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Asst. Professor & Head, Department of Management
Studies, Markaz Law College, Markaz Knowledge City
Module 1- Introduction
Chapters
1. Introduction to Managerial
Economics
2. Decision making and forward
planning
3. Basic economic tools in
Managerial Economics
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Chapte
Introduction to Managerial
r 1 Economics
4. Principle of discounting
5. Equi-Marginal Principle
Optimization.
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1.Principle of opportunity cost
Opportunity cost is the cost of the next best
alternative which is given up. It is the cost of
sacrificing the alternatives to a decision. When
we choose the best, we automatically leave
behind all the remaining alternatives.
Chapters
4. Fundamentals of Demand and
Law of Demand
5. Elasticity of Demand
6. Demand Estimation and
forecasting
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Chapte
Fundamentals of Demand and Law of
r 4 Demand
Demand…
4
D
1
0
1 3 5 7 9 X
Quantity Demanded
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Demand curve is the graphical representation
of law of demand. It is a downward sloping
curve from left to right.
Income effect
Substitution effect
Price effect
r 5 Elasticity of Demand
Elasticity
40 4
ED OR
50 5
E D 0.8
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2. Expenditure or outlay method: Using this
method, elasticity is calculated by measuring
the changes in total expenditure as a result of
changes in price and quantity demanded. It is
clear from the following example.
5.00 30 150
Case 1 E>1
4.75 40 190
4.00 75 300
Case 2 E=1
3.75 80 300
3.50 84 294
Case 3 E<1
3.25 87 286
PM 5
ED 1
PN 5
AN 7.5
ED( A) 3 1
AM 2.5
MN 10
ED( M )
M 0
BN 2.5
ED( B ) 0.33 1
BM 7.5
N 0
ED( N ) 0
NM 10
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If the curve is not a straight line as in the
previous example, elasticity is measured with
the help of a tangent. A tangent is drawn at the
point where we want to measure the elasticity
and use the following formula.
Lower section of the tangent
ED
Upper section of the tangent
To determine the elasticity at
point T of demand curve DD
the tangent PM is drawn.
The tangent P’M’ is drawn to
find out the elasticity of T’
This method is applicable only when there is very
small change in price and demand
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4. Arc method: This method is used when the
change in demand and price is very large.
Elasticity in such case can’t be measured at a
point on a demand curve. Elasticity between
two points are measured here. The formula
used isED Q P1 P2
PQ1 Q2
Q Change in quantity
P Change in price
Q1 Original quantity
Q2 New quantity
P1 Original price
P2 New price
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Factors affecting Elasticity of
Demand
Nature of commodity: comforts, luxuries,
necessaries
Availability of substitutes
Income of consumers
Habit of consumers
Durability of a commodity
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Practical importance of
elasticity
Price determination
Helpful in price discrimination
Demand forecasting
Helpful to the government in taxation policy
Sample
Survey
Sales
Force
Opinion
Survey
End use
Survey
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Qualitative techniques depend upon information
about the likes and dislikes of the consumers, but
the latter methods uses quantitative data from the
past and extrapolate it to project future demand
I. Expert Opinion Method/Delphi method: There are
experts in every field, and they are the bank of
information and embodiment of enriched
experience. Future demand can be developed on
the basis of expert insights. Biased and vested
interests is the most important disadvantage of
this method. Advantages are
a) Simple to conduct.
c) Reliable.
d) inexpensive
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e) Time saving
II. Survey method: Under survey method, we will
approach different people connected to the product
under consideration such as consumers, sales force
etc. Each method is discussed one by one.
1. Consumers complete enumeration method: In
this case, interviews and questionnaires are
used to ask all the consumers about the quantity
of commodity they would like to buy during a
Advantages
particular period.
