MANAGERIAL ECONOMICS

Introduction to the Course

Faculty of Management and Commerce

MANAGERIAL ECONOMICS

Introduction to the Course

Department of Management Studies

MANAGERIAL ECONOMICS
Course Objectives

The objectives of the course is to enable the student gain knowledge of

the
❑ concept of demand, supply, equilibrium in the products and factors
market.
❑ economic theory explains how firms make decisions about production
processes and cost minimization.
❑ characteristics of different market structures in the context of a short-
run and long-run situation.
❑ different types of Nash equilibria, the role of information and
rationality in game theory, and the optimal strategy in an auction.
❑ list of actions decisions makers can take to deduce their risk.
MANAGERIAL ECONOMICS
Course Outcomes

At the end of this course, the student will be able to:

❑ interpret the concepts of demand and supply analysis in the products

and factors market.

❑ implement the economic theory that guides to select the suitable

production process and minimizes the cost.

❑ compare the behaviour of firms under different market structures to

derive the optimal level of output and price.
❑ analyze the outcome of a bargaining game.
❑ evaluate how attitudes toward risk affect choice under uncertainty and
describe factors in analysing decision making under uncertainty.
MANAGERIAL ECONOMICS
Course Content

Unit I: Demand, Supply, and Equilibrium

• Managerial Economics: Meaning and Scope;

• Importance of Studying Economics for Business Decision Making;
• Concept of Demand and Its Determinants
• Indifference Curve Approach and Revealed Preference Approach
• Case 1: WHO and COVID Vaccine
• Concept of Supply and Its Determinants
• Elasticity of Demand and Elasticity of Supply
• Case 2: Elasticity of Demand for Food in India
• Market Equilibrium: Divergence from the Equilibrium Price
• Case 3: Lessons not Learnt: Onion Prices
MANAGERIAL ECONOMICS
Course Content

Unit II: Production Costs and Market Structure

• Organization of Production and Production Function;
• Production Function with one Variable Input: Law of Variable Proportions;
• Production Function with Two Variable Inputs: Isoquant, Ridge Lines;
• Returns to Scale;
• Case 4: Taiwan, Semiconductors, and a “New Cold War”?
• Concepts of Cost: Short-run Cost Functions and Long-run Cost Functions;
• Economies of Scale;
• Perfect Competition in the Short-run and Long-run
• Monopoly Profit Maximization
• Monopolistic Competition in the Short-run and Long-run
• Case 5: Agarwal Packers and Movers: Competing for Moving Experiences
• Oligopoly and Cartels
MANAGERIAL ECONOMICS
Course Content

Unit III: Game Theory and Business Strategy

• Oligopoly Games: Dominant Strategies, Best Responses, Failure to Maximise Joint

Profits.
• Pricing Games in Two-Sided Markets.
• Case 6: Diplomacy as a Tool for Conflict Resolution in Inter-States Relations:
Lessons from Russia’s War on Ukraine (Game Theory)
• Types of Nash Equilibria: Multiple Equilibria, The Pareto Criterion, Mixed Strategy
Equilibria.
• Information and Rationality: Incomplete Information, Rationality.
• Inefficiency in Bargaining, Auctions: Number of Units, Format of Bidding, Value.
• Bidding Strategies in Private-Value Auctions, The Winner’s Curse, Repeated
Games, Sequential Games.
• Deterring Entry, Cost and Innovation Strategies, Behavioural Game Theory.
• Case 7: Game Theory and Hostage-Taking Incidents: Munich Olympic Games
MANAGERIAL ECONOMICS
Course Content

Unit IV: Decision Making Under Uncertainty

• Assessing Risk;
• Case 8: Should Maruthi Suzuki invest in Electric Cars?
• Attitudes Toward Risk: Expected Utility, Risk Aversion, Risk Neutrality,
Risk Preference, Risk Attitudes of Managers;
• Reducing Risk: Obtaining Information, Diversification, Insurance;
• Case 9: Cutting through the Fog: Finding a Future with Fintech
• Investing Under Uncertainty: Risk Neutral Investing, Risk-Averse
Investing, Behavioural Economics and Uncertainty;
• Asymmetric Information;
• Case 10: Jalaram Rice Mills Pvt. Ltd. :Vishal H. Mistry’s Dilemma
• Adverse Selection, Reducing Adverse Selection;
MANAGERIAL ECONOMICS
Text Book
MANAGERIAL ECONOMICS
Reference Books
MANAGERIAL ECONOMICS
Evaluation Pattern

To be evaluated for 10
marks. Each case to be
evaluated for 10 marks ,
5*4 = 20 : best scale down to 10%
of four to be (10 marks)
considered
Each class will (20 marks)
10 Case study will be discussed in
be evaluated for
5 marks, One per subject: class. Students to submit the case

(10 marks) One test per unit

before the discussion
Best of five to
be taken: To be conducted in

(10 Marks) Research Assessment centres or in

Assignment of class
10 + 5 minutes white paper quality
(10 marks)
Class Participation
by student
Individual
Presentation in
each class ( per
student)
ISA: 60 marks, ESA : 40 marks
MANAGERIAL ECONOMICS
Presentation Expectation

S.I. Expectation Marks

1. PPT Style- It should have PES logo 1
2. Presentation Style- He/she should not use/hold any chit/paper while 1
presenting, should have eye-contact etc.
3. Presentation starts from a news article on the given topic- with 2
source
4. Complete your presentation in 10 minutes. (time management) 1
5. Your presentation content 3
6. Answering Q&A 2
Total 10
MANAGERIAL ECONOMICS
Class Participation

S.I. Expectation Marks

(5)
1. Following Seating arrangement (with name plate) 1

2. Attending the session with full concentration 1

3. Writing the points/solving the problems/drawing the diagrams 2

4. Asking questions to presenters 1

MANAGERIAL ECONOMICS
Introduction to the Course

Economic
Theory

Business
Decision
Managerial Making
Economics

Decision
Sciences
MANAGERIAL ECONOMICS
Introduction to the Course

Adam Smith Jean Baptiste Say John Stuart Mill

(1723 - 1790) (1767 - 1832) (1806 - 1873)
MANAGERIAL ECONOMICS
Meaning of Economics – Wealth Aspect

