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Managerial Economics I Module
Managerial Economics I Module
Managerial Economics I Module
I Module
Definition: Economics
• The term Economics came into existence
because of 2 reasons
– unlimited needs, wants and desires
– scarce resources
• It refers to the allocation of scarce resources
among unlimited needs, wants and desires
• Economics is a social science which studies
human behavior in relation to optimizing
allocation of available resources to achieve
given ends.
Economics
It encompasses
Choice Making Behavior
Maximizing Behavior
Alternative Choices
I Alternative II Alternative III Alternative
• Total Rs 10000/-
Branches of Economics
• There are 2 branches in Economics
1. Micro Economics
2. Macro Economics
Micro Economics
• It deals with individual units of the economy
like investor, a company, a firm, a producer
etc.
• It deals with how an individual company or a
firm or a consumer behaves while making their
various decisions.
• Microeconomics studies man’s economic
behavior at the level of the individual, such as
buyer, a consumer, a producer, a seller and so
on.
Uses of Microeconomics
• Price Fixation, Knowing the Market mechanism, Market
Competition
• It helps the Business to attain maximum productivity form
optimum allocation of scarce resources.
• It helps in Selection of Projects , making investment decisions
• It helps in Demand Forecasting, Sales forecasting.
• It helps in how to achieve maximum out of minimum
resources
• It helps the Govt in deciding on Tax Structure on various
industries, products and services.
• It helps in reducing the wastages and use the resources
optimally
Macro Economics
• It deals with aggregate economic variables of a
country.
ex: GDP, Inflation, Unemployment, Interest
rates, Fiscal policies.
1 20
2 16
3 12 Positive Utility
4 8
5 4
6 0 Zero Utility
7 -4 Negative Utility
Total Utility & Average Utility
• Total Utility: It refers to the total utility given
by all the units of a particular product
consumed. It is the sum of all marginal utilities
associated with the consumption of additional
units
Total Utility Table
Number Of Marginal Utility Total Utility
Chocolates
1 20 20
2 16 36 (20+16)
3 12 48 (20+16+12)
4 8 56 (20+16+12+8)
5 4 60 (20+16+12+8+4)
Total= 60
Average Utility
• It refers to that utility in which the Total
Utility of Product is divided by total units of
product consumed.
Average Utility Table
Unit of Marginal Utility Total Utility Average Utility
Chocolates
1 16 16 16
2 12 28(16+12) 28%2=14
3 8 36(16+12+8) 36%3=12
4 4 40(16+12+8+4) 40%4=10
5 0 40(16+12+8+4+0) 40%5=8
6 -4 36(40-4) 36%6=6
7 -8 28(36-8) 28%7=4
To Remember
• Marginal Utility Goes on diminishing with
consumption of every additional unit of product
• Total utility goes on increasing with consumption of
every additional unit of product
• When Marginal Utility is Zero, Total Utility is
Maximum
• When Marginal Utility is negative, Total Utility
decreases
• Total Utility is the sum of all marginal utility of all
additional units consumed
Concept of Demand
• Desire or want to have something generally
means demand
• In Economics it refers to effective demand
supported by ability to pay and willingness to
pay
Concept of Demand
• Desire to Buy + Willingness to Spend Demand
• Desire to Buy + Ability to Buy Demand
• Desire to Buy + Ability to Pay+ Willingness to Spend
= Demand
• All 3 conditions have to be satisfied in order to call it
as a demand for a product
Concept of Demand
Initiation of Need, Want or Desire to
buy a product
5 2
4 4
3 6
2 8
1 10
Assumptions
of Law of Demand
• Money or income of the consumer does not change.
• Habits, tastes and fashions remain constant
• Prices of other goods remain constant
• The commodity in question has no substitute
• The commodity is a normal good and has no prestige
or status value.
• People do not expect changes in the prices.
Reasons behind Law of Demand
• Price Effect: As the Price of Product
decreases the Disposable income of consumer
will increase which will motivate to purchase
more qty of same products with same income
• Income Effect: As the Income of Consumer
increase ,it will lead to increase in his
purchasing power leading to increase in his
consumption or products
• Substitution Effect
Exceptions to Law of Demand
• Giffen goods or Low Quality Goods, inferior
product that does not have easily available substitutes
• Veblen Goods ,Commodities which are used as
status symbols like Diamonds, Imported Cars
• Ignorance
• Emergencies
• Future changes in prices
• Change in fashion
Demand Schedule
• It is a tabular statement of showing the
relationship of a price of a product & its
quantity
• It is the list of different qty of products that
buyer is willing to purchase at a different
prices during a particular time
• There are 2 types of Demand Schedule
Individual Demand schedule
Market Demand Schedule
Individual Demand schedule
• A Qty of a product that will be purchased by an
individual at each conceivable price in a given period
of time is referred as Individual Demand schedule.
