MANAGERIAL ECONOMICS

By: Prof. Vani Khosla Dated: 28th August, 2012

WHAT IS ECONOMICS ???

The word Economics is derived from Greek words oikos and nomos.

Oikos means House, Nomos means Manage. Economics is considered as the art of Household Management.

According to J.S.Mill, Economics is the practical science of production and distribution of wealth.

MAJOR TERMS IN ECONOMICS

SOCIAL SCIENCE

Economics is the study of man and his activities in relation to his environment. It studies the relation between people & money, and how one effects the other.

CONT
SCARCITY OF RESOURCES
LABOR LAND

Scarcity is a situation in which the amount of something available is insufficient to satisfy the desire for it. The three basic resources are:

CAPITAL

NEEDS AND WANTS

Needs are something you have to have.
Food Clothes Shelter

Wants are something you would like to have.

Jewellery

House

Car

GOODS AND SERVICES

Good is a physical thing that you can hold, see or touch. For e.g. books, mp3.

Service is something that is provided to you by other person. For e.g. dentist, hair cuts

Production, Distribution & Consumption

Production means the creation of goods & services by using resources. Distribution means to deliver the goods & services to the consumers. Consumption means spending money on goods & services for the satisfaction of human wants. For Example: Tree cuts down.... Furniture manufactured... Stocked in a shop and sold to the customers.

So, Economics is.

It talks about Economic Activity and Economic Problem. Economics is a social science. It compares the alternative ways for using the limited or scarce resources. It is concerned about meeting people's demands to satisfy their needs and wants. It analyzes the production, distribution, and consumption of goods and services. Economics is to get the answer to the basic questions of an economy such as What to produce ?? How to produce?? And for whom to produce ??

Why to study Economics ???

To Learn Economic Way of Thinking.

To Understand Global Affairs.

To Be An Informed Voter.

Introduction to Managerial Economics

Emergence of managerial economics as a separate curse 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.

Meaning of Managerial Economics

BUSINESS DECISION
(Scarcity of Resources)
Management

Allocation Decision i.e; What to Produce? Production Decision i.e; How to Produce? Distribution Decision i.e; For whom to Produce?

Managerial
Economics

Economics

Cont.
Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem.

Definitions of Managerial Economics

According to Spencer & Siegelman opines, Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.

According to W.W.Haynes defines, Managerial Economics is the study of the allocation of resources available to a firm or the other unit of management among the activities of that unit. So, Managerial Economics..
is basically concerned with the decision making process for achieving business goals effectively and efficiently.

How does Managerial Economics differ from Economics ??

S.NO 1. ECONOMICS MANAGERIAL ECONOMICS

Economics is a science which studies Managerial Economics is a science which human behavior. studies that aspect of managerial behavior which helps in decision making. It is a old and well established subject. It is a new and developing subject.

2. 3. 4.

It is positive as well as normative It is only normative science. science. It deals with the body of principles. It involves the application of economic principles.

5.

It is both micro and macro economics It is only micro economics in character. in character.

MICRO ECONOMICS

Micro means small. According to Boulding, Micro Economics is the study of particular household, individual price, wage, income industry & particular commodity.

Some of the theories which comes under microeconomics , Theory of Individual Demand or Market Demand. Theory of Production and Cost Theory of Distribution, Theory of markets, price, profit etc.

MACRO ECONOMICS

According to Boulding,

Macro Economics deals not with individual quantities as such, but with the aggregates of these quantities, not with individual incomes but with national income, not with individual prices but with price level, not with individual outputs but with national output.

Some of the theories which comes under microeconomics , Theory of Income & Employment. Theory of Inflation. Theory of General Price Level. Theory of Business or Trade Cycles etc.

Examples of Micro & Macro Economic Concerns

Production Microeconomic (Individual) Production-Output in Individual Industries and Businesses How much steel How many offices How many cars Macroeconomic (As a Whole) National Production Output Prices Price of Individual Goods and Services Price of medical care Food prices Apartment rents Aggregate Price Level Income Distribution of Income and Wealth Wages in the auto industry Minimum wages Executive salaries Poverty National Income Employment Employment by Individual Businesses Jobs in the steel industry Number of employees in a firm Employment and Unemployment in the Economy Total number of jobs Unemployment rate

Total Industrial Output Gross Domestic Product Growth of Output

Consumer prices Producer Prices Rate of Inflation

Total wages and salaries Total corporate profits

POSITIVE SCIENCE

It studies things as they are.

It remains neutral & refuses to pass moral judgement. It describes.

For Example:

The price of milk has risen from Rs.45 per litre to Rs.50 per litre in the past one year.

This is a positive statement because it can be proven true or false by comparison against real-world data. In this case, the statement focuses on facts.

