ASSIGNMENT

Subject – Managerial
Economics

Submitted by : Anurag shukla

1) What is managerial economics? Explain its functions.

2) FUNCTIONS OF MANAGERIAL ECONOMICS

3) • Studies the business environment
4) The managerial economics is responsible for analysing
the environment
5) in which business operates. Proper study of all external factors
that affect the
6) functioning of organisation in must for proper functioning. He
studies various
7) factors like growth of national income, competition level, price
trends, phase
8) of the business cycle and economy and updates the
management regarding it
9) from time to time
10) FUNCTIONS OF MANAGERIAL ECONOMICS
11) • Studies the business environment
12) The managerial economics is responsible for
analysing the environment
13) in which business operates. Proper study of all external
factors that affect the
14) functioning of organisation in must for proper
functioning. He studies various
15) factors like growth of national income, competition level,
price trends, phase
16) of the business cycle and economy and updates the
management regarding it
17) from time to time
18) FUNCTIONS OF MANAGERIAL ECONOMICS
19) • Studies the business environment
20) The managerial economics is responsible for
analysing the environment
 21) in which business operates. Proper study of all external
factors that affect the
22) functioning of organisation in must for proper
functioning. He studies various
23) factors like growth of national income, competition level,
price trends, phase
24) of the business cycle and economy and updates the
management regarding it
25) from time to time
Definition: Managerial economics is a stream of management
studies which emphasises solving business problems and decision-
making by applying the theories and principles of microeconomics
and macroeconomics. It is a specialised stream dealing with the
organisation’s internal issues by using various economic theories.

 Managerial economics is the application of various economic

measures, policies, principles, tools, methods, and theories to
enable decision-making and problem-solving.
 It highlights techniques for efficient utilization of financial,
human, and material resources—so that profits can be
maximized.
 It is a pragmatic and normative approach—it solves a business’s
internal (microeconomic) problems—by analyzing
macroeconomic threats and challenges.

Specific Functions of Managerial Economics-

The managerial economists can play a further role, which can cover
the following specific functions as revealed by a survey pertaining to
Britain conducted by K.J.W. Alexander and Alexander G. Kemp:

 Sales forecasting.
 Industrial market research.
  Economic analysis of competing companies.
 Pricing problems of industry.
 Capital projects.
 Production programmes.
 Security / Investment analysis and forecasts.
 Advice on trade and public relations.
 Advice on primary commodities.
 Advice on foreign exchange.
 Economic analysis of agriculture.
 Analysis of underdeveloped economics.
 Environmental forecasting.

2) Write the difference between Micro and Macro- economic?

Microeconomics Macroeconomics

                                                                             Meaning

Microeconomics is the branch of Macroeconomics is the branch of

Economics that is related to the
study of individual, household and
firm’s behaviour in decision making
and allocation of the resources. It
comprises markets of goods and
services and deals with economic
issues.
Economics that deals with the study of
the behaviour and performance of the
economy in total. The most important
factors studied in macroeconomics
involve gross domestic product (GDP),
unemployment, inflation and growth
rate etc.

                                                                         Area of study

Microeconomics studies the Macroeconomics studies the whole

particular market segment of the economy, that covers several market
economy segments
                                                                             Deals with

Microeconomics deals with various

Macroeconomics deals with various
issues like demand, supply, factor
issues like national income,
pricing, product pricing, economic
distribution, employment, general
welfare, production, consumption,
price level, money, and more.
and more.

                                                          Business Application

It is applied to environmental and
It is applied to internal issues.
external issues.
 
 

                                                                                 Scope

It covers several issues like demand, It covers several issues like

supply, factor pricing, product distribution, national income,
pricing, economic welfare, employment, money, general price
production, consumption, and more. level, and more.

                                                                              Significance

It perpetuates firmness in the broad

It is useful in regulating the prices
price level, and solves the major
of a product alongside the prices
issues of the economy like
of factors of production (labour,
deflation, inflation, rising prices
land, entrepreneur, capital, and
(reflation), unemployment, and
more) within the economy.
poverty as a whole.

