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Managerial Economics
Managerial Economics
● Theory of Demand
● Production theory (Theory of firm)
● Pricing theory
● Profit analysis and Management
● Theory of Capital and investment
decisions
Macro economic applied
● Inverse relationship
The relationship between price and quantity
demanded is inverse. i.e., if the price rises, the
demand falls; the price falls, demand goes up.
● Price is an independent variable, demand a
dependent variable.
Under the law of demand it is the effect of price on
demand that is examined and not the effect of
demand on the price. When demand goes up
price goes up and when demand falls price would
fall. But the law of demand does not concern with
this phenomenon.
● The law of demand assumes that Other things
remain the same
In other words there should be no change in other
factors influencing demand except the price.
Changes in income, substitutes’ prices, consumer
tastes and preferences, advertising spend etc due
to which the demand may rise even if price
increases or demand may fall in spite of fall in
prices
● Factors Behind law of Demand
Substitution effect
Income effect
Utility maximizing behavior
Demand Curve
● Availability of substitutes
● Nature of commodity- essentials,
luxuries
● Weight age in the total consumption –if
the commodity purchase accounts for a
very small percentage of total income
then less elastic
● Time factor in adjustment of
consumption pattern
● Range of use of commodity
Income elasticity of Demand
3. General or specific
Commodity or product wise, nationwide
or area wise.
4. New products vs established products
5. Type of products – consumer goods,
producer goods, durable goods, non
durable goods etc.
6. Factors specific to particular goods
SUPPLY ANALYSIS
Meaning of Supply
Meaning of Production
1. Perfect Competition
2. Imperfect Competition
a. Monopoly
b. Oligopoly
c. Monopolistic competition
Perfect Competition
Many producers
Real or perceived difference in products.
products are not identical.
Resembles perfect competition in that
there are large number of producers, none
have large market share.
Barriers to entry
PRICING POLICIES
AND
PRICING METHODS
General considerations in
formulating pricing policy
1. Objectives of the business
2. Competitive situation
3. Product and promotional policies
4. Price Sensitivity
5. Interests of Manufacturers and
middlemen
6. Influence of Non business entities on
price determination
Objectives of Pricing Policy
Cost Oriented
1. Cost- plus or Full cost pricing
2. Pricing for return or target pricing
3. Marginal cost pricing
Competition Oriented
4. Going rate pricing
5. Customary pricing
6. Sealed bid pricing
Full cost or Cost plus pricing
● What is Profit ?
Profit is essentially a residual sum.
Net profit is a sum over and above the
ordinary costs including contractual outlays
Land ,labor and capital are frequently used
under contracts whereby they receive pre
determined return.
Nobody contracts to the entrepreneur the
residual sum - profits
Business is faced with a number of uncertainties:
Technical uncertainties
Cost uncertainties
Demand uncertainties
Market uncertainties
Profit is the reward to entrepreneur for combining
factors of production to meet the economic needs
of the world and successfully managing the risks
and uncertainties in the process.
Accounting Profit and
Economic Profit
● In the accounting sense profit is revenue
realised during the period minus the
explicit or actual cost and expenses
incurred in producing the revenue – the
residual concept.
The economic profit also calls for
deduction of imputed costs –
● Entrepreneur’s wages (which he could
earn by working for others)
● Rental income from self owned land and
buildings (he would got by renting to
others)
● Interest on self owned capital (which he
would earned by investing elsewhere)
● Economic Profit =
Accounting profit – imputed costs
From the managerial point of view
economic profits are more important than
accounting profits as the former reflect the
true profitability of the business. A firm
incurring economic loss but making
accounting profit may have to withdraw
from business in the long run.
Functions of profit