Managerial Economics

Bilal Sajid, 01-111172-020, Bs Economics

Instructor: Arslan khursheed

Q. no1:
Managerial economics is one of the application of economic theory to managerial practice. It
relates to the use of tools and techniques of economic analysis. It can also be defined as the
integration of economic theory with business practice to facilitate or catalyze decision-making
and forward practice. It also relates to the business administration practice. It deals with the
economic aspect of managerial decisions and with those of management decisions that have an
economic content.
Methods of managerial economics:

 Experimental method: it is of limited use to managerial economics, because it is difficult

to carry out experiments to test the validity of managerial behavior as it deals with
human aspect and human behavior is inherently complex. Sometimes induction
precedes deduction and vice versa. To make it more clear, in deductive method we go
from the general rule to the particulars, whereas in inductive method we examine
behavior of individual managerial economists. For e.g. the aim of one producer is to
maximize profit, the aim of the other producer is also to maximize profit. Thus we come
to the generalization that the primary aim of producers is to maximize profits and then
work out the method to drive for profit maximization.
 Statistical method: is a device by which the quantitative data are collected and
scientifically analyzed in order to give us a clearer picture of happenings. The collected
data are classified, compared, correlated and finally interpreted. It is generally used in
demand forecasting and sales promotion.
 Model building is yet another method used in ME. It helps us to understand the actual
socio-economic relationships existing within a firm. It can guide towards taking more
appropriate decisions.
 The method of stimulation has acquired importance with the oncoming of electronic
computers. With this method we can program complex systems of relationship.
 The descriptive method is used to analyze the impact of original structure on the
working of business enterprises
 Reference to facts and figures of the firm provides complete information about the
working of the firm. An approach can be set up to compile the data from various
departments. The management then compiles the data so as to derive a complete
picture of the overall performance which would help them make decisions for future.
 Similarly, the businessmen or manufacturers may form voluntary associations and
compile the data about different business activities.
 Case studies bring out the complexity of the environment in which managers have to
take economic decisions and thus case study is regarded as an important method
 The managerial economist should also be conversant with important lessons from other
related subjects like philosophy, sociology, psychology, politics and human resources,
finance and mathematics etc. which should help him/her in drawing more accurate
decisions.

Q.no 2
The Law of Demand:
The law of demand establishes the functional relationship between price of X and the
quantity demanded of commodity X, assuming other factors remain constant.
It states other things remaining the same quantity demanded of a commodity is inversely
related to its price. When the price of commodity X rises the demand for it declines and
when the price of commodity X falls the demand for it rises
The Law of demand results from:
Substitution effect and income effect.
It is expressed by the demand schedule which makes the demand curve, which is a
downward sloping curve showing inverse or negative relationship between price and
quantity.
Exceptions to the law of demand:

 Expectations of further changes in prices. The law of demand will not hold good
when people expect prices to rise still further. In this case consumers will demand
more in anticipation of further increase in price. This behavior is usually observed on
the stock exchange
 Giffens paradox: when the price of bread declined the demand for break also
declined and when the price increased the demand also increased. This is against
the law of demand. In case of bread being an inferior good of a special kind. When
the price of bread declined the real income of the consumer increased, the
consumers decided to consume some other commodity instead of demanding more
bread. This explanation is the giffen’s paradox.
 Qualitative changes: the law of demand does not consider qualitative changes in the
commodity. If the price is taken by the consumer as the yardstick of quality of
commodity, mere rise in price of it may raise the demand for it.
 Display of standard living: the consumer is very often governed by what is called the
demonstration effect. Expensive jewelry paintings antiques are bought not because
they are needed but the purchase of such articles will enable the professor to
display his wealth. The law of demand fails to operate in the case of prestige articles.

Q.no 3:
a) yes
b) yes
c) no
d) yes
e) no