Mefa 1 &2 Units PDF

Unit-I: Introduction to Managerial Economics 1.
UNIT – I
INTRODUCTION TO MANAGERIAL ECONOMICS
MANAGERIAL ECONOMICS
Managerial economics is an offshoot of two distinct disciplines: Economics and
Management. Economics is a study of human activity both at individual and national level.
Every one of us in involved in efforts aimed at earning money and spending this money to
satisfy our wants such as food, Clothing, shelter, and others. Such activities of earning and
spending money are called “Economic activities”.
Management is the science and art of getting things done through people in formally
organized groups. It is necessary that every organization be well managed to enable it to
achieve its desired goals. Management includes a number of functions like planning,
organizing, staffing, directing, and controlling.
Meaning:
Managerial economics has been generally defined as the study of economic theories,
logic and tools of economic analysis, used in the process of business decision making.
Managerial Economics is also called as “Industrial Economics” or “Business Economics” or
“Economics of Management”.
The Economic Principles, Concepts, tools and techniques that can be applied
practically to solve the problems of business is known as Managerial Economics.
Here two aspects are involved i.e.,
 Decision Making: It involves selection of best alternative, estimating the cost, and
 Forward Planning: It is a projected blue print of operations with their costs and
benefits.
Definition:
1. M. H. Spencer and Louis Siegelman explain the “Managerial Economics is the
integration of economic theory with business practice for the purpose of facilitating
decision making and forward planning by management”.
2. Edurin Mansfield, "Managerial Economics is concerned with the application of
economic concepts and economic analysis to the problem of formulating rational
managerial decisions".
CHARACTERISTICS / NATURE OF MANAGERIAL ECONOMICS

As it originates from Economics, it has the basis features of economics, such as
assuming that other things remaining the same. The features of managerial economics are
explained as below:
1. Close to Micro Economics: Managerial economics is concerned with finding the
solutions for different managerial problems of a particular firm. It studies how the firm
can use resources to produce more output with minimum cost and maximum profit.
2. Operates against the backdrop of Macro economics: The managerial economist has
to be aware of the limits set by the macroeconomics conditions such as government
industrial policy, inflation and so on.
Unit-I: Introduction to Managerial Economics 1.2
3. Concerned with Normative Economics: A normative statement usually includes or

implies the words ‘ought’ or ‘should’. It suggests the business firm to do certain things
which will benefit them and not to do certain things which leads to losses.
4. Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the
objectives of the firm, it suggests the course of action from the available alternatives
for optimal solution.
5. Application Oriented: Managerial Economics solves complicated problems and
decision making skills can be improved by applying some principles and concepts. We
also employ case study methods to conceptualize the problem, identify that alternative
and determine the best course of action.
6. Interdisciplinary: The tools and techniques of managerial economics are drawn from
different subjects such as economics, management, mathematics, statistics,
accountancy, psychology, organizational behavior, sociology and etc.
7. Assumptions and limitations: Every concept and theory of managerial economics is
based on certain assumption and as such their validity is not universal. If there is
change in assumptions, the theory may not hold good.
SCOPE OF MANAGERIAL ECONOMICS

The scope of managerial economics refers to its area of study. The main focus of
Managerial economics is to find an optimal solution to a given managerial problem. The
managerial economist makes used of concepts, tools and theories of economics and other
related disciplines to find the solution to given problems.
Managerial Problems
Production Decisions
Make-Buy Decisions
Concepts, Inventory Decisions
Tools & applied for Optimum
Investment Decisions
Techniques to Solutions
Profit planning & management
Determination of price of goods
Reduction or control costs
Human Resource Management
1. Demand Decisions: Demand analysis should be a basic activity of the firm because
many of the other activities of the firms depend upon the outcome of the demand
forecast. The implications are like need of customers, change in price or supply. The
impacts of these are assessed and the decisions are taken to maximize the profits.
2. Profit related Decisions: Profit making is the major goal of firms. There are several
techniques such as Break-Even analysis, cost reduction, cost control and ratio analysis
to ascertain level of profits. In BEP we are concerned with profit planning and
control. If a firm produces less than BEP it gets losses.
3. Pricing – Output Decisions: Pricing decisions have been always within the preview
of managerial economics. Here the production is ready and the task is to determine
the price in different market situations as perfect and imperfect market ranging from
monopoly, duopoly and oligopoly. The pricing policies, methods, strategies and
practices constitute part of the study.
4. Input – Output Decisions: The costs of inputs in relation to output are studied to
optimize profits. The behaviors of costs at different levels of production are assessed
here. Some costs are fixed, semi-variable and variable. It is necessary to know the
relationship between costs and output both in short and long run.
5. Capital or investment Decisions: Capital is the foundation of business. Lack of
capital may result in small size of operations. Availability of capital from various
sources like equity capital, banks, institutional finance etc. may help to undertake
large-scale operations. Hence efficient allocation and management of capital is one of
the most important tasks of the managers.
6. Economic forecasting & Planning: Economic forecasting leads to forward planning.
The firm operates in an environment dominated by external and internal factors.
External factors include government policies, competition, employment, price and
income levels. Internal factors include policies and procedures relating to production,
finance and marketing. This will minimize the risk & uncertainty about the future.
LINKS WITH OTHER DISCIPLINES

Many new subjects have evolved in recent years due to the interaction among basic
disciplines. It is necessary to trace its roots and relationship with other disciplines. A
successful managerial economist must be a mathematician, a statistician and an economist.
1. Economics: Managerial Economics if the offshoot of economics. Economics deals
with theoretical concepts where as Managerial economics deal with application of
these in real life. The relationship between them may be viewed from the point of
view of the two approaches to the subject Viz. Micro Economics and Marco
Economics. Managerial economics is rooted in Micro Economic theory.
2. Management and Accounting: Managerial economics has been influenced by the
developments in management theory and accounting techniques. Accounting refers to
the recording of transactions of the firm in certain books. It provides information
relating to costs, revenues, receivables, payables, profit & loss, etc. It is known as
Managerial Accounting.
3. Mathematics: Mathematical concepts and techniques are widely used in economic
logic to solve these problems. Also mathematical methods help to estimate and
predict the economic factors for decision making and forward planning. The concepts
like logarithms, exponentials, geometry, Algebra and calculus vectors etc., are widely
used. Advanced techniques like linear programming, inventory models and game
theory are also used.
4. Statistics: Managerial Economics needs the tools of statistics in more than one way.
A successful businessman must correctly estimate the demand for his product.
Statistical tools like probability, averages correlation, regression, time series, etc are
used in collecting data and analyzing them to help in the decision making process.
5. Operations Research: Managerial Economics focuses on problems on decision
making. It is a tool for finding the solutions for managerial problems such as linear
programming, queuing, transportation, optimization techniques. The varied tools of
operations Research are helpful to managerial economists in decision-making.
6. Computer Science: Computers have changes the way of the world functions and
economic or business activity is no exception. Computers are used in data and
accounts maintenance, inventory and stock controls and supply and demand
predictions.
7. Psychology: Consumers psychology is the basis on which managerial economist acts
upon i.e. how the customer reacts when there is a change in price, supply, income, etc.
DEMAND ANALYSIS
Demand means the quantity of goods or service which the consumer would buy in the
market at a given time and given place. Every want supported by the willingness and ability
to buy constitutes demand for a product or service a product or service is said to have demand
when three conditions are satisfied:
 Desire for specific commodity
 Willingness to pay for it
 Ability to pay for certain price, place & time.
Definition:
According to Benham, “The demand for anything, at a given price, is the amount of it,
which well be bought per unit of time at that price.
Demand Schedule:
The tabular presentation of relationship between price and demand for a commodity is
known as Demand Schedule.
Demand Curve:
The graphical representation of demand schedule or relationship between price and
demand for a product is known as Demand Curve
INDIVIDUAL DEMAND
It shows the quantities of demand for a commodity by a particular consumer at
various prices of that commodity.
Ex: Mohan’s demand for milk and Sohan’s demand for milk represent individual demand
schedule and curve.
Individual Demand Schedule

Price of Milk Mohan’s Demand
15 2
14 3
13 5
Y
D
Price
0 Demand X
Individual Demand Curve
MARKET DEMAND
The demand of the whole market at various prices of the commodity is known as
market demand. It is shown by market demand schedule and demand curve. By adding
individual demand schedules we get market demand schedule.
Ex: X’s & Y’s demand for milk.
Market Demand Schedule

Price of Milk X’s Demand Y’s Demand Market Demand
15 2 1 3
14 3 2 5
13 5 4 9
12 6 5 11
Y D
Price
0 Demand X
Market Demand Curve
INCOME DEMAND
It indicates the relationship between income of the consumer and the quantity of
commodity demanded, other things remaining constant like price, taste, nature, etc.
(a) Demand for Normal Goods:

Normal goods are those goods whose demand increases with rise in income
and decreases with fall in income. The income demand curve has a positive slope. It is
an upward sloping curve. Normal goods are price negative, with increase in price
demand falls and vice-versa.
Ex: bread, wheat, milk, etc.
Income Demand
10,000 100
20,000 200
Y
D
Income
I1
I
D
0 D D1 X
Demand
(b) Demand for Inferior Goods:

The demand for these goods decreases with the rise in consumer’s income. In
this case, there is inverse relation between income and demand. The income demand
curve has negative slope.
Ex: ghee, grain, etc.
Income Demand
10,000 100
20,000 50
Y
D
Income
0 Demand X
CROSS DEMAND
When a change in the price of one commodity results in the change of demand of
other commodity, it is known as Cross Demand. It indicates how the prices of related goods
are affected by the changes in demand.
(a) Demand for Substitute or Competitive goods:

