MBA - I Semester General Foundations of Managerial Economics - Economic Approach Write short notes on Marginal Product and Average product. 4. Managerial Economics can be viewed as an application of that part of Study of Managerial Economics essentially involves the analysis of certain major. Download Managerial Economics Notes for MBA. Students can Download MBA 1st Sem Managerial Economics Notes Pdf will be available.
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This tutorial covers most of the topics of managerial economics including micro, macro, and managerial economic relationship; demand forecasting, production. GENERAL FOUNDATION OF MANAGERIAL ECONOMICS. Economics can be broadly divided into two categories namely, microeconomics. Managerial Economics, ME Study Materials, Engineering Class handwritten notes, exam notes, previous year questions, PDF free download.
What do you mean by Monopoly? Features of monopoly Single seller: In a monopoly there is one seller of the good who produces all the output therefore, the whole market is being served by a single firm, and for practical purposes, the firm is the same as the industry.
Although a monopoly's market power is high it is still limited by the demand side of the market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers. Firm and industry: In a monopoly, market, a firm is itself an industry.
Therefore, there is no distinction between a firm and an industry in such a market. Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price against the product in a highly elastic market and sells less quantities charging high price in a less elastic market.
What are the sources of monopoly? Sources of monopoly power Monopolies derive their market power from barriers to entry - circumstances that prevent or greatly impede a potential competitor's entry into the market or ability to compete in the market. There are three major types of barriers to entry; economic, legal and deliberate. Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.
Economies of scale: Monopolies are characterised by declining costs over a relatively large range of production. Declining costs coupled with large start up costs give monopolies an advantage over would be competitors. Monopolies are often in a position to cut prices below a new entrant's operating costs and drive them out of the industry. Further the size of the industry relative to the minimum efficient scale may limit the number of firms that can effectively compete within the industry.
If for example the industry is large enough to support one firm of minimum efficient scale then other firms entering the industry will operate at a size that is less than MES meaning that these firms cannot produce at an average cost that is competitive with the dominant firm.
Finally, if long run average cost is constantly falling the least cost way to provide a good or service is through a single firm. Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of firms in an industry.
Large fixed costs also make it difficult for a small firm to enter an industry and expand. Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or fiscal muscle to use the best available technology.
In plain English one large firm can sometimes produce goods cheaper than several small firms. No substitute goods: A monopoly sells a good for which there is no close substitutes. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits. Network Externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product.
In other words the more people who are using a product the higher the probability of any individual starting to use the product. This effect accounts for fads and fashion trends. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft operating system in personal computers. Legal barriers: Legal rights can provide opportunity to monopolise the market in a good.
Intellectual property rights, including patents and copyrights, give a monopolist exclusive control over the production and selling of certain goods. Property rights may give a firm the exclusive control over the materials necessary to produce a good.
Deliberate Actions: A firm wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force. In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a firm to leave the market. High liquidation costs are a primary barrier to exit.
Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A firm will shut down if price falls below minimum average variable costs. What do you mean by monopolistic competion? In a monopolistic market a large number of sellers or producers sell differentiated products.
It differs from perfect competition that the products sold by different firms are not identical. As example Nokia sells its Music Express phones in slightly higher price than the other music phones of other companies because of its differentiated features.
Discuss the characteristics of oligopoly. Also explain the concept of kinked demand curve. Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs.
Ability to set price: Oligopolies are price setters rather than price takers. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms.
Number of firms: "Few" a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.
Product differentiation: Product may be homogeneous steel or differentiated automobiles. Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete.
downloaders have only imperfect knowledge as to price cost and product quality. Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately.
This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves.
It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms greater revenue and market share. Discuss the shape of Kinked demand curve.
They are distinguished by a hypothesized convex bend with a discontinuity at the bend "kink". Thus the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve.
Classical economic theory assumes that a profit-maximizing producer with some market power either due to oligopoly or monopolistic competition will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve because the more one sells, the lower the price must be, so the less a producer earns per unit.
This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices.
