MANAGERIAL ECONOMICSMANAGERIAL ECONOMICS

DEFINITION OF ECONOMICSDEFINITION OF ECONOMICS

• 1. 1. A Science of Wealth A Science of Wealth

• 2. A Science of Material Welfare2. A Science of Material Welfare

• 3. A Science of Scarcity and 3. A Science of Scarcity and

• 4. A Science of Dynamic Growth and 4. A Science of Dynamic Growth and DevelopmentDevelopment

ECONOMIC PROBLEMS

ENDS

ECONOMICS

MEANS

UNLIMITED GRADED ON

LIMITED ATERNATIVE NUMBER PRIORITY

BASIS USES

SCARCITY OF RESOURCES

DEFINITION OF MANAGERIAL DEFINITION OF MANAGERIAL ECONOMICSECONOMICS

• 1. ECONOMICS APPLIED IN DECISION – 1. ECONOMICS APPLIED IN DECISION – MAKING.MAKING.

• 2. SPECIAL BRANCH OF ECONOMICS 2. SPECIAL BRANCH OF ECONOMICS BRIDGINGBRIDGING

THE GAP BETWEEN ABSTRACT THE GAP BETWEEN ABSTRACT THEORY THEORY

AND MANAGERIAL PRACTICE. AND MANAGERIAL PRACTICE.

CONCEPT OF BUSINESS CONCEPT OF BUSINESS ECONOMICSECONOMICS

• BUSINESS ECONOMICS ATTEMPTS TO BUSINESS ECONOMICS ATTEMPTS TO INDICATE HOW BUSINESS POLICIES ARE INDICATE HOW BUSINESS POLICIES ARE FIRMLY ROOTED IN ECONOMIC FIRMLY ROOTED IN ECONOMIC PRINCIPLES. PRINCIPLES.

• DISTINCTION BETWEEN BUSINESS DISTINCTION BETWEEN BUSINESS ECONOMICS AND MANAGERIAL ECONOMICS AND MANAGERIAL ECONOMICS.ECONOMICS.

BUSINESS ECONOMICS USESBUSINESS ECONOMICS USES

A.A. MICRO-ECONOMIC ANALYSIS OF THE BUSINESS MICRO-ECONOMIC ANALYSIS OF THE BUSINESS UNIT ANDUNIT AND

B.B. MACROECONIMIC ANALYSIS OF THE BUSINESS MACROECONIMIC ANALYSIS OF THE BUSINESS ENVIRONMENT.ENVIRONMENT.

BUSINESS ECONOMICS IS THUS MORE BUSINESS ECONOMICS IS THUS MORE

COMPREHENSIVE AND BROAD BASED THAN COMPREHENSIVE AND BROAD BASED THAN MANAGERIAL ECONIMICS WHICH IS MOSTLY MANAGERIAL ECONIMICS WHICH IS MOSTLY MICRO – ECONOMICS WITH HIGH – PITCHED MICRO – ECONOMICS WITH HIGH – PITCHED DEGREE OF ANALYTICAL RIGOUR THROUGH DEGREE OF ANALYTICAL RIGOUR THROUGH SOPHISTICATED TOOLS AND TECHNIQUES OF SOPHISTICATED TOOLS AND TECHNIQUES OF ECONOMETRICS AND OPERATIONS RESEARCH ECONOMETRICS AND OPERATIONS RESEARCH

DEMANDDEMAND

DEMAND IN ECONOMICS MEANS DESIRE DEMAND IN ECONOMICS MEANS DESIRE BACKED BY PURCHASING POWER AS BACKED BY PURCHASING POWER AS WELL AS WILLINGNESS TO SPEND FOR WELL AS WILLINGNESS TO SPEND FOR THE GOODS DESIRED. DEMAND IS THUS THE GOODS DESIRED. DEMAND IS THUS REFLECTED IN TERMS OF QUANTITY OF A REFLECTED IN TERMS OF QUANTITY OF A GOODS OR SERVICE THAT CONSUMERS ARE GOODS OR SERVICE THAT CONSUMERS ARE WILLING AND ABLE TO PURCHASE AT WILLING AND ABLE TO PURCHASE AT VARIOUS PRICES DURING A GIVEN PERIOD VARIOUS PRICES DURING A GIVEN PERIOD OF TIME. OF TIME.

