Meaning and Definition of ME

8/9/2019 Meaning and Definition of ME

1/26

Nature and Scope of ManagerialNature and Scope of ManagerialEconomicsEconomics

Dr. GOPALAKRISHNA B.V.Dr. GOPALAKRISHNA B.V.Faculty in MBA,Faculty in MBA,

SDM, MangaloreSDM, Mangalore


2/26

Meaning and nature of Managerial EconomicsMeaning and nature of Managerial Economics Managerial economics became a very popular subjectManagerial economics became a very popular subject

after the publication of the text book after the publication of the text book ManagerialManagerial

EconomicsEconomics, by, by Joel DeanJoel Dean in 1951.in 1951. Managerial economics is an interesting andManagerial economics is an interesting and

fundamental part of the business education.fundamental part of the business education. Modern business has become very competitive andModern business has become very competitive and

complex.complex. Managerial Economics generally refers to theManagerial Economics generally refers to the

integration of economic theory with businessintegration of economic theory with businesspractices.practices.

While economics provides the tools and techniquesWhile economics provides the tools and techniquessuch as demand, supply, price, competition etc.such as demand, supply, price, competition etc.

Managerial economics applies these tools to theManagerial economics applies these tools to themanagement of business.management of business.


3/26

Economics is an social sciences is concernedEconomics is an social sciences is concerned

with allocation of scarce resources towith allocation of scarce resources to

alternative uses.alternative uses. RobinsRobins quotes that Economics is a sciencequotes that Economics is a science

which studies human behavior as awhich studies human behavior as a

relationship between means and ends whichrelationship between means and ends which

have alternative uses.have alternative uses. Economics is the study of evaluation ofEconomics is the study of evaluation of

economic problems. Each and every economiceconomic problems. Each and every economic

problem is a problem of choice and valuation.problem is a problem of choice and valuation.

The problem of choice arises due toThe problem of choice arises due torelationship between means and endsrelationship between means and ends


4/26

The relationship between means (wants)The relationship between means (wants)and ends (resources) creates economicand ends (resources) creates economic

activities in the country.activities in the country. The purpose of economic activities is toThe purpose of economic activities is to

satisfy maximum possible wants withsatisfy maximum possible wants withminimum possible resources.minimum possible resources.

Human wants are two types Human wants are two types 1.1. Human wants are unlimitedHuman wants are unlimited

2.2. Human wants can be graded more urgentHuman wants can be graded more urgentand less urgentand less urgent

Resources money and materials twoResources money and materials twotypes types 1.1. Resources are limited in supplyResources are limited in supply

2.2. Resources have alternative usesResources have alternative uses


5/26

Economics

Economic Problems

Ends (Resources)Means (Human Wants)

UnlimitedWants

GradedWants

LimitedResource

AlternativeUses

Scarcity of Resources


6/26

Meaning and Definition of Managerial Economics .Meaning and Definition of Managerial Economics .

Managerial EconomicsManagerial Economics

Decision making and forward planning are theDecision making and forward planning are thetwo important functions of every management.two important functions of every management.

Decision making is the process of selecting oneDecision making is the process of selecting onecourse of action from three or four alternativecourse of action from three or four alternativecourses of action.courses of action.

Forward Planning means establishing plans forForward Planning means establishing plans forthe future (planning for the future).the future (planning for the future).

Decision Making

Forward Planning


7/26

Definitions of Managerial Economics

Joel Dean Managerial Economics is the use of economic

analysis in the formulation of business policies

Mansfield Managerial Economics is concerned with the

application of economic concepts and economic analysis to the

problems of formulating rational managerial decisions.

Mcnair and Meriam Managerial Economics consists of the

use of economic modes of thought to analyse business situation.

M.H. Spencer and L. Siegelman Managerial Economics as

the integration of economic theory with business practice for the

purpose of facilitating decision making and forward planning by

management.


8/26

Haynes, Mote and PaulHaynes, Mote and Paul define those aspects ofdefine those aspects of

economic and its tools of analysis which are most relevanteconomic and its tools of analysis which are most relevant

to the firms decision making process..to the firms decision making process.. Thus, it is clear explains managerial economics isThus, it is clear explains managerial economics is

nothing but the application of economic principlesnothing but the application of economic principlesby management in decision making and forwardby management in decision making and forwardplanning.planning.

