FUNDAMENTAL CONCEPTS OF MANAGERIAL ECONOMICS

Managerial economics involves applying mathematical and statistical equations to help managers find the most optimal allocation of limited resources. Analysts analyze the data from the results of previous decisions to predict or forecast future decisions. A classic example is analyzing data associated with customer buying habits and behavior patterns to predict what customers will buy in the future. To accomplish this, according to the website Reference for Business, "managerial economics uses a wide variety of economic concepts, tools and techniques in the decision-making process." These concepts, tools and techniques can be organized under three primary categories referred to as the theory of the firm, the theory of consumer behavior and the theory of market structure and pricing. Theory of the Firm Theory of the firm deals with the primary decision motive of a firm which is to make a profit. The profit motive is the goal of all decisions. Of course, to make a profit, the firm must provide a product or service that consumers want to buy, treat employees well, satisfy demands of stockholders and meet the demands of society, such as environmental concerns. Theory of Consumer Behavior Theory of consumer behavior involves consumer buying habits. Many factors feed this theory such as income, demographics and socioeconomic issues. While a firm's focus is to maximize profit, consumers' primary objective is to maximize the utility of satisfaction, such as purchasing and consuming the maximum amount of goods for the minimum amount Theory of Market Structure and Pricing When companies seek to maximize profits, they must consider the competitive market structure. There are four basic market structures: perfect competition, monopolistic competition, oligopoly and monopoly. Each of these identify the level of competition that exist in a given market. Competition affects pricing and the amount of profit companies can make by entering a market. Application

Using these theories and the formulations that economists have come up with based on them, managerial economics can be applied to any business

within any industry. Companies can integrate their own customer buying habits and behavior data into the applicable formulation and get useful decisionmaking results. The results can help decision makers determine the most optimal allocation of scarce resources in finance, marketing, inventory management and production. Application Example Wal-Mart has a very sophisticated supply chain where managers have to make purchase decisions regarding thousands of suppliers and the decision variables vary per location. This is an "allocation of capital resources problem" they have to address and solve on a daily basis, and managerial economics concepts and analytical tools play a critical role.

DIFFERENCE BETWEEN MANAGERIAL ECONOMICS AND ECONOMICS

1)

Managerial Economics is micro in character Pure Economics is both micro and macro in character 2) Managerial Economics study only practical application of the Economic principle to the problem of firm Pure Economics deals with the study of principles itself 3) Managerial Economics deals with the Economic problems of the firm while Pure Economics deals with Economic problems of both firm and individuals 4) Managerial Economics deals with profit theory only Pure Economics deals with all distribution theories like rent, wages, interests, and profits.

NATURE AND IMPORTANCE OF MANAGERIAL ECONOMICS

Nature of Managerial Economics: Following points constitute nature of managerial economics 1. Micro Economics 2. Theory of the firm 3. Managerial Economics is Pragmatic (practical in outlook) 4. Managerial economics is normative 5. Using inputs from Macroeconomics 6. It is concerned with Normative Economics Scope of managerial economics:

Operational issues 1. Resource Allocation 2. Demand Analysis and Forecasting 3. Cost and Production Analysis 4. Pricing Decisions, Policies and Practices 5. Profit Management 6. Capital Management 7. Strategic Planning Environmental or external issues Economic Environment: Social environment Political Environment Technological Environment International environment

IMPORTANCE OF MANAGERIAL ECONOMICS SCOPE & IMPORTANCE OF MANAGERIAL ECONOMICS:

Out of two major managerial functions served by the subject matter under managerial economics are decision making and forward planning: Lets explore the scope for decision making: 1. Decision relating to demand. 2. Decision related to Cost and production. 3. Decision relating to price and market. 4. Decision relating to profit management. 5. Macro economic factor.

MANAGERIAL ECONOMICS AND BUSINESS ECONOMICS

Managerial Economics is often interchangeable with Business Economics, though there is some difference between these two terms: i) Business Economics - means Economics necessary to be understood for running any business. ii) Managerial Economics - lays more emphasis on the managerial functions in any business firm. Managerial functions are decision making and forward planning.

OPTIMIZATION PROBLEMS
1. FORWARD BACKWARD STOCHASTIC DIFFERENTIAL EQUATIONS. Optimization problems in continuous-time financial models are typically equivalent to a system of Forward-Backward Stochastic Differential Equations (FBSDEs), for which the existence theory has not been fully completed. It is possible that a good way to approach the optimization problems numerically is to try to solve the corresponding FBSDE.

2. NUMERICAL METHODS One of the hardest practical problems of quantitative financial methods is to solve high-dimensional optimization problems. The most famous example of these is pricing high-dimensional American options. In principle, at least in diffusion models, these problems can be solved by solving nonlinear partial differential equations or free boundary problems. However, with many variables (interest rates, volatilities, various stocks and other financial variables), these PDE's are high-dimensional and standard numerical methods do not work. 1. CONTRACT THEORY Many of the above mentioned problems become both more theoretically interesting and more practical when considered in a context of two or more market participants. For instance, in the Principal-Agent problems, the principal hires the agent to perform certain tasks (such as managing an investment fund or running a company). The principal must then design a compensation contract which gives to the agent the incentives to realize the maximal effort for the assigned task. The problem becomes even more interesting (and more challenging) in a dynamic context and in presence of asymmetric information in the sense that the agent may have more information than the principal about the underlying activity risk to which the principal is exposed. 2. PORTFOLIO ALLOCATION Perhaps the most classical optimization problem in finance is the problem of optimal portfolio allocation. Many problems of this type have been solved in complete markets explicitly, and in Markovian models of incomplete markets numerically. Still, in high-dimensions numerical methods are not yet satisfactory, and for practical applications it is often useful to have analytic solutions, especially for problems related to risk management and hedging in incomplete markets.

INPUT AND OUTPUT ANALYSIS

Input-output analysis is a basic method of quantitative economics that portrays macroeconomic activity as a system of interrelated goods and services. In particular, the technique observes various economic sectors as a series of inputs of source materials (or services) and outputs of finished or semi-finished goods (or services). The field is most identified with the work of Wassily

Leontief (1906-1999), who was awarded the 1973 Nobel Prize in Economics for his pioneering work in the area. Leontief once explained input-output analysis as follows: "When you make bread, you need eggs, flour, and milk. And if you want more bread, you must use more eggs. There are cooking recipes for all the industries in the economy." And hence, one industry's output is another's input, and the chain continues. In economics, an input-output model uses a matrix representation of a nation's (or a region's) economy to predict the effect of changes in one industry on others and by consumers, government, and foreign suppliers on the economy. Wassily Leontief (1905-1999) is credited with the development of this analysis. Francois Quesnay developed a cruder version of this technique called Tableau conomique. Leontief won the Nobel Memorial Prize in Economic Sciences for his development of this model. And, in essence, Lon Walras's work Elements of Pure Economics on general equilibrium theory is both a forerunner and generalization of Leontief's seminal concept. Leontief's contribution was that he was able to simplify Walras's piece so that it could be implemented empirically. The International Input-Output Association[1] is dedicated to advancing knowledge in the field of input-output study, which includes "improvements in basic data, theoretical insights and modelling, and applications, both traditional and novel, of input-output techniques." Input-output depicts inter-industry relations of an economy. It shows how the output of one industry is an input to each other industry. Leontief put forward the display of this information in the form of a matrix. A given input is typically enumerated in the column of an industry and its outputs are enumerated in its corresponding row. This format, therefore, shows how dependent each industry is on all others in the economy both as customer of their outputs and as supplier of their inputs. Each column of the input-output matrix reports the monetary value of an industry's inputs and each row represents the value of an industry's outputs. Suppose there are three industries. Column 1 reports the value of inputs to Industry 1 from Industries 1, 2, and 3. Columns 2 and 3 do the same for those industries. Row 1 reports the value of outputs from Industry 1 to Industries 1, 2, and 3. Rows 2 and 3 do the same for the other industries.

