HOTEL ECONOMICS

UNIT-1
INTRODUCTION TO MANAGERIAL ECONOMICS
MANAGERIAL DECISION MAKING

UNIT-2
CONCEPTS OF DEMAND
ECONOMIES OF SIZE AND CAPACITY UTILIZATION

UNIT-3
MARKET STRUCTURE AND PRICE
PRICING METHODS AND APPROACHES

UNIT-4
CAPITAL MANAGEMENT
THE ECONOMIES OF ADVERTISING

UNIT-5
NATIONAL

INCOME

MEASUREMENT
MONOPOLY

UNIT-1
1

CONCEPTS

AND

INTRODUCTION TO MANAGERIAL ECONOMICS

INTRODUCTION
Managerial economics draws on economic analysis for such concepts
as cost, demand, profit and competition. A close inter-relationship between
management and economics had led to the development of managerial
economics.
SCOPE OF MANAGERIAL ECONOMICS
Managerial economics is a discipline that combines economic theory
with managerial practice. The subject offers powerful tools and techniques
for managerial policy making. The study of managerial economics
enriches the analytical skills, helps in logical structuring of problems, and
provides adequate solution to the economic problems.
CONTRIBUTION OF ECONOMIC THEORY TO MANAGERIAL
ECONOMICS:
First, it helps in recognizing managerial problems, eliminating
minor details, which might obstruct decision making and in concentrating
on the main issue. Second, it offers them a set of analytical methods to
solve problems. Third, it helps in clarity of concepts used in business
analysis, which avoids conceptual pitfalls .

PROBLEMS FACED BY MANAGERS:

There are four groups of problems in both decision making and forward
planning.
Resource allocation:

Scarce resources have to be used with utmost efficiency to get

optimum results. These include production planning, problem of
transportation.
Inventory and queuing problem:
Inventory problems include decisions about holding of stocks of raw
materials and finished goods over a period. These decisions are taken by
considering demand and supply condition.
Pricing problem:
Fixing prices for the products of the firm is an important part of
decision making process. Pricing problem involve decisions regarding
various methods of pricing to be adopted.
Investment problem:
These are problems of allocating scarce resources over time. For
example investment in new plants, how much to invest, source of funds etc.
RISK, UNCERTAINTY
Risk:
The concept risk is a situation in which the probability distribution of a
variable is known but its actual value is not . Risk may be defined as an
uncertainty of financial loss on the occurrence of an unfortunate event.
Risk is uncertainty of loss.
Types of Risk:
Pure risk or static risk: Pure risk is where there is a probability of loss but
no chance of gain. For example, if the firm is gutted out by fire, the owner
sustains financial loss. If there is no such fire accident also, owner does not
gain either.
Dynamic risk: These risk exists when there is even chance for both gain
and loss. This type of risk arises from fluctuation of prices.
Insurable risk: Transferable risks are also known as insurable risks. Such
risk can be predicted, estimated and measured in terms of money and so
are insurable.

Non-insurable risk: Those risks which cannot be calculated and insured

are called non-insurable risks.eg. Competitive risk, technical risk, risk of
government intervention.
Uncertainty:
Uncertainty is a situation regarding a variable in which neither its
probability distribution nor its mode of occurrence is known. Uncertainty
arises when actual conditions differ from anticipated conditions.
Sources of uncertainty;

Uncertain pattern
Existing facts and future plan.
Bias of self-interest
Belief about an event, either help or harm.

Factors determining uncertainty

The character of the entrepreneur.
On the amount of resources possessed by him
On the proportion of these resources exposed to uncertainty.

