Unit-1Nature & fundamental concepts & basis techniques of managerial economics

1. Unit-1Nature & fundamental concepts & basis techniques of managerial economics

2. Micro Economics • According to Prof. McConnel- “ Micro Economics is concerned with specific economic units & detailed consideration of the behavior of these individual units.”

3. Macro Economics • According to Gardner Ackley- “ Macro Economics deals with economic affairs at large. It concerns with the overall dimensions of economic life.”

4. Managerial Economics • Spencer & Siegelman has defined Managerial Economics as “ the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”

5. Nature of Managerial Economics • Decision-making • Forward Planning • Economic theory & logic

6. Scope of Managerial Economics • Demand analysis & forecasting • Cost & production analysis • Pricing decisions, policies & practice • Profit Management • Capital Management • Analysis of Business environment • Allied disciplines

7. Demand :- Desire to buy + Ability to pay + Willingness to pay

8. Law of Demand “ Other things being equal, the demand varies with the price, more is demanded at a low price or less is demanded at a high price.”

9. $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - 200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - Demand  Demand Curve Price of Pizzas  Quantity of Pizzas Demanded 1-9 1-9

10. Assumptions of the Law • The size of income of a consumer remain unchanged • The size & composition of population remains unchanged • Tastes & preferences remain the same • Prices of other goods remain same • No expectation of price change • No change in government policy

11. DETERMINANTS OF DEMAND • Price • Income • Taste, habit and preferences • Price of related goods • Advertisement effect • Consumer expectation • No. of buyers in market • Distribution of income in community • Population • Invention and innovation • Fashion • Climate

12. Typesof Demand Direct demand Derived or indirect demand Joint or complimentary demand Composite demand

13. EXCEPTIONS OF DEMAND LAW • Giffen goods • Ignorance • Luxury goods • Superior goods • Medicine • Speculation • Demonstration • Fashion

14. Individual & Market Demand • The quantity demanded by an individual purchaser at a given price is known as individual demand whereas the total quantity demanded by all the purchaser together is known as market demand.

15. Individual demand function Qd = f(Px , I , Pr, T, A ) • Where, px = own price of the com. X • I = Income of the individual • Pr = Prices of related com. • T = tastes & Pref. of the Individual consumer • A= Advert . exp. made by the producers of the com.

16. Market Demand functions Dx = F(Y, Px, Ps, Pc, T, E p, Ey, N D, U) • Where, Dx = demand of good • Y= consumer’s income • Px = Price of good x • Ps = Price of substitutes of x • Pc = Price of complements of x • T = Consumer’s tastes & Preference

17. Market Demand functions • Ep = Consumer’s expectation about future price • Ey = consumer’s expected future income • N= Number of consumers • D= distribution of consumes • U= other determinants of the demand for x

18. DEMAND FORECASTING

19. The Meaning of Demand Forecasting In Modern Business, Production is often made in anticipation of demand. Anticipation demandimplies demand forecasting. Forecasting means expectation about future course of development. The future is uncertain. But not entirely so. Hence one can hopefully predict the future event and gain demand forecasting means expectation about the future course of the market demand of a product.Demand forecasting is based on statistical data about past behavior and empirical relationship.

20. Demand Forecasting May Be Undertaken At The Following Level:- Micro Level Industry Level Macro Level

21. Significance of Demand Forecasting:- • Production Planning • Sales Forecasting • Control of Business • Growth & Long Term Investment Programmes • Stability • Economic Planning & Policy Making

22. Short-Term & Long-Term Demand Forecasting Short-Term Forecasting :- Short term forecasting normally related to a period not exceeding a year. Some writers like professor E. J. Douglas (1994) prefers to use the term Demand Estimation for short term demand forecasting. Short term forecasting related to day to day particulars which are concerned with tactical decision under the given resource constraints.

