INTRODUCTION TO MANAGERIAL

ECONOMICS

PROF. V. R . KISHORE KUMAR,

M.A(Q.E.)(MPhil.)

INDEX Introduction Definition of Economics and Managerial

Economics Scope of Managerial Economics Basic Economic Problems The Firm Role of a Managerial Economist Decision making areas Steps in decision making References

Emergence of managerial economics as a separate curse of

management studies can be attributed to at least three factors

a) Growing complexity of business decision making process

due to changing market conditions and business

environment

b) The increasing use of economic logic, conceptual theories

and tools of economic analysis in the process of business

decision making process

c) Rapid increase in demand for professionally trained

managerial manpower

INTRODUCTION

DFINITIONS OF ECONOMICS AND

MANAGERIAL ECONOMICSECONOMICS: Economics is a social science . Its basic

function is to study how people – individual house holds, firms and nations maximizing their gains from their limited resources and opportunities.

In economic terminology it is called as “maximizing behaviour” or more approximately “optimizing behaviour” .

Optimization means selecting best out of available resources with the objective of maximizing gains from given resources.

Economics is thus a social science, which studies

human behaviour in relation to optimizing

allocation of available resources to achieve the

given goals.

Eg : individual household behaviour, firm, industry

and nation

Economics is also a study of choice-making

behaviour of the people.

The origin of the subject could be traced from the works of the

Greek philosopher Aristotle who confined the study of

economics to household management and acquiring, guarding

and making proper use of wealth.

The term economics is derived from two Greek words

“OIKOS”(a house) and “NEMEIN”(to manage).

Prof. Samuleson remarks economics as “the oldest of arts and

newest of science, indeed the queen of the social science.

Definitions of Economics:

Wealth Definition- Adam Smith, J.B.Say, J.S.Mill etc.

(Classical definition)

Welfare Definition- Marshall, A.C.Pigue etc.(Neoclassical

definition)

Scarcity definition- Robbins

Growth Definition- Paul A Samuelson Moderndefinition

Managerial economics can be broadly defined as

the study of economic theories, logic and tools

of economic analysis that are used in the

process of decision making. Economic theories

and techniques of economic analysis are applied

to analyze business problems, evaluate business

options and opportunities with a view to arriving

at an appropriate business decision.

Managerial Economics

Douglas : Managerial economics is concerned

with the application of economic principles and

methodologies to the decision making process

within the firm or organization. It seeks to

establish rules and principles to facilitate the

attainment of the desired economic goals of the

management.

Mansfield : He defines that managerial economics

is concerned with the application of economic

concepts and economic tools to the problems of

formulating rational decision making.

Spencer and Seigleman : It is the integration of

economic theory with business practice for the

purpose of facilitating decision making and

forward planning by management

Economic Theory and Managerial Theory

Economic Theory Managerial Theory

1. It deals with the body principles

2. It has the characteristics of both

micro and macro economics

3. It deals with a study of

individual firm and individual

consumer

4. It based on certain assumptions

5. It studies economic aspects of

the problem

1. It deals with the application of

certain principles to solve the

problem of a firm

2. It has only micro characteristics

3. It deals with the study of only profit

theories

4. In managerial theory assumptions

disappear due to practical situations

5. It studies both economic and non-

economic concepts.

Scope of Managerial Economics

Economics has two major branches

1. Micro Economics

2. Macro Economics

The term Micro means small and Macro means big.

Both are applied to business directly or indirectly.

managerial economics comprises both micro and

macro economic theories. The parts of micro and

macro economics that constitute managerial

economics depend on the purpose of analysis.

The scope of M.E. comprises all the economic concepts, theories and tools of analysis which can be used for analyse the issues related to demand , production and cost, market structure etc.,

In other words managerial economics is economics applied to analysis of business problems and decision making . Broadly it is applied economics

Micro-economics applied to internal issues :

Operational issues are of internal nature. Internal issues include

all those problems which arise within the business organization

and fall within purview and control of the management .

Some of the basic internal issues are :

What to produce

How much to produce

Choice of technology i.e. choosing of the factor –combination

Choice of price i.e. how to price the commodity

How to promote sales

How to face the price competition

How to decide on new investments

How to manage capital and profit

How to manage inventory i.e. stock of both

finished goods and raw material

Most of the micro economic problems deals with

most of these questions.

The Law Demand

The Theory of Production

Analysis of Market Structure and Pricing

Theory

Profit analysis and management

It guide firms in the measurement and management

of profit , in making new allowances for the risk

premium, in calculating the pure return on capital

and pure profit and also for future planning.

Theory of Capital and Investment Decisions

Knowledge of capital theory can contribute a

great deal in investment-decision making, choice of

projects, maintaining the capital, capital budjeting

etc.

