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