Managerial economics

1. Managerial Economics and Indian
Economic Policy
Dr.M.Kalaivani, Assistant Professor(Sr.G)
DOMS
SRM INSTITUTE OF SCIENCE AND TECHNOLOGY,
VADAPALANI CAMPUS,
DOMS

2. TEXT BOOK
• Mark Hirschey and Bentzen, Managerial Economics.
Cengage Learning, 2017.
• Uma Kapila, “Indian Economy, 17th Edition: Performance
and Policies”, Academic Foundation, 2017.

3. Introduction: Meaning, Nature, Scope and Importance of Managerial
Economics-
Meaning of Demand: Theory of demand, Law of Demand, Elasticity of
Demand, Shifting and expansion of demand– Exceptions to law of demand.
Demand Forecasting, Methods of Demand Forecasting
Meaning of Supply: Theory of supply- Market Equilibrium
UNIT I - The Economic Way of Thinking

4. What is Economics?
Unlimited wants and scarceresources

5. In front of you are chocolates that you could get
and eat. Come on, everybody is invited to get
chocolates. Do not be shy…

6. Analyses of the activity
 What happened when you were invited to get
chocolates? State your observation.

7. Definition of Economics
 How would you define Economics?
?

8. INTRODUCTION
• Economics is a study of ‘Choices’ or ‘Choice- Making’
• Choice-making is relevant for every individuals, families,
societies, institutions, areas, state and nations and for the whole
world.
• Hence, Economics has wide applications and relevance to all
individuals and institutions.

9. Economics
Economics: ‘A Queen of Social Sciences’
Economics ‘OIKOS’ ‘NOMOS’ (Greek Words)
‘OIKOS’
‘NOMOS’
‘HOUSE’
‘MANAGEMENT’
According to J.S. Mill Economics is “The practical science of
production and distribution of wealth.”
‘It is the study of How people produce and spend
income.’

10. Economics as defined by authors of
Economics books
 Paul Samuelson (Economics)
“the study of how people and society end up choosing, with or without use of money, to employ
scarce resources that could have alternative uses to produce various commodities among
various persons and groups in society.”
 Roger Le Roy Miller (Economics, Today and Tomorrow) “Economics concerns situations in
which choices must be made about how to use limited resources, when to use them and for
what purposes. Resources can be defined as the things people use to make the commodities
they want.”
 Hall and Loeberman (Macroeconomics: Principles andApplications)
“The study of choice under the condition of scarcity”

11. Common words among definitions…
 Scarcity- a situation wherein the amount of something
available is insufficient to satisfy the desire for it.
 Resources-The labor, capital, land and natural resources and
entrepreneurship that are used to produce goods and services.
 Unlimited – without limits, infinite
 Wants –desires

12. Finally…
 ECONOMICS – is a social science that deals with how people
organize themselves in order to allocate scarce resources in
order to produce goods and services that will satisfy the
unlimited and multiplying wants and needs of man.

13. DIVISIONS OF ECONOMICS
ECONOMICS
MICROECONOMICS
Specific
Deals with the economic behavior of
the individual units such as
consumers, firms, the owners of factors
of productions
MACROECONOMICS
General, economy as a whole
Deals with the economic behavior of the
whole economy or its aggregate such as
government, business, unemployment,
inflation and the like.
Refers to management of income,
expenditures, wealth or resources of a
nation.

15. Managerial Economics
• Branch of Economics.
• ‘Managerial Economics is the study of Economic
Theories, Principles and Concepts which is used in
Managerial Decision Making.’
• ‘Managerial Economics is the Application of various
Theories, Concepts and Principles of Economics in the
Business Decisions.’
• It also Includes ‘The Application of Mathematical and
Statistical tools in Management decisions.’

