marginal economics

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Managerial Economics Chapter-1

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Page 1: Marginal economics

Managerial Economics Chapter-1

Page 2: Marginal economics

Definition

• According to Spencer and Siegelman “Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.”

• Brigham and Pappas believe that managerial economics is “the application of economic theory and methodology to business administration practise.”

• Hague, on the other hand, views managerial economics as “a fundamental academic subject which seeks to understand and to analyse the problems of business decision-making”.

Page 3: Marginal economics

Features

• ME is concerned with decision-making of economic nature. This implies that managerial economics deals with identification of economic choices and allocation of scarce resources.

• ME is goal-oriented and prescriptive .It deals with how decisions should be made by managers to achieve the organisational goals.

• ME is pragmatic. It is concerned with those analytical tools which are useful in improving decision-making.

• It is both conceptual and metrical. An intelligent application of quantitative techniques to business.

• It provides a link between traditional economics and the decision sciences for managerial decision-making

Page 4: Marginal economics

Nature

• Macro-economic conditions-• (i) The economy in which the business operates is

predominantly a free enterprise economy using prices and market.

• The present-day economy is the one undergoing rapid technological and economic changes

• The intervention of government in economic affairs has increased in recent times and there is no likelihood that this intervention will stop in future.

Page 5: Marginal economics

Contd.

• Micro-economic Analysis• This deals with the problems of an individual

firm,industry, consumer,etc.

• In the case of managerial economics , micro-economics helps in studying what is going on within the firm;

• How best to use the available scarce resources between various activities of the firm;

• How to be technically as well as economically efficient

Page 6: Marginal economics

Scope

1. Demand Analysis and forecasting,

2. Cost Analysis

3. Production and Supply Analysis

4. Pricing decisions, Policies and Practices

5. Profit Management

6. Capital Management

Page 7: Marginal economics

Demand Analysis and Forecasting

• Demand analysis helps identify the various factors influencing the demand for a firm’s product

• It is essential for business planning and occupies a strategic place in Managerial Economics

• It mainly consists of discovering the forces determining sales and their measurement.

Page 8: Marginal economics

Cost Analysis

• A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates that are useful for management decisions

• The factors causing variations in costs must be recognised

• An element of cost uncertainity exists because all the factors determinig costs are not always known as controllable.

• Discovering economic costs and being able to measure them are necessary steps for more effective profit planning,cost control and often for sound pricing practises.

Page 9: Marginal economics

Production and Supply Analysis

• Production analysis is narrower in scope than cost analysis.

• Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms

• Production analysis mainly deals with different production functions and their managerial uses.

• Supply analysis deals with various aspects of supply of a commodity.

• Certain important aspects of supply are: Supply schedule, curves and function ,Law of supply and its limitations,

Page 10: Marginal economics

Pricing Decisions, Policies and Practises

• Pricing is a very important area of Managerial Economics

• Price is the genesis of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the price decisions taken by it.

• The important aspects dealt with under this area are : Price Determination in various Market Forms, Pricing Methods, Differential Pricing , Product-line Pricing and Price Forecasting.

Page 11: Marginal economics

Profit Management

• Business firms are generally organisedfor the purpose of making profits and, in the long run, profits provide the chief measure of success.

• If knowledge about the future were perfect, profit analysis would have been very easy task.

• Profit planning and measurement constitute the difficult area are: Nature and measurement of profit,Profit Policies and Techniques of profit planning like Break-Even Analysis

Page 12: Marginal economics

Capital Management

• The most complex and troublesome for the business manager are likely to those relating to the firm’s capital investments.

• Capital management implies planning and control of capital expenditure

• The main topics dealt with are : Cost of Capital, Rate of Return and Selection of projects.

Page 13: Marginal economics

Significance

• Managerial economics provides a number of tools and techniques to enable the manager to become a competent model builder.

• M.E provides most of the concepts that are needed for the analysis of business problems .Concepts of elasticity of demand, fixed and variable costs, short and long-run costs ,help in understanding and solving decision problems.

• M.E is helpful in making decisions such as : What should be the product-mix? Which is the production technique and the input-mix that is least costly?

Page 14: Marginal economics

Methods of ME

1) The scientific Method or Experimental Method- The blend of Inductive and Deductive method

2) The Statistical Method –is a device by which the quantitative data are collected and scientifically analyzed in order to give us a more clear picture of happenings.

3) The Method of Simulation- This method has acquired prominence with the oncoming of electronic computers.

4) The Description method- It is used by Managerial Economist to analyse the impact of original structure on the working of business enterprises

Page 15: Marginal economics

Contd.

5) Reference to facts and figures of the firm provides complete information about the working of the firm. Systematically an approach can be set up to compile the data from the various departments of the firm.

6) Case studies undertaken would provide an invigorating method in the learning process in the science of Managerial Economics. Case studies bring out the complexity of the environment in which the managers have to take economic decisions

Page 16: Marginal economics

Concepts of Economics relevant to business

1) Wants- Want refers to lack of satisfaction, a state of discomfort which every individual desires to eliminate.

2) Utility- Utility is the capacity of a good to satisfy a human want. Total utility and Marginal Utility

3) Demand- Demand is the desire backed by purchasing power.

4) Supply- Supply of any commodity refers to various amounts of the commodity which the sellers are willing to sell at different possible prices at any given time.

5) Production- Production refers to creation of something tangible which can be used to satisfy human want.

6) Distribution- 7) Consumption

Page 17: Marginal economics

Contd.

8) Cost9) Price10) Competition11) Monopoly12)Profit13) Optimisation- Making the best possible use of available

resources to obtain the maximum possible desired quality of output.

14) Average and Marginal 15) Elasticity16) Micro and Macro Economics -