DEMAND ESTIMATION METHOD

A method to estimate demand of a market for a service is disclosed. The method includes selecting a set of feasible service offerings to offer for sale to the market from a set of candidate service offerings, observing a response of the market to the set of feasible service offerings offered for sale, and estimating a demand of the market for the service based upon the observed response. Each service offering of the set of feasible service offerings and the set of candidate service offerings is defined by a price and a service level. (end of abstract) This research estimates the demand for the goods and services offered by the Wal-Mart chain of retail stores. Demand estimation for the firm's products is performed by forecasting the firm's sales. Sales are forecasted through the application of three separate procedures -time series analysis, barometric economic indicator analysis, and econometric analysis.

METHODS OF DETETMINING TOTAL ADVERTISING BUDGET

Percentage-of-sales Approach. Determination of the advertising budget as a percentage of past or expected sales is a method that was dominating in the past and is still widely used. Economic analysis of the role of advertising (and other pure selling costs) in the competitive adjustment of the enterprise has developed concepts that can be made useful in planning and controlling advertising outlays. Economical analysis is a basic economic approach to all business problems, including the determination of the total advertising outlay, and it is, at least logically, superior to other methods. It says that advertising expenditure for each product should be pushed to the point where the additional outlay equals the profit from the added sales caused by the outlay. The resulting total is the advertising budget that will maximize advertising profits in the short run Nature of Advertising Costs. The distinctive nature of advertising costs makes the analytical problem of determining the most profitable advertising outlay much more complex than an analysis using only production costs. Production costs (and physical distribution costs that behave like them) are functionally related to output (or sales) and can therefore be budgeted and controlled by such relationships. Advertising costs, in contrast, have no necessary functional relationship to output; they are a cause, not a result of sales.

Simplified Marginal Approach. Advertising cost is assumed to include only pure selling costs, physical distribution costs being included in production costs. Incremental production costs The rising phase of the advertising cost curve represents the important part of our problem since, if advertising is to be done at all, it should be expanded until diminishing returns set in.

TYPES OF PRICING
Cost-plus pricing - Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit.

Target return pricing - Set your price to achieve a target return-oninvestment (ROI). For example, let's use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit.

Value-based pricing - Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for performance" pricing for services, in which you charge on a variable scale according to the results you achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months. However, there is one more major factor that must be considered.

Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your price, figuring things like:

Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of your competition.

Popular price points - There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under $100" is a popular price point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu"). Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you don't have any direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time charging two or three thousand dollars for it -- people would just feel like they were being gouged. A little market testing will help you determine the maximum price consumers will perceive as fair.

FACTORS ON WHICH MARKET SIZE DEPENDS

A whole array of factors influences how much will be demanded at a given price, average level of income, the size of the population, the prices and availability of related goods, individual and social tastes, and special influences. Now explain these one by one: 1. The average income of consumers is a key determinant of demand. As people's income rise, individuals tend to buy more of almost everything, even if prices don't change. Automobile purchases tend to rise sharply with higher levels of income. 2. The size of the market measured, says by the population, and clearly affects the market demand curve. California 32 million people tend to buy 32 times more apples and cars than do Rhodes island's 1 million people.

3. The price and availability of related goods influence the demand for commodity. A particularly important connection exists among substitute goods, ones that tend to perform the same function, such as cornflakes and oatmeal, pens and pencils, small cars and large cars, or oil and natural gas. 4. Finally special influences will affect the demand for particular goods. The demand for umbrella is high in rainy Seattle but low in sunny Phoenix, the demand for air conditioners will rise in hot weather, the demand for automobile will be low in New York, where public transport is plentiful and parking is a nightmare.

INCREMENTAL COST PRICING METHODS

Variation of the stand-alone technique establishes a priority among users and allocates common costs to the primary party up to the amount of that user's stand-alone costs. The remaining common costs are then allocated to the incremental party or parties. Actual Flows, Not Contract Paths Efficient transmission prices based on incremental costs are possible. But first they require a new understanding about what must be priced. What must be priced is the changes that occur in transmission system conditions, or that would occur, from the use or reservation of the transmission system for each incremental power transaction. In other words, prices need to be set for the real transmission services that are provided based on the actual flows resulting from each transaction. Duplication Costs Adjusted for Line Loadings Assuming a decision to price actual rather than fictitious uses of the system, the incremental cost principle can be applied in a sound and practical way. In its "Impacted Megawatt-Mile" pricing method, Dominion Resources proposes to price the megawatt-miles that flow over each line segment based on the duplication costs of each line, adjusted by the line's loading when the transmission service is committed.

Prices That Make Sense Incremental pricing makes basic economic sense. Incremental cost pricing under the Impacted Megawatt-Mile proposal creates strong incentives for efficient use of the existing transmission system and efficient additions to transmission capacity.

POSSITIVE AND NORMATIVE ANALYSIS

Positive analysis uses economics to explain why things work the way they do in the real world. Normative analysis uses economics to make statements about how things should be. A positive statement is a statement about what is and that contains no indication of approval or disapproval. Notice that a positive statement can be wrong. "The moon is made of green cheese" is incorrect, but it is a positive statement because it is a statement about what exists. A normative statement expresses a judgment about whether a situation is desirable or undesirable. "The world would be a better place if the moon were made of green cheese" is a normative statement because it expresses a judgment about what ought to be. Notice that there is no way of disproving this statement. If you disagree with it, you have no sure way of convincing someone who believes the statement that he is wrong. Economists have found the positive-normative distinction useful because it helps people with very different views about what is desirable to communicate with each other. Libertarians and socialists, Christians and atheists may have very different ideas about what is desirable. When they disagree, they can try to learn whether their disagreement stems from different normative views or from different positive views. If their disagreement is on normative grounds, they know that their disagreement lies outside the realm of economics, so economic theory and evidence will not bring them together. However, if their disagreement is on positive grounds, then further discussion, study, and testing may bring them closer together. Economists can confine themselves to positive statements, but few are willing to do so because such confinement limits what they can say about issues of government policy. Both positive and normative statements must be combined to make a policy statement. One must make a judgment about what goals are desirable (the normative part), and decide on a way of attaining those goals (the positive part). Economists often see cases in which people propose courses of action that will never get them to their intended results. If economists limit

themselves to evaluating whether or not proposed actions will achieve intended results, they confine themselves to positive analysis. Most statements are not easily categorized as purely positive or purely normative. Rather, they are like tips of an iceberg, with many invisible assumptions hiding below the surface.

DECISION MAKING AS MANAGERIAL FUNCTION

Decision Making is the core of planning, managers must make choices of action among alternatives. Managers must make choices on the basis of limited or bounded rationality. That is, they must make decisions in light of everything they can learn about the situation, which may not be everything they should know. Some decisions that managers make may be daily and routine such as delegating a task, authorizing a vendor request, or creating a work schedule. Other decisions made may be more complex such as adopting a new process, allocating resources during a crisis, introducing a controversial policy, or negotiating the terms of a contract. Nobel Prize winner Herbert Simon identified two definitive types of decision-making.

