DEPARTMENT OF MECHANICAL ENGINEERING�SUBJECT: MEFA�CLASS: II YEAR II SEM�TOPIC : UNIT 1�FACULTY: T MANASA �DESIGNATION: ASSISTANT PROFFESSOR
MANAGERIAL ECONOMICS & FINANCIAL ANALYSIS�� UNIT-I�Introduction to Managerial Economics and demand Analysis:� Definition of Managerial Economics –Scope of Managerial Economics and its relationship with other subjects –Concept of Demand, Types of Demand, Determinants of Demand- Demand schedule, Demand curve, Law of Demand and its limitations- Elasticity of Demand, Types of Elasticity of Demand and Measurement- Demand forecasting and Methods of forecasting, Concept of Supply and Law of Supply.�� UNIT – II:�Production and Cost Analysis:� Concept of Production function- Cobb-Douglas Production function- Leontief production function - Law of Variable proportions-Isoquants and Isocosts and choice of least cost factor combination-Concepts of Returns to scale and Economies of scale-Different cost concepts: opportunity costs, explicit and implicit costs- Fixed costs,�Variable Costs and Total costs –Cost –Volume-Profit analysis-Determination of Breakeven point(simple problems)-Managerial significance and limitations of Breakeven point.
UNIT – III:�Introduction to Markets, Theories of the Firm & Pricing Policies:� Market Structures: Perfect Competition, Monopoly, Monopolistic competition and Oligopoly – Features – Price and Output Determination – Managerial Theories of firm: Marris and Williamson’s models – other Methods of Pricing: Average cost pricing, Limit Pricing, Market Skimming Pricing, Internet Pricing: (Flat Rate Pricing, Usage sensitive pricing) and Priority Pricing.��UNIT – IV:�Types of Business Organization and Business Cycles:� Features and Evaluation of Sole Trader, Partnership, Joint Stock Company – State/Public Enterprises and their forms – Business Cycles : Meaning and Features – Phases of a Business Cycle.
UNIT – V:�Introduction to Accounting & Financing Analysis:� Introduction to Double Entry Systems – Preparation of Financial Statements-Analysis and Interpretation of Financial Statements-Ratio Analysis – Preparation of Funds flow and cash flow statements (Simple Problems)�� UNIT – VI:�Capital and Capital Budgeting: � Capital Budgeting: Meaning of Capital-Capitalization-Meaning of Capital�Budgeting-Time value of money- Methods of appraising Project profitability: Traditional Methods(pay back period, accounting rate of return) and modern methods(Discounted cash flow method, Net Present Value method, Internal Rate of Return Method and Profitability Index
UNIT -1�� INTRODUCTION TO MANAGERIAL ECONOMICS���INTRODUCTION TO ECONOMICS�� Economics is a study of human activity both at individual and national level. The economists of early age treated economics merely as the science of wealth. The reason for this is clear. Every one of us in involved in efforts aimed at earning money and spending this money to satisfy our wants such as food, Clothing, shelter, and others. Such activities of earning and spending money are called “Economic activities”.���
MICROECONOMICS:� � The study of an individual consumer or a firm is called microeconomics (also called the Theory of Firm). Micro means ‘one millionth’. Microeconomics deals with behavior and problems of single individual and of micro organization. Managerial economics has its roots in microeconomics and it deals with the micro or individual enterprises. It is concerned with the application of the concepts such as price theory, Law of Demand and theories of market structure and so on.��MACROECONOMICS:� � The study of ‘aggregate’ or total level of economics activity in a country is called macroeconomics. It studies the flow of economics resources or factors of production (such as land, labor, capital, organization and technology) from the resource owner to the business firms and then from the business firms to the households. It deals with total aggregates, for instance, total national income total employment, output and total investment. �
