managerial economics note

8/21/2019 Managerial Economics Note

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Module -1

NATURE, SCOPE, AND METHODS OF MANAGERIAL ECONOMICS

Scarcit, c!oice a"d allocatio" #ro$le%& i" $u&i"e&&' (a&ic )actor& i" $u&i"e&& deci&io"

%a*i"+ Mar+i"ali&%, Eui-%ar+i"ali&% a"d O##ortu"it co&t #ri"ci#le, Ri&*& a"d

u"certai"tie&, Ti%e .alue o) %o"e' U&e o) ua"titati.e tec!"iue& i" %a"a+erial

eco"o%ic& Mat!e%atical )u"ctio"&, deri.ati.e&, o#ti%i/atio" #ri"ci#le& a"d

&tati&tical tec!"iue&'

1' I"troductio"

The term economics is derived from the Greek words 0Oi*o& and 0No%o&' Oikos means

!ou&e!old, Nomos means %a"a+e%e"t. In its original sense economics means household

management.

Economics is the study of how societies use scarce resources to produce valuable

commodities and distribute them among different people.

Efficiency denotes the most effective use of a societys resources in satisfying peoples

wants and needs.

De)i"itio"& o) eco"o%ic&'

There are four different definitions:

1' Cla&&ical or 2ealt! De)i"itio"&- dam !mith the father of economics defined economics as

"economics is a science which deals with the nature and causes of wealth.#

In short $conomics is a science of wealth.

%. 2el)are De)i"itio": - This was given &' (rof. lfred )arshall. In his &ook Principles of

Economics (*+. /e defined "economics is the stud' of mankind in the ordinar' &usiness of

life#, It studies that how a man earns his income and uses it. It e0amines that 1art of the individual

and social action which is most closel' connected with the attainment and use of material

re2uisites of well &eing.

3' Scarcit de)i"itio" - this definition was given &' 3ionel 4o&&ins, a 5 6 &ased economist.

ccording to him "economics is a science which studies human &ehaviour as a relationshi1

&etween ends and scarce means which have alternative uses.#

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4' Moder" De)i"itio"&- this was given &' 7.). 6e'nes and other modern economists, according

to modern definitions, economics is not onl' a stud' of allocation of scarce resources &ut also a

stud' of how the means can &e further increased to secure ma0imum satisfaction of wants and how

the level of income and em1lo'ment in a countr' are determined and how national income grow

over 'ears.

5' Micro Eco"o%ic& a"d Macro Eco"o%ic&

$conomics is traditionall' divided into two main &ranches - micro economics and macro

economics.

Micro- Eco"o%ic&- The term 8micro means small. Therefore, micro economics is the stud' of

onl' a small 1art of the econom'. It is a stud' of small individual units of the economic s'stem.

)icro economics deals with the &ehaviour of individual units of the econom' such as consumers,

workers, investors, owners of land and &usiness firms. )icro economics anal'ses how these

individual units of the econom' make their economic decisions. )icro economics e01lains how

individual consumer makes 1urchase decisions with his limited income and o&tain e2uili&rium.

!imilarl', micro economics studies how an individual 1roducer makes his out1ut and 1rice

decisions.

Macro Eco"o%ic&-- the term 8)acro means large. )acro economics is a stud' of large 1art of

the econom' that is the whole econom'. In other words, it is the stud' of the economic &ehaviour

of the econom' as a whole and not the individual units of the econom'.

It is the stud' of the ggregates and verages. It deals with total consum1tion, total savings, total

investment, total out1ut, total national income, &usiness c'cles, inflation and deflation etc.

)icro economics and macroeconomics are ver' closel' interrelated. 9e cannot understand macro

economic develo1ments without considering the micro economic &ehaviour associated with these

economic units. Therefore, macro economics is &ased on the micro economic foundations of the

aggregate economic 1henomena. In fact, macro economics is an e0tension of micro economic

anal'sis.

3' T!e Pro$le% o) Scarcit a"d Allocatio" o) Re&ource&'

The economic 1ro&lem arises due to scarcit' of resources. $ver' individual consumer, firm and

societ' has to choose from the availa&le alternatives and make the &est use of scarce resources.

$ver' economic societ' faces the &asic 1ro&lems of allocation of its resources which are scarce in

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relation to its unlimited wants. ue to the scarcit' of resources we face three fundamental

1ro&lems.

9hat goods are to &e 1roduced;

/ow to 1roduce these goods;


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Aa1italism is an economic s'stem which &elieves in the free market and 1rice mechanism. It was

dam !mith who first 1o1ulari=ed economics as a scientific disci1line. /e &elieved in the

invisible hand that guided the market. /e 1u&lished his &ook An En!uiry into the "ature and

#auses of $ealth of "ationsin *BBC. /e strongl' argued for the emanci1ation of the market from

the interfered hands of state regulation.

dam !mith re1resented onl' a &eginning. $conomics has undergone several stages of

develo1ments. In *+CB, 6arl )ar0 1u&lished %as #apital which was a massive criti2ue on

ca1italism. &illion 1eo1le even toda' &elieve this as the economic truth. In *@C, 7. ) 6e'nes

through his &ook &eneral 'heory f Employment, )nterest And *oney 1o1ulari=ed the state

intervention as necessar' for achieving full em1lo'ment. !ocialism is an economic s'stem &ased

on the fundamentals of 1lanning and administered 1rices.

8' Met!odolo+ o) Eco"o%ic&

The term methodolog' refers to the wa' in which economists go a&out the stud' of its su&?ect

matter. The methodolog' of economics is &oth 1ositive and normative in its a11roach. $conomics

uses &oth deductive and inductive methodolog' for &uilding its theor'.

8'1' Po&iti.e a"d Nor%ati.e A##roac!

!cience is a s'stematic stud' of an' su&?ect matter. It is the method that makes science rather than

its su&?ect matter. 9hat is im1ortant in science is its s'stematic methodolog'.

!ciences can &e classified into 1ositive and normative sciences. (ositive sciences concern what is,

what was or what will &e the nature of the su&?ect of its stud'; /owever, normative sciences

concern a&out what ought to &e, what is good or what is &ad; In this sense, methodolog' of

economics is &oth 1ositive and normative in nature.

In economics, we use 1ositive statements. (ositive statements in economics concern what is, what

was and what will &e the economic 1henomena that we stud'; (ositive economics e01lains how

the economic world o1erates. (ositive economics is &ased on facts and o&servations.

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Normative economics concerns what ought to &e and what is good or &ad for the individual

consumers, firms and the societ'; Normative economics 1ro1oses 1olic' solutions to societ's

1ro&lems. It is also known as welfare economics. (ositive economics is descri1tive in nature,

whereas, normative economics is 1rescri1tive in nature.

