Download Managerial economics notes unit 1 and more Essays (university) Economics in PDF only on Docsity!
MANAGERIAL
ECONOMICS (UPTU)
Unit-
Introduction to economics-
Economics is the social science that analyzes the production, distribution &
consumption of goods & services.
The word economics is originated from ancient Greek word “OKIANOMIA.”
oikas- house & nomos- custom or law.
So economics may also consider as the management of household.
Economics views-
The two important views aspect of economics are-
1. Classical views
2. The neo classical views
3. Scarcity definition of Robinson
The classical view- “According to Adam smith”
Adam smith was the first economist in classical view who defines the wealth
related definition of economics.
Adam smith defines it as “the nature & cause of wealth of nation”. Whereby he
said that “economics proposes to enrich both the people & their sovereign”.
His one of the follower J.B. says “economics, the study of law, which govern
wealth”.
Other follower of classical views is J. S. Mill. F.A. Walker, Nassau senior, E.
Carries and others.
The neo classical view- According to Prof. Marshall.
Prof Marshall was the first economist who denied the wealth related definition of
Adam smith. This definition was in vogue for a long time.
He published two books by the name of “Principle of economics” & “economics of
industries” in 1890.
He defined economics not only the study of wealth, but the study of human welfare
also & clarified that “Wealth is for the man. Man is not for the wealth”.
He gave “man” the first place and “wealth” as a secondary place.
According to Marshall “economics is the study of human activities in the ordinary
course of business. It studies how man attains his income and how he utilizes it.
Main characteristics of Marshall definition-
1. Greater emphasis on human aspect
2. Material welfare
3. Study of social nominal & real person
4. Study of ordinary business activity of life
5. Practical points of views
6. Simple & clear definition
Scarcity definition of Robinson-
Prof. Marshall tried to give a complete and faultless definition of economics.
But in 1932, a controversy roused in the field of economics after the publication of
prof. Lionel Robinson, “The essay on the nature and significance of social
science”.
In the word of Robinson- economics is the science which studies human behavior
as relationships between end and scare means which have alternative use,
Robinsons says that economics also studies those activities which have no relation
with money- such as study of scare resource.
Definition- In the word of boulding,”In micro economics particular firms,
particular family, individual price, wage, incomes, particular industries and
specific commodities are studied.”
Micro economics
Pricing theory distribution Welfare
Theory of demand theory of production Theory of pricing general theory of distribution theory of rent theory of wages theory of profit
Definition of Macro economics-
In the word of Prof. Boulding “economics deals not only with the
individual quantities but with the aggregate or total quantities, not with the
individual income but with the national income, not only with the individual
output but with the national output.
Macro word is originated from ancient Greek word makro which means big,
large or aggregate.
Thus it deals with the national income, industries total saving, total
consumption, total investment, GDP, unemployment, economic growth rate
etc. means overall dimension of economic affairs of a country , in relation
with economic as a whole.
Nature and scope of management economics -
Economics a management may also considered as a managerial economic.
Managerial Economics- Managerial economics helps in decision making as
it involve logical thinking moreover; by studying simple models managers
can deal with more complex and practical solution.
Economics is a science is concerned with the problem of allocation of scare
resources.
Managerial economic involves analysis of allocation of the resources
available a firm or a unit of management among the activities of that units.
ME thus concerned with the choice or selection among alternatives.
Managerial economics is the integration of economic theory with the
business practice for the purpose of facilitating decision making and forward
planning by management. - Spencer and fisherman.
Nature of managerial economics-
1. Managerial economics is a science.
2. Managerial economics is an art.
3. Managerial economics is a normative science.
4. Managerial economics is pragmatic.
5. Managerial economics is goal oriented.
Scope of managerial economics -
- Demand Analysis and Forecasting
- Cost and Production Analysis
- Pricing Decisions, Policies and Practices
Business decision making is essentially a process of selecting the best out of alternative opportunities open to the firm. The steps below put manager’s analytical ability to test and determine the appropriateness and validity of decisions in the modern business world.
Following are the various steps in decision making process :
- Establish objectives
- Specify the decision problem
- Identify the alternatives
- Evaluate alternatives
- Select the best alternatives
- Implement the decision
- Monitor the performance
Modern business conditions are changing so fast and becoming so competitive and complex that personal business sense, intuition and experience alone are not sufficient to make appropriate business decisions. It is in this area of decision making that economic theories and tools of economic analysis contribute a great deal.
