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. As such it can be seen as a means
to an end by managers, in terms of finding the most efficient way of allocating their
scarce resources and reaching their objectives. However, the definition above might
seem to be a little narrow in scope when applied to the case study involving global
warming. This situation involves governments, non-profit objectives, non-monetary
costs and benefits, international negotiations and a very long-term time
perspective, with an associated high degree of uncertainty. Therefore it needs to be
clarified that managerial economics can still be applied in such situations. The term
‘business’ must be defined very broadly in this context:

b. The importance of managerial economics for an enterpreneur is to help him to

choose the right venture after taking effective analyzes of both fianancial and
general situations that can positively or negatively affect a business. It is therefore
important for every enterpreneur to have a fair knowledge in managerial
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.

DEAN, author of the first managerial economics text books defines managerial economics as
"the use of economic analysis in the formulation of business policies"

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.

Q2Price elasticity of demand (PED) is defined as the measure of responsiveness in the quantity
demanded for a commodity as a result of change in price of the same commodity. It is a measure
of how consumers react to a change in price.[1] In other words, it is percentage change in quantity
demanded by the percentage change in price of the same commodity. In economics and business
studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to
changes in price. It is measured as elasticity, that is it measures the relationship as the ratio of
percentage changes between quantity demanded of a good and changes in its price.

In simpler words, demand for a product can be said to be very inelastic if consumers will pay
almost any price for the product, and very elastic if consumers will only pay a certain price, or a
narrow range of prices, for the product. Inelastic demand means a producer can raise prices
without much hurting demand for its product, and elastic demand means that consumers are
sensitive to the price at which a product is sold and will not buy it if the price rises by what they
consider too much.

A number of factors determine the elasticity:

• Substitutes: The more substitutes, the higher the elasticity, as people can easily switch
from one good to another if a minor price change is made
• Percentage of income: The higher the percentage that the product's price is of the
consumer's income, the higher the elasticity, as people will be careful with purchasing the
good because of its cost
• Necessity: The more necessary a good is, the lower the elasticity, as people will attempt
to buy it no matter the price, such as the case of insulin for those that need it.
• Duration: The longer a price change holds, the higher the elasticity, as more and more
people will stop demanding the goods (i.e. if you go to the supermarket and find that
blueberries have doubled in price, you'll buy it because you need it this time, but next
time you won't, unless the price drops back down again)

b. Different degree of price elasticity:

 • Perfectly Elastic Demand:-

If demand is perfectly elastic, it means that at a certain price demand is infinite (A good with a
very high elasticity of demand). In other words if a firm increased price by 1%, it would see all
its demand evaporate.

In a perfectly competitive market it is assumed a firm would have a perfectly elastic demand.
This is because if they increased the price, the consumers with perfect information would switch
to other firms who offer the identical product.

For Example:

A consumer will not purchase designer jeans if he or she is in financial dire straits or price
increases of those jeans.

But necessary goods like medicines, food items, petrol etc are the exceptions.

Q
Perfectly Elastic

• Perfectly Inelastic Demand:-

Perfectly Inelastic

When a price change has no effect on the supply and demand of a good or service, it is
considered perfectly inelastic. An example of perfectly inelastic demand would be a life saving
drug that people will pay any price to obtain. Even if the price of the drug were to increase
dramatically, the quantity demanded would remain the same.

3) A sales forecast is a prediction based on past sales performance and an analysis of

expected market conditions. The true value in making a forecast is that it forces us to look
at the future objectively. The company that takes note of the past stays aware of the
present and precisely analyzes that information to see into the future.

Conducting a sales forecast will provide your business with an evaluation of past and current
sales levels and annual growth, and allow you to compare your company to industry norms.
It will also help you establish your policies so that you easily can monitor your prices and
operating costs to guarantee profits, and make you aware of minor problems before they
become major problems.
Sales forecasting is a self-assessment tool for a company. You have to keep taking the pulse
of your company to know how healthy it is. A sales forecast reports, graphs and analyzes
the pulse of your business. It can make the difference between just surviving and being
highly successful in business. It is a vital cornerstone of a company's budget. The future
direction of the company may rest on the accuracy of your sales forecasting.

Companies that implement accurate sales forecasting processes realize important benefits
such as:

* Enhanced cash flow

* Knowing when and how much to buy
* In-depth knowledge of customers and the products they order
* The ability to plan for production and capacity
* The ability to identify the pattern or trend of sales
* Determine the value of a business above the value of its current assets
* Ability to determine the expected return on investment (This can be very helpful if the
company is trying to obtain financing from investors or other lending institutions)

The combination of these benefits may result in:

*Increased revenue
*Increased customer retention
* Decreased costs
* Increased efficiency

For sales forecasting to be valuable to your business, it must not be treated as an isolated
exercise. Rather, it must be integrated into all facets of your organization.

