New Microsoft PowerPoint Presentation Final

7/29/2019 New Microsoft PowerPoint Presentation Final

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Managerial Economics

Douglas-Managerial economics is ..the application of economicprinciples and methodologies to the

decision-making process within thefirm or organization.

It is the application of economic

analysis to business problems; ithas its origin in theoreticalmicroeconomics.


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Managerial economics is theintegration of economic theory with

business practice for the purpose offacilitating decision making andforward planning by management.

It is the application of Micro-Economic principles, and the tools &techniques of decision sciences to

examine how an organisation/ afirm can achieve its objective mosteffectively


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Key Concepts:

Decision-Making - The primarydecision-making role of managerialeconomics is in determining the

optimal course of action wherethere are constraints imposed onthe decision

Managerial decisions are subject tolegal, moral, contractual, financial,and technological constraints


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Economic Decisions of the Firm:

What goods and services should be

produced (product decision) How should these goods and services be

produced (hiring, staffing and capital-

budgeting decision) For whom should these goods and services

be produced (market segmentation

decision) How price output should be determined

(pricing decision)


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Scarcity - A condition that existswhen resources are limited

relative to their demand. In themarket process, the extent of thisis normally reflected by the price

of the resources, goods orservices.

Resources- Also referred as inputsor factors of production - viz. Land,Labour, Capital, Entrepreneurshipusually used in economic analysis.


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Profit- A reward to entrepreneursfor taking risks, being innovative indeveloping new products, andreducing production costs etc.

Changes in profit give signal to theproducers to change the rate ofproduction.

Economic Profit- Revenue less allrelevant costs, both explicit andimplicit.


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Opportunity Cost - The amount orthe subjective value foregone inchoosing one activity over the nextbest alternative.

Circular Flow - The interaction ofindividuals and firms, in a marketeconomy, can be described as a

circular flow of money, goods andservices, and also of resourcesthrough product and factor markets.


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Functional Relationship - Total, Averageand Marginal

For any total function (e.g. totalproduct, total revenue etc.) there is anassociated marginal function andaverage function.

The key relationships among the total,average and marginal functions are:

The value of the average function atany point is the slope of a ray drawnfrom the origin to the total function.

The value of the marginal function atany point is the slope of a line drawntangent to the total function at thatpoint.


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Functional Relationship - Total,Average and Marginal

The marginal function will intersectthe average function either at aminimum or at a maximum point of

the average functionIf the marginal function is positive,the total function will be increasing.If the marginal function is negative,

the total function will be decreasingThe total function reaches maximum

or the minimum when the marginal

function equals zero


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Economic Model - Economic model consistsof functional relationship/s, condition/s, orconstraint/s on one or more equilibriumconditions

Generally, economic models are used todemonstrate an economic principle, toexplain an economic phenomenon, or to

predict the economic implications of somechange affecting one or more of thefunctional relationships

The slope of a function Y= f (X) is the

change in Y (i.e.Y) divided by thecorresponding change in X (i.e. X)

For a function Y= f (X), the derivative,written as dy/dx is the slope of the functionat a particular point on the function.


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Circular Flow of EconomicActivities

Firm: Objectives and Constraints

Nature and Scope of ManagerialEconomics


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Firms objectives

Profit maximisationValue maximisation

Sales (revenue) maximisation

with some predetermined profit

Size maximisation

Long-run survival Management utility maximisation

Satisfying


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Firms Constraints

Resource constraintsOutput quantity or/and

quality constraints

Legal constraints

Environmental constraint


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Basic Concepts :

Economic Problem - Scarcity and Choice

Opportunity Cost

Profit - Concept and Measurement Economic Profit and Accounting Profit

Functional Relationship-Total, Average and Marginal

Time Perspective

Marginal and Incremental Equi - marginal

Economic Model

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New Microsoft PowerPoint Presentation Final