Introduction to Managerial Economics

“Managerial Economics is concerned with business

efficiency”

Economics Early Definitions “An enquiry into the Nature and Causes of

Wealth of Nations” – Adam Smith “Economics is that body of knowledge which

relates to wealth” – F.A.Walker

Economics: Science of Scarcity or Science of Choice

Economics is the science which studies economic behavior as a relationship between ends and scarce means which have alternative uses” – Robbins

Economics behavior is essentially the process of evaluating economic opportunities open to an individual or a society and given resources, making choice of the best of the opportunities.

Major Economic Problems What to produce? For whom to produce? Are the resources economically used? Maximum utilization of resources and men. Problem of growth.

Definition of Managerial Economics

“ME …is the use of economic modes of thought to analyze business situation.” – McNair and Meriam

“ME .. Is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.” – Spencer and Siegelmam

Managerial Economics Defined The application of economic theory and the

tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Managerial Decision Problems

Economic theoryMicroeconomicsMacroeconomics

Decision Sciences(tools and techniques of

Analysis)

MANAGERIAL ECONOMICSApplication of economic theory

and decision science tools to solvemanagerial decision problems

OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS

Nature of Managerial Economics

Micro Economics Macro Economics

Micro Economics The word Micro means a millionth part When speaking of micro-economics or the

micro approach, it means some small part or component of the whole economy that we are analyzing.

Example: Individual consumer behavior, Price analysis of a particular firm, study of demand of individual product or firm.

Macro-Economics or the Theory of Income and Employment

Macro Economics is the analysis of economic system as a whole.

Example Aggregate output and aggregate expenditure

Circular Flow of Income or A Simple Model of an Economy In an economy there are two main decision

makers Households (Individual or consumers,

society) Business firms

Households These supply all the factors of production,

viz., land, labour and capital, to the firms which constitute the production sector and

They consume all the goods and services produced by the business

Business firms These include all firms, farms, factories and

shops engaged in production and distribution and goods and services performing two functions:

They hire factors of production from the households and transform them into final goods and services

They supply all the goods and services to the households, the consumers

Interaction between the Households and Firms The sale and purchase of inputs creates

factor market where the factor prices are determined

The sale and purchase of final goods and services creates product market where product prices are determined

Concepts Positive vs Normative approach Risk and uncertainty Decision making and forward planning Business Environment

Positive vs Normative approach Positive approach concerns with what is, was

or will be. This studies the phenomena as they actually are or as they actually happen.

Example: as per the ministry of textiles figures, of the $13billion western style Indian apparel market – urban as well rural – ready to wear segment was just $2.5 billion, while tailors enjoyed a whopping 80% share worth $10.5billion.

A normative or regulatory science is a body of systematized knowledge relating to criteria of what ought to be and is concerned therefore with ideal as distinguished from actual. This involves value judgements on whether what happens is good or bad, desirable or undesirable.

The retail sector has a huge scope to increase with special reference to ready to wear apparel industry to grow.

Characteristics of ME ME is micro-economic in character Takes the help of macro-economics It is prescriptive rather than descriptive It is both conceptual and metrical Used in decision making