economics for managers - session 04

8/3/2019 Economics For Managers - Session 04

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PSG INSTITUTE OF MANAGEMENT

MBA 2011-13 BATCH - I Trimester

Session IV- For Batch C and D

22nd Aug 2011 1EFM Faculty P.Uday Shankar


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Shifts in Demand Curve The demand curve you drew on the 22nd Aug the curve indicates

the level of demand of the product at various prices ceterisparibus.

Draw the same curve for the same parameters and contemplatewhat will happen to the Demand Curve if say INCOME

INCREASES. Name the old Demand curve as D1 and the new one as D2.

There will be a SHIFT in the demand curve and this could happendue to any of the following reasons:

Rise in household income

Rise in price of substitutes

Fall in price of complements

Change in taste /preferences

Expected rise in the price of the product.

22nd Aug 2011 2EFM Faculty P.Uday Shankar


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The Demand Curve shifts to the right when income increases and

shifts to the left when there is a decrease in incomeceteris

paribus

22nd Aug 2011 EFM Faculty P.Uday Shankar 3


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Elasticity of Demand- Price Elasticity of Demand

The price elasticity of demand measures how far

the quantity demanded changes as the pricechanges. (BE-E)

The formula is:

Percentage change in quantity demandedPercentage change in price.

Exercise: Work out the elasticity of demand at thefirst and second levels of price in the graph you

drew yesterday.



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Price Elasticity of Demand- Interpretation

Elastic Demand: for eg the elasticity is 20/10=2 . Aproduct is said to have an elastic demand if theelasticity is greater than one. In other words, it meansthat a small change in the price (up or down) leads to

a large change in quantity demanded. Unit Elasticity: for eg the elasticity is 20/20= 1. A

product is said to have an unit elastic demand when agiven percentage change in price leads to an equal

percentage change in demand. Inelastic Demand: for eg the elasticity is 10/20= 2 (-) < 1

A large change in the price (up or down) leads to onlya small change in quantity demanded.



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Managers Decision based on Elasticity of Demand

Price Elasticity helps managers take crucialdecisions on price of a product.

Decision making in an inelastic demandsituation: If demand is inelastic then the

Manager should seriously consider increasing theprice. As he will not loose any sales. In fact, histotal revenue will go up even though he is sellingless than before and therefore is incurring lower

costs.



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Managers Decision based on Elasticity of Demand

Decision making in an elastic demand situation:If demand is elastic, then a hike in price wouldnot be a good idea since sales will fall fast andtotal revenue will fall too. A price cut would be a

fair idea as it will lead to a lot of extra sales. Insuch a situation costs would rise too.

In similar methods one can work out IncomeElasticity and Cross-price Elasticity for related

products.



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Law of Demand

Quantity demanded increases

when price falls, and quantitydemanded decreases when pricerises, ceteris paribus. ( Thomas

& Maurice)



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Topics for Group Presentations Economics of petroleum as a natural resource,

economics of water for irrigation, drinking water,economics of foodgrains, education, reservation ineducation, Gandhian Economics, economics ofclimate change, economics of cloud computing,economics of health care, economics of video piracy,economics of anti-virus business, economics of war,economics of transportation and traffic congestion,economics of religion, economics of corruption,economics of aging, economics of death, economics ofopen source, .



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Thanks


economics for managers - session 04

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