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Managerial Economics Book 1st Sem Mba @ Bec Doms

Managerial Economics Book 1st Sem Mba @ Bec Doms

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Managerial Economics Book 1st Sem Mba @ Bec Doms
Managerial Economics Book 1st Sem Mba @ Bec Doms

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Published by: Babasab Patil (Karrisatte) on Mar 01, 2012
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UNIT – IDefinition of Managerial Economics
Managerial economics refers to those aspects of economics and its tools of analysis most relevant to thefirm’s decision-making process. According to MeNair and Meriam, managerial economies consists of the use of economic models of thought to analyze business situations. Some writers consider managerial economics as theintegration of economic theory with business practice for the purpose of facilitating decision-making and forwardplanning by management. The underlying idea of all these definitions is that managerial economics means economicsapplied in decision-making. So we may consider managerial economics as a special branch of economics bridgingthe gap between abstract theory and managerial practice.It may be pointed out here that effective decision-making at the firms’ level calls for a careful analysis of achoice between alternative courses of action. Economic theory offers a variety of concepts and analytical tools whichcan be of considerable assistance to the manager in his decision-making process. In fact actual problem-solving mayrequire many skills and tools which are not available in the traditional economist’s. For example, knowledge of accounting and of statistical concepts and methods, which are not taught in economics, can help the analyses toapply more effectively the economic tools in a concrete situation. The problems of industrial management do notneatly fall into one academic discipline or another. Rather they tend to out across different disciplines.Managerial economics is pragmatic, it is concerned with analytical tools that are useful, that have proventhemselves in practice, or that promise to improve decision – making in the future. In the attempt to be practical it cutsthrough many of the refinements of theory.Managerial economies differs from other discipline in the field of economics in two important respects. First, itis that portion of economics which has to do specifically with managerial decision making. Therefore, it makes aselection from among all the theoretical tools available and those that are directly applicable, empirically based, andthus testable. These qualifications do not mean that these tools are either easier to work with or to comprehend or that they do not require atleast as high an order of economic know-how as the rest of economics.
Haynes and others point out that y definition the scope of managerial economics does not extend to macroeconomic theory and the economics of public policy an understanding of which is who essential for the manager. Thisis because there is an important link between the two in so far as the decision at the firm level must take into accountthe trends in the economy and the impact of a host of environmental factors. Hence in our decision we extend itsscope to macro economic theory also.
The simplest way to calrify the scope of field of study is to discuss its relation to other subjects. In thisconnection it is easy to see that managerial economics has close connection with economics, the theory of decision-making, operation research, statistics and accounting. The fully trained managerial economist integrates conceptsand methods form all of these disciplines, bringing them together to bear on managerial problems.
Managerial economics has been defined as economics applied in decision-making. It is a special branch of economics bridging the gap between abstract economic theory and managerial practice. The primary source of concepts and analytical tools for managerial economics in micro-economic theory or what is popularly termed asMarshallian economics concepts such as the elasticity of demand, marginal cost, the short and long runs, marketstructures, etc. are all of great significance to managerial economics. Well-known model in price theory such as themodels for the monopoly price, the kinked demand theory and the models of price discrimination are also made use of in managerial economics. Macro-economics aids managerial economics in the area of forecasting. Post-Keynesiantheory of income and employment has direct implications for forecasting general business conditions. Since theprospects of an individual firm often depend greatly on business in general, individual firm forecasts depend ongeneral business forecasts, which make use of models derived from theory.A survey conducted in the United Kingdom showed that business economists have found economic concepts
such as price elasticity of demand, income elasticity of demand, opportunity casts, the multiplier, propensity toconsume, marginal revenue products,. Speculative motive, production function, balanced growth, liquidity preferenceetc., quite useful and of frequent application. They have also found the following main areas of economics as useful intheir works.1)Demand theory2)Theory of the firm-price and output3)Business financing4)Public Finance and Fiscal Policy5)Money and banking6)National income and Social accounting7)Theory of international trade, and8)Economics of developing countries.To quote Haynes, et. Al. “The relation of managerial economics to economic theory (of either the micro or macro varieties) is much like that of engineering to physics, or of medicine to biology or bacteriology. It is the relationof an applied field to the more fundamental but more abstract basic discipline from which it borrows concepts andanalytical tools. The fundamental theoretical fields will no doubt on the long run make the greater contribution to theextension of human knowledge. But the applied fields involve the development of skills that are worthy of respect inthemselves and that require specialized training. the practicing physician may not contribute much to the advance of biological theory but he plays an essential role in producing the fruits of progress in theory. The managerial economiststands in a similar relation to theory with perhaps the difference that the dichotomy between the pure and the“applied” is less clear in management than it is in medicine.
The theory of decision-making ahs a significance to managerial economics. Much of economic theory isbased on the assumption of a single goal-maximization of utility for the individual or maximization of profit for the firm.It also rests on the assumption of certainty or perforce knowledge. The theory of decision – making, on the other hand, recognizes the multiplicity of goals and the existence of uncertainty in the realm of management. The theory of decision making invariably replaces the notion of a single optimum making invariably replaces the notion of a singleoptimum solution with the view what the objective is to find solution that “Satisfice” rather than maximize, It inquiresinto an analysis of motivation, of the relation of rewards and aspiration levels, of patterns of influence on humanbehaviour.The theory of decision-making, in short, is a reminder of the complexities of decision-making and the frequentneeds to compromise “pure” models to make them useful in actual practice. Again, the theory of decision-makingpromise to contribute to the improvement of practice by focusing on new problems and suggesting new lines of attack.Managerial economics must take note of these developments.
Operations research is very closely related to managerial economics. It is concerned with model building i.e.to the construction of theoretical models that aid in decision-making. Managerial economics applies these “models” of decision-making. Operations research is often concerned with optimization, econo0mics has long dealt with theconsequences of the maximization of profits or minimization of costs.Operations research, as applied to business, generally is concerned with the broad, Overall operation of acompany rather than with the details of a specific operation Viewing the business in its entirely, studies are made of he inter-relationship and relative efficiencies of the various aspects of a business in combination, such as salesproduction and financing. To find the most effective flow pattern, operations research may encompass the completecycle of the flow of goods and services from suppliers to company plants, then to consumers. The primary purpose of operations research, as pointed out earlier, is to find the best (optimum) combination of factors to achieve a given

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