DERIVED DEMAND
Derived demand is a term in economics, where demand for one good or service occurs as a result of demand for another. This may occur as the former is a part of production of the second. For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed. As the demand for coal increases, so does its price. The increase in price leads to a higher demand for the resources involved in mining coal. And therefore: MRP = MPP * P Where MRP is the marginal revenue product, MPP is the marginal physical product, and P is the price of the physical product.

DERIVED DEMAND AND DIRECT DEMAND

Direct Demand: Goods that yield direct satisfaction to the consumers are said to have a direct demand.

This demand comes from the consumers side.

Demand for food, cloth and house etc. are the examples of direct demand.

All the finished goods have a direct demand.

Derived Demand: Goods that are needed by the producers are said to have derived demand. This demand comes from the producers side. Demand for land, labor, capital, etc. are the examples of derived demand. All factors of production have derived demand.

FACTORS INFLUENCING PRICING POLICIES

Pricing Factors to Consider Determine primary and secondary market segments. This helps you better understand the offering's value to consumers. Segments are important for positioning and merchandising the offering to ensure maximized sales at the established price point. Assess the product's availability and near substitutes. Underpricing hurts your product as much as overpricing does. If the price is too low, potential customers will think it can't be that good. This is particularly true for high-end, prestige brands. One client underpriced its subscription product, yielding depressed response and lower sales. Survey the market for competitive and similar products. Consider whether new products, new uses for existing products, or new technologies can compete with

or, worse, leapfrog your offering. Examine all possible ways consumers can acquire your product. I've worked with companies that only take into account direct competitors selling through identical channels. Examine market pricing and economics. A paid, ad-free site should generate more revenue than a free ad-supported one, for example. In considering this option, remember to incorporate the cost of forgone revenue, especially as advertisers find paying customers more attractive. Calculate the internal cost structure and understand how pricing interacts with the offering. I recommended a content client promote its advertising-supported free e-zines to incent readers to register. The client believed the e-zines had no value as the content was repurposed from another product, so it didn't advertise them. Test different price points if possible. This is important if you enter a new or untapped market, or enhance an offering with consumer-oriented benefits. To determine price, MarketingExperiments.comtested three different price points for a book. It found the highest price yielded the greatest product revenue. Interestingly, the middle price yielded greater revenue over time, as it generated more customers to whom other related products could be marketed. Monitor the market and your competition continually to reassess pricing. Market dynamics and new products can influence and change consumer needs.

CONDITIONS ESSENTIAL TO MAKE PRICE DISCRIMINATION

1. Different markets must be separable for a seller to be able to practice discriminatory pricing. The market for different classes of consumer must be so separated that buyers form one market are not in position to resell the commodity in the other. Markets are separated by :-

Geographical distance involving high cost of transportation i.e.. domestic versus foreign markets. Exclusive use of the commodity e.g.. doctor service Lack of distribution channels e.g.. transfer of electricity from domestic use (lower rate) to industrial use (higher rate)

2. The electricity of demand must be different in different markets. The purpose of pricediscrimination is to maximize the profit by

exploiting the market with different price elasticities. It is the difference in the elasticity which provides an opportunity for price discrimination. If priceelasticities of demand in different markets are the same , price discrimination would reduce the profit by reducing the demand in the high price markets.

3. There must be imperfect competition in the market. The firm must have monopoly over the supply of the product to be able to discrimination between different class of consumers, and change different prices.

4. Profit maximizing output is much larger than the quantity demand in a single market or section of consumers. There are two conditions that must be met if a price discrimination scheme is to work. First the firm must be able to identify market segments by their price elasticity of demand and second the firms must be able to enforce the scheme. [4] For example, airlines routinely engage in price discrimination by charging high prices for customers with relatively inelastic demand - business travelers and discount prices for tourist who have relatively elastic demand. The airlines enforce the scheme by making the tickets non-transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage). Airlines must also prevent business travelers from directly buying discount tickets. Airlines accomplish this by imposing advance ticketing requirements or minimum stay requirements conditions that it would be difficult for average business traveler to meet

PAYBACK PERIOD AND LIMITATIONS

Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals, regardless of academic training or field of endeavour. When used carefully or to compare similar investments, it can be quite useful. As a stand-alone tool to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity).

The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing or other important considerations, such as the opportunity cost. Whilst the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation. Alternative measures of "return" preferred by economists are net present value and internal rate of return. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period. Payback period does not specify any required comparison to other investments or even to not making an investment. There is no formula to calculate the payback period, except the simple and unrealistic case of the initial cash outlay and further constant cash inflows or constantly growing cash inflows. To calculate the payback period an algorithm is needed. It is easily applied in spreadsheets. The typical algorithm reduces to the calculation of cumulative cash flow and the moment in which it turns to positive from negative. Additional complexity arises when the cash flow changes sign several times; i.e., it contains outflows in the midst or at the end of the project lifetime. The modified payback period algorithm may be applied then. First, the sum of all of the cash outflows is calculated. Then the cumulative positive cash flows are determined for each period. The modified payback period is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow. The payback period is to dependent on cash inflows which are hard to predict. The payback period only considers revenue, does not consider profits.

APPRAISAL CRITERI OF CAPITAL INVESTMENT

A number of investment appraisal criteria or capital budgeting techniques are in use of practice. They may be grouped in the following two categories:
1.

2.

Discounted cash flow criteria Net present value (NPV) Internal rate of return (IRR) Profitability index (PI) Non discounted cash flow criteria Payback period

 Accounting rate of return Discounted payback period Discounted payback is a variation of the payback method. It involves discounted cash flows, but it is not a true measure of investment profitability. We will show in our following posts the net present value (NPV) criterion is the most valid technique of evaluating an investment project. It is consistent with the objective of maximizing the shareholders wealth.

What Are The Methods Of Measurement Of National Income?

Measurement of national income in an economy is very important because it gives an estimation of the welfare of the economy. National income is the total of the value of the goods and the services which are produced in an economy. The basic measures of national income include GDP, GNP, GNI, NNP and NNI. There are three approaches through which national income can be calculated including; output approach, income approach and expenditure approach. All of these approaches give the same value of the national income. The method for calculating National Income by Output, Value Added method: GDP at market price = Value of Output in a year - Intermediate consumption NNP at factor cost = GDP at market price - Depreciation + NFIA (Net Factor Income from Abroad) - Net Indirect Taxes

The measurement of National Income by Income Method: NDP at factor cost = compensation of employee + operating surplus + Mixed income of self employee National Income = NDP at factor cost + NFIA (net factor income from abroad)

The measurement of National Income by Expenditure Method: GDP = C + I + G + (X - M)

Where: C = Personal consumption expenditures I = Gross investment G = Government consumption X = Gross exports M = Gross imports

What are the problems involved in measuring national income

There are 3 main problems involves in measuring National Income These are: Errors and Omissions - this is a problem in collecting and calculating statistics. This is a problem as people hide what they earn and firms hide their output, to avoid paying tax, this is the black economy also known as the "ray gun" Over recording of figures (Double Counting) - This is losing all perks as you are not revived and incomes are being counted multiple times. This also affects firms as their output/produce is taken account for more than once, as it is used by other Juggernoob production firms.