Commodities which can be used in place of other goods are known as substitute
goods. With a rise in price of product A the demand for it decreases and demand for
product B increases.
Ex: Tea & Coffee, bread & rice, etc.
Price of Coffee Demand for Tea

100 20
200 25
Y
D
Price
P1
P
D
0 D D1 X
Demand
(b) Demand for Complementary Goods:

Commodities which are required jointly are termed as complementary goods. A
fall in price of commodity A brings rise I demand for commodity B. These products have
joint demand.
Ex: Pen & paper, car & petrol, printer & cartridge, etc.
Price of petrol Demand for car

100 10
200 20
Y
D
Price
0 Quantity X
DEMAND DISTINCTIONS
1. Consumer goods Vs. Producer goods:
Consumer goods refer to such products and services which are capable of
satisfying human needs. These are available for ultimate consumption. These give direct
and immediate satisfaction. Ex: bread, apple, rice, milk, etc.
Producer goods are those which are used for further process of production of
goods or services to earn income. Ex: machinery, tractor, etc.
2. Durable goods Vs. Perishable goods:

Durable goods are those which give service relatively for a long time. Ex: TV,
refrigerator, etc. Perishable goods are those which have short life time, it may be in hours
or days. Ex: milk, vegetables, fish, etc.
3. Short-run Demand Vs. Long-run Demand:

The demand for a product or service in a given region for a particular day is short-
run demand. The demand which has immediate reaction to changes in price, income is
called short-run.
The demand for a longer period for the same region can be viewed as long-run.
The demand which will ultimately exist as a result of changes in price, promotion or
product improvement is long run demand.
4. Firm Demand Vs. Industry Demand:

The firm is a single business unit. The quantity of goods demanded by a single
firm is called firm demand. Industry refers to a group of firms carrying on similar
business activity. The quantity demanded by the industry as a whole is called Industry
demand.
5. Autonomous Demand Vs. Derived Demand:

Autonomous refers to the demand for products directly. Ex: Hospitals, schools, etc.
Derived refers to the demand for a product arises out of purchase of parent
product. Ex: Hotels, etc. Demand for house is autonomous and demand for units like
brick, sand, cement, iron etc are derived.
6. New Demand Vs. Replacement Demand:

New refers to the demand for new products and it is addition to existing stock. Ex:
cars, bikes, etc.
Replacement refers to the item purchased to maintain the asset in good condition
or replacing the existing one. Ex: TC, washing machine, etc.
7. Total Market Demand Vs. Segment Market Demand:

The total demand for a product in a region in known as total market demand.
Ex: sugar, etc.
The demand for a product for a firm or industry from this region is segment
market demand. Ex: demand for sugar for sweet making industry.
DEMAND FUNCTION
It is a function which describes a relationship between one variable and its
determinants. It describes how much quantity of goods are brought at alternative prices of
goods and its related goods, alternative income levels, alternative values of other variables.
Thus the above factors can be built up into a demand function.
Mathematically, the demand function for a product can be explained as:
Qd = f (P, I, T, PR, EP, EI, SP, DC, A, O)
Where,
Qd refers to quantity of demand and it is a function of the various determinants
Demand Determinants:
1. Price of the product (P): The price of the product and its quantity demanded is
inversely related. If there is a fall in the price of the product, there is a rise in the
demand for that product and vice-versa.
2. Income of the consumer (I): A consumer with an average income spends to buy
some commodities. As he becomes richer he spends his money to buy adequate
quantities so that he becomes satisfied quantitatively. Once he is satisfied
quantitatively he spends his increased income to improve quality consumption. The
former type of goods are called inferior goods and latter are called superior goods.
3. Tastes & Preferences (T): Taste and preference depend on the changing life-style,
customs, religious values attached to a good, habit of the people, the general levels of
living of the society and age and sex of the consumers. Change in these factors
changes consumer's taste and preferences.
4. Prices of related goods (PR): Goods and services have two kinds of relationships -
substitute goods or complementary goods. When there is a fall in the price of a
commodity x, the demand for it (x) goes up. This further leads to a fall in the demand
for its substitute goods and vice versa. With a fall in the price of x, increases the
demand for its complementary goods.
5. Expected change in future Income (EI): If the consumer expects that his income
will be higher in the future the consumer may buy the good now. In other words
positive expectations about future income may encourage present consumption.
6. Expected change in future Prices (EP): If consumers expect a rise in the price of a
storable good, they would buy more of it at its current price with a view to avoiding
the possibility of price rise future. If he expects a fall in the price of certain goods,
they postpone their purchase to take advantage of lower prices in future.
7. Size of Population (SP): As the consumption habits vary from region to region the
demand for a product depends positively upon the size of population i.e. children and
adults, male and female, rich and poor.
8. Distribution to Customers (DC): The distribution changes from region to region
which depends on the demand for a product and it also changes with the needs of
children and adults, and rich and poor. Thus demand is affected by various sections of
a community.
9. Advertisement (A): Advertisement costs are incurred with the objective of promoting
sale of the product. It helps in increasing the demand for the product through various
media like T.V, radio, newspapers, etc.
10. Other factors (O): With a change in other factors like nature, quality and quantity
also the demand for the product changes from time to time.
LAW OF DEMAND
Law of demand shows the relation between price and quantity demanded of a
commodity in the market with an assumption that all the other demand determinants remain
same or do no change. In the words of Marshall, “the amount demand increases with a fall in
price and diminishes with a rise in price”.
The demand curve slopes downward from left to right and with a fall in price of a
product the demand goes on increasing and vice-versa.
Assumptions of Law of Demand:

Law is demand is based on certain assumptions:
1. No change in consumers income or remain constant.
2. No change in consumers taste and preferences.
3. No change in Prices of other related goods.
4. There should be no substitute for the commodity.
5. No change in the size of population.
Exceptions of Law of Demand:

There are certain exceptions to the law of demand as follows:
1) Giffen Paradox or Inferior Goods: When the price of an inferior good falls, the
demand may not increase, instead they buy the same quantity and use the savings for
purchase of better goods like meat, etc. Thus a fall in price is followed by reduction in
quantity demanded and vice versa. “Giffen” first explained this and therefore it is
called as Giffen’s paradox. Ex: bread, cloth, broken rice, etc.
2) Veblen Effect or Conspicuous consumption: This law will not apply in case of
costly items. Rich people buy certain good because it gives social distinction or
prestige. It the price of diamonds falls poor also will buy is hence they will not give
prestige. These products have demand even if the prices go higher. This effect is
called Veblen effect. Ex: Diamond, Gold, etc.
3) Ignorance: Sometimes the quantity of the product is judged by its price. If the
consumer is not aware of the competitive price of the product that is prevailing in the
market, he may purchase more even at a higher price. Consumers think that the
product is superior if the price is high and they buy more at a higher price. Ex:
Exhibitions
4) Speculative Effect or Expected changes in prices: The law of demand does not
operate in case of speculative demand. When there is an expectation of further rise in
the price of a product or service, the demand increases more and more even with a
rise in price. Similarly, if there is an expectation that the price of a product or service
falls in future the demand also falls. Ex: Shares
5) Extra ordinary situations: During the times extra ordinary situations such as
emergency, wars, famines, riots, floods, strikes, etc., the consumer becomes abnormal
and buys products at any price available in the market. Due to the fear of scarcity of
products they buy more at higher prices.
6) Change in tastes and preferences: The changes in consumer needs, fashions, tastes,
preferences, customs, beliefs, etc., are also responsible to make the law of demand
ineffective. The quantity demanded will remain same irrespective of the change in
price.
ELASTICITY OF DEMAND
Elasticity of demand explains the relationship between a change in price and
consequent change in amount demanded. “Marshall” introduced the concept of elasticity of
demand. Elasticity of demand shows the extent of change in quantity demanded to a change
in price.
In the words of “Marshall”, “The elasticity of demand in a market is great or small
according as the amount demanded increases much or little for a given fall in the price and
diminishes much or little for a given rise in Price”.
Percentage change in the dependent variable

Elasticity =
Percentage change in the independent variable
 Elastic demand: A small change or no change in price may lead to a great or infinite
change in quantity demanded. In this case, demand is “Elastic” (Ed>1).
 In-elastic demand: If a large change in price is followed by a small change or no
change in quantity demanded then the demand in “Inelastic” (Ed<1).
 Unitary demand: If the change in demand is exactly equal or proportionate to the
change in price, then it is “Unitary” (Ed=1).
Factors affecting Elasticity of Demand:

1. Nature of the Commodity: Based on their nature, the products and services are
classified as Necessaries, Comforts and Luxuries. Necessaries imply basic things like
food, clothing and shelter. Comforts imply TV, DVD players, etc. Luxuries refer to
gold, diamonds, etc. These change from person to person, time to time and place to
place.
2. Time period: The demand for a commodity is always related to same period of time,
say a day, a week, a month, etc. Elasticity of demand varies with the length of time
periods. Generally longer the duration of period, greater will be the elasticity of
demand and vice-versa.
3. Change in Income: The demand for various commodities are affected in different
degrees due to change in income. The change in income in case of comforts is less
elastic and incase of necessaries it is probably inelastic.
4. Postponement of Consumption: The demand for commodities, whose consumption
can be postponed for sometime, is elastic Ex: VCR, TV, etc. if prices are higher. The
demand for necessities such as food grains are inelastic, they cannot be postponed.
5. Tastes and Preferences: When a customer is particular about his taste and
preference, the product is said to be in elastic. Ex: Colgate, Tate Tea, etc.
6. Complementary products: In case of complementary goods having joint demand the
elasticity is low.
7. Availability of Substitutes: The demand for commodities having substitutes is
elastic, because if there is increase in price of a product, we use other products. Ex:
gas, kerosene, coal, electricity, etc. The commodities having no substitutes are
inelastic.
8. Price level: Generally the demands for very costly or very cheap goods are inelastic.
Ex: Car and salt. The increase in price of car by Rs.10,000 will not make any
difference in its demand. Similarly changes in very cheap goods do not have any
effect on demand.
9. Durability of the product: Where the product is durable in case of consumer
durables such as TC, the demand is elastic. In case of perishable goods it is inelastic.
10. Government Policy: When the policy is liberal, the demand for the product is elastic
demand and vice-versa.
TYPES OF ELASTICITY OF DEMAND

