Managerial EconomicsùMeaning,nature,scope

8/14/2019 Managerial EconomicsMeaning,nature,scope

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Module -1 Meaning,Module -1 Meaning,

nature and scope.nature and scope.*Introduction*What is Management ?Duties ,functions and role of manager

*What is Economics?*Definition of Managerial Economics* Relationship to Economic Theory*Relationship to decision science

*Business environment and managerial economics*Scope of Managerial economics

Managerial Economics


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IntroductionIntroduction

Modernbusiness world is characterized by dynamism,computerization, Awareness about environment ,caring forconsumer satisfaction, worried about cost effectiveness etc.

Economies are no longer self-sufficient, inward-looking;added is the pressure of severe competition due toglobalization.

Darwins principle applies even today nay more strongly. Big corporates follow military strategies involving surprise,

security and unity of command. Business units aim at a variety of goals / objectives. Problem of economizing and choice are most imp. for firms .


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IntroductionIntroduction

continued-----------continued----------- Decision-making is a must at every

stage. Survival amidst uncertainties is no

doubt challenging. Managerial Economicshelps them to plan and implementdecisions in such a complex and dynamicatmosphere.

ME or Business Economics or Economicsof firms provides managers withdifferent tools. techniques and principlesenabling them make optimum use ofresources within constraints.


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The term Managerial EconomicsThe term Managerial Economics

involves 2 terms; former refers toinvolves 2 terms; former refers to

acts and decisions of manager lateracts and decisions of manager later

to a subject matter.to a subject matter. What is management ?Answer to this question takes us

to jobs ,duties and functions of manager. Manager as an organizer has to take decisions involving

various parties (Owners, shareholders, employees, rivals

customers, suppliers , creditors , distributors ,society andgovernment.) Moreover their interests are separate andat times even conflicting.

This means the manager has to co-ordinate variousgoals in a fruitful manner; justice to everybody warrantsbalanced approach and rational behavior.

Management is an art as well as a science. Careful decisions and foresight are pre-requisites of a

good manager..


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What is Economics ?What is Economics ?

It is a science of earning and spending wealth asdefined by the Father of Economics Adam Smith inhis classic work An enquiry into nature and causesof the Wealth of Nations.

In the opinion of Alfred Marshall it was study ofmankind in ordinary business of life.

Lionel Robbins gave us the most accepted scarcity-oriented definition of Economics. He saysEconomics is a social science which studies humanbehavior as a relationship between unlimited wants

and scarce means which have alternative uses..


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Economic problem &Economic problem &

choice--choice-- Choice becomes necessary because :1)wantsChoice becomes necessary because :1)wants

are unlimitedare unlimited

2)means are scarce2)means are scarce

Choice is possible becauseChoice is possible because1)All wants are not of same importance.1)All wants are not of same importance.

2)Means have alternative uses2)Means have alternative uses

In what way does economic problem becomeIn what way does economic problem become

applicable to firms ?applicable to firms ?A firm too has to allocate limited resourcesA firm too has to allocate limited resources

which are available among its variouswhich are available among its variousactivitiesactivities ..


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Definition of M E ----Definition of M E ----

According to Mansfield ,managerial economics is appliedAccording to Mansfield ,managerial economics is appliedmicroeconomics.microeconomics.

Whether profit or non-profit making organisations andWhether profit or non-profit making organisations andwhatever may be their goals , they have all to facewhatever may be their goals , they have all to face

constraints which may be internal & /or external.constraints which may be internal & /or external. THE BASIC DECISION-MAKING PROCESS IS SAME FOR ALLTHE BASIC DECISION-MAKING PROCESS IS SAME FOR ALLFIRMS.FIRMS.

All managerial decision problems are solved with the helpAll managerial decision problems are solved with the helpof tools ,concepts and principles in.a) Economic theory;of tools ,concepts and principles in.a) Economic theory;b) Managerial economics c) Mathematical economics.b) Managerial economics c) Mathematical economics.

Role of economic theory----Role of economic theory----In any business, the businessman has to decide what ,In any business, the businessman has to decide what ,how ,when ,how much , whom , where etc.how ,when ,how much , whom , where etc.


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There arises question of choice at everyThere arises question of choice at every

stage of production. eg. Choice regardingstage of production. eg. Choice regarding

selection of project, location of plantselection of project, location of plant

,inputs , funds etc.,inputs , funds etc.

The manager has to study environment atThe manager has to study environment atMicro as well as Macro levels.Micro as well as Macro levels.

