output (4).ppt
TRANSCRIPT
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PAN African eNetwork Project
DBM Economic Analysis
Semester - I
Sonia Singh
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This topic deals with:
• The nature and scope of Managerial Economics as a
whole.
• The place of Managerial economics in the Economics
discipline.
• How do managers make their decisions?
Decision making process
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Economic Mysteries
• Why have aer towels
relace! hot-air han!!ryers in "#lic restrooms$
• Why do prices of some goods, like apples,
go down during months of heaiest
consumption, while others like !eachfront
cottages, go up?
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What is Economics?
Economics is the study of how economic agents
or societies choose to use scarce productive
resources that have alternative uses to satisfy
wants which are unlimited and of varyingdegrees of importance need of economics
arises because of –
a Un!imited wants
b "carce resources with a!ternative uses
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Microeconomics "
The study of the decisions of people and
!usinesses and the interaction of those
decisions in markets. The goal of
microeconomics is to e#plain the
prices and $uantities of indiidual
goods and serices.
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%ome Managerial Decisions
• #esource a!!ocation within the
organi$ation in the short% and !ong%run
• E&panding or contracting production
and distribution faci!ities
• 'eve!oping and mar(eting new
products
• Capita! e&penditures inc!uding the
possib!e ac)uisition of other firms
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Macroeconomics &
• The study of the national economy and
the glo!al economy and the way that
economic aggregates grow and
fluctuate. The goal of macroeconomics
is to e#plain aerage prices and the
total employment, income, and
production
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*acroeconomics vs+ *icroeconomics M'()*E(*+*M'( -E%T'*+ M()*E(*+*M'( -E%T'*+
,o to business schoo! or ta(e a -ob? .ow many peop!e are emp!oyed in theeconomy as a who!e?
What determines the sa!ary offered byCitiban( to/ a new Co!umbia *0A?
What determines the overa!! sa!ary !eve!spaid to wor(ers in a given year?
What determines the cost to a university orco!!ege of offering a new course?
What determines the overa!! !eve! of prices inthe economy as a who!e?
What government po!icies shou!d be adoptedto ma(e it easier for !ow%income students toattend co!!ege?
What government po!icies shou!d be adoptedto promote fu!! emp!oyment and growth in theeconomy as a who!e?
What determines whether Citiban( opens anew office in "hanghai?
What determines the overa!! trade in goods/services and financia! assets between theU+"+ and the rest of the wor!d?
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Economic heory
• *icroeconomics
– "tudy of the economic behavior of individual
decision%ma(ing units+
– #e!evance to *anageria! Economics
• *acroeconomics
– "tudy of the tota! or aggregate !eve! of output/
income/ emp!oyment/ consumption/investment/ and prices for the economy
viewed as a whole+
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Economic *ethodo!ogy
• Economic *ode!s
– Abstract from detai!s
– 2ocus on most important determinants of
economic behavior – cause and effect
• Eva!uating Economic *ode!s
– A mode! is accepted if it predicts accurate!y
and if the predictions fo!!ow !ogica!!y from theassumptions+
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'ecision "ciences
• *athematica! Economics
– E&presses and ana!y$es economic mode!s
using the too!s of mathematics+
• Econometrics
– Emp!oys statistica! methods to estimate and
test economic mode!s using empirica! data+
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*ar(et *echanism
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*anageria! Economics
• *anager – A person who directs resources to achieve a stated
goa!+
• Economics – he science of ma(ing decisions in the presence of
scare resources+
• *anageria! Economics – he study of how to direct scarce resources in the
way that most efficient!y achieves a manageria! goa!+
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Do"glas - +Managerial economics is (( the
alication of economic rinciles an!metho!ologies to the !ecision-making rocess
within the firm or organi,ation(
Paas . 'irschey - +Managerial economicsalies economic theory an! metho!s to #"siness
an! a!ministrative !ecision-making(
Salvatore - +Managerial economics refers to thealication of economic theory an! the tools of
analysis of !ecision science to e/amine how an
organisation can achieve its o#jectives most
effectively(
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%hese Definitions 0over a N"m#er of
Different Aroaches
1( Analysis #ase! on the theory of the firm
2( Analysis #ase! "on management sciences
3( Analysis #ase! "on in!"strial economics
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MANAGERIAL ECONOMICS
The application of economics’ theoriesand principles in managerial problems iththe p!rpose of optimi"ation of decisionma#ing$
%ecision ma#ing in&ol&es the acti&itiesregarding prod!ction' distrib!tion andcons!mption$
