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Unit-1Nature &
fundamental concepts &
basis techniques of
managerial economics
Micro Economics
 According
to Prof. McConnel-
“ Micro Economics is
concerned with specific economic
units & detailed consideration of the
behavior of these individual units.”
Macro Economics
 According
to Gardner Ackley-
“ Macro Economics deals with
economic affairs at large. It concerns
with the overall dimensions of
economic life.”
Managerial Economics
 Spencer
& Siegelman has defined
Managerial Economics as
“ the integration of economic theory
with business practice for the
purpose of facilitating decisionmaking and forward planning by
management”
Nature of Managerial Economics
 Decision-making
 Forward
Planning
 Economic theory & logic
Scope of Managerial Economics
 Demand
analysis & forecasting
 Cost & production analysis
 Pricing decisions, policies & practice
 Profit Management
 Capital Management
 Analysis of Business environment
 Allied disciplines
Demand :Desire to buy
+
Ability to pay
+
Willingness to pay
Law of Demand
“ Other things being equal, the
demand varies with the price, more
is demanded at a low price or less is
demanded at a high price.”
Demand
$20 -

Demand Curve
16 14 12 10 864-
2000 -
1600 -
1400 -
1200 -
1000 -
800 -
600 -
400 -
1800 -

2-
200 -
Price of Pizzas
18 -
Quantity of Pizzas Demanded
1-9
Assumptions of the Law
The
size of income of a consumer remain
unchanged
The
size & composition of population
remains unchanged
Tastes
& preferences remain the same
Prices
of other goods remain same
No

expectation of price change
No change in government policy
DETERMINANTS OF DEMAND
•
•
•
•
•
•
•
•
•
•
•
•
Price
Income
Taste, habit and preferences
Price of related goods
Advertisement effect
Consumer expectation
No. of buyers in market
Distribution of income in community
Population
Invention and innovation
Fashion
Climate
Types of Demand
Direct demand
• Derived or indirect demand
• Joint or complimentary demand
• Composite demand
•
EXCEPTIONS OF DEMAND LAW
Giffen goods
Ignorance
Luxury goods
Superior goods
Medicine
Speculation
Demonstration
Fashion
Individual & Market Demand
 The
quantity demanded by an
individual purchaser at a given price
is known as individual demand
whereas the total quantity demanded
by all the purchaser together is
known as market demand.
Individual demand function
Qd = f(Px , I , Pr, T, A )
 Where, px = own price of the com. X

I = Income of the individual

Pr = Prices of related com.

T = tastes & Pref. of the
Individual consumer

A= Advert . exp. made by the
producers of the com.
Market Demand functions
Dx = F(Y, Px, Ps, Pc, T, E p, Ey, N D, U)
 Where, Dx = demand of good

Y= consumer’s income

Px = Price of good x

Ps = Price of substitutes of x

Pc = Price of complements of
x

T = Consumer’s tastes &
Preference
Market Demand functions
 Ep
= Consumer’s expectation about
future price
 Ey = consumer’s expected future
income
 N= Number of consumers
 D= distribution of consumes
 U= other determinants of the
demand for x
DEMAND FORECASTING
The Meaning of Demand Forecasting
In Modern Business, Production is often made in anticipation of demand. Anticipation
demand implies demand forecasting. Forecasting means expectation about future course of
development. The future is uncertain. But not entirely so. Hence one can hopefully predict
the future event and gain demand forecasting means expectation about the future course of
the market demand of a product. Demand forecasting is based on statistical data about past
behavior and empirical relationship.
Demand Forecasting May Be
Undertaken At The Following
Level:1.
Micro Level
2.
Industry Level
3.
Macro Level
Significance of Demand
Forecasting:◦ Production Planning
◦ Sales Forecasting
◦ Control of Business
◦ Growth & Long Term Investment Programmes
◦ Stability
◦ Economic Planning & Policy Making
Short-Term & Long-Term
Demand Forecasting
Short-Term Forecasting :Short term forecasting normally related to a period not
exceeding a year. Some writers like professor E. J. Douglas (1994) prefers to
use the term Demand Estimation for short term demand forecasting.
Short term forecasting related to day to day particulars which
are concerned with tactical decision under the given resource constraints.
Short-Term Forecasting May Serve
The Following Purpose
◦ Evolving Sales Policy
◦ Determining Price Policy
◦ Evolving Purchase Policy
◦ Fixation of Sales Target
◦ Determining Short-Term Financial
Planning
Long-Term Forecasting
Long-Term Forecasting :Long term forecasting refers to the forecasts prepared for long
period during which the firms scales of operations or the production
capacity may be expanded or reduced.
Long term forecasts are normally for the periods exceeding a
year, usually 3-5 years or even a decade or more. A long term forecasting
relates to those information which are vital for undertaking strategic
decision of the business pertaining to its expansion or contraction over a
period of time.
In business decision making long term forecasting may serve
the following purpose.
Long-Term Forecasting May
Serve The Following Purpose
 Business Planning
 Manpower Planning
 Long-Term Financial Planning
General Approach To Demand
Forecasting
Important steps in dealing with any demand forecasting as
under:-
◦ Specification of objectives
◦ Identification of demand determinants
◦ Choice of methods of forecasting
◦ Interpretation
The Sources of Data Collection
Primary Data
◦ Observation
◦ Interview
◦ Survey
◦ Executive of Organization
◦ Market Experiment
The Sources of Data Collection
Secondary Data:◦ Official publication of the Central, State, Local government. Such as plan
Documents, Annual Survey of Industries.
◦ Trade & Technical or Economic Journal & Political Weekly, India
Economic
Journal
◦ Official publication like Reserve Bank of India
◦ Official publication of International Bodies like the IMF, UNO, World Bank
etc.
◦ Publication brought out by Research Institution, Universities Association
◦ Market Report & Trade Bulletin published by Stock Exchange, Trade
Association,
Chamber of Commerce
The Collective Opinion
It is also referred to as sales force polling expert
opinion survey under this method, the salesman have to report to the
head office their estimates of expectations of sales in their territories.
Such information can be obtain from the retailers & wholesalers by
the company. By aggregating these forecasting generalization on an
average is made, which is also based on the value judgment &
collective wisdom of top Sales Executives, Marketing Manager,
Business/Managerial Economist. Some times even experts opinion is
obtained from the dealers, distribution, suppliers or from the
executive of trade Association or Marketing Consultant.
• Market Experiments
• 1)Experimentation in Laboratory
• 2)Test Marketing
Method of Demand Forecasting
Market Survey / Studies
The market survey is most direct approach to demand forecasting. It
may be a sample survey or census enquiry.
There are two variant of survey method
1) Consumer Survey
2) The Collective Opinion
There are certain drawbacks of the consumer survey methods
1) This method is Expensive
2) It is time consumed
3) Information abstained through consumer survey is likely to be limited or
incomplete.
4) The success of this method also depends on designing questionnaire.
5) Cheating on part of enumerators may also vitiate the result of the survey.
Elasticity of Demand
Demand usually varies with price but the extent of
variation is not uniform in all cases. In some cases the
variation is extremely wide. In some other it may just be
nominal .That means sometime demand is greatly
responsive to change in price ; at other times it may not be
so responsive .The Economists,To measure this
responsiveness or the extent of variation, use the term
elasticity. In measuring the elasticity of demand two
variables are considered (i) Demand (ii) the determinants
of demand.Thus a ratio is made of two variables.
Elasticity of Demand= %change in quantity demanded
%change in determinants of demand
Types of Elasticity
 Price
Elasticity
 Income
 Cross
Elasticity
Elasticity
1) Price Elasticity of Demand

The extent response of demand for a
commodity to given change in price, other
demand determinant remaining constant, is
termed as the price elasticity of demand. The
price elasticity of demand may, thus, be defined
as the ratio of the relative change in demand
and price variables.
The Co-efficient of price elasticity (e) is
measured as
e = The percentage change in quantity demand
The percentage change in price
Since the relative change of variables can be measured either in
terms of percentage change or proportional change, the price elasticity coefficient can be measured alternatively as
The Proportional Change in Quality Demanded
e =
The Proportional Change in Price
Representing it in symbols, the price elasticity formula can be stated
as
e = Δ Q/Q or e = Δ Q × P
Δ P/P
Q
or
ΔP
Where Q = The original Demand (Q)
P = The original Price (P)
ΔQ = Change in Demand
ΔP = Change in Price
e = ΔQ × P
ΔP Q
Types of Price Elasticity
Modern Economist have elaborated the
Marshallian Classification further and stated five
kinds of price elasticity as under
1) Perfectly elastic demand
2) Perfectly Inelastic demand
3) Relatively elastic demand
4) Unitary inelastic demand
5) Relatively inelastic demand
1. Perfectly Elastic Demand
An endless demand at a given price is the case of perfectly elastic demand.
When the demand is perfectly elastic , with a slight or infinitely small rise
in the price of Commodity, the consumer stop buying it. The numerical
co-efficient of perfectly elastic demand is ( e=α)
Y
P
O
Demand
X Axis
2.
Perfectly Inelastic Demand
When the demand for the commodity shows no response at all to
change in price, that is to say, whatever change in price the demand
remain the same it is called perfectly inelastic demand. Perfectly
inelastic demand
has thus zero elasticity (e=o)
Y
P1
P2
P3
O
Demand
X Axis
Relatively Elastic Demand
When the proportion change in quantity demanded is
greater than that of price the demand is said to be
relatively elastic. The numerical value of relatively elastic
demand One or Infinite.
Y
e>1
P
r
i
c
e
P1
P2
M1
M2
Demand
X Axis
Relatively Inelastic Demand
When the proportion change in quantity demanded is less than that of price,
the demand is considered to be relatively inelastic. The numerical value of
relatively inelastic demand lies between zero and one.
Y
P P1
r
i
c P2
e
e<1
M1 M2
Demand
X Axis
Unitary Elastic Demand
When the proportion of change in demand is exactly the same as the change
in
price, the demand is said to be unitary elastic. The numerical value of unitary
demand is exactly 1.
Y
e=1
P P1
r
i
c P2
e
M1
M2
Demand
X Axis
Income Elasticity of Demand
The income elasticity of demand measures the degree
of responsiveness of demand for a good to changes in
the consumer’s income.
Definition :- The income elasticity is defined as a ratio
percentage or proportional change in the quantity
demanded to the percentage or proportional change
in income.
Income Elasticity = % change in quantity demanded
% change in income
Types of Income Elasticity

Unitary income elasticity of demand (e=1)

Income elasticity of demand greater than
unity (e>1)

Income elasticity of demand less than unity
(e<1)

Zero income elasticity of demand

Negative income elasticity of demand
1)Unitary Income Elasticity:When the percentage change in demand is equal to
percentage change in income, the demand is unitary
elastic, Thus e=1.
2) Income Elasticity greater than Unity:When percentage change in quantity demanded is
greater than the percentage change in income, the income
elasticity is greater than the unity. e>1
3) Income Elasticity less than Unity:When the percentage change in demand is less than
the percentage change in income the income elasticity of
demand is less than the unity. e<1
4) Zero Income Elasticity:When income change in any direction
or in any proportion but carries no effect
on demand, so that the quantity
demanded remain unchanged. It is
referred to as zero income elasticity of
demand thus e=o
 5) Negative Income Elasticity:When an increase in income cause a
decrease in demand for a commodity the
demand is said to be negative income
elasticity thus e<o

Cross Elasticity of Demand
In arriving the price elasticity of demand one takes into account
the change in demand due to the change in price of the same
commodity. In cross elasticity of demand, we takes into account the
change in the price of commodity Y & its effect on demand of
commodity X.
Definition :- The cross elasticity demand refers the degree of
responsiveness of demand for a commodity to a given price in the
price of same related commodity.
Cross Elasticity =
Proportionate or Percentage Change in Demand For X
Proportionate or Percentage Change in Demand For Y
Factors Influencing Elasticity of
Demand

Nature of Commodity

Availability of Substitute

Consumer’s Income

Height of Price & Range of Price Change

Proportion Expenditure

Durability of the Commodity

Habit & custom


Recurrence of Demand
Possibility of Postponement
Business Applications of Price
Elasticity
Price Discrimination
 Public utility pricing
 Joint supply
 Super markets
 Use of machines
 Factor pricing
 International Trade
 Shifting of tax buden
 Taxation policy

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