8'5' Deductio" a"d E%#irical Te&ti"+

eduction and em1irical testing is the most im1ortant method of en2uir' followed in economics.

eduction is a method of thinking that starts with a priori1ro1osition which seem reasona&le to

the investigator. A priori 1ro1osition is &ased on some theories and not directl' derived from

em1irical evidence. This 1ro1osition is demonstrated logicall' in the light of a sim1le model. The

model is set u1 &' a num&er of assum1tions concerning the &ehaviour of the economic varia&les

under investigation. This 1rocess of logical reasoning


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$conomic models are com1osed of diagrams and e2uations. The' e01lain the relationshi1 &etween

economic varia&les. $conomic models are constructed with the assum1tion of ceteris paribus -

other things remaining the same. 9hile making the assum1tions, economists ignore man' of the

details of the real world that are irrelevant to the stud' of the investigator. ll economic models

sim1lif' the realit' in order to im1rove our understanding of the data. Three im1ortant instances of

economic models are circular flow of income, 1roduction 1ossi&ilit' frontier, market e2uili&rium.

1' Ma"a+erial Eco"o%ic&

)anagerial economics, 1o1ularl' known as >usiness economics or $conomics for >usiness

ecisions, is an a11lied &ranch of economics. It is associated with &usiness management.

)anagerial economics originated in the earl' 'ears of *s, when &usiness management &ecame

so com1le0, that it needed constant a11lication of economic 1rinci1les for solving the 1ractical

issues and 1ro&lems of &usiness. >usiness economics uses micro and macroeconomic conce1ts and

1rinci1les to make decisions on da' to da' o1erational issues of &usiness.

5' De)i"itio" o) Ma"a+erial Eco"o%ic&

")anagerial economics refers to the a11lication of economic theor' and tools of anal'sis of

decision science to e0amine how an organi=ation can achieve its aims or o&?ectives most

efficientl'*

.# The meaning of this definition can &e e0amined with the hel1 of the following

diagram.

C

Management Decision Problems

Economic TheoryMicro Economics

Macro Economics

Decision SciencesMathematical Economics

Econometrics

Managerial EconomicsApplication of economic theory

and decision science tools tosolve managerial decision

problems


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5'1' Ma"a+e%e"t Deci&io" Pro$le%&

)anagement decision 1ro&lems arise in an' organi=ation- &e it a firm, a non-1rofit organi=ation or

a government agenc'- when it seeks to achieve some goals or o&?ective su&?ect to some

constraints. For instance, a firm ma' seek to ma0imi=e 1rofits su&?ect to limitations on the

availa&ilit' of essential in1uts in the face of legal constraints. hos1ital ma' seek to treat as man'

1atients as 1ossi&le at "ade2uate# medical standards with its limited 1h'sical resources


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economics e01ress in e2uation form, the economic models 1ostulated &' economic theor'.

$conometrics a11lies statistical tools, 1articularl' regression anal'sis to real world data to estimate

the models 1ostulated &' economic theor'. To conclude, managerial economics refers to the

a11lication of economic theor' and decision science tools to find the o1timal solution to

managerial decision 1ro&lems.

ccording to !1encer and !iegalman, ")anagerial economics otherwise known as >usiness

$conomics is the integration of economic theor' with &usiness 1ractices for the 1ur1ose of

facilitating decision making and forward 1lanning &' management#. From this definition, we

o&serve the im1ortant characteristics of )anagerial economics as following.

)anagerial economics is an a11lied &ranch of economics.

)anagerial economics uses economics theories for &usiness 1ractices. It is associated with

a11lication of economic theories in taking &usiness decisions.

)anagerial economics facilitates management decisions.

)anagement decisions are associated with the o1erational issues of dail' &usiness.

)anagement decisions also 1ertain to future 1lanning of the &usiness.

)cNair and )eriam defined, ")anagerial $conomics consists of the use of economic mode of

thought to anal'se &usiness situations#. This definition highlights the following features of

)anagerial economics.

)anagerial economics is associated with &usiness situations.

)anagerial economics is an anal'tical science. )anagerial economics anal'ses the

&usiness situations.

)anagerial economics is concerned with onl' those economic mode of thought which are

useful n e01laining the &ehaviour of the &usiness units.

)anagerial $conomics is that 1art of economic science, which uses economic 1rinci1les to anal'se

&usiness 1ro&lems to take rational &usiness decisions.

3' C!aracteri&tic& o) Ma"a+erial Eco"o%ic&


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Ma"a+erial Eco"o%ic& Pure Eco"o%ic&

*. )anagerial economics is micro innature.

(ure economics is &oth micro and macroin nature.

%. )anagerial economics is a11lied

economics, which deals with 1ractical

a11lications of economic 1rinci1les.

(ure economics is theoretical and

a&stract.

@. )anagerial economics deals with the

1ro&lems of firms.

(ure economics is concerned with

studies of firm, industr', individual

consumer and the econom' as a whole.

D. )anagerial economics is focused on

onl' one of the theories of distri&ution

i.e. 1rofit.

(ure economics deals with all the

theories of distri&ution, such as wage,

rent, interest and 1rofit.

11' O$;ecti.e& o) Ma"a+erial Eco"o%ic&

>usiness is an economic activit' that involves transformation of in1uts into out1uts. In this 1rocess of

transformation, the value of out1uts should e0ceed the value of in1uts used. In this sense, &usiness is a

1rocess of creating net value to 1roducts. The success of &usiness is measured &' the net value

addition or sur1lus creation, which is otherwise called as 1rofit. $conomic 1rinci1les are a11lied for

this value addition 1rocess of &usiness. In this res1ect, )anagerial $conomics has the following

o&?ectives.

11' 1' Deci&io" Ma*i"+

The most im1ortant function of management in a &usiness is to take decisions on various &usiness

issues. The success of &usiness de1ends on the right decisions taken &' the management. decision

maker is faced with two or more alternative courses of actions to achieve a 1redetermined o&?ective

like 1rofit-ma0imisation, sales-o1timi=ation or cost-minimi=ation. decision has to &e taken as to

which course of action is to &e taken to attain the &est result. ecision-making is a 1rocess of selecting

a 1articular course of action from a num&er of alternatives.

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ecision making with res1ect to &usiness issues can &e classified into two &road categories.

O1erational issues

Issues related to forward 1lanning

11' 1' 1' Deci&io" Ma*i"+ o" O#eratio"al I&&ue& o) (u&i"e&&

O1erational issues of &usiness 1ertain to da'-to-da' affairs of &usiness and its 1lanning for future.

