MANAGERIAL ECONOMICS

INTRODUCTION
Emergence of managerial economics as a separate course of

management studies can be attributed to at least three factors

a)

Growing complexity of business decision making process due to changing market conditions and business environment.

b)

The increasing use of economic logic, conceptual theories and

tools of economic analysis in the process of business decision making process.

c)

Rapid increase in demand for professionally trained managerial

manpower.

Defining Economics
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.
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Managerial Economics
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.

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.

Characteristics

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

Nature

Arts or science?

Scope

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

Difference b/w Managerial and Traditional Economics

Traditional It has Micro & Macro aspects It is both positive and normative science It deals with theoretical aspect It studies human Behavior on certain assumptions We study Economic aspects of the problem Studies principles underlying rent, wages, interest and profits Limited scope Micro aspect Normative in nature Practical Aspect No assumptions Both economic and non-economic aspects Only the principles of profit Wide scope
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Managerial

Importance

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.

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MICRO ECONOMICS

The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decisionmaking 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

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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
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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
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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.
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MACRO ECONOMICS

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.

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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 Governments economic policies i.e., industrial, monetary, fiscal, price and foreign etc.
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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
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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, Tatas small car in Singur district in West Bengal

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Responsibilities of Managerial Economist

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

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Fundamental Concepts

Opportunity cost Incremental Principle

Incremental Cost Incremental Revenue Business implication of Incremental Concept Series of order Discrimination

Time Perspective

Discounting Principle The Equi-marginal Principle

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Role of a managerial economist in the firm

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
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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.

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DECISION MAKING AREAS

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.
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Decision Making Areas

Demand forecasting

Production planning and cost revenue decision

Study of economic environment

Pricing and related decisions

Investment decisions

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