me- introduction module 1
TRANSCRIPT
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Module 1
Introduction to ManagerialEconomics
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Learning Objectives
After completing this chapter, the student should be able to:
Understand the nature and use of managerial economics as an
applied science.
Trace the role and responsibilities of a managerial economist.
Explain the differences between normative and positive aspects
of managerial economics.
Be familiar with the scientific process of decision making.
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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
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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 thebest of the opportunities.
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Major Economic Problems
What to produce?
For whom to produce?
Are the resources economically used?
Maximum utilization of resources and men.
Problem of growth
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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
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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.
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Nature of Managerial Economics
Micro Economics
Macro Economics
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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
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DEFINITION :
Prof. Mac cannel , micro economics is a study of
the specific economic units and a detailed
consideration of the behavior of these individual
units .
Prof.Boulding , micro economics seeks to
explain the working of individuals, firms
,households ,individual prices ,wages ,particular
industries .
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Subject-matter :
It deals with determination of product prices and
factor of prices . In short , it is concerned with the determination
of prices like theory of production ,theory of rent,
wages.Interest,profit & economic welfare .
It also known as PRICE THEORY .
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Merits :
A worms eye view of a small specific unit.
Formulating economic policies and scarce
resources of the country.
Achieve maximum output with minimum
costs. It is helpful for macro economic studies.
It does not give the correct pictures of the
working of the economy .
It does not provide solution to certain
economic problems .
The area of study covered by it is limited .
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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
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DEFINITION :
Prof. Boulding , Marco economics deals not only with
individual quantities but with the aggregates of these
quantities , not with the individual incomes , but with
national income , not with individual prices , but with
prices level , not with individual outputs but with thenational output .
.
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Subject Matter :
It deals with total consumption, total savings ,
total investment , total output, total or national
income, inflation & deflation economic growth,etc.
In other words it is concerned with the analysis
of income & employment in the economy as a
whole .
Theory of income & employment .
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Merits :
A birds eye-view of the entire economy .
Macro economic is more useful in solution to economyproblems.
It is quite helpful in formulation of GOVT. Economic
policies.
Study of macro economic is useful to micro economicstudies.
Limitations :
The study of individual units becomes more useful
than study of aggregates.
It is useful for for develop countries for solving their
problems but less useful or undeveloped country.
It studies the economy in general or in detail .
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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
Rs.13billion western style Indian apparel market
urban as well rural ready to wear segment was just
Rs.2.5 billion, while tailors enjoyed a whopping 80%
share worth Rs.10.5billion.
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A normative or regulatory science is a
body of systematized knowledge relatingto 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.
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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
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The Nature of Managerial Economics
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Managerial Insight
Managers have to acquire the insight of both
micro-economics and macroeconomics as theformer analyses the behaviour of individualeconomic entities such as consumer and producers, while the later exposes issues
pertaining to their behaviour in the economy as awhole.
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Role of ManagerialE
conomics in Decision-making
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The Business Decision
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Functions: Role and Responsibilities of a
ManagerialEconomist
A managerial economist in a business firm may carry on a wide range ofduties, such as:
Demand estimation and forecasting.
Preparation of business/sales forecasts.
Analysis of the market survey to determine the nature and extentof competition.
Analysing the issues and problems of the concerned industry. Assisting the business planning process of the firm.
Discovering new and possible fields of business endeavour andits cost-benefit analysis as well as feasibility studies.
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Advising on pricing, investment and capitalbudgeting policies.
Evaluation of capital budgets.
Building micro and macro economic models
Directing economic research activity.
Briefing the management on current domestic and
global economic issues and emerging challenges. Interpretation, analysis and reporting of current
economic matters, upcoming developments inbusiness, government and foreign or global sectors.
Contd.
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Scope of Managerial Economics
Following are the core topics of managerial economics: Demand Function and Estimation Demand Elasticity Demand Forecasting Production Function and Laws Cost Analysis
Pricing and Output Determination in different market structuressuch as perfect competition, monopoly, oligopoly andmonopolistic competition
Pricing Policies and Practices in Real Business Profit Planning and Management Project-Planning and Management
Project-Planning Capital Budgeting and Management Break-even Analysis Linear Programming Game Theory Government and Business.
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Application Areas of Managerial Economics in Business
Decision-making
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Managerial economists tend to rely on the scientific researchmethod in building and empirically testing business orientedeconomic models. This scientific approach consists of thefollowing steps:
Defining the problem Formulation of the hypothesis Abstraction for the model building Data collection
Testing the hypothesis Deduction based on data analysis Evaluating the test results Conclusion for decisions
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Chart 1.1
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Salient features & significance
of M.E
It involves an application of economic theory- especially
microeconomic analysis practical problem solving in real
business life. It is essentially applied microeconomics.
It is science as well as art facilitating better managerial
discipline. It explores & enhance economic mindfulness and
awareness of business problems and managerial decision.
It is concerned with firms behavior in optimal allocation ofresources. It provides tools to help in identifying the best
course among the alternatives & competing activities in any
productive sector whether private or public.
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Role & responsibilities of a
Managerial Economist
A managerial economist in a business firm may carry on a
wide range of duties, such as:
Demand estimation and forecasting.
Preparation of business/sales forecast. To provide forecasts
of changes in costs and business conditions based on market
research and policy analysis.
Analysis of the market survey to determine the nature and
extent of competition.
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Contd
Analyzing the issues and problems of the concerned
industry.
Assisting the business planning process of the firm.
Discovering new and possible fields of business
Endeavour and its cost-benefit analysis as well as
feasibility studies
Advising on pricing, investment and capital budgeting
policies
Evaluation of capital budgets
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Contd
Building micro and macro economic models of
particular aspects of the firms activities that are
useful in solving specific business problems. Most
models may be prediction oriented.
Directing economic research activity.
Briefing the management on current domestic and
global economic issues and emerging challenges
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Mangerial economic analysis
Reasoning for economic events and behavior of
business and economic entities
Tracing the cause effect relationships among
business economic variables and predicting
economic behavior.
Building economic models and testing them
empirically for making sound inferences towards
decision making based on theoretical framework.
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Steps for managerial
economic analysis
Defining the problem
Formulation of hypothesis Abstraction for the model building
Data collection
Deduction based on data analysis
Testing the hypothesis
Evaluating the test results
Conclusion for decision