4. To studying the optimal use of scare resources to
satisfy Human Needs and Wants.
Problems in Economics
◦ Human needs and wants are unlimited
◦ Resources have alternative uses.
Micro
Economics
Macro
Economics
Economics
6. “ It is an application of that part of Microeconomics
which focuses attention on those topics which are of
greatest interest and importance to managerial
enterprises” by Peterson and Lewis
“Managerial Economics is the analysis of major
management decisions using the tools of economics”
by Samuelson and Marks
7. It is an application of economics, particularly of
microeconomics to managerial decision making
It can be used to make better management
decisions.
It uses decision sciences for decision making about
optimal allocations of scare resources to competing
activities
It can be applied to govt. agencies and other non
profit organizations as well as to business
8. Applied Economic Theory (Micro & Macro)
Pragmatic (Practical)(Suggest How Economic theories
can be applied for policy formulation)
Multi-Disciplinary
Descriptive(positive) and
Prescriptive(normative)
9. Demand Analysis and Forecasting
Production Function
Cost Analysis
Inventory Management
Resource Allocation
Price System
Capital budgeting
10. Micro Economics Macro Economics
Boulding:
“Microeconomics is the
study of a particular
firm, particular
Housesold, individual
price, wage, income,
industry and particular
commodity”
Boulding: “ Macro
economic theory is that
part of the economics
which studies the
overall averages and
aggregates of the
system”
11. Theory of Demand
Theory of Production
Theory of Price determination
Theory of Factor Pricing
Optimal allocation of resources
Limitations of Micro Economics
1. Static
2. Wrong conclusions
3. Limited scope
4. Unrealistic assumption
12. Theory of National income
Theory of Employment
Theory of Money
Theory of General price level(Inflation/
Deflation)
Theory of International trade
Limitations of Macro Economics Analysis
1. Dependence on Individual units
2. Heterogeneous Units
3. Different effects of aggregates
13. Studies problem related to
single unit of individual
It studies principles,
problems and policies
dealing with optimal
allocation of resources
Main problem of micro
economics is Price
Some activates like
withdrawal of money from
Bank or lower wages to get
employment may be
beneficial for one unit
Studies problem related
to all firm in economy
It studies principles,
problems and policies
dealing with full
employment
Main problem in Macro
economics is Income
Activities which are
beneficial for one may
not be beneficial for
whole society as a whole
eg total withdrawal from
banks
14. Micro economy
assumes that there is
full employment in
economy and
aggregate demand and
supply remain
constant. It make
efforts for optimal
utilization of resources
Macro economy
assumes allocation of
resources to be
constant and it puts
efforts for achieving
full employment in
economy
15. Production possibility frontier is the graph
which indicates the various production
possibilities of two commodities when
resources are fixed. The production of one
commodity can only be increased by
sacrificing the production of the other
commodity. It is also called the production
possibility curve or product transformation
curve.
16. Utility: Want satisfying power
“ Utility is the quality of a good t satisfy a want”. BY Hibdon
Util: An imaginary unit of satisfaction from
the consumption of a good
Total
Utility
Marginal
Utility
17. Total Utility (TU): it is the total satisfaction a
person gains from all those units of a commodity
consumed within a given time period
Marginal Utility (MU) : It is the additional
satisfaction gained from consuming one extra unit
within a given period of time.
18. Quantity Total Utility Marginal Utility0
0 0 0
1 8 8
2 14 6
3 18 4
4 18 0
5 16 -2
Diagrammatically draw Relationship between Total
Utility and Marginal Utility
19. As more and more units of a good are
consumed , additional units will provide less
additional satisfaction than previous unit.
Assumptions:
◦ Utility can be measured in cardinal Number system
◦ Marginal Utility of Money remain same
◦ Utility of one commodity is independent of other
◦ Every unit of the commodity being used is of same quality
and size
◦ There is continues consumption of the commodity
◦ Commodity is consumed in some standard units.