The o1erational issues include the use of in1uts like men, materials, machines and management. The'

also include the alterations and ad?ustments of in1uts in accordance with the change in cost of

1roduction and availa&ilit' of resources. )anagement does not 1ose much difficult' in the decision-

making as1ects of o1erational issues &ecause it is related to varia&les, which are more or less

1redicta&le for the 1resent use.

)anagerial $conomics em1lo's economic conce1ts and theories to solve &usiness 1ro&lems. It hel1s

to achieve o&?ectives of firm like sales ma0imisation, attaining leadershi1 in the market, cost-

minimisation and 1rofit ma0imisation.

11'1' 5' For7ard Pla""i"+

Forward 1lanning is the most delicate and com1licated issues of decision making. It relates to

formulation of 1lans for future &usiness. It involves 1rediction and forecasting. Formulation of 1lans

for future is not an eas' task, &ecause future is uncertain. It demands utmost care and 1rudence from

the 1art of a decision maker. slight mistake in 1rediction can result in the colla1se and immense loss

for &usiness.

ccurate information a&out economic varia&les like future demand, cost, 1rofit etc., is rarel' availa&le

to the manager. /e has to make use of the 1ast and current data for 1redicting the future economic

models. The success of &usiness 1lan de1ends u1on the accurac' of such 1redictions a&out future

estimates of economic varia&les. >usiness economics makes use of various statistical tools for demand

forecasting and 1rofit 1lanning.

15' Sco#e o) Ma"a+erial Eco"o%ic&

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The sco1e of an' su&?ect deals with its su&?ect matter. The sco1e of &usiness economics consists of

various economic conce1ts and theories, which e01lain &usiness 1ro&lems &etter. The following are

the sco1e of >usiness $conomics.

15'1' T!eor o) De%a"d: (roduction and sale of a 1roduct de1ends u1on its demand. /ence a

decision maker should estimate the demand for his 1roduct 1rior to its actual 1roduction. Forecast ofdemand is essential for out1ut decision and 1urchase of resources. emand forecasts hel1 in taking

these decisions. Theor' of demand e01lains the consumer &ehaviour in making 1urchase decisions and

various factors that influence the demand for a 1articular 1roduct. emand anal'sis ena&les the firm to

ad?ust its 1roduction in tune with the 1revailing market conditions of demand.

15'5' T!eor o) Co&t: Aost estimates are essential for making 1rice decisions. ccurate cost estimates

are difficult to make. 9ith the hel1 of economic cost and accounting cost drawn from the records of

the firm, the 1rice is generall' fi0ed adding a reasona&le 1rofit.

15'3' Price T!eor: (rice determination is another im1ortant decision the manager has to make. )icro

economics otherwise known as (rice theor' e01lains how 1rices of commodities are determined in the

commodit' market. For in-de1th anal'sis of 1rice determination it contains:

Theor' of demand of the anal'sis of consumer &ehaviour.

Theor' of 1roduction and cost or the anal'sis of 1roducer &ehaviour.

Theor' of 1roduct 1ricing or 1rice determination under different market structures.

15'4' Prici"+ Policie&: The success of the firm de1ends on its 1ricing 1olic'. 9hen the 1roduct enters

the market two alternative strategies are followed.

Pe"etratio" Prici"+: 5nder this 1ricing 1olic' the firm sets a ver' low 1rice in the 1roduct

introduction stage, in order to com1ete with the e0isting rival firms and 1enetrate into the

market. $.g. +ijay 'imesdail' entered into the market with a 1rice of 4s*.H-.

S*i%%i"+ Prici"+: In this case, a firm sets a ver' high 1rice in the 1roduct introduction stage

and rea1s ma0imum returns. s com1etitors enter into the market, the 1rice would &e reduced.

15'8' T!eor o) Pro)it: (rofit making is the 1rimar' o&?ective of the firm. The survival of the firm

de1ends on the 1rofit. >ut 1rofits are uncertain. 5ncertaint' is caused &' the unforeseen variations in

costs and revenues of the firm. /ence, 1rofit 1lanning and measurement are difficult tasks. (rofit

theor' hel1s decision makers in managing, measuring and 1lanning the 1rofit of the firm.

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15'9' Ca#ital Ma"a+e%e"t: Aa1ital management is associated with 1re1aration of a long-term &udget

1lanning of the &usiness firm. It deals with costing of ca1ital, rate of return and 1ro?ect evaluation.

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the changing situations. )anagerial economist has following im1ortant roles to 1la' in the

functioning of &usiness.

14'1' Stud o) (u&i"e&& Or+a"i&atio": )anagerial economist anal'ses various internal factors, which

are within the control of the firm that can influence the &usiness. These issues are related to 1rice and

out1ut decisions, investment decisions, e01ansion of the si=e of the firm, 2ualit' control 1rogrammes,arranging finance from various sources, and selection of a11ro1riate 1ricing 1olic'.

14'5' Stud o) E6ter"alitie&: )anagerial economist has to anal'=e the e0ternal factors that influence

firms decisions. These e0ternal factors consist of trends in national income, &usiness c'cles, fiscal

1olic' and international trade.

14'3' S#eci)ic Role: )anagerial economist conducts market research and surve's in order to monitor

the market share, consumer 1references, demand, etc. and make recommendations for the firm.

14'4' Pro.ide Eco"o%ic I")or%atio": )anagerial economist has to collect data regarding rival

1roducts, market 1otential, demand changes, sales trends, ta0 1olic' etc. and make them availa&le to

firms decision making 1rocess.

In addition to the a&ove, a )anagerial economist has the following res1onsi&ilities.

Forecasting of demand.

(re1aration of sales targets.

Forecasting the changes in costs and &usiness conditions &ased on market research.

Aonducting market surve' to decide the nature of com1etition e0isting in the market.

5nderstanding various issues and 1ro&lems faced &' the industr'.

ssisting in &usiness 1lanning.

iscovering new 1ossi&ilities for &usiness firm.

dvising on 1rice and investment decisions of the firm.

$valuating the 1ro?ect.

>uilding micro economic and macroeconomic models of firms &ehaviour.

>riefing the management on contem1orar' issues related to domestic and glo&al econom'.

Fir% a"d I"du&tr

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Firm is a single unit of &usiness o1eration of 1roduction that em1lo's factors of 1roduction to

1roduce goods and services under given state of technolog'.

Industr' is a grou1 of firms which are in some form closel' related to each other. $0am1le:

!oa1 Industr', !ugar Industr', I. T. Industr', Film Industr', 3eather Industr' etc.

