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Managerial Economics
It’s a study of how people- Individual, households, firms, nation – maximize their gains from their limited resources and opportunities
It the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of `society
Economics
… made simpler
…Social Science
…studies Human behavior in relation to optimizing allocation of available resources to achieve given ends.
…science which deals with wealth.
…study of the choice-making behavior of the people.
…science of scarcity and choice.
Adam SmithFather of Modern Economics
Hence…
Limited Means
Problem of Choices
Unlimited Desires
Why do managers need to know Economics?
Role of a Manager
To meet Business Objectives of the Firm
Needs to take Judicious Decisions
Economics facilitates‘Decisions’
What kind of decisions?
• To be or not to be
• Ensuring revenue
• Production planning
• Maintaining profitability
• Pricing
• Resource allocation
• Etc..
Decisions…
What kind of Environment?
• Complex
• Continuously evolving
• Uncertain & risky
• Incomplete knowledge
So a manager needs…
Intelligence
Experience
IntuitionQualitative Analysis of
Business data
Economic Law & Economic Theories
Knowledge of Business Environment
Four Stages of Change
Stage 1 Stage 2Stage 2 Stage 4Stage 4Stage 3Stage 3
Cost Plus
Cost Management
RevenueManagement
Revenue Plus
Changing Economics•Competition•Technology•Customers
GAP
Economic Theory
Business Environment
Managerial Economics bridges the Gap
Managerial Economics Fills The GAP
• Economic Theories – Cannot be applied directly Business
decision making.– They do not offer a readymade solution to
business problems.
Economic Theories:
PROVIDE A FRAMEWORK FOR LOGICAL ECONOMIC THINKING AND ANALYSIS
Managerial Economics
It is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.
Scope of Managerial Economics
Business Decision and Economic Analysis
Objective to be achieved
Collection and analysis
Developing and analyzingpossible course of action
Selecting the course of action
Determining and Evaluating the alternative means to achieve Goals
Responsibilities of a Managerial Economist
– Profit Maximization
– To make successful forecast
– Minimising the risk involved in uncertainties
– Reassurance to the management about the trends
– Establish and maintain contacts with data sources
– Successful decision making and forward planning
Launching a New Product
New Product
Operational /Internal Issues
Environment / External Issues
Operational Issues
• Choice of Business• What to produce• Size of the Firm• Techniques of Production (Factor Combination)• Price structure of Inputs• Cost of Production• Supply position of Inputs (Raw Material)• How to promote Sales• Cost structure of Competitive Products• How to manage profit and Capital• How to manage Inventory
……………….Microeconomics
Environment / External Issues
• The type of economic system• The general trend in production, employment, income,
prices ..• Structure and trends of Financial Institutions• Trends in Foreign Trade• Trend in labour and capital market• Government economic policies• Social Organization and Social environment• Political environment• Influence of MNC’S on Domestic Markets
………………………Macroeconomics
Microeconomics applied toOperational Issues
• It studies the working of markets for particular goods & services, and the interdependencies among them..
• It includes all those problems which fall within the purview and control of the management.
• Theory of Demand• Theory of Production• Market Structure and Pricing Theory• Profit Analysis and Profit Management• Theory of Capital and Investment decisions
Macroeconomics applied to Business Environment
• Macroeconomics is the study of the entire Economy in terms of the
• Theory of National Income• Economic Growth• International Trade• Demand and Supply of Money• Monetary and Fiscal Policy• Inflation and the general behaviour of Prices.• Globalisation
The Three Basic Economic Questions ????
From the standpoint of a Country
From the standpoint of a Company
1. What goods and services should be produced.
2. How should these goods
and services be produced.
3. For whom should these
goods and services be
produced.
1. The Product decision
2. The hiring, staffing, procurement
and capital budgeting decisions.
3. The market segmentation
Macroeconomics Microeconomics
Chakravyuh
Central Problem of an Economy
• What to produce
• How to produce
• For whom to produce
• What provision (if any) be made for Economic Growth
What provision should be made for Economic Growth?
• Individual and society would not like to use all its resources for current consumption.
• Resources should be used for producing Capital goods for increasing the standard of living.
• Capital accumulation and Technological progress needs to be achieved by sacrificing current consumptions.
Production Possibility Curve
• Resources of all kinds are scarce.
• We do not have enough resources to produce all of the goods and services.
• It means, we need to "allocate" resources.
• So that the resources are used for the rewarding kinds of production --that is, we would like to allocate resources "efficiently."
Choice and Opportunity Cost
It’s a trade-off.
Whenever we increase the output of one we must decrease the output of other.
The “Opportunity Cost“ of anything is the value of the next best alternative that is given up for it.
Cost of any good or service as the value of all the other goods or services that we must give up in order to produce it.
Production Possibility Curve
At any given time, a country cannot produce more Machines without producing less of Food.
This relationship is called the “Production Possibility Frontier."
R
S
Economic Growth
Food
Machinery
P
P P’
P’
Capital Formation and Economic Growth
• Rate of Economic Growth • Capital Accumulation• Technological Progress
Consumer Goods
K1
K2
OC2 C1
Capital Goods Growth Rate