MANAGERIAL ECNOMICS

Rajni Ranjan
 Economy

The word economy comes

from a greek word for
“one who manages a
household”
 Society and Scarce Resources
• The management of Society’s resources is
important because resources are scarce.

• Scarcity implies choices and choice

implies cost.
 Why Choices ?

• Because human want, desires and

aspiration and limitless.
• Resources are scarce.
- Natural resources
- Human resources
- Capital
- Entrepreneurship
• People are gain maximisers.
 Scarcity
• Means that society has limited resources and
therefore cannot produce all the goods and
services the people wish to have.

• And so economics is the study of how the

society manages its scarce resources
 Scope of Economics

• Microeconomics : is the study of the

economic behaviour of the individual
consumer and producer and of individual
economic variables, i.e., production and
pricing of individual goods and services.
 Scope of Economics
• Macroeconomics deals with not individual
quantities, as such, but aggregates of
these quantities.
For example :
Not with individual income but national
income.
Not with individual price but with general
price levels.
Basic Problem Of An Economy
• What to produce ?
All goods are not and services are not
equally valued.

• How to Produce ?
Labor intensive and capital intensive.b

• For whom to produce ?

Major Macroeconomic Problems
• How to increase the production capacity of
the economy ?

• How to stabilize economy ?

• Other macro economic problems ?

Meaning of Managerial Economics
• Decision making is becoming complex.

• Leading to increasing use of economic

tool, theory, logic and concept.

• Leading to rapid demand for professionally

trained managerial manpower.
 Definition
“Managerial Economics is the integration of
economic theory with business practice for the
purpose of facilitating decision making and
forward planning by management.”

------- Spencer and Seigelman

 The Scope Of Managerial
Economics
• Operational and internal issues
Theory of Demand
Theory of Production
Analysis of Market structure and pricing
theory.
Profit analysis and profit management.
Theory of investment and capital
decisions.
 Basics
• Demand, production, cost, market
structure, profit, price.
INPUTS

OUTPUT
FIRM

INTERNAL
ISSUES

EXTERNAL
ISSUES
Macroeconomics Applies to BE

• Issues related to macro variables

• Issues related to foreign trade.

• Issues related to government policies.

 Basic concepts
• Basically a study of variables – cost,
demand, price etc.

• Functional relationship is studied.

Y=f(X)
Let us say that Y = Sales
X = Advertisement Budget
 Relationships
• Study of managerial economcs is the
study of relationship basically we study
Demand Function – D = f( Price )

Production Function – TP = f( input)

Cost Function – TC = f( output )

 Knowing these relationships
• For example let us Year Population Sugar
Consumed
examine this data:
2000 10 40
2001 12 50
2002 15 60
2003 20 70
2004 25 80
2005 30 90
2006 40 100
• When we see we find that there is a
positive relationship between the data and
also if we apply correlation and regression
analysis to this data we can know the
relationship.

• For the above data the regression result is

Y = 27.44 + 1.96 X.
• So here we can infer that through
correlation coefficient we establish that
there is a relationship that exists positive
and negative.

• Through regression analysis exact

relationship between the two variable is
established in the form of an equation.
 CHAPTER 2

• The fundamental laws of market : The

laws of demand and supply
 Demand
• The term demand refers to the quantity
demanded of a commodity per unit of time
at a given time.

• It also implies a desire backed by ability

and willingness to pay.
 Demand Function
Activity :

If we analyse what are the factors that

effect the demand for cars ?
• The factors are – Price (X1), price of
substitutes and complementary
products(X2),consumers
income(X3),consumers taste (X4) and
preferences (X5), credit facilities (X6),
distribution of national income (X7),
----------------------------.
• D = f ( X1, X2, X3, X4, X5,-----------------)
 Law of Demand
• The law of demand states that quantity of
a product demanded per unit time
increases when its price falls and
decreases when its price decreases
keeping all other factors constant.

D = f ( P)
 Demand Schedule
Price per cup Demand
2 8
3 7
4 6
5 5
6 4
7 3
8 2
 Demand Schedule
9 D
8 A
7 B
Price 6 C
Per 5 D
Cup 4 E
(Rs) 3 F
2 G
1 D'
0
1 2 3 4 5 6 7 8 9 10

Cups of tea demanded per day

 Reasons Of Law of Demand
• Income effect

• Substitution effect

• Law of diminishing marginal utility

Exceptions of Law Of Demand

• Giffin Goods

• Status Goods

• Share market
Explanation of Giffin Concept
• Suppose a poor family in IRELAND
consumes 1 KG food everyday and a
combination of MEAT And POTATO is
used.
• Conditions – Income – 100 Rs per week
Meat – 40 Rs
Potato – 10 Rs
• Monday to Saturday – potato
• Sunday - Meat
 Market Demand
Price A B C Market
Demand
10 4 2 0 6
8 8 4 0 12
6 12 6 2 20
4 16 8 4 28
2 20 10 6 36
0 24 12 8 44
 Market Demand Schedule

10
9
8
7
Price Of
6
Commodity X
5
4
3
2 DB DA DM
1 DC
0 4 8 12 16 20 24 28 32 36 40

Quantity Demanded of X Per Time Unit

 Determinants of Market Demand
• Price
• Consumer Income- NG, LG, IG, ECG
• Substitute and complementary products
• Population
• Credit facility
• Consumer taste and preferences
• National Income Distribution
• Demonstration Effect
 Movement along and shift.
• ALONG – Whenever price as a factor
effects the demand it brings movement
along the demand schedule.

• PARALLEL SHIFT – Whenever factor

other than price effect demand there is a
parallel shift in the demand schedule.
 Shift In Demand Curves

Price
A
Of X
P2
(Px)
D3
B D2
P1
D1

0 Q1 Q2

Quantity Demanded of X (Qx)

 Law of Supply
• Market supply is the quantity of a
commodity that all firms producing and
selling it offer for a sale at a given price
per unit of time.
• According to the law of supply there is a
positive relationship between the two.
 Determinants of law of supply
• Supply depends on
Price - P
Cost of production - C
Technology – T
Supply Function –
S = f( P, C, T )
 The Supply Schedule

Price – 100 200 300 400 600 800

Supply - 10 40 55 70 75 80
 Shift in supply schedule
• Change in input prices

• Technological Progress

• Price of product Substitutes

 Equilibrium Demand and Supply `

• Equilibrium refers to state of market in

which the quantity demanded is equal to
the quantity supplied in the market.
 Market equilibrium
Price – 100 200 300 400 500 600
Demand - 80 55 40 28 20 15
Supply - 10 28 40 50 55 60