Objectives of the Session Objectives of the Session

By the end of this session, it will be hoped to achieve By the end of this session, it will be hoped to achieve the following objectives;the following objectives;

To understand the nature and scope of managerial To understand the nature and scope of managerial economicseconomics

Able to introduce and define managerial economics,Able to introduce and define managerial economics,

To have understanding about the economic theory To have understanding about the economic theory and tools of decision sciencesand tools of decision sciences

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to explain the relationship between to explain the relationship between managerial economics, economic theory, managerial economics, economic theory, decision sciences and functional areas of decision sciences and functional areas of business administration.business administration.

To discuss the importance of managerial To discuss the importance of managerial economicseconomics

Nature and Scope of Managerial Nature and Scope of Managerial EconomicsEconomics

Definition of Managerial EconomicsDefinition of Managerial Economics

Relationship to other fields of StudyRelationship to other fields of Study

Relationship to the Economic TheoryRelationship to the Economic Theory Relationship to the Decision SciencesRelationship to the Decision Sciences Relationship to the Functional Areas of Business Relationship to the Functional Areas of Business

Administration StudiesAdministration Studies

Definition of Managerial EconomicsDefinition of Managerial Economics

Salvatore Salvatore defines as;defines as;““Managerial economics refers to the application Managerial economics refers to the application of economic theory and the tools of analysis of of economic theory and the tools of analysis of decision science to examine how an organization decision science to examine how an organization can achieve its objectives most efficiently.”can achieve its objectives most efficiently.”

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

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It can be seen as a means to an end by It can be seen as a means to an end by managers, in terms of finding the most managers, in terms of finding the most efficient way of allocating their scarce efficient way of allocating their scarce resources and reaching their objectives.resources and reaching their objectives.

As an approach to decision-making, As an approach to decision-making, managerial economics is related to economic managerial economics is related to economic theory, decision sciences and business theory, decision sciences and business functions.functions.

This definition can be well explained with the help This definition can be well explained with the help of following diagram;of following diagram;

Management Decision ProblemsManagement Decision Problems

Examples;Examples; A hospital may seek to treat as many patients as possible at A hospital may seek to treat as many patients as possible at

an adequate medical standard with its limited physical an adequate medical standard with its limited physical resources (i.e. physicians, technicians, nurses, equipment, resources (i.e. physicians, technicians, nurses, equipment, beds etc.) and budget.beds etc.) and budget.

The goal of a state university may provide an adequate The goal of a state university may provide an adequate education to as student as possible subject to the physical education to as student as possible subject to the physical and financial constraints it faces. and financial constraints it faces.

Similarly, a government agency may investigate to provide Similarly, a government agency may investigate to provide a particular service to as many people as possible the a particular service to as many people as possible the lowest feasible cost.lowest feasible cost.

Relationship to Economic TheoryRelationship to Economic Theory

Economic theory seeks to predict and explain Economic theory seeks to predict and explain economic behaviour. It begins with a model, economic behaviour. It begins with a model, which is the abstract of many details which is the abstract of many details surrounding an event and seeks to identify a few surrounding an event and seeks to identify a few of the most important determinants of the event. of the most important determinants of the event.

For example, economic theory assumes that firm For example, economic theory assumes that firm seeks to maximize profits, thus it predicts how seeks to maximize profits, thus it predicts how much of particular commodity the firm should much of particular commodity the firm should produce under different form of market structure. produce under different form of market structure.

ContinueContinue Economic theory is mainly divided into microeconomics Economic theory is mainly divided into microeconomics

and macroeconomics.and macroeconomics.

Microeconomics is the Microeconomics is the study of the economic behavior study of the economic behavior of individual decision-making units –individual of individual decision-making units –individual consumers, resource owners, and business firms in an consumers, resource owners, and business firms in an economy.economy.

Macroeconomics is theMacroeconomics is the study of the total or aggregate study of the total or aggregate level of output, income, employment, consumption, level of output, income, employment, consumption, investment, and prices for the economy viewed as a investment, and prices for the economy viewed as a whole.whole.

