MANAGERIAL ECONOMICS
1. Consumer’s Equilibrium- it refers to the situation in
which a consumer gets maximum satisfaction from the
use of given level of income. In other words,
consumer’s equilibrium with reference to purchase of
one good is attained when the difference between total
utility in terms of money and total expenditure on it is
maximized.
2. Total Utility- total psychological satisfaction obtained
by a consumer from consuming given amount of a
particular commodity. It is equal to sum of marginal
utilities.
3. Marginal Utility- the utility derived from the
consumption of additional unit.
4. Law of Diminishing Marginal Utility- decline in the
utility due to the consumption of the successive units of
particular commodity.
5. Indifference Curve- the various combinations of the
quantities of two commodities according to consumer’s
preference in such a manner that the consumer remains
at same satisfaction level at each combination.
6. Properties of Indifference Curve-
(1) It slopes downward to the right.
(2) It is convex to the origin.
(3) Two indifference curves never intersect
each other.
7. Consumer’s Equilibrium under IC Analysis- a
consumer is said to have equilibrium at point which
corresponds to the highest indifference curve on the
consumer’s budget line.
8. Concept/Meaning of Demand- is an effective desire to
obtain certain commodity at certain price, time and
place.
9. Individual Demand- shows the quantities of demand for
a commodity by a particular consumer at various prices
of that commodity.
10. Market Demand- the demand of the whole market at
various prices of the commodity. Market Demand
Curve is obtained by horizontally summing up the
individual demand curves.
11. Income Demand- indicates the relationship between
income of the consumer and the quantity of commodity
demanded. Income demand has positive relationship
with the income.
12. Cross Demand- is a situation wherein change in the
price of one commodity results in the change of the
demand of other commodity.
13. Demand Function- expresses the functional
relationship between the demand for a commodity and
the factors affecting it.
14. Factors Affecting Demand-
(a) Price of the commodity (P1)
(b) Price of related commodity (P2)
(c) Income of the consumer (Y)
(d) Tastes and preference of consumer (T)
(e) Size and composition of population
(f) Distribution of income
(g) Expected change in the price
15. Law of Demand- states that other things remaining the
same, the consumer will demand lesser quantity of
goods at higher price and more quantity of goods at
lower price.
16. Causes for Downward Sloping of Demand Curve-
(1) Effect of the law of diminishing utility
(2) Change in the number of consumers
(3) Price effect
(4) Substitution effect
(5) Income effect
17. Exception to the Law of Demand-
(1) Inferior goods
(2) Conspicuous consumption
(3) Conspicuous necessities
(4) Expected change in price
(5) Ignorance
(6) Extraordinary situation
(7) Change in fashion, habits, attitudes and
preferences.
18. Importance of Law of Demand-
(I) Determination of Price
(II) Importance to the Finance Minister
(III) Importance to Farmers
19. Extension of Demand- other things being equal, when
due to fall in price more quantity of a commodity is
demanded.
20. Contraction of Demand- Decrease in demand of a
commodity due to increase in price.
21. Increase in Demand- When due to factors other than the
price, more quantity at the same price is demanded.
22. Decrease in Demand- Due to factors other than the (V) Elastic or more than unit elastic
price, smaller quantity at the same price or same 30. Uses/Importance of Price Elasticity of Demand-
quantity at the lower price is demanded. (I) Importance to monopolist
23. Points of Distinction between Extension and Increase (II) Importance to Finance Minister
of Demand- (III) Importance for foreign trade
(1) Meaning (IV) Helpful in deciding remuneration of
(2) Movement of the Curve factors
(3) Causes for increase in demand 31. Methods of Measuring Price Elasticity of Demand-
(4) Examples (I) Percentage method
(5) Diagram (II) Total expenditure method
24. Points of Distinction between Contraction and (III) Geometric method
Decrease in Demand- *Longer the horizon, more elastic is the demand for
(1) Meaning product.*
(2) Movement of the Curve *If the demand curve is vertical, the price elasticity is
(3) Causes for increase in demand zero.*
(4) Examples *In case of elasticity equal to one, the demand curve is
(5) Diagram rectangular hyperbola.*
25. Elasticity of Demand- responsiveness of the demand to 32. Percentage or Proportionate Method
change in price of a commodity. 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦
26. Factors Affecting the Elasticity of Demand- 𝑃𝑒𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
=
(1) Availability of substitutes 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
(2) Postponement of consumption 33. Total Outlay Method- the greater is the share of the
(3) Proportion of expenditure total budget spent on the particular good, more elastic
(4) Nature of the commodity is the demand for it.
(5) Different uses of the commodity TO = TQ x P
(6) Time period 34. Geometric Method- price elasticity of demand can be
(7) Change in income measured geometrically also. The method is known as
(8) Habits point method.
(9) Joint demand 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 𝑎𝑡 𝑎 𝑃𝑜𝑖𝑛𝑡
(10) Distribution of income 𝐿𝑜𝑤𝑒𝑟 𝑠𝑒𝑔𝑚𝑒𝑛𝑡 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑐𝑢𝑟𝑣𝑒
=
(11) Price level 𝑈𝑝𝑝𝑒𝑟 𝑠𝑒𝑔𝑚𝑒𝑛𝑡 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑐𝑢𝑟𝑣𝑒
27. Concepts of Elasticity of Demand- 35. Income Elasticity of Demand- responsiveness of the
(I) Price elasticity of demand demand of a commodity to the change in the income of
(II) Income elasticity of demand a consumer.
(III) Cross elasticity of demand 36. Cross Elasticity of Demand- responsiveness to a
28. Price Elasticity of Demand- responsiveness of the change in the price of related commodity.
demand to the change in the price. When two demand 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑
curves intersect, the elasticity associated with the flatter 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐷𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑋 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦
=
demand curve is greater. 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐷𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑌 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦
*The demand for luxury products is elastic and that for
necessary goods is inelastic*
29. Types/Degrees/Magnitude of Price Elasticity of
Demand-
(I) Perfectly Inelastic or Zero Elastic
(II) Perfectly Elastic or Infinite Elastic
(III) Unitary Elastic
(IV) Inelastic or less than unit elastic