ME- Introduction Module 1

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    Module 1

    Introduction to ManagerialEconomics

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    Learning Objectives

    After completing this chapter, the student should be able to:

    Understand the nature and use of managerial economics as an

    applied science.

    Trace the role and responsibilities of a managerial economist.

    Explain the differences between normative and positive aspects

    of managerial economics.

    Be familiar with the scientific process of decision making.

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    Economics Early Definitions

    An enquiry into the Nature and Causes of

    Wealth of Nations Adam Smith

    Economics is that body of knowledge which

    relates to wealth F.A.Walker

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    Economics: Science of Scarcity

    or Science of Choice

    Economics is the science which studies economic

    behavior as a relationship between ends and scarce

    means which have alternative uses Robbins

    Economics behavior is essentially the process of

    evaluating economic opportunities open to an individual

    or a society and given resources, making choice of thebest of the opportunities.

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    Major Economic Problems

    What to produce?

    For whom to produce?

    Are the resources economically used?

    Maximum utilization of resources and men.

    Problem of growth

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    Definition of Managerial

    Economics

    ME is the use of economic modes of thought

    to analyze business situation. McNair and

    Meriam

    ME .. Is the integration of economic theory with

    business practice for the purpose of facilitating

    decision-making and forward planning by

    management. Spencer and Siegelmam

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    Managerial Economics Defined

    The application of economic theory and

    the tools of decision science to examine

    how an organization can achieve its aims

    or objectives most efficiently.

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    Nature of Managerial Economics

    Micro Economics

    Macro Economics

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    Micro Economics

    The word Micro means a millionth part

    When speaking of micro-economics or the

    micro approach, it means some small

    part or component of the whole economy

    that we are analyzing.

    Example: Individual consumer behavior,Price analysis of a particular firm, study of

    demand of individual product or firm

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    DEFINITION :

    Prof. Mac cannel , micro economics is a study of

    the specific economic units and a detailed

    consideration of the behavior of these individual

    units .

    Prof.Boulding , micro economics seeks to

    explain the working of individuals, firms

    ,households ,individual prices ,wages ,particular

    industries .

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    Subject-matter :

    It deals with determination of product prices and

    factor of prices . In short , it is concerned with the determination

    of prices like theory of production ,theory of rent,

    wages.Interest,profit & economic welfare .

    It also known as PRICE THEORY .

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    Merits :

    A worms eye view of a small specific unit.

    Formulating economic policies and scarce

    resources of the country.

    Achieve maximum output with minimum

    costs. It is helpful for macro economic studies.

    It does not give the correct pictures of the

    working of the economy .

    It does not provide solution to certain

    economic problems .

    The area of study covered by it is limited .

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    Macro-Economics or the Theory of

    Income and Employment

    Macro Economics is the analysis of

    economic system as a whole.

    Example Aggregate output and aggregate

    expenditure

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    DEFINITION :

    Prof. Boulding , Marco economics deals not only with

    individual quantities but with the aggregates of these

    quantities , not with the individual incomes , but with

    national income , not with individual prices , but with

    prices level , not with individual outputs but with thenational output .

    .

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    Subject Matter :

    It deals with total consumption, total savings ,

    total investment , total output, total or national

    income, inflation & deflation economic growth,etc.

    In other words it is concerned with the analysis

    of income & employment in the economy as a

    whole .

    Theory of income & employment .

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    Merits :

    A birds eye-view of the entire economy .

    Macro economic is more useful in solution to economyproblems.

    It is quite helpful in formulation of GOVT. Economic

    policies.

    Study of macro economic is useful to micro economicstudies.

    Limitations :

    The study of individual units becomes more useful

    than study of aggregates.

    It is useful for for develop countries for solving their

    problems but less useful or undeveloped country.

    It studies the economy in general or in detail .

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    Positive vs Normative approach

    Positive approach concerns with what is,

    was or will be. This studies the

    phenomena as they actually are or as

    they actually happen.

    Example: as per the ministry of textiles figures, of the

    Rs.13billion western style Indian apparel market

    urban as well rural ready to wear segment was just

    Rs.2.5 billion, while tailors enjoyed a whopping 80%

    share worth Rs.10.5billion.

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    A normative or regulatory science is a

    body of systematized knowledge relatingto criteria of what ought to be and is

    concerned therefore with ideal as

    distinguished from actual. This involves

    value judgements on whether what

    happens is good or bad, desirable or

    undesirable.