Macro-economics deals with external issues :

The type of economic system in the country

General trends in N.I., employment, prices, savings and

investments

Structural change in the working financial institutions

viz., banks, insurance companies etc

Magnitude of and trends in foreign trade

Trends in labour supply and strength of capital market

Government’s economic policies i.e., industrial,

monetary, fiscal, price and foreign etc.

Social factors viz., value system of the society,

property rights, customs and habits etc.,

Political environment i.e., democratic, authoritarian,

socialist political systems, or state attitude towards

private business man etc.

These Environmental factors have a far-reaching

bearing upon the functioning and performance of the

firms. Therefore, decision makers have to take in to

account the present and future economic, political and

social

Conditions in the country and give due consideration

to the environmental factors in the process of decision

making.

Eg : SEZ in the Nandigram, Tata’s small car in Singur

district in West Bengal

BASIC ECONOMIC PROBLEMS

WHAT TO PRODUCE ?

WHERE TO PRODUCE ?

HOW TO PRODUCE ?

WHOOM TO PRODUCE ?

THE FIRM

Meaning :

The basic unit for obtaining production which

performs crucial role of linking product, factor and

money markets.

It is an administrative organization, utilising a pool

of resources.

A business organization under a single

management with one or more establishments.

FIRMS,INPUTS AND OUTPUTS F.O.P

HUMAN RESOURCE LABOUR

ENTERPRENURESHIP

CAPITAL RESOURCESNATURAL (LAND)

HANDMADE(STRUCTURES, EQUPMENTS

AND INVENTORIES)

Role of a managerial economist in the firm

Demand estimation and forecasting

Preparation of business /sales forecasts

Analysis of market survey to determine

the nature and extent of competition

Analyzing the issues and problems of

concerned industry

Assisting the business planning process of

the firm

Discovering new possible fields of business

endeavor and its cost-benefit analysis

Advising on prices, investment and capital

budgeting policies

Evaluation of capital budgeting etc.

DECISION MAKING AREAS

Business decision making is influenced not only by

economic considerations, but also by human

behavioral, technological and environmental factors

due to growing public awareness.

“Decision making and processing information are two

important tasks of managers”

In order to make good decisions managers must be able

to obtain, process and use information.

Decision Making Areas

Demand

forecasting

Production

planning

and cost

revenue

decision

Study of

economic

environmen

t

Pricing and relate

d decisions

Investme

nt decisions

DEMAND FORECASTING

QUALITATIVE

CONSUMER SURVEY

JURY OF EXPERT OPINION

SALESFORCE COMPOSITE METHOD

DELPHI METHOD

NOMINAL GROUP METHOD

PRODUCTION PLANNING AND COST REVENUE DECISIONS

Production Function :

The production function is a technological

relationship between output and various inputs used

in production viz., land, labour, capital and

technology.

The output depends on the increasing function of

all the factor inputs

Q=f(S,L,K,T)

The following types of cost are useful in the

decision areas

Average, Marginal and Total Costs

Fixed and Variable Cost

Direct and Indirect Cost

Replacement and Original Cost

Opportunity and Industrial Cost

Sunk Cost and Outlay Cost

STUDY OF ECONOMIC ENVIORNMENT

Economic environment is the most significant component of the business environment. It affects the survival and success of a business organization.

Economic environment

General conditionsIndustrial conditions

Stage of supply of resources of production

PRICING AND RELATED DECISIONS

The Price-output decisions are taken under various market

structures. The structure of the market refers to the degree

of competition in the market for the firms goods and

services. MarketPerfect competition

Monopoly market

Monopolistic market

Oligopoly market

INVESTMENT DECISION

Business firms invest large money in their

projects. Therefore, capital expenditure for

different project proposals compete within

themselves for their claim on scarce resources.

Generally , in business sector itself, individual

firms compete against access to financial

resources and scares .

The investment decisions are important as

Not easily reversible

Generally involves large sums of money

Highly futuristic and future is full of uncertainty

Long gestation periods

Thus, careful financial appraisal of each project

involves larger investments. Due to above reasons,

capital decisions fall in the category of investment and

known as “capital budgeting decisions” made by

highest level of management.

STEPS IN DECISION MAKING

Managerial economics is concerned with decision

making at the level of firm. These decisions have far

reaching effects on the firm. Delay in taking

decisions or implementing decisions might turn in to

losses.

Various steps in the decision making by a business firm

are as fallows :

Defining business problem

Determining objective

Exploring available alternatives

Assessing consequences of various alternatives

Choosing best alternative

Performing sensitive analysis

REFERENCES

1. MANAGERIAL ECONOMICS -- D.N.DWIVEDI2. BUSINESS ECONOMICS -- D.D. CHATURVEDI S.L. GUPTA SUMITRA PAUL 3. MICRO ECONOMICS -- JHON KENNADY4. MANGERIAL ECONOMICS – MITHANI

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