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MANAGERIAL ECONOMICS
By: Prof. Vani Khosla
Dated: 28th August, 2012
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WHAT IS ECONOMICS ???
The word Economics is derived from Greek words oikos and nomos.
Oikos means House,
Nomos means Manage.
Economics is considered as
the art of Household Management.
According to J.S.Mill, Economics is the practical science of production
and distribution of wealth.
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MAJOR TERMS IN ECONOMICS
Economics is the study of man and his activities in relation to hisenvironment.
It studies the relation between people & money, and how one
effects the other.
SOCIAL
SCIENCE
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Scarcity is asituation in which the amount of
something available is insufficient
to satisfy the desire for it.
The three basic resources are:
SCARCITY
OF
RESOURCES
LAND
CAPITAL
LABOR
CONT
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Needs are
something you
have to have.
Wants aresomething you
would like to
have.
Food
CarHouseJewellery
ShelterClothes
NEEDS AND WANTS
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Good is a physical thing that
you can hold, see or touch.
For e.g. books, mp3.
Service is something that isprovided to you by other
person.
For e.g. dentist, hair cuts
GOODS AND SERVICES
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Production means the creation of goods &
services by using resources.
Distribution means to deliver the goods &
services to the consumers.
Consumption means spending money on
goods & services for the satisfaction of
human wants.
For Example:
Tree cuts down....
Furniture manufactured...
Stocked in a shop
and sold to the customers.
Production, Distribution & Consumption
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So, Economics is.
It talks about Economic Activity and Economic Problem.
Economics is a social science.
It compares the alternative ways for using the limited or scarce resources.
It is concerned about meeting people's demands to satisfy their needs andwants.
It analyzes the production, distribution, and consumption of goods and
services.
Economics is to get the answer to the basic questions of an economy such
as
What to produce ??
How to produce??
And for whom to produce ??
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To Be An Informed Voter.
To Learn Economic Way of Thinking.
To Understand Global Affairs.
Why to study Economics ???
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Introduction to Managerial Economics
Emergence of managerial economics as a separate curse of management
studies can be attributed to at least three factors:
Growing complexity of business decision making process due to changingmarket conditions and business environment.
The increasing use of economic logic, conceptual theories and tools of
economic analysis in the process of business decision making process.
Rapid increase in demand for professionally trained managerial
manpower.
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Management
Economics
Managerial
Economics
Meaning of Managerial Economics
BUSINESS DECISION
(Scarcity of Resources)
Allocation Decision
i.e; What to Produce?
Production Decision
i.e; How to Produce?
Distribution Decision
i.e; For whom to
Produce?
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Cont.
Managerial economics
to a certain degree is
prescriptive in nature as
it suggests course of
action to a managerial
problem.
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According to Spencer & Siegelman opines,
Managerial Economics is the integration of
economic theory with business practice for the purpose of facilitating
decision making and forward planning by management.
According to W.W.Haynes defines,
Managerial Economics is the study of the
allocation of resources available to a firm or the other unit of management
among the activities of that unit.
So, Managerial Economics..
is basically concerned with the decision making process for achieving
business goals effectively and efficiently.
Definitions of Managerial Economics
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How does Managerial Economics differ from
Economics ??
S.NO ECONOMICS MANAGERIAL ECONOMICS
1. Economics is a science which studies
human behavior.
Managerial Economics is a science which
studies that aspect of managerial
behavior which helps in decision making.
2. It is a old and well established subject. It is a new and developing subject.
3. It is positive as well as normative
science.
It is only normative science.
4. It deals with the body of principles. It involves the application of economic
principles.
5. It is both micro and macro economics
in character.
It is only micro economics in character.
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MICRO ECONOMICS
Micro means small.
According to Boulding,
Micro Economics is the study of particular
household, individual price, wage, income industry& particular commodity.
Some of the theories which comes under micro-
economics ,
Theory of Individual Demand or Market Demand.
Theory of Production and Cost
Theory of Distribution,
Theory of markets, price, profit etc.