Two criteria are commonl' used for the definition of an industr', the 1roduct &eing 1roduced


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decision is 1rofita&le if I4 IA or if it reduces some cost more than it increases others. It is also

1rofita&le if it increases some resources more than it decreases others and it decreases costs more

than it decreases revenue.

$0am1le: The 1roduction ca1acit' of a firm is *,, units. It 1roduces onl' , units and

sells it to Indian market at 4s.* 1er unit.

The e01enses are:3and J >uilding - 4s. *,,

$2ui1ments and )achiner' K 4s.%,

4aw )aterial - 4s. ,

3a&our - 4s. ,

dministrative $01enses: 4s. *,

The com1an' receives an order from )ala'sia for @, units L 4s.B 1er unit.

9hat is the Incremental 4evenue and Incremental Aost;

9hat difference it makes in the total 1rofitHloss if the order is acce1ted;

!hould the com1an' acce1t the order;

nswer: The total e01enses for 1roducing and selling , units M *,,%,

,,*, M4s. %,@,.

Total 4evenue &' selling , units M (rice 0 uantit' M * 0 , M 4s. ,,

Total (rofit in Indian )arket M Total 4evenue K Total Aost M ,, K %,@, M 4s. %,B,

Incremental cost of 1roducing @, units more M 4aw )aterial 3a&our M 0 @,

0 @, M 4s. C,.

Incremental 4evenue M (rice 0 uantit' M B 0 @, M 4s. %,*,

Incremental (rofit M I4 K IA M %,*, K C, M 4s. *,,.

The com1an' should acce1t the order. 9hile acce1ting the order and 1roducing and selling @,

units more, it can earn an incremental 1rofit of 4s. *,,.

18'3' T!e Ti%e =alue o) Mo"e

The 1rocess of converting the 1resent mone' into future value and future mone' into 1resent value

is called discounting conce1t or the time value of mone'. 1resent gain is valued more than a

future gain. Thus, in investment decision making, discounting of future value with the 1resent one

is ver' essential.

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The 1resent value of a sum to &e received at an' future date can &e found &' using the following

formula

(PM 9here (P is the (resent Palue of )one', is the sum of mone', 8i is the rate

of interest 1revailed in the market, and 8n is the time for which the mone' to &e ac2uired.

Aalculating the (resent Palue usiness decisions involve future revenues and costs. >ut it is not 1ossi&le to 1redict future with

great accurac'. Future involves change. The changes ma' &e known or unknown.

The result of known changes ma' &e either definite or indefinite. The definite result or outcome

related with known changes is known as certainty. On the other hand if changes are unknown,

their outcome is indefinite and the risk element is incalcula&le and immeasura&le. This is called as

>u"certai"tand can &e insured. !uch risks can &e estimated and can &e insured. For e0am1le,

theft, loss &' fire, death &' accident etc. are insura&le risks. !uch insura&le risks do not result in

the emergence of 1rofits.

The indefinite nature of outcome or result related with known changes involves risk. For

e0am1le: changes in 1rice, demand, su11l' etc. are non insura&le risks. !uch non-insura&le risks

give 1rofit to the firm. It is onl' the non insura&le risks which involve uncertaint' result in

emergence of 1rofits.

18'8' Mar+i"ali&%

The conce1t of )arginalism finds its origin in the scarcit' of resources. s resources are scarce,

the' have to &e allocated ver' carefull'. For deciding whether an additional unit of la&our or

ca1ital should &e em1lo'ed or not, one has to know the additional out1ut e01ected there from.

This gives rise to )arginal 4evenue and marginal costs. One of the most im1ortant lessons of

economics is that 'ou should look at the marginal costs and marginal &enefits of decisions and

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ignore 1ast or sunk costs. This is the marginal 1rinci1le, which means that 1eo1le will ma0imi=e

their incomes or 1rofits or satisfactions &' counting onl' the marginal costs and marginal &enefits

of a decision. There are countless situations in which the marginal 1rinci1le a11lies.

)arginal 4evenue is defined as the amount of mone' received &' selling one more unit of the

commodit'. )arginal Aost is the cost incurred to 1roduce an additional unit of the commodit'.

s long as the )arginal 4evenue is greater than )arginal cost, the firm generates 1rofit. Thema0imum 1rofit of a firm is where the difference &etween Total 4evenue and Total Aost is

ma0imum. t the ma0imum 1rofit, T4 and TA are 1arallel and therefore have e2ual slo1es, )4 M

)A. Therefore, the marginal 1rinci1le of e2uating marginal cost and marginal revenue is the rule

for 1rofit ma0imi=ation of the firms. If 1roduction is carried on &e'ond this 1oint, marginal

revenue will &e less than marginal cost and firm will incur loss.

18'9' Eui-%ar+i"al Pri"ci#le

The $2ui-marginal 1rinci1le is fundamental in economic anal'sis. It is ver' significant in determining

o1timal condition in resource allocation. ccording to e2ui-marginal 1rinci1le, a factor in1ut should

&e em1lo'ed in different activities in such a 1ro1ortion that its value of marginal 1roduct is e2ual


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marginal utilit' states that the consumer would distri&ute his mone' income &etween the goods in such

a wa' that the utilit' derived from the last ru1ee s1ent on each good is e2ual.

U&e o) ?ua"titati.e Tec!"iue& i" Ma"a+erial Eco"o%ic&

9hether it is factor', farm, or a domestic kitchen, resources of men, machine and mone' have to &e

coordinated against time and s1ace constraints to achieve given o&?ective in a most efficient manner.The manager has to

Function

relationshi1 &etween two varia&les

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--------------

=5

?ue&tio"&

*. efine the following:

i )anagerial economics

ii Forward 1lanning

iii )icroeconomics

iv !ocialism

v Induction

vi $conomic model

vii (ositive economics

viii eduction

i0 $conomic 1ro&lem

0 Normative economics

0i (roduction 1ossi&ilit' curve

0ii )arket e2uili&rium

0iii ca1italism

0iv ecision-making

0v O1erational issues

0vi Incremental Aonce1t

0vii O11ortunit' Aost

0viii )arginalism

0i0 $2ui-marginal 1rinci1le

00 iscounting 1rinci1le

00i 4isk and 5ncertaint'

%. $01lain the nature of )anagerial economics

@. istinguish &etween 1ure economics and )anagerial economics

D. istinguish &etween 1ositive economics and normative economics

. istinguish &etween micro and macro economics.

C. 9hat is economic model; Give e0am1les.

B. $01lain circular flow of income in a sim1le econom'.

+. efine )anagerial economics and &ring out its sco1e of stud'.

. 9hat is the utilit' of &usiness economics;

*. $01lain the function of &usiness economics in &usiness decision-making 1rocess.

