Scope of managerial Economics

Economics has two major branches Micro economics and Macro economics. Both micro and macro economics are applied to business analysis which can be used to analyse the business environment and to find solutions to practical business problems.

Micro and Macro Economics

Micro-economics deals with the analysis of small individual units of economy such as individual firm, an individual consumer, an individual industry etc.

Macro-economics is the study of entire economy. It also gives an understanding of the various factors like business cycles, national income economic policies of Govt. like those relating to taxation, foreign policy, labour relations etc.

Business issues are…

1. Operational or internal issues2. Environment or external issues

Micro economics applied to operational issue

Include all the problems which arises within the organization.eg.Some of basic internal issues are, Choice of business and nature of product, choice of size of the firm, choice of technology, choice of price(how to price commodity),how to promote sales, how to face price competition, how to decide on new investments, how to manage profit and capital, how to manage inventory etc.

Microeconomics theories which deals with most of these issues are following:

Theory of demand and supply-it explains the consumer behaviour. How do the consumers decide whether or not to buy a commodity to be purchased? How do the consumers behave when price of the commodity, their income, tastes and fasions etc.. change?

Cont…Theory of Production: Relationship b/w I/O. Explains

under what conditions costs increase or decrease; how total o/p constant when units of one factor(i/p) are increased keeping other factors constant; how can o/p be max from a given quantity of resourses;how can optimum size of o/p be determined?

Market Analysis: Explains how prices are determined under diff. market conditions; when price discrimination is desirable, feasible and profitable; how advertising can be expanding sales in a competitive market.

Profit Analysis: Determined by Demand for the product, input prices in the factor market, nature and degree of competition in the product market, price behaviour under changing conditions in the product market

Theory of capital:Success of the firm determined by the efficient allocation and management of capital.Major issues related to capital are Choise of investment project, assessing the efficiency of capital, most efficient allocation of capital.

Macro economic applied to Business environment

Include overall economic , social and political atmosphere of the country. Economic environment of a country include the following factors:

Type of economic system of the country. General trends in production, employment,

income, prices, savings and investments. Structure and trends of working of the financial

institutions .eg. Banks, insurance companies.

Cont… Magnitude of and trends in foreign trade. Eg.

Fluctuations in the price of crude oil in international market affects on price of desel and petrol in India.

Govt’s economic policies- Govt policies designed to control and regulate economic activities of private firms. eg. Industrial policy, price policy.

Social factor. eg. society , property rights , customs.

Political environment – Govt attitude towards business. eg. Democratic, socialist.

Degree of openness of the economy and influence of MNC’s on the domestic market.

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