Scope of Managerial Economics

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Scope of Managerial

Economics

• _{Demand decision}

• _{Cost and production decision} • _{Pricing decisions}

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Demand Analysis

Demand

Analysis PlanningProft

Sales Forecasti

ng

Business Strategi

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What is Demand?

the desire

to have

possession

the

willingness

to pay for

that

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Type of Demand

• _{Individual vs Market demand.}

• _{Market demand vs Total market demand.} • _{Company vs Industry demand.}

• _{Domestic vs National demand.} • _{Direct vs Derived demand.}

• _{New vs Replacement demand.} • _{Short run vs Long run demand.}

• _{Household vs Corporate vs Government}

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Individual demand vs market

demand

• _{The consumer's choice to buy a}

product that maximizes their

personal satisfaction refects the individual demand.

• _{The market demand for goods or}

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Market demand vs Total market

demand

• _{An aggregate of individual's demand}

from high income, middle income and low-income group yields the market demand.

• _{An aggregate of various market}

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Company vs Industry

demand

• _{The demand of an individual}

company is the company's demand and the aggregate of various

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Direct demand vs Derived

demand

• _{The demand for an item in response}

to its own price is called 'direct

demand' whereas the demand for an item is called 'derived demand'.

• _{For example, demand for coal leads}

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Law of Demand

• There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.

• Income and Substitution Efect • Assumptions of Law of demand:

– This law assumes the income of the consumer to be constant.

– Preference of the consumer is constant and he is ready to spend for it even if it is expensive.

– _{A change in government policies will infuence demand for the}

product hence this law assumes a constant government policy.

– _{No change in size, composition and sex ratio of population.}

– _{Change in weather conditions is also likely to afect the demand}

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Exceptions to the law of

demand

• _{Gifen's goods (normal goods vs inferior goods)}

Symbol of luxury e.g. diamonds, crystal etc

• _{Consumer's psychology e.g.}_{the higher the price}

the better the quality according to this view

• _{Sale during offseason e.g.}_{reduction ofers yet}

demand is low

• _{Uncertain future e.g.}_{product is uncertain in}

future, people may buy more of it even in the face of rising prices

• _{Expectations of consumers e.g.}_{When prices fall,}

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Determinants of Demand

• _{Consumer's income.} • _{Price of the product.}

• _{Consumer's preferences.}

• _{Prices of related goods (substitution}

and complementary)

• _{Population and its distribution.}

• _{Consumer's expectations about the}

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Demand Function

• _{Describes the relationship between}

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Change in Demand

• _{The demand function yields an Engel}

curve if income is allowed to vary while all other variables are held constant.

• _{Thus a change in the factors other}

than price leads to an increase or decrease in demand and this is

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Contraction in Demand

• _{This refers to an upward movement}

along the demand curve, indicating a lowering in the quantity demand for a given increase in the price of the commodity.

• _{Thus extension and contraction}

refers to downward or upward

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Elasticity of Demand

• _{The demand function is useful for managers as}

it identifes the causal variables for and the direction of their efects on the demand for their products.

• _{However, this knowledge is not enough. The}

manager must know the quantitative

relationship between the demand for his

product and its determinants for taking certain managerial decisions.

• _{This leads to the concept of 'elasticity of}

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Elasticity of Demand

Demand for a commodity will be more elastic if:

• _{It has many close substitutes} • It is narrowly defned

• _{More time is available to adjust to a price}

change

Demand for a commodity will be less elastic if:

• It has few substitutes

• It is broadly defned

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Types of Elasticity

• _{Price elasticity of demand.}

• _{Income elasticity of demand.} • _{Cross elasticity of demand.}

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Price Elasticity

• _{It refers to the quantity demanded of a} commodity in response to a given

change in the price of the commodity. • _{Importance of Price Elasticity}

– _{A knowledge of price elasticity helps to}

guide a frm whether its sales proceeds, decrease or remain invariable under

conditions of price variations.

– _{It also helps the frm to estimate the likely}

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Price Elasticity

The demand is said to be elastic with respect to price if the change in quantity

demanded is more than the change in price. This implies that the elasticity is more

than one (e > I).

The demand is said to be inelastic with respect to price when the change in quantity

demanded is less than the proportionate change in price. This implies that the elasticity

is less than one (e < 1).

The demand is said to be unity with respect to price when the change in quantity

demanded is equal to the change in price (e = I).

The demand elasticity is zero when a change in price causes no change in quantity

demanded and the demand elasticity is said to be infnity when no reduction in price

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Income elasticity

• _{Income elasticity refers to the quantity}

demanded to the commodity in response to a given change in income of the consumer.

• _{Importance of income elasticity :}

– _{A knowledge of income elasticity of demand}

helps to estimate the likely change in demand for a product as a result of changes in national income.

– _{It also helps us to know whether a commodity is}

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Income elasticity

• _{The income elasticity of demand is}

positive for superior goods and negative for inferior goods.

• _{The income elasticity of demand is}

negative, when an increase in

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Cross elasticity

• It refers to the quantity demanded for a commodity in response to a change in the price of a related good, which may be a

substitute or a complement. • _{Importance of cross elasticity :}

– _{It is useful in measuring the inter dependence of}

demand for a commodity and the prices of its related commodities.

– _{It helps to estimate the likely efect on its sales}

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Cross elasticity

• _{Cross elasticity is always positive for}

substitute and negative for complements. • _{It should be noted that greater the cross}

elasticity, the more related the two goods are. • _{The cross elasticity will be zero, if the two}

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Advertising elasticity

• _{It refers to the measurement of}

proportionate change in demand in response to the proportionate

change in promotional eforts.

• _{Advertising elasticity is always}

positive.

• _Importance:

– _{It helps a decision maker to determine}

his advertisement outlay and necessary amount to be invested for the

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Advertising elasticity

• _{Advertising elasticity of demand is}

high when even a small percentage change in advertising expenditure results in a large percentage of

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Factors Governing Elasticity of

Demand

• _{Nature of the product}

• _{Tastes and preferences of the}

consumer

• _{Time period} • _{Level of price}

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Importance of elasticity of

demand

• _{It helps:}

(a)to fx the prices of factors of production,

(b)to fx the prices of goods or services, (c) to formulate government policies,

(d)to forecast demand, and

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Group Assignment

• _{Do Case Study in e-book}

“Fundamental of Managerial

Economics: Economic Application”