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The !se of Economic Anal(sis in
management is to ma#e b!siness decisionsin&ol&ing the best !se )allocation* ofscarce reso!rces $
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Economic Theor( helps managers tocollect the rele&ant information andprocess it in order to arri&e at the
optimal decision$Gi&en the goals of afirm' a decision is O+TIMAL if it bringsthe firm closest to its goals
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Management %ecision +roblems
•
+rod!ct +rice and O!tp!t•+rod!ction Techni,!e•Stoc# Le&els•Ad&ertising Media and intensit(•Labor hiring and firing•In&estment and -inancing
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The Process of decision-making
Identify objectives
Dene the problemIdentify possible solutions
Select the best possiblesolution
Implement the decision
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Nat!re of %ecision
•.hat goods shall firm prod!ce/•0o sho!ld firm raise the necessar( capital andhat shall be its legal form$•.hat techni,!e shall be adopted' and hat shallbe the scale of operations/•.here prod!ction is located/•0o shall its prod!ct be distrib!ted/•0o shall reso!rces be combined/
•.hat shall be the si"e of o!tp!t/•0o shall it deal ith its emplo(ees/
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T(pes of %ecision
•Organi"ational and personal decisions
•1asic and ro!tine decisions
•+rogrammed and non2programmeddecisions$
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Conditions Affecting %ecision Ma#ing
•
Certaint(
•Ris#
•3ncertaint(
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Economic Conditions
•Mar#et Str!ct!re•
S!ppl( and %emand conditions•State of Technolog(•Go&t$ Reg!lations•International %imensions•-!t!re Macroeconomic factors
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%ecision Ma#ing Model
•The Classical Model
•The Administrati&e Model
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The Classical Model
•The manager has completed information abo!t the
decision sit!ation and operations !nder a conditionof certaint($ •The problem is clearl( defined' and the decision2
ma#er has #noledge of all possible alternati&es andtheir o!tcomes$
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•Thro!gh the !se of ,!antitati&etechni,!es' rationalit(' and logic' thedecision2ma#er e&al!ates the alternati&es
and selects the optim!m alternati&e 2theone that ill ma4imi"e the decisionsit!ation b( offering the best sol!tion tothe problem$
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The Administrati&e Model•The manager has incomplete information abo!tthe decision sit!ation and operates !nder acondition of ris# or !ncertaint($
•The problem is not clearl( defined' and thedecision2ma#er has limited #noledge of possiblealternati&es and their o!tcomes$•The decision2ma#er satisfies b( choosing the
first satisfactor( alternati&e2 one that illresol&e the problem sit!ation b( offering a goodsol!tion to the problem$
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Tools of %ecision Ma#ing
•Marginal Anal(sis•
Linear +rogramming•Game Theor(•Optimi"ation•-orecasting
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*ar(et 3nteractions
• Consumer%4roducer #iva!ry – Consumers attempt to !ocate !ow prices/ whi!e
producers attempt to charge high prices+
• Consumer%Consumer #iva!ry
– "carcity of goods reduces the negotiating power ofconsumers as they compete for the right to thosegoods+
• 4roducer%4roducer #iva!ry
– "carcity of consumers causes producers tocompete with one another for the right to servicecustomers+
• he #o!e of ,overnment – 'iscip!ines the mar(et process+
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0ost-Benefit Aroach to Decision Making
• 0456 7 0ost of !oing
activity 5• B456 7 Benefit of !oing
activity 5• If B456 8 0456 then !o 5
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Theory of the Firm
!pected "alue #a!imi$ation %&ner-managers ma!imi$e short-run prots' Primary goal is long-term e!pected value
ma!imi$ation' (onstraints and the Theory of the Firm
)esource constraints' Social constraints
*imitations of the Theory of the Firm +lternative theory adds perspective' (ompetition forces e,ciency' ostile takeovers threaten ine,cient managers'
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)ole of .usiness in Society
/hy Firms !ist .usiness is useful in satisfying consumer
&ants'
.usiness contributes to social &elfare Social )esponsibility of .usiness Serve customers' Provide employment opportunities' %bey la&s and regulations'
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The role of managerial economics in managerial decision makingThe role of managerial economics in managerial decision making
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The (oncept of /usiness and the
(oncept of 0rofit/usiness
An organi$ation that provides goods or
services to earn profits
0rofits
he difference between a business5s
revenues and its e&penses
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Economic %ystems round the
World
Economic %ystem
A nation5s system fora!!ocating its resourcesamong its citi$ens
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2actors of 4roduction
)esources used in the production of
goods and serices
