1. introduction to managerial economics

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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.

1. introduction to managerial economics

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