questation

Managerial Economics

Subject Code:

MB 0042/MBF 105

Revised Edition: Spring 2010

BKID –

B1625

Sikkim Manipal University
Directorate of Distance Education
Department of Management and Commerce
Board of Studies
Chairman
HOD Management and Commerce
SMU DDE

Mr. Pankaj Khanna
Director
HR, Fidelity Mutual Fund

Additional Registrar
SMU DDE

Mr. Shankar Jagannathan
Former Group Treasurer
Wipro Technologies Limited

Dr. T. V. Narasimha Rao
Adjunct Faculty and Advisor
SMU DDE

Mr. Abraham Mathew
Chief Financial Officer
Infosys BPO

Prof. K. V. Varambally
Director
Manipal Institute of Management, Manipal
Originally Prepared by
Prof. M. M. Gupta
Former Principal & HoD, Economics
Sheshadripuram College, Bangalore

Prof. G. Krishnaveni
Professor of Economics
Sheshadripuram College, Bangalore

Revised Edition: Spring 2010
Printed: May 2012
This book is a distance education module comprising a collection of learning materials for our students. All rights reserved. No part of this work may be reproduced in any form by any means without permission in writing from Sikkim
Manipal University, Gangtok, Sikkim. Printed and Published on behalf of Sikkim
Manipal University, Gangtok, Sikkim by Manipal Global Education Services
Manipal – 576 104. Printed at Manipal Technologies Limited, Manipal.

Content Revised and Updated by:
Dr. Ashwini Kumar, currently the Professor and Head of the Department of
Management Studies at Nitte Meenakshi Institute of Technology (NMIT), Bangalore.
He is also an approved research supervisor of Visvesvaraya Technological
University and Mysore University. His areas of interest include Economics of
Entrepreneurship and Energy Management. He has taught full courses in
Economics, Managerial Economics, Entrepreneurship, and Research Methodology in various institutions. He has recently been awarded a Fellowship of the ‘Karnataka
Knowledge Commission’. He holds a Ph.D. in Business Management from Indian
Institute of Science, Bangalore.
Peer Reviewed by:
Dr. Lalith Achoth, currently the Professor and Head of the Department of Dairy
Economics and Business Management and Coordinator of the MBA programme in
Food Business at Dairy Science College of the Karnataka Veterinary University,
Bangalore. His areas of interest include Agricultural Economics, Quantitative
Techniques, and Econometric Modelling. He has taught full courses in Economics,
Quantitative Techniques, Financial Modelling, Risk Management, and Operations
Research. He holds a Ph.D. in Agricultural Economics from UAS, Bangalore. He has published 128 research articles in refereed scientific journals.
In House Content Review Team
Dr. Sudhakar G. P.
HOD, Management and Commerce
SMU DDE
Bangalore

