Introduction to Introduction to Managerial Managerial EconomicsEconomics

Presented ByPresented ByProf. S P DasProf. S P Das

M.Phil. (Economics), M.B.A. (Finance), M.A. (Economics), M.Phil. (Economics), M.B.A. (Finance), M.A. (Economics), PGDM, PGDFM, DHMCT, MCCP, B.Com.PGDM, PGDFM, DHMCT, MCCP, B.Com.

Meaning Of EconomicsMeaning Of Economics Economics can be called as social science dealing Economics can be called as social science dealing

with economics problem and man’s economic with economics problem and man’s economic behavior.behavior.

It deals with economic behavior of man in society in It deals with economic behavior of man in society in respect of consumption, production; distribution respect of consumption, production; distribution etc. economics can be called as an unending etc. economics can be called as an unending science.science.

Economic behavior is related to choice by Economic behavior is related to choice by individuals and others.individuals and others.

Individuals and others have to decide “Individuals and others have to decide “how to how to allocate scarce resources in the most allocate scarce resources in the most effective wayseffective ways..

Economics provide optimum utilization of scarce Economics provide optimum utilization of scarce resources to achieve the desired result. It provides resources to achieve the desired result. It provides the basis for decision making. the basis for decision making.

Micro Economics Micro Economics

It has been defined as that branch where the unit It has been defined as that branch where the unit of study is an individual, firm or household.of study is an individual, firm or household.

It studies how individual make their choices It studies how individual make their choices about,about,– what to produce?what to produce?– How to produce?How to produce?– For whom to produce?, andFor whom to produce?, and– What price to charge?What price to charge?

It is also known as the price theory.It is also known as the price theory. It is the main source of concepts and analytical It is the main source of concepts and analytical

tools for managerial decision making tools for managerial decision making

Macro EconomicsMacro Economics

It studies the economics as a whole.It studies the economics as a whole. It is aggregative in character and takes the entire It is aggregative in character and takes the entire

economic as a unit of study.economic as a unit of study. Macro economics helps in the area of forecasting.Macro economics helps in the area of forecasting. It includes National Income, aggregate It includes National Income, aggregate

consumption, investments, employment etc.consumption, investments, employment etc. It facilitates government in taking policy decisions It facilitates government in taking policy decisions

such as,such as,– How much to spend on health?How much to spend on health?– How much to spend on services?How much to spend on services?

– How much should go in to providing social security benefits?How much should go in to providing social security benefits?

Economic Concept for Decision MakingEconomic Concept for Decision Making Price elasticity of demand Price elasticity of demand Income elasticity of demand Income elasticity of demand Cost and output relationship Cost and output relationship Opportunity cost Opportunity cost Multiplier Multiplier Propensity to consume Propensity to consume Marginal revenue product Marginal revenue product Production function Production function Demand theory Demand theory Theory of firm—price, output and investment Theory of firm—price, output and investment

decisions decisions Money and banking Money and banking Public finance and fiscal and monetary policy Public finance and fiscal and monetary policy National income National income Theory of international trade Theory of international trade

What is Managerial Economics?What is Managerial Economics? Managerial economic is concerned with decision Managerial economic is concerned with decision

making at the level of firm.making at the level of firm. It is viewed as a special branch of economics It is viewed as a special branch of economics

bridging the gap between pure economic theory bridging the gap between pure economic theory and managerial practices. and managerial practices.

It is defined as application of economic theory It is defined as application of economic theory and methodology to decision making process by and methodology to decision making process by the management of the business firms.the management of the business firms.

The basic purpose of managerial economic is to The basic purpose of managerial economic is to show how economic analysis can be used in show how economic analysis can be used in formulating business plans.formulating business plans.

ME = Management + EconomicsME = Management + Economics

Management deals with principles which Management deals with principles which helps in decision making under uncertainty helps in decision making under uncertainty and improves effectiveness of the and improves effectiveness of the organization. organization.

On the other hand economics provide a set On the other hand economics provide a set of preposition for optimum allocation of of preposition for optimum allocation of scarce resources to achieve a desired result. scarce resources to achieve a desired result.

ME deals with the integration of economic ME deals with the integration of economic theory with business practices for the theory with business practices for the purpose of facilitating decision making and purpose of facilitating decision making and forward planning by management. forward planning by management.

In other words it is concerned with using of In other words it is concerned with using of logic of economics, mathematics, and logic of economics, mathematics, and statistics to provide effective ways of statistics to provide effective ways of thinking about business decision problems. thinking about business decision problems.