**. iscuss the role and res1onsi&ilities of )anagerial economist.

%


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MODULE 5DEMAND ANAL@SIS, ESTIMATION AND FORECASTING

De%a"d t!eor' T#e& o) de%a"d, De%a"d Ela&ticit T#e&, %ea&ure%e"t a"d )actor&,

Ela&ticit o) de%a"d a"d Mar+i"al Re.e"ue' U&e o) ela&ticit co"ce#t i" $u&i"e&&

deci&io" %a*i"+' E&ti%atio" o) De%a"d )u"ctio"' De%a"d )oreca&ti"+

I%#orta"ce a"d %et!od&' ?ualitati.e a"d ?ua"titati.e Tec!"iue&'

Mea"i"+ o) De%a"d

In economics, demand indicates the 2uantit' of a commodit' or service the consumer is willing

to 1urchase at a 1rice. The term demand is distinct from desire, need or want. emand is not

mere desire to &u' a commodit' or service. 9hen desire is &acked &' ca1acit' to &u' it is called

demand. Thus demand indicates desire to &u' a commodit' &acked &' his a&ilit' to &u' and

willingness to 1a' for it. emand for a commodit' thus im1lies three elements:

De&ire to $u

A$ilit to $u

2illi"+"e&& to #a )or'

The term demand &ecomes meaningful onl' when it has a reference to the 1rice, a 1articular

1eriod and 1lace. emand refers to the 2uantit' of a commodit' which consumers are willing to

&u' at a 1rice at a 1articular 1eriod.

De%a"d Fu"ctio"

emand is a multivariate relationshi1 that is determined &' man' factors. !ome of the most

im1ortant factors that determine demand for a 1articular 1roduct are its 1rice, consumers

income, 1rices of other goods, consumers tastes, income distri&ution, total 1o1ulation,

consumers wealth, credit availa&ilit', government 1olic' and 1ast level of income and demand.

emand function e01lains that demand for a commodit' de1ends on various factors that

influence it. emand function can &e e01ressed as the following e2uation.

%*


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0M f


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Fig. (rice demand

I"co%e de%a"d:

Income demand refers to the 2uantit' of a commodit' or service that consumer is willing to &u'

at various levels of his income, other things like 1rice of the goods, consumers taste, fashion and

1rices of other commodit' remain constant. Generall', there is a direct relationshi1 &etween

income and 2uantit' demanded. 9henever income rises, consumer can &u' more 2uantit' of a

commodit' and when his income falls, he &u's less. Income demand curve slo1es u1ward in caseof normal goods. >ut in case of inferior goods, income demand curve slo1es &ackwards. This is

e01lained in the following diagram.

Fig. Income demand curve. 9hen income increases from OR to OR *, demand increases from

O to O*.

%@


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Cro&& De%a"d

emand for a commodit' is also influenced &' the 1rice of the related goods. 4elated goods can

&e su&stitutes or com1lements. Two goods are said to &e su&stitutes when the' can satisf' same

want. For instance, tea and coffee can &e considered as su&stitutes if the' can 2uench the thirst of

the consumer. Two goods are said to &e com1lements when the' have to &e used together i.e. useof one good necessitates the use of the other. For instance, car and 1etrol are com1lement goods.

Aross demand refers to the 2uantit' of a commodit' that a consumer is 1re1ared to &u' at a given

time due to change in the 1rice of the related goods, given his income and 1rice of that 1articular

goods as constant. In case of su&stitutes, cross demand 1ositive i.e. when the 1rice of a su&stitute

good increases, demand for the other su&stitute good ywill increase. nd when 1rice of a

su&stitute goods decreases, it leads to decrease in demand for its su&stitute goods y. For

instance, when 1rice of tea increases demand for coffee increases. 9hen 1rice of tea decreases,

demand for coffee decreases. In case of com1lements, cross demand is negative. 9hen 1rice of a

com1lement goodincrease, demand for the other goodsydecreases. For instance, when the

1rice of 1etrol increases, demand for car decreases. The following diagram e01lains the cross

demand function.

Fig. Aross demand curve for su&stitutes is 1ositivel' slo1ed. 9hen the 1rice of ygood increases

from O( to O(*demand forgood increases from O to O*.

%D


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Fig. Aross demand curve for com1lements is negativel' slo1ed. 9hen the 1rice of ygood rises

from O( to O(*demand forgood decreases from O to O*.

Deri.ed De%a"d: emand for a 1roduct can &e also derived from the demand for othercommodities. For instance, demand for cement is derived from the demand for construction

activities.

Deter%i"a"t& o) De%a"d

(rice of the 1roduct


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Ta$le 1. Individual emand !chedule for carrot.

(rice


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La7 o) De%a"d

Pro)' Mar&!all stated the law of demand as >ot!er t!i"+& re%ai"i"+ t!e &a%e, ua"tit

de%a"ded o) a #roduct .ar i".er&el 7it! it& #rice . The law of demand e01lains the

inverse relationshi1 &etween 1rice and 2uantit' demanded. 9henever, the 1rice of a commodit'

rises, 2uantit' demanded of that commodit' falls and whenever its 1rice falls, 2uantit' demanded

of that commodit' rises. The o1eration of the law of demand is &ased on following assum1tions.

1' Co"&u%er& i"co%e re%ai"& co"&ta"t If a consumers income increases, he can &u' more

even at higher 1rices. /ence the law is invalidated if consumers income changes.

5' Price& o) ot!er co%%oditie& re%ai" co"&ta"t If the 1rices of su&stitutes or com1lement

goods change, law of demand will not o1erate.

3' Ta&te a"d #re)ere"ce o) co"&u%er& do "ot c!a"+e If consumers taste and 1references

change, he will not &u' more 2uantit' of a commodit' when its 1rice decreases. In such case law

of demand will not o1erate.

4' Fa&!io" doe& "ot c!a"+e If fashion changes, even at lower 1rices, goods will not &e

demanded as such goods &ecomes out of fashion.

8' T!ere i& "o e6#ected c!a"+e i" )uture #rice o) co%%odit If 1rices are e01ected to fall or

rise in future, consumers will either 1ost1one or 1re-1one the 1urchase decisions and the law of

demand will not o1erate.

9' Po#ulatio" re%ai"& co"&ta"t: If si=e and com1osition of the 1o1ulation change the law of

demand will not o1erate.


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1B' Go.er"%e"t #olic: Government 1olic' of ta0 and e01enditure influences the consumers

income and 1urchase decisions. /ence these varia&les should remain constant if law of demand

is to o1erate.

