Unit 1.pdf of mba of far Western University

 Subject code: Eco 522
 Credit Hours: 2
 Semester: First
 Lecture Hours: 30
 F.M. 100
 P.M. 50
 Time: 4 hrs
Saturday, February 10,
2024
R K Saud Asst. Prof. FWU 2

 Group-A: Case Analysis- 1: (1× 20 = 20 marks)
 Group-B: Problem solving/Critical analysis
questions- 6 (any five): (5 × 12 = 60 marks)
 Group-C: Concept based short answer questions- 4
(all): 4 × 5 = 20 marks
2024

 Unit -1: Introduction and Objectives Firm (LH 6)
 Unit -2 : Demand Analysis and Forecasting (LH 6)
 Unit -3 : Theory of Production and Cost (LH 6)
 Unit -4 : Pricing Theory and Techniques (LH 7)
 Unit -5: Role of Government in Market (LH 5)
Saturday, February 10, 2024 R K Saud Asst. Prof. FWU 4

 Text Books:
 1. Dwivedi, D. N. (2008). Managerial Economics, 7th
Edition, Vikash Publishing House PVT LTD.
 2. Hirschey, Mark (2009). Fundamentals of Managerial
Economics, 9th Edition, Cengage Learning
 3. Salvatore, D. (2012). Managerial Economics Principles
and Worldwide Application, 7th Edition, Oxford University
Press.
 4. Petersen, Craig H., Lewis, W Cris, Jain, Sudhir K.
(2009). Managerial Economics, 4th Edition, Indian Institute
of Technology, Delhi.
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 1. Mankiw, N. G. (2011), Principles of Microeconomics.
Sixth Edition, USA: South Western College publication.
 2. P. Robert S., R. Daniel L., M. Prem L. (2012).
Microeconomics, 7th Edition, Published by Dorling
Kindersley (India) Pvt. Ltd.
 3. Dwivedi, D. N. (2012 ). Microeconomics, Theory and
Application, 2nd Edition, Dorling Kindersley (India) Pvt. Ltd.
 4. Chandra, P. (2002), Project Planning, Analysis Financing,
Implementation and Review, New Delhi, Tata McGraw- Hill
Publishing Company Limited.
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 Other Books (Nepali Writer):
1) Managerial Economics: Prof. Dr. Shyam Joshi
2) Business Economics: Sushil Kumar Nepal and two
others
3) Managerial Economics: Prof . Tara P Bhusal, Shankar
Datt Bhatt and three others
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 Meaning and Scope of Managerial Economics
 Role of Managerial Economics in Business Decision Making
 Organizational Objectives:
1. Profit Maximization
2. Sales Maximization
3. Value Maximization
4. Simon’s Theory of Satisfaction Behaviour and
5. Williamsons’ Model of Managerial Discretion
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Reasons for the emergence of Managerial Economics
as a separate course of management studies:
1)Growing complexity of business decision making
process due to changing market conditions and
business environment.
2)The increasing use of economic logic, concepts,
theories and tools of economic analysis in the
process of business decision making.
3)Rapid increase in demand for professionally
trained managerial manpower. etc
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 Now a days, business decision process has become
increasingly complicated due to ever growing
complexities in the business world.
 There was a time when business units were set up,
owned and managed by individuals or business
families.
 But, now the industrial business world has changed
drastically in size, nature and content.
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 The growing complexity of the business world can be
attributed to the growth of large scale industries,
growth of large variety of industries, diversification
of industrial products, expansion and diversification
of business activities of corporate firms, growth of
multinational corporations etc. especially after the
second world war.
 These factors have contributed a great deal to the
recent increase in inter-firm and international
competition, risk and uncertainty.
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 Business decision making in this kind of business
environment is very complex affair and the family
training and experience is no longer sufficient to met
the managerial challenges.
 For business decision making, there is need of
application of economic concepts, theories and tools of
economic analysis.
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 The application of economic concepts,
theories, logic and analytical tools in the
assessment and predication of market
conditions and business environment has
proved to be of great help in business decision
making.