Business decision making
Fundamental principles-
- The Incremental Concept
- The Concept of Time Perspective
- The Opportunity Cost Concept
- The Discounting Concept
- The Equi-marginal Concept
- Risk and Uncertainty
- The Incremental Concept: Incremental concept is closely related to the marginal cost and marginal revenues of economic theory.
The two major concepts in this analysis are incremental cost and incremental revenue. Incremental cost denotes change in total cost, whereas incremental revenue means change in total revenue resulting from a decision of the firm.
The incremental principle may be stated as follows:
A decision is clearly a profitable one if
(i) It increases revenue more than costs.
(ii) It decreases some cost to a greater extent than it increases others.
(iii) It increases some revenues more than it decreases others.
(iv) It reduces costs more than revenues.
2. Concept of Time Perspective:
The time perspective concept states that the decision maker must give due consideration both to the short run and long run effects of his decisions. The main problem in decision making is to establish the right balance between long run and short run.
In the short period, the firm can change its output without changing its size. In the long period, the firm can change its output by changing its size. In the short period, the output of the industry is fixed because the firms cannot change their size of operation and they can vary only variable factors. In the long period, the output of the industry is likely to be more because the firms have enough time to increase their sizes and also use both variable and fixed factors.
In the short period, the average cost of a firm may be either more or less than its average revenue. In the long period, the average cost of the firm will be equal to its average revenue. A decision may be made on the basis of short run considerations, but may as time elapses have long run repercussions which make it more or less profitable than it at first appeared.
3. The Opportunity Cost Concept:
In Managerial Economics, the opportunity cost concept is useful in decision involving a choice between different alternative courses of action.
Resources are scarce, we cannot produce all the commodities. For the production of one commodity, we have to forego the production of another commodity. We cannot have everything we want. We are, therefore, forced to make a choice.
Opportunity cost of a decision is the sacrifice of alternatives required by that decision. Sacrifice of alternatives is involved when carrying out a decision requires using a resource that is limited in supply with the firm. Opportunity cost, therefore, represents the benefits or revenue forgone by pursuing one course of action rather than another.
4. Equi-Marginal Concept:
One of the widest known principles of economics is the equi-marginal principle. The principle states that an input should be allocated so that value added by the last unit is the same in all cases. This generalization is popularly called the equi-marginal.
Let us assume a case in which the firm has 100 unit of labour at its disposal. And the firm is involved in five activities viz., А, В, C, D and E. The firm can increase any one of
marginal revenue. As marginal costs increase, the t-shirt manufacturer should sell t-shirts as long as the marginal costs are less than or equal to $10.
Minimize Uncertainty
- In managerial economics, uncertainty is always an unknown input. In our salon example above, the hairstylist may not know how many haircuts she will do in the next month. She reduces her uncertainty by requesting that clients make an appointment for their next haircut to ensure they get the desired time slot. Other companies may reduce uncertainty by offering discounts if a client signs a long- term contract.
Minimize Opportunity Costs
- Opportunity costs refer to the sacrifice made when one option is chosen over another. In a firm, the goal is to ensure that the foregone revenue is always less than the chosen option. If a t-shirt manufacturer could use the same machinery to produce jogging shorts that would sell for $7 each, his opportunity cost is $7 per t-shirt. The two objectives of reducing uncertainty and minimizing opportunity cost may sometimes seem to be in conflict with each other, but when uncertainty cannot be quantified, it is often preferable to take the less profitable, more certain option.
Role of Economist-
The role of managerial economist can be summarized as follows:
- He studies the economic patterns at macro-level and analysis it’s significance to the specific firm he is working in.
- He has to consistently examine the probabilities of transforming an ever- changing economic environment into profitable business avenues.
- He assists the business planning process of a firm.
- He also carries cost-benefit analysis.
- He assists the management in the decisions pertaining to internal functioning of a firm such as changes in price, investment plans, type of goods /services to be produced, inputs to be used, techniques of production to be employed, expansion/ contraction of firm, allocation of capital, location of new plants, quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting, etc.
- In addition, a managerial economist has to analyze changes in macro- economic indicators such as national income, population, business cycles, and their possible effect on the firm’s functioning.
- He is also involved in advicing the management on public relations, foreign exchange, and trade. He guides the firm on the likely impact of changes in monetary and fiscal policy on the firm’s functioning.
