UNIT-1 INTRODUCTION TO MANAGERIAL ECONOMICS

In the present context of business world basically business is concerned to profit making by interaction with few factors. Therefore some factors are responsible to start up a business. Every business is affected by two factors as: 1. Internal factors 2. External factors Internal factors are basically belongs to interaction past of the business. They are suppliers, creditors, customers, distributors, shareholders, competitors etc. External factors are belongs to outside of the business concerned, they are political, social, economical, technical, government, legal etc.

Therefore by interacting with internal and external factors business can start in any regions or any location. For shifting up an industry, it is required to be concentrate on the following objectives: Maximize the return on investment. Maximize the profit of the company. Minimize the cost of production.

In our day to day life, we are always facing lot of issues on1

How much to produce? In what price is to produce? What quality is to produce?

Hence, we are always commencing through different calculation and estimation to come forward from loss. As estimation is there, economics is also prevailing some extent of calculations.

ECONOMICS: - It is the study of human activity both at individual and national level, so it is
also called as science of wealth. According to Adam smith, the father of economics, defined economics as the study of nature and use of national wealth. Wealth can not be the ultimate goal because we should keep our health for future. Therefore according to Alfred Marshall derived the word from wealth to welfare. According to Dr.Alfred Marshall economic is the study of mans action s in the ordinary business life, if enquires how he gets his income and how he uses it.

So we can say that economic is a science which studies the human behavior with welfare and wealth of individual and nation. Prof, Robbins defined economic as the science which studies human behavior as a relational ship between ends and scarce means which have alternative uses.

FEATURES OF ECONOMICS:
1. 2. 3. 4. Unlimited wants:-eg: sky is the limit. Scarce resource:-eg: suppose demand of product is 100 units but supply is 50 units. Alternative uses:-eg: alternative or substitute sources are available in market. Choice:-eg: choice is run to select of one course among 5.

DIVISION OF ECONOMICS: - Economics is developed to 2 parts.

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1. Micro economics:-which is concerned to individual firm or consumer. 2. Macro economics:-which is concerned to aggregate or total level of economic activity

MANEGERIAL ECONOMICS;- In our present world of business when ever we want to start
an industry various things are required as men, money, machine, material and market. So these things cannot maintain every thing on progress of business and prosperity. In this connection management is required to control every thing with profit planning.

MANGEMENT: - It is the science and art of getting things done through others by planning,
organizing, staffing, directing and controlling for a common objective in a uniform and formal way. How to become an entrepreneur? 1. 2. 3. 4. 5. 6. Location is first preference. Layout of the industry. Capital. Raw material. Labor. Communication-transportation.

On the above criterias, the prime function of a management executive in business organization is decision making and forward planning. Decision making means the process of selecting one action from 2 or more alternatives where as forward planning means establishing plants for future. Both the factors are integrated with past data, present situation and future production. Therefore managerial economics is the application of economic theory into management. Because division making and forward planning are important in accounting, investment, forecasting, business decision and planning etc.

According to Mc near and Marian, managerial economics consists of the use of economics mode of thought to analyze business situations.

Spencer and siege men have defined managerial economics as the integration of economic theory with business practice for the purpose of facilitating division making and forward planning by management. Thus it is the relationship between applications of economic theory into business management.

NATURE OF MANEGERIAL ECONOMICS: The managerial economics pertains with the

simplification of complexity by managerial phenomenon under study in a dynamic business environment. Therefore it is the combination of economic thought and managerial assumption on the affective situations.

There are various characteristics as follows:1. It is the micro-economics of a firm. So it is always interacting with individual calculation of a firm. 2. It is the body of economics concept and principles which is none to be theory of the firm. 3. It is having natural and practical implementation of most activities on decision making. So it is called as pragmatic in nature. 4. It is normative economics rather positive. So it is established by certain norms, policies on implementation. 5. It is also aggregate by macro economics which is also required for managerial economics which will provide an intelligent understanding of the environment.

