Managerial economics short note pdf pdf

Law of demand states that, other things remaining constant, quantity demanded increases when price falls and decreases when price rises.

Two exceptions are:

1. Veblen/prestige goods: higher price increases status, so demand may rise (designer products).
2. Expectations: if prices are expected to rise further, consumers may buy more even at higher current price.

(Other exceptions include Giffen goods and necessities with low sensitivity.)

TP (Total Product) is total output produced. AP (Average Product) is output per unit of variable input (AP = TP/L). MP (Marginal Product) is additional output from one more unit of variable input (MP = ΔTP/ΔL).

Relationship: When MP > AP, AP rises; when MP < AP, AP falls; MP intersects AP at AP's maximum point.

These relationships explain the stages of the law of variable proportions.

Factors affecting price elasticity:

1. Availability of close substitutes: more substitutes → more elastic demand (customers can switch).
2. Nature of good: necessities are usually inelastic; luxuries are elastic.
3. Proportion of income: goods taking a high share of income are more elastic.
4. Time period: demand becomes more elastic in the long run as consumers adjust habits and find alternatives.
5. Number of uses: goods with multiple uses show higher elasticity because consumers can reduce some uses.
6. Habit-forming/addictive goods tend to be inelastic.

Managerial use in pricing:

• If demand is elastic, increasing price will sharply reduce quantity and total revenue; better strategy may be to reduce price, improve value, or differentiate product.
• If demand is inelastic, increasing price may increase total revenue; firms can raise prices (carefully) to improve revenue, especially for necessities.
• Elasticity also guides discount policy: discount works better when demand is elastic.

Hence managers estimate elasticity before changing prices to avoid unexpected revenue loss.