At the end of the reading this chapter, the reader will be able to understand that economics is the study of mankind's attempt to satisfy their unlimited wants with. Managerial Economics can be viewed as an application of that part of Study of Managerial Economics essentially involves the analysis of certain major. study booklet managerial economics lecture introduction, microeconomics, consumer behavior assumptions of consumers: consumers are rational they consider.
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Download Managerial Economics Notes for MBA. Students can Download MBA 1st Sem Managerial Economics Notes Pdf will be available. MANAGERIAL ECONOMICS. DEFINITION. • PROVIDES LINK BETWEEN. ECONOMIC THEORY AND. DECISION SCIENCES IN. ANALYSIS OF MANAGERIAL. MANAGERIAL ECONOMICS notes unit I & maroc-evasion.info - Download as PDF File .pdf), Text File .txt) or read online.
Methods of forecasting. If the product happens to be a consumer good Managerial Economics Honoursinfo. This method is known as the collective opinion method, as it takes advantage of the collective wisdom of the salesmen,departmental heads like prod. Market Experiments Method: Under this method, the main determinants of the demand of a product like prices, advt, product design, packaging,etc are identified. These factors are then varied separately over different markets or time periods holding other factors constant.
The effect of the experiment on consumer behaviour is studied under actual or controlled mkt conditions which is used for overall forecasting purpose.
Statistical methods: These methods make use of historical data as a basis for extrapolating quantitative relationships to arrive at the future demand pattern and trends. The data a may also be analyzed through econometric models. These are used for long term forecasting and for products for larger levels of aggregation.
They are based on scientific base of estimation which are logical, unbiased and proven to be useful. Time series analysis: It is an arrangement of statistical data in a chronological order, i. It reflects the dynamic pace of steady movement of a phenomenon over a period of time. Most of the variables in business, economic and commerce be it a series related to price, production, consumption, projects,sales, etc. Graphical Methods: This method gives the basic tendency of a series to grow, decline or remain steady over a period of time.
This method is useful in forecasting population, demand etc. Theperiod time in the trend analysis is always long; but the concept of trend does not include short time oscillations and fluctuations. Semi Average Method: According to this method the date is divided into two parts preferably with the same number of years. The averages of the first and second part Managerial Economics Honoursinfo.
These averages are called semi averages which are plotted as 11 points against middle point of the respective time period covered by each part. Moving Averages Method: This is a very simple and flexible method of measuring trend which consists of obtaining a series of moving averages of successes overlapping groups of the time series. The averaging process smoothens out fluctuation as well as the ups and down in the given data.
Least square method:The principle of least squares provides us an analytical tool to obtain an objective fit to the trend of the given time series.
Most of the data relating to economic and business time series conform to definite laws of growth or decay. Thus, in such situation, trend fittings will be most reliable way of forecasting. Regression Analysis:This is also a popular method of forecasting among the economists. It is a mathematical analysis of the average relation between two or more variables in terms of original units of the data.
Here the data analysis should be based on logic of economic theory. Demand Forecasting of New Products:Projecting demand of new products is different from those of established products.
This requires an intensive study of the economic and competitive characteristics of the product. Product Life Cycle Analysis:Many products ar distinct when it degenerates over the years into a common product. Innovation of a new product and its degeneration into a common product is termed as Life Cycle of a Product. The forecaster must identify the phase of product cycle at which the industry is operating at the time of prediction. Test Markting:Under test marketing the product is introduced in selected area often at different prices.
Th number of area selected depends on the representatives and cost of marketing. The selected area must have an average competition, presence of chain of departmental stores, optimum size of population, etc.
The duration of testing depends upon the average download period, the competitive situation and cost of testing. Survey of Consumer Intention: This method involves interviewing the consumer by sending questionnaires to elicit replies so as to make short term prediction of demand. Samples may be given for this purpose. This method is most useful when bulk of the sales is made to industrial producers. Here the burden of forecasting is shifted to consumer. Evolutionary Approach: The demand for a new product may be projected as an outgrowth and evolution of an existing old product.
