1

Managerial Economics

Introduction to Managerial Economics and Demand Analysis

1 Green marketing is a practice whereby companies seek to go above
and beyond traditional marketing values.

Elasticity of Demand and Demand Forecasting

2 Green marketing is a practice whereby companies seek to go above
and beyond traditional marketing values.

Supply and Production Decision

3 Green marketing is a practice whereby companies seek to go above
and beyond traditional marketing values.

Cost of Production and Managerial Decision

4 Green marketing is a practice whereby companies seek to go above
and beyond traditional marketing values.
 2

Pricing
5 Green marketing is a practice whereby companies seek to go above
and beyond traditional marketing values.

Profit
6 Green marketing is a practice whereby companies seek to go above
and beyond traditional marketing values.
 Introduction to Managerial
Economics & Demand Analysis

• Meaning
• Chief characteristics,
• Scope and Role of a Managerial economist.
• Demand- Meaning, Determinants of Demand.
• Law of Demand and Exceptions to law of Demand
 4

ECONOMICS

Economics is a
social science which
studies human
behavior as a
relationship between
numerous wants and
scares resources
 5

MACROECONOMICS
Branch of economics which deals with aggregate behavior of economy as whole

FEATURES

1 2 3 4 5

The Inflation, GDP, It considers the Useful in

Macroeconomics production, controlling overall
concepts are used National Income,
consumption, economic activity
by the government Monetary policy,
demand, income, of the country and
to frame policy for Fiscal Policy etc. etc of the country identifying
the nation or as a whole problem areas
Industry are the different
concepts used
 6

MICROECONOMICS
Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions
regarding the allocation of scarce resources and the interactions among these individuals and firms

11 2 3 4 5

Micro economics is the
study of individual firm,
particular household,
individual prices, wages,
income, individual
incomes, individual
industries, particular
commodities. Etc
Businesses use micro
economic concepts to plan
for future of their firm like
production level, demand
level, pricing of products
etc
Different concepts of Micro economic concepts
Micro economics used by help firms react to
the businesses are dynamic business
Demand analysis, Cost environment.
analysis, Pricing in
different types of market
etc
 7

MANAGERIAL ECONOMICS

Managerial Economics is applied economics in the field of business

management
Making best use of available resources.
It involves various analytical tools such as Demand forecasting, Break
even Point, Inflation, etc that are useful in taking decisions.

According to Haynes, Monte and Paul

“Managerial Economics is economics applied to decision making. It is special
branch of economics bridging the gap between abstract theory and
managerial practice. It stresses is on the use of the tools of economics analysis
in clarifying problems, in organisaing and evaluating information, and in
computing alternative course of action”
 8

CHARACTERISTICS

ART & SCIENCE MICRO ECONOMICS

REACTIVE TO
PRAGMATIC
MACROECONOMICS

MANAGEMENT
ORIENTED MULTI DISCIPLINARY

NORMATIVE
 9

SCOPE OF MANAGERIAL ECONOMICS

Theory of PRODUCTION
CAPITAL AND
INVESTMENT
Theory of
profit

DEMAND PRICE THEORY

ENVIRONMENTAL
ISSUES
 10

ROLE OF MANAGERIAL ECONOMIST

1. CONSULTANT 2. RISK ANALYST

PROFIT AND PRODUCTION

3. ANALYST 4. PLANNING

5. MODEL BUILDER
6. ADVISER

MENTAIN RELATIONS
7. ECONOMIC INTELLIGENCE
8.

IMPLEMENTING GOVERNMENT
9. ENVIRONMENT FORECASTER 10. POLICY
 DEMAND

• NEED
• WANT
• DEMAND
 NEED

• NEED ARE THE BASIC NECESSITIES WHICH REQUIRED BY

THE HUMAN BEING TO SUSTAIN.
• EXAMPLES:
• FOOD
• WATER
• SHELTER
• CLOTHES ETC
 WANT

• WANT ARE THE DESIRE WHICH REQUIRED BY THE HUMAN

BEING FOR HIGHER SATISFACTION.
• EXAMPLES: IF A PERSON FEEL THIRSTY HE CAN HAVE
WATER OR JUICE.