DETERMINANTS OF AN DETERMINANTS OF AN INDIVIDUAL CONSUMER’S INDIVIDUAL CONSUMER’S

DEMANDDEMAND

1.1. OWN PRICE OF GOODSOWN PRICE OF GOODS

2.2. PRICE OF RELATED GOODSPRICE OF RELATED GOODS• COMPETITIVE / SUBSTITUTE GOODSCOMPETITIVE / SUBSTITUTE GOODS• COMPLEMENTARY GOODS COMPLEMENTARY GOODS

3.3. INCOME OF CONSUMERINCOME OF CONSUMER• NECESSARY GOODSNECESSARY GOODS• COMFORTS AND LUXURIESCOMFORTS AND LUXURIES

4.4. SUBJECTIVE FOCTORS SUBJECTIVE FOCTORS

WHAT ARE THE DETERMINANTS OF WHAT ARE THE DETERMINANTS OF AGGREGATE DEMAND ?AGGREGATE DEMAND ?

i.e., DEMAND FOR GOODS IN THE i.e., DEMAND FOR GOODS IN THE MARKETMARKET

• SIZE AND COMPOSITION OF POPULATIONSIZE AND COMPOSITION OF POPULATION

• LEVEL AND DISTRIBUTION OF INCOMELEVEL AND DISTRIBUTION OF INCOME

• ADVERTISEMENTADVERTISEMENT

• THE NUMBER OF CONSUMERS IN THE MARKETTHE NUMBER OF CONSUMERS IN THE MARKET

• CHANGES IN PROPENSITY TO CONSUME AND SAVECHANGES IN PROPENSITY TO CONSUME AND SAVE

• QUALITY OF PRODUCT QUALITY OF PRODUCT

• MODE OF PAYMENTMODE OF PAYMENT

• EXPECTATION ABOUT FUTUREEXPECTATION ABOUT FUTURE

• STATE OF ECONOMYSTATE OF ECONOMY

• WEATHER CONDITIONWEATHER CONDITION

• ASSET / LIQUIDITY PREFERENCEASSET / LIQUIDITY PREFERENCE

• NATURE OF PRODUCT’S MARKET DEVELOPMENTNATURE OF PRODUCT’S MARKET DEVELOPMENT

percentage change in Quantity demandedpercentage change in Quantity demanded

Elasticity of Demand=Elasticity of Demand= percentage change in determining factorpercentage change in determining factor

Elasticity of demand measures the degree of responsiveness or sensitivity of quantity demanded to Elasticity of demand measures the degree of responsiveness or sensitivity of quantity demanded to a change in a particular determining factor when all other determinants of demand remain a change in a particular determining factor when all other determinants of demand remain

unchanged at a particular point of time.unchanged at a particular point of time.

Different Types of Elasticities of DemandDifferent Types of Elasticities of Demand

1.1. Price-elasticity of demand:Price-elasticity of demand:

percentage change in Quantity demandedpercentage change in Quantity demandedPrice elasticity =Price elasticity =

Percentage change in pricePercentage change in price

ELASTICITY OF DEMANDELASTICITY OF DEMAND

THE DIFFERENT SEGMENTS OF THE DIFFERENT SEGMENTS OF PRICE ELASTICITY OF DEMAND ARE PRICE ELASTICITY OF DEMAND ARE

AS FOLLOWS:AS FOLLOWS:

i)i) Inelastic demand:Inelastic demand:

ii)ii) Elastic demand:Elastic demand:

iii)iii) Unity elastic demand:Unity elastic demand:

iv)iv) Perfectly elastic demand:Perfectly elastic demand:

v)v) Perfectly inelastic demand:Perfectly inelastic demand:

INCOME ELASTICITY OF DEMAND:INCOME ELASTICITY OF DEMAND:

Percentage change in quantity demanded Percentage change in quantity demanded Income elasticity=Income elasticity= Percentage change in consumer incomePercentage change in consumer income

Cross –elasticity of demand:Cross –elasticity of demand: Percentage change in quantity demanded Percentage change in quantity demanded

of Xof XCross –elasticity of demand = Cross –elasticity of demand = Percentage change in price of YPercentage change in price of Y

Elasticity of substitution: Elasticity of substitution:

Proportionate change in the ratio of the two consumed goodsProportionate change in the ratio of the two consumed goods

Proportionate change in their marginal rate of substitutionProportionate change in their marginal rate of substitution

SIGNIFIANCE OF CROSS-ELASTCITYSIGNIFIANCE OF CROSS-ELASTCITY

• Case I: If cross elasticity is positive then there exists a Case I: If cross elasticity is positive then there exists a relation of substitution between the said two goods.relation of substitution between the said two goods.

• Case II: If it is negative in sign, the two commodities must Case II: If it is negative in sign, the two commodities must be complementary to each other.be complementary to each other.

• Advertising Elasticity of DemandAdvertising Elasticity of Demand

Percentage change in salesPercentage change in sales

Percentage change in advertising expenditurePercentage change in advertising expenditure

PRODUCTION FUNCTIONPRODUCTION FUNCTION

Production function refers to the technical, Production function refers to the technical, quantitative and physical interrelationship quantitative and physical interrelationship between output of a product with one/more of its between output of a product with one/more of its inputs at a particular point of time when the inputs at a particular point of time when the method and technology of production remains method and technology of production remains unchanged.unchanged.

1.1. Production function must be considered with Production function must be considered with respect to a particular point of time.respect to a particular point of time.

2.2. Production function of a firm is determined by the Production function of a firm is determined by the state of technology.state of technology.

DIFERENT TYPES OF PRODUCTION DIFERENT TYPES OF PRODUCTION FUNCTIONFUNCTION

• AA) Short run and long run production function:) Short run and long run production function:

• B) Fixed proportions production function and variable B) Fixed proportions production function and variable proportion function:proportion function:

• C) Homogenous production function and Cobb-C) Homogenous production function and Cobb-Douglas production function:Douglas production function:

THE LAW OF VARIABLE THE LAW OF VARIABLE PROPORTIONSPROPORTIONS

P.A. Samuelson: ”An increase in P.A. Samuelson: ”An increase in some inputs relative to other fixed some inputs relative to other fixed inputs will, in a given state of inputs will, in a given state of technology, cause output to increase, technology, cause output to increase, but after a point the extra output but after a point the extra output resulting from the same additions of resulting from the same additions of extra inputs will become less and extra inputs will become less and lessless

DIFFERENT STAGES OF THE LAW OF DIFFERENT STAGES OF THE LAW OF VARIABLE PROPORTIONSVARIABLE PROPORTIONS

STAGE I: STAGE OF INCREASING STAGE I: STAGE OF INCREASING RETURN:RETURN:

VARIABLE FACTOR

AP

I II III

TP

POINT OF INFLEXION

MP

CAUSES OF INCREASING RETURNS CAUSES OF INCREASING RETURNS DURING THE FIRST STAGE:DURING THE FIRST STAGE:

i)i) Abundance of fixed factor:Abundance of fixed factor:

ii)ii) Indivisibility of fixed factor:Indivisibility of fixed factor:

iii)iii) Division of labour:Division of labour:

STAGE II: STAGE OF DECREASING STAGE II: STAGE OF DECREASING RETURNS:RETURNS:

Explanation of decreasing returns:Explanation of decreasing returns:

i)i) Disturbance to optimum proportion:Disturbance to optimum proportion:

ii)ii) Imperfect substitutability of factors of Imperfect substitutability of factors of production:production:

STAGE III: STAGE OF NEGATIVE STAGE III: STAGE OF NEGATIVE RETURNS:RETURNS:

Explanation of negative returns:Explanation of negative returns:

1.1. Abundance of variable factor:Abundance of variable factor:

2.2. Declining efficiency of fixed factor:Declining efficiency of fixed factor:

THE LAW OF RETURNS TO THE LAW OF RETURNS TO SCALESCALE

RETURNS TO SCALE REFER TO RETURNS TO SCALE REFER TO CHANGE IN CHANGE IN

OUTPUT WHEN ALL THE FACTORS OUTPUT WHEN ALL THE FACTORS ARE ARE

CHANGED IN THE SAME PROPORTION. A CHANGED IN THE SAME PROPORTION. A LONG LONG

RUN HOMOGENOUS PRODUCTION RUN HOMOGENOUS PRODUCTION FUNCTION FUNCTION

EXHIBITS RETURNS TO SCALE. EXHIBITS RETURNS TO SCALE.

ECONOMIES AND DISECONOMIES ECONOMIES AND DISECONOMIES OF SCALEOF SCALE

1.1. INTERNAL ECONOMIES AND DISECONOMIESINTERNAL ECONOMIES AND DISECONOMIES

a) TECHNICAL ECONOMIES & DISECONOMIESa) TECHNICAL ECONOMIES & DISECONOMIESb) PRODUCTION ECONOMIES AND DISECONOMIESb) PRODUCTION ECONOMIES AND DISECONOMIESc) MARKETING ECONOMIES & DISECONOMIESc) MARKETING ECONOMIES & DISECONOMIESd) MANAGERIAL ECONOMIES & DISECONOMIESd) MANAGERIAL ECONOMIES & DISECONOMIESe) FINANCIAL ECONOMIES & DISECONOMIESe) FINANCIAL ECONOMIES & DISECONOMIESf) RISK – BEARING ECONOMIESf) RISK – BEARING ECONOMIESg) ECONOMIES OF RESEARCH AND DEVELOPMENTg) ECONOMIES OF RESEARCH AND DEVELOPMENTh) ECONOMIES OF WELFAREh) ECONOMIES OF WELFARE

ECONOMIES AND DISECONOMIES ECONOMIES AND DISECONOMIES OF SCALEOF SCALE

2.2. EXTERNAL ECONOMIES AND EXTERNAL ECONOMIES AND DISECONOMIESDISECONOMIES

a) CHEAPER RAW MATERIALS AND CAPITAL a) CHEAPER RAW MATERIALS AND CAPITAL EQUIPMENTSEQUIPMENTS

b) TECHNOLOGICAL EXTERNAL ECONOMICS b) TECHNOLOGICAL EXTERNAL ECONOMICS

c) DEVELOPMENT OF SKILLED LABOURc) DEVELOPMENT OF SKILLED LABOUR

d) GRPWTH OF ANCILLARY INDUSTRIESd) GRPWTH OF ANCILLARY INDUSTRIES

e) BETTER TRANSPORTATION AND e) BETTER TRANSPORTATION AND MARKETING FACILITIES MARKETING FACILITIES

HOW PRODUCER’S EQUILIBRIUM IS HOW PRODUCER’S EQUILIBRIUM IS REACHED THROUGH OPTIMAL REACHED THROUGH OPTIMAL

INPUT COMBINATION?INPUT COMBINATION?

Let the profit function be represented by, total Let the profit function be represented by, total revenue berevenue be

TR and total cost be TC, then, =TR-TC= pq-TR and total cost be TC, then, =TR-TC= pq-C(P=commodity price, q=quantity) we assume that C(P=commodity price, q=quantity) we assume that commodity price is given, i.e., p=p, therefore = commodity price is given, i.e., p=p, therefore = pq-C.pq-C.

