DIFFFFERENCE BETWEEN MANAGERIAL ECONOMICS AND ECONOMICS The difference between managerial economics and economics can be understood

with the help of the following points: y Managerial economics involves application of economic principles to the problems of a business firm whereas; economics deals with the study of these principles only. Economics ignores the application of economic principles to the problems of a business firm. y Managerial economics is micro-economic in character, however, Economics is both macro-economic and micro-economic. y Managerial economics, though micro in character, deals only with a firm and has nothing to do with an individuals economic problems. But microeconomics as a branch of economics deals with both economics of the individual as well as economics of a firm. y Economic theory assumes economic relationships and builds economic models. Managerial economics adopts, modifies and reformulates the economic models to suit the specific conditions and serves the specific problem solving process. Thus, economics gives the simplified model, whereas managerial economics modifies and enlarges it. y Economics involves the study of certain assumptions like in the law of proportion where it is assumed that The variable input as applied, unit by unit is homogeneous or identical in amount and quality. Managerial economics on the other hand, introduces certain feedbacks. These feedbacks are in the form of objectives of the firm, multi-product nature of manufacture, behavioral constraints, environmental aspects, legal constraints, constraints on resource availability, etc. Thus managerial economics, attempts to solve the complexities in real life, which are assumed in economics. this is done with the help of mathematics, statistics, econometrics, accounting, operations research, etc.

3.Distinguish between Micro and Macro Economics.

Broadly speaking, microeconomic analysis is individualistic, whereas macroeconomic analysis is aggregative. Microeconomics deals with the part (individual) units while macroeconomics deals with the whole (all units taken together) of the economy. 1. Difference in nature: Microeconomics is the study of the behavior of the individual units. Macroeconomics is the study of the behavior of the economy as a whole. 2. Difference in methodology: Microeconomics is individualistic; whereas macroeconomics is aggregative in its approach. 3. Difference in economic variables: Microeconomics is concerned with the behavior of micro variables or micro quantities. Macroeconomics is concerned with the behavior of macro variables and macro quantities. In short, microeconomics deals with the individual incomes and output, whereas macroeconomics deals with the national income and national output. 4. Difference in field of interest: Microeconomics primarily deals with the problems of pricing and income distribution. Macroeconomics pertains to the problems of the size of national income, economic growth and general price level. 5. Difference in outlook and scope: The concept of industry in microeconomics is an aggregate concept but it refers to all firms producing homogenous goods taken together. Macroeconomics uses aggregates which relate to the entire economy or to a large sector of the economy. Aggregate demand covers all market demands. 6. Demarcation in areas of study: Theories of value and economic welfare are major areas in microeconomics. Theories of Income and employment are core topics in macroeconomics.

Law of demand states the inverse relationship between price of a commodity and quantity demanded, other things remaining the same. The demand of a commodity is more at a lower price and less at a higher price. That is why the demand curve slopes downward. The factors responsible for the downward slope of demand curve are : (a) Law of diminishing marginal utility: The law of diminishing marginal utility states that as the consumption of a commodity by a consumer increases the satisfaction obtained by the consumer from each additional unit of the commodity goes on diminishing. (b) Income effect: A fall in the price of the commodity increase the purchasing power of the consumer, in otherwords the consumer has to spend less to buy the same quantity of the commodity as before. The money so saved because of a fall in the price of the commodity can be spent by the consumer in ways he likes. He will spend a part of this money on buying some more units of the same commodity whose price has fallen. Thus a fall in the price of this commodity increases its demand. This is called income effect.

(c) Substitution effect: This also increases demand as a result of a fall in the price of the commodity and viceversa. When the price of a commodity falls it becomes relatively cheaper than other commodity whose prices have not fallen. So the consumer substitute this commodity for other commodities which are now relatively dearer. This is know as substitution or complementarily effect.

(d) Changes in the number of consumers: Many people cannot afford to buy a commodity at a high price. When price of a commodity falls, the number of persons who could not afforded at a higher price can purchase it at a reduced price. This increases the consumer of the commodity. Thus at a lower price the quantity demand of the commodity increases because of increase in the number of consumers of the commodity and vice versa.

(e) Diverse Uses of the commodity: Many commodities can be put to several uses. The commodity having several uses is set to have composite demand.

All the above factors are responsible for the downward slope of demand curve. These factors explain the operations of the Law of Demand. The important of these factors depends upon the circumstances of the case.