Water juice
 MEANING OF DEMAND

• DEMAND IS NOT DESIRE. MERE DESIRE NOT CONSTITUTE

DEMAND IN ECONOMICS. THE DESIRE SUPPORTED BY
WILLINGNESS AND ABILITY TO PAY THE PRICE IS
DESCRIBED AS DEMAND.
• DEMAND IS ALWAYS AT A PRICE. THE DEMAND FOR ANY
COMMODITY OR SERVICE IS THE QUANTITY THAT WILL BE
PURCHASED AT ANY GIVEN PRICE PER UNIT OF TIME.
 DEMAND

• DEMAND CONSTITUTE OF THREE ELEMENTS:

• 1. DESIRE TO ACQUIRE A COMMODITY
• 2. WILLINGNESS TO PAY FOR IT
• 3. ABILITY TO PAY FOR IT
 DEMAND

Desire Desire Desire

Willingness to pay Willingness to pay Willingness to pay

Ability to pay Ability to pay Ability to pay

 FACTORS AFFECTING DEMAND

• 1. FEAR OF SHORTAGE
• 2. CHANGE IN TASTE
• 3. CHANGE IN CLIMATE
• 4. CHANGE IN POPULATION
• 5. SUBSTITUTES
• 6. ADVERTISEMENT
• 7. TECHNICAL PROGRESS
• 8. CHANGE IN REAL INCOME
 1.FEAR OF SHORTAGE

• DURING EMERGENCIES LIKE WAR, PEOPLE THINK THAT

CERTAIN COMMODITIES WILL NOT BE AVAILABLE IN
FUTURE. THEY BECOME PANIC. THEY FEAR THAT THERE
WILL BE SHORTAGE OF COMMODITIES, SO THEY INCREASE
THEIR DEMAND FOR COMMODITIES.
 FEAR OF SHORTAGE

Due to fear of shortage of petrol Demand for petrol will increase

FEAR OF SHORTAGE
 2.CHANGE IN TASTE

• PEOPLE’S TASTE MAY CHANGE IN SUCH A WAY THAT THE

DEMAND FOR ONE COMMODITY MAY INCREASE SUDDENLY.
SIMILARLY PEOPLE MAY NOT LIKE TO CONSUME A
PARTICULAR COMMODITY DUE TO SUDDEN CHANGE IN
TASTE. IT MEANS DECREASE IN DEMAND FOR THAT
PRODUCT.
CHANGE IN TASTE
 3. CHANGE IN CLIMATE

• DEMAND ALSO CHANGES WITH WEATHER OR CLIMATE

CONDITIONS. FOR EXAMPLE THERE WILL BE HIGH DEMAND
FOR WOOLLEN CLOTHES WHEN CLIMATE IS TOO COLD.
CHANGE IN CLIMATE
CHANGE IN CLIMATE
 4.CHANGE IN POPULATION

• GREATER POPULATION MAY LEAD TO GREATER DEMAND.

WHEN MORE PEOPLE ARE BORN, MORE GOODS AND
SERVICE ARE NECESSARY TO SATISFY THEIR WANT.
THEREFORE WHEN POPULATION INCREASES, DEMAND WILL
ALSO INCREASE.
CHANGE IN POPULATION
 5.SUBSTITUTES

• WHEN BETTER SUBSTITUTE COMES TO THE MARKET, THE

DEMAND FOR PRESENT COMMODITY DECREASE, EVEN THE
CHANGES IN THE PRICE OF SUBSTITUTE MAY DECREASE
THE DEMAND FOR THE COMMODITY.
SUBSTITUTE
SUBSTITUTE
 6.ADVERTISEMENT

• ADVERTISEMENT HAS BECOME THE MOST POPULAR MEANS

CHANGING THE DEMAND FOR PRODUCTS IN THE MODERN
WORLD. BY CHANGING THE SCALE OF PREFERENCE OF THE
CONSUMERS, ADVERTISEMENT CAN BRING ABOUT AN
INCREASE OR DECREASE IN DEMAND.
ADVERTISEMENT
 7.TECHNICAL PROGRESS

