Department of Management Studies

Subject code: MS-5103

Managerial Economics
 Managerial Economics

Economic theory

Managerial
Economics
Business
Practices
It guides the managers in taking
decisions relating to the firm’s
customers, competitors, suppliers as
well as relating to the internal
functioning of a firm.

It uses statistical and analytical tools to

assess economic theories in solving
practical business problems.
 Micro and Macro Economics

Micro Economics: Macro economics:

•Deals with the actions of individual •Deals with the economy as a whole and
agents within the economy like firms, studies actions and policies of a country
households, workers, businesses etc. affecting its economy.

•Micro and Macro economics cannot be separated distinctly; they are

interdependent and complementary to each other.

•Micro decisions of individual firms is influenced by the health of the macro

economy.

•The overall health of the economy is dependent on various decisions and

performance of individual entities of the economy.
 Three fundamental questions
•Economics deals with scarcity of resources---Limited means and unlimited wants

•The main aim of managerial economics is to allocate the scarce resources efficiently

The scarcity problem gives rise to three

fundamental questions:

What to produce?
How to produce?
For whom to produce?
MICRO ECONOMICS
 Course Contents:

Demand and Supply analysis

Utility: Cardinal and ordinal

Consumer Theory

Production and cost analysis

Theory of markets and pricing strategies

❖Perfect competition
❖Monopoly
❖Monopolistic competition
❖Oligopoly
 Demand and Supply Analysis

Basic Concepts

Elasticity of demand and supply

 Basic concepts of demand and supply analysis

•Concept of demand and supply

•Demand function and supply function

•Law of demand and law of supply

•Demand schedule and supply schedule

•Demand curve and supply curve

•Change in demand and change in quantity demanded

•Change in supply and change in quantity supplied

•Concept of individual demand and market demand

•Concept of individual supply and market supply

•Equilibrium
Basic concepts of demand and supply analysis (contd..)

Concept of demand and supply

Demand:
•Desire backed by purchasing power of an individual (quantity of a commodity that a
consumer is willing and able to purchase)

•Consumer’s desire to purchase commodities at the given market price

Supply:
•Amount of goods/ quantity of a commodity that a producer is willing and able to offer
at various market prices

•Quantity that is offered for sale and not what is finally sold
Basic concepts of demand and supply analysis (contd..)

Demand and supply function

Demand function: Supply function:

D(x)= f {P(x),T,M,P(o)} S(x)= f {P(x),P(f),T,P(o)}

D(x)=demand of a commodity S(x)=supply of a commodity x

x
P(x)=Price of the commodity x
T=Taste and preference
P(x)=Price of the commodity x
P(f)=Prices of factors of
production/Cost of production

M=Money income T= Technology of production

P(o)=prices of other P(o)=prices of other commodities

commodities (substitutes or (substitutes or complements)
complements)
Basic concepts of demand and supply analysis (contd..)

Law of demand and Law of supply

Law of Demand Law of Supply

•Ceteris paribus, the demand of •Ceteris paribus, the supply of a

a commodity falls as its prices commodity rises as its prices
rises and vice versa. rises and vice versa.

•Price and demand are inversely •Price and demand are directly
related (demand changes related (supply changes directly
inversely with price) with price)
Basic concepts of demand and supply analysis (contd..)

Demand schedule and Supply schedule

Price of Apple Quantity Price of Apple Quantity

(Rs./ kg) demanded (in (Rs./ kg) supplied (in
kgs) kgs)
150 20 150 60
120 25 120 50
100 35 100 45
90 40 90 30
80 45 80 25

Demand schedule Supply schedule

Basic concepts of demand and supply analysis (contd..)

Demand curve and Supply curve

Basic concepts of demand and supply analysis (contd..)
Change in demand and change in quantity demanded

Change in demand Change in the quantity demanded

•Occurs when there is a change in the
demand of a commodity due to
changes in the determinants of
demand other than the own price of
the commodity in question
•Also called shift in demand
•Leads to the shift of the entire
demand curve (left or right)
•Occurs when there is a change in the
demand of a commodity due to changes in
the own price of the commodity in
question
•Not a shift in demand
•Does not lead to the shift of the entire
demand curve but just a movement along
the original demand curve (from one point
to another)
Basic concepts of demand and supply analysis (contd..)
Change in supply and change in quantity supplied