❑ Adam Smith (1776), defined Economics as the study of

wealth. (Book -- An Inquiry into the Nature and Causes of
the Wealth of Nations).
❑ J B Say (1803), defined economics as the science of
production, distribution, and consumption of wealth.
❑ John Stuart Mill (1844), defined economics as the science
which traces the laws of such of the phenomena of society
as arise from the combined operations of mankind for the
production of wealth.
MANAGERIAL ECONOMICS
Introduction to the Course

Alfred Marshall Lionel Robbins Joel Dean

(1842 - 1924) (1898 - 1984) (1906 - 1979)
MANAGERIAL ECONOMICS
Meaning of Economics – Welfare Aspect

Alfred Marshall (1890), emphasized on human activities or

human welfare rather than on wealth. (Book -- Principles of
Economics)

“Political Economy or Economics is a study of mankind in the

ordinary business of life; it examines that part of individual
and social action which is most closely connected with the
attainment and with the use of the material requisites of
well-being.”
MANAGERIAL ECONOMICS
Meaning of Economics – Scarcity Aspect

Lionel Robbins (1932), “Economics is the science which

studies human behaviour as a relationship between ends
and scarce means which have alternative uses.” (‘An Essay
on the Nature and Significance of Economic Science'

How do we understand Scarcity?

MANAGERIAL ECONOMICS
Application Areas

Consumer Demand

Products: Goods and Services

Market Equilibrium
Supply Demand

Inputs
Production Process
MANAGERIAL ECONOMICS
Application Areas

Consumer Demand

Products: Goods and Services ENVIRONMENT

MACRO-ECONOMIC
Market Equilibrium
Supply Demand

Inputs
Production Process
MANAGERIAL ECONOMICS
Meaning of Economics – Concept of Scarcity

• May encounter scarcity of sales force

Marketing Manager
at his command.

• May face the scarcity of funds

Finance Manager necessary for expansion or renovate
a program.

• May not find enough revenue

Finance Minister resources to finance the necessary
expenditure on plans and programs.
MANAGERIAL ECONOMICS
Meaning of Economics – Technical Definition of Scarcity

❑ In economics, it can be termed as 'Excess of Demand‘.

❑ Any time for anything if demand exceeds supply, that

thing is said to be scarce.

❑ Scarcity is a relative term, demand in relation to its supply

determines the element of scarcity.
MANAGERIAL ECONOMICS
Meaning of Economics – Examples of Scarcity

Unemployment • Scarcity of job.

Unsold Stock of
• Scarcity of buyers.
Inventory

Underutilized • Scarcity of power or any other

Capacity of Firm support facilities.
MANAGERIAL ECONOMICS
Meaning of Economics – Efficiency

Purpose of economics is to make best use of its limited

resources. That brings the critical notion of efficiency.

Efficiency denotes most effective use of a society's resources

in satisfying wants and needs of the people.
MANAGERIAL ECONOMICS
Meaning of Economics

Economics is a social science that studies – how individuals,

governments, firms, and nations make choices on allocating
scarce resources to satisfy their unlimited wants.
MANAGERIAL ECONOMICS
Meaning-Managerial Economics

❑ Joel Dean (1951), defines business economics as “the use

of economic analysis in the formulation of business
policies”. (Book – Managerial Economics)

❑ Milton L Spencer and Louis Siegleman (1959), defined

business Economics as “the integration of economic
theory with business practice for the purpose of
facilitating decision making and forward planning of
management”.
MANAGERIAL ECONOMICS
Meaning

Source: Salvatore and Srivastava, 2012

MANAGERIAL ECONOMICS
Scope

Source: https://theinvestorsbook.com/managerial-economics.html
MANAGERIAL ECONOMICS
Activity-1: Preparation of Household Budget (Use Excel)

• A family (Husband, Wife, 2 children and Grandparents) staying in

Bangalore on a rented house. Prepare the estimated budget
(Expenditure and Income) statement using excel sheet.

• Note: Only Man works in the family having 1 Lac salary per month.
THANK YOU

Dr. Ajay Massand

Department of Management Studies
[email protected]
MANAGERIAL ECONOMICS
Unit I: Demand, Supply, and
Equilibrium

Faculty of Management and Commerce

MANAGERIAL ECONOMICS

Unit I: Demand, Supply, and

Equilibrium

Department of Management Studies

MANAGERIAL ECONOMICS
Fundamental Economic Questions

❑ What commodities shall be produced in what quantities

and when shall they be produced?

❑ How shall goods be produced, i.e., by whom and with

what resources and in what technological manner are they
to be produced?

❑ For whom shall goods be produced, i.e., who is to enjoy

and get the benefit of the goods and services produced?
MANAGERIAL ECONOMICS
Branches of Economic Theory

Source: https://www.sarthaks.com/60585/discuss-the-subject-matter-of-economics
MANAGERIAL ECONOMICS
Micro and Macroeconomics

Microeconomics Macroeconomics

• Microeconomics is the branch of economy • Macroeconomics is a branch of economics

which is concerned with the behavior of dealing with the performance, structure,
individual entities such as market, firms behavior, and decision-making of an
and households. economy as a whole.
• Microeconomics is the study of particular • Macroeconomics is the study of the whole
markets, and segments of the economy. It economy. It looks at ‘aggregate’ variables,
looks at issues such as consumer such as aggregate demand, national
behaviour, individual labour markets, and output and inflation.
the theory of firms.
• National Output and National income,
• Preference relations, supply and demand, unemployment, inflation and deflation.
opportunity cost.
• Used to determine an economy's overall
• Used to determine methods of health, standard of living, and needs for
improvement for individual business improvement.
entities.
MANAGERIAL ECONOMICS
Micro and Macroeconomics

