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MBA 2 All right are reserved with CU-IDOL MANAGERIAL ECONOMICS Course Code: MBA601 Semester: First SLM UNIT : 1 E-Lesson: 1 www.cuidol.in Unit-1 (MBA601)

MANAGERIAL ECONOMICS OBJECTIVES 33 Student will be able to : INTRODUCTION Grasp how prices get determined in markets and what Economics is a social science about are the consequences of government intervention. management of limited resources with unlimited wants of human beings Understand the internal and external decisions to be made by managers Managerial economics is often defined as the science of management of economic Design competition strategies, including costing, institutions which engage in the conversion pricing, product differentiation, and market and transformation of raw-resources into environment according to the nature of products and consumable products structure of the markets. Managerial economics as such is derived as Analyze the demand and supply conditions and a body of organized and systematized assess the position of a company. knowledge comprising of theories . www.cuidol.in Unit-1 (MBA601) INASllTIrTiUghTEt aOrFeDreISsTeArNveCdE wANitDh COUN-LIIDNOELLEARNING

TOPICS TO BE COVERED 4 > Introduction > Methods of Managerial Economics > Economic Principles Applicable to Business Analysis > Basic Concepts in Managerial Economics > Determinant of Demand > Demand Functions and Demand Schedule - The Law of Demand - Exceptional Demand Curve - Change in Demand - Kinds of Demand www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

INTRODUCTION TO MANAGERIAL ECONOMICS 5  Economics is a social science of management of limited resources with unlimited wants of human beings. Man wants food, shelter and clothing primarily.  These lead to exploration of various resources and materials and technique of production, movement and consumption of various types of goods.  The development and happiness of human beings depend upon the production, distribution and consumption of various goods and services.  Man is confronted with various problems like what to produce, how to produce, for whom to produce, are the resources economically used, the products so produced are within the reach of men, etc. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

INTRODUCTION TO MANAGERIAL 6 ECONOMICS  Knowledge of economics helps to solve all these problems.  Managerial economics as such is derived as a body of organized and systematized knowledge comprising of theories.  Managerial economics is often defined as the science of management of economic institutions which engage in the conversion and transformation of raw resources into consumable products.  Managerial Economics is thus a ready made tool for the business people in shaping their business decisions.  Managerial Economics or Business Economics has become an indispensable tool for the business people to make proper decisions. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Methods of Managerial Economics  Economics is recognized as a science and thus, it follows certain methodologies. 7  A systematic way of approach to any problem is called methodology. In fact, method means the mode of rule of accomplishing an end. It is a procedure of examining any economic problem.  Some tools are employed to arrive at a solution. These tools are used in a systematic way in business economics. For eg a business manager is confronted with many problems. In order to solve these problems, he is required to use some tools of investigation. In other words, he uses certain methods which would help him to collect data to understand the problems. These methods are data-oriented: (1) Internal data (2) The data given by associations (3) Published data (4) Field investigations and assistance of specialized agencies www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Methods of Managerial Economics  Internal Data: 8 Internal data refers to facts and figures available with the company or business organization. When a manager wants to solve the problem, he should have complete knowledge of things going on in his company. He gets the latest figures and facts regarding production, inventory, sales, etc.  Associations: Manufacturers form association in order to promote their interests, Association will help the producers in obtaining information on sources of raw materials, marketing movement of finished goods, etc. The members of the association are required to furnish various data, which will compile it and publish in their annual reports www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

 Published Data: 9 The data furnished by the Associations does not give a correct picture of the industry as a whole and it is only partial. In order to get the information at the national level, he has to depend upon the published data brought out either by the government or by research bodies. Data published by Planning Commission, Centre for Monitoring Indian Economy (CMIE), National Council of Applied Economic Research.  Field investigation: In addition to the above mentioned methods, it is necessary to undertake field investigation. The Company can take up this work itself by sending sales executives or personnel to the respective areas. The company takes up market survey by itself. On the basis of the survey report, the company can take suitable measures to face the competition. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

 Specialized Agencies: 10 All right are reserved with CU-IDOL If the Company finds that its officers are not equipped to undertake this type of enquiry, it can entrust this work to specialized consultancies. The Consultants may also furnish many related matters such as potential buyers, their income and their consumption pattern, etc. It is also better to entrust such specially technical enquiries to those agencies. www.cuidol.in Unit-1 (MBA601)

Economic Principles applicable to Business Analysis 11  Several concepts and tools are used in economic theory to analyze various problems concerned with production and consumption. These concepts and tools are very much used in Managerial Economics too. The basic principle tools which are used in managerial economics are as follows: (a) The Opportunity Cost Principle (b) The Incremental Principle (c) The Principle of Time Perspective (d) The Discounting Principle (e) The Equi-marginal Principle www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

The Opportunity Cost Principle 12  Opportunity cost is the cost involved in any decision that consists of sacrifices of alternatives required by that decision.  If there are no sacrifices there are no costs. For example, the opportunity cost of using a machine to produce one product is the income foregone which would have been possible from other products.  If the machine has only one use, it has no opportunity cost.  If the machine has a number of uses, opportunity cost of a product is measured in terms of cost of producing an alternative product.  For decision making, application of opportunity cost principle is very much useful and it is the only relevant cost. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

