Unit-1

Introduction to managerial economics

Managerial economics is a part of
economics and it is concerned with decision –
making.
Those economic principles, concepts,
methods, tools and techniques that can be applied
practically to solve the problems of business
management is known as managerial economics.

1) Nature (features) of Managerial

Economics:-
 Close to micro economics
 Study of macro economics
 Managerial economics is science as well art
 Applied in nature
 Evaluate each alternative
 Interdisciplinary
 Assumptions and limitations
2) Scope (areas) of Managerial
Economics:-
 Demand decisions
 Input- output decisions
 Price – out put decisions
 Profit –related decisions
 Investment decisions
 Economic forecasting and forward planning
3) Relationship between managerial
Economics and other Subjects
(disciplines):-

 Economics and managerial economics

 Statistics and managerial economics
 Mathematics and managerial economics
 Accounting managerial economics
 Operation research and managerial economics
 Psychology and managerial economics

Demand analysis
Demand:-demand is any goods or commodity
purchase quantity it is called as demand.
1)Law of demand: - according to law of
demand a negative relationship between the
prices of a product its demand. The law may
be stated as follows when the price falls
(decrease) demand extends (increase).price
rises demand falls (decrease).other things,
remaining constant.
2) Law of Demand- table

Price in Quantity
Rs. (demand)
10 1000 3) Diagram – law of
8 2000 demand.
6 3000
4 4000
2 5000 4) Assumptions law
of demand:-
 No change in consumer income.
 No change in consumer’s preference.
 No change in consumer tastes and fashion
 No change in the price of related product.
 No change in the population.
 No change in govt. policy.
 No change in weather condition.
5) Factors influencing the demand for a
product (or) determinants of demand:-
 Price of the product
 Income of the consumer
 Tastes, habits and preference of the
consumers
 Relative price of substitute goods and
complement goods.
 Consumer expectation
 Population
 Climate and weather
 Advertisement effect.

6) Exceptions or limitations the law of

demand:-
 Inferior goods (or) Giffen goods
 Prestige goods (or) Veblen goods
 Consumer expectation
 Consumer psychological bias
 Necessaries
 Sale during off season
 Uncertain future.

7) Elasticity of demand
Elasticity of demand:-elasticity of demand is
the measure of the degree of change in the
amount demand of the commodity in response to
a given change in price of the commodity (goods)
or price of some related goods or changes in
consumer’s income.

Measurements of elasticity:-
 Perfectly elastic demand
 Perfectly inelastic demand
 Relatively elastic demand
 Relatively inelastic demand
 Unity elastic demand

6)Types of demand
elasticity :-
 Price elasticity of demand
EP=Proportionate change in quantity
demand/proportionate change in price

 Income elasticity of demand

EI=proportionate change in quantity
demand/proportionate change in
income
 Cross elasticity of demand
EC=Proportionate change in quantity
demand product A/Proportionate change
in price of product B
 Advertising elasticity of demand.
EA=Proportionate change in quantity
demand/proportionate change in
advertisement cost

7)Significance of elasticity
demand:-
 Useful to businessmen
 Useful to the government and
finance minister
 Useful to international trade
 Useful for planning
 Usefulness to consumer
 Useful to trade unions
8) Demand fore casting:-
Demand fore casting:-demand fore casting
means expectation about the future course
of the market demand for a product.
Demand forecasting is essentially a
reasonable judgment of future
probabilities of the future demand

Types of demand forecasting:-

 Active and passive forecasting
 Short – run and long-run forecasting
 Company forecasting and industry
forecasting
 Micro level forecasting and macro
level forecasting

9) Factors affecting demand forecast

 Nature of goods
 Level of competition
 Price
 Level of technology
 Economic out look

10) Importance of demand forecasting:-

 Production planning and product scheduling
 Inventory planning
 Capital planning
 Marketing strategy
 Manpower planning
 Pricing strategies
11) Methods of demand forecasting:-
1) Survey method
2) Market studies and experiments method
3) Statistical methods.
1) Survey method:-
 Direct interview method
 Executives judgment method
 Expert opinion survey method
2) Market studies and experiments method
3) Statistical methods:-
 Time series analysis
 Economic barometers
 Regression method.

