Download Elasticity of Demand

MANAGERIAL ECONOMICS
DEFINITION OF ECONOMICS
• 1. A Science of Wealth
• 2. A Science of Material Welfare
• 3. A Science of Scarcity and
• 4. A Science of Dynamic Growth and
Development
ECONOMICS
ECONOMIC PROBLEMS
ENDS
UNLIMITED
NUMBER
GRADED ON
PRIORITY BASIS
MEANS
LIMITED
SCARCITY OF
RESOURCES
ATERNATIVE
USES
DEFINITION OF MANAGERIAL
ECONOMICS
• 1. ECONOMICS APPLIED IN DECISION – MAKING.
• 2. SPECIAL BRANCH OF ECONOMICS BRIDGING
THE GAP BETWEEN ABSTRACT
AND MANAGERIAL PRACTICE.
THEORY
CONCEPT OF BUSINESS
ECONOMICS
• BUSINESS ECONOMICS ATTEMPTS TO
INDICATE HOW BUSINESS POLICIES ARE
FIRMLY ROOTED IN ECONOMIC PRINCIPLES.
• DISTINCTION BETWEEN BUSINESS ECONOMICS
AND MANAGERIAL ECONOMICS.
BUSINESS ECONOMICS USES
A. MICRO-ECONOMIC ANALYSIS OF THE
B.
BUSINESS UNIT AND
MACROECONIMIC ANALYSIS OF THE BUSINESS
ENVIRONMENT.
BUSINESS ECONOMICS IS THUS MORE
COMPREHENSIVE AND BROAD BASED THAN
MANAGERIAL ECONIMICS WHICH IS
MOSTLY MICRO – ECONOMICS WITH HIGH –
PITCHED DEGREE OF ANALYTICAL RIGOUR
THROUGH SOPHISTICATED TOOLS AND
TECHNIQUES OF ECONOMETRICS AND
OPERATIONS RESEARCH
DEMAND
DEMAND IN ECONOMICS MEANS DESIRE BACKED
BY PURCHASING POWER AS WELL AS
WILLINGNESS TO SPEND FOR THE GOODS
DESIRED. DEMAND IS THUS REFLECTED IN
TERMS OF QUANTITY OF A GOODS OR SERVICE
THAT CONSUMERS ARE WILLING AND ABLE TO
PURCHASE AT VARIOUS PRICES DURING A GIVEN
PERIOD OF TIME.
DETERMINANTS OF AN INDIVIDUAL
CONSUMER’S DEMAND
1.
OWN PRICE OF GOODS
2.
PRICE OF RELATED GOODS
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3.
INCOME OF CONSUMER
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4.
COMPETITIVE / SUBSTITUTE GOODS
COMPLEMENTARY GOODS
NECESSARY GOODS
COMFORTS AND LUXURIES
SUBJECTIVE FOCTORS
WHAT ARE THE DETERMINANTS OF
AGGREGATE DEMAND ?
i.e., DEMAND FOR GOODS IN THE MARKET
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•
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SIZE AND COMPOSITION OF POPULATION
LEVEL AND DISTRIBUTION OF INCOME
ADVERTISEMENT
THE NUMBER OF CONSUMERS IN THE MARKET
CHANGES IN PROPENSITY TO CONSUME AND SAVE
QUALITY OF PRODUCT
MODE OF PAYMENT
EXPECTATION ABOUT FUTURE
STATE OF ECONOMY
WEATHER CONDITION
ASSET / LIQUIDITY PREFERENCE
NATURE OF PRODUCT’S MARKET DEVELOPMENT
ELASTICITY OF DEMAND
percentage change in Quantity demanded
Elasticity of Demand=
percentage change in determining factor
Elasticity of demand measures the degree of responsiveness or sensitivity of quantity demanded to a change in a
particular determining factor when all other determinants of demand remain unchanged at a particular
point of time.
Different Types of Elasticities of Demand
1.
