Managerial Economics

Discussion
 What is Managerial Economics?
• What is managerial economics? It is the science of
decision making at managerial level in any
organization that need to generate its own resources
for survival. It can be a profit making business like
proprietorship firm, partnership firm, private limited
company, public limited or a self employed person. It
can be non profit organization like NGO, religious
organization etc.
• What is the science of decision making?
It is the study of the methods of achieving organizational
goals using scarce resources. Example of organizational
goal: profit maximization, sales maximization etc.
• What is scarce resource?
Scarce resource means any commodity or object useful to our
daily life (e.g. business life, personal life, family life, social life,
community life) but available at a price, not free.
An example of how we meet an organizational goal using
scarce resources
Every non-lock down day, we find some sales person are
knocking the doors of open houses (not inside any housing
society, blocked by security personnel). Generally local
distributors of FMCG products like Surf 1 kg packet everyday
fix some sales target for their sales managers. A sales manager
controls a group of sales representatives.
• Suppose a sales manager got a target of selling 500 packets
of 1 kg surf in some particular zone, say east Barasat zone,
from Helabattata to Moyna. He has 10 sales boys under
him with a target of 50 packets per head. A packet costs Rs.
200 (suppose). The total salary of a boy is 6000 per month,
out of which 3000 is fixed and 3000 is variable. In a month
one boy has to sale 1500 packets. The variable components
of his salary is Rs 2 per packet. In this case the sales person
or the boy is a scarce resource because the distributor has
to pay salary to him = 101 (fixed) + 98(variable and
maximum) on per day basis. i.e. 199 His goal, a part of the
organizational goal is to bring sales revenue = 50*200 =
10000 on a day.
 Concept of Choice
Suppose, you are already an existing business man. Suppose
your name is Mr. R. I. Ambani. Your company is R I Limited (R I
L). Suppose your existing business is refining crude petroleum
and selling the refined petroleum to different customers.
Suppose you have accumulated huge profit. You like to start
another company for a different business, say, mobile
telephone. Suppose your daughter’s name is Jia. So you like to
launch a mobile brand after her name Jia Mobile but you are
thinking whether it will be a wise or prudent decision. You are
hesitating to finalize the decision because you have some
other business proposal. You are in dilemma – facing choice
problem, whether to start a mobile and ISP business or to
start a private hospital business in Ahmedabad or Mumbai.
Your decision may depend on the following
business related factors:
1. Performance of existing
concerns/companies/organizations
2. Nature of demand
3. Nature of product
4. Life of business in terms of profitability
5. Rate of return = (Profit/Investment)
 Simple Example of Opportunity Cost
Suppose 1 hour I spent on watching IPL match.

If I would have spent that time on studying PoM,

I would have got 5 marks more in exam, had I
spent on MM, I would have got 4 marks more,
had I spent on ME, I would have got 6 marks
more. He 6 marks is the maximum loss. This is
my opportunity cost/loss of spending time on
watching IPL.
 Components of Opportunity Cost
• Direct Cost
• Indirect Cost
• Sunk Cost
 Marginal Analysis
In the beginning total profit was 10. Now appoint a sales manager and under him you are appointing
some sales boys.
Additional Cost on employee Additional Rev Additional Profit Total Profit
First Time 1 10 9 10+9 = 19
2nd Time 1 9 8 19+8 = 27
3rd Time 1 5 4 27+4 = 31
4th Time 1 1 0 31+0 = 31 maximum Profit

Additional cost is called of one rupee on labour/employee/sales boy is called marginal cost.
Additional revenue out of one additional sales boy is called marginal revenue.
Additional profit out of additional sale because of the additional sales boy is called marginal profit.
In this case marginal analysis means to find out the maximum profit through analysing additional
cost, additional revenue and additional profit.
 Preferences
• Rationality: we want to take as much as possible, but want to give as less possible.
We like to maximize our welfare or interest.
• When we pay price for some product, for us, more is better, e.g. Dabur Honey the
biggest bottle is offering 20% free at the same price such that we buy this product
in lieu of any Honey manufactured by other company. (MIB: More is better)
• We can rank the products according to our preferences, i.e. 'likes' or 'dislikes', e.g.
if freely available, I shall prefer or like more Apple's iphone compared to models of
any other manufacture.
• The above characters of a typical person who is studying economics or
participating in economic activities like buying, selling, producing, consuming, broking
etc is known as 'preferences'
 Theory of Cost and Other Topics
• Check the files, pictures uploaded in teams
and also those posted in whatsapp
Effect of Change in Price and Income
on CE
•
Categories
There are four categories of goods:
of Goods
1. Normal Good – demand falls as price rises and vice versa; demand falls
a little bit when income falls and vice versa, example Tshirts
2. Inferior good – demand falls when price rises and vice versa; demand
falls when income rises and vice versa; a special category is Giffen
Good; for Giffen Good demand falls when price falls and vice versa,
inferior good example ration rice; Giffen Good Example iphone,
diamond, luxury bike etc status symbol, financial security like share is
also a Giffen good.
3. Superior Good - demand falls as prices rises and vice versa; demand
falls drastically when incomes falls and vice versa; example aromatic
basmati rice, mutton etc
4. Essential Goods: demand has no relation with price or income,
example salt, medicine etc
 Elasticity of Demand
1. Own price elasticity of demand:
OPED = - % change in demand / % change in own price;
positive for normal, superior and inferior good, negative
for Giffen Good
2. Cross price elasticity of demand
CPED = % change in demand / % change in price of
substitute or complementary, positive between
substitutes, negative between complementariness
3. Income elasticity of demand
IED = % change in demand / % change in income; positive
for normal and superior goods, negative for inferior and
Giffen Goods
 Supply function
• Supply of a commodity means current production plus
inventory/stock.
• Supply depends on own price, input factor prices,
technology, preferences, expectations.
• Simple supply function means the relationship
between supply and price, other things remaining
unchanged.
• The process of sales converts of the supply into cash.
• For sale, the supplier needs a minimum price that
covers at least the variable costs in the short run.
Above that level as price increases, supply increases.
Supply Function
 Market Equilibrium
• Market equilibrium depends on the structure
of the market. In a market where the
product/good/commodity is homogenous,
numerous sellers and buyers, that is called the
‘market’ in the truest sense of the word and in
technical jargons, it is called perfect
competition or competitive market. The market
equilibrium is as follows:
Market Equilibrium
 Market Structure
Before knowing the market equilibrium, we need to know
about market structure.
Market structure means combinations of number of
buyers, number of sellers and type of the product.
When the product is homogenous and there are
numerous buyers and sellers, the market structure is
called perfect competition or competitive market.
Example poultry/farm chicken, Jyoti potato etc.
If there is only one seller but numerous buyers, it is called
monopoly, example legal gun in India, only GoI sells it.
There are many buyers all over the country. Similar is the
case of PAN card, DL, train ticket etc. The fee of the card is
the price, made and sold only by government.
If the number is less on one side, it is called
market imperfection, say, in monopoly the
number of sellers is minimum. In duopoly the
number of sellers is 2 only, example plain cola
market.
Individual Producer Equilibrium in
perfect competition
Individual Producer Equilibrium in
monopoly
You need to write the required text
along with the diagram
 What is demand curve for labour
in a textile factory?
You need to write the required text
What is the supply function of MCY?
 Explain when a supply curve can be downward sloping.

Suppose you are an executive in a local company. After some time, you get an opportunity to join a big
brand like TATA but at a lower salary where your future is much more bright. Then you agree to work,
i.e. supply your intellectual labour at a lower salary. So the supply curve becomes negatively sloped like
below. This is called decreasing cost supply.