Manecon PPT-M4

P2405 MANAGERIAL ECONOMICS

FUNDAMENTALS-II
Managerial Economics performs three [3] important roles
for business organizations:

1. Demand Analysis and Forecasting;

2. Capital Management; and
3. Profit Management
DEMAND ANALYSIS
AND FORECASTING
DEMAND
Demand is simply the quantity of a good or service that consumers are willing and able
to buy at a given price in a given time period.
People demand goods and services in an economy to satisfy their wants, such as food, healthcare,
clothing, entertainment, shelter, etc. The demand for a product at a certain price reflects the satisfaction
that an individual expects from consuming the product.
This level of satisfaction is referred to as utility and it differs from consumer to consumer. The
demand for a good or service depends on two factors:
(1) its utility to satisfy a want or need, and

(2) the consumer’s ability to pay for the good or service.
In effect, real demand is when the readiness to satisfy a want is backed up by the individual’s ability
and willingness to pay.
THEORY OF DEMAND
Theory of Demand
Demand theory is an economic principle relating to the

relationship between consumer demand for goods and
services and their prices in the market.
Demand theory forms the basis for the demand curve, which
relates consumer desire to the amount of goods available. As
more of a good or service is available, demand drops and so
does the equilibrium price.
THE LAW OF DEMAND
The Law of Demand
The law of demand is one of the most fundamental concepts in economics.
It works with the law of supply to explain how market economies allocate
resources and determine the prices of goods and services that we observe in
everyday transactions.
The law of demand states that the quantity purchased varies inversely with
price. In other words, the higher the price, the lower the quantity demanded.
This occurs because of diminishing marginal utility. That is, consumers use
the first units of an economic good they purchase to serve their most urgent
needs first, then they use each additional unit of the good to serve successively
lower-valued ends.
THE LAW OF SUPPLY
The Law of Supply
The law of supply is the microeconomic law that states

that, all other factors being equal, as the price of a good or
service increases, the quantity of goods or services that
suppliers offer will increase, and vice versa.
The law of supply says that as the price of an item goes

up, suppliers will attempt to maximize their profits by
increasing the number of items for sale.
Theory of Demand
is the principle/law that correlates the
demand for a product with the price of the
product.
The Law of Demand

is the basis for price determination in an
open market.
DETERMINANTS OF
DEMAND
DETERMINANTS OF DEMAND
1. PRICE OF PRODUCTS/SERVICES
2. TASTES AND PREFERENCES
3. CONSUMER’S INCOME
4. AVAILABILITY OF SUBSTITUTES
5. CONSUMERS POPULATION
6. CONSUMERS EXPECTATIONS
7. ELASTICITY VERSUS INELASTICITY
8. NATURAL CALAMITIES
9. MANMADE EVENTS
10. POPULARITY [FINANCIAL/ECONOMIC/TECHNOLOGICAL, ENVIRONMENTAL]
Exceptions to the
Law of Demand
Note that the law of demand holds true in
most cases. The price keeps fluctuating until an
equilibrium is created.
However, there are some exceptions to the law

of demand. These include the Giffen goods,
Veblen goods, possible price changes, and
essential goods. Let us discuss these exceptions
in detail.
Giffen Goods
Giffen Goods is a concept that was introduced by Sir Robert Giffen. These
goods are goods that are inferior in comparison to luxury goods. However, the
unique characteristic of Giffen goods is that as its price increases, the demand
also increases. And this feature is what makes it an exception to the law of
demand.
The Irish Potato Famine is a classic example of the Giffen goods concept.
Potato is a staple in the Irish diet. During the potato famine, when the price of
potatoes increased, people spent less on luxury foods such as meat and bought
more potatoes to stick to their diet. So as the price of potatoes increased, so
did the demand, which is a complete reversal of the law of demand.
Veblen Goods
The second exception to the law of demand is the concept of Veblen goods.
Veblen Goods is a concept that is named after the economist Thorstein Veblen,
who introduced the theory of “conspicuous consumption“. According to
Veblen, there are certain goods that become more valuable as their price
increases. If a product is expensive, then its value and utility are perceived to be
more, and hence the demand for that product increases.
And this happens mostly with precious metals and stones such as gold and
diamonds and luxury cars such as Rolls-Royce. As the price of these goods
increases, their demand also increases because these products then become a
status symbol.
The Expectation of Price Change
In addition to Giffen and Veblen goods, another exception to the law of demand is the
expectation of price change. There are times when the price of a product increases and market
conditions are such that the product may get more expensive. In such cases, consumers may buy
more of these products before the price increases any further. Consequently, when the price
drops or may be expected to drop further, consumers might postpone the purchase to avail the
benefits of a lower price.
For instance, in recent times, the price of onions had increased to quite an extent. Consumers
started buying and storing more onions fearing further price rise, which resulted in increased
demand.
There are also times when consumers may buy and store commodities due to a fear of shortage.
Therefore, even if the price of a product increases, its associated demand may also increase as
the product may be taken off the shelf or it might cease to exist in the market.
Necessary Goods and Services
Another exception to the law of demand is

