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 Societys 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
examine this data:

Year

Population

Sugar
Consumed

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

Demand Schedule
Price
Per
Cup
(Rs)

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

Market
Demand

10

12

12

20

16

28

20

10

36

24

12

44

Market Demand Schedule

Price Of
Commodity X

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
Of X
(Px)

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