Micro economicsMicro economics here the subject-matter ishere the subject-matter is

individual consumer ,firm market , industryindividual consumer ,firm market , industryetc. Theories under micro-economics areetc. Theories under micro-economics are:Theory of value, theory of distribution,:Theory of value, theory of distribution,theory of economic welfare etc.theory of economic welfare etc.

Macro-economic environment is generalMacro-economic environment is general

eco-pol-social condition of the larger systemeco-pol-social condition of the larger systemwhich may be at domestic & /or internationalwhich may be at domestic & /or internationallevel.level.


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What is Macro-What is Macro-

economicseconomics It analyses behavior of entire system as aIt analyses behavior of entire system as a

whole. It deals with aggregates such aswhole. It deals with aggregates such asGNP , TOTAL EMPLOYMENT ,General levelGNP , TOTAL EMPLOYMENT ,General level

of prices , GDS , GDCF etc .Followingof prices , GDS , GDCF etc .Followingtheories are part of Macroeconomicstheories are part of Macroeconomics

Theory of income and employment ,Theory of income and employment ,Theory of income distribution, theory ofTheory of income distribution, theory of

general level of prices , theory of growthgeneral level of prices , theory of growthetc.etc.


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Both these branchesBoth these branches

are relevant for aare relevant for a

manager.manager.Off course one should not forget that justOff course one should not forget that just

adding /aggregation would not lead toadding /aggregation would not lead tosolution of problems at macroeconomic levelsolution of problems at macroeconomic level

what is true at micro level may not be so atwhat is true at micro level may not be so atmacro level and vice-versa.macro level and vice-versa.Both approaches are supplementary to eachBoth approaches are supplementary to each

other. Decisions of an individual firm can beother. Decisions of an individual firm can besolved by applying micro-economic conceptssolved by applying micro-economic conceptstools and principles `yet it is also true thattools and principles `yet it is also true thatno firm functions in isolation ; aggregatesno firm functions in isolation ; aggregatesnecessarily influence its performance.necessarily influence its performance.


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Role of mathematicalRole of mathematical

economics andeconomics and

econometrics----econometrics---- Mathematical economics is used to formalizeMathematical economics is used to formalize

economic laws. Eg. Law of demand can beeconomic laws. Eg. Law of demand can beexpressed mathematically as Q =25 -3 (p) hereexpressed mathematically as Q =25 -3 (p) heredemand is dependent variable and pricedemand is dependent variable and price

independent variable ;moreover demand isindependent variable ;moreover demand isinversely related to price.inversely related to price.

Econometrics is application of statistics to realEconometrics is application of statistics to realworld. Empirically collected data can be appliedworld. Empirically collected data can be appliedto equations to find solution. eg.to equations to find solution. eg.

Q= f (Y, Px , Py , W , U , T ,E ----- )Q= f (Y, Px , Py , W , U , T ,E ----- ) Trends revealed by forecasting help a firm takeTrends revealed by forecasting help a firm takeoptimal decisions.optimal decisions.


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An entrepreneur has to face realAn entrepreneur has to face real

world which is uncertain and he isworld which is uncertain and he is

not well equipped with informationnot well equipped with information

about reality.about reality. Because of uncertainty in future decision-Because of uncertainty in future decision-

making becomes complicated. His plansmaking becomes complicated. His plansrequire revision.require revision.

Various disciplines such as BusinessVarious disciplines such as Businessadministration, mathematics, statisticsadministration, mathematics, statisticsaccounts , finance , marketing ,humanaccounts , finance , marketing ,humanrelations management form the corerelations management form the core

background in his decision-making.background in his decision-making.


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Business environmentBusiness environment

and managerialand managerial

economics--economics-- Business environment refers to all those forces whichBusiness environment refers to all those forces which

influence functioning of business.influence functioning of business. Two types of factors are relevant here-1)InternalTwo types of factors are relevant here-1)Internal

factors :these are controllable; either altered orfactors :these are controllable; either altered or

modified. 2) External factors- these are beyond controlmodified. 2) External factors- these are beyond control Example of internal factors: corporate philosophy,Example of internal factors: corporate philosophy,

physical assets , management structure, humanphysical assets , management structure, humanresources , R &D , FINANCE , technology etc.resources , R &D , FINANCE , technology etc.

Example of external factors :Customers , suppliers ,Example of external factors :Customers , suppliers ,competitors , natural factors ,demographic changes ,competitors , natural factors ,demographic changes ,political situation , eco-social condition , governmentpolitical situation , eco-social condition , governmentpolicies etc.policies etc.