ContinueContinue The main branch of economic theory with which The main branch of economic theory with which

managerial economics is related is managerial economics is related is microeconomics. In particular, the following microeconomics. In particular, the following aspects of microeconomic theory are relevant:aspects of microeconomic theory are relevant:

theory of the firmtheory of the firm theory of consumer behaviour (demand)theory of consumer behaviour (demand) production and cost theory (supply)production and cost theory (supply) price theoryprice theory market structure and competition theorymarket structure and competition theory

ContinueContinue There is one main difference between the There is one main difference between the

emphasis of microeconomics and that of emphasis of microeconomics and that of managerial economics: managerial economics:

the former tends to be descriptive, explaining the former tends to be descriptive, explaining how markets work and what firms do in practice, how markets work and what firms do in practice,

while the latter is often prescriptive, stating what while the latter is often prescriptive, stating what firms should do, in order to reach certain firms should do, in order to reach certain objectives.objectives.

Relationship to Decision SciencesRelationship to Decision Sciences The decision sciences provide the tools and The decision sciences provide the tools and

techniques of analysis used in managerial economics. techniques of analysis used in managerial economics.

Decision SciencesDecision Sciences comprise of mathematical comprise of mathematical economics and econometrics.economics and econometrics.

Mathematical EconomicsMathematical Economics expresses and analyzes expresses and analyzes economic models using the tools of mathematics. economic models using the tools of mathematics.

EconometricsEconometrics employs statistical methods to employs statistical methods to estimate and test economic models using empirical estimate and test economic models using empirical data.data.

Relationship to Functional Areas of Relationship to Functional Areas of Business AdministrationBusiness Administration

Functional areas of business Functional areas of business administration studies include accounting administration studies include accounting and finance, marketing, human resource and finance, marketing, human resource management and production.management and production.

These disciplines study the business These disciplines study the business environment in which the firm operates environment in which the firm operates and therefore the background for and therefore the background for managerial decision making. managerial decision making.

ContinueContinue For exampleFor example A production department may want to plan and A production department may want to plan and

schedule the level of output for the next quarter, schedule the level of output for the next quarter,

the marketing department may want to know what price the marketing department may want to know what price to charge and how much to spend on advertising, to charge and how much to spend on advertising,

the finance department may want to determine whether the finance department may want to determine whether to build a new factory to expand capacity, and to build a new factory to expand capacity, and

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the human resources department may want the human resources department may want to know how many people to hire in the to know how many people to hire in the coming period and what it should be offering coming period and what it should be offering to pay them.to pay them.

All of these functional areas can apply the All of these functional areas can apply the theories and method in the context of the theories and method in the context of the particular situation and tasks that they have particular situation and tasks that they have to perform.to perform.

ConclusionConclusion

Thus managerial economics can be regarded Thus managerial economics can be regarded as an overview course that integrates economic as an overview course that integrates economic theory, decision sciences, and the functional theory, decision sciences, and the functional areas of business administration studies and areas of business administration studies and examines how they interact with one another as examines how they interact with one another as the firm attempts to achieve its goal most the firm attempts to achieve its goal most efficiently.efficiently.

Basic process of decision makingBasic process of decision making

It is important to note that the goals and It is important to note that the goals and constraints may differ from case to case, however constraints may differ from case to case, however the basic decision-making process is the same as the basic decision-making process is the same as it can be divided into five basic steps;it can be divided into five basic steps;

1.1. Define the problem.Define the problem.

2.2. Determine the objectiveDetermine the objective

3.3. Identify possible solutionsIdentify possible solutions

4.4. Select the best possible solutionSelect the best possible solution

5.5. Implement the decisionImplement the decision

Nature of Managerial Economics; Nature of Managerial Economics; A further noteA further note

Managerial Economics is micro-economic in character.Managerial Economics is micro-economic in character.

Managerial Economics largely uses that body of economic Managerial Economics largely uses that body of economic concepts and principles, which is known as 'Theory of the firm' concepts and principles, which is known as 'Theory of the firm' or 'Economics of the firm'.or 'Economics of the firm'.

Managerial Economics is pragmatic. It avoids difficult abstract Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves complications ignored in issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions economic theory to face the overall situation in which decisions are made. are made.

Managerial economics to a certain degree is prescriptive in Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. nature as it suggests course of action to a managerial problem.

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Managerial economics to a certain degree Managerial economics to a certain degree is prescriptive in nature as it suggests is prescriptive in nature as it suggests course of action to a managerial problem. course of action to a managerial problem.