Risk
The concept risk is a situation in which the probability distribution of a variable
is known but its actual value is not. Risk is an actuarial concept risk may be
defined as an uncertainty of financial loss on the occurrence of an unfortunate
event a risk is uncertainty of loss
Types of risk
Pure risk or static risk
Speculative risk or dynamic risk
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 Insurable risks
Non- Insurable risk
Probability Analysis
In ordinary language then term probability refers to the chance of happening or
not happening of an event the use of the word chance in any statement indicates
that there is an element of uncertainty most of the managerial decision are
decisions related to uncertainty. The theory of probability provides a numerical
measure of the element of uncertainty. It enables the business Managers to take
decision under conditions of uncertainty with a calculated risk. Probability may
be defined as the ratio of the frequency with which a certain event occurs to the
total frequency of a sufficiently long sequence of observation.
Number of favorable cases
P = ------------------------------------------Total number of equally likely cases
Kinds of probability:
1 Aprion probability: Consider the tossing of the coin it may fall head up
wards or tail upwards therefore there are only 2 possible ways (head or
Tail ) one of which is sure to happen.
2 Aposterion probability: Under the aposterion probability the probability is
determined after the result of the experiment is known for example out of
500 children admitted with symptoms of viral fever in a government
hospital, how many survive and how many die? The answer for this
question or the probability of success can be determined only after treating
the 500 cases and estimating the success of the trial.
MANAGERIAL DECISION MAKING:
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Managerial economics refers to the application of economic theory and the

tools of analysis of decision science to examine how an organization can
achive its aims and objectives most efficiently. Management decision
problems arise in any organization be it a firm a non profit making
organization (eg, hospital , university ) or a government agency, when it
seeks to achieve some goal or objective subject to some constraints.
The objectives may differ from case to case but the basic form of decision
making process can be framed and analyzed using a common approach
based on six steps:
1 Defining the problem
2 Determining the objective
3 Exploring the alternatives
4 Predicting the consequences
5 Making a choice
6 Performing sensitivity analysis
Following are the decision making steps :
1
2
3
4
5
6

Recognize need for a decision

Generate alternatives
Evaluate alternatives
Choose among alternatives
Implement choose alternative
Learn from feedback

THEORIES OF THE FIRM

A firm is an organisation which changes hired inputs into saleable
outputs the inputs or

the factors of production are divisible into two board

categories human resource and capital Resource labour resource and

entrepreneurial resource are the two human resource inputs land man maid
capitals ,forest ,rivers etc are the two capital resource. In economics the four
major factors of production (f o p) are land , labour, capital and entrepreneur
and the renumeration they get are wage , rent , interest and profit respectively.
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Firms are classified into different categories as follows:

1
2
3
4

Private sector firms.

Public sector firms.
Joint sector firms.
Not-for-profit-firms

Firms can be classified on the basis of number of owners as :

1 Proprietership.
2 Partnership.
3 Corporations.
Firm Constraints:
1 Resource constraints:
Many inputs may be available in a limited or fixed quantity. Eg. Skilled
workers, raw material etc.
2 Legal constraint:
Both individuals and firms have to obey the laws of the state as well as
local laws.Environmental laws, employment laws, disposal of waste are
some example.
3 Moral constraint:
These refer to actions that are not illegal but are sufficiently inconsistent
with generally accepted standards of behavior to be considered proper.
4 Contractual constraints:
These bind the firm because of some prior agreement such as long term
lease on a building or a contract with a labour union that represents the
firms employees.
QUESTION BANK
CHECK YOUR PROGRESS
FILL IN THE BLANKS
1. Managerial economics is a discipline that combines economic theory
with----------------------2. ------------- divided economics in two broad categories macro and micro.
3.Regression is applied for ----------------4. probability theory is used in -------------------5. Economist use --------------- in the study of behavior of firm
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CHECK YOUR PROGRESS

State Whether the Following Statement Are True Or False
1. Supply theory guides the manager in the selection of goods and services
of production.
2. Managerial economics involves selection of inputs and techniques of
production.
3. Firms third basic question related segmentation of market.
4. The development of the product of a particular section of society
consider question for how to produce.
5. A choice has to me made between ends (unlimited wants) and means
(limited resource)
QUESTION FOR DISCUSSION
1 Discuss the nature and the scope of managerial economics
2 Managerial economics is the integration of economic theory with business
practice for the purpose of facilitating decision making and forward
planning by manager Explain and command
3 Define scarcity and opportunity cost. What role do these two concepts play
in the making of management decisions?