E6ce#tio"& to La7 o) De%a"d

1' Gi))e" Parado6 !ir 4o&ert Giffen an Irish economist conducted an em1irical stud' of law of

demand in case of inferior goods. The stud' found that when the 1rice of an inferior

goods falls, 1eo1le cut down their e01enditure on these goods and shifts to su1erior

goods, which consumer could not afford to &u' &efore.

In his em1irical stud' of 1otato and &eef, Giffen found that when 1rice of 1otato decreased,

instead of &u'ing more of 1otato, consumer s1ends his increased real income on &eef, which he

could not afford to &u' &efore. On the contrar', when the 1rice of 1otato rises, the' sto1 &u'ing

&eef and demand more of 1otato as &efore. This is due to fall in the real income of the consumer

due to 1rice rise. Thus law of demand is considered an e0ce1tion to inferior goods. Income

consum1tion cure in case of inferior goods slo1es &ackwards as a result if negative income

effect. This 1henomenon is known as Giffen (arado0.

5' =e$le" E))ect

Thorstein Pe&len, an merican $conomist, contends that there are certain commodities, which

are 1urchased &' rich 1eo1le not for their direct satisfaction, &ut for their 8sno&-a11eal or show

off. In case of these status s'm&ol commodities, it is not the 1rice, which is im1ortant, &ut the

1restige conferred &' that commodit' on a 1erson that makes him to go for it. $.g. diamonds,

1recious stones, world famous 1aintings, commodities used &' world famous 1ersonalities etc.

The law of demand does not o1erate in these goods. The demand for such commodities is

directl' related to their 1rice. 9hen their 1rice increases consumers tend to &u' more of such

goods and when their 1rice decreases the' &u' less. This 1henomenon is called Pe&len 1arado0.

3' S#eculatio"

!1eculation is guesswork on the 1rices of stocks. (eo1le &u' stocks and securities and kee1 it

when their 1rices increase thinking that it is going to further increase and the' will make a 1rofit

%+


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out of it. On the contrar', when 1rices of stocks and securities decrease the' are not demanded as

1eo1le think the' are going to further decrease and the' will make a loss &' 1urchasing this. !o

when the share 1rices fall 1eo1le sell off their shares to reduce their loss. !1eculation is an

e0ce1tion to law of demand.

4' Future E6#ectatio" i" Price&

9hen 1eo1le e01ect a further rise in 1rice of a 1articular commodit' in near future, demand for

it increases &ecause 1eo1le tr' to 1urchase and kee1 it. !imilarl', when 1rices are e01ected to

fall in near future, 1eo1le 1ost1one their 1urchase decisions. In such cases law of demand does

not o1erate.

8' De%a"d For Nece&&arie&

emand for necessar' goods like medicine does not fall when their 1rice rises. The' are

e0ce1tions to law of demand.


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goods whose utilit' cannot &e e0hausted &' a single use. !uch goods can &e used re1eatedl' or

continuousl' over a 1eriod of time e.g. furniture, T.P., 4efrigerator etc. The demand for such

commodit' is long-term demand.

3' Co"&u%er +ood& de%a"d a"d #roducer& +ood& De%a"d

Aonsumer goods are goods used for final consum1tion. The' satisf' human wants directl'.

/ence, there is a direct demand for them in the market e.g. food, clothes, &everages etc.

Aonsumer goods are further divided into dura&le consumer goods and non-dura&le consumer

goods. The dura&le consumer goods are those items, which can &e used more than once and over

a 1eriod of time. The non-dura&le consumer goods are those goods, which cannot &e consumed

more than once.

(roducer goods are those goods which are 1urchased &' the 1roducers and are used for the

1roduction of other consumer goods or 1roducer goods. The' satisf' wants indirectl'

contri&uting towards the 1roduction of consumer goods. (roducers goods are classified into two

categories:


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dvertisement elasticit'

Price Ela&ticit o) De%a"d

(rice elasticit' of demand measures the e0tent of res1onse of demand for a commodit' to a given

change in its 1rice. )athematicall' it is e01ressed as the ratio of the relative change in 2uantit'demanded due change in 1rice.

e1 M (ercentage Ahange in uantit' emanded

(ercentage Ahange in (rice

e1 M UH

U(H (

M


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e1 M UH

U(H (

e1 M


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Fig.* shows that 2uantit' demanded at 1ricepis infinite.

Per)ectl I"ela&tic De%a"d

emand is 1erfectl' inelastic when there is a&solutel' no change in 2uantit' demanded at an'

change of 1rice. In case of 1erfectl' elastic demand, demand curve will &e vertical straight line.

In case of 1erfectl' inelastic demand, degree of elasticit' is =ero


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Relati.el Ela&tic De%a"d

9hen the 1ro1ortion of change in 2uantit' demand is greater than the change in 1rice demand is

said to &e relativel' elastic. In case of relativel' elastic demand, the numerical value of elasticit'is greater than one &ut less than infinit'


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(oint method

rc method

Outla Met!od

(rof. )arshall develo1ed outla' method to measure the degree of elasticit' of demand.

ccording to this method, we e0amine whether the total outla' of the consumer or revenue of the

seller has changed after the 1rice change. Total outla' of total revenue M (rice S uantit'

1urchased or sold. If the total outla' remains unchanged, after the change in 1rice, the demand is

said to &e unit elastic


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U M


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9hen 1rice change from % to 4s.D in the Ist case

* M B % M C

(* M % (% MD

U M


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U( M


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t 1oint c, 1rice elasticit' e1M A>HA M *E note that the line segment A> and A are of e2ual

length.

t 1oint , e1M > H E e1 M W.

t 1oint >, e1M H >E e1 M .

t 1oint , e1M d& H adE e1 * &ecause d&ad. Note that the length of line segment > is

more than .t 1oint $, e1M $> H $E e1 V * &ecause e&Vae. Note that the length of line segment $> is

less than $.

Arc Ela&ticit o) De%a"d

rc method is used to measure the elasticit' of demand for &ig change in 1rice. The formula for

measuring 1rice elasticit' f demand through arc method is

e# Ori+i"al ua"tit- ua"tit a)ter c!a"+e Ori+i"al ua"tit ua"tit a)ter

c!a"+e

----------------------------------------------------------------------------------------------Original 1rice K 1rice after changeH Original 1rice 1rice after change

e1M < - *H


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rc method is the most 1o1ular method of measuring elasticit' of demand.

Factor& Deter%i"i"+ Price Ela&ticit o) De%a"d

The 1rice elasticit' of demand de1ends on several factors. The' are as follows:-

1' T!e Nature o) Co%%odit emand for necessar' goods do not change with changes in their

1rice, and therefore their demand is inelastic. e.g., demand for salt or medicine. On the other

hand, demand for lu0ur' goods is elastic. 9hen their 1rices increase, consumers would 1ost1one

their 1urchase and when their 1rice falls, consumers are induced to 1urchase them e.g., demand

for air conditioners, electric chimne's etc.