This approach is useful when the new product is nearly an improvement of an existing product. Managerial Economics Honoursinfo. What are the determinant of Demand.? Answer: Demand for a commodity depends upon number of factors. Factors influencing individual demand. An individuals demand for a commodity is generally determined by factors such as: Price of the Product: Price is always a basic consideration in determining the demand for a commodity.
Normally a larger quantity is demanded at a lower price than at a higher price. Income: Income is an equally important determinant of demand. Obviously with the increase in income one can download more goods.
Thus a rich consumer usually demands more goods than poor consumer. Tastes and Habits: Demand for many goods depend on the persons tastes, habits and preferences. Demand for several products like ice-creams, chocolates, cool drinks etc. Demand for tea, betel, tobacco etc. People with different tastes and habits have different preferences for different goods.
A strict vegetarian will have no demand for meat at any price. Similar is the case with demand for cigarettes by smokers and non-smokers.
Relative prices of Other Goods: How much the consumer would like to download of a given commodity, however also depends on the relative prices of other related goods such as substitutes or complementary goods to a commodity. When a want can be satisfied by alternate similar goods, they are called substitutes. For example, peas and beans, ground nuts oil and sun-flower oil, tea and coffee etc.
The demand for commodity depends on the relative process f its substitutes. If the substitutes are relatively costly, then there will be more demand for the commodity is question at a given price than in case its substitutes are relatively cheaper. In order to satisfy a given want, two or more goods are 13 needed in combination, these goods are referred as complementary goods. For example car and petrol, pen and ink, tea and sugar, shoes and sacks, gun and bullets etc.
Complementary goods are always in joint demand. Thus if a given commodity is a complementary product, its demand will be relatively high when its related commoditys price is lower, than otherwise.
When the price of one commodity decreases the demand for its complementary product will tend to increase and vice versa. For example, a fall in price of cars will lead to increase in the demand for petrol. Similarly a steep rise in the price of petrol will cause a decrease in demand of petrol driven cars and its accessories. Consumers Expectations: Consumers expectations about the future changes in the price of a given commodity also may affect its demand.
When consumer expects its prices to fall in future, they will tend to download less at the present prevailing price. Similarly if they expects its prices to rise in future they will tend to download more at present. Advertisement Effect: In modern times the preferences of a consumer can be altered by advertisement and sales propaganda, albeit to certain extent only.
Thus demand for many products like tooth pastes, toilet soaps, washing powder, processed foods etc. In undemocratic countries, the rulers are unaffected by famine and there is no one to hold them accountable, even when millions die.
Welfare economics takes care of what managerial economics tends to ignore. In other words, the growth for an economic growth with societal upliftment is countered productive. In times of crisis, what comes to the rescue of people is their won literacy, public health facilities, a system of food distribution, stable democracy, social safety, that is, systems or policies that take care of people when things go wrong for one reason or other.
As Joel Dean observes managerial economics shows how economic analysis can be used in formulating polices. In the words of E. Brigham and J. Managerial Economics bridges the gap between traditional economics theory and real business practices in two days. First it provides a number of tools and techniques to enable the manager to become more competent to take decisions in real and practical situations. Secondly it serves as an integrating course to show the interaction between various areas in which the firm operates.
It is clear, therefore, that managerial economics deals with economic aspects of managerial decisions of with those managerial decisions, which have an economics contest. Managerial economics may therefore, be defined as a body of knowledge, techniques and practices which give substance to those economic concepts which are useful in deciding the business strategy of a unit of management. Managerial economics is, perhaps, the youngest of all the social sciences. Since it originates from Economics, it has the basis features of economics, such as assuming that other things remaining the same or the Latin equivalent ceteris paribus.
This assumption is made to simplify the complexity of the managerial phenomenon under study in a dynamic business environment so many things are changing simultaneously. The other features of managerial economics are explained as below:. Managerial economics is concerned with finding the solutions for different managerial problems of a particular firm. Thus, it is more close to microeconomics. Where there is change in assumptions. Every concept and theory of managerial economics is based on certain assumption and as such their validity is not universal.