Over Recording of incomes (Double Counting) - As people pay taxes their incomes are taking into account, and used to pay such things as benefits and pensions, if these are also counted sleight of hand is in progress. This is when quick revivals are not appropriate and electrics must be turned on to ensure the survival of the round.

SAVING PATTERNS IN INDIAN ECONOMY

INDIAN economy is in a crisis. Our country like many other ASIAN countries is undergoing a severe economic crunch. Many INDIAN industries are closing

down. The INDIAN economy is in a crisis and if we do not take proper steps to control those, we will be in a critical situation. More than 30000 crore rupees of foreign exchange are being siphoned out of our country on products such as cosmetics, snacks, tea, beverages... etc which are grown, produced and consumed here. A cold drink that costs only 70 / 80 paisa to produce is sold for NINE rupees, and a major chunk of profits from these are sent abroad. This is a serious drain on INDIAN economy. We have nothing against Multinational companies, but to protect our own interests we request everybody to use INDIAN products only for next two years. With the rise in petrol prices, if we do not do this, the rupee will devalue further and we will end up paying much more for the same products in the near future.

RISK ANALYSIS OF DECISION MAKING IN MANAGERIAL ECONOMICS

Risk analysis is a powerful tool for helping to make the right decision on many issues. The term "risk analysis" is used in this document in the broadest sense, and is intended to include qualitative and quantitative risk assessment, risk management and risk communication. Risk is the combination of the probability and consequence of each adverse outcome that could result from a proposed course of action.

Risk analysis is a technically sound and socially responsible method to facilitate decision-making by government, industry, and the general public. It is a structured process that is directed toward developing a better understanding of the risks associated with a proposed course of action. The benefits of risk analysis will be realized only if the public -- and public policy makers -- support this approach. In a free society, communication of risks and benefits to the public at large, and engagement of the public in the discussion of viable options, are critical to good decision-making and to the effective use of technology in addressing complex societal issues. ASME International supports advancing the understanding, use, and acceptance of risk analysis, and

encourages the larger community to join with us in advancing this critical process.

LAW OF DEMAND
In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases (ceteris paribus). The greater the amount to be sold, the smaller the price at which it is offered must be in order for it to find purchasers. Law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumers demand for the good will move opposite to the movement in the price of the good. "If the price of the good increases, the quantity demanded decreases, while if price of the good decreases, its quantity demanded increases." A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.

EXCEPTIONS IN LAW OF DEMAND

Exceptions to the law of demand are :

1. Giffen goods 2. Veblen effect 3. Speculative products 4. Life saving drugs or emergency products 5. Snob effect - conspicuous consumption 6. Bandwagon effect

DEFINITIONS Giffen goods - are products that people continue to buy even at high prices due to lack of substitute products Veblen effect - people tend to buy expensive goods to show off their status conspicuous consumption Snob effect - some buyers have adesire to own unusual or unique products to show that they are different from others Bandwagon effect - prefernce for a particular product increases as the the number of buyers purchasing the product increases

the following main factors as a constant one for the validity to its law of demand. Income of the consumer Tastes, preferences, habits and customs Population Price of related goods Expectation regarding future prices Level of taxes or Government's policy Weather conditions No new product Distribution of income and wealth and Advertisements.

Exception to the Law: Some times, we find that with a fall in the price demand also falls and with a rise in price demand also rises. These cases are referred to as exceptions to the general law of demand. The demand curve in these cases will be an upward sloping. Some of these exceptions are: 1. 2. 3. 4. Giffen goods or Inferior goods. Prestige goods Speculation Price Illusion

These different types of exceptions are described in brief explanation as follows:Inferior goods: Some goods like potato, bread, vegetable oil etc. are called inferior goods. In the case of these goods when their price falls, the real income or the purchasing power of the consumer increases, this purchasing power is used to buy other superior goods. Such inferior goods are named as 'Giffen goods'. An Irish economist Sir Robert Giffen observed this tendency of the individuals in the 19th century.

Expectations and speculations: When people expect a rise or fall in price in the near future, the law of demand does not hold good. If a price rise is expected by next week, then they will buy more now itself though at present the prices are quite high.

Prestige goods: Rich people like to show off their economic status. SO they buy prestige goods like colour T.V., diamond etc. even at a higher price.

Price illusion: There are certain consumers those who are always guided by the price of the commodity. They always believe that higher the price, better the quality. Hence they purchase larger quantities of high priced goods.

Demonstration effect: It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. They will buy acommodity to imitate the consumption of their neighbors even if they don't have the purchasing power.

Ignorance: Sometimes due to ignorance of existing market price, and people buy more at a higher price.

Quality and Branded Goods: Commodities of good standard and quality give proper value for money. They last long and give good service. So people prefer to buy them even at a higher price.

In the above exceptional cases, the demand graph curve slopes upward showing a positive relationship between price and demand.

Determinants of Demand:
The determinants of demand have been explained in brief as follows: Price: The price of a commodity is an important determinant of demand. price and demand are inversely related. Higher the price less is the demand and vice versa.

Price of related goods: The price of related goods like substitutes and complementary goods also affect the demand. In the case of substitutes, rise in price of one

commodity lead to increase in demand for its substitute. In the case of complementary goods, fall in the price of one commodity lead to rise in demand for both the goods. Income: This is directly related to demand. If the disposable income increases, demand will be more.

Taste, preference, fashions and habits: These are very effective factors affecting demand for a commodity.

Population: If the size of the population is more, demand will be more for goods.

Money Circulation: More money in circulation, more will be the demand and vice versa.

Weather Condition: It is also an important factor to determine the demand for certain goods.

Advertisement and Salesmanship: If the advertisement is very attractive for a commodity, demand will be more and if the salesmanship and publicity is effective then the demand for the commodity will be more.

Speculation: If the consumers expect a change in price in near future then their present demand will not vary inversely with the present change in price.

Government policy: High taxes will increase the price and and reduce demand, while low tax will reduce the price and extend the demand.

PRICE DISCRIMINATION
Price discrimination or price differentiation[1] exists when sales of identical goods or services are transacted at different prices from the same provider.[2] In a theoretical market withperfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature ofmonopolistic and oligopolistic markets[3], where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the

consumer buying at the higher price but with a tiny discount. However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets. Price discrimination also occurs when the same price is charged to customers which have different supply costs. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others for example Zain. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers. Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are referred to as a rate fence. Price discrimination is thus very common in services, where resale is not possible; an example is student discounts at museums. Price discrimination in intellectual property is also enforced by law and by technology. In the market for DVDs, DVD players are designed - by law - with chips to prevent use of an inexpensive copy of the DVD (for example legally purchased in India) from being used in a higher price market (like the US). The Digital Millennium Copyright Act has provisions to outlaw circumventing of such devices to protect the enhanced monopoly profits that copyright holders can obtain from price discrimination against higher price market segments. Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay.

Price Discrimination

This involves charging a different price to different groups of people for the same good. For example: student discounts, off peak fares cheaper than peak fares. Different Types of Price Discrimination 1. First Degree Price Discrimination This involves charging consumers the maximum price that they are willing to pay. There will be no consumer surplus. 2. Second Degree Price Discrimination This involves charging different prices depending upon the quantity consumed. E.g. after 10 minutes phone calls become cheaper. 3. Third Degree Price Discrimination This involves charging different prices to different groups of people. E.g. students, OAPs and peak travellers e.t.c.

