Module 1 -Economics for Managers-MBA-1st semester MBA

09/28/16
KIRAN S, Assistant Professor @ BGS Institute
of Technology-MBA
1
Module 1

Kiran.shetty763@gmail.com
Assistant Professor at BGSIT,
BG Nagar
Mob:8123849682
09/28/16KIRAN S, Assistant Professor @ BGS Institute
of Technology-MBA
2
Nature and Scope of Managerial
Economics

What’s Economics
of Technology-MBA
3
Artha – Money/Income
Shasthra – Body of Knowledge
Economics – Body of knowledge which deals with the
management of money

Managerial Economics
of Technology-MBA
4
According to Milton H Spencer and Louis Siegelman
“Managerial Economics is the integration of economic theory
with business practice for the purpose of facilitating decision
making and forward planning by the management.

09/28/16
KIRAN S, Assistant Professor @ BGS Institute of Technology-MBA
5
Economic Theory
and Methodology
Business
Management
Decision Problems
Business Economics
Application of Economics
to solve business
problems
Optimal solutions to
business problems

Nature of Managerial Economics
of Technology-MBA
6
 Micro in nature- concerned with the study of the problems
of the firm.
Pragmatic in nature- aims at solutions to problems
considering the environment in which the business operates.

of Technology-MBA
7
 Prescriptive in nature rather than descriptive- aims at
prescribing solutions to business problems rather than
describing theories.
Uses Macro-Economics too – enables an executive to
understand the business environment nd adjust with the
uncontrollable external factors

Scope of Managerial Economics
of Technology-MBA
8
1) Demand Analysis and Forecasting:
- Forecasting future sales of products and services.
- Identify demand determinants
- guidelines to manipulate demand
2) Cost Analysis:
- Discovering and measuring them for effective profit
planning and cost control
- covers cost-output relationships, economies and
diseconomies of scale, cost control and cost reduction

of Technology-MBA
9
3) Production and Supply Analysis:
- deals with planning production and its managerial uses
- supply analysis deals with various aspects of supply of a
commodity
- maximize firm’s revenue through proper planning of
production and supply.
4) Pricing decisions, policies and practices:
- correct pricing decisions form the backbone of success of
the firm
- covers price determination in various market conditions,
pricing methods and price forecasting.

of Technology-MBA
10
5) Profit Management:
- high level of uncertainty in variation of costs caused by sudden
change in the internal and external factors
- ME helps in estimating considerably such uncertainties by
manipulating costs
- covers break even analysis, measurement of profit, profit
policies and techniques etc
6) Capital Management:
- most complex decisions of business often revolve around
planning and allocation of capital
- decisions irreversible in nature
- ME helps in planning and control of capital expenditure.
- covers cost of capital, rate of return and selection of projects

09/28/16
of Technology-MBA11
Law of Demand
States the relationship between price and quantity demanded.
Relationship is inverse.
Assumes other things constant.

09/28/16
of Technology-MBA12
Ceteris paribus, the higher the price of the good, the
smaller is the quantity demanded and the lower
the price of a good, the higher is the quantity
demanded.
P ↑ Qd ↓
P ↓ Qd ↑ ceteris paribus

09/28/16
of Technology-MBA13
“As the price of Pepsi-Cola rises, the quantity demanded of
Pepsi-Cola falls, ceteris paribus.”
Ceteris paribus -a Latin term that means all other things held
constant or nothing else changes.

Four Ways to Represent the Law of
Demand
09/28/16
of Technology-MBA14
In Words
In symbols
In a demand Schedule –(Numerical)
As a demand curve.

09/28/16
of Technology-MBA15
Why does lower price increases quantity demanded?
-Income Effect (real)
-Substitution Effect

Demand Curve
09/28/16
of Technology-MBA16

Individual demand curve and Market
demand curve
09/28/16
of Technology-MBA17
An individual demand curve represents the price-quantity
combinations of a particular good for a single buyer.
A market demand curve is derived by “adding up” individual
demand curves.

Individual & Market demand schedule
09/28/16
of Technology-MBA18

A Change in Quantity Demanded Versus a
Change in Demand
09/28/16
of Technology-MBA19
Economics often talk about;
(1) a change in quantity demanded and
(2) a change in demand.

09/28/16
of Technology-MBA20
- A change in quantity demanded refers to movement on the
demand curve.
- Quantity demanded at various price levels.
- Change in demand brought about by change in price.
A movement from one point to another point
on the same demand curve caused by a change in the price of
the good

09/28/16
of Technology-MBA21

09/28/16
of Technology-MBA22
Change in demand refers to shift in the demand curve.
Demand can change in two ways: Demand can increase, and
demand can decrease. Let’s look first at an increase in
demand.
Change in demand refers a shift in the demand curve caused
by the factors other than price.

