Managerial Economics

PRICE ELASTICITY OF DEMAND

The Degree of Co. relation between demand and price is called elasticity.

Types of elasticity of demand.

  1. Price Elasticity.

  2. Income Elasticity.

  3. Substitution Elasticity.

  4. Cross Elasticity.

1. Price Elasticity.

Price Elasticity Measures responsive of potential buyers to change in price it is the ratio of percentage change in quantity demanded in response to percentage change in priced. Let suppose that the price of particulars brand of a T.V set falls from 15,000 to 14,000 each or 20 % fall. As results of this fall in price further suppose that the demand for the T.V sets has gone up from 14,000 to 16,000 i.e. 50% Elasticity of demand will be 50/20 or 25%.

2. Income Elasticity.

Income elasticity is measure of response increase of potential buyers to change in income. It shows how the quantity demanded will change when the income of a purchaser change the price of the commodity remaining the same.

3. Substitution Elasticity.

If good that have ready substitutes tend to have more elastic demand than those that have substitutes.

4. Cross Elasticity.

When a change in the price of one good causes a change in the demand for another. Cross elasticity of demand for X and Y.

Influence on Elasticity of Demand.

  1. Own Price

  2. Average income.

  3. Population.

  4. Consumer’s habits / Taste.

  5. Possibility of substitution.

  6. Price of related goods.

Calculation Elasticity.

Price elasticity of demand=% Change in quantity demand

% Change in price.

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Demand

It means the quantity of commodities that will be bought at a particular price and not merely desire for it.

Law of Demand:-

A rise in the price of a commodity or service is followed by a reduction and a fall in price is followed by an increase in demand if commodities of demand remain constant.

Demand Schedule:-

There exit at any one time a definite relationship between the market price of a good and quantity demanded of that a good. This relationship between price and price and quantity bought is called demand schedule.

Demand schedule

Price

Quantity Demand.

5

9

4

10

3

12

2

15

1

20

Factors Affecting Demand Curve

  1. Average Income. (As income rise , people increase )

  2. Population (A growth in population increases)

  3. Price Of Related Goods.(Lower Gasoline price raise the demand)

  4. Tastes (Having a new commodities becomes a status symbol)

  5. Special Influences (Special Influences include availability of alternative forms of transportation safety)

Limitation of the Law

  1. Change in taste or Fashion.

  2. Change in income.

  3. Change in Price.

  4. Discovery of substituted.

  5. Anticipatory Change in price.

  6. Commodities used comfort distinction.

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Define and explain the Economics with the Views of different economists?

“A social science concerned with proper uses and allocation of resources for the achievement and maintenance of growth with stability”

Or

“It is an art of analyzing, recording, interpretation and communicating the results of economic transaction.”

Or

“Economic is a social science concerned chiefly with way the societies chooses to employ its limited recourses, which have alternative uses to produce goods and services for present ant future consumption”

Or

“Economics is the study of how solidifies uses scare recourses to produce valuable commodities and distribute them among different groups.”

Views of Economists

According to Adam Smith: “Economic is science of wealth.”

According to J.S.Smith: He supports the definition of Adam Smith.” Economic is the practical science of production and distribution of wealth.”

According to J.E Cairnes: “Economics deal with phenomena of wealth.”

Adven Canon: “The aim of political economy is explanations of general causes on which the material welfare of human being depend.”

According to Marshall: “Economics is study of man’s action in ordinary business of life, it Enquirer how he gets his income and how he spent it. Thus it is on the on the other and more important side, a part of study of man.”

In this definition the expression “man’s’ action in ordinary business of life refers to the facts that economic studies the activities of real, social and normal human beings.

While the expression” how he get income and how he spend it indicates the study of wealth. Marshall doesn’t indicate the nature of science. He maintained that economic is positive science.

According to Robbins: “Economics is science which studies human behavior as a relationship b/w ends and scare means whish have alternative uses.”

