PROF. V. R . KISHORE KUMAR, M.A(Q.E.)(MPhil.

INDEX

Introduction Definition of Economics and Managerial Economics Scope of Managerial Economics Basic Economic Problems The Firm Role of a Managerial Economist Decision making areas Steps in decision making References

INTRODUCTION
Emergence of managerial economics as a separate curse of management studies can be attributed to at least three factors a) Growing complexity of business decision making process due to changing market conditions and business environment b) The increasing use of economic logic, conceptual theories and tools of economic analysis in the process of business decision making process c) Rapid increase in demand for professionally trained managerial manpower

DFINITIONS OF ECONOMICS AND MANAGERIAL ECONOMICS

ECONOMICS: Economics is a social science . Its basic function is to study how people individual house holds, firms and nations maximizing their gains from their limited resources and opportunities.

In economic terminology it is called as maximizing behaviour or more approximately optimizing behaviour . Optimization means selecting best out of available resources with the objective of maximizing gains from given resources.

Economics is thus a social science, which studies human behaviour in relation to optimizing allocation of available resources to achieve the given goals.

Eg : individual household behaviour, firm, industry and nation Economics is also a study of choice-making behaviour of the people.

The origin of the subject could be traced from the works of the Greek philosopher Aristotle who confined the study of economics to household management and acquiring, guarding and making proper use of wealth. The term economics is derived from two Greek words OIKOS(a house) and NEMEIN(to manage). Prof. Samuleson remarks economics as the oldest of arts and newest of science, indeed the queen of the social science.

Definitions of Economics:
Wealth Definition- Adam Smith, J.B.Say, J.S.Mill etc.(Classical definition) Welfare Definition- Marshall, A.C.Pigue etc.(Neoclassical definition) Scarcity definition- Robbins Growth Definition- Paul A Samuelson Moderndefinition

Managerial Economics
Managerial economics can be broadly defined as the study of economic theories, logic and tools of economic analysis that are used in the process of decision making. Economic theories and techniques of economic analysis are applied to analyze business problems, evaluate business options and opportunities with a view to arriving at an appropriate business decision.

Douglas : Managerial economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of the management.

Mansfield : He defines that managerial economics is concerned with the application of economic concepts and economic tools to the problems of formulating rational decision making. Spencer and Seigleman : It is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management

Economic Theory and Managerial Theory

Economic Theory
1. 2.

Managerial Theory
1.

It deals with the body principles It has the characteristics of both micro and macro economics

It deals with the application of certain principles to solve the problem of a firm

3.

It

deals

with

study

of

2. 3.

It has only micro characteristics It deals with the study of only profit theories

individual firm and individual consumer

4. 5.

It based on certain assumptions It studies economic aspects of the problem

4.

In managerial theory assumptions disappear due to practical situations

5.

It studies both economic and noneconomic concepts.

Scope of Managerial Economics

Economics has two major branches 1. Micro Economics 2. Macro Economics The term Micro means small and Macro means big. Both are applied to business directly or indirectly. managerial economics comprises both micro and macro economic theories. The parts of micro and macro economics that constitute managerial economics depend on the purpose of analysis.

The scope of M.E. comprises all the economic concepts, theories and tools of analysis which can be used for analyse the issues related to demand , production and cost, market structure etc., In other words managerial economics is economics applied to analysis of business problems and decision making . Broadly it is applied economics

Micro-economics applied to internal issues : Operational issues are of internal nature. Internal issues include all those problems which arise within the business organization and fall within purview and control of the management . Some of the basic internal issues are : What to produce How much to produce Choice of technology i.e. choosing of the factor combination Choice of price i.e. how to price the commodity How to promote sales How to face the price competition

How to decide on new investments How to manage capital and profit How to manage inventory i.e. stock of both finished goods and raw material Most of the micro economic problems deals with most of these questions. The Law Demand The Theory of Production Analysis of Market Structure and Pricing Theory

Profit analysis and management It guide firms in the measurement and management of profit , in making new allowances for the risk premium, in calculating the pure return on capital and pure profit and also for future planning. Theory of Capital and Investment Decisions Knowledge of capital theory can contribute a great deal in investment-decision making, choice of projects, maintaining the capital, capital budjeting etc.

Macro-economics deals with external issues : The type of economic system in the country General trends in N.I., employment, prices, savings and investments Structural change in the working financial institutions viz., banks, insurance companies etc Magnitude of and trends in foreign trade Trends in labour supply and strength of capital market Governments economic policies i.e., industrial, monetary, fiscal, price and foreign etc.