)esources used in the production of
goods and serices
Four traditional factors of production:
1. Natural Resources
2. Labor
3. Capital
4. Entrepreneurs
Newer perspectives include:
. !"#sical Resources
$. %nfor&ation Resources
Newer perspectives include:. !"#sical Resources
$. %nfor&ation Resources
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2actors of 4roduction
+atural )esources
*ateria!s supp!ied by nature 6such as !and/
water/ minera! deposits/ and trees
1a!or 2or Human )esources3
4hysica! and menta! capabi!ities of peop!e as
they contribute to economic production
(apital
2unds needed to create and operate a business
enterprise
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2actors of 4roduction
Entrepreneur
4erson who starts a new business or ma(es the
decisions that e&pand a sma!! business
0hysical )esources
angib!e things organi$ations use in the conduct of
their business
'nformation )esources
'ata and other information used by a business
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ypes of Economic "ystems
0lanned Economy
Centra!i$ed government contro!s a!! or most
factors of production and ma(es a!! or most
production and a!!ocation decisions
Market Economy
3ndividua!s contro! production and a!!ocation
decisions through supp!y and demand
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4!anned Economies
(ommunism
4!anned economic system in which the
government owns and operates a!! ma-or
sources of production
%ocialism
4!anned economic system in which thegovernment owns and operates se!ected
ma-or sources of production
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*ar(et EconomiesMarket
*echanism for e&change between buyers and
se!!ers of a particu!ar good or service
'nput Market
2irms buy resources from supp!ier househo!ds*utput Market
2irms supp!y goods and services in response to
demand on the part of househo!ds
(apitalism
*ar(et economy that provides for private
ownership of production and encourages
entrepreneurship by offering profits as an incentive
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74ure *ar(et Economy8
1'4
OUTPUT MARKETS
9oo!s
Services
INPUT MARKETS
*a#or0aital
Entrerene"rs
Physical :eso"rces
Information :eso"rces
HOUSEHOLDS
• Deman! ro!"cts in
o"t"t markets
• S"ly reso"rces in
in"t markets
FIRMS
• S"ly ro!"cts in
o"t"t markets
• Deman! reso"rces
in in"t markets
DEMANDDEMAND
DEMANDDEMAND SUPPLYSUPPLY
SUPPLYSUPPLY
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*i&ed *ar(et Economies
0riati4ation
4rocess of converting government enterprises
into private!y owned companies
%ocialism
4!anned economic system in which the
government owns and operates on!y se!ected
ma-or sources of production
Econo&ic s#ste& featurin( c"aracteristics
of bot" planned and &ar)et econo&ies
Econo&ic s#ste& featurin( c"aracteristicsof bot" planned and &ar)et econo&ies
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*argina! 4rincip!e
• To ma#imi4e net !enefits, themanagerial control aria!le should !eincreased up to the point where M/ 5
M(• M/ 6 M( means the last unit of the
control aria!le increased !enefits
more than it increased costs• M/ 7 M( means the last unit of thecontrol aria!le increased costs morethan it increased !enefits
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Marginal Analysis
The marginal cost of any good or
actiity is its opportunity cost
The opportunity cost is the ne#t !estalternatie gien up when a decision
is made?
What is your opportunity cost for!eing here today?
's it the same for eeryone in this
room?
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%hould you keep your !usiness openfor one additional hour? – %cenario: 8ou are managing a fast
food ham!urger restaurant.
– 8ou currently close at 9 pm eery
night, !ut are considering
e#tending your hours to 99 pm on
weekends.
– What are the releant
considerations?
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;o"r monthly rent$
)ther s"nk costs$
%he ho"rly wages yo" ay yo"r
emloyees$
)ther varia#le costs associate!
with the e/tra ho"r$
;o"r weekly reven"es$
;o"r likely reven"es for the e/tra
ho"r$
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"(i!!s re)uired for sub-ect
• 9ogica! and intuitive thin(ing
• 3nterpretation of graphs
• *athematics
he main thin(ing too!
: *;'E9"
#educe comp!e& situations
to their fundamenta!s to
deve!op genera! princip!es
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The Modern economy
• Economy & mechanism that allocates
scarce resources among alternatie
uses. This mechanism achiees fie
things: What, How, When, Where, Who.
• Decision makers & Households, ;irms,
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he 0asic 'ecision%*a(ing Units
• A firm is an organi$ation that
transforms resources 6inputs intoproducts 6outputs+ 2irms are theprimary producing units in a mar(eteconomy+
• +
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;ther important decision ma(ers
• An entrepreneur is a person who
organi$es/ manages/ and assumes the
ris(s of a firm/ ta(ing a new idea or a new
product and turning it into a successfu!business+
• Market & ny arrangement that ena!les
!uyers and sellers to get informationand to do !usiness with each other.
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%he Invisi#le 'an!
• Decentrali,e!
