1. Define Managerial Economics. Explain its nature ?

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

(b) 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.

(c) Normative statements: A normative statement usually includes or implies the words ‘ought’ or ‘should’.
They reflect people’s 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.

(d) 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.

(e) 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

(f) 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 decide which is the better
alternative to maximize the profits for the firm.

(g) Interdisciplinary: 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.

(h) 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

.
2. Explain scope of Managerial Economics ?

The scope of managerial economics covers two areas of decision making a. Operational or Internal issues b.
Environmental or External issues a. Operational issues: Operational issues refer to those, which wise within
the business organization and they are under the control of the management. Those are:
1. Theory of demand and Demand Forecasting
2. Pricing and Competitive strategy
3. Production cost analysis
4. Resource allocation
5. Profit analysis
6. Capital or Investment analysis
7. 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 cost. Demand analysis provides: 1.
The basis for analyzing market influences on the firms; products and thus helps in the adaptation to those
influences. 2. 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 firm’s pricing,
advertising and marketing strategies. Product line pricing and price forecasting occupy an important place
here.

3. Production and cost analysis: 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 themanagers.

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 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.
3.WHAT IS DEMAND AND EXPLAIN THE CLASSIFICATION IOF DEMAND

EVERY WANT SUPPORTED BY THE WILLINGNESS AND ABILITY TO BUY CONTITUETES DEMAND FOPR A
PARTICULAR PRODUCT OR SERVICE

A PRODUCT OR SERVICE IS SAIOD TO HAVE DEMAND WHEN THREE CONDITIONS ARE SATISFY
1.DESIRE
2. WILLINGNESS
3.ABILITY TO PAY
CLASSIFICATIONS:
1. Consumer goods and producer goods
2. Autonomous demand and derived damand
3. Durable and perishable demand
4. Firm demand and industry
5. Short run demand and long run
6. New demand and replacement demand
7. Total market and segment market demand

B)demand determinance:

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. 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 affectdemand.

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:

(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 commodity’s demand in the same direction in which price
changes. The rise in price of coffee shall raise the demand fortea;

(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 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. Wealth: 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
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 muchdemanded.

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

4.WHAT IS LAW OF DEMAND ?EXPLAIN ITS ASSUMPTIONS?

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.

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

B)EXCEPTIONS OF DEMAND?
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 Giffen’s paradox.

2. Veblen or Demonstration effect: ‘Veblen’ 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. Ignorance: 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.

5)ELASTICITY OF DEMAND?EXPLAIN ITS CLASSIFICATION

ELASTICITY OF DEMAND Elasticity of demand explains the relationship between a change in price and
consequent change in amount demanded. “Marshall” introduced the concept of elasticity of demand.
Elasticity of demand shows the extent of change in quantity demanded to a change in price. In the words of
“Marshall”, “The elasticity of demand in a market is great or small according as the amount demanded
increases much or little for a given fall in the price and diminishes much or little for a given rise in Price”
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 and measurements 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
4. Advertising elasticity of demand

1. PRICE 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 increase 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
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”

4.ADVERTISING ELASTICITY OF DEMAND: Advertising elasticity of demand shows the change in quantity
demanded as a result of a change in cost of Advertisement. Advertising elasticity of demand may be slated in
the form of a formula. Proportionate change in the quantity demand of commodity Advertising Elasticity = -
Proportionate change in the advertisement cost

6)SIGNIFICANCE OF ELASTICITY OF DEMAND

IMPORTANCE OF ELASTICITY OF DEMAND: The concept of elasticity of demand is of much practical importance.
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

7)STATE AND EXPLAIN VARIOUS METHODS OF DEMAND 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.

. 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. Factors Influencing Demand Forecasting: Demand
forecasting is a proactive process that helps in determining what products are needed where, when, and in
what quantities. There are a number of factors that affect demand forecasting.