Price-elasticity of demand:
Price elasticity =
percentage change in Quantity demanded
Percentage change in price
THE DIFFERENT SEGMENTS OF PRICE
ELASTICITY OF DEMAND ARE AS
FOLLOWS:
i)
ii)
iii)
iv)
v)
Inelastic demand:
Elastic demand:
Unity elastic demand:
Perfectly elastic demand:
Perfectly inelastic demand:
INCOME ELASTICITY OF DEMAND:
Percentage change in quantity demanded
Income elasticity=
Percentage change in consumer income
Cross –elasticity of demand:
Cross –elasticity of demand =
Percentage change in quantity demanded of X
Percentage change in price of Y
Elasticity of substitution:
Proportionate change in the ratio of the two consumed goods
Proportionate change in their marginal rate of substitution
SIGNIFIANCE OF CROSS-ELASTCITY
• Case I: If cross elasticity is positive then there exists a relation of
substitution between the said two goods.
• Case II: If it is negative in sign, the two commodities must be
complementary to each other.
• Advertising Elasticity of Demand
Percentage change in sales
Percentage change in advertising expenditure
PRODUCTION FUNCTION
Production function refers to the technical, quantitative
and physical interrelationship between output of a
product with one/more of its inputs at a particular
point of time when the method and technology of
production remains unchanged.
1. Production function must be considered with respect to
2.
a particular point of time.
Production function of a firm is determined by the
state of technology.
DIFERENT TYPES OF PRODUCTION
FUNCTION
• A) Short run and long run production function:
• B) Fixed proportions production function and variable
proportion function:
• C) Homogenous production function and Cobb-Douglas
production function:
THE LAW OF VARIABLE PROPORTIONS
P.A. Samuelson: ”An increase in some
inputs relative to other fixed inputs will, in
a given state of technology, cause output
to increase, but after a point the extra
output resulting from the same additions
of extra inputs will become less and less
DIFFERENT STAGES OF THE LAW OF
VARIABLE PROPORTIONS
STAGE I: STAGE OF INCREASING RETURN:
TP
POINT OF
INFLEXION
I
II
III
MP
AP
VARIABLE FACTOR
CAUSES OF INCREASING RETURNS
DURING THE FIRST STAGE:
i) Abundance of fixed factor:
ii) Indivisibility of fixed factor:
iii) Division of labour:
STAGE II: STAGE OF DECREASING
RETURNS:
Explanation of decreasing returns:
i)
Disturbance to optimum proportion:
ii) Imperfect substitutability of factors of production:
STAGE III: STAGE OF NEGATIVE
RETURNS:
Explanation of negative returns:
1. Abundance of variable factor:
2. Declining efficiency of fixed factor:
THE LAW OF RETURNS TO SCALE
RETURNS TO SCALE REFER TO CHANGE IN
OUTPUT WHEN ALL THE FACTORS
ARE
CHANGED IN THE SAME PROPORTION. A LONG
RUN HOMOGENOUS PRODUCTION FUNCTION
EXHIBITS RETURNS TO SCALE.
ECONOMIES AND DISECONOMIES OF
SCALE
1. INTERNAL ECONOMIES AND DISECONOMIES
a)
b)
c)
d)
e)
f)
g)
h)
TECHNICAL ECONOMIES & DISECONOMIES
PRODUCTION ECONOMIES AND DISECONOMIES
MARKETING ECONOMIES & DISECONOMIES
MANAGERIAL ECONOMIES & DISECONOMIES
FINANCIAL ECONOMIES & DISECONOMIES
RISK – BEARING ECONOMIES
ECONOMIES OF RESEARCH AND DEVELOPMENT
ECONOMIES OF WELFARE
ECONOMIES AND DISECONOMIES OF
SCALE
2. EXTERNAL ECONOMIES AND DISECONOMIES
a) CHEAPER RAW MATERIALS AND CAPITAL
EQUIPMENTS
b) TECHNOLOGICAL EXTERNAL ECONOMICS
c) DEVELOPMENT OF SKILLED LABOUR
d) GRPWTH OF ANCILLARY INDUSTRIES
e) BETTER TRANSPORTATION AND MARKETING
FACILITIES
HOW PRODUCER’S EQUILIBRIUM IS
REACHED THROUGH OPTIMAL INPUT
COMBINATION?

Let the profit function be represented by, total revenue be
TR and total cost be TC, then, =TR-TC= pq-C(P=commodity
price, q=quantity) we assume that commodity price is given,
i.e., p=p, therefore
= pq-C.


