Managerial Economics

Unit-I
Introduction to economicsThe term “Economics” is derived from the two Greek words, OIKOU and NOMOS; meaning the rule or law of household. It originally dealt with the way in which a prudent household might best make the most efficient use of the limited income. The concept of efficient use of resources of the family was later carried over to society as a whole. In broader sense, economics analysis how a society utilizes its scarce resources of manpower, raw materials and capital to satisfy the material wants of its members. Example- What determines how much steel and manpower are devoted to the production of automobiles and how much to the output of tin cans or refrigerators. In day to day events we come across several economic problems like change in price of individual commodities (goods) as well as general price level changes; the economic prosperity and well-being are reflected by higher standards of living of some people despite general poverty of the masses in India. DEFINTION of ECONOMICS It can be defined as “social science concerned with the proper uses and allocation of resources for the achievement and maintenance of growth with stability.” Economics deals with the laws and principles which govern the functioning of an economy and its various parts. An economy exists because of two basic facts1) Human wants for goods and services are unlimited. 2) Productive resources with which to produce goods and services are scarce There are four fundamental problems with which the economics deals witha) b) c) d) What to produce How to produce For whom to produce Are the resources economically used?

A) What to produce-This problem calls for deciding which goods to produce and in what quantities. The problem arises because of the scarcity of resources. For example- the case of BATA INDIA LIMITED, since the resources (leather, capital, labour etc.) are scarce or limited, the company has to decide whether it has to produce shoes, sandals or chappals or combination of these and also what quantities of the selected goods should be produced.

Anything that can satisfy human wants is called goods in economics. 2) Utility. For a good to have value.National Income.Micro stands for just a small part of the whole or individualistic. 4) Wealth. Economics can be broadly divided into two categories1) Microeconomics 2) Macroeconomics Microeconomics. In the above example. Different technologies require different combination of resources. Goods can be of various types. individual industries. It is thus a branch of economics which deals with the aggregate behavior of the economy as a whole. d) Are the resources economically used? .The want satisfying quality of a good is known as utility.This is the problem of economic efficiency. They can be free or economic.While services also satisfy human wants. total saving and total investment are studied. Example. Utility of good changes with certain conditions and circumstances. incomes. c) For whom to produce. individual prices.4 lakh and the man earns Rs 10000 per month from the taxi operation. but to all goods that have value. 3) Value. It is the study of particular firms. There is to be no waste or misuse of resources since they are limited.b) How to produce. particular households.Anything that has value is called wealth. . consumer or producer.A man who owns a car and runs it as a taxi. total consumption. The car is worth Rs. Macroeconomics. wages. particular commodities. 5) Income.What combination of resources and technology should be used for producing the goods which have been decided on in response to first problem.(intangible). Example.The amount of money that wealth yields is known as income. transferable or non-transferable and so on. the difference is that good are tangible but services are not.Economy has to decide who should get how much of the total amount of goods and services produced. employment and economic growth. Basic terms in economics1) Goods. shoes can be produced by cobblers or produced by machines.the value of a good denotes the goods/services that we can have in exchange for it. Here Rs 4lakh is the wealth and Rs 10000 per month is the income.It is aggregative economics wherein the overall conditions of the economy such as total production. it should also be scarce & transferable. besides possessing utility. In economics wealth does not refer to money.

economic growth & general price level.DIFFERENCE between Micro economics and macroeconomics MICROECONOMICS 1) Study of the behavior of individual units. MACROECONOMICS 1) Study of behavior of economy as a whole. theories and methodologies to the practical problems of business/forms in order to formulate rational managerial decisions for solving those problems.” . profit maximization and market structures help in finding out optimal solutions. DEFINITIONSAccording to Spencer and Siegelman“Business economics is the integration of economic theory and business practices for the purpose of facilitating decision making and forward planning by management. In fact no business can run without an economic background. 4) It pertains to the problems of the size of national income. The basic economic concepts of demand. 4) Deals with problems of pricing and income distribution. 2) It is individualistic 3) It is concerned with behavior of micro variables. 3) It is concerned with behavior of macro variables. The subject that uses the theories of economics and the methodologies of the decision sciences for managerial decision-making is known as managerial economics. cost. MANAGERIAL ECONOMICS INTRODUCTIONThe role of managerial economics or business economics is very wide. along with the theories of consumer behavior. production and price. 2) It is aggregative in approach. Managerial economics is the discipline that deals with the application of economic concepts. Managerial economics is that applied aspect of economics which studies a business firm and helps the management in decision making for tackling the problems of the firm.