Conditions Necessary for Price Discrimination

1. The firm must operate in imperfect competition, it must be a price maker with a downwardly sloping demand curve. 2. The firm must be able to separate markets and prevent resale. E.g. stopping an adults using a childs ticket. 3. Different consumer groups must have elasticities of demand. E.g. students with low income will be more price elastic. To maximise profits a firm sets output and price where MR=MC. If there are 2 sub markets with different elasticities of demand. The firm will increase profits by setting different prices depending upon the slope of the demand curve. Therefore for a group like adults, PED is inelastic - the price will be higher For groups like students prices will be lower becaue there demand is elastic

Advantages of Price Discrimination

1. Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off peak. 2. Increased revenues can be used for research and development which benefit consumers 3. Some consumers will benefit from lower fares. E.G. old people benefit from lower train companies, old people are more likely to be poor.

Disadvantages of Price Discrimination

1. Some consumers will end up paying higher prices. These higher prices are likely to be allocatively inefficient because P>MC. 2. Decline in consumer surplus. 3. Those who pay higher prices may not be the poorest. E.g. adults could be unemployed, OAPs well off. 4. There may be administration costs in separating the markets. 5. Profits from price discrimination could be used to finance predatory pricing.

Importance of Marginal Cost in Price Discrimination

In markets where the marginal cost of an extra passenger is very low. E.G. a bus traveller the firm has an incentive to use price discrimination to sell all the tickets. This is why sometimes prices for airlines can be very low just before their date. Once the company is due to fly the MC of an extra passenger will be very low. Therefore this justifies selling the remaining tickets at a low price.

THEORY OD DETERMINATIONS
Theory of income determination postulates that the level of national income is determined where aggregate demand equals aggregate supply. PRODUCTION FUNCTION

a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs. This function is an assumed technological relationship, based on the current state of engineering knowledge; it does not represent the result of economic choices, but rather is an externally given entity that influences economic decisionmaking. Almost all economic theories presuppose a production function, either on the firm level or the aggregate level. In this sense, the production function is one of the key concepts of mainstream neoclassical theories. Some nonmainstream economists, however, reject the very concept of an aggregate production function. Production is the transformation of inputs into outputs. Inputs are the factors of production -- land, labor, and capital -- plus raw materials and business services. The transformation of inputs into outputs is determined by the technology in use. Limited quantities of inputs will yield only limited quantities of outputs. The relationship between the quantities of inputs and the maximum quantities of outputs produced is called the "production function."

ELASTICITY OF DEMAND
The degree of buyers' responsiveness to price changes. Elasticity is measured as the percent change in quantity divided by the percent change in price. A large value (greater than 1) of elasticity indicates sensitivity of demand to price, e.g., luxury goods, where a rise in price causes a decrease in demand. Goods with a small value of elasticity (less than 1) have a demand that is insensitive to price, e.g., food, where a rise in price has little or no effect on the quantity demanded by buyers. A simple method of measuring the price elasticity of demand is the total outlays method. This method is only an approximate method of determining elasticity. The most accurate method is the arc method of elasticity, which will be outlined later in this section. The ''total outlays'' method has two steps. The first is to prepare a total outlay or total revenue table for the good or service under investigation. The second step is to look at the change in total revenue

received and compare it with the direction of the price change that caused the change in total revenue.

DIFFERENTIAL PRICING
Differential pricing occurs when a company attempts to charge different prices to two different customers for what is essentially the same product. One place we all encounter it a lot is air travel, where it seems no two passengers paid the same price for their tickets on any given flight.

FACTORS AFFECTING DEMAND OF A PRODUCT

Even though the focus in economics is on the relationship between the price of a product and how much consumers are willing and able to buy, it is important to examine all of the factors that affect the demand for a good or service. These factors include: Price of the Product There is an inverse (negative) relationship between the price of a product and the amount of that product consumers are willing and able to buy. Consumers want to buy more of a product at a low price and less of a product at a high price. This inverse relationship between price and the amount consumers are willing and able to buy is often referred to as The Law of Demand. The Consumer's Income The effect that income has on the amount of a product that consumers are willing and able to buy depends on the type of good we're talking about. For

most goods, there is a positive (direct) relationship between a consumer's income and the amount of the good that one is willing and able to buy. In other words, for these goods when income rises the demand for the product will increase; when income falls, the demand for the product will decrease. We call these types of goods normal goods. The Price of Related Goods As with income, the effect that this has on the amount that one is willing and able to buy depends on the type of good we're talking about. Think about two goods that are typically consumed together. For example, bagels and cream cheese. We call these types of goods compliments The Tastes and Preferences of Consumers This is a less tangible item that still can have a big impact on demand. There are all kinds of things that can change one's tastes or preferences that cause people to want to buy more or less of a product. For example, if a celebrity endorses a new product, this may increase the demand for a product. The Consumer's Expectations It doesn't just matter what is currently going on - one's expectations for the future can also affect how much of a product one is willing and able to buy. For example, if you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other consumers) may decide to wait to buy an iPod until the new product comes out. The Number of Consumers in the Market As more or fewer consumers enter the market this has a direct effect on the amount of a product that consumers (in general) are willing and able to buy. For example, a pizza shop located near a University will have more demand and thus higher sales during the fall and spring semesters. In the summers, when less students are taking classes, the demand for their product will decrease because the number of consumers in the area has significantly decreased.

Advantages And Disadvantages Of Break-Even Analysis

Break-even is an excellent method of analysing a business. Its advantages are

It is cheap to carry out and it can show the profits/losses at varying levels of output. It provides a simple picture of a business - a new business will often have to present a break-even analysis to its bank in order to get a loan.

A break-even analysis can have some disadvantages

It assumes that everything produced is sold whereas it is often the case that not all output will be sold. It assumes that all of the output is sold at the same price - often a business will have to lower its price in order to increase its sales.

TOOLS USED IN DEMAND FORECASTING

Demand forecasting helps companies devise plans for future product sales. The goal of demand forecasting is to determine the amount of merchandise that customers will buy. Techniques include the informal method of educated guesses, as well as formal methods such as analysis of historical data and data from current test markets. Integrated Inventory Planning Any demand forecasting software must be able to help the user determine the amount of inventory he needs to order. However, demand forecasting works in a range, not an exact number to be ordered. An important factor to consider for an accurate range is safety stock. This is product ordered over the forecasted allotment to act as a buffer. When working on the integrated inventory planning, users must understand that ordering is never a fixed amount per month. Instead, calculations go into deciding the amount to order, as well as the safety stock. Calculations include lead time, replenishment frequency, and forecast error. If a company uses a fixed order system rather than integrated planning, it often ends up with too much of some product and not enough of others.

FACTORS THAT SHIFT THE DEMAND CURVE

Change in consumer tastes Change in the number of buyers Change in consumer incomes Change in the prices of complementary and substitute goods Change in consumer expectations

ROLE OF COST IN PRICING

Short-Run Pricing Decisions: Occasionally, a company faces a sales opportunity for which the only relevant costs and revenues are the incremental costs and revenues for that one transaction. In this situation, accurate information about marginal costs are important, because the company should be willing to set the sales price at any amount in excess of marginal cost (marginal production cost plus any marginal non-manufacturing costs such as distribution and marketing costs). Typically, marginal production costs consist of all variable production costs. These opportunities probably occur relatively infrequently (certainly less often, for example, than one might infer from Eliyahu Goldratts popular business novel The Goal). Among the conditions that are typically required for the optimal sales price to depend only on the variable costs of the one transaction the company now faces are: (1) excess production capacity (so that the sales order does not displace existing orders); (2) a one-time customer (since the price the customer is willing to pay in the future might depend on the price the customer pays today); and (3) a customer not in the companys normal sales channels (because if other customers learn that the company has given another customer a price break, they are likely to demand similar concessions).

