Introduction to managerial economics
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Transcript of Introduction to managerial economics
1
MANAGERIAL ECONOMICS
By Snigdha Singh
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INTRODUCTION
Emergence of managerial economics as a separate course of
management studies can be attributed to at least three factors
a) Growing complexity of business decision making process due to
changing market conditions and business environment.
b) The increasing use of economic logic, conceptual theories and
tools of economic analysis in the process of business decision
making process.
c) Rapid increase in demand for professionally trained managerial
manpower.
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Defining Economics
Economics is a social science, which studies human behaviour in relation to optimizing allocation of available resources to achieve the given goals.
Eg : individual household behaviour, firm, industry and
nation
Economics is also a study of choice-making behaviour of
the people.
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Managerial economics can be broadly defined as the study of
economic theories, logic and tools of economic analysis
that are used in the process of decision making. Economic
theories and techniques of economic analysis are applied to
analyze business problems, evaluate business options and
opportunities with a view to arriving at an appropriate
business decision.
Managerial Economics
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Douglas : Managerial economics is concerned
with the application of economic principles and
methodologies to the decision making process
within the firm or organization. It seeks to
establish rules and principles to facilitate the
attainment of the desired economic goals of the
management.
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Characteristics
Micro Economics Economics of Firms Uses Macro-economics Analysis Managerial Economics is Pragmatic Managerial Economics is Normative Bridge between traditional economics
and Business Management
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Nature
Arts or science?
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Scope
Demand Analysis Cost Analysis Pricing Practices and Policies Profit Management Capital Management Analysis of Business Environment Allied Disciplines
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Difference b/w Managerial and Traditional Economics
Traditional Managerial
It has Micro & Macro aspects Micro aspect
It is both positive and normative science
Normative in nature
It deals with theoretical aspect Practical Aspect
It studies human Behavior on certain assumptions
No assumptions
We study Economic aspects of the problem
Both economic and non-economic aspects
Studies principles underlying rent, wages, interest and profits
Only the principles of profit
Limited scope Wide scope
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Importance
Basis of Business Policies Predicting economic Quantities Estimating economics relationship Helpful in Understanding the External
forces constituting the environment. Reconciling theoretical concepts of
economics in relation to the actual business behavior and conditions.
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MICRO ECONOMICS
The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households.
the analysis of the decisions made by individuals and groups, the factors that affect those decisions, and how those decisions effect others
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Micro-economics applied to internal issues :
Operational issues are of internal nature. Internal issues include
all those problems which arise within the business organization
and fall within purview and control of the management .
Some of the basic internal issues are :
What to produce
How much to produce
Choice of technology i.e. choosing of the factor –combination
Choice of price i.e. how to price the commodity
How to promote sales
How to face the price competition
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How to decide on new investments
How to manage capital and profit
How to manage inventory i.e. stock of both
finished goods and raw material
Most of the micro economic problems deals with
most of these questions.
The Law Demand
The Theory of Production
Analysis of Market Structure and Pricing
Theory
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Profit analysis and management
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.
Theory of Capital and Investment Decisions
Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
etc.
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MACRO ECONOMICS
Study of the entire economy in terms of the total amount of goods and services produced, total income earned, level of employment of productive resources, and general behaviour of prices.
Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.
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Macro-economics deals with external issues :
The type of economic system in the country
General trends in N.I., employment, prices, savings and
investments
Structural change in the working financial institutions viz.,
banks, insurance companies etc
Magnitude of and trends in foreign trade
Trends in labour supply and strength of capital market
Government’s economic policies i.e., industrial, monetary,
fiscal, price and foreign etc.
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Social factors viz., value system of the society,
property rights, customs and habits etc.,
Political environment i.e., democratic, authoritarian,
socialist political systems, or state attitude towards
private business man etc.
These Environmental factors have a far-reaching
bearing upon the functioning and performance of the
firms. Therefore, decision makers have to take in to
account the present and future economic, political and
social
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Conditions in the country and give due consideration
to the environmental factors in the process of decision
making.
Eg : SEZ in the Nandigram, Tata’s small car in Singur
district in West Bengal
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Responsibilities of Managerial Economist
To make reasonable profits on capital employed.
Successful forecasts Knowledge of sources of Economic
Information His status in the firm
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Fundamental Concepts
Opportunity cost Incremental Principle
Incremental Cost Incremental Revenue Business implication of Incremental Concept
Time Perspective Series of order Discrimination
Discounting Principle The Equi-marginal Principle
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Role of a managerial economist in the firm
Demand estimation and forecasting
Preparation of business /sales forecasts
Analysis of market survey to determine
the nature and extent of competition
Analyzing the issues and problems of
concerned industry
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Assisting the business planning process
of the firm
Discovering new possible fields of
business endeavor and its cost-benefit
analysis
Advising on prices, investment and
capital budgeting policies
Evaluation of capital budgeting etc.
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DECISION MAKING AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.
“Decision making and processing information are two
important tasks of managers”
In order to make good decisions managers must be able
to obtain, process and use information.
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Decision Making Areas
Demand forecast
ing
Production
planning and cost
revenue decisio
n
Study of econom
ic environ
ment
Pricing and
related decisio
ns
Investment
decisions