•
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EC;
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he Comp!e&ity of the *odern Economy• A mar(et economy is se!f%organising in the sense that when
individua!s act independent!y to pursue their own se!f%interest/responding to prices set on open mar(ets/ they produce co%ordinated and re!ative!y efficient economic activity+
#esources and "carcity• "carcity is a fundamenta! prob!em faced by a!! economies because
not enough resources % !and/ !abour/ capita!/ and entrepreneurship %are avai!ab!e to produce a!! the goods and services that peop!ewou!d !i(e to consume+
• "carcity ma(es it necessary to choose among a!ternative
possibi!ities> what products wi!! be produced and in what )uantities+
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Who *a(es the Choices and .ow• *odern economies are based on the specia!isation and
division of !abour/ which necessitate the e&change of goodsand services+
• E&change ta(es p!ace in mar(ets and is faci!itated by the use
of money+• *uch of economics is devoted to a study of how mar(ets wor(
to co%ordinate mi!!ions of individua!/ decentra!ised decisions+• hree pure types of economy can be distinguished>
traditiona!/ command and free mar(et+
• 3n practice/ a!! economies are mi&ed economies in that theireconomic behaviour responds to mi&es of tradition/government command/ and price incentives+
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•consumer soereignty he
idea that consumers u!timate!y
dictate what wi!! be produced
6or not produced by choosing
what to purchase 6and what
not to purchase+
•(onsumer %oereignty
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•Distri!ution of *utput
•he amount that any one househo!d•gets depends on its income and wea!th+
Income is the amount that a househo!d
earns each year+ 3t comes in a number of
forms> wages/ sa!aries/ interest/ and the
!i(e+•
Wealth is the amount that househo!ds
have accumu!ated out of past income
through saving or inheritance+
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uestions
According to the te&t the reason to study
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According to the te&t/ the reason to study
economics is
• A
to !earn a way of thin(ing+•
0
to understand society and g!oba! affairs+
•C
to be an informed voter+•
'
A!! of the above•
Answer>'•
Among the fundamenta! concepts in
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Among the fundamenta! concepts in
economics are
• A opportunity cost+•
0 margina!ism+•
C efficient mar(ets+•
'A!! of the above•
Answer>'
Which of the fo!!o ing is the best
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Which of the fo!!owing is the best
definition of economics?
• A he study of how individua!s and societies choose to use thescarce resources that nature and previous generations haveprovided+
•0he study of how consumers spend their income+
•C he study of how business firms decide what inputs to hire andwhat outputs to produce+
•'he study of how the federa! government a!!ocates ta& do!!ars+
• Answer> A
Whi h f th f !! i t t t
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Which of the fo!!owing statements
is
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he study of economics
• A is a very narrow endeavor+•
0is a way of ana!y$ing decision%ma(ing processes causedby scarcity+
•Cis concerned with proving that capita!ism is better thansocia!ism+
•
'focuses on how a business shou!d function+
• Answer> 0
Which of the fo!!owing is an e&!e of a
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Which of the fo!!owing is an e&!e of a
normative statement?• Ahe unemp!oyment rate is si& percent+
• 0here shou!d be no unemp!oyment in an advanced industria! society+
•C.igher prices cause consumers to buy !ess+
• 'E)ui!ibrium price imp!ies that )uantity demanded e)ua!s )uantitysupp!ied+
• Answer>
0
Which of the fo!!owing is an
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Which of the fo!!owing is an
e&!e of a positive statement?• A
here shou!d be no unemp!oyment in an advanced industria! society+•
0.igher prices cause consumers to purchase !ess+
•
C
Consumption shou!d be distributed fair!y in society+•
'
4eop!e shou!d po!!ute as !itt!e as possib!e+•
Answer>0
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• #esources are un!imited in a wea!thy society+•
Answer>
• rue
2a!se• A: 2
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he branch of economics that e&amines the functioning of individua!
industries and the behavior of individua! decision%ma(ing units is
• Apositive economics+
•0normative economics+
•Cmacroeconomics+
•'
microeconomics+•
Answer>'
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3nf!ation and unemp!oyment
• Aare the focus of normative economics+
•0are a focus of microeconomics+
•Care a focus of positive economics+
•'are a focus of macroeconomics
Ans: '
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#eview erms and Conceptsceteris paribus
descriptive economics
economic growth
economic theory
economicsefficiency
efficient market
empirical economics
equity
Industrial Revolution
macroeconomics
marginalism
microeconomics
model
normative economics
opportunity cost
positive economics
scarce
stability
sunk costs
variable
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The role of managerial economics in managerial decision makingThe role of managerial economics in managerial decision making
The role of managerial economics in managerial decision
The role of managerial economics in managerial decision
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The role of managerial economics in managerial decisionmakingmaking
Managerial decision pro!lems
0roduct price and output
Make or !uy
0roduction techni$ue
'nternet strategy
dertising media and intensity
'nestment and financing
Managerial decision pro!lems
0roduct price and output
Make or !uy
0roduction techni$ue
'nternet strategy
dertising media and intensity
'nestment and financing
Economic concepts
Theory of consumer !ehaiour
Theory of firm
Theory of market structures and
pricing
Economic concepts
Theory of consumer !ehaiour Theory of firm
Theory of market structures and
pricing
Decision making tools
+umerical analysis
%tatistical analysis
;orecasting
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han( =ou
4!ease forward your )uery
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