MB0042 – Managerial Economics
1. Explain the importance of managerial economics.
The following points illustrate the importance of managerial economics.
It gives guidance for identification of key variables in decision-making process. It helps the business executives to understand the various intricacies of business and managerial problems and to take right decisions at the right time. It provides the necessary conceptual, technical skills, toolbox of analysis and techniques of thinking and other such modern tools and instruments like elasticity of demand and supply, cost and revenue, income and expenditure, profit and volume of production, etc to solve various business problems. It is both a science and an art. In the context of globalisation, privatisation, liberalisation and marketisation and a highly competitive dynamic economy, it helps in identifying various business and managerial problems, their causes and consequence, and suggests various policies and programmes to overcome them.
It helps the business executives to become much more responsive, realistic and competent to face the dynamic challenges in the modern business world. It helps in the optimum use of scarce resources of a firm to maximize its profits. It also helps in achieving other objectives a firm likes attaining industry leadership, market share expansion and social responsibilities, etc. It helps a firm in forecasting the most important economic variables like demand, supply, cost, revenue, price, sales and profit, etc and formulate sound business policies . It also helps in understanding the various external factors and forces which affect the decision-making of a firm.
Discuss the determinants of price elasticity of demand.
Following are the determinants of price elasticity.
Nature of the commodity – Commodities coming under the category of necessaries and
essentials tend to be inelastic, because people buy them whatever may be the price. For
example, rice, wheat, sugar, milk, vegetables, etc.; on the other hand, for comforts and luxuries,
demand tends to be elastic, e.g., TV sets, refrigerators, etc.
Existence of substitutes – Substitute goods are those that are considered to be economically
interchangeable by buyers. If a commodity has no substitutes in the market, demand tends to be
inelastic because people have to pay higher price for such articles. For example, salt, onions,
garlic, ginger, etc. In case of commodities having different substitutes, demand tends to be
elastic. For example, blades, tooth pastes, soaps, etc.
Number of uses for the commodity – Single-use goods are those, which can be used for only
one purpose and multiple-use goods can be used for a variety of purposes. If a commodity has
only one use (single use product), demand tends to be inelastic because people have to pay more
prices if they have to use that product for only one use, for example, all kinds of eatables, seeds,
fertilizers, pesticides, etc. On the contrary, for commodities having several uses, [multiple- use-
products] demand tends to be elastic, for example, coal, electricity, steel, etc.
Durability and reparability of a commodity – Durable goods are those, which can be used for
a long period of time. Demand tends to be elastic in case of durable and repairable goods,
because people do not buy them frequently, e.g., table, chair, vessels etc. On the other
for perishable and non-repairable goods, demand tends to be inelastic e.g., milk,
electronic watches, etc.
Possibility of postponing the use of a commodity – In case there is no possibility to postpone
the use of a commodity, demand tends to be inelastic because people have to buy them
irrespective of their prices, e.g., medicines. If there is a possibility to postpone the use of a
commodity, demand tends to be elastic, e.g., buying TV set, motor cycle, washing machine, car,
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