Change in supply Change in the quantity supplied

•Occurs when there is a change in the
supply of a commodity due to
changes in the determinants of supply
other than the own price of the
commodity in question
•Also called shift in supply
•Leads to the shift of the entire supply
curve (left or right)
•Occurs when there is a change in the
supply of a commodity due to changes in
the own price of the commodity in
question
•Not a shift in supply
•Does not lead to the shift of the entire
supply curve but just a movement along
the original supply curve (from one point
to another)
Basic concepts of demand and supply analysis (contd..)
Individual demand and market demand

Individual demand: Market demand:

•Demand for a commodity by an
individual according to the law of
demand
•Graphically, a downward sloping
curve from left to right
•Total of all individual demand
for a commodity in the market
•Graphically, the horizontal
summation of all individual
demand curves
Basic concepts of demand and supply analysis (contd..)
Individual supply and market supply

Individual supply: Market supply:

•Supply of a commodity by an
individual according to the law of
supply
•Graphically, an upward sloping
curve from left to right
•Total of all individual supply of
a commodity in the market
•Graphically, the horizontal
summation of all individual
supply curves
Basic concepts of demand and supply analysis (contd..)
Concept of equilibrium

•Equilibrium is a state from where there is no tendency to deviate

•Market Equilibrium is reached when demand equals supply
•Graphically, it is the point where the demand curve intersects the supply curve
•The corresponding price and quantity at the intersection of demand and supply
gives us the equilibrium price and quantity respectively
 Why is it an equilibrium:

•If the market price is above the equilibrium price, quantity supplied is greater than
quantity demanded, creating a surplus. Market price will fall (unless it reaches
equilibrium again).

•If the market price is below the equilibrium price, quantity supplied is less than
quantity demanded, creating a shortage. Market price will rise because of this
shortage (unless it reaches equilibrium again.

•So equilibrium is a state of stability (an ideal state) from which there is no
tendency to deviate.
 Demand and Supply Analysis

Basic Concepts

Elasticity of demand and supply

 Elasticity of demand and supply

•Elasticity of demand and supply

•Classification of elasticity according to degree of elasticity: Demand and Supply

•Two other types of demand elasticity: Income and Cross elasticity

 Elasticity of demand and supply (contd..)

Elasticity of demand and supply

Elasticity of demand:

•Elasticity of demand, more commonly called price elasticity of demand refers to

the responsiveness of quantity demanded of a commodity to change in its price

•Mathematically, it is the ratio of percentage change in quantity demanded of a

commodity to the percentage change in its price:

ed =
 Elasticity of demand and supply (contd..)

Elasticity of demand and supply

Elasticity of supply:

•Elasticity of supply, more commonly called price elasticity of supply refers to the
responsiveness of quantity supplied of a commodity to change in its price

•Mathematically, it is the ratio of percentage change in quantity supplied of a

commodity to the percentage change in its price:

es =
 Elasticity of demand and supply (contd..)

Classification of elasticity according to the degree of elasticity

According to the degree of
elasticity, the price elasticity of
demand can be classified into five
types:

❖Perfectly elastic demand- ed : ∞

❖Relatively elastic demand- ed : >1

❖Unit elastic demand- ed : 1

❖Relatively inelastic demand- ed :

<1

❖Perfectly inelastic demand- ed : 0

 Elasticity of demand and supply (contd..)

Classification of elasticity according to the degree of elasticity

According to the degree of elasticity, the

price elasticity of supply can be classified
into five types:

❖Perfectly elastic supply- ed : ∞

❖Relatively elastic supply- ed : >1

❖Unit elastic supply- ed : 1

❖Relatively inelastic supply- ed : <1

❖Perfectly inelastic supply- ed : 0

 Elasticity of demand and supply (contd..)

Income and Cross elasticity of demand

Income elasticity Cross elasticity

•Income elasticity of demand is the
responsiveness of quantity
demanded of a commodity to
change in income of the consumer
•Mathematically, it is the ratio of
percentage change in quantity
demanded of a commodity to the
percentage change in income
• em =
•Cross elasticity of demand refers to
the responsiveness of quantity
demanded of a commodity to
change in the price of a related
commodity
•Mathematically, it is the ratio of
percentage change in quantity
demanded of a commodity to the
percentage change in price of
another commodity

•exy =
Next up: Utility- Cardinal and ordinal approach