Since the forecast is based on your company's previous sales, it is necessary to know your
dollar sales volume for the past several years. To complete a thorough sales forecast, you
also need to take into consideration all of the elements, both internal and external, that can
affect sales.

Budget Forecasting--A good cash flow forecast, also called a cash flow budget, is at the
core of the corporate financial process and is important for corporate survival. How can you
get somewhere if you don't have a map to follow? How can you ensure that you will have
the financial resources available to fund your company's growth or to just "make payroll" if
you don't plan out the cash receipts and disbursements for the week, month, and year? You
can't!

Your cash flow budget doesn't have to be intricate to be effective. You can use a
spreadsheet, purchase a simple budgeting program, or even do a forecast by hand. The
important thing is that you have one.

To create one, use your financial or income statement monthly forecast and a calendar year
for financial reporting, and do the following:

Outline the expected collections from your budgeted monthly invoicing. If your terms are
net 30 and your clients typically pay in 45 days, use this fact as your basis for forecasts. For
example, under that scenario, March's invoices become May's collections.
For the first months of the year, add in when you expect to collect existing accounts
receivable. If you have $20,000 in accounts receivable that were all invoiced in December of
the prior year, then, based on the above assumption, the $20,000 should be added as
projected cash inflow for the second month of your budget, which is February.

Identify any other expected cash receipts. In your cash receipts forecast, include proceeds
from bank loans or equity transactions, refunds, and customer deposits.

Start looking at expenses and cash disbursements. Look at your expenses for the prior and
current months and identify when they will be paid. Items such as payroll, rent, leases,
travel, and entertainment are either recurring or paid out in the current budget month. Also,
identify what fixed asset purchases and loan repayments you will make during the year.

Review your accounts payable balance at the end of December for the prior year, and
identify when these items will be paid. Add the amounts to your cash disbursements
forecast.

----The development and introduction of a new product is an inherently risky venture. In an effort to reduce
the risks associated with new products, the forecasting of year-one sales has become an established practice
within the marketing research industry. Forecasting sales of new products is fraught with risks, and
estimates can often be off the mark. The risk of great error is particularly high for new products that
represent something fundamentally new and different. The goal of this article is to take a bit of the mystery
out of the methods used to derive year-one sales forecasts for new consumer packaged goods.

Typically, the objective is to predict year-one "depletions"; that is, the actual volume of goods consumers
will buy in retail stores. The term "depletions" excludes new products in the factory, in warehouses, on
trucks, or in the retailer’s distribution system (i.e., all inventory built is excluded). Most often, these sales
estimates are in retail dollars, not the manufacturer’s selling prices. So after receiving a retail depletions
estimate of new product sales, the manufacturer must discount the retail sales numbers to arrive at the
manufacturer’s actual sales (or actual depletions) in year one.

The first method of forecasting new product depletions is historical review. If a company has introduced
similar new products into similar markets in the past, these histories can often be good predictors of future
outcomes. If a company has no such history, then histories of similar new products introduced by
competitors or other companies can serve as historical guidelines to help derive a new product sales
forecast. However, history is not always a good predictor of the future; it is often difficult to find accurate
historical data relevant to the new product under consideration; and what other companies have been able
to do does not necessarily tell us what the next company can do. Lastly, histories of two new products may
look the same on the surface, but actually be driven by completely different underlying variables (trial rates,
repeat purchase rates, purchase cycle lengths, etc.).

A second method of forecasting new product success is the test market. The new product is developed and
introduced into one or more test markets. Often this sales tracking is supplemented by survey-based
tracking of consumer awareness, trial, usage, and repeat purchase patterns. In some instances, consumer
diary panels or purchase panels are used to track consumer trial, repeat purchases, and share. No variables
are excluded from the test. Success in test markets is highly predictive of success nationwide (especially if
multiple test markets are used). The test market gives the manufacturer the opportunity to work the "bugs"
out of the new product, its packaging, its shipping, and its display on store shelves so a national rollout later
is likely to be trouble-free. The greatest downside of test markets is the risk that competitors will read the
test market with their own marketing research and be ready to "go national" at about the same time you
are. Another risk is the possibility competitors will take marketing actions to distort or destroy the reliability
of the test market. For example, a major competitor might run a deep discount promotion so category users
will stock up with the competition’s product, and this could effectively block or delay trial of your new
product.

