introduction to managerial economics

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introduction,characteristics,scope ,importance ,micro & macro concept,decision making,fundamental concept,etc

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By Snigdha Singh 1

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Emergence of managerial economics as a separate course of management studies can be attributed to at least three factors Growing complexity of business decision making process due to changing market conditions and business environment. The increasing use of economic logic, conceptual theories and tools of economic analysis in the process of business decision making process. Rapid increase in demand for professionally trained managerial manpower. 2

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Economics is a social science, which studies human behaviour in relation to optimizing allocation of available resources to achieve the given goals. Eg : individual household behaviour, firm, industry and nation Economics is also a study of choice-making behaviour of the people. 3

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Managerial economics can be broadly defined as the study of economic theories, logic and tools of economic analysis that are used in the process of decision making. Economic theories and techniques of economic analysis are applied to analyze business problems, evaluate business options and opportunities with a view to arriving at an appropriate business decision. 4

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Douglas : Managerial economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of the management. 5

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Micro Economics Economics of Firms Uses Macro-economics Analysis Managerial Economics is Pragmatic Managerial Economics is Normative Bridge between traditional economics and Business Management 6

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Demand Analysis Cost Analysis Pricing Practices and Policies Profit Management Capital Management Analysis of Business Environment Allied Disciplines 8

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Basis of Business Policies Predicting economic Quantities Estimating economics relationship Helpful in Understanding the External forces constituting the environment. Reconciling theoretical concepts of economics in relation to the actual business behavior and conditions. 10

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The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. the analysis of the decisions made by individuals and groups, the factors that affect those decisions, and how those decisions effect others 11

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Micro-economics applied to internal issues : Operational issues are of internal nature. Internal issues include all those problems which arise within the business organization and fall within purview and control of the management . Some of the basic internal issues are : What to produce How much to produce Choice of technology i.e. choosing of the factor –combination Choice of price i.e. how to price the commodity How to promote sales How to face the price competition 12

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How to decide on new investments How to manage capital and profit How to manage inventory i.e. stock of both finished goods and raw material Most of the micro economic problems deals with most of these questions. The Law Demand The Theory of Production Analysis of Market Structure and Pricing Theory 13

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Profit analysis and management It guide firms in the measurement and management of profit , in making new allowances for the risk premium, in calculating the pure return on capital and pure profit and also for future planning. Theory of Capital and Investment Decisions Knowledge of capital theory can contribute a great deal in investment-decision making, choice of projects, maintaining the capital, capital budjeting etc. 14

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Study of the entire economy in terms of the total amount of goods and services produced, total income earned, level of employment of productive resources, and general behaviour of prices. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. 15

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Macro-economics deals with external issues : The type of economic system in the country General trends in N.I., employment, prices, savings and investments Structural change in the working financial institutions viz., banks, insurance companies etc Magnitude of and trends in foreign trade Trends in labour supply and strength of capital market Government’s economic policies i.e., industrial, monetary, fiscal, price and foreign etc. 16

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Social factors viz., value system of the society, property rights, customs and habits etc., Political environment i.e., democratic, authoritarian, socialist political systems, or state attitude towards private business man etc. These Environmental factors have a far-reaching bearing upon the functioning and performance of the firms. Therefore, decision makers have to take in to account the present and future economic, political and social 17

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Conditions in the country and give due consideration to the environmental factors in the process of decision making. Eg : SEZ in the Nandigram, Tata’s small car in Singur district in West Bengal 18

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To make reasonable profits on capital employed. Successful forecasts Knowledge of sources of Economic Information His status in the firm 19

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Opportunity cost Incremental Principle Incremental Cost Incremental Revenue Business implication of Incremental Concept Time Perspective Series of order Discrimination Discounting Principle The Equi-marginal Principle 20

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Demand estimation and forecasting Preparation of business /sales forecasts Analysis of market survey to determine the nature and extent of competition Analyzing the issues and problems of concerned industry 21

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Assisting the business planning process of the firm Discovering new possible fields of business endeavor and its cost-benefit analysis Advising on prices, investment and capital budgeting policies Evaluation of capital budgeting etc. 22

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Business decision making is influenced not only by economic considerations, but also by human behavioral, technological and environmental factors due to growing public awareness. “Decision making and processing information are two important tasks of managers” In order to make good decisions managers must be able to obtain, process and use information. 23

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