Transcript (1)

MANAGERIAL
ECONOMICS
DR. Itty Benjamin
WHAT IS ECONOMICS
• Economics is the study of those activities of
human beings, which are concerned, with the
satisfaction of unlimited wants by using the
limited resources.
• Economics was made compulsory for engineers
in the first decade of 20th century. Institute of
Mechanical Engineers (UK) found that 90% of
the management decisions required some
managerial responsibility and most of them
were basic in nature. Hence, managerial
economics was introduced in engineering and
management subjects.
What is Managerial Economics?
• Managerial economics is essentially applied
economics in the field of business management.
• It is the economics of business or managerial
decisions.
• Managerial decision making mainly deals with the
question of what to produce, how to produce and how
much to produce.
Managerial Insight
• Managers have to acquire the insight
of
both
microeconomics
and
macroeconomics. The former analyses
the behaviour of individual economic
entities such as consumer and producer,
while the later deals issues pertaining to
the economy as a whole, such as
unemployment, population etc.
The Business Decision
Functions: Role and Responsibilities of a Managerial
Economist
A managerial economist in a business firm may carry on a wide range of
duties, such as:
• Demand estimation and forecasting.
• Preparation of business/sales forecasts.
• Analysis of the market survey to determine the nature and extent of
competition.
• Analysing the issues and problems of the concerned industry.
• Assisting the business planning process of the firm.
• Discovering new and possible fields of business endeavour and its
cost-benefit analysis as well as feasibility studies.
• Advising on pricing, investment and capital budgeting policies.
• Evaluation of capital budgets.
• Building micro and macro economic models.
• Directing economic research activity.
• Briefing the management on current domestic and global economic
issues and emerging challenges.
• Interpretation, analysis and reporting of current economic matters,
upcoming developments in business, government and foreign or
global sectors.
Scope of Managerial Economics
Following are the core topics of managerial economics:
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Demand Function and Estimation
Demand Elasticity
Demand Forecasting
Production Function and Laws
Cost Analysis
Pricing and Output Determination in different market structures such as perfect competition,
monopoly, oligopoly and monopolistic competition
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Pricing Policies and Practices in Real Business
Profit Planning and Management
Break-even Analysis
Linear Programming
Game Theory
Government and Business.
Managerial economists tend to rely on the scientific research method
in building and empirically testing business oriented economic
models. This scientific approach consists of the following steps:
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Defining the problem
Formulation of the hypothesis
Abstraction for the model building
Data collection
Testing the hypothesis
Deduction based on data analysis
Evaluating the test results
Conclusion for decisions
• Effective Demand
A buyer’s desire for a product in the market backed by
the ability and willing to pay for its price.
Definition of Demand - The demand for a product refers to the
amount of it which will be bought per unit of time at a
particular price.
Determinants of Demand
 Factors Influencing Individual Demand
• Price
• Income
• Tastes, habits and preferences
• People with different tastes and habits have different preferences for
different goods
• Relative prices of other goods – substitute and complementary
products
• Consumer’s expectation
• Advertisement effect
Factors Influencing Market Demand
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Price of the product
Distribution of income and wealth in the community
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
Level of taxation and tax structure
Inventions and innovations
Fashions
Climate or weather conditions
Customs
Advertisement and sales propaganda
Demand Function
Mathematical of expression of functional relationship between determinants (such
as price, income, etc., determining variables) and the amount of demand of a
given product.
In composing the demand function for a product, therefore, one should identify
and enlist the most important factors (key variables) which affect its demand. To
suggest a few, such as:
• The ‘own price’ of the product itself (P)
• The price of the substitute and complementary goods (Ps or Pc)
• The level of disposable income (Yd) with the buyers (i.e., income left after
direct taxes)
• Change in the buyers’ taste and preferences (T)
• The advertisement effect measured through the level of advertising
expenditure (A)
• Changes in population number or the number of the buyers (N).
Using the symbolic notations, we may express the demand function, as follows:
Dx = f (Px, Ps, Pc, Yd, T, A, N, u)
Demand Schedule
• A tabular statement of price/quantity relationship is called
the demand schedule.
Individual Demand Schedule
A Market Demand Schedule (Hypothetical Data)
• Market Demand Curve
In graphical terms, a market demand curve for a product
is derived through the horizontal summation of all
individual buyer’s demand curves for the given product.
• Demand Curve
Demand curve refers to the graph of a demand schedule,
measuring price on the Y-axis and quantity demand on
the X-axis. Usually, a demand curve has a downward
slope, representing an inverse relationship between price
and demand.
A Linear Demand Curve
The Law of Demand
The conventional law of demand, however, relates to the
much simplified demand function:
D = f (P)
Demand Curve
Assumptions Underlying the Law of
Demand
• No change in consumer’s income
• No change in consumer’s preferences
• No change in the fashion
• No change in the price of related goods
• No expectation 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 the consumers
• No change in the distribution of income and wealth of the
community
• No change in government policy
• No change in weather conditions
Exceptions Demand Curve: Upward-sloping Demand
Curve
Exceptional Cases
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Giffen goods
Articles of snob appeal
Speculation
Consumer’s psychological bias or Iillusion
Extension and Contraction of
Demand
• The terms ‘extension’ and ‘contraction’ are
technically used in stating the law of demand.
Quantity Demanded
Increase and Decrease in Demand
• An ‘increase’ in demand signifies either that more will be
demanded at a given price or same will be demanded at a
higher price. An increase in demand really means that
more is now demanded than before at each and every
price. Likewise, a ‘decrease’ in demand signifies either
that less will be demanded at a given price or the same
quantity will be demanded at the lower price. Decrease in
demand really means that less is now demanded than
before at each and every rise in price. Shifting the
demand curves shows the increase and decrease in
demand.
Increase in Demand (A) and Decrease in Demand (B)
Reasons For Change (Increase or Decrease) in Demand
• Changes in income
• Changes in taste, habits and preference
• Change in fashions and customs
• Change in the distribution of wealth
• Change in substitutes
• Change in demand of position complementary goods
• Change in population
• Advertisement and publicity persuasion
• Change in the level of taxation
• Expectation of future changes in prices
Major Types of Demand
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Demand for Consumer’s Goods and Producer’s
Goods;
Demand for Perishable Goods and Durable Goods;
Autonomous demand and Company Demand;
Industry Demand and Long-Run Demand;
Short Run Demand and Company Demand;
Joint Demand and Composite Demand; and
Price Demand, Income Demand, and Cross Demand.
Industry Demand and Firm or Company
Demand
Industry and Company Demand
Short-run and
Long-run Demand
Bandwagon Effects
Demonstration effect of consumption by the
others lead to the bandwagon effects of change in
demand for a product in the market. Advertising
and fashion play a significant role in this regard.
Bandwagon
Effect: The
Demand Curve
Shifts to the Right
Veblen Effect
Snob appeal of luxury goods leads to the Veblen effect
of demand through conspicuous consumption.
The Market Demand Curve for
Veblen Effect Product