MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS

P.Amarnath, Assistant professor, Department of MBA. Page 1

UNIT-I
INTRODUCTION TO MANAGERIAL ECONOMICS

Introduction to Economics:

A preliminary definition, Economics is a study of the ways in which people use resources to
satisfy their wants. The word wants requires little explanation. All of us want the food, clothing, and shelter that
we need to stay alive. But most of us (even college teachers!) want much more. We want cars, television sets,
vacation tripsin fact, our capacity to want is almost unlimited. In contrast, the things we want are always
limited in quantity. Even in a wealthy country like the United States there is never enough of everything to
satisfy all the wants of every person in the country. How to narrow this gap between what people want and what
they are able to get is the basic problem studied in economics. We shall refer to this problem as the problem of
scarcity. For narrowing this gap, there are two ways to narrow the gap. One is to want less; the other is to get
more. Poets, philosophers, the proponents of various religions, and employers often counsel us to follow the
first way. History shows that we have usually attempted the second way, the way of getting more, with varying
and not-easily-measured degrees of success. The economist cannot say which way is the better. His studies,
however, are limited to the second way, to the method of getting more rather than to the method of wanting less.
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. It
was only during the eighteenth century that Adam Smith, the Father of Economics, defined economics as the
study of nature and uses of national wealth.
Definition of Economics:
Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes Economics is a
study of mans actions in the ordinary business of life: it enquires how he gets his income and how he
uses it. Thus, it is one side, a study of wealth; and on the other, and more important side; it is the study
of man. As Marshall observed, the chief aim of economics is to promote human welfare, but not
wealth.
Prof. Lionel Robbins defined Economics as the science, which studies human behavior as a relationship
between ends and scarce means which have alternative uses. With this, the focus of economics shifted

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from wealth to human behavior.
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 economic activity in a country is called macroeconomics. It studies the
flow of economics resources or factors of production (such as land, labour, capital, organisation 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.
It studies the interrelations among various aggregates and examines their nature and behaviour, their
determination and causes of fluctuations in the. It deals with the price level in general, instead of studying the
prices of individual commodities. It is concerned with the level of employment in the economy. It discusses
aggregate consumption, aggregate investment, price level, and payment, theories of employment, and so on.

Though macroeconomics provides the necessary framework in term of government policies etc., for the firm to
act upon dealing with analysis of business conditions, it has less direct relevance in the study of theory of firm.

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. The manager while
directing the efforts of his staff communicates to them the goals, objectives, policies, and procedures;
coordinates their efforts; motivates them to sustain their enthusiasm; and leads them to achieve the corporate
goals.




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MANAGERIAL ECONOMICS
Managerial Economics refers to the firms decision making process. It could be also interpreted as Economics
of Management. Managerial Economics is also called as Industrial Economics or Business Economics.

MEANING AND DFINNI TI ON OF MANAGERI AL ECONOMI CS:

In the words of E. F. Brigham and J. L. Pappas Managerial Economics is the applications of
economics theory and methodology to business administration practice.

Managerial Economics bridges the gap between traditional economics theory and real business
practices in two days. First it provides a number of tools and techniques to enable the manager to become more
competent to take decisions in real and practical situations. Secondly it serves as an integrating course to show
the interaction between various areas in which the firm operates.

M. H. Spencer and Louis Siegelman explain the Managerial Economics is the integration of economic
theory with business practice for the purpose of facilitating decision making and forward planning by
management.

It is clear, therefore, that managerial economics deals with economic aspects of managerial decisions of
with those managerial decisions, which have an economics contest. Managerial economics may therefore, be
defined as a body of knowledge, techniques and practices which give substance to those economic concepts
which are useful in deciding the business strategy of a unit of management.
Economics, therefore, focuses on those tools and techniques, which are useful in decision-making.




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Nature of Managerial Economics

Managerial economics is, perhaps, the youngest of all the social sciences. Since it originates from Economics, it
has the basis features of economics, such as assuming that other things remaining the same (or the Latin
equivalent ceteris paribus). This assumption is made to simplify the complexity of the managerial phenomenon
under study in a dynamic business environment so many things are changing simultaneously.