23. Short-Term Forecasting May Serve The Following Purpose • Evolving Sales Policy • Determining Price Policy • Evolving Purchase Policy • Fixation of Sales Target • Determining Short-Term Financial Planning

24. Long-Term Forecasting Long-Term Forecasting :- Long term forecasting refers to the forecasts prepared for long period during which the firms scales of operations or the production capacity may be expanded or reduced. Long term forecasts are normally for the periods exceeding a year, usually 3-5 years or even a decade or more. A long term forecasting relates to those information which are vital for undertaking strategic decision of the business pertaining to its expansion or contraction over a period of time. In business decision making long term forecasting may serve the following purpose.

25. Long-Term Forecasting May Serve The Following Purpose • Business Planning • Manpower Planning • Long-Term Financial Planning

26. General Approach To Demand Forecasting Important steps in dealing with any demand forecasting as under:- • Specification of objectives • Identification of demand determinants • Choice of methods of forecasting • Interpretation

27. The Sources of Data Collection Primary Data • Observation • Interview • Survey • Executive of Organization • Market Experiment

28. The Sources of Data Collection Secondary Data:- • Official publication of the Central, State, Local government. Such as plan Documents, Annual Survey of Industries. • Trade & Technical or Economic Journal & Political Weekly, India Economic Journal • Official publication like Reserve Bank of India • Official publication of International Bodies like the IMF, UNO, World Bank etc. • Publication brought out by Research Institution, Universities Association • Market Report & Trade Bulletin published by Stock Exchange, Trade Association, Chamber of Commerce

29. The Collective Opinion It is also referred to as sales force polling expert opinion survey under this method, the salesman have to report to the head office their estimates of expectations of sales in their territories. Such information can be obtain from the retailers & wholesalers by the company. By aggregating these forecasting generalization on an average is made, which is also based on the value judgment & collective wisdom of top Sales Executives, Marketing Manager, Business/Managerial Economist. Some times even experts opinion is obtained from the dealers, distribution, suppliers or from the executive of trade Association or Marketing Consultant.

30. Market Experiments • 1)Experimentation in Laboratory • 2)Test Marketing

31. Method of Demand Forecasting Market Survey / Studies The market survey is most direct approach to demand forecasting. It may be a sample survey or census enquiry. There are two variant of survey method 1) Consumer Survey 2) The Collective Opinion There are certain drawbacks of the consumer survey methods 1) This method is Expensive 2) It is time consumed 3) Information abstained through consumer survey is likely to be limited or incomplete. 4) The success of this method also depends on designing questionnaire. 5) Cheating on part of enumerators may also vitiate the result of the survey.

32. Elasticity of Demand Demand usually varies with price but the extent of variation is not uniform in all cases. In some cases the variation is extremely wide. In some other it may just be nominal .That means sometime demand is greatly responsive to change in price ; at other times it may not be so responsive . The Economists, To measure this responsiveness or the extent of variation, use the term elasticity. In measuring the elasticity of demand two variables are considered (i) Demand (ii) the determinants of demand. Thus a ratio is made of two variables. Elasticity of Demand= %change in quantity demanded %change in determinants of demand

33. Types of Elasticity • Price Elasticity • Income Elasticity • Cross Elasticity

34. 1) Price Elasticity of Demand • The extent response of demand for a commodity to given change in price, other demand determinant remaining constant, is termed as the price elasticity of demand. The price elasticity of demand may, thus, be defined as the ratio of the relative change in demand and price variables. The Co-efficient of price elasticity (e) is measured ase = The percentage change in quantity demand The percentage change in price

35. Since the relative change of variables can be measured either in terms of percentage change or proportional change, the price elasticity co-efficient can be measured alternatively as The Proportional Change in Quality Demanded e = The Proportional Change in Price Representing it in symbols, the price elasticity formula can be stated as e = Δ Q/Q or e = Δ Q × P or e = Δ Q × P Δ P/P Q Δ PΔ P Q Where Q = The original Demand (Q) P = The original Price (P)ΔQ = Change in DemandΔP = Change in Price