Explanation

The economists to explain the meaning of economics, which will be probably, proceed as follows,

Economics studies only those activities, which are directly related to wealth:

Men have wants. Some wants are elemental and very pressing like the want of food and water; other are less urgent, e.g., the want for a car or a beautiful bungalow. All these of different kinds as they are, have to be satisfied. Faced by this problem, men are driven to work in factories and fields, schools and offices, so that they may earn money by which they may purchase the article of their desire. All human activities related to wealth (mean to satisfy human wants directly) constitute the subject –matter of economics. That’s why they are called “ economic activities”.

It studies only human activities: Economics is concerned with the activities of human beings only, and not with those of other creatures. Other creatures either make efforts themselves with a view to satisfy their wants but they are much below human beings in mental power in intelligence and mental ability. Therefore their activities are not studied in economics. It studies the activities of only those Human beings who are social, real and normal:

Economics is positive, Normative and Applied science: It should be remembered that Economics is science and science can be divided in three groups.

Positive science: This establishes relation b/w causes and effects.

Normative science: this setup idea.

Applied science: This prescribed rules for guide ness.

Economics is science of all these three types.

It is positive science because it shows the connection b/w causes and effects of economic phenomena. It is normative science because it sets up ideas concerning wealth. It is applied science because it prescribed rules for achievement of material prosperity.

Therefore the correct definition of economics is that in which above four points must be mentioned.

It is positive, normative and applied science which studies those activities of social, real and normal human beings, that are related to wealth“.


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Major Economic Problems

Meaning of economic problem: In view of scarcity means at our disposal and multiplicity of ends we seek to achieve, the economic problem lies in making the best possible use of our recourses so as to get maximum satisfaction in the case of the customer and maximum output or profit for the producer. Hence economic problem consist in making decision regarding the ends to be perused and the goods to be produced and the means to be used for achievement of certain ends.

  • Fundamental Problem facing an economy

Following are the fundamental problem, which an economy has to tackle;

  • What to produce: The first major decision relates to the quantity and the range of goods to be produced. Since recourses are limited, we must choose b/w different alternative collection of goods and services that may be produced. It also implies the allocation of recourses b/w the different types of goods, e.g. customer goods and capital goods.

  • How to produce: When you decide the quantity and types of goods to be produced. We must next decide the techniques of production to be used e.g. labour intensive or capital intensive.

  • For whom to produce: This means how the national product is distributed I- who should get how much. This is the problem of sharing of national product.

  • Are the recourses economically used: This is the problem of economic efficiency or welfare maximization. There is to be no waste or misuse of recourses since they are limited.

  • Problem of full employment: Fullest possible use must be made of the available recourses. In other words, an economy must endeavor to achieve full employment not only of labour but of all its recourses.

  • Problem of growth: Another problem for an economy is to make sure that it keeps expanding or developing so that it maintain conditions of stability. It is not to be static its productive capacity must continue to increase. It is an under developed economy, it must accelerate its process to growth.

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Micro and Macro Economics

The study of economics is divided into two parts.

Micro Economics

Macro Economics

Micro economics: The word micro means a millionth part. Microeconomics is the study of the small part or component of the whole economy that we are analyzing. For example we may be studying an individual firm or in any particular industry. In Microeconomics we study of the price of the particular product or particular factor of the production.

The Micro Economics theory studies the behavior of individual decision-making units such as consumers, recourse owners and business firms.


Importance of Micro & Macro Economics

It has both theoretical and practical importance, from the theoretical point of view, it explains the functioning of a free enterprise economy. It tells us how million of consumers and producers in an economy take decision about the allocation of productive recourses and million of goods and services. As for the practical importance Micro economics in the formulation of economics policies calculate to promote efficiency in production and welfare of the masses.

The role of Micro economics is both positive and normative; it not only tells how economy operates but also how it should operate in to improve general welfare.


Macro Economics

Macro economics is the study of behavior of the economy as a whole. It examines the overall level of nations out put, employment, price and foreign trade.

Macroeconomics is concerned with aggregate and average of entire economy.

e.g. In Macro economics we study about forest not about tree.

In other words in macro economics study how these aggregates and averages of economy as whole are determined and what causes fluctuation in them. For making of useful economic policies for the nation macroeconomics is necessary.

