Outline

What is managerial economics and why should

you study it?

Examples of managerial decisions

Six steps to decision making

How does managerial economics helps in

decision making?

?

Managerial economics

is the application of

economic theory to

management decision

making

What is managerial economics?

Economics ManagementManagerial

economics

Why Managerial Economics ?

Managerial economics is the study of how managers can apply

economic principles and analyses as well as quantitative tools in

making an effective business and managerial decisions

involving the best use (allocation) of the organizations scarce

resources to achieve their objectives.

Examples of Managerial Decisions

• How to use economic theory to set prices that maximize profits.

• How to use economic theory to choose the cost-minimizing production technique for a given scale of output.

• How to use economic theory to select the “optimal” location for a new restaurant, grocery store, etc.

• How to use economic theory to forecast near-term demand for goods and services.

ROLE OF MANAGERIAL ECONOMICS IN

MANAGERIAL DECISION MAKING

Managerial economics uses economic concepts and decision

science techniques to solve managerial problems.

Management Decision Problems

Managerial Economics

Optimal Solutions to Managerial

Decision Problems

Economic Concepts Decision Sciences

• Framework for Decisions

• Theory of Consumer Behaviour

• Theory of the Firm

• Theory of Market Structure and Pricing

Economic Concepts

Management Decision Problems

Product Price and Output

• Make or Buy

• Production Technique

• Internet Strategy

• Advertising Media and Intensity

• Investment and Financing

Decision Sciences

Tools and Techniques of Analysis

• Numerical Analysis

• Statistical Analysis

• Forecasting

• Game Theory

• Optimization

Managerial Economics

Use of Economic Concepts and Decision Science Methodology to

Solve Managerial Decision Problems

Six Steps to Decision Making

1. Defining the Problem

2. Determining the

Objective

3. Exploring the

Alternatives

4. Predicting the

consequences

5. Making a choice

6. Performing

sensitivity analysis

Defining the problem

“I have a flat tire.”

Defining the objective

The spare won’t last long I

gotta get this tire replaced!

Exploring the alternatives

• Go to Sears

• Go to Wal-Mart

Predicting the consequences

• Wal-Mart is closer and cheaper.

• Sears is a costlier and poor in facilities.

Making a choice

I’m going to Wal-Mart

Sensitivity Analysis:

Why is it Useful?

Sensitivity analysis provides an insight into the key features of a problem that affect a decision—

•e.g., the decision to continue a product line depends of profit forecasts, which in turn are based on assumptions about future sales, prices, or costs. What happens to our forecast when we modify the assumptions?

•It allows us to trace the effects of changes about which the manager may be uncertain.

•It can give solutions to decisions which are recurring, but must be made under slightly different conditions.

How does managerial economics

helps in decision making?

Following are the steps helps to managers while taking

decisions..

1.Establish objectives.

2.Define the problem.

3.Identify factors that affect the problem.

4.Specify alternative solutions.

5.collect data and other information's.

6.Evaluate and screen alternatives.

7.Implement best alternative and monitor result.

1. “Kolaveri D”• Tamil Actor Dhanush recorded a

song for the film 3, in which he also

plays the lead role - only to discover

soon after that a disgruntled

employee in his office had leaked it

on YouTube.

• "Then someone suggested making

a video of the song and releasing

that as well on YouTube as the

official version,“.

• As if by magic, the song became a

rage, effortlessly transcending

language barriers - the first Tamil

song, albeit with a smattering of

English, to do so.

2. VOLVOCHANGE STRATEGY

Volvo brought in its inter-city bus when it

saw the market was not ready for a city bus

SELL THE CONCEPT, NOT JUST THE

PRODUCT

Volvo engaged with all stakeholders - from

operators to passengers to drivers - to sell its

buses

USE MACRO CHANGES TO YOUR

ADVANTAGE

When Volvo saw that increasing congestion

and growing environmental awareness were

making public transport attractive, it brought

back the city bus

CHANGE THE GAME

When the competition started to close in on

Volvo, it introduced products that would

increase the number of passengers

3. GODREJ APPLIANCES

THE PROBLEM

Despite the strong brand name,

people were turning away from the

company's products.

THE CHALLENGE

The market had turned competitive

and Godrej could not connect with

young buyers.

THE WAY OUT

Introduce better technology, more

products, re-brand products to

appeal to the youth.

THE SUCCESS

Success Acquired a youthful tech

image, recaptured significant market

share in refrigerators.