16. Managerial Economics
Economic
Theories,
Principles
and
Concepts.
Managerial
Decision
Making.
Application
Application
Application of Mathematical
And Statistical tools

17. Managerial Economics
Managerial Decisions
Choice of product
Choice of production method
Choice of price, Etc…
Managerial Economics
‘Application of Economic
Concepts, Theories and
Analytical tools to find
solutions for managerial
problems.
Application of
Economic concepts,
Theories and
Principles in
decision Making
Application of
Analytical tools
such as,
Mathematical and
Statistical tools

18. Difference between Managerial Economics
and Economics
•Economics
1. Comprehensive and wider scope
2. It has both Micro and Macro in nature
3. It is both Normative and positive science
4. It is concerned with the formulation of
theories and principles
5. It discusses general problems
Managerial Economics
1.Narrow and limited scope
2.It is essentially Micro in nature
and Macro in analysis
3.It is mainly a Normative science
4.It is concerned with the
application of theories and
principles of economics
5.It discusses Individual problems

19. Nature of Managerial Economics
 Science as well as Art of decision making.
 It is essentially Micro in nature but Macro in analysis.
 It is mainly a Normative science(assumed) but positive in
analysis.
 It is concerned with the application of theories and principles of
economics.
 It discusses Individual problems.
 It is dynamic in nature not a Static.
 It discuss the economic behavior of a firm.
 It concentrates on optimum utilization of resources.

20. Scope of Managerial Economics
Objectives of a Firm.
Demand Analysis and Forecasting.
Production and cost analysis.
Pricing decisions.
Profit Analysis
Capital management.
Market structure.
Inflation and economic conditions.

21. Importance OF ME
 Basis of Business Policies
 Business Planning and forecasting
 Its very much helpful to Analyse Cost and production level
 Predicting business future
 Helpful in Understanding the External forces constituting the
environment.
 Reconciling theoretical concepts of economics in relation to the
actual business behavior and conditions.

22. DEMAND
• Meaning of Demand: Theory of demand, Law of Demand, Elasticity
of Demand, Shifting and expansion of demand– Exceptions to law of
demand.

23. Demand

24. Demand Analysis
Meaning of Demand:
 Demand for a particular commodity refers to the
commodity which an individual consumer or household is
willing to purchase per unit of time at a particular price.
 Demand for a particular commodity implies:
Desire of the customer to buy the product;
The customers willingness to buy the product;
Sufficient purchasing power in the customers possession to buy
the product.

The demand for a particular commodity by
as an Individual demand for the commodity and
Summation of the individual demand is known as the
Market demand.

25. Law of Demand

26. DEMAND CURVE
• It shows the price and output relationship.
• Tabular representation of price and demand
• The geometrical representation of demand schedule is
called the demand curve.

27. LAW OF DEMAND
• As the price of a good rises, quantity demanded of that good
falls.
• As the price of a good falls, quantity demanded of that good
rises.
• Ceteris paribus("all other things being equal.”)
Law of demand expresses the functional relationship D = f(P)
where, P is price and
D is quantity demanded of a commodity

28. DETERMINANTS OF DEMAND
• Price of Product
• Income of the Consumer
• Price of Related Good
• Tastes and Preferences
• Advertising
• Consumer’s expectation of future Income and Price
• Growth of Economy
• Seasonal conditions
• Population

29. DEMAND FUNCTION
• When we express the relationship between demand and its
determinant mathematically, the relationship is known as demand
function.
• The demand for product X can be written in functional form
as-
Dx= f (Px, Y, Po, T, A, Ef, N )
Px – price of the product x, Y- Income, Po- Price of other
products, T- Taste and Preference, A- Advertising, Ef-Expected
future price and income,N-Other determinents

30. Exceptions and Limitations of law of Demand
•Inferior goods/ Giffen goods
•Veblen Effect (Goods having prestige value)
•Price expectation
•Fear of shortage
•Change in income
•Change in fashion
•Basic necessities of life
•Ignorance

31. Giffen Goods / paradox
• Giffen goods are the inferior goods whose demand increases with the increase in its
prices. There are several inferior commodities, much cheaper than the superior
substitutes often consumed by the poor households as an essential commodity.
• Whenever the price of the Giffen goods increases its quantity demanded also increases
because, with an increase in the price, and the income remaining the same, the poor
people cut the consumption of superior substitute and buy more quantities of Giffen
goods to meet their basic needs.