Disagreements about such statements are usually settled by voting on them. The macroeconomics conditions of the economy are also seen as limiting factors for the firm to operate. In other words.
The managerial economist can decide which is the better alternative to maximize the profits for the firm. If does not merely mention the concept. Given a problem and the objectives of the firm. For instance.
The different areas where models are extensively used include inventory control. Prescriptive action is goal oriented. One problem with normative statements is that they cannot to verify by looking at the facts.
In managerial economics. Managerial economics provides an opportunity to evaluate each alternative in terms of its costs and revenue. The contents. Scope of Managerial Economics: The scope of managerial economics includes all concepts. Those are: Pricing and Competitive strategy 3. Environmental or External issues a. Theory of demand and Demand Forecasting 2. The scope of managerial economics covers two areas of decision making a. Production cost analysis 4.
The following business areas can be considered as the scope of managerial economics. Operational or Internal issues b. Resource allocation. Operational issues: Operational issues refer to those. Pricing and competitive strategy: Pricing decisions have been always within the preview of managerial economics.
Profit analysis 6. Understanding the basic concepts of demand is essential for demand forecasting. The basis for analyzing market influences on the firms. Pricing policies are merely a subset of broader class of managerial economic problems. Demand analysis provides: Production and cost analysis: Production analysis is in physical terms. Thus demand analysis studies not only the price elasticity but also income elasticity.
Resource Allocation: Managerial Economics is the traditional economic theory that is concerned with the problem of optimum allocation of scarce resources. Price theory helps to explain how prices are determined under different types of market conditions.
Marginal analysis is applied to the. Demand analysis also highlights for factors. Product line pricing and price forecasting occupy an important place here. Demand Analyses and Forecasting: A firm can survive only if it is able to the demand for its product at the right time.
While the cost analysis is in monetary terms cost concepts and classifications. Capital or Investment analysis 7. Demand analysis should be a basic activity of the firm because many of the other activities of the firms depend upon the outcome of the demand forecast.
This helps to manipulate demand. Strategic planning 1. Strategic planning: Strategic planning provides management with a framework on which long-term decisions can be made which has an impact on the behavior of the firm.
Evaluation of the efficiency of capital 3. The choice of investment project 2. Lack of capital may result in small size of operations. Hence efficient allocation and management of capital is one of the most important tasks of the managers. Profit theory guides in the measurement and management of profit. Managerial economics deals with techniques of averting of minimizing risks.
In fact lines programming is one of the most practical and powerful managerial decision making tools currently available. Profit analysis: Profit making is the major goal of firms. Capital or investment analyses: Capital is the foundation of business. This involves. Availability of capital from various sources like equity capital.
In this respect linear programming techniques has been used to solve optimization problems. There are several constraints here an account of competition from other products. The major issues related to capital analysis are: Most efficient allocation of capital Knowledge of capital theory can help very much in taking investment decisions.
Strategic planning is now a new addition to the scope of managerial economics with the emergence of multinational corporations. The perspective of strategic planning is global. The firm sets certain long-term goals and objectives and selects the strategies to achieve the same. It is in contrast to project planning which focuses on a specific project or activity. The Political environment refers to the nature of state activity. Trends in labour and capital markets. In fact the integration of managerial economics and strategic planning has given rise to be new area of study called corporate economics.
They refer to general economic. The social environment refers to social structure as well as social organization like trade unions. The scope of managerial economics is ever widening with the dynamic role of big firms in a society. The environmental or external issues relate managerial economics to macro-economic theory while operational issues relate the scope to micro economic theory.
Magnitude and trends in foreign trade. A study of economic environment should include: Private gains of the firm alone cannot be the goal. Environmental or External Issues: An environmental issue in managerial economics refers to the general business environment in which the firm operates.