 The contribution of economics to business
decision making has come to be widely
recognized.
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 Consequently, the economic theories and
analytical tools, which are widely used in
business decision making, are included in a
separate branch of managerial studies, called
‘Managerial Economics’.
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 Managerial economics is a part of economics and it
provides economic theories, analytical tool and decision
making tools in business and economics activities to the
Managerial economics.
 Therefore, we should have knowledge about economics.
 Economics is a socio-economic science and it is the study
of economic activities of human being.
 Its basic function is to study how people like individuals,
households, firms and nation maximize their
gains/satisfaction from their limited resources and
opportunities.
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 In economic terminology, this is called maximizing
behavior, or more appropriately, or optimizing
behavior.
 Optimizing behavior is selecting the best out of
available options with the objective of maximizing
gains from the given resources or minimizing cost for
given output.
 The main objective of economics is how
households/consumers maximize their satisfaction
and firms/producers maximize the profit or minimize
the cost of production by allocating their limited
resources.
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 Therefore, economics is a study of the choice making
behavior of the people.
 However, choice making i.e. decision making is not as
simple as it looks, under the condition of imperfect
knowledge, risk and uncertainty.
 Therefore, taking an appropriate decision in an extremely
complex situation is a very difficult task.
 For the complex decision making process, economists
have developed a large kit of analytical tools and
techniques with the aid of mathematics, econometrics
and statistics, that are used in managerial economics.
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 Managerial economics refers to the application
of economic theory, laws and tools of analysis
of decision science to examine how an
organization can achieve its objectives most
efficiently.
 It can be broadly defined as the study of
economic theories, logic and tools of
economic analysis that are used in the process
of business decision making.
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 Economic theories and techniques of
economic analysis are applied to analyze
business problems, evaluate business options
and opportunities with a view to arriving at a
appropriate business decision.
 Managerial economics is thus constituted of
that part of economic knowledge, logic,
theories and analytical tools that are used for
rational business decision making.
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 According to Mansfield,- “Managerial
economics is concerned with the application of
economic concepts and economics to the
problems of formulating rational decision
making.”
 According to Spencer and S Eigelman,-
“Managerial economics is the integration of
economic theory with business practice for the
purpose of facilitating decision making and
forward planning by management.”
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 According to Douglas,- “Managerial economics is
concerned with the application of economic
principles and methodologies to decision making
process within the firm or organization. It seeks to
establishing rules and principles to facilitate the
attainment of the desired economic goals of
management.”
 Thus, managerial economics is the applied and
decision making science, that includes the practical
theories and concepts of economics.
 The application of economic concepts, theories and
quantitative tools can be shown by following figure:-
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2024
Managerial Decision areas:
Selecting business area
Choice of fund
Determining optimal output
Determining price of the product
Determining input combination and technology
Sales promotion
Application of economic
concepts and
theories in decision making
Use of quantitative methods
Mathematical tools
Statistical tools,
Econometrics
Managerial Economics
Application of economic concepts, theories
and analytical tools to find optimum solution
to business problems
Figure-1