32. Veblen effect
• Veblen effect is for prestigious goods like diamond
People sometimes buy certain commodities like diamonds at high prices not due to their
intrinsic worth but for a different reason. The basic object is to display their riches to
the other members of the community to which they themselves belong.
This is known as ‘snob appeal’, which induces people to purchase items of
conspicuous consumption. Such a commodity is also known as Veblen good (named
after the economist Thorstein Veblen) whose demand rises (fails) when its price rises
(falls).

33. Why the demand curve slope downwards?
• Law of diminishing marginal utility.
• Income effect.
• Substitution effect.
• New consumers.
• Old Buyers.

34. Why demand Curve Slope Downwards
• Law of diminishing the marginal utility
• The law of diminishing marginal utility states that with each increasing quantity of the commodity, its marginal
utility declines.
• For example, when a person is very hungry the first chapatti that he eats will give him the most satisfaction. As
he will consume more chapattis, his level of satisfaction will diminish.
• Substitution effect
• Tea and coffee are substitute goods. If the price of tea rises, consumers will shift to coffee.
• Income effect
• Income increases the purchasing power of the people will get increase
• New Consumer
• Due to the fall in the prices of a commodity new buyers get attracted towards it and buy it. Thus, this increases
the demand for the commodity.
• Old buyers
• When the prices of the goods fall the old buyers tend to buy more goods than usual thereby increasing its
demand. This causes the downward sloping of demand curve.

35. ELASTICITY OF DEMAND
• Elasticity of demand is defined as the responsiveness of the quantity of a good to
changes in one of the variables on which demand depends-
1. Price Elasticity of the Demand
2. Income Elasticity of the Demand
3. Various otherfactors
DEFINATION-’’The elasticity of demand measures the response of the demand for the
commodity to change in price”.

36. Definition Of Price Elasticity Of Demand
• The change in the quantity demanded of a product due to
a change in its price is known as Price elasticity of
demand. Thus, the sensitiveness or responsiveness of
demand to change in price is as called elasticity of
demand

37. Computing the Price Elasticity of Demand
The price elasticity of demand is computed as the percentage change in
the quantity demanded divided by the percentage change in price.
Price Elasticity = Percentage Change in Qd
Of Demand Percentage Change in Price

38. Kinds Of Price Elasticity Of Demand
1) Perfectly elastic demand
2) Relatively elastic demand
3) Elasticity of demand equal to utility
4) Relatively inelastic demand
5) Perfectly inelastic demand

39. Perfectly Elastic Demand
- Elasticity equals infinity
Quantity Demand
Price
Demand
$4
1. At any price
above $4, quantity
demanded is zero.
2. At exactly $4,
consumers will
buy any quantity.
3. At a price below $4,
quantity demanded is infinite.
When there is little
changes in price will
have infinite changes
in Demand. it is known
as perfect elastic
demand.

40. Relatively Elastic Demand
- Elasticity is greater than 1
Quantity
Price
4
$5
1. A 25%
increase
in price...
Demand
100
50
2. ...leads to a 50% decrease in quantity.
When the proportionate
change in demand is
greater than the
proportionate changes in
price, it is known as
relatively elastic demand

41. Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$5
A 25%
increase
in price...
Demand
100
75
leads to a 25% decrease in quantity.
When the proportionate
change in demand is equal to
proportionate changes in
price, it is known as unitary
elastic demand

42. Relatively Inelastic Demand
- Elasticity is less than 1
Quantity
Price
4
$5
A 25%
increase
in price
Demand
100
90
leads to a 10% decrease in quantity.
When the proportionate change in
demand is less than the proportionate
changes in price, it is known as
relatively inelastic demand

43. Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
100
Quantity demanded
Price
When a change in price,
howsoever large change
no changes in quantity
demand, it is known as
perfectly inelastic demand

