Managerial Economics Lecture Notes 2024 PDF

BABASAHEB GAWDE INSTITUTE OF MANAGEMENT STUDIES Class: MMS-II Semester: I Name of the Subject: Managerial Economics Name of the Faculty: Prof. Sabir Mujawar Date of Lecture 24 September 2024 C...

BABASAHEB GAWDE INSTITUTE OF MANAGEMENT STUDIES Class: MMS-II Semester: I Name of the Subject: Managerial Economics Name of the Faculty: Prof. Sabir Mujawar Date of Lecture 24 September 2024 Consumer Behaviour & Utility Analysis What is Utility ? Utility is a key concept in economics that refers to the satisfaction or pleasure that a consumer derives from consuming goods and services. Here’s a simplified breakdown of utility and its importance:  Consumer Choice: Utility helps explain how consumers make choices based on their preferences and the satisfaction they expect to receive from different goods and services.  Demand Theory: Understanding utility is crucial for demand theory, as it influences consumers' willingness to buy products at various prices.  Welfare Economics: Utility is central to welfare economics, as it provides a framework for analyzing how resources can be allocated to maximize overall satisfaction in society. Types Utility equi- Cardinal Ordinal marginal utility Cardinal Utility Approach 1. Definition: Quantifies satisfaction from goods and services. 2. Measurement: Expressed in utils (e.g., 10 utils from an apple). 3. Assumptions: Utility differences can be measured and compared. Implications of Cardinal Utility Consumers aim to maximize total utility based on measurable satisfaction. Example: 40 utils from 2 slices of pizza vs. 60 utils from 3 slices. Ordinal Utility Analysis 1. Definition: Ranks preferences without quantifying satisfaction. 2. Measurement: Uses rankings instead of specific values. 3. Assumptions: Consumers can rank their preferences. Implications of Cardinal Utility Choices are based on preference rankings. Example: 1st choice: pizza, 2nd choice: burger, no quantification.  Aspect Cardinal Utility Ordinal Utility Definition Quantifiable satisfaction Ranking of preferences Measureme Assigns specific numerical values Uses rankings without specific nt (utils) values Assumptions Differences in utility can be measured Preferences can be ranked Focus on choice based on Implications Focus on maximizing total utility preferences The Equi-Marginal Utility Principle The Equi-Marginal Utility Principle states that consumers will allocate their income in such a way that the marginal utility (MU) per unit of currency spent is equal across all goods and services. This ensures maximum satisfaction.  Marginal utility is the additional satisfaction gained from consuming one more unit of a good or service. According to the principle, consumers will continue to consume a good until the additional satisfaction per dollar spent is the same across all goods. Assumptions of Law of Equi-Marginal Utility  There is no change in the price of the goods or services.  The consumer has a fixed income.  The marginal utility of money is constant.  A consumer has perfect knowledge of utility.  Consumer tries to have maximum satisfaction.  The utility is measurable in cardinal terms.  There are substitutes for goods.  A consumer has many wants.  Margin Total Units al Utility Utility 1 20 20 2 35 15 3 45 10 4 52 7 5 55 3 6 55 0 7 52 -2 8 47 -5 9 36 -11 10 20 -16 Limitations  The law is not applicable in case of knowledge. Reading books provides more knowledge and has more utility.  This law is not applicable in case of fashion and customs.  This law is not applicable for very low income.  There is no measurement of utility.  Not all consumer care for variety.  The law fails when there are no choices available for the good.  The law fails in case of frequent price change.