1.MANAGERIAL ECONOMICS Meaning, Scope and Objectives

The BIG Picture

ProductMarket

FirmsHouseholds

FactorMarket

Income spent

Goods demand

Inputs supplied

Income earned

Inputs demand

Factor costs

Goods supplied

Revenue

Revenue earned

Managerial and business economics

The terms mostly used interchangeably Lately, the term managerial economics has

become more popular and is displacing the other term

With modifications the principles of managerial economics can be applied to the management of non-business, non-profit organizations like schools, hospitals, government organizations

Business economics was focused primarily to business decision making

Managerial economics applies to both business and non business decision making, as well as to public and private organizations/ institutions.

Nature of managerial economics

Decision making and forward planning Business manager’s prime function is decision making

and forward 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 resources

and their possible alternative uses. Thus decision making function is one of making choices

for the most efficient use of resources or desired ends. Once a decision is made or a goal is set, forward planning

has to be made to achieve the targets in terms of production, pricing, capital, raw materials, labour etc.,

Thus decision making and forward planning go hand in hand.

Decision making and uncertainty

Uncertainty is the typical characteristic of decision making

This feature not only makes decision making and forward planning complicated

If there was no uncertainty in future, or knowledge about future was perfect, plans could be formulated without and without any need for subsequent revision.

When plan execution begins, new facts come to light requiring alterations in past decisions and plans.

Managers are thus engaged in continuous process of decision making through an uncertain future

Adjusting to uncertainty is managers main challenge.

Managerial economics and decision making

Economic theory is of considerable help to managers in fulfilling the function of ‘decision-making’ in an uncertainty frame-work.

This is because economics deals with a number of concepts and principles relating to profit, demand, cost, supply, pricing, production, competition,, business cycles, national income, etc.,

This help is enhanced when economics is aided by disciplines like accounting, statistics, and mathematics. The two together aid the process of business decision making and planning

The subject-matter of managerial economics revolves around as to how economic analysis can be used in solving business problems

Definition of managerial economics

According to McNair and Meriam, Business economics consists of the use of economic models/modes of thought to analyze business situations.

Spencer and Siegelman have defined, Managerial economics as “ the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”

Managerial economics may therefore be defined as the discipline which deals with the application of economic theory to business management.

Managerial economic is a bridge between economics and business management. It aims to offer optimum solutions to business problems.

Aspects of application

1.Reconciling traditional theoretical concepts of economics in relation to

actual business behavior and conditions. For instance, firms may not always aim at profit maximization.

2. Managerial economics attempts to reconcile accounting concepts with the economic concepts

3. Estimation of economic relationships like various types of elasticity's 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 in numerical terms and with probabilities

Continued

5. Formulating business policies on the basis of economic data and decision making processes.

Understanding significant external forces constituting the environment in which the business is operating and to which it must adjust, for example business cycles, fluctuations in national income and government policies

In short managerial economics shows how to apply economic concepts and theories to business decision making and planning with the help of real world examples and case studies. It breaths life into abstract concepts of economics.

Chief characteristics

Managerial economics is micro-economic in character

Uses broadly theory of the firm concepts

Also seeks to apply profit theory which forms part of distribution theories

Is pragmatic as it avoids difficult abstract issues of economic theory.

But involves dealing with real life complications of business world

Chief characteristics continued

Belongs to normative economics rather than positive economics. It is prescriptive rather than descriptive. It involves judgement as to what is good/bad for business. Managerial economics deals with which decision needs to be made on the basis of its merits and demerits. Economic theory does not go into judging decisions. Managerial economics tells what the aims and objectives of a firm should be. Then it tells how best these can be achieved

Managerial economics is therefore described as ‘normative micro-economics of the firm’

Macro-economics is also useful to managerial economics as it provides an intelligent understanding of the environment in which the business must operate.

Scope of managerial economics

Demand analysis and forecasting Cost analysis Production and supply analysis Pricing decisions, policies nd

practices Profit management, and Capital

management