managerial economics -1[1]

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Managerial EconomicsManagerial Economics

Meaning and Nature of M EMeaning and Nature of M E

Chief CharacteristicsChief Characteristics

ScopeScopeRole and responsibilitiesRole and responsibilities

Basic concepts and precepts.Basic concepts and precepts.


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Managerial economics, popularly known asManagerial economics, popularly known asBusiness economicsBusiness economics

An applied branch of economics associated withAn applied branch of economics associated withbusiness management.business management.

Originated in early 1950s, when businessOriginated in early 1950s, when businessmanagement became so complex, that it neededmanagement became so complex, that it neededconstant application of economic principles forconstant application of economic principles forsolving many of its practical business issues andsolving many of its practical business issues andproblems.problems.

ME uses micro and macro economic conceptsME uses micro and macro economic conceptsand principles to take business decisions andand principles to take business decisions and

forward planning.forward planning.


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Dominique SalvatoreDominique Salvatore

Managerial economics refers to the applicationManagerial economics refers to the application

of economic theory and tools of analysis ofof economic theory and tools of analysis ofdecision sciences to examine how andecision sciences to examine how an

organisation can achieve its aims andorganisation can achieve its aims and

objectives most efficiently.objectives most efficiently.


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Spencer and SiegalmanSpencer and Siegalman

Managerial Economics is the integration ofManagerial Economics is the integration of

economic theory with business practices for theeconomic theory with business practices for the

purpose of facilitating decision making andpurpose of facilitating decision making andforward planning by management.forward planning by management.


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McNair and MeriamMcNair and Meriam

Managerial Economics consists of the use ofManagerial Economics consists of the use ofeconomic mode of thought to analyse businesseconomic mode of thought to analyse business

situations.situations.

Business Economics is that part of economicBusiness Economics is that part of economic

science, which uses economic principles toscience, which uses economic principles to

analyse business problems to arrive at rationalanalyse business problems to arrive at rationalbusiness decisions.business decisions.


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CharacteristicsCharacteristics

(1) Managerial Economics is micro in(1) Managerial Economics is micro in

nature. It does not study the economynature. It does not study the economy

as a whole and as such is not macro inas a whole and as such is not macro in

nature.nature.


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(2) Managerial Economics is centered(2) Managerial Economics is centered

on the study of the firm and itson the study of the firm and its

problems.problems.


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(3) Managerial Economics is pragmatic in(3) Managerial Economics is pragmatic in

nature.nature.

It is concerned with the analytical tools ofIt is concerned with the analytical tools of

economics which are capable of solving practicaleconomics which are capable of solving practicalproblems of business and which can helpproblems of business and which can help

decision making about future.decision making about future.


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4) Managerial Economics is concerned with4) Managerial Economics is concerned with

dayday--toto--day decision making and forwardday decision making and forward

planning of business.planning of business.


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(5) Managerial Economics is normative in(5) Managerial Economics is normative in

approach. It seeks what is desirable andapproach. It seeks what is desirable andundesirable. It judges whether the result of aundesirable. It judges whether the result of a

particular action is good or bad.particular action is good or bad.


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(6) Managerial Economics also makes use of(6) Managerial Economics also makes use ofmacroeconomic principles in taking businessmacroeconomic principles in taking business

decisions.decisions.

An understanding of macro aspects of businessAn understanding of macro aspects of businesscycle, national income, foreign trade,cycle, national income, foreign trade,

government policies etc., enables an individualgovernment policies etc., enables an individual

firm to adjust its business operations in the bestfirm to adjust its business operations in the best

possible manner.possible manner.


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Managerial Economics and Pure EconomicsManagerial Economics and Pure Economics

ME is an applied science.ME is an applied science.

It deals with the application of economicIt deals with the application of economic

principles in business decisions.principles in business decisions.

Pure economics deals with theory.Pure economics deals with theory.

ME deals with practice of economic principlesME deals with practice of economic principles

in doing business.in doing business.

ME depends on economic analysis forME depends on economic analysis for

theoretical tools and forward planning.theoretical tools and forward planning.


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Managerial economics is micro in nature.Managerial economics is micro in nature.

Pure economics is both micro and macro inPure economics is both micro and macro innature.nature.

Managerial economics deals with only problemsManagerial economics deals with only problemsof firms.of firms.

Pure economics studies firm, industry, individualPure economics studies firm, industry, individualconsumer and economy in aggregates.consumer and economy in aggregates.

