UNIT 6: ECONOMICS FOR MANAGERIAL DECISIONS – MICRO NOTES

INTRODUCTION TO ECONOMICS
Meaning: Study of production, distribution & consumption of goods/services under scarcity. Helps choose best alternative from limited resources.
Example: Company with ₹10L budget decides between marketing or new machinery based on expected returns.
BRANCHES OF ECONOMICS
Micro Economics: Studies individual units – one consumer, firm, family (pricing of a product).
Macro Economics: Studies whole economy – national & international (GDP, inflation).
MANAGERIAL ECONOMICS
Meaning: Integration of economic theory with business practice to facilitate decision-making & forward planning.
PRINCIPLES OF MANAGERIAL ECONOMICS
1. Incremental Concept: Decision based on change in total cost (incremental cost) vs change in total revenue (incremental revenue). If 100 more units cost ₹5000 extra but earn ₹7000 extra → profitable.
2. Time Perspective: Consider both short-run & long-run effects. Discounts may increase short-term sales but reduce long-term brand value.
3. Opportunity Cost: Cost of sacrificing next best alternative. Investing ₹1L in business means losing bank interest you could have earned.
4. Equi-Marginal Concept: Allocate resources so last unit yields equal benefit in all uses. ₹100 on advertising should give same benefit as ₹100 on R&D.
5. Discounting Concept: A rupee today is worth more than a rupee tomorrow (due to inflation & investment opportunity). "A bird in hand is worth two in bush".
6. Risk & Uncertainty: Future is unforeseen; decisions involve risk. New product launch may succeed or fail.
7. Law of Demand: Price ↑ → Demand ↓ (other factors constant). Petrol price ↑ → people reduce car usage.
8. Law of Supply: Price ↑ → Supply ↑ (other factors constant). Mobile phone price ↑ → companies produce more.
DEMAND ANALYSIS
Demand = Willingness + Ability to pay
Types: Individual Demand (one consumer) vs Aggregate Demand (market total).
Law of Demand: Price ↑ → Demand ↓ (inverse relationship).
Determinants of Demand (10 Factors): Price of product, Income, Tastes & preferences, Price of related goods (substitutes & complements), Consumer expectations, Number of buyers, Advertisements, Income distribution, Population growth, Government policy (taxes).
Exceptions to Law of Demand: Giffen goods (inferior goods like tapioca – poor buy less when price falls), Necessities (medicine – demand doesn't fall with price rise), Status symbols (luxury cars – higher price may increase demand), Price expectations (expecting future price rise → buy more now), Consumer ignorance.
SUPPLY ANALYSIS
Supply: Willingness of sellers to offer given quantity at given price.
Law of Supply: Price ↑ → Supply ↑ (direct relationship).
Determinants of Supply: Price, Cost of production, Natural conditions, Technology, Transport conditions, Government policies (taxes/subsidies), Price of related goods.
Exceptions to Law of Supply: Future price expectations (sellers withhold supply expecting higher prices), Farm produce (depends on climate), Perishable goods (must sell quickly even at low price), Out of fashion goods (sold at low price), Economic slowdown (accept lower prices to recover costs).
IMPORTANT EXAM QUESTIONS
1. Differentiate between Microeconomics and Macroeconomics with examples.
2. Explain any five principles of Managerial Economics with practical examples (8 marks).
3. Explain the determinants of demand (10 factors).
4. What are the exceptions to the Law of Demand?
5. Explain the determinants of supply.
6. What are the exceptions to the Law of Supply?
7. Explain the importance of demand analysis in managerial decision-making.
QUICK COMPARISON
Micro vs Macro: Micro = individual units (one firm), Macro = whole economy (GDP).
Demand vs Supply: Demand = consumer willingness + ability; Supply = seller willingness. Law of Demand: inverse relation; Law of Supply: direct relation.