Contents Unit 1 Introduction to Business (Managerial) Economics Meaning of Managerial Economics... 2 Definitions of Managerial Economics... 2 Features (Characteristics) of Managerial Economics... 5 Nature of Managerial Economics... 6 Scope of Managerial Economics... 8 Operational Issues or Internal Issues... 9 External Issues... 11 Meaning, Scope, Use and Limitations of Microeconomics... 12 Contributions of Economic Theory to Business Economics... 17 Relation of Business Economics with Traditional Economics... 18 Differences between Traditional and Managerial Economics... 19 Chapter Questions... 20 Unit 2 Theory of Demand, Supply and Equilibrium Price Meaning and Concept of Demand... 22 Types of Demand... 23 Demand Function... 25 Types of Demand Function... 26 Determinants of Demand... 27 Law of Demand... 28 Exceptions of the Law of Demand... 30 Individual Demand Schedule and Derivation of Individual Demand Curve... 31 Movement along and Shift of a Demand Curve... 36 Theory of Supply... 40 Meaning of Supply... 40 Supply Function... 41 Law of Supply... 42 Derivation of Single Producer's Supply Curve... 44 Movement along and Shift of a Supply Curve... 47
Market Equilibrium and Determination of Equilibrium Price... 51 Change in Equilibrium Due to Shift in Demand Curve and Supply Curve... 54 Numerical Exercise : Problems and Solution... 59 Chapter Questions... 65 Unit 3 Elasticity of Demand and Supply Concept of Elasticity... 70 Types of Elasticity of Demand... 70 Methods of Measurement of Price Elasticity of Demand... 79 Total Outlay or Expenditure Method... 79 Point Method of Measuring Elasticity of Demand... 83 Arc Elasticity of Demand... 89 Determinants of Price Elasticity of Demand... 92 Uses of Price, Income and Cross Elasticity of Demand... 93 Price Elasticity of Demand and Revenue of the Firm... 96 Price Elasticity of Supply... 99 Basic Concept... 99 Types of Price Elasticity of Supply... 100 Measurement of Elasticity of Supply (Geometry of Elasticity of Supply)... 102 Measuring Elasticity of Supply in the Case of a Non-Linear Supply Curve... 104 Measuring Elasticity of Supply by Arc Method... 106 Factors that Determine Elasticity of Supply... 107 Numerical Exercise: Problems and Solution... 109 Chapter Questions... 116 Unit 4 Theory of Consumer Behavior Concept of Utility... 120 Consumer s Utility Analysis... 120 Cardinal Approach... 120 Concepts of Total Utility and Marginal Utility... 122 Basic Assumptions of Cardinal Utility Analysis... 122 Law of Diminishing Marginal Utility... 124 Derivation of Demand Curve from the Law of Diminishing Marginal Utility... 126
Law of Equi-Marginal Utility: Consumer s Equilibrium... 127 Derivation of Demand Curve from Equi-marginal Utility Approach... 130 Ordinal Approach to Utility Analysis... 131 Assumptions of Ordinal (Indifference Curve) Approach... 132 The Indifference Curve (IC) Approach to Utility Analysis... 133 Marginal Rate of Substitution (MRS)... 134 Indifference Map... 137 Properties of Indifference Curves of Two Goods... 138 Budget Constraint or Budget Line... 144 Budget Line Gymnastics (Change in the Budget Line)... 147 Consumer s Equilibrium under Ordinal Utility: Consumer s Equilibrium under Indifference Curve Approach... 149 Income Effect and the Income Consumption Curve... 152 The Case of Normal Goods... 153 Income Effect in the Case of an Inferior Good... 154 The Case of Neutral Goods... 155 Income Effect and Derivation of Engle Curve... 156 Price Effect and Price Consumption Curve (PCC)... 157 Price Effect in Case of Giffen Good... 158 Separation of Price Effect into Substitution and Income Effects... 159 Hicks and Slutsky Decomposition of Income and Substitution Effects... 160 Income and Substitution Effect for Inferior Goods... 167 Income and Substitution Effect for Giffen Goods... 168 Price Effect and Derivation of Demand Curve: Normal Good... 169 Engel Curve vs. Demand Curve... 170 Comparison of Cardinal Utility Analysis with Ordinal Utility Analysis... 171 Superiority of Ordinal Utility Approach... 171 Criticisms of Indifference Curve... 173 Numerical Exercise: Problems and Solution... 174 Chapter Questions... 179 Unit 5 Theory of Production Meaning of Production... 184 Production Function... 184 Short-Run and Long-Run Production Function... 186 Short-Run Production Function... 186
Long-Run Production Function... 187 Total Product, Average Product and Marginal Product... 188 Cobb-Douglas Production Function... 190 Formulation... 190 Laws of Production Function... 193 Law of Variable Proportion... 193 Importance of the Law of Diminishing Returns... 199 Production with Two Variable Inputs: The Concept of Isoquant... 200 Isoquant Map... 201 Marginal Rate of Technical Substitution (MRTS)... 201 Diminishing Marginal Rate of Technical Substitution... 203 Properties of Isoquant... 204 Exceptions to the General Properties... 206 Isocost Line... 208 Shift in Iso Cost Line... 210 Least Cost Combination of Factors... 211 Expansion Path or Scale Line of the Firm... 213 Laws of Returns to Scale: Long Run Production Behaviour... 216 Increasing Returns to Scale (IRS)... 217 Constant Returns to Scale (CRS)... 218 Decreasing Returns to Scale (DRS)... 219 Numerical Exercise: Problems and Solution... 223 Chapter Questions... 226 Unit 6 Cost and Revenue PART A : COST AND COST CURVES Concept of Cost of Production... 230 Actual Cost and Opportunity Cost... 231 Explicit Cost and Implicit Cost... 232 Accounting and Economic Cost... 232 Historical Cost and Replacement Cost... 233 Short Run and Long Run Costs... 234 Short-run Total Cost... 235 Geometry of Short-run Total Costs... 237 Short-run Pre Unit Costs... 238 Numerical illustration of short-run cost concepts... 240 Geometry of short-run Per-Unit costs... 241
