managerial economics introduction and scope
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This slides contains the introduction about managerial economics and its scope for business leaders
managerial economics introduction and scope
- 1. Unit I Managerial Economics- An Introduction
- 2. Managerial Economics • It is the discipline that deals with application of economic concepts, theories and methodologies to practical problems of businesses/firms. • Subject that uses the theories of economics and the methodologies of decision sciences for managerial decision- making is known as managerial economics.
- 3. Nature &Characteristics of M.E • It is micro-economic in character. • It largely uses the economic concepts and principles which is known as ‘ The theory of the firm’ or ‘ Economics of the firm’ • Pragmatic in nature. • It belongs to normative economics rather than positive economics • Macro-economics is also useful since it provides an intelligent understanding of the environment in which the business must operate.
- 4. Scope of M.E • The following aspects fall under M.E: • Demand analysis and Forecasting • Cost Analysis • Production and Supply Analysis • Pricing Decisions, Policies and Practices • Profit Management and • Capital Management
- 5. What is Decision Making in Business • Decisions are very important factors that determine the growth of organizations oEstablishment of firm’s objectives oIdentification of problems involved in achievement of those objectives oDevelopment of various alternative solutions oSelection of best alternative and finally implementation of the decision
- 6. Business Decision-making and Managerial Economics • The success of management in any business firm depends on the decision process.The various steps includes: • Establishing objectives • Defining problems • Identification of alternatives • Selection of best alternatives • Implementation of the decision.
- 7. Role of Managerial Economist • The factors that influence the business have two categories. • External factors- beyond the control of management which operates outside the firm (national income, value of trade etc) • Internal factors- within the control of management like expansion, level of activity, investment etc
- 8. Contd…. • The other functions performed are • Sales forecasting • Market research • Pricing problems • Production programmes • Investment analysis • Environmental forecasting.
- 9. Contd…. • What products and services should be produced? • What inputs and production techniques should be used? • When should be equipment replaced? • How the available capital be allocated?
- 10. Responsibilities of Managerial Economist • To make a reasonable profit on capital employed • Successful forecasts • To assure the management of a particular trend • To establish and maintain contacts with individuals and data sources • His status in the firm.
- 11. Fundamental concepts of Managerial Economics • Incremental Concept • Discounting Principle • Opportunity Cost • Time perspective • Equi-marginal principle.
- 12. Demand Analysis • Demand- is the amount that people are ready to buy at various prices within some given time period, other factors held constant. • Demand depends on: a) Desire to buy b) Ability to pay and c) Willingness to pay.
- 13. Law of Demand • The law of demand states the relationship between the price of a commodity and the quantity demanded in the market. • Higher the price, lower the demand and vice versa, other things remaining the same • There is a inverse relationship between price and demand.
- 14. Demand Curve
- 15. Types of Demand • Price demand- commodity or service that a consumer purchases at a given time in a market at various prices • Income demand- commodity or service that consumer purchase at a given time in a market at various income levels. • Cross demand- interrelated goods or services (incase of substitute goods and complementary goods)
- 16. Demand Function • A mathematical expression of relationship between dd of a commodity and its price- dd function. • Dx= f(Px,Y, Ps, Pc,A,T) Y- consumer’s income Ps- price of substitutes Pc- price of complements A- advertisement expenditure T - consumer’s tastes
- 17. Why does dd curve slope downwards • Law of diminishing marginal utility • Substitution effect • Income effect • Effect of tastes and preferences of consumers.
- 18. Exceptional demand curve • In sometimes dd curve slopes upwards due to the following conditions • Status symbol commodity • Ignorance • Necessities of life • Giffen’s paradox.
- 19. Determinants of Market Demand • Price of the product • Price of related goods • Consumer’s income • Consumer’s taste and preferences • Advertisement expenditure • Consumer’s expectations • Population of the country • Distribution of national income • Climate & season
- 20. Elasticity of Demand • Quantity of demand changes due to change in price. Ep = proportionate change in demand _________________________________ proportionate change in price
- 21. Price Elasticity of Demand • Change in demand in relation to certain change in price • ep = proportionate change in demand _________________________________ proportionate change in price
- 22. Determinants of Price elasticity • Substitutes • Nature of the commodity • Extent of use • Income level • Proportion of income spent on commodity • Postponement of purchases • Price level
- 23. Income elasticity of Demand • The responsiveness of quantity demanded to changes in income is called income elasticity of demand. ei = proportionate change in demand _________________________________ proportionate change in income
- 24. Cross elasticity of demand • The cross elasticity measures the responsiveness of quantity demanded to changes in price of other goods and services. ey = proportionate change in dd of A ________________________________ proportionate change in price of B.
- 25. Importance of Elasticity in Decision- making • It is helpful in determining the price of product • Budget formulation- shifting of tax • Terms of trade • Effectiveness of price control • Forecasting demand
- 26. Types of Price Elasticity of demand • Elastic Demand- a change in price, results in a greater than proportional change in the quantity demanded ED>1. • Inelastic Demand- a change in price results in a less than proportional change ED<1. • Unitary Demand- a change in price results in equal proportionate change ED=1. • Perfectly elastic Demand- dd changes when price remains unchanged e= ∞ • Perfectly inelastic Demand- change in price does not result in any change e= 0.
- 27. Measurement of Price elasticity • Total outlay method • Proportionate method • Arc method • Point method
- 28. Types of Income Elasticity • Zero income elastic demand (e¡=0) eg.salt • Negative income elasticity e.g .inferior goods • Positive income elasticity e,g. superior goods.
- 29. Types of Cross Elasticity • Zero cross elastic demand (e¡=0) • Infinite cross elastic demand (e¡=∞) • Unitary elastic cross demand (e¡=1) • Relatively elastic cross demand (e¡>1) • Relatively inelastic cross demand (e¡<1).
- 30. Indifference Curve • It is the combination of two commodities which gives consumer the same level of satisfaction • What does Indifference Curve mean? • A diagram depicting equal levels of utility for a consumer faced with various combinations of goods. Properties of Indifference Curve- slopes downwards to right, do not intersect, convex to the origin, represents higher level of satisfaction than a lower indifference curve.
- 32. Demand Forecasting • An estimate of future situation, prediction of demand for good or service on the basis of present and past behavioral patterns of some related events. • A good forecast should be accurate, simple, economical, consistent and timely.
- 33. Types of DD Forecasting • Two types of forecasting • Short-term – not exceeding one year eg. clothes • Long- term- plan for new units, new projects, new plants, expansion, technological development eg. Petroleum, paper, shipping. • Objectives of short term forecasting- framing suitable production policy, inventory management, sales strategy, financial requirements etc. • Objectives of Long term forecasting- long term business planning, financial planning, man-power planning.
- 34. Forecasting Techniques Forecasts on the basis of : • What people say- the opinion of the buyers • What people do- the buyer response • What people have done- analyzing the past records.
- 35. Methods of Forecasting Techniques Methods of forecasting Survey method Opinion survey Consumers interview Statistical method Trend projections& barometric method