The other features of managerial economics are explained as below:

BUSINESS PROBLEM
DECISION SCIENCES, MODELS,
METHODS, TOOLS, TECHNIQUES
AND PROCEDURES.
(
APPLICATION
OF
ECONOMIC THEORIES
MANAGERIAL ECONOMICS
OPTIMAL SOLLUTION TO THE PROBLEM

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1. Close to microeconomics: Managerial economics is concerned with finding the solutions for different
managerial problems of a particular firm. Thus, it is more close to microeconomics.

2. Operates against the backdrop of macroeconomics: The macroeconomics conditions of the economy are
also seen as limiting factors for the firm to operate. In other words, the managerial economist has to be
aware of the limits set by the macroeconomics conditions such as government industrial policy, inflation
and so on.

3. Normative statements: A normative statement usually includes or implies the words ought or should.
They reflect peoples moral attitudes and are expressions of what a team of people ought to do. For instance,
it deals with statements such as Government of India should open up the economy. Such statement are
based on value judgments and express views of what is good or bad, right or wrong. One problem
with normative statements is that they cannot to verify by looking at the facts, because they mostly deal with
the future. Disagreements about such statements are usually settled by voting on them.
4. Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the objectives of the firm, it
suggests the course of action from the available alternatives for optimal solution. If does not merely mention
the concept, it also explains whether the concept can be applied in a given context on not. For instance, the
fact that variable costs are marginal costs can be used to judge the feasibility of an export order.
MANAGERIAL
ECONOMICS
CLOSE TO MICRO
ECONOMICS
ACT as BACK
DROP OF MACRO
ECONOMICS
NORMATIVE
STATEMENT
APPLIED IN
NATURE
SCOPE TO
EVALUATE ALL
ALTERNATIVES
INTERDICPLINARY
PRESCRIPTIVE
STATEMENT

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5. Applied in nature: Models are built to reflect the real life complex business situations and these models
are of immense help to managers for decision-making. The different areas where models are extensively
used include inventory control, optimization, project management etc. In managerial economics, we also
employ case study methods to conceptualize the problem, identify that alternative and determine the best
course of action.

6. Offers scope to evaluate each alternative: Managerial economics provides an opportunity to evaluate each
alternative in terms of its costs and revenue. The managerial economist can decides which is the better
alternative to maximize the profits for the firm.

7. I nterdisciplinary: The contents, tools and techniques of managerial economics are drawn from different
subjects such as economics, management, mathematics, statistics, accountancy, psychology, organizational
behavior, sociology and etc.
8. Assumptions and limitations: Every concept and theory of managerial economics is based on certain
assumption and as such their validity is not universal. Where there is change in assumptions, the theory may
not hold good at all.
Scope of Managerial Economics:

The scope of managerial economics refers to its area of study. Managerial economics, Provides management
with a strategic planning tool that can be used to get a clear perspective of the way the business world works
and what can be done to maintain profitability in an ever-changing environment. Managerial economics is
primarily concerned with the application of economic principles and theories to five types of resource decisions
made by all types of business organizations.

The selection of product or service to be produced.
The choice of production methods and resource combinations.
The determination of the best price and quantity combination
Promotional strategy and activities.
The selection of the location from which to produce and sell goods or service to consumer.

