Managerial economics scope @ ppt mba 2009

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Managerial economics scope @ ppt mba 2009

Transcript of Managerial economics scope @ ppt mba 2009

  • 1. 1.MANAGERIAL ECONOMICS Meaning, Scope and Objectives

2. The BIG PictureIncome spentRevenue earnedProduct Re Goods demand MarketvGoods suppliedenHouseholdsuFirmse Inputs suppliedInputs demand Factor Income earned Market Factor costs 3. Managerial and businesseconomics The terms mostly used interchangeably Lately, the term managerial economics hasbecome more popular and is displacing the otherterm With modifications the principles of managerialeconomics can be applied to the management ofnon-business, non-profit organizations like schools,hospitals, government organizations Business economics was focused primarily tobusiness decision making Managerial economics applies to both businessand non business decision making, as well as topublic and private organizations/ institutions. 4. Nature of managerial economics Decision making and forward planning Business managers prime function is decision making andforward planning It implies selecting one of the many alternative decisions. Forward planning means establishing plans or future The question of choice arises due to scarcity of resourcesand their possible alternative uses. Thus decision making function is one of making choices forthe most efficient use of resources or desired ends. Once a decision is made or a goal is set, forward planninghas to be made to achieve the targets in terms ofproduction, pricing, capital, raw materials, labour etc., Thus decision making and forward planning go hand in hand. 5. Decision making and uncertainty Uncertainty is the typical characteristic of decision making This feature not only makes decision making and forwardplanning complicated If there was no uncertainty in future, or knowledge aboutfuture was perfect, plans could be formulated without andwithout any need for subsequent revision. When plan execution begins, new facts come to lightrequiring alterations in past decisions and plans. Managers are thus engaged in continuous process ofdecision making through an uncertain future Adjusting to uncertainty is managers main challenge. 6. Managerial economics anddecision making Economic theory is of considerable help to managers infulfilling the function of decision-making in an uncertaintyframe-work. This is because economics deals with a number of conceptsand principles relating to profit, demand, cost, supply,pricing, production, competition,, business cycles, nationalincome, etc., This help is enhanced when economics is aided by disciplineslike accounting, statistics, and mathematics. The twotogether aid the process of business decision making andplanning The subject-matter of managerial economics revolves aroundas to how economic analysis can be used in solving businessproblems 7. Definition of managerial economics According to McNair and Meriam, Business economicsconsists of the use of economic models/modes of thought toanalyze business situations. Spencer and Siegelman have defined, Managerial economicsas the integration of economic theory with businesspractice for the purpose of facilitating decision-making andforward planning by management Managerial economics may therefore be defined as thediscipline which deals with the application of economictheory to business management. Managerial economic is a bridge between economics andbusiness management. It aims to offer optimum solutions tobusiness problems. 8. Aspects of application1.Reconciling traditional theoretical concepts of economics inrelation toactual business behavior and conditions. For instance, firms maynot always aim at profit maximization.2. Managerial economics attempts to reconcile accountingconcepts with the economic concepts3. Estimation of economic relationships like various types ofelasticitys of demand and supply, cost output relationships,etc. These relationships are used for forecasting purposes.,4. Predicting relevant economic quantities, for example, profit,demand, production, costs, pricing, capital etc. both innumerical terms and with probabilities 9. Continued5. Formulating business policies on the basis ofeconomic data and decision making processes.Understanding significant external forces constitutingthe environment in which the business is operatingand to which it must adjust, for example businesscycles, fluctuations in national income andgovernment policiesIn short managerial economics shows how to applyeconomic concepts and theories to businessdecision making and planning with the help of realworld examples and case studies. It breaths lifeinto abstract concepts of economics. 10. Chief characteristics Managerial economics is micro-economic incharacter Uses broadly theory of the firm concepts Also seeks to apply profit theory whichforms part of distribution theories Is pragmatic as it avoids difficult abstractissues of economic theory. But involves dealing with real lifecomplications of business world 11. Chief characteristics continued Belongs to normative economics rather than positiveeconomics. It is prescriptive rather than descriptive. Itinvolves judgement as to what is good/bad for business.Managerial economics deals with which decision needs to bemade on the basis of its merits and demerits. Economictheory does not go into judging decisions. Managerialeconomics tells what the aims and objectives of a firmshould be. Then it tells how best these can be achieved Managerial economics is therefore described as normativemicro-economics of the firm Macro-economics is also useful to managerial economics as itprovides an intelligent understanding of the environment inwhich the business must operate. 12. Scope of managerialeconomics Demand analysis and forecasting Cost analysis Production and supply analysis Pricing decisions, policies nd practices Profit management, and Capitalmanagement