Managerial economics lecture MBA notes
1) Managerial Economic:-
Managerial Economics lecture notes generally refers to the integration of economic theory with business practice while economics provides the tools which explain various concepts such as Demand, Supply, Price, and Competition etc. Managerial Economics applies these tools to the management of business. In this sense, Managerial Economics is also understood to refer to business economics or applied economics. Managerial Economics lies on the border line of management and economics. It is a hybrid of two disciplines and it is primarily an applied branch of knowledge. Management deals with principles which help in decision making under uncertainty and improve effectiveness of an organisation. Economics on the other hand provides a set of propositions for optimum allocation of scarce resources to achieve the desired objectives.
Profit means different things to different people. The word ‘Profit’ has different meanings to businessmen, accountants, tax collectors, workers and economists and it is often used in a loose sense that buries its real significance. In general sense, ‘profit’ is regarded as income accruing to the equity holders, in the same sense as wages accrue to the lab our, rent accrues to the owners of rent able assets; and interest accrues to the money lenders. To a layman, profit means all incomes that flow to the investors. To an accountant, ‘profit’ means the excess of revenue over all paid-out costs including both manufacturing and overhead expenses. It is more or less the same as ‘net profit’. For all practical purposes, businessmen also use this definition of profit. For taxation purposes, profit or business income means profit in accountancy sense plus non-allowable expenses. Economist’s concept of profit is of ‘Pure Profit’, also called ‘economic profit’ or ‘just profit’. Pure profit is a return over and above the opportunity cost, i.e. the income which a businessman might expect from the second best alternative use of his resources.
In Economics, ‘Demand’ does not mean simple desire. Thus, a poor man’s desire to have a motor-car or middle class person’s desire to have an air-conditioned bunglow in a city or suburb will not have any influence on the production of cars and bunglows. Nor does ‘Demand’ mean ‘need’. For example, a beggar’s need for more bread, clothing and shelter will have absolutely no influence on the production of those three goods, however urgently they may be needed by a beggar. In Economics ‘Demand’ means ‘desire backed by adequate purchasing power’ or enough money to purchase desired goods. In fact, in Economics, ‘demand’ means specific quantity of a commodity actually purchased or bought. Further, since quantity purchased will depend upon price of the commodity in question, it follows that ‘demand means at a specific price’. Unless the price per unit of the commodity is stated, the concept of demand will not be clear.
4) Elasticity of Demand
Demand for goods varies with price. But the extent of variation is not uniform in all cases. In some cases the variation is extremely wide; in some others it may just be nominal. That means, sometimes demand is greatly responsive to changes in price; at other times, it may not be so responsive. The extent of variation in demand is technically expressed as elasticity of demand. According to Marshall, the elasticity (or responsiveness) of demand in a market is great or small, depending on whether the amount demanded increases much or little for a given fall in price; and diminishes much or little for a given rise in price.
5) Demand Forecasting
A forecast is a guess or anticipation or a prediction about any event which is likely to happen in the future. Forecasts are made either through experience or through statistical methods. As individual may forecast his job prospects, a consumer may forecast an increase in his income and therefore purchases, similarly a firm may forecast the sales of its product. Predictions of future demand for a firm’s product or products are called demand forecasts.
6) Supply Analysis
In economics, supply during a given period of time means the quantities of goods which are offered for sale at particular prices. Thus, the supply of a commodity may be defined as the amount of the commodity which the sellers (or producers) are able and willing to offer for sale at a particular price, during a certain period of time. Supply is a relative term. It is always referred to in relation to price and time. A statement of supply without reference to price and time conveys no economic sense. For instance, a statement such as : “the supply of milk is 500 litres” is meaningless in economic analysis. One must say, “the supply at such and such a price and during a specific period.” Hence, the above statement becomes meaningful if it is said “at the price of Rs.20 per litre, a dairy farm’s daily supply of milk is 500 liters.” Here, both price and time are referred to with the quantity of milk supplied.
7) Production and Costs – I
Till now we have studied demand analysis i.e. individual demand curve, market demand curve, law of demand and elasticity of demand and demand forecasting. In our study of demand side the demand was expressed as Da = (Pa, Pb, I, P3 Â n). Now we will shift our attention to the study of supply side of the product pricing i.e. “Theory of Production” and cost. By production or the act o production involves “transformation of inputs into output”. By output we mean supply of product which depends upon cost production which again depends upon input price and relationship between input and output which is called production function. Theory of production means nothing but study of production function.
8) Production and Costs – II
The cost of production of an individual firm has an important influence on the market supply of a commodity. The product prices are determined by the interaction of the forces of demand and supply. We have seen that the basic factor underlying the ability and willingness of firms to supply a product in the market is the cost of production. A firm aims at maximizing its profits; profits depend on the costs of production and the prices of products. Thus, given the market price of the firm’s product, the amount a firm is willing to supply in the market will depend on the cost of production. It is therefore, necessary to have a clear idea about the concept of the cost of production. Costs may be nominal costs or real costs. Nominal cost is the money cost of production. It is also called expenses of production. The real cost is the opportunity cost of production. Money costs and real costs do not coincide with each other.
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