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Porters model :Porters model :

According to Porter M .of HarvardAccording to Porter M .of Harvard

University environment is determined byUniversity environment is determined by

5 forces.5 forces.

Environment

BARGAINING POWEROF CONSUMER

POWER OFINPUT SUPPLIERS

Rivalry amongst firms

Threat frompotential entrants

Threat fromsubstitutes


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Scope of managerialScope of managerial

economics---- Studies 8economics---- Studies 8

different areas.(1) Demanddifferent areas.(1) DemandDemand analysis and demand forecastingDemand analysis and demand forecasting

Before production starts accurateBefore production starts accurateestimation of demand is necessary .Thisestimation of demand is necessary .Thisfacilitates the firmfacilitates the firm

employ proper number and size ofemploy proper number and size ofresources so that right quantity is producedresources so that right quantity is producedand supplied at a right price and right time.and supplied at a right price and right time.


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(2) Cost Analysis(2) Cost Analysis

EstimationEstimation of costs is important of mobilization ofof costs is important of mobilization ofresources and pricing of final goods .Accurateresources and pricing of final goods .Accurateestimation is however made difficult because ofestimation is however made difficult because ofuncertaintiesuncertainties

((3)Pricing policies3)Pricing policies ---Success of a firm largely depends---Success of a firm largely dependson correctness of pricing. Pricing decision depends onon correctness of pricing. Pricing decision depends onmarket structure ,price-leadership non-pricemarket structure ,price-leadership non-pricecompetition etc.competition etc.

((4)Profit management-4)Profit management- this ensures sustainability, helpsthis ensures sustainability, helpsattract shareholders, reduces dependence on externalattract shareholders, reduces dependence on external

finance. In this connection Study of Break-EVENfinance. In this connection Study of Break-EVENAnalysis is essential .Realized profit may be differentAnalysis is essential .Realized profit may be differentfrom expected profit. both from viewpointfrom expected profit. both from viewpoint


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(5) Capital(5) Capital

ManagementManagementBeing a top level decision it becomesBeing a top level decision it becomes

crucial. Cost of capital , ROR oncrucial. Cost of capital , ROR oncapital ,proper selection of projects , arecapital ,proper selection of projects , are

of great importance. Capital is scarceof great importance. Capital is scarceand has a cost therefore its optimumand has a cost therefore its optimumuse ,planning, budgeting , control areuse ,planning, budgeting , control areimportant.important.

((6)Inventory management-6)Inventory management- InventoryInventory

refers to stock of raw-materials andrefers to stock of raw-materials andfinished products. This has to be optimalfinished products. This has to be optimal;both under stocking and overstocking;both under stocking and overstockingshould be avoided .should be avoided .


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(7) Whether it is setting of new(7) Whether it is setting of new

machinery/plant or recruitingmachinery/plant or recruiting

/laying off labor---s/laying off labor---sThere necessarily occurs queuing problem.There necessarily occurs queuing problem.

(8)Marketing and advertising(8)Marketing and advertising

Estimate costs ,allocate resources ,select media,Estimate costs ,allocate resources ,select media,and measure its economic effects. Salesand measure its economic effects. Salespromotion and distribution are imp. activities.promotion and distribution are imp. activities.Right selection of consumer segment marketRight selection of consumer segment marketterritory are areas where focus is demanded interritory are areas where focus is demanded in

modern business world of keen competition.modern business world of keen competition.


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List of References-----List of References-----

Managerial Economics by Dr.Maheshwari andManagerial Economics by Dr.Maheshwari andVarshneyVarshney

Managerial economics by Dr D.M .Mithani.Managerial economics by Dr D.M .Mithani. Managerial Economics by Prof . A N. Oza an. BakulManagerial Economics by Prof . A N. Oza an. Bakul

Dholakia.Dholakia. Managerial Economics by Dr. Dwivedi.Managerial Economics by Dr. Dwivedi. Microeconomics by Salvatore.Microeconomics by Salvatore. Managerial economics by Joel DeanManagerial economics by Joel Dean Managerial economics by Peterson and LewisManagerial economics by Peterson and Lewis Economics by Paul Samuelson and NordhasEconomics by Paul Samuelson and Nordhas Economics by Dornbush ,Fischer and Begg.Economics by Dornbush ,Fischer and Begg. Indian Economy by Ruder Dutt andIndian Economy by Ruder Dutt and

K.P.M.Sundaram .K.P.M.Sundaram .

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Managerial EconomicsùMeaning,nature,scope