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Economic theory
Micro-economics
Macro-economics
Decision science
Mathematical economics
Econometric
Application of economic theory
and decision science tools to
solve managerial decision problems
Optimal solution to managerial problems
Figure-2

 Scope of managerial economics includes the area, subject
matter, nature, importance and limitation of managerial
economics.
 Again nature, importance and limitations of managerial
economics depends on subject matter of managerial economics.
 Therefore, scope of managerial economics depends on the
subject matter of managerial economics.
 That is, scope and subject matter are used in similar meaning.
 In general, the scope or subject matter of managerial economics
includes all those economic concept, theories and tools of
analysis which can be used to analyze issues related to demand
prospects, level of competition and general business
environment.
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 The area of business issues to which
economic theories can be directly applied
may be broadly divided into following two
categories:-
1. Micro-economics applied to operational or
internal issues and
2. Macro-economic issues applied to
environmental or external issues.
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 Operational and internal issues includes all
those problems arise within the business
organizations.
 Some internal issues are: i) what to produce
ii) how to produce iii) how much to produce
iv) for whom to produce v) how to price of
the commodity vi) how to promote sales vii)
how to face price competition viii) how to
determine new investment ix) how to manage
capital x) how to manage human resource
etc.
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 The following micro economic theories deal
with most of these questions:
a) Theory of Demand:
 Theory of demand deals with consumer’s
behavior.
 It answer the questions such as –how to the
consumer decide on the quantity of a
commodity to be purchased? When do they
stop consuming a commodity? How do the
consumer behave when price of the
commodity, income etc. changes.
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 The knowledge of demand theory can
therefore be helpful in making the choice of
the commodities, finding optimal level of
output and in determining the price of the
product.
 Theory of demand includes factors affecting
the demand, types of demand, elasticity of
demand, techniques of demand forecasting etc.
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b) Theory of Production and Production
Decision:
 Production theory explains the relationship
between inputs and output.
 It also explains how total output behaves
when unit of one factors or all factors are
increased? How optimum combination of
inputs be determined? How can the optimal
size of output be determined?
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 The production theory thus, helps in
determining the size of the firm, size of the
total output, amount of capital and labour to be
employed etc.
 Theory of production includes the production
function, optimal use of an input, optimal use
of two inputs, economies of scope etc.
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c) Analysis of Market Structure and Pricing
Theory:
 Price theory explains how price is
determined under different market structures.
 Price theory can be helpful in determining
price policy of the firm.
 It includes the pricing under different market
structures, strategic behaviour and game
theory.
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d) Profit Analysis and Profit Management:
 It explains the techniques of profit
maximization under the conditions of risk
and uncertainty.
 Profit theory guides the firm in the
measurement and management of profit.
 It includes the techniques of calculating the
pure return on capital, pure profit and factors
affecting profit.
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e) Theory of Capital and Investment
Decisions:
 Capital is the foundation of business.
 Its efficient allocation and management is
one of the most important task of the
managers.
 The major issues related to capital are i)
choice of investment project ii) efficiency of
capital etc.
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 Knowledge of capital theory can contribute a
great deal in industrial decision making,
choice of projects, capital budgeting etc.
 It includes the factors affecting investment
decision, risk analysis.
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 Business environment is related to the overall
economic, social and political atmosphere of
the country as well as the world.
 It includes the type economic system, general
trends in national income, price, salaries,
investment, employment, magnitude and
trends in foreign trade, condition of financial
institutions, trend in labour market.
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 It also includes the capital markets, economic
policies of the government, social traditions,
customs, condition of trade unions, political
environment, degree of globalization etc.
 These environmental factors are far beyond the
powers of a single firm but they are directly or
indirectly affecting the business decision
making
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 So, business decision makers have to take into
account the present and future economic,
political and social condition in the country
and these all are the subject matter of
managerial economics.
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 Decision making is an important function of a
business executive.
 It is a process of selecting a particular course of
action from among number of alternative course
of action.
 That is, it the process of selecting best alternate
out of different alternatives.
 If all the factors of production are easily
available, then there is no need of decision
making.
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 But, the factors of production are limited and
can be used for many purpose and there are
unlimited ends of a firm.
 So, the question of choice making arises.
 Decisions will have to be made in condition of
uncertainty and must formulate plans for the
future.
 In such situation, managerial economics is of
considerable help.
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 Managerial economics uses the principles,
laws and methods in managerial decision
making.
 By using the tools and techniques of economic
analysis in solving managerial problems,
managerial economics links the traditional
economics with the decision science.
 As a result, managerial economics develops
the tools, which are important for managerial
decision making.
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 It teaches the manager as how the works
should be done efficiently to achieve the
objectives.
 It also help to know that how economic factor
affects the organization and identifying the
ways to achieve objectives of the organization
efficiently.
 It provides pricing and output strategies for the
efficient attainment of the objectives like rapid
growth for the firm or profit maximization or
output maximization etc.
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 It helps the firms in the proper use of scare
capital and human resources.
 Managerial economics explains how the
economic environment affects managerial
decisions and how the managerial decision
affect economic environment.
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 Managerial economics provides the basis for
evaluating whether the resources are being
efficiently allocated within the firm or not.
 The theories of managerial economics helps
the manager to act according to various
economic signals or indicators.
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Suppose a firm/organization plans to lunch a
new product in Mahendranagar for which
close substitutes are available in market. If the
matter has to decided by the managers of the
firm or organization themselves, then discuss
the areas which they will need to investigate
and analyze.
Hints:- a) Production related issues and
b) Sales prospects and problems.
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 In regard to production related issue, managers will
be required to collect and analyze the data on:-
 Available techniques of production.
 Cost of production associated with each production
techniques.
 Supply position of inputs required to produce the
planed commodity.
 Price structure of competitive products.
 Price structure of inputs.
 Available of foreign exchange if inputs are to be
imported.
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 In regard to sales prospects and problems
managers are required to collect and analyze the
data on:-
 Market size ,general market trends and demand
prospects for the products.
 Price of competing products.
 Trends in industry to which the planed product belongs.
 Major existing and potential competitors and their
respective market shares.
 Pricing strategy of the prospective competitors.
 Market structure and degree of competition.
 Supply position of complementary goods. Etc.
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 There are various objectives of a firm.
 The traditional objective of a firm is to maximize the
profit.
 Now a days, there are different other objectives like
value maximization, sales revenue maximization,
goodwill maximization, satisfaction maximization
etc. on the basis of empirical analysis.
 But the final target of all other objective is also profit
maximization.
 This part analyze the different empirical theories of
firm including traditional theory of a firm.
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R K Saud Asst. Prof. FWU