Microeconomics Macroeconomics
• Supply and demand in individual • Monetary / fiscal policy. e.g. what
markets. effect does interest rates have on
whole economy?
• Individual consumer behaviour.
e.g. Consumer preference theory • Reasons for inflation, and
unemployment.
• Individual labour markets – e.g.
demand for labour, wage • Economic Growth
determination.
• International trade and globalization.
• Externalities arising from production
• Reasons for differences in living
and consumption.
standards and economic growth
between countries.
• Government borrowing.
MANAGERIAL ECONOMICS
Approaches in Studying Economics

Positive Approach Normative Approach

• It deals with the description and • It is concerned with the prescription

the explanation of the economic or what ought to be done in certain
economic conditions.
behaviour.
• It is subjective and value based.
• It is objective and fact based.
• Example : The price of tomatoes
• It includes the development and should be Rs 20 a kilo to give
verification of economic theories. farmers a higher living standard and
to save the family farm. This is a
normative statement, because it
reflects value judgments.
MANAGERIAL ECONOMICS
Positive Approach Vs. Normative Approach

• What is unemployment rate • How much inflation should be

today? tolerated?
• How does a higher level of • Should higher taxes be levied on
unemployment affect inflation? the rich to help the poor?
• How does an increase in Road • Should we have different income
Tax or an in crease in tax on tax slabs or should we tax
petrol affects the automobile everyone equally?
industry?
• Should agricultural income be
taxed?
MANAGERIAL ECONOMICS
Fundamental Economic Questions

Positive Approach Normative Approach

• What goods and services are to • What goods and services should
be produced? be produced?
• How are goods and services to be • How should the goods and
produced? services be produced?
• For whom are goods and services • For whom goods and services
to be produced? Who share the should be produced? Or who
use of these goods and services? should share the use of these
Or Who gets the stuff? goods and services?
MANAGERIAL ECONOMICS
Factors of Production

Land – in economics, land comprises all naturally occurring resources

whose supply is inherently fixed, such as land, forest, minerals etc.

Labour – all human resources, mental and physical.

Capital – money and equipment

Entrepreneurship?

Labour refers to any kind of human effort provided in the creation of

goods and services. Usually done in exchange for a monetary
compensation (wage) an upon instruction.

Entrepreneurship is the designing, launching and running a process of

production in the creation of goods and services. Entrepreneurs are also
part of labour force.
MANAGERIAL ECONOMICS
What is Decision Making?

Decision making may be defined as the process of selecting

the suitable action from among several alternative courses of
action.
MANAGERIAL ECONOMICS
What is Decision Making?

❑ What should be the price of the product?

❑ What should be the size of the plant to be installed?
❑ How many workers should be employed?
❑ What kind of training should be imparted to them?
❑ What is the optimal level of inventories of finished
products, raw material, spare parts etc.?
MANAGERIAL ECONOMICS
Important Areas of Decision Making

❑ Selection of product
❑ Selection of method of production
❑ Optimum input combination
❑ Allocation of resources
❑ Determination of price and quantity
❑ Decision on promotion strategy
❑ Purchase and sale of assets
❑ Shut down decision
MANAGERIAL ECONOMICS
Basic Process of Decision Making

❑ Define the problem

❑ Determine the objective
❑ Identify possible solutions
❑ Select the Best Possible Solution
❑ Implement the Decision
MANAGERIAL ECONOMICS
Economic Concepts for Insightful Decision Making

❑ Opportunity Cost
❑ Optimization Techniques
❑ Incremental Principle
❑ Time-perspective
❑ Discounting Principle
MANAGERIAL ECONOMICS
Equi-marginal Principal

Multi-plant Firm: Cost Minimization

MC1 = MC2 = MC3 = …. = MCn

Multi-market Territories: Sales Revenue Maximization

MR1 = MR2 = MR3 = …. = MRn

Multi-product Firm: Profit Maximization

MPF1 = MPF2 = MPF3 = … = MPFn

MANAGERIAL ECONOMICS
Rule of Maximization

Profit function is: π = TR – TC

Total revenue (TR) is maximized, when marginal revenue

(MR) is zero.

Total Revenue function is: TR = P.Q

Where, P = price
Q = Quantity of output

𝑑
Marginal Revenue is: MR = (TR)
𝑑𝑞
MANAGERIAL ECONOMICS
Rule of Maximization

Price function: P = 600 – 6Q

Total Revenue function: TR = 600Q – 6Q2
Now, first order derivative of TR will give us the MR.
𝑑
Marginal Revenue: MR = (TR) = 600 -12Q
𝑑𝑞

To maximize the TR, marginal revenue needs to be zero.

MR = 0
600 – 12Q = 0
12Q = 600
Q = 50
MANAGERIAL ECONOMICS
Rule of Maximization

Substituting Q = 50 in the equation TR = 600Q -6Q2

TR = 600(50) – 6(50)2
= 30,000 – 15,000
= 15000
If we change Q by 1 unit more or less, the total revenue will
decline. In this case, if Q = 51
TR = 600(51) – 6(51)2
= 30,600 – 15,606
= 14,994
If Q = 49
TR = 600(49) – 6(49)2
= 29,400 – 14,406
= 14,994
MANAGERIAL ECONOMICS
Concept of Demand

The demand for a commodity arises from the consumer’s

willingness and ability to purchase that commodity.

Creation Survival Profitability

MANAGERIAL ECONOMICS
Demand Function

QX = f (PX, PY, IC, TC)

• Where,

QX = Quantity demanded of commodity X by an individual

per time period
PX = Price per unit of commodity X
PY = Price of related (substitute or complementary)
commodities
IC = Income of the consumer
TC = Tastes and preferences of the consumer
MANAGERIAL ECONOMICS
Substitute and Complementary Good

1 2 3

4 5
MANAGERIAL ECONOMICS
Relationship of Demand with Price

1 2

3
Price of a Quantity
Substitute Good Demand
MANAGERIAL ECONOMICS
Relationship of Demand with Income of the Consumer

1
Income of the Quantity
Consumer Demand Normal
Goods

Inferior
Goods
MANAGERIAL ECONOMICS
Determinants of Demand

Price of that commodity or related commodity

Determinants of Demand

Income, tastes, and preferences of the consumer

Past levels of demand of the consumer

Past levels of income of the consumer

Wealth of the consumer

Credit availability

Government policy
MANAGERIAL ECONOMICS
The Law of Demand

• The law of demand states that other things remaining the

same if the price of any commodity increases its quantity
demanded decreases and vice-versa.