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MACRO ECONOMICS
According to Boulding,
Macro Economics deals not with
individual quantities as such, but with the aggregates
of these quantities, not with individual incomes but
with national income, not with individual prices butwith price level, not with individual outputs but with
national output.
Some of the theories which comes under micro-
economics ,
Theory of Income & Employment.
Theory of Inflation.
Theory of General Price Level.
Theory of Business or Trade Cycles etc.
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Production Prices Income Employment
Microeconomic
(Individual)
Production-Output
in Individual
Industries and
Businesses
How much steel
How many offices
How many cars
Price of Individual
Goods and
Services
Price of medical
care
Food prices
Apartment rents
Distribution of
Income and Wealth
Wages in the auto
industry
Minimum wages
Executive salaries
Poverty
Employment by
Individual
Businesses
Jobs in the steel
industry
Number of
employees in a
firmMacroeconomic
(As a Whole)
National
Production Output
Total Industrial
Output
Gross Domestic
Product
Growth of Output
Aggregate Price
Level
Consumer prices
Producer Prices
Rate of Inflation
National Income
Total wages and
salaries
Total corporate
profits
Employment and
Unemployment in
the Economy
Total number of
jobs
Unemployment
rate
Examples of Micro & Macro Economic Concerns
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POSITIVE SCIENCE
It studies things as they are.
It remains neutral & refuses to pass moral
judgement.
It describes.
For Example:
The price of milk has risen from Rs.45 per
litre to Rs.50 per litre in the past one year. This is a positive statement because it can
be proven true or false by comparison
against real-world data. In this case, the
statement focuses on facts.
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1. Goal oriented approach.
2. It is pragmatic and realistic in nature.
3. It is normative rather than positive in character.
4. Forward Planning
5. Microeconomic in character and marginally takes the help ofmacro-economics.
6. Identification of Economic choices and Allocation.
Nature of Managerial Economics
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SCOPE
OF
MANAGERIAL
ECONOMICS
Demand
Analysis
ProductionAnalysis
CostAnalysis
PricingAnalysis
ProfitAnalysis
InvestmentAnalysis
Scope of Managerial Economics
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Cont.
DEMAND ANALYSIS::
It is the basic activity of the
firm and it helps the businessexecutives:
To carry out business process.
To strengthen the market
position.
To maximize profits.
To maximize social welfare.
PRODUCTION ANALYSIS::
There are four factors of
production which are:
Land: resources provided bynature.
Labour: human inputs in
production process. Capital: financial capabilities.
Entrepreneur: ability toorganize and combine allactivities.
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1. THE SCIENTIFIC METHOD
2. THE STATISTICAL METHOD
3. THE METHOD OF INTELLECTUAL EXPERIMENT
4. THE METHOD OF SIMULATION
5. THE HISTORICAL METHOD
6. THE DESCRIPTIVE METHOD
Methods of Managerial Economics
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Question 5 :
When productivity increases ____________.
a) Prices rise.
b) Living standards improve.
c) There are fewer good jobs.
d) Living standards deteriorate.
Correct answer is :
Living Standards Improve.
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Question 7 :
Ceteris paribus means ___________.
a) Equal access to public transportation.
b) Other things being equal.
c) Holding everything constant.d) All things considered.
Correct answer is :
Other things being equal.
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Question 8 :
Which statement about the factors of production is correct ?
a) Land is always freely available.
b) Enterprise includes all natural resources.
c) Capital is produced by factors of production.
d) Laborers earn profit.
Correct answer is :
Capital is produced by factors of production.
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Question 9 :
The money value of goods & services produced in a year within ageographical boundaries of country known as __________.
a) Gross National Product.
b) Per capita National Income.
c) Gross Domestic Product.
d) The balance of payments.
Correct answer is :
Gross Domestic Product.
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Question 10 :
What usually constitutes the main source of a government'sincome?
a) Loans
b) Grants from World Bank
c) Profits from business undertakings
d) Taxes and levies
Correct Answer Is :Taxes and Levies.
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Question 11 :
Which areas covered by the subject Managerial Economics.
a) Operational issues.
b) Environmental issues .
c) Operational & Environmental issues.
d) None
Correct answer is :Operational & Environmental issues.