Introduction to Managerial Economics

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Mr. R S Ch Murthy Chodisetty
M.Com., MBA (HR)., MBA (FIN)., (PhD).
Faculty of Management, Sreenidhi Institute of Science and Technology,
Hyderabad, Telangana.
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Managerial Economics and Financial Analysis
LECTURE-1

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Introduction to Management
Management is science and art of getting things done through people
formally organized groups.
According to lousis allen Management is “what managers do” is called
management.

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Introduction to Economics
® It’s a study of human activity both at Individual & National level
® It’s also called as “Science of wealth”
® Its satisfying human needs such as food, clothing and shelter

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Definition of Economics:
According to Adam smith- Economics as the “study of nature and uses of
national wealth”
According to A. Marshal- Economics is a “study of man’s actions in the
ordinary business life, its enquires how he gets his income and how he uses
it”.
According to Robbins- “Economics as the science which studies human
behavior as a relationship b/w ends and scarce means which have
alternative uses”.

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Types of Economics:
Micro Economics
® The study of individual consumer or a firm is called micro economics
® It is also called as “Theory of firm”.
® It deals with behavior & Problems of individual persons & small
organizations
® Its includes price theory, law of demand and theory of market

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Types of Economics:
Macro Economics
® Its means the study of aggregate or total level of economic activities in a
country
® It studies flow of economic resource or factors of production
® Factors of production includes L,L,C,O,T
® Its capital structure

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Scope of Managerial Economics:
Concepts
& Techniques
of ME
Optimum
solutions
Managerial decisions areas
® Production
® Reduction or control of costs
® Price of a product
® Make or buy decisions
® Inventory decisions
® Capital management
® Profit planning Management
® Investment decisions

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Main areas of Economics:
® Demand decisions
® Input-Output decisions
® Price-Output decisions
® Profit related decisions
® Investment decisions
® Forecasting & Forward decisions

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Linkages with other discipline of Economics:
® Operation research
® Mathematics
® Statistics
® Accountancy
® Psychology
® HRM
® Organizational behavior

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Nature of Managerial Economics:
Economic
Theory
Decision
Science
ME
Solutions
To Business
Problems

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Role of Managerial Economics:
® Objectives of the firm
® Allocation of resources
® Demand analysis and forecasting
® Competitive analysis
® Strategic planning
® Production planning
® Cost analysis
® Pricing strategies
® Market structure analysis
® Capital budgeting decisions
® Marketing strategies
® Achieving economic scale

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Introduction to Demand :
® Asking with authority
® Popularity
® Good will of a product
® Claim
® Need
® Want
® Request
® Call for authority

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Definition of Demand :
® Consumer’s desire to purchase the product
® Consumer’s willingness to purchase the product
® Sufficient purchasing power or ability to pay

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Types of Demand :
Individual Demand
when demand arises from an individual consumer, it is called as individual
demand. Individual consumers usually demand for product like clothes, foot
wares
House hold Demand
when demand arises from a house hold, it is called house hold demand,
house hold demand generally demand for refrigerator, TV, washing machine
Market Demand
when demand arises of all individual and house hold for a product in given
a market is considered, it is called market demand.

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Types of Demand :
1.Individual function
Qx = f {Px, I, P1…Pn, T, A, Ep, Ei, U}
Qx = Quantity demanded of the commodity ‘X’
Px = Price of the commodity
I = Consumer’s income
P1..Pn = Prices of the other related goods
T = Consumer’s tastes and preferences
A = Advertisement
Ep = Consumer’s expectations about future prices
Ei = Consumer’s expectations about future income
U = Other determinants
F = Function

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Types of Demand :
2. Market function
Qx = f {Px, I, P1…Pn, T, A, Ep, Ei, U}
Qx = Quantity demanded of the commodity ‘X’
Px = Price of the commodity
I = Consumer’s income
P1..Pn = Prices of the other related goods
T = Consumer’s tastes and preferences
A = Advertisement
Ep = Consumer’s expectations about future prices
Ei = Consumer’s expectations about future income
P = Population or market size
D = Distribution or the consumers in the market according to income,
age, demand etc
U = Other determinants
F = Function

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Law of Demand:
The law of demand states that a consumer’s behavior, in demanding a
commodity in relation to the variations in its prices”.
Other things remaining the same, the amount of the quantity demanded
arises with every fall in the prices and vice versa.”
The law of demand states that other things remaining constant, the higher
the price of the commodity, the lower is the demand and low the price,
higher is the quantity demanded.

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Law of Demand:

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Assumptions of Law of Demand :
® The law of demand states that a consumer’s behavior, in demanding a
commodity in relation to the variations in its prices”.
® Other things remaining the same, the amount of the quantity demanded
arises with every fall in the prices and vice versa.”
® The law of demand states that other things remaining constant, the higher
the price of the commodity, the lower is the demand and low the price,
higher is the quantity demanded.