 It is a traditional and important objective of a
firm.
 It is also known as basic or fundamental
objective.
 This model assumes that a firm or producer
always try to maximize its profit.
 The following are the main assumptions of
this model:
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 The firm is an individual enterprises
 Rational entrepreneur
 Each firm produces only single goods
 Price of factors of production remains constant
 All the factors of production are homogeneous etc.
 On the basis of above assumptions, equilibrium
condition of a firm with profit maximization can
explained by using following two approaches:
1. TR- TC approach and
2. MR- MC approach
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 Under TR-TC approach, the main objective of a firm is to
maximize the profit.
 So, a firm always, try to maximize its profit.
 TR-TC approach is one traditional way of finding
equilibrium under profit-maximization model.
 Profit is maximized at that output level at which total
revenue exceeds total cost by the largest amount.
 According this approach, profit is the difference between
total revenue and total cost.
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 If the positive difference between TR and TC is maximum
then the firm will be in equilibrium.
 In other words, under this approach the firm will produce
that level of output where the positive difference between
total revenue and total cost is maximized i.e.
 Profit = TR –TC ……(i)
= Maximum
 Therefore, under TR – TC approach, the firm will be in
equilibrium when it gets maximum profit .
51
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 That is, in this situation the firm will be in
equilibrium with making maximum profit.
 The equilibriums of firm under this approach can be
explained by using following figure:
52
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 In the above both figures, the equilibrium condition of a
firm under TR –TC approach has been explained.
 The TR line under perfect competition is upward sloping
straight line due to the constant price for every units and
the TR line under imperfect competition or monopoly is
initially increases at decreasing rate and after reaching the
maximum point, it starts to decrease due decrrese in price
with the increase in quantity sold.
54
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 In the short run, the total cost curve is determined by
the law of variable proportion under both markets.
 So, in the beginning it increases at decreasing rate and
later on increases at increasing rate and its shape is
nearly inverse of ‘S’.
 In the first figure, a firm is bearing losses before M1
and after M2 units of output and the profit or positive
gap becomes maximum at M level of output.
55
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 This fact is justified by the total profit curve (TPC),
which is negative up to M1 level of output and then it
is positive between M1M2 level of output and
becomes maximum at M level of output, finally after
M1 it becomes negative.
 So, M1 is the equilibrium level of output, where total
profit becomes maximum.
 Similarly, In the second figure, a firm is bearing
losses before C and after D units of output and the
profit or positive gap becomes maximum at Q level
of output.
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 This fact is justified by the total profit curve (TP),
which is negative up to C level of output and then it is
positive between CD level of output and becomes
maximum at Q level of output, finally after D it
becomes negative.
 So, Q is the equilibrium level of output, where total
profit becomes maximum.
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 MR –MC approach is a modern approach for equilibrium
or profit maximization of a firm under every market
structure.
 According to this approach, equilibrium of a firm under
perfect competition and other market is explained on the
basis of MR and MC.
 Marginal revenue is the additional revenue obtained from
the sale of one extra unit of goods and marginal cost is the
additional cost of production to produce one extra unit of
output.
58
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 This approach explains that when marginal revenue
and marginal cost are equal to each other then the
firm gets equilibrium and earns maximum profit.
 According to this approach, the producer will
continue increase in production till MR is equal to
MC.
 The equality between MR and MC may be at two
levels of production.
 This situation is only necessary condition for
equilibrium but for the sufficient condition MC must
cuts MR from below.
59
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 Therefore, the following two conditions must be fulfilled
for profit maximizing level of output under this
approach.
1) Necessary condition for equilibrium:
MC = MR
1) Sufficient condition for equilibrium:
MC cuts MR from below i.e.
slope of MC ˃ slope of MR
 When these two conditions are fulfilled, then the firm is
said to be in equilibrium with maximization of profit.
60
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 On the basis of above analysis and two conditions, short
run equilibrium of a with profit maximization can be
explained by the following figure:
 (Under Perfect Competition)
61
AR=MR=P
Output
Qe
Q1
O X
Y
Pe
A B
E
M
Abnormal Profit
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 (Under Imperfect Competition or Monopoly)
62
AR=P
Output
Qe
O
X
Y
Pe
A B
E
C
Abnormal Profit
MR
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 In the above both figures, equilibrium of a firm is
explained with the help of MR and MC curves.
 In these figure, MC and MR are equal to each other and
MC cuts MR from below at point ‘E’.
 That is, the necessary and sufficient condition for
equilibrium are fulfilled at point ‘E’, so this point is an
equilibrium point and at this point, profit of a firm
becomes maximum.
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 At this point the firm sells OQe units at OPe price and
maximized its profit.
 The firms profit per unit at this point is BE and the total
profit is PeABE on both figures.
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 This model is a neo-classical model of firm’s objective.
 This model is also known as shareholder’s wealth
maximization.
 It is the analysis of value maximization objective of a
firm and this model is modified form of profit
maximization.
 So, this objective of a firm is also known as long run
profit maximization objective.
65
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 According to this model, the act or process of adding to
an individual's net worth by increasing the share price of
the common stock in which that individual has invested.
 It says that all firms seek to maximize their total market
value and maximizing social welfare .
 If the manager of a firm is able to receive more and more
return then value of a firm will be maximized.
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 Under this model, the main objective of the financial
manager is to maximize the shareholder’s wealth and
wealth of shareholders is measured on the basis of price
of share.
 This model focused that profit of a firm in the beginning
may reduce but it should increase for long period of time
so as to maximize the value of shares.
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 If there is maximization of long run profit then there
will be value maximization or shareholder’s wealth
maximization.
 According to this model, value maximization is the
maximization of present value or discounted value of
future profit.
 Present value is the firm’s expected future profit
discounted to present value.
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 Symbolically, it can be expressed as follows:
 Maximize of PV (π) = π1 + π2+…. …….. πn ….(i)
 (1+r) (1+ r)2 (1+r)n
 Where, π1, π2, ……. πn = future expected profit of ‘n’ years.
 r = discount rate
 t = time period
 n = no of years
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n

