a car increases, so its demand gets decrease and whenever
the price of car decreases, its demand get increase. This movement in the change of the
price and demand is known as Movement in the demand curve. (Refer to the graph)

If the price of that same car remains constant i.e. it doesn’t get change, but the demand is
changing a lot i.e. suddenly the demand gets increase or decrease a lot, without changing
in the price of the car. (Refer to the graph)