ME Session1

76
Copyright © Amity University 1 PAN African eNetwork Project DBM Economic Analysis Semester - I Sonia Singh

description

school

Transcript of ME Session1

Page 1: ME Session1

Copyright © Amity University1

PAN African eNetwork Project

DBM

Economic Analysis

Semester - I

Sonia Singh

Page 2: ME Session1

Copyright © Amity University

This topic deals with:

• The nature and scope of Managerial Economics as a whole.

• The place of Managerial economics in the Economics discipline.

• How do managers make their decisions?

Decision making process

Page 3: ME Session1

Copyright © Amity University

Economic Mysteries

• Why have paper towels replaced hot-air hand dryers in public restrooms?

• Why do prices of some goods, like apples, go down during months of heaviest consumption, while others like beachfront cottages, go up?

Page 4: ME Session1

Copyright © Amity University

What is Economics?

Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance need of economics arises because of –

a) Unlimited wants

b) Scarce resources with alternative uses

Page 5: ME Session1

Copyright © Amity University

Microeconomics –

The study of the decisions of people and businesses and the interaction of those decisions in markets. The goal of microeconomics is to explain the prices and quantities of individual goods and services.

Page 6: ME Session1

Copyright © Amity University

Some Managerial Decisions

• Resource allocation within the organization in the short- and long-run

• Expanding or contracting production and distribution facilities

• Developing and marketing new products

• Capital expenditures including the possible acquisition of other firms

Page 7: ME Session1

Copyright © Amity University

Macroeconomics -

• The study of the national economy and the global economy and the way that economic aggregates grow and fluctuate. The goal of macroeconomics is to explain average prices and the total employment, income, and production

Page 8: ME Session1

Copyright © Amity University

Macroeconomics vs. Microeconomics MICROECONOMIC QUESTION MACROECONOMIC QUESTION

Go to business school or take a job? How many people are employed in the economy as a whole?

What determines the salary offered by Citibank to, a new Columbia MBA?

What determines the overall salary levels paid to workers in a given year?

What determines the cost to a university or college of offering a new course?

What determines the overall level of prices in the economy as a whole?

What government policies should be adopted to make it easier for low-income students to attend college?

What government policies should be adopted to promote full employment and growth in the economy as a whole?

What determines whether Citibank opens a new office in Shanghai?

What determines the overall trade in goods, services and financial assets between the U.S. and the rest of the world?

Page 9: ME Session1

Copyright © Amity University

Page 10: ME Session1

Copyright © Amity University

Economic Theory

• Microeconomics– Study of the economic behavior of individual

decision-making units.– Relevance to Managerial Economics

• Macroeconomics– Study of the total or aggregate level of output,

income, employment, consumption, investment, and prices for the economy viewed as a whole.

Page 11: ME Session1

Copyright © Amity University

Economic Methodology

• Economic Models– Abstract from details– Focus on most important determinants of

economic behavior – cause and effect

• Evaluating Economic Models– A model is accepted if it predicts accurately

and if the predictions follow logically from the assumptions.

Page 12: ME Session1

Copyright © Amity University

Decision Sciences

• Mathematical Economics– Expresses and analyzes economic models

using the tools of mathematics.

• Econometrics– Employs statistical methods to estimate and

test economic models using empirical data.

Page 13: ME Session1

Copyright © Amity University

The Use of Economic Models

Positive Economics:-

Derives useful theories with testable propositions about WHAT IS.

Normative Economics:-

Provides the basis for value judgements on economic outcomes.WHAT SHOULD BE

Page 14: ME Session1

Copyright © Amity University

Market Mechanism

Page 15: ME Session1

Copyright © Amity University

Managerial Economics

• Manager– A person who directs resources to achieve a stated

goal.

• Economics– The science of making decisions in the presence of

scare resources.

• Managerial Economics– The study of how to direct scarce resources in the

way that most efficiently achieves a managerial goal.