 In this way, the present value of expected future profit
should be maximize for value maximization of a firm
or shareholder’s wealth maximization.
 If there is maximization of wealth then there will be
maximization of long run profit.
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 Sales maximization model is also known as sales revenue
maximization model.
 This model was explained by W.J. Boumol by criticizing
profit maximization model.
 According to Boumol, the main objective of manager is
to maximize the sales revenue in place of maximization
of profit.
 Boumol conclude that, a firm under oligopoly wants to
maximize its sales subject to a minimum profit
constraint.
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 In this way, this model explains that there should be
minimum profit but total sales revenue or market share
should be maximized.
 Under this objective, output is greater and price is lower
than under the objective of profit maximization.
 Boumol analyze that in modern businesses, owners and
management are separate.
 Therefore, top management always want to maximize
the sales revenue in place of profit maximization.
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 The following are the main reason for sales maximization:
 The salary and other facilities of top management depends
on sales revenue than profit.
 Banks and financial institutions can provide more loan on
the basis of sales in place of profit.
 Maximization of sales is beneficial and easy to provide
salary and other facilities to the employee.
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 Increase in sales will determine the efficiency and
prestige of the manager.
 Easy to competitive with others with the sales revenue
maximization. etc.
 According to Baumol, there are two types of
equilibrium under sales revenue maximization model.
They are:
1. Sales revenue maximization without profit
constraint and
2. Sales revenue maximization with profit constraint
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N P1
L