There are four types of Elasticity of Demand:
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Advertisement Elasticity of Demand
I. PRICE ELASTICITY OF DEMAND:

Marshall was the first economist to define price elasticity of demand. Price elasticity
of demand measures changes in quantity demand to a change in Price. It is the ratio of
percentage change in quantity demanded to a percentage change in price. Price elasticity is
always negative which indicates that the consumer tends to buy more with every fall in price.
proportionate/percentage change in quantity demand for product 'X'

Price Elasticity =
proportionate/percentage change in price of product 'X'
The formula is mathematically presented as:

(Q2 - Q1)/Q1 ∆Q P
Ed = or ×
(P2 - P1)/P1 ∆P Q
where, ∆Q = change in quantity demanded or difference in Q2 - Q1

∆P = change in price or difference in P2 - P1
P = price of product
Q = quantity demanded
Example:
Price Quantity ∆Q = 2
8 10 ∆P = 4
4 12 P=8
Q = 10
2/10 2 8
Ed = or × = 0.4 (Inelastic)
4/8 4 10
Degrees/Types of Price Elasticity of Demand:

The Measures of Elasticity of Demand are divided in to five categories. It is also
referred as Degrees or Types of Price Elasticity of Demand:
1. Perfectly Elastic demand (Ed=∞):

It is also known as Infinite Elasticity of demand. When small change in price
leads to an infinitely large change is quantity demand, it is called perfectly or infinitely
elastic demand. In this case Ed=∞.
P D
Price
0 Q Q1 X
Quantity
The demand curve DD is horizontal straight line or parallel to X-axis. It shows
the at “OP” price any amount is demand and if price increases, the consumer will not
purchase the commodity.
2. Perfectly Inelastic Demand (Ed=0):

It is also known as Zero Elasticity of demand. In this case, even a large change in
price fails to bring about a change in quantity demanded or demand remains constant. Ex:
Salt. In this case Ed=0.
Y
D
Price
P1
0 Q X
Quantity
The demand curve DD is parallel or vertical to Y-axis. When price increases

from ‘OP’ to ‘OP1’, the quantity demanded remains the same. In other words the
response of demand to a change in Price is nil.
3. Unitary Elasticity of Demand (Ed=1):

The change in demand is exactly equal to the change in price. When both are
equal Ed=1 and elasticity is said to be unitary.
Y
D
P
P1
Price
D
0 Q Q1 X
Quantity
The demand curve DD is in the shape of Rectangular Hyperbola. When price
falls from ‘OP’ to ‘OP1’ quantity demanded increases from ‘OQ’ to ‘OQ1’. Thus a
change in price has resulted in an equal change in quantity.
4. Relatively Elastic Demand (Ed>1):

It is also referred as More than unitary Elasticity of demand. Demand changes more
than proportionately to a change in price. i.e. a small change in price leads to a very big
change in the quantity demanded. Here Ed>1.
Y
D
P
D
P1
Price
0 Q Q1 X
Quantity
Here the demand curve is inclined to X-axis or curve will be flatter. When price falls
from ‘OP’ to ‘OP1’, amount demanded increase from ‘OQ’ to ‘OQ1’ which is larger than the
change in price.
5. Relatively In-Elastic Demand (Ed<1):

Quantity demanded changes less than proportional to a change in price. A large
change in price leads to small change in amount demanded. Here Ed<1.
Y
D
P
P1
Price
0 Q Q1 X
Quantity
Here the demand curve is inclined towards Y-axis or the curve will be steeper. When
price falls from ‘OP’ to ‘OP1‘, amount demanded increases from OQ to OQ1, which is
smaller than the change in price.
II. INCOME ELASTICITY OF DEMAND

It refers to the quantity demanded of a product in response to given change in income
of the consumer. It is normally positive, which indicates the consumer tends to buy more and
more with every increase in income.
proportionate change in quantity demanded for product 'X'

Income Elasticity =
proportionate change in consumers income

(Q2 - Q1)/Q1 ∆Q I
Ed = or ×
(I2 - I1)/I1 ∆I Q
where, ∆Q = change in quantity demanded or difference in Q2 -Q1

∆I = change in income or difference in I2 - I1
I = income of the consumer
Example:
Income Quantity ∆Q = 5
4000 20 ∆I = 1000
5000 25 I = 4000
Q = 20
5/20 5 4000
Ed = or × = 1 (unitary)
1000/4000 1000 20
Degrees/Types of Income Elasticity of Demand:

The income elasticity of demand is positive for superior/normal goods and negative
for inferior goods. The income elasticity of demand is shown as follows:
1. Positive income elasticity of demand:
The income elasticity of demand is positive when change in income leads to a direct
and more than proportionate change in quantity demanded. It is as follows:
(a) Income elasticity of demand greater than unity: For a given proportionate rise in
the consumer’s income, there is a greater proportionate rise in the quantity demanded
of a commodity. EI is greater than unity. This is in case of luxuries. (EI >1).
Quantity
(b) Income elasticity of demand less than unity: For a given proportionate rise in the
consumer’s income, there is a smaller proportionate rise in the quantity demanded of a
commodity. The income elasticity of demand is less than unity in case of necessaries.
(EI < 1).
Quantity
(c) Unitary income elasticity: A given proportionate rise in the consumer’s income is
accompanied by an equally proportionate rise in the quantity demanded of a
commodity and vice versa (EI=1).
Quantity
2. Zero Income Elasticity: A given increase in the consumer’s income does not result in
any increase in the quantity demanded of a commodity (E I =0).
Quantity
3. Negative income elasticity: A given increase in the consumer’s money income is
followed by an actual fall in the quantity demanded of a commodity. This happens in
the case of economically inferior goods (E I < 0).
Quantity
The income elasticity of demand is negative, when an increase in income leads
to decrease in quantity demanded.
III. CROSS ELASTICITY OF DEMAND:

Cross-price elasticity of demand (EXY) measures the responsiveness of quantity
demanded of good X to changes in the price of related good Y, holding the price of good X &
all other demand determinants for good X constant. These are substitute or complimentary
goods.
proportionate change in demand for product 'X'
Cross Elasticity =
proportionate change in price of product 'Y'

(Qx2 - Qx1)/Qx1 ∆Qx Py
Ed = or ×
(Py2 - Py1)/Py1 ∆Py Qx
where, ∆Qx = change in quantity demanded or difference in Qx2 - Qx1
∆Py = change in price or difference in Py2 - Py1
Py = price of product y
Qx = quantity demanded for product x
Example:
Price of Y Quantity of X ∆Qx = 20
20 100 ∆Py = 10
30 120 Py = 20
Qx = 100
20/100 20 20
10/20 10 100
Degrees/Types of Cross Elasticity of Demand:

Cross elasticity of demand is always referred to substitute and complements. It should
be noted that greater the cross elasticity, the more related the two goods are. The cross
elasticity will be zero, if the two goods have no relationship.
1. Substitutes: Substitutes in consumption are goods that can be used in place of each
other. The cross elasticity for substitutes in consumption is positive. This is because a
rise in the price of good Y will cause people to substitute the cheaper good X for Y.
Example: Pepsi & Coke.
Price of Coke Price of Pepsi Quantity of Pepsi

20 25 10
30 25 20
D1 D2
P D
Price
0 Q Q1 X
Quantity
2. Complements: Complements are goods that are consumed together. The cross
elasticity for complements in consumption is negative. This is because a rise in the
price of good Y will cause people to consume less of good Y. since they consume X
& Y together, they will consume less of good X as well. Example: Coffee & Sugar.
Quantity
Price of Petrol Price of Car
demanded Car
70 100 10
80 100 20
Y
D2 D1
P D
Price
0 Q Q1 X
Quantity
IV. ADVERTISING ELASTICITY OF DEMAND:

It measures the response of quantity demanded to change in the expenditure on
advertising and other sales promotion activities. Advertising elasticity is always positive. The
advertisement-elasticity of sales varies between zero and infinity. Thus, 0 ≤ EA ≤ ∞.
proportionate change in quantity demanded for product 'X'

Advertising Elasticity =
proportionate change in advertising costs

(Q2 - Q1)/Q1 ∆Q A
Ed = or ×
(A2 - A1)/A1 ∆A Q
where, ∆Q = change in quantity demanded or difference in Q2 - Q1
∆A = change in advertisement cost or difference in A2 - A1
A = Advertisement costs
Example:
Advertisement Quantity ∆Q = 100
10000 300 ∆A = 5000
5000 200 A = 10000
Q = 300
100/300 100 10000

5000/10000 5000 300
Degrees/Types of Advertisement Elasticity of Demand:

1. Zero Elasticity of Demand (EA=0): The sales do not respond to advertisement
expenditure.
2. Less than Elasticity of Demand (0 < EA < 1): The increase in total Sales is less than
proportionate to the increase in advertisement expenditure.
3. More than Elastic Demand (EA>1): The sales increase at a higher rate than the rate
of increase in advertisement expenditure.
4. Unitary Elasticity of Demand (EA=1): The sales increase in proportion to the
increase in expenditure on advertisement.
SIGNIFICANCE OF ELASTICITY OF DEMAND

The concept of elasticity of demand is much of practical importance:
1. Price fixation: The demand for any product depends upon its price. Hence, the price
fixed for any product must suit the market conditions, more precisely, the consumers’
expectations and prices of competing brands. Before launching any product, the
enterprise must analyze carefully the price elasticity for it in order to match market
expectations. A mismatch may result in failure of the product. Thus, a product having
more elasticity cannot be priced high. On the other hand, low price level is always
desirable to the product with less elasticity.
2. Price discrimination: If the monopolist finds that the demand for his commodities is
inelastic, he will at once fix the price at a higher level in order to maximize his net
profit. In case of elastic demand, he will lower the price in order to increase his sale
and derive the maximum net profit.
3. Taxation Policy: Tax authorities study the price elasticity of each type of product
before fixing its rate of tax, as levying a higher rate of tax for a relatively elastic
product will lead to increase in price and consequently reduce its sales and thus tax
revenues. They have to see whether the demand for that commodity is elastic or
inelastic.
4. Distribution: Elasticity provides a guideline to the producers for the amount to be
spent on advertisement. If the demand for a commodity is elastic, the producers shall
have to spend large sums of money on advertisements to increase sales.
5. International trade: This concept helps in finding out the terms of trade between two
countries. Terms of trade means rate at which domestic commodities is exchanged for
foreign commodities. The rate of foreign exchange is also considered on the elasticity
of imports and exports of a country.
6. Production: Producers generally decide their production level on the basis of demand
for their product. Hence elasticity of demand helps to fix the level of output. The
factors of production which have inelastic demand can obtain a higher price in the
market then those which have elastic demand. This concept explains the reason of
variation in factor pricing.
7. Help to trade unions: The trade unions can raise the wages of the labor in an
industry where the demand of the product is relatively inelastic. On the other hand, if
the demand, for product is relatively elastic, the trade unions cannot press for higher
wages.
8. Importance to businessmen: The concept of elasticity is of great importance to
businessmen. When the demand of a good is elastic, they increases sale by towering
its price. In case the demand' is inelastic, they are then in a position to charge higher
price for a commodity.
9. Others Factors: The concept elasticity of demand also helping in taking other vital
decision Ex: Determining the price of joint product, take over decision etc.
DEMAND FORECASTING
Demand Forecasting refers to an estimate of future demand for the product. It is an
“objective assessment of the future course of demand”. Forecasting helps the firm to assess
the probable demand for its products and plan its production accordingly.
Demand forecasting is helpful not only at firm level but also at national level. It is the
key driver for success or failure. It is essential to guard the future against any surprises.
Demand forecast relate to production inventory control, timing, reliability of forecast, etc. It
is an essential element to make business decisions to foresee the future and act accordingly.
Demand forecasting may be undertaken at three different levels:

1. Firm level: It is more important from managerial view point as it helps the
management in decision making with regard to the firms demand and production.
2. Industry Level: It is prepared by different trade association in order to estimate the
demand for particular industries products. Industry includes number of firms. It is
useful for inter- industry comparison.
3. Macro level: Micro level demand forecasting is related to the business conditions
prevailing in the economy as a whole.
TECHNIQUES OF DEMAND FORECASTING

Demand forecasting plays an important role in decision making. It is crucial to use the
best technique to minimize forecast inaccuracy. However there is no unique method, which
always guarantees the best result. The choice of a method often depends upon data
availability, urgency of forecast, etc.
Demand forecasting techniques range from the simple to the extremely complex.
There are two approaches to the problem of business forecasting. One is to obtain
information about the intentions of the consumers through collecting expert’s opinion known
as qualitative method and the other is to use past experience as a guide and, by extrapolating
past statistical relationships to suggest the level of future demand called as quantitative
method. The various forecasting methods are:
Qualitative Techniques (Survey Method):

1. Consumer’s opinion survey
 Census Method
 Sample Method
2. Sales force opinion method
3. Expert opinion Method or Delphi Method
4. Test Marketing
5. End-Use Method
Quantitative Techniques (Statistical Methods):

1. Trend Projection Method
a) Trend line by observation
b) Least Square Method
c) Time Series Analysis
d) Moving Average Method
e) Exponential Smoothing
2. Barometric Method
3. Simultaneous Equation Method
4. Correlation and Regression Method
QUALITATIVE TECHNIQUES (SURVEY METHODS)

When sufficient data for statistical analysis are not available, if may become
necessary to perform marketing research in which the analyst obtain certain information
directly from the consumer rather than from statistical data. The following are the qualitative
techniques for demand forecasting:
1. Consumer’s opinion survey:

Individuals and companies plan in advance for their future purchases. For this it is
important that buyers should be approached and asked as how much they intend to buy a
particular product, at a particular point of time. This is the most effective method as the buyer
is the ultimate decision maker, so we are collecting the information directly from him.
Consumer surveys can be used to ask consumers about buying behaviors, using a number of
ways like face to face, telephone, direct mail, internet, spot survey, etc.
Consumer survey can be done in two ways:
 Census Method: When the total population of potential buyers in a nation or
region is surveyed it is known as census method. This is possible when the total
number of buyers is limited.
 Sample Method: When only a portion/group of total population of potential buyers in
a region is surveyed it is called sample method. It is less tedious and less costly.
2. Sales force opinion method:

In this method, the firm will extract the opinions of the sales team, which is on the
payrolls of the company about the future demand for the product. The sales personnel are
very close to the consumers and dealers. They express their opinions about the future demand
for the product. The opinions so gathered are tabulated and the demand forecasts will be
arrived at. However, care be taken before forming an opinion about the future demand.
3. Expert Opinion Method or Delphi Method:

Expert opinion method is a variant of the consumer's opinion survey method. It was
also popular as Delphi method and first used by Rand Corporation in USA for predicting the
demand under conditions of intractable technological changes. It is used under conditions of
nonexistence of data or when a new product is being launched. Experts are the outside
persons and they do not have any interest in results of particular survey. It is used for
predicting the demand under conditions of technological changes. It is under conditions of
non-existence of data or when a new product is launched.
4. Test Marketing:
Firms resort to test marketing while launching a new product or likely to change the
design or model of the existing products. This is also known as controlled experimentation
method as the product is likely to be launched in a segmented market to identity its demand
potential. The essential prerequisites of test marketing are that the product price, its design,
quality, level of advertisement and sales promotion campaign should be equal in promotion to
that of what the firm is likely to incur had it been released in the national market.
5. End user survey Method:

The end-use method applies for forecasting the demand for intermediate products.
These are products used in the manufacture of some other final goods. The demand for the
final product is an indicator of the demand for intermediate product, subject to the availability
of the input-output coefficients. Once the demand for the final goods estimated, the demand
for the intermediate product can be easily arrived at using the input-output coefficients.
QUANTITATIVE TECHNIQUES (STATISTICAL METHODS)

These are based on the assumption that future patterns tend to be extensions of past
ones and that one can make useful predictions by studying the past behaviour i.e. the factors
which were responsible in the past will also be operative to the same extent in future.
The following are the statistical techniques for demand forecasting:
1. Trend Projection Method:

It is also referred as Mechanical Extrapolations Method. These are generally based
on analysis of past sales data. For forecasting the demand for goods in long-run, statistical
and mathematical methods are used for considering past data.
The mechanical extrapolation methods used for demand forecasting are:
a) Time Series Analysis:

Where the surveys or market tests are costly and time consuming, statistical
analysis provides another method to prepare forecasts, i.e. time series analysis. In this the
product should have been traded in the market in the past i.e. data on performance should be
available. It can forecast future values of time series by examining past observations only.
There are four major components for forecasting demand:
1. Trend (T): It results in developments in population, capital and technology. It refers
to increase or decrease in time series data. It relates to over a period of long time say
five to 10 years.
2. Cyclic Trend (C): These are variations caused by economic cycles like boom,
depression, recovery. These economic changes causes severely the firms sales graph
move upward and downward depending on the economic cycle the firm is operating.
3. Seasonal Trend (S): It refers to a consistent pattern of sales movements within
a year. More goods are sold during festival seasons. It may be related to weather
factors, holidays, etc.
4. Erratic Trend (E): It results from occurrence of strikes, riots, wars, natural
disasters, etc. These make forecasting process more complex or difficult.
Time series involves process of decomposing original sales series (y) in to
components T,C,S,E. There are different models while one model states
Y=T+C+S+E, another states that Y=T*C*S*E. It can be projected in a graph i.e. sales on Y
axis and time on X axis. It is very simple and inexpensive.
b) Trend line by observation:

This method of forecasting trend is easy and quick as it involves the plotting the
actual sales data on a chart and their estimating by observation where the trend line lies
from the graph. In this method based on the Time series data, for the period is taken on x-axis
and the corresponding sales values on y-axis and the points are plotted for given data on
graph paper. It is a very simple, quick and inexpensive method.
c) Least Square Method:

This is one of the best methods to determine trend. In most cases, we try to fit a
straight line to the given data. The line is known as ‘Line of best fit’ as we try to minimize
the sum of the squares of deviation between the observed and the fitted values of the data.
The basic assumption here is that the relationship between the various factors remains
unchanged in future period also.
Certain statistical formulae are used to find the trend line which fits the available data.
The estimating trend line is projected by a linear equation.
Y = a + bX
where,
Y = future sales
X = period for a certain commodity
a = Y axis intercept i.e, constant
b = Coefficient of the determining variable x
The value of a & b can be calculated as follows:
Σy=Na+bx
Σxy=aΣx+bΣx2
where,
N = No. of years or months for which data is available.
d) Moving Average Method:

This method can be used to determine the trend values for given data without
going into complex mathematical calculations. The calculations are based on some
predetermined period in weeks, months, years, etc. A moving average is an average of some
fixed or pre-determined number of observations (given by the period) which moves through
the series by dropping of top item of the previous averaged group and adding the next
item below in each successive average. The calculation depends upon the period to be odd
or even. It is simple to use and easy to understand.
e) Exponential Smoothing:
This technique is an improvement over moving averages method. Unlike in moving
averages method, all the time periods are assigned weights in order that nearest one gets
higher weight and distant one gets lower weight. This method proves more realistic when the
data is consistent all through the year, unaffected by wide seasonal fluctuations. It is used for
short run demand forecasts. The formula for exponential smoothing is:
St + 1 = cSt + (1 – c) Smt
Where,
St + 1 = exponentially smoothed average for a new year
St = actual data in the most recent past
Smt = most recent smoothed forecast
c =smoothing constant
2. Barometric Technique or Lead-Lag Indicators Method:

Barometric Technique refers to the time series data on important business and
economic activities in key sectors of the economy. These time series are representative, in one
way or the other, of the aggregate business and economic activity in the economy as a
whole. An intelligent analysis and understanding of the time duration and the amplitude of
cyclical ups and downs in the selected indicators provide useful information regarding the
future behaviour of overall cyclical movements.
In this one set of data is used to predict another set. It focuses on cyclical variations
caused due to changes in economic environment (i.e. boom, depression and recovery). That is
why, this method it called barometric method. It evolves over a period of time which is
driven by changes in government policies, prices, inflation, employment, income, etc. It is a
simple method. It is a useful method for short-term forecasting. It is not applicable for long-
term forecasting.
3. Simultaneous Equation Method:

This method of demand forecasting involves the estimation of several simultaneous
equations. These equations are, generally, behavioural equations, mathematical identities, and
market-clearing equations. The simultaneous equations method is a complete and systematic
approach to forecasting in general. This is a simple way to forecast demand. The first step
is to identify the factors which effect demand of a product. The forecaster needs to
estimate the future values of only the exogenous variables. The firm usually indicates
demand in quantity as a function of Price (P), Income (I), Tastes & Preferences (T), etc as:
Qd = f (P, I, T, PR, EP, EI, SP, DC, A, O).
4. Correlation and Regression Method:

Correlation and regression methods are statistical techniques. Correlation describes
the Correlation is used to indicate the relationship between two variables. When one variable
increased with increase in other variable it is positive correlation and decreases it is negative
correlation. Demand forecasting can be done by relationship between demand and other
variables like Price, Income, etc.
Regression tries to explain the extent of this relationship. In this past data of two
variables is collected and converted in to equation to forecast demand for future. For
example, demand for cold drinks in a city may be said to depend largely on ‘per capita
income’ of the city and its population. Here, demand for cold drinks is a ‘dependent
variable’ and ‘per capita income’ and ‘population’ are the ‘explanatory’ variables. In this past
data of two variables is collected and converted in to equation to forecast demand for future.
Y= a +bx
Where,
Y= demand
a= fixed demand
b= rate of change of demand
X=value of related variables like price, income, etc.
IMPORTANT QUESTIONS
1. Define Managerial Economics? Explain the nature and scope of managerial
economics?
2. What is Demand? Explain the various determinants of demand?
3. What is law of demand? Explain the exceptions of law of demand?
4. What do you understand by elasticity of demand? Explain the factors governing it.
5. What are the types of elasticity of demand? Explain them diagrammatically.
6. Distinguish various types of price elasticity of demand. Discuss the factors on which
the elasticity of demand depends.
7. What is demand forecasting? Explain different methods of demand forecasting.
Unit-II: Theory of Production and Cost Analysis 2.1
UNIT - II
THEORY OF PRODUCTION AND COST ANALYSIS
PRODUCTION FUNCTION
The term Production function refers to the relationship between the inputs and outputs
produced by them in physical terms. The production function may be defined as the
functional relationship between physical inputs (i.e. the factors of production) and physical
outputs (i.e. the quantity of goods produced).
According to Watson - “Production function is the relation between physical inputs
and outputs of a firm”. A production function includes a wide range of inputs like Land,
Labour, Capital, Organization, and Technology. Algebraically, it may be expressed in the
form of an equation as:
Q = f (L, La, K, O, T)
where,
Q stands for the output of a good per unit of time;
f refers to the functional relationship;
L for land (or natural resources);
La for labour (or employees);
K for capital (or investment);
O for organization (or management); and
T for given technology.
The production function with many inputs cannot be depicted on a diagram.

Moreover, given the specific values of the various inputs, it becomes difficult to solve such a
production function mathematically. Economists, therefore, use a two input production
function. If we take two inputs, labour and capital, the production function assumes the form
Q = f (L, K)
It explains in what proportion, factor inputs should be combined to increase the
production with lower costs.
ISO – QUANTS
The term ‘Iso’ is derived from a Greek work which means ‘Equal’ and the term
‘Quant’ is derived from a Latin word which means ‘Quantity’. Iso-Quant means equal
quantity throughout the production process. It is defined as a curve which shows different
combinations of two inputs producing same level of output. It is also called ‘Iso-Product
Curve’.
The producer is indifferent as to which combination he uses for producing the same
level of output, so it is also known as ‘Product Indifference Curve’ or ‘Equal Product Curve’
or ‘Production function with two variables’.
Iso-Quant Schedule
Combinations Labour Capital Output (units)
A 1 20 1000
B 2 15 1000
C 3 11 1000
D 4 8 1000
E 5 4 1000
In the above schedule, there are five possible combinations. All the five combinations
yield the same level of output i.e. 1000 units. 20 units of labour and 1 unit of capital produce
1000 units. 15 units of labour and 2 units of capital also produce 1000 units and so on. All
combination are equally likely because all of them produce the same level of output i.e. 1000
units. Now if plot these combination of labour and capital, we shall get a curve. This curve is
known as an Iso-quant.
The table shows different combinations of input factors to yield an output of 100 units
of output. The degree of convexity of isoquants depends upon the rate at which marginal rate
of technical substitution changes. The greater the rate at which MRTS falls, the greater the
convexity of the isoquants and vice-versa. The graphical representation of an Iso-Product
schedule is Iso-Quant Curve.
Iso-Quant Map:
A group or a set of Iso-Product curves representing different levels of output shown
on a graph is called Iso-Quant Map. A higher Isoquant shows a higher level of output and a
lower Isoquant represents a lower level of output.
Features of Iso-Quant:
1. Slopes downwards from left to right: Isoquants have negative slope. This is so
because, when the quantity of one factor (say, ‘X’) is increased, the quantity of other
factor (say, ‘Y’) must be reduced, so that total product remains constant. If, however,
the marginal productivity of the factor becomes negative, the isoquant bends back and
acquires positive slope.
2. Do not intersect each other: Intersection of isoquants showing different levels of
output is a logical contradiction. It would mean that isoquants representing different
levels of output are showing the same amount of output at the point of intersection,
which is wrong. Thus, we rule out the following cases in case of isoquants.
3. Do not touch the axes: Isoquants do not touch both x-axis and y-axis as one input
factor (labour) is increasing the other input factor (capital) is decreased in a
proportionate rate.
4. Convex to point of origin: This property of isoquants is based upon the ‘Principle of
Diminishing Marginal Rate of Technical Substitution’. Employment of each
successive unit of one factor (say, labour) will be required to compensate for smaller
and smaller sacrifice of the other factor (say, capital) so as to maintain the same level
of output. Concave shape of the isoquants would be against the above principle of
‘Diminishing Marginal Rate of Technical Substitution’.
ISO - COSTS
Iso-Cost line represents different combinations of two factors which the producer can
get for a certain amount of given money at given prices of the factors. If the production
changes the total cost also changes. Ex: Suppose a producer is having Rs.500. If the price of
units of labour is Rs.10, he can buy 50 units of labour. If the price of unit of capital is Rs.5,
he can buy 100 units of capital. Thus Iso-Cost curve moves upwards.
Combinations Labour Capital Cost (Rs.)