The Incremental Principle  Incremental concept is closely related to marginal cost and marginal revenue in the theory of pricing. 13  The two basic components of incremental principle are incremental cost and incremental revenue.  Incremental cost is the change in the total cost as a result of new decision. The incremental principle is useful when the firm wants to expand the production of a commodity.  If the incremental revenue is higher than incremental cost, then it is profitable for the manager to expand the business. The moment the incremental revenue is equal to incremental cost, the manager is required to stop further expansion.  Incremental principle is very much used in decision taking www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

The Principle of Time Perspective 14  The Principle of Time Perspective can be stated as ‘A decision should take into account both the short run and the long run effects on revenues and costs and maintain a right balance between short run and long run perspectives’. This principle can be explained with the following illustration. If a company has idle capacity, to make use of this idle capacity, it may offer the product at a price lower than the cost. This may be alright in the short period The Equimarginal Principle  The Equimarginal Principle is one of the widely used concepts in economics. The law of equi-marginal principle states that an input should be allocated in such a way that the value added by last unit of the input is the same in all its uses. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Discounting Principle 15  Discounting principle occupies a very important place in managerial economics. It is because the future is uncertain.  The costs and revenues may change in future. Whenever the present value of a business is to be known, the future values will have to be discounted.  For example, suppose a person is offered to make a choice to make an investment on shares of a company, he will prefer the present value more than the future value. It is because of the uncertainty of the future. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Basic Concepts in Managerial Economics 16 1. Scarcity: The term scarcity in terms of economics may be defined as ‘excess demand’. At any time, for any thing if demand (requirement) exceeds supply (availability) that thing or good is said to be scarce, i.e., the demand in relation to supply determines the elements of scarcity. 2. Marginalism: When the resources are scarce managers have to be careful about the utilisation of every additional resources. In economics the term “marginal” is used for all such additional magnitudes of out put or return www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Basic Concepts in Managerial Economics 17 3. Risk & uncertainity 4. Profits(TR-TC) 5. Industry: Group of firms which produces similar commodity is called an industry. There are two criteria of industry classification:  Product criterion  Process criterion 6. Firm 7. The Market (meeting place of buyers and sellers directly or indirectly) Market comprises of following components:  Consumers Commodity  Price Sellers www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Determinants of Demand 18  Demand for a commodity depends on a number of factors.  Factors Influencing Individual Demand  Price of the Product  Income  Taste & habits  Relative Prices of Other Goods – Substitutes and Complementary Products  Consumer Expectations  Advertisement Effect www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Determinants of Demand 19 Factors Influencing Market Demand  Price of product  Distribution of Income and Wealth in the Community  Common Habits and Scale of Preferences  General Standards of Living and Spending Habits of the People  Number of Buyers in the Market and the Growth of Population  Age Structure and Sex Ratio of the Population  Future Expectations www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Determinants of Demand 20  Level of Taxation and Tax Structure  Inventions & Innovations  Fashions  Climatic or Weather Conditions  Customs  Advertisement and Sales Propaganda www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Demand Functions & Demand Schedule 21 Demand Function: The functional relationship between the demand for a commodity and its various determinants may be expressed mathematically in terms of a demand function, thus: Dx = f (Px, Py, M, T, A, U) where, Dx = Quantity demanded for commodity X. f = Functional relation. Px = The price of commodity X. Py = The price of substitutes and complementary goods. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Demand Functions & Demand Schedule 22 M = The money income of the consumer. T = The taste of the consumer. A = The advertisement effects. U = Unknown variables or influences.  Demand Schedule: A tabular statement of price-quantity relationship is known as the demand schedule. It narrates how much amount of a commodity is demanded by an individual or a group of individuals in the market at alternative prices per unit of time. There are, thus, two types of demand schedule: (i) individual demand schedule, and (ii) the market demand schedule. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Law of Demand 23  The law may be stated thus. “Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded.” In other words, the demand for a commodity extends (i.e., the demand rises) as the price falls and contracts (i.e., the demand falls) as the price rises. Briefly it can be stated, law of demand stresses that, other things remaining unchanged, demand varies inversely with price. The conventional law of demand however, relates to the much simplified demand function: D = f(P) where, D represents demand, P the price, and f connotes a functional relationship. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Explanation of the Law of Demand 24  This table represents hypothetical demanded schedule for commodity X. We can from this ascertain that with a fall in price at each state demand tends to rise. There is an inverse relationship between price and quantity demanded.  In this Figure, DD is a downward slopping demand curve indicating an inverse relationship between price and demand. From the given market demand curve, one can easily locate the market demand for a product at a given price. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Assumptions Underlying the Law of Demand 25  No change in consumer’s income  No change in consumer’s preferences  No change in Fashion  No change in the prices of related goods  No expectations of future price changes or shortages  No change in size, age-composition and sex-ratio of the population  No change in the range of goods available to consumers  No change in the distribution of income and wealth of the community  No change in government policy and weather conditions www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Exceptional Demand Curve 26  Sometimes, it may be observed that with a fall in price, demand also falls and with a rise a price, demand also rises. This is a paradoxical situation or a situation which apparently is contrary to the law of demand. Cases in which this tendency is observed are referred to as exceptions to the general law of demand. The demand curve for such cases will be typically unusual. It will be upward sloping demand curve. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Exceptional Demand Curve 27  In this Figure, DD is the demand curve which slopes upward from left to right. It appears that when OP1 , is the price, OQ1 is the demand and when the price rises to OP2 , demand also extends to OQ2 . It represents a direct functional relationship between price and demand. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Exceptional Demand Curve 28 There are a few such exceptional cases to the exceptions to the demand curve, which may be categorised as follows:  Giffen goods  Articles of snob appeal  Speculation  Consumer’s psychological bias or Iillusion www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Change in Demand  In economic analysis, the technical jargon ‘changes in quantity demanded’ and ‘changes in demand’ altogether 2 9 have different meanings.  Changes in quantity demanded refers to the changes in the quantities purchased by the consumer on account of the changes in price. We, may say that the quantity demanded of a commodity increases when its price increases. But, it is incorrect to say that demand decreases when price increases or demand increases when price decreases. For ‘increase and decrease’ in demand, refers to changes in demand caused by the changes in various other determinants of demand, price remaining unchanged  The movement along the demand curve measures changes in quantity demanded in relation to changes in price, while changes in demand are reflected through shifts in demand curve. The phrase ‘changes in quantity demanded’ essentially implies variation in demand referring to ‘extension’ or ‘contraction’ of demand which are quite distinct from the term ‘increase’ or ‘decrease’ in demand www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Extension and Contraction in Demand 30  Extension or contraction implies a movement on the same demand curve. It, thus, signifies that the demand schedule remains the same. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Increase and Decrease in Demand Curve 31  A change in the quantity demanded due to change in the overall pattern of demand results in an increase or decrease in demand. For a change in demand, the change in factors other than price is responsible. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

