Subject Code: IMT-20

Subject Name : Managerial Economics

Objective: 1. The objective of the paper is to explain the concepts of applied microeconomics. 2. The emphasis shall be on theory of the firm, consumer demand, market system, production analysis, theory of cost, capital budgeting and risk analysis. Contents : INTRODUCTION TO MANAGERIAL ECONOMICS The Basic Problems of an Economy, Meaning and Nature of Managerial Economics, How Economics Contributes to Managerial Functions, Major Areas of Economics Applied to Business Decisions, The Scope of Managerial Economics ECONOMIC PRINCIPLES AND CONCEPTS APPLIED Marginalism and Incrementalism, The Equi-marginal Principle, Time Perspective in Business Decisions, Opportunity Cost, The Concept of Present Value of Money and Discounting Principle, Concept of Externalities, Concept of Trade-off THE FUNDAMENTAL LAWS OF MARKET: THE LAWS OF DEMAND AND SUPPLY The Law of Demand: Price-Demand Relationship, The Demand Function, Types of Demand, The Law of Supply, Equilibrium of Demand and Supply: Determination of Equilibrium Price ELASTICITY OF DEMAND AND SUPPLY Price Elasticity of Demand, Determinants of Price Elasticity of Demand, Price Elasticity and Marginal Revenue, Promotional or Advertisement Elasticity of Sales, Cross-elasticity of Demand, Income Elasticity of Demand, Elasticity of Price Expectations, The Uses of Elasticity, Price Elasticity of Supply THEORY OF CONSUMER DEMAND: CARDINAL UTILITY APPROACH Cardinal Utility Theory, The Law of Diminishing Marginal Utility, Consumers Equilibrium, Derivation of Demand Curve, Drawbacks of Cardinal Approach THEORY OF CONSUMER DEMAND: ORDINAL UTILITY APPROACH The Meaning and Nature of Indifference Curve, The Diminishing Marginal Rate of Substitution, Properties of Indifference Curves, The Budget Constraint and the Budget Line, Consumers Equilibrium, Effect of Change in Consumers Income, Effects of Price Change, Income and Substitution Effects of Price Change on Inferior Goods, Complementarity and Substitutability, The Corner Solution: The Extreme Choice, Derivation of Individual Demand Curve, Comparison of Cardinal and Ordinal Utility Approaches, Critique of Indifference Curve Approach, Samuelsons Revealed Preference Theory DEMAND FORECASTING The Need for Demand Forecasting, Methods of Demand Forecasting, Survey Methods, Statistical Methods. THEORY OF PRODUCTIONI: PRODUCTION WITH ONE VARIABLE INPUT Meaning of Production, Some Production Related Concepts, Production Function, The Laws of Production THEORY OF PRODUCTIONII: PRODUCTION WITH TWO VARIABLE INPUTS Isoquant Curves, Marginal Rate of Technical Substitution, Properties of Isoquant Curves, Isoquant Map and Economic Region, Optimum Combination of Inputs, Other Forms of Isoquants, Elasticity of Substitution, Laws of Returns to Scale: Long Run, Analysis of Production, Empirical Production Functions THEORY OF PRODUCTION COST Cost Concepts, Short-run Cost-Output Relations, Long-Run Cost-Output Relations, Economies of Scale: why lac decreases, Diseconomies of Scales;Why LAC Increases, Cost Functions and Cost Curves, Modern Approach to the Theory of Cost, Economies of scope MARKET STRUCTURE AND OBJECTIVES OF BUSINESS FIRMS Objectives of Business Firms, Profit Maximization, Alternative Objectives of Business Firms PRICE AND OUTPUT DETERMINATION UNDER PERFECT COMPETITION Managerial Economics ............................................. Page 1 of 5 ............................................................................... IMT-20

