Explanation : The scope of Managerial Economics include the following fields:
(i) Theory of Demand: Demand theory is the study of behaviour of consumers. In studying the behaviour of consumers it answers questions as:
(a) Why do consumers buy a Particular Commodity?
(b) How much do they purchase a commodity?
(c) What is the effect of income, habit & taste of consumers on demand for their commodity?
(d) What are other factors affecting demand?
(e) Why and when consumers stop to further consume a commodity?
(ii) Theory of Production: Production & cost analysis is important for the smooth functioning of production process. A certain amount of goods has to be produced to earn a certain level of profit. To obtain such output, some costs are incurred. Then the problem for management is to
determine the level of production at which cost may be minimum. Production theory help in determining the size & level of production. It explains how average and marginal cost change with the change of production & how can the optimum size of production be obtained.
(iii) Theory of Exchange or Price Theory: Theory of exchange is popularly known as Price theory. Does it explain how the commodity price is determined under different types of market conditions? How & to what extent advertisement can be helpful in increasing the sales of a firm? Price theory is helpful in determining the Price policy of firm pricing is an important area of managerial economics. Price policy affects the demand for the product. It includes determination of product prices under different market conditions, Pricing methods, Pricing policies & Price
(iv) Theory of Profit: Every business & industrial enterprise aims at earning maximum profit. Profit is the difference between total revenue & total cost. Because of these factors, profit is always uncertain:
(a) The demand of Product.
(b) Nature & Degree of Competition
(c) Changing Conditions
Hence the theory of profit proves helpful for improving earning efficiency of from & most efficient technique used for predicting the future.
(v) Theory of Capital Investment: Theory of Capital investment explain the following important issues:
(a) Selection of most suitable investment project.
(b) Most efficient allocation of capital.
(c) Minimizing the possibility of undercapitalisation & over-capitalisation. Capital is the foundation of business & like other factors. It is also scarce & expensive. It should be allocated in most efficient manner.
(vi) Environmental Issues: Certain issues of macro-economics also form part of Managerial Economics. These relate to the social & political environment in which business & industrial firm has to operate.
This is governed by such factors as:
(a) Business cycles
(b) Industrial policy of country
(c) Trade & Fiscal policy
(d) Taxation policy
(e) Trends in economy
(f) Political system of country.
Explanation : Price elasticity of demand is the sensitivity measure of the quantity demanded (Q) for a product/service as a result of change in price (P) of the same product/service. Mathematically, the price elasticity (PE) of demand for a given product/service is defined as the percentage change in quantity demanded caused by a per cent change in price:
Intuitively, the price elasticity is generally negative due to the negative relationship between the price and quantity demanded.
Explanation : Penetration pricing strategy: Penetration pricing is based on setting lower, rather than higher prices in order to gain a large, if not dominant market share. Market penetration strategies differentiate between opinion leaders and market followers and are primarily applied if a new market is entered. The expectation is that a quick product diffusion allows benefiting from cost degression that
allows a market leadership position.
Explanation : Profitability Index (PI) or Benefit-Cost Ratio (B/C Ratio): Important time-adjusted capital budgeting technique is the profitability index (PI) or a benefit-cost ratio (B/C). It is similar to the NPV approach. The profitability index approach measures the present value of returns per rupee invested, while the NPV is based on the difference between the present value of future cash inflows and the present value of cash outlays. A major shortcoming of the NPV method is that being an absolute measure, it is not a reliable method to evaluate projects requiring different initial investments. The PI method provides a solution to this kind of problem. It is, in other words, a relative measure. It may be defined as the ratio which is obtained dividing the present value of future cash inflows by the present value of cash outlays. Symbolically,PI=Present value cash inflowsPresent value of cash outflows This method is also known as the B/C ratio
because the numerator measures benefits and the denominator costs. A more appropriate description would be the present value index.