Module I- ME

8/14/2019 Module I- ME

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Introduction to Managerial

Econo0mics


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Economics is the social science that studies theproduction, distribution, and consumption of goods

and services.

Managerial economics (sometimesreferred to as business economics), is a branch of

economics that applies microeconomic analysis to

decision methods of businesses or other

management units.


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scarcity

Unlimited choice Limited resources

What to produce? How to produce? For whom to produce?


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1. Resources are always scarce.2. They are not only scarce, but also have

alternative uses.3. Optimum allocation is required

Allocation problems are faced by individuals,Organizations (Both profit making and non-

profit making) and Nations also.


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Managerial Economics is economics applied in decision making.It is a special branch of economics bridging the gap between

abstract theory and managerial practice

Willian WarrenHaynes, V.L. Mote, Samuel Paul

Integration of economic theory with business practice for thepurpose of facilitating decision-making and forward planning -Milton H. Spencer

Managerial economics is the study of the allocation of scarceresources available to a firm or other unit of management amongthe activities of that unit - Willian WarrenHaynes, V.L. Mote, Samuel Paul

Price theory in the service of business executives is known asManagerial economics -Donald Stevenson Watson


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Introduction to Managerial Economics

BUSINESS ADMINISTRATION

DECISION PROBLEMS

MANAGERIAL ECONOMICS :

INTEGRATION OF ECONOMIC

THEORY AND

METHODOLOGY WITH TOOLS

AND TECHNICS BORROWEDFROM OTHER DECIPLINES

OPTIMAL SOLUTIONS TO

BUSINESS PROBLEMS

TRADITIONAL ECONOMICS :

THEORY AND METHODOLOGY

DECISION SCIENCES :

TOOLS AND TECHNICS


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Decision Making Managerial Economics is a science applied to decision making. It

bridges the gap between abstract theory and managerial practice. Managerial Economics is supposed to enrich the conceptual and

technical skill of a manager. The primary function of a manager in business organization is

decision making and forward planning under certain businessconditions.Some of the important managerial decisions: Production decision,

inventory decision, cost decision, marketing decision, financialdecision, personnel decision, and miscellaneous decisions.

One of the hallmarks of a good executive is the ability to take quick

decision, he must have the clarity of goals, use all the informationhe can get, weigh pros and cons and make fast decisions.


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Why Decisions are taken? The decisions are taken to achieve certain objectives.

Quantitative techniques are also used in decision making,but it is important to remember other variables such ashuman and behavioral considerations, technological forces

and environmental factors influence the choices anddecisions made by mangers.

Steps in Decision Making Set objectives Define the problem

Find possible alternative solutions Select the best solution And proceed with that choice


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Managerial Economics is a developing subject.

The scope of managerial economics refers to its area ofstudy. Its scope does not extend to macro-economictheory and the economic of public policy.

Positive versus Normative

Managerial Economic is fundamentally normative andperspective in nature.


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Scope of Managerial Economics (contd.)

Microeconomics Applied to Operational Issues:

Operational issues of firms are of internal nature. Internal issuesinclude all those problems which arise within the businessorganization and fall within the control of the management.Some of the basic internal issues are:

a) Choice of business and the nature of products, that is, what toproduce,

b) Choice of size of the firm, that is, how much to produce,

c) Choice of technology, that is, choosing the factor-combination (technique of production)

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a) Choice of price, that is, how to price thecommodity,

b) How to promote sales,

c) How to face competition,d) How to decide on new investments,

e) How to manage profit and capital,

f) How to manage an inventory, that is, stock of bothfinished goods and raw materials.


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Scope of Managerial

Economics (contd)

a) Demand Analysis and Forecasting: - An

understanding of the forces behind demand isa powerful tool for managers. Such knowledgeprovides the background needed to makepricing decisions, forecast sales and formulate

marketing strategies. A forecast of future salesis essential before employing resources.

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c) Market Structure and Pricing Theory: - Price theoryexplains how prices of outputs and inputs are determined

under different market conditions; when price discriminationis desirable, feasible and profitable; and to what extentadvertising can be helpful in expanding sales in a competitivemarket. Hence, price theory can be helpful in determining theprice policy of the firm.

d) Analysis of Cost: - Estimates of cost are essential for planningpurposes. The factors determining costs are not always known orcontrollable which gives rise to cost uncertainty. Factors of

production are scarce and they have alternative uses. Factors ofproduction may be allocated in a particular way to get maximumoutput. Thus the analysis of costs and their links to output are alsoimportance in managerial economics.

