Def|n|t|on of manager|a| econom|cs

Managerlal economlcs ls explalned as Lhe appllcaLlon of economlc Lheory and Lhe Lools of analysls of
declslon sclence Lo examlne how an organlzaLlon can achleve lLs alms mosL efflclenLly
ke|at|onsh|p to econom|c theory
Lconomlc Lheory refers Lo mlcroeconomlcs and macroeconomlcs Mlcroeconomlcs ls Lhe sLudy of Lhe
economlc behavlor of lndlvldual declslon maklng unlLs such as lndlvldual consumers buslness flrms and
resource owners
Macroeconomlcs ls Lhe sLudy of Lhe LoLal or aggregaLe level of ouLpuL lncome employmenL
consumpLlon and prlces for Lhe economy vlewed as a whole
Lconomlc Lheorles usually begln wlLh a model 1hls absLracLs from Lhe many deLalls surroundlng an
evenL and seeks Lo ldenLlfy a few of Lhe mosL lmporLanL deLermlnanLs of Lhe evenL
ke|at|onsh|p to the dec|s|on sc|ences
1here are Lwo meLhods or Lools LhaL are used Lo consLrucL and esLlmaLe declslon models almed aL
deLermlnlng Lhe opLlmal behavlor of Lhe flrm MaLhemaLlcal economlcs ls used Lo formallze Lhe
economlc models posLulaLed by economlc Lheory LconomeLrlc applles sLaLlsLlcal Lools Lo real world
daLa Lo esLlmaLe Lhe models posLulaLed by economlc Lheory and for forecasLlng
ke|at|onsh|p to the funct|ona| areas of bus|ness adm|n|strat|on stud|es
Pere we wlll dlscuss Lhe relaLlonshlp beLween managerlal economlcs and Lhe funcLlonal areas of
buslness admlnlsLraLlon sLudles 1hls wlll lnclude accounLlng flnance markeLlng personnel or human
resource managemenL 1hese are Lhe sLudles of buslness envlronmenL ln whlch a flrm operaLes and Lhey
also provlde a background for managerlal declslon maklng managerlal Lconomlcs provlde an overvlew
course LhaL lnLegraLes economlc Lheory declslon sclences and Lhe funcLlonal areas of buslness
admlnlsLraLlon sLudles
So lf we conclude we can say LhaL ML ls noL Lhe sLudy of a number of lndependenL Loplcs buL Lhe use of
economlc Lheory and managemenL sclence Lools Lo examlne how a flrm can achleve lLs ob[ecLlve mosL
efflclenLly wlLhln Lhe buslness envlronmenL ln whlch lLs operaLe
Manager|a| dec|s|on mak|ng |nvo|ved f|ve steps
1 LsLabllshlng Lhe ob[ecLlve of Lhe flrm
2 ueflnlng Lhe problem LhaL Lhe flrm faces ln Lrylng Lo achleve lLs ob[ecLlve
3 ldenLlfylng Lhe range of posslble soluLlons
4 SelecLlng Lhe besL soluLlon
lmplemenLlng LhaL declslon
1he theory of the f|rm
Pere we dlscuss exlsLence of flrms and Lhelr funcLlon Lhem we deflne Lhe value of Lhe flrm and Lhe
consLralnLs llnally we deLermlne Lhe llmlLaLlons of Lhe Lheory of Lhe flrm
keason for the ex|stence of f|rms and the|r funct|ons
llrm ls an organlzaLlon LhaL comblnes and organlzer resources for Lhe purpose of produclng goods and
servlces for sale llrms are of dlfferenL Lypes 1ypes lnclude proprleLorshlps parLnershlps and
corporaLlons
Why f|rms ex|st?
llrm exlsL because lL would be very lnefflclenL and cosLly for enLrepreneurs Lo enLer lnLo and enforce
conLracLs wlLh workers and owners of caplLal land and oLher resources for each separaLe sLep of Lhe
producLlon and dlsLrlbuLlon process
1he flrm exlsL ln order Lo raLe on such LransacLlon cosLs
llrms do noL conLlnue Lo grow larger and larger lndeflnlLely because of llmlLaLlons on managemenL
ablllLy Lo effecLlvely conLrol and dlrecL Lhe operaLlon of Lhe flrm as lL becomes larger and larger
Iunct|ons of the f|rm
1he funcLlons of Lhe flrm ls Lo purchase resources or lnpuLs of labor servlces caplLal and say maLerlal ln
order Lo Lransform Lhem lnLo goods and servlces for sale 8esource owners Lhem use Lhe lncome
generaLed from Lhe sale of Lhelr servlces or oLher resources Lo flrms Lo purchase Lhe goods and servlces
produced by flrms Lhe clrcular flow of economlc acLlvlLy ls Lhus compleLe
2 Cb[ect|ve and va|ue of the f|rm
1he flrm maxlmlze lLs currenL or shorL Lerm proflLs and also Lhe long Lerm proflLs 8oLh shorL Lerm as
well as long Lerm proflLs are clearly lmporLanL Lhe Lheory of Lhe flrm posLulaLes LhaL Lhe prlmary goal of
Lhe flrm ls Lo maxlmlze Lhe wealLh or value of Lhe flrm
Constra|nts of the f|rm
llrms face many consLralnLs LhaL arlses from llmlLaLlons on Lhe avallablllLy of essenLlal lnpuLs A flrms
mlghL noL be able Lo hlre as many skllled workers as lL wanLs especlally ln shorL run 1he flrm mlghL noL
be able Lo acqulre all Lhe Lhe speclflc raw maLerlal lL demands CovermenL agencles and noL for proflL
flrms also face slmlllar resource consLralnLs llrms also face some legal consLralnLs ln order Lo work ln a
parLlcular area and also some laws LhaL resLrlcL Lhe flrms from employlng unfalr buslness pracLlces
ConsLralned opLlmlzaLlon ls Lhe prlmary goal or ob[ecLlve of Lhe flrm ls Lo maxlmlze wealLh or value of
Lhe flrm sub[ecL Lo Lhe consLralnLs lL faces
lmlLaLlons of Lhe Lheory of Lhe flrm