MANAGEMENT:�� Management is the science and art of getting things done through people in formally organized groups. It is necessary that every organization be well managed to enable it to achieve its desired goals. Management includes a number of functions: Planning, organizing, staffing, directing, and controlling. ��NATURE OF MANAGERIAL ECONOMICS:��1. Managerial economics is confined only to a part of business�2. Managerial economics relies of traditional economics & decision science�3. Micro economics in nature�4. Managerial economics is goal oriented & problem solving���
SCOPE OF MANAGERIAL ECONOMICS:� 1. Objective of a business firm or organization� 2.Resource allocation� 3. Demand analysis and demand forecasting� 4. Competitive analysis� 5.Strategic planning� 6.Production management� 7.Cost analysis� 8.Pricing strategies� 9. Investment and capital budgeting decisions� 10.Marketing strategies� 11. Economics of sales� 12. Profit management� 13. Input and output analysis� 14. Inventory control
ECONOMICS RELATION WITH OTHER SCIENCES�� 1. Accounting � 2. Mathematics� 3. Operational research� 4. Decision making� 5. Statistics�� DEMAND:�� In ordinary language demand means desires. Thus the quantity of commodity purchased at a given price at a given time in a given market is called demand�
DEMAND FUNCTION:�� The demand function explain the relationship between the demand for commodity and its various determinants maybe express mathematically is called demand function.� Dn = f {P1, P2 ,P, I, T……….n}� where:� Dn = demand for commodity� f = function� P1 = price of the product� P2 = price of other product� I = income of the customer� T = taste & habits of customer� P = population�
LAW OF DEMAND: � Law of demand shows the relation between price and quantity demanded of a commodity in the market. In the words of Marshall, “the amount demand increases with a fall in price and diminishes with a rise in price”. A rise in the price of a commodity is followed by a reduction in demand and a fall in price is followed by an increase in demand, if a condition of demand remains constant.�� LAW IS DEMAND IS BASED ON CERTAIN ASSUMPTIONS: �1. This is no change in consumers taste and preferences. �2. Income should remain constant. �3. Prices of other goods should not change. �4. There should be no substitute for the commodity �5. The commodity should not confer at any distinction �6. The demand for the commodity should be continuous �7. People should not expect any change in the price of the commodity
DETERMINANTS OF DEMAND:�� 1. Price of the Commodity� 2. Income of the Consumer � 3. Prices of related goods� 4. Tastes of the Consumers � 5. Population� 6. Climate and weather �� 1. PRICE OF THE COMMODITY: � The most important factor-affecting amount demanded is the price of the commodity. The amount of a commodity demanded at a particular price is more properly called price demand. The relation between price and demand is called the Law of Demand. It is not only the existing price but also the expected changes in price, which affect demand.
� 2. INCOME OF THE CONSUMER: � The second most important factor influencing demand is consumer income. In fact, we can establish a relation between the consumer income and the demand at different levels of income, price and other things remaining the same. The demand for a normal commodity goes up when income rises and falls down when income falls. But in case of Giffen goods the relationship is the opposite. �� 3. PRICES OF RELATED GOODS: � The demand for a commodity is also affected by the changes in prices of the related goods also. Related goods can be of two types: �Substitutes which can replace each other in use; for example, tea and coffee are substitutes. �Complementary foods are those which are jointly demanded, such as pen and ink. In such cases complementary goods have opposite relationship between price of one commodity and the amount demanded for the other. �
� 4. TASTES OF THE CONSUMERS: � The amount demanded also depends on consumer’s taste. Tastes include fashion, habit, customs, etc. A consumer’s taste is also affected by advertisement. If the taste for a commodity goes up, its amount demanded is more even at the same price. This is called increase in demand. The opposite is called decrease in demand. �� 5. POPULATION: � Increase in population increases demand for necessaries of life. The composition of population also affects demand. Composition of population means the proportion of young and old and children as well as the ratio of men to women. A change in composition of population has an effect on the nature of demand for different commodities. � 6. CLIMATE AND WEATHER: � The climate of an area and the weather prevailing there has a decisive effect on consumer’s demand. In cold areas woolen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day, ice cream is not so much demanded. �
EXCEPTIONAL DEMAND CURVE: � Some times the demand curve slopes upwards from left to right. In this case the demand curve has a positive slope. ������������� When price increases from OP to Op1 quantity demanded also increases from to OQ1 and vice versa. The reasons for exceptional demand curve are as follows. �
1. GIFFEN PARADOX: � The Giffen good or inferior good is an exception to the law of demand. When the price of an inferior good falls, the poor will buy less and vice versa. For example, when the price of maize falls, the poor are willing to spend more on superior goods than on maize if the price of maize increases, he has to increase the quantity of money spent on it.� 2. VEBLEN OR DEMONSTRATION EFFECT: � ‘Veblan’ has explained the exceptional demand curve through his doctrine of conspicuous consumption. Rich people buy certain good because it gives social distinction or prestige for example diamonds are bought by the richer class for the prestige it possess. It the price of diamonds falls poor also will buy is hence they will not give prestige. Therefore, rich people may stop buying this commodity. � 3. NECESSARIES: � In the case of necessaries like rice, vegetables etc. people buy more even at a higher price.� 4.FEAR OF SHORTAGE: � During the times of emergency of war People may expect shortage of a commodity. At that time, they may buy more at a higher price to keep stocks for the future.
VARIOUS TYPES OF DEMAND� 1. Individual demand� 2. Market demand� 3. Demand schedule� 4. Demand curve� 5. Direct demand� 6. Derived demand� 7. Demand function� 8. Income demand� 9. Composite demand� 10. Cross demand� 11. Demand unrelated goods� 12. Joint demand
DEMAND DISTINCTIONS�� 1. Producers goods and consumers goods� 2. Durable goods and nondurable demand� 3. Derived demand and autonomous demand� 4. Industry demand and company demand� 5. Short run demand and long run demand��
ELASTIC DEMAND: �� A small change in price may lead to a great change in quantity �demanded. In this case, demand is elastic.��� IN-ELASTIC DEMAND:�� If a big change in price is followed by a small change in ��demanded then the demand in “inelastic”.� � TYPES OF ELASTICITY OF DEMAND:� � There are three types of elasticity of demand:� � 1.Price elasticity of demand�� 2.Income elasticity of demand�� 3.Cross elasticity of demand�
Marshall was the first economist to define price elasticity of demand. Price elasticity of demand measures changes in quantity demand to a change in Price. It is the ratio of percentage change in quantity demanded to a percentage change in price.
Proportionate change in the quantity demand of commodity
Price elasticity = -------------------------------------------------------------------------------------------------
Proportionate change in the price of commodity
There are five cases of price elasticity of demand
A. Perfectly elastic demand:
When small change in price leads to an infinitely large change is quantity demand, it is called perfectly or infinitely elastic demand. In this case E=∞
The demand curve DD1 is horizontal straight line. It shows the at “OP” price any amount is demand and if price increases, the consumer will not purchase the commodity.