Managerial economics focuses only on one ofManagerial economics focuses only on one ofthe theories of distribution i.e. profit.the theories of distribution i.e. profit.

Pure economics deals with all the theories ofPure economics deals with all the theories ofdistribution, such as wage, rent, interest anddistribution, such as wage, rent, interest andprofit theories.profit theories.


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Objectives of Managerial EconomicsObjectives of Managerial Economics

Decision MakingDecision Making The most important function of management inThe most important function of management in

a business is to take decisions on business issues.a business is to take decisions on business issues.

The success of business depends on the rightThe success of business depends on the rightdecisions taken by the management.decisions taken by the management.


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A decision maker is faced with two or moreA decision maker is faced with two or more

alternative course of actions to achieve aalternative course of actions to achieve a

predetermined objective like profitpredetermined objective like profit--

maximisation, salesmaximisation, sales--optimization or costoptimization or cost--

minimization.minimization. A decision has to be taken as to which course ofA decision has to be taken as to which course of

alternative is to be chosen to attain the bestalternative is to be chosen to attain the best

result.result.


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DecisionDecision--making is a process of selecting amaking is a process of selecting a

particular course of action from a number ofparticular course of action from a number ofalternatives.alternatives.

Decision making with respect to business issuesDecision making with respect to business issues

can be classified into two broad categories.can be classified into two broad categories.

Operational issuesOperational issues

Issues related to forward planningIssues related to forward planning


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2. Decision on Operational Issues of2. Decision on Operational Issues ofBusinessBusiness

Operational issues of business pertain to dayOperational issues of business pertain to day--toto--day business affairs and their planning.day business affairs and their planning.

The issues include the use of inputs like men,The issues include the use of inputs like men,materials, machines and management.materials, machines and management.

They also include the alterations andThey also include the alterations and

adjustments of inputs in accordance with theadjustments of inputs in accordance with thechange in cost of production and availability ofchange in cost of production and availability ofresources.resources.


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Management does not pose much difficulty inManagement does not pose much difficulty inthe decisionthe decision--making aspects of operationalmaking aspects of operational

issues because it is related to variables, which areissues because it is related to variables, which are

more or less predictable for the present use.more or less predictable for the present use.


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Forward PlanningForward Planning

Forward planning issues are the most delicateForward planning issues are the most delicateand complicated part of decision making.and complicated part of decision making.

It relates to formulation of plans for futureIt relates to formulation of plans for future

business. It involves prediction and forecasting.business. It involves prediction and forecasting.


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Formulation of plans for future is not an easyFormulation of plans for future is not an easy

task, because future is uncertain.task, because future is uncertain.

It demands utmost care and prudence from theIt demands utmost care and prudence from the

part of a decision maker.part of a decision maker.

A slight mistake in prediction will result inA slight mistake in prediction will result in

collapse and immense loss of business.collapse and immense loss of business.


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Information about economic variables like futureInformation about economic variables like futuredemand, cost, profit etc., is rarely available to thedemand, cost, profit etc., is rarely available to themanager.manager.

Make use of the past data and current information forMake use of the past data and current information forpredicting the future variables.predicting the future variables.

The success of business plan depends upon theThe success of business plan depends upon theaccuracy of such predictions about future estimates ofaccuracy of such predictions about future estimates ofeconomic variables.economic variables.

ME makes use of statistical techniques for predictionME makes use of statistical techniques for predictionand forecasting.and forecasting.


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Scope of Managerial EconomicsScope of Managerial Economics

Theory of DemandTheory of Demand::

Production and sale of a product depends on consumerProduction and sale of a product depends on consumerdemand.demand.

Hence a decision maker should have an estimate ofHence a decision maker should have an estimate offuture demand for his product.future demand for his product.

Forecast of demand is essential for production decisionForecast of demand is essential for production decisionand purchase of resources.and purchase of resources.


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Theory of CostTheory of Cost::

Cost estimates are essential for decisionCost estimates are essential for decision--making onmaking on

price. Accurate cost estimates are difficult to make.price. Accurate cost estimates are difficult to make.

With the help of economic cost and accounting costWith the help of economic cost and accounting cost

drawn from the past records of the firm, the price isdrawn from the past records of the firm, the price isfixed with reasonable profits.fixed with reasonable profits.


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Price TheoryPrice Theory::

Price determination is another important decisionPrice determination is another important decision

making of the manager.making of the manager.

The revenue of the firm depends on price policy.The revenue of the firm depends on price policy.