44. ALL KINDS OF DEMAND CAN BE SHOWN IN ONE
DIAGRAM AS FOLLOW
D
D2
D3
D4
Y
X
0 D5
DEMAND
P
R
I
C
E
WHERE
D1) Perfectly elastic
demand
D2)Relatively elastic
demand
D3)Elasticity of demand
equal to utility
D4)Relatively inelastic
demand
D5)Perfectly inelastic
demand
D1

45. Determinants of Elasticity of Demand
• Availability of Substitutes
• Proportion of Income spent on Commodity
• Different Use of Commodity
• Habit of Consumer
• Nature of the Commodity
• Postponement of the Use

46. (2) Income Elasticity Of Demand
Income elasticity of demand measures how much
the quantity demanded of a good responds to a
change in consumers’ income.
It is computed as the percentage change in the
quantity demanded divided by the percentage
change in income.

47. Measurement Of Income Elasticity Of Demand
Proportionate change in Demand
Income Elasticity Of Demand =
Proportionate change in Income
i.e.
Income Elasticity Of Demand =
Q Y
∆q ∆ y
+

48. Measurement Of Income Elasticity Of Demand
• Here , ∆q = Change in the quantity demanded.
Q = Original quantity demanded.
∆y = Change in income. Y =
Original income.
• For e.g. ,when Income of the consumer = 2,500/-
, he purchases 20 units of X, when income =
3,000/- he purchases 25 units of X

49. Types Of Income Elasticity Of Demand
• Positive Income elasticity of demand
• Negative Income elasticity of demand
• Zero Income elasticity of demand

50. Positive Income elasticity of demand
Y
D
Y1
Y
D
O X
D D1
Quantity Demanded
Income Income increases
equally the
demand is also
increasing

51. Negative Income elasticity of demand
Income
Y1
Y
Total Revenue
D1 D
Quantity Demanded (000s)
if the quantity
demanded for a
commodity decreases
with the rise in income
of the consumer and
vice versa
D

52. Zero Income elasticity of demand
Y
X
O
D
D
Quantity Demanded
Income
Income increases the
demand of the
product is stable
there is no changes
in demand

53. Cross Elasticity of Demand
•Substituted products elasticity of demand
Eg- Coffee and Tea, Pepsi& Coke, Car & Bike,
Apple &Banana
•Complementary products elasticity of demand

54. Substituted Products Examples

55. Complimentary products examples

56. (3) Elasticity Of Substitution
• The selection between two product or thing is called
substitution
• So Elasticity of Substitution measures the rate at which
the particular product is substituted .
• Thus EOS is the degree to which one product could be
substituted in context of price and proportion
Eg – Coffee and Tea, Pepsi& Coke, Car & Bike, Apple
&Banana

57. Elasticity Of Substitution
Proportionate change in the quantity ratios
of goods x & y
Proportionate change in the price ratios of
goods x & y.
Elasticity of Substitution =

58. Substitution Effect
Price of Coffee
Quantity demanded of Tea
10
5
10 units 20 units
D
When there is a change
in product X there
would a change in
Quantity demanded in
product Y

59. Elasticity of Complimentary
•Complimentary elasticity of demand express the
relationship between the change in the demand for a
given product in response to a change in the price of
some other product(Substituted product)
• E.g. if the X tea demand reduces tremendously than it
effect could be seen in demand of sugar and
milk.(Complementary Products)

60. Complimentary elasticity of demand
• say car, and B, say gas, are complimentary goods, and an
increase in price of B will reduce the quantity demanded of
A. This is because people consume both A and B as a bundle
and an increase in price reduces their purchasing power and
decreases quantity demanded.

61. Measurement complimentary Elasticity of
Demand
Proportionate change in Price of
product Y
i.e.
∆qx
Qx Py
∆p y
+
Proportionate change in Demand
for product X
Cross Elasticity of Demand =
Cross Elasticity of Demand =

63. Advertising Elasticity of Demand
• Advertising elasticity of demand is the measure of
the rate of change in demand due to change in
advertising expenditure
• Advertising elasticity of demand refers to the
proportionate change in demand of a commodity due to
proportionate change in advertising expenses.

