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Notes for Managerial Economics - ME by Tulasi Miriyala

  • Managerial Economics - ME
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Demand Analysis and Forecasting: Demand analysis and forecasting involves huge amount of decision-making! Demand estimation is an integral part of decision making, an assessment of future sales helps in strengthening the market position and maximizing profit. In managerial economics, demand analysis and forecasting holds a very important place. Profit Management: Success of a firm depends on its primary measure and that is profit. Firms are operated to earn long term profit which is generally the reward for risk taking. Appropriate planning and measuring profit is the most important and challenging area of managerial economics. Capital Management: Capital management involves planning and controlling of expenses. There are many problems related to capital investments which involve considerable amount of time and labor. Cost of capital and rate of return are important factors of capital management. Demand for Managerial Economics: The demand for this subject has increased post liberalization and globalization period primarily because of increasing use of economic logic, concepts, tools and theories in the decision making process of large multinationals. Objectives of firm: 1. Profit Satisficing: In many firms there is separation of ownership and control. Those who own the company (shareholders) often do not get involved in the day to day running of the company. A. This is a problem because although the owners may want to maximise profits, the managers have much less incentive to maximise profits because they do not get the same rewards, (share dividends). B. Therefore managers may create a minimum level of profit to keep the shareholders happy, but then maximise other objectives, such as enjoying work, getting on with other workers. (e.g. not sacking them) This is the problem of separation between owners and managers. C.This ‘principal agent’ problem can be overcome, to some extent, by giving mangers share options and performance related pay although in some industries it is difficult to measure performance. 2. Sales maximization: Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons: A. Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. B. Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. C. Increasing market share may force rivals out of business. E.g. supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business. 3. Growth maximization: This is similar to sales maximisation and may involve mergers and takeovers. With this objective, the firm may be willing to make lower levels of profit in order to increase in size and gain more market share.

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4. Long run; profit maximization: In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, by investing heavily in new capacity, firms may make a loss in the short run, but enable higher profits in the future. 5. Social / environmental concerns: A firm may incur extra expense to choose products which don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community / charitable concerns. 6. Co-operatives: Co-operatives may have completely different objectives to a typical PLC. A co-operative is run to maximise the welfare of all stakeholders – especially workers. Any profit the co-operative makes will be shared amongst all members. Diagram showing different objectives of firms Management Theories: Management theories are implemented to help increase organizational productivity and service quality. Not many managers use a singular theory or concept when implementing strategies in the workplace. Theory X and Theory Y The management theory an individual chooses to utilize is strongly influenced by beliefs about worker attitudes. Managers who believe workers naturally lack ambition and need incentives to increase productivity lean toward the Theory X management style. Theory Y believes that workers are naturally driven and take responsibility. While managers who believe in Theory X values often use an authoritarian style of leadership, Theory Y leaders encourage participation from workers.

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Profit Maximization. Vs. Wealth Maximization: Definition of Profit Maximization Profit Maximization is the capability of the firm in producing maximum output with the limited input, or it uses minimum input for producing stated output. It is termed as the foremost objective of the company. Definition of Wealth Maximization Wealth maximization is the ability of a company to increase the market value of its common stock over time. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products, etc.

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UNIT-2 Demand Analysis Demand: Demand is an economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease demand, and vice versa.      Determinants of demand: The five determinants of demand are: The price of the good or service. Prices of related goods or services. These are either complementary (purchased along with) or substitutes (purchased instead of). Income of buyers. Tastes or preferences of consumers. Expectations. Law Of Demand: The law of demand is one of the vital laws of economic theory. According to the law of demand, other things being equal, if the price of a commodity falls, the quantity demanded will rise and if the price of a commodity rises, its quantity demanded declines. Thus other things being constant, there is an inverse relationship between the price and demand of commodities. Things which are assumed to be constant are income of consumers, taste and preference, price of related commodities, etc., which may influence the demand. If these factors undergo change, then this law of demand may not hold good. Definition of Law of Demand: According to Prof. Alfred Marshall “The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchase. Let’s have a look at an illustration to further understand the price and demand relationship assuming all other factors being constant − In the above demand schedule, we can see when the price of commodity X is 10 per unit, the consumer purchases 15 units of the commodity. Similarly, when the price falls to 9 per unit, the quantity demanded increases to 20 units. Thus quantity demanded by the consumer goes on increasing until the price is lowest i.e. 6 per unit where the demand is 80 units. The above demand schedule helps in depicting the inverse relationship between the price and quantity demanded. We can also refer the graph below to have more clear understanding of the same −

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