09/28/16
of Technology-MBA23

09/28/16
of Technology-MBA24

Increase in demand = Rightward shift in
the demand curve
09/28/16
of Technology-MBA25

Decrease in demand = Leftward shift in
the demand curve
09/28/16
of Technology-MBA26

DETERMINANTS OR FACTORS of law of
Demand
09/28/16
of Technology-MBA27
1.Income of the consumer
-Key determinant of demand
-positively related with the demand.
X is a normal good: If income then↑ DX ↑
If income then↓ DX ↓

09/28/16
of Technology-MBA28
Y is an inferior good: If income then↑ Dy ↓
If income then↓ Dy ↑
-If good is neutral good the income effect is neutral.
For a neutral good, as income rises or falls, the demand
for the good does not change.

09/28/16
of Technology-MBA29
2.Prices of the related goods
-Substitutes
-Complementary goods.

09/28/16
of Technology-MBA30
X and Y are substitutes: If PX then↑ DY ↑
If PX then↓ DY ↓

09/28/16
of Technology-MBA31
X and Y are Complements: If PX then↑ DY
If PX then↓ DY

09/28/16
of Technology-MBA32
3.Taste and preference of the consumer
- Can have both positive and negative impact on demand.
- A change in preferences in favor of a good shifts the demand
curve rightward.

09/28/16
of Technology-MBA33
4.Advertisements
-Influence taste and preference of the consumers
-This influences the demand.
5.Expectations
-Related to their future income
-Related to the prices of the goodS
6. 6.Customs and traditions
-Put restrictions on the consumption of certain commodities.

09/28/16
of Technology-MBA34
7.Income distribution
-Slow growth in consumption if income is concentrated than if
income is equally distributed.
8.Size of the Population

Exceptions to law of demand
of Technology-MBA
35
1. Giffen goods: A Giffen good describes an inferior good
that as the price increases, demand for the product
increases. Giffen goods - are products that people
continue to buy even at higher price due to lack of
alternatives for the products or no substitutes
ex: Gold jewells
2.Speculative products: the law of demand does not affect
to speculative product ex: Lottery

of Technology-MBA
36
3.Veblen effect: people tend to buy some expensive products in
order to show off their status
4. Necessities of life- all the basic material that we usually
consume
5.Conspicuous necessities- Refrigerator, coolers, cooking gas
inspite of increase in all these it doesn’t show any impact on
demand
6. Outdated goods- the sale of air cooler may go down during
the winters even if they are sold at reduced prices

of Technology-MBA
37

Methods
of Technology-MBA
38

Elasticity of Demand
of Technology-MBA
39
The law of demand states that price and quantity demanded
are inversely related, ceteris paribus.
But it doesn’t tell us by what percentage the quantity demanded
changes as price changes.

of Technology-MBA
40
• Elasticity provides a technique for estimating the
response of one variable to changes in another.
• Price elasticity of demand is a measure of the
responsiveness of quantity demanded to changes in
price.
• More specifically, it addresses the percentage change in
quantity demanded for a given percentage change in
price.

of Technology-MBA
41

of Technology-MBA
42

of Technology-MBA
43
We know that…

Income elasticity of demand
of Technology-MBA
44
It is defined as the “ the percentage change in the quantity
demanded of a good divided by the percentage change in the
income of the consumer
EY=change in q × Y
change in y q
EY = income elasticity
Q= quantity
Y=income

Types of income elasticity of demand
of Technology-MBA
45
High income elasticity: whn the qnty demanded increase by a
larger proportion as compared with income of the consumer
Unitary income elasticiy: when the percentage change in qty
demanded is equal to the percentage change in income,
income elasticity of a consumer
Low income elasticity: when the qty demanded of a good
increases by a smaller percentage as compared with the
income of consumer

of Technology-MBA
46
Zero income elasticity:
When the qty demanded of a good remains unchanged upon
the change of income
Negative income elasticity:
When the quantity demanded of a good falls in response to an
increase in income

Cross elasticity of demand
of Technology-MBA
47
A change in the quantity demanded for one good in response
to a change in the price of another good represents cross
elasticity of demand of the former good for the latter good.
It is defined as folows
 E
c = % change in the qty demanded of good A
% change in the price of good B
= ^qx
^py *py
qx

of Technology-MBA
48
Substitute goods:
Complementary goods
Independent goods

Advertising and promotional elasticity
of demand
of Technology-MBA
49
The promotional elasticity of demand is a measure of
responsiveness of demand for a commodity to the change in the
outlay of the advertisements and other promotional efforts
E = % change in demand
% change in expenditure on advertisements and
promotional efforts
The greater the promotional elasticity, the more will be the
incentive to go in for advertising . The advertisements of sales
varies between zero to infinity