The Market Structure, The Features of Perfect Competition, Equilibrium of the Firm, , Derivation of Supply Curve of the Firm, Derivation of Supply Curve of the Industry, Price and Output Determination Under Perfect Competition, Price and Output Determination in the Long-run, Long-run Supply Curve of a Competitive Industry PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY Monopoly: Definition and Sources, Demand and Revenue Curves Under Monopoly, Cost and Supply Curves Under Monopoly, Profit Maximisation under Monopoly, Why Absence of Supply Curve Under Monopoly, Monopoly Vs. Perfect Competition: Comparison of Long-run Price and Output, Price Discrimination by Monopoly, Measures of Monopoly Power PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION Monopolistic Competition and Its Features, Foundations of the Monopolistic Competition Model, Price and Output Determination Under Monopolistic Competition, Analysis of Selling Cost and Firms Equilibrium, Critical Appraisal of Chamberlins Theory of Monopolistic Competition PRICE AND OUTPUT DETERMINATION UNDER OLIGOPOLY Oligopoly: Meaning and Characteristics, Duopoly Models, Oligopoly Models, The Game Theory Approach to Oligopoly ALTERNATIVE THEORIES OF THE FIRM Baumols Theory of Sales Revenue Maximization, Marriss Theory of Maximization of Growth Rate, Maximization of Managerial Utility Function: Williamsons Model, The Behavioural Model of Cyert and March, Conventional vs Alternative Theories of Firm PRICING STRATEGIES AND PRACTICES Cost-Plus Pricing, Bains Model of Limit Pricing, Multiple Product Pricing, Pricing in Life Cycle of a Product, Pricing in Relation to Established Products, Transfer Pricing, Competitive Bidding of Price, Peak Load Pricing CAPITAL BUDGETING AND INVESTMENT UNDER CERTAINTY Capital Budgeting, Determining the Optimum Level of Capital, Investment Decisions under Certainty, Sources and Cost of Capital INVESTMENT DECISIONS UNDER RISK AND UNCERTAINTY Concepts of Risk and Uncerainty, Investment Decisions Under Risk, Investment Decisions Under Uncertainty

Notes:
a. b. c. d. Write answers in your own words as far as possible and refrain from copying from the text books/handouts. Answers of Ist Set (Part-A), IInd Set (Part-B), IIIrd Set (Part C) and Set-IV (Case Study) must be sent together. Mail the answer sheets alongwith the copy of assignments for evaluation & return. Only hand written assignments shall be accepted. 5 Questions, each question carries 1 marks. 5 Questions, each question carries 1 marks. 5 Questions, each question carries 1 marks. Confine your answers to 150 to 200 Words. Two Case Studies : 5 Marks. Each case study carries 2.5 marks.

A. First Set of Assignments: B. Second Set of Assignments: C. Third Set of Assignments: D. Forth Set of Assignments:

ASSIGNMENTS
FIRST SET OF ASSIGNMENTS Marks Assignment-I = 5

PART A
1. Distinguish between the principles of marginalism and incrementalism with the help of examples. 2. How is the price elasticity of demand measured? Explain the relationship between price elasticity, average revenue and marginal revenue.
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3. Critically examine the law of diminishing marginal utility. 4. Why is an indifference curve for two normal goods convex to origin? Why cannot it be a concave curve or a straight line? 5. Why is demand forecasting important? Explain the various types of survey methods of forecasting demand and their usefulness.
SECOND SET OF ASSIGNMENTS Assignment-II = 5 Marks

PART B
1. Diagramatically explain the three stages of the law of diminishing marginal returns. 2. What are isoquants and isocost lines? Explain graphically 3. Distinguish between implicit cost and explicit cost with the help of example. 4. Graphically explain the relationship between change in output and AVC, AC and MC. 5. Describe the long run average cost (LAC) curve according to the modern cost theory.
THIRD SET OF ASSIGNMENTS Assignment-III = 5 Marks

PART C
1. Explain the Cyert-March Hypothesis of satisficing behavior. 2. Explain the profit maximizing conditions of a firm with the help of marginal revenue and marginal cost. 3. Explain why does a perfectly competitive firm reaps normal profits in the long run. 4. What is price discrimination? How does a discriminating monopolist allocate his output in different markets to charge different price. 5. Explain how price is determined under oligopoly under conditions of price leadership.
FOURTH SET OF ASSIGNMENTS Assignment-IV = 2.5 Each Case Study