• WITH TECHNICAL PROGRESS NEW GOODS COME TO THE

MARKET. AS A RESULT, THE DEMAND FOR OLD
COMMODITIES DECREASES. THE DECREASE IN THE
DEMAND WILL BE MORE EFFECTIVE IF THE NEW AND
GOODS ARE PERFECT SUBSTITUTES.
TECHNICAL PROGRESS
 8.CHANGE IN REAL INCOME

• AS INCREASE IN REAL INCOME LEADS TO A GREATER

DEMAND FOR THE COMMODITIES. IT MEANS PEOPLE
PURCHASES MORE COMMODITIES WITH LARGER INCOME.
SIMILARLY DECREASE IN INCOME LEADS TO DECREASE IN
DEMAND.
CHANGE IN REAL INCOME
CHANGE IN REAL INCOME
LAW OF DEMAND
 LAW OF DEMAND

• THERE EXISTS A FUNCTIONAL RELATIONSHIP BETWEEN THE

PRICE OF A PRODUCT/SERVICE AND THE QUANTITY
DEMANDED. THE QUANTITY DEMANDED VARIES INVERSELY
WITH PRICE.
• “ WHEN PRICE FALLS, QUANTITY DEMANDED EXTENDS.
THIS INVERSE RELATIONSHIP BETWEEN PRICE AND
QUANTITY IS STATED IN THE FORM OF A STATEMENT
KNOWN AS THE LAW OF DEMAND”.
 MEANING OF LAW OF DEMAND

• LAW OF DEMAND : “PEOPLE DEMAND A LARGER QUANTITY

OF GOODS AND SERVICES AT A LOWER PRICE THAN AT A
HIGHER PRICE.” IT MEANS HIGHER THE PRICE, LESSER WILL
BE THE QUANTITY DEMANDED AND LOWER THE PRICE THE
PRICE, GREATER WILL BE THE QUANTITY DEMANDED.
 ASSUMPTIONS OF THE LAW

• THE LAW OF DEMAND IS BASED ON THE FOLLOWING

ASSUMPTIONS.
• 1. INCOME OF THE BUYER REMAINS THE SAME
• 2. THE TASTE OF THE BUYER DOES NOT CHANGE
• 3. THE PRICE OF RELATED GOODS- SUBSTITUTE AND
COMPLEMENTS REMAINS THE SAME.
• 4. NO CLOSE SUBSTITUTE IS DISCOVERED
 DEMAND SCHEDULE

• A DEMAND SCHEDULE IS A LIST OF PRICES AND

QUANTITIES. AT EACH PRICE,
Price per CERTAIN
unit (in Rs) QUANTITY OF A in units
Quantity demanded
COMMODITY IS DEMANDED IN THE MARKET. THE DEMAND
6
SCHEDULE SHOWS WHAT QUANTITY IS DEMANDED0AT
5 10
EACH OF THESE PRICES.
4 20
• IT CONSIST OF TWO COLUMNS.
3 IN ONE COLUMN DIFFERENT
30
PRICES ARE SHOWN AND IN
2 OTHER, QUANTITY DEMANDED
40
BY THE CONSUMER AT VARIOUS
1 PRICES. 50
 DEMAND CURVE

• WHEN WE TRANSLATE THE DEMAND SCHEDULE IN THE FORM OF A GRAPH,

WE GET A CURVE KNOWN AS A DEMAND CURVE.
 EXCEPTION TO LAW OF DEMAND

• EXCEPTION TO LAW OF DEMAND MEANS, THERE ARE

CERTAIN SITUATION/ COMMODITIES WHERE THE CONCEPT
OF LAW OF DEMAND DOESN’T APPLY I.E. WITH FALL IN
PRICE THE DEMAND FALLS AND WITH RISE IN PRICE THE
DEMAND ALSO RISES.
 EXCEPTION TO LAW OF DEMAND

 IT SHOWS THAT WHEN PRICE RISES, DEMAND ALSO RISES

AND WHEN PRICE FALLS DEMAND ALSO FAILS.
 IN THIS CASE DEMAND CURVE HAS A POSITIVE SLOPE.
 IN THIS CASE DEMAND CURVE SLOPES UPWARD FROM LEFT
TO RIGHT.
 EXCEPTION TO LAW OF DEMAND