Example: Individual Demand schedule
5 50 60
10 40 50
15 30 40
20 20 30
25 10 20
Positive Shift in Demand Curve
70
60
50
40
Demand
30 Demand
20
10
0
1 2 3 4 5
Shifts in Demand Curve:
Negative
Price (Per Cup) Demand (Monthly Demand( Monthly
Income Rs 30,000) Income Rs 10,000)
50
5 60 50
10 50 40
15 40 30
20 30 20
25 20 10
Negative Shift in Demand Curve
Shifts in Demand Curve
Positive Shift in Demand Curve
Negative Shifts in Demand Curve
Problem 1:
• Assume that there is a fruit seller who has 20 Kg of
Apples to be sold and he wants to fix the price so that
all apples are sold. There are three customers in the
market and their individual demand functions are
given below.
• D1= 25-1.0P
• D2= 20-0.5P
• D3= 15-0.5P
– Determine the Market Demand equation for the fruit seller
and find out the price at which he can sell all the apples
Supply
• Supply Refers to the quantities of good that
the seller is willing and able to provide at a
price at a given point of time all other thing
remain same.
Determinants of Supply
• Price of the Commodity
• Cost of Production
• State of technology
• Number of Firms
• Govt Policies
Supply Function
• It is a mathematical relationship between supply and its
determinants.
• Sx=(Px,C,T,G,N)
Px=Price of Product
C=Cost of Production
T=State of Technology
G=Govt Policy
N=Other Factors
“C” & “d” are constants,C represents the Supply when price is
zero
D represents positive change in Qty supplied per unit increase in
price
Law of Supply
• Law of Supply states that other things
remaining same the higher the price of the
product higher will be qty supplied.
• Higher price represents higher revenue to the
supplier and hence greater profits
Supply Schedule & Supply
Curve
• It is a tabular statement showing different qty
of products supplies at different prices
• Supply curve is the graphical representation of
supply schedule.
• It shows qty supplied of a product at different
price levels
Supply Schedule
Price (Rs per Cup) Supply (‘000 cups per month)
5 10
10 20
15 30
20 40
25 50
Market equilibrium
• Market equilibrium implies there is neither
excess demand nor excess supply
• It is a stage where demand of products is equal
to supply of products
• The point of equilibrium determines the
equilibrium price
Market Equilibrium Table
Price Supply Demand
15 10 50
20 15 40
25 30 30
30 45 15
35 70 10
Problem:
• Suppose the demand equation for Wrist
watches by Titan for the Year 2012 is given by
Q=1000-P and the supply equation is given by
Qs=100+4P
• What is the equilibrium Price?
• What is the excess demand or supply if price is
Rs 500 & Rs 100
Elasticity of Demand
• The intensity or the magnitude with which demand
reacts to the change in the price is explained through
Elasticity of Demand
• The extent to which a good responds to a price
change is called its price elasticity
• The good which responds more to the price change is
said to have higher elasticity
• The good which responds less to the price change is
said to have lower elasticity.
• Price elasticity is commonly known as Elasticity of
Demand
Elasticity of Demand
• Elasticity of Demand refers to the magnitude
of responsiveness of Demand to the
determinants of demand.
• It is the ratio of % Change in qty demanded to
the % change in factors affecting demand
Kinds of Elasticity of Demands
• Price elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
Price elasticity of Demand
• It is the extent of change in demand of a product with
respect to the change in the price of the product ,
other determinants remaining constant.
• It is the ratio of relative change in demand and price
variable.
• Price elasticity of demand is measured as the ratio
of percentage change in the quantity demanded of
a product to the percentage change in its price.
• E=Proportional change in demand/Proportional
change in Price
Price elasticity of Demand
Price of Apples Qty Demanded
20(P1) 100(Q1)
21(P2) 96(Q2)
Types of Price Elasticity
Unit elasticity of demand (e = 1)
Elastic demand (e > 1), i.e., elasticity is greater than unity.
Inelastic demand (e < 1 ), i.e., elasticity is less than unity.