The environmental issues highlight the social objective of a firm i. The type of economic system in the country. Trends in the working of financial institutions like banks. The general trends in production. Macro theory on the other hand is the study of the economy as a whole. The focus of accounting within the firm is fast changing from the concepts of store keeping to that if managerial decision making.
Accounting refers to the recording of pecuniary transactions of the firm in certain books. Hence it is necessary to trace its roots and relationship with other disciplines. Both managerial economics and economics deal with problems of scarcity and resource allocation. Relationship with economics: The relationship between managerial economics and economics theory may be viewed form the point of view of the two approaches to the subject Viz.
Managerial economics is rooted in Micro Economic theory. It deals with the analysis of national income. Micro Economics and Marco Economics. The relationship between managerial economics and economics theory is like that of engineering science to physics or of medicine to biology.
Managerial economics has an applied bias and its wider scope lies in applying economic theory to solve real life problems of enterprises. Managerial economics relationship with other disciplines: Many new subjects have evolved in recent years due to the interaction among basic disciplines.
Managerial Economics makes use to several Micro Economic concepts such as marginal cost. Management theory and accounting: Managerial economics has been influenced by the developments in management theory and accounting techniques.
Microeconomics is the study of the economic behavior of individuals. While there are many such new subjects in natural and social sciences. A proper knowledge of accounting techniques is very essential for the success of the firm because profit maximization is the major objective of the firm.
A student of managerial economics should be familiar with the generation. Managerial Economics requires a proper knowledge of cost and revenue information and their classification. Managerial Economics also make use of correlation and multiple regressions in related variables like price and demand to estimate the extent of dependence of one variable on the other.
Managerial Economics and Operations Research: Taking effectives decisions is the major concern of both managerial economics and operations research. Besides these usual tools. Statistical methods provide and sure base for decision-making. Thus statistical tools are used in collecting data and analyzing them to help in the decision making process. Algebra and calculus are the major branches of mathematics which are of use in managerial economics. The development of techniques and concepts such as linear programming.
Managerial Economics and mathematics: The use of mathematics is significant for managerial economics in view of its profit maximization goal long with optional use of resources. He should be able to analyses the impact of variations in tastes. The major problem of the firm is how to minimize cost. Statistical tools like the theory of probability and forecasting techniques help the firm to predict the future course of events.
A successful businessman must correctly estimate the demand for his product. Managerial Economics and Statistics: Managerial Economics needs the tools of statistics in more than one way. The theory of probability is very useful in problems involving uncertainty. Mathematical symbols are more convenient to handle and understand various concepts like incremental cost. Fashion and changes in income on demand only then he can adjust his output..
Also mathematical methods help to estimate and predict the economic factors for decision making and forward planning. The main concepts of mathematics like logarithms.
Mathematical concepts and techniques are widely used in economic logic to solve these problems. Managerial Economics and the theory of Decision. The varied tools of operations Research are helpful to managerial economists in decision-making. Operation research provides a scientific model of the system and it helps managerial economists in the field of product development. In short managerial practices with the help of other allied sciences. As such this new branch of knowledge is useful to business firms.
It strength lies in its ability to integrate ideas from various specialized subjects to gain a proper perspective for decision-making. Operations research is concerned with the complex problems arising out of the management of men. He must be also able to combine philosophic methods with historical methods to get the right perspective only then.
But the theory of decision-making is developed to explain multiplicity of goals and lot of uncertainty. Most of the economic theories explain a single goal for the consumer i. Managerial Economics and Computer Science: Computers have changes the way of the world functions and economic or business activity is no exception. The Theory of decision-making is a new field of knowledge grown in the second half of this century. To conclude. A successful managerial economist must be a mathematician.
Profit maximization for the firm. What used to take days and months is done in a few minutes or hours by the computers. Viewed this way the theory of decision making is more practical and application oriented than the economic theories. Computers are used in data and accounts maintenance. In fact computerization of business activities on a large scale has reduced the workload of managerial personnel.
In most countries a basic knowledge of computer science. A management economist with sound knowledge of theory and analytical tools for information system occupies a prestigious place among the personnel. The need to know forecasting techniques on the part of the managerial economics means. Equipped with specialized skills and modern techniques he analyses the internal and external operations of the firm.
