SYNOPTIC NOTES ON

MANAGERIAL ECONOMICS
FOR MMS

PROF. KAZI
nskazi@gmail.com
9820490844

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 SUBJECT : MANAGERIAL
ECONOMICS
Chapter CONTENTS
1) INTRODUCTION
2) CONSUMER BEHAVIOUR - I
3) CONSUMER BEHAVIOUR - II
4) SUPPLY/EQUILIBRIUM PRICE
5) PRODUCTION FUNCTION
6) RETURNS TO SCALE
7) REVENUE AND COST
8) TYPES OF MARKET
9) PRICING PRACTICES
10) PROFIT MANAGEMENT
11) CAPITAL BUDGETING 2
Chapter Two – Consumer Behaviour 1

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 CHAPTER TWO
CONSUMER BEHAVIOUR

CONTENTS:
(A)MEANING AND TYPES OF DEMAND
(B) FACTORS AFFECTING DEMAND
(C) DEMAND FUNCTION
(D) LAW OF DEMAND
(E) CONUMER SURPLUS
(F) QUESTIONS/ASSIGNMENTS

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(A) MEANING AND TYPES OF DEMAND

Demand is defined as “desire backed by ability and willingness to pay”.

Different types of demand are:
 Individual Demand
 Market Demand
 Direct Demand
 Derived Demand
 Joint Demand
 Competitive Demand
 Composite Demand
 Autonomous Demand
 Induced Demand 5
 (B) FACTORS AFFECTING DEMAND
• The various determinants of demand are
 Price of the product
 Price of Substitutes
 Income of the consumer
 Size of population
 Advertisement and Publicity
 Income Distribution
 Consumer expectation about future price/supply
 Demonstration effect/Bandwagon effect
 Consumer Credit Facilities 6
 (B) FACTORS AFFECTING DEMAND

Government Policies include:

 Monetary Policy
 Fiscal Policy
 Trade Policy
 Licensing Policy
 Price Policy
 Income Policy

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 (D) DEMAND FUNCTION

 On the basis of company sales it is possible to derive demand function with

the help of quantitative techniques. The demand function is given below
Qd= 1000- 25px
 Prepare suitable demand schedule. In this case the maximum demand is
1000 and minimum demand can be zero. The maximum demand of 1000 is
at zero price and the zero demand is at price Rs 40 ( Rs
40X25=1000).Hence between the two price levels ie 40 and zero we can
take some prices and calculate the demand.

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 (D) DEMAND FUNCTION

 At Rs 30 the demand will be 30x 25=750.Thus 1000-750=250

 At Rs 20 the demand will be 20x 25=500.Thus 1000-500=500
 At Rs 10 the demand will be 10x25=250.Thus 1000-250=750
 At Rs zero the demand will be 0x 25=0.Thus 1000-0=1000
 At Rs 40 the demand will be 40x 25=1000.Thus 1000-1000=0
 On the basis of this data we can derive demand schedule and demand
curve.(For figure of demand schedule refer topic No C and for demand curve
refer Topic No D)
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 (D) LAW OF DEMAND

 The law given by Prof Alfred Marshall.

 The law states ”Other things remaining constant, demand varies inversely
with price”.
 Other things remaining constant means no change in the following factors.
 Price of substitute Income of the consumers
 Size of population Advertisement and publicity
 Climatic conditions Consumer tastes and preferences
 Government policies.
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 (D) LAW OF DEMAND

 The law of demand can be explained with the help

of demand curve which slopes downward from left
to right.
 The reasons for the downward sloping demand
curve can be explained in terms of:
 Rise in Real Income (income effect)
 Rise in Marginal Utility
 Substitution effect
 Increased uses of the product
 Entry of additional customers (potential
 customers become actual customers)
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 (D) LAW OF DEMAND

 Demand Schedule shows the relationship between price level and quantity
demanded. It can be individual demand schedule and market demand
schedule.
 Example PRICE Mr X Mr Y MDS
 100 20 30 50
 75 50 60 110
 50 75 100 175
 25 100 150 250
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(D) LAW OF
DEMAND
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 ( D) LAW OF DEMAND
LIMITATIONS OF LAW OF DEMAND:
 Inferior Goods
 Superior Goods
 Necessaries of Life
 Future expectations
 Impulsive buying
 Outdated products
 Consumer Illusion
 Market ignorance
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  Meaning/Definition:
 Consumer surplus is a measure of the welfare that
people gain from consuming goods and services.
 It is the difference between the total amount that
consumer is willing to pay ( as indicated by demand
curve) and the total amount he actually pays.(the
(E) market price).
CONSUMER  Prof Marshall defined consumer surplus as “excess of
the price that consumer would be willing to pay rather
SURPLUS than go without a commodity over which he actually
pays.”
 Consumer surplus is derived from the law of
diminishing marginal utility.The law states as consumer
buys more and more of the same commodity, the
marginal utility goes on diminishing .Since price is
fixed for all the units, consumer get some extra
utility .This extra utility is called consumer surplus.
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 (E) CONSUMER SURPLUS