We can summarize the objects of macroeconomics as follows.

1. A high and rising level of real output.

2. High employment and low unemployment, providing good jobs at high pay to those

who want to work.

3. A stable or gently rising price level, with process and wages determined by free

Markets.

4. Foreign economic relations marked by stable foreign exchange rate and exports more

or less balancing imports.

Macro economics involves choice among alternative central objectives.

A nation can’t high consumption and rapid growth. To lower a high inflation rate requires either a period of high unemployment and low output, or interfering with free markets through wage-price policies. These difficult choices are among those that must be faced by macroeconomic policy makes in any nation.

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Macro Economics

  • Macro economics is the study and analysis of economic system as a whole

  • Macro economics is called income theory. It explains the level of total production and why the level rises and fall.

  • In Macro we study how the aggregates and the averages of the economy as whole is determined and what causes fluctuation in them.

  • In macro we study the general price level in country.

  • In macro we study the aggregate demand of the entire country.

  • Here we study the national income of the country.

  • It shows how an economy grows. It gives bird eye view of economic world.

  • Individual ignored altogether. It is individual welfare, which is the main aim of economics. Increasing national saving at the expense of individual welfare is not a wise policy.

  • It over looks individual differences for instance, the general price level may be stable but the prices of food grains may have gone spelling ruin to the poor.

  • The economy as a whole is more important for formulation of useful economic policies for the nation.

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Micro Economics

  • Micro economics is the study of small part of component of the whole economy.

  • Micro economics is called the price theory. It’s explained its composition, or allocation of total production why more of something is produced than of others.

  • In Micro study about individual consumer behavior or individuals firm or what happens in any particular industry.

  • If it be an analysis of price, we study about the price of a particular producer or of a particular factor of production.

  • If it is demand we analysis demand of an individual or that of an industry.

  • Here we study the income of an individual.

  • It is both positive and normative science. It not only tells us how the economy operates but also how it should be operated to promote general welfare.

  • It can not give an idea of the functioning of the economy as a whole example. An individual industry may be flourishing whereas, the economy as a whole may be languishing.

  • It assumes full employment, which is rare phenomenon, at any state in the capitalist world. It is therefore, an unrealistic assumption.

  • Study of individual aspects of economy will lead us now here.

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Scale of Production

The scale of production has important bearing on the cost of the production. It is manufactures common experience that larger the scale of production, the lower generally the average cost of production. That is why the entrepreneur id tempted to average the scale of production so that he may benefit from the resulting economics of scale. These economics are broadly speaking of two types:

  1. Internal economics
  2. External economics

Internal economics:

Internal economics are those economics in production, those reductions in production cost, which is accrue to the firm itself when it expands its output or enlarge it scale of production. The internal economics arise within a firm as a result of its own expansion independent of the size and expansion of the industry. The internal economics are simply due to the increase in the scale of the production. They arise from the use of methods which small firms don’t find it worthwhile to empty internal economics may be of the following types: large machine and he is a mechanical advantage in a use of large machine. Technical economics pertain not to the size of the firm but to a size of factory or establishment.

  • Technical economics: They arise from the fact that it is easy to make the a large machine, and there is a mechanical advantage in a the use of large machines. technical economics pertain not to size of the firm but to a size of a factory or establishment `
  • Managerial economics: Those economics arise from the certain of special departments. They also result from the delegation of routine and details matter to subordinates. The managerial expenses can be reduced by increasing the size of an establishment under one management.
  • Commercial economics: They arise from the purchase of materials and scale of goods. Large businesses have bargaining advantages and are accorded a preferential treatment by the firms they deal with.
  • Financial economics: These economics arise from the fact that a big firm has a better credit and can borrow on more favorable terms. Its share enjoys a wider market, which encourages a prospective investor.
  • Risk- bearing economics: A big firm can spread risks and can often eliminate them. This it does by diversifying outputs.

External Economics:

External economics are those economics which accrue to each number firm as a result of the expansion of the industry as a whole.