This is concerned with project evaluation and feasibility study at the firm level i. A managerial economist is nearer to the policy-making. He evaluates and helps in decision making regarding sales. He should evaluate the market potential. The fourth function of the managerial economist is to undertake an economic analysis of the industry. Most firms require two forecasts one covering the short term for nest three months to one year and the other covering the long term. He has to be ever alert to gauge the changes in tastes and preferences of the consumers.
Pricing financial issues. At the external level. He prepares a short-term forecast of general business activity and relates general economic forecasts to specific market trends. A managerial economist who is well equipped with this knowledge can help the firm to plan product improvement. Location of plant. The managerial economist should be adept at investment appraisal methods. His role in decision-making applies to routine affairs such as price fixation.
He helps in decision-making keeping in view the different goals of the firm. The purpose of market research is to provide a firm with information about current market position as well as present and possible future trends in the industry. The most important role of the managerial economist relates to demand forecasting because an analysis of general business conditions is most vital for the success of the firm.
Managerial economists have gained importance in recent years with the emergence of an organizational culture in production and sales activities. The role of managerial economist in internal management covers wide areas of production. Modern theory of managerial economics recognizes the social responsibility of the firm.
Security management means. The success of the firm depends upon a proper pricing strategy. The managerial economist has to be very alert and dynamic to take correct pricing decision in changing environment. It should not have adverse impact on pollution and if possible try to contribute to environmental preservation and protection in a positive way.
This is very important in the case of defense-oriented industries. Here his advice is required on all matters of production and trade. It refers to the impact of a firm on environmental factors.
He may have to anticipate the reactions of competitors in pricing.
He should have the freedom to operate and analyze and must possess full knowledge of facts. The pricing decision is one of the most difficult decisions to be made in business because the information required is never fully available. Another function of importance for the managerial economist is a concerned with pricing and related problems.
The managerial economist helps to co-ordinate policies relating to production. The role of management economist lies not in taking decision but in analyzing. It is the managerial economist of each firm who has to advise them on all matters of trade since they are in the know of actual functioning of the unit in all aspects. He may have to operate in an atmosphere constrained by government regulation. Finally the specific function of a managerial economist includes an analysis of environment issues.
Another function is security management analysis. He has to collect and provide the quantitative data from within the firm. He has to get information on external business environment such as general market conditions.
This security is more necessary in strategic and defense-oriented projects of national importance. The sixth function is an advisory function.
In the hierarchy of management. Pricing of established products is different from new products. In both cases.
He should have equanimity to meet crisis. The change in total cost resulting from a decision. The change in total revenue resulting from a decision. Put another way. It would be an easy decision if you knew the end outcome. He should act only after analysis and discussion with relevant departments.
He should have sound theoretical knowledge to take up the challenges he has to face in actual day to day affairs. He should do well to have intuitive ability to know what is good or bad for the firm.
He should have diplomacy to act in advisory capacity to the top executive as well as getting co-operation from different departments for his economic analysis. The two basic concepts in this analysis are incremental cost and incremental revenue. The theories thus imply equilibrium conditions in terms of margin. Can we see what. These decisions are made by giving up trading off one want to satisfy another.
When we talk of scarcity within an economic context. In symbolic terms. We say that a consumer attempts to maximize his or her utility.
According to the equi-marginal principle. Because of scarcity. We use the utility theory to explain consumer demand and to understand the nature of demand curves. For this purpose.
Marginal changes refer to the addition of just a single unit more. So the optimal level is reached. These resources are the inputs of production: Marginal changes are assumed in the relevant phenomena.
People must make choices between different items because the resources necessary to fulfill their wants are limited. VMPL refers to the value of marginal product of labor: It is very significant in determining optimal condition in resource allocation.