Problem I:Problem I: When producer is asked to produce a specified When producer is asked to produce a specified output, i.e., q=q, =pq-C. Therefore will be maximum output, i.e., q=q, =pq-C. Therefore will be maximum when C is minimum.when C is minimum.

Problem II: When the cost is specified, i.e. c=c then Problem II: When the cost is specified, i.e. c=c then =pq-c, then will be maximum if q is maximum. =pq-c, then will be maximum if q is maximum. So this is a problem of output maximization.So this is a problem of output maximization.

THE DIFFERENCE BETWEEN FIXED THE DIFFERENCE BETWEEN FIXED COST AND VARIABLE COSTCOST AND VARIABLE COST

1) The short run cost of production can be 1) The short run cost of production can be divided into two partsdivided into two parts

(i) Fixed cost and(i) Fixed cost and (ii) Variable cost(ii) Variable cost

Fixed Costs are those cost items which do not change with Fixed Costs are those cost items which do not change with changes in level of output, that means, they are changes in level of output, that means, they are independent of output. Fixed costs are contractually fixed.independent of output. Fixed costs are contractually fixed.

Variable Costs are those items of costs which change with Variable Costs are those items of costs which change with changes in the level of output in the short run i.e. they changes in the level of output in the short run i.e. they increase or decrease with the rise or fall of the output e.g. increase or decrease with the rise or fall of the output e.g. wages of labour, prices of raw materials, fuel, power etc.wages of labour, prices of raw materials, fuel, power etc.

COST FUNCTIONCOST FUNCTION

Cost function is a derivative function from Cost function is a derivative function from production and is also determined by prices of production and is also determined by prices of inputs. Cost function refers to the mathematical inputs. Cost function refers to the mathematical relationship which exists between cost of a relationship which exists between cost of a product and various determinants of cost. product and various determinants of cost. Symbolically it is represented by :Symbolically it is represented by :

C=f (O, S, T, U, P,……………)C=f (O, S, T, U, P,……………)

Where C= Cost, O = Level of output, T = Time Where C= Cost, O = Level of output, T = Time period under consideration, S= Size of plant, P= period under consideration, S= Size of plant, P= Prices of factors of production, U= Technology Prices of factors of production, U= Technology etc.etc.

MEANING OF MARKETMEANING OF MARKET

“ “ MARKET “ REFERS TO A SYSTEM OF NETWORK MARKET “ REFERS TO A SYSTEM OF NETWORK OROR

DEALINGS BETWEEN BUYERS AND SELLERS DEALINGS BETWEEN BUYERS AND SELLERS

WHERE THEY BARGAIN FOR THE PRICE OF WHERE THEY BARGAIN FOR THE PRICE OF

PRODUCT, SETTLE THE PRICE AND BUY AND PRODUCT, SETTLE THE PRICE AND BUY AND

SELL THE PRODUCT.SELL THE PRODUCT.

