Law Of Diminishing Marginal Utility Economics Essay

righteousness Of diminish borderline returns Economics Essay hu humanitynessagerial Economics is the intergration of b relievege over the gap in the midst of economic theory with condescension organization practice so as to facilitate determination qualification Comment outline the record and scope of managerial Economics in light of this statement.Spencer and Siegelman have defined managerial Economics as the integration of economic theory with traffic concern practice for the purpose of facilitating decision-making and forward supply by counsel.The above definitions signify that managerial economic science is the discipline, which deals with the application of economic theory to blood management. Managerial Economics thus lies on the margin betwixt economics and vexation management and serves as the bridge between the deuce disciplines. The avocation count on 1.1 shows the relationship between economics, business management and managerial economics.pg-2NATUR E OF managerial ECONOMICST here argon certain chief characteristics of managerial economics, which solelyt end help to chthonicstand the nature of the subject matter and help in a clear understanding of the following harmManagerial economics is micro-economic in character. This is because the unit of measuring stickment of study is a firm and its problems. Managerial economics does non deal with the entire economy as a unit of study.Managerial economics aroundly uses that body of economic creations and principles, which is known as Theory of the Firm or Economics of the Firm. Managerial economics is concrete and pragmatic. It avoids difficult abstract issues of economic theory. solely it withal involves complications ignored in economic theory in order to face the over any accompaniment in which decisions ar light upon. Economic theory ignores the variety of backgrounds and training put in in single(a) firms.Managerial economics belongs to normative economics quite than positive economics. Normative economy is the branch of economics in which judgments around the desir susceptibility of conf employ policies be made. Positive economics describes how the economy behaves and predicts how it exponent exchange. In other words, managerial economics is prescriptive rather than descriptive. It rest confined to descriptive hypothesis.Managerial economics in any case simplifies the relations among contrasting variables without judging what is desirable or undesirable. For instance, the fairness of rent states that as legal injury amplifications, pack goes dispirited or vice-versa b bely this statement does not suggest if the contribute is desirable or not. Managerial economics, however, is concerned with what decisions ought to be made and hence involves comfort judgments. This throw out has deuce aspects beginning(a), it tells what aims and objectives a firm should surveil and secondly, how scoop out to achieve these aims in bre ak awayicular situations.Macroeconomics is too useful to managerial economics since it provides an intelligent understanding of the business environment. This understanding enables a business executive to ad meet with the external forces that ar beyond the managements control but which play a crucial role in the well cosmos of the firm.SCOPE OF MANAGERIAL ECONOMICSAs regards the scope of managerial economics, in that respect is no habitual uniform pattern. However, the following aspects may be express to be inclusive under managerial economicsDemand compendium and reckoning.Cost and production compendium.Pricing decisions, policies and practices.Profit management.Capital management.Demand analytic thinking and ForecastingA business firm is an economic Organisation, which transforms productive resources into adepts that be to be sold in a market. A major(ip) part of managerial decision-making depends on accurate estimates of assume. This is because before production sc hedules groundwork be prep bed and resources are employed, a forecast of forthcoming sales is indispensable. This forecast puke as well as guide the management in maintaining or change the market position and enlarging acquire. The demand analysis helps to identify the various factors influencing demand for a firms product and thus provides guidelines to manipulate demand. Demand analysis and forecasting, thus, is essential for business planning and occupies a strategic place in managerial economics. It comp crams of discovering the forces determining sales and their measure outmentDemand determinantsDemand distinctionsDemand forecasting.Cost and action digestA study of economic be, combined with the data drawn from the firms accounting system records, prat yield significant greet estimates. These estimates are useful for management decisions. The factors ca victimisation variations in make ups must be recognised and thitherby should be used for taking management dec isions. This facilitates the management to arrive at cost estimates, which are significant for planning purposes. An element of cost disbelief exists in this because tout ensemble the factors determining