64. Advertising Elasticity of Demand
Proportionate change in Advertising
expenditure
i.e.
∆qx
Q A
∆a
÷
Proportionate change in Quantity
Demand for product
Advertising Elasticity of Demand =
Advertising Elasticity of Demand =

65. Factors Influencing Elasticity Of Demand
• Nature of commodity
• Availability of substitutes
• Number of uses
• Consumers income
• Level of price and range of price change
• Proportion of expenditure
• Durability of the commodity
• Habit of the consumer
• Complementary goods
• Time
• Recurrence of demand
• Possibility of postponement

66. As against this, a shift in the demand curve
represents a change in the demand for the
commodity
Price remains unchanged, the rightward shift of
the demand curve from D to D1 is termed as an
increase in demand, as demand goes up from Q
to Q1. The leftward shift of the demand curve from
D to D2 is known as a decrease in demand, as
demand goes down from Q to Q2.
Shifting and expansion of demand

67. DEMAND FORECASTING

68. INTRODUCTION
Our life is full of uncertainties and so is the buisness. Changes are even
seen in the behaviour of consumer depending on his tastes and preferences
over time .
In short all calculations and speculations of a firm regarding the details
of his product depends on demand.
And in this topic we will study about various methods to calculate those
predictions and objectives behind them.

69. MEANING
• A forecast is a guess or anticipation or a prediction about any event which is
likely to happen in the future.
• For example : An individual may forecast his job prospects, a consumer may
forecast an increase in his income and therefore purchases, similarly a firm
may forecast the sales of its product.
• Demand Forecasting means predicting or estimating the future demand for a
firm’s product or products .
• Important aid in effective and efficient planning It is backbone of any
business

70. NEED AND SIGNIFICANCE
• It is necessary to forecast demand in buisness because :
1.Effective planning : provides scientific and reliable basis for anticipating future
operations
2.Reduction of uncertainty : aims at reducing the area of uncertainty that
surrounds mangerial decision making with respect to costs , production, sales ,
profit etc .
3.Investment decision : investments are made keeping in mind the the returns
and returns depend on market demand.
4. Resource allocation : efficient allocation of resources when future estimates
are available .

71. 5. Pricing decisions : in order to pursue optimal pricing strategies firm need to have
complete information about the future demand.Two concepts arises here :
(a)Overoptimistic :these estimates may lead to an excessively high price and lost sales.
(b)Overpessimistic : these estimates of demand may lead to a price which is set too
low resulting in losses.
6.Competitve strategy : the level of demand for a product will influence decisions ,
which the firm will take regarding the non-price factors .
7. Managerial control : forecasting disclose the areas where control is lacking . It is
must in order to control costs of production .

72. METHODS OF DEMAND FORECASTING

73. A) Qualitative Techniques/ Opinion Polling Method
-In this method, the opinion of the buyers, sales force and expert
could be gathered to determine the emerging trend in the market.
- Suited for short term demand forecasting.
-Demand forecasting for new product can b made by qualitative
techniques.
1) Consumer Survey Method
2) Sales Force Opinion Method
3) Delphi Method

74. 1) Consumer Survey Method
Survey method include:
a) Complete Enumeration Survey
b) Sample Survey and Test Marketing
c) End Use
In this method, an organization conducts surveys with consumers to
determine the demand for their existing products and services and anticipate
the future demand accordingly.

75. 1) Consumer Survey Method
a) Complete Enumeration Survey:
Under this method, a forecaster contact almost all the potential users of the product
and ask them about their future purchase plan. The probable demand for a product
can be obtained by adding all the quantities indicated by the consumers.
b) Sample Survey & Test Marketing:
Only few customers selected and their views collected. Based on the assumption that
the sample truly represents the population.
This method is simple and does not cost much.
The main disadvantage is that the sample may not be a true representation of the
entire population.

76. 1) Consumer Survey Method
c) End Use Method:
This method Focuses on Forecasting the demand for
intermediary Goods. Under this method, the sales of a Product are projected
through a survey of its end users.
Example:
Milk is a commodity which can be used as an intermediary good for the
production of ice cream, and other dairy products.