Unit-2
Theories of production and
cost analysis
1)Production:- production is a process by which
the inputs (factors) are converted into
outputs(goods).
It is the process of transforming factors such as
land, labour and capital into goods and services.
Production means creation of goods and
services for the human consumption.

Factors of production:-
 Land
 Labour
 Capital
 Entrepreneur.
2)Production function:-production
function is that function which defines the
maximum amount of output the can be produced
with a given set of inputs. Production function is
expressed mathematically.
Q= f(Ld,Lb,K,M,T)
Where Q=out put
F=functional relation
Ld=Land
Lb=Labour
K=capital
M=Management
T=Technology
 3)Types of production
functions.
1. short –run production function
2. long-run production function.
Short-run production function
Production function with one variable input (or)
Law of variable proportion(or) law of returns.

Units Units Total Marginal Average stages

of of product product product
land labour quantity quantity quantity
(acrs)
1 1 4 4 4
1.stage
1 2 10 6 5
Increasing
1 3 18 8 6
returns
1 4 24 6 6 2.stage
1 5 28 4 5.6 Decreasing(or)
1 6 30 2 5 Diminishing
1 7 30 0 4.2 returns

3.stage
1 8 28 -2 3.5
Negative
1 9 25 -3 2.8
returns

Stages - law of returns:-

 Increasing returns- 1 stage
 Diminishing or decreasing returns –
2 stage
 Negative returns – 3 stage.

Note:-
 Total production(tp):-refers to the
total output product by all factors
inputs.
 Average production(ap) :-avarage
production refer to the total
production by number of units of
variable input.
 Marginal production(mp):-marginal
production refer to the rate of change
in total production due to change in
variable input.
Assumption the law of return:-
 Constant technology
 Operation in short –run only
 Homogeneous factors
4)internal and external
economies of scale:-
1) Internal economies
2) External economies.
1) Internal economies:-internal
economies are those benefits or
advantages enjoyed by an individual
firm if it increases its size and the
output
 Technical economies
 Managerial economies
 Labour economies
 Marketing economies
 Financial economies
 Risk bearing economies
 Economies of welfare.
2)External economies:-external
economies are those benefits which are
shared in by a number of firms or industries.
when the scale of production in an industry
or groups of industries increases. Hence
external economies benefit all firms within
the industry as the size of the industry
expands.
 Economies of concentration
 Economies of information
 Economies of disintegration.

5) Cost concepts and cost behavior

Cost definition:- cost means the expense incurred on
producing goods and services. Product makes use of
different factors or inputs such as land, labour, capital,
raw material ,power etc. the expenditure incurred on
the inputs (factors) during the process of production is
called cost. Cost of production includes rent, wage,
interest and other input factors.
Classification of costs:-
1) Time base costs
2) Activities or volume base costs
3) Functional base costs
4) Controllability base costs
5) Decision making costs

1)Time base costs:-

Historical cost
Predetermined cost

2) Activities or volume base costs:-

 Fixed cost
 Variable cost
 Semi – variable cost
3) Functional base costs:-
 Manufacturing or production cost
 Administration or office cost
 Selling and distribution cost
 Research and development cost.

4) Controllability base costs:-

 Controllable cost
 UN controllable cost.
5) Decision making costs:-
 Opportunity cost
 Sunk cost
 Joint cost
 Explicitly cost
 Implicitly cost.
 6)Break even analysis
Break even point:-the break – even point
may be defined as that point of sales volume
where total revenue is equal to total cost.ie.
point of no profit or no loss. In this point
contribution is equal to the fixed cost .if sales are
higher than this point it means the business is
earn the profits. on the other hand if sales are
below this point means it is in losses.
Assumption of break – even analysis
Cost can be segregated into fixed cost and
variable cost
Total fixed cost remains the same
Variable cost per unit remains constant
The selling price does not change.
There is one product
There is a constant demand for the product.
Uses of break-even analysis:-
 Information provided by the break even chart
to be understands by the management more
easily.
 It helps the fix the sales volume
 It helps the fore casting of cost and profit.
 Profit abilities of various products can be
studied
 Helps determination of cost and revenue at
various levels of output.

Limitations of break – even

analysis:-
 It is based on short run cost
 All the costs cannot be classified as fixed and
variable cost
 There are problems in application in a
multiproduct firm.
IMPORTANCE FORMULAS
1)Contribution:-the difference between price
and variable cost is known as contribution. As
following formula use for calculation of
contribution

Contribution =selling price - variable cost

2)P/V Ratio (profit volume ratio):-is ratio of

contribution to sales. As following formula use for
calculation of P/V Ratio.