Page 16: ME Session1

Copyright © Amity University

Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization.”

Pappas & Hirschey - “Managerial economics applies economic theory and methods to business and administrative decision-making.”

Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”

Page 17: ME Session1

Copyright © Amity University

These Definitions Cover a Number of Different Approaches

1. Analysis based on the theory of the firm

2. Analysis based upon management sciences

3. Analysis based upon industrial economics

Page 18: ME Session1

Copyright © Amity University

MANAGERIAL ECONOMICS

The application of economics’ theories and principles in managerial problems with the purpose of optimization of decision making.

Decision making involves the activities regarding production, distribution and consumption.

Page 19: ME Session1

Copyright © Amity University

The use of Economic Analysis in management is to make business decisions involving the best use (allocation) of scarce resources.

Page 20: ME Session1

Copyright © Amity University

Economic Theory helps managers to collect the relevant information and process it in order to arrive at the optimal decision.Given the goals of a firm, a decision is OPTIMAL if it brings the firm closest to its goals

Page 21: ME Session1

Copyright © Amity University

Management Decision Problems

•Product Price and Output•Production Technique•Stock Levels•Advertising Media and intensity•Labor hiring and firing•Investment and Financing

Page 22: ME Session1

Copyright © Amity University

The Process of decision-making

Identify objectivesDefine the problemIdentify possible solutionsSelect the best possible

solutionImplement the decision

Page 23: ME Session1

Copyright © Amity University

Nature of Decision

•What goods shall firm produce? •How should firm raise the necessary capital and what shall be its legal form. •What technique shall be adopted, and what shall be the scale of operations? •Where production is located? •How shall its product be distributed? •How shall resources be combined? •What shall be the size of output? •How shall it deal with its employees?

Page 24: ME Session1

Copyright © Amity University

Types of Decision

•Organizational and personal decisions •Basic and routine decisions

•Programmed and non-programmed decisions.

Page 25: ME Session1

Copyright © Amity University

Conditions Affecting Decision Making

•Certainty

•Risk

•Uncertainty

Page 26: ME Session1

Copyright © Amity University

Economic Conditions

•Market Structure•Supply and Demand conditions•State of Technology•Govt. Regulations•International Dimensions•Future Macroeconomic factors

Page 27: ME Session1

Copyright © Amity University

Decision Making Model

•The Classical Model

•The Administrative Model

Page 28: ME Session1

Copyright © Amity University

The Classical Model

•The manager has completed information about the decision situation and operations under a condition of certainty. •The problem is clearly defined, and the decision-maker has knowledge of all possible alternatives and their outcomes.

Page 29: ME Session1

Copyright © Amity University

•Through the use of quantitative techniques, rationality, and logic, the decision-maker evaluates the alternatives and selects the optimum alternative -the one that will maximize the decision situation by offering the best solution to the problem.

Page 30: ME Session1

Copyright © Amity University

The Administrative Model

•The manager has incomplete information about the decision situation and operates under a condition of risk or uncertainty. •The problem is not clearly defined, and the decision-maker has limited knowledge of possible alternatives and their outcomes. •The decision-maker satisfies by choosing the first satisfactory alternative- one that will resolve the problem situation by offering a good solution to the problem.

Page 31: ME Session1

Copyright © Amity University

Tools of Decision Making

•Marginal Analysis•Linear Programming•Game Theory•Optimization•Forecasting

Page 32: ME Session1

Copyright © Amity University

Market Interactions

• Consumer-Producer Rivalry– Consumers attempt to locate low prices, while

producers attempt to charge high prices.

• Consumer-Consumer Rivalry– Scarcity of goods reduces the negotiating power of

consumers as they compete for the right to those goods.

• Producer-Producer Rivalry– Scarcity of consumers causes producers to

compete with one another for the right to service customers.

• The Role of Government– Disciplines the market process.