Managerial economics is the integration ofManagerial economics is the integration ofeconomic theory with business practice and lies oneconomic theory with business practice and lies onthe borderline of economics and management. Itthe borderline of economics and management. Itcan be represented as belowcan be represented as below


9/26

Diagrammatically RepresentationDiagrammatically Representation

EconomicTheory

Business

Management

Managerial Economics


10/26

Managerial Economics and Economic TheoryManagerial Economics and Economic Theory

Managerial economics is anManagerial economics is an appliedappliedeconomicseconomics, it depends entirely on, it depends entirely oneconomic analysis for getting theoreticaleconomic analysis for getting theoreticalknowledge forknowledge for decision-makingdecision-making..

ItIt bridges the gulf between purebridges the gulf between pure

economics and management practiceeconomics and management practice.. The important subject of study ofThe important subject of study of

managerial economics managerial economics demand, supply,demand, supply,cost of production, pricing of products incost of production, pricing of products in

different market structuredifferent market structure

.

. The study of economics is divided byThe study of economics is divided by

modern economists into two parts modern economists into two parts micro and macro economicsmicro and macro economics..


11/26

The term micro economics and macroeconomics were first used by Swedish

Economist Ragnar Frish in 1933.

Micro economics is the study of theeconomic actions of individual and smallgroups of individual.

For example single households, individual prices, wages, income, individual industry,single commodityetc.

Macro economics on the other hand, studiesof aggregates the economy as a whole total employment, unemployment, nationalincome, total consumption etc.


12/26

Characterstics of Managerial EconomicsCharacterstics of Managerial Economics

Managerial economics isManagerial economics is MicroMicro

EconomicsEconomics in character. It studies thein character. It studies theproblems of a business firm and does notproblems of a business firm and does notdeal with the entire economy.deal with the entire economy.

Managerial economics uses economicManagerial economics uses economic

concepts and principles which is known asconcepts and principles which is known astheory of the firmtheory of the firm.. Managerial economics makes use ofManagerial economics makes use of

macro economicsmacro economics, because macro, because macro

economics provides an intelligenteconomics provides an intelligentunderstanding of the external environmentunderstanding of the external environmentof the business.of the business.

Managerial economicsManagerial economics differs fromdiffers from

general economicsgeneral economics in several respectsin several respects..


13/26

Characteristics of ManagerialCharacteristics of Managerial

EconomicsEconomics

Managerial economics, being the studyManagerial economics, being the study

of theof the allocation of the resourcesallocation of the resourcesavailable to a firm.available to a firm.

Managerial economics are basedManagerial economics are based

mainly on themainly on the theory of firm.theory of firm. It isIt is

only for the analysis of profits thatonly for the analysis of profits that

help is taken of the theory ofhelp is taken of the theory ofdistribution.distribution.


14/26

Differences between Managerial Economics andDifferences between Managerial Economics and

Economic TheoryEconomic TheoryManagerial EconomicsManagerial Economics

1.1. Managerial economicsManagerial economics

applies principles to theapplies principles to theproblems of a firmproblems of a firm..

2.2. Managerial economics isManagerial economics ismicro Economicsmicro Economics inincharacter.character.

3.3. Managerial economics,Managerial economics,

though micro in characterthough micro in characterdealsdeals only with the firmonly with the firm. It. Itmeans that it has nothing tomeans that it has nothing todo with the individualsdo with the individualseconomic problems.economic problems.

4.4. Managerial economicsManagerial economicsmakes use of themakes use of the theory oftheory of

profitprofit only.only.5.5. Managerial economics isManagerial economics is

realistic in naturerealistic in nature

Economic TheoryEconomic Theory

1. But economics deals with1. But economics deals with

economic theory andeconomic theory andprinciplesprinciples

2. on the other hand is both2. on the other hand is both micromicroand macroand macro in its nature.in its nature.

3. Economics deals with the3. Economics deals with theeconomic problems noteconomic problems not only of aonly of afirm, but also of an individualfirm, but also of an individual..

4.4. Economics deals with all theEconomics deals with all the theoriestheoriesof distributionof distribution, namely rent, wages,, namely rent, wages,interest, profits.interest, profits.

5. The scope of economic theory is wider5. The scope of economic theory is widerthan that of managerial economicsthan that of managerial economics..