77. 2) Sales Force Opinion Method
-In this method , instead of consumers, the opinion of the opinion of salesman is
sought.
-It is also referred as the “grass root approach” as it is a bottom- up method that
requires each sales person in the company to make an individual forecast for his or her
particular sales territory.
-The main advantage is that the collecting data from its own employees is easier for a
firm than to do it from external parties.
-The main disadvantage is that the sales force may give biased views as the projected
demand affects their future job prospects.

78. 3) Expert Opinion Method / Delphi Technique
This method is also known as expert opinion method.
In this method seeks the opinion of groups of Expert through mail about the expected level
of Demand..
If the forecasting is based on the opinion of several experts, then it is known panel
consensus
These opinion exchanged among the various experts and their reactions are sought and
analyzed.
The advantage is that the forecast is reliable as it is based on the opinion of people
who know the product very well.
The disadvantage is that the method is subjective and not based on scientific analysis.

79. B) Quantitative Techniques/ Statistical or Analytical Methods
These are forecasting techniquesthat make use of historical
quantitative data.
A statistical concept is applied to the existing data in order to generate the
predicted demand in the forecast period.
1) Trend Projection Method
2) Barometric Method
3) Regression Method
4) Econometric Method

80. 1) Trend Projection Method
-An old firm can use its own data of past years regarding sales in past years.
-These data are known as time series of sales.
-Assumes that past trend will continue in future.
The trend can be estimated by using any one of the following methods:
a)Graphical Method
b) Least Square Method
c)Time Series Data
d) Moving Average Method
e)Exponential Smoothing

81. a) Trend Projection Method :
• This method is used when a detailed estimate has to be made.
• Time plays a n important role in this method .
• This method uses historical and cross –sectional data for estimating
demand
This technique assumes that whatever has been the pattern of demand in
the past, will continue to hold good in the future as well.

82. Graphical method :
• A trend line can be fitted through a series graphically .
• Old values of sale for different areas are plotted on graph and a free hand
curve is drawn passing through as many points as possible .
• Based on trend equation, we find ‘Line of Best Fit’ and then it is
projected in a scatter diagram,dividing points equally on both sides

83. Least Square Method :
• It is a mathematical procedure for fitting a line to a set of
observed data points.
• The "least squares" method is a form of mathematical regression
analysis used to determine the line of best fit for a set of data,
providing a visual demonstration of the relationship between the
data points. Each point of data represents the relationship
between a known independent variable and an unknown
dependent variable.

84. c) Time Series Data:
• Data collected over a period of time recording historical changes in price,
income, and other relevant variables influencing demand for a commodity.
d) Moving Average Method:
• The moving average of the sales of the past years is computed.
• The computed moving average is taken as forecast for the next year or
period.
• This is based on the assumption that future sales are the average of the past
sales.

85. e) Exponential Smoothing:
• It uses a weighted average of past data as the basis for a forecast.
• The procedure gives heaviest weight to more recent information and
smaller weights to observations in the more distant past.
• The reason for this is that the future is more dependent on the recent
past than on the distant past.

86. 2) Barometric Method
This method is based on the past demands of the product and tries to
project the past into the future. The economic indicators are used to
predict the future trends of the business. Based on future
trends, such as saving, investment, and income. This technique helps
in determining the general trend of business activities.
For example, suppose government allots land to the XYZ society for
constructing buildings. This indicates that there would be high
demand for cement, bricks, and steel.

87. 3) Regression Method
This method is undertake to measure the relationship between two variables
where correlation appears to exist.
E.g. The age of the air condition machine and the annual repair expenses.
This method is purely based on the statistical data.
4) Econometric Method
It is assumed that demand is determined by one or more variables. E.g. income,
population, etc.

88. Assignment 1

89. Supply
Meaning of Supply:
Theory of supply
Market Equilibrium.

90. What Is Supply?
● Supply is the willingness and ability of the sellers to produce and
offer to sell different quantities of a good at different prices during a
specific time period.
● Quantity supplied is the number of units of a good produced
and offered for sale at a specific price.

91. Supply

92. Law of Supply

93. Supply

94. THESUPPLYCURVE
• The Supply Curve is the graphical representation of
Supply Schedule.
Price of Coffee Quantity supplied of Coffee
1
2
6
9
3 12
4 15
5 18

95. DETERMINANTS OF SUPPLY
• Px- Price of the commodity
• Pr- Price of related goods
• Pf- price of factors of production
• G- Government Policy
• St- State of technology
• F-Number of firms
• S-Season and Weather
• E-Future Expecations

96. SHIFTIN SUPPLYCURVE
{CHANGES IN SUPPLY}
• Expansion/Contraction in supply curve occurs due
to change in its own Price others factors
Remaining constant.

97. Price Elasticity of Supply
 The degree of sensitivity of producers to a change in price is measured by the concept
of price elasticity of supply.
 Price elasticity of supply is the percentage change in quantity supplied resulting from a
percent change in price.
Price Elasticity of Supply =
Percentage Change in Quantity Supply
Percentage Change in Price

98. Types of Elasticity of Supply
 Perfectly Elastic ES =
 Relatively Elastic ES >1
 Unit Elastic ES =1
 Relatively Inelastic ES <1
 Perfectly Inelastic ES =0

99. A Variety of SupplyCurves
Perfectly Inelastic Supply - Elasticity equals 0
Price
100Quantity Supply
$10
$5
1. An increase in price
2. leaves the quantity
supplied unchanged.
Price
Quantity Supply
100
$5
$4
1. A 22 % increase in price...
2. ...leads to 10% increase in
Quantity.
110
Supply
Supply
Relatively Inelastic Supply- Elasticity is less than 1

100. Unit Elastic Supply - Elasticity equals 1
Relatively Elastic Supply - - Elasticity is greater than 1
A Variety of SupplyCurves
Price
Quantity Supply
$5
$4
1. A 25 % increase in price...
2. ...leads to a 25% increase in
Quantity Supply
Price
Quantity Supply
100
$5
$4
1. A 22 % increase in price...
2. …leads to a 67% increase
in Quantity Supply
167
100 125

101. Quantity Supply
Supply
$4
Price
1. At any price
above $4, quantity
supplied is infinite.
2. At exactly $4,
producers will
supply any quantity.
3. At a price below$4,
Quantity supplied is zero.
Perfectly Elastic Supply - Elasticity equals infinity

102. 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.

103. Market Equilibrium
Market equilibrium
refers to the stage
where the quantity
demanded for a
product is equal to the
quantity supplied for
the product at one
price.

104. 2 Marks
• Define Economics
• Define Managerial economics
• What are the major classification of Economics
• Economics is science or art?
• Scarcity of resources – describe
• Differentiate Managerial economics and Economics
• Define Demand
• What is Giffen paradox?
• What is Veblen effect?
• What is the law of demand
• Why demand curve slopes downward
• What are the exceptions in law of demand
• What determines law of demand
• Define law of diminishing marginal utility
• Define Demand Forecasting
• Why demand forecasting is important?
• Define Elasticity of Demand
• How will you measure the price elasticity of demand
• Define Substitution product
• Give an example for complimentary products
• Define supply
• Why supply cure slopes downward
• What is the relationship between Supply and price

105. 10 Marks
• Explain the Nature and characteristics of Managerial economics
• Define Managerial economics? Explain the scope of managerial economics?
• Why ME is Important?
• Differentiate Economics and Managerial Economics
• Explain the Determinants of Demand
• Explain the Demand Function
• Explain the Law of Demand
• Explain Elasticity of Demand
• What are different types of price elasticity of demand?
• Explain the Exception to the law of Demand
• Explain Law of Supply
• Explain the elasticity of Supply
• Shifting and Expansion of Demand curve – Explain
• Market equilibrium – Explain
• Explain the demand forecasting Methods
• What are the factors influencing the Supply

106. UNIT 1 END