08-08-08eco
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Managerial Economics
Key References
• Chapter 1 & Chapter 3 – Managerial Economics – Petersen & Lewis
Managerial Economics • Refers to the application of economic theory and methodology to business decision making.
Managerial Economics
Micro Economics vs Macro economics • Microeconomics includes all economic factors that are specific to a particular firm operating in its own particular market • Macroeconomics is the national, political and international economic situation in which business as a whole operates
Managerial Economics
Success story 1-Coca cola the “ perfect business” • According to a survey “Where the typical company earns 10% rates of return on invested capital, Coca-cola earns 3 and 4 times as much” • Enjoys large and growing profits • No operating losses
Success story 2-The ‘Microsoft’ Money Machine
Lessons learnt • Define your goals clearly!!!! What product do you want and for whom do want? • Price the product carefully. • Leave something on the table. Profit with your customer, not off your customer
One of the most important skills to learn in managerial economics is “the ability to identify a good business”
Syllabus • Micro Economics • Theory of demand & supply • Theory of Production and Cost • Market Structure • Pricing Policies
• Macro Economics • Consumption and Investment functions • Monetary and fiscal Policy • Theory of Business cycle • Business Environment
Theory of Demand
Demand • Dem and refers to the various amounts of a product consumers are willing and able to purchase at each price • It is different from Quantity demanded. Quantity demanded is the amount of the commodity which a person is willing to buy at a given price
Law of Demand • Law o f D emand – Other things held constant, there exists a negative relationship between price and quantity demanded i.e as price falls, the quantity demanded rises. Similarly, as price increases, the corresponding quantity demanded falls. This relationship leads to the downward sloping demand curve.
Demand Curve Price ($ per unit)
Vertical axis measures price (P) paid per unit in dollars
The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper and the consumer’s real income increases.
Horizontal axis measures quantity (Q) demanded in number of units per time period
Quantity
Case study-1 Law of Demand & City of Gujarat
Law of Demand-Reasons • Law of Diminishing marginal utility • Decomposition into income effect & Substitution effect
Law of Diminishing marginal utility • This Law states that with successive increases in the units of consumption of a commodity, every additional unit of that commodity gives lesser satisfaction to the consumer. • Hence a consumer will consume till a point where marginal utility=price of the commodity.
Application of Law of diminishing Marginal Utility • Offers like “Buy 2 get 1 free” • Happy hours
Reason for Law of Demand
Price effect • Substitution effect: When the price of a commodity rises, the substitutes become relatively cheaper. The household will purchase more of the commodity which has become relatively cheaper.
Price effect Income Effect: Any change in price of the commodity affects the purchasing power ( real income) of a household. • A rise in real income induces more consumption and higher demand. • A fall in real income compels a consumer to demand less units of the commodity.
Market Demand Curve • At any price, the market demand is the sum of the amounts demanded by each of the individuals. • That is, the market demand is the horizontal sum of the individual demands. Market Demand=Da+ Db+ Dc………
The demand for potatoes (monthly)
Eg-Market Demand for Tests • Q1= 30 – P • Q2= 22.5 – 0.75P • Q3= 37.5 – 1.25P What is the market demand for Mithun’s tests and how many more tests can he sell for each one rupee decrease in price? What price should he charge to sell his entire collection of 60 tests?
Determinants of Demand • • • • • •
Market price Consumer income Prices of related goods Tastes –Eg McDonalds, KFC Demographic characteristics Environmental factors
Income of the consumer 3 cases • Normal goods-They are positively related with income. • Inferior goods- they are negatively related with income. • Necessities-their demand does not change with change in income.
Prices of Related Goods 2 cases • If products can replace one another, they are called substitu tes . Eg.Pepsi & Coke • When products are used with one another, they are called com plem ents . Torch & Pencil cell
Shift in demand curve vs movement along the demand curve Variables that Affect Quantity Demanded
A Change in This Variable . . .
Price
Represents a movement along the demand curve
Income
Shifts the demand curve
Prices of related goods
Shifts the demand curve
Tastes (new products)
Shifts the demand curve
Expectations
Shifts the demand curve
Number of buyers
Shifts the demand curve
Shift in Demand-Change in Demand • Demand Response: – The movement of the demand curve to the right from D to D’ is an increase in demand.
P
D
D’
P2 P1
Q1
Q2
Q3 Q
Movement along the demand curve- Changes in Quantity Demanded
Price $4 .00
C
In incre as e i n price res ult s in a moveme nt along the dema nd c urve. A
2.00 0
12
20
D1
Num ber of Ch ocola tes
Theory of Supply
Supply • Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at each given price.
Supply & its determinants • • • • • • •
Price of the commodity Costs of production Production Technology Government regulations Climate Price of a Substitute Number of firms
Price of the commodity Law of supply • As the market price of a commodity rises, producers will expand their supply onto the market. • Supply curves for most products slope upwards from left to right giving a positive relationship between the market price and quantity supplied
The Supply Curve Price ($ per unit)
S
The supply curve slopes upward demonstrating that at higher prices firms will increase output
Quantity
Key References
• Chapter 1 & Chapter 3 – Managerial Economics – Petersen & Lewis
Managerial Economics • Refers to the application of economic theory and methodology to business decision making.