Ms. Shubha P.
Assistant Professor
SMU DDE
Bangalore

Contents
Unit 1
Meaning and Importance of Managerial Economics

1

Unit 2
Demand Analysis

15

Unit 3
Demand Forecasting

49

Unit 4
Supply and Market Equilibrium

76

Unit 5
Production Analysis

105

Unit 6
Cost Analysis

145

Unit 7
Objectives of Firms

175

Unit 8
Revenue Analysis and Pricing Policies

203

Unit 9
Price Determination under Perfect Competition

238

Unit 10
Pricing under Imperfect Competition

260

Unit 11
Macroeconomics and Some of its Measures

298

Unit 12
Consumption Function and Investment Function

322

Unit 13
Stabilisation Policies

362

Unit 14
Business Cycles

399

Unit 15
Inflation and Deflation

428

MB 0042/MBF 105
Managerial Economics
Course Description
‘Managerial Economics’ is a four-credit subject in the first semester of MBA programme. This course will prepare the learner for a fulfilling career in business management.
Economics impacts our day-to-day lives. Any business is a part of the economy in which it operates. In business organisations, the main function of a manager is decision making. The manager needs to ensure the optimal utilisation of scarce resources that are available to the firm. In doing so, the manager needs to understand the role that economic environment plays and its impact on business activities.
Managerial Economics is the study of the allocation of scarce resources because most decisions are essentially about the allocation of scarce resources. It is, in fact, the study of decision making and problem solving in general. The modern theory helps the managers to find a framework to meet the business challenges.
Managerial Economics is a discipline which deals with the application of economic theory to business management. It deals with the use of economic concepts and principles of business decision making. Formerly, it was known as “Business Economics,” but the term has now been discarded in favour of Managerial Economics.
Thus, it has become essential for all students who are planning a career in business management to have strong foundations in the concepts and techniques of managerial economics.
Course Objectives:
The objective of this course is to introduce the students into the world of managerial economics and obtain a basic awareness of the economic concepts such as demand, supply, pricing, inflation, and deflation.

After studying this subject, the student should be able to:
1. explain the role of managerial economics in the company and its relation to domestic and international economy
2. generate useful and timely information for decision making by different users 3. develop skills to derive the combination of inputs which maximises profits 4. estimate the price (of goods/services) that maximises profits under a variety of circumstances, including perfect and imperfect competition
5. develop the relevant quantitative skills and problem solving skills
6. anticipate how other firms and consumers will respond to decisions they make, and how to incorporate these responses into their own decisions
The Self Learning Material (SLM) for this subject is divided into 15 units. A brief description of all the 15 units is given below:
Unit 1: Meaning and Importance of Managerial Economics
This unit explains the background, meaning, definition, features, scope, and importance of managerial economics and the basic functions of a managerial economist.
Unit 2: Demand Analysis
This unit describes the concepts of demand analysis and elasticity of demand and their practical applications in business decisions.
Unit 3: Demand Forecasting
This unit defines the concept of demand forecasting, its importance, and various methods of demand forecasting for both old and new products.
Unit 4: Supply and Market Equilibrium
This unit describes the concept of supply, various aspects of supply, concept of market equilibrium, and the forces that bring about changes in market equilibrium.
Unit 5: Production Analysis
This unit defines the concept of production and production function, production function with one variable input, production function with two variable inputs, returns to scale, economies of scale, and economies of scope. Unit 6: Cost Analysis
This unit describes the types of costs, cost-output relationship, cost function, cost-output relationships in the short run, and cost-output relationships in the long run.
Unit 7: Objectives of Firms
This unit explains the changing objectives of a business firm, various models which impact business, and their implications on a business unit.
Unit 8: Revenue Analysis and Pricing Policies
This unit describes the revenue concepts for cost-benefit analysis, concept of pricing policy with their determinants, different objectives of pricing policy, and various pricing methods adopted by business firms.
Unit 9: Price Determination under Perfect Competition
This unit explains the price-output determination under perfect competition, short-run industry equilibrium under perfect competition, long-run industry equilibrium under perfect competition, and market and market structure.
Unit 10: Pricing under Imperfect Competition
This unit describes the price discrimination under monopoly, bilateral monopoly, monopolistic competition, oligopoly, duopoly, and industry analysis. Unit 11: Macroeconomics and Some of its Measures
This unit defines the concepts of macroeconomics, ratios, index numbers, and its significance in modern business management.
Unit 12: Consumption Function and Investment Function
This unit describes the concepts of consumption and investment functions with their major determinants and the importance of multiplier and accelerator in national income multiplication.
Unit 13: Stabilisation Policies
This unit explains the concepts of economic stability and the different instruments that are applied to ensure the economic stability in a modern economy. Unit 14: Business Cycles
This unit describes the concepts of business cycles, causes and effects of business cycles, various theories of business cycles, and measures to control business cycles.
Unit 15: Inflation and Deflation
This unit explains the concepts of inflation and deflation, causes and effects, kinds of inflation, various remedial measures to control inflation, and deflation and stagflation.