    The retail sector has a huge scope to

    increase with special reference to ready to

    wear apparel industry to grow.

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    Characteristics of ME

    ME is micro-economic in character

    Takes the help of macro-economics

    It is prescriptive rather than descriptive

    It is both conceptual and metrical

    Used in decision making

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    The Nature of Managerial Economics

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    Managerial Insight

    Managers have to acquire the insight of both

    micro-economics and macroeconomics as theformer analyses the behaviour of individualeconomic entities such as consumer and producers, while the later exposes issues

    pertaining to their behaviour in the economy as awhole.

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    Role of ManagerialE

    conomics in Decision-making

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    The Business Decision

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    Functions: Role and Responsibilities of a

    ManagerialEconomist

    A managerial economist in a business firm may carry on a wide range ofduties, such as:

    Demand estimation and forecasting.

    Preparation of business/sales forecasts.

    Analysis of the market survey to determine the nature and extentof competition.

    Analysing the issues and problems of the concerned industry. Assisting the business planning process of the firm.

    Discovering new and possible fields of business endeavour andits cost-benefit analysis as well as feasibility studies.

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    Advising on pricing, investment and capitalbudgeting policies.

    Evaluation of capital budgets.

    Building micro and macro economic models

    Directing economic research activity.

    Briefing the management on current domestic and

    global economic issues and emerging challenges. Interpretation, analysis and reporting of current

    economic matters, upcoming developments inbusiness, government and foreign or global sectors.

    Contd.

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    Scope of Managerial Economics

    Following are the core topics of managerial economics: Demand Function and Estimation Demand Elasticity Demand Forecasting Production Function and Laws Cost Analysis

    Pricing and Output Determination in different market structuressuch as perfect competition, monopoly, oligopoly andmonopolistic competition

    Pricing Policies and Practices in Real Business Profit Planning and Management Project-Planning and Management

    Project-Planning Capital Budgeting and Management Break-even Analysis Linear Programming Game Theory Government and Business.

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    Application Areas of Managerial Economics in Business

    Decision-making

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    Managerial economists tend to rely on the scientific researchmethod in building and empirically testing business orientedeconomic models. This scientific approach consists of thefollowing steps:

    Defining the problem Formulation of the hypothesis Abstraction for the model building Data collection

    Testing the hypothesis Deduction based on data analysis Evaluating the test results Conclusion for decisions

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    Chart 1.1

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    Salient features & significance

    of M.E

    It involves an application of economic theory- especially

    microeconomic analysis practical problem solving in real

    business life. It is essentially applied microeconomics.

    It is science as well as art facilitating better managerial

    discipline. It explores & enhance economic mindfulness and

    awareness of business problems and managerial decision.

    It is concerned with firms behavior in optimal allocation ofresources. It provides tools to help in identifying the best

    course among the alternatives & competing activities in any

    productive sector whether private or public.

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    Role & responsibilities of a

    Managerial Economist

    A managerial economist in a business firm may carry on a

    wide range of duties, such as:

    Demand estimation and forecasting.

    Preparation of business/sales forecast. To provide forecasts

    of changes in costs and business conditions based on market

    research and policy analysis.

    Analysis of the market survey to determine the nature and

    extent of competition.

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    Contd

    Analyzing the issues and problems of the concerned

    industry.

    Assisting the business planning process of the firm.

    Discovering new and possible fields of business

    Endeavour and its cost-benefit analysis as well as

    feasibility studies

    Advising on pricing, investment and capital budgeting

    policies

    Evaluation of capital budgets

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    Contd

    Building micro and macro economic models of

    particular aspects of the firms activities that are

    useful in solving specific business problems. Most

    models may be prediction oriented.

    Directing economic research activity.

    Briefing the management on current domestic and

    global economic issues and emerging challenges

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    Mangerial economic analysis

    Reasoning for economic events and behavior of

    business and economic entities

    Tracing the cause effect relationships among

    business economic variables and predicting

    economic behavior.

    Building economic models and testing them

    empirically for making sound inferences towards

    decision making based on theoretical framework.

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    Steps for managerial

    economic analysis

    Defining the problem

    Formulation of hypothesis Abstraction for the model building

    Data collection

    Deduction based on data analysis

    Testing the hypothesis

    Evaluating the test results

    Conclusion for decision


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