Scope of Managerial EconomicsScope of Managerial Economics The scope of economics can further be The scope of economics can further be

understood with following;understood with following;

Demand and Supply analysis:Demand and Supply analysis: It deals with It deals with various aspects of demand and supply of a various aspects of demand and supply of a commodity. Certain important aspects of commodity. Certain important aspects of demand and supply analysis are demand and demand and supply analysis are demand and supply schedules, curves and functions, law of supply schedules, curves and functions, law of demand and supply and their limitations, demand and supply and their limitations, elasticity of demand and supply and factors elasticity of demand and supply and factors influencing demand and supply.influencing demand and supply.

ContinueContinue Production analysisProduction analysis: microeconomic techniques : microeconomic techniques

are used to analyse production efficiency, optimum are used to analyse production efficiency, optimum factor allocation, costs, economies of scale and to factor allocation, costs, economies of scale and to estimate the firm's cost function.estimate the firm's cost function.

Pricing analysisPricing analysis: Pricing is a very important area of : Pricing is a very important area of Managerial Economics. In fact, the success of a Managerial Economics. In fact, the success of a business firm largely depends on the correctness of business firm largely depends on the correctness of the prices decisions taken by it. The important the prices decisions taken by it. The important aspects dealt with under this area are :- Price aspects dealt with under this area are :- Price Determination in various Market Forms, Pricing Determination in various Market Forms, Pricing methods, Differential Pricing, Product-line Pricing methods, Differential Pricing, Product-line Pricing and Price Forecasting.and Price Forecasting.

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Capital budgetingCapital budgeting: Investment theory is used to : Investment theory is used to examine a firm's capital purchasing decisions examine a firm's capital purchasing decisions

Risk analysisRisk analysis: various uncertainty models, decision : various uncertainty models, decision rules, and risk quantification techniques are used to rules, and risk quantification techniques are used to assess the riskiness of a decision.assess the riskiness of a decision.

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The various aspects outlined above represent The various aspects outlined above represent the major uncertainties which a firm has to the major uncertainties which a firm has to face with, viz., demand uncertainty, cost face with, viz., demand uncertainty, cost uncertainty, price certainty, profit uncertainty, uncertainty, price certainty, profit uncertainty, and capital uncertainty. It can, therefore, be and capital uncertainty. It can, therefore, be concluded that the subject matter of concluded that the subject matter of Managerial Economics consists of applying Managerial Economics consists of applying economic principles and concepts towards economic principles and concepts towards adjusting with various uncertainties faced by a adjusting with various uncertainties faced by a firm.firm.

Importance of managerial economicsImportance of managerial economics Managerial economics has been receiving more Managerial economics has been receiving more

attention in business as managers become more attention in business as managers become more aware of its potential as an aid to decision-making, aware of its potential as an aid to decision-making, and this potential is increasing all the time. This is and this potential is increasing all the time. This is happening for several reasons:happening for several reasons:

It is becoming more important for managers to It is becoming more important for managers to make good decisions and to justify them, as their make good decisions and to justify them, as their accountability either to senior management or to accountability either to senior management or to shareholders increases.shareholders increases.

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As the number and size of multinationals As the number and size of multinationals increases, the costs and benefits at stake in increases, the costs and benefits at stake in the decision-making process are also the decision-making process are also increasing.increasing.

In the age of plentiful data it is more In the age of plentiful data it is more imperative to use quantitative and rationally imperative to use quantitative and rationally based methods, rather than ‘intuition’.based methods, rather than ‘intuition’.

ContinueContinue The pace of technological development is The pace of technological development is

increasing with the impact of the ‘new economy’. increasing with the impact of the ‘new economy’. There is no doubt that there is an increased need There is no doubt that there is an increased need for economic analysis because of the greater for economic analysis because of the greater uncertainty and the need to evaluate it.uncertainty and the need to evaluate it.

Improved technology has also made it possible to Improved technology has also made it possible to develop more sophisticated methods of data develop more sophisticated methods of data analysis involving statistical techniques. Modern analysis involving statistical techniques. Modern computers are adept at ‘number-crunching’, and this computers are adept at ‘number-crunching’, and this is a considerable aid to decision-making that was is a considerable aid to decision-making that was not available to most firms until recent years.not available to most firms until recent years.

Business Versus Economic ProfitBusiness Versus Economic Profit

Business ProfitBusiness Profit

Economic ProfitEconomic Profit