Q.Exceptions to the Law of Demand:

Sometimes it may be observed, that with a fall in price, demand also falls and with a rise in price, demand also rises. This is apparently contrary to the law of demand. The demand curve in such cases will be typically unusual and will be upward sloping.

There are few such exceptional cases:y

Giffen Goods: In the case of certain Giffen goods, when price falls, quite often less quantity will be purchased because of the negative income effect and people s increasing preference for a superior commodity with rise in their real income. E.g. staple foods such as cheap potatoes, cheap bread, pucca rice, vegetable ghee, etc. as against good potatoes, cake, basmati rice and pure ghee. Articles of Snob appeal (Veblen effect): Sometimes, certain commodities are demanded just because they happen to be expensive or prestige goods and have a snob appeal . They satisfy the aristocratic desire to preserve the exclusiveness for unique goods. These goods are purchased by few rich people who use them as status symbol. When prices of articles like diamonds rise, their demand rises. Rolls Royce car is another example. Speculation: When people are convinced that the price of a particular commodity will rise further, they will not contract their demand; on the contrary they may purchase more for profiteering. In the stock exchange, people tend to buy more and more when prices are rising and unload heavily when prices start falling. Consumer s psychological bias or illusion: When the consumer is wrongly biased against the quality of a commodity with reduction in the price such as in the case of a stock clearance sale and does not buy at reduced prices, thinking that these goods on sale are of inferior quality.

Criteria of a good forecasting method:

Joel Dean lays down the following criteria of a good forecasting method: Accuracy: Forecast should be accurate as far as possible. Its accuracy must be judged by examining the past forecasts in the light of the present situation. Plausibility: It implies managements understanding of the method used for forecasting. It is essential for a correct interpretation of the results. Simplicity: A simpler method is always more comprehensive than the complicated one. Economy: It should involve lesser costs as far as possible. Its costs must be compared against the benefits of forecasts. Quickness: It should yield quick results. A time consuming method may delay the decision making process.
Flexibility: Not only the forecast is to be maintained up to date, there should be possibility of changes to be incorporated in the relationships entailed in forecast procedure, time to time.

PROPUCTION FUNCTION WITH ONE VARIABLE INPUT In economics, the production function with one variable input is explained with the help of'Law of Variable Proportions', which is as follows: Law of Variable Proportions The law of variable proportion is one of the fundamental laws of economics. It is also known as the 'Law of Diminishing Marginal Returns' or the 'Law of Diminishing Marginal Productivity.' This Law of variable proportion shows the input-outPut relationship or production function with one variable factor, i.e., a factor, which can be changed, while other factors of production are kept constant. This is explained with the help of the following example: Suppose a farmer has 20 acres of land to cultivate. The land has some fixed investment, Le., capital in the form of a tube well, farmhouse and farm maehinery. The amount of land and capital is supposed to be fixed factors of production. However, the farmer can vary the number of workers employed on its land. Labour is thus the variable factor of production. The change in the number of workers will change the output. The point worth noting here is that the law does not state that each and every increase in the amount of the variable factor that is employed in the production process will yield diminishing marginal returns. It is, however, possible that preliminary increases in the amount of a variable factor may yield increasing marginal returns. While increasing the amount of the variable factor, a point will " be reached though, where the; marginal increases in total output or the marginal retums will begin declining. Assumptions for Law of Variable Proportions The law of variable proportions functions is based on following assumptions: y Constant technology: The technology is assumed to be constant because technological changes will result into rise of marginal and average product.

y Snort-run: The law operates in the short-run because it is here that some factors are fixed and others are variable. In the long-run, all factors are variable. y Homogeneous input: The variable input employed is homogeneous or identical in amount and quality. y Use of varying amount of variable factor: It is possible to use various amounts of a variable factor on the fixed factors of production. Three Stages of Production A graphic description of the production function is shown in following figure 4.1. The total, marginal and average product curves in Figure 4.1,

demonstrates the law of variable proportions. The figure also shows three stages of production associated with law of variable proportions. The total product curve is divided info three segments popularly known as three stages of production, which are as follows:

