01 - Introduction To Managerial Economics

Introduction to Managerial Economics Presented By Prof. S P Das M.Phil. (Economics), M.B.A. (Finance), M.A. (Economics), PGDM, PGDFM, DHMCT, MCCP, B.Com.

Meaning Of Economics 

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Economics can be called as social science dealing with economics problem and man’s economic behavior. It deals with economic behavior of man in society in respect of consumption, production; distribution etc. economics can be called as an unending science. Economic behavior is related to choice by individuals and others. Individuals and others have to decide “how to allocate scarce resources in the most effective ways. Economics provide optimum utilization of scarce resources to achieve the desired result. It provides the basis for decision making.

Micro Economics  

It has been defined as that branch where the unit of study is an individual, firm or household. It studies how individual make their choices about, – – – –

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what to produce? How to produce? For whom to produce?, and What price to charge?

It is also known as the price theory. It is the main source of concepts and analytical tools for managerial decision making

Macro Economics     

It studies the economics as a whole. It is aggregative in character and takes the entire economic as a unit of study. Macro economics helps in the area of forecasting. It includes National Income, aggregate consumption, investments, employment etc. It facilitates government in taking policy decisions such as, – How much to spend on health? – How much to spend on services? – How much should go in to providing social security benefits?

Economic Concept for Decision Making              

Price elasticity of demand Income elasticity of demand Cost and output relationship Opportunity cost Multiplier Propensity to consume Marginal revenue product Production function Demand theory Theory of firm—price, output and investment decisions Money and banking Public finance and fiscal and monetary policy National income Theory of international trade

What is Managerial Economics?  

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Managerial economic is concerned with decision making at the level of firm. It is viewed as a special branch of economics bridging the gap between pure economic theory and managerial practices. It is defined as application of economic theory and methodology to decision making process by the management of the business firms. The basic purpose of managerial economic is to show how economic analysis can be used in formulating business plans.

ME = Management + Economics 

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Management deals with principles which helps in decision making under uncertainty and improves effectiveness of the organization. On the other hand economics provide a set of preposition for optimum allocation of scarce resources to achieve a desired result. ME deals with the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management. In other words it is concerned with using of logic of economics, mathematics, and statistics to provide effective ways of thinking about business decision problems.

Diagrammatic Presentation

Economic Theory and Methodology

Business Management Decision Problems

Managerial Economics: Application of Economics to solving business

Optimal solution to business problems

Decision Making  

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Decision making is the central objective of Managerial Economics Decision making may be defined as the process of selecting the suitable action from among several alternative courses of action The problem of decision making arises whenever a number of alternatives are available. Such as, – What should be the price of the product? – What should be the size of the plant to be installed? – How many workers should be employed? – What kind of training should be imparted to them? – What is the optimal level of inventories of finished products, raw material, spare parts, etc.?

Why Problems of Decision Making Arises?    

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The problem of decision making arises due to the scarcity of resources. We have unlimited wants and the means to satisfy those wants are limited, With the satisfaction of one want, another arises, and here arises the problem of decision making. While performing his function manager has to take a lot of decisions in conformity with the goal of the firm. Most of the decisions are taken under the condition of uncertainty, and involves risks. The main reasons behind uncertainty and risks are uncertain behavior of the market forces.

Uncertain Market Forces     

The demand and supply Changing business environment Government policies External influence on the domestic market Social and political changes

Economic Problem 

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Economic problem can be called as the problem related to the unlimited wants with limited resources having alternative applications Thus, every man faces the problem of ‘economizing his means’. How to make the maximum use of limited resources?, is known as the problem of economy. Main Groups of Scarce Resources are, – Land – Labor – Capital

Decision Making Problems of Firm   

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To identify the alternative courses of action of achieving given objectives To select the course of action that achieves the objectives in the economically most efficient way To implement the selected course of action in a right way to achieve the business objectives. The prime function of management is Decision making and forward planning. Forward planning goes hand in hand with decision making. Forward planning means establishing plans for the future.

ME and Other Disciplines      

Mathematics Statistics Operations Research Management Theory Accounting Computers

Scope of ME        

Demand analysis, Forecasting, Production function, Cost analysis, Inventory Management, Advertising, Pricing System, Resource allocation etc

Nature of ME 

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Concepts of Micro-Economics – Elasticity of demand – Marginal cost – Marginal revenue – Market structures and their significance in pricing policies. Concepts of Macro-Economics – The magnitude of investment and the level of national income, – The level of national income and the level of employment, – The level of consumption and the level of national income In ME emphasis is laid on those prepositions which are likely to be useful to management

Factors Influencing Managerial Decision Making  Besides

economic variables managerial decision making is also influenced by other significant variables, such as – Human and Behavioral Considerations – Technological Forces – Environmental Forces

Steps in Decision Making  Establish

objectives  Specify the decision problem  Identify the alternatives  Evaluate alternatives  Select the best alternatives  Implement the decision  Monitor the performance

Tools of Decision Making  Opportunity

cost  Incremental principle (Cost & Revenue)  Principle of the time perspective  Discounting principle  Equi-marginal principle

Reference Books        

Managerial Economics – M L Jhingan Managerial Economics – Varshney & Maheshwari Managerial Economics – P L Mehta Managerial Economics – Atmanand Managerial Economics – Craig Peterson & Cris Lewis Managerial Economics – Salvatore Managerial Economics – Joel Dean Managerial Economics – Mithani

Activity 1. Make a list in your own words of some of the economic decision that – you are facing – your family has to take – your country has to take

2. Take any quality newspaper, go through it and make notes on the following: – Micro economic – Macro economic (problems and issues you find)

3. Suppose there is a firm with a temporary idle capacity. An order for 5000 units comes to management’s attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for the whole lot but not more. The short run incremental cost (ignoring the fixed cost) is only Rs.3/-. There fore the contribution to overhead and profit is Rs.1/per unit (Rs.5000/- for the lot) What long run repercussion of the order is to be taken into account?

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