costs are not forever known or controllable. thereof, it is essential to discover economic costs and measure them for trenchant profit planning, cost control and sound pricing practices. Production analysis is narrower in scope than cost analysis. The chief topics covered under cost and production analysis areCost notions and classificationsCost- railroad siding relationshipsEconomics of get overProduction functionsCost control.Pricing stopping shoot downs, Policies and PracticesPricing is a very most-worthful country of operations of managerial economics. In fact price is the origin of the revenue enhancement of a firm. As such the success of a usiness firm largely depends on the accuracy of price decisions of that firm. The alpha aspects dealt under area, are as fol lowsPrice determination in various market formsPricing methods oppositeial gear pricing product-line pricing and price forecasting.Profit warinessBusiness firms are generally organised with the purpose of making profits. In the long run, profits provide the chief measure of success. In this connection, an Copernican manoeuvre outlay considering is the element of uncertainty existing more or less profits. This uncertainty occurs because of variations in costs and revenues. These are caused by factors such as internal and external. If knowledge about the future were perfect, profit analysis would have been a very well-heeled t pray. However, in a world of uncertainty, expectations are not always sureised. so profit planning and measurement make up the difficult area of managerial economics. The important aspects covered under this area are reputation and measurement of profit.Profit policies and techniques of profit planning.Capital ManagementAmong the various types and class es of business problems, the most complex and troublesome for the business manager are those relating to the firms swell enthronizations. Capital management implies planning and control and capital expenditure. In this procedure, relatively large sums are involved and the problems are so complex that their administration not only requires considerable time and labour but also top-level decisions. The main elements dealt with cost management areCost of capital tramp of return and selection of projects.The various aspects outlined above represent the major uncertainties, which a business firm has to consider viz., demand uncertainty, cost uncertainty, price uncertainty, profit uncertainty and capital uncertainty. We can, therefore, conclude that managerial economics is in general concerned with applying economic principles and apprehensions to adjust with the various uncertainties faced by a business firm.Managerial Economics serves as a link between traditional economics and the decision making sciences for business decision making.The best way to get acquainted with managerial economics and decision making is to come face to face with real world decision problems.Managerial economics is used by firms to improve their profitability. It is the economics applied to problems of prime(prenominal)s and allocation of scarce resources by the firms. It refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objective most efficiently.Ques No 2. converse the role of Managerial Economist in a Business Organization.A managerial economist helps the management by using his analytical skills and highly developed techniques in solving complex issues of prospered decision-making and future advanced planning.Therole of managerial economistcan be summarized as followsHe studies the economic patterns at macro-level and analysis its significance to the particularised firm he is working in.He has to consistently examine the probabilities of transforming an ever-changing economic environment into profitable business avenues.He assists the business planning motion of a firm.He also carries cost- put on analysis.He assists the management in the decisions pertaining to internal functioning of a firm such as changes in price, investment plans, type of bullys /services to be produced, inputs to be used, techniques of production to be employed, expansion/ contraction of firm, allocation of capital, location of sensitive plants, quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting, etc.In addition, a managerial economist has to analyze changes in macro- economic indicators such as internal income, population, business cycles, and their possible effect on the firms functioning.He is also involved in advising the management on public relations, hostile exchange, and trade. He guides the firm on the likely impact of chang es in pecuniary and fiscal policy on the firms functioning.He also makes an economic analysis of the firms in competition. He has to collect economic data and examine all crucial tuition about the environment in which the firm operates.The most significant function of a managerial economist is to conduct a detailed research on industrial market.In order to carry out all these roles, a managerial economist has to conduct an elaborate statistical analysis.He must be vigilant and must have ability to cope up with the pressures.He also provides management with economic information such as tax rates, competitors price and product, etc. They give their valuable advice to government authorities as well.At times, a managerial economist has to prepare speeches for top management.Ques No 3.Critically explain the role of the concept of Time value of Money in Mangerial decisions?The time value concept of money assumes importance because of the fact that future is always associated with uncer tainty. A rupee in hand today is valued higher than the one rupee that is expecting to be recovered tomorrow. The following are points that come in nourish of the fact that the concept of time value of money is quite applicable in any area of decision making (a) The purchasing big businessman of money over period of tinw goes down in real times. That means, though numerically the akin, the purchasing power of one rupee today is considered to be high economically than its value as on a future date.(b) Individuals pick present wasting disease to future consuiilption. This is because of the risk a n d uncertainty associated with future.(c) There is always related costs in any investinent. These costs tend to bring down future value of money.The concept of time value of money figures in rnany day-to-day decisions. For ideal. in the vital decision making areas in the management like the effective rate of interest on a business give. The mortgage defrayal in real estate transacti on and evaluation of true drive off on investment etc. the time value of money plays an important role. Wherever use Of money is involved and its inflow and outflow patterns are spread over a time horizon, this concept very useful. For example consider the following* A banker must establish the term of loan* A finance manager is who considers various alternatives sources of funds in terms of cost.* A portfolio manager is one who evaluates various securitiesQues No 4 oppose the cardinal grosbeak Ordinal neares to Consumer Behaviour. Which of these enables us to bifurcate the price effect and how?Cardinal Approach refers that you can calculate or Measure the returns (degree of joy) Numerically, objet dart According to ordinal approach you can not measure the service program program numerically.Cardinal Approach follow the Law of Diminishing Marginal Utility speckle Ordinal Approach follow the nonchalance meander.Cardinal Approach Emphasis on units while ordinal approach i s based on rank.When discussing cardinal vs. ordinal, it is helpful to look at what the words mean. The distinguishing factor here is between cardinal and ordinal numbers. Cardinal numbers are 1, 2, 3 ordinal numbers, 1st, second, 3rd. Some crucial differences follow from that. Whereas mathematical operations can be performed on cardinal numbers, they cannot be performed on ordinal numbers. Now, when public lecture about cardinal value, it is an guarantee to measure the public improvement company(prenominal) of various alternatives. When talking about ordinal utility, it is the ranking of alternatives.Cardinal utility is, however, an erroneous concept. It is unrealistic to measure utility. People can only say I prefer A to B, but cannot importantly say I prefer A 2.5 times more(prenominal) than B or something to that effect. Furthermore, comparisons of utility between divers(prenominal) individuals are impossible and meaning slight, as well as between the same individual at different points in time (as individuals can and do change their preferences that is, ordinal value-scale rankings). Because value is subjective, we cannot measure it and cannot compare between two different people, or even between the same person at different times.To clarify, ordinal utility culminates in value-scales1st A2nd B3rd Cwhereas cardinal utility is the erroneous attempt at measurement10utils A7utils B3utils CQues No 5.Managerial Economics is inter- disciplinary in natureComment/ Explain the relationship of ME with other disciplines.Managerial economics is essentially applied economics in the field ofbusiness management.It is the economics of business.It pertains to all economics aspects ofmanagerial decisions making.It is the integration of economic principles with business management practices.Managerial economics rests on the edifice ofeconomics.A pro strand knowledge of economics and economic theory is takeed for ameaningful analysis of business situationManag erial economics is linked with various other fields of study like-Microeconomic Theory As verbalize in the introduction, the roots of managerialeconomics spring from micro-economic theory. Price theory, demand concepts andtheories of market structure are few elements of micro economics used bymanagerial economists. It has an applied bias as it applies economic theories inorder to solve real world problems of enterprises.Macroeconomic Theory This field has little relevance for managerial economicsbut at least one part of it is incorporated in managerial economics i.e. nationalincome forecasting. The latter could be an important aid to business conditionanalysis, which in turn could be a valuable input for forecasting the demand forspecific product groups.Operations Research This field is used in managerial economics to find out thebest of all possibilities. analogue programming is a great aid in decision making inbusiness and industry as it can help in solving problems like determin ation offacilities on machine scheduling, distribution of commodities and best productmix etc.Theory of Decision Making Decision theory has been developed to deal withproblems of choice or decision making under uncertainty, where the applicability offigures required for the utility calculus are not available. Economic theory is based onassumptions of a single terminal whereas decision theory breaks new grounds byrecognizing multiplicity of goals and intensity level of uncertainty in the real worldof management.Statistics Statistics helps in empirical interrogatory of theory. With its help, betterdecisions relating to demand and cost functions, production, sales or distribution aretaken. Managerial economics is heavily dependent on statistical methods.Management Theory and Accounting Maximisation of profit has beenregarded as a primordial concept in the theory of the firm in microeconomics.Ques No 6. treat the properties of Indifference Curves. Discuss their role in put onrs de cision making process?Indifference CurvesEach point in thediagramstands for a basketful of meat and ghee (cooking oil) A, B, C, D are all baskets among which a certain shoot downr is indifferent. either give equal utility. These points and all others on a smooth edit out connecting them constitute an unfeelingness set. An indifference skip is a graphical model of an indifferent set.Indifference Curve PropertiesFollowing are the indifference dilute properties1. If two commodities are perfect substitute the indifference kink up is a straight line.http//www.studylecturenotes.com/images/stories/Indifference%20Curve%20Properties%20Fig%201.jpgWhen two commodities are not substitutable hence the shape is represented by two vertical and horizontal lines.http//www.studylecturenotes.com/images/stories/Indifference%20Curve%20Properties%20Fig%202.jpgIn more typical cases, in which the two commodities can be substituted for each other but are not perfect substitutes, the indifference thin exit be convoluted ashttp//www.studylecturenotes.com/images/stories/Indifference%20Curve%20Properties%20Fig%203.jpg4. The more easily the two commodities can be substituted for each other the nigher leave behind the curve approach straight line.5. Indifference curves normally slope downward, the upward sloping portion of curve shown here s impossible. hoop A has more respectables than basket B and therefore it could not be on the same indifference curve. The indifference curves have normally blackball slops sloping downward.http//www.studylecturenotes.com/images/stories/Indifference%20Curve%20Properties%20Fig%204.jpg6. The absolute value of the slope of an indifference curve at any point represents the ratio of the fringy utility of the good and on the horizontal axis to the bare(a) utility of the good on the vertical axis. The rate at which one good can be substituted for the other without gain or loss in expiation is called marginal rate of substitution.7. Indiff erence curves are convex, that is, their slope decrease as one moves down and to the mature along them. The implies that the ratio of the marginal utility of meat to the marginal utility of the ghee (cooking oil) also known as marginal ratio of substitution of meat for ghee (cooking oil) diminishes as one moves down and to the salutary along the curve.8. Indifference curves can be drawn through the point that represents the basket of goods whatsoever.Ques No 7.Discuss the concept of Production Possibility Curve? What is the reason behind its shape? Do you think there are exceptions to it?Production Possibility curvesThe production hazard curves is a hypothetical agency of the amount of two different goods that can be obtained by transmutation resources from the production of one, to the production of the other. The curve is used to describe a societys choice between two different goods.Figure 1, shows the two goods as consumption and investment.Investment goods are goods that a re involved in the production of further consumption goods.They allow in physical capital such as machines, buildings, roads etc. and human investments such as education and training. The sums of all investments make up the capital stock of a society. To show the point where all resources were used to produce consumption goods, one should move straight up the vertical axes to the curve.To show the point were all resources were used to produce investment goods, one should move straight on the horizontal axes to the curve.Both points are extreme and unrealistic.Both points A and B represented more realistic combinations, with point A showing more consumption and less investment, while point B shows more investment and less consumption.http//krypton.mnsu.edu/renner/image001.JPGThe production possibility curve of figure 1., shows the trade off in production between investments and consumption goods. Any two categories of different goods could be chosen. What they are is arbitrary. The curve is used to show during a specificperiod, what could be produced of the combination of the two goods, if all resources are fully employed, while technology and institutions do not change.Given those conditions, societies output potential is realized anywhere on the curve (which is called the production possibility curves frontier). Unemployed resources (labor, capital, physical resources) of any kind would result in an inefficient production level,and would be shown as a point to the left, or inside the curve. By definition all point to the right or outside of the production possibility curve (frontier) are impossible, stipulation the limits of resources and technology.Opportunity CostThis hypothetical curve shows how much of consumption must be given up to increase investments (the movement from A to B).This demonstrates the important economic concept ofOpportunity Cost, which is the cost of anything (such as an investment in a new road), in terms of what has to be given up. This is the general concept of cost in economics. For the individual, these costs could be financial, but they could include a individuals time and other intangibles. For society the production possibility curve shows opportunity cost only on the curve itself.If society found itself inside the curve, for instance, during a recession (where all resources are not cosmos utilized), then(prenominal) a movement out to the production possibility curve has no real opportunity cost. The unemployed resources are just world utilized (unemployed labor going back to work).Opportunity cost is different than accounting cost, and unfortunately is not so easily calculated. Opportunity cost has a subjective element.For instance, to determine the opportunity cost of a new highway, includes the obvious cost of materials, of labor, of land, (these are the easily determined accounting cost), but there are also intangible cost, such as the cost to the community of the disruption involved with new cons truction, and the change in the communities make by the highway. Also there may be costs attached to increase pollution (with health effects), increased noise, and an increase in general unattractiveness.These cost are real, but are difficult to both measure and evaluate. Putting a dollar value on these cost adds a subjective element to the evaluation. As a result sometimes they are ignored.Ques No 8.Graphically explain the Law of Diminishing Marginal utility. Discuss its applicability in the intergrated Global EconomyLaw of Diminishing Marginal UtilityThe Law of Diminishing Marginal Utility states that as the consumer consume more and more units of a good the marginal utility of the trade good falls.The constabulary of diminishing marginal utility is a psychological justice arrived at by introspection and by empirical evidence.The example of this legality is when a consumer drinks pee on a hot afternoon the low codswallop of water gives him more satisfaction as compared to the second (as the smart has decreased after consuming one field glass of water). The second glass of water gives more satisfaction as compared to the third and so on.The Law of Diminishing Marginal Utility, which states that as the consumer consume more and more units of a commodity the marginal utility of the commodity falls.If MUx MUyPx Pyit means that good x is giving more satisfaction to the consumer as compared to good y. Therefore the consumer would gain satisfaction by consuming more of good x and less of good y. As he consumes more of good x, MUx leave fall which would lead to fall in MUx/ Px. Similarly MUy will rise as he consumes less of good y. This would increase MUy/ Py. This process will continue till we reach the equilibrium point whereMUx = MUy = MU of the last rupee spent on each goodPx PySimilarly if MUx Px PyThe consumer would increase the consumption of good y and reduce the consumption of good x till he reaches the equilibrium point whereMUx = MUy = MU of the last rupee spent on each goodPx PyEXAMPLE OF diminish borderline UTILITY -This natural law can be explained by the following example. Suppose in the month of June a person start imbibition water. First glass of water has a great utility for him. If he takes the second glass of water, the utility will be less than the first. If he drinks the third glass , the utility of third will be less than the second, and so on. The utility goes on diminishing with the consumption of every conterminous unit and it drops down to postcode. If the consumer is forced further, the utility will become negative. This law can also be explained by the following table httphttps://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQ_RuHDxssZ64mPwsA9WzJMiFY7fNGuXyPEASRMt5zyLDB8ij-z7piXntuEneFNzKgJo_1naQMeZEd48LS7h8yi_ZN61Ym54WUm1l3dRXZaEukI7HfkK5qMiag_8q_HIgImNiZBV5OXxg/s320/schedule+of+diminshing+marginal+utility.JPGEXPLANATION -The above table show that first glass of water gives units of utility to the thirsty man. When he takes second the marginal utility drops down to 8. When he consumes the 6th glass the marginal utility drops down to zero and by the use of 7th it becomes negative.httphttps://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqOOjVhNvGfprkeShj-Rxh-ueZB5zYdGdZ4xamSeC-4M5s65QVi6WtkyUhkBthAP4to7JS3sH9ZPU63R6t7chGBFfU8xwN3VgRRzHLfsvs844lI0v1j3rqDD6HqigT7SUKog8Bs9rBgv4/s320/diagram+of+diminishing+marginal+utility.JPGEXPLANATION -Along OX we measure the units of commodity consumed along OY utility derived from them. The utility of the first glass of water is represented by the first rectangle and second glass by the second rectangle and so on. FF curve is the diminishing utility curve.ASSUMPTIONS OF DIMINISHING MARGINAL UTILITY1. NATURE OF THE COMMODITY -There should be no change in the nature of the commodity. For example, If first mango taken is not better, while the second is better, then the utility will not decrease and the utility of second will be greater than first.2. REASONABLE UNITS -It is assumed that the units of a commodity which are used should be suitable and reasonable if the units are too small then this law will not operate.3. continual USE -It is also assumed that the units of the commodity should be used continuously. If there is interval between the consumption the same two units then the law will not be applicable.4. NO CHANGE IN INCOME -It is also assumed that the income of the consumer should not change, otherwise the law may not operate.5. NO CHANGE IN FASHION AND CUSTOMS -If there is a fast change in fashion or customs of a consumer, the law may not operate.6. RARE COLLECTIONS -If there are two diamonds in the world the possession of the second diamond will push up the marginal utility.7. NO CHANGE IN THE STOCK OF OTHER plurality -Sometimes an increase in the stock of a commodity increases the marginal utility. For example the number of telephone increase in the city, but the utility of our telephone increases.8. STATE OF MIND SHOULD NOT CHANGE -If a consumer has been told thatmangois a tonic for his health, then marginal utility will increase instead of falling.EXCEPTIONS OR LIMITATIONS1. DESIRE OF MONEY -This law is not applicable in case of money with an increase in wealth man wants to get more and more.2. DESIRE OF KNOWLEDGE -Some experts say that man wants to get more and more knowledge so the law can not be applied in this case.3. USE OF LIQUOR -With the superfluous use of liquor like wine marginal utility also goes on increasing.4. PERSONAL HOBBY -In case of hobby also this law can not operate. For example , as the collection of tickets increases, its utility also increases.5. FASHION -Utility also depends upon fashion. If the fashion of any commodity changes, its utility drops down to zero. On the other hand if fashion exists then utility increases.Ques No 9.Describe how Marginalism, Opportunity cost Incremental concept aid Decision Making.The marginalist explanation is as follows The match utility or satisfaction of water exceeds that of diamonds. We would all rather do without diamonds than without water. But almost all of us would prefer to win a prize of a diamond rather than an additional bucket of water. To mak e this last choice, we ask ourselves not whether diamonds or water give more satisfaction in total, but whether one more diamond gives greater additional satisfaction than one more bucket of water. For this marginal utility question, our answer will depend on how much of each we already have. Though the first units of water we consume every month are of enormous value to us, the last units are not. The utility of additional (or marginal) units continues to decrease as we consume more and more.Economists believe that sensible choice requires comparing marginal utilities and marginal costs. They also think that people apply the marginalism concept regularly, even if subconsciously, in their private decisions. In southern states, for example, a much lower split of people buy degree Celsius shovels than in northern states. The reason is that although snow shovels cost about the same from state to state, the marginal benefit of a snow shovel is much higher in northern states. But in di scussions of public-policy issues, where most of the benefits and costs do not accrue to the individual making the policy decision (e.g., subsidies forhealth care), the appeal of total utility and intrinsic worth as the basis for decision can bury the insights of marginalism.Even good answers to certain grand questions give little pleader for rational public policy choices. For example, what is more important, health or digression? If forced to choose, everyone would find health more important than recreation. But marginalism suggests that our real concernshould be with proportion, not rank. Finding health in total to be more important than recreation in total does not imply that all diving boards should be removed from swimming pools just because a few people die in diving accidents. We need to compare the number of lives saved from fewer diving accidents, that is, the marginal benefit of getting rid of diving boards, with the pleasure given up by getting rid of diving boards, t hat is, the marginal cost of getting rid of