Consumer Surplus = Price consumer – price consumer

ready to pay actually pays.
Consumer Surplus = Price – Marginal Utility
Assumptions:
The concept is based on the following assumptions:
1 Utility is cardinal.
2 Utility goes on diminishing.
3 Utility is independent.
4 Product has no substitutes available.
5 Marginal utility of money constant.
6 Income ,tastes remain constant. 16
 (E) CONSUMER SURPLUS
Example/Figure:
The concept can be explained with
the following example and figure.
Units MU P CS
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
6 20 20 0
7 18 20 - 17
 (E) CONSUMER SURPLUS
 Usefulness of the concept:
 It is useful in pricing the product.
 It is useful to the government in taxing the product.(High CS, high taxes)
 It is useful in providing subsidy.(gain from subsidy >loss to the govt.)
 It is useful in evaluating tax system.(gains >sacrifice)
 It is useful in pricing of public utilities.
 It is useful in measuring gains from international trade.
 Producer adopts price discrimination to convert consumer surplus into producer
surplus.
 When demand is inelastic ,greater will be the scope for consumer surplus. 18
 (E) CONSUMER SURPLUS

Limitations of Consumer Surplus:

 Difficult to measure consumer surplus in practice.
 Not applicable to necessaries of life.
 Marginal utility of money changes.
 Imaginary and hypothetical concept.
 Utility is not cardinal but ordinal.
 Utility is not independent but inter dependent.
 There is always change in consumer tastes and income.
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 (F)QUESTIONS
Q1 State whether the following statements are True or False.
(1) All desire is demand.
(2) Demand for labour is derived demand.
(3) Price is the only determinant of demand.
(4) Demand is inversely related to price of the product.
(5) The law of demand has no limitations.

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 (F)QUESTIONS
(6) Government policy has no influence on demand for any
specific product.
(7) Consumer surplus has no practical applications.
(8) A high GST will increase the demand of the product.
(9) Autonomous demand is independent of the income of the
country.
(10) Market demand is a macro concept.

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 (F)QUESTIONS

Q2 Fill in the blanks:

(1) Demand for consumer goods is ---------- demand.
(a) Derived ( b) Direct (c ) Autonomous (d) Induced
(2) Demand for machine is a ----------- demand.
(b) Direct (b) Autonomous (c ) Derived (d) Induced.
(3) The law of demand is advocated by Prof------------
(c) Adam Smith (b) Robbins (c ) Keynes (d) Marshall
(4) Demand varies-----------with price.
(a) Directly (b) Proportionately ( c) Inversely (d) marginally
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 (F) QUESTIONS

(5) Consumer surplus is the difference between price and--------

(a) Quality (b) Quantity (c ) Utility. (d) cost
(6) Demand for producer’s goods is ---------- demand.
(b) Direct (b) derived (c ) Limited (d) Unlimited
(7) Demand curve slopes ------------
(c) Backward (b) upward ( c) downward (d) Upward and backward.
(8) ----------- demand depend on the national income of a country.
(a) Autonomous (b) induced (c) Necessaries (d) Perishable goods 23
 (F) QUESTIONS

(9) Demand for Coco-cola v/s pepsi is an example of ---------

demand.
(a) Joint (b ) Composite ( c) Competitive (d ) Derived
(10) The law of demand is applicable only to----------goods.
(a) Luxury (b) Inferior (c ) Basic (d) Normal

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 (F)QUESTIONS

QUESTIONS:

1 - Define demand and explain different types of demand.

2 - Explain the various determinants of demand with reference to any suitable product.
3 - Explain the law of demand .what are its limitations.
4 - Explain why demand curve slopes downward from left to right.
5 - Explain the concept of consumer surplus with suitable example and figure. Do
you think the concept is practical?
6 - Prepare suitable demand schedule and demand curve from the demand function
Qd=2000 – 50p.

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 ASSIGNMENTS

ASSIGNMENTS: (ANY ONE)

1- In the year 1996 India had five car manufacturer and sold 4.68 lakh
car. Today there are about 17 car manufacturer with over 100 variants selling
30 lakh car. Discuss the factors responsible for this.
2 - The housing prices in Mumbai are exorbitant. What factors are
responsible for the higher prices.
3- Petrol price in India is much higher than some of the Asian countries.
What are the factors responsible for this?
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 ASSIGNMENTS

4 - Gold demand in India has declined from 1000 MT in 2010 to 690 MT in

2019 but there is rapid rise in the gold prices. How would you explain this
situation.
5 - Collect data on demand for any product of your choice and analyse the
size of the market, market growth rate, market share of different companies,
current prices, factors responsible for the higher/lower demand for the
product.
NOTE: Assignment should be maximum two pages only.
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 TRENDS IN GNI AND PCI IN INDIA
YEAR GROSS NATIONAL INCOME PER CAPITA INCOME
( Rs. in Crore) (Rs.)
1950-51 10360 274
1960-61 17870 393
1970-71 47354 860
1980-81 149987 2040
1990-91 578667 6270
2000-01 2154680 19115
2010-11 7702308 58534
2019-20 20339374 135050 28
 TOP TEN ECONOMIES IN THE
WORLD
 RANK COUNTRY GDP (USD TRILLION ) (2019)
 1 USA 21.4
 2 China 14.1
 3 Japan 5.2
 4 Germany 3.9
 5 India 2.9
 6 UK 2.7
 7 France 2.7
 8 Italy 2.0
 9 Brazil 1.8
 10 Korea 1.6 SOURCE: WORLD BANK 29
Consumption Pattern In INDIA (Percentage)

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