• 1. STATUS SYMBOL COMMODITIES LIKE DIAMONDS

• 2. FEAR OF SHORTAGE
• 3. SPECULATION
• 4. IGNORANCE
• 5.GIFFIN GOODS
1. STATUS SYMBOL COMMODITIES
LIKE DIAMONDS
• THERE ARE CERTAIN COMMODITIES WHICH HAVE PRESTIGE
VALUE OR SNOB APPEAL. DEMAND FOR THESE
COMMODITIES RISES WHEN THE PRICES GO UP. THESE
COMMODITIES ARE BOUGHT IN SMALLER QUANTITIES
WHEN THE PRICES COME DOWN AS THEY FAIL TO
REPRESENT THE STATUS OF THE BUYER.
 2. FEAR OF SHORTAGE

• IF PEOPLE FEEL THAT IN FUTURE THERE WILL BE THE

SHORTAGE OF THE COMMODITY, THEY WOULD LIKE TO
STORE THE COMMODITY AT ANY PRICE. FOR EXAMPLE
DURING WAR TIME THERE IS SCARCITY OF ALMOST ALL
COMMODITIES AND SERVICES. PRICES SHOW A TENDENCY
TO RISE AND PEOPLE BECOME PANIC ABOUT THE FUTURE.
THEY THINK THAT THE PRICES WOULD RISE FURTHER AND
HENCE THEY START BUYING MORE EVEN THOUGH PRICES
ARE HIGH.
 3. SPECULATION

• THE LAW OF DEMAND DOES NOT APPLY IN CASE OF

SPECULATION. NORMALLY SPECULATION OCCURS IN THE
STOCK EXCHANGE MARKET. THE DEALERS IN THE STOCK
EXCHANGE MARKET THINK OF BUYING MORE SECURITIES
IF PRICES SHOW A TREND OF INCREASE. THIS IS SO
BECAUSE WITH INCREASING PRICES OF SECURITIES,
DEALERS IN THE STOCK MARKET ANTICIPATE FURTHER
RISE AND HENCE PURCHASE MORE SECURITIES WITH THE
OBJECTIVE OF MAKING MORE PROFIT.
 4. IGNORANCE

• SOMETIMES A CONSUMER MAY BE IGNORANT ABOUT THE

PRICES PREVAILING IN THE MARKET. DUE TO IGNORANCE,
IT MAY NOT BE POSSIBLE FOR HIM TO PURCHASE MORE
UNITS AT A LOWER PRICES.
 5. GIFFEN GOODS

• SIR ROBERT GIFFEN OBSERVED THAT SOMETIME PEOPLE

BUY LESS GOODS AT LOWER PRICE AND MORE AT A HIGHER
PRICE. HE CITED THE EXAMPLE OF LOW PAID BRITISH WAGE
EARNERS. DURING THE EARLY PERIOD OF THE 19TH
CENTUARY, A RISE IN THE PRICE OF BREAD CAUSED THE
BRITISH WAGE-EARNERS TO BUY MORE BREAD. GIFFEN
GOODS ARE A SPECIAL TYPE OF INFERIOR GOODS. THESE
GOODS ARE CONSIDERED AS AN EXCEPTION TO THE LAW OF
DEMAND
 WHY DEMAND CURVE SLOPE
DOWNWARDS
• INCOME EFFECT
• SUBSTITUTION EFFECT
• LAW OF DIMINISHING MARGINAL RETURNS

52
 CHANGE IN
QUANTITY
DEMANDED VS
CHANGE IN DEMAND
 CHANGE IN QUANTITY
DEMANDED
• WHEN THE DEMAND CHANGES DUE TO CHANGE IN PRICE
( OTHER FACTORS WILL REMAIN CONSTANT)

• IT IMPACT ON DEMAND BY

 EXTENSION IN DEMAND
 CONTRACTION IN DEMAND
 EXTENSION IN DEMAND

• EXTENSION IN DEMAND REFERS TO A SITUATION WHERE

MORE UNITS ARE DEMANDED AT LOWER PRICE
 CONTRACTION IN DEMAND
• CONTRACTION OF DEMAND REFERS TO LESS COMMODITIES ARE
DEMANDED AT A HIGHER PRICE
 CHANGE IN DEMAND

