Some key points in Managerial Economiccs

1. MANAGERIAL ECONOMICS

2. WHAT IS MANAGERIAL ECONOMICS ?
 Economics: The branch of knowledge concerned
with the production, consumption, and transfer of
wealth.
It is the study of to use scarce resources that
have alternate uses to satisfy needs which are
unlimited and of varying importance
The manager is a person who direct resources to
achieve a stated goal
The managerial Economics: The study of how to
direct scarce resources in the way that most
efficiently achieves a managerial goal

3. DIFFERENT TYPES OF ECONOMY : CAPITALIST
 Capitalist Economy:
A system of economics based on the private
ownership of capital and production inputs, and on
the production of goods and services for profit. No
government involved in the economic decisions.
 Example : United States of America
In economics, the invisible hand is a metaphor
used by Adam Smith to describe unintended social
benefits resulting from individual actions in his book
"An Inquiry into the Nature and Causes of the
Wealth of Nations"

4.  Smith’s Invisible Hand
"Every individual necessarily labors to render the annual
revenue of the society as great as he can. He generally
neither intends to promote the public interest, nor knows
how much he is promoting it .
He intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote
an end which was no part of his intention. Nor is it
always the worse for society that it was no part of his
intention. By pursuing his own interest he frequently
promotes that of the society more effectually than when
he really intends to promote it. I have never known
much good done by those who affected to trade for the
public good."

5. DIFFERENT TYPES OF ECONOMY : SOCIALIST
 Socialist economy : a system is based on some
form of social ownership of the means of
production, which mean direct public ownership,
where the government answer the questions of
What to produce ? How to produce and For Whom
to produce?
Example : North Korea

6. DIFFERENT TYPES OF ECONOMY : MIXED
 Mixed Economy : A system in which both the
private enterprise and public sector coexist. All
modern economies are mixed where the means of
production are shared between the private and
public sectors. Also called dual economy.
Example : India

7. ECONOMIC COST
 Cost : is payment of labor or estimated price and
 Opportunity cost is the benefit of resources that
we gave up. For example a man opt a job offer in a
city away from his home town for better salary
gave up the opportunity of staying home, which is
the opportunity cost in this case

8. COST & PROFIT
 Profit is the difference between the amount earned and the
amount spent for any commodity
 Economic profit = Total Revenue – Total Economic cost
 The economic cost composed of the sum of all opportunity
costs
 Economic cost = Explicit costs + Implicit costs
 Explicit cost : Direct Monetary payments/cost
 Implicit Cost : Non Monetary opportunity costs, like the
technology used by the manufacturer
 Ie Economic profit = Total Revenue – (Explicit costs +
Implicit costs)
 Economic profit = Accounting Profit – Implicit costs
 Where Accounting Profit = Total Revenue – Explicit costs

9. COST
 Marginal cost : marginal cost is the change in the
total cost when the quantity produced has an
increment by unit.
 Incremental cost : Incremental cost is the change in
total cost when the quantity produced has changed
in terms of bulk

10. ECONOMIC VARIABLES : DEMAND
 Demand : defines a consumer's desire and
willingness to pay a price for a specific good or
service when all other factors are constant
The law of demand :
states that, other things remaining same, the
quantity demanded of a good increases when its
price falls and vice versa

11. ECONOMIC VARIABLES : DEMAND
 Exceptions to the law of demand
 Inferior Goods : The goods consumed by the
people even if the price raises
Example : Hike in Ticket rates
 Veblen Goods : Veblen good’s demand also
increases with the raise in price. Veblen goods are
types of Luxury goods, expressing conspicuous
consumption and high status seeking
Example : a Rolls-Royce

12. THE DEMAND CURVE
 The Demand curve is diminishing in nature
Price
Quantity

13. FACTORS INFLUENCING DEMAND
 Price of goods or services
 Prices of related goods
 Income of the consumers
 Taste of the consumers
 Expected raise in the price
 Number of consumers

14. FACTORS INFLUENCING DEMAND
 The variation of Demand curve w.r.t PRICE
The change in price moves along with the curve
Price
Quantity
P1
P2
q1 q2

15. FACTORS INFLUENCING DEMAND
 The variation of curve w.r.t Taste and other factors
(excluding price of the goods)
A decrease in quantity demanded results a leftward
shift ( Demand 2) and an increase results a
rightward shift (Demand 3) of the curve
Price
Quantity

16. COMPLIMENTARY AND SUBSTITUTE
 Complimentary Goods
Whenever price of a good decreases as per the
law of demand it’s demand will increase.
Complimentary goods are those whose demand
increases with the increase in demand of the
former.
Example : Tea and Sugar
Whenever the demand of Tea increases, demand
of sugar also increases. Here Sugar is the
complimentary good of Tea.