Page 33: ME Session1

Copyright © Amity University

Cost-Benefit Approach to Decision Making

• C(X) = Cost of doing activity X

• B(X) = Benefit of doing activity X

• If B(X) > C(X) then do X

Page 34: ME Session1

Copyright © Amity University

Theory of the Firm

Expected Value Maximization Owner-managers maximize short-run profits. Primary goal is long-term expected value

maximization. Constraints and the Theory of the Firm

Resource constraints. Social constraints

Limitations of the Theory of the Firm Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient

managers.

Page 35: ME Session1

Copyright © Amity University

Role of Business in Society Why Firms Exist

Business is useful in satisfying consumer wants.

Business contributes to social welfare Social Responsibility of Business

Serve customers. Provide employment opportunities. Obey laws and regulations.

Page 36: ME Session1

Copyright © Amity University

The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making

Page 37: ME Session1

Copyright © Amity University

The Concept of Business and the Concept of Profit

Business

An organization that provides goods or services to earn profits

Profits

The difference between a business’s revenues and its expenses

Page 38: ME Session1

Copyright © Amity University

Economic Systems Around the World

Economic System

A nation’s system for allocating its resources among its citizens

Page 39: ME Session1

Copyright © Amity University

Factors of Production

Resources used in the production of goods and services

Resources used in the production of goods and services

Four traditional factors of production:

1. Natural Resources

2. Labor

3. Capital

4. Entrepreneurs

Newer perspectives include:

5. Physical Resources

6. Information Resources

Newer perspectives include:

5. Physical Resources

6. Information Resources

Page 40: ME Session1

Copyright © Amity University

Factors of Production

Natural Resources

Materials supplied by nature (such as land, water, mineral deposits, and trees)

Labor (or Human Resources)

Physical and mental capabilities of people as they contribute to economic production

Capital

Funds needed to create and operate a business enterprise

Page 41: ME Session1

Copyright © Amity University

Factors of Production

Entrepreneur

Person who starts a new business or makes the decisions that expand a small business

Physical Resources 

Tangible things organizations use in the conduct of their business

Information Resources

Data and other information used by a business

Page 42: ME Session1

Copyright © Amity University

Types of Economic Systems

Planned Economy

Centralized government controls all or most factors of production and makes all or most production and allocation decisions

Market Economy

Individuals control production and allocation decisions through supply and demand

Page 43: ME Session1

Copyright © Amity University

Planned Economies

Communism

Planned economic system in which the government owns and operates all major sources of production

Socialism

Planned economic system in which the government owns and operates selected major sources of production

Page 44: ME Session1

Copyright © Amity University

Market EconomiesMarket 

Mechanism for exchange between buyers and sellers of a particular good or service

Input Market 

Firms buy resources from supplier households

Output Market 

Firms supply goods and services in response to demand on the part of households

Capitalism

Market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive

Page 45: ME Session1

Copyright © Amity University

“Pure Market Economy”

1-45

OUTPUT MARKETSGoods

Services

INPUT MARKETSLabor

CapitalEntrepreneurs

Physical ResourcesInformation Resources

HOUSEHOLDS• Demand products in

output markets• Supply resources in

input markets

FIRMS• Supply products in

output markets• Demand resources

in input markets

DEMANDDEMAND

DEMANDDEMAND SUPPLYSUPPLY

SUPPLYSUPPLY

Page 46: ME Session1

Copyright © Amity University

Mixed Market Economies

Privatization

Process of converting government enterprises into privately owned companies

Socialism

Planned economic system in which the government owns and operates only selected major sources of production

Economic system featuring characteristics of both planned and market economies Economic system featuring characteristics of both planned and market economies

Page 47: ME Session1

Copyright © Amity University

Marginal Principle

• To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC

• MB > MC means the last unit of the control variable increased benefits more than it increased costs

• MB < MC means the last unit of the control variable increased costs more than it increased benefits

Page 48: ME Session1

Copyright © Amity University

Marginal AnalysisThe marginal cost of any good or

activity is its opportunity costThe opportunity cost is the next best

alternative given up when a decision is made?