A. It is accurate as itDisadvantages
surveys all the A. It is costly and time
consumers consuming
B. Simple to use B. Many practical
C. No personal bias difficulties are involved
D. It is based on collected C. Useful only for products
data with limited customers
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2. Consumers Sample Survey: It is an extension
of complete survey. A sample of customers
are selected and their views are collected. A
sample is considered as a true representation
of the population.
Advantages Disadvantages
A. Suitable for short term A. Conclusions are made on
projections the basis of a few
B. Simple and cost effective B. Sample selection is very
C. Time saving difficult
D. Gives excellent results if
used properly
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Disadvantages
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4. Consumer’s end use survey: This method is
used in case of intermediary goods which are
used for final consumption as well as for
production of some other finally consumable
goods. For example, Milk is an intermediary
goods which is used for final consumption as
well as for production of other final goods
such as ice cream, milk peda etc.
Dm Dmc Dme I m xi Oi x p O p ......xn On
Dmc Demand for final consumption milk
Dme Export demand for milk
I m Import demand for milk
xi Per unit milk requirement of ice cream industry
Oi Total output of ice cream industry
x p Per unit milk requirement of peda industry
O p Total output of Peda industry
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Quantitative Techniques
1. Trend projection method: We can project
future trend of demand by analyzing the past
data. Here, we assume the past behavior will
continue in future also. There are two ways to
project future trend
1. Graphical method
2. Algebraic method
Sales in 12 13 15 14 16
thousands
Estimate the demand for watches in the year 2019. If the
present trend will persist.
Year X Y X2 Y2 XY
2010 1 12 1 144 12
2011 2 13 4 169 26
2012 3 15 9 225 45
2013 4 14 16 196 56
2014 5 16 25 256 80
D Demand for X
is
y
Px Price of X
I Consumersincome
A Advertisement outlay
Py Price of
MANAGERIAL
substitute Y
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Advantages
Method is based on causal relationship
It forecasts and explains the economic phenomenon
Disadvantages
It uses complex calculations
Costly and time consuming
Chapters
7. Production function and laws of
production
8. Concept of cost and revenue
Laws of Production
Labour
Capital
Management
technology
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Fixed and variable inputs.
Inputs which remain fixed in the short period is
called fixed inputs. They don’t vary according to
production. But variable inputs, as the name
implies, varies according to the volume of
production. For example- land, machinery,
factory building etc. are fixed inputs. Raw
materials, ordinary labour, power fuel etc are
variable inputs as they vary in tune with the
volume of output.
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Production function
A production function is the technological
relationship between the factors of
production and outputs. It shows the
relationship between dependent variable (Q)
and independent variables (Ld, L, K, M, T).
This can be shown by the following equation.
Q=f(Ld, L, K, M, T)
Where, Q=Output, Ld=Land, K=Capital,
M=Management, T=Technology
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Cobb Douglas Production
Function
This is the statistical production function
formulated by the two Americans Paul H
Douglas and CW Cobb. It is the most
commonly used production function in the field
of economics. It is stated as follows.
Q= K La C(1-a)
Q= Output
L= Quantity of Labour
C= Quantity of Capital
K and a are positive constants
Q=KL3/4 C1/4
It indicates constant returns to scale. There will
be no economies or diseconomies of scale.
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I2nd stage
I3rd stage
I1st stage
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As explained by law there are three identifiable stages
in short term relationship.
In the first stage, TPP increases at an increasing rate
up to 3 units of labour. But in the second stage, rate of
increase start decreasing. In the third stage, it
absolutely diminishes.
APP first increases, attains peak value at 3 units of
labour and then decreases thereafter.
MPP’s behavior is also similar to that of APP. But in
the case of MPP as compared to the APP curve, the
rate of rise and fall is more pronounced. Thus it first
remains above the APP curve, achieves higher peak
of 31 units compared to 25 units of APP at 3 units of
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labour. FinallySHAREEF
it falls faster.
Laws of returns to scale
In the previous law, the discussion was
confined to production function, when one of
the inputs change while all others are kept
constant.
