Managerial EconomicsManagerial Economics

What is Managerial What is Managerial Economics?Economics?• Managerial economics is concerned with the Managerial economics is concerned with the

application of economic concepts and economics to application of economic concepts and economics to the problems of formulating rational decision the problems of formulating rational decision making - making - MansfieldMansfield

• Managerial economics applies the principals and Managerial economics applies the principals and methods of economics to analyze problems faced methods of economics to analyze problems faced by the management of a business, or other types by the management of a business, or other types of organizations and to help and to help find of organizations and to help and to help find solutions that advance the best interests of such solutions that advance the best interests of such organizations – organizations – Davis & ChangDavis & Chang

How did it Emerge?How did it Emerge?

Three factors led to the emergence of Managerial Three factors led to the emergence of Managerial EconomicsEconomics

• Growing complexity of business decision making due Growing complexity of business decision making due to changing market conditions and business to changing market conditions and business environmentenvironment

• Consequent upon, the increasing use of economic Consequent upon, the increasing use of economic logic, concepts, theories and tools of economic logic, concepts, theories and tools of economic analyses in the process of business decision makinganalyses in the process of business decision making

• Rapid increase in demand for professionally trained Rapid increase in demand for professionally trained managerial manpowermanagerial manpower

Why do manager need to know Why do manager need to know economics?economics?

Business decisions taken under uncertainty and risk Business decisions taken under uncertainty and risk which arises due towhich arises due to

1.1. Behavior of market forcesBehavior of market forces

2.2. Changing business environmentChanging business environment

3.3. Emergence of competitors with highly Emergence of competitors with highly competitive productscompetitive products

4.4. Government PolicyGovernment Policy

5.5. External influence on domestic on domestic External influence on domestic on domestic marketmarket

6.6. Social and political changesSocial and political changes

Phases of Decision makingPhases of Decision making

1.1. Determining and defining the objective to be Determining and defining the objective to be achievedachieved

2.2. Collections and analysis of information Collections and analysis of information regarding economic, social, political, and regarding economic, social, political, and technological environment and foreseeing the technological environment and foreseeing the necessity and occasion for decisionnecessity and occasion for decision

3.3. Inventing, developing and analyzing possible Inventing, developing and analyzing possible course of actioncourse of action

4.4. Selecting a particular course of action from Selecting a particular course of action from available alternativesavailable alternatives

Areas of decision makingAreas of decision making

• Production related issuesProduction related issues

• Sale prospects and problemsSale prospects and problems

Production related issuesProduction related issues

1.1. Available techniques of productionAvailable techniques of production

2.2. Cost of production associated with each Cost of production associated with each production techniqueproduction technique

3.3. Supply position of inputs required to produce Supply position of inputs required to produce the planned commoditythe planned commodity

4.4. Price structure of InputsPrice structure of Inputs

5.5. Cost structure of competitive productsCost structure of competitive products

6.6. Availability of foreign exchange if inputs are tp Availability of foreign exchange if inputs are tp be importedbe imported

Sale Prospects and Sale Prospects and problemsproblems1.1. General market trendsGeneral market trends

2.2. Trends in the industry to which the planned Trends in the industry to which the planned products belongproducts belong

3.3. Major existing and potential competitors and Major existing and potential competitors and their respective market sharestheir respective market shares

4.4. Prices of competing productsPrices of competing products

5.5. Pricing strategy of the prospective competitorsPricing strategy of the prospective competitors

6.6. Market structure and degree of competitionMarket structure and degree of competition

7.7. Supply position of complimentary goodsSupply position of complimentary goods