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Introduction to

Managerial
Economics
Presented By
Prof. S P Das
M.Phil. (Economics), M.B.A. (Finance), M.A. (Economics),
PGDM, PGDFM, DHMCT, MCCP, B.Com.
Meaning Of Economics
 Economics can be called as social science dealing
with economics problem and man’s economic
behavior.
 It deals with economic behavior of man in society in
respect of consumption, production; distribution etc.
economics can be called as an unending science.
 Economic behavior is related to choice by individuals
and others.
 Individuals and others have to decide “how to
allocate scarce resources in the most effective
ways.
 Economics provide optimum utilization of scarce
resources to achieve the desired result. It provides
the basis for decision making.
Micro Economics
 It has been defined as that branch where the unit
of study is an individual, firm or household.
 It studies how individual make their choices
about,
– what to produce?
– How to produce?
– For whom to produce?, and
– What price to charge?
 It is also known as the price theory.
 It is the main source of concepts and analytical
tools for managerial decision making
Macro Economics
 It studies the economics as a whole.
 It is aggregative in character and takes the entire
economic as a unit of study.
 Macro economics helps in the area of forecasting.
 It includes National Income, aggregate
consumption, investments, employment etc.
 It facilitates government in taking policy decisions
such as,
– How much to spend on health?
– How much to spend on services?
– How much should go in to providing social security benefits?
Economic Concept for Decision Making
 Price elasticity of demand
 Income elasticity of demand
 Cost and output relationship
 Opportunity cost
 Multiplier
 Propensity to consume
 Marginal revenue product
 Production function
 Demand theory
 Theory of firm—price, output and investment decisions
 Money and banking
 Public finance and fiscal and monetary policy
 National income
 Theory of international trade
What is Managerial Economics?
 Managerial economic is concerned with decision
making at the level of firm.
 It is viewed as a special branch of economics
bridging the gap between pure economic theory
and managerial practices.
 It is defined as application of economic theory
and methodology to decision making process by
the management of the business firms.
 The basic purpose of managerial economic is to
show how economic analysis can be used in
formulating business plans.
ME = Management + Economics
 Management deals with principles which helps in
decision making under uncertainty and improves
effectiveness of the organization.
 On the other hand economics provide a set of
preposition for optimum allocation of scarce
resources to achieve a desired result.
 ME deals with the integration of economic theory
with business practices for the purpose of
facilitating decision making and forward planning
by management.
 In other words it is concerned with using of logic of
economics, mathematics, and statistics to provide
effective ways of thinking about business decision
problems.
Diagrammatic Presentation

Economic Theory Business Management


and Methodology Decision Problems

Managerial Economics:
Application of Economics
to solving business

Optimal solution to
business problems
Decision Making

 Decision making is the central objective of Managerial


Economics
 Decision making may be defined as the process of
selecting the suitable action from among several
alternative courses of action
 The problem of decision making arises whenever a
number of alternatives are available. Such as,
– What should be the price of the product?
– What should be the size of the plant to be installed?
– How many workers should be employed?
– What kind of training should be imparted to them?
– What is the optimal level of inventories of finished
products, raw material, spare parts, etc.?
Why Problems of Decision Making
Arises?
 The problem of decision making arises due to the
scarcity of resources.
 We have unlimited wants and the means to
satisfy those wants are limited,
 With the satisfaction of one want, another arises,
and here arises the problem of decision making.
 While performing his function manager has to
take a lot of decisions in conformity with the goal
of the firm.
 Most of the decisions are taken under the
condition of uncertainty, and involves risks.
 The main reasons behind uncertainty and risks
are uncertain behavior of the market forces.
Uncertain Market Forces

 The demand and supply


 Changing business environment
 Government policies
 External influence on the domestic market
 Social and political changes
Economic Problem
 Economic problem can be called as the problem
related to the unlimited wants with limited
resources having alternative applications
 Thus, every man faces the problem of
‘economizing his means’.
 How to make the maximum use of limited
resources?, is known as the problem of economy.
 Main Groups of Scarce Resources are,
– Land
– Labor
– Capital
Decision Making Problems of Firm
 To identify the alternative courses of action of
achieving given objectives
 To select the course of action that achieves the
objectives in the economically most efficient way
 To implement the selected course of action in a right
way to achieve the business objectives.

 The prime function of management is Decision


making and forward planning.
 Forward planning goes hand in hand with decision
making.
 Forward planning means establishing plans for the
future.
ME and Other Disciplines

 Mathematics
 Statistics
 Operations Research
 Management Theory
 Accounting
 Computers
Scope of ME

 Demand analysis,
 Forecasting,
 Production function,
 Cost analysis,
 Inventory Management,
 Advertising,
 Pricing System,
 Resource allocation etc
Nature of ME
 Concepts of Micro-Economics
– Elasticity of demand
– Marginal cost
– Marginal revenue
– Market structures and their significance in pricing
policies.
 Concepts of Macro-Economics
– The magnitude of investment and the level of
national income,
– The level of national income and the level of
employment,
– The level of consumption and the level of national
income
 In ME emphasis is laid on those prepositions which
are likely to be useful to management
Factors Influencing Managerial Decision
Making
 Besides economic variables
managerial decision making is also
influenced by other significant
variables, such as
– Human and Behavioral Considerations
– Technological Forces
– Environmental Forces
Steps in Decision Making

 Establish objectives
 Specify the decision problem
 Identify the alternatives
 Evaluate alternatives
 Select the best alternatives
 Implement the decision
 Monitor the performance
Tools of Decision Making

 Opportunity cost
 Incremental principle (Cost &
Revenue)
 Principle of the time perspective
 Discounting principle
 Equi-marginal principle
Reference Books
 Managerial Economics – M L Jhingan
 Managerial Economics – Varshney & Maheshwari
 Managerial Economics – P L Mehta
 Managerial Economics – Atmanand
 Managerial Economics – Craig Peterson & Cris
Lewis
 Managerial Economics – Salvatore
 Managerial Economics – Joel Dean
 Managerial Economics – Mithani
Activity

1. Make a list in your own words of some of


the economic decision that
– you are facing
– your family has to take
– your country has to take
2. Take any quality newspaper, go through it
and make notes on the following:
– Micro economic
– Macro economic (problems and issues you find)
3. Suppose there is a firm with a temporary idle
capacity. An order for 5000 units comes to
management’s attention. The customer is willing
to pay Rs 4/- unit or Rs.20000/- for the whole lot
but not more. The short run incremental cost
(ignoring the fixed cost) is only Rs.3/-. There fore
the contribution to overhead and profit is Rs.1/-
per unit (Rs.5000/- for the lot)

What long run repercussion of the order is to be


taken into account?
THANK YOU