A 1 20 1000
B 2 15 1000
C 3 11 1000
D 4 8 1000
y
Capital
Ic3000
Ic2000
Ic1000
0 Labour x
An isocost line (equal-cost line) is a Total Cost of production line that recognizes all
combinations of two resources that a firm can use, given the Total Cost (TC). Moving up or
down the line shows the rate at which one input could be substituted for another in the input
market.
MARGINAL RATE OF TECHNICAL SUBSTITUTION

The slope of the isoquant has a technical name known as Marginal Rate of Technical
Substitution (MRTS) or sometimes the marginal rate of substitution in production. It refers to
the rate at which one input factor is substituted with other to attain given level of output i.e.
lesser units of one input must be combined with increasing amount of other input.
In other words, it is the ratio of small decrease in the amount of labour and a small
increase in the amount of capital so as to keep the same level of output. Thus, in terms of
inputs of capital services ‘K’ and Labour ‘L’.
change in one input ∆K
MRTS = =
change in other input ∆L
MRTS is similar to MRS, I.e., Marginal Rate of Substitution, (which is slope, of an
indifference curve).
Combinations Capital Labour MRTS
A 1 20 -
B 2 15 5:1
C 3 11 4:1
D 4 8 3:1
2-1 1
MRTS = = =1:5
20-15 5
The table presents the ratio of MRTS between two input factors, capital and labour. 5
units of decrease in labour are compensated by an increase of 1 unit of capital i.e. 5:1. It is
also important to note that the marginal rate of technical substitution is the ratio of
marginal productivity of labour to marginal productivity of capital.
LEAST COST COMBINATION OF INPUTS

Maximizing profits by combining the factors of production in such a way that the cost
involved in inputs is minimum or least and get maximum return is known as least cost
combination. The Iso-costs and Iso-quants can be used to determine the input usage that
minimizes the cost of production. When an Iso-quant curve is equal to Iso-cost, there lies the
lowest point of cost of production. This can be observed by improving Iso-costs and Iso-
quant curves. The points A,B,C on each curve represent the least cost combination of inputs,
yielding maximum level of output. Any output lower or higher will result in higher cost of
production. So, the obvious choice for the producer is ‘Q’ combination of inputs on IQ 2.
y
C
Capital B
IQ300 units
A
IQ200 units
IQ100 units
0 Ic1000 Ic2000 Ic3000 x
Labour
LAW OF VARIABLE PROPORTIONS

The law of production shows the relationship between additional input and additional
output. In economics, the production function with one variable input is explained with the
help of Law of Variable Proportions. The law of variable proportion is the modern approach
to the 'Law of Diminishing Returns’ (or The Laws of Returns).
The law of variable proportion shows the production function with one input factor
variable while keeping the other input factors constant. The law of variable proportion states
that, if one factor is used more and more (variable), keeping the other factors constant, the
total output will increase at an increasing rate in the beginning and then at a diminishing
rate and eventually decreases absolutely.
This law states three types of productivity an input factor – Total productivity,
Average productivity and Marginal Productivity.
1. Total production (TP): The maximum level of output that can be produced with a
given amount of input.
2. Average Production (AP): The output produced per unit of input AP = Q/L
3. Marginal Production (MP): The change in total output produced by the last unit of
an input.
 Marginal production of labour = ΔQ / ΔL (i.e. change in the quantity produced to
a given change in the labour).
 Marginal production of capital = ΔQ / ΔK (i.e. change in the quantity produced to
a given change in the capital).
Three stages of law:

The behaviors of the output when the varying quantity of one factor is combines with
a fixed quantity of the other can be divided in to three stages. The three stages can be better
understood by following the table:
Fixed factor Variable factor Total Average Marginal

Stage
(Capital) (Labour) Product Product Product
1 1 100 100 -
1 2 220 120 120 Stage I
1 3 270 90 50
1 4 300 75 30
1 5 320 64 20 Stage II
1 6 330 55 10
1 7 330 47 0
Stage III
1 8 320 40 -10
From the above table we can see that both the average and marginal products increase
at first and then decline. Average product is the product for one unit of labour. It is calculated
by dividing the total product by the number of labour. Marginal product is the additional
product resulting from additional labour. The total product increases at an increasing rate till
the employment of the 4th labour. Beyond 4th labour, the marginal product is diminishing.
The marginal product declines faster than the average product. When 7th labour is employed,
the total product is maximum. For 8th labour the marginal product is zero and 9th labour is
negative. Thus when more and more units labour are combined with other fixed factors, the
total product increases first at an increasing rate, then at a diminishing rate and finally it
becomes negative.
The above idea can be more clearly illustrated with the help of a diagram:
When one input is variable and others are held constant, the relations between the
input and the output are divided into three stages. The law of variable proportion may be
explained under the following three stages as shown in the graph.
 Stage-I: The total product increases at an increasing rate, the marginal product
increases at an increasing rate resulting in a greater increase in total product. The
average product also increases. This stage continues up to the point where average
product is equal to marginal product. It is known as Stage of Increasing Returns.
 Stage-II: The total product increases only at a diminishing rate. The average product
also declines. The second stage comes to an end where total product becomes
maximum and marginal product becomes zero. It is stage of Diminishing Returns.
 Stage-III: The marginal product becomes negative, the total product also declines.
The average product continues to decline. This is stage of Negative Returns.
LAW OF RETURNS TO SCALE

The law of variable proportion analyses the behaviour of output when one input factor
is variable and the other factors are held constant. Thus it is a short run analysis. But in the
long run all factors are variable. When all factors are changed in same proportion, the
behaviour of output is analysed with laws of returns to scale. Thus law of returns to scale is a
long run analysis. The law of returns to scale seeks to analyse the effects of scale on the level
of output. If the firm increases the units of both factors labour and capital, its scale of
production increases.
Returns to scale describes the relationship between outputs and scale of inputs in the
long run when all the inputs are increased in the same proportion. To meet a long run change
in demand, the firm increases its scale of production by using more space, more machines
and laborers in the factory. Returns to scale are categorized as: Increasing returns to scale,
Constant return to scale and Decreasing returns to scale.
This can be shown using the following table:
Scale of production Total Marginal

scale
L + C production production
1+2 4 4
2+4 10 6 Increasing
3+6 18 8
4+8 28 10
5 + 10 38 10 Constant
6 + 12 48 10
7 + 14 56 8
Decreasing
8 + 16 62 6
Output B Constant C
Increasing Decreasing
A D
0 scale of production x
It consists of three stages:

1. Increasing Returns to Scale: It state that the volume of output keeps on increasing
with every increase in input. Where a given increase in input leads to a more
proportionate increase in output, it is increasing returns to scale i.e. total product
increases at increasing rate.
2. Constant Returns to Scale: It states that the rate of increase or decrease in volume
of output is same to that of increase or decrease in input. When the scope of labour
gets restricted, the rate of increase in the total output remains constant i.e. Constant
returns to scale.
3. Decreasing Returns to Scale: When the proportionate increase in inputs does not
lead to equivalent increase in output, i.e. output increases in decreasing rate it is
Diminishing returns to scale.
COBB-DOUGLAS PRODUCTION FUNCTION

In economics, the Cobb-Douglas functional form of production functions is widely
used to represent the relationship of an output to inputs. The American Ex-senator and
Economist Paul H.Douglas and the Mathematician Charles W.Cobb, proposed and tested
against statistical evidence, and published a study in which they modeled the growth of the
American economy during the period 1899 - 1922. They considered a simplified view of the
economy in which production output is determined by the amount of labor involved and the
amount of capital invested. While there are many other factors affecting economic
performance, their model proved to be remarkably accurate. The inputs are capital and
labour.
The formula is:
Q = b La C1-a
where,
Q = total production (the monetary value of all goods produced in a year)
L = labor input (the total number of person-hours worked in a year)
K = capital input (the monetary worth of all machinery, equipment, and buildings)
b = total factor productivity
The exponents ‘a’ and ‘1 – a’ are the elasticity of production that is, ‘a’ and ‘1- a’
measure the percentage response of output to percentage changes in labour and capital
respectively. The function estimated for the USA by Cobb and Douglas is:
Q = 1 L0.75 C0.25
R2 = 94.09
This production function shows that a 1 per cent change in labour input, with the
capital remaining constant, is associated with a 0.75 per cent change in output. Similarly, a 1
per cent change in capital, with the labour remaining constant, is associated with a 0.25 per
cent change in output. The coefficient of determination (R2) means that 94 per cent of the
variations on the dependent variable (P) were accounted for, by the variations in the
independent variables (L and C). That is, if L and K are each increased by 20%, then P
increases by 20%.
In these terms, the assumptions made by Cobb and Douglas can be stated as follows:
1. If either labor or capital vanishes, then so will production.
2. The marginal productivity of labor is proportional to the amount of production per
unit of labor.
3. The marginal productivity of capital is proportional to the amount of production per
unit of capital.
COST ANALYSIS
Cost refers to the expenditure incurred to produce a particular product or service. The
costs may be monetary or non-monetary, tangible or intangible etc. The cost of production
includes cost of raw materials, labour, and other expenses. This cost is known as Total Cost
(TC) and it is compared with Total Revenue (TR) which is realized on sale of products and
the difference is Profit (P).
P = TR – TC
Profit is the ultimate aim of any business. The firm should therefore aim at controlling
and minimizing cost.
COST CONCEPTS:
A managerial economist must have a clear understanding of the different cost
concepts for clear business thinking and proper application. The various relevant concepts of
cost are:
Actual Cost and Opportunity Cost:

Actual costs are those that involve financial expenditure incurred for acquiring inputs
for producing a commodity. These expenditures are recorded in the books of accounts of the
firm. The expenditures are wages, payment made for the purchase made for the purchase of
raw materials machinery etc. These costs are called actual costs or outlay costs or real costs.
The real cost of production has been interpreted in different forms.
Opportunity cost refers to the expected benefit foregone in sacrificing one alternative
for another. It exists when resources are scarce and there are alternative uses for them. When
they are no alternative, there is no opportunity cost. This concept is useful for long run
decisions. When one is selected it means that opportunity cost of gaining benefits from other
alternatives. Ex: If one acre of land produces rice worth Rs.5000 and when of Rs.8000, so the
producer will forego rice for wheat.
Fixed Cost and Variable Cost:

Fixed cost is that cost which remains constant for a certain level to output in short run.
These are incurred even the production is stopped. It is not affected by the changes in the
volume of production. But fixed cost per unit decrease when the production is increased.
Fixed cost includes salaries, Rent, Administrative expenses, taxes, depreciations etc.
Variable is that which varies directly with the variation is output. It exists only when
there is production. An increase in total output results in an increase in total variable costs
and decrease in total output results in a proportionate decline in the total variables costs. The
variable cost per unit will be constant. Ex: Raw materials, labour, direct expenses, etc.
Short Run and Long Run Costs:

Short-run costs are those costs, which change with the variation in output, the size of
the firm remaining the same. In other words, short-run costs are the same as variable costs.
Long-run costs, on the other hand, are the costs, which are incurred on the fixed assets like
plant, building, machinery, etc.
Long-run costs are, by implication, same as fixed costs. In the long-run, however,
even the fixed costs become variable costs as the size of the firm or scale of production
increases. Broadly speaking, the short-run costs are those associated with variables in the
utilization of fixed plant or other facilities whereas long-run costs are associated with the
changes in the size and type of plant.
Incremental Costs and Sunk Costs:

Incremental costs are the added costs of a change in the level of production or the
nature of activity. It may be adding a new product or changing distribution channel, or adding
new machinery, etc. It appears to be similar to marginal cost, but it is not managerial cost.
Marginal cost refers to the cost on added unit of output.
Sunk costs are costs which cannot be altered in any way. Sunk costs are costs which
have already been uncured. For example, cost incurred in constructing a factory. When the
factory building is constructed costs have already been incurred. The building has to be used
for which originally envisaged. It cannot be altered when operations are increased or
decreased. Investment on machinery is an example of sunk cost.
Historical and Replacement Costs:

Historical cost refers to the cost of an asset acquired in the past whereas replacement
cost refers to the outlay, which has to be made for replacing an old asset. These concepts own
their significance to unstable nature of price behaviour. Stable prices over a period of time,
other things given, keep historical and replacement costs on par with each other. Instability in
asset prices, however, makes the two costs differ from each other. Historical cost of assets is
used for accounting purposes, in the assessment of net worth of the firm.
Explicit Cost and Implicit Cost:

Explicit costs are those expenses that involve cash payments. These are the actual or
business costs that appear in the books of accounts. These costs include payment of wages
and salaries, payment for raw-materials, interest on borrowed capital funds, rent on hired
land, Taxes paid etc. These are known as Out-of-Pocket Costs.
Implicit costs are the costs of the factor units that are owned by the employer himself.
It does not involve payment of cash as they are not actually incurred. It is incurred in the
absence of employment of self – owned factors. The implicit costs are depreciation, interest
on capital, rent of own premises, savings from salary, etc. These are known as Imputed Cost
or Book Cost.
Total Cost, Average Cost & Marginal Cost:

Total cost is the total cash payment made for the input needed for production. It is the
sum total of the fixed and variable costs. TC = FC + VC.
Average cost is the cost per unit of output. If is obtained by dividing the total cost
(TC) by the total quantity produced (Q).
Marginal cost is the additional cost incurred to produce and additional unit of output
or it is the cost of the marginal unit produced. It is ascertained for one additional product.
BREAK EVEN ANALYSIS

Break even analysis helps to identify the level of output and sales volume at which
the firm ‘breaks even’. It means the revenues are sufficient to cover all costs of production.
Various managerial decisions of firms are taken by the managers based on the break- even
point. It refers to the analysis of Break Even Point (BEP) i.e. no profit or no loss point.
It is a study of cost, revenues and sales of a firm and finding out the volume of sales
where the firm’s costs and revenues will be equal. There is no profit and no loss. The total
revenue is equal to the total cost of production. The amount of money which the firm
receives by the sale of its output in the market is known as revenue.
Output Total Total Total

Total Cost
(units) Revenue Fixed Cost Variable Cost
0 0 300 0 300
100 400 300 300 600
200 800 300 600 900
300 1200 300 900 1200
400 1500 300 1200 1500
Graph – Break Even Point
The above graph shows the break- even point of an organization. The total revenue
curve (TR) and total cost curve (TC) is given. When they produce 50 units the total cost and
total revenue are equal that is Rs.150000 which is at the intersecting point of the curves.
Breakeven point always denotes the quantity produced or sold to equalize the revenue and
cost.
When the firm produces less than 50 units the revenue earned is less than the cost of
production (TR<TC) therefore in the initial period the firm incurs loss which is shown in the
graph. Through selling more than 50 units the revenue increases more than the cost of
production therefore the difference increases and provides profit to the organization
(TR>TC).
Significance of Break Even Analysis:

Break Even Analysis is an important tool for a business for decision making. It helps
in identifying various components of costs and their impact on product of a firm. It helps in
arriving at effective decisions relating to product mix, make or buy decisions, etc.:
1. It helps in determining contribution of each product.
2. It helps in determining required sales at a given level of profit.
3. To compare efficiency of different firm.
4. To decide whether to add a product to the existing or drop one from it.
5. To access the impact of changes in Fixed Cost, Variable Cost & Selling price on BEP
and profits during a period.
Limitations of Break Even Analysis:

1. Break Even Point is based on Fixed Cost, Variable Cost and Total Revenue. A change
in one variable effects BEP.
2. All costs cannot be classified as Fixed & variable as there are certain semi variable
costs.
3. It is based on fixed cost, so it is applicable only in short run.
4. If business conditions are volatile, BEP cannot give stable results.
5. It is applicable to single product firm; there are problems in application of multi
product firms.
Application of Break Even Analysis:

1. Make or Buy Decisions: The decision involves choice between the options to
purchase the input from market or to manufacture by its own.
2. Determination of product mix when there is limiting factor: When a company
manufactures a combination of two or more products using same plant or machinery,
the managers have to arrive at optimum product mix.
3. Drop or Add Decisions: Break Even Analysis helps to know whether to add a new
product to existing or drop one product from existing one.
4. When there is change in sales & variable cost: When there is change in price of a
product the variable cost per unit will remain the same. If price is reduced there is no
change in quantity sold.
DETERMINATION OF BREAK EVEN POINT
Sales = Total Cost + Profit (or)

Sales = Fixed cost + Variable cost + Profit
Contribution = S – V (or) F + P
Contribution per unit = Sales per unit – VC per unit
Contribution Ratio = (S – V / S) x %of sales
Total Contribution = Total sales (Rs.) x Total Contribution Ratio
P/V Ratio = Contribution / Sales x 100 (or)

Change in Profit / Change in Sales (or)
∆ Contribution / ∆ Sales (or)
S – V / S x 100
BEP (Rs.) = FC / PV Ratio (or)

F C / Contribution ratio
BEP (units) = FC / Contribution per unit (or)

FC / C
Margin of Safety (Rs.) = Actual Sales – Sales at BEP (or)

Profit / PV Ratio
Margin of Safety (units) = Actual Sales – Sales at BEP(units)
Sales when profit is ‘x’ = Sales – Variable cost = Fixed cost + Profit (or)
S–V=F+P (or)
F+P/S–V (or)
F+P/C
Calculation of Profit = S – VC – FC (or)
Sales (No. of units x selling price per unit) = xxx

(-) VC (No. of units x variable cost per unit) = xxx
---------
Contribution = xxx
(-) Fixed Cost = xxx
---------
Profit / Loss = xxx
---------
ILLUSTRATIONS
1. If sales are 10,000 units and selling price is Rs. 20 per unit, variable cost Rs. 10 per unit
and fixed cost is Rs. 80,000. Find out BEP in units and sales revenue. What is profit
earned? What should be the sales for earning a profit of Rs. 60,000/-.
Solution:
(a) BEP (units) = FC / Contribution
= 80000 / 10 = 8000 units
Contribution = Sales – VC = 20 – 10 = 10
(b) Sales = BEP (units) x Selling price per unit

= 8000 units x Rs.20 = Rs.160000
(c) Sales when profit is Rs.60000

S=F+P/S-V
= 80000 + 60000 / 20 - 10
= 140000 / 10 = 14,000 units

Sales = 14,000 units x 20 = Rs.2,80,000
Verify:
Profit = Sales – VC – FC
= 280000 – (14000 x 10) – 80000
= 280000 – 140000 – 80000 = 60000
2. XYZ Company has supplied you the following information.

Selling price per unit Rs. 30,
No. of units sold 20,000 units
Fixed cost Rs. 2, 40, 000
Variable cost per unit Rs. 15
Find out: (i) BEP in units & Rs.
(ii) Margin of safety
(iii) Sales to get a profit of Rs. 2,00,000
(iv) Verify the results in all the above cases
Solution:
(i) BEP (Units) = Fixed Cost / Contribution per unit
= 240000 / (30-15) = 16000 units
BEP (Rs.) = Fixed Cost / PV Ratio

= 240000 / 0.50 = Rs.480000
P/V Ratio = Contribution / Sales x 100
= 15 / 30 x 100 = 0.50 or 50%
(ii) Margin of Safety (units) = Actual Sales – BEP Sales (units)

= 20000 – 16000 = 16000 units
Margin of Safety (Rs.) = Actual Sales – BEP Sales (Rs.)

