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Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Nature Of The Firm A firm is an association of individuals who have organized themselves for the purpose of turning inputs into output. The firm organizes the factors of production to produce goods and services to fulfill the needs of the households. Each firm lays down its own objectives which is fundamental to the existence of a firm. The major objectives of the firm are: Ֆ To achieve the Organizational Goal

  • To maximize the Output
  • To maximize the Sales
  • To maximize the Profit of the Organization
  • To maximize the Customer and Stakeholders Satisfaction
  • To maximize Shareholder’s Return on Investment
  • To maximize the Growth of the Organization

Firms are established to earn profit, to keep the shareholders happy. To increase their market share, they try to maximize their sales. In the present business world firms try to produce goods and services without harming the environment. Firms are not always able to operate at a profit. They may be facing the operating loss also. Economists believe that firms maximize their long run rather than their short run profit. So managers have to make enough profit to satisfy the demands of their shareholders and to maximize their wealth through the company

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Demand: Demand means the ability and willingness to buy a specific quantity of a commodity at the prevailing price in a given period of time. Therefore, demand for a commodity implies the desire to acquire it, willingness and the ability to pay for it.

Law of demand: The quantity of a commodity demanded in a given time period increases as its price falls, ceteris paribus. (I.e. other things remaining constant)

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Demand Curve: A curve indicating the total quantity of a product that all consumers are willing and able to purchase at the prevailing price level, holding the prices of related goods, income and other variables as constant. A demand curve is a graphical representation of a demand schedule. The price is quoted in the ‘Y’ axis and the quantity demanded over time at different price levels is quoted in ‘X’ axis. Each point on the curve refers to a specific quantity that will be demanded at a given price. If for example the price of a 200 ml coke is Rs. 10, this curve tells us that the consumer (the students in a class of 50) would purchase 20 units. When the price rises to Rs. 50 there was only one student would buy it. The demand curve, (DD) is downward sloping curve from left to right showing that as price falls, quantity demanded rises. This inverse relationship between price and quantity is called as the law of demand.

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Demand function is a function that describe how much of a commodity will be purchased at the prevailing prices of that commodity and related commodities, alternative income levels, and alternative values of other variables affecting demand.

Price is not the only factor which determines the level of demand for a good. Other important factor is income. The rise in income will lead to an increase in demand for a normal commodity. A few goods are named as inferior goods for which the demand will fall, when income rises. Another important factor which influences the demand for a good is the price of other goods. Other factors which affect the demand for a good apart from the above mentioned factors are:

  • Changes in Population
  • Changes in Fashion
  • Changes in Taste
  • Changes in Advertising

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Determinants Of Demand:

There are various factors affecting the demand for a commodity. They are:

1.Price of the good: The price of a commodity is an important determinant of demand. Price and demand are inversely related. Higher the price less is the demand and vice versa.

2.Price of related goods: The price of related goods like substitutes and complementary goods also affect the demand. In the case of substitutes, rise in price of one commodity lead to increase in demand for its substitute.In the case of complementary goods, fall in the price of one commodity lead to rise in demand for both the goods.

3.Consumer’s Income: This is directly related to demand. A change in the income of the consumer significantly influences his demand for most commodities. If the disposable income increases, demand will be more.

4.Taste, preference, fashions and habits: These are very effective factors affecting demand for a commodity. When there is a change in taste, habits or preferences of the consumer, his demand will change. Fashions and customs in society determine many of our demands.

5.Population: If the size of the population is more, demand for goods will be more . The market demand for a commodity substantially changes when there is change in the total population.

6.Money Circulation: More the money in circulation, higher the demand and vice versa.

7.Value of money: The value of money determines the demand for a commodity in the market. When there is a rise or fall in the value of money there may be changes in the relative prices of different goods and their demand.

8.Weather Condition: Weather is also an important factor that determines the demand for certain goods.

9.Advertisement and Salesmanship: If the advertisement is very attractive for a commodity, demand will be more. Similarly if the salesmanship and publicity is effective then the demand for the commodity will be more.

10.Consumer’s future price expectation: If the consumers expect that there will be a rise in prices in future, he may buy more at the present price and so his demand increases.

11.Government policy (taxation): High taxes will increase the price and reduce demand, while low taxes will reduce the price and extend the demand.

12.Credit facilities: Depending on the availability of credit facilities the demand for commodities will change. More the facilities higher the demand.

13.Multiplicity of uses of goods: if the commodity has multiple uses then the demand will be more than if the commodity is used for a single purpose.

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Demand Distinctions: Types Of Demand

Demand may be defined as the quantity of goods or services desired by an individual, backed by the ability and willingness to pay.

Types Of Demand:

1.Direct and indirect demand: (or) Producers’ goods and consumers’ goods: demand for goods that are directly used for consumption by the ultimate consumer is known as direct demand (example: Demand for T shirts). On the other hand demand for goods that are used by producers for producing goods and services. (example: Demand for cotton by a textile mill)

2.Derived demand and autonomous demand: when a produce derives its usage from the use of some primary product it is known as derived demand. (example: demand for tyres derived from demand for car) Autonomous demand is the demand for a product that can be independently used. (example: demand for a washing machine)

3.Durable and non durable goods demand: durable goods are those that can be used more than once, over a period of time (example: Microwave oven) Non durable goods can be used only once (example: Band-aid)

4.Firm and industry demand: firm demand is the demand for the product of a particular firm. (example: Dove soap) The demand for the product of a particular industry is industry demand (example: demand for steel in India )

5.Total market and market segment demand: a particular segment of the markets demand is called as segment demand (example: demand for laptops by engineering students) the sum total of the demand for laptops by various segments in India is the total market demand. (example: demand for laptops in India)

6.Short run and long run demand: short run demand refers to demand with its immediate reaction to price changes and income fluctuations. Long run demand is that which will ultimately exist as a result of the changes in pricing, promotion or product improvement after market adjustment with sufficient time.

7.Joint demand and Composite demand: when two goods are demanded in conjunction with one another at the same time to satisfy a single want, it is called as joint or complementary demand. (example: demand for petrol and two wheelers) A composite demand is one in which a good is wanted for several different uses. ( example: demand for iron rods for various purposes)

8.Price demand, income demand and cross demand: demand for commodities by the consumers at alternative prices are called as price demand. Quantity demanded by the consumers at alternative levels of income is income demand. Cross demand refers to the quantity demanded of commodity ‘X’ at a price of a related commodity ‘Y’ which may be a substitute or complementary to X.

Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Recommended Mcom Notes

M. Com. (Part-I)

M. Com. (Part-II)

Demand and supply of factors of production for Managerial Economics Mcom Delhi University

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