5' Su$&titute& emand for those goods, which have several su&stitutes, is usuall' elasticE

&ecause a slight reduction in the 1rice of su&stitute goods leads to su&stitution effect and attracts

consumers to goods whose 1rice has fallen. On the other hand, a slight increase in its 1rice drives

awa' consumers to 1urchase other su&stitutes e.g., demand for toilet soa1s.

3' E6te"t o) U&eemand for commodities, which have a variet' of use is elastic. 9hen their

1rice rises, their consum1tion will &e restricted to most im1ortant use. Aommodities, which have

limited use, are of inelastic demand.

4'Pro#ortio" o) I"co%e S#e"tIf the 1ro1ortion of income s1ent on a 1articular commodit' is

ver' small, its demand will &e inelastic e.g., demand for salt, matches etc.

8'Po&&i$ilit o) #o&t#o"e%e"t o) u&e: If consumers can 1ost1one the use of a commodit', its

demand will &e elastic. 5rgent wants create inelastic demand.

9' Dura$ilit o) Good&ura&le goods are elastic &ecause consumers re1lace them when their

1rice falls and 1ost1one their 1urchase when 1rice increase e.g., a consumer thinks of re1lacing a

car when its 1rice falls.


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U&e& o) Price Ela&ticit

6nowledge of 1rice elasticit' is a good guide to &usinessman. It ena&les him to take decisions on

fi0ation of 1rice of his 1roduct according to the nature of elasticit' of commodities. If the

1roduct is of elastic demand, managers can increase total revenue of the firm &' a reduction in its

1rice. In that case 1rice cut is advantageous to the firm &ecause reduction in 1rice will increasetotal revenue &ringing in more 1rofit with it. On the other hand, if the 1roduct has inelastic

demand, reduction in 1rice will onl' reduce total revenue. In such case, an increase in 1rice is

more advantageous to the firm, &ecause that will increase total revenue, and 1rofit.

I"co%e Ela&ticit o) De%a"d

Income elasticit' of demand refers to the degree of res1onsiveness of 2uantit' demanded of a

commodit' due to a change in consumers income, kee1ing other factors constant. Income

elasticit' can &e measured &' either &' 1oint method or arc method.

Poi"t Met!od

e' M (ro1ortionate Ahange in uantit' emanded

(ro1ortionate Ahange in Income

e' M < -*H

< R-R*HR

Arc Met!od

e' M < -*H


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3' Po&iti.e I"co%e Ela&ticit In this case an increase in consumers income is followed

&' an increase in 2uantit' demanded e.g. consumer &u' more 2uantities of normal goods

when their 1rice falls.

U&e& o) I"co%e Ela&ticit

The knowledge of income elasticit' is useful to &usiness mangers in forecasting change in

demand for their 1roducts under different income situations. !imilarl', sales forecast are done

for different 1hases of &usiness c'cles on the &asis of income elasticit' of demand.

Cro&& Ela&ticit o) De%a"d

Aross elasticit' of demand refers to the degree of res1onsiveness of 2uantit' demanded for a

commodit'due to a change in the 1rice of its related commodit' sa' y. Aross elasticit' can &e

measured either &' 1oint method or &' arc method.

Poi"t Met!od

ec M (ro1ortionate Ahange in uantit' emanded of S

(ro1ortionate Ahange in (rice of R

ec M < 0-0*H

< (R-(R*H(R

Arc Met!od

e' M < -*H


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U&e& o) Cro&& Ela&ticit

The knowledge of cross elasticit' is useful to &usiness mangers in making 1rice decisions of

1roduct, which has several su&stitutes in the market. !imilarl', 1rice decisions of com1lement

goods are &ased on cross elasticit' conce1t.

De%a"d Foreca&ti"+

Mea"i"+ o) De%a"d Foreca&ti"+

Forecast is an estimation or 1rediction of future situation. emand forecasting means 1redicting

the e01ected changes in future demand for a 1articular 1roduct or service. !ince 1roduction is

&ased on the antici1ated demand, forecasting ena&les the firm to 1roduce o1timum 2uantit' of

out1ut. emand forecasting hel1s to avoid over 1roduction or under 1roduction. Inaccurate

demand forecasts can result to loss in &usiness and unnecessar' waste of resources.

O$;ecti.e o) De%a"d Foreca&ti"+

emand forecasting has the following o&?ectives.


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achieved. /igher targets can discourage salesmen and 1romotion incentives will &ecome futile

and meaningless.


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efficienc' of ca1ital. 4ate of interest is another factor that influences the demand for ca1ital

goods.

Met!od& o) De%a"d Foreca&ti"+

There are several methods for forecasting the demand for an esta&lished 1roduct. In economictheor', demand forecasting methods are &roadl' divided into three grou1s.

*. !urve' methods

%. $01eriments methods

@. !tatistical methods

1' Sur.e Met!od: Generall' there are three t'1es of surve's conducted.

*. Aonsumer surve' through direct interview.

%. !urve' of &u'ers intention

@. !urve' of e01ert o1inion.

1' 1' Co"&u%er Sur.e

Aonsumer surve' can &e &ased on census stud' or &' sam1le stud'. In census method entire

1o1ulation of consumers is studied. This method is ver' e01ensive and unmanagea&le. !am1le

stud' is &ased on stud' of a few re1resentative sam1les selected from the 1o1ulation of

consumers. !am1le surve' is eas' to manage and ine01ensive. The surve' can &e conducted &'

consumer interviews or &' em1lo'ing 2uestionnaires. The 1ur1ose of the surve' is to stud'

consumers 1urchase decisions over a given 1eriod of time.

1'5' Sur.e o) Sale&%e" O#i"io"

!ince sales men are in direct contact with retailers and consumers the' are &etter likel' to know

consumers 1articular taste and 1references for a 1roduct. Interviews and 2uestionnaires are

em1lo'ed on salesmen to find out consumer choices and 1references in a 1articular area. Their

res1onses are anal'sed to stud' the demand for a 1articular 1roduct.

!urve' of sales force o1inion is sim1le and ine01ensive method of demand forecasting. It is

generall' used for forecasting demand for a new 1roduct. >ut 1ersonnel &ias of salesmen can

D


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lead to inaccurate forecasts. The data is relia&le onl' to the e0tent of the e01ertise of the

salesman.