A third method of forecasting is before-after retail simulation. A sample of consumers is presented with
simulations showing the in-store retail environment and a realistic display of all the major brands in the
category. The consumer is asked to "purchase" brands as they normally would. The new product is missing
from the simulation during this "before" measurement. Then the consumer is exposed to the new product
concept and/or advertising that conveys the new product concept. Later the consumer sees the exact same
simulated display (except now it contains the new product) and is asked to make the same choices or
purchase decisions as before. So we have market shares for all brands in the category before the new
product is introduced, and the same data after the new brand is introduced. The market share achieved by
the new brand is a predictor of the brand’s "instantaneous sales rate" at retail at the end of year one, once
discounted by predicted awareness, trial, and distribution levels for the new brand year-one trial volume is
partly excluded from this sales or depletions forecast, however, and the sales estimate is not for year one,
but for the "going rate" at the end of year one. This approach tends to overstate the true market potential of
a new product, so the results must be discounted to compensate for this tendency. With a few other
adjustments a reasonably good estimate of year-one depletions can be derived. This method is conceptually
sound and can yield good estimates of year-one sales volume. With the inclusion of 3-D simulation to create
realistic in-store purchase experiences, this method will become more accurate and play a more important
future role.

A fourth technique for forecasting new product sales is the "normative" approach. A database of historical
norms for new products is assembled by product category. A mathematical model sits atop the normative
database and includes the marketing plan variables that might cause a new brand to perform above, at, or
below the norms. If an in-home usage product test has proven the new brand is better than its major
competitors, then the model would adjust the repeat purchase rate higher within the distribution of historical
norms. Therefore, based on inputs from concept testing, product testing, and copy testing, the model
decides where (within the normative possibilities) this new brand will fall. Then the model simply combines
all of this into predicting a trial curve and a repeat purchase curve, which yields a year-one forecast of sales
or retail depletions. This method can produce accurate forecasts, depending upon the accuracy of the
normative data, the quality of the model, and the accuracy of the marketing inputs.

The last method is the traditional awareness-trial-repeat purchase model. Awareness is forecast based on
year-one advertising and media plans. All media advertising is converted into television GRP (gross rating
point) equivalents. These GRP equivalents are fed into a mathematical model to forecast awareness week by
week during the brand’s first year of life. The model converts this awareness into a cumulative trial rate,
week by week, based on predicted distribution levels, promotional plans, and inputs from concept research
and advertising testing. Samples of the new product are placed in homes for consumers to use under normal
conditions for a period of days or weeks. The results of the product test are used to predict the repeat
purchase curve and the purchase cycle. The model combines the trial predictions and the repeat purchase
curve into a forecast of first-year retail depletions. These types of models can often generate accurate new
product forecasts for consumer packaged goods (within 10% to 15% of actual depletions, plus or minus).

All of these models are based on hidden assumptions and include human judgment, and if these underlying
assumptions or judgments are off the mark, the corresponding forecast can be inaccurate (that is, error
greater than 15%). Nevertheless, volumetric forecasting is typically accurate enough to be a valuable ally in
new product decision making, and is very economical compared to the cost of a major test market, or the
cost and embarrassment of new-product failure in the marketplace.

4) At its simplest, however, we often find an equilibrium at the intersection of two or more
lines. The explanation is this. Suppose line A represents the optimizing behavior of one
group of agents, and suppose line B represents the optimizing behavior of another group of
agents. Then, the intersection of lines A and B is the equilibrium where both groups of
agents are optimizing.

The classic example is supply and demand. The supply curve shows the quantity supplied
at a given price by profit-maximizing firms. The demand curve shows the quantity
demanded at a given price by utility-maximizing consumers. The intersection of the supply
curve and the demand curve is the point that maximizes both profits and utility.
B ---Sometimes the market is not in equilibrium-that is quantity supplied doesn't equal quantity demanded. When

this occurs there is either excess supply or excess demand.

A Market Surplus occurs when there is excess supply- that is quantity supplied is greater than quantity demanded.

In this situation, some producers won't be able to sell all their goods. This will induce them to lower their price to

make their product more appealing. In order to stay competitive many firms will lower their prices thus lowering the

market price for the product. In response to the lower price, consumers will increase their quantity demanded,

moving the market toward an equilibrium price and quantity. In this situation, excess supply has exerted downward

pressure on the price of the product.

A Market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity

supplied. In this situation, consumers won't be able to buy as much of a good as they would like. In response to the

demand of the consumers, producers will raise both the price of their product and the quantity they are willing to

supply. The increase in price will be too much for some consumers and they will no longer demand the product.

Meanwhile the increased quantity of available product will satisfy other consumers. Eventually equilibrium will be

reached.