Intermediate-Run Pricing Decisions: Over the course of several months to a year or two, costs associated with many fixed assets are unavoidable, but the company can make meaningful decisions about product prices, production levels and product mix. For these decisions, microeconomics provides analytical tools for jointly determining the optimal sales price and production level to maximize profits. The solution to this problem depends on the elasticity of demand and also on variable production costs (marginal production cost, in the terminology of economics). Long-Run Pricing Decisions: In the long-run, all fixed costs become relevant costs. Factories and warehouses can be built, rebuilt, purchased or sold. Salaried employees can be hired, fired, reassigned, or given incentives to resign or retire. Long-term leases and other contracts come up for renewal. In the long-run, the companys revenues must exceed its costs, if it is to survive. Therefore, the management accounting system should provide managers information about whether sales prices for products are sufficiently in excess of their full cost of production to cover non-manufacturing costs and still provide the company a reasonable rate of return. Management should consider dropping products that are unable to cover their full costs (manufacturing costs plus non-manufacturing costs), unless there are extenuating circumstances such as a product that serves as a loss leader (e.g., sell the inkjet printer at or near cost, and make high profit margins on sales of ink cartridges). The timing for eliminating unprofitable products might depend on when the costs of fixed assets associated with those products can be avoided.

price leadership
Situation in which a market leader sets the price of a product or service, and competitors feel compelled to match that price. Dominant competitor in a market whose price changes are matched by the rest of the competitors. The price leader usually has greater capital resources and economies of scale that enable it to risk sustaining lower prices than its competitors. The price leader may also have a distinct product advantage or enough advertising resources to sustain a higher price than its competitors. Price leadership is effective in the prevention of price wars and in reaching a consensus on pricing without collusion in violation of antitrust laws. If the price leader is not followed by the rest of the market, the leader is at risk of losing market share.

MONOPOLY
Market situation where one producer (or a group of producers acting in concert) controls supply of a good or service, and where the entry of new producers is prevented or highly restricted. Monopolist firms (in their attempt to maximize profits) keep the price high and restrict the output, and show little or no responsiveness to the needs of their customers. Most governments therefore try to control monopolies by (1) imposing price controls, (2) taking over their ownership (called 'nationalization'), or (3) by breaking them up into two or more competing firms. Sometimes governments facilitate the creation of monopolies for reasons of national security, to realize economies of scale for competing internationally, or where two or more producers would be wasteful or pointless (as in the case of utilities ). Although monopolies exist in varying degrees (due to copyrights, patents, access to materials, exclusive tech nologies, or unfair trade practices) almost no firm has a complete monopoly in the era of globalization.

DUOPOLY
Market situation in which only sellers supply a particular commodity to many buyers. Either seller can exert some control over the output and prices, but must consider the reaction of its sole competitor (unless both have formed an illegal collusive duopoly).

OLIGOPOLY
Market situation between, and much more common than, perfect competition (having many suppliers) and monopoly (having only one supplier). In oligopolistic markets, independent suppliers (few in numbers and not necessarily acting in collusion) can effectively control the supply, and thus the price, thereby creating a seller's market. They offer largely similar products, differentiated mainly by heavy advertising and promotional expenditure, and can anticipate the effect of one another's marketing strategies. Examples include airline, automotive, banking, and petroleum markets. Mirror image of oligopsony.

OPPURTUNITY COST
Opportunity cost is the cost related to the next-best choice available to someone who has picked among several mutually exclusive choices.[1] It is a key concept in economics. It has been described as expressing "the basic relationship between scarcity and choice."[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs.

Value Maximization
The act or process of adding to an individual's net worth by increasing the share price of the common stock in which that individual has invested.

ELASTICITY OF DEMAND
Responsiveness of the demand for a good or service to the increase or decrease in its price. Normally, sales increase with drop in prices and decrease with rise in prices. As a general rule, appliances, cars, confectionary and other non-essentials show elasticity of demand whereas most necessities (food, medicine, basic clothing) show inelasticity of demand (do not sell significantly more or less with changes in price). See also cross price elasticity of demand.

PRICE REDGITY
Price Rigidity is a condition where one follows a decrease in price but not an increase in price. This is due to the ability of other firms to match prices with it and it often leads to a kinked demand curve.

PRICE DETERMINATIONS
Keyenes Model of income determination theory stated that people will put aside the same level of income or save the same amount of money at all possible

rates of interest. He concluded that the level of a person's income determined the amount of money people demand to hold or save. Or transaction demand for money. Keyenes theorized the three reasons people demand money to hold (or save). Those motives are for 1) Transactional, or for day to day purchases2)Precautionary motives, or the amount people put aside for emergency purposes- and 3)Speculative motives, the amount of money people put aside for the purchase of earning assets (or to invest).

MANAGERIAL ECONOMICS
Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear). If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research and programming. Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision. Production analysis - microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function. Pricing analysis - microeconomic techniques are used to analyse various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method. Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.

DEMAND
Desire for certain good or service supported by the capacity to purchase it. (2) Aggregate quantity of a product or service estimated to be bought at a particular price. (3) Total amount of funds which individuals or organizations want to commit for spending on goods or services over a specific period.

PERFECT COMPETITION
What Does Perfect Competition Mean? A market structure in which the following five criteria are met: 1. All firms sell an identical product. 2. All firms are price takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit. Sometimes referred to as "pure competition".

NATIONAL INCOME
The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.

MEASURES OF NATIONAL INCOME

Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. They use a system of national accounts or national accounting developed by Simon Kuznets in the 1960s. Some of the more common measures are Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP), and Net National Income (NNI). There are at least two or three different ways of calculating these numbers. The expenditure approach determines aggregate demand, or Gross National Expenditure, by summing consumption, investment, government expenditure and net exports. On the other hand, theincome approach and the closely

related output approach can be seen as the summation of consumption, savings and taxation. The three methods must yield the same results because the total expenditures on goods and services (GNE) must by definition be equal to the value of the goods and services produced (GNP) which must be equal to the total income paid to the factors that produced these goods and services (GNI). (GNP=GNI=GNE by definition) In actual fact, there will be minor differences in the results obtained from the various methods due to changes in inventory levels. This is because goods in inventory have been produced (and therefore included in GDP), but not yet sold (and therefore not yet included in GNE). Similar timing issues can also cause a slight discrepancy between the value of goods produced (GDP) and the payments to the factors that produced the goods (particularly if inputs are purchased on credit).

Factors Affecting National Income

1.

Factors of Production

Normally the more efficient and richer the resources, the higher the level of national income or GNP will be. Land Resources like coal, iron & timber are essential for heavy industries so that they must be available and accessible. In other words, the geographical location of these natural resources affect the level of GNP.

Capital Capital is greatly determined by investment. Investment in turn depends on other factors like profitability, political stability etc. Labour & Entrepreneur The quality or productivity of human resources is more important than quantity. Manpower planning and education affect the productivity and production capacity of an economy.

2.

Technology This factor is more important for nations with little natural resources. The development in technology is affected by the level of invention and innovation on production.

3.