5) Choosing the best solution consistent with our firm’s or agency’s objectives. consumers respond to changes in prices and income.” Managerial economics is the science of directing scarce resources to manage cost effectively.According to Prof. 6) It is essentially microeconomic in nature.” According to Davis and Chang“Managerial economics applies to the principle and methods of economics to the problems faced by management of business. Joel Dean“The purpose of managerial economics is to show how economic analysis can be used in formulating business policies. competitors or the internal workings of the organization. import and export policies. A statement of alternative solution to the problems. Example. 1. or other types of organization and to help find solutions that advance the best interests of such organization. supplies. . Example.It studies the aggregate economic variables directly. managers must understand the economic environment in which they operate. ii) It can be used to specify pricing and production strategies. c) It makes problem solving easy in business. How is Managerial Economics Useful?(Significance) a) Evaluating Choice alternatives. 7) Utilizes some theories of macroeconomics. It applies to businesses such as decision in relation to customers including pricing and advertising. how business decides on employment and sales. iii) It provides production and marketing rules to help maximize net profits. 2. b) Making the Best Decisions. A determination of what data is relevant to the decisions and an analysis of that data relative to the alternative solutions.Managerial economics links economic concepts with quantitative methods to develop vital tools for managerial decision making. It involves identification of the problems and decision to be made.It studies the individual economic behavior where resources are costly. d) It improves the quality and preciseness of decision.issues related to interest and exchange rates. inflation. i) Managerial economics identifies ways to efficiently achieve goals. e) It helps in arising at quick and appropriate decision Nature of Managerial Economics 1) 2) 3) 4) It is concerned with business.To establish appropriate decision rules.

Following are the decisions taken under this theorya) Planning of production schedule b) Deciding the input combination. b) Analysis of price of product. 4) Theory of Profit: A business works for the profit. It is the difference between total revenue and total cost. Success of a business and industrial firm depends upon the accuracy and correctness of pricing decisions taken by it. iii) Nature and degree of competition in the market. 3) Theory of Price: It explains how the prices are determined under different types of market conditions. c) Assessing efficiency of capital. iv) Price behavior under changing conditions. Under this two decisions are important-a) determination of price of product. 5) Theory of Capital and Investment: For a business. c) Estimation of cost of production. It tries to find out why consumer buys a particular product.Scope of Managerial economics Scope of managerial economics according to the theories1) Demand theory: a) estimation of future sales is essential before preparing production schedule and employing productive resources. it is essential to decide the optimum capital and investment. 2) Theory of Production: Production and cost analysis is important for smooth functioning of production process and project planning. d) Planning and control of capital expenditure. b) Most efficient allocation of capital. Because of the following factors profit is uncertain i) Demand of the product. ii) Prices of the factors of Production. d) Analysis of cost of production. b) The study of behavior of consumers is also essential. it is the objective of an organization to maximize the profits. theory of capital & investment is employed which address the issues related to – a) Selection of most suitable investment project. . For this purpose.

from the firm applying managerial economics.materials and processes that safely realize improvements to the lives of people. economic. Definition of engineering. mathematical. 3) Efficient use of resources results in better output and economic advancement. construction. more wages and salaries. more output.devices.Scope of Managerial economics in engineering perspectiveThe scope of economics in engineering is many and varied1) It has wide scope in manufacturing. social and practical knowledge in order to design and build structures. techniques. mining and other engineering industries. crafts. . 6) Elimination of waste can result in application of engineering economics or managerial economics. art. 4) Cost of production is reduced.“It is the discipline.“It is making usage & knowledge of tools.” It affects humans as well as animal species ability to control and adapt to their natural environments. 8) Improves the standard of living with the result of better products. B) Production planning and control C) Selection of equipment and their replacement analysis. 5) Alternative courses of action using economic principles may result in reduction of prices of goods and services.systems. 7) More capital will be made available for investment and growth. skill and profession of acquiring and applying scientific. machines. Example of economic application are as follows: A) Selection of location and site for a new plant. etc. Engineering and TechnologyScience. systems or methods of organization in order to solve a problem or serve some purpose. D) Selection of material handling system.” Definition of Technology. 2) Better decision making on the part of engineers. engineering and technology are the most important factors for transforming a traditional society into a modern and developed one. Meaning of Science. In many societies technology has helped develop more advanced economies and has allowed the rise of a leisure class.

. applied science and technology is the applied engineering. This clearly shows that social.From the above definitions we can say that engineering is the. economic and scientific factors for development are highly interrelated. Technology arising from scientific research followed by technological development has been a prime mover in creating the kind of world in which we live today. Discovery of natural laws through scientific research has given a new dimension to technology.

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