CASE STUDY - I
Estimation of the Demand for Oranges by Market Experiment Researchers at the University of Florida conducted a market experiment in Grand Rapids, Michigan, to determine the price elasticity and the cross-price elasticity of demand for three types of Valencia oranges: those from the Indian River district of Florida, those from the interior district of Florida, and those from California. Grand Rapids was chosen as the site for the market experiment because its size, demographic characteristics, and economic base were representative of other midwestern markets for oranges. Nine supermarkets participated in the experiment, which involved changing the price of the three types of oranges, each day, for 31 consecutive days and recording the quantity sold of each variety. The price changes ranged within 16 cents in 4-cent increments, around the price of oranges that prevailed in the market at the time of the study. More than 9,250 dozen oranges were sold in the nine supermarkets during the 31 days of the experiment. Each of the participating supermarkets was provided with an adequate supply of each type of orange so that supply
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effects could be ignored. The length of the experiment was also sufficiently short so as to ensure no change in tastes, incomes, population, the rate of inflation, and determinants of demand other than price. The results, summarized in the following table indicate that the price elasticity of demand for all three types of oranges was fairly high (the boldface numbers in the main diagonal of the table). For example, the price elasticity of demand for the Indian River oranges of -3.07 indicates that a 1 percent increase in their price leads to a 3.07 percent decline in their quantity demanded. More interestingly, the off-diagonal entries in the table, show that while the crossprice elasticities of demand between the two types of Florida oranges were larger than 1, they were close to zero with respect to the California oranges. In other words, while consumers regarded the two types of Florida oranges as close substitutes, they did not view the California oranges as such. In pricing their oranges, therefore, producers of each of the two Florida varieties would have to carefully consider the price of the other (as consumers switch readily among them as a result of price changes) but need not be much concerned about the price of California oranges. Price Elasticity and Cross-Price Elasticity of Demand for Florida Indian River, Florida Interior, and California Oranges Price Elasticities and Cross-Price Elasticities Type of Orange Florida Indian Florida Interior California River Florida Indian River - 3.07 +1.56 +0.01 Florida Interior +1.16 +0.14 - 3.01 California +0.18 +0.09 - 2.76 Questions (a) In light of the case define a test market? When should a firm take help of market experiments to forecast demand? (b) Suggest a suitable price policy for the three types of oranges.

CASE STUDY-II
A deodorant company manufactures and sells several types of deodorants which are branded as Smell Fresh. The company introduced five years ago, a new type of deodorant and its sales increased rapidly. However, over the past two years, sales have been declining steadily even though the market for deodorants has been expanding. Worried by the declining sales the company conducted a survey of the market, which yielded the following information: (i) (ii) (iii) (iv) Several new rivals have come up during the past five years, which manufacture and sell almost similar deodorants. Other companies have set prices lower than the prices of this company. This company had initially set the price of its new brand at Rs 40, for which retailer pays Rs 30, which was never changed. The rival firms have set their prices at Rs 37.50, retailers paying Rs 25.

In view of these facts, the company decided to review the cost structure to find out whether the margin to the retailers could be reduced to the level of the rival firms. The company finds that the variable costs (including raw materials and labour) stands at Rs 15 per deodorant. At present the company sells 4, 00,000 deodorants. As to the market prospects, if the price is reduced to Rs 35, the demand would increase by 1,50,000 and if the price is reduced to Rs. 32.50, demand would increase to Managerial Economics ............................................. Page 4 of 5 ............................................................................... IMT-20

6,50,000 units. With such an increase in production, the firm could use its resources more fully. The bulk of purchase of raw materials and more efficient use of labour would both help to reduce the unit variable cost to Rs. 12.50. Questions (i) (ii) What price should the company charge to recapture market lost to rival firms? Suggest alternative strategies that the company can adopt to counteract competition.

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