--Whenever there is a change in one of the factors of either supply or demand, market equilibrium will be affected.

Shift in Demand

When there is a change of one of the factors of demand- like the price of the product and related goods,
consumer preferences, or income- there is a corresponding change in the demand curve. For instance, if someone's

income grows, then his demand for goods will increase, shifting his demand curve to the right. This will lead to a

higher quantity being consumed at a higher price, ceteris paribus. Conversely, there can be a negative effect that

shifts the supply curve to the left where a lower quantity is consumed at a lower price, ceteris paribus. This can occur

when the price of substitutes falls or consumers begin to lose their taste for the product.

Shift in Supply

When there is a change of one of the factors of supply- like changes in the prices of production inputs like labor or
capital; a change in production technology and its associated productivity change; or the amount of competition in a

specific product market- there is a corresponding change in the supply curve. For example, if worker productivity

improves due to some human capital or technology investment, then the costs of production decrease. This exerts a

positive effect on the supply curve shifting it right, where the new market equilibrium is at a higher quantity and a

lower price, holding everything else constant. There can also be a negative shift that moves the supply curve to the
left, with the resulting market clearing price being higher and quantity lower, ceteris paribus. This type of change can

occur when the price of an input like labor or raw material jumps.

Shifts in Demand and Supply

Realistically speaking, ceteris paribus doesn't hold in the real world marketplace as many things are happening at

once that either have complimentary or contrary influences upon the market equilibrium. You can't gauge what the

new market equilibrium might be as you are not holding everything constant, but two things are being changed

simultaneously. To find out what the new market equilibrium is you need detailed information on the magnitude of the

supply and demand factor changes and the corresponding shifts in the graph, along with knowledge of the shapes of

the curves.

Take the market for apples for instance. If both supply and demand increase (on the graph this would be represented

by the supply and demand curves both shifting to the right)- if orchard productivity rises while a new medical reports

touts the discovery of the newly added health benefits of apples- then the quantity will definitely go up but the new

price is indefinite. It could go up if the increase in demand is significant enough, or it could go down if it's not.

Similarly, a certain quantity reduction but an uncertain price will pertain when the both demand and supply curves

shift to the left. This could happen if the price of apple substitutes like plums drops dramatically, while farm labor

becomes much more expensive.

There will be certainty about the price, but not the quantity when the supply and demand curves move in opposite

directions. For instance, another medical report could come out detailing the unsanitary apple harvesting conditions,

shifting demand curve to the left. Simultaneously, genetic engineers have produced an apple that doesn't require as

much costly care as before, shifting the supply curve to the right. Price will certainly go down, but the quantity

consumed will demand on how relatively large the shifts of each curve are. Similarly, it could be certain that price

would go up, but whether quantity consumed would go up or down is uncertain. This could happen if the demand

curve shifts to the right while the supply curve shifts to the left- say if everyone's income increases, thereby

increasing their consumption of apples and new government regulations curtail farmer's dependence on cheap illegal

alien labor. The price of apples would rise, but it would depend on magnitude of the changes in both the supply and

demand curves.

5) Explicit cost
An Explicit cost is a business expense accounted cost that can be easily identified such as
wage, rent and materials. Explicit costs gives clear and evident cash outflows from business
that decreases its end result profitability. This cost directly effect the revenue. Intangible
expenses such as goodwill and amortization are not explicit expense because these expenses
don't show clear effects on a business's revenue and expenses.

Implicit cost
An implicit cost results if the person who at first foregoes the satisfaction in the search of an
activity and is not rewarded by money or another form of payment. The implicit cost begins and
ends with foregoing the benefits and satisfaction. When an organization or owner uses its own
equity for company's well-air then that cost is considered as implicit cost. Goodwill is a good
example of implicit cost.

Explicit Cost vs. Implicit Cost

Explicit cost can be counted in terms of money whereas implicit cost can not be traded and
therefore can not be counted in terms of money.
Explicit cost is a direct tangible cost whereas implicit cost is indirect intangible cost.

b) 1. The cost of an alternative that must be forgone in order to pursue a certain action. Put
another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up.
Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the
stock, you gave up the opportunity of another investment - say, a risk-free government bond
yielding 6%. In this situation, your opportunity costs are 4% (6%-2%).

Investopedia Says:
1. The opportunity cost of going to college is the money you would have earned if you worked
instead. On the one hand, you lose four years of salary while getting your degree; on the other
hand, you hope to earn more during your career, thanks to your education, to offset the lost
wages.

Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the
alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

In both cases, a choice between two options must be made. It would be an easy decision if you
knew the end outcome; however, the risk that you could achieve greater "benefits" (be they
monetary or otherwise) with another option is the opportunity cost.

