dec.14.14. man econ
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ood Morning
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Economics in general takes a
positive and predictive approach
not prescriptive or normative
Try to explain what is
not what should be
the main objective is to understand how a market
economy works
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Economics in general is Not Very concernedabout the descriptive realism of assumptions:
Example : I assume X
does not mean I believe X to be true
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Topics to share:
The Definition and Scope of
Managerial Economics
Learning Objectives:1. To appreciate the subject matter of
Managerial Economics
2. To understand the analytical approach used in
Managerial Economics
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What is Managerial Economics?
DouglasManagerial economics
is the applicationof
economic principles andmethodologies to the
decision-making process
within the firm or organization.
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What is Managerial Economics?
Pappas & Hirschey
Managerial economics applies
economic theory and methodsto business and administrative
decision-making.
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What is Managerial Economics?
Howard Davies and Pun-Lee Lam -
It is the applicationof economic analysis
to business problems; it has its origin in
theoretical microeconomics.
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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
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Managerial Economics subject matter revolves around
the
.
Theory of the firm
approach
two aspects
Financial
aspect
Physical
aspect
Comprises
2 sides
Cost side
Revenue
side
gain maximumpossible profits
Theory of the Firm
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Th f th Fi
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Towards the end, the firm
1. has to fix price2. predict or forecast demand
3. consider market morphology
4. work out price output relationscondition for profit maximization
condition for loss minimization
5. Work out means for survival or decide
to shut-down
Theory of the Firm
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Th f th Fi A t
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Financial aspect Physical aspectrequires managers to consider
Input-output relationships or production process
Optimization of the available resources
to produce maximum, desirable output
Project planning Capital budgeting
Use of mathematical tools like diagrams, derivatives, correlation, regression,
probability theory, etc.
Theory of the Firm Aspects
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What are these limitations?
If the aim is prediction, unrealistic assumptionsare acceptable and may be needed;
for instance: the firm may be assumed to behave as if
its managers had perfect knowledge of its environment
If the aim is to produce decision-rules which can
be applied by practising managers, unrealistic
assumptions will produce decision-rules whichare not operational
for instance: set output and price
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How Can Managerial Economics
Assist Decision-Making?
1. Adopt a general perspective,
not a sample of one
2. Simple models provide stepping stone
to more complexity and realism
3. Thinking logically has value itself
and can expose sloppy thinking
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Why Managerial Economics?
A powerful analytical engine.
A broader perspective on the firm.
what is a firm?
what are the firms overall objectives?
what pressures drive the firm towards profit and
away from profit
The basis for some of the more rigorous analysis
of issues in Marketing and Strategic Management.
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In industr ial economics
(or industr ial
organization), the
emphasis is (or was) uponthe behavior of the
whole industry, in
which the firm is simplya component.
In manager ial economics,
the emphasis is upon the
firm, the
environment inwhich the firm finds
itself, and the
decisions whichindividual firms have to
take.
Links between Managerial Economics
and Industrial Economics
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What is Industrial Organization?
It is the study of industry.
It is the study of marketsfor goods and of thefirms which produce them.
It studies how the performance of anindustry is related to its structure, that is, to the
number and size of firms it contains.
It is more concerned with
why markets are structured the way they are
and behave the way they do.
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Management science: is
essentially concerned with
techniques for the
improvement of decision-
making and hence it isessentially normative; firms
are not assumed to find the
optimal solutions for
themselves. They are foundby the researchers who then
present them as prescriptions
for what the firm should do.
Manager ial economics
is often concerned with
finding optimal solutions to
decision problems.However,the primary purpose of using
models is to predict how firms
will behave, not to advise them
what ought to do. Managers
are assumed to find the optimal
solutions for themselves and
that is how predictions are
made.
Links between
Managerial Economics and Management Science
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Management without
Economics has no roots&
Economics without managementbears no fruits!
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Thank you!
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