The production department, marketing and sales department and the finance department usually handle these

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five types of decisions.
The scope of managerial economics covers two areas of decision making
Operational or Internal issues
Environmental or External issues






Operational issues:
Operational issues refer to those, which wise within the business organization and they are under the
control of the management. Those are:
Theory of demand and Demand Forecasting
Pricing and Competitive strategy
Scope
Operational
issuues
Demand forecasting
pricing analysis
Product cost analysos
Resource allocation
profit analysis
Capital dgetting analysis
Extternal
Issues
Government policies

Tecnological changes

Political anlysis

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Production cost analysis
Resource allocation
Profit analysis
Capital or Investment analysis
Strategic planning

1. Demand Analyses and Forecasting:

A firm can survive only if it is able to the demand for its product at the right time, within the right quantity.
Understanding the basic concepts of demand is essential for demand forecasting. Demand analysis should be a
basic activity of the firm because many of the other activities of the firms depend upon the outcome of the
demand fore cast. Demand analysis provides:

The basis for analyzing market influences on the firms; products and thus helps in the adaptation to
those influences.
Demand analysis also highlights for factors, which influence the demand for a product. This helps to
manipulate demand. Thus demand analysis studies not only the price elasticity but also income
elasticity, cross elasticity as well as the influence of advertising expenditure with the advent of
computers, demand forecasting has become an increasingly important function of managerial
economics.

2. Pricing and competitive strategy:

Pricing decisions have been always within the preview of managerial economics. Pricing policies are merely a
subset of broader class of managerial economic problems. Price theory helps to explain how prices are
determined under different types of market conditions. Competitions analysis includes the anticipation of the
response of competitions the firms pricing, advertising and marketing strategies. Product line pricing and price
forecasting occupy an important place here.

3. Production and cost analysis:


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Production analysis is in physical terms. While the cost analysis is in monetary terms cost concepts and
classifications, cost-out-put relationships, economies and diseconomies of scale and production functions are
some of the points constituting cost and production analysis.
4. Resource Allocation:
Managerial Economics is the traditional economic theory that is concerned with the problem of optimum
allocation of scarce resources. Marginal analysis is applied to the problem of determining the level of output,
which maximizes profit. In this respect linear programming techniques has been used to solve optimization
problems. In fact lines programming is one of the most practical and powerful managerial decision making tools
currently available.
5. Profit analysis:
Profit making is the major goal of firms. There are several constraints here an account of competition from
other products, changing input prices and changing business environment hence in spite of careful planning,
there is always certain risk involved. Managerial economics deals with techniques of averting of minimizing
risks. Profit theory guides in the measurement and management of profit, in calculating the pure return on
capital, besides future profit planning.
6. Capital or investment analyses:
Capital is the foundation of business. Lack of capital may result in small size of operations. Availability of
capital from various sources like equity capital, institutional finance etc. may help to undertake large-scale
operations. Hence efficient allocation and management of capital is one of the most important tasks of the
managers. The major issues related to capital analysis are:
The choice of investment project
Evaluation of the efficiency of capital
Most efficient allocation of capital
Knowledge of capital theory can help very much in taking investment decisions. This involves, capital
budgeting, feasibility studies, analysis of cost of capital etc.

7. Strategic planning:

Strategic planning provides management with a framework on which long-term decisions can be made which
has an impact on the behavior of the firm. The firm sets certain long-term goals and objectives and selects the
strategies to achieve the same. Strategic planning is now a new addition to the scope of managerial economics

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with the emergence of multinational corporations. The perspective of strategic planning is global.

It is in contrast to project planning which focuses on a specific project or activity. In fact the integration of
managerial economics and strategic planning has given rise to be new area of study called corporate economics.

B. Environmental or External Issues:
An environmental issue in managerial economics refers to the general business environment in which the firm
operates. They refer to general economic, social and political atmosphere within which the firm operates. A
study of economic environment should include:

The type of economic system in the country.
The general trends in production, employment, income, prices, saving and investment.
Trends in the working of financial institutions like banks, financial corporations, insurance companies
Magnitude and trends in foreign trade;
Trends in labour and capital markets;
Governments economic policies viz. industrial policy monetary policy, fiscal policy, price policy etc.

The social environment refers to social structure as well as social organization like trade unions, consumers co-
operative etc. The Political environment refers to the nature of state activity, chiefly states attitude towards
private business, political stability etc.

The environmental issues highlight the social objective of a firm i.e.; the firm owes a responsibility to the
society. Private gains of the firm alone cannot be the goal.