This time perspective of short and long period is also important in business decision making. In general. It is the uncertainty associated with the returns from an investment that introduces risk into an investment. A more sensible rule would be: The following formula is useful in this regard. Certainly I would not expect that the last egg I am downloading bring exactly the same marginal utility as the last pair of shoes I am downloading. The word risk has a definite financial meaning.
But as future is uncertain so is the future expected returns can not predicted. I am attaining maximum satisfaction or utility from my downloads. In business decision making process. A person making an investment expects to get some return from the investment from the future.
This is clear concept of equimarginal principle. In such a situation. This leads to the equimarginal principle that I should arrange my consumption so that every single good is bringing me the same marginal utility per dollar of expenditure. His willingness to download the product. A product or service is said to have demand when three conditions are satisfied. Durable goods are these goods which gives services relatively for a long period.
Short run demand vs long run demand: The short run and long run cannot be clearly defined other than in terms of duration of time. Demand for a commodity refers to the quantity of the commodity which is individual consumer or household is willing to download a particular price. Types of demand: The use of perishable goods is very less may be in hours or days. Example of perishable goods: Firm demand vs industry demand: Ability to pay the specified price for it.
The quantity of goods demanded by single is called firm demand and the quantity demanded by industry as a whole is called industry demand. Durable goods meet the both the current as well as future demand. The demand for the services of a super specialty hospital can be considered as autonomous whereas the demand for the hotels around the hospital is called a derived demand. Desire of the customer to download the product 2.
Demand for durable goods vsperishable goods: Here the demand for goods is classified based on their durability. Demand for consumer goods vs producer goods: Autonomous demand vs derived demand: Autonomous demand refers to the demand for products and services directly. The amount of a commodity demanded at a particular price is more properly called price demand.
Income of the Consumer: The second most important factor influencing demand is consumer income. It is not only the existing price but also the expected changes in price. The total demand for sugar in the region is the total market demand.
These factors are as follows: Totalmarket vs segment market demand: The demand for the sugar from the sweet making industry from this region is the segment market demand. New demand vs replacement demand: The relation between price and demand is called the Law of Demand.
The demand for cars in new demand and the demand spare parts is replacement demand. But in case of Giffen goods the relationship is the opposite. Short run refers to a period of shorter duration and long run refers to the relatively period of longer duration.
There are factors on which the demand for a commodity depends. These factors are economic. Replacement demand may also refer to the demand resulting out of replacing the existing assets with the new ones. Price of the Commodity: The most important factor-affecting amount demanded is the price of the commodity.
In replacement demand. The effect of all the factors on the amount demanded for the commodity is called Demand Function. In fact. The demand for a normal commodity goes up when income rises and falls down when income falls. The aggregate demand for all the segment market is called the total market demand.
Increase in population increases demand for necessaries of life. The opposite is called decrease in demand. The effect of changes in price of a commodity on amounts demanded of related commodities is called Cross Demand. A change in. The rise in price of coffee shall raise the demand for tea. Related goods can be of two types: Prices of related goods: The demand for a commodity is also affected by the changes in prices of the related goods also.
Substitutes which can replace each other in use. Tastes of the Consumers: If the price of pens goes up. If the taste for a commodity goes up. If wealth is more equally distributed.
Composition of population means the proportion of young and old and children as well as the ratio of men to women. The composition of population also affects demand. This is called increase in demand. The price and demand go in opposite direction. Complementary foods are those which are jointly demanded. The wealthier are the people. On the other hand. Tastes include fashion. The amount demanded of commodity is also affected by the amount of wealth as well as its distribution. In such cases complementary goods have opposite relationship between price of one commodity and the amount demanded for the other.
Expectations regarding the future: If consumers expect changes in price of commodity in future. Climate and weather: Government Policy: Government policy affects the demands for commodities through taxation.
Taxing a commodity increases its price and the demand goes down. If the country is passing through boom conditions. During hot summer days. On a rainy day. State of business: The level of demand for different commodities also depends upon the business conditions in the country. In cold areas woolen cloth is demanded.
Price The de emand curve D DD shows the inverse relation between price and quantity Demand d of apple.