• WHEN DEMAND CHANGES DUE TO CHANGE IN ANY FACTOR

( PRICE REMAIN CONSTANT)

• IT IMPACT ON DEMAND BY
 INCREASE IN DEMAND
 DECREASE IN DEMAND
 INCREASE IN DEMAND

• INCREASE IN DEMAND MEANS MORE UNITS ARE

DEMANDED AT THE SAME PRICE OR THE SAME QUANTITY IS
DEMANDED AT A HIGHER PRICE.
 DECREASE IN DEMAND

• DECREASE IN DEMAND MEANS CONSUMERS PURCHASE

LESS QUANTITIES OF GOODS AT GIVEN PRICE.
INCREASE AND DECREASE IN
DEMAND
 DIFFERENCE B/W CHANGE IN
QUANTITY DEMANDED AND
CHANGE IN DEMAND
Key points Change in quantity demand
Meaning When demand changes due to
change in price. ( other factor
remains constant)
Changes It impact on demand by
1) Extension in demand
2) Contraction in demand
Assumption Other factors remains constant
like income of the buyer, taste, etc
Major factor Price
Change in demand
When demand changes due
to other factors, ( price
remain constant)
It impact on demand by
1) Increase in demand
2) Decrees in demand
Price remain constant
Other factors like, income
of the consumers, taste of
the consumers etc
 DEMAND
DISTINCTIONS
 CONSUMER GOODS AND
PRODUCER GOODS
• CONSUMER GOODS ARE THOSE GOODS OR COMMODITIES
WHICH ARE MEANT FOR DIRECT PURCHASE AND USED FOR
FINAL CONSUMPTION.

• PRODUCER GOODS ARE THOSE COMMODITIES WHICH ARE

PURCHASED FOR FURTHER PRODUCTION OF GOODS.
 DURABLE AND PERISHABLE
GOODS
• DURABLE GOODS ARE THOSE GOODS THAT CAN BE USED
MORE THAN ONCE OVER A PERIOD OF TIME.

• PERISHABLE GOODS ARE THOSE GOODS WHICH CAN BE

USED ONLY ONCE.
 AUTONOMOUS AND DERIVED
DEMAND
• AUTONOMOUS DEMAND : WHEN THE DEMAND FOR A
PARTICULAR COMMODITY IS ENTIRELY INDEPENDENT OF
THE DEMAND FOR ANY OTHER COMMODITY.

• DERIVED DEMAND : WHEN THE DEMAND FOR A

COMMODITY IS DERIVED FROM SOME OTHER PARENT
PRODUCT.
 SHORT RUN AND LONG RUN
DEMAND
• THE SHORT RUN DEMAND TEMPORARY DEMAND FOR
CERTAIN PRODUCTS WITH ITS REACTION TO PRICE
CHANGES, INCOME VARIATION ETC

• THE DEMAND FOR A PRODUCT OVER A LONG PERIOD TIME

IS TERMED AS LONG RUN DEMAND.
 COMPANY DEMAND AND
INDUSTRY DEMAND
• COMPANY DEMAND REFERS TO DEMAND FOR THE
PRODUCTS OF A PARTICULAR COMPANY OR A FIRM.

• INDUSTRY DEMAND REFERS TO TOTAL DEMAND FOR THE

PRODUCT OF A PARTICULAR INDUSTRY. IT SHOWS THE
QUANTITY OF A CERTAIN PRODUCT DEMANDED BY ALL
 TOTAL MARKET DEMAND AND
MARKET SEGMENT DEMAND
• TOTAL MARKET DEMAND IMPLIES THE TOTAL DEMAND FOR
THE PRODUCT IN THE MARKET.

• THE MARKET SEGMENT DEMAND IS THE DEMAND FOR

PARTICULAR SEGMENT IN THE MARKET. MARKET SEGMENT
IS DONE ON THE BASIS OF GEOGRAPHICAL AREAS, USE OF
THE PRODUCT, SIZE OF THE CUSTOMERS ETC