Managerial Economics
Micro Economics vs Macro economics • Microeconomics includes all economic factors that are specific to a particular firm operating in its own particular market • Macroeconomics is the national, political and international economic situation in which business as a whole operates
Managerial Economics
Success story 1-Coca cola the “ perfect business” • According to a survey “Where the typical company earns 10% rates of return on invested capital, Coca-cola earns 3 and 4 times as much” • Enjoys large and growing profits • No operating losses
Success story 2-The ‘Microsoft’ Money Machine
Lessons learnt • Define your goals clearly!!!! What product do you want and for whom do want? • Price the product carefully. • Leave something on the table. Profit with your customer, not off your customer
One of the most important skills to learn in managerial economics is “the ability to identify a good business”
Syllabus • Micro Economics • Theory of demand & supply • Theory of Production and Cost • Market Structure • Pricing Policies
• Macro Economics • Consumption and Investment functions • Monetary and fiscal Policy • Theory of Business cycle • Business Environment
Theory of Demand
Demand • Dem and refers to the various amounts of a product consumers are willing and able to purchase at each price • It is different from Quantity demanded. Quantity demanded is the amount of the commodity which a person is willing to buy at a given price
Law of Demand • Law o f D emand – Other things held constant, there exists a negative relationship between price and quantity demanded i.e as price falls, the quantity demanded rises. Similarly, as price increases, the corresponding quantity demanded falls. This relationship leads to the downward sloping demand curve.
Demand Curve Price ($ per unit)
Vertical axis measures price (P) paid per unit in dollars
The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper and the consumer’s real income increases.
Horizontal axis measures quantity (Q) demanded in number of units per time period
Quantity
Case study-1 Law of Demand & City of Gujarat
Law of Demand-Reasons • Law of Diminishing marginal utility • Decomposition into income effect & Substitution effect
Law of Diminishing marginal utility • This Law states that with successive increases in the units of consumption of a commodity, every additional unit of that commodity gives lesser satisfaction to the consumer. • Hence a consumer will consume till a point where marginal utility=price of the commodity.
Application of Law of diminishing Marginal Utility • Offers like “Buy 2 get 1 free” • Happy hours
Reason for Law of Demand
Price effect • Substitution effect: When the price of a commodity rises, the substitutes become relatively cheaper. The household will purchase more of the commodity which has become relatively cheaper.
Price effect Income Effect: Any change in price of the commodity affects the purchasing power ( real income) of a household. • A rise in real income induces more consumption and higher demand. • A fall in real income compels a consumer to demand less units of the commodity.
Market Demand Curve • At any price, the market demand is the sum of the amounts demanded by each of the individuals. • That is, the market demand is the horizontal sum of the individual demands. Market Demand=Da+ Db+ Dc………
The demand for potatoes (monthly)
Eg-Market Demand for Tests • Q1= 30 – P • Q2= 22.5 – 0.75P • Q3= 37.5 – 1.25P What is the market demand for Mithun’s tests and how many more tests can he sell for each one rupee decrease in price? What price should he charge to sell his entire collection of 60 tests?
Determinants of Demand • • • • • •
Market price Consumer income Prices of related goods Tastes –Eg McDonalds, KFC Demographic characteristics Environmental factors
Income of the consumer 3 cases • Normal goods-They are positively related with income. • Inferior goods- they are negatively related with income. • Necessities-their demand does not change with change in income.
Prices of Related Goods 2 cases • If products can replace one another, they are called substitu tes . Eg.Pepsi & Coke • When products are used with one another, they are called com plem ents . Torch & Pencil cell
Shift in demand curve vs movement along the demand curve Variables that Affect Quantity Demanded
A Change in This Variable . . .
Price
Represents a movement along the demand curve
Income
Shifts the demand curve
Prices of related goods
Shifts the demand curve
Tastes (new products)
Shifts the demand curve
Expectations
Shifts the demand curve
Number of buyers
Shifts the demand curve
Shift in Demand-Change in Demand • Demand Response: – The movement of the demand curve to the right from D to D’ is an increase in demand.
P
D
D’
P2 P1
Q1
Q2
Q3 Q
Movement along the demand curve- Changes in Quantity Demanded
Price $4 .00
C
In incre as e i n price res ult s in a moveme nt along the dema nd c urve. A
2.00 0
12
20
D1
Num ber of Ch ocola tes
Theory of Supply
Supply • Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at each given price.
Supply & its determinants • • • • • • •
Price of the commodity Costs of production Production Technology Government regulations Climate Price of a Substitute Number of firms
Price of the commodity Law of supply • As the market price of a commodity rises, producers will expand their supply onto the market. • Supply curves for most products slope upwards from left to right giving a positive relationship between the market price and quantity supplied
The Supply Curve Price ($ per unit)
S
The supply curve slopes upward demonstrating that at higher prices firms will increase output
Quantity