1'3' E6#ert O#i"io"

In this method, e01erts o1inion is assessed for forecasting demand for a s1ecific 1roduct. This

method uses so1histicated techni2ues. It is &ased on the anal'sis of 1ast and 1resent demand

conditions e0isting in the market. The method is also called o1inion 1oll. It is eas' to conduct,

ine01ensive and &ased on scientific anal'sis. It is more relia&le.

1'3'1' Del#!i Met!od

This is a variant form of o1inion 1oll method. This techni2ue is designed to arrive at a consensus

in an uncertain situation, &' 2uestioning a grou1 of e01erts until their res1onses converge along a

single line. The techni2ue is like this. leader first of all invites o1inion on a s1ecific issue from

a num&er of e01erts. $ach e01ert is 1rovided with the res1onse of others, kee1ing the name of

e01erts anon'mous, thus giving an o11ortunit' to react. If an' e01ert revises his earlier res1onse,

reason for such an action is stated. The 1rocess is re1eated till a consensus of o1inion is o&tained.

This method is used in demand forecasting of man1ower 1lanning.

5' Mar*et E6#eri%e"t&

In market e01eriment, an investigator selects certain areas of re1resentative markets. Aonsumers

in these markets are known to have different characteristics such as income level, occu1ation and

demogra1hic features. The market e01eriments are conducted &' var'ing se1aratel', certain

im1ortant determinants of demand like 1rice, advertisement etc., assuming other demand

determinants remain constant.

The resulting changes in demand over a 1eriod of time due to change in each varia&le are then

recorded and their res1ective elasticit' co-efficient are calculated. In this wa', effect of

im1ortant demand determinants like 1rice, advertisement etc., can &e assessed.

5'1' Co"&u%er Cli"ic&

DC


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5nder this method, consumers are given some mone' income and are asked to s1end it in a

1articular store. Goods dis1la'ed are of different 2ualit', 1rices and 1acking. Aonsumers

res1onses to various determinants are anal'sed to stud' the demand.

3' Stati&tical Met!od&

3'1' Tre"d Pro;ectio" Met!od

Trend is the general tendenc' of a data to increase or decrease. The trend 1ro?ection is &ased the

anal'sis of a time series data. series of 2uantit' demanded for a 1roduct according to

chronological order is o&tained. Trend stud' is used to forecast demand for a 1roduct whose 1ast

sales records are availa&le for a num&er of 'ears. Trend indicates the long-term tendenc' of the

sales to grow or decline over a 1eriod of time. emand for a 1articular 1eriod can &e influenced

&' short-term factors like seasons, 1hases of &usiness c'cles and various irregularities like war,

earth 2uake, e1idemics etc. These short term factors that cause change in demand are eliminated

to find out the long term trend in demand. 9hile estimating the trend, we assume that there is a

sta&le &ehaviour of demand for a 1articular 1roduct over a 1eriod of time.

The following statistical methods are used for trend anal'sis.

Freehand method

)ethod of semi average method

)oving average method

)ethod of least s2uares

3'1'1' Free!a"d Met!od: This is a time series gra1h of 2uantities demanded of a 1roduct over a

1eriod of time. Time is measured on S-a0is and 2uantit' demanded is measured on R- a0is. 9e

1lot the 2uantities demanded for each 1eriod and ?oin these 1lots &' a smooth curve, which

indicates the trend of demand.

3'1'5' Se%i- A.era+e Met!od: In this method, a given time series data is divided into two e2ual

1arts. 9e take the average of each 1art. The average value is 1lotted to the median of each 1art

to find the trend of the demand.

3'1'3' Mo.i"+ A.era+e& )oving averages can &e calculated for three, four, five or seven 'ears.

For calculating three-'earl' moving average, we o&tain the three-'earl' moving totals of the

DB


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given time series data &' adding the successive three 'ear 1eriods. These moving totals are

averaged and 1lotted against the res1ective middle 'ears. The 1rocess is continued for the entire

data. The three 'earl' averages are 1lotted on a time series gra1h to o&tain the trend of the

demand. !imilar 1rocess is followed to o&tain five 'earl' and seven 'earl' moving averages. The

onl' difference is that instead of three 'earl' moving totals are re1laced &' five-'earl' or seven-

'earl' moving totals. For o&taining four-'earl' moving average, four 'earl' moving totals areo&tained. This is 1lotted &etween the second and the third 'ear. The 1rocess continues for the

entire data. These four-'ear moving totals are once again averaged and 1laced to a 1articular

'ear. 9e 1lot these into a time series gra1h to o&tain the trend in demand.

3'1'4' Met!od o) Lea&t Suare&: 5nder method of least s2uares, we fit a straight line trend

using the straight line trend e2uation i.e. R M a &0E where a and & are two unknown whose

values can &e determined &' solving the following normal e2uations

R M na &0

0' M a0 & 0%.

Re+re&&io" Model&

4egression is a statistical techni2ue for estimating the value of an unknown varia&le from the

known value of the inde1endent varia&le. The demand for a 1articular 'ear can &e esta&lished &'

using the following regression e2uationE


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*@. istinguish &etween dura&le goods demand and 1erisha&le goods demand.

*D. 9hat are different kinds of demand;

*. istinguish &etween ca1ital goods demand and consumer goods demand.

*C. 9hat are different determinants of demand;

*B. $01lain law of demand and assum1tions for the o1eration of demand law.

*+. 9hat are the e0ce1tions to law of demand;*. efine the following:

i (rice elasticit' of demand

ii Income elasticit' of demand

iii Aross elasticit' of demand

%. istinguish various t'1es of income elasticit' of demand.

%*. 9hat are the t'1es of income elasticit' of demand;

%%. istinguish &etween elasticit' of su&stitutes and com1lement goods

%@. 9hat are the determinants of elasticit' of demand;

%D. 9hat are the degrees of 1rice elasticit' of demand;

%. 9hat is 1oint elasticit';

%C. 9hat is outla' method;

%B. $01lain when arc method is used for measuring elasticit' of demand;

%+. /ow is cross elasticit' of demand useful to &usiness managers;

%. 9hen is arc elasticit' method is used;

@. $01lain the conce1t of income elasticit' and its role to &usiness managers.

@*. efine the following:

i emand forecasting

ii O1inion 1oll

iii el1hi method

iv Time !eries

v 4egression

vi Trend

@%. 9hat are the methods used for demand forecasting;

@@. 9hat is consumer surve';

@D. 9hat are consumer clinics;

@. 9hat is moving averages;

@C. 9hat is least s2uare method;

@B. 9hat is time series;

@+. 9h' is demand forecasting im1ortant;

@. 9hat are the o&?ectives of demand forecasting;

D. 9hat are the a11roaches in forecasting the demand for new 1roducts;


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managerial economics note

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