UNIT - 2
CONCEPT OF DEMAND
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Basic concept:
In managerial economics we are concerned with demand for a commodity
faced byt the firm. This depends on the size of the total market or industry
demand for the commodity, which in turn is the sum of the demands for
the commodity of the individual consumers in the market. Demand is one
of the crucial requirements for the existence of any business enterprise. A
firm is interested in its own profit or sales, both of which depend partially
upon the demand for its product. Demand for a commodity implies,
Desire to acquire it.
Willingness to pay for it.
Ability to pay for it.
Demand is thus reflected in terms of the amount of consumers are willing
to buy a product at a given price over a given period of time.
Types of demand:
Consumer goods and producer goods:
Goods and services used for final consumption are called as
consumer goods.
These include those consumed by human-beings, animals, birds, etc.
Producer goods refers to the goods used for production of other goods ,
like plant and machines, factory buildings, services of employees.
Perishable and durable goods:
Perishable goods become unusable after sometime, others are
durable goods. Perishable goods are those which can be consumed only
once while in durable goods , their services only are consumed.
Autonomous and derived demand:
The goods those demand is not tied with the demand for some other
goods are said to have autonomous demand, while the rest have derived
demand.Thus the demand for all producer goods are derived demands.
Individual demand and Market demand:
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Market demand is the summation of demand for a good to buy all

individual buyers in the market. A firm would be interested in the market
demand for its product while each consumer would be concerned basically
with only his own individual demand.
DEMAND FORECASTING FOR CONSUMER
Various factors affecting the demand forecasting for consumer are
CPI : Consumer price index : It indicates the inflation in the selected
commodies that are used by the direct consumer. If income of the
consumer remains constant the increase in CPI means decrease in
the purchasing power of the consumer .
WPI : Wholesale price index : It indicates the inflation in the
selected commodities that are consumed by the industry itself for
example steel coal etc broadly any change in WPI is the indication of
the change in cost of raw materials which may affect the demand
Consumer Electronic Industry Growth : This indicates the growth in
consumer electronic industry. There are different consumer
electronics item which are included in determining the sales growth
of a lot of item and are interdependent for example if there is an
increase in the production of cables, satellite receivers VCRs and
VCPs, then the CTV demand in the market is bound to increase.
GDP (Gross Domestic Product ) GDP represent the economy of the
country the increase in the GDP means the total output of the
products and the services including agriculture, industry and
various other services have increased Since it represents the
economy of the country so any increase will have a positive effect on
the demand.
ECONOMIES OF SIZE AND CAPACITY UTILIZATION:
The larger plant will lead to lower per unit cost in the long run However,
beyond some point, successive larger plants will mean higher average cost
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Exactly why is the long run ATC curves u shaped needs further explanations
It must be emphasised first of all that the law of diminishing retuns is not
applicable here for it presumes that one resource is fixed in supply and also
that in the long run resource prices are variable also we assumed that
resources price are constant in the short run the u shaped long run average
cost curve is explained thus in terms of economics and diseconomies of large
scale production.
This is most notable with regard to labour but may apply to others factors
as well. Other factors contributing to declining LAC include ability to use
more advanced technologies and more sophisticated capital equipment,
managerial specialisation, opportunity to take advantage of lower costs for
some inputs by purchasing larger quantities, effective utilisation of
byproducts etc. But after sometime, expansion of a firms output may give
rise to diseconomies, and therefore, higher per unit cost. Further expansion
of output beyond a reasonable level may lead to problems of over crowding
of labour, managerial inefficiencies, etc., pushing up per unit cost.
All these are examples of internal economies and diseconomies
of scale arsing due to the firms own expansion. According to Marshall,
external economies and diseconomies of scale may arise due to the
expansion of industry as a whole. For example, improved infrastructure
facilities due to industrial expansion may lead to reduction in per unit cost
of production in all the firms in an industry. Economies of scale refer to a
situation where output grows proportionately faster than the use of inputs.
With prices remaining constant, this leads to lower cost per unit. Thus, the
primary reason for scale economies, in the long run, is the increasing
returns to scale in the firms long run production function. This is reflected
in the declining portion of the LAC. While under decreasing returns to
scale, output increases at a proportionately slower rate than the increases in
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inputs. With input price constant, this leads to higher costs per unit. The
rising portion of LAC depicts this change. The lowest point on the LAC
curve occurs at the output level at which the forces for increasing returns to
scale are just balanced by the forces of decreasing to scale.