The relation between the output and variation
is all the inputs taken together is known as
returns to scale. We change all the factors of
production in the same proportion and the
same direction. It is a long term phenomenon.
nP = f(nK , nL)
Where, n = number of times
nP = number of times the output is increased
nK= number of times the capital is increased
nL = number of times the labor is increased
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In the case of a linear
homogeneous
production function,
the expansion is
always a straight line
through the origin, as
shown in the figure.
This means that the
proportions between
the factors used will
always be the same
irrespective of the
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Isoquants
It is a production function with two variable
inputs which are substitutes for each other.
Isoquants means equal output. It refers to the
output produced by various combination of two
inputs are same.
The following Isoquants schedule makes it
clear.
Figure D
Figure C
Specialized managers
Internal New better quality
Economies machines
Purchase discounts
Low cost funds
Marketing and
Economies distribution
Better transport facilities
Better repairs and
maintenance
External Common research and
Economies development
Training and development
Social problems
Chapters
9. Fundamentals Pricing and forms of market.
market forms.
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
O
Demand and Supply
0
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Secondly, supply may shift when demand
remains the same. This is shown in the
following figure.
Homogeneous product
Uniform price
Loss.
Leader-Follower Model
Chapters
10. Pricing Policies and Practices.
Costs Demand
Objectives Competition
Organizational factors
Distribution
Marketing Mix
channels
Product differentiation
General economic
Product life cycle
conditions
Characteristics of the
product Govt. Policy
Reactions of
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consumers
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What’s a pricing policy?
The policy adopted Profit maximization
by an organization Market share
regarding price is Return on
called their pricing investment
policy. Following are
Manage competition
the objectives of a
pricing policy. Cash collection
Survival in the
market
Goodwill of the
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concern.
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Pricing methods
Cost Plus Pricing: Majority of firms price their
products on the basis of cost. Total cost is
arrived at by adding variable and fixed costs.
This method is also known as margin pricing
or average cost pricing or full cost pricing or
mark up pricing. This method guarantees
recovery of cost at the same time it ignores the
effect of demand.
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phaseECONOMICS
MANAGERIAL of expansion and prosperity.
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Economic Stabilization Policies
Violent fluctuations in economy is harmful to
business community and general people in a
country. It causes for unemployment and
poverty during the depression period. The
great depression of 1930s has rewritten the
misconceptions that the invisible market forces
would automatically bring back the economy to
a normal condition. Interventions from the part
of government plays a vital role in it. Major
stabilization policies are discussed below.
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Objectives of stabilization
I. Tackling with heavy fluctuations and making
allowance for necessary fluctuations for a
long term. Sustained economic growth.
II. Providing a conducive environment for
efficient utilization of labour and other factors
of production
III. Encouraging free competitive firms with
minimum interference to function in the
economy and
IV. Reduce the conflict between the internal and
external interests of the economy
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Policies for stabilization
The widely used policies fall under two categories.
They are
1. Fiscal policy and
2. Monetary policy
Fiscal policy means the policy of government on
taxation and public expenditure programs. Both
has unique effects i.e. taxation transfers funds
from the private purses to the public coffers;
Public expenditure on the other hand increases
the flow of funds in the economy. These policies
are also called budgetary policies.
Contd…
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The relevance of fiscal policy as a stabilization
instrument lies on the fact that government
activities in modern economies rise tax
revenue and expenditure which in turn form a
considerable portion of GNP, ranging from 10
to 25%.
If fiscal policy of the government is so
formulated that it generates additional
purchasing power during depression and it
contracts purchasing power during the period
of expansion , it is known as “Counter-cyclical
241 fiscal policy”
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Public expenditure and GNP: As public
expenditure increases, it raises the level of
GNP. The magnitude of raise in GNP is
determined by the multiplier effect. Business
incomes and household incomes- wage,
interest, rent and business profit increase
when the government spends in the form of
purchase of goods and services. It brings in
tax to the government.