���������������������B. Perfectly Inelastic Demand� In this case, even a large change in price fails to bring about a change in quantity demanded. When price increases from ‘OP’ to ‘OP’, the quantity demanded remains the same. In other words the response of demand to a change in Price is nil. In this case ‘E’=0.� �C. Relatively elastic demand:� Demand changes more than proportionately to a change in price. i.e. a small change in price loads to a very big change in the quantity demanded. In this case E > 1. This demand curve will be flatter. When price falls from ‘OP’ to ‘OP’, amount demanded in crease from “OQ’ to “OQ1’ which is larger than the change in price.���
����D. Relatively in-elastic demand.� Quantity demanded changes less than proportional to a change in price. A large change in price leads to small change in amount demanded. Here E < 1. Demanded carve will be steeper. When price falls from “OP’ to ‘OP1 amount demanded increases from OQ to OQ1, which is smaller than the change in price.��E. Unit elasticity of demand:� The change in demand is exactly equal to the change in price. When both are equal E=1 and elasticity if said to be unitary.��When price falls from ‘OP’ to ‘OP1’ quantity demanded increases from ‘OP’ to ‘OP1’, quantity demanded increases from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted in an equal change in quantity demanded so price elasticity of demand is equal to unity.�� �
2. Income elasticity of demand:�Income elasticity of demand shows the change in quantity demanded as a result of a change in income.� Income elasticity of demand may be slated in the form of a formula.� � Proportionate change in the quantity demand of commodity�Income Elasticity = ------------------------------------------------------------------� Proportionate change in the income of the people� �Income elasticity of demand can be classified in to�five types.� �A. Zero income elasticity:� Quantity demanded remains the same, even �though money income increases. Symbolically,� it can be expressed as Ey=0. It can be depicted� in the following way: As income increases from�OY to OY1, quantity demanded never changes.��
B. Negative Income elasticity:
When income increases, quantity demanded falls. In this case, income elasticity of demand is negative. i.e., Ey < 0.
When income increases from OY to OY1, demand falls from OQ to OQ1.
C. Unit income elasticity:
When an increase in income brings about a proportionate increase in quantity demanded, and then income elasticity of demand is equal to one. Ey = 1. When income increases from OY to OY1, Quantity demanded also increases from OQ to OQ1.
D. Income elasticity greater than unity:
In this case, an increase in come brings about a more than proportionate increase in quantity demanded.
Symbolically it can be written as Ey > 1.
It shows high-income elasticity of demand. When income increases from OY to OY1, Quantity demanded increases from OQ to OQ1.
E. Income elasticity leas than unity:
When income increases quantity demanded also increases but less than proportionately. In this case E < 1. An increase in income from OY to OY, brings what an increase in quantity demanded from OQ to OQ1, But the increase in quantity demanded is smaller than the increase in income. Hence, income elasticity of demand is less than one.
���3. Cross elasticity of Demand:� �A change in the price of one commodity leads to a change in the quantity demanded of another commodity.� �This is called a cross elasticity of demand. The formula for cross elasticity of demand is:� � Proportionate change in the quantity demand of commodity “X”�Cross elasticity = ------------------------------------------------------------------------------� Proportionate change in the price of commodity “Y”� �a. In case of substitutes, cross elasticity of demand is positive. �Eg: Coffee and Tea��When the price of coffee increases, Quantity demanded �of tea increases. Both are substitutes.�������
���������������������b. Incase of compliments, cross elasticity is negative. If increase in the price of one commodity leads to a decrease in the quantity demanded of another and vice versa. When price of car goes up from OP to OP!, the quantity demanded of petrol decreases from OQ to OQ!. The cross-demanded curve has negative slope.���������c. In case of unrelated commodities, cross elasticity of �demanded is zero. A change in the price of one commodity �will not affect the quantity demanded of another.��Quantity demanded of commodity “b” remains unchanged �due to a change in the price of ‘A’, as both are unrelated goods.���
� Factors influencing the elasticity of demand��1. Nature of commodity:� Elasticity or in-elasticity of demand depends on the nature of the commodity i.e. whether a commodity is a necessity, comfort or luxury, normally; the demand for Necessaries like salt, rice etc is inelastic. On the other band, the demand for comforts and luxuries is elastic.� 2. Availability of substitutes:� Elasticity of demand depends on availability or non-availability of substitutes. In case of commodities, which have substitutes, demand is elastic, but in case of commodities, which have no substitutes, demand is in elastic.� 3. Variety of uses:� If a commodity can be used for several purposes, than it will have elastic demand. i.e. electricity. On the other hand, demanded is inelastic for commodities, which can be put to only one use.� 4. Postponement of demand: � If the consumption of a commodity can be postponed, than it will have elastic demand. On the contrary, if the demand for a commodity cannot be postpones, than demand is in elastic. The demand for rice or medicine cannot be postponed, while the demand for Cycle or umbrella can be postponed.��
5. Amount of money spent:� Elasticity of demand depends on the amount of money spent on the commodity. If the consumer spends a smaller for example a consumer spends a little amount on salt and matchboxes. Even when price of salt or matchbox goes up, demanded will not fall. Therefore, demand is in case of clothing a consumer spends a large proportion of his income and an increase in price will reduce his demand for clothing. So the demand is elastic.��6. Time:� Elasticity of demand varies with time. Generally, demand is inelastic during short period and elastic during the long period. Demand is inelastic during short period because the consumers do not have enough time to know about the change is price. Even if they are aware of the price change, they may not immediately switch over to a new commodity, as they are accustomed to the old commodity��7. Range of Prices: � Range of prices exerts an important influence on elasticity of demand. At a very high price, demand is inelastic because a slight fall in price will not induce the people buy more. Similarly at a low price also demand is inelastic. This is because at a low price all those who want to buy the commodity would have bought it and a further fall in price will not increase the demand. Therefore, elasticity is low at very him and very low prices.�
Importance of Elasticity of Demand:��1. Price fixation:� Each seller under monopoly and imperfect competition has to take into account elasticity of demand while fixing the price for his product. If the demand for the product is inelastic, he can fix a higher price.� �2. Production:� Producers generally decide their production level on the basis of demand for the product. Hence elasticity of demand helps the producers to take correct decision regarding the level of cut put to be produced.� �3. Distribution:� Elasticity of demand also helps in the determination of rewards for factors of production. For example, if the demand for labour is inelastic, trade unions will be successful in raising wages. It is applicable to other factors of production.��
4. International Trade:� Elasticity of demand helps in finding out the terms of trade between two countries. Terms of trade refers to the rate at which domestic commodity is exchanged for foreign commodities. Terms of trade depends upon the elasticity of demand of the two countries for each other goods.� �5. Public Finance:� Elasticity of demand helps the government in formulating tax policies. For example, for imposing tax on a commodity, the Finance Minister has to take into account the elasticity of demand.� �6. Nationalization:� The concept of elasticity of demand enables the government to decide about nationalization of industries�
� Demand Forecasting� �Introduction: � � The information about the future is essential for both new firms and those planning to expand the scale of their production. Demand forecasting refers to an estimate of future demand for the product.� � It is an ‘objective assessment of the future course of demand”. In recent times, forecasting plays an important role in business decision-making. Demand forecasting has an important influence on production planning. It is essential for a firm to produce the required quantities at the right time.� � It is essential to distinguish between forecasts of demand and forecasts of sales. Sales forecast is important for estimating revenue cash requirements and expenses. Demand forecasts relate to production, inventory control, timing, reliability of forecast etc. However, there is not much difference between these two terms.� �Types of demand Forecasting:� � Based on the time span and planning requirements of business firms, demand forecasting can be classified in to �1. Short-term demand forecasting and�2. Long – term demand forecasting.� �
������1. Short-term demand forecasting:� Short-term demand forecasting is limited to short periods, usually for one year. It relates to policies regarding sales, purchase, price and finances. It refers to existing production capacity of the firm. Short-term forecasting is essential for formulating is essential for formulating a suitable price policy. If the business people expect of rise in the prices of raw materials of shortages, they may buy early. This price forecasting helps in sale policy formulation. Production may be undertaken based on expected sales and not on actual sales. Further, demand forecasting assists in financial forecasting also. Prior information about production and sales is essential to provide additional funds on reasonable terms.� �2. Long – term forecasting:� In long-term forecasting, the businessmen should now about the long-term demand for the product. Planning of a new plant or expansion of an existing unit depends on long-term demand. Similarly a multi product firm must take into account the demand for different items. When forecast are mode covering long periods, the probability of error is high. It is vary difficult to forecast the production, the trend of prices and the nature of competition. Hence quality and competent forecasts are essential.� ��� �
Prof. C. I. Savage and T.R. Small classify demand forecasting into time types. They are� 1. Economic forecasting,� 2.Industry forecasting, �3. Firm level forecasting.� Economics forecasting is concerned with the economics, while industrial level forecasting is used for inter-industry comparisons and is being supplied by trade association or chamber of commerce. Firm level forecasting relates to individual firm.�� Methods of forecasting:� � Several methods are employed for forecasting demand. All these methods can be grouped under survey method and statistical method. Survey methods and statistical methods are further subdivided in to different categories.� �1. Survey Method:� Under this method, information about the desires of the consumer and opinion of exports are collected by interviewing them. Survey method can be divided into four type’s viz., Option survey method; expert opinion; Delphi method and consumers interview methods.�
��A. Opinion survey method:� This method is also known as sales-force composite method (or) collective opinion method. Under this method, the company asks its salesman to submit estimate of future sales in their respective territories. Since the forecasts of the salesmen are biased due to their optimistic or pessimistic attitude ignorance about economic developments etc. these estimates are consolidated, reviewed and adjusted by the top executives. In case of wide differences, an average is struck to make the forecasts realistic.� �This method is more useful and appropriate because the salesmen are more knowledge. They can be important source of information. They are cooperative. The implementation within unbiased or their basic can be corrected.� �B. Expert opinion method:� Apart from salesmen and consumers, distributors or outside experts may also e used for forecasting. In the United States of America, the automobile companies get sales estimates directly from their dealers. Firms in advanced countries make use of outside experts for estimating future demand. Various public and private agencies all periodic forecasts of short or long term business conditions.� �
��C. Delphi Method:� A variant of the survey method is Delphi method. It is a sophisticated method to arrive at a consensus. Under this method, a panel is selected to give suggestions to solve the problems in hand. Both internal and external experts can be the members of the panel. Panel members one kept apart from each other and express their views in an anonymous manner. There is also a coordinator who acts as an intermediary among the panelists. He prepares the questionnaire and sends it to the panelist. At the end of each round, he prepares a summary report. On the basis of the summary report the panel members have to give suggestions. This method has been used in the area of technological forecasting. It has proved more popular in forecasting. It has provided more popular in forecasting non-economic rather than economic variables.� �D. Consumers interview method:� In this method the consumers are contacted personally to know about their plans and preference regarding the consumption of the product. A list of all potential buyers would be drawn and each buyer will be approached and asked how much he plans to buy the listed product in future. He would be asked the proportion in which he intends to buy. This method seems to be the most ideal method for forecasting demand.��
2. Statistical Methods:� � Statistical method is used for long run forecasting. In this method, statistical and mathematical techniques are used to forecast demand. This method relies on post data.� �a. Time series analysis or trend projection methods:� A well-established firm would have accumulated data. These data are analyzed to determine the nature of existing trend. Then, this trend is projected in to the future and the results are used as the basis for forecast. This is called as time series analysis. This data can be presented either in a tabular form or a graph. In the time series post data of sales are used to forecast future.� �b. Barometric Technique:� Simple trend projections are not capable of forecasting turning paints. Under Barometric method, present events are used to predict the directions of change in future. This is done with the help of economics and statistical indicators. Those are (1) Construction Contracts awarded for building materials (2) Personal income (3) Agricultural Income. (4) Employment (5) Gross national income (6) Industrial Production (7) Bank Deposits etc.�
c. Regression and correlation method:� Regression and correlation are used for forecasting demand. Based on post data the future data trend is forecasted. If the functional relationship is analyzed with the independent variable it is simple correction. When there are several independent variables it is multiple correlation. In correlation we analyze the nature of relation between the variables while in regression; the extent of relation between the variables is analyzed. The results are expressed in mathematical form. Therefore, it is called as econometric model building. The main advantage of this method is that it provides the values of the independent variables from within the model itself.�� ��
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