 In the above figure, TR and TC are the total revenue
and total cost curves respectively.
 Similarly, TP is the total profit curve, which is the
positive difference between TR and TC curves.
 Initially TP curve is continuously increasing and after
reaching the maximum point it is continuously
decreasing and also becomes negative.
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 According to the above figure, if the firm aims to
maximize the profit, then it will produce OQ units of
output with QB level of profit.
 But, according to this model, firm should maximize its
sales revenue.
 So, the firm will produce OK level of output, where TR
becomes maximum.
 At OK level of output, the total profit is KS, which is
less than QB.
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 In this way, OK level of output under the objective of
sales revenue maximization without profit constraint is
more than the OQ level of output under the objective of
profit maximization.
 If the firm’s objective is to earn certain level of profit i.e.
profit constraint or OM level of profit then the firm will
produce OD level of output.
 Similarly, if the firm’s profit constraint is ON, then the
firm will produce OL level of output and so on.
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 Again, under the objective of sales revenue
maximization with profit constraint, there is the greater
output and lower level of price than under the objective
of profit maximization.
 In this way, Baumol conclude that sales revenue
maximization objective is better than the profit
maximization objective of a firm.
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 This model of a firm is related with managerial
discretion or judgment/diplomacy.
 According this theory, the managers look their self
interest while making decisions about price, output,
sales, advertisement etc of a firm.
 This theory conclude that managers are motivated
by their self interest and they are not interested for
profit maximization.
 The managers of a company always wants to
increase their own utility by increasing salary,
security, power etc.
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 Therefore, according to this theory, the main objective
of a manager is to maximize his/her utility and the
manager’s utility function is expressed as follows:
 U = f ( S, M, ID) …………….(i)
 Where, U = manager’s utility
 f = function
 S = expenditure on staffs
 M = managerial emoluments or management slack/ Extra facilities
to the manager
 ID = discretionary or flexible investment
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 On the basis of this theory, factors determining utility
of a manager are as follows:
1. The salaries and other forms of monetary
compensation to the manager.
2. Quality of staffs and control over the number of
staffs.
3. Managerial emoluments like extra facilities of
personal secretary, car, and other equipments.
4. Discretionary investment expenditure i.e. amount
that the manager spend according to his desire. etc
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 According to Williamson, if the above factors
favourable for manager then the utility of manager
becomes maximum.
 That is, all the managers wants to maximize their
utility subject to minimum profit constraint.
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 The following are the two levels of decision making for
achieving the goals of a firm:
1. Decision at the top level management (resource
allocation to various department)
2. Decision at the lower level of administration (various
degree of freedom for action)
2024

 This theory was propounded by Herbert Alexander
Simon in 1955AD.
 This theory was first behavioural theory related with
firm, which was based on the criticism of profit
maximization model of the firm.
 This theory explained that business firms wants to
achieve a satisfactory level of profit rather than
maximizing level of profit.
2024

 Simon explains that managers will have imperfect
knowledge for taking proper decision.
 He explains that due to the uncertainties surrounding
decision making in reality, businessmen can never
know whether they are maximizing profit or not.
 Therefore, businessmen may not maximize their profit
and they aim at satisfactory level.
 Due to future uncertainties and lack of accurate and
required information related to the firm, managers have
to take decision about future condition of the business
on the basis of past events and incomplete information.
2024

 In the large firms many people are involved in the top and
medium management and all these persons are involved in
formulating different policies of the firm and most of the large
firms can’t known about where, how and from whom the
decisions are made.
 This theory explains that different groups within a firm and
develop their own view and intra-firm politics is important in the
process of policy making of firm.
 In other words, if there are different departments in the company
then each department struggles to increase its share in the
company’s budget and each department tries to keep other
departments at a lower level.
 In this way, the political struggle within the firm plays an
important role in determining its objectives.
2024

 This theory explained that a firm has satisfactory ambition
level of profit and an ambition level is the level of
achievement that the firm hopes for in a particular field.
 The ambition level of profit depends on last experience and
if it is attained easily then the ambition level will be higher
and if it is difficult to attain then it will be decreased .
 If the actual performance of a firm fails to obtain ambition
level, then research for new alternatives actively will be
started so that corrective action can be taken to achieve the
ambition level by better performance.
2024

 But there is a problem of budget for such research or
exploring different alternatives and a satisfactory
alternative course of action will be selected and the
firm will not go for all the alternatives for maximizing
profit.
 Therefore, this theory conclude that forms aim a
satisfying level of profit rather than maximizing level
of profit.
2024