The environmental or external issues relate managerial economics to macro economic theory while operational
issues relate the scope to micro economic theory. The scope of managerial economics is ever widening with the
dynamic role of big firms in a society.

Managerial economics relationship with other disciplines:

Many new subjects have evolved in recent years due to the interaction among basic disciplines. While there are

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many such new subjects in natural and social sciences, managerial economics can be taken as the best example
of such a phenomenon among social sciences. Hence it is necessary to trace its roots and relationship with other
disciplines.



1. Relationship with economics:

The relationship between managerial economics and economics theory may be viewed form the point of view of
the two approaches to the subject Viz. Micro Economics and Marco Economics. Microeconomics is the study of
the economic behavior of individuals, firms and other such micro organizations. Managerial economics is
rooted in Micro Economic theory. Managerial Economics makes use to several Micro Economic concepts such
as marginal cost, marginal revenue, elasticity of demand as well as price theory and theories of market structure
to name only a few. Macro theory on the other hand is the study of the economy as a whole. It deals with the
analysis of national income, the level of employment, general price level, consumption and investment in the
economy and even matters related to international trade, Money, public finance, etc.
Economics
Mathematics
Operation
Research
Psychology
Statistics
Accountancy
MANAGERIAL
ECONOMICS

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The relationship between managerial economics and economics theory is like that of engineering science to
physics or of medicine to biology. Managerial economics has an applied bias and its wider scope lies in
applying economic theory to solve real life problems of enterprises. Both managerial economics and economics
deal with problems of scarcity and resource allocation.

2. Management theory and accounting:
Managerial economics has been influenced by the developments in management theory and accounting
techniques. Accounting refers to the recording of pecuniary transactions of the firm in certain books. A proper
knowledge of accounting techniques is very essential for the success of the firm because profit maximization is
the major objective of the firm.
Managerial Economics requires a proper knowledge of cost and revenue information and their classification. A
student of managerial economics should be familiar with the generation, interpretation and use of accounting
data. The focus of accounting within the firm is fast changing from the concepts of store keeping to that if
managerial decision making, this has resulted in a new specialized area of study called Managerial
Accounting.

3. Managerial Economics and mathematics:
The use of mathematics is significant for managerial economics in view of its profit maximization goal
long with optional use of resources. The major problem of the firm is how to minimize cost, hoe to maximize
profit or how to optimize sales. Mathematical concepts and techniques are widely used in economic logic to
solve these problems. Also mathematical methods help to estimate and predict the economic factors for decision
making and forward planning.
Mathematical symbols are more convenient to handle and understand various concepts like incremental
cost, elasticity of demand etc., Geometry, Algebra and calculus are the major branches of mathematics which
are of use in managerial economics. The main concepts of mathematics like logarithms, and exponentials,
vectors and determinants, input-output models etc., are widely used. Besides these usual tools, more advanced
techniques designed in the recent years viz. linear programming, inventory models and game theory fine wide
application in managerial economics.

4. Managerial Economics and Statistics:
Managerial Economics needs the tools of statistics in more than one way. A successful businessman must

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correctly estimate the demand for his product. He should be able to analyses the impact of variations in tastes.
Fashion and changes in income on demand only then he can adjust his output. Statistical methods provide and
sure base for decision-making. Thus statistical tools are used in collecting data and analyzing them to help in
the decision making process.

Statistical tools like the theory of probability and forecasting techniques help the firm to predict the future
course of events. Managerial Economics also make use of correlation and multiple regressions in related
variables like price and demand to estimate the extent of dependence of one variable on the other. The theory of
probability is very useful in problems involving uncertainty.

5. Managerial Economics and Operations Research:
Taking effectives decisions is the major concern of both managerial economics and operations research. The
development of techniques and concepts such as linear programming, inventory models and game theory is due
to the development of this new subject of operations research in the postwar years. Operations research is
concerned with the complex problems arising out of the management of men, machines, materials and money.