What is your opportunity cost for being here today?

Is it the same for everyone in this room?

Page 49: ME Session1

Copyright © Amity University

Should you keep your business open for one additional hour?

– Scenario: You are managing a fast food hamburger restaurant.

– You currently close at 10 pm every night, but are considering extending your hours to 11 pm on weekends.

– What are the relevant considerations?

Page 50: ME Session1

Copyright © Amity University

Your monthly rent?

Other sunk costs?

The hourly wages you pay your employees?

Other variable costs associated with the extra hour?

Your weekly revenues?

Your likely revenues for the extra hour?

Page 51: ME Session1

Copyright © Amity University

Skills required for subject

• Logical and intuitive thinking

• Interpretation of graphs

• Mathematics

The main thinking tool = MODELS

Reduce complex situations to their fundamentals to develop general principles

Page 52: ME Session1

Copyright © Amity University

The Modern economy

• Economy - A mechanism that allocates scarce resources among alternative uses. This mechanism achieves five things: What, How, When, Where, Who.

• Decision makers - Households, Firms, Governments.

Page 53: ME Session1

Copyright © Amity University

The Basic Decision-Making Units

• A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

• .

Page 54: ME Session1

Copyright © Amity University

• Households are the consuming units in an economy

• Firm : A many-layered organization that sets laws and rules, operates a law-enforcement mechanism, taxes households and firms, and provides public goods and services such as national defense, public health, transportation, and education.

•  

Page 55: ME Session1

Copyright © Amity University

Other important decision makers

• An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

• Market - Any arrangement that enables buyers and sellers to get information and to do business with each other.

Page 56: ME Session1

Copyright © Amity University

The Invisible Hand

• Decentralized

• Freedom

• Self-interest

• Motivated by incentives

Page 57: ME Session1

Copyright © Amity University

ECONOMIC SYSTEMS

•LAISSEZ-FAIRE ECONOMIES: THE FREE MARKET

•laissez-faire economy Literally from the French: “allow [them] to do.” An economy in which individual people and firms pursue their own self-interests without any central direction or regulation.

Page 58: ME Session1

Copyright © Amity University

The Complexity of the Modern Economy• A market economy is self-organising in the sense that when

individuals act independently to pursue their own self-interest, responding to prices set on open markets, they produce co-ordinated and relatively efficient economic activity.

Resources and Scarcity• Scarcity is a fundamental problem faced by all economies because

not enough resources - land, labour, capital, and entrepreneurship - are available to produce all the goods and services that people would like to consume.

• Scarcity makes it necessary to choose among alternative possibilities: what products will be produced and in what quantities.

Page 59: ME Session1

Copyright © Amity University

Who Makes the Choices and How• Modern economies are based on the specialisation and

division of labour, which necessitate the exchange of goods and services.

• Exchange takes place in markets and is facilitated by the use of money.

• Much of economics is devoted to a study of how markets work to co-ordinate millions of individual, decentralised decisions.

• Three pure types of economy can be distinguished: traditional, command and free market.

• In practice, all economies are mixed economies in that their economic behaviour responds to mixes of tradition, government command, and price incentives.

Page 60: ME Session1

Copyright © Amity University

•consumer sovereignty The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

•Consumer Sovereignty

Page 61: ME Session1

Copyright © Amity University

•Distribution of Output

•The amount that any one household•gets depends on its income and wealth.Income is the amount that a household earns each year. It comes in a number of forms: wages, salaries, interest, and the like.•Wealth is the amount that households have accumulated out of past income through saving or inheritance.