Relation of AVC, AC and MC... 243 Relationship between AC and MC... 244 Derivation of Short-run Per-Unit Cost Curves from Total Costs.. 245 Derivation of the Average fixed cost (AFC)... 245 Derivation of the Average Variable Cost (AVC) Curve... 247 Average Total Cost (ATC) or Average Cost (AC)... 247 Derivation of the Short-run Marginal Cost (MC)... 248 Reason for the U Shape of Short Run Average Cost Curve... 249 Why U-Shaped Cost Curves?... 250 Long Run Cost Curves... 251 Relationship between Short Run and Long Run AC and MC Curves... 257 Shape of the Long Run Average Cost Curve: Theoretical Reason and Empirical Evidence... 260 Empirical Evidence on the Shape of Long-Run Average Cost Curve 263 Economies of Scale... 264 Types of Economies of Scale... 265 Concept of Economies of Scope... 268 Numerical Exercise: Questions and Solution... 271 PART B: REVENUE AND REVENUE CURVES Concept of Revenue... 275 Concepts of Total, Average and Marginal Revenues... 275 Relation between AR and MR... 276 Relation under Perfect Competition... 276 Relation under Imperfect Competition... 278 Relation between AR and MR Curves in Imperfect Competition Market... 281 Relation between Price Elasticity of Demand and Revenue of the Firm... 283 Chapter Question... 286 Unit 7 Theory of Product Pricing Introduction to the Concept of Product Pricing... 290 Market Structure and Product Pricing... 291 Product Pricing in a Market of Perfect Competition... 291 Price and Output Determination under Perfect Competition... 292 Marginal Revenue Marginal Cost (MR MC) Approach... 293
Short Run Equilibrium of the Industry... 294 Short Run Equilibrium of the Firm... 294 Long Run Equilibrium of Firm... 296 Derivation of Short Run and Long Run Supply Curve of A Firm and Industry... 298 Supply Curve of Decreasing Cost Industry... 303 Long run Supply Curve of Constant Cost Industry... 305 Product Pricing in Monopoly Market... 307 Reasons for Monopoly... 308 Price and Output Determination under Monopoly... 308 Short Run Equilibrium of the Monopoly... 308 Long Run Equilibrium of Firm under Monopoly... 311 Price Discrimination under Monopoly... 313 Degree of Price Discrimination... 314 Product Pricing in Monopolistic Competition... 317 Characteristics of Monopolistic Competition... 317 Equilibrium Output and Price Determination of a Firm under Monopolistic Competition... 319 The Short Run Equilibrium... 319 The Long Run Equilibrium... 321 Difference between Perfect Competition and Monopolistic Competition... 322 Equilibrium of Firm under Product Variation and Selling Expenses. 323 Oligopoly Business Market... 324 Price and Output Outcomes in Oligopoly... 327 Pricing Under Cartel... 327 Concept of Dumping... 330 Market Structure and Degree of Firm s Market Power... 331 The Herfindahl Hirschman Index (HHI) and Market Power... 334 Numerical Exercise: Questions and Solution... 335 Chapter Questions... 342 Unit 8 Theory of Factor Pricing Meaning of Factor Pricing... 346 Factor Market Structures... 347 Factor Pricing in Perfectly Competitive Markets... 347 The Demand Curve of a Firm for a Single Variable Input... 348 Shape of MRP and VMP Curves... 351 Optimum Condition for Hiring a Factor (Labour) by a Firm... 352
Demand for a Factor Input when Several Inputs are Variable... 358 The Market/Industry Demand for a Factor... 360 The Supply of Labour (a Variable Factor) in Perfectly Competitive Markets... 363 The Work-Leisure Trade Off: Backward-Bending Labour Supply Curve... 363 Market Supply Curve for an Input (Labour)... 366 The Determination of the Factor Price in Perfectly Competitive Market... 367 Factor Pricing in Imperfect Competition Market... 368 Demand for a Variable Factor by a Monopolistic Firm when Many Factors are Used... 371 The Market Demand for and Supply of Labour... 372 Bilateral Monopoly... 374 Theory of Rent: Modern Theory of Rent... 378 Modern Theory of Rent... 378 The Concept of Quasi Rent... 381 Marginal Productivity Theory of Wage... 381 Explanation of the Marginal Productivity Theory of Wage... 382 Concept of Collective Bargaining and Minimum Wage Fixation... 386 Minimum Wage Fixation... 388 Theories of Interest Rate... 389 Loanable Funds Theory of Interest... 389 Liquidity Preference Theory of Interest... 393 Theories of Profit... 398 Economic and Business Profit... 400 Economic Profit... 401 Dynamic Theory of Profit... 403 Innovation Theory of Profit... 405 Numerical Exercise: Questions and Solution... 407 Chapter Questions... 409 Model Questions... 411 TU Exam Question 2071... 413 Bibliography... 415