necessary or basic goods. People will continue to buy
necessities such as medicines or basic staples such as
sugar or salt even if the price increases.
The prices of these products do not affect their

associated demand.
Change in Income
Sometimes the demand for a product may change according
to the change in income. If a household’s income increases,
they may purchase more products irrespective of the increase
in their price, thereby increasing the demand for the product.
Similarly, they might postpone buying a product even if its

price reduces if their income has reduced. Hence, change in
a consumer’s income pattern may also be an exception to the
law of demand.
In summary as follows are the exceptions to the Law of Demand:
 GIFFEN GOODS
 VEBLEN GOODS
 THE EXPECTATION OF PRICE CHANGE
 NECESSARY GOODS AND SERVICES
 CHANGE IN INCOME
Demand vs. Quantity Demanded
In economic thinking, it is important to understand the difference between

the phenomenon of demand and the quantity demanded. In the chart, the term
“demand” refers to the light blue line plotted through A, B, and C. It expresses
the relationship between the urgency of consumer wants and the number of
units of the economic good at hand.
A change in demand means a shift of the position or shape of this curve; it

reflects a change in the underlying pattern of consumer wants and needs vis-à-
vis the means available to satisfy them.
On the other hand, the term “quantity demanded” refers to a point
along the horizontal axis. Changes in the quantity demanded strictly
reflect changes in the price, without implying any change in the pattern
of consumer preferences. Changes in quantity demanded just mean
movement along the demand curve itself because of a change in price.
These two ideas are often conflated, but this is a common error—
rising (or falling) prices do not decrease (or increase) demand; they
change the quantity demanded.
Demand Forecasting is
fundamentally about predicting
what people are going to want,
how much, and when.
It is the research done to estimate or find out the customer
demand for a product or service in a particular market.
It is one of the important consideration for a variety of

business decisions like determining sales forecasting, pricing
products/services, marketing and advertisement spending,
manufacturing decisions, expansion planning etc.
It covers both future and retrospective analysis so that they

can analyze the demand better and understand the
product/service's past success and failure too.
CAPITAL MANAGEMENT
Capital refers to economic assets, including a company's
office, intellectual property, inventory, shares and stock,
cash balances, bank deposits, and other short-term
accounts. Thus, capital is any resource that has value and,
by using it, a business generates revenue.
The financial strategy that helps organizations maximize cash flow
efficiency is called capital management (CM).
Also known as Working Capital, it maintains an appropriate ratio

between current assets and liabilities.
In other words, capital management revolves around carefully analyzing

company assets and liabilities and managing individual financial
components to maximize efficient cash flows and increase earnings.
PROFIT MANAGEMENT
Profit Management is the process of maximizing profits from
individual sales. The process involves improving pricing and
customer insight, understanding the operational cost of an offer, and
better directing customers to profitable offers.
Profit Management is the process of measuring and monitoring a

company’s profitability. The data generated from the profit
management system will show the profitability of different parts of
a business. With profits and revenues in mind, the profit can be
optimized.
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P2405 MANAGERIAL ECONOMICS

1. Demand Analysis and Forecasting;

2. Capital Management; and

(1) its utility to satisfy a want or need, and

Demand theory is an economic principle relating to the

The law of supply is the microeconomic law that states

The law of supply says that as the price of an item goes

The Law of Demand

However, there are some exceptions to the law

Another exception to the law of demand is

The prices of these products do not affect their

Similarly, they might postpone buying a product even if its

In economic thinking, it is important to understand the difference between

A change in demand means a shift of the position or shape of this curve; it

It is one of the important consideration for a variety of

It covers both future and retrospective analysis so that they

Also known as Working Capital, it maintains an appropriate ratio

In other words, capital management revolves around carefully analyzing

Profit Management is the process of measuring and monitoring a

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