CHECK YOUR PROGRESS:

State whether you agree or disagree with this statements:
1 A commodity can be distinguished into consumer or industrial on the basis
of who is using it Demand of petrol is independent.
2 An individual is concerned with his demand while firms sales depend
upon market demand
3 The demand for perishable goods is generally more stable than the
demand for durable goods.
QUESTIONS FOR DISCUSSION:
1. Explain the effect on demand of butter in each of the following cases.
a. the price of jam falls
b. the price of butter rises.
c. An increase in the family income.
d. Expectation of a sudden scarcity of demand.
e. A free gift offered with a packet of butter.
f. The price of bread rises.
2. What is the importance of demand analysis? What are the different
types of demands?

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UNIT-3
MARKET STRUCTURE AND PRICE
The function of a market is to enable an exchange of goods and
services to take place. A market is that area which brings buyers and
sellers in contact with one another. According to Frederic Bentham,
a Market is any area over which buyers and sellers are in such
close touch with one another, either directly or through dealers, that
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the prices obtainable in one part of the market affect the prices paid
in other parts.
TYPES OF MARKET:
By categorizing markets in terms of their basic characteristics, it
may be possible to identify a limited number of markets that can be
used to analyze decision-making. Although there are many possible
ways of categorizing market structures, the following characteristics
are frequently employed.
Markets based on area: When area is used as a basis of
market classification, we categories markets into local
markets, regional markets, national markets and international
markets. Its depends on the manner in which the buyers and
sellers are located in a particular place.
Markets based on nature of transactions: We can classify the
markets on the basis of nature of transactions into two broad
categories: the spot market and the futures market.
Markets based on volume of business: On the basis of the
volume of business, the markets are broadly classified into
wholesale and retail markets.
Market based on time: Sometimes the time element is used to
classify the markets. The time is classified as very short
period, short period and long period. Accordingly we have
very short period markets, short period markets and long
period markets.
Markets based on status of sellers: On the basis of the status of
sellers the markets are broadly classified into three categories:
primary, secondary and terminal markets.
Markets based on nature of competition: The most important
form of market classification is based on the nature of
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competition, i.e., the buyer-seller interaction. The competition

in the market depends upon three main factors.
a Substitutability factor
b Interdependence factor
c Ease of entry factor
Concept of pricing and output:
Price determination in general refers to the interaction of the free
market forces of demand and supply to establish the general level of price for a
good or service. When buyers and sellers come into market , each buyer has in
mind the maximum price he will pay for the good., while each seller , has
determined on a minimum price.
Determination of market price:
The market period is very short period in which the supply is fixed that is
no adjustment can take place in supply conditions. The rpice prevailing in the
market period is called market price which changes with the nature of the
commodity-many a time within a day or a week or a month.
PRICING METHODS AND APPROACHES
The microeconomics principle of profit maximisation suggests pricing by
the marginal analysis that is by equating MR to MC. However, in the pricing
methods followed in practice, firms rarely follow this process. Uncertainty with
regard to demand and cost functions and the deviation from the objective of
short run profit maximization are the two main reasons for this.
Determination of profit maximization requires an accurate knowledge or
the demand and cost conditions facing the firm it is not easy is not easy to get a
good estimate of the true demand function for one faces difficulties with regard
to the specification of the function, data availability and limitations of the
estimation period.
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Multi product pricing:

Most modern firms produce a variety of products than a single product. This
requires that we expand our simple pricing rule and consider demand and
product interdependencies. While there are separate demand functions for all
products of a multiple product firm, there is only one cost function for all
products.
Price discrimination:
Price discrimination occurs when variation in prices for a product in different
markets does not reflect vazriation in cost. It is designed to increase the total
profit. Three conditions must be fulfilled before a firm successfully practices
price discrimination.
The firm must have atleast some control over the price.
It must be possible to group different markets in terms of the price elasticity
of demand in cash.
The firms market must be separable.
QUESTION BANK
FILL IN THE BLANKS:
1 A market facilitates the _________ of goods and services.
2 Four basic concepts of a market are buyers, sellers, commodity and
_______.
3 When divided on the basis of _______ markets can be divided as retail and
whole sale markets.
4 Based on status of sellers, markets can be classified as primary, secondary,
________ markets.
5 Imperfect competition has several _______.
QUESTION FOR DISCUSSION:
1 Define markets and state the types of markets.
2 Compare perfect and imperfect market.
3 What do you mean by monopoly? List its features.
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4 What are the unique features of monopolistic competition?