 This theory was unable to explain the equilibrium of a
firm.
 This theory explains about satisfying level of profit but
it is not clear about that satisfying level of profit.
 This theory explained about the intra-firm conflict and
politics but did not give any solutions of such conflict
and their effect on decision making of the firm.
2024

 A company has the following demand and cost function:
Demand function, P = 40 – 2Q
Cost function, C = Q2 +10Q + 4
Determine the optimum level of output(Q), price(P), total
profit (π), and total revenue(R)
a) Under profit maximization
b) Under sales revenue maximization and
c) Under sales revenue maximization subject to profit constraint of
Rs 23.
2024

 Given that, P = 40 -2Q ………….(i)
 C = Q2 + 10Q +4 ……..(ii)
 Q = ?, P = ?, π = ? and R or TR =? Under different
objectives.
 a) Calculation of Q,P, π and R under the objective of
profit maximization:
 We know that,
 Profit(π) = TR – TC
2024

 or, π = P*Q – TC
 = (40 -2Q)Q – (Q2 + 10Q + 4)
 = 40Q – 2Q2 - Q2 - 10Q – 4
 π = -3Q2 + 30Q -4 ……………(iii)
 For profit maximization, first order
derivative of equation (iii) should equal to
zero.
 Therefore, d/dQ(π) = 0
 or, d/dQ(-3Q2 + 30Q -4 ) = 0
 or, -6Q + 30 = 0
2024

 or, -6Q = -30
 or Q = 5 units
 Now, putting the value of Q in equation (i), we get:
 P = 40 -2*5
 P = Rs 30
 Similarly, from equation (iii), we get
 π = -3(5)2 + 30*5 - 4
 = -75 + 150 -4
 π = Rs 71 and TR = P*Q = 30*5 = Rs 150
2024

 b) Calculation of Q,P, π and R under the objective of
sales revenue maximization:
 We know that,
 TR = P*Q
 or, TR = (40 -2Q)Q
 or, TR = 40Q – 2Q2 ……….(iv)
 For sales revenue maximization, first order
derivative of equation (iv) should equal to
zero.
 Therefore, d/dQ(TR) = 0
2024

 or, d/dQ (40Q – 2Q2) = 0
 or, 40 – 4Q = 0
 or, -4Q = -40
 or, Q = 10 units
 Now, putting the value of Q in equation (i), we get:
 P = 40 -2*10
 P = Rs 20
 Similarly, from equation (iv), we get;
 TR = 40Q – 2Q2
 or, TR = 40 *10 – 2(10)2
 or, TR = Rs 200
2024

 And, π = TR – TC
 or, π = 200 – (102 + 10*10 +4)
 or, π = 200 – 100 - 100 - 4
 or, π = Rs -4
 Therefore, loss = Rs 4
2024

 c) Calculation of Q,P, π and R under sales revenue
maximization subject to profit constraint of Rs 23:
 We know that,
 π = TR – TC
 or, π = -3Q2 + 30Q -4 [from equation
(iii)]
 or 23 = - 3Q2 + 30Q -4
 or, 3Q2 - 30Q + 27 = 0
 or, 3Q2 - 27Q -3Q + 27 = 0
 or, 3Q( Q – 9 ) -3( Q – 9) =0
2024

 or, (Q – 9)( 3Q – 3) =0
 So, Q – 9 = 0 and 3Q -3 = 0
 Q = 9 and Q = 1
 Now from equation (i),
 P = 40 -2 *9 = Rs 22 ( when Q = 9)
 And P = 40 – 2*1 = Rs 38 ( when Q = 1)
 Similarly, TR = P*Q = 22*9 = Rs198
 And TR = P*Q = 38*1 = Rs 38
 Again from equation (iii)
 π = -3Q2 + 30Q -4
 or, π = -3(9)2 + 30(9) -4 = -247 + 270 = Rs 23
 And, π = -3(1)2 + 30(1) -4 = Rs 23
2024

1) A ‘XYZ’ company of Mahendranagar has the
following demand and cost function:
Demand function, P = 20 – Q
Cost function, C = Q2 +8Q + 2
Determine the optimum level of output(Q), price(P),
total profit (π), and total revenue(R)
a) Under profit maximization
b) Under sales revenue maximization and
c) Under sales revenue maximization subject to profit constraint
of Rs 8.
2024
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Thank You
2024
10
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