• The law of demand can be represented by a graph.

• The graphical representation of the law of demand is a

curve that determine the relationship between the
quantity demanded and the price of a good.
MANAGERIAL ECONOMICS
Graphical Representation of the Law of Demand

Demand Schedule Demand Curve

P

Price per Quantity

unit (₹) demanded 14
2 80 12
4 70
10
6 60
8 50 8

10 40 6
12 30 4
14 20
2 QD
20 20 40 50 60 70 80
MANAGERIAL ECONOMICS
Shape of the Demand Curve
MANAGERIAL ECONOMICS
Explanations of the Downward Slopping Demand Curve

Assumption of the Diminishing Marginal

1 Utility

Income effect of a change in price

2

Substitution effect of a change in price

3
MANAGERIAL ECONOMICS
Diminishing Marginal Utility

• Utility – refers to the total

satisfaction received by consumer
from consuming a good or service.

• Marginal Utility – refers to the

additional utility that the consumer
gets by consuming one addition
unit of the product.

• Law of Diminishing Marginal Utility

MANAGERIAL ECONOMICS
Income Effect of a Change in Price

₹ 50 per kg ₹ 25 per kg ₹ 30 per kg ₹ 110 per pack ₹ 45 per kg ₹ 315

1 kg 2 kg 2 kg 1 pack 1 kg
₹ 50 ₹ 50 ₹ 60 ₹ 110 ₹ 45

₹ 45 per kg ₹ 20 per kg ₹ 15 per kg ₹ 90 per pack ₹ 35 per kg ₹ 240

1 kg 2 kg 2 kg 1 pack 1 kg
₹ 45 ₹ 40 ₹ 30 ₹ 90 ₹ 35
MANAGERIAL ECONOMICS
Income Effect of a Change in Price

₹ 45 per kg ₹ 20 per kg ₹ 15 per kg ₹ 90 per pack ₹ 35 per kg ₹ 300

1 kg 2.5 kg 3 kg 1 pack 2 kg
₹ 45 ₹ 50 ₹ 45 ₹ 90 ₹ 70

This is the source of the income effect of the fall in price.

MANAGERIAL ECONOMICS
Substitution Effect of a Change in Price

₹ 2526
₹ 911 per 5 kg ₹ 295 per 5 kg ₹ 18 per kg ₹ 71 per kg ₹ 320 per kg
10 kg 5 kg 1 kg 1 kg 1 kg
₹ 1822 ₹ 295 ₹ 18 ₹ 71 ₹ 320

₹ 1125 per 5 kg ₹ 295 per 5 kg ₹ 18 per kg ₹ 71 per kg ₹ 320 per kg ₹ 2456

7 kg 8 kg 1 kg 1 kg 1 kg
₹ 1575 ₹ 472 ₹ 18 ₹ 71 ₹ 320
MANAGERIAL ECONOMICS
Exceptions to the Law of Demand

Giffen
Goods

Veblen
Goods
MANAGERIAL ECONOMICS
Individual and Market Demand

Price Quantity Quantity Quantity Quantity Market

Demanded by Demanded by Demanded by Demanded by Demand
Consumer A Consumer B Consumer C Consumer D
2 40 40 45 18 143
4 30 30 35 16 111
6 24 21 30 13 88
8 18 15 20 12 65
10 14 10 15 11 50
12 10 7 13 8 38
14 8 5 10 6 29
16 6 3 8 4 21
18 4 2 0 0 6
MANAGERIAL ECONOMICS
Activity-2: Plot-Individual and Market Demand

• Using Excel sheet, plot Individual and Market Demand curve.

THANK YOU

Dr. Ajay Massand

Department of Management Studies
[email protected]
MANAGERIAL ECONOMICS
Indifference Curve Approach

Dr. Ajay Massand

Faculty of Management and Commerce
MANAGERIAL ECONOMICS

Indifference Curve Approach

Dr. Ajay Massand

Department of Management Studies
MANAGERIAL ECONOMICS
Theory of Consumer Behaviour

• Axiom of Utility

• Utility – refers to the total satisfaction received by

consumer from consuming a good or service.

• Utility Function - 𝑈 = σ 𝑈𝑖 (𝑄𝑗 )

• Marginal Utility (MU) – refers to the additional utility that

the consumer gets by consuming one additional unit of the
product.
MANAGERIAL ECONOMICS
Total Utility and Marginal Utility

Utility Schedule Utility Curve

Number Total Marginal
of Units Utility Utility
(TU) (MU)
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
8 24 -4
MANAGERIAL ECONOMICS
Approaches of Utility

✓ Cardinal Utility Approach – Marshallian Theory of

Consumer Behaviour suggest that the utility can be
measured in monetary units – Walras suggested that
measurement of utility is subjective units, called utils.

✓ Ordinal Utility Approach – states that utility is not

measurable, but can be ranked in order according to the
satisfaction of the consumer. Indifference Curve Approach
and Revealed Preference Approach.
MANAGERIAL ECONOMICS
Assumptions of the Cardinal Utility Theory

✓ Rationality – consumer is rational.

✓ Cardinal Utility – utility is measurable.

✓ Constant Marginal Utility of Money – marginal utility of

money is constant as income increases or decreases.

✓ Law of Diminishing marginal utility – states that increase

in consumption of a product while keeping consumption
of other products constants, there is a decline in the
marginal utility that consumer derives from consuming
each additional unit of the product.
 MANAGERIAL ECONOMICS
Law of Diminishing Marginal Utility

Y
Diminishing Marginal Utility Curve
12 A (1,12)
Marginal Utility (MU)

Positive Utility (A, B, C)

8 B (2,8)

C (3,4) Zero Utility (D)

4

D (4,0)
0 X
1 2 3 4 5
-4 E (5,- 4)
Consumption of a Product Negative Utility (E)
MANAGERIAL ECONOMICS
Critique of the Cardinal Utility Approach

❖ The assumption of the cardinal utility is extremely

doubtful.