5 Explain Cournots Duopoly Model.
6 Explain with diagrams price determination under perfect competition.
UNIT 4
CAPITAL MANAGEMENT
The survival of business in the competitive market involves a lot of
monetary and non- monetary effort .one of the major strategies would be
investing in new opportunities with changing time. Generation of capital
from own resources of borrowing helps in investing in the long run
.however often the capital may be scarce and this calls for its allocation in
such a manner that maximum return is obtained from the capital invested
capital being expensive the basic objective of the investor is to maximize
the net return i.e, revenue minus cost capital would then be invested in
only those products where the excess of the revenue over (capital)
expenditure or the investment is the maximum over the period of that
investment the life of the plant . this process can indeed be applied to
various other areas including service industry in setting up a management
consultancy firm for example investment will be made in acquiring the
professionals . in most cases they are very expensive .the product here
would be the service provide by these professionals in solving a clients
problem revenue will come from the sale of their services accordingly
capital would be required to set up such an organization
Capital budgeting
Replacement
Cost reduction
Output expansion of traditional product and markets
Expansion into new products and markets
Government regulation
Techniques or methods of investment evaluation
The play back period method
17

The average return on investment

The net present value method
The internal rate of return method
Probability index criterion

The economics of advertising:

Advertising is a prominent feature of modern economic life
consumers encounter advertising message as they watch TV , read magazines
listen to the radio , surf the internet or simply walk down the street and the
associated have to say about advertising
Advertising expenditure of a firm and other related promotional activities
are a kind of selling cost however they require a different kind of economic
approach than the production cost selling cost may be regarded as all cost
incurred to shift the demand curve for a particular product to the right.
Advertising is a tool for manipulating the sales volume of an enterprise
like price and product improvement it shifts the whole demand schedule for the
product like product improvement price affects the volume obtained from any
given demand schedule thus short run profit depends on the combination of
price , product improvement, advertising expenditure changes in product will
definitely do so the price that will maximise profits may be different when
advertising is stepped up or the product is improved. Advertising shifts that
demand curve to the right. It also makes the demand less elastic
QUESTIONS FOR DISCUSSION
1 what is capital budgeting?
2 Discus the consideration in various kinds of capital investment decisions?
3 Differentiate between risk, certainty and uncertainty?

UNIT -5
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NATIONAL INCOME CONCEPTS AND MEASUREMENT

National income is the most comprehensive measure of the level of the
aggregate economic activity in an economy it is the total income of a nation as
against the income of an individual but you must note that the term national
income is not as simple as self-explanatory as the concept of the individual
income may be for example you cannot include all the income received by the
individuals during a given period in the national income similarly not all the
inmcome that is generated in the process of production in an economy during a
given period is received by the individuals in the economy.
National aggregate:
For the purpose of measurement and analysis , national income can be
viewed as an aggregate of various component flows. Genrally these component
flows represent the intersectoral transactions which describe the broad structure
of the economic system. Accordingly there exist several measures of aggregate
incomes varying in their scope and coverage.
Gross and net concepts:
Gross emphasis that no allowance for capital consumption has been made or
that depreciation has yet to be deducted.
Net indicates that provision for capital consumption has already been made
or that depreciation has already been deducted.
Thus the difference between gross and net aggregate is depreciation. Ie. GNP
at market price/factor cost = NNP at market price/factor + depreciation.
National and domestic concepts:
The concept of national versus domestic arises because of the fact that the
economy is not closed in the sense that it has transactions with the rest of the

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world in the form of exports and imports , gifts, loans, factor income flows
etc.
National income or product is that income or product which accrues to the
economic agents who are resdident of the country.Most of the national
income are derived from the economic activity within the country.But some
income arises due to the activities of the resident outside the sountry.
GNP at market price/factor cost = GDP at market price/factor cost + Net
factor income from abroad.
NNP at market price/factor cost = NDP at market price/factor cost + Net
factor income from abroad.
Net factor income from abroad = Factor income received from abroad
Factor income paid abroad.
Gross domestic product (GDP):
For some purposes we need to find the total income generated from the
production within the territorial boundaries of an economy, irrespective of
whether it belongs to the residents of that nation or not. Such an income is
known as Gross Domestic Product and found as
GDP = GNP Net factor income from abroad.
GNP as the total of factor incomes:
When national income is calculated after exclufing indirect taxes like excise
duty , sales tax etc and including subsidies we get GNP at factor cost as this is
the amount received by all the factors of production
GNP(fc) = GNP(mp) Indirect taxes + subsidies.
Net Natioanl product(NNP):
The NNP is an alternative and closely related measure of the national
income . It differs from GNP only one respect. GNP is the sum of final
products. It include consumption goods plus gross investment plus
government expenditures on goods and services plus net exports. Here gross