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Exceptions Law of Demand:
® Giffen goods or Giffen paradox
® Goods of status
® Future prices of goods
® Ignorance effect
® War or emergency

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Demand schedule :
A demand schedule is a tabular presentation of the relationship between
the amount demanded of a commodities and different price levels of that
commodity.
In other words demand schedule is a tabular statement of price and
quantity relationship.
Price of the
Commodity (Y)
Demand of a
Commodity (X)
5 15
8 14
10 12
12 10
15 8
20 5

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Types of Demand (General) :
Price Demand
It shows the inverse relationship b/w the prices of a commodity and its demand
of a commodity. That means other things being constant if price fall demand
extends, and if price rises demand contracts.
Income Demand
It shows the functional relationship b/w income of a consumer and quantity
demand when other factors are constant. That means when other things constant
if the income of consumer increases the quantity demand also increase and if
income decreases the quantity demand falls
Cross Demand
Substitute goods : the goods satisfy the same want are called substitute goods. Eg.
Coffee and Tea
Complementary Goods : The goods required at the same time to satisfy a want are
called complementary goods. Eg. Car and petrol

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Types of Demand (General) :
Price Demand Income Demand Cross Demand

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Elasticity of Demand
According to Dr. Marshall – Elasticity demand means the degree of
responsiveness of demand or the sensitiveness of demand to change in
price.
The concept of Elasticity of demand explain How much demand increases
due to a certain fall in price and How much demand decreases due to a
certain rise in the price.
The term Elasticity is defined as the rate of responsiveness in the demand
of a commodity for a given change in price or any other determinants of
demand.

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Elasticity of Demand

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Types of Elasticity of Demand
® Price Elasticity Demand
® Income Elasticity Demand
® Cross Elasticity Demand

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Importance of price elastic demand
® Importance to Monopolistic
® Importance to finance manager/minister
® Importance to international trade
® Help full to decision making process

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Measurement of price elastic demand
® Perfect elastic demand
® Perfect in elastic demand
® Relatively elastic demand
® Relatively in elastic demand
® Unitary elastic demand

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Types of price elastic demand-Tabular format.
Numerical
Measures
Types of elasticity Relationship of demand with the price
1. Ed = Perfectly elastic demand Increase or decrease in demand to any extent
irrespective of change in price.
Eg. Imaginary
2.Ed=0 Perfectly inelastic demand Demand does not change with the change in
price.
Eg. Salt
3.Ed>1 Relative elastic demand Percentage change in demand more then
percentage change in price.
Eg. Petrol
4.Ed<1 Relative inelastic demand Percentage change in demand is lesser than the
percentage change in price.
Eg. Sugar
5.Ed=1 Unitary elastic demand Percentage change in demand is equal to
percentage change in price.
Eg. Cloth

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Perfect elastic demand ( Ep=Infinity)
If a negligible change in price leads to an infinitive change in demand is
said to be perfectly elastic demand. The infinity elastic demand curve is a
horizontal straight line to X axis.

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Perfect inelastic demand ( Ep=0)
Even a great rise or fall in price does not lead and change in quantity
demand is known as perfectly in elastic demand.

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Relatively elastic demand (Ep >1)
When a proportionate change in price leads to a more then proportionate
change in quantity demand is called relatively elastic demand

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Relatively inelastic demand (Ep <1)
When a proportionate change in price leads to a less then proportionate
change in quantity demand is called relatively inelastic demand

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Unitary elastic demand (Ep=1)
If the proportionate change in price leads to the same proportionate
change in quantity demand is called unitary elastic demand

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Significance of Elastic demand
® Prices of factors of production
® Price fixation
® Govt. policies
® Forecasting demand
® Planning the level of output and price

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Factors governing elasticity of demand
® Nature of product
® Time frame
® Degree of postponement
® Number of alternative uses
® Tastes and preferences of the consumer
® Availability of substitutes
® Complementary products
® Expectation of price
® Durability of the product
® Govt. policies

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Determinants of Elastic demand
® Availability of substitutes
® Nature of commodity
® Proportion of income spent
® Time factor
® Range of alternative uses of commodity
® Habit

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Importance of Elasticity of Demand
® Finance minister
® Monopolist
® Terms of Trade
® Determination of wages
® Price under discriminating monopoly

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Demand forecasting
The importance of demand forecasting is paramount when either
production or demand is uncertain.
When the supply is not in accordance with the demand, it results in the
development of black market or excessive prices.
The results of demand forecasting guide the entrepreneur to set up their
business or industrial activities accordingly

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Factors affecting Demand forecasting
® Nature of demand
® Types of forecasting
® Forecasting level
® Degree of orientation
® Introduce new products
® Nature of goods
® Degree of competition
® Market demand

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THANK YOU