Diagrammatic PresentationDiagrammatic Presentation

Economic Theoryand Methodology

Business ManagementDecision Problems

Managerial Economics:Application of Economics

to solving business

Optimal solution tobusiness problems

Decision MakingDecision Making

Decision making is the central objective of Managerial Economics

Decision making may be defined as the process of selecting the suitable action from among several alternative courses of action

The problem of decision making arises whenever a number of alternatives are available. Such as, – What should be the price of the product? – What should be the size of the plant to be

installed? – How many workers should be employed? – What kind of training should be imparted to

them? – What is the optimal level of inventories of

finished products, raw material, spare parts, etc.?

Why Problems of Decision Making Why Problems of Decision Making Arises?Arises?

The problem of decision making arises due to the scarcity of resources.

We have unlimited wants and the means to satisfy those wants are limited,

With the satisfaction of one want, another arises, and here arises the problem of decision making.

While performing his function manager has to take a lot of decisions in conformity with the goal of the firm.

Most of the decisions are taken under the condition of uncertainty, and involves risks.

The main reasons behind uncertainty and risks are uncertain behavior of the market forces..

Uncertain Market ForcesUncertain Market Forces

The demand and supply Changing business environment Government policies External influence on the domestic market Social and political changes

Economic ProblemEconomic Problem Economic problem can be called as the problem

related to the unlimited wants with limited resources having alternative applications having alternative applications

Thus, every man faces the problem of Thus, every man faces the problem of ‘economizing his means’.‘economizing his means’.

How to make the maximum use of limited resources?, is known as the problem of economy..

Main Groups of Scarce Resources are,Main Groups of Scarce Resources are,– LandLand– LaborLabor– CapitalCapital

Decision Making Problems of FirmDecision Making Problems of Firm To identify the alternative courses of action of

achieving given objectives To select the course of action that achieves the

objectives in the economically most efficient way To implement the selected course of action in a

right way to achieve the business objectives.

The prime function of management is Decision making and forward planning.

Forward planning goes hand in hand with decision making.

Forward planning means establishing plans for the future.

ME and Other DisciplinesME and Other Disciplines

MathematicsMathematics StatisticsStatistics Operations ResearchOperations Research Management TheoryManagement Theory AccountingAccounting ComputersComputers

Scope of MEScope of ME

Demand analysis, Forecasting, Production function, Cost analysis, Inventory Management, Advertising, Pricing System, Resource allocation etc

Nature of MENature of ME Concepts of Micro-EconomicsConcepts of Micro-Economics

– Elasticity of demand – Marginal cost – Marginal revenue – Market structures and their significance in

pricing policies. Concepts of Macro-EconomicsConcepts of Macro-Economics

– The magnitude of investment and the level of national income,

– The level of national income and the level of employment,

– The level of consumption and the level of national income

In ME emphasis is laid on those prepositions which are likely to be useful to management

Factors Influencing Managerial Decision Factors Influencing Managerial Decision MakingMaking

Besides economic variables Besides economic variables managerial decision making is also managerial decision making is also influenced by other significant influenced by other significant variables, such asvariables, such as– Human and Behavioral ConsiderationsHuman and Behavioral Considerations– Technological ForcesTechnological Forces– Environmental ForcesEnvironmental Forces

Steps in Decision MakingSteps in Decision Making

Establish objectives Specify the decision problem Identify the alternatives Evaluate alternatives Select the best alternatives Implement the decision Monitor the performance

Tools of Decision MakingTools of Decision Making

Opportunity cost Incremental principle (Cost &

Revenue) Principle of the time perspective Discounting principle Equi-marginal principle

Reference BooksReference Books

Managerial Economics – M L JhinganManagerial Economics – M L Jhingan Managerial Economics – Varshney & MaheshwariManagerial Economics – Varshney & Maheshwari Managerial Economics – P L MehtaManagerial Economics – P L Mehta Managerial Economics – AtmanandManagerial Economics – Atmanand Managerial Economics – Craig Peterson & Cris Managerial Economics – Craig Peterson & Cris

LewisLewis Managerial Economics – SalvatoreManagerial Economics – Salvatore Managerial Economics – Joel DeanManagerial Economics – Joel Dean Managerial Economics – MithaniManagerial Economics – Mithani

ActivityActivity

1. Make a list in your own words of some of the economic decision that– you are facing – your family has to take – your country has to take

2. Take any quality newspaper, go through it and make notes on the following:– Micro economic – Macro economic (problems and issues you find)

3. Suppose there is a firm with a temporary idle capacity. An order for 5000 units comes to management’s attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for the whole lot but not more. The short run incremental cost (ignoring the fixed cost) is only Rs.3/-. There fore the contribution to overhead and profit is Rs.1/- per unit (Rs.5000/- for the lot)

What What long run repercussion of the order is to be taken into account??

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