Unit:-1

MB-106: Managerial Economics

By:- Manoj Kumar Gautam

The Definition and Scope of Managerial EconomicsAfter studying the chapter, you should understand:1. the subject matter of Managerial Economics

2. the analytical approach used in Managerial Economics

3.Elucidate on the characteristics and scope of managerial economics

4.Describe the techniques of managerial economics

Introduction

Managers in all type of organization are confronted with two type of problem:

Decision MakingForward planning

Managerial + Economics

Economics: Economics is primarily concerned with analyzing and providing answer to the various economic problem

Management: Planning, Organizing, leading and Controlling the efforts of a group of people towards some common objective

What is Managerial Economics?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.”

What is Managerial Economics?

Howard Davies and Pun-Lee Lam -

“It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics.”

Spencer & Siegelman-

“It is the integration of economic theory & Business practice for the purpose of facilitating decision making & forward planmning by Management

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

Count…..Managerial economics is thereby a

study of application of managerial skills in economics. It helps in anticipating, determining and resolving potential problems or obstacles.

These problems may pertain to costs, prices, forecasting future market, human resource management, profits and so on.

Basic Nature of Economic

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

Scope:

Demand Analysis and forecastingResource AllocationPricingCost AnalysisCompetitive analysisStrategic Planning

Scope of managerial economicsThe scope of managerial economics

includes following subjects:1) Theory of Demand 2) Theory of Production 3)Theory of Exchange or Price Theory 4) Theory of Profit 5) Theory of Capital and Investment 6) Environmental Issues

CHARACTERISTICS OF MANAGERIAL ECONOMICS1. Microeconomics2. Normative economics3. Pragmatic(Applied)4. Uses theory of firm5. Takes the help of macroeconomics6. Aims at helping the management7. A scientific art8. Prescriptive rather than descriptive

1. Microeconomics:

It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market.

2. Normative economics:

It is concerned with varied corrective measures that a management undertakes under various circumstances. It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision-making and optimal utilization of available resources, come under the banner of managerial economics.

3. Pragmatic:Managerial economics is

pragmatic. However, in managerial economics, managerial issues are resolved daily and difficult issues of economic theory are kept at bay.

4. Uses theory of firm:

Managerial economics employs economic concepts and principles, which are known as the theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory.

5. Takes the help of macroeconomics:

Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the successful functioning of a business enterprise

6. Aims at helping the management:Managerial economics aims

at supporting the management in taking corrective decisions and charting plans and policies for future.

7. A scientific art:

It is also called a scientific art because it helps the management in the best and efficient utilization of scarce economic resources. It considers production costs, demand, price, profit, risk etc.

8. Prescriptive rather than descriptive:

Managerial economics is a normative and applied discipline. It suggests the application of economic principles with regard to policy formulation, decision-making and future planning. It not only describes the goals of an organization but also prescribes the means of achieving these goals.

Importance of managerial economics

1.Accommodating traditional theoretical concepts to the actual business behavior and conditions

2.Estimating economic relationships3.Predicting relevant economic quantities4.Understanding significant external

forces:• External factors• Internal factors:

Count…..

5. Basis of business policies6 Analysis of Business Problem7 Helpful in Decision –Making8 Reducing Risk & Uncertainty

Techniques of managerial economics:

The theory of the firm, which elucidates how businesses make a variety of decisions

The theory of consumer behavior, which describes decision making by consumers

The theory of market structure and pricing, which opens a window into the structure and characteristics of different market forms under which business firms operate

Business Decisions or Decision- Making in BusinessThe thought process of selecting a

logical choice from the available options.For effective decision making, a person

must be able to forecast the outcome of each option as well, and based on all these items, determine which option is the best for that particular situation.

Features of Decision - Making

Goal OrientedVarious AlternativesFreedom to ChooseJudgmental and EmotionalContinuous Process

Trewatha & Newport defines decision making process as follows:,

“Decision-making involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem”.

Types of Business Decisions

Production DecisionsPersonnel DecisionsFinancial DecisionsMarketing Decisions

Steps involved in Decision-Making process

Defining / Identifying the managerial problem,

Analyzing the problem, Developing alternative solutions, Selecting the best solution out of the

available alternatives, Converting the decision into action, and Ensuring feedback for follow-up.

Role of a Managerial Economist in Business DecisionsTask of making Specific decisions by

managersProduction schedulingDemand forecastingMarket researchEconomic Analysis of the industry

Cont…………Investment appraisalSecurity management analysisAdvice on Foreign exchange

managementAdvice on tradePricing and the related decision andAnalyzing and Forecasting

environmental factor

Principles of Managerial Economics

1.Incremental Principle:-This principle states that a decision is said to be rational & sound if given the firm’s objective of profit maximisation, It leads to increase in profit, Which in either of two Scenarios- a. If total revenue increases more than total cost b. If total revenue declines less than total cost

Equi Marginal principle:-It states that a consumer will reach the stage of equilibrium when the marginal utilities of various commodity he consumes are equal.

The Law of Equi Marginal Utility:- According to the modern Economist, This law has been formulated in form of law of proportional marginal utility. It states that the consumer will spend his money –income on different goods in such a way that the marginal utility of each good is proportional to its price.

Opportunity cost principle:- it is one of the important & fundamental concept in economics.

1. opportunity cost is the minimum price that would be necessary to retain a factor price in it’s given use. It is also defined as cost of sacrificed alternatives.

2. By opportunity cost of a decision is meant the sacrifice of alternatives required by that decision.

Time perspective Principle:- According to this principle, a manager should give due emphasis, both to short term & long term impact of his decisions, giving apt significance to the different time periods before reaching any decision.

Short run refers to a time period in which some factors are fixed while other are variable. The production can be increased by increasing quantity of variable factor of production.

Long term is a time period in which all factors of productions can become variable. Entry & exit of sellers firms can take place easily.

Discounting Principle:- According to this principle, if a decision affects costs & revenues in long run, all those costs & revenues must be discounted to the present values before valid comparison of alternatives is possible.

Discounting can be defined as a process used to transform future rupees into an equivalent number of present rupees.

this is essential because a rupee worth of money ata future date is not worth a rupee today. Money actually has a time value.

For instance- Rs 100 Invested today @ 10% is equivalent to Rs 110 next year.

Economic Growth & Development

Economic Growth:

Economic Growth is an increase in aggregate output of real goods and services over a period of time

Economic Development: is a broader term and includes besides economic growth, qualitative change in technical, structural and institutional arrangement by which higher output is made possible and distributed.