Uses of elasticity of demand for
managerial decision making
of Technology-MBA
50
Determination of price policy: while fixing the price of
the product. A businessman has to consider the elasticity of
demand for the product. He should consider the elasticity of
demand for the product.
Price determination-price discrimination refers to the act
of selling the technically same products at different prices to
different section of consumers or different in different sub
markets

of Technology-MBA
51
Shifting of tax burden: to what extent a producer can shift
the burden of indirect tax to the buyers by increasing price of his
product depends upon the degree of elasticity of demand.
Taxation and subsidy policy: the government can impose
higher taxes and collect more revenue if the demand for the
commodity on which a tax is levied is inelastic.
Importance in international trade: the concept of elasticity
of demand is of crucial importance in many aspect of
international trade. The main objective is to correct the adverse
balance of payments

of Technology-MBA
52
Importance in the determination of factor prices-a
factor with an elastic demand can always command a higher price
as compared to a factor with relatively elastic demand.
Pricing of joint supply products: the goods that are
produced by a single production process are joint supply
products.
Effect on use of machines on employment: ordinarily it is
thought that use of machines reduced the demand for labour.
There fore trade unions often oppose the use of machines fearing
unemployment.

of Technology-MBA
53
Public utilities- the nationalization of public utility services
can also be justified with the help of elasticity of demand.
Demand for public utilities such as electricity, water supply, post
and telegraph, public transportation.
Output decisions- the elasticity of demand helps the
businessman to decide about production. The businessman
chooses the optimum product mix on the basis of elasticity of
demand

Demand Forecasting
09/28/16
of Technology-MBA54
Demand forecasting is the activity of estimating the
quantity of a product or service that consumers will
purchase. Demand forecasting involves techniques including
both informal methods, such as educated guesses, and
quantitative methods, such as the use of historical sales data
or current data from test markets. Demand forecasting may
be used in making pricing decisions, in assessing future
capacity requirements, or in making decisions on whether to
enter a new market.

09/28/16
of Technology-MBA55
A) Time series projection methods this includes:
moving average method
exponential smoothing method
trend projection methods
B) Casual methods this includes:
chain-ratio method
consumption level method
end use method

Importance of Demand forecasting
09/28/16
of Technology-MBA56
The significance of demand forecasting is shown in the
following points:
i. Fulfilling objectives:
Implies that every business unit starts with certain pre-decided
objectives. Demand forecasting helps in fulfilling these objectives.
An organization estimates the current demand for its products and
services in the market and move forward to achieve the set goals.
For example, an organization has set a target of selling 50, 000 units
of its products. In such a case, the organization would perform
demand forecasting for its products. If the demand for the
organization’s products is low, the organization would take
corrective actions, so that the set objective can be achieved.

09/28/16
of Technology-MBA57
ii. Preparing the budget:
Plays a crucial role in making budget by estimating costs and
expected revenues. For instance, an organization has forecasted
that the demand for its product, which is priced at Rs. 10, would
be 10, 00, 00 units. In such a case, the total expected revenue
would be 10* 100000 = Rs. 10, 00, 000. In this way, demand
forecasting enables organizations to prepare their budget.
iii. Stabilizing employment and production:
Helps an organization to control its production and recruitment
activities. Producing according to the forecasted demand of
products helps in avoiding the wastage of the resources of an
organization. This further helps an organization to hire human
resource according to requirement. For example, if an
organization expects a rise in the demand for its products, it may
opt for extra labor to fulfill the increased demand.

09/28/16
of Technology-MBA58
iv. Expanding organizations:
Implies that demand forecasting helps in deciding about the expansion of
the business of the organization. If the expected demand for products is
higher, then the organization may plan to expand further. On the other
hand, if the demand for products is expected to fall, the organization
may cut down the investment in the business.
v. Taking Management Decisions:
Helps in making critical decisions, such as deciding the plant capacity,
determining the requirement of raw material, and ensuring the
availability of labor and capital.
vi. Evaluating Performance:
Helps in making corrections. For example, if the demand for an
organization’s products is less, it may take corrective actions and
improve the level of demand by enhancing the quality of its products or
spending more on advertisements.
vii. Helping Government:
Enables the government to coordinate import and export activities and
plan international trade.

Module 1 -Economics for Managers-MBA-1st semester MBA

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Module 1 -Economics for Managers-MBA-1st semester MBA

Similar to Module 1 -Economics for Managers-MBA-1st semester MBA (8)

More from KIRAN SHETTY -Qualified in SLET-MANAGEMENT and COMMERCE

More from KIRAN SHETTY -Qualified in SLET-MANAGEMENT and COMMERCE (8)

Recently uploaded

Recently uploaded (20)

Module 1 -Economics for Managers-MBA-1st semester MBA