= (20000 units x 30) - 480000
= 600000 – 480000 = Rs.120000
(iii) Sales to get a profit of Rs.200000

S=F+P/C
= 240000 + 200000 / 15
= 440000 / 15 = 29333.33 units
Sales = 29333.33 units x 30 = Rs.880000
(or)
Sales + VC = FC + Profit
Let no. of units = x
30x - 15x = 240000 + 200000
15x = 440000
x = 440000/15
x = 29333.33
Therefore, Sales = 29333.33 x 30 = Rs.880000
(iv) Verification:
i) Contribution at BEP – FC = 0
(16000 units x 15) – 240000 = 0
ii) Sales – BEP sales
(20000 units x 30) – (16000 x 30) = Rs.120000

iii) Profit = C – FC
(880000 x 50%) - 240000 = Rs.200000
3. A firm manufactures two products viz. P and Q. The firm wants to drop the product Q as
it is yielding less contribution per unit and add the product R. By adding the product R,
the new fixed cost is likely to be Rs. 2,50,000/- and the sales volume will increase to
Rs.18,00,000/- Consider the following information and suggest whether the firm should
change the product or not.
Solution:
(a) Existing Product-mix
Contribution ratio for product P & Q =
(Selling price – Variable cost / Selling price) x percentage of total sales
Product P = (80 - 32 / 80) x 0.60 = 0.36
Product Q = (100 - 40 / 100) x 0.40 = 0.24
Total contribution ratio for P & Q = P + Q = 0.36 + 0.24 = 0.60
Total contribution = sales x contribution ratio = 1600000 x 0.60 = 960000
Profit = total contribution – fixed cost = 960000 - 200000 = 760000
(b) Proposed Product-mix

Contribution ratio for product P & R =
(Selling price – Variable cost / Selling price) x percentage of total sales
Product P = (100 - 40 / 100) x 0.30 = 0.18
Product R = (120 - 48 / 120) x 0.70 = 0.42
Total contribution ratio for P & Q = P + Q = 0.18 + 0.42 = 0.60
Total contribution = sales x contribution ratio = 1800000 x 0.60 = 1080000
Profit = total contribution – fixed cost = 1080000 - 250000 = 830000
Recommendation:
The profit in proposed product-mix is higher than the existing product mix and hence the firm
can change the product mix.
4. A company estimates its fixed costs for the year at Rs. 8, 00,000 and its profit target at
Rs.2,00,000. Each unit of product is sold at Rs. 10 and variable cost per unit is Rs.8.
What sales level must the company achieve in order to realize its profit goal?
Solution:
Sales to get a profit of Rs.200000
S=F+P/C
= 800000 + 200000 / (10-8)
= 1000000 / 2 = 500000 units
Sales = 500000 units x 10 = Rs.5000000
Verify:
Profit = Sales – VC – FC
= 5000000 – (500000 x 8) – 800000
= 5000000 – 4000000 – 800000
= 200000
5. From the following data calculate the break-even point:

Fixed cost ----- Rs. 9,000
Selling price ----Rs. 5 per unit
Variable cost ---Rs. 3 per unit
Suppose the price reduces to Rs. 2 per unit, what would you say about the break-even
position?
Solution:
BEP (units) = FC / C = 9000 / (5-3)
= 4500 units
BEP (Rs.) = FC / PV Ratio = 9000 / 0.4

= Rs.22500
PV Ratio = C / S = 2 / 5 = 0.4 or 40%
Calculation after price reduction:

BEP (units) = FC / C = 9000 / (3-1)
= 4500 units
BEP (Rs.) = FC / PV Ratio = 9000 / 0.4

= Rs.13500
PV Ratio = C / S = 1 / 3 = 0.667 or 66.667%
IMPORTANT QUESTIONS
1. Define production function? What are the types of production function? Explain
Cobb-Douglas production function?
2. Explain the concepts of Iso-Quants and Iso-Costs. Analyze how the manufacturer
reaches the least cost combination of inputs. Illustrate.
3. Define returns to scale. What is the significance of increasing, decreasing and
constant returns to scale?
4. Explain different cost concepts which are essential for business decisions.
5. What are Laws of Variable Proportions? Illustrate with an illustration.
6. What is meant by Break Even Analysis? Explain its significance and limitations?
7. You are required to calculate.
i. Margin of Safety
ii. Total sales
iii. Variable cost from the following figures;
Fixed costs Rs. 12, 000
Profit Rs. 1, 000
Break-Even Sales Rs.60, 000
8. The information about Raj and Co., are given below.

i. Profit-Volume Ratio (P/V Ratio) is 20%
ii. Fixed costs Rs. 36000
iii. Selling price per Unit Rs. 150
Calculate:
i) BEP (in Rs.)
ii) BEP (in Units)
iii) Variable Cost per Unit
iv) Selling Price per Unit
v)
9. A company reported the following results for two periods.
Period Sales Profit
I Rs.20,00,000 Rs.2,00,000
II Rs.25,00,000 Rs.3,00,000
Ascertain the BEP, P/V Ratio, Fixed cost and Margin of Safety.
10. Sales are Rs. 1, 10,000 Yielding a profit of Rs. 4,000 in period-I; Sales are
Rs. 1, 50,000 with a profit of Rs. 12,000 in period-II. Determine BEP and Fixed Cost.
11. The P/V Ratio of Matrix Books Ltd is 40% and the Margin of safety is 30%. You are
required to work out the BEP and Net Profit, if the Sales Volume is Rs.14,000.
12. ABC Company has supplied the following data:

No. of units sold 30,000
Fixed cost Rs. 1,50,000
Selling price per unit Rs. 20
Find out:
(a) BEP in units and in Rupees
(b) Margin of safety
(c) Sales to get a profit of Rs. 3,00,000
(d) Verify the results in all the above cases
13. A Company prepares a budget to produce 3, 00,000 Units, with fixed costs as Rs. 15,
00,000 and average variable cost of Rs.10 per unit. The selling price is to Yield 20%
profit on Cost. You are required to calculate
a) P/V Ratio
b) BEP in Rs and in Units.
14. If sales are 20,000 units and selling price is Rs 15 per unit, variable cost Rs. 10 per
unit and fixed cost is Rs. 1, 00,000. Find out BEP in units and in sales rupee value.
What is profit earned? What should be the sales for earning a profit of Rs. 50,000
15. ABC company has supplied the following data:

No. of units sold 40,000 units
Fixed cost Rs. 2, 20,000
Selling price per unit Rs. 30
Find out: (1) BEP in units (2) Margin of safety
(3) Sales to get a profit of Rs. 3,00,000
(4) Verify the results in all the above cases
16. You are given the following information about two companies in 2000
Particulars Company A Company B

Sales Rs.50,00,000 Rs.50,00,000
Fixed Expenses Rs.12,00,000 Rs.17,00,000
Variable Expenses Rs.35,00,000 Rs.30,00,000
You are required to Calculate (For Both Companies)
a) BEP (in Rs.)
b) P/V Ratio
c) Margin of safety

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Unit-I: Introduction to Managerial Economics 1.

CHARACTERISTICS / NATURE OF MANAGERIAL ECONOMICS

3. Concerned with Normative Economics: A normative statement usually includes or

SCOPE OF MANAGERIAL ECONOMICS

LINKS WITH OTHER DISCIPLINES

Individual Demand Schedule

Market Demand Schedule

(a) Demand for Normal Goods:

(b) Demand for Inferior Goods:

(a) Demand for Substitute or Competitive goods:

Price of Coffee Demand for Tea

(b) Demand for Complementary Goods:

Price of petrol Demand for car

2. Durable goods Vs. Perishable goods:

3. Short-run Demand Vs. Long-run Demand:

4. Firm Demand Vs. Industry Demand:

5. Autonomous Demand Vs. Derived Demand:

6. New Demand Vs. Replacement Demand:

7. Total Market Demand Vs. Segment Market Demand:

Assumptions of Law of Demand:

Exceptions of Law of Demand:

Percentage change in the dependent variable

Factors affecting Elasticity of Demand:

TYPES OF ELASTICITY OF DEMAND

I. PRICE ELASTICITY OF DEMAND:

proportionate/percentage change in quantity demand for product 'X'

The formula is mathematically presented as:

where, ∆Q = change in quantity demanded or difference in Q2 - Q1

Degrees/Types of Price Elasticity of Demand:

1. Perfectly Elastic demand (Ed=∞):

2. Perfectly Inelastic Demand (Ed=0):

The demand curve DD is parallel or vertical to Y-axis. When price increases

3. Unitary Elasticity of Demand (Ed=1):

4. Relatively Elastic Demand (Ed>1):

5. Relatively In-Elastic Demand (Ed<1):

II. INCOME ELASTICITY OF DEMAND

proportionate change in quantity demanded for product 'X'

The formula is mathematically presented as:

where, ∆Q = change in quantity demanded or difference in Q2 -Q1

Degrees/Types of Income Elasticity of Demand:

III. CROSS ELASTICITY OF DEMAND:

The formula is mathematically presented as:

Degrees/Types of Cross Elasticity of Demand:

Price of Coke Price of Pepsi Quantity of Pepsi

IV. ADVERTISING ELASTICITY OF DEMAND:

proportionate change in quantity demanded for product 'X'

The formula is mathematically presented as:

100/300 100 10000

Degrees/Types of Advertisement Elasticity of Demand:

SIGNIFICANCE OF ELASTICITY OF DEMAND

Demand forecasting may be undertaken at three different levels:

TECHNIQUES OF DEMAND FORECASTING

Qualitative Techniques (Survey Method):

Quantitative Techniques (Statistical Methods):

QUALITATIVE TECHNIQUES (SURVEY METHODS)

1. Consumer’s opinion survey:

2. Sales force opinion method:

3. Expert Opinion Method or Delphi Method:

5. End user survey Method:

QUANTITATIVE TECHNIQUES (STATISTICAL METHODS)

1. Trend Projection Method:

a) Time Series Analysis:

b) Trend line by observation: