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- A BriefCompendium
FACILITATOR: Dr. V S GAJAVELLI
PRESENTED BY:KARAN SOOD HITANSH VIJ CHANDNI BERI
CHANDNI CAUL BEN C KURIAN
MANAGERIAL ECONOMICS: -A Brief synopsis
Economics in today’s world is ubiquitous. It permeates every possible strand of the not only the corporte arena but life in general. A thorough working knowledge of how economics shapes the different institutions, more specifically business units is imperative to an MBA or for that matter any scholar. Manangerial Economics is a branch of economics that applies microeconomic analysis to decision methods of business entities or other management units. It refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently. Managerial economics essentially deals with the allocation of scarce resources to attain the optimally desired results. Every organization faces managenent decision problems, as it seeks to achieve its goal or objective, subject to the constraints it faces.the organization can solve its problems by the application of economic theory and the tools of decision science. Economic theory refers to microeconomics and macroeconomics. It forms an integral part of Mnagerial economics. Decision sciences also constitue a major chunk of this particular branch of economics. Mathematical economics and econometrics are the tools it employs to construct and estimate decision models aimed at determining the optimal behaviour of the firm. Mathematical economics is used to formalize the economic models postulated by economic theory. Econometrics then applies statistical tools to real-world data to estimate the models postulated by economic theory.
The subject matter of managerial economics aside, it is the functional areas of business administration studies (which include accounting, finance, marketing, personnel and production) which provide he background for managerial decision making. Hence, managerial economics can be regarded as an overview course of study that integrates economic theory, decision sciences and the functional areas of business administration studies.
Managerial Economics consists of the following subdivisions which by their very nature define it: • • • • • The Basic Process of Decision-Making The Basic Theory of the Firm The Nature and function of Profits Business ethics The Basics of Demand, Supply and Equilibrium
THE BASIC PROCESS OF DECISION-MAKING
Decision making can be regarded as an outcome of mental processes (cognitive process) leading to the selection of a course of action among several alternatives. Every decision making process produces a final choice. The output can be an action or an opinion of choice. Human performance in decision making terms has been the subject of active research from several perspectives. From a psychological perspective, it is necessary to examine individual decisions in the context of a set of needs, preferences an individual has and values they seek. From a cognitive perspective, the decision making process must be regarded as a continuous process integrated in the interaction with the environment. From a normative perspective, the analysis of individual decisions is concerned with the logic of decision making and rationality and the invariant choice it leads to. Yet, at another level, it might be regarded as a problem solving activity which is terminated when a satisfactory solution is found. Therefore,
decision making is a reasoning or emotional process which can be rational or irrational, can be based on explicit assumptions or tacit assumptions. Regardless of the type, all decision-making processes involve or can be subdivided into five basic steps: 1. 2. 3. 4. 5. Defining the problem Determining the problem Identifying the possible solutions Selecting the best possible solutions Implementing the decisions.
BASIC THEORY OF THE FIRM
A firm is an organization that combines and organizes resources for the purpose of producing goods and/or services for sale. Proprietorships, partnerships and corporations are the various types of firms existing around the world. They account for more tham two-thirds of all goods and services produced. The non-feasibiltiy of enterpreneurs to involve themselves extensively int eh various taxing stages of the production process is the prima facie reason for the existence of firms.
Managerial economics begins by postulating a theory of the firm, which it then uses to analyze managerial decision making. Originally, the theory of the firm was based on the assumption that the goal of the firm was to maximize current or short-term profits. Conversely however, firms often sacrifice short-term profits for the sake of increasing future or long-term profits.since both are equally important, the theory of the firm now postulates that the primary goal or objective of the firm is to maximize the wealth or the value of the firm, which is nothing but the present value of all expected future profits of the firm.
In trying to attain its objective, a firm invariably faces various constraints. The limitations on the availability of the essential inputs essentially gives rise to these constraints. Inability to procure the desired raw material or the labour, factory and warehouse space and adequate capital are the several limitations which lead to constraints. Legal restrains are yet another source of concern for the firm, since they are inflicted by the society to bring about equitable social welfare. These constraints emanate a phenomenon called CONSTRAINED OPTIMIZATION. That is, the primary goal or objective of the firm is to maximize wealth or the value of the firm subject to the constraints it faces.
NATURE AND FUNCTION OF PROFITS
Profit is the making of gain in business activity for the benefit of the owners of the business. Profit plays a vital role in determining the performance of a company. The nature of profit can be categorized into two heads: 1) Business Profit is the difference between the revenue of the firm and the cost of bringing the product to the market starting from the production cost. 2) Economic Profit is the difference between a company's total revenue and its opportunity costs of the capital. While the concept of business profit is may be useful for accounting purposes, it is the concept of economic profit that a manager must use in order to reach correct investment decisions.
Business ethics is a form of applied ethics that examines ethical and moral problems that arise in a business environment. Business Ethics
seeks to proscribe behavior that businesses, firm managers, and workers should not engage in. It circumvents all aspects of business and individual conduct and is relevant to business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in fields such as medical, technical, legal and business ethics. Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have redefined their core values in the light of business ethical considerations (e.g. BP's "beyond petroleum" environmental tilt).
Corporate ethics policies As part of more comprehensive compliance and ethics programs, many companies have formulated internal policies pertaining to the ethical conduct of employees. These policies can be simple exhortations in broad, highly-generalized language (typically called a corporate ethics statement), or they can be more detailed policies, containing specific behavioral requirements (typically called corporate ethics codes). They are generally meant to identify the company's expectations of workers and to offer guidance on handling some of the more common ethical problems that might arise in the course of doing business. It is hoped that having such a policy will lead to greater ethical awareness, consistency in application, and the avoidance of ethical disasters. An increasing number of companies also requires employees to attend seminars regarding business conduct, which often include discussion of the company's policies, specific case studies, and legal requirements. Some companies even require their employees to sign agreements stating that they will abide by the company's rules of conduct. Many companies are assessing the environmental factors that can lead employees to engage in unethical conduct. A competitive business environment may call for unethical behavior. Lying has become expected in fields such as trading. An example of this is the issues surrounding the unethical actions of the Salomon Brothers. Not everyone supports corporate policies that govern ethical conduct. Some claim that ethical problems are better dealt with by depending upon employees to use their own judgment.
Others believe that corporate ethics policies are primarily rooted in utilitarian concerns, and that they are mainly to limit the company's legal liability, or to curry public favor by giving the appearance of being a good corporate citizen. Ideally, the company will avoid a lawsuit because its employees will follow the rules. Should a lawsuit occur, the company can claim that the problem would not have arisen if the employee had only followed the code properly. Sometimes there is disconnection between the company's code of ethics and the company's actual practices. Thus, whether or not such conduct is explicitly sanctioned by management, at worst, this makes the policy duplicitous, and, at best, it is merely a marketing tool. To be successful, most ethicists would suggest that an ethics policy should be: • • • • • • Given the unequivocal support of top management, by both word and example. Explained in writing and orally, with periodic reinforcement. Doable....something employees can both understand and perform. Monitored by top management, with routine inspections for compliance and improvement. Backed up by clearly stated consequences in the case of disobedience. Remain neutral and nonsexist.
Related disciplines Business ethics should be distinguished from the philosophy of business, the branch of philosophy that deals with the philosophical, political, and ethical underpinnings of business and economics. Business ethics operates on the premise, for example, that the ethical operation of a private business is possible -- those who dispute that premise, such as libertarian socialists, (who contend that "business ethics" is an oxymoron) do so by definition outside of the domain of business ethics proper. The philosophy of business also deals with questions such as what, if any, are the social responsibilities of a business; business management theory; theories of individualism vs. collectivism; free will among participants in the marketplace; the role of self interest; invisible hand theories; the requirements of social justice; and natural rights, especially property rights, in relation to the business enterprise. Business ethics is also related to political economy, which is economic analysis from political and historical perspectives. Political economy deals with the distributive consequences of economic actions. It asks who gains
and who loses from economic activity, and is the resultant distribution fair or just, which are central ethical issues.
THE BASICS OF DEMAND, SUPPLY AND EQUILIBRIUM
DEMAND refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.
The Law of Demand
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.
SUPPLY represents how much the market can offer. The quantity
supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.
The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied
When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
SHIFT IN DEMAND AND SUPPLY CURVES
A shift in the demand or supply curve to the left or right on a price– quantity diagram. A shift in thedemand curve can arise because of a change in the income of buyers, a change in the price of other goods, or a change in tastes for the product. An increase in demand caused by an increase in consumer incomes shifts the demand curve to the right; as a result, the equilibrium quantity bought increases, but the equilibrium price also rises.
A shift in the supply curve can arise because of change in the costs of production, a change in technology, or a change in price of other goods. . A rise in labour costs leading to a fall in supply shifts the supply curve to the left; as a result, the equilibrium quantity sold falls while the equilibrium price rises.
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