For example, a fall in price of cars will lead to increase in the demand for petrol. Similarly a steep rise in the price of petrol will cause a decrease in demand of petrol driven cars and its accessories. Consumers Expectations: Consumers expectations about the future changes in the price of a given commodity also may affect its demand. When consumer expects its prices to fall in future, they will tend to download less at the present prevailing price. Similarly if they expects its prices to rise in future they will tend to download more at present.
Advertisement Effect: In modern times the preferences of a consumer can be altered by advertisement and sales propaganda, albeit to certain extent only. Thus demand for many products like tooth pastes, toilet soaps, washing powder, processed foods etc. What is Demand Forecasting.? Briefly review the methods of Demand Forecasting? Answer: Demand Forecasting is the method of predicting the future demand for the firms product. It is guess or anticipation or prediction of what is likely to happen in the future.
Forecast can be done for several things. It is based on the experience. Techniques or methods of Demand Forecasting: Method of Demand Forecasting is based on whether the good is Established Good or new good.
Methods of Demand Forecasting for established goods: Information of the established good is available so the forecast can be based on this information. Two basic methods of demand forecasting for the established goods are: Interview and Survey Approach for short period forecast : Interview and Survey Approach collects information in the different way.
Depending upon how the information is collected, we have different sub methods as follows: Opinion-Polling Method: This method tries to collect information from the customer directly or indirectly through market research department of the Managerial Economics Honoursinfo. Consumers are contacted through mails or phones or Internet and information regarding their 14 expected expenditure is collected.
This method is useful when consumers are small in number.
Limitations: It is difficult and costly to contact all the customers It is suitable only for short period Consumers are not sure of their download plans Collective Opinion Method: Large firms have organized sales department. The salesman has the technical training as how to collect the information from the downloaders. This information is further used for forecasting the demand. Sample Survey Method: The total number of consumers for the firms product is very large called as population.
It is practically not possible to contact all the consumers. Only few of them are contacted and this forms the sample.
The sample forecasts are then generalized for the whole population through advanced statistical methods available. Limitations: Information collected may not be accurate.
Sample is not a random sample. Consumers do not have the correct idea of their downloads in future. Panel of experts: Panel of experts consists of persons either from within the firm or from outside the firm. These experts come together and forecast the demand for their product that is purely based on the judgment of these experts so they are less accurate.
But if based on the scientific method the forecast would be accurate. Composite management opinion: The opinions of the experienced person within the firm are collected and manger analyses this information.
This Managerial Economics Honoursinfo. In this method past Projection Approach for long period forecast : experience is projected into the future. This can be done with the help of statistical methods. Correlation and Regression Analysis: Past data regarding the factors affecting the demand can be collected. It is possible to express this on the graph. This is a scatter diagram. Here Advertisement Expenditure is the independent variable and Sales is the dependent variable. The relationship between these variables is correlation and the technique of establishing this relationship is regression.
In simple Managerial Economics Honoursinfo.
Limitations: Assumption made is that correlation between two variables will continue in future also, this might not happen.
Time Series Analysis: Demand forecasts for a period of years are based on time series analysis. It is similar to the correlation analysis.
It is based on the assumption that the relationship between the dependent and the independent variable continues to hold in the future. 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: 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. Limitations: 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 downloaders 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: It is difficult and costly to contact all the customers It is suitable only for short period Consumers are not sure of their download 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: Information collected may not be accurate Tastes and the preferences may differ from market to market Managerial Economics 17 Honoursinfo. Statement of the Law: 1. As equal increments of one input are added; the inputs of other productive services being held, constant, beyond a certain point the resulting increments of product will decrease, i. Stigler 2.
As the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average product of that factor will diminish. Benham 3. An increase in some inputs relative to other fixed inputs will, in a given state of technology, cause output to increase; but after a point the extra output resulting from the same additions of extra inputs will become less and less.
Samulson Managerial Economics Honoursinfo. But first to decline is the marginal product. The relationship between them is as follows.
As long as the average product is rising, marginal product would be larger than the average product. The A. Also, when A. Total product is maximum when M. In the table, when 1 to 4 workers are employed, the marginal product goes on increasing. This is the phase of Increasing Returns. When workers 4,5 and 6 are employed, M. This is the phase when the Law of constant returns is in operation.