Chapter

1
INTRODUCTION

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INTRODUCTION

To understand the economy one needs to learn the following Some economic terminology Some insight into economic issues Some information about the economic institutions

Some information about the policy options facing society today

Economic reasoning.

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INTRODUCTION

Fundamental Nature of Managerial Economics

A close interrelationship between management and economics has led to the development of managerial economics. Management is Coordination An activity or an ongoing process A purposive process An art of getting things done by other people.

On the other hand, economics, in its broadest sense, is what economists do. Economists are primarily engaged in analysing and providing answers to manifestations of the most fundamental problem, scarcity. Scarcity of resources results from two fundamental facts of life Human wants are virtually unlimited and insatiable, and Economic resources to satisfy these human demands are limited.
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INTRODUCTION

Unlimited Choice

Limited Resources

Scarcity

For whom to Produce? What to Produce?

How to Produce?

Three Choice Problems of an Economy

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INTRODUCTION

Basic Characteristics: Decision Making

Managerial Economics serves as "a link between traditional economics and the decision making sciences" for business decision making. The best way to get acquainted with managerial economics and decision making is to come fact to face with real world decision problems.

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INTRODUCTION

DecisionProblem

Traditional

Managerial

Economics

Economics

Decision Sciences (Tools and Techniques of Analysis)

Optimal Solution to Business Problems

Decision Making
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INTRODUCTION

The basic form of decision making process can be framed and analysed using a common approach based on six steps.

1.
2. 3. 4. 5. 6.

Defining the problem

Determining the objective Exploring the alternatives Predicting the consequences Making a choice Performing sensitivity analysis

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INTRODUCTION

The basic characteristics of managerial economics can now be enumerated as

It is concerned with "decision making of an economic nature."

It is "micro-economic" in character. It largely uses that body of economic concepts and principles which is known as "theory of the firm." It is "goal oriented and perspective". Managerial economics is both "conceptual and metrical". It includes theory with measurement.

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INTRODUCTION

Economic Analysis
Micro and Macro Analysis

Partial and General Equilibrium Analysis

Static, Comparative Static and Dynamic Analysis Positive and Normative Analysis

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INTRODUCTION

Subject Matter and Scope of Managerial Economics

There are four groups of problem in both decision making and forward planning.

Resource allocation
Inventory and queuing problem Pricing problems Investment problems

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INTRODUCTION

Study of managerial economics essentially involves the analysis of certain major subjects like

Demand analysis and methods of forecasting

Cost analysis Pricing theory and policies Profit analysis with special reference to break-even point Capital budgeting for investment decisions The business firm and objectives Competition.

Thus managerial economics tries to find out which course is likely to be the best for the firm under a given set of conditions.

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INTRODUCTION

Managerial Economics and Other Disciplines

Managerial economics is linked with various other fields of study like

Microeconomic Theory
Macroeconomic Theory Operation Research Theory of Decision Making Statistics Management Theory and Accounting

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INTRODUCTION

Basic Factors
The Incremental Concept The Equi-marginal Principle The Discounting Principle Opportunity Cost Principle The "Invisible Hand"

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