Should I go to work today? Should I go to college after high school? Should

the government spend money on a new weapon system? These are decisions
that are made everyday; however, what is the cost of our decisions? What is
the cost of going to work, or the decision not to go to work? What is the cost
of college, or not to go to college? Finally what is the cost of buying that
weapon system, or the cost of not buying that weapon? In economics it is
called opportunity cost.

Opportunity cost is the cost we pay when we give up something to get

something else. There can be many alternatives that we give up to get
something else, but the opportunity cost of a decision is the most desirable
alternative we give up to get what we want.

Let’s look at our examples from above. If you have a job, what do you give
up to go to work? There are many possibilities. I could sleep in. If it is a nice
day I could take my dog to the park and play all day. Or, I could even spend
the day looking for a better job right? I give up all of these things if I choose
to go to work. What I get from working is a greater benefit than the cost of
giving up these things. But, opportunity cost is the most desirable thing
given up not the aggregate of the things we gave up.

Let’s look at the college example. We are all told to go to college so you can
get a good education and that will translate into a good job. How do we know
that college is such a good thing? How much college do we need? Let’s look
at some numbers from a 2002 study on education from the Institute of
Government and Public Affairs:

“There are distinct benefits of a college education. A study conducted in April

of 2002, by the Institute of Government and Public Affairs for the Illinois
Board of Higher Education, showed the following benefits:

• Higher Earnings - Earning a bachelor’s degree provides the average

student with over $590,000 in future earnings. Similarly a professional
degree provides a present value to the student of almost $1.25 million
in future earnings.
• Labor force participation rates and employment rates for people aged
25 and over increase with increased levels of education.
• People with college experience contribute time and money to
charitable causes at a higher rate than those with less education.
• Increased levels of education are associated with the increased
likelihood of voting or registering to vote.

B. Opportunity Cost
Opportunity cost is the value of what is foregone in order to have something else. This value is unique for each
individual. You may, for instance, forgo ice cream in order to have an extra helping of mashed potatoes. For you, the
mashed potatoes have a greater value than dessert. But you can always change your mind in the future because
there may be some instances when the mashed potatoes are just not as attractive as the ice cream. The opportunity
cost of an individual's decisions, therefore, is determined by his or her needs, wants, time and resources (income).

This is important to the PPF because a country will decide how to best allocate its resources according to its
opportunity cost. Therefore, the previous wine/cotton example shows that if the country chooses to produce more
wine than cotton, the opportunity cost is equivalent to the cost of giving up the required cotton production.
Let's look at another example to demonstrate how opportunity cost ensures that an individual will buy the least
expensive of two similar goods when given the choice. For example, assume that an individual has a choice between
two telephone services. If he or she were to buy the most expensive service, that individual may have to reduce the
number of times he or she goes to the movies each month. Giving up these opportunities to go to the movies may be
a cost that is too high for this person, leading him or her to choose the less expensive service.

Remember that opportunity cost is different for each individual and nation. Thus, what is valued more than something
else will vary among people and countries when decisions are made about how to allocate resources.

--Opportunity cost or economic opportunity loss is the value of the next best alternative
forgone as the result of making a decision.[1] Opportunity cost analysis is an important part of a
company's decision-making processes but is not treated as an actual cost in any financial
statement.[2] The next best thing that a person can engage in is referred to as the opportunity cost
of doing the best thing and ignoring the next best thing to be done.

Opportunity cost is a key concept in economics because it implies the choice between desirable,
yet mutually exclusive results. It is a calculating factor used in mixed markets which favour
social change in favour of purely individualistic economics. It has been described as expressing
"the basic relationship between scarcity and choice."[3] The notion of opportunity cost plays a
crucial part in ensuring that scarce resources are used efficiently.[4] Thus, opportunity costs are
not restricted to monetary or financial costs: the real cost of output forgone, lost time, swag,
pleasure or any other benefit that provides utility should also be considered opportunity costs.

A person who invests $10,000 in a stock denies herself or himself the interest that could have
accrued by leaving the $10,000 in a bank account instead. The opportunity cost of the decision to
invest in stock is the value of the interest.

A person who sells stock for $10,000 denies himself or herself the opportunity to sell the stock
for a higher price in the future, inheriting an opportunity cost equal to future price minus sale
price.

An organization that invests $1 million in acquiring a new asset instead of spending that money
on maintaining its existing asset portfolio incurs the increased risk of failure of its existing assets.
The opportunity cost of the decision to acquire a new asset is the financial security that comes
from the organization's spending the money on maintaining its existing asset portfolio.