15/26

Scope of Managerial EconomicsScope of Managerial Economics

1.1. Demand Analysis and ForecastingDemand Analysis and Forecasting

2.2. Cost and Production AnalysesCost and Production Analyses

3.3. Pricing Practices and PoliciesPricing Practices and Policies4.4. Profit ManagementProfit Management

5.5. Capital ManagementCapital Management

6.6. Linear Programming and the TheoryLinear Programming and the Theoryof Gamesof Games


16/26

Scope of Managerial EconomicsScope of Managerial Economics

1.1. Demand Analysis and ForecastingDemand Analysis and Forecasting

An accurate estimation of demand is a majorAn accurate estimation of demand is a majorpart of business decision-making.part of business decision-making.

Traditional demand theory explains theTraditional demand theory explains theconsumers behaviour, it is very useful inconsumers behaviour, it is very useful in

demand estimations.demand estimations. A number of factors influence the demand suchA number of factors influence the demand such

factors are called demand determinants.factors are called demand determinants. Demand forecasting relates to the study ofDemand forecasting relates to the study of

demand determinants, demand distinctions anddemand determinants, demand distinctions and

demand forecasting.demand forecasting. Demand analysis and forecasting occupies aDemand analysis and forecasting occupies a

strategic place in managerial Economics.strategic place in managerial Economics.


17/26

2. Cost and Production Analysis2. Cost and Production Analysis

Cost estimates are most useful forCost estimates are most useful for

management decision-making.management decision-making.

Accurate cost, sound pricing practices andAccurate cost, sound pricing practices and

production analysis is necessary for profitproduction analysis is necessary for profitmaximization firm.maximization firm.

Cost and production analysis are inter-Cost and production analysis are inter-

connected. But cost analysis is wider inconnected. But cost analysis is wider in

scope than production analysis.scope than production analysis.


18/26

3. Pricing Practices and Policies3. Pricing Practices and Policies

Most important area of managerialMost important area of managerialeconomics is pricing.economics is pricing. Accurate determination of price decidesAccurate determination of price decides

the future of a firm.the future of a firm.

Since firms work for profits, pricingSince firms work for profits, pricingdecisions are to be taken with sufficientdecisions are to be taken with sufficientvigil.vigil.

The various aspects that are dealt under itThe various aspects that are dealt under itcover the price determination in variouscover the price determination in various

market forms, pricing policies, pricingmarket forms, pricing policies, pricingmethods, differential pricing productivemethods, differential pricing productivepricing and price forecasting.pricing and price forecasting.


19/26

4. Profit Management4. Profit Management The chief purpose of a business firm is to earnThe chief purpose of a business firm is to earn

thethe maximum profitmaximum profit..

There is always anThere is always an element of uncertaintyelement of uncertaintyabout profits be a use of variation in costs andabout profits be a use of variation in costs andrevenues.revenues.

If knowledge about future were perfect, profitIf knowledge about future were perfect, profitanalysis would have been very easy task.analysis would have been very easy task.

Hence profit planning and its measurementHence profit planning and its measurementconstitute the most difficult area of managerialconstitute the most difficult area of managerialEconomics.Economics.

Various inter and external factors causeVarious inter and external factors causevariations in cost and revenues of the firm.variations in cost and revenues of the firm.

Fluctuations in demand, wide changes in prices ofFluctuations in demand, wide changes in prices ofinputs and products, changes in the number ofinputs and products, changes in the number ofcompetitions and degreee of competition,competitions and degreee of competition,changes in technology and methods of productionchanges in technology and methods of productionchanges in government policies etc.changes in government policies etc.

Break-Even Point analysisBreak-Even Point analysis

andand

alternativealternative

profit policiesprofit policies studies. studies.


20/26

5. Capital Management5. Capital Management

Capital management means planning and control ofCapital management means planning and control of

capital expenditure.capital expenditure. Capital is a scarce and dear factor. The success of aCapital is a scarce and dear factor. The success of a

business depends upon successful capitalbusiness depends upon successful capitalmanagement.management.

Since the business is full of risks and uncertaintiesSince the business is full of risks and uncertainties

capital investment needs atmost care.capital investment needs atmost care. Issues related to the firms capital investments areIssues related to the firms capital investments are

most complex and troublesome.most complex and troublesome. Accurate calculation of the profitability of capitalAccurate calculation of the profitability of capital

investment, choice of capital investments andinvestment, choice of capital investments and

optimal allocation of capital are the three problemsoptimal allocation of capital are the three problemsof capital management.of capital management.