❖ Constant utility of money is unrealistic.

❖ Axiom of diminishing marginal utility has been

established from introspection – psychological law.
MANAGERIAL ECONOMICS
Indifference Curve Approach

✓ Ordinal Utility Approach.

✓ Commodity Bundle.

✓ Scale of preferences.

✓ Developed by British economist Francis Edgeworth (1881)

– put into use by Italian economist Vilfredo Pareto (1906)
– brought into extensive use by economist J R Hicks and R
G D Allen (1934).
MANAGERIAL ECONOMICS
Scale of Preferences

Commodity Bundle Level of Ranking Order of

(Apples and Satisfaction Preferences
Bananas) Derived
(a) 1 apple + 12 Highest I
bananas
(b) 2 apples + 8 Lesser than (a) II
bananas
(c) 3 apples + 5 Lesser than (b) III
bananas
MANAGERIAL ECONOMICS
Indifference Schedule and Indifference Curve

Indifference Schedule Indifference Curve

Combination Commodity Commodity

X (Mangoes) Y (Oranges)
A 1 14
B 2 9
C 3 6
D 4 4
E 5 2

Marginal Rate of Substitution

MANAGERIAL ECONOMICS
Assumptions of The Indifference Curve

• Rationality Indifference Map

• Ordinal Utility

• Law of Diminishing Marginal Rate of

Substitution – states that marginal rate of
substitution decreases as one moves
down a standard convex-shaped
indifference curve.
• Consistency and Transitivity of Choice
If A > B, and B > C, then A > C
MANAGERIAL ECONOMICS
Properties of Indifference Curve

• Property 1: Indifference curve slopes downward from left

to right.
• Property 2: Indifference curve is convex to the origin.

• Property 3: Indifference curve cannot intersect each

other.
• Property 4: Higher indifference curve represents higher
level of satisfaction.
MANAGERIAL ECONOMICS
Properties of Indifference Curve

Property 1 Property 2
MANAGERIAL ECONOMICS
Properties of Indifference Curve

Property 3 Property 4
MANAGERIAL ECONOMICS
Consumer Income and Expenditure

Monthly average income and expenditure of the consumer

surveyed in Bengaluru, Karnataka, India 2019
Group I: Households with income between ₹ 30,000 to
₹ 50,000 per month
Average income per month: ₹ 41,924
Average expenditure per month: ₹ 38,623

Group II: Households with income between ₹ 70,000 to

₹ 150,000 per month
Average income per month: ₹ 85,600
Average expenditure per month: ₹ 68,623
MANAGERIAL ECONOMICS
Consumer Expenditures

Expenditure Expenditure per month

Category Group I Group II
(₹ 38,623/month) (₹ 68,623/month)
Food 14,500 20,000
Housing 12,000 26,500
Clothing 3,000 6500
Commuting 1,600 1,800
Education 5,000 7,750
Health Care 1,523 2,873
Entertainment 1,000 3,200
MANAGERIAL ECONOMICS
The Budget Constraints

✓ Assume only two commodities in the basket: X and Y

✓ Price of X = PX
Price of Y = PY
Income =I
✓ Total expenditure on basket: PX.QX + PY.QY
✓ The basket is affordable if total expenditure does not
exceed total income. PX.QX + PY.QY ≤ I
✓ Therefore the budget constraint can be defined as the set
of baskets that the consumer may purchase given the
income level.
MANAGERIAL ECONOMICS
Market Basket and Budget Line

Y
Market Basket

Market Vegetables Grocery Total 40 A Budget Line

Basket (V) (G) Spending

Grocery (in Units)

(Rs. Per
Month) 30 B
A 0 40 ₹ 20,000
20 C
B 100 30 ₹ 20,000
C 200 20 ₹ 20,000 D
10
D 300 10 ₹ 20,000
E 400 0 ₹ 20,000 E
X
O 100 200 300 400
Vegetables (in Units)
 MANAGERIAL ECONOMICS
The Effects of Change in Income and Prices

Y BL 2, Y
I = ₹ 40,000 BL 2,
80 80 V Price Falls
BL 1,

Grocery (in Units)

Grocery (in Units)

60 I = ₹ 20,000 60 BL 1,
V Price Rs. 50/Unit
40 BL 3,
40
I = ₹ 10,000
BL 3,
20 20 V Price Increases

X X
O 200 400 600 800 O 200 400 600 800
Vegetables (in Units) Vegetables (in Units)
MANAGERIAL ECONOMICS
Consumer Choice

Budget Line
.
Grocery (in Units)

40
37 .B D

20 . C IC3
IC2
IC1

X
O 40 200 400
Vegetables (in Units)
THANK YOU

Dr. Ajay Massand

Department of Management Studies
[email protected]
MANAGERIAL ECONOMICS
Elasticity of Demand

Dr. Ajay Massand

Faculty of Management and Commerce
MANAGERIAL ECONOMICS

Elasticity of Demand

Dr. Ajay Massand

Department of Management Studies
MANAGERIAL ECONOMICS
Concept of Elasticity of Demand

• Elasticity of demand refers to how sensitive the demand

for a good/service is to changes in other determinants of
demand.

• Elasticity of demand is calculated by taking the percentage

change in the quantity of a good/service demanded
divided by a percentage change in determinants of
demand.

• Higher elasticity of demand – more responsive to changes

in its determinants of demand.
MANAGERIAL ECONOMICS
Concept of Elasticity of Demand

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 .

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑛𝑡 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑

✓ Price Elasticity of Demand

✓ Cross-price Elasticity of Demand

✓ Income Elasticity of Demand
MANAGERIAL ECONOMICS
Price Elasticity of Demand

Price elasticity of demand for any commodity is the

percentage change in quantity demanded due to one percent
change in its price, other things remaining the same.

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑.

𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

𝑄2 − 𝑄1 ∆𝑄
× 100 𝑄1 100 ∆𝑄 𝑃
𝑄1 𝑒𝑝 = ×
𝑒𝑝 = 𝑒𝑝 = × ∆𝑃 𝑄
𝑃2 − 𝑃1 ∆𝑃 100
× 100 𝑃1
𝑃1
MANAGERIAL ECONOMICS
Price Elasticity of Demand

Find out the price elasticity of demand.