Stage I The figure 4.1 shows stage 1 as the segment from the origin to pointX2. Here, total product (TP) rises at an increasing rate. At this point, the marginal product (MP) of X equals its average product (AP). X2 is, also the point at which

the average product is maximised. In this stage, the production function is characterised first by increasing marginal returns from the origin to point X1and then by diminishing marginal returns, from X1to X2. It should not be assumed that in stage 1, only increasing marginal returns take place. Because increasing returns may occur until a certain point, and thereafter diminishing returns may take place. Stage I should not therefore be identified with increasing marginal returns only. Here, both AP and MP increase. In this stage, a firm can move towards optimum combination of factors of production and increasing returns, by adding more and more variable units to fixed factors. Stage II The stage II is depicted by the figure in the range from X2 to X3. In othcr words, stage II begins where the average product of the variable factor is maximised. It continues till the point at which total product is maximised and marginal product is zero. Here, TP rises at diminishing rate. This stage is thus, called the stage of diminishing returns, where a firm decides its level of production. Stage III Finally, we have stage III, which is depicted by the area beyond X3 where the total product curve starts decreasing. Here, too much variable input is being used as related to the available fixed inputs and thus variable inputs' are overutilized. The efficiency of both variable inputs and fixed inputs decline through out this stage. In this range, the marginal product of the variable factor is negative. It starts from the point where MP is nil and TP is maximum and covers the whole range of negative marginal productivity. The following Table 4.2 shows the various stages.

Table 4.2: Stages of Production Total Physical Product Stage I Increasing at an increasing rate Marginal Physical Product Average Physical Product

Increases, reaches its Increases and reaches maxiIhum and then its maximum declines till MR = AP

Stage II Increases at diminishing Is diminishing and Starts diminishing rate till it reaches becomes equal to zero maximum Stage III Starts declining Becomes negative Continues to decline From this stage-wise description of the production function we can reach two conclusions, which are as follows:

Stage II is Rational Only stage II is rational and denotes the relevant range-within which a rationai firm should operate. In Stage I, it is profitable for the fiim to keep on increasing the use of labour and in Stage, III, MP is negative and hence it is inadvisable to use additional labour. The firm, therefore, has a strong incentive to expand through Stage I into Stage II. Stages I and /II are Irrational Stages I and III are described as irrational stages. They are called so because management, if it is to maxi mise profits will never intentionally apply the variable to the fixed factors in any combination, which will yield a total product falling in either of these two stages.

PRODUCTION FUNCTION WITH TWO VARIABLE INPUTS To understand a production function with two variable inputs, it is necessary to explain what is an ' Isoquant'. Isoquants An isoquant is also known as an 'iso-product curve', 'equal product curve' or a 'production indifferent curve'. These curves show the various combinations of two variable inputs resulting in the same level of output. Table 4.3 shows how different pairs of labour and capital result in the same output. Table 4.3: Different Pairs of Labour and Capital Labour (Units) I 2 3 4 5 Capital (Units) 5 3 2 1 0 Output (Units) 10 10 10 10 10

It is evident that output is the same either when 4 units of labour with 1 unit of capital or 5 units of labour with 0 units of capital are employed. This relationship, when shown graphically results in an isoquant. Thus, by graphing a production function with two variable inputs, one can derive the isoquant that helps in tracing all the combinations of the two factors of production that yield the same output. Thus, an isoquant can be defined as "the curve passing through the plotted points representing all the combinations of the two factors of production, which will produce the given output." Figure 4.2 depicts a typical isoquant digram in which by an upward movement to the right, one can obtain higher levels of outputs, using larger quantities of output. For each level of output, there will be different isoquant. When the whole array of isoquants is represented on a graph, it is called 'isoquant map'.

Methods of Demand Forecasting for new products:

Indirect methods of forecasting are used to estimate demand for new products. Following are the methods suggested:

Evolutionary Method: Some new goods evolve from already established goods. Demand forecast for such new good is based on already established good from which they are evolved. For example Demand for the color TV can be calculated from Demand for the black and white TV, from which it is actually evolved.

Limitations:

y y

The product should have been evolved from the existing product. It ignores the problem of how the new product differs from the old product.

Substitution Method: Some new goods are substituted of already established goods. For example VCR substituted with VCD player.

Limitations:

y y

New product may have many uses and each use has different substitutability When the substitute is added is added into market existing firm may react by changing the prices.

Opinion Polling Method: Expected buyers and the consumers are directly contacted and opinion about the product is directly taken from them. If the population is large then sample is selected and results are generalized for the population.

Limitations:

y y y

It is difficult and costly to contact all the customers It is suitable only for short period Consumers are not sure of their purchase plans

Sample Survey Method: New product are first introduced in the sample market and the results seen in the sample market are generalized for the total market.

Limitations:

y y

Information collected may not be accurate Tastes and the preferences may differ from market to market

Indirect Opinion Polling Method: Opinion of the consumers is indirectly collected through the dealers who are aware of the needs of the customers.

Limitations:

It is based on the judgment

Limited Scope