Various types of the external economics are given below:

  • Economic of concentration: These economic are relate to advantages arising from the availability of skilled workers, the provision o better transport an credit facilities, stimulation of improvement , benefits from subsidiaries and so on.
  • Economics of information: These economics refer to the benefits which all firms engaged in an industry derived from the publication of trade and technical journals and from central research institution.
  • Economics of disintegration: When an industry grows, it becomes possible to split up some of the processes which are taken over by specialist firms. For example, a number of con mills located in a particular locality may have the benefit of a separate calendaring plant.

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Disadvantage of large-scale production

Large –scale production is not without is disadvantages. Some of these disadvantages are:

Over-worked management: A large-scale producer cannot pay off that you can think of full attention to every detail. costs often raise on account of the employees or waste of material by them. This is due to the lack of supervision. Owing to laxity of control costs of production go up. The management is overworked

Individual tastes ignored: Large-scale production is a mass production or standardized production. Goods of uniform quality are turned out irrespective of the preferences of individual customers. Individual tastes are not therefore, satisfied. This results in a loss of custom.

Personal element: Paid employees generally manage a large-scale business. The owner is usually absent. The sympathy and personal touch, which ought to exit between the master and the men, are missing frequent misunderstandings lead to strikes and lack outs. This is positively harmful to the business.

Possibility of depression: large-scale production may result overhead production. Production may exceed demand and cause depression unemployment. It is not always easy or profitable to dispose of a large output.

Dependence on foreign market: A large-scale producer has generally to depend on foreign markets. The foreign markets may be cut of by war or some other political upheaval this makes the business risky.

Cut throat competition: Large-scale producers must fight for the markets. These are wasteful competition, which does not to society. Many promising businesses are ruined by senses competition. There is also competition and biddings for resorts and inputs.

International complications and war: When the large-scale producer operates on an international scale, their interest clash either on the score of markets or of materials. These complications sometimes lead to armed conflicts. Many a modem war a rose on account of scramble for materials & markets.

Lack of adaptability: A large scale producing units find its very difficult to switch on from one business to another, in a depression small firms are able to move away from declining trades to flourishing ones easily. In this way they are able to avoid losses. This adaptability is lacking in a big business.

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Advantage of Large scale production

Efficient use of capital equipment: There is large scope for use of machinery, which results in lower costs. A Large producer can install an up-to- date and expensive machinery. He can also have own repairing unit. Specialized in machinery can be employed for each job. The result is that production is very economical. Small producer with a small markets cant keep the machinery continuous working. Keeping it idle is uneconomical.. A large Producer can work it continuously and reap resulting economies.

Using of specialized labour: Specialized labour produce a large output and of better quality. It is only in a large business organization that every person can be put on the job that he can best perform.

Better utilization of special in management: The use of capable manager’s time in an enlarged scale production. His assistance and specialized may be used in a large-scale production where his ability is more fruitful.

Economies of buying and selling: While purchasing raw material and other accessories , a big business can secure specially favorable term an account of its large custom. He can attract customer by offering a greater variety and by ensuring prompt execution of the orders, placed with it when he selling a product.

Economy in rent: A large-scale producer makes a saving in rent too. If the same factory made to produce a large Quantity of goods, the same amount of rent is divided over a large output. This means a smaller addition to the cost per unit in the form of rent.

Experiment and research: A large concern can afford to spend liberally on research and experiments. Successfully research may lead to the discovery of cheaper process.

Advertisement and salesman ship: A big concern can afford to spent large amount of money on advertisement and salesmanship. Amount of money spent on advertisement per unit comes to a low figure when production is on large scale. Salesman can make a careful study of individual markets and thus acquire a hold on new market or strengthen it on old ones.

Utilization of by-products: A big producer will not have to throw away any of its by products or waste products. It will be able to make an economical use of them.

Meeting adversity: A big business can show better resistance in times of adversity.

It has much better recourses. Losses can easily bear.

Cheap credit: A large business can secure credit facilities at cheap rate. Its credit in the money market is high and banks are only two willing to give advance. Low cost of credit reduces cost of production.

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