Page 62: ME Session1

Copyright © Amity University

Questions

Page 63: ME Session1

Copyright © Amity University

According to the text, the reason to study economics is

• A)

to learn a way of thinking. •

B)

to understand society and global affairs. •

C)

to be an informed voter. •

D)

All of the above •

Answer:D •

Page 64: ME Session1

Copyright © Amity University

Among the fundamental concepts in economics are

• A) opportunity cost. •

B) marginalism. •

C) efficient markets. •

D)All of the above •

Answer: D

Page 65: ME Session1

Copyright © Amity University

Which of the following is the best definition of economics?

• A) The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

•B)The study of how consumers spend their income.

•C) The study of how business firms decide what inputs to hire and what outputs to produce.

•D) The study of how the federal government allocates tax dollars.

•Answer:A

Page 66: ME Session1

Copyright © Amity University

Which of the following statements is NOT correct?

• A)Economics is a behavioral science. •

B) In large measure, economics is the study of how people make choices.

•C) If poverty were eliminated there would be no reason to study economics.

•D) Economic analysis can be used to explain how both individuals and societies make decisions.

•Answer: C

Page 67: ME Session1

Copyright © Amity University

The study of economics

• A) is a very narrow endeavor. •

B) is a way of analyzing decision-making processes caused by scarcity.

•C) is concerned with proving that capitalism is better than socialism.

•D) focuses on how a business should function.

•Answer: B

Page 68: ME Session1

Copyright © Amity University

Which of the following is an example of a normative statement? • A)

The unemployment rate is six percent. •

B) There should be no unemployment in an advanced industrial society.

•C) Higher prices cause consumers to buy less.

•D) Equilibrium price implies that quantity demanded equals quantity supplied.

•Answer:

B

Page 69: ME Session1

Copyright © Amity University

Which of the following is an example of a positive statement?

• A) There should be no unemployment in an advanced industrial society.

•B) Higher prices cause consumers to purchase less.

•C)

Consumption should be distributed fairly in society. •

D)

People should pollute as little as possible. •

Answer: B

Page 70: ME Session1

Copyright © Amity University

• Resources are unlimited in a wealthy society. •

Answer:

• True

False •

A= F

Page 71: ME Session1

Copyright © Amity University

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units is

• A) positive economics.

•B)normative economics.

•C) macroeconomics.

•D) microeconomics.

•Answer: D

Page 72: ME Session1

Copyright © Amity University

Inflation and unemployment

• A) are the focus of normative economics.

•B) are a focus of microeconomics.

•C) are a focus of positive economics.

•D) are a focus of macroeconomics

Ans = D

Page 73: ME Session1

Copyright © Amity University

Review Terms and Conceptsceteris paribus

descriptive economics

economic growth

economic theory

economics

efficiency

efficient market

empirical economics

equity

Industrial Revolution

macroeconomics

marginalism

microeconomics

model

normative economics

opportunity cost

positive economics

scarce

stability

sunk costs

variable

Page 74: ME Session1

Copyright © Amity University

The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making

Page 75: ME Session1

Copyright © Amity University

The role of managerial economics in managerial decision making

The role of managerial economics in managerial decision making

Managerial decision problems

Product price and output

Make or buy

Production technique

Internet strategy

Advertising media and intensity

Investment and financing

Managerial decision problems

Product price and output

Make or buy

Production technique

Internet strategy

Advertising media and intensity

Investment and financing

Economic concepts

Theory of consumer behaviour

Theory of firm

Theory of market structures and pricing

Economic concepts

Theory of consumer behaviour

Theory of firm

Theory of market structures and pricing

Decision making tools

Numerical analysis

Statistical analysis

Forecasting

Game theory

Optimisation

Decision making tools

Numerical analysis

Statistical analysis

Forecasting

Game theory

Optimisation

Managerial Economics

Use of economics concepts and decision making tools to solve managerial decision problems

Managerial Economics

Use of economics concepts and decision making tools to solve managerial decision problems

Optimal solutions Optimal solutions

Page 76: ME Session1

Thank You

76

Please forward your query To: [email protected]

CC: [email protected]