Price of Quantity ∆𝑄 𝑃
𝑒𝑝 = ×
Apples (₹) Demanded ∆𝑃 𝑄
(in kg)
150 (P1) 4 (Q1) 𝑄2 − 𝑄1 𝑃1 −15
𝑒𝑝 = × 𝑒𝑝 =
𝑃2 − 𝑃1 𝑄1 4
160 (P2) 3 (Q2)
3 −4 150 𝑒𝑝 = −3.75
𝑒𝑝 = ×
160 − 150 4
−1 150
𝑒𝑝 = ×
10 4
MANAGERIAL ECONOMICS
Types of Price Elasticity of Demand

Perfectly Elastic Demand (e = α)

1

Perfectly Inelastic Demand (e = 0)

2

Relatively Elastic Demand (1 < e < α)

3

Relatively Inelastic Demand (0 < e < 1)

4

Unitary Elastic Demand (e = 1)

5
MANAGERIAL ECONOMICS
Price Elasticity of Demand for Food Items

Relatively Elastic Demand Relatively Inelastic Demand

e >1 e<1
Cheese e = 1.20 Bread e = 0.09
Meat e = 1.37 Milk e = 0.19
Frozen Peas e = 1.12 Sugar e = 0.24
Potatoes e = 0.21
Vegetables e = 0.27
Chicken e = 0.13
MANAGERIAL ECONOMICS
Cross-Price Elasticity of Demand

Cross price elasticity of demand for any commodity is the

percentage change in quantity demanded due to one percent
change in the price of a related commodity, other things
remaining the same.
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑓𝑜𝑟 𝐺𝑜𝑜𝑑 𝑋.
𝐶𝑟𝑜𝑠𝑠 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑌

𝑄𝑋2 − 𝑄𝑋1 ∆𝑄𝑋

𝑄𝑋1 × 100 100 ∆𝑄𝑋 𝑃𝑌
𝑄𝑋1
𝑒𝑐 = 𝑒𝑐 = × 𝑒𝑐 = ×
𝑃𝑌2 − 𝑃𝑌1 ∆𝑃𝑌 100 ∆𝑃𝑌 𝑄𝑋
× 100
𝑃𝑌1 𝑃𝑌1
MANAGERIAL ECONOMICS
Cross-Price Elasticity of Demand

Find out the cross-price elasticity of demand for tea and bread.

Commodity Initial Change

Price Quantity Price Quantity
(₹ per kg) Demanded (₹ per kg) Demanded
(in kg) (in kg)
Tea 383 1 383 2
Coffee 385 2 415 1
Bread 48 2 48 3
Butter 1450 2 1560 1
MANAGERIAL ECONOMICS
Cross-Price Elasticity of Demand

Tea
QX1 = 1
Now, compute
∆𝑄𝑋 𝑃𝑌
𝑒𝑐 = × QX2 = 2 𝒆𝒄 for Bread
∆𝑃𝑌 𝑄𝑋
PY1 = 385
𝑄𝑋2 − 𝑄𝑋1 𝑃𝑌1
𝑒𝑐 = × PY2 = 415
𝑃𝑌2 − 𝑃𝑌1 𝑄𝑋1
𝑒𝑐 = 12.83
2 −1 385
𝑒𝑐 = ×
415 − 385 1 Relatively Elastic Demand
385
𝑒𝑐 =
30
MANAGERIAL ECONOMICS
Income Elasticity of Demand

Income elasticity of demand for any commodity is the

percentage change in quantity demanded due to change in
the income of the consumer, other things remaining the
same.
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 .
𝐼𝑛𝑐𝑜𝑚𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟

𝑄2 − 𝑄1 ∆𝑄
𝑄1 × 100 100 ∆𝑄 𝑌
𝑄1
𝑒𝑦 = 𝑒𝑦 = × 𝑒𝑦 = ×
𝑌2 − 𝑌1 ∆𝑌 100 ∆𝑌 𝑄
× 100
𝑌1 𝑌1
MANAGERIAL ECONOMICS
Income Elasticity of Demand

Find out the income elasticity of demand from the following data.

Income (₹) Quantity ∆𝑄 𝑌

Demanded 𝑒𝑦 = ×
∆𝑌 𝑄
(Units)
15,000 200 300 − 200 15,000
𝑒𝑦 = ×
20,000 − 15,000 200
20,000 300
1,500,000
𝑒𝑦 = Relatively
1,000,000 Elastic
𝑒𝑦 = 1.5 > 1 Demand
MANAGERIAL ECONOMICS
Problem-1

• When the price of commodity X was ₹10 per unit,

people consumed 3000 units. With a fall in price
to ₹ 9, they consumed 3150 units. State the
formula and measure the price elasticity of
demand for X.
MANAGERIAL ECONOMICS
Problem-2

• A consumer buys 10 units of a good at a price of ₹

6 per unit. Price Elasticity of Demand is (-) 1. At
what price will he buy 12 units? Use the ratio
method of Price Elasticity of Demand to answer
this question.
MANAGERIAL ECONOMICS
Methods of Measuring Elasticity of Demand

Percentage Method/Ratio Method

1

Total Outlay Method/Total Revenue Method

2

Point Method
3

Arc Method
4
MANAGERIAL ECONOMICS
Percentage Method/Ratio Method

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 .

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑛𝑡 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑

∆𝑄 𝑃
✓ 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 (𝑒𝑝 ) = ×
∆𝑃 𝑄

∆𝑄𝑋 𝑃𝑌
✓ 𝐶𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 (𝑒𝑐 ) = ×
∆𝑃𝑌 𝑄𝑋

∆𝑄 𝑌
✓ 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 (𝑒𝑦 ) = ×
∆𝑌 𝑄
MANAGERIAL ECONOMICS
Total Outlay Method

• Total outlay method, or total revenue method, or total

expenditure method was developed by Professor Alfred
Marshall as a measure of elasticity.