21/26

6. Linear Programming and the Theory of6. Linear Programming and the Theory of

GamesGames

In recent years, the subject OperationsIn recent years, the subject OperationsResearch has become very popular in theResearch has become very popular in themanagement education.management education.

Linear programming and the theory ofLinear programming and the theory of

games are the important techniques ofgames are the important techniques ofoperations research.operations research.

These two are the mathematicalThese two are the mathematicaltechniques very widely used in managerialtechniques very widely used in managerial

economics.economics. Therefore, these two have become theTherefore, these two have become thepart of the study of managerial economics.part of the study of managerial economics.


22/26

Factors influence on Business Decision-Factors influence on Business Decision-

makingmaking

Decision-making is anDecision-making is an integral part of the modernintegral part of the modernbusiness managementbusiness management..

The success and failure of firm depends onThe success and failure of firm depends on decisiondecision

makingmaking of a manager.of a manager.

Decision-making impliesDecision-making implies selection of one action fromselection of one action from

out of two or more alternative courses of actionout of two or more alternative courses of action.. TheThe limited amount of resourceslimited amount of resources is one type ofis one type of

constraint faced by the manager of a firm.constraint faced by the manager of a firm.

The phase ofThe phase of business Cycles, the competition frombusiness Cycles, the competition from

the rival firms, governments fiscal and monetarythe rival firms, governments fiscal and monetary

policies and export and import policiespolicies and export and import policies etc.etc.


23/26

Important area of business decision-Important area of business decision-

making of business managers are -making of business managers are -

1.1. Price and output decisionPrice and output decision

2.2. Demand estimation decisionDemand estimation decision

3.3. Choice of production techniqueChoice of production techniquedecisiondecision

4.4. Advertising decisionAdvertising decision

5.5. Investment decisionInvestment decision


24/26

1. Price and output decision1. Price and output decision

Price determination is an important decisionPrice determination is an important decisionmaking of business manager.making of business manager. Price of a product will determine -Price of a product will determine - how muchhow much

quantity of its product it will be able to sellquantity of its product it will be able to sell..

Price and cost per unit of output willPrice and cost per unit of output willdetermine itsdetermine itsprofitprofit.. Demand estimationDemand estimation determines success anddetermines success and

failure of firms.failure of firms.

Price-output decisions are also depends onPrice-output decisions are also depends onnature of market structure & degree ofnature of market structure & degree ofcompetition.competition.


25/26

2. Demand estimation decision2. Demand estimation decision

Demand estimation is a crucial factor to achievingDemand estimation is a crucial factor to achieving

maximum profitmaximum profit..

It is also depends onIt is also depends on consumer behavior, tastes,consumer behavior, tastes,

preferences, habits and level of growth of GNPpreferences, habits and level of growth of GNP..

Manager of business firm have not only to estimateManager of business firm have not only to estimate currentcurrent

demand for the product but also for the futuredemand for the product but also for the future..

3. Choice of production technique decision3. Choice of production technique decision Choice of production decision depends upon availability ofChoice of production decision depends upon availability of factors offactors of

production and relative pricesproduction and relative prices

Production techniques involves theProduction techniques involves the combination of labour andcombination of labour and

capitalcapital..

Labour intensive technologyLabour intensive technology requires more of labour and less ofrequires more of labour and less of

capital. While,capital. While, capital intensive technologycapital intensive technologyuses more of capital anduses more of capital andless of labourless of labour


26/26

4. Advertising decision4. Advertising decision Advertising expenditure plays anAdvertising expenditure plays an important roleimportant role

in the monopolistic competition andin the monopolistic competition andoligopoly marketoligopoly market..

Advertisement is required toAdvertisement is required to promote sales of apromote sales of aproductproduct..

Advertisement tries to influence the consumersAdvertisement tries to influence the consumers

aboutabout quality/featuresquality/features of its products.of its products. Advertisement undertakes with the help ofAdvertisement undertakes with the help of

newspaper, television, radio, cable TVnewspaper, television, radio, cable TVetc.etc.

5. Investment Decision5. Investment Decision (investment expenditure)(investment expenditure)

It relatesIt relates how much of investment is to behow much of investment is to beundertaken in a particular periodundertaken in a particular period..

How much returns/reward obtained fromHow much returns/reward obtained fromparticular machineryparticular machinery..

Investment decision characterised byInvestment decision characterised by risk andrisk anduncertaintyuncertainty

Documents

Meaning and Definition of ME