                                                                             Limitations

It is based on impractical It has been scrutinised that the

presuppositions, i.e., in misconception of composition’
microeconomics, it is presumed incorporates, which sometimes fails
that there is full employment in to prove accurate because it is
 feasible that what is true for
the community, which is not at
aggregate (comprehensive) may
all feasible.
not be true for individuals as well.

3) Explain opportunity cost principal and incremental principal

along with that.
Opportunity cost-
Opportunity cost is commonly defined as the next best alternative.
Also, known as the alternative cost, it is the loss of gain which could
have been gained if another alternative was chosen. It can also be
explained as the loss of benefit due to a change in
choice. Opportunity cost is an economic concept arising out of the
realistic assumption of the scarcity of resources. The limited amount
of resources will also limit the number of possibilities for production.
As the number of possibilities of production is limited, to produce a
given combination of goods, the production of another combination
of goods would have to be forgotten. This can be referred to as
opportunity cost. 
Opportunity Cost is Important Because
1. It's a measure of the cost of alternatives like sacrificing short-term
profits
2. It is used to analyse the potential of an opportunity
3. And it can help you determine whether or not a particular course
of action is worth pursuing.
4. It can help you make better decisions
5. It helps to assess opportunity costs and benefits.
6. It encourages you to think about the future.
Types of Opportunity Costs

There are broadly two types of opportunity costs. They are explicit
costs and implicit costs. 

Explicit costs-
Explicit costs are as the name suggests direct costs that can be
identified clearly. The explicit costs are incurred and recorded in the
books of accounts. These explicit costs would have to be paid in cash
or kind. For example, if a piece of machinery in the firm
malfunctions, the repairing cost is explicit. The repairing and
reinstalling work will have to be paid in cash and the transaction is
charged in the books of accounts as an expenditure.

 Implicit costs-
Implicit costs are indirect or invisible costs that cannot be directly or
easily traced down. The implicit costs affect the firm as the loss of its
owned resources. Payments are not usually made as there is no real
cost. For example, if in a firm a piece of machinery breaks down as
mentioned earlier, in addition to the cost of repairing which is an
explicit cost there is also an implicit cost of loss in production. The
production in that unit is stalled as the machinery is not working and,
in the meantime, other valuable resources like human resources are
being wasted. 

Incremental Principle-

The incremental concept is closely related to the marginal costs and

marginal revenues of economic theory. Incremental concept involves
two important activities which are as follows:

 Estimating the impact of decision alternatives on costs and

revenues.
  Emphasising the changes in total cost and total cost and total
revenue resulting from changes in prices, products, procedures,
investments or whatever may be at stake in the decision.

The two basic components of incremental reasoning are as follows:

 Incremental cost: Incremental cost may be defined as the

change in total cost resulting from a particular decision.
 Incremental revenue: Incremental revenue means the change
in total revenue resulting from a particular decision.

The incremental principle may be stated as under:

A decision is obviously a profitable one if:

 It increases revenue more than costs

 It reduces costs more that revenues.

 It decreases some costs to a greater extent than it increases

other costs
 It increases some revenues more than it decreases other
revenues

4) Explain the concept of demand and supply analysis and also

discuss demand function.
Demand and Supply-
The demand for goods and services signifies the consumers’ need,
willingness, and ability to buy a particular product. Supply, on the
other hand, refers to the production capacity of manufacturers and
distributors. A demand and supply analysis is essential to understand
the impact of those forces on buyers, sellers, buyer-seller
interactions, and prices.
The demand-supply study is based on the laws of demand and
supply. The law of demand depicts an inverse relationship between
goods price and goods demand. The law of demand renders a
downward sloping curve—demand goes up when goods price falls.

If other factors remain constant, the law of supply suggests that an

increase in goods price should result in an increase in the supply of
goods and vice-versa. It establishes a direct relationship between the
price and supply of a commodity—forming an upward curve.

Demand and supply together help determine market conditions and

consumer behaviour. Thus, understanding economic equilibrium is
crucial in economics.