NORMATIVE SCIENCE

It studies things as they ought be.

It passes moral judgement on the rightness & wrongness of things. It evaluates.

For Example:

The price of milk should be Rs. 55 per litre to give dairy farmers a higher living standard and to save the family farm. This is a normative statement, because it reflects value judgments and cannot be proven true or false by comparison against real world data.

Nature of Managerial Economics

1. Goal oriented approach. 2. It is pragmatic and realistic in nature. 3. It is normative rather than positive in character. 4. Forward Planning 5. Microeconomic in character and marginally takes the help of macro-economics. 6. Identification of Economic choices and Allocation.

Scope of Managerial Economics

Demand Analysis Investment Analysis SCOPE OF MANAGERIAL ECONOMICS Profit Analysis Pricing Analysis Cost Analysis Production Analysis

Cont.
DEMAND ANALYSIS::

PRODUCTION ANALYSIS::

It is the basic activity of the firm and it helps the business executives: To carry out business process. To strengthen position. the market

There are four factors production which are:

of

To maximize profits. To maximize social welfare.

Land: resources provided by nature. Labour: human inputs in production process. Capital: financial capabilities. Entrepreneur: ability to organize and combine all activities.

Cont.
COST ANALYSIS::

PRICING ANALYSIS::

It is the process of analyzing and estimating the total resources required to support past, present & future forces, units, systems , functions and equipments.

It is the process of examining and evaluating a proposed price. It influences the demand conditions and the revenue earned by the business firm. It is influenced by competitors as well Government. the as

This is an integral step in the selection between alternatives by decision maker.

Cont.
PROFIT ANALYSIS::

INVESTMENT ANALYSIS::

It is the difference between total revenue and total cost. It is the best index of good performance of a business firm.

It helps to determine the suitable investment strategies. The major issues are: Choice of investment project. Evaluation of the efficiency of capital. Most efficient allocation of capital.

Profit planning & profit management are necessary for improving the efficiency of the business.

Methods of Managerial Economics

1. THE SCIENTIFIC METHOD

2. THE STATISTICAL METHOD

3. THE METHOD OF INTELLECTUAL EXPERIMENT

4. THE METHOD OF SIMULATION

5. THE HISTORICAL METHOD

6. THE DESCRIPTIVE METHOD

QUIZ

Question 1 : Economics may be defined as the science that explains _____________. a) b) c) d) The choices that we make as we cope with scarcity. The decisions made by politicians. The decisions made by households. All human behavior.

Correct answer is : The choices that we make as we cope with scarcity.

Question 2 : Scarcity is a situation in which ___________ . a) b) c) d) Wants exceed the resources available to satisfy them. Something is being wasted. People are poor. There is insufficiency of resources.

Correct answer is : There is insufficiency of resources.

Question 3 : Application of Economics for managerial decision-making is called__________. a) b) c) d) Macro Economics. Welfare Economics. Managerial Economics. Micro Economics

Correct answer is : Managerial Economics.

Question 4 :
Making a decision at the margin means _______.

a) b) c) d)

Letting someone else choose for you. Deciding to do a little bit more or a little bit less of an activity. Making an all-or-nothing choice. Waiting until the last minute to make a choice.

Correct answer is : Deciding to do a little bit more or a little bit less of an activity.

Question 5 : When productivity increases ____________. a) b) c) d) Prices rise. Living standards improve. There are fewer good jobs. Living standards deteriorate.

Correct answer is : Living Standards Improve.

Question 6 : Macroeconomics is the study of __________. a) b) c) d) All aspects of scarcity. The national economy and the global economy as a whole. Big businesses. The decisions of individual businesses and people.

Correct answer is : The National economy and the Global economy as a whole.

Question 7 : Ceteris paribus means ___________. a) b) c) d) Equal access to public transportation. Other things being equal. Holding everything constant. All things considered.

Correct answer is : Other things being equal.

Question 8 : Which statement about the factors of production is correct ? a) b) c) d) Land is always freely available. Enterprise includes all natural resources. Capital is produced by factors of production. Laborers earn profit.

Correct answer is : Capital is produced by factors of production.

Question 9 : The money value of goods & services produced in a year within a geographical boundaries of country known as __________. a) b) c) d) Gross National Product. Per capita National Income. Gross Domestic Product. The balance of payments.

Correct answer is : Gross Domestic Product.

Question 10 : What usually constitutes the main source of a government's income? a) b) c) d) Loans Grants from World Bank Profits from business undertakings Taxes and levies Correct Answer Is : Taxes and Levies.

Question 11 : Which areas covered by the subject Managerial Economics. a) b) c) d) Operational issues. Environmental issues . Operational & Environmental issues. None

Correct answer is : Operational & Environmental issues.