The Definition and Scope of Managerial Economics

 Objectives:  After studying the chapter, you should  understand:

1. The subject matter of Managerial Economics

2. The analytical approach or concepts used in Managerial Economics

What is managerial economics?  Douglas “Managerial economics is .“Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.” to business and -  Pappas & Hirschey ..“Managerial economics applies  Salvatore .” economic theory and methods administrative decision-making. the application of economic principles and methodologies to the decisionmaking process within the firm or organization.” .

 It is concerned with firms behaviour in optimal allocation of resources. .SIGNIFICANCE OF MANAGERIAL ECONOMICS  It involves an application of managerial economic theory.  It is a science as well as art.

Typical managerial decision making may involve one of the following issues: . by no means.APPLICATIONS OF MANAGERIAL ECONOMICS  The application of managerial economics is. limited . Tools of managerial economics can be used to achieve virtually all the goals of a business organization in an efficient manner.

Various decisions are…  Deciding the price of a product and the quantity of the       commodity to be produced Deciding whether to manufacture a product or to buy from another manufacturer Choosing the production technique to be employed in the production of a given product Deciding on the level of inventory a firm will maintain of a product or raw material Deciding on the advertising media and the intensity of the advertising campaign Making employment and training decisions Making decisions regarding further business investment and the mode of financing the investment .

. and (3) The theory of market structure and pricing. (2) The theory of consumer behavior. which describes the structure and characteristics of different market forms under which business firms operate. tools.VARIOUS CONCEPTS USED IN MANAGERIAL ECONOMICS  Managerial economics uses a wide variety of economic concepts. which describes decision making by consumers. These concepts can be placed in three broad categories: (1) The theory of the firm. and techniques in the decision-making process. which describes how businesses make a variety of decisions.

an idealized version of a real-world firm.  A firm can be considered a combination of people.  The behavior of firms is usually analyzed in the context of an economic model. The theory provides a broad framework within which issues relevant to managerial decisions are analyzed. The basic economic model of a business enterprise is called the theory of the firm.  Firms exist because they perform useful functions in society by producing and distributing goods and services. . and a variety of information.THE THEORY OF THE FIRM  The theory of the firm is an useful way to begin the study of managerial economics. physical and financial resources.

. more goods and services will. studying the theory of consumer behavior is quite important. Thus. provide greater utility to a consumer. they consume what firms produce.  Economists have an optimization model for consumers.  While firms are assumed to be maximizing profits.  Of course. in general. consumers are assumed to be maximizing their utility or satisfaction.THE THEORY OF CONSUMER BEHAVIOUR  Consumers play an important role in the economy since they spend most of their incomes on goods and services produced by firms. similar to that applied to firms or producers.  In other words.

And Monopoly. firms' profit maximizing output     decisions take into account the market structure under which they are operating. There are four kinds of market organizations: Perfect competition. Monopolistic competition. oligopoly. .THEORIES ASSOCIATED WITH DIFFERENT MARKET STRUCTURES  As mentioned earlier.

FMCG products.. . buyer dealing with identical product. Perfect knowledge about market perfect mobility of resources or factors of production. Free entry and exit Example. homogeneity of the product sold in the industry. of seller and large no.  Conditions need to be satisfied before a market structure is considered perfectly competitive are:       existence of many buyers and sellers.PERFECT COMPETITION  It is a market form in which there is large no.

MONOPOLISTIC COMPETITION. fashion bazaar . unlike under perfect competition. the products are not considered identical. pantaloon.  Example…Apparel retail stores in india.  A market structure comprising many firms competing with differentiated product . life style.  The sellers under monopolistic competition differentiate their product.  Free entry and exit  Selling cost.

 Thus.MRF.  If an oligopolistic firm changes its price or output.  Probably the most important characteristic of an oligopolistic market structure is the interdependence of firms in the industry. Tyre producer in India..OLIGOPOLY  Oligopoly means there is few seller in market and large no.  Competition among the few producer. it has perceptible effects on the sales and profits of its competitors in the industry. of buyer.. an oligopolistic market always considers the reactions of its rivals in formulating its pricing or output decisions. JK.  Example. Continental … .Apollo.CEAT.TVS.

.  There are many factors that give rise to a monopoly. govt.rules) .  It is a market form in which there is only one seller and large no. Example. Fevi quick  Example. Indian railway (govt. Monopoly due to rules. rules  A monopoly may arise due to declining cost of production for a particular product. buyer.MONOPOLY  Monopoly can be considered as the polar opposite of perfect competition.. Like high cost of product/service in production.

. And it includes…  Opportunity cost  Optimisation techniques  Incremental principle  Time perspective and  Discounting principle.MARKET STRUCTURES AND MANAGERIAL DECISIONS  Managerial decisions both in the short run and in the long run are partly shaped by the market structure relevant to the firm.  The following economic concept are fundamental to business analysis and decision making.

in relation to time period . .g. It is very significant in determining optimal condition in resource allocation. o SHORT TERM PERSPECTIVE:-Short term time perspectives are based on the short-run analysis of the business data and performance.  OPTIMISATION TECHNIQUE: EQUI MARGINAL PRINCIPLE:-The equi marginal principle is fundamental in economics analysis. similarly incremental revenue is the change in total revenue caused by a decision. incremental cost may be defined as the change in total cost due to a specific decision. In business decisions . A timely decision is always effective and rewarding.EXPLANATION: OPPORTUNITY COST:-The cost of sacrificing something else(y) from the use of a given resources when a decision is made in favour of one thing (x). e. there are short term and long term perspective.. o LONG TERM PERSPECTIVE :-In long run the perception is towards growth development and expansion. if appropriate.  INCREMENTAL PRINCIPLE:-The incremental concept refers to the change in total .  TIME PERSPECTIVE:-Time is an important factor in business decision making.

V=present value. Thus . The following formula is useful in this regard: V=A/(1+i) where . . discounting of future value with the present one is very essential .A present gain is value more then a future gain. A=annuity or returns expected during a year . I =current rate of interest. in investment decision making.Cont…  DISCOUNTING PRINCIPLE:.

managerial accounting and psychology. Microeconomics is a disciplinary study. 2) Managerial economics applies available economic reasoning to get practical solution whereas microeconomics searches for new reasoning to get theoretical solution.HOW IT IS DIFFERENT FROM MICRO ECONOMICS  Four major differences are listed here:  1) Managerial economics is an interdisciplinary study combining microeconomics. . operational research.

Microeconomics assumes simpler situations to make theoretical points easy and clear.Cont… Therefore managerial economics is for practitioners while microeconomics is for theorists. 3) Assumptions of the study in managerial economics are more realistic. . Managerial economics. Managerial economics deals with each transaction while microeconomics deals with a firm as an organization. places more realistic assumptions to get more precise solution. coping with realistic problem. 4) The element of the study of managerial economics is narrower.

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