- (^) He also makes an economic analysis of the firms in competition. He has to collect economic data and examine all crucial information about the environment in which the firm operates.
- The most significant function of a managerial economist is to conduct a detailed research on industrial market.
- In order to perform all these roles, a managerial economist has to conduct an elaborate statistical analysis.
- He must be vigilant and must have ability to cope up with the pressures.
- He also provides management with economic information such as tax rates, competitor’s price and product, etc. They give their valuable advice to government authorities as well.
- At times, a managerial economist has to prepare speeches for top management.
Unit- 2
Law of demand
There is an inverse relationship between quantity demanded and its price. The people know that when price of a commodity goes up its demand comes down. When there is decrease in price the demand for a commodity goes up. There is inverse relation between price and demand.
A consumer may demand one dozen oranges at $5 per dozen. He may demand two dozens when the price is $4 per dozen. A person generally buys more at a lower price. He buys less at higher price. It is not the case with one person but all people liken to buy more due to fall in price and vice versa. This is true for all commodities and under all conditions. The economists call it as law of demand. In simple words the law of demand states that other things being equal more will be demanded at lower price and lower will be demanded at higher price.
Demand schedule
Price in dollars. Demand in Kg. 5 100 4 200 3 300 2 400
Why demand curve falls
Marginal utility decreases: ( Law of diminishing marginal utility)
When a consumer buys more units of a commodity, the marginal utility of such commodity
continue to decline. The consumer can buy more units of commodity when its price falls and vice versa. The demand curve falls because demand is more at lower price.
Price effect:
When there is increase in price of commodity, the consumers reduce the consumption of such commodity. The result is that there is decrease in demand for that commodity. The consumers consume mo0re or less of a commodity due to price effect. The demand curve slopes downward.
Income effect
Real income of consumer rises due to fall in prices. The consumer can buy more quantity of same commodity. When there is increase in price, real income of consumer falls. This is income effect that the consumer can spend increased income on other commodities. The demand curve slopes downward due to positive income effect.
Same price of substitutes
When the price of a commodity falls, the prices of substitutes remaining the same, consumer can
buy more of the commodity and vice versa. The demand curve slopes downward due to substitution effect.
Demand of poor people
The income of people is not the same, The rich people have money to buy same commodity at high prices. Large majority of people are poor, They buy more when price fall and vice versa. The demand curve slopes due to poor people.
Different uses of goods
There are different uses of many goods. When prices of such goods increase these goods are put into uses that are more important and their demand falls. The demand curve slopes downward due to such goods.
Exceptions to the law
Inferior goods
The law of demand does not apply in case of inferior goods. When price of inferior commodity decreases and its demand also decrease and amount so saved in spent on superior commodity. The wheat and rice are superior food grains while maize is inferior food grain.
Demonstration effect
The law of demand does not apply in case of diamond and jewelry. There is more demand when prices are high. There is less demand due to low prices. The rich people like to demonstrate such items that only they have such commodities.
Ignorance of consumers
The consumer usually judge the quality of a commodity from its price. A low priced commodity is considered as inferior and less quantity is purchased. A high priced commodity is treated as superior and more quantity is purchased. The law of demand does not apply in this case.
Less supply
The law of demand does not work when there is less supply of commodity. The people buy more
for stock purpose even at high price. They think that commodity will become short.
Depression
The law of demand does not work during period of depression. The prices of commodities are low but there is increase in demand. it is due to low purchasing power of people.
Speculation
The law does not apply in case of speculation. The speculators start buying share just to raise the price. Then they start selling large quantity of shares to avoid losses.
Out of fashion
The law of demand is not applicable in case of goods out of fashion. The decrease in prices cannot raise the demand of such goods. The quantity purchased is less even though there is falls in prices.
Importance of the law
Price determination
A monopolist can determine price of a commodity on the basis of such law. He can know the
effect on demand due to increase or decrease in price. The demand schedule can help him to determine the most suitable price level.
Tax on commodities
The law of demand is important for tax authorities. The effect of tax on different commodities is
checked. The commodity must be taxed if its demand is relatively inelastic. A commodity cannot be taxed if its sales fall to great extent.
Agricultural prices
The law of demand is useful to determine agricultural prices. When there are good crops, the
prices come down due to change in demand. In case of bad crops, the prices go up if demand remains the same. The poverty of farmers can be determined.