17. COMPLIMENTARY AND SUBSTITUTE
 Substitute Goods
Whenever the price of a good increases as per the law
of demand it’s demand will decrease. Substitute good’s
demand will decrease with increase in price of the
former
Example : Tea and Coffee
Whenever the price of Tea increases, it’s demand will
decreases. Here Coffee act as a substitute of Tea and
it’s demand decreases

18. ECONOMIC VARIABLES : SUPPLY
 Supply : refers to the amount of goods that
producers and firms are willing to sell at a given
price when all other factors being held constant.
 Law of Supply: The law of supply states that the
quantity supplied of good rises when the price of
good rises, considering all other factors constant

19. THE SUPPLY CURVE
 The Supply curve is incrementing in nature
Price
Quantity

20. FACTORS INFLUENCING SUPPLY
 Price of goods or services
 Price of production inputs
 Price of substitute goods
 Advance in production technology
 Expected raise in the price
 Number of sellers

21. FACTORS INFLUENCING SUPPLY
 The variation of Supply curve w.r.t PRICE
The change in price moves along with the curve
Price
Quantity
P1
P2
q2 q1

22. FACTORS INFLUENCING SUPPLY
 The variation of Supply curve other than price
Price
Quantity

23. MARKET EQUILIBRIUM
 A market attain equilibrium when,
QUANTITY DEMANDED = QUANTITY SUPPLIED
Price
Quantity

24. SURPLUS AND SHORTAGE
 Surplus : It is the condition that arises when price of the
commodity is greater than market equilibrium price. This
leads to increase in quantity supplied than the quantity
demanded. This excess supply of quantity is called
Surplus
 Shortage : It is the condition that arises when price of
the commodity is less than market equilibrium price.
This leads to a hype in demand. This scarcity of
commodity than the actual demand is called Shortage

25. SURPLUS AND SHORTAGE
Price
Quantity
Equilibrium Price
Higher Price
Supply
Demand
Qtydemanded
Qtysupplied
Surplus

26. SURPLUS AND SHORTAGE
Price
Quantity
Equilibrium Price
Lower Price
Supply
Demand
Qtysupplied
QtydemandedShortage

27. VARIATION IN PRICE AND QUANTITY WHEN SUPPLY AND
DEMAND CHANGES SIMULTANEOUSLY
Supply
No Change Increases Decreases
No Change Price no change
Qty no change
Price decreases
Qty increases
Price increases
Qty decreases
Increases Price increases
Qty increases
Price can’t say
Qty increases
Price increases
Qty can’t say
Decreases Price decreases
Qty decreases
Price decreases
Qty can’t say
Price can’t say
Qty decreases
Demand

28. ELASTICITY OF DEMAND
 Elasticity of demand : It is used to show the
responsiveness, of the quantity demanded of a
good or service to a change in any of the
determinants of demand
 Price Elasticity : measures the responsiveness, of
the quantity demanded of a good or service to a
change in price of that good
Ep = % change in quantity demanded for a given
% change in price
Ep = %ΔQ
%ΔP

29. ELASTICITY OF DEMAND
 Elasticity of demand : It is used to show the
responsiveness, of the quantity demanded of a
good or service to a change in any of the
determinants of demand
 Price Elasticity : measures the responsiveness, of
the quantity demanded of a good or service to a
change in price of that good
Ep = % change in quantity demanded for a given
% change in price, since Q and P are inversely
related the value of Ep will be -ve
Ep = %ΔQ
%ΔP

30. ELASTICITY OF DEMAND
 Larger the absolute value of Ep (or E), more
sensitive the buyers are to a change in price
%ΔQ > %ΔP E > 1 Relatively Elastic
%ΔQ < %ΔP E < 1 Relatively Inelastic
%ΔQ = %ΔP E = 1 Unit Elastic
%ΔQ = 0 E = 0 Perfectly Inelastic
%ΔQ = ∞ E = ∞ Perfectly Elastic

31. ELASTICITY OF DEMAND
Price
Quantity
Price
Quantity
Perfectly Elastic Perfectly Inelastic

32. ELASTICITY OF DEMAND
Price
Quantity
Price
Quantity
Relatively less elastic
5
4
10075
Unit Elastic
10090
Elastic curves are more flatter and Inelastic curves are more steeper

33. PRICE ELASTICITY AND TOTAL REVENUE
Price
Quantity
5
75
Totalrevenue
Total Revenue = Price x Quantity
Here ; Total Revenue = 5 x 75

34. PRICE ELASTICITY AND TOTAL REVENUE
Price Elastic Unitary Inelastic
Increases Total Revenue
Decreases
No change Total Revenue
Increases
Decreases Total Revenue
Increases
No change Total Revenue
Decreases