Assignment: Are there any goods/services and persons
where we don't experience diminishing Marginal utility?
20. Second Law of Gossen
“Other thing remaining the same, a consumer
maximizing his utility will spend his income among
different goods in such a way that the utility derived
from the last unit of money spend on each good is
equal”. Amount spend1 Utility of A Utility of B
1 12 10
2 10 8
3 8 6
4 6 4
5 4 2
21. It is the excess of what a person would have been
prepared to pay for a good over what that person
actually pays.
Marginal Consumer Surplus: it is the
difference between what the person is willing to
pay for one more unit and what he is actually being
charged.
Consumption Utility derived
per Rupee
Price of
commodity
surplus
1 7 5 2
2 6 5 1
3 5 5 0
4 4 5 -1
22. A curve showing all the various combinations
of two goods that give an equal amount of
satisfaction or utility to consumers.
Combination Apple Orange
A 10 100
B 20 60
C 30 30
D 40 10
23. It is convex to the point of origin
It never touches any axis
Higher IC curve shows higher satisfaction
IC curve never intersect each other
It is always downward sloping (Law of
Marginal Substitution).
24. 1) “Using Application of economics especially micro economics for better
management decision making” Define the statement in the light of
Nature and Scope of Managerial Economics?
2) Critically Examine the Micro and Macro form of Economics along with
the scope covered by them. Differentiate between them too.
3) Explain Utility Analysis? Diagrammatically draw Relationship between
Total Utility and Marginal Utility.
4) Differentiate between Law of Diminishing Marginal Utility and Law of
Equi-Marginal utility. Are there any goods/services and persons where
we don't experience diminishing Marginal utility?
5) What is Indifference curve? Explain its properties?
6) A case: Would redistribution of income from rich to poor
may reduce the overall problem of scarcity?
27. Law of demand states that people will buy
more at lower prices and buy less at higher
prices, other things remaining constant
Main Characteristics of Law of Demand
◦ Inverse relationship
Price is an independent variable while demand is
dependent
◦ Other things remaining constant
◦ Direction of change
◦ Related with time
28. Prices of Substitute goods remain same(+ve )
Price of complimentary goods remain same(-ve)
No change in taste and preference of customer(+ve)
No expectation for change in prices in future (+ve )
No change in Income of consumer (+ve)
Others are:
◦ No change in size, age composition and sex ratio of
population.
◦ No change in Govt. policy.
◦ No change in weather condition.
29. Law of Diminishing Marginal Utility
Income Effect
Substitution Effect
Different Uses
Size of Consumer Group
30. Articles of Distinction/ Veblen Goods
Ignorance
Giffen goods
Expectation of Rise/ Fall in price in future
Consumer’s psychological Bias
Necessaries of Life
Commodity with Special Brand
War or Emergency
Small part of total expenditure
32. It is a proportionate change in demand due to
a proportionate change in price of a
commodity.
It is of 5 types
◦ Perfect Elastic demand
◦ Perfect inelastic demand
◦ Unitary elastic demand
◦ Less than unitary elastic demand
◦ Greater than unitary elastic demand
33. Proportionate Method
Total Expenditure Method
Point elasticity of Method
Arc Elasticity Method
◦ (-) Q1-Q/Q1+Q x P1+P/ P1-P
34. Increase in Price Same
expenditure
Unitary elastic
demand
Increase in price Fall in
expenditure
-ve Relation Greater than
unitary
Increase in Price Increase in
Expenditure
+ve relation Less than
unitary
Ed= 1- ∆ EXP/X∆P
35. “When elasticity is computed between two
separate points on a demand curve, the
concept is called Arc Elasticity”.
