MANAGERIAL ECONOMICS - INTRODUCTION ME consists of that part of economic theory

which helps the business manager to take rational decisions

Economic theory helps to analyse practical problems

ME integrates economic theory with business practice

ME bridges the gap between abstract theory and business practice

MANAGERIAL ECONOMICS – INTRODUCTION CTD…. Deals with the use of economic concepts and

principles for decision-making in a business Otherwise called Business Economics or

Economics of the Firm It is economics applied in decision-making So also called Applied Economics

MANAGERIAL ECONOMICSDEFINITION-SPENCER AND SIEGELMAN

The integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management

MANAGERIAL ECONOMICSSPENCER AND SIEGELMAN

Operational Issues- arise in the daily operation- issues that arise in relation

to implementation of plans already made

- day-to-day management of men and materials

- alterations and adjustments in plans made

MANAGERIAL ECONOMICS

SPENCER AND SIEGELMAN

Forward PlanningEstablishing plans for future regarding

production, pricing, capital, profit, raw materials, labour etc.

Needs forecast of future market situationsFuture is always uncertainThis uncertainty makes decision-making

difficultEconomic theories help to overcome this

difficulty

FORWARD PLANNING CTD…..

Economics provides tools to analyse market conditions, demand, supply

Also helps to understand external forces influencing business like business cycles, fluctuations in national income, government policies on taxation, foreign trade, labour relations, industrial licensing, price control etc.

CHARACTERISTICS OF MANAGERIAL ECONOMICS Micro-economic in nature Based on the theory of the firm Pragmatic-helps decision making Normative rather than positive-positive-

what is normative-what ought to be-ethical economics, prescriptive economics

Both conceptual and metrical Macro-economics is useful to managerial

economist Bridges the gap between pure theory and

practice

MANAGERIAL ECONOMICS-CHARACTERISTICS Both science and art Has a multi-disciplinary approach Helps to take operational decisions and

forward planning A social science Not an exact science

DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS

Traditional economics is the study of concepts, principles and theoretical aspects. Managerial economics deals with the application of economic theory for business decision-making

Economics includes both micro economics and macro economics whereas managerial economics is micro in character

DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…

Economics is both positive and normative science and managerial economics is only normative science

Economics deals with theoretical aspects only whereas managerial economics deals with practical aspects

DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…

Economics studies both individuals and firms whereas managerial economics is limited to firms

Economics considers only the economic aspects of a problem, whereas managerial economics considers economic and non-economic aspects

DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…

Economics deals with all the distribution theories , viz., rent, wages, interest and profit. Managerial economics mainly uses profit theory

Managerial economics is mainly concerned with the process of decision-making whereas decision-making is not a concern of economics

DISTINCTION BETWEEN MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS CTD…

Scope of economics is very wide whereas the scope of managerial economics is narrow as it deals with only a branch of traditional economics

Economics is a very old subject whereas managerial economics is a new and developing subject which evolved only after the second world war

SCOPE OF MANAGERIAL ECONOMICS Demand Analysis Production Function Cost Analysis Pricing Policies Profit Management Capital Budgeting Inventory Management Linear Programming and Theory of

Games Environmental Issues

USES OF MANAGERIAL ECONOMICS Helps find answer to the following

questions:What to produce?What inputs and production techniques?How much output to produce and its priceSize and location of new plantWhen should an existing plant be replaced?How should the available capital be

allocated?How much for advertisement?-Effective

media?-When to advertise? etc.

USES OF MANAGERIAL ECONOMICS CNTD.. Helps build suitable tool-kit from

traditional economics Incorporates ideas from other subjects Estimates economic relationships Predicts relevant economic quantities Understanding various influencing

factorsExternal internal

USES OF MANAGERIAL ECONOMICS CNTD.. Basis of Business Policies Model Building Integrating Agent Helps meeting social obligations

ROLE OF A MANAGERIAL ECONOMIST To collect data To analyse economic trends To act as an advisor to the firm To forecast market trends

RESPONSIBILITY OF A MANAGERIAL ECONOMIST Maximisation of profit To make accurate forecasts To make changes in forecasts, if needed To keep the management informed of

economic trends Rapport with data sources Prove himself inevitable to the top

management

DECISION-MAKING Decision-making is a function of choice

A decision is needed only when there are two or more alternatives from which one is to be chosen

DEFINITION OF DECISION-MAKING Bayard O. Wheeler

Decision-making is the process of selecting a particular course of action from among a number of alternatives. As applied to business, a choice is made among alternative ways of using resources to accomplish predetermined objectives.

STEPS IN DECISION-MAKING Defining and analysing the problemOnly when the problem is analysed

properly, all the aspects of the problem can be understood

Identifying alternative solutionsA problem can be solved in different

waysHs to search for and identify each

possible solution or alternative

STEPS IN DECISION-MAKING CTD… Evaluating alternatives

The merits and demerits of each alternative must be studied

Selecting the best alternativeSelection depends on the cost of the alternatives, feasibility and constraints on them

STEPS IN DECISION-MAKING CTD… Communicating and implementing the decisionDecisions taken should be effectively communicated to those persons who are to implement them

STEPS IN DECISION-MAKING CTD… Follow-up

It helps to evaluate the effectiveness of the decision taken and implemented

Helps to revise the past decision, if needed or to make a better decision in future

TYPES OF BUSINESS DECISIONS Programmed and Non-programmed decisionsProgrammed decisions are of a routine nature

These decisions are taken for simple, common and frequently occurring problems

TYPES OF BUSINESS DECISIONS CTD… Programmed and Non-programmed decisionsThese decisions are taken on the basis of set procedures

These decisions are taken by lower level executives

TYPES OF BUSINESS DECISIONS CTD… Programmed and Non-programmed decisions ctd…Non-programmed decisions are highly important and unstructured

They are non-repetitive in nature

There is no standard procedure for handling such problems

TYPES OF BUSINESS DECISIONS CTD… Major and Minor decisions

Major decisions have direct bearing on the achievement of the goals of the concern and so these decisions are made very carefully

They are decided by top executives

Minor decisions are made in the course of execution of major decisions

TYPES OF BUSINESS DECISIONS CTD… Routine and Strategic decisionsRoutine decisions are for carrying out day-to-day activities

They have only a minor impact on the business

These decisions are made at middle and lower levels of management

TYPES OF BUSINESS DECISIONS CTD… Routine and Strategic decisions

ctd…Strategic decisions are of long-term nature and involve commitment of large funds

As these decisions affect the entire organisation, they are considered as basic decisions

They are taken by top level management

TYPES OF BUSINESS DECISIONS CTD… Individual and Group decisions

Individual decisions are taken on routine problems and there is an already set procedure to solve these problems

Group decisions are taken in the interest of the organisation as a whole

TYPES OF BUSINESS DECISIONS CTD… Analytical and Adaptive decisionsAnalytical decision is taken when the problem is complex but its output is certain

Adaptive decision is taken when the problem is complex but the output is uncertain

TYPES OF BUSINESS DECISIONS CTD… Mechanical and Judgemental decisionsMechanical decisions are applicable for simple problems the result of which are certain

Judgemental decisions are taken for simple problems the result of which are vague

TYPES OF BUSINESS DECISIONS CTD… Technical decisions

These decisions are pertaining to the production process

TYPES OF BUSINESS DECISIONS CTD… Managerial decisions

These are decisions connected with the integration and co-ordination of all the activities of an organisation to achieve the organisational goals

TYPES OF BUSINESS DECISIONS CTD… Institutional decisions

These are higher level decisions like expansion, diversification, issue of new shares, acquisition, mergers, closure of divisions etc.

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS All those economic concepts, theories and tools that can be used to analyse business environment and to take decisions on business problems come under the scope of managerial economics

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD.. Theory of Demand

It explains the consumer’s behaviour

It explains the why, how, when and how much of the demand of a product

The theory helps to understand the change in consumer behaviour when the price of the commodity, consumer’s income, taste and fashions change

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Theory of Production

Otherwise called theory of firmIt helps to understand the effect on average cost and marginal cost when the rate of production is varied

It examines how the total output increases when only one factor of production is increased or when all the factors are increased simultaneously

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Theory of Production ctd…

It also shows how much one factor of production can be substituted by another and how optimum and equilibrium points can be attained

The theory is of use in planning the size of the firm, volume of production and the proportion of the factors of production

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Price Theory

This theory is of use in determining the price policy of a firm

The theory explains how prices are determined under different market situations

It also helps to know how different prices can be charged for the same product in different markets

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…

Price Theory ctd…What price policy a new firm should pursue in a rather competitive market or a less competitive market

A successful price policy spells the future of any firm

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…

Theory of ProfitProfit theory helps in measuring, managing and planning future profit

It gives a guideline to calculate the required return on capital employed and in making allowances for risk element

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…

Theory of Capital and InvestmentA sound knowledge of capital theory helps in choosing investment proposals, efficient allocation of capital and the evaluation of the efficiency of the capital invested etc.

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD…

Macroeconomic TheoriesThey help to understand the external factors that are beyond his control and to take suitable decisions

A business concern cannot survive unless it adjusts its decisions in accordance with external factors

ECONOMIC THEORIES APPLIED TO BUSINESS ANALYSIS CTD… Macroeconomic Theories ctd…

The businessman must know the macroeconomic theories like Theory of national IncomeTheories of economic growth and fluctuations

Theory of international trade and monetary mechanism

Government policies relating to taxation, labour relations etc.