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MANAGERIAL ECONOMICS

By Snigdha Singh

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INTRODUCTION

Emergence of managerial economics as a separate course of

management studies can be attributed to at least three factors

a) Growing complexity of business decision making process due to

changing market conditions and business environment.

b) The increasing use of economic logic, conceptual theories and

tools of economic analysis in the process of business decision

making process.

c) Rapid increase in demand for professionally trained managerial

manpower.

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Defining Economics

Economics is a social science, which studies human behaviour in relation to optimizing allocation of available resources to achieve the given goals.

Eg : individual household behaviour, firm, industry and

nation

Economics is also a study of choice-making behaviour of

the people.

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Managerial economics can be broadly defined as the study of

economic theories, logic and tools of economic analysis

that are used in the process of decision making. Economic

theories and techniques of economic analysis are applied to

analyze business problems, evaluate business options and

opportunities with a view to arriving at an appropriate

business decision.

Managerial Economics

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Douglas : Managerial economics is concerned

with the application of economic principles and

methodologies to the decision making process

within the firm or organization. It seeks to

establish rules and principles to facilitate the

attainment of the desired economic goals of the

management.

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Characteristics

Micro Economics Economics of Firms Uses Macro-economics Analysis Managerial Economics is Pragmatic Managerial Economics is Normative Bridge between traditional economics

and Business Management

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Nature

Arts or science?

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Scope

Demand Analysis Cost Analysis Pricing Practices and Policies Profit Management Capital Management Analysis of Business Environment Allied Disciplines

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Difference b/w Managerial and Traditional Economics

Traditional Managerial

It has Micro & Macro aspects Micro aspect

It is both positive and normative science

Normative in nature

It deals with theoretical aspect Practical Aspect

It studies human Behavior on certain assumptions

No assumptions

We study Economic aspects of the problem

Both economic and non-economic aspects

Studies principles underlying rent, wages, interest and profits

Only the principles of profit

Limited scope Wide scope

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Importance

Basis of Business Policies Predicting economic Quantities Estimating economics relationship Helpful in Understanding the External

forces constituting the environment. Reconciling theoretical concepts of

economics in relation to the actual business behavior and conditions.

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MICRO ECONOMICS

The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households.

the analysis of the decisions made by individuals and groups, the factors that affect those decisions, and how those decisions effect others

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Micro-economics applied to internal issues :

Operational issues are of internal nature. Internal issues include

all those problems which arise within the business organization

and fall within purview and control of the management .

Some of the basic internal issues are :

What to produce

How much to produce

Choice of technology i.e. choosing of the factor –combination

Choice of price i.e. how to price the commodity

How to promote sales

How to face the price competition

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How to decide on new investments

How to manage capital and profit

How to manage inventory i.e. stock of both

finished goods and raw material

Most of the micro economic problems deals with

most of these questions.

The Law Demand

The Theory of Production

Analysis of Market Structure and Pricing

Theory

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Profit analysis and management

It guide firms in the measurement and management

of profit , in making new allowances for the risk

premium, in calculating the pure return on capital

and pure profit and also for future planning.

Theory of Capital and Investment Decisions

Knowledge of capital theory can contribute a

great deal in investment-decision making, choice of

projects, maintaining the capital, capital budjeting

etc.

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MACRO ECONOMICS

Study of the entire economy in terms of the total amount of goods and services produced, total income earned, level of employment of productive resources, and general behaviour of prices.

Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

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Macro-economics deals with external issues :

The type of economic system in the country

General trends in N.I., employment, prices, savings and

investments

Structural change in the working financial institutions viz.,

banks, insurance companies etc

Magnitude of and trends in foreign trade

Trends in labour supply and strength of capital market

Government’s economic policies i.e., industrial, monetary,

fiscal, price and foreign etc.

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Social factors viz., value system of the society,

property rights, customs and habits etc.,

Political environment i.e., democratic, authoritarian,

socialist political systems, or state attitude towards

private business man etc.

These Environmental factors have a far-reaching

bearing upon the functioning and performance of the

firms. Therefore, decision makers have to take in to

account the present and future economic, political and

social

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Conditions in the country and give due consideration

to the environmental factors in the process of decision

making.

Eg : SEZ in the Nandigram, Tata’s small car in Singur

district in West Bengal

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Responsibilities of Managerial Economist

To make reasonable profits on capital employed.

Successful forecasts Knowledge of sources of Economic

Information His status in the firm

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Fundamental Concepts

Opportunity cost Incremental Principle

Incremental Cost Incremental Revenue Business implication of Incremental Concept

Time Perspective Series of order Discrimination

Discounting Principle The Equi-marginal Principle

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Role of a managerial economist in the firm

Demand estimation and forecasting

Preparation of business /sales forecasts

Analysis of market survey to determine

the nature and extent of competition

Analyzing the issues and problems of

concerned industry

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Assisting the business planning process

of the firm

Discovering new possible fields of

business endeavor and its cost-benefit

analysis

Advising on prices, investment and

capital budgeting policies

Evaluation of capital budgeting etc.

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DECISION MAKING AREAS

Business decision making is influenced not only by

economic considerations, but also by human

behavioral, technological and environmental factors

due to growing public awareness.

“Decision making and processing information are two

important tasks of managers”

In order to make good decisions managers must be able

to obtain, process and use information.

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Decision Making Areas

Demand forecast

ing

Production

planning and cost

revenue decisio

n

Study of econom

ic environ

ment

Pricing and

related decisio

ns

Investment

decisions