DIFFERENT TYPES OF MARKET ON DIFFERENT TYPES OF MARKET ON THE BASIS OF DEGREE OF THE BASIS OF DEGREE OF

COMPETITIONCOMPETITION

1.1. PERFECT COMPETITIONPERFECT COMPETITION

2.2. MONOPOLYMONOPOLY

3.3. MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION

4.4. OLIGOPOLY MARKETOLIGOPOLY MARKET

5.5. DUOPOLYDUOPOLY

6.6. BILATERAL MONOPOLYBILATERAL MONOPOLY

7.7. MONOPSONYMONOPSONY

8.8. OLIGOPSONYOLIGOPSONY

PERFECT COMPETITION MARKETPERFECT COMPETITION MARKET

1.1. MANY FIRMSMANY FIRMS

2.2. HOMOGENOUS PRODUCTSHOMOGENOUS PRODUCTS

3.3. FREE ENTRY AND EXITFREE ENTRY AND EXIT

4.4. NO GOVERNMENT INTERVENTIONNO GOVERNMENT INTERVENTION

5.5. PROFIT MECHANISMPROFIT MECHANISM

6.6. PERFECT KNOWLEDGE ABOUT MERKET PERFECT KNOWLEDGE ABOUT MERKET CONDITIONSCONDITIONS

7.7. PERFECT FLUIDITY OF FACTORS OF PERFECT FLUIDITY OF FACTORS OF PRODUCTIONPRODUCTION

8.8. ABSENCE OF DISCRIMINATIONABSENCE OF DISCRIMINATION

9.9. ABSENCE OF TRANSPORT COST ABSENCE OF TRANSPORT COST

MONOPOLY MARKETMONOPOLY MARKET

MONOPOLY IS A MARKET IN WHICH MONOPOLY IS A MARKET IN WHICH THERE ISTHERE IS

A SINGLE SELLER, THERE ARE LARGE A SINGLE SELLER, THERE ARE LARGE NUMBERNUMBER

OF BUYERS , THE PRODUCT HAS NO OF BUYERS , THE PRODUCT HAS NO CLOSE CLOSE

SUBSTITUTE AND THERE ARE BARRIERS SUBSTITUTE AND THERE ARE BARRIERS TO TO

ENTRY.ENTRY.

THE FEATURES OF MONOPOLISTIC THE FEATURES OF MONOPOLISTIC COMPETITIONCOMPETITION

• A LARGE NUMBER OF FIRMSA LARGE NUMBER OF FIRMS

• PRODUCT DIFFERENTIATIONPRODUCT DIFFERENTIATION

• FREE ENTRY AND EXITFREE ENTRY AND EXIT

• NON-PRICE COMPETITIONNON-PRICE COMPETITION

• GROUP CONCEPTGROUP CONCEPT

• HIGH ELASTIC DEMAND CURVEHIGH ELASTIC DEMAND CURVE

• PRODUCT VARIATIONPRODUCT VARIATION

• SOME INFLUENCE OVER PRICESSOME INFLUENCE OVER PRICES

FEATURES OF OLIGOPOLYFEATURES OF OLIGOPOLY

1.1. NUMBERNUMBER

2.2. DIFFERENTIATIONDIFFERENTIATION

3.3. ENTRY ENTRY

4.4. INTERDEPENDENCE IN DECISION MAKINGINTERDEPENDENCE IN DECISION MAKING

5.5. GROUP BEHAVIOURGROUP BEHAVIOUR

6.6. PREPONDENCE OF ADVERTISEMENT AND PREPONDENCE OF ADVERTISEMENT AND SELLING COSTSSELLING COSTS

7.7. INDETERMINATE DEMAND CURVEINDETERMINATE DEMAND CURVE

SWEEZY’S KINKED DEMAND CURVE SWEEZY’S KINKED DEMAND CURVE MODELMODEL

PP

DD

GG

O D QO D Q

(A) PRICE REDUCTION :(A) PRICE REDUCTION :(B) PRICE HIKE:(B) PRICE HIKE:

CONCLUSION:CONCLUSION: Each oligopolist finds Each oligopolist finds himself placed in such a position that he himself placed in such a position that he expects that price cuts by him will be expects that price cuts by him will be followed by price cuts by other firms but followed by price cuts by other firms but price hike by him will not be followed by price hike by him will not be followed by price increase by other firms – so that price increase by other firms – so that oligopolists will stick to existing prices and oligopolists will stick to existing prices and given this view of competitor’s reaction given this view of competitor’s reaction pattern the firm’s demand curve will be pattern the firm’s demand curve will be composite curve DGD characterised by composite curve DGD characterised by kink /bent (G) at the prevailing price level.kink /bent (G) at the prevailing price level.