Managerial Economics

Module -1 Meaning,
nature and scope.
*Introduction
*What is Management ?
Duties ,functions and role of manager
*What is Economics?
*Definition of Managerial Economics
* Relationship to Economic Theory
*Relationship to decision science
*Business environment and managerial economics
*Scope of Managerial economics
Introduction
 Modern business world –is characterized by dynamism
,computerization, Awareness about environment ,caring for
consumer satisfaction, worried about cost effectiveness etc.
 Economies are no longer self-sufficient, inward-looking;
added is the pressure of severe competition due to
globalization.
 Darwin’s principle applies even today nay more strongly.
 Big corporates follow military strategies involving surprise,
security and unity of command.
 Business units aim at a variety of goals / objectives.
 Problem of economizing and choice are most imp. for firms.
Introduction
continued-----------
 Decision-making is a must at every
stage.
 Survival amidst uncertainties is no
doubt challenging. Managerial Economics
helps them to plan and implement
decisions in such a complex and dynamic
atmosphere.
 ME or Business Economics or Economics
of firms –provides managers with
different tools. techniques and principles
enabling them make optimum use of
resources within constraints.
The term Managerial Economics
involves 2 terms; former refers to
acts and decisions of manager later
to a subject –matter.
 What is management ?Answer to this question takes us
to jobs ,duties and functions of manager.
 Manager as an organizer has to take decisions involving
various parties (Owners, shareholders, employees, rivals
customers, suppliers , creditors , distributors ,society and
government.) Moreover their interests are separate and
at times even conflicting.
 This means the manager has to co-ordinate various
goals in a fruitful manner; justice to everybody warrants
balanced approach and rational behavior.
 Management is an art as well as a science.
 Careful decisions and foresight are pre-requisites of a
good manager.
What is Economics ?
 It is a science of earning and spending wealth as
defined by the Father of Economics Adam Smith in
his classic work ‘An enquiry into nature and causes
of the Wealth of Nations.’
 In the opinion of Alfred Marshall it was study of
mankind in ordinary business of life.
 Lionel Robbins gave us the most accepted scarcity-
oriented definition of Economics. He says
Economics is a social science which studies human
behavior as a relationship between unlimited wants
and scarce means which have alternative uses.
Economic problem &
choice--
 Choice becomes necessary because :1)wants
are unlimited
2)means are scarce
Choice is possible because
1)All wants are not of same importance.
2)Means have alternative uses
In what way does economic problem become
applicable to firms ?
A firm too has to allocate limited resources
which are available among its various
activities .
Definition of M E ----
 According to Mansfield ,managerial economics is applied
microeconomics.
 Whether profit or non-profit making organisations and
whatever may be their goals , they have all to face
constraints which may be internal & /or external.
 THE BASIC DECISION-MAKING PROCESS IS SAME FOR ALL
FIRMS.
 All managerial decision problems are solved with the help
of tools ,concepts and principles in….a) Economic theory;
b) Managerial economics c) Mathematical economics.
 Role of economic theory----
In any business, the businessman has to decide what ,
how ,when ,how much , whom , where etc.
There arises question of choice at every
stage of production. eg. Choice regarding
selection of project, location of plant
,inputs , funds etc.
 The manager has to study environment at
Micro as well as Macro levels.
 Micro economics here the subject-matter is
individual consumer ,firm market , industry
etc. Theories under micro-economics are
:Theory of value, theory of distribution,
theory of economic welfare etc.
 Macro-economic environment is general
eco-pol-social condition of the larger system
which may be at domestic & /or international
level.
What is Macro-
economics
 It analyses behavior of entire system as a
whole. It deals with aggregates such as
GNP , TOTAL EMPLOYMENT ,General level
of prices , GDS , GDCF etc .Following
theories are part of Macroeconomics—
Theory of income and employment ,
Theory of income distribution, theory of
general level of prices , theory of growth
etc.
Both these branches
are relevant for a
manager.
Off course one should not forget that just
adding /aggregation would not lead to
solution of problems at macroeconomic level
what is true at micro level may not be so at
macro level and vice-versa.
Both approaches are supplementary to each
other. Decisions of an individual firm can be
solved by applying micro-economic concepts
tools and principles `yet it is also true that
no firm functions in isolation ; aggregates
necessarily influence its performance.
Role of mathematical
economics and
econometrics----
 Mathematical economics is used to formalize
economic laws. Eg. Law of demand can be
expressed mathematically as Q =25 -3 (p) here
demand is dependent variable and price
independent variable ;moreover demand is
inversely related to price.
 Econometrics is application of statistics to real
world. Empirically collected data can be applied
to equations to find solution. eg.
 Q= f (Y, Px , Py , W , U , T ,E ----- )
 Trends revealed by forecasting help a firm take
optimal decisions.
An entrepreneur has to face real
world which is uncertain and he is
not well –equipped with information
about reality.
 Because of uncertainty in future decision-
making becomes complicated. His plans
require revision.
 Various disciplines such as Business
administration, mathematics, statistics
accounts , finance , marketing ,human
relations management form the core
background in his decision-making.
Business environment
and managerial
economics--
 Business environment refers to all those forces which
influence functioning of business.
 Two types of factors are relevant here-1)Internal
factors :these are controllable; either altered or
modified. 2) External factors- these are beyond control
 Example of internal factors: corporate philosophy,
physical assets , management structure, human
resources , R &D , FINANCE , technology etc.
 Example of external factors :Customers , suppliers ,
competitors , natural factors ,demographic changes ,
political situation , eco-social condition , government
policies etc.
Porter’s model :
According to Porter M .of Harvard
University environment is determined by
5 forces.