Operation research provides a scientific model of the system and it helps managerial economists in the field of
product development, material management, and inventory control, quality control, marketing and demand
analysis. The varied tools of operations Research are helpful to managerial economists in decision-making.

6. Managerial Economics and the theory of Decision- making:

The Theory of decision-making is a new field of knowledge grown in the second half of this century. Most
of the economic theories explain a single goal for the consumer i.e., Profit maximization for the firm. But the
theory of decision-making is developed to explain multiplicity of goals and lot of uncertainty.
As such this new branch of knowledge is useful to business firms, which have to take quick decision in the
case of multiple goals. Viewed this way the theory of decision making is more practical and application oriented
than the economic theories.
7. Managerial Economics and Computer Science:
Computers have changes the way of the world functions and economic or business activity is no exception.
Computers are used in data and accounts maintenance, inventory and stock controls and supply and demand

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predictions. What used to take days and months is done in a few minutes or hours by the computers. In fact
computerization of business activities on a large scale has reduced the workload of managerial personnel. In
most countries a basic knowledge of computer science, is a compulsory programme for managerial trainees.To
conclude, managerial economics, which is an offshoot traditional economics, has gained strength to be a
separate branch of knowledge. It strength lies in its ability to integrate ideas from various specialized subjects to
gain a proper perspective for decision-making.

A successful managerial economist must be a mathematician, a statistician and an economist. He must be also
able to combine philosophic methods with historical methods to get the right perspective only then; he will be
good at predictions. In short managerial practices with the help of other allied sciences.


DEMAND ANALYSIS
Introduction & Meaning:

Demand in common parlance means the desire for an object. But in economics demand is something more than
this. According to Stonier and Hague, Demand in economics means demand backed up by enough money to
pay for the goods demanded. This means that the demand becomes effective only it if is backed by the
purchasing power in addition to this there must be willingness to buy a commodity.

Thus demand in economics means the desire backed by the willingness to buy a commodity and the purchasing
power to pay. In the words of Benham The demand for anything at a given price is the amount of it which
will be bought per unit of time at that Price. (Thus demand is always at a price for a definite quantity at a
specified time.) Thus demand has three essentials price, quantity demanded and time. Without these, demand
has to significance in economics.

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.


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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.

The law of demand may be explained with the help of the following demand schedule.



Demand Schedule.

Price of Appel (In. Rs.) Quantity Demanded
10 1
8 2
6 3
4 4
2 5

When the price falls from Rs. 10 to 8 quantity demand increases from 1 to 2. In the same way as price falls,
quantity demand increases on the basis of the demand schedule we can draw the demand curve.

Price

The demand curve DD shows the inverse relation between price and quantity demand of apple. It is
downward sloping.



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Assumptions:

Law is demand is based on certain assumptions:

This is no change in consumers taste and preferences.
Income should remain constant.
Prices of other goods should not change.
There should be no substitute for the commodity
The commodity should not confer at any distinction
The demand for the commodity should be continuous
People should not expect any change in the price of the commodity
Exceptional demand curve:

Sometimes 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.


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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. Otherwise he will have to face starvation. Thus a fall in price is followed by reduction in quantity
demanded and vice versa. Giffen first explained this and therefore it is called as Giffens paradox.


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. I gnorance:
Sometimes, the quality of the commodity is Judge by its price. Consumers think that the product is superior if
the price is high. As such they buy more at a higher price.
4. Speculative effect:
If the price of the commodity is increasing the consumers will buy more of it because of the fear that it increase
still further, Thus, an increase in price may not be accomplished by a decrease in demand.
5. 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.
6. Necessaries:
In the case of necessaries like rice, vegetables etc. people buy more even at a higher price.


Factors Affecting Demand:
There are factors on which the demand for a commodity depends. These factors are economic, social as well as
political factors. The effect of all the factors on the amount demanded for the commodity is called Demand
Function.