(-) Q1-Q x P1+P
Q1+Q P1-P
e.g. elasticity 6 in first case and .75 in next
Quantity Price2
Prev price/QD 4 2
New P/QD 1 4
New P/QD 4 2
37. Availability of Substitute
Good With Different Uses >1
Postponement of Use
Income of Consumer
Influence of Habits and Customs
Nature of Commodity
Necessaries =0
Comfort=1
Luxuries >1
38. BY Evan J Donglas:
Demand estimation may be defined as the process of
finding values for demand in future time period
Steps /Factors involved in demand Estimation
Identification of Objective
Determining the nature of Good
Selection of Proper method
Interpretation of Result
42. Effect on Employment
International Trade
Wage determination
Fixation of Rail freight charges
Important in Govt. Policy Formulation
Advantage to Finance minister in deciding Tax level
Distribution of Burden of taxation
Fixing rate of Exchange
Significance in Price Determination
Price determination under monopoly
Price determination of Joint Supply
43. It is a Technique of Profit Planning
Profits earned by Firm is divided into two
parts
Economic or Super Normal profit
Normal or Zero Economic Profit
Break Even Analysis is a device for integrating Costs,
revenue and output of the firm in order to illustrate the
probable effects of alternative causes of action upon net
Profit
44. Constancy of FC
Constant Technology
Constant Return to factor
Constant sales Price
Identity of Sales and Output
Division of cost into fixed and Variable
46. “Rhythmic fluctuations taking place in an
economy at intervals in the form of boom and
depression are called Business cycles”.
Types of Business Cycles:
◦ Major Cycle: duration of 8-12 years, first explained
by French economist Juglar
◦ Minor Cycle: duration is 2-5 years, defined by
English Economist Kitchen
◦ Very Long Cycle: duration 50-60 years, first
mentioned by russian economist Kondratiekk
47. Income and Production is maximum
Full employment
Prices Rise very high
Wage rate is high
Traders and Industrialist earn good profits
Expansion in bank credits
All kinds of investment increases
Increase in consumption expenses
All people become optimist
48. There is fall in income and output
Workers are rendered unemployed
Prices began to fall
Wages fall
Profits fall
No further borrowing in spite of lesser
interest rate
There is feeling of doubt and fear among
people
49. Level of income and out becomes very low
Unemployment increases
Wages, interest and other cost decreases
Price level falls
Cash reserves with banks pile up and demand
for credit contracts sharply
Demand for consumer goods fall as income
source
Old and worn out Machines are not replaced
so demand for capital goods fall
People goes pessimist,
50. Replacement investment results into increase
in Income and Output
Employment increases
Demand for production and consumption
goods increases
Prices starts increasing so more profit than
cost
Demand for bank loans and advances
increases
51. Rise in prices or rise in general price level
Output
price
Money Supply
Price line
Full
employment
52. Demand Pull Inflation Theory
◦ Leads to inflationary Gap
Cost pull Inflation theory
55. Large number of buyers and sellers
Homogenous products
Independent decision Making
Free entry and exit of firms
Perfect Knowledge
Perfect Mobility
No transport cost
No Transaction cost
No govt. regulations
56. “ it is a market situation in which there is a
single seller with no close substitute for
commodity it produces, there are barriers to
entry”
Features
◦ One seller and large no of buyers
◦ Monopoly is also an industry
◦ Restriction on entry of new firms
◦ No close substitutes
◦ Price maker
◦ Price discrimination
57. Firm is a price taker not maker
Application of One price law
Price Market Demand Market Supply
5 10 50
4 20 40
3 30 30
2 40 20
1 50 10
58. Short run: Demand Dominated
Long run: Both and Demand determine
price
59. AR= MR
MC cuts MR from below
Firm experiences:
Super Normal Profit
Normal Profit
Losses
60. Price discrimination exists when the
same product is sold at different
prices to different buyers.
When a monopolist charges different
prices of the same product from
different consumers
61. Personal price discrimination
Geographical price discrimination
Trade discrimination/according to uses
62. Existence of monopoly
Separate Market
Difference in the elasticity of demand
Legal sanctions
Product differentiation: ticker in different
coaches in rails
Made to order commodity
63. Beneficial to the poor
Public utility services
Full utilization of resources
