MANAGERIAL ECONOMICS

UNIT I
UNIT-I
Introduction to Managerial Economics: Definition, Nature and Scope, Relationship with
other areas in Economics, The role of managerial economist. Concept of opportunity
cost, Incremental concept, time Perfective, Discounting Principle , Risk & uncertainty

Case 1:
THEORY AND REAL WORLD MARKETS:
The theory of perfect competition describe how firms act in a market structure where (1)
there are many buyers and sellers, none of which is large in relation to total sales or
purchase; (2) sellers sell a homogenous product; (3) buyers and sellers have all relevant
information; (a) there is easy entry and exit. These assumptions are closely met in very
few real world markets. These assumptions may however be approximated in some real
world markets. In such markets the number of sellers mat not be large enough for every
firm to be a price taker, but firms control may be so negligible, in fact that the firm acts
as if it were a perfectly competitive firm. Similarly, buyers may not have all relevant
information concerning price and quality, but the differences may be inconsequential.
In short, a market that does not meet the assumptions of perfect competition may
nonetheless approximate those assumptions to such a degree that it behaves as if were a
perfectly competitive markets. If so, the theory of perfect competition can be used to
predict the markets behaviour.
Questions:
(a) A price taker does not have the ability to control the price of the product it sells. What
does this mean?
(b) Why is a perfectly competitive firm a price taker?
(c) The horizontal demand curve for the perfectly competitive firm signifies that it cannot
sell any of its products for a price higher than the market equilibrium price. Why cant
it?
(d) Suppose the firms in a real world market do not sell a homogeneous product.
Does it necessarily follow that the market is not perfectly competitive?

UNIT-II
Demand Analysis: Elasticity of demand, types and significance of Elasticity of Demand
- Measurement of price Elasticity of Demand Need for Demand forecasting,
forecasting techniques, Law of Supply, Elasticity of Supply.

On April 23, 1985, the Coca-Cola Company announced that it was changing its 99-year-old
recipe for coke. Coke is the leading soft drink in the world, and the company took an unusual
risk in tampering with its highly successful product. The coca-cola company felt that
changing its recipe was a necessary strategy to ward off the challenge from Pepsi-cola, which
had been changing away at cokes market lead less fizzy taste, was clearly aimed at reversing
Pepsis market gains. Coca-cola spent more than $4million to develop its new coke, and it
conducted taste tests on more than 1, 90,000 consumers over a three-year period. These tests
seemed to indicate that consumers preferred the new coke over the old coke by 61 percent to
39 percent. Coca-cola then spent more than $10 million to advertise its new product.
When the new coke was finally introduced in May 1985, there was nothing short of a
consumers revolt against the new coke, and in what is certainly one of the most stunning
multimillion-dollar about-faces in the history of marketing, the company felt compelled to
bring back the old coke under the brand name coca-cola. The irony is that with the classic and
the new coke sold side by side. Coca-cola regained some of the market share that it had lost
to Pepsi.
Although some people believed that coca-cola intended all along to reintroduce the old coke
and that the whole thing was part of a shrewed marketing strategy, most marketing experts
are convinced that coca-cola had underestimated consumers loyalty to the old coke. This did
not come up in the extensive taste tests conducted by coca-cola because the consumers tested
were never informed that the company intended to replace the old coke with the new cokr
rather than sell them side by side. This example clearly shows that even a well-conceived
strategy is risky and can lead to results estimated to have small probability of occurrence.
Although coca-cola recuperated from the fiasco, most companies are not so lucky. In the
meantime, the perennial cola battle for market supremacy between coke and Pepsi ranges on..

UNIT-III
Production Analysis: Production function, Marginal Rate of Technical Substitution,
Production function with one/two variables, Cobb-Douglas Production Function, Returns to
Scale and Laws of returns.

THEORY AND REAL WORLD MARKETS

The theory of perfect competition describe how firms act in a market structure where (1)
there are many buyers and sellers, none of which is large in relation to total sales or
purchase; (2) sellers sell a homogenous product; (3) buyers and sellers have all relevant
information; (a) there is easy entry and exit. These assumptions are closely met in very
few real world markets. These assumptions may however be approximated in some real
world markets. In such markets the number of sellers mat not be large enough for every
firm to be a price taker, but firms control may be so negligible, in fact that the firm acts

as if it were a perfectly competitive firm. Similarly, buyers may not have all relevant
information concerning price and quality, but the differences may be inconsequential.
In short, a market that does not meet the assumptions of perfect competition may
nonetheless approximate those assumptions to such a degree that it behaves as if were a
perfectly competitive markets. If so, the theory of perfect competition can be used to
predict the markets behaviour.
Questions:
(e) A price taker does not have the ability to control the price of the product it sells. What
does this mean?
(f) Why is a perfectly competitive firm a price taker?
(g) The horizontal demand curve for the perfectly competitive firm signifies that it
cannot sell any of its products for a price higher than the market equilibrium price.
Why cant it?
(h) Suppose the firms in a real world market do not sell a homogeneous product.
Does it necessarily follow that the market is not perfectly competitive?

UNIT-IV
Cost theory and estimation: Cost concepts, determinants of cost, cost output
relationship in the short run and long run Modern development in cost theory
Saucer shaped short run Average cost curves Average total cost curve Cost Volume Profit analysis
The ICICI bank is running the business on the hypothesis that it deals only in borrowing
money (thorough public deposits only i.e., fixed depositors, saving bank accounts and current
accounts) and in lending money and through car loans. The bank incurs the following costs.
Fixed Costs
Salaries of managerial staff
Rent of the premises
Advertising costs
Depreciation
Total
Variable costs
Stationary & printing
Wages

Rs.in Lakhs
100
120
85
35
340
Amount in Rs.
60
55

Power charges
Raw material
total

75
300
490

The interest revenue of the per lakh of Rs.per annum is Rs.1800. let us determine (a)the
number of loans that the bank has to issue in order to break even and (b) if the bank wants to
earn a profit of Rs.100 lakhs ,how many loans will it have to issue.

UNIT-V
Market Structure and Pricing practices: Features and Types of different Markets
Price- Output determination in Perfect competition, Monopoly, Monopolistic
competition and Oligopoly both in the long run and short run. Pricing methods in
practice Bains limit pricing theory - Managerial Theories of a firm Marris &
Williams Models.
Curator of A Art Museum
You are curator of a major art museum. Your director of finance tells you that the museum is
running short of funds and suggests that you consider changing the price of admission to
increase total revenue. What do you do? Do you raise the price of admission ,or do you lower
it ? Justify your answer with an explanation.