Modern economics ( overview )

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  • 1. Modern Economic AnalysisManagerial Economics:-Prime function of Management:- (1). Decision Making (DM):- (2). Forward Planning (FP):-DM: - Process of selecting one action from two or more alternative courses of action.FP: - Establishing plans for future.Resources - Land, Labour, Capital are limited and can be employed to alternative uses.DM function becomes making choices that will provide the most efficient means ofattaining desired objective (Profit maximisation).Managers have to make decisions under uncertainty. Future is uncertain. So, DM and FPbecomes complicated.If the knowledge of future is perfect than DM and FP will be perfect.As future is uncertain- business managers rarely has complete information of future-sales, cost, profits, capital conditions.Decisions are made on the basis of past data, current information and estimates aboutfuture predicted as best as possible.In fulfilling the function of DM in an uncertainty frame work, economic theory can bepressed into service with considerable advantage.Economic theory deals with number of concepts and principles relativity like -profit,demand, cost, pricing, production, competition, national income.Definitions of ME:-Definition1:- ME is the use of economic modes of thought to analyse business situation. -MC Nair, MerianDefinition 2:- ME is the integration of economy theory with business practice for thepurpose of facilitating decision making and forward planning. -By Spencer and SiegelmenDefinition 3:- ME is a price theory in the service of business executive. -By WatsonDefinition 4:- ME is the application of economic theory methodology to businessadministration practice.Summary(1). Link between traditional economics to decision science.(2). It is concerned with DM.(3). It is pragmatic.(4). It is both Conceptual (Idea, thought) and Metrical (Measurable).(5) Goal Oriented.
  • 2. Nature of ME(1). Micro economic:- Study of a firm.(2). Is concerned with normative micro economics.(3). Makes economic theory more application oriented.(4). Takes the help of macro economics also.Characteristics of ME:-(1). Micro economic is character.(2).Takes help of macro economic (to understand and adjust to the environment in which the firm operates).(3). It is pragmatic-(practical oriented).(4). It is prescriptive (giving order or directions) rather than Descriptive(not just describe)(5). It is normative (they ought to have to) rather than positive (descriptive)(6). Both conceptual (takes the help of conceptual frame work to understand and analyse decision problem) and metrical (takes the help of quantitative technique to measure the impact of different factors and policies).(7). It is the study of allocation of scarce resources available to a firm among the activities of that unit, to maximize the benefits.Scope of M.E(1). Demand analysis and forecasting:- estimation of demand (a). Demand determinants (b). Demand distinction (c). Law of demand (d). Exception to rules (e) Demand forecasting (f). Methods of forecasting (g). Forecasting of new and existing product(2). Cost and Production analysis:- (a). Cost estimation. (b). Factors causing variation in cost. (c). Cost classification. (d). Cost -O/P relationship (e). Economies and Diseconomies scale. (f). Production function. (g). Cost control.(3). Pricing Decisions, Policies and practices:- (a). Price determination in various (b). Pricing methods (c). Differential pricing (d). Product-line pricing (e). Price forecasting
  • 3. (4). Profit Management:- Depends upon costs and revenues Measurement of profit Profit policies Techniques of profit planning (break -even analysis).(5).Capital Management:- Planning and controlling capital expenditure, cost of capital, rate of return, selection of projects.Difference between ME and Economics:- ME Economics(1). It is application of economics (1). It is basically body of principles. principles to problem of firm.(2). It is micro in character. (2). It is micro and macro in character.(3). It deals with firm only. (3). It deals with firm and industry.(4). Scope is limited (i.e only firm profits) (4). Scope is vast (deals with wages, prices, interest)(5). It modifies economic models to select (5). It builds economic models. particular situation.(6). Along with certain general economic (6). It is purely based on certain assumptions. assumptions.Certain complex situations are also assumed to solve problems with the help of thesubjects (forecasting-stastics ) cost-accounting, mathematics.Uses of ME:-(1). ME accomplishes the objective of building a suitable kit from traditional economics.(2). ME also incorporates useful ideas from other disciplines such as psychology, sociologyetc.(3). ME helps in reaching variety of business decisions in a complicated environment- (a). what products and services to be produced (b). what inputs and production techniques should be used (c). what op to produced, what its price should be (d). what are the best sizes and locations of new plants (e). When should the equipment be replaced (f). How much capital should be allocated(4). ME makes a manager a more competent model builder(5). ME serves as an integrator agent by coordinating different functional areas to make effective decisions(6). ME takes into consideration of integration between firm and society.Limitations of ME:-(1). Firms do not continuously seek maximum profit(2). Large firms run by managers(3). Different groups in a firm, different objectives to pursue
  • 4. (4). Profit maximization is not sole objective other objectives are also important(5). Economic theory- unable to provide satisfactory answers for output, price, cost andrevenue policies when firm produces many products simultaneously.FUNDAMENTAL CONCEPTS OF M.EBasic Economic tools in ME:- Principles of ME(1) Opportunity cost principle(2) Incremental cost principle(3) Principle of time perspective(4) Discounting principle(5) Equi-marginal principle(6) Risk and uncertainty(7) Contribution.(1). Opportunity cost:- is the cost of sacrificing an alternative.Definition:- The cost involved in any decision consists of the sacrifices of alternativesrequired by that decision. If there is no sacrifice, there is no cost.OC represents the benefits or revenue foregone by perusing one course of action ratherthan anotherEx1:- OC of funds invested in ones own business is the amount of interest could have been earned had it invested in bank.Ex2:- OC of putting labour in ones own business is the income and one could have earned by accepting job outside.(2). Incremental Principle:- This concept is used instead of using the concept of MC.Incremental cost- The total increase in cost of production due to additional unit increase in the production is known as Marginal use.Incremental revenue- Increase in income due to additional unit of selling of selling is known as marginal revenues.According to the principle a business manager should expand his business in eachdirection only so long as the incremental benefits to his firm is more than incrementalcost.So, the business executive should keep certain as follows:(i). He should see that the incremental profits should be more than incremental cost(ii). If the income is reduced due to some internal or external problems, they should be alert to improve their incomes.(iii). The firm should limit its activities when incremental benefits = incremental cost.(iv). Due to some unavoidable circumstances if the firms income is reduced to considerable extent, the business manager should try to reduce their unnecessary expenditure on other side.
  • 5. (3). Principle of time perspective:-Economists use the functional time periods in analyzing equilibrium phenomenon. Theseperiods are distinguished as short period and long period.Short period- is defined as a period in which F.C are constant though the firm increase itsproduction.Long run period- fixed cost also vary so all costs are V.C. In short period the firm canbear normal losses. The firm can exits at least the profits covers V.C. But if the losespersists in the long run period it indicates complete failure of business. Hence it isadvisable to stop business activities. According to this principle-The business executives,while taking decision should take into account both the short run and long run effect onrevenues and costs and maintain right balance between long run and short runperspective.(4). Discounting principle:- Fundamental ideas in economics is that a rupee tomorrow isworth less than a rupee today. (A bird in hand is worth two in bush).Example: - Rs. 100 on 8% interest rate