36. Types of Price Elasticity Modern Economist have elaborated the Marshallian Classification further and stated five kinds of price elasticity as under 1) Perfectly elastic demand 2) Perfectly Inelastic demand 3) Relatively elastic demand 4) Unitary inelastic demand 5) Relatively inelastic demand

37. Perfectly Elastic Demand An endless demand at a given price is the case of perfectly elastic demand. When the demand is perfectly elastic , with a slight or infinitely small rise in the price of Commodity, the consumer stop buying it. The numerical co-efficient of perfectly elastic demand is ( e=α) Y P O X Axis Demand

38. 2. Perfectly Inelastic Demand When the demand for the commodity shows no response at all to change in price, that is to say, whatever change in price the demand remain the same it is called perfectly inelastic demand. Perfectly inelastic demand has thus zero elasticity (e=o) Y P1 P2 P3 O X Axis Demand

39. Relatively Elastic Demand When the proportion change in quantity demanded is greater than that of price the demand is said to be relatively elastic. The numerical value of relatively elastic demand One or Infinite. Y e > 1 P1 Price P2 M1 M2 X Axis Demand

40. Relatively Inelastic Demand When the proportion change in quantity demanded is less than that of price, the demand is considered to be relatively inelastic. The numerical value of relatively inelastic demand lies between zero and one. Y e < 1 Price P1 P2 M1 M2 X Axis Demand

41. Unitary Elastic Demand When the proportion of change in demand is exactly the same as the change in price, the demand is said to be unitary elastic. The numerical value of unitary demand is exactly 1. Y e = 1 Price P1 P2 M1 M2 X Axis Demand

42. Income Elasticity of Demand The income elasticity of demand measures the degree of responsiveness of demand for a good to changes in the consumer’s income. Definition :- The income elasticity is defined as a ratio percentage or proportional change in the quantity demanded to the percentage or proportional change in income. Income Elasticity = % change in quantity demanded % change in income

43. Types of Income Elasticity • Unitary income elasticity of demand (e=1) • Income elasticity of demand greater than unity (e>1) • Income elasticity of demand less than unity (e<1) • Zero income elasticity of demand • Negative income elasticity of demand

44. 1)Unitary Income Elasticity:-When the percentage change in demand is equal to percentage change in income, the demand is unitary elastic, Thus e=1. 2) Income Elasticity greater than Unity:- When percentage change in quantity demanded is greater than the percentage change in income, the income elasticity is greater than the unity. e>1 3) Income Elasticity less than Unity:- When the percentage change in demand is less than the percentage change in income the income elasticity of demand is less than the unity. e<1

45. 4) Zero Income Elasticity:- When income change in any direction or in any proportion but carries no effect on demand, so that the quantity demanded remain unchanged. It is referred to as zero income elasticity of demand thus e=o • 5) Negative Income Elasticity:- When an increase in income cause a decrease in demand for a commodity the demand is said to be negative income elasticity thus e<o

46. Cross Elasticity of Demand In arriving the price elasticity of demand one takes into account the change in demand due to the change in price of the same commodity. In cross elasticity of demand, we takes into account the change in the price of commodity Y & its effect on demand of commodity X. Definition :- The cross elasticity demand refers the degree of responsiveness of demand for a commodity to a given price in the price of same related commodity. Proportionate or Percentage Change in Demand For X Cross Elasticity = Proportionate or Percentage Change in Demand For Y

47. Factors Influencing Elasticity of Demand • Nature of Commodity • Availability of Substitute • Consumer’s Income • Height of Price & Range of Price Change • Proportion Expenditure • Durability of the Commodity • Habit & custom • Recurrence of Demand • Possibility of Postponement

48. Business Applications of Price Elasticity • Price Discrimination • Public utility pricing • Joint supply • Super markets • Use of machines • Factor pricing • International Trade • Shifting of tax buden • Taxation policy

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