• In total outlay method, we measure elasticity of demand

by examining the change in the total expenditure due to a
change in price.

• Total outlay is price multiplied by the quantity of a good

purchased.
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦 = 𝑃𝑟𝑖𝑐𝑒 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
MANAGERIAL ECONOMICS
Total Outlay Method

Cases Price (₹) Quantity Total EP

Demanded Outlay
(Units)
I 6 1 6 10/6 > 1
5 2 10
II 4 3 12 12/12 = 1
3 4 12
III 2 5 10 6/10 < 1
1 6 6
MANAGERIAL ECONOMICS
Point Elasticity Method or Geometric Method

Y 𝑁𝑄 (𝐿𝑜𝑤𝑒𝑟 𝑆𝑒𝑔𝑚𝑒𝑛𝑡)
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑎𝑡 𝑝𝑜𝑖𝑛𝑡 𝑁 =
𝑁𝑃 (𝑈𝑝𝑝𝑒𝑟 𝑆𝑒𝑔𝑚𝑒𝑛𝑡)
P Upper Segment
Price (in ₹)

N Lower Segment

X
O Q
Quantity Demanded (in Units)
MANAGERIAL ECONOMICS
Important Observations in Point Elasticity/Geometric Method

.
P Perfectly Elastic Demand (e = α)

.
Price (in ₹)

Relatively Elastic Demand (1 < e < α)

.
A
Unitary Elastic Demand (e = 1)
N

Middle Point B
. Relatively Inelastic Demand (0 < e < 1)

O Q
.
Perfectly Inelastic Demand (e = 0)
X
Quantity Demanded (in Units)
 MANAGERIAL ECONOMICS
Arc Elasticity of Demand

To calculate the price elasticity over some portion of the

demand curve rather than at a point, the concept of arc
elasticity of demand is used.
Y

∆𝑸 𝑷𝟏 + 𝑷𝟐
𝒆𝒂𝒓𝒄 = ×
Price (in ₹)

A ∆𝑷 𝑸𝟏 + 𝑸𝟐
P1 B
P2

O Q1 Q2 X
Quantity Demanded (in Units)
 MANAGERIAL ECONOMICS
Arc Elasticity of Demand

Y Now, let us assume:

P1 = 120 and P2 = 100 Measure elasticity at point A and B
Q1 = 800 and Q2 = 1000
Ep at point A = - 1.5 ∆𝑸 𝑷𝟏 + 𝑷𝟐
A Ep at point B = - 1 𝒆𝒂𝒓𝒄 = ×
Price (in ₹)

P1 ∆𝑷 𝑸𝟏 + 𝑸𝟐
B
P2 𝟐𝟎𝟎 𝟐𝟐𝟎
𝒆𝒂𝒓𝒄 = ×
−𝟐𝟎 𝟏𝟖𝟎𝟎

X 𝒆𝒂𝒓𝒄 = −𝟏. 𝟐𝟐
O Q1 Q2
Quantity Demanded (in Units)
MANAGERIAL ECONOMICS
Problem-3

• In 2021, Amazon raised the annual subscription

fee for its Prime membership service, which
provides free two-day shipping on many goods
and other benefits, from $99 to $119. Piper
Jaffray, an investment bank, estimated that before
the price increase, Prime had 77 million U.S.
subscribers. The bank speculated that the number
of members would fall to about 62 million. If so,
what is the price elasticity of demand for a Prime
membership?
MANAGERIAL ECONOMICS
Problem-4

• An estimated linear equation for the U.S. corn

demand function is Q = 15.6 - 0.5p, where p is the
price in dollars per bushel and Q is the quantity
demanded in billion bushels per year. Use Excel to
calculate the price elasticity of demand for every
price between $2 and $10 in one-dollar
increments. Round the elasticity to three digits
after the decimal point. Is the demand curve
more elastic or less elastic at higher prices?
MANAGERIAL ECONOMICS
Problem-5

• According to Duffy-Deno (2003), when the price

of broadband access capacity (the amount of
information one can send over an Internet
connection) increases 10%, commercial
customers buy about 3.8% less capacity. What is
the elasticity of demand for broadband access
capacity for these firms? Is demand at the current
price inelastic?
MANAGERIAL ECONOMICS
Problem-6

• Ghose and Han (2014) found that the elasticity of

demand for Google Play apps is -3.7. This
elasticity applies to a small college town where
consumers buy approximately 1,000 apps per
month. If price rises by 5%, what would be the
effect on quantity demanded? Would revenue
rise or fall? What is the percentage change in
revenue ( = price * quantity)?
MANAGERIAL ECONOMICS
Problem-7

• Calculate the price and cross-price elasticities of

demand for coconut oil. The coconut oil demand
function (Buschena and Perloff, 1991) is Q = 1,200
- 9.5p + 16.2pp + 0.2Y, where Q is the quantity of
coconut oil demanded in thousands of metric
tons per year, p is the price of coconut oil in cents
per pound, pp is the price of palm oil in cents per
pound, and Y is the income of consumers. Assume
that p is initially 45¢ per pound, pp is 31¢ per
pound, and Q is 1,275 thousand metric tons per
year.
THANK YOU

Dr. Ajay Massand

Department of Management Studies
[email protected]
MANAGERIAL ECONOMICS
Concept of Supply and Its
Determinants

Faculty of Management and Commerce

MANAGERIAL ECONOMICS

Concept of Supply and Its

Determinants

Department of Management Studies

MANAGERIAL ECONOMICS
Concept of Supply

✓ The supply refers to the quantity of good that producers

are willing to sell at a given price, holding constant any
other factors that might affect the quantity supplied.

✓ The curve that represents the supply is know as supply

curve.
✓ The supply curve is thus a relationship between the
quantity supplied and the price. We can write this
relationship as an equation:
MANAGERIAL ECONOMICS
Supply Curve
MANAGERIAL ECONOMICS
The Law of Supply

• Law of supply states that if other things remain

unchanged, the supply of a commodity expands with a
rise in its price, and contracts with a fall in its price.