Social factors viz., value system of the society, property rights, customs and habits etc., Political environment i.e., democratic, authoritarian, socialist political systems, or state attitude towards private business man etc. These Environmental factors have a far-reaching bearing upon the functioning and performance of the firms. Therefore, decision makers have to take in to account the present and future economic, political and social

Conditions in the country and give due consideration to the environmental factors in the process of decision making. Eg : SEZ in the Nandigram, Tatas small car in Singur district in West Bengal

BASIC ECONOMIC PROBLEMS

WHAT TO PRODUCE ? WHERE TO PRODUCE ? HOW TO PRODUCE ? WHOOM TO PRODUCE ?

THE FIRM

Meaning : The basic unit for obtaining production which performs crucial role of linking product, factor and money markets. It is an administrative organization, utilising a pool of resources. A business organization under a single management with one or more establishments.

FIRMS,INPUTS AND OUTPUTS

HUMAN RESOUR CE LABOUR
ENTERPRENU RESHIP NATURAL (LAND)

F.O.P
CAPITAL RESOUR CES

HANDMADE(STR UCTURES, EQUPMENTS AND INVENTORIES)

Role of a managerial economist in the firm

Demand estimation and forecasting Preparation of business /sales forecasts Analysis of market survey to determine the nature and extent of competition Analyzing the issues and problems of concerned industry

Assisting the business planning process of the firm Discovering new possible fields of business endeavor and its cost-benefit analysis Advising on prices, investment and capital budgeting policies Evaluation of capital budgeting etc.

DECISION MAKING AREAS

Business decision making is influenced not only by economic considerations, but also by human behavioral, technological and environmental factors due to growing public awareness. Decision making and processing information are two important tasks of managers In order to make good decisions managers must be able to obtain, process and use information.

Decision Making Areas

Demand forecasti ng

Producti on plannin g and cost revenue decision

Study of econo mic environ ment

Pricing and related decisio ns

Invest ment decisio ns

DEMAND FORECASTING
QUALITATIVE QUANTITATIVE CONSUMER SURVEY JURY OF EXPERT OPINION SALESFORCE COMPOSITE METHOD DELPHI METHOD
TIMESERIES METHODS

CAUSAL METHODS

NOMINAL GROUP METHOD

PRODUCTION PLANNING AND COST REVENUE DECISIONS Production Function : The production function is a technological relationship between output and various inputs used in production viz., land, labour, capital and technology. The output depends on the increasing function of all the factor inputs Q=f(S,L,K,T)

The following types of cost are useful in the decision areas Average, Marginal and Total Costs Fixed and Variable Cost Direct and Indirect Cost Replacement and Original Cost Opportunity and Industrial Cost Sunk Cost and Outlay Cost

STUDY OF ECONOMIC ENVIORNMENT

Economic environment is the most significant component of the business environment. It affects the survival and success of a business organization. Economic environment

General conditions

Industrial conditions

Stage of supply of resources of production

PRICING AND RELATED DECISIONS

The Price-output decisions are taken under various market structures. The structure of the market refers to the degree of competition in the market for the firms goods and services.

Perfect competition Monopoly market

Market

Monopolistic market Oligopoly market

INVESTMENT DECISION Business firms invest large money in their projects. Therefore, capital expenditure for different project proposals compete within themselves for their claim on scarce resources. Generally , in business sector itself, individual firms compete against access to financial resources and scares .

The investment decisions are important as Not easily reversible Generally involves large sums of money Highly futuristic and future is full of uncertainty Long gestation periods Thus, careful financial appraisal of each project involves larger investments. Due to above reasons, capital decisions fall in the category of investment and known as capital budgeting decisions made by highest level of management.

STEPS IN DECISION MAKING

Managerial economics is concerned with decision making at the level of firm. These decisions have far reaching effects on the firm. Delay in taking decisions or implementing decisions might turn in to losses. Various steps in the decision making by a business firm are as fallows :

Defining business problem Determining objective Exploring available alternatives Assessing consequences of various alternatives Choosing best alternative

Performing sensitive analysis

REFERENCES 1. MANAGERIAL ECONOMICS -D.N.DWIVEDI 2. BUSINESS ECONOMICS -D.D. CHATURVEDI S.L. GUPTA SUMITRA PAUL 3. MICRO ECONOMICS -JHON KENNADY 4. MANGERIAL ECONOMICS MITHANI

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