Price theory explains how prices are determined underPrice theory explains how prices are determined under

various market situations.various market situations.


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Price PoliciesPrice Policies::

The success of the firm depends on the price policy.The success of the firm depends on the price policy.

When the product enters the market two alternativeWhen the product enters the market two alternative

strategies are possible.strategies are possible.

Penetration Pricing: here the firm set a very low pricePenetration Pricing: here the firm set a very low price

to enable the firm to rapidly create a market for tits newto enable the firm to rapidly create a market for tits newproduct.product.

Skimming Pricing: here firm set a very high initial priceSkimming Pricing: here firm set a very high initial price

to maximise returns.to maximise returns.


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Theory of ProfitTheory of Profit::

Profit making is the prime objective of the firm. TheProfit making is the prime objective of the firm. Thesuccess of the firm depends on the profit.success of the firm depends on the profit.

But profits are uncertain.But profits are uncertain.

Uncertainty is cause by the unforeseen variations inUncertainty is cause by the unforeseen variations in

cost and revenue.cost and revenue.

Hence profit planning and measurement are difficultHence profit planning and measurement are difficult

tasks.tasks.

Profit theory helps decision makers in managing,Profit theory helps decision makers in managing,measuring and planning future profits.measuring and planning future profits.


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Capital ManagementCapital Management::

Capital management involves preparation of longCapital management involves preparation of long--termtermbudget.budget.

It deals with cost of capital, rate of return and selectionIt deals with cost of capital, rate of return and selection

of projectof project..


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Macro Economic TheoryMacro Economic Theory::

Many external factors have significant influence on theMany external factors have significant influence on the

performance of the firm.performance of the firm.

These factors are external to firm on which it has littleThese factors are external to firm on which it has little

control.control. Major environmental factors that influence firmsMajor environmental factors that influence firms

decisiondecision--making are business cycle, national income,making are business cycle, national income,

foreign trade, government policy, labour relations etc.foreign trade, government policy, labour relations etc.

These are part of macroeconomics, which businessThese are part of macroeconomics, which businesseconomics makes use of.economics makes use of.


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Role and Responsibilities of MERole and Responsibilities of ME

Study of Business OrganisationStudy of Business Organisation::

Business economist studies the internal factors, whichBusiness economist studies the internal factors, whichare within the control of the firm that can influence theare within the control of the firm that can influence the

business.business.

These relate to price and output determination, theThese relate to price and output determination, theinvestment decision regarding the size of the firm,investment decision regarding the size of the firm,

expansion programme quality control, sources ofexpansion programme quality control, sources offinance, pricing policies and forward planning.finance, pricing policies and forward planning.


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Study of ExternalitiesStudy of Externalities::

Mangerial economist studies the external factorsMangerial economist studies the external factors

influencing the firms decisions.influencing the firms decisions.

The external factors include national income, businessThe external factors include national income, business

cycles, government policies and international trade.cycles, government policies and international trade.


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Specific RoleSpecific Role::

Managerial economist conducts market survey andManagerial economist conducts market survey and

monitors variables like sales, consumer preferences,monitors variables like sales, consumer preferences,

demand, etc. and recommends optimization models fordemand, etc. and recommends optimization models for

the firm.the firm.


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Provide Economic InformationProvide Economic Information::

Managerial economist collects data regarding output,Managerial economist collects data regarding output,

market potential, demand, sales, tax structure etc. andmarket potential, demand, sales, tax structure etc. and

make them available to firms decision making process.make them available to firms decision making process.


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Estimation and forecasting of demand.Estimation and forecasting of demand.

Preparation of business and sales forecast.Preparation of business and sales forecast. Forecasting changes in costs and business conditionsForecasting changes in costs and business conditions

based on market research.based on market research.

Conducting market survey and determining the natureConducting market survey and determining the nature

of competition.of competition.

Analyzing and understanding the issues and problemsAnalyzing and understanding the issues and problems

of the industry.of the industry.

Assisting in business planning.Assisting in business planning.


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Discovering new possible fields of business.Discovering new possible fields of business.

Advising on pricing, investment and capital budgeting.Advising on pricing, investment and capital budgeting.

Evaluating capital budget.Evaluating capital budget.

Building of micro economic and macro economicBuilding of micro economic and macro economic

models of firms activities.models of firms activities.

Directing of economic research.Directing of economic research.

Briefing the management on contemporary issues ofBriefing the management on contemporary issues of

domestic and global economy.domestic and global economy.

managerial economics -1[1]

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