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These factors are as follows:
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. I ncome of the Consumer:

The second most important factor influencing demand is consumer income. In fact, we can establish a relation
Factors
affecting
demand
price of the
product
income level
of customer
Price of
related
goods
Taste and
preferences
of customer
wealth
population
government
policy

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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:
1. Substitute products
2. Complimentary

(i). Substitutes which can replace each other in use; for example, tea and coffee are
substitutes. The change in price of a substitute has effect on a commoditys demand
in the same direction in which price changes. The rise in price of coffee shall raise
the demand for tea;

(ii). 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. If the price of pens goes up,
their demand is less as a result of which the demand for ink is also less. The price
and demand go in opposite direction. The effect of changes in price of a commodity on
amounts demanded of related commodities is called Cross Demand.

4.Tastes of the Consumers:

The amount demanded also depends on consumers taste. Tastes include fashion, habit, customs, etc. A
consumers 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. Wealth:


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The amount demanded of commodity is also affected by the amount of wealth as well as its distribution. The
wealthier are the people; higher is the demand for normal commodities. If wealth is more equally distributed,
the demand for necessaries and comforts is more. On the other hand, if some people are rich, while the
majorities are poor, the demand for luxuries is generally higher.

6. 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.


7. Government Policy:
Government policy affects the demands for commodities through taxation. Taxing a commodity increases its
price and the demand goes down. Similarly, financial help from the government increases the demand for a
commodity while lowering its price.
8. Expectations regarding the future:
If consumers expect changes in price of commodity in future, they will change the demand at present even
when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near future
they may increase the demand for a commodity just now.
9. Climate and weather:
The climate of an area and the weather prevailing there has a decisive effect on consumers 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.
10. State of business:
The level of demand for different commodities also depends upon the business conditions in the country. If the
country is passing through boom conditions, there will be a marked increase in demand. On the other hand, the
level of demand goes down during depression.

CHANGES OR SHIFT IN DEMAND

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Extension in demand: it is a situation when increase in demand of a commodity with respect to every fall in
the price and other determinants of demand are constant.
Example: when the price of commodity is 20rs the demand is 100 if the price decreases to 10 the demand will
increase to 200.


Price 20 A down word movement


10 B
Extension in demand

100 200
Demand

Contraction in demand: it is a situation when decrease in demand of a commodity with respect to every rice
in the price of the commodity and other determinants of demand are constant.
CHANGES
when price
changes
Extension
in demand
contraction
in demand
Price is
constant
Increase in
demand
Decrease in
demand

MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS

P.Amarnath, Assistant professor, Department of MBA. Page 22
Example: when the price of commodity is 10 rs the demand is 200 if the price decreases to 20 the demand will
decrease to 100.
Y

Price 20 price B up word movement
decrease

10 A
Contraction in demand

100 200 X
Demand



Increase in demand: it is a situation when increase in a demand of a commodity with respect to changes in the
determinants of demand except price of that commodity.
Example: the demand for a product increases to 100 to 200 units due to changes in the income levels of the
customer even though the price is fixed at Rs.20.
Y D1
D
20 A B
Right words movement
D1

D
X
100 200
Decrease in demand: it is a situation when decrease in a demand of a commodity with respect to changes in the
determinants of demand except price of that commodity.
Example: the demand for a product decreases to 200 to 100 units due to changes in the income levels of the

MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS

P.Amarnath, Assistant professor, Department of MBA. Page 23
customer even though the price is fixed at Rs.20.
Y D
D1
20 A B
Left words movement
D

D1
X
100 200






QUESTIONS:
1. Define Managerial Economics? Explain the Nature and Scope of ME.
(Or)
Define managerial economics. Explain how it is useful to managerial decision making?
(OR)
Explain the role of a Managerial Economist in a Business rm.

2. Explain the relationship of Managerial Economics with other disciplines.
(OR)
Managerial Economics have the relationship with other disciplines. Explain?

3. Dene Demand and explain the factors that inuence the demand of a product? Distinguish between
extension and increase, contraction and decrease in demand?

4. State law of demand? Explain its exceptions with suitable examples?

MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS

P.Amarnath, Assistant professor, Department of MBA. Page 24