SCOPE OF MANAGERIAL ECONOMICS:-

1. DEMAND ANALYSIS AND FORECASTING:- A major pert of managerial decision making depends on accurate estimates of demand. Before production schedules can be prepared and resources employed. A fore cast of future sales is essential. This fore cast can also serve as a guide to management for maintain or strengthen market position and enlarging profits. It is also a guide line for manipulation of demand. It is determining the force of sales and their measurements. Topics covered under this are demand determinants, demand distinctions, demand fore casting etc. 2. COST ANALYSIS: - A study of economic cost combined with the data drawn from the firms accounting records can yield significant cost estimates that are useful for management decisions. An element of cost uncertainty exits because all the factors determining cost are not always known or controllable. Thus economics of cost are endevour with profit planning, cost control, sound pricing practices. Topics covered under this are cost concept, cost out put relationship, cost control and cost reduction. 3. PRODUCTION AND SUPPLY ANALYSIS: - production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in monetary terms. Production analysis mainly deals with different production function and their managerial uses. Supply analysis deals with various aspects of supply of commodity. There are supply scheduled, curves and function, law of supply and its limitations, elasticity of supply and other factors. 4. PRICING DECISIONS POLICIES AND PRACTICES: - Price is the genetic of revenue of a firm and as such the success of a business firms depends on the correctness of price
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decisions taken by it. There are various aspects on price decisions as price determinations, pricing methods, differential pricing, product line pricing, price fore casting etc. 5. PROFIT MANAGEMAGENT:-Business firms are generally organized for the purpose of making profits and in long run profits provide the chief measure of success. Profit is always considering internal and external factors of the organization. Topics covered under this are measurement of profit, profit policies and techniques, break even analysis etc. 6. CAPITAL MANAGEMENT: - capital management implies planning and control of capital expenditure. There are various aspects of a capital management as cost of capital, rate of return, selection of project.

RELATION WITH THE OTHER DEPARTMENTS:- Managerial economics is closely

related with other department such as economics, mathematics, statistics, operation research, psychology etc.

ECONOMICS:-Economics is particularly accountancy deals with theory where as

managerial economics is the application of these in the real life. Both economics and managerial economics are related because both are concerned with problem of scarcity and resource allocation.

OPERATION RESEARCH:-It is concerned to problem finding on managerial problem. So

various techniques are used in the decision making process such as linear programming,

queuing, transportation, optimization etc. decision making is the main focus in operations research and managerial economics

MATHEMATICS: - For decision making and forward planning, managerial economist are
always predicting and estimating. So mathematic can help buffer to find out optimum result by using some tools as algebra, calculus etc.

STATISTICS:-Decision making is also concerned with probability to analyze past data and
current information. So various statistical formula of regression, correlation etc can help to resolve the problem.

ACCOUNTANCY:-The accountant provides accounting information relating to costs,

revenues, receivables, payables, profit, loss etc. and this forms the basis for managerial economics.

PSYCHOLOGY:-The reaction and implementation of consumer behavior is significant in

managerial economics for the purpose of decision making and formed planning.

DEMAND ANALYSIS:- Demand determinants economic has 4 aspects on

Consumption Production Exchange Distribution 1. Consumption deals with consumer behavior which proceeds production. 2. Exchange deals with how the goods ones produced are sold for a price to the consumer. 3. Distribution deals with the how the sales proceeds of the goods sold are distributed among the various factors of production towards rents, wages, interest, profit etc. Therefore basic law of consumption deals with the salient aspects of consumer behavior.

BASIC LAWS OF CONSUMPTION / Determinants of law of consumption 1. 2. 3. 4. 5. Law of diminishing marginal utility. Law of equi marginal utility. Consumer surplus. Concept of indifference curves. Consumer equilibrium.

1. LAW OF DIMENSHING MARGINIAL UTILITY:It states that marginal utility derived on the consumption on every unit is goes on diminishing, other thing remains same.

EXAMPLES:-Suppose we take sweets with increasing in numbers, what will be the taste?
NUMBER OF SWEETS 1 2 3 4 5 AMOUNT OF TOTAL UTILITY 30 45 57 50 50 MARGINAL UTILITY ---25 20 10 -5

From the above table we can observe that the taste of sweet is decreasing through more number of utility.

EXCEPTION: To become a lakhpati, additional are rupee is very significant (99999+1). To resolve the thirstiness of a person one tea spoon of water is not sufficient rather one glass of water. The law of equi-marginal utility explains the prerequisite for the consumer to be in equilibrium. Marginal utility of product (X) = Price of (X) Where X & Y are products brought. Marginal utility of product (Y) price of (Y)

2. LAW OF EQUI-MARGINAL UTILITY:-

EXAMPLE:
Suppose in our house two bikes are available for six members. So we can add bike to maintain some proportion.

3. CONSUMER SURPLUS:- Consumer surplus is defined as the difference between the

price that consumer is prepare to pay and the price that he is exactly paying.

4. THE INDIFFERENCE CURVE:- An indifference

curve is a curve which reveals certain combination of goods or services which yield him same utility.