Kinds of Demand 32 1. Demand for Consumer’s Goods and Producer’s Goods; 2. Demand for Perishable Goods and Durable Goods; 3. Autonomous Demand and Company Demand; 4. Industry Demand and Long-Run Demand; 5. Short Run Demand and Company Demand; 6. Joint Demand and Composite Demand; and 7. Price Demand, Income Demand, and Cross Demand. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

SUMMARY  Economics is a science of management of scarce resources ordained towards the satisfaction of chosen wants 33 on priorities determined from the unlimited nature of human wants.  Managerial Economics is essentially a ready-made tool for helping the business community in undertaking their business decisions in the high-order. Business information in practice are incorporated in terms of Business Data relating to trends of production, inventory and sales volume.  Market is an economic arrangement operating towards buying and selling behaviour of the consumer and producers. In reality these tends to the imperfect competition. Monopoly, Duopoly, Oligopoly and monopolist competition are the variants of imperfect competition:  Monopoly: Single seller,  Duopoly: Two seller,  Oligopoly: A few seller  Monopolistic connection: Many sellers connecting on the basis of price and products.  Demand implies effective desire. Demand for a product in the market implies the quantity of the product purchased at a given price per unit of time. Market demand is the aggregation of individual demand. Demand is the function of price. Demand for a product varies in opposite direction to changes in its price. Demand varies inversely to price change. Law of demand: Other things being equal, when price rises, demand contracts. When price falls, demand rises. www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

MULTIPLE CHOICE QUESTIONS 1. The men behind organizing production and marketing are ____________. 34 (a) government (b) business executive (c) marketers (d) functionalist 2. To a modern manager the knowledge of business economics is ____________. (a) indispensable (b) beneficial (c) internal market (d) none of the above 3. Demand means effective____________. (a) desire (b) wish (c) purchase (d) buying 4. Demand function may be stated as ____________. (a) Dx = f(Px) (b) D = P (c) D = P (d) Df = fP Answers: 1.(b) 2. (a) 3. (a) 4.(a) Unit-1 (MBA601) All right are reserved with CU-IDOL www.cuidol.in

FREQUENTLY ASKED QUESTIONS 35 Q1. What are the methods of Managerial economics. Ans: (1) Internal data (2) The data given by associations (3) Published data (4) Field investigations and assistance of specialized agencies. For further details Refer to the SLM Q2. Define Demand Schedule and its types. Ans: A tabular statement of price-quantity relationship is known as the demand schedule. It narrates how much amount of a commodity is demanded by an individual or a group of individuals in the market at alternative prices per unit of time. There are, thus, two types of demand schedule: (i) individual demand schedule, and (ii) the market demand schedule. For further details Refer to the SLM www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

REFERENCES 36  Peterson, Lewis and Jain, Managerial Economics, Prentice Hall of India, Fourth Edition, New Delhi.  V.L. Mote, Samuel Paul, G.S. Gupta, Manageial Economics, McGraw Hill Education, New Edition.  H.L. Ahuja, Managerial Economics, S. Chand  Dwivedi, D.N., Managerial Economics, Vikas Publications, New Delhi www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL

37 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-1 (MBA601) All right are reserved with CU-IDOL