Government Government can help to provide a favourable business environment for investment. It provides laws and order, regulations that affect exchanges. In HK, the government promotes free trade and competition which encourage economic activities. 4. Political Stability A stable economic and political system helps the allocation of resources. Wars, strikes and social unrests will discourage investment and business activities.

Measurement of National Income

There are mainly 3 approaches to measure GNP. The relationship of the 3 approaches is shown by the diagram below.

The Circular Flow of Economic Activities

Expenditures ($)

Product Market

$ Output

Househol d s Income by production $ Factor Costs

Firms

The 3 arrows in the diagram show the overall level of economic activities. Based on these 3 directions of flows, i.e. a flow of income, a flow of output, & a flow of expenditures, economists develop 3 approaches to measure GNP.

1.

Output or Value-Added Approach

The total value of all final goods & services ( i.e. outputs ) can be found by adding up the total values of outputs produced at different stages of production.

This method is to avoid the so-called double-counting or an over-estimation of GNP. However, there are difficulties in the collection and calculation of data obtained. It is from 1980 that the H.K. government started to collect data by this approach. In 1995, the government started to release GNP data.

2.

Expenditure Approach

The amount of expenditures refers to all those spending on currentlyproduced final goods & services only. In an economy, there are 3 main agencies which buy goods & services. They are the households, firms and the government. In economics, we have the following terms: C = Private Consumption Expenditure ( of all households ) I = Investment Expenditure ( of all firms) G = Government Consumption Expenditure ( of the local government )

The expenditure approach is to measure the GNP. We could not buy all our outputs because some are exported to overseas. Similarly, our consumption expenditures may include the purchases of some imports. In order to find the GNP, the value of exports must be added to C, I & G whereas the value of imports must be deducted from the above amount. Finally, we have : G N P at market prices = C + I + G +X-M

DEPRECIATION

Depreciation refers to two very different but related concepts: 1. decline in value of assets, and 2. allocation of the cost of tangible assets to periods in which the assets are used. The former affects values of businesses and entities. The latter affects net income. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. Such expense is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation may vary by asset for the same business. Methods and lives may be specified in accounting and/or tax rules in a country. Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. Example: a depreciation expense of 100 per year for 5 years may be recognized for an asset costing 500. In economics, depreciation is the decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. If capital stock is C0 at the beginning of a period, investment is I and depreciation D, the capital stock at the end of the period, C1, is C0 + I - D.

PENETRATION PRICING
Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers. The strategy works on the expectation that customers will switch to the new brand because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term. The advantages of penetration pricing to the firm are: It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competition by surprise, not giving them time to react.

It can create goodwill among the early adopters segment. This can create more trade through word of mouth. It creates cost control and cost reduction pressures from the start, leading to greater efficiency. It discourages the entry of competitors. Low prices act as a barrier to entry (see: porter 5 forces analysis). It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel. It can be based on marginal cost pricing, which is economically efficient.

SKIMMING PRICE
Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price. Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture theconsumer surplus. If this is done successfully, then theoretically no customer will pay less for the product than the maximum they are willing to pay. In practice, it is almost impossible for a firm to capture all of this surplus.

IMPLICIT COST
an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly.[1] In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it. The term also applies to forgone income from choosing not to work. Implicit costs also represent the divergence between economic profit (total revenues minus total costs, where total costs are the sum of implicit and explicit costs) and accounting profit(total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit

MARGIN OF SAFETY
Margin of safety (safety margin) is the difference between the intrinsic value of a stock and its market price. Using margin of safety, one should buy a stock when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing. Benjamin Graham suggested to look at unpopular or neglected companies with low P/E and P/B ratios. One should also analyze financial statements and footnotes to understand whether companies have hidden assets (e.g., investments in other companies) that are potentially unnoticed by the market. The margin of safety protects the investor from both poor decisions and downturns in the market. Because fair value is difficult to accurately compute, the margin of safety gives the investor room for error.

BANDWAGON EFFECT IN DEMAND

he bandwagon effect, also known as the "cromo effect" and closely related to opportunism, is a phenomenonobserved primarily within the fields of microeconomics, political science, and behaviorismthat people often do and believe things merely because many other people do and believe the same things. The effect is often called herd instinct, though strictly speaking, this effect is not a result of herd instinct. The bandwagon effect is the reason for the bandwagon fallacy's success. The bandwagon effect is well-documented in behavioral science and has many applications. The general rule is that conduct or beliefs spread among people, as fads and trends clearly do, with "the probability of any individual adopting it increasing with the proportion who have already done so". As more people

come to believe in something, others also "hop on the bandwagon" regardless of the underlying evidence. The tendency to follow the actions or beliefs of others can occur because individuals directly prefer to conform, or because individuals derive information from others. Both explanations have been used for evidence of conformity in psychological experiments.

MICRO ECONOMICS
Microeconomics is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.

MACRO ECONOMICS
Macroeconomics is a branch of economics that deals with the performance, structure, behavior and decision-making of the entire economy, be that a national, regional, or the global economy. With microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, int ernational trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).

Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.

THEORY OF FIRM
The theory of the firm consists of a number of economic theories that describe the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market. In simplified terms, the theory of the firm aims to answer these questions: 1. Existence why do firms emerge, why are not all transactions in the economy mediated over the market? 2. Boundaries why is the boundary between firms and the market located exactly there as to size and output variety? Which transactions are performed internally and which are negotiated on the market? 3. Organization why are firms structured in such a specific way, for example as to hierarchy or decentralization? What is the interplay of formal and informal relationships? 4. Heterogeneity of firm actions/performances what drives different actions and performances of firms?

Firms exist as an alternative system to the market-price mechanism when it is more efficient to produce in a non-market environment. For example, in a labor market, it might be very difficult or costly for firms or organization to engage in production when they have to hire and fire their workers depending on demand/supply conditions. It might also be costly for employees to shift companies everyday looking for better alternatives. Thus, firms engage in a long-term contract with their employees to minimize the cost.

PERISHABLE GOODS

Perishable foods are something liable to perish, decay or spoil rapidly... such as fresh meat, seafood, and ripe fruits. While non-perishable are items that do not spoil or decay.... for example; canned goods, all pasta types, sugar, flour, curls (and chips if air-sealed), spices are non perishable as well. Perishable foods are foods that perish. After a certain time they can't be eaten. Perishable foods include meat. Non-perishable foods is the opposite. They last for a long time and don't perish. Non-perishable foods include canned goods.

NORMAL PRICE
Equilibrium price of a good or service in a perfectly competitive market (see perfect competition), the price that is equal to the lowest possible average total cost of production plus normal profit.

MARKET PRICE
In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics. Market value and market price are equal only under conditions of market efficiency, equilibrium, and rational expectations. In classical economics, market pricing is primarily determined by the interaction of supply and demand. Price is interrelated with both of these measures of value. The relationship between price and supply is generally negative, meaning that the higher the price climbs, the lower amount of the supply is demanded. Conversely, the lower the price, the greater the supply is demanded . Market price is just one of the number of ways to establish the monetary value of a good or a transaction. Shifts due to changing consumer preferences will inherently influence market price. Other measures of value include historical cost, the resource cost of the good or service an appraised value (such as the discounted present value), economic value and intrinsic value.

CUT THROAT COMPETITION

Cut-throat competition, also known as destructive or ruinous competition, refers to situations when competition results in prices that do not chronically or for extended periods of time cover costs of production, particularly fixed costs. This may arise in secularly declining or "sick" industries with high levels of excess capacity or where frequent cyclical or random demand downturns are experienced.