ASSUMPTIONS: Consumer behaves rationally to maximize his satisfaction. The price and income of the consumer are defined for analysis. A consumer is said to be in equilibrium when his utility given budget constraint and when the budget line is fangential to any of the difference curve, then he is said to be in equilibrium.

5. CONSUMER EQUILLIBRIUM:-

DEMAND ANALYSIS: Demand analysis refers to the desire, backed by the necessary ability to
pay. It is the quality desire at given price. It is the demand at price during a given time. It is the quantity demand per unit of time.

IMPORTANTS OF DEMAND:1) Forecasting sales 2) Manipulating demand

DETERMINANTS OF DEMAND:We can say that the quantity of a goods demanded is a function of its price

Q=f(p)
Where Q = quantity demanded f = function p = price of the function here some of determinants of demand as follows:1) 2) 3) 4) 5) 6) 7) Price of the goods Income of buyers Price of related goods(substitute) Taste/ preference of the buyers Season preventing at the time of purchase Fashion Advertisement and sales promotion

NATURE AND TYPES OF DEMAND:-

1) CONSUMER GOODS VS PRODUCERS GOODS:Consumer goods as Rice, Bread, Milk which are consumed directly by the consumer increasing the demand of each item .Therefore it can be called as the direct demand from the consumer. Produced goods such as raw materials, machines which are utilize to produce the consumer goods indirectly for making the demand by consumers. Therefore it can be called as indirect demand of consumer. 2) AUTONOMOUS DEMAND VS DERIVED DEMAND:Autonomous demand is refers to the independent demand made directly by a organization. Suppose a cinema hall is situated near by the city to attract the audiences which signify independence demand character. Where as surroundings to the cinema hall various tea shops, food cafeteria, coffee stalls etc are doing the business with the impact of cinema hall. Therefore the demand is created by the cinema hall and is calls as the derived demand.
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3) DURABLE GOODS VS PERISHABLE GOODS:Durable goods like TV, Refrigerators etc having the longitinity and durableness. Therefore the demand of durable goods is more than others. But in case of perishable goods it can not be preserve for long duration so demand is very less. For example fish, vegetable etc .having less demand offer two days.

4) FIRM DEMAND VS INDUSTRY DEMAND:The firm is a single business unit where as industry refers to the group of firms carrying on similar activity. The quantity of the goods demanded by a single firm is called firm demand and the quantity demanded by the industry as a whole is called industry demand. EX :-100 bags of cement is required for one construction company is firm demand where as construction company of the entire state 10,000 bags of cement requirement is called as industry demand.

5) SHORT RUN DEMAND VS LONG RUN DEMAND:Short run demand as the demand with its immediate reaction to rice change income fluctuation and so on. Long run demand is that demand which will ultimately exist as a result of changes in price, promotion and product improvement after enough time is allowed to let the market adjust itself to the given situation. The demand for a particular product or service in a given region for a particular day can be viewed as short run demand the demand for a longer period for the some region can be viewed as long run demand. EX:- Demand created by inflation in find items is short run demand where as 5yrs plan by the government for find supply is demand for long run.

LAW OF DEMAND:-

Definition:
The relation of price to sales is known in economics as the laws of demand. The law of demand states that higher the price lower the demand and vice verse other thing remain same.

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DEMAND SCHEDULE
Price Rs 5 Rs 4 Rs 3 Rs 2 Quantity Demanded 80 Units 100 Units 150 Units 200 Units

DEMAND CURVE:DD1 is the demand curve of a commodity the curve slopes downward from left to right indicating that when price rises, less is demanded and when price falls more is demanded . This kind of slop is also known as negative slope

CHARECTERASTICS OF LAW:1) 2) 3) 4) Inverse relationship Price on independent variable and demand dependent variable Other things remain same income of buyers, substitute price Reason under lying the law of demand i) Income effect ii) Substitution effect

EXCEMPTIONS:1) 2) 3) Under Veblen effect price of gold, diamond ornaments when increasing the demand is also increasing. In speculative market a rise in price is frequently followed by buyer purchase and a fall in price by smaller purchase. The Geffen Case:-

Geffen found that in 19th century Ireland people were so poor that they spent a major port of their income on potatoes and a small part on meat. When the price of potatoes, raise they had to economies on meat even to maintain the same consumption of potatoes. Further to fill up the resulting gap in food supply caused by a reduction in meat consumption more potatoes had to be purchased because was still the cheapest food. Thus the rise in the price of potatoes led to increased sales of potatoes. It must be noted that such cases would occur only when a considerable part of total income is spent on an inferior goods 12

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