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e) Profit and Capital Management (Investment Decisions):- Profit provides the index of success of a business firm.

Profit analysis is difficult, because the uncertainty ofexpectations makes realization of profit planning andmeasurement difficult and these areas are covered in thestudy of managerial economics.Capital management means planning and control of capital

expenditures. Hence, it is very important for a firm tomanage required capital through proper investmentplanning. The main topics covered are: cost of capital, typesof investment decisions, and evaluation and selections of

investment projects.

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f) Inventory Management: - Inventory refers to a stock of raw

materials or finished goods which a firm keeps. Managementof inventory is very important for a firm to keep intact of itscurrent production and supply capacity and to meet thechallenges arising from change in market and otherconditions. In this regard, a major question that arises is: howmuch of the inventory is the ideal stock? If it is high, capital isunproductively tied up, and that might be useful for otherproductive purposes if the stock of inventory is reduced. Onthe other hand, if the level of inventory is low, production will

be hampered. Hence, managerial economics uses differentmethods which are helpful in minimizing the inventory cost.

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Macroeconomic issues relate to the general business environment in whicha business operates. The factors which constitute economic environment ofa country include the following.

a. Types of economic system in the country;b. General trends in national income, employment, prices, saving and

investment, etc;c. Trend in labour supply and strength of the capital market;

d. Governments economic policies: industrial policy, fiscal policy,monetary policy, price and foreign trade policies;

e. Social factors like value system of the society, property rights, customsand habits;

f. Socio-economic organization like trade unions, consumersassociations,

and producersunionsg. The degree of globalization of the economy and the influence on the

domestic markets.

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Uses and Significance of Managerial Economics inBusiness Decision Making

Every management system is related with decision-making. Decision-

making requires a balance between simplification of analysis ofmanagement problems and complications of handling a numbers offactors and tools to attain predetermined objectives. In this contextmanagerial economics occupies important place. The uses orsignificance of managerial economics can be outlined as:

i. Provide Tools and Techniques: It selects those economic theories,concepts, and techniques of analysis, which have a bearing on thedecision-making process. These are, if necessary, modified with a

view to enable the manager take better decisions. Thus, managerial

economics accomplished the objective of building a suitable tool kitfrom traditional economics.

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ii. Adopts Ideas from Other Subjects: Managerial economics also takes theaid of other academic disciplines having a bearing upon the business

decisions of a manager in view of the various explicit and implicitconstraints subject to which resource allocation is to be optimized.

iii.Decision Making: Managerial economics helps in reaching avariety of business decisions in a complicated environment such as

what to produce, what inputs and production techniques should beapplied, how much output should be produced and at what prices itshould be sold, what should be the product-mix, what are the bestsizes and locations of new plants, when should equipment bereplaced and how should the available capital be allocated, etc.

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Production theory explains the relationshipbetween inputs and output. It also explains under

what conditions costs increase or decrease; how

total output behaves when use of inputs ischanged; and how can output be maximized froma given quantity of resources. Thus, it helps themanagers in determining the size of the firm, and

the amount of capital and labour to be employedkeeping in view the objectives of the firm.


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iv. Managerial Competency: Managerial economics makes a managera more competent model builder. Thus s/he can capture the essential

relationship, while leaving out the cluttering details and peripheralrelationships. It means managerial economics helps in modelbuilding depicting the relationship between essential variables.

v. Serve as an Integrating Agent:When size of a firm expands its activities

are undertaken by more specializing departments or functional areaslike finance, marketing, personnel, production, etc. Managerialeconomics serves as an integrating agent by coordinating thedifferent areas. The significance of which lies in the fact that thefunctional departments often enjoy considerable autonomy and

aspire conflicting goals, and coordination of goals of different units ismust to achieve the goals of the firm as a whole.

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Statistics is important to managerial economics. Itprovides the basis for the empirical testing of theory.Statistics is important in providing the individual firmwith measures of the appropriate functional

relationship involved in decision making. Statisticssupplies many tools to managerial economics,forecasting has to be done . For this purpose, trendprojections are used. Similarly regression technique is

used.


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Module I- ME