CAUSES OF MONOPOLY
Most economists regard monopoly as an exceptional case in a modern economy. In an economy populated by alert profit-seekers, it seems that any profitable monopoly would quickly attract competitors. For a monopoly to be stable, there must be some "barrier to entry." The assumption of free entry into the industry must not apply. Thus, we ask what might create the exception -what might "cause" a monopoly, what the "barrier to entry" might be. Most texts give four causes of monopoly, which I will also give and add a fifth.

patents and other forms of intellectual property control of an input resource government decreasing cost crime

RESTRICTIVE TRADE PRACTICE

The term restrictive trade practice is used for any strategy used by producers to restrict competition within a given market. Collusion resulting in the formation of a cartel is one such practice. Other practices that fall short of the formation of a cartel but are nonetheless against the public interest and illegal include: (a) the setting of minimum prices; (b) agreements to share markets; (c) the refusal to supply retailers that stock the products of other competitors; (d) setting different prices for different buyers (discriminatory pricing); (e) exchanging information. The aim of restrictive practices is to raise prices and restrict output to the benefit of the companies practicing them.

What are restrictive trade practices? These include: Anti-competitive arrangements Competitors must not enter arrangements that will substantially lessen competition in a market, which is deemed to be the largest area within which substitutable products are sold. Examples of anti-competitive conduct are market sharing and bid rigging (collusive tendering). Price fixing Any agreement between competitors fixing the price of goods or services is illegal. It is illegal for competitors to get together to fix prices or share markets. Informal arrangements made over lunch or on the tennis court may be held to be as illegal as formal written agreements. Boycotts Competitors are prohibited from getting together and restricting the flow of goods or services to another person. It is illegal to enter agreements (known as primary boycotts), which have the effect of excluding a person or class of persons from a particular market. Misuse of Market Power A supplier with substantial market power must not damage a competitor or competitive conduct generally. Exclusive Dealing It is illegal to supply goods or services on the condition that the buyer will not acquire those goods or services exclusively or principally from a competing supplier, where the arrangement is also likely to substantially lessen competition in a market ("tying"). A supplier must not supply goods or services on the condition that the buyer obtains other goods or services from a third party ("third line forcing"). Resale Price Maintenance

It is illegal for suppliers to try to force resellers not to discount or not to advertise discounts (although they can set maximum prices). A supplier must not demand that resellers charge a specified minimum price. Provision of a recommended retail price is not illegal, if it is a genuine recommendation.

STSTISTICS
Statistics is the science of the collection, organization, and interpretation of data. It deals with all aspects of this, including the planning of data collection in terms of the design of surveys and experiments.[1] Statistics is closely related to probability theory, with which it is often grouped.

STOCK AND FLOW CONCEPT

Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense. For example, U.S. nominal gross domestic product refers to a total number of dollars spent during a specific time period, such as a year. Therefore it is a flow variable, and has units of dollars/year. In contrast, the U.S. nominal capital stock is the total value, in dollars, of equipment, buildings, inventories, and other real assets in the U.S. economy, and has units of dollars. The diagram provides an intuitive illustration of how the stock of capital currently available is increased by the flow of new investment and depleted by the flow of depreciation.

CONCEPT OF DUMPING
Exporting goods at prices lower than the home-market prices. In price-to-price dumping, the exporter uses higher home-prices to supplement the reduced revenue from lower export prices. In price-cost dumping, the exporter is subsidized by the local government with duty drawbacks, cash incentives, etc. Dumping islegal under GATT (now WTO) rules unless its injurious effect on the importing country's producers can be established. If injury is established,

GATT rules allow imposition of anti-dumping duty equal to the difference between the exporter's home-market price and the importer's FOB price.

Demand Forecasting in Managerial Economics

One of the crucial aspects in which managerial economics differs from pure economic theory lies in the treatment of risk and uncertainty. Traditional economic theory assumes a risk-free world of certainty; but the real world business is full of all sorts of risk and uncertainty. A manager cannot, therefore, afford to ignore risk and uncertainty. The element of risk is associated with future which is indefinite and uncertain. To cope with future risk and uncertainty, the manager needs to predict the future event. The likely future event has to be given form and content in terms of projected course of variables, i.e. forecasting. Thus, business forecasting is an essential ingredient of corporate planning. Such forecasting enables the manager to minimize the element of risk and uncertainty. Demand forecasting is a specific type of business forecasting.

Concepts of Forecasting:
The manager can conceptualize the future in definite terms. If he is concerned with future event- its order, intensity and duration, he can predict the future. If he is concerned with the course of future variables- like demand, price or profit, he can project the future. Thus prediction and projection-both have reference to future; in fact, one supplements the other. Suppose, it is predicted that there will be inflation (event). To establish the nature of this event, one needs to consider the projected course of general price index (variable). Exactly in the same way, the predicted event of business recession has to be established with reference to the projected course of variables like sales, inventory etc. Projection is of two types forward and backward. It is a forward projection of data variables, which is named forecasting. By contrast, the backward projection of data may be named back casting, a tool used by the new economic historians. For practical managers concerned with futurology, what is relevant is forecasting, the forward projection of data, which supports the production of an event.

Thus, if a marketing manager fears demand recession, he must establish its basis in terms of trends in sales data; he can estimate such trends through extrapolation of his available sales data. This trend estimation is an exercise in forecasting.

Need for Demand Forecasting

Business managers, depending upon their functional area, need various forecasts. They need to forecast demand, supply, price, profit, costs and returns from investments. The question may arise: Why have we chosen demand forecasting as a model? What is the use of demand forecasting? The significance of demand or sales forecasting in the context of business policy decisions can hardly be overemphasized. Sales constitute the primary source of revenue for the corporate unit and reduction for sales gives rise to most of the costs incurred by the firm. Demand forecasting is essential for a firm because it must plan its output to meet the forecasted demand according to the quantities demanded and the time at which these are demanded. The forecasting demand helps a firm to arrange for the supplies of the necessary inputs without any wastage of materials and time and also helps a firm to diversify its output to stabilize its income overtime.

The purpose of demand forecasting differs according to the type of forecasting. (1) The purpose of the Short term forecasting: It is difficult to define short run for a firm because its duration may differ according to the nature of the commodity. For a highly sophisticated automatic plant 3 months time may be considered as short run, while for another plant duration may extend to 6 months or one year. Time duration may be set for demand forecasting depending upon how frequent the fluctuations in demand are, short- term forecasting can be undertaken by affirm for the following purpose;

Appropriate scheduling of production to avoid problems of over production Proper management of inventories Evolving suitable price strategy to maintain consistent sales Formulating a suitable sales strategy in accordance with the changing Forecasting financial requirements for the short period.

and under- production.

pattern of demand and extent of competition among the firms.

(2) The purpose of long- term forecasting: The concept of demand forecasting is more relevant to the long-run that the short-run. It is comparatively easy to forecast the immediate future than to forecast the distant future. Fluctuations of a larger magnitude may take place in the distant future. In fast developing economy the duration may go up to 5 or 10 years, while in stagnant economy it may go up to 20 years. More over the time duration also depends upon the nature of the product for which demand forecasting is to be made. The purposes are;

Planning for a new project, expansion and modernization of an existing Assessing long term financial needs. It takes time to raise financial Arranging suitable manpower. It can help a firm to arrange for specialized Evolving a suitable strategy for changing pattern of consumption.

unit, diversification and technological up gradation.

resources.

labour force and personnel.