Economic equilibrium or market equilibrium is a point where the

demand curve cuts across the supply curve. It is a scenario where the
demand for a commodity is equal to its supply. On a graph, it is
represented as follows:

However, if demand exceeds supply, then there is a shortage of that

product. Also, if supply is higher than demand, there is a surplus.

The demand for a product or service is dictated by various factors—

goods price, consumer income, consumer taste, consumer
preference, price of related goods, competition, consumer
expectations, and income distribution.

Similarly, supply fluctuates due to price changes, fiscal

policy, monetary policy, natural disasters, price of production
factors, monopoly, climate conditions, infrastructure, and
technological advancement.

Demand Function-

The demand function is an equation that showcases the demand for

a product or service as a function of its price, and other variables
including income, preferences, and prices of substitutes and
complements. The Demand Function is a mathematical function that
describes the relationship between price and quantity demanded. It
is used to determine how much of a good or service consumers are
willing to purchase at a given price.

A demand schedule is a table that shows how much of a good or

service consumers are willing and able to purchase at different
prices.

Demand Function Formula

The Demand Function can be represented by the following equation:

Q = f(P,I,U)

Where Q is quantity demanded, P is price, I is income, and U is utility.

The Demand Function can also be represented by the following

equation:

Q = f(P, I, Px, Py)

Where:

 Q = Quantity demanded
 P = Price
 I = Income
 Px = Price of substitutes
 Py = Price of complements
Types of Demand Function

1. Linear Demand Function

A linear Demand Function is one in which the quantity demanded is
directly proportional to the price. This means that as the price
decreases, the quantity demanded increases at a constant rate.

2. Non-Linear Demand Function

A non-linear Demand Function is one in which the quantity
demanded is not directly proportional to the price. This means that
as the price decreases, the quantity demanded does not increase at a
constant rate.

5) What is utility? Difference between cardinal and ordinal utility.

Utility-
In economics, utility is a term used to determine the worth or value
of a good or service. More specifically, utility is the total satisfaction
or benefit derived from consuming a good or service. Economic
theories based on rational choice usually assume that consumers
will strive to maximize their utility.

The economic utility of a good or service is important to understand

because it directly influences the demand, and therefore price, of
that good or service. In practice, a consumer's utility is usually
impossible to measure or quantify. However, some economists
believe that they can indirectly estimate what is the utility of an
economic good or service by employing various models.

Comparison Chart

BASIS FOR
CARDINAL UTILITY ORDINAL UTILITY
COMPARISON

Meaning Cardinal utility is the Ordinal utility states that

utility wherein the
satisfaction derived by the
consumers from the
consumption of good or
service can be expressed
numerically.
the satisfaction which a
consumer derives from
the consumption of good
or service cannot be
expressed numerical
units.

Approach Quantitative Qualitative

Realistic Less More

Measurement Utils Ranks

Analysis Marginal Utility Analysis Indifference Curve

Analysis

Promoted by Classical and Neo-classical Modern Economists

Economists

Key Differences Between Cardinal and Ordinal Utility

The following points are noteworthy so far as the difference between

cardinal and ordinal utility is concerned:
1. Cardinal utility is the utility wherein the satisfaction derived by
the consumers from the consumption of good or service can be
measured numerically. Ordinal utility states that the
satisfaction which a consumer derives from the consumption of
product or service cannot be measured numerically.
2. Cardinal utility measures the utility objectively, whereas there
is a subjective measurement of ordinal utility.
3. Cardinal utility is less realistic, as quantitative measurement of
utility is not possible. On the other end, the ordinal utility is
more realistic as it relies on qualitative measurement.
4. Cardinal utility, is based on marginal utility analysis. As against
this, the concept of ordinal utility is based on indifference curve
analysis.
5. The cardinal utility is measured in terms of utils, i.e. units of
utility. On the contrary, the ordinal utility is measured in terms
of ranking of preferences of a commodity when compared to
each other.
6. Cardinal utility approach propounded by Alfred Marshall and
his followers. Conversely, ordinal utility approach pioneered by
Hicks and Allen.