Managerial Economics

By: Malik Abrar AltafLecturer Management Dr. SM Iqbal Business School

NATURE & SCOPE

Nature of Managerial Economics

Microeconomic in Nature: Unit of Study is a Firm.

Managerial Economics largely uses that body of Economic concepts and principles which is known as ‘Theory of Firm’. Also Seeks to apply Profit Theory concepts ( Distribution Economics).

Pragmatic : avoids difficult abstract issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made.

Managerial Economics Belongs to Normative ( What Ought to be?) Economics rather than Positive ( What Is?). It is Prescriptive rather than Descriptive in Nature.Eg: Law of Demand: As Price increases, Demand goes down or Vice Versa, but this statement does not tell whether the outcome is good or bad.

Scope of Managerial Economics

Capital Management

Demand

Analysis &

Forecasting

Demand Analysis & Forecasting

Business Firm is an Economic Organism which transforms productive resources into goods that are to be sold in market.

Major Part of the Managerial Decision making depends on accurate estimates of Demand. Before Production schedules can be prepared & resources employed, a forecast of future sales is essential.

Forecast serves as a guide to management for maintaining or strengthening market position and enlarging profits.

Demand Analysis & Forecasting is essential for business planning and occupies a strategic place in managerial Economics.

Chief Topics:•Demand determinants•Demand Distinction & Demand Forecasting.

Cost Analysis

Cost Estimates are important for Management Decisions.

Necessary for More Effective Profit Planning, Cost Control, and often for sound practices.

Chief Topics:•Cost Concepts & Classification•Cost output Relationships•Economies & Diseconomies of Scale•Cost Control & Cost reduction.

Production & Supply Analysis

Narrower in Scope than Cost Analysis.

Frequently Proceeds in physical terms whils cost analysis proceeds in monetary terms.

Mainly Deals with Various aspects of Production function and their managerial Uses.

Supply Analysis deals with various aspects of supply of a commodity.

Chief Topics:•Production Function.•Isoquants •IsoCosts•Supply Schedule •Law of supply and its limitations•Elasticity of Supply and Factors influencing it.

Pricing Decisions , Policies & Practices

Price is the genesis of the revenue of the firm .

The success of a business firm largely depends on the correctness of the pricing decisions taken by it.

Chief Topics:•Price Determination in various market forms.•Pricing methods.•Differential pricing•Product-Line Pricing.•Price Forecasting.

Profit Management

The ultimate goal of very business is to make profits.

In the long run profits provide the chief measure of success.

Factors as internal and external affect the costs and revenues which in turn affect the rate of profits.

Knowledge of Future is not perfect , thus profit planning and measurement constitute the difficult area of Managerial Economics.

Chief Topics:• Nature and Measurement of Profits.• Profit , Policies and techniques of Profit Planning like Break even Analysis.

Capital Management

Most Complex and troublesome for the business manager are those relating to the firm’s Capital Investments.

Matter of Top Level Consideration.

Capital Management Implies Planning and Control of Capital Expenditure.

Chief Topics:• Cost of Capital.• Rate of Return.•Selection of Projects.