Contribution
p/v ratio =---------------------x100
sales
or
Sales- variable cost
p/v ratio =----------------------------x100
sales
or
 Change in profit
p/v ratio =-------------------------x100
Change in sales

3) Break even point:- the break – even point

may be defined as that point of sales volume
where total revenue is equal to total cost. As
following formula use for calculation of break -
even point.

Fixed cost
Break-even point (units)= -----------------------
Contribution unit
or
Fixed cost
Break-even point (rupees)= ------------------------
p/v ratio
or
Fixed cost
Break-even point (Rupees ) = ----------------------- x selling price
Contribution unit
 4)Margin of safety:-margin of safety is difference
between actual sales and break-even point sales. As
following formula use for calculation of margin of
safety.
Margin of safety = sales – break-even point sales.
Or
Profit
Margin of safety = -----------------------
P/v ratio

5) Required sales:-required sales to expected

profit .formula as given below.

Fixedcost+.Expectedprofit.
Required sales = ----------------------------------------
P/v ratio
6) Fixed cost:-formula for calculation of fixed cost.
Fixed cost= sales x p/v ratio - profit
7) Profit:-formula for calculation of profit

Profit= sales x p/v ratio – fixed cost

Problems
1) The following information is extracted from the
Recodes of ABC Ltd.
Fixed cost Rs 50000
Selling price /unit Rs 10
Variable cost/unit Rs 6
You are required to determine.
1).p/v ratio 2) break-even point in terms value
(rupees) and volume (units)
3) Margin of safety when actual sales is 15000 units.

(December 2016)

Problem 2. A Company makes a single

product with a sales price of Rs10 and a variable cost
of Rs6 per unit. Fixed costs are Rs 60 000 calculate.
1. Profit – volume ratio.
2. Number of units to break –even
3. Break – even rupees
4. Sales to get a profit of Rs 10 000

Problem3.if selling price per Unit Rs.12, variable cost

per Unit Rs.8, fixed cost Rs.4 00 00 find out.
1. Break even sales units and value.
2. p/v ratio.
3. Profit when sales are Rs. 3 00 000
4. Margin of safety when sales are Rs.3 50 000
Problem4.from the following figures you are
required to calculate.
1.p/v ratio
2.break – even sales value
3.margin of safety and
4.Profit.
Sales Rs.4 000, variable cost Rs.2 000, fixed cost
Rs.1600.
Problem 5.a firm has fixed cost of Rs.50 000,selling
price is Rs.100 and variable cost is Rs.30.determine
the 1).p/v ratio 2).break – even point in volume and
sales.( june-2016)

Problem 6.from the following particulars, calculate.

1) p/v ratio.
2) Break – even point in terms of sales value and in
units.
3) Number of sales that must be sold to earn a profit
of Rs.90 000.
Fixed factory overheads cost Rs.60 000,fixed selling
overheads cost Rs 12 000,selling price per unit Rs.24
variable manufacturing cost per unit Rs 12,variable
selling cost per unit Rs.3 (December 2017)
Problem 7.A company makes a single product with a
sales price of Rs 20 and a variable cost of Rs.12 per
unit, fixed costs are Rs.1 20 000.calculate.
1) Number of units to break even
2) Sales at breakeven point
3) Contribution to sales ratio
4) What number of units will need to be sold to
achieve a profit of Rs.20 000
5) What level of sales will achieve a profit of Rs.60
000.
6) Given a decrease in variable cost by 5% per unit,
and increase in the fixed costs by Rs.20 000 per
annum, what will be the new BEP in units?
(December 2014)
Problem 8.with the following information calculates.
1) P/V Ratio 2) fixed cost 3) BEP and 4) profit on
estimated sales of Rs.1 25 000.
year sales profit
2015 1 00 000 15 000
2016 1 20 000 23 000

Problem 9.the following information is given.

Year Sales profit
2016 160000 20000
2017 180000 25000
Calculate.1) p/v ratio 2) fixed cost 3) BEP sales.
4) Sales required to earning a profit of Rs.50 000.
5) Profit when sales are Rs 2 00 000.