Category: Management Notes

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis.

Understanding the Demand Curve

The demand curve will move downward from the left to the right, which expresses the law of demand — as the price of a given commodity increases, the quantity demanded decreases, all else being equal.

Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

For example, if the price of corn rises, consumers will have an incentive to buy less corn and substitute it for other foods, so the total quantity of corn consumers demand will fall.

Types of Demand Curves

Elastic demand is when a price decrease causes a significant increase in the quantities bought. Like a stretchy rubber band, the quantity demanded moves a lot with just a little change in prices. An example of this would be ground beef; if prices drop just 25%, you might buy three times as much as you usually would because you know you’ll use it eventually and can put the extras in the freezer. If demand is perfectly elastic, the curve looks like a horizontal flat line.

Inelastic demand is when a price decrease won’t increase the quantities purchased. An example of this is bananas. No matter how cheap they are, there’s only so many you can eat before they spoil. You won’t buy three bunches even if the price falls 25%. If demand is perfectly inelastic, the curve looks like a vertical straight line.

The reason you react more to a sale on ground beef than a sale on bananas is because of the marginal utility of each additional unit. Marginal utility refers to the usefulness (utility) of each additional unit the further out on the margin you go. Because you can freeze ground beef, the third package is just as good to you as the first. The marginal utility of ground beef is high. Bananas lose their consistency in the freezer, so their marginal utility is low.

Shifting the Curve

If any determinants of demand other than the price change, the demand curve shifts. If demand increases, the entire curve will move to the right. That means larger quantities will be demanded at every price. If the entire curve shifts to the left, it means total demand has dropped for all price levels. For instance, if you just lost your job, you might not buy that third package of ground beef, even if it is on sale. You might just buy one package and be glad it’s 25% off.

Aggregate or Market Demand Curve

The market demand curve describes the quantity demanded by the entire market for a category of goods or services, like gasoline prices. When the price of oil goes up, all gas stations must raise their prices to cover their costs. Oil prices comprise 71% of gas prices; even if the price drops 50%, drivers don’t generally stock up on extra gas. That’s why when the price skyrockets by $0.50–$1 per gallon, people get upset. They can’t cut back their driving to work, school, or the grocery store, and are forced to pay more for gas. That’s an inelastic aggregate demand curve.

High gas prices lower people’s incomes for things other than gas, and that means the demand curve for those other things will drop. This is called a demand shift, and in this case, the entire demand curve shifts to the left. Since buyers have less income, they will purchase a lower quantity of a product even if its price doesn’t rise.

Demand Schedule

In economics, a demand schedule is a table that shows the quantity demanded of a good or service at different price levels. A demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis represents price and the X-axis represents quantity.

A demand schedule most commonly consists of two columns. The first column lists a price for a product in ascending or descending order. The second column lists the quantity of the product desired or demanded at that price. The price is determined based on research of the market.

When the data in the demand schedule is graphed to create the demand curve, it supplies a visual demonstration of the relationship between price and demand, allowing easy estimation of the demand for a product or service at any point along the curve.

Demand Schedules vs. Supply Schedules

A demand schedule is typically used in conjunction with a supply schedule, which shows the quantity of a good that would be supplied to the market by producers at given price levels. By graphing both schedules on a chart with the axes described above, it is possible to obtain a graphical representation of the supply and demand dynamics of a particular market.

In a typical supply and demand relationship, as the price of a good or service rises, the quantity demanded tends to fall. If all other factors are equal, the market reaches an equilibrium where the supply and demand schedules intersect. At this point, the corresponding price is the equilibrium market price, and the corresponding quantity is the equilibrium quantity exchanged in the market.

Demand analysis is a research done to estimate or find out the customer demand for a product or service in a particular market. Demand analysis is one of the important consideration for a variety of business decisions like determining sales forecasting, pricing products/services, marketing and advertisement spending, manufacturing decisions, expansion planning etc. Demand analysis covers both future and retrospective analysis so that they can analyze the demand better and understand the product/service’s past success and failure too.

For a new company, the demand analysis can tell whether a substantial demand exists for the product/service and given the other information like number of competitors, size of competitors, industry growth etc it helps to decide if the company could enter the market and generate enough returns to sustain and advance its business.

The Demand Analysis is a process whereby the management makes decisions with respect to the production, cost allocation, advertising, inventory holding, pricing, etc. Although, how much a firm produces depends on its production capacity but how much it must endeavor to produce depends on the potential demand for its product.

Thus, the marketer is required to analyze properly the demand for its product in the market and must hold inventory accordingly. Such as if there is a potential demand in the future, then the firm should hold more inventories and in case there is no demand, then the production remains unwarranted, and hence, lesser inventories are held.

There is a possibility that production might exceed the demand, then the marketer must use alternative ways such as better advertisements to create a new demand.

The demand shows the relationship between two economic variables, the price of the product and the quantity of product that a consumer is willing to buy for a given period of time, other things being equal.

Features/Characteristics of Demand

The following are the main features or characteristics of demand that the marketer must keep in mind while analyzing the demand for its product:

• The demand is the specific quantity that a consumer is willing to purchase. Thus, it is expressed in numbers.
• The demand must mean the demand per unit of time, per month, per week, per day.
• The demand is always at a price, e. any change in the price of a commodity will bring about a certain change in its quantity demanded.
• The demand is always in a market, a place where a set of buyers and sellers meet. The market needs not to be a geographical area.

Thus, demand plays a crucial role in the success of any business enterprise. And it must be remembered that demand is always at a price and a particular time period in which it is created. Such as demand for woolen clothes will be more in winters than in any other season. Hence, demand analysis is always done in terms of the price and the relevant time period.

LAW OF DEMAND

The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions. The law of demand states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, and use each additional unit of the good to serve successively lower valued ends.

Understanding the Law of Demand

Economics involves the study of how people use limited means to satisfy unlimited wants. The law of demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs over less urgent ones in their economic behavior, and this carries over into how people choose among the limited means available to them. For any economic good, the first unit of that good that a consumer gets their hands on will tend to be put to use to satisfy the most urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island who obtains a six pack of bottled, fresh water washed up on shore. The first bottle will be used to satisfy the castaway’s most urgently felt need, most likely drinking water to avoid dying of thirst. The second bottle might be used for bathing to stave off disease, an urgent but less immediate need. The third bottle could be used for a less urgent need such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority like watering a small potted plant to keep him company on the island.

In our example, because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before. Similarly, when consumers purchase goods on the market each additional unit of any given good or service that they buy will be put to a less valued use than the one before, so we can say that they value each additional unit less and less. Because they value each additional unit of the good less, they are willing to pay less for it. So the more units of a good consumers buy, the less they are willing to pay in terms of the price.

By adding up all the units of a good that consumers are willing to buy at any given price we can describe a market demand curve, which is always downward-sloping, like the one shown in the chart below. Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is low (Q1) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

Demand vs Quantity Demanded

In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. In the chart, the term “demand” refers to the green line plotted through A, B, and C. It expresses the relationship between the urgency of consumer wants and the number of units of the economic good at hand. A change in demand means a shift of the position or shape of this curve; it reflects a change in the underlying pattern of consumer wants and needs vis-a-vis the means available to satisfy them. On the other hand, the term “quantity demanded” refers to a point along with horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences. Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error; rising (or falling) in prices do not decrease (or increase) demand, they change the quantity demanded.

Factors Affecting Demand

The shape and position of the demand curve can be impacted by several factors. Rising incomes tend to increase demand for normal economic goods, as people are willing to spend more. The availability of close substitute products that compete with a given economic good will tend to reduce demand for that good, since they can satisfy the same kinds of consumer wants and needs. Conversely, the availability of closely complementary goods will tend to increase demand for an economic good, because the use of two goods together can be even more valuable to consumers than using them separately, like peanut butter and jelly. Other factors such as future expectations, changes in background environmental conditions, or change in the actual or perceived quality of a good can change the demand curve, because they alter the pattern of consumer preferences for how the good can be used and how urgently it is needed.

• The law of demand is a fundamental principle of economics which states that at a higher price consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.
• A market demand curve expresses the sum of quantity demanded at each price across all consumers in the market.
• Changes in price can be reflected in movement along a demand curve, but do not by themselves increase or decrease demand.
• The shape and magnitude of demand shifts in response to changes in consumer preferences, incomes, or related economic goods, NOT to changes in price.

Managerial Economics is both conceptual and metrical. Before the substantive decision problems which fall within the purview of managerial economics are discussed, it is useful to identify and under­stand some of the basic concepts underlying the subject.

Economic theory provides a number of con­cepts and analytical tools which can be of considerable and immense help to a manager in taking many decisions and business planning. This is not to say that economics has all the solutions. In fact, actual problem solving in business has found that there exists a wide disparity between economic theory of the firm and actual observed practice.

Therefore, it would be useful to examine the basic tools of managerial economics and the nature and extent of gap between the economic theory of the firm and the managerial theory of the firm. The contribution of economics to managerial economics lies in certain principles which are basic to managerial economics. There are six basic principles of managerial economics. They are:-

1. The Incremental Principle

The incremental concept is probably the most important concept in economics and is certainly the most frequently used in Managerial Economics. Incremental concept is closely related to the mar­ginal cost and marginal revenues of economic theory.

The two major concepts in this analysis are incremental cost and incremental revenue. Incremental cost denotes change in total cost, whereas incremental revenue means change in total revenue resulting from a decision of the firm.

The incremental principle may be stated as follows:

A decision is clearly a profitable one if

(i) It increases revenue more than costs.

(ii) It decreases some cost to a greater extent than it increases others.

(iii) It increases some revenues more than it decreases others.

(iv) It reduces costs more than revenues.

2. Marginal Principle

Marginal analysis implies judging the impact of a unit change in one variable on the other. Marginal generally refers to small changes. Marginal revenue is change in total revenue per unit change in output sold. Marginal cost refers to change in total costs per unit change in output produced (While incremental cost refers to change in total costs due to change in total output). The decision of a firm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price.

3. The Opportunity Cost Principle

Both micro and macro economics make abundant use of the fundamental concept of opportunity cost. In everyday life, we apply the notion of opportunity cost even if we are unable to articulate its significance. In Managerial Economics, the opportunity cost concept is useful in decision involving a choice between different alternative courses of action.

Resources are scarce, we cannot produce all the commodities. For the production of one com­modity, we have to forego the production of another commodity. We cannot have everything we want. We are, therefore, forced to make a choice.

Opportunity cost of a decision is the sacrifice of alternatives required by that decision. Sacrifice of alternatives is involved when carrying out a decision requires using a resource that is limited in supply with the firm. Opportunity cost, therefore, represents the benefits or revenue forgone by pursuing one course of action rather than another.

The concept of opportunity cost implies three things:

(i) The calculation of opportunity cost involves the measurement of sacrifices.

(ii) Sacrifices may be monetary or real.

(iii) The opportunity cost is termed as the cost of sacrificed alternatives.

Opportunity cost is just a notional idea which does not appear in the books of account of the company. If resource has no alternative use, then its opportunity cost is nil.

In managerial decision making, the concept of opportunity cost occupies an important place. The economic significance of opportunity cost is as follows:

(i) It helps in determining relative prices of different goods.

(ii) It helps in determining normal remuneration to a factor of production.

(iii) It helps in proper allocation of factor resources.

4. Discounting Principle

This concept is an extension of the concept of time perspective. Since future is unknown and incalculable, there is lot of risk and uncertainty in future. Everyone knows that a rupee today is worth more than a rupee will be two years from now. This appears similar to the saying that “a bird in hand is more worth than two in the bush.” This judgment is made not on account of the uncertainty surround­ing the future or the risk of inflation.

It is simply that in the intervening period a sum of money can earn a return which is ruled out if the same sum is available only at the end of the period. In technical parlance, it is said that the present value of one rupee available at the end of two years is the present value of one rupee available today. The mathematical technique for adjusting for the time value of money and computing present value is called ‘discounting’.

5. Concept of Time Perspective Principle

The time perspective concept states that the decision maker must give due consideration both to the short run and long run effects of his decisions. He must give due emphasis to the various time periods. It was Marshall who introduced time element in economic theory.

The economic concepts of the long run and the short run have become part of everyday language. Managerial economists are also concerned with the short run and long run effects of decisions on revenues as well as costs. The main problem in decision making is to establish the right balance between long run and short run.

In the short period, the firm can change its output without changing its size. In the long period, the firm can change its output by changing its size. In the short period, the output of the industry is fixed because the firms cannot change their size of operation and they can vary only variable factors. In the long period, the output of the industry is likely to be more because the firms have enough time to increase their sizes and also use both variable and fixed factors.

In the short period, the average cost of a firm may be either more or less than its average revenue. In the long period, the average cost of the firm will be equal to its average revenue. A decision may be made on the basis of short run considerations, but may as time elapses have long run repercussions which make it more or less profitable than it at first appeared.

6. Equi-Marginal Principle

One of the widest known principles of economics is the equi-marginal principle. The principle states that an input should be allocated so that value added by the last unit is the same in all cases. This generalization is popularly called the equi-marginal.

Let us assume a case in which the firm has 100 unit of labour at its disposal. And the firm is involved in five activities viz., А, В, C, D and E. The firm can increase any one of these activities by employing more labour but only at the cost i.e., sacrifice of other activities.

An optimum allocation cannot be achieved if the value of the marginal product is greater in one activity than in another. It would be, therefore, profitable to shift labour from low marginal value activity to high marginal value activity, thus increasing the total value of all products taken together.

Business firms are a combination of manpower, financial, and physical resources which help in making managerial decisions. Societies can be classified into two main categories production and consumption. Firms are the economic entities and are on the production side, whereas consumers are on the consumption side.

The performances of firms get analyzed in the framework of an economic model. The economic model of a firm is called the theory of the firm. Business decisions include many vital decisions like whether a firm should undertake research and development program, should a company launch a new product, etc.

Business decisions made by the managers are very important for the success and failure of a firm. Complexity in the business world continuously grows making the role of a manager or a decision maker of an organization more challenging! The impact of goods production, marketing, and technological changes highly contribute to the complexity of the business environment.

Steps for Decision Making

The steps for decision making like problem description, objective determination, discovering alternatives, forecasting cnsequences are described below:

Business Decision Making Steps

(i) Define the Problem

What is the problem and how does it influence managerial objectives are the main questions. Decisions are usually made in the firm’s planning process. Managerial decisions are at times not very well defined and thus are sometimes source of a problem.

(ii) Determine the Objective

The goal of an organization or decision maker is very important. In practice, there may be many problems while setting the objectives of a firm related to profit maximization and benefit cost analysis. Are the future benefits worth the present capital? Should a firm make an investment for higher profits for over 8 to 10 years? These are the questions asked before determining the objectives of a firm.

(iii) Discover the Alternatives

For a sound decision framework, there are many questions which are needed to be answered such as − What are the alternatives? What factors are under the decision maker’s control? What variables constrain the choice of options? The manager needs to carefully formulate all such questions in order to weigh the attractive alternatives.

(iv) Forecast the Consequences

Forecasting or predicting the consequences of each alternative should be considered. Conditions could change by applying each alternative action so it is crucial to decide which alternative action to use when outcomes are uncertain.

(v) Make a Choice

Once all the analysis and scrutinizing is completed, the preferred course of action is selected. This step of the process is said to occupy the lion’s share in analysis. In this step, the objectives and outcomes are directly quantifiable. It all depends on how the decision maker puts the problem, how he formalizes the objectives, considers the appropriate alternatives, and finds out the most preferable course of action.

Sensitivity Analysis

Sensitivity analysis helps us in determining the strong features of the optimal choice of action. It helps us to know how the optimal decision changes, if conditions related to the solution are altered. Thus, it proves that the optimal solution chosen should be based on the objective and well structured. Sensitivity analysis reflects how an optimal solution is affected, if the important factors vary or are altered.

Managerial economics is competent enough for serving the purposes in decision making. It focuses on the theory of the firm which considers profit maximization as the main objective. The theory of the firm was developed in the nineteenth century by French and English economists. Theory of the firm emphasizes on optimum utilization of resources, cost control, and profits in a single time period. Theory of the firm approach, with its focus on optimization, is relevant for small farms and producers.

Direct marketing is an advertising strategy that relies on the individual distribution of a sales pitch to potential customers. Mail, email, and texting are among the delivery systems used. It is called direct marketing because it generally eliminates the middleman such as advertising media.

Direct Marketing is a form of advertising in which companies provide physical marketing materials to consumers to communicate information about a product or service. Direct marketing does not involve advertisements placed on the internet, on television or over the radio. Types of direct marketing materials include catalogs, mailers and fliers.

Direct marketing removes the “middle man” from the promotion process, as a company provides a message directly to a potential customer. Companies with smaller advertising budgets typically use this type of marketing since they cannot afford to pay for advertisements on television and often do not have the brand recognition of larger firms.

Direct-marketing messages generally include a call to action, encouraging the recipient to respond via a toll-free phone number or a reply card or by clicking on a link in an email promotion. Companies are able to measure the effectiveness of their direct-marketing campaigns by tracking responses. Direct marketing is more effective when companies use targeted lists of prospects developed using available marketing data that can segment them into identifiable groups that are likely to have an interest in a product or service.

Unlike most marketing campaigns, direct marketing campaigns do not rely on advertising in mass media. Instead, they deliver their sales pitches by mail, by phone, or by email. Although the number of pitches sent can be massive, an attempt is often made to personalize the message, by inserting the recipient’s name or city in a prominent place.

The call to action is a common factor in much of direct marketing. The recipient of the message is urged to immediately respond by calling a toll-free phone number, sending in a reply card, or clicking on a link in an email promotion. Any response is a positive indicator of a prospective purchaser. This variety of direct marketing is often called direct response marketing.

Over the years direct marketing has developed a bad reputation for cluttering up people’s mail boxes with junk mail or generating spam in email inboxes. Many companies engage in opt-in or permission marketing, which limits their mailing or emailing to only those willing to receive it. Companies select communication channels they consider most effective for a particular market. For instance, a new gym may find more success distributing flyers, while a new grocery store prefers to mail promotional coupons to the residents of nearby neighborhoods.

Targeting in Direct Marketing

The most effective direct marketing campaigns use lists of targeted prospects in order to send their messages only to the likeliest prospects. The lists might target families who have recently had a baby, or new homeowners, or recent retirees with products or services that they are most likely to need.

Catalogs are a form of direct marketing with a history that dates back to the latter half of the 19th century. In modern times, catalogs are usually sent only to consumers who have indicated an interest in a previous purchase of a similar product.

The Advantages and Disadvantages of Direct Marketing

A direct marketing pitch that is delivered to the widest possible audience is probably the least effective. That is, the company may gain a few customers while merely annoying all of the other recipients. Junk mail, spam email, and texting all are forms of direct marketing that many people can’t get rid of fast enough.

Many companies engage in opt-in or permission marketing, which limits their mailing or emailing to people who have indicated a willingness to receive it. Lists of opt-in subscribers are particularly valuable as they indicate a real interest in the products or services being advertised.

Who Uses Direct Marketing

Despite its drawbacks, direct marketing has its appeal, particularly to companies on a shoestring budget who can’t afford to pay for television or internet advertising campaigns.

Direct marketing is the preferred advertising strategy for small local businesses, which can distribute hundreds of flyers, coupons, or menus for less than it would cost them to place an ad or make a commercial.

By its nature, the effectiveness of a direct marketing campaign is easier to measure than other types of advertising. This is because they often contain a call to action. The company an measure its success by how many consumers make the call, return the card, use the coupon, or click on the link.

• Direct marketing relies on distribution to individual consumers rather than advertising in mass media.
• The call to action is a common factor in much of direct marketing.
• The effectiveness of direct marketing is easier to measure than media advertising.

Advertising is one of the widely used techniques of promotion, wherein modes like television, radio, newspapers, internet, etc. are used for creating demand or interest of the customers towards the product or services offered by the company. On the other hand, personal selling is the verbal communication of the message, to one or more customers, so as to create sales.

Both advertising and personal selling are two major elements of promotion mix, which is employed by the organization to reach communication objectives. Advertising differs from personal selling, in the fact that the former is a monolog activity, but the latter is dialogue.

Advertising

Advertising can be defined as the act of drawing the attention of the target audience, towards a product or service. It is an impersonal, paid message, delivered to the general public with the sole aim of creating demand for the product and thus increasing sales. It has a great role to play in marketing, to make people aware of the product.

The sponsors of the advertisement, have full control over it. The advertising message is aired through various channels like radio, television, magazines, newspapers, posters, billboards, websites, blogs, apps, text messages, social networks, e-mail, etc.

Advertising aims at creating such an image in the minds of the audience, that they are instigated to purchase that product. The greatest advantage of advertising is its range, i.e. it reaches a large number of people in one go.

Personal Selling

Personal Selling, as the name signifies, is a promotional tool, where companies use sales force, to increase sales of product and services.

Under personal selling, there is a face to face meeting between the clients or customers and the sales representative, wherein the representatives visit customers personally, so as to transact a sale, by offering and inducing them to make a purchase. Personal Selling involves developing a strong relationship with customers, discovering their needs and providing them such products, which satisfy their needs.

The process requires huge workforce to cover the entire market. Moreover, proper training is also an important requirement of this process, to deal with different types of customers and instigating them to buy the product.

The difference between advertising and personal selling, are as follows:

1. Advertising alludes to paid form of communication, which commercializes product or service, offered by an identified sponsor, to increase sales. On the other hand, a form of promotion, wherein the sales personnel sells the product to customers, by directly visiting them, is known as personal selling.
2. While advertising is a one-way communication, wherein the message is transmitted to the customers, personal selling is a two-way communication, wherein the message is transmitted to customers, as well as feedback is provided simultaneously.
3. Advertising is a non-personal form of communication the message reaches the target audience after it is being aired. On the contrary, personal selling, as the name suggest involves salesman visit to customer’s place individually, which is a personal form of communication.
4. Advertising uses pull strategy, which draws public attention and persuades them to buy the product. As against, personal selling uses push strategy, which induces them to buy the product.
5. In advertising, the flexibility is missing, as the message is standardized and cannot be changed according to customers. In contrast, personal selling uses customized messages.
6. Advertising uses mass media, like radio, television, hoardings, the internet, blogs, apps, newspaper, etc. On the flip side, in personal selling, salesman delivers the message, personally to the target audience.
7. Advertising conveys a message to end number of individual in less time. As against this, personal selling conveys the message to a few customers only in relatively high time.
8. There is a lack of feedback in advertising, whereas, in personal selling, feedback is always present.

There are hundreds of advertisements, that we go through almost every day, that are used for commercial or social purposes. These are messages, which reach us through various mediums, though we do not recognize them they are present.

Personal selling involves direct contact between the seller and buyer. It is one of the best technique used for business customers.