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MANAGERIAL ECONOMICS DR. Itty Benjamin

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.

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MANAGERIAL ECONOMICS DR. Itty Benjamin

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  1. MANAGERIAL ECONOMICS DR. Itty Benjamin

  2. 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.

  3. 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.

  4. 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.

  5. The Business Decision

  6. 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.

  7. 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.

  8. Scope of Managerial Economics Following are the core topics of managerial economics: • 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 • Pricing Policies and Practices in Real Business • Profit Planning and Management • Break-even Analysis • Linear Programming • Game Theory • Government and Business.

  9. 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: • 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

  10. 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.

  11. 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

  12. Factors Influencing Market Demand • 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

  13. 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)

  14. Demand Schedule • A tabular statement of price/quantity relationship is called the demand schedule. Individual Demand Schedule

  15. A Market Demand Schedule (Hypothetical Data)

  16. 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.

  17. A Linear Demand Curve

  18. The Law of Demand The conventional law of demand, however, relates to the much simplified demand function: D = f (P)

  19. Demand Curve

  20. 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

  21. Exceptions Demand Curve: Upward-sloping Demand Curve

  22. Exceptional Cases • Giffen goods • Articles of snob appeal • Speculation • Consumer’s psychological bias or Iillusion

  23. Extension and Contraction of Demand • The terms ‘extension’ and ‘contraction’ are technically used in stating the law of demand. Quantity Demanded

  24. 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.

  25. Increase in Demand (A) and Decrease in Demand (B)

  26. 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

  27. Major Types of Demand • 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.

  28. Industry Demand and Firm or Company Demand Industry and Company Demand

  29. 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. Short-run and Long-run Demand Bandwagon Effects

  30. 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.

  31. The Market Demand Curve for Veblen Effect Product

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