Lecture 01

UNIT -1 BASICS OF MANAGERIAL ECONOMICS LESSON 1- Introduction to Economics INTRODUCTION : This lesson introduces you to the basic concepts of Economics. After going through this lesson you will come to know how Economics is helpful for Managers in their Decision making process. Objectives: To analyze the concept of managerial economics To understand the concept of economics in decision making Nature, scope and characteristics of managerial economics How managerial economics differ from economics Managerial economics and other subjects Steps in decision making Condition affecting decision making Tools and techniques of decision making Good morning students, As an MBA student you need to study Managerial Economics which is concerned with decision making by managers. As you all are aware that the main job of managers is decision making only. Before making a decision one has to take into accounts so many things. And here comes the importance of managerial economics. Meaning of Economics: 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. There are almost as many definitions of economy as there are economists. We know that definition of subject is to be expected but at this stage it is more useful to set out few examples of the sort of issues which concerns professional economists.

Example: For e.g. most of us want to lead an exciting life i.e. life full of excitements, adventures etc. but unluckily we do not always have the resources necessary to do everything we want to do. Therefore choices have to be made or in the words of economists “individuals have to decide-----“how to allocate scarce resources in the most effective ways”. For this a body of economic principles and concepts has been developed to explain how people and also business react in this situation. Economics provide optimum utilization of scarce resources to achieve the desired result. It provides the basis for decision making. Economics can be studied under two heads: 1) Micro Economics 2) Macro Economics 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 what to produce, how to produce, and for whom to produce, and what price to charge. It is also known as the price theory is the main source of concepts and analytical tools for managerial decision making. Various micro-economic concepts such as demand, supply, elasticity of demand and supply, marginal cost, various market forms, etc. are of great significance to managerial economics. Macro Economics: It’s not only individuals and forms who are faced with having to make choices. Governments face many such problems. For e.g. How much to spend on health How much to spend on services How much should go in to providing social security benefits. This is the same type of problem facing all of us in our daily lives but in different scales. 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. Following are the various economic concepts which are useful for managers for decision making: • Price elasticity of demand • Income elasticity of demand

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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

For Self Assessment: 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)

Meaning of managerial economics: It is another branch in the science of economics. Sometimes it is interchangeably used with business economics. Managerial economic is concerned with decision making at the level of firm. It has been described as an economics applied to decision making. 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. In it economic theories and concepts are used to solve practical business problem. It lies on the borderline of economic and management. It helps in decision making under uncertainty and improves effectiveness of the organization. The basic purpose of managerial economic is to show how economic analysis can be used in formulating business plans.

Definitions of managerial economics: In the words of Mc Nair and Merriam,” ME consists of use of economic modes of thought to analyze business situation”. According to Spencer and Seigelman—“it is defined as the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management”. Economic provides optimum utilization of scarce resource to achieve the desired result. ME’s purpose is to show how economic analysis can be used formulating business planning. Managerial Economics = Management + Economics 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.

Diagrammatical representation of management and managerial economics.

relationship

Economics: Theory and Methodology

between

economics,

Business ManagementDecision problems Managerial Economics— Application of Economics to solving business problems

Optimal solution to business problems