• The law of supply can be explained and illustrated with

the help of a supply schedule as well as a supply curve.
MANAGERIAL ECONOMICS
Supply Schedule and Supply Curve
MANAGERIAL ECONOMICS
Assumptions Underlying in the Law of Supply

• Cost of production is unchanged.

• No change in technique of production.
• Fixed scale of production.
• Government Policies are unchanged.
• No change in transport costs.
• No speculation.
• The prices of other goods are held constant.
MANAGERIAL ECONOMICS
Determinants of Supply

Price of that commodity

Determinants of Supply

The cost of factors of production

The state of technology

Taxes: fees levied on firms

Subsidy: direct or indirect payment to firms

Factors outside the economic sphere

Government policy
MANAGERIAL ECONOMICS
Supply Function
MANAGERIAL ECONOMICS
Change in Supply and Change in the Quantity Supplied
MANAGERIAL ECONOMICS
Exercise: Linear Supply Function

A supplier will only start to supply T-shirts when a price

greater than $ 5 per unit is available. He or she will then
increase the output by 2 units (2 T-shirts) for every $ 0.50
per unit increase in price.

a) Plot the supply function in the form Q = f(P).

b) Write down the equation of the supply function.
c) Find the value of Q when P=15 from the graph. Confirm
your answer from the equation.
d) Write the equation of the supply function in the form,
P=f(Q), i.e., write P in terms of Q. Plot the graph of P in
terms of Q.
MANAGERIAL ECONOMICS
Causes for Change in Supply

• Cost of production.
• Supply also depends on natural factors.
• Changes in technique of production.
• Policy of Government also influences supply.
• Development of transport.
• Business Combines: like trusts, cartel, or a syndicate.
MANAGERIAL ECONOMICS

Elasticity of Supply and Equilibrium

Department of Management Studies

MANAGERIAL ECONOMICS
Elasticity of Supply

• Elasticity of supply are defined similarly as the elasticity of

demand.
• The price elasticity of supply is the percentage change in
the quantity supplied resulting from a one percent
increase/decrease in price. The price elasticity is usually
positive because a higher price gives producers an
incentive to increase output.
MANAGERIAL ECONOMICS
Price Elasticity of Supply

The coefficient of price elasticity of supply is given by the

formula:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

𝜀𝑠 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
% ∆𝑄𝑠
𝜀𝑠 =
%∆𝑃
∆𝑄 𝑃
𝜀𝑠 = .
∆𝑃 𝑄
MANAGERIAL ECONOMICS
Exercise: Price Elasticity of Supply

Given the supply function, P = 20 + 0.5Q,

a) Calculate the price elasticity of supply when price

increases from Rs. 40 to Rs. 60. Interpret your result.

b) Calculate the percentage change in quantity supplied in

response to a price increase of 10 per cent when P= Rs.
40.
MANAGERIAL ECONOMICS
Market Equilibrium

✓ The operation of the market

depends on the interaction
between buyers and sellers.

✓ An equilibrium is the condition

that exists when quantity
supplied and quantity
demanded are equal.

✓ At equilibrium, there is no
tendency for the market price
to change.
MANAGERIAL ECONOMICS
Market Disequilibrium: Excess Supply

✓ Excess supply, or surplus, is the

condition that exists when
quantity supplied exceeds
quantity demanded at the
current price.

✓ When quantity supplied

exceeds quantity demanded,
price tends to fall until
equilibrium is restored.
MANAGERIAL ECONOMICS
Market Disequilibrium: Excess Demand

✓ Excess demand, or shortage, is

the condition that exists when
quantity demanded exceeds
quantity supplied at the current
price.

✓ When quantity demanded

exceeds quantity supplied price
tends to rise until equilibrium is
restored.
MANAGERIAL ECONOMICS
Market Equilibrium: Supply-Demand Model

WHEN CAN WE USE THE SUPPLY-DEMAND MODEL?

MANAGERIAL ECONOMICS
New Equilibrium Following Shifts in Supply
MANAGERIAL ECONOMICS
New Equilibrium Following Shifts in Demand
MANAGERIAL ECONOMICS
New Equilibrium Following Shifts in Supply and Demand
MANAGERIAL ECONOMICS
The Effect of 9/11 on the Supply and Demand for New York
City Office Space
MANAGERIAL ECONOMICS
Problem-8

The demand function for a truckload of firewood for college students in a

small town is Qc = 400 - p. It is sometimes convenient to rewrite a
demand function with price on the left side. We refer to such a
relationship as the inverse demand function. Therefore, the inverse
demand function for college students is p = 400 - Qc. The demand
function for other town residents is Qr = 400 - 2p.

a) What is the inverse demand function for other town residents?

b) At a price of $300, will college students buy any firewood? What

about other town residents? At what price is the quantity demanded
by other town residents zero?
MANAGERIAL ECONOMICS
Problem-9

1) The demand function is Q = 5,000 - 10p, and the supply function is Q =

200 + 6p. Determine the equilibrium price and quantity.

2) Use supply-and-demand diagrams to illustrate the qualitative effect of

the following possible shocks on the world coffee market.

a) A new study shows significant health benefits from drinking coffee.

b) An important new use for cocoa is discovered.
c) A recession causes a decline in per capita income.
d) A new coffee plant that allows for much greater output or yield
without increasing cost is introduced into the market.
MANAGERIAL ECONOMICS
Activity-3: Excel Exercise

• Download the price and quantity data for any stock and plot the
equilibrium diagram using Excel. Find the Equilibrium price for the
stock.
THANK YOU

Dr. Ajay Massand

Department of Management Studies
[email protected]
MANAGERIAL ECONOMICS
Market Equilibrium

Faculty of Management and Commerce

MANAGERIAL ECONOMICS

Market Equilibrium

Dr. Ajay Massand

Department of Management Studies
MANAGERIAL ECONOMICS
Problem Solving-10
MANAGERIAL ECONOMICS
Problem Solving-11
MANAGERIAL ECONOMICS
Problem Solving-12
MANAGERIAL ECONOMICS
Problem Solving-13
MANAGERIAL ECONOMICS
Problem Solving-14
THANK YOU

Dr. Ajay Massand

Department of Management Studies
[email protected]