Environment

BARGAINING POWER
OF CONSUMER

POWER OF
INPUT SUPPLIERS

Rivalry amongst firms

Threat from
potential entrants

Threat from
substitutes
Scope of managerial
economics---- Studies 8
different areas.(1) Demand
Demand analysis and demand forecasting—
Before production starts accurate
estimation of demand is necessary .This
facilitates the firm
employ proper number and size of
resources so that right quantity is produced
and supplied at a right price and right time.
(2) Cost Analysis
Estimation of costs is important of mobilization of
resources and pricing of final goods .Accurate
estimation is however made difficult because of
uncertainties
(3)Pricing policies ---Success of a firm largely depends
on correctness of pricing. Pricing decision depends on
market structure ,price-leadership non-price
competition etc.
(4)Profit management- this ensures sustainability, helps
attract shareholders, reduces dependence on external
finance. In this connection Study of Break-EVEN
Analysis is essential .Realized profit may be different
from expected profit. both from viewpoint
(5) Capital
Management
Being a top level decision it becomes
crucial. Cost of capital , ROR on
capital ,proper selection of projects , are
of great importance. Capital is scarce
and has a cost therefore its optimum
use ,planning, budgeting , control are
important.
(6)Inventory management- Inventory
refers to stock of raw-materials and
finished products. This has to be optimal
;both under stocking and overstocking
should be avoided .
(7) Whether it is setting of new
machinery/plant or recruiting
/laying off labor---s
There necessarily occurs ‘queuing problem.’
(8)Marketing and advertising—
Estimate costs ,allocate resources ,select media,
and measure its economic effects. Sales
promotion and distribution are imp. activities.
Right selection of consumer segment market
territory are areas where focus is demanded in
modern business world of keen competition.
List of References-----
 Managerial Economics by Dr.Maheshwari and
Varshney
 Managerial economics by Dr D.M .Mithani.
 Managerial Economics by Prof . A N. Oza an. Bakul
Dholakia.
 Managerial Economics by Dr. Dwivedi.
 Microeconomics by Salvatore.
 Managerial economics by Joel Dean
 Managerial economics by Peterson and Lewis
 Economics by Paul Samuelson and Nordhas
 Economics by Dornbush ,Fischer and Begg.
 Indian Economy by Ruder Dutt and
K.P.M.Sundaram .