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income is the increase in investment plus fixed assets, like buildings and
equipments and thus exceeds net investment by depreciation.
GNP = NNP + Depreciation.
Personal Income:
Two types of factors account for the difference between national income and
personal income. On the one hand a part of the total income which accrues to
the factors of production is not actually paid out to the individuals who own
the factors of production. The obvious instances are corporate taxes and un
distributed or retained profits.
Personal income is calculated by subtracting from national income those
types of incomes that are earned but not received and adding those types
which are received but not currently earned.
Personal income = NNP Undistributed profits corporate taxes +
transfer payments.
Disposable income:
Disposable income is the total income that actually remains with
individuals to dispose off as they wish. It differs from personal income by the
amount of direct taxes paid by individuals.
Disposable income = Personal income personal taxes.
Theory of income and employment:
The basic difference between the two is as follows:
The classical held that unemployment cannot exist. Even if there is any
unemployment, it is self correcting. The complete flexibility in real variable
wage, price level and rate of interest ensures full employment level.
It is believed that it is the aggregate demand, not wages, price level and
rate of interest which determine unemployment.
Concepts:
Planned output (income): It is also called as aggregate supply. It is the value
of final goods and services planned to be produced in an economy during a
period.

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Planned aggregate expenditure: It is the value of final goods and services

planned to be purchased by people in an economy during a given period.
Planned consumption spending:
The main factors determining consumption spending are
1 Households income.
2 Households wealth.
3 Interest rate.
4 Household expectation about future.

Consumption function:
The relation between income and consumption spending is called as
consumption function
C = a+ by
C = Consumption spending.
A = Consumption spending at zero income
B = the proportion of the increased income spent on consumption.
Y = income.
Savings Function:
The relation between income and savings is referred top as savings function.
S = Y C
And C = a +b y
S = Y (a+ b y)
S = -a +(1-b)Y
Where a = Savings at zero income.
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(1-b) = the proportion of increase in income saved.

MONOPOLY:
Monopoly is said to exist when one firm is the sole producer or seller of a
product which has no close substitutes. According to this definition there must
be a single producer or seller of a product if there are many producers
producing a product either perfect competition or monopolistic competition will
prevail depending upon whether the product is homogeneous or differentiated
on the other hand when there are few producers, oligopoly is said to exist . a
second condition which is essential for a firm to be called a monopolist is that no
close substitutes for the product of that firm should be available.
From the above discussion it follows that for monopoly to exist following
conditions are essential
One and only firm produces and sells a particular commodity or a service
There are no rivals or direct competitors of the firm
No other seller can enter the market for whatever reasons- legal, technical
or economic.
Monopolist is a price maker .he tries to take the best of whatever demand
and cost conditions exist without the fear of new firms entering to compete
away his profits.
In the case of monopoly one firm constitutes the whole industry Therefore
the entire demand of the consumer for that product faces the monopolist which
slopes downward. Monopolist can lower the price by increasing his level of sales
and output and he can raise the price by reducing his level of sales demand
curve facing the monopolist will be his average revenue curve. Which also slopes
downward since average revenue curve slopes downward, marginal revenue
curve will be below it

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QUESTION BANK
FILL IN THE BLANKS.
1 National product is also referred to as--------------------2 Gross national income includes the total value produced within a country
together with its income received from other countries ----------------- similar
payments made to other countries.
3 The value of wood used to make a wardrobe is not included in the calculation
of national income so as to avoid the problem of -----------------QUESTION FOR DISCUSSION
1
2
3
4

What is aggregate demand?

What is consumption function?
What is paradox of thrift?
What do you understand by competition in the market? How

monopolistic competitions affect market activities?

Explain briefly about monopoly policies?

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