Problem I: When producer is asked to produce a specified output, i.e.,
q=q, =pq-C. Therefore
will be maximum when C is minimum.



Problem II: When the cost is specified, i.e. c=c then
=pq-c,
then  will be maximum if q is maximum. So this is a
problem of output maximization.
THE DIFFERENCE BETWEEN FIXED
COST AND VARIABLE COST
1) The short run cost of production can be divided
into two parts
(i) Fixed cost and
(ii) Variable cost
Fixed Costs are those cost items which do not change with changes in
level of output, that means, they are independent of output.
Fixed costs are contractually fixed.
Variable Costs are those items of costs which change with changes in
the level of output in the short run i.e. they increase or decrease
with the rise or fall of the output e.g. wages of labour, prices of
raw materials, fuel, power etc.
COST FUNCTION
Cost function is a derivative function from
production and is also determined by prices of
inputs. Cost function refers to the mathematical
relationship which exists between cost of a
product and various determinants of cost.
Symbolically it is represented by :
C=f (O, S, T, U, P,……………)
Where C= Cost, O = Level of output, T = Time
period under consideration, S= Size of plant, P=
Prices of factors of production, U= Technology
etc.
MEANING OF MARKET
“ MARKET “ REFERS TO A SYSTEM OF NETWORK OR
DEALINGS BETWEEN BUYERS AND SELLERS
WHERE THEY BARGAIN FOR THE PRICE OF
PRODUCT, SETTLE THE PRICE AND BUY AND
SELL THE PRODUCT.
DIFFERENT TYPES OF MARKET ON THE
BASIS OF DEGREE OF COMPETITION
1.
2.
3.
4.
5.
6.
7.
8.
PERFECT COMPETITION
MONOPOLY
MONOPOLISTIC COMPETITION
OLIGOPOLY MARKET
DUOPOLY
BILATERAL MONOPOLY
MONOPSONY
OLIGOPSONY
PERFECT COMPETITION MARKET
1.
2.
3.
4.
5.
6.
MANY FIRMS
HOMOGENOUS PRODUCTS
FREE ENTRY AND EXIT
NO GOVERNMENT INTERVENTION
PROFIT MECHANISM
PERFECT KNOWLEDGE ABOUT MERKET
CONDITIONS
7. PERFECT FLUIDITY OF FACTORS OF
PRODUCTION
8. ABSENCE OF DISCRIMINATION
9. ABSENCE OF TRANSPORT COST
MONOPOLY MARKET
MONOPOLY IS A MARKET IN WHICH THERE IS
A SINGLE SELLER, THERE ARE LARGE NUMBER
OF BUYERS , THE PRODUCT HAS NO CLOSE
SUBSTITUTE AND THERE ARE BARRIERS TO
ENTRY.
THE FEATURES OF MONOPOLISTIC
COMPETITION
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•
A LARGE NUMBER OF FIRMS
PRODUCT DIFFERENTIATION
FREE ENTRY AND EXIT
NON-PRICE COMPETITION
GROUP CONCEPT
HIGH ELASTIC DEMAND CURVE
PRODUCT VARIATION
SOME INFLUENCE OVER PRICES
FEATURES OF OLIGOPOLY
1.
2.
3.
4.
5.
6.
7.
NUMBER
DIFFERENTIATION
ENTRY
INTERDEPENDENCE IN DECISION MAKING
GROUP BEHAVIOUR
PREPONDENCE OF ADVERTISEMENT AND
SELLING COSTS
INDETERMINATE DEMAND CURVE
SWEEZY’S KINKED DEMAND CURVE
MODEL
P
D
G
O
D Q
(A) PRICE REDUCTION :
(B) PRICE HIKE:
CONCLUSION: Each oligopolist finds himself
placed in such a position that he expects that
price cuts by him will be followed by price
cuts by other firms but price hike by him will
not be followed by price increase by other
firms – so that oligopolists will stick to existing
prices and given this view of competitor’s
reaction pattern the firm’s demand curve will be
composite curve DGD characterised by kink
/bent (G) at the prevailing price level.