Managerial Economics

534 Pages·2017·2.5 MB·English

MANAGERIAL
ECONOMICS
[FOR MMS MUMBAI UNIVERSITY]
D. M. MITHANI, M.A., Ph.D.,
Professor Emeritus
L.J. Institute of Management, Ahmedabad.
Professor,
College of Business,
Norths University of Malaysia.
Formerly Reader
Department of Commerce,
University of Mumbai,
Mumbai.
First Edition: 2010
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Preface
This book explores Managerial Economics for the understanding and application of
economic analysis in the process of business decision-making by the managers. Understanding
of economics as an applied science in management is crucial for the decision-makers in
business tasks, such as correct pricing and marketing decisions and resource allocation as well
as business forecasting and planning.
The book offers an exploration of managerial economic concepts, principles and tools
of analysis with illustration and cases on practical consideration as an outcome of over four
decades long teaching and writing experience of the author in India and abroad.
The volume is especially designed to cater to the syllabus of MANAGERIAL ECONOMICS
prescribed by the Mumbai University for the MMS Course, (w.e.f. academic year 2010–2011).
The book is research-based on the guidelines indicated in the syllabus. In covering the topics
of the syllabus, a synthetic approach is made by filling up the gaps in the logical development
of the subject for a better understanding by the Indian students. The text will be equally useful
to the teaching fraternity as well. The book can also be fruitfully used by the students of
management discipline in other Universities in India and abroad.
The author is grateful to Dr. Shirhhalti, Director general of Oriental Institute of
Management, Vashi, Prof. Timojit Roy, H.K. Institute of (HKMR) Management and Research,
(Mumbai), Prof. G.H. Hamlani, and Shri Wasim Javed Khan, Managing Director of HKMR,
Mumbai, Prof. Mukul Mukerjee, Oriental Institute of Management, Vashi for their valuable
suggestion and interaction with the author on the subject.
Mumbai, 9 March, 2010 D. M. MITHANI
Syllabus
(a) The Meaning, Scope and Methods of Management Economics
(b) Economics Concepts Relevant to Business, Demand and Supply, Production,
Distribution, Consumption and Consumption Function, Cost, Price, Competition,
Monopoly, Profit, Optimisation Margin and Average, Elasticity Micro and Macro
Analysis.
(c) Demand Analysis and Business Forecasting Market Structures, Factors
Influencing Demand Elasticities and Demand Levels Demand Analysis for
Various Products and Situations, Determinants of Demand Durable and Non-
Durable Goods Long Run and Short Run Demand and Autonomous Demand
Industry and Firm Demand.
(d) Cost and Production Analysis, Cost Concepts, Short Term and Long Term, Cost
Output Relationship, Cost of Multiple Products Economies of Scale Production
Functions Cost and Profit Forecasting Break-even Analysis.
(e) Market Analysis, Competition, Kinds of Competitive Situations, Oligopoly and
Monopoly, Measuring Concentration of Economics Power.
(f) Pricing Decisions, Policies and Practices, Pricing and Output Decisions under
Perfect and Imperfect Competition, Oligopoly and Monopoly, Pricing Methods,
Products Line Pricing, Specific Pricing Problem, Price Dissemination, Price
Forecasting.
(g) Profit Management, Role of Profit in the Economy, Nature and Measurement
of Profit, Profit Policies, or Profit, Maximisation, Profits and Control, Profit
Planning and Control.
(h) Capital Budgeting, Demand for Capital, Supply of Capital, Capital Relationing
Cost of Capital Appraising of Profitability of a Project, Risk and Uncertainty,
Economics and Probability Analysis.
(i) Macro Economics and Business, Business Cycle and Business Policies, Economic
Indication, Forecasting for Business, Input-output Analysis.
Contents
UNIT – 1 : THE MEANING OF MANAGERIAL ECONOMICS
Chapter 1 The Meaning, Scope and Methods of Managerial Economics 3 – 23
– Meaning of Managerial Economics
– The Salient Features and Significance of Managerial
Economics
– Managerial Economics: Normative or Positive
– Scope of Managerial Economics
– Scientific Method of Economic Analysis in the Managerial
Decision-making
– Basic Assumptions in Economic Models and Analysis
– Time Perspective
– Discounting Principle
UNIT – 2 : ECONOMIC CONCEPTS RELEVANT TO BUSINESS
Chapter 2 Economic Concepts 27 – 44
– Demand
– Supply
– Production
– Distribution
– Consumption
– Consumption Function
– Cost
– Price
– Competition
– Monopoly
– Profit
– Margin and Average
– Otimisation
– Elasticity
– Firm and Industry
Chapter 3 Macro and Micro Analysis 45 – 53
– Micro and Macroeconomics
– Distinction between Micro and Macroeconomics
– The Subject-matter and the Scope of Microeconomics
– Importance and Uses of Microeconomics
– Limitations of Microeconomics
– Importance of Macroeconomics
– Limitations of Macroeconomics
UNIT – 3 : DEMAND ANALYSIS AND BUSINESS
FORECASTING
Chapter 4 Market Structures 57 – 67
– Meaning of Market
– Product and Factor Markets
– Classification of Market Structures
– Markets based on Time Element
– Types of Market Structures formed by the Nature of
Competition
– Perfect Competition
– Monopoly
– Types of Monopoly
– Imperfect Competition
– Market Economy Paradigm
Chapter 5 Demand Analysis 68 – 103
– Introduction
– Individual Demand and Market Demand
– Determinants of Demand
– Demand Function
– Demand Schedule
– The Demand Curve
– The Law of Demand
– Exceptions to the Law of Demand or Exceptional Demand
Curve (Upward Sloping Demand Curve)
– Change in Quantity Demanded Versus Change in Demand
– Reasons for Change (Increase or Decrease) in Demand
– Demand Distinctions: Types of Demand
– Network Externalities in Market Demand
– Practical Problems
Chapter 6 Elasticities and Demand Levels 104 – 141
– The Concept of Elasticity of Demand
– Price Elasticity of Demand
– Types of Price Elasticity
– Measurement of Price Elasticity
– Proof of the Geometric Method
– ARC Elasticity of Demand
– Factors Influencing Elasticity of Demand
– Income Elasticity of Demand
– Types of Income Elasticity
– Applications of Income Elasticity
– Cross Elasticity of Demand
– Advertising or Promotional Elasticity of Demand
– Practical Applications
– Application Problem: A Hypothetical Case Study
Chapter 7 Demand Estimation: Analysis for Various Products 142 – 168
and Situations
– Estimating the Demand Function
– Major Steps in Demand Estimation
– Functional Forms in Estimation
– Properties of Empirical Results
– Demand Function Illustration/Problem
– Hypothetical Cases of Demand Estimation
– A Review of Select Case Studies on Demand Estimation
Chapter 8 Demand Analysis in Business Forecasting 169 – 193
– The Meaning of Demand Forecasting
– The Significance of Demand Forecasting in Business
– Short-term and Long-term Forecasting
– General Approach to Demand Forecasting
– The Sources of Data Collection for Business Forecasting
– Market Survey/Studies
– Statistical Method of Forecasting Demand
– Consumption Level Method
– Trend Projections
– Criteria of a Good Forecasting Method
– Sales Growth Trend Analysis
– Business Forecasting Function: Some Reflections on Practical
Considerations
– Choosing a Forecasting Model
– Business Forecasting: Summing Up
UNIT – 4 : COST AND PRODUCTION ANALYSIS
Chapter 9 Cost: Concepts and Cost-Output Relationship 197 – 237
– Introduction
– Real Cost
– Opportunity Cost or Alternative Cost
– Money Cost
– Accounting and Economic Costs
– Fixed and Variable Costs
– Types of Production Cost and their Measurement
– Short-run Total Costs Schedule of a Firm
– TFC, TVC and TC Curves
– Short-run Per Unit Cost
– Explanation of the U-shape of ATC Curve
– Marginal Cost Curve (MC Curve)
– The Relationship Between Marginal Cost and Average Cost
– Empirical Cost Functions
– Characteristics of Long-run Costs
– Economies of Scale and the LAC
– Technological Change and Long-run Cost
– Long-run Marginal Cost Curve (LMC)
– Estimation of Long-run Cost Function
– Cost Elasticity
– Minimum Efficient Scale
– Cost Leadership
Chapter 10 Economies of Scale and Scope 238 – 264
– Large-scale of Production
– The Size of Firm and Industry
– Economies of Scale
– Forms of Internal Economies
– Forms of External Economies
– Diseconomies as Limits to Large-scale Production
– Scale Economies Index
– X-efficiency
– Managers Per Operative Ratio (MOR)
– Economies of Scope
– The Learning Curve
– A Case Study: Costs Matter
Chapter 11 Production Function 265 – 300
– Introduction
– The Concept of Production Function
– Time Element and Production Functions
– Cobb-Douglas Production Function
– Laws of Production
– The Law of Diminishing Marginal Returns
– The Law of Variable Proportions
– The Laws of Returns to Scale: The Traditional Approach
– Estimation of Production Functions
– Cobb-Douglas Production Function
– Measurement of AP and MP
– Empirical Illustrations
– Output Elasticity
– Production Function through Iso-quant Curve
– Properties of Iso-quant
– Economic Region
– Least-cost Factor Combination: Producer’s Equilibrium
– Returns to Scale Explained through Iso-quants
– Technical Change
Chapter 12 Cost and Profit Forecasting: Break-Even Analysis 301 – 314
– The Meaning of Break-even Analysis (BEA)
– The Break-even Chart
– Formula Method for Determining BEP
– Assumptions of Break-even Analysis
– Limitations of BEA
– Usefulness of BEA
– Practical Problem
– Cost Control
– Techniques of Cost Control
– Areas of Cost Control
UNIT – 5 : MARKET ANALYSIS
Chapter 13 Market Analysis: Price Determination 317 – 331
– Market Economy
– Price Determination Under Perfect Competition
– Significance of Time Element