MANAGERIAL ECONOMICS Module 1 Introduction 1 Introduction Managerial

MANAGERIAL ECONOMICS Module – 1: Introduction 1

Introduction: Managerial Economics and Business Economics are the two terms which have been used interchangeably. The prime function of a management executive in a business organization is decision making and forward planning. In fulfilling the function of decision making in an uncertainty frame-work, economic theory can be pressed into service with considerable advantage 2

What is Managerial Economics? Douglas - “Managerial economics is. . the application of economic principles and methodologies to the decision-making process within the firm or organization. ” Pappas & Hirschey - “Managerial economics applies economic theory and methods to business and administrative decision-making. ” Spencer and Siegelman – “Managerial Economics as the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. ” 3

What is Managerial Economics? Mc. Nair and Meriam “Managerial economics consists of the use of economic modes of thought to analyse business situations. ” 4

BUSINESS ADMINISTRATION DECISION PROBLEMS TRADITIONAL ECONOMICS : THEORY AND METHODOLOGY DECISION SCIENCES : TOOLS AND TECHNICS MANAGERIAL ECONOMICS : INTEGRATION OF ECONOMIC THEORY AND METHODOLOGY WITH TOOLS AND TECHNICS BORROWED FROM OTHER DECIPLINES OPTIMAL SOLUTIONS TO BUSINESS PROBLEMS

Nature & Characteristics Ø Micro – economic Ø Economics of the Firm ØPragmatic ØNormative : Prescriptive rather than descriptive ØMacro-economics is also useful to Managerial Economics 6

Scope: ØDemand Analysis and forecasting of demand ØCost Analysis (Output - Cost relations) Ø Production decisions (Input-Output Decisions) Ø Supply Analysis Ø Pricing Decisions Ø Profit Management Ø Investment / Capital Management 7

1. Demand Analysis & Forecasting n n n A major part of managerial decision making depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production schedules and employing resources Demand analysis and forecasting occupies a strategic place in Managerial Economics. 8

2. Cost Analysis n n A firm’s profitability depends much on its cost of production. A wise manager would prepare cost estimates of a range of output, identify the factors causing are cause variations in cost estimates and choose the cost-minimising output level, taking also into consideration the degree of uncertainty in production and cost calculations. 9

3. Production & Supply Analysis n n Production analysis is narrow in scope than cost analysis. Supply analysis deals with various aspects like Supply Schedule, Law of supply & its limitations. 10

4. Pricing Management n n n Pricing is a very important area of Managerial Economics. In fact, price is the origin 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 this area are: Price determination in various market forms, pricing methods, differential pricing, product-line pricing and price forecasting. 11

5. Profit Management n n n Business firms are generally organized for earning profit and in the long period, it is profit which provides the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty bearing and risk taking. In fact, profit-planning and profit measurement constitute the most challenging area of Managerial Economics. 12

6. Capital Decision n The problems relating to firm’s capital investments are perhaps the most complex and troublesome. Capital management implies planning and control of capital expenditure The main topics dealt with under capital management are cost of capital, rate of return and selection of projects. 13

Managerial Economics And Other Subjects 1. Managerial Economics and Economics 2. Managerial Economics and Statistics 3. Managerial Economics and Mathematics 4. Managerial Economics and Accounting 5. Managerial Economics and operations research 14

1. M. E & Economics The two main contributions of economics to managerial economics are: Ø To help in understanding the market conditions and the general economic environment within which the firm operates. Ø To provide a philosophy for understanding and analyzing resource allocation problems 15

2. M. E & Statistics n n n ME aims at quantifying data Employs statistical methods for testing Heavily depend upon theory of probability to take care of such problems in decision making. 16

M. E & Mathematics n n Managerial economics, besides being conceptual, is also metrical. Geometry, trigonometry and other generally used by ME. 17

4. M. E & Accounting n Profit and loss statement of a firm tells how well the firm has done & inform managerial economist to throw light on the future course of action. 18

5. M. E & Operations Research n n Certain important problems can be solved with the help of OR techniques. The problems are : allocation problems, competitive problems, waiting line problems and inventory problems. 19

Significance / Uses: ØIt enable the manager to become a more competent, ME provides a number of tools and techniques. ØIt incorporates useful ideas from other disciplines , if they found relevant for decision making. Ø It provides most of the concepts that are needed for the analysis of business problems. ØIt serve as an integrating agent by coordinating the different functional areas. ØIt takes awareness of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. 20

International Business Environment ØThe international business envi. has undergone a tremendous change since 1990. ØGlobalization refers to free flow of goods & services, capital and labour, technology and finance between the nations. ØMany economic and political factors